As filed with the Securities and Exchange Commission on December 28, 2012
Registration No. 333-183254
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 3 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Zoetis Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 2834 |
46-0696167 |
||
(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification No.) |
(I.R.S. Employer Identification No.) |
c/o Pfizer Inc.
235 East 42nd Street
New York, New York 10017
(212) 733-2323
(Address, Including Zip Code, of Registrants Principal Executive Offices)
Juan Ramón Alaix
Chief Executive Officer
Zoetis Inc.
c/o Pfizer Inc.
235 East 42nd Street
New York, New York 10017
(212) 733-2323
(Name, Address and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
Stacy J. Kanter, Esq. Dwight S. Yoo, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 (212) 735-2000 (facsimile) |
Richard D. Truesdell, Jr., Esq. Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (212) 701-5800 (facsimile) |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
The information in this preliminary prospectus is not complete and may be changed. The debt exchange parties may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated December 28, 2012
Prospectus
Shares
Zoetis Inc.
Class A common stock
This is the initial public offering of Class A common stock of Zoetis Inc. All of our shares of common stock are currently held by Pfizer Inc.
In connection with this offering, Pfizer will exchange shares of our Class A common stock for indebtedness of Pfizer held by certain of the underwriters, which we refer to, in such role, as the debt exchange parties. The debt exchange parties will then sell these shares pursuant to this offering. As a result, the debt exchange parties, and not Pfizer or Zoetis, will receive the net proceeds from the sale of the shares in this offering. Prior to this offering, there has been no public market for our Class A common stock. We intend to apply for listing of our Class A common stock on the New York Stock Exchange, or NYSE, under the symbol ZTS. The estimated initial public offering price is between $ and $ per share of Class A common stock.
In connection with this offering, we will have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. The holders of Class A common stock and Class B common stock will each be entitled to one vote per share for all matters submitted to a vote of stockholders other than with respect to the election of directors. With respect to the election of directors, the holders of Class B common stock will be entitled to ten votes per share, and the holders of Class A common stock will be entitled to one vote per share. Each share of Class B common stock held by Pfizer or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder.
Investing in our Class A common stock involves a high degree of risk. See Risk factors beginning on page 14.
Per share | Total | |||||||
Initial public offering price |
$ | $ | ||||||
Underwriting discounts and commissions |
$ | $ | ||||||
Proceeds to the debt exchange parties, before expenses |
$ | $ |
The debt exchange parties have granted the underwriters an option for a period of 30 days to purchase from them up to additional shares of Class A common stock. The debt exchange parties, and not Pfizer or Zoetis, will receive the net proceeds from any shares of Class A common stock sold pursuant to this option to purchase additional shares.
Delivery of the shares of Class A common stock will be made on or about , 2012 through the book-entry facilities of The Depository Trust Company.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
J.P. Morgan | BofA Merrill Lynch | Morgan Stanley |
, 2012
1 | ||||
14 | ||||
40 | ||||
41 | ||||
42 | ||||
43 | ||||
44 | ||||
45 | ||||
47 | ||||
56 | ||||
Managements discussion and analysis of financial condition and results of operations |
58 | |||
94 | ||||
100 | ||||
122 | ||||
148 | ||||
149 | ||||
162 | ||||
163 | ||||
172 | ||||
Material United States federal income and estate tax consequences to non-U.S. holders |
174 | |||
177 | ||||
184 | ||||
184 | ||||
184 | ||||
F-1 |
Zoetis Inc., Pfizer Inc., the debt exchange parties and the underwriters have not authorized anyone to provide any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of Zoetis Inc. None of Zoetis Inc., Pfizer Inc., the debt exchange parties or the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale thereof is not permitted. Zoetis Inc., Pfizer Inc., the debt exchange parties and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus is accurate only as of the date of this prospectus.
i
Unless the context requires otherwise: (a) references to Zoetis, our company, we, us or our refer to Zoetis Inc., a Delaware corporation, and its subsidiaries after giving effect to the transactions described under The Separation and Distribution transactionsThe Separation; and (b) references to Pfizer refer to Pfizer Inc., a Delaware corporation, and its subsidiaries other than Zoetis and Zoetiss subsidiaries. Accordingly, unless the context requires otherwise, statements relating to our history in this prospectus describe the history of Pfizers animal health business unit.
Currency amounts in this prospectus are stated in United States dollars, unless otherwise indicated.
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from Vetnosis Limited, or Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine, and management estimates. Vetnosis is a leading provider of research products, commercial information and analysis of the global animal health sector. The information from Vetnosis contained in this prospectus was not prepared by Vetnosis on our behalf. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industrys future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Risk factors. These and other factors could cause future performance to differ materially from our assumptions and estimates. See Cautionary statement concerning forward-looking statements.
The name and mark, Pfizer, and other trademarks, trade names and service marks of Pfizer appearing in this prospectus are the property of Pfizer. Prior to the completion of this offering, Zoetis and other trademarks, trade names and service marks of Zoetis appearing in this prospectus are the property of Pfizer, and after the completion of this offering, Zoetis and other trademarks, trade names and service marks of Zoetis appearing in this prospectus will be the property of Zoetis. This prospectus also contains additional trade names, trademarks and service marks belonging to Pfizer and to other companies. We do not intend our use or display of other parties trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
ii
This summary highlights information included elsewhere in this prospectus and does not contain all of the information you should consider in making an investment decision. You should read this entire prospectus carefully, including the sections entitled Risk factors, Cautionary statement concerning forward-looking statements, Selected historical combined financial data and Managements discussion and analysis of financial condition and results of operations and our combined financial statements and the notes thereto before making an investment decision regarding our Class A common stock.
Our company
Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. For more than 60 years, as a business unit of Pfizer, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. Measured by our revenues of $4.2 billion for the year ended December 31, 2011, we are the largest animal health medicines and vaccines business, with our products sold in more than 120 countries and across eight core species and five major product categories.
With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and Latin America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, emerging markets contributed 27% of our revenues for the year ended December 31, 2011, which we believe makes us the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.
We believe our investments in the industrys largest sales organization, which includes an extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, lead to enduring and valued relationships with our customers. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the U.S. Food and Drug Administration, or FDA, and approximately one-fifth of all animal health vaccine approvals granted by the U.S. Department of Agriculture, or USDA. The majority of our research and development, or R&D, programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.
We believe our ability to successfully position our diverse portfolio of products with high brand recognition in attractive markets and execute our operating plan has contributed to our financial performance over the last several years. For the nine months ended September 30, 2012, our revenues were $3.2 billion, reflecting growth of 2% compared to the nine months ended October 2, 2011. For the years ended December 31, 2011 and 2010, our revenues were $4.2 billion and $3.6 billion, reflecting growth of 18% and 30% compared to the prior year periods.
As a result of the impact of recent significant acquisitions and the related government-mandated divestitures on the revenue numbers in our statement of operations, during the nine months ended September 30, 2012 and October 2, 2011 and the years ended December 31, 2011, 2010 and 2009, the growth trend on our existing portfolio from year to year is not readily apparent. We believe that it is not only important to understand overall revenue growth, but also existing portfolio growth year over year. As such, we utilize base revenue growth. Base revenue growth is defined as revenue growth excluding the impact of incremental revenues from recent
1
significant acquisitions, government-mandated divestitures and foreign exchange. Our base revenue growth was 5% in the nine months ended September 30, 2012, 7% in 2011 and 7% in 2010 compared to the prior year periods. For a more complete description of base revenue growth, see Managements discussion and analysis of financial condition and results of operationsAnalysis of the combined statements of operations.
For the nine months ended September 30, 2012, our Adjusted net income (a non-GAAP financial measure) was $482 million, reflecting growth of 27% compared to the nine months ended October 2, 2011. In 2011 and 2010, our Adjusted net income was $503 million and $275 million, reflecting growth of 83% and 46% compared to the prior year periods. For the nine months ended September 30, 2012, our net income attributable to Zoetis was $446 million, reflecting growth of 89% compared to the nine months ended October 2, 2011. In 2011 and 2010, our net income attributable to Zoetis was $245 million and $110 million, reflecting growth of 123% and 210% compared to the prior year periods. For a reconciliation of Adjusted net income to net income attributable to Zoetis, see Managements discussion and analysis of financial condition and results of operationsAdjusted net income.
Our leadership in animal health medicines and vaccines extends across both livestock and companion animals. The primary livestock species are cattle (both beef and dairy), swine, poultry, sheep and fish, and the primary companion animal species are dogs, cats and horses. Our livestock products primarily prevent or treat conditions in livestock, enabling the cost-effective production of safe, high-quality animal protein, whereas our companion animal products improve the quality of and extend the life of pets and increase convenience and compliance for pet owners. Livestock and companion animal products represented approximately 66% and 34% of our revenues, respectively, for the year ended December 31, 2011.
Our more than 300 product lines include vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceutical products. Our product portfolio is enhanced by complementary businesses, including diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting.
Animal health industry
The animal health industry, which focuses on both livestock and companion animals, is a growing industry that impacts billions of people worldwide. Broadly defined, as measured by revenues, the approximately $100 billion animal health industry includes all products and services, other than livestock feed and pet food, that promote livestock productivity and health and companion animal health, such as medicines and vaccines, diagnostics, medical devices, pet supplies, nutritional supplements, veterinary services and other related services.
Within this broad market, medicines and vaccines, our core area of operation, represented a global market of $22 billion, as measured by 2011 revenues, grew at a compound annual growth rate, or CAGR, of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine.
The livestock medicines and vaccines sector represented $13.1 billion of sales in 2011, or 60% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 7% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis.
Growth in the livestock medicines and vaccines sector is driven by human population growth and increasing standards of living, consequently increasing demand for improved nutrition, particularly animal protein, increasing natural resource constraints driving a need for enhanced productivity, and increased focus on food safety. Livestock health and production are essential to meeting the growing demand for animal protein of a
2
global population that is increasing in size and standard of living, particularly in many emerging markets. As part of the global ecosystem, livestock health is critical to assuring a safe, sustainable global food supply and reducing the outbreak of infectious disease in both humans and animals.
The cost to livestock producers of animal health medicines and vaccines is small relative to other livestock production costs, including feed, and these products help protect producers investments by treating and preventing diseases in herds and flocks before they become widespread, thus improving economic outcomes for producers. As a result, demand for animal health medicines and vaccines has typically been more stable than demand for other production inputs.
The companion animal medicines and vaccines sector represented $8.9 billion of sales in 2011, or 40% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 5% per year between 2011 and 2016, according to Vetnosis.
Growth in the companion animal medicines and vaccines sector is driven by economic development and related increases in disposable income, increasing pet ownership, companion animals living longer, increasing medical treatment of companion animals and advances in animal health medicines and vaccines. Industry sources indicate that companion animals improve the physical and emotional well-being of pet owners. Pet ownership and spending per pet are increasing globally, and industry sources report that pet owners indicate a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on petcare.
Animal health distinctions from human health
The business of developing and marketing animal health medicines and vaccines shares a number of characteristics with the business of developing and marketing medicines and vaccines for human health. These similarities include complex and regulated product manufacturing, products that must be proven efficacious and safe in clinical trials to be approved by regulators, a reliance on new product development through R&D and products that are marketed based on labeled claims regarding impacts on health. However, there are also significant differences between the animal health medicines and vaccines and human health businesses, including:
|
R&D is faster, less expensive and more predictable and sustainable. R&D for animal health generally requires fewer clinical studies, involves fewer subjects and is conducted directly in the target species. As a result, decisions on the potential efficacy and safety of products often can be made more quickly, and the likelihood of success often can be established earlier in development than in human health R&D. While the development of new chemical and biological entities through new product R&D continues to play an important role, the majority of animal health R&D investment is focused on brand lifecycle development. These factors generally yield faster, less expensive and more predictable R&D processes and more sustainable R&D pipelines as compared to human health. |
|
More diverse product portfolios. In general, animal health medicines and vaccines businesses are less reliant on a small number of top selling key products than human health businesses. Animal health products are developed for multiple species and sold across different regions, which may have environmental, cultural, epidemiological and other differences that contribute to distinct product requirements. As a result, animal health products often have a smaller market size, and the performance of any single product typically has less impact on an animal health medicines and vaccines business as compared to a human health business. |
|
Partnership relationships with customers. While some industry participants rely on distributors to market and sell their products, particularly in certain emerging markets, the animal health industry typically uses a |
3
combination of sales representatives to inform customers about the attributes of animal health products and technical and veterinary operations specialists to provide advice regarding local, regional and global trends in animal health. As a result of these relationships, sales and consulting visits are typically longer and more meaningful, and sales representatives have better access to customer decision makers, as compared to human health. |
|
Primarily self-pay. Livestock producers and pet owners generally pay for animal healthcare out-of-pocket. Purchasers make decisions without the influence of insurance companies or government payors that are often involved in product and pricing decisions in human healthcare. Livestock producers are able to see measurable economic outcomes related to the use of animal health medicines and vaccines, as compared to human health in which outcomes can be less certain and more difficult to demonstrate. Companion animal veterinarians continue to be key decision-makers and dispensers of medicines and vaccines for companion animals. The sale of animal health products directly to pet owners is a meaningful contributor to veterinary practice economics. We believe that these dynamics result in less pricing pressure than in human health. |
|
Strong brand loyalty and less generic competition. Generic competition in the animal health industry is less than in human health. The reasons for this include the smaller average market size of each product opportunity, the importance of direct distribution and education to veterinarians and livestock producers and the primarily self-pay nature of the business. In addition, companion animal health products are often directly prescribed and dispensed by veterinarians. The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty, which we believe often continues after the loss of patent-based and regulatory exclusivity. |
Our segments
Due to meaningful differences in customer needs across different regions, we organize and operate our business in four regions. Within each of these regional segments, we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on local and regional trends and customer needs. Our business segments are:
|
United States. Revenues of $1,294 million and $1,659 million represented 41% and 39% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. We experienced base revenue growth of 7% in 2011 and 13% in 2010 and 6% for the nine months ended September 30, 2012 in this segment. |
|
Europe/Africa/Middle East. Revenues of $799 million and $1,144 million represented 25% and 27% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include the United Kingdom, Germany and France. Key emerging markets in this segment include Russia, Turkey and South Africa. We experienced base revenue growth of 3% in 2011 and (1)% in 2010 and less than 1% for the nine months ended September 30, 2012 in this segment. |
|
Canada/Latin America. Revenues of $549 million and $788 million represented 18% and 19% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The developed market in this segment is Canada. Key emerging markets in this segment include Brazil and Mexico. We experienced base revenue growth of 9% in 2011 and 5% in 2010 and 4% for the nine months ended September 30, 2012 in this segment. |
|
Asia/Pacific. Revenues of $518 million and $642 million represented 16% and 15% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include Australia, Japan, New Zealand and South Korea. Key emerging markets in this segment include India and China. We experienced base revenue growth of 12% in 2011 and 15% in 2010 and 8% for the nine months ended September 30, 2012 in this segment. |
4
Our competitive strengths
We believe that the following strengths create sustainable competitive advantages that will enable us to continue our growth as a leader in the animal health medicines and vaccines industry:
|
Global leader with scale and scope. According to Vetnosis, as measured by revenues in 2011, we are the market leader in all of the major regions in which we operate, with the exception of Western Europe, where we hold the number two position. We believe we have an industry-leading global footprint, with products sold in more than 120 countries. Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines. |
|
Established direct presence in emerging markets. We have an established direct presence in many important emerging markets, and we are a leader in many of the emerging markets in which we operate. We believe this direct presence has enabled us to become the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. Emerging markets contributed approximately 27% of our revenues for the year ended December 31, 2011. |
|
Diversified product portfolio. We market products across eight core species and five major product categories, and our portfolio contains more than 300 product lines. The depth of our product portfolio enables us to address the varying needs of different customers. Generally, because we have lower product sales concentration than many of our competitors, the performance of any single product has less impact on our business as compared to other, less-diversified animal health medicines and vaccines businesses. In 2011, our top selling product line, the ceftiofur line, contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues. |
|
Leader in direct sales and marketing with strong customer relationships. Our commercial model emphasizes direct selling, and we believe we are less reliant on distributors than our competitors. We believe our sales organization, consisting of approximately 3,400 employees, is the largest in our industry, with direct operations in approximately 70 countries. Our sales organization is supported by our technical and veterinary operations specialists, who advise our customers with in-depth technical and medical expertise and disease education. Our direct relationships and our direct global presence create a high level of local and regional specialization, which allows us to rapidly capitalize on market-specific situations and provides a global platform for R&D and business expansion. We believe we achieve both stronger customer relationships and better economic returns on our products by emphasizing these direct relationships. |
|
Leader in product developmentnew product R&D and brand lifecycle development. We believe that we are a leader in animal health R&D. We have a track record of developing products that meet the needs of our customers. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA and approximately one-fifth of all animal health vaccine approvals granted by the USDA. While new chemical and biological entities play an important role in our growth, the majority of our R&D investment is in brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations. |
|
High-quality products delivered reliably by our world-class manufacturing operations. We believe that our customers value high-quality manufacturing and reliability of supply. We utilize a diversified network of 29 proprietary manufacturing sites located in 11 countries and numerous third-party contract manufacturing organizations, which we refer to as CMOs, to maximize operational efficiencies and to introduce products quickly and efficiently. Our manufacturing sites experienced approximately 170 regulatory inspections globally between 2007 and 2011, with no findings that required material remediation or other penalties. We believe this reflects the strong quality controls and quality assurance programs in place at our manufacturing sites. |
5
|
Dedicated employees and experienced management team. We believe that we have more professionally educated animal health experts on our team than any of our competitors. Our research team has an average tenure of more than ten years, and our sales organization employees have, on average, been with us for more than five years. Several members of our executive team lead and have led important and influential animal health industry organizations. |
|
Track record of strong top-line revenue growth and significant cash flow generation. We have generated revenue growth at a CAGR of 24% over the three years ended December 31, 2011. Our revenue growth, driven by a diverse product portfolio and acquisitions, has generated significant cash flow. We have generated base revenue growth of 7% and 7% for the years ended December 31, 2011 and December 31, 2010, respectively. |
Our growth strategies
We are committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. We intend to continue to grow our business by pursuing the following core strategies:
|
Leverage our direct local presence and strong customer relationships. We believe our direct selling commercial model and the brand loyalty enjoyed by our existing products provide us with operational efficiencies and access to an array of new growth opportunities, including a platform to encourage the adoption of more sophisticated animal health products. We believe our close contact with customers provides us with an in-depth understanding of their businesses, which allows us to develop products that address unmet customer needs. |
|
Further penetrate emerging markets. We believe we are well-positioned in many emerging markets, based on our diverse product portfolio and our regional and local focus, and that we have further opportunities to expand in emerging markets by reaching new customers, by introducing more of our products and by supporting the adoption of more sophisticated medicines and vaccines. Furthermore, we believe that consolidation of livestock producers in certain emerging markets will drive adoption of our products. We intend to continue to efficiently develop and market new products that respond to the needs of these customers and provide them with strong customer service and technical support. |
|
Pursue new product development and value-added brand lifecycle development to extend our product portfolio. We intend to continue to develop and grow our product portfolio by developing new chemical and biological entities through new product R&D as well as by expanding our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. Our R&D efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. We leverage our strong direct presence in many regions, which we believe allows us to cost-effectively develop and introduce new products, including brand lifecycle development products. |
|
Remain the partner of choice for access to new products and technologies. We intend to continue to expand our extensive network of research partnerships around the globe in order to gain access to new technologies, pharmaceutical targets and vaccine antigens. Through participation in over 100 research alliances with leading universities and research institutes, we support cutting-edge research and secure the right to develop and commercialize new products and technologies. We also intend to continue to grow our business through smaller scale acquisitions, asset purchases, in-licensing transactions, supply and distribution agreements and other strategic partnerships. Subject to certain restrictions pursuant to the R&D collaboration and license agreement, following this offering, we expect to have access to Pfizers proprietary compound library and database to develop new products. We also intend to explore opportunities to enter into collaboration agreements and external alliances with other parties, including parties that may have chosen not to collaborate with us while we were a business unit of Pfizer. As a result, we will continue to offer and develop products that add value for veterinary professionals, livestock producers and pet owners. |
6
|
Continue to provide high-quality products and improve manufacturing production margins. We believe that we are a leader in manufacturing quality and in supply reliability. Our manufacturing and supply chain provide us with a global platform for continued expansion, including in emerging markets, and we believe that we will continue to increase our production efficiencies and expand production margins as our business grows. Our operational efficiency initiatives have delivered consistent gross margin improvements for our legacy products, and as we have integrated acquisitions we have also applied these operational efficiency initiatives to improve production margins. |
|
Expand into complementary businesses to become a more complete, trusted partner in providing solutions. We intend to continue to expand our presence in complementary businesses, including diagnostics, genetics, devices and services. We also intend to expand our complementary services, including dairy data management, e-learning and professional consulting, to help our customers improve their practice management capabilities and production efficiencies. We believe that these expanded offerings, supported by our technical expertise, will drive an outcomes-based approach to animal healthcare that has the potential to generate incremental revenues, as well as increase customer loyalty and sales of our products. |
The Separation
Prior to the completion of this offering, we will be a wholly-owned subsidiary of Pfizer, and all of our outstanding shares of common stock will be owned by Pfizer.
Prior to the completion of the debt financing described below, through a series of steps, Pfizer transferred to us its subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we transferred or will transfer to Pfizer: (i) all of the shares of our Class A common stock; (ii) all of the shares of our Class B common stock; (iii) $ aggregate principal amount of our senior indebtedness, which Pfizer disposed of in the debt financing; and (iv) $ of the proceeds received in the debt financing and/or cash on hand, which amount will be paid immediately prior to the completion of this offering. In addition, immediately prior to the completion of this offering, we and Pfizer intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with Pfizer. For a description of these agreements, see Certain relationships and related party transactionsRelationship with Pfizer. We refer to the separation transactions, as described in The Separation and Distribution transactionsThe Separation, as the Separation.
The underwriting and the debt-for-equity exchange
Instead of selling shares of our Class A common stock directly to the underwriters for cash, Pfizer will first exchange the shares of our Class A common stock to be sold in this offering with certain of the underwriters, which we refer to, in such role, as the debt exchange parties, for outstanding indebtedness of Pfizer held by the debt exchange parties. The debt exchange parties will then sell the shares to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of this offering immediately prior to the settlement of the debt exchange parties sale of the shares to the underwriters. If the underwriters exercise their option to purchase additional shares of Class A common stock from the debt exchange parties, Pfizer will convert shares of Class B common stock into shares of Class A common stock and exchange such shares of Class A common stock with the debt exchange parties. The debt exchange parties will then sell such shares of Class A common stock to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of such option exercise immediately prior to the settlement of the debt exchange parties sale of such shares to the underwriters. We refer to these exchanges collectively as the debt-for-equity exchange.
We expect that the indebtedness of Pfizer held by the debt exchange parties will have an aggregate principal amount of at least $ . The amount of indebtedness of Pfizer held by the debt exchange parties is expected to be sufficient to acquire all of the shares of our Class A common stock to be sold in this offering, inclusive of the shares that may be sold pursuant to the underwriters option to purchase additional shares. Upon completion of
7
the debt-for-equity exchange, the Pfizer indebtedness exchanged in such debt-for-equity exchange will be retired. We do not guarantee or have any other obligations in respect of the Pfizer indebtedness. See UnderwritingThe debt-for-equity exchange.
Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer % of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and % of the combined voting power of our outstanding common stock with respect to the election of directors (or % and %, respectively, if the underwriters exercise their option to purchase additional shares in full). We refer to the Class A common stock and Class B common stock collectively as our common stock.
The debt financing
In , we incurred approximately $ aggregate principal amount of our senior indebtedness, including the $ senior indebtedness that was transferred to Pfizer and subsequently sold by Pfizer. We refer to this as the debt financing. Immediately prior to the completion of this offering, we will transfer $ of the proceeds received in the debt financing and/or cash on hand to Pfizer.
Credit facility
In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility, which we refer to as the credit facility. The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. See Description of certain indebtednessCredit facility.
Commercial paper program
We expect to enter into a commercial paper program with a capacity of up to $1.0 billion prior to or concurrently with the completion of this offering. While we do not anticipate that any commercial paper will be issued under the commercial paper program at the time of this offering, we may incur indebtedness under this program in the future.
The Distribution
Pfizer has informed us that, following this offering, it may make a tax-free distribution to its stockholders of all or a portion of its remaining equity interest in us, which may include one or more distributions effected as a dividend to all Pfizer stockholders, one or more distributions in exchange for Pfizer shares or other securities, or any combination thereof. We refer to any such potential distribution as the Distribution.
Pfizer has received a private letter ruling from the Internal Revenue Service, or the IRS, substantially to the effect that, among other things, the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, or the Code. Pfizer has no obligation to pursue or consummate any further dispositions of its ownership interest in us, including through the Distribution, by any specified date or at all. If pursued, the Distribution would be subject to various conditions, including receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the continuing application of Pfizers private letter ruling from the IRS and the receipt of an opinion of counsel to the effect that such Distribution would be tax-free to Pfizer and its stockholders. The conditions to the Distribution may not be satisfied, Pfizer may decide not to consummate the Distribution even if the conditions are satisfied or Pfizer may decide to waive one or more of these conditions and consummate the Distribution even if all of the conditions are not satisfied.
8
Risk factors
There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled Risk factors following this prospectus summary. These risks include, but are not limited to:
|
emerging restrictions and bans on the use of antibacterials used in food-producing animals; |
|
perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products; |
|
increased regulation relating to the raising, processing or consumption of food-producing animals; |
|
an outbreak of infectious disease carried by animals; |
|
adverse global economic conditions; |
|
failure of our R&D, acquisition and licensing efforts to generate new products; |
|
failure to achieve the expected benefits of the Separation or the Distribution, which include improved strategic and operational efficiency, the adoption of a capital structure and investment and dividend policies that are best suited to our standalone company, the use of our equity to facilitate future acquisitions and improved alignment of employee incentives with our performance and growth objectives; |
|
operation as a standalone public company without many of the resources previously available to us as a business unit of Pfizer; |
|
control of a majority of the voting power of our common stock by Pfizer and, as a result, Pfizers ability to determine the outcome of our future corporate actions, including the election of our directors; and |
|
actual or potential conflicts of interest as a result of the fact that several of our directors will simultaneously serve as employees of Pfizer. |
Conflicts of interest
The offering is being conducted in accordance with the applicable provisions of Rule 5121 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., or FINRA, because certain of the underwriters will have a conflict of interest pursuant to Rule 5121(f)(5)(C)(ii) by virtue of their role as debt exchange parties, since all of the net proceeds of this offering will be received by the debt exchange parties. Rule 5121 requires that a qualified independent underwriter as defined in Rule 5121 must participate in the preparation of the prospectus and perform its usual standard of diligence with respect to the registration statement and this prospectus. Accordingly, is assuming the responsibilities of acting as the qualified independent underwriter in the offering. See UnderwritingConflicts of interest.
Corporate information
We were incorporated in Delaware in July 2012. The location of our principal executive offices will be determined prior to the consummation of this offering. Our website is currently located at www.pfizerah.com. Prior to the consummation of this offering, our website will be located at www.zoetis.com. Information on, or accessible through, our website is not part of this prospectus.
9
Class A common stock offered in this
|
shares ( shares if the underwriters exercise their option to purchase additional shares in full) |
Common stock to be held by Pfizer
|
No shares of Class A common stock (no shares if the underwriters exercise their option to purchase additional shares in full) |
shares of Class B common stock ( shares if the underwriters exercise their option to purchase additional shares in full) |
Common stock to be outstanding
|
shares of Class A common stock ( shares if the underwriters exercise their option to purchase additional shares in full) |
shares of Class B common stock ( shares if the underwriters exercise their option to purchase additional shares in full) |
Underwriters option |
The underwriters have an option to purchase up to additional shares of Class A common stock from the debt exchange parties as described in Underwriting. |
Use of proceeds |
We will not receive any proceeds from the sale of our Class A common stock in this offering. All of the net proceeds from this offering will be received by the debt exchange parties. On the settlement date of this offering immediately prior to the settlement of the debt exchange parties sale of the shares to the underwriters, the debt exchange parties will acquire the Class A common stock being sold in this offering from Pfizer in exchange for outstanding Pfizer indebtedness held by the debt exchange parties. See Use of proceeds. |
Voting rights |
In connection with this offering, we will have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. The holders of Class A common stock and Class B common stock will each be entitled to one vote per share for all matters submitted to a vote of stockholders other than with respect to the election of directors. With respect to the election of directors, the holders of Class B common stock will be entitled to ten votes per share, and the holders of Class A common stock will be entitled to one vote per share. Each share of Class B common stock held by Pfizer or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder. |
10
Selling stockholder |
In connection with this offering, Pfizer, as a selling stockholder for purposes of the U.S. securities laws, will exchange all of the shares of our Class A common stock being sold in this offering for indebtedness of Pfizer held by the debt exchange parties. The debt exchange parties will then sell these shares pursuant to this offering. |
Conflicts of interest |
Certain of the underwriters may be deemed to have a conflict of interest under Rule 5121 of the Conduct Rules of FINRA. See UnderwritingConflicts of interest. |
Stock exchange symbol |
We intend to apply for listing of our Class A common stock on the NYSE under the symbol ZTS. |
Unless the context requires otherwise, references to the number and percentage of shares of common stock to be outstanding immediately after this offering are based on shares of Class A common stock and shares of Class B common stock outstanding as of , 2012 and:
|
assume the underwriters option to purchase additional shares will not be exercised; and |
|
exclude shares of our Class A common stock issuable under our equity incentive plans. |
Unless otherwise indicated, the information presented in this prospectus:
|
gives effect to the transactions described under The Separation and Distribution transactionsThe Separation; and |
|
assumes an initial public offering price of $ per share of our Class A common stock, the midpoint of the price range set forth on the cover of this prospectus. |
11
Summary historical combined financial data
The summary historical combined statement of operations data for the years ended December 31, 2011, 2010 and 2009 presented below have been derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined statement of operations data for the nine months ended September 30, 2012 and October 2, 2011 and the summary historical combined balance sheet data at September 30, 2012 have been derived from our unaudited condensed combined financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed combined financial statements for the interim periods included in this prospectus include all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and the operating results for these periods. The operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.
Our combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units, Pfizers global external supply group and Pfizers global logistics and support group. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional cost allocation methods depending on the nature of the services and/or costs.
The financial statements included in this prospectus may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we operated as a standalone public company during the periods presented, including changes that will occur in our operations and capital structure as a result of this offering and the Separation.
Our combined financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. You should read the summary historical combined financial data set forth below in conjunction with the sections entitled Managements discussion and analysis of financial condition and results of operations and Selected historical combined financial data and our combined financial statements and notes thereto included elsewhere in this prospectus.
Statement of operations data:
Nine Months
Ended |
Year Ended
December 31,(a) |
|||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
2011 | 2010 | 2009 | |||||||||||||||
Revenues |
$ | 3,160 | $ | 3,106 | $ | 4,233 | $ | 3,582 | $ | 2,760 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses(b) |
2,469 | 2,634 | 3,685 | 3,202 | 2,568 | |||||||||||||||
Restructuring charges and certain acquisitionrelated costs |
55 | 108 | 154 | 202 | 340 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income/(loss) before provision/(benefit) for taxes on income |
636 | 364 | 394 | 178 | (148 | ) | ||||||||||||||
Provision/(benefit) for taxes on income/(loss) |
190 | 126 | 146 | 67 | (47 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income/(loss) before allocation to noncontrolling interests |
446 | 238 | 248 | 111 | (101 | ) | ||||||||||||||
Less: Net income/(loss) attributable to noncontrolling interests |
| 2 | 3 | 1 | (1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income/(loss) attributable to Zoetis |
$ | 446 | $ | 236 | $ | 245 | $ | 110 | $ | (100 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
12
Balance sheet data:
(MILLIONS OF DOLLARS) |
At September
30,
2012 |
|||
Working capital |
$ | 1,818 | ||
Property, plant and equipment, less accumulated depreciation |
1,204 | |||
Total assets |
5,904 | |||
Allocated long-term debt(c) |
580 | |||
Total liabilities |
1,795 | |||
Total Zoetis equity |
4,094 |
Certain amounts may reflect rounding adjustments.
(a) | Starting in 2011, includes the King Animal Health business, or KAH, acquired as part of Pfizers acquisition of King Pharmaceuticals, Inc., commencing on the acquisition date of January 31, 2011. Starting in 2009, includes Fort Dodge Animal Health, or FDAH, operations, acquired as part of Pfizers acquisition of Wyeth, commencing on the acquisition date of October 15, 2009. |
(b) | Excludes restructuring charges and certain acquisition-related costs. |
(c) | Starting in 2009, represents an allocation of Pfizer debt that was issued to partially finance the acquisition of Wyeth (including FDAH) in 2009. The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. |
Other data:
Nine Months
Ended |
Year Ended
December 31, |
|||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
2011 | 2010 | 2009 | |||||||||||||||
Adjusted net income(a) |
$ | 482 | $ | 381 | $ | 503 | $ | 275 | $ | 189 |
Certain amounts may reflect rounding adjustments.
(a) | Adjusted net income (a non-GAAP financial measure) is defined as reported net income attributable to Zoetis excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Management uses Adjusted net income, among other factors, to set performance goals and to measure the performance of the overall company, as described in Managements discussion and analysis of financial condition and results of operationsAdjusted net income. We believe that investors understanding of our performance is enhanced by disclosing this performance measure. Reconciliations of U.S. GAAP reported net income attributable to Zoetis to non-GAAP Adjusted net income for the nine months ended September 30, 2012 and October 2, 2011, as well as reconciliations of the years ended December 31, 2011, 2010 and 2009, are provided in Managements discussion and analysis of financial condition and results of operationsAdjusted net income. The Adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis. |
13
Investing in our Class A common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this prospectus, including our combined financial statements and notes thereto, before you invest in our Class A common stock. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose part or all of your investment.
Risks related to our business and industry
Restrictions and bans on the use of antibacterials used in food-producing animals may become more prevalent.
The issue of the potential transfer of increased antibacterials resistance in bacteria from food-producing animals to human pathogens, and the causality of that transfer, are the subject of global scientific and regulatory discussion. Antibacterials refer to small molecules that can be used to treat or prevent bacterial infections and are a sub-categorization of the products that make up our anti-infectives and medicinal feed additives portfolios. In some countries, this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals, regardless of the route of administration (in feed or injectable). These restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take action even when there is scientific uncertainty. For example, in April 2012, the FDA announced guidance calling for the voluntary elimination over a period of time of the use of medically important antibacterials in animal feed for growth promotion in food production animals (medically important antibacterials include classes that are prescribed in animal and human health). The guidance provides for continued use of antibacterials in food-producing animals for treatment, control and prevention of disease under the supervision of a veterinarian. The FDA indicated that they took this action to help preserve the efficacy of medically important antibacterials to treat infections in humans. Our revenues attributable to antibacterials for livestock were approximately $841 million for the nine months ended September 30, 2012 and approximately $1.2 billion for the year ended December 31, 2011. We cannot predict whether antibacterials resistance concerns will result in additional restrictions or bans, expanded regulations or public pressure to discontinue or reduce use of antibacterials in food-producing animals, which could materially adversely affect our operating results and financial condition.
Perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products could cause a decline in the sales of such products.
Our livestock business depends heavily on a healthy and growing livestock industry. If the public perceives a risk to human health from the consumption of the food-producing animals that utilize our products, there may be a decline in the production of such food products and, in turn, demand for our products. For example, livestock producers may experience decreased demand for their products or reputational harm as a result of evolving consumer views of animal rights, nutrition and health-related or other concerns. Any reputational harm to the livestock industry may also extend to companies in related industries, including our company. Adverse consumer views related to the use of one or more of our products in livestock also may result in a decrease in the use of such products and could have a material adverse effect on our operating results and financial condition.
Increased regulation relating to the raising, processing or consumption of food-producing animals could reduce demand for our livestock products.
Companies in the livestock industries are subject to extensive and increasingly stringent regulations. If livestock producers are adversely affected by new regulations or changes to existing regulations, they may reduce herd sizes or become less profitable and, as a result, they may reduce their use of our products, which may materially adversely affect our operating results and financial condition. Furthermore, adverse regulations related, directly
14
or indirectly, to the use of one or more of our products may injure livestock producers market position. More stringent regulation of the livestock industry or our products could have a material adverse effect on our operating results and financial condition.
An outbreak of infectious disease carried by animals could negatively affect the sale and production of our products.
Sales of our livestock products could be materially adversely affected by the outbreak of disease carried by animals, such as avian influenza, foot-and-mouth disease or bovine spongiform encephalopathy (otherwise known as BSE or mad cow disease), which could lead to the widespread death or precautionary destruction of animals as well as the reduced consumption and demand for animal protein. In addition, outbreaks of disease carried by animals may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products due to reduced herd or flock sizes. For example, in April 2012, the USDA announced that it had identified a case of BSE in California. This announcement caused certain countries to implement additional inspections of, or suspend the importation of, United States beef. Additionally, in December 2012, the World Animal Health Organization announced that a case of BSE had been identified in Brazil. This announcement similarly caused certain countries to suspend the importation of Brazilian beef. While the restrictions that were implemented as a result of these cases of BSE have not significantly affected demand for our products, the discovery of additional cases of BSE may result in additional restrictions related to, or reduced demand for, animal protein, which may have a material adverse effect on our operating results and financial condition. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere.
Consolidation of our customers could negatively affect the pricing of our products.
Veterinarians and livestock producers are our primary customers. In recent years, there has been a trend towards the concentration of veterinarians in large clinics and hospitals. In addition, livestock producers, particularly swine and poultry producers, have seen recent consolidation in their industries. If these trends towards consolidation continue, these customers could attempt to improve their profitability by leveraging their buying power to obtain favorable pricing. The resulting decrease in our prices could have a material adverse effect on our operating results and financial condition.
Our business may be negatively affected by weather conditions and the availability of natural resources.
The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, as usage of our products follows varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
In addition, livestock producers depend on the availability of natural resources, including large supplies of fresh water. Their animals health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, livestock producers may purchase less of our products.
For example, the current drought impacting the United States is considered the worst in many years, impacting both the supply of corn and the availability of grazing pasture. The decrease in harvested corn has resulted in higher corn prices, which has impacted the profitability of livestock producers of cattle, pork and poultry. Higher corn prices may contribute to reductions in herd or flock size that may result in reduced spending on animal health products. Reduced availability of grazing pasture may also force cattle producers to cull their herds. Fewer heads of cattle would result in reduced demand for our products. A prolonged drought could have a material adverse effect on our operating results and financial condition.
15
Our business is subject to risk based on global economic conditions.
The global financial markets recently have undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions could have a material adverse effect on our operating results, financial condition and liquidity. Certain of our customers and suppliers have been affected directly by the economic downturn and continue to face credit issues and could experience cash flow problems that have given rise to and could continue to give rise to payment delays, increased credit risk, bankruptcies and other financial hardships that could decrease the demand for our products or hinder our ability to collect amounts due from customers. If one or more of our large customers, including distributors, discontinue their relationship with us as a result of economic conditions or otherwise, our operating results and financial condition may be materially adversely affected. In addition, economic concerns may cause some pet owners to forgo or defer visits to veterinary practices or could reduce their willingness to treat pet health conditions or even to continue to own a pet.
Our business is subject to risk based on customer exposure to rising costs and reduced customer income.
Feed, fuel and transportation and other key costs for livestock producers may increase or animal protein prices or sales may decrease. Either of these trends could cause deterioration in the financial condition of our livestock product customers, potentially inhibiting their ability to purchase our products or pay us for products delivered. Our livestock product customers may offset rising costs by reducing spending on our products, including by switching to lower-cost alternatives to our products. In addition, concerns about the financial resources of pet owners also could cause veterinarians to alter their treatment recommendations in favor of lower-cost alternatives to our products. These shifts could result in a decrease of sales of our companion animal products, especially in developed countries where there is a higher rate of pet ownership.
Changes in distribution channels for companion animal products could negatively impact our market share, margins and distribution of our products.
In most markets, companion animal owners typically purchase their animal health products directly from veterinarians. Companion animal owners increasingly could purchase animal health products from sources other than veterinarians, such as Internet-based retailers, big-box retail stores or other over-the-counter distribution channels. This trend has been demonstrated by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products in recent years. Companion animal owners also could decrease their reliance on, and visits to, veterinarians as they rely more on Internet-based animal health information. Because we market our companion animal prescription products through the veterinarian distribution channel, any decrease in visits to veterinarians by companion animal owners could reduce our market share for such products and materially adversely affect our operating results and financial condition. In addition, companion animal owners may substitute human health products for animal health products if human health products are deemed to be lower-cost alternatives.
Legislation has also been proposed in the United States, and may be proposed in the United States or abroad in the future, that could impact the distribution channels for our companion animal products. For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their animal health products directly from veterinarians. Such requirements may lead to increased use of generic alternatives to our products or the increased substitution of our products with other animal health products or human health products if such other products are deemed to be lower-cost alternatives. Many states already have regulations requiring veterinarians to provide prescriptions to pet owners upon request and the American Veterinary Medical Association has long-standing policies in place to encourage this practice.
Over time, these and other competitive conditions may increase our reliance on Internet-based retailers, big-box retail stores or other over-the-counter distribution channels to sell our companion animal products. We may
16
be unable to sustain our current margins and we may not be adequately prepared or able to distribute our products if an increased portion of our sales is through these channels. Any of these events could materially adversely affect our operating results and financial condition.
The animal health industry is highly competitive.
The animal health industry is highly competitive. We believe many of our competitors are conducting R&D activities in areas served by our products and in areas in which we are developing products. Our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses. These competitors may have access to greater financial, marketing, technical and other resources. As a result, they may be able to devote more resources to developing, manufacturing, marketing and selling their products, initiating or withstanding substantial price competition or more readily taking advantage of acquisitions or other opportunities. In addition to competition from established market participants, new entrants to the animal health medicines and vaccines industry could substantially reduce our market share or render our products obsolete.
To the extent that any of our competitors are more successful with respect to any key competitive factor or we are forced to reduce, or are unable to raise, the price of any of our products in order to remain competitive, our operating results and financial condition could be materially adversely affected. Competitive pressure could arise from, among other things, safety and efficacy concerns, limited demand growth or a significant number of additional competitive products being introduced into a particular market, price reductions by competitors, the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure animal health products at lower costs than us and the ability of competitors to access more or newer technology than us.
Generic products may be viewed as more cost-effective than our products.
We face competition from products produced by other companies, including generic alternatives to our products. We depend on patents to provide us with exclusive marketing rights for some of our products. Our patent protection for these products extends for varying periods in accordance with the dates of filing or grant and the legal life of patents in countries in which patents are granted. The protection afforded, which varies from country to country, is limited by the scope and applicable terms of our patents and the availability of legal remedies in the applicable country. As a result, we may face competition from lower-priced generic alternatives to many of our products. Generic competitors are becoming more aggressive in terms of pricing, and generic products are an increasing percentage of overall animal health sales in certain regions. In addition, private label products may compete with our products. If animal health customers increase their use of new or existing generic or private label products, our operating results and financial condition could be materially adversely affected. We estimate that approximately 80% of our revenues in 2011 were derived from products that are either unpatented (i.e., never patented or off-patent) or covered by our patents that, while providing a competitive advantage, do not provide market exclusivity. Over the next several years, several of our products patents will expire.
We may not successfully acquire and integrate other businesses, license rights to technologies or products, form and manage alliances or divest businesses.
We may pursue acquisitions, technology licensing arrangements, strategic alliances or divestitures of some of our businesses as part of our business strategy. We may not complete these transactions in a timely manner, on a cost-effective basis or at all. In addition, we may be subject to regulatory constraints or limitations or other unforeseen factors that prevent us from realizing the expected benefits. Even if we are successful in making an acquisition, the products and technologies that are acquired may not be successful or may require significantly greater resources and investments than originally anticipated. We may be unable to integrate acquisitions successfully into our existing business, and we may be unable to achieve expected gross margin improvements or efficiencies. We also could incur or assume significant debt and unknown or contingent liabilities. Our reported
17
results of operations could be negatively affected by acquisition or disposition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. We may be subject to litigation in connection with, or as a result of, acquisitions, dispositions, licenses or other alliances, including claims from terminated employees, customers or third parties, and we may be liable for future or existing litigation and claims related to the acquired business, disposition, license or other alliance because either we are not indemnified for such claims or the indemnification is insufficient. These effects could cause us to incur significant expenses and could materially adversely affect our operating results and financial condition.
We may not successfully implement our business strategies or achieve expected gross margin improvements.
We are and may continue to pursue strategic initiatives that management considers critical to our long-term success, including, but not limited to, increasing sales in emerging markets, base revenue growth through new product development and value added brand lifecycle development; improving operational efficiency through manufacturing efficiency improvement and other programs; using cash flow from operations to service or reduce debt; and expanding our complementary products and services. In addition to base revenue growth, we also have historically grown our business through Pfizers acquisitions of large pharmaceutical companies that had animal health businesses, including the Fort Dodge Animal Health business of Wyeth and the Alpharma Animal Health business of King Pharmaceuticals, Inc. However, following the Separation, we will no longer be able to benefit from Pfizers acquisition activity. We also have acquired or partnered with a number of smaller animal health businesses, and we intend to continue to do so in the future. There are significant risks involved with the execution of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our control. Accordingly, we cannot predict whether we will succeed in implementing these strategic initiatives. It could take several years to realize the anticipated benefits from these initiatives, if any benefits are achieved at all. We may be unable to achieve expected gross margin improvements on our products and technologies, including those acquired and those developed internally. Additionally, our business strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our business.
Our business could be affected adversely by labor disputes, strikes or work stoppages.
Some of our employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements in certain jurisdictions, including the United States. As a result, we are subject to the risk of labor disputes, strikes, work stoppages and other labor-relations matters. We may be unable to negotiate new collective bargaining agreements on similar or more favorable terms and may experience work stoppages or other labor problems in the future at our sites. These risks may be increased by the Separation because we will no longer be able to benefit from Pfizers prior relationships and negotiations relating to such agreements. We could experience a disruption of our operations or higher ongoing labor costs, which could have a material adverse effect on our operating results and financial condition, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation or shortages and reduced revenues and net income. In addition, labor problems at our suppliers or CMOs could have a material adverse effect on our operating results and financial condition.
Loss of our executive officers could disrupt our operations.
We depend on the efforts of our executive officers. Our executive officers are not currently, and are not expected to be, subject to non-compete provisions. In addition, we have not entered into employment agreements with our executive officers. Any unplanned turnover or our failure to develop an adequate succession plan for one or more of our executive officer positions could deplete our institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more of our executive officers, or our inability to recruit and retain qualified executive officers in the future, could, at least temporarily, have a material adverse effect on our operating results and financial condition.
18
We may be required to write down goodwill or identifiable intangible assets.
Under U.S. GAAP, if we determine goodwill or identifiable intangible assets are impaired, we will be required to write down these assets and record a non-cash impairment charge. As of September 30, 2012, we had goodwill of $981 million and identifiable intangible assets, less accumulated amortization, of $877 million. Identifiable intangible assets consist primarily of developed technology rights, brands, trademarks, license agreements, patents and in-process R&D.
Determining whether an impairment exists and the amount of the potential impairment involves quantitative data and qualitative criteria that are based on estimates and assumptions requiring significant management judgment. Future events or new information may change managements valuation of an intangible asset in a short amount of time. The timing and amount of impairment charges recorded in our combined statements of income and write-downs recorded in our combined balance sheets could vary if managements conclusions change. Any impairment of goodwill or identifiable intangible assets could have a material adverse effect on our operating results and financial position.
Risks related to research and development
Our R&D, acquisition and licensing efforts may fail to generate new products and brand lifecycle developments.
Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition. We commit substantial effort, funds and other resources to R&D, both through our own dedicated resources and through collaborations with third parties.
We may be unable to determine with accuracy when or whether any of our products now under development will be approved or launched, or we may be unable to develop, license or otherwise acquire product candidates or products. In addition, we cannot predict whether any products, once launched, will be commercially successful or will achieve sales and revenues that are consistent with our expectations. The animal health industry is subject to regional and local trends and regulations and, as a result, products that are successful in some of our markets may not achieve similar success when introduced into new markets. Furthermore, the timing and cost of our R&D may increase, and our R&D may become less predictable. For example, changes in regulations applicable to our industry may make it more time-consuming and/or costly to research, test and develop products.
Products in the animal health industry are sometimes derived from molecules and compounds discovered or developed as part of human health research. In addition to the R&D collaboration and license agreement with Pfizer, we expect to enter into other collaboration or licensing arrangements with third parties to provide us with access to compounds and other technology for purposes of our business. Such agreements are typically complex and require time to negotiate and implement. If we enter into these arrangements, we may not be able to maintain these relationships or establish new ones in the future on acceptable terms or at all. In addition, any collaboration that we enter into may not be successful, and the success may depend on the efforts and actions of our collaborators, which we may not be able to control. If we are unable to access human health-generated molecules and compounds to conduct research and development on cost-effective terms, our ability to develop new products could be limited.
Advances in veterinary medical practices and animal health technologies could negatively affect the market for our products.
The market for our products could be impacted negatively by the introduction and/or broad market acceptance of newly-developed or alternative products that address the diseases and conditions for which we sell products, including green or holistic health products or specially bred disease-resistant animals. In addition, technological breakthroughs by others may obviate our technology and reduce or eliminate the market for our products. Introduction or acceptance of such products or technologies could materially adversely affect our operating results and financial condition.
19
Our R&D relies on evaluations in animals, which may become subject to bans or additional regulations.
As an animal health medicines and vaccines business, the evaluation of our existing and new products in animals is required to register our products. Animal testing in certain industries has been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to ban animal testing or encourage the adoption of additional regulations applicable to animal testing. To the extent that the activities of such organizations and individuals are successful, our R&D, and by extension our operating results and financial condition, could be materially adversely affected. In addition, negative publicity about us or our industry could harm our reputation.
Risks related to manufacturing
Manufacturing problems and capacity imbalances may cause product launch delays, inventory shortages, recalls or unanticipated costs.
In order to sell our products, we must be able to produce and ship sufficient quantities. We have a global manufacturing network consisting of 29 manufacturing sites located in 11 countries. In addition, 14 Pfizer sites located in 13 countries will manufacture certain of our products for us. We also employ a network of approximately 200 CMOs. Many of our products involve complex manufacturing processes and are sole-sourced from certain manufacturing sites.
Minor deviations in our manufacturing processes, such as temperature excursions or improper package sealing, could result in delays, inventory shortages, unanticipated costs, product recalls, product liability and/or regulatory action. In addition, a number of factors could cause production interruptions, including:
|
the failure of us or any of our vendors or suppliers to comply with applicable regulations and quality assurance guidelines; |
|
construction delays; |
|
equipment malfunctions; |
|
shortages of materials; |
|
labor problems; |
|
natural disasters; |
|
power outages; |
|
terrorist activities; |
|
changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, shipping distributions or physical limitations; and |
|
the outbreak of any highly contagious diseases near our production sites. |
These interruptions could result in launch delays, inventory shortages, recalls, unanticipated costs or issues with our agreements under which we supply third parties, which may adversely affect our operating results. For example, our manufacturing site in Medolla, Italy was damaged in an earthquake in May 2012, which resulted in production interruptions at that site.
Our manufacturing network may be unable to meet the demand for our products or we may have excess capacity if demand for our products changes. The unpredictability of a products regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites, and shifting customer demand (including as a result of market conditions or entry of branded or generic competition) increase the potential for capacity imbalances. In addition, construction of sites is expensive, and our ability to recover costs will depend on the market acceptance and success of the products produced at the new sites, which is uncertain.
20
We rely on third parties to provide us with materials and services and are subject to increased labor and material costs.
The materials used to manufacture our products may be subject to availability constraints and price volatility caused by changes in demand, weather conditions, supply conditions, government regulations, economic climate and other factors. In addition, labor costs may be subject to volatility caused by the supply of labor, governmental regulations, economic climate and other factors. Increases in the demand for, availability or the price of, materials used to manufacture our products and increases in labor costs could increase the costs to manufacture our products. We may not be able to pass all or a material portion of any higher material or labor costs on to our customers, which could materially adversely affect our operating results and financial condition.
In addition, certain third-party suppliers are the sole source of certain materials necessary for production of our products. We may be unable to meet demand for certain of our products if any of our third-party suppliers cease or interrupt operations or otherwise fail to meet their obligations to us.
Risks related to legal matters and regulation
We may incur substantial costs and receive adverse outcomes in litigation and other legal matters.
Our operating results, financial condition and liquidity could be materially adversely affected by unfavorable results in pending or future litigation matters. These matters include, among other things, allegations of violation of United States and foreign competition law, labor laws, consumer protection laws, and environmental laws and regulations, as well as claims or litigations relating to product liability, intellectual property, securities, breach of contract and tort. In addition, changes in the interpretations of laws and regulations to which we are subject, or in legal standards in one or more of the jurisdictions in which we operate, could increase our exposure to liability. For example, in the United States, attempts have been made to allow damages for emotional distress and pain and suffering in connection with the loss of, or injury to, a companion animal. If such attempts were successful, our exposure with respect to product liability claims could increase materially.
Litigation matters, regardless of their merits or their ultimate outcomes, are costly, divert managements attention and may materially adversely affect our reputation and demand for our products. We cannot predict with certainty the eventual outcome of pending or future litigation matters. An adverse outcome of litigation or legal matters could result in our being responsible for significant damages. Any of these negative effects resulting from litigation matters could materially adversely affect our operating results and financial condition.
The misuse or off-label use of our products may harm our reputation or result in financial or other damages.
Our products have been approved for use under specific circumstances for the treatment of certain diseases and conditions in specific species. There may be increased risk of product liability if veterinarians, livestock producers, pet owners or others attempt to use our products off-label, including the use of our products in species (including humans) for which they have not been approved. For example, Ketamine, the active pharmaceutical ingredient in our Ketaset product, is a commonly abused hallucinogen. Furthermore, the use of our products for indications other than those indications for which our products have been approved may not be effective, which could harm our reputation and lead to an increased risk of litigation. If we are deemed by a governmental or regulatory agency to have engaged in the promotion of any of our products for off-label use, such agency could request that we modify our training or promotional materials and practices and we could be subject to significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry. Any of these events could materially adversely affect our operating results and financial condition.
Animal health products are subject to unanticipated safety or efficacy concerns, which may harm our reputation.
Unanticipated safety or efficacy concerns can arise with respect to animal health products, whether or not scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as
21
well as product liability, and other claims. For example, as a result of safety concerns related to our product, PregSure BVD, in 2010, we voluntarily suspended sales of the product and withdrew the marketing authorization in the EU and, in 2011, we also suspended sales and withdrew the marketing authorization for the product in New Zealand.
In addition, we depend on positive perceptions of the safety and quality of our products, and animal health products generally, by our customers, veterinarians and end-users, and such concerns may harm our reputation. These concerns and the related harm to our reputation could materially adversely affect our operating results and financial condition, regardless of whether such reports are accurate.
Our business is subject to substantial regulation.
We will not be able to market new products unless and until we have obtained all required regulatory approvals in each jurisdiction where we propose to market those products. Even after a product reaches market, it may be subject to re-review and may lose its approvals. In connection with the Separation, we will likely change the location of the manufacture of certain of our products and, because of these changes, may be required to obtain new regulatory approvals. Our failure to obtain approvals, delays in the approval process, or our failure to maintain approvals in any jurisdiction, may prevent us from selling products in that jurisdiction until approval or reapproval is obtained, if ever.
In addition, we cannot predict the nature of future laws or regulations, nor can we determine the effect that additional laws or regulations or changes in existing laws or regulations could have on our business when and if promulgated, or the impact of changes in the interpretation of these laws and regulations, or of disparate federal, state, local and foreign regulatory schemes. Changes to such laws or regulations may include, among other things, changes to taxation requirements, such as tax-rate changes and changes affecting the taxation by the United States of income earned outside the United States.
Changes in applicable federal, state, local and foreign laws and regulations could have a material adverse effect on our operating results and financial condition. For example, regulatory agencies have recently increased their focus on the potential for vaccines to induce immunity anomalies. Absent a clear understanding of these anomalies, regulatory scrutiny of vaccines may become stricter. Additional scrutiny or regulation of our vaccine products could materially adversely affect our operating results and financial condition.
We are subject to complex environmental, health and safety laws and regulations.
We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. Due to our operations, these laws and regulations also require us to obtain, and comply with, permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.
Given the nature of our business, we have incurred, are currently incurring and may in the future incur liabilities under the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA, or under other federal, state, local and foreign environmental cleanup laws, with respect to our current or former sites, adjacent or nearby third-party sites, or offsite disposal locations. See BusinessEnvironmental, health and safety. The costs associated with future cleanup activities that we may be required to conduct or finance could be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous materials into the environment. Such liability could materially adversely affect our operating results and financial condition.
22
Furthermore, regulatory agencies are showing increasing concern over the impact of animal health products and livestock operations on the environment. This increased regulatory scrutiny may necessitate that additional time and resources be spent to address these concerns in both new and existing products.
Our failure to comply with the environmental, health and safety laws and regulations to which we are subject, including any permits issued thereunder, may result in environmental remediation costs, loss of permits, fines, penalties or other adverse governmental or private actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial measures. We could also be held liable for any and all consequences arising out of human exposure to hazardous materials or environmental damage. Environmental laws and regulations are complex, change frequently, have tended to become more stringent and stringently enforced over time and may be subject to new interpretation. We cannot assure you that our costs of complying with current and future environmental, health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous materials will not materially adversely affect our business, results of operations or financial condition.
Risks related to our international operations
A significant portion of our operations are conducted in foreign jurisdictions and are subject to the economic, political, legal and business environments of the countries in which we do business.
Our international operations could be limited or disrupted by any of the following:
|
volatility in the international financial markets; |
|
compliance with governmental controls; |
|
difficulties enforcing contractual and intellectual property rights; |
|
compliance with a wide variety of laws and regulations, such as the Foreign Corrupt Practices Act and similar non-U.S. laws and regulations; |
|
compliance with foreign labor laws; |
|
burdens to comply with multiple and potentially conflicting foreign laws and regulations, including those relating to environmental, health and safety requirements; |
|
changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our customers; |
|
political and social instability, including crime, civil disturbance, terrorist activities and armed conflicts; |
|
trade restrictions and restrictions on direct investments by foreign entities, including restrictions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury; |
|
changes in tax laws and tariffs; |
|
costs and difficulties in staffing, managing and monitoring international operations; and |
|
longer payment cycles and increased exposure to counterparty risk. |
The multinational nature of our business subjects us to potential risks that various taxing authorities may challenge the pricing of our cross-border arrangements and subject us to additional tax, adversely impacting our effective tax rate and our tax liability.
In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs. Compliance with these requirements may prohibit the import or export of certain products and technologies or may require us to obtain a license before importing or exporting certain products or technology. A failure to comply with any of these laws, regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary penalties, or both, disruptions to our business, limitations
23
on our ability to import and export products and services, and damage to our reputation. In addition, variations in the pricing of our products between jurisdictions may result in the unauthorized importation of our products between jurisdictions. While the impact of these factors is difficult to predict, any of them could materially adversely affect our operating results and financial condition. Changes in any of these laws, regulations or requirements, or the political environment in a particular country, may affect our ability to engage in business transactions in certain markets, including investment, procurement and repatriation of earnings.
Foreign exchange rate fluctuations and potential currency controls affect our results of operations, as reported in our financial statements.
We conduct operations in many areas of the world, involving transactions denominated in a variety of currencies. In 2011, we generated approximately 61% of our revenues in currencies other than the U.S. dollar, principally the euro, Australian dollar and Brazilian real. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, because our financial statements are reported in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations.
We also face risks arising from currency devaluations and the imposition of cash repatriation restrictions and exchange controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Cash repatriation restrictions and exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing restrictions or controls. While we currently have no need, and do not intend, to repatriate or convert cash held in countries that have significant restrictions or controls in place, should we need to do so to fund our operations, we may be unable to repatriate or convert such cash, or unable to do so without incurring substantial costs. We currently have substantial operations in countries that have cash repatriation restrictions or exchange controls in place, including China and Venezuela, and, if we were to need to repatriate or convert such cash, these controls and restrictions may have a material adverse effect on our operating results and financial condition.
We may not be able to realize the expected benefits of our investments in emerging markets.
We have been taking steps to increase our presence in emerging markets, including by expanding our manufacturing presence, sales organization and product offerings in these markets. Failure to continue to maintain and expand our business in emerging markets could also materially adversely affect our operating results and financial condition.
Some countries within emerging markets may be especially vulnerable to periods of local, regional or global economic, political or social instability or crisis. For example, our sales in certain emerging markets have suffered from extended periods of disruption due to natural disasters. Furthermore, we have also experienced lower than expected sales in certain emerging markets due to local, regional and global restrictions on banking and commercial activities in those countries. In addition, certain emerging markets have currencies that fluctuate substantially, which may impact our financial performance. For example, in the past, our revenues in certain emerging markets in Latin America have been adversely impacted by currency fluctuations and devaluations. For all these and other reasons, sales within emerging markets carry significant risks.
Risks related to intellectual property
The actual or purported intellectual property rights of third parties may negatively affect our business.
A third party may sue us or otherwise make a claim, alleging infringement or other violation of the third-partys patents, trademarks, trade dress, copyrights, trade secrets, domain names or other intellectual property rights. If we do not prevail in this type of litigation, we may be required to:
|
pay monetary damages; |
24
|
obtain a license in order to continue manufacturing or marketing the affected products, which may not be available on commercially reasonable terms, or at all; or |
|
stop activities, including any commercial activities, relating to the affected products, which could include a recall of the affected products and/or a cessation of sales in the future. |
The costs of defending an intellectual property claim could be substantial and could materially adversely affect our operating results and financial condition, even if we successfully defend such claims.
The intellectual property positions of animal health medicines and vaccines businesses frequently involve complex legal and factual questions, and an issued patent does not guarantee us the right to practice the patented technology or develop, manufacture or commercialize the patented product. We cannot be certain that a competitor or other third party does not have or will not obtain rights to intellectual property that may prevent us from manufacturing, developing or marketing certain of our products, regardless of whether we believe such intellectual property rights are valid and enforceable or we believe we would be otherwise able to develop a more commercially successful product, which may harm our operating results and financial condition.
If our intellectual property rights are challenged or circumvented, competitors may be able to take advantage of our research and development efforts.
Our long-term success largely depends on our ability to market technologically competitive products. We rely and expect to continue to rely on a combination of intellectual property, including patent, trademark, trade dress, copyright, trade secret and domain name protection laws, as well as confidentiality and license agreements with our employees and others, to protect our intellectual property and proprietary rights. If we fail to obtain and maintain adequate intellectual property protection, we may not be able to prevent third parties from using our proprietary technologies or from marketing products that are very similar or identical to ours. Our currently pending or future patent applications may not result in issued patents, or be approved on a timely basis, or at all. Similarly, any term extensions that we seek may not be approved on a timely basis, if at all. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage, including exclusivity in a particular product area. The scope of our patent claims also may vary between countries, as individual countries have their own patent laws. For example, some countries only permit the issuance of patents covering a novel chemical compound itself, and its first use, and thus further methods of use for the same compound, may not be patentable. We may be subject to challenges by third parties regarding our intellectual property, including claims regarding validity, enforceability, scope and effective term. The validity, enforceability, scope and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings. Our ability to enforce our patents also depends on the laws of individual countries and each countrys practice with respect to enforcement of intellectual property rights. In addition, if we are unable to maintain our existing license agreements or other agreements pursuant to which third parties grant us rights to intellectual property, including because such agreements expire or are terminated, our operating results and financial condition could be materially adversely affected.
In addition, patent law reform in the United States and other countries may also weaken our ability to enforce our patent rights, or make such enforcement financially unattractive. For instance, in September 2011, the United States enacted the America Invents Act, which will permit enhanced third-party actions for challenging patents and implement a first-to-invent system, and, in April 2012, Australia enacted the Intellectual Property Laws Amendment (Raising the Bar) Act, which provides higher standards for obtaining patents. These reforms could result in increased costs to protect our intellectual property or limit our ability to patent our products in these jurisdictions.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies, which could diminish or eliminate sales and profits from those regions and materially adversely affect our operating results and financial condition.
25
Likewise, in the United States and other countries, we currently hold issued trademark registrations and have trademark applications pending, any of which may be the subject of a governmental or third party objection, which could prevent the maintenance or issuance of the same and thus create the potential need to rebrand or relabel a product. As our products mature, our reliance on our trademarks to differentiate us from our competitors increases and as a result, if we are unable to prevent third parties from adopting, registering or using trademarks and trade dress that infringe, dilute or otherwise violate our trademark rights, our business could be materially adversely affected.
Many of our vaccine products and other products are based on or incorporate proprietary information, including proprietary master seeds and proprietary or patented adjuvant formulations. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees, consultants, other advisors and other third parties to execute proprietary information and confidentiality agreements upon the commencement of their employment, engagement or other relationship. Despite these efforts and precautions, we may be unable to prevent a third party from copying or otherwise obtaining and using our trade secrets or our other intellectual property without authorization and legal remedies may not adequately compensate us for the damages caused by such unauthorized use. Further, others may independently and lawfully develop substantially similar or identical products that circumvent our intellectual property by means of alternative designs or processes or otherwise.
The misappropriation and infringement of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, may occur even when we take steps to prevent it. We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and if resolved adversely, could have a significant impact on our business and financial condition. In the future, we may not be able to enforce intellectual property that relates to our products for various reasons, including licensor restrictions and other restrictions imposed by third parties, and that the costs of doing so may outweigh the value of doing so, and this could have a material adverse impact on our business and financial condition.
Risks related to information technology
We may be unable to successfully manage our online ordering sites.
In many markets around the world, such as the United States and Brazil, we provide online ordering sites to customers, often through third-party service providers. The operation of our online business depends on our ability to maintain the efficient and uninterrupted operation of our online order-taking and fulfillment operations. Risks associated with our online business include: disruptions in telephone service or power outages; failures of the computer systems that operate our website, including inadequate system capacity, computer viruses, human error, changes in programming, security breaches, system upgrades or migration of these services to new systems; reliance on third parties for computer hardware and software as well as delivery of merchandise to our customers; rapid technology changes; credit card fraud; natural disasters or adverse weather conditions; power and network outages; changes in applicable federal and state regulations; liability for online content; and consumer privacy concerns. Problems in any one or more of these areas could have a material adverse effect on our operating results and financial condition and could damage our reputation.
We depend on sophisticated information technology and infrastructure.
We rely on various information systems to manage our operations, and we increasingly depend on third parties and applications on virtualized, or cloud, infrastructure to operate and support our information technology systems. These third parties include large established vendors as well as many small, privately owned companies. Failure by these providers to adequately service our operations or a change in control or insolvency of these providers could have an adverse effect on our business, which in turn may materially adversely affect our operating results and financial condition.
26
Prior to the completion of this offering and in connection with the Separation, we will substantially change a number of our business processes, including changes in our financial reporting and supply chain processes. In order to support the new business processes under the terms of our transitional services agreement with Pfizer, we will make significant configuration and data changes within some of our information technology systems. If our information technology and processes are not sufficient to support our business and financial reporting functions, or if we fail to properly implement our new business processes, our financial reporting may be delayed or inaccurate and our operations may be adversely affected and, as a result, our operating results and financial condition may be materially adversely affected.
In addition, over the next few years, we expect to begin implementing a new enterprise resource planning system to better integrate our manufacturing, financial, commercial and business operations. Transitioning to new systems, integrating new systems into current systems or any disruptions or malfunctions (including from circumstances beyond our control) affecting our information systems could cause critical information upon which we rely to be delayed, unreliable, corrupted, insufficient or inaccessible. Any of these potential issues, individually or in aggregation, could have a material adverse effect on our operating results and financial condition.
Even if we are able to implement these systems successfully, all technology systems, despite implementation of security measures, are vulnerable to disability, failures or unauthorized access. If our information technology systems were to fail or be breached, this could materially adversely affect our ability to perform critical business functions and sensitive and confidential data could be compromised.
We may be unable to adequately protect our customers privacy or we may fail to comply with privacy laws.
The protection of customer, employee and company data is critical and the regulatory environment surrounding information security, storage, use, processing, disclosure and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, our customers expect that we will adequately protect their personal information. Any actual or perceived significant breakdown, intrusion, interruption, cyber-attack or corruption of customer, employee or company data or our failure to comply with federal, state, local and foreign privacy laws could damage our reputation and result in lost sales, fines and lawsuits. Despite our considerable efforts and technology to secure our computer network, security could be compromised, confidential information could be misappropriated or system disruptions could occur. Our systems and procedures meet the payment card industry, or PCI, data security standards, which require periodic audits by independent third parties to assess compliance. Failure to comply with the security requirements or rectify a security issue may result in fines and the imposition of restrictions on our ability to accept payment by credit or debit cards. In addition, PCI is controlled by a limited number of vendors that have the ability to impose changes in PCIs fee structure and operational requirements on us without negotiation. Such changes in fees and operational requirements may result in our failure to comply with PCI security standards, as well as significant unanticipated expenses. Such failures could materially adversely affect our operating results and financial condition.
Risks related to our indebtedness
We have substantial indebtedness.
We have a significant amount of indebtedness, which could materially adversely affect our operating results, financial condition and liquidity. We incurred approximately $ aggregate principal amount of senior indebtedness in the debt financing. As of September 30, 2012, after giving pro forma effect to the Transactions, which include the debt financing, our total debt would have been approximately $ . Immediately prior to the completion of this offering, we will transfer $ of the proceeds received in the debt financing and/or cash on hand to Pfizer. In addition, $ of our senior indebtedness was transferred to Pfizer and subsequently sold by Pfizer. See Unaudited pro forma condensed combined financial statements. In addition, we have entered into an agreement for a $1.0 billion five-year revolving credit facility and expect to enter into a commercial paper program with a capacity of up to $1.0 billion prior to or concurrently with the completion of this offering. The credit facility will not available for borrowings until the date on which certain conditions,
27
including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering, which we refer to as the credit facility effective date. While we do not anticipate that any amounts will be drawn under the credit facility or that any commercial paper will be issued under the commercial paper program at the time of this offering, we may incur indebtedness under these arrangements in the future.
We may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:
|
making it more difficult for us to satisfy our obligations with respect to our debt; |
|
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements, including dividends; |
|
increasing our vulnerability to general adverse economic and industry conditions; |
|
exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable rates of interest; |
|
limiting our flexibility in planning for and reacting to changes in the animal health industry; |
|
placing us at a competitive disadvantage to other, less leveraged competitors; |
|
impacting our effective tax rate; and |
|
increasing our cost of borrowing. |
In addition, the instruments governing our indebtedness contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. For example, our credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the credit facility effective date certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains covenants that, among other things, limit or restrict our and our subsidiaries ability, subject to certain exceptions, to incur liens, merge, consolidate or sell, transfer or lease assets, transact with subsidiaries and incur priority indebtedness. Our failure to comply with such covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to dispose of material assets or operations, alter our dividend policy, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The instruments that will govern our indebtedness may restrict our ability to dispose of assets and may restrict the use of proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.
28
In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness will depend on the generation of cash flow by our subsidiaries, including our international subsidiaries, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, may materially adversely affect our operating results, financial condition and liquidity and our ability to satisfy our obligations under our indebtedness or pay dividends on our common stock.
Risks related to our relationship with Pfizer
The Separation and Distribution, if any, may not be successful and we may not achieve some or all of the expected benefits of the Separation and Distribution.
We may not be successful in implementing the Separation and Distribution. In addition, we may not be able to achieve the full strategic and financial benefits expected to result from the Separation and Distribution, or such benefits may be delayed or not occur at all. These benefits include the following:
|
improving strategic and operational flexibility, increasing management focus and streamlining decision-making by providing the flexibility to implement our strategic plan and to respond more effectively to different customer needs and the changing economic environment; |
|
allowing us to adopt the capital structure, investment policy and dividend policy best suited to our financial profile and business needs, without competing for capital with Pfizers other businesses; |
|
creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our common stock; and |
|
facilitating incentive compensation arrangements for employees more directly tied to the performance of our business, and enhancing employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of our business. |
We may not achieve the anticipated benefits of the Separation and Distribution for a variety of reasons. In addition, the Separation and Distribution could adversely affect our operating results and financial condition.
Pfizer controls the direction of our business, and the concentrated ownership of our common stock and certain governance arrangements will prevent you and other stockholders from influencing significant decisions.
Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer % of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and % of the combined voting power of our outstanding common stock with respect to the election of directors (or % and %, respectively, if the underwriters exercise their option to purchase additional shares in full). As long as Pfizer beneficially controls a majority of the voting power of our outstanding common stock with respect to a particular matter, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors. Even if Pfizer were to control less than a majority of the voting power of our outstanding common stock, it may be able to influence the outcome of such corporate actions so long as it owns a significant portion of our common stock. Pfizer may
29
distribute all or a portion of its remaining equity interest in us to its stockholders by means of the Distribution following this offering. If Pfizer does not complete the Distribution or otherwise dispose of its shares of our common stock, it could remain our controlling stockholder for an extended period of time or indefinitely.
Pfizers interests may not be the same as, or may conflict with, the interests of our other stockholders. Investors in this offering will not be able to affect the outcome of any stockholder vote while Pfizer controls the majority of the voting power of our outstanding common stock. As a result, Pfizer will be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including:
|
any determination with respect to our business direction and policies, including the appointment and removal of officers and directors; |
|
any determinations with respect to mergers, business combinations or disposition of assets; |
|
our financing and dividend policy; |
|
compensation and benefit programs and other human resources policy decisions; |
|
termination of, changes to or determinations under our agreements with Pfizer relating to the Separation; |
|
changes to any other agreements that may adversely affect us; |
|
the payment of dividends on our common stock; and |
|
determinations with respect to our tax returns. |
Because Pfizers interests may differ from ours or from those of our other stockholders, actions that Pfizer takes with respect to us, as our controlling stockholder, may not be favorable to us or our other stockholders.
The Distribution may not occur.
Pfizer has no obligation to complete the Distribution. Whether Pfizer proceeds with the Distribution, in whole or in part, is subject to a number of conditions, including the receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the continuing application of Pfizers private letter ruling from the IRS and the receipt of an opinion of counsel to the effect that such Distribution would be tax-free to Pfizer and its stockholders. Even if Pfizer elects to pursue the Distribution, Pfizer has the right to abandon or change the structure of the Distribution if the Pfizer board of directors determines, in its sole discretion, that the Distribution is not in the best interest of Pfizer or its stockholders.
Furthermore, if the Distribution does not occur, or if Pfizer does not otherwise dispose of its shares of our common stock, the risks relating to Pfizers control of us and the potential business conflicts of interest between Pfizer and us will continue to be relevant to our stockholders. The liquidity of shares of our common stock in the market may be constrained for as long as Pfizer continues to hold a significant position in our stock. A lack of liquidity in our Class A common stock could depress the price of our Class A common stock.
Our Class B common stock may remain as a separate class.
Each share of Class B common stock held by Pfizer or a subsidiary of Pfizer will be convertible at any time into one share of Class A common stock at Pfizers option but will not be convertible if held by any other holder. As a result, if Pfizer were to distribute shares of Class B common stock in the Distribution, or otherwise dispose of its shares of Class B common stock, the new holders of such shares would not be able to convert the shares of Class B common stock into Class A common stock. In such event, we may apply to have our Class B common stock listed on a securities exchange. The existence of multiple classes of publicly traded common stock could depress the price of our Class A common stock.
If Pfizer were to distribute shares of Class B common stock in the Distribution, or otherwise dispose of its shares of Class B common stock, our board of directors may in the future consider a proposal to amend our certificate of
30
incorporation to mandatorily convert Class B common stock to Class A common stock on a share-for-share basis, subject to the receipt of the required approval by our stockholders. If the proposal is approved by our board of directors and presented to our stockholders, a vote by (i) a majority of the shares of Class A common stock and Class B common stock, voting together as a single class, and (ii) a majority of the shares of the Class B common stock, voting as a separate class, will be required for the proposal to be approved. There will be no binding commitment by the board to, and our board of directors may elect not to consider the issue or resolve to present any such proposal to our stockholders at any stockholders meeting. Moreover, if presented, our stockholders may not approve any such conversion.
If Pfizer sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party.
Following the completion of this offering, Pfizer will continue to own a significant equity interest in our company. Pfizer will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company.
The ability of Pfizer to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our Class A common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our Class A common stock that may otherwise accrue to Pfizer on its private sale of our common stock. Additionally, if Pfizer privately sells its significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. In addition, if Pfizer sells a controlling interest in our company to a third party, our indebtedness may be subject to acceleration, Pfizer may terminate the R&D collaboration agreement and license agreement, and other transitional arrangements, and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our operating results and financial condition.
The Distribution or future sales by Pfizer or others of our common stock, or the perception that the Distribution or such sales may occur, could depress our Class A common stock price.
Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer % of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and % of the combined voting power of our outstanding common stock with respect to the election of directors (or % and %, respectively, if the underwriters exercise their option to purchase additional shares in full). Subject to the restrictions described in the paragraph below, future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act of 1933, or the Securities Act, for so long as Pfizer is deemed to be our affiliate, unless the shares to be sold are registered with the Securities and Exchange Commission, or SEC. We are unable to predict with certainty whether or when Pfizer will sell a substantial number of shares of our common stock to the extent it retains shares following the Distribution or in the event the Distribution does not occur. The Distribution or sale by Pfizer of a substantial number of shares after this offering, or a perception that the Distribution or such sales could occur, could significantly reduce the market price of our Class A common stock. Upon completion of this offering, except as otherwise described herein, all shares that are being offered hereby will be freely tradable without restriction, assuming they are not held by our affiliates.
We, our officers and directors and Pfizer have agreed with the underwriters that, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to
31
purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up.
Immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of Class A common stock reserved for issuance in respect of certain incentive awards to our directors, officers and employees under the Securities Act. If any of these holders causes a large number of securities to be sold in the public market, the sales could reduce the trading price of our Class A common stock. These sales also could impede our ability to raise future capital.
We will be a controlled company within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Upon completion of this offering, Pfizer will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a controlled company within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including:
|
the requirement that a majority of the board of directors consist of independent directors; |
|
the requirement that our corporate governance committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; |
|
the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
|
the requirement for an annual performance evaluation of our corporate governance and compensation committees. |
While Pfizer controls a majority of the voting power of our outstanding common stock, we may not have a majority of independent directors or corporate governance and compensation committees consisting entirely of independent directors and we will not be required to have written charters addressing these committees purposes and responsibilities or have annual performance evaluations of these committees. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
As a result of the Separation, we will lose Pfizers brand, reputation, capital base and other resources.
Prior to the completion of this offering, as a business unit of Pfizer, we have generally used the name Pfizer Animal Health, and we believe the association with Pfizer has contributed to our building relationships with our customers due to Pfizers globally recognized brand and perceived high-quality products. This offering, the Separation and Distribution could adversely affect our ability to attract and retain customers, which could result in reduced sales of our products.
The loss of Pfizers scale, capital base and financial strength may also prompt suppliers to reprice, modify or terminate their relationships with us. In addition, Pfizers reduction of its ownership of our company may cause some of our existing agreements and licenses to be terminated. We cannot predict with certainty the effect that this offering, the Separation or the Distribution will have on our business, our clients, vendors or other persons, or whether our new brand, Zoetis, will be accepted in the marketplace.
32
Pfizer may compete with us.
Pfizer will not be restricted from competing with us in the animal health business, including as a result of acquiring a company that operates an animal health business. Due to the significant resources of Pfizer, including financial resources, name recognition and know-how resulting from the previous management of our business, Pfizer could have a significant competitive advantage over us should it decide to engage in the type of business we conduct, which may cause our operating results and financial condition to be materially adversely affected.
Certain of our directors may have actual or potential conflicts of interest because of their positions with Pfizer.
Following this offering, Frank A. DAmelio (Executive Vice President, Chief Financial Officer and Business Operations for Pfizer), Geno J. Germano (President and General Manager, Specialty Care and Oncology for Pfizer), Douglas E. Giordano (Senior Vice President, Worldwide Business Development for Pfizer), Charles H. Hill (Executive Vice President, Worldwide Human Resources for Pfizer) and Amy W. Schulman (Executive Vice President and General Counsel, Business Unit Lead, Consumer Healthcare for Pfizer) will serve on our board of directors and retain their positions with Pfizer. In addition, such directors may own Pfizer common stock, options to purchase Pfizer common stock or other Pfizer equity awards. These individuals holdings of Pfizer common stock, options to purchase common stock of Pfizer or other equity awards may be significant for some of these persons compared to these persons total assets. Their position at Pfizer and the ownership of any Pfizer equity or equity awards creates, or may create the appearance of, conflicts of interest when these directors are faced with decisions that could have different implications for Pfizer than the decisions have for us.
Pfizer and its directors and officers will have limited liability to us or you for breach of fiduciary duty.
Our certificate of incorporation provides that, subject to any contractual provision to the contrary, Pfizer will have no obligation to refrain from:
|
engaging in the same or similar business activities or lines of business as we do; |
|
doing business with any of our clients or consumers; or |
|
employing or otherwise engaging any of our officers or employees. |
Under our certificate of incorporation, neither Pfizer nor any officer or director of Pfizer, except as provided in our certificate of incorporation, is liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities.
To preserve the tax-free treatment to Pfizer and its stockholders of the Separation, the debt financing, the debt-for-equity exchange and the potential Distribution, we may not be able to engage in certain transactions.
To preserve the tax-free treatment to Pfizer and its stockholders of the Separation, the debt financing, the debt-for-equity exchange, the potential Distribution and certain related transactions, under the tax matters agreement, we will be restricted from taking any action that prevents the Separation, the debt financing, the debt-for-equity exchange, the potential Distribution and certain related transactions from being tax-free for U.S. federal, state, local and foreign income tax purposes. These restrictions may limit our ability to pursue certain strategic transactions or engage in other transactions, including use of our common stock to make acquisitions and equity capital market transactions that might increase the value of our business. See Certain relationships and related party transactionsRelationship with PfizerTax matters agreement.
33
The assets and resources that we acquire from Pfizer in the Separation may not be sufficient for us to operate as a standalone company, and we may experience difficulty in separating our assets and resources from Pfizer.
Because we have not operated as a standalone company in the past, we may have difficulty doing so. We may need to acquire assets and resources in addition to those provided by Pfizer to our company, and in connection with the Separation, may also face difficulty in separating our assets from Pfizers assets and integrating newly acquired assets into our business. Our business, financial condition and results of operations could be harmed if we have difficulty operating as a standalone company, fail to acquire assets that prove to be important to our operations or incur unexpected costs in separating our assets from Pfizers assets or integrating newly acquired assets.
We will incur significant charges in connection with this offering and the Separation and incremental costs as a standalone public company.
We will need to replicate or replace certain functions, systems and infrastructure to which we will no longer have the same access after this offering. We may also need to make investments or hire additional employees to operate without the same access to Pfizers existing operational and administrative infrastructure. These initiatives may be costly to implement. Due to the scope and complexity of the underlying projects relative to these efforts, the amount of total costs could be materially higher than our estimate, and the timing of the incurrence of these costs is subject to change.
Pfizer currently performs or supports many important corporate functions for our company. Our combined financial statements reflect charges for these services on an allocation basis. Following this offering, many of these services will be governed by our transitional services agreement with Pfizer. Under the transitional services agreement we will be able to use these Pfizer services for a fixed term established on a service-by-service basis. However, we generally will have the right to terminate a service earlier if we give notice to Pfizer. Partial reduction in the provision of any service requires Pfizers consent. In addition, either party will be able to terminate the agreement due to a material breach of the other party, upon prior written notice, subject to limited cure periods.
We will pay Pfizer mutually agreed-upon fees for these services, which will be based on Pfizers costs of providing the services. During the two years following the completion of this offering, the markup for these services will be 0% and, for the remainder of the term of the agreement, Pfizer may introduce a markup of 7%, which we believe is consistent with arms length pricing for the services provided. However, since our transitional services agreement was negotiated in the context of a parent-subsidiary relationship, the terms of the agreement, including the fees charged for the services, may be higher or lower than those that would be agreed to by parties bargaining at arms length for similar services and may be higher or lower than the costs reflected in the allocations in our historical financial statements. Third party costs will be passed through to us at Pfizers or its affiliates cost. In addition, while these services are being provided to us by Pfizer, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited. Prior to the Distribution, if effected, Pfizer will have the unilateral right to resolve disputes under the transitional services agreement.
We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we will receive from Pfizer under our transitional services agreement. Additionally, after the agreement terminates, we may be unable to sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from Pfizer. When we begin to operate these functions separately, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. In addition, we have historically received informal support from Pfizer, which may not be addressed in our transitional services agreement. The level of this informal support will diminish or be eliminated following this offering.
34
We may not be able to fully realize the expected benefits of our R&D agreement with Pfizer.
Prior to the Separation, as a business unit of Pfizer, we had the ability to leverage Pfizers proprietary compound library and database to identify, research and develop compounds suitable as new product candidates for the animal health field. As part of the Separation, we intend to enter into an R&D collaboration and license agreement with Pfizer, which we refer to as the R&D agreement. Pursuant to the R&D agreement, we will have continued access to Pfizers compound library and database for a period of seven years and will have, subject to Pfizers approval, the possibility to exclusively license compounds from Pfizer that we develop under the R&D agreement.
While the R&D agreement is intended to bolster our post-Separation R&D capabilities, certain terms of the R&D agreement may limit our ability to achieve this expected benefit, including:
|
Pfizer will retain ownership of, and license to us, the intellectual property that we develop under the R&D agreement. In some circumstances, the intellectual property we license from Pfizer will be non-exclusive as to Pfizer and third parties. |
|
We are not assured access to Pfizers newest programs. |
|
Pfizer can prevent us from progressing pre-development compounds and, under certain circumstances, Pfizer may terminate our rights to a development stage compound by paying us the fair market value for such compound. |
|
The R&D agreement may be terminated before the expiration of the seven year term in certain circumstances, including if we acquire an interest in or assets of a human pharmaceutical business, we enter into a definitive agreement relating to or undergo a change of control other than the Distribution, if any, or Pfizer acquires, or is acquired by, a company with an animal health business. |
Each of the foregoing terms and Pfizers other rights under the R&D agreement and related licenses (if any), could limit our ability to realize the expected benefits of the R&D agreement. If we fail to achieve the expected benefits of the R&D agreement, it may be more difficult, time consuming or expensive for us to develop and commercialize certain new products, or may result in our products being later to market than those of our competitors. We may experience delays in new product development, which may result in our loss of the first-in-class products in a given therapeutic area.
For a summary description of the terms of the R&D collaboration and license agreement, see Certain relationships and related party transactionsRelationship with PfizerResearch and development collaboration and license agreement.
We are dependent on Pfizer to prosecute, maintain and enforce certain intellectual property.
Under the patent and know-how license agreement (Pfizer as licensor), Pfizer will be responsible for filing, prosecuting and maintaining all patents that Pfizer licenses to us. Pfizer also has the first right, and in some cases the sole right, to enforce such patents. In addition, under the patent and know-how license agreement (Zoetis as licensor), subject to certain exceptions, Pfizer will have the sole right to enforce the licensed patents if the enforcement relates to the human health field. If Pfizer fails to fulfill its obligations or chooses to not enforce the licensed patents under these agreements, we may not be able to prevent competitors from making, using and selling competitive products.
Pfizers rights as licensor under the patent and know-how license could limit our ability to develop and commercialize certain products .
Under the patent and know-how license, Pfizer licenses to us certain of its intellectual property. If we fail to comply with our obligations under this license agreement and Pfizer exercises its right to terminate it, our ability to continue to research, develop and commercialize products incorporating that intellectual property will be
35
limited. In addition, in circumstances where Pfizer has an interest in the subject matter licensed intellectual property in connection with its human health development programs, our rights to use the licensed intellectual property are restricted and/or in limited instances, subject to Pfizers right to terminate at will by Pfizer. These limitations and termination rights may make it more difficult, time consuming or expensive for us to develop and commercialize certain new products, or may result in our products being later to market than those of our competitors.
For a summary description of the terms of the patent and know-how license (Pfizer as licensor), see Certain relationships and related party transactionsRelationship with PfizerIntellectual property license agreements.
Risks related to this offering and ownership of our Class A common stock
An active trading market for our Class A common stock may not develop, and you may not be able to sell your Class A common stock at or above the initial public offering price.
Prior to the completion of this offering, there has been no public market for our common stock. An active trading market for shares of our Class A common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of Class A common stock at an attractive price, or at all. The price for our Class A common stock in this offering will be determined by negotiations among Pfizer, us and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your Class A common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using our common stock as consideration.
The price of our Class A common stock may fluctuate substantially.
You should consider an investment in our Class A common stock to be risky, and you should invest in our Class A common stock only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our Class A common stock to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:
|
our announcements or our competitors announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments; |
|
changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock; |
|
failures to meet external expectations or management guidance; |
|
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; |
|
changes in our capital structure or dividend policy, including as a result of the Distribution, future issuances of securities, sales of large blocks of common stock by our stockholders, including Pfizer, or our incurrence of additional debt; |
|
reputational issues; |
|
changes in general economic and market conditions in or any of the regions in which we conduct our business; |
|
changes in industry conditions or perceptions; |
|
changes in applicable laws, rules or regulations and other dynamics; and |
|
announcements or actions taken by Pfizer as our principal stockholder. |
36
In addition, if the market for stocks in our industry or industries related to our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition and results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
You will incur immediate dilution as a result of this offering.
If you purchase Class A common stock in this offering, you will pay more for your shares than the net tangible book value of your shares. As a result, you will incur immediate dilution of $ per share, representing the difference between the assumed initial public offering price of $ per share (the midpoint of the range on the cover of this prospectus) and our estimated net tangible book value per share as of September 30, 2012 of $ . Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment.
Our historical combined financial data is not necessarily representative of the results we would have achieved as a standalone company and may not be a reliable indicator of our future results.
Our historical combined financial data included in this prospectus does not reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. This is primarily the result of the following factors:
|
our historical combined financial data does not reflect the Separation; |
|
our historical combined financial data reflects expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units that may be higher or lower than the comparable expenses we would have actually incurred, or will incur in the future, as a standalone company; |
|
our cost of debt and our capital structure will be different from that reflected in our combined financial statements; |
|
significant increases may occur in our cost structure as a result of this offering, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; and |
|
this offering may have a material effect on our customers and other business relationships, including supplier relationships, and may result in the loss of preferred pricing available by virtue of our reduced relationship with Pfizer. |
Our financial condition and future results of operations, after giving effect to the Separation, will be materially different from amounts reflected in our combined financial statements included elsewhere in this prospectus. As a result of the Separation, it may be difficult for investors to compare our future results to historical results or to evaluate our relative performance or trends in our business.
As a standalone public company, we may expend additional time and resources to comply with rules and regulations that do not currently apply to us, and failure to comply with such rules may lead investors to lose confidence in our financial data.
As a standalone public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and regulations of the NYSE. Such requirements will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and could be burdensome on our personnel, systems and resources. We will devote significant
37
resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations has and will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly.
In particular, as a public company, our management will be required to conduct an annual evaluation of our internal controls over financial reporting and include a report of management on our internal controls in our annual reports on Form 10-K. Under current rules, we will be subject to these requirements beginning with our annual report on Form 10-K for the year ended December 31, . In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls over financial reporting pursuant to Auditing Standard No. 5 beginning with our annual report on Form 10-K for the year ended December 31, . If we are unable to conclude that we have effective internal controls over financial reporting, or if our registered public accounting firm is unable to provide us with an attestation and an unqualified report as to the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our Class A common stock.
While we currently intend to pay a quarterly cash dividend to our common stockholders, we may change our dividend policy at any time.
Although we currently intend to pay a quarterly cash dividend to our Class A common stockholders and Class B common stockholders, we have no obligation to do so, and our dividend policy may change at any time without notice to our stockholders. We currently intend to pay a quarterly cash dividend on our common stock of $ per share. Returns on your investment will primarily depend on the appreciation, if any, in the price of our Class A common stock. We anticipate that we will retain most of our future earnings, if any, for use in the development and expansion of our business, repayment of indebtedness and for general corporate purposes. The declaration and payment of dividends to holders of our Class A common stock and Class B common stock will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows available in the United States, impact on our effective tax rate, indebtedness, legal requirements and other factors that our board of directors deems relevant.
Provisions in our amended and restated certificate of incorporation, amended and restated by-laws and Delaware law may prevent or delay an acquisition of us, which could decrease the trading price of our Class A common stock.
Our amended and restated certificate of incorporation, which we refer to as our certificate of incorporation, and amended and restated by-laws, which we refer to as our by-laws, contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include:
|
a board of directors that is divided into three classes with staggered terms; |
|
a dual class equity structure; |
|
rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings; |
|
the right of our board of directors to issue preferred stock without stockholder approval; and |
|
limitations on the right of stockholders to remove directors. |
In addition, Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our and our stockholders best interests.
38
If Pfizer makes the Distribution, and there is later a determination that the Separation, the debt financing, the debt-for-equity exchange and/or the Distribution is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying the IRS private letter ruling and/or tax opinion are incorrect or for any other reason, then Pfizer and its stockholders could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities.
Pfizer has received a private letter ruling from the IRS substantially to the effect that, among other things, the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. If pursued, completion by Pfizer of the Distribution would be conditioned on, among other things, the continuing application of Pfizers private letter ruling from the IRS and the receipt of an opinion of tax counsel, to the effect that, among other things, the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The ruling relies and the opinion will rely on certain facts, assumptions, representations and undertakings from Pfizer and us regarding the past and future conduct of the companies respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Pfizer and its stockholders may not be able to rely on the ruling or the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinion of tax counsel, the IRS could determine on audit that the Separation, the debt financing, the debt-for-equity exchange and/or the Distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Pfizer or us after the Distribution. If the Separation, the debt financing, the debt-for-equity exchange and/or the Distribution is determined to be taxable for U.S. federal income tax purposes, Pfizer and its stockholders could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities under applicable law or as a result of certain agreements entered into with Pfizer.
39
Cautionary statement concerning forward-looking statements
This prospectus contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. We generally identify forward-looking statements by words such as anticipate, estimate, expect, intend, project, plan, predict, believe, seek, continue, outlook, may, might, will, should, can have, likely or the negative version of these words or comparable words or by using future dates in connection with any discussion of future performance, actions or events. Forward-looking statements are based on beliefs and assumptions made by management using currently available information.
These statements are not guarantees of future performance, actions or events. In particular, forward-looking statements include statements relating to future actions, business plans or prospects, prospective products, product approvals or products under development, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, strategies, sales efforts, expenses, production efficiencies, production margins, interest rates, foreign exchange rates, growth in emerging markets, the outcome of contingencies, such as legal proceedings, dividend plans, the Distribution, our agreements with Pfizer, Pfizers control of our company, government regulation and financial results. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control and potentially inaccurate assumptions. These risks and uncertainties include those set forth under Risk factors. However, there may also be other risks that we are unable to predict at this time. If one or more of these risks or uncertainties materialize, or if managements underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. You should not put undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
40
We will not receive any proceeds from the sale of our Class A common stock in this offering. All of the net proceeds from this offering will be received by the debt exchange parties. On the settlement date of this offering immediately prior to the settlement of the debt exchange parties sale of the shares to the underwriters, the debt exchange parties will acquire the Class A common stock being sold in this offering from Pfizer in exchange for outstanding Pfizer indebtedness held by the debt exchange parties. See SummaryThe underwriting and the debt-for-equity exchange, UnderwritingThe debt-for-equity exchange and UnderwritingConflicts of interest.
41
We initially expect to pay quarterly cash dividends to holders of our Class A common stock and Class B common stock of $ per share, subject to the discretion of our board of directors. The declaration and payment of dividends to holders of our Class A common stock and Class B common stock will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows available in the United States, impact on our effective tax rate, indebtedness, legal requirements and other factors that our board of directors deems relevant. In addition, the instruments governing our indebtedness may limit our ability to pay dividends. Therefore, no assurance is given that we will pay any dividends to our common stockholders, or as to the amount of any such dividends if our board of directors determines to do so.
Because we are a holding company, our ability to pay cash dividends on our common stock will depend on the receipt of dividends or other distributions from our subsidiaries.
42
Our net tangible book value as of September 30, 2012 was approximately $ , or $ per share, assuming shares of our Class A common stock and shares of our Class B common stock were issued and outstanding at such date. Net tangible book value per share represents:
|
total assets less intangible assets; |
|
reduced by our total liabilities; and |
|
divided by the number of shares of our common stock outstanding. |
Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of our Class A common stock in this offering and the net tangible book value per share immediately following this offering.
After giving effect to this offering and after deducting estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2012 would have been approximately $ , or $ per share. This represents an immediate dilution of $ per share to investors purchasing shares of our Class A common stock in this offering. The following table illustrates this dilution per share:
Assumed initial public offering price per share |
$ | |||||||
Pro forma net tangible book value per share |
$ | |||||||
|
|
|||||||
Dilution per share to new investors |
$ | |||||||
|
|
43
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2012 on a historical basis, and on a pro forma basis to reflect the Transactions, as defined in Unaudited pro forma condensed combined financial statements.
As the net proceeds of this offering are received by the debt exchange parties, this offering has no impact on our capitalization.
The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had the Transactions been completed as of September 30, 2012. In addition, it is not indicative of our future cash and cash equivalents and capitalization. This table is derived from, and is qualified in its entirety by reference to, our historical and pro forma financial statements and the notes thereto included elsewhere in this prospectus, and should be read in conjunction with Managements discussion and analysis of financial condition and results of operations, Unaudited pro forma condensed combined financial statements and our combined financial statements and notes thereto included elsewhere in this prospectus.
As of
September 30, 2012 |
||||||||
Actual | Pro forma | |||||||
(MILLIONS OF DOLLARS) | ||||||||
Cash and cash equivalents |
$ | 133 | $ | |||||
|
|
|
|
|||||
Allocated long-term debt |
$ | 580 | $ | | ||||
Long-term debt |
||||||||
Equity: |
||||||||
Business unit equity |
4,263 | |||||||
Class A common stock, authorizedno shares actual, shares pro forma; issued and outstandingno shares actual, shares pro forma; par value $0.01 per share |
||||||||
Class B common stock, authorizedno shares actual, shares pro forma; issued and outstandingno shares actual, shares pro forma; par value $0.01 per share |
||||||||
Preferred stock, authorizedno shares actual, no shares pro forma; issued and outstandingno shares actual and pro forma; par value $0.01 per share |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive loss |
(169 | ) | (195 | ) | ||||
|
|
|
|
|||||
Total Zoetis equity |
4,094 | |||||||
Equity attributable to noncontrolling interests |
15 | 15 | ||||||
|
|
|
|
|||||
Total equity |
$ | 4,109 | $ | |||||
|
|
|
|
|||||
Total capitalization |
$ | 4,689 | $ | |||||
|
|
|
|
44
Selected historical combined financial data
The following table sets forth our selected historical combined financial data for the periods indicated.
The selected historical combined statement of operations data for the years ended December 31, 2011, 2010 and 2009 and the selected historical combined balance sheet data as of December 31, 2011 and 2010 presented below have been derived from our audited combined financial statements included elsewhere in this prospectus. The selected historical combined balance sheet data as of December 31, 2009 and 2008 have been derived from unaudited combined financial information not included in this prospectus.
The revenue data for the years ended December 31, 2008 and 2007 are derived from unaudited combined financial information not included in this prospectus.
The selected historical combined statement of operations data for the nine months ended September 30, 2012 and October 2, 2011 and the selected historical combined balance sheet data as of September 30, 2012 have been derived from our unaudited condensed combined financial statements included elsewhere in this prospectus. The selected historical combined balance sheet data as of October 2, 2011 has been derived from unaudited combined financial information not included in this prospectus. In the opinion of management, the unaudited condensed combined financial statements for the interim periods included in this prospectus include all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and operating results for these periods. The operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.
Our combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units, Pfizers global external supply group and Pfizers global logistics and support group. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional cost allocation methods (e.g., using third-party sales, headcount, animal health identified manufacturing costs, etc.), depending on the nature of the services and/or costs.
The financial statements included in this prospectus may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we operated as a standalone public company during the periods presented, including changes that will occur in our operations and capital structure as a result of this offering and the Separation.
45
You should read the selected historical combined financial data set forth below in conjunction with the sections entitled Managements discussion and analysis of financial condition and results of operations and our combined financial statements and notes thereto included elsewhere in this prospectus.
Nine Months Ended(a) |
Year
Ended
December 31,(a) |
||||||||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
2011 | 2010 | 2009 | 2008(b) | 2007(b) | ||||||||||||||||||||||||||||
Statement of operations data: |
|||||||||||||||||||||||||||||||||||
Revenues |
$ | 3,160 | $ | 3,106 | $ | 4,233 | $ | 3,582 | $ | 2,760 | $ | 2,825 | $ | 2,639 | |||||||||||||||||||||
Net income/(loss) before allocation to noncontrolling interests(c) |
446 | 238 | 248 | 111 | (101 | ) | NA | NA | |||||||||||||||||||||||||||
Balance sheet data: |
|||||||||||||||||||||||||||||||||||
Total assets |
$ | 5,904 | $ | 5,844 | $ | 5,711 | $ | 5,284 | $ | 5,598 | $ | 2,993 | NA | ||||||||||||||||||||||
Long-term obligations(d) |
580 | 689 | 575 | 673 | 728 | | NA | ||||||||||||||||||||||||||||
Other data: |
|||||||||||||||||||||||||||||||||||
Adjusted net income(e) |
$ | 482 | $ | 381 | $ | 503 | $ | 275 | $ | 189 | NA | NA |
NA: Not Available
Certain amounts may reflect rounding adjustments.
(a) | Starting in 2011, includes the KAH business acquired as part of Pfizers acquisition of King Pharmaceuticals, Inc., commencing on the acquisition date of January 31, 2011. Starting in 2009, includes FDAH operations, acquired as part of Pfizers acquisition of Wyeth, commencing on the acquisition date of October 15, 2009. |
(b) | Certain information for 2007 and 2008 is not available. Over the last five years, there have been significant changes in Pfizers corporate structure and a number of restructurings and personnel changes which have impacted our business. As such, it is not practicable for us to determine net income/(loss) for the years ended December 31, 2008 and 2007 or to determine Total assets and Long-term obligations at December 31, 2007. |
(c) | Defined as net income/(loss) before allocation to noncontrolling interests. |
(d) | Starting in 2009, primarily includes an allocation of Pfizer debt that was issued to partially finance the acquisition of Wyeth (including FDAH) in 2009. The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. |
(e) | Adjusted net income (a non-GAAP financial measure) is defined as reported net income attributable to Zoetis excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Management uses Adjusted net income, among other factors, to set performance goals and to measure the performance of the overall company, as described in Managements discussion and analysis of financial condition and results of operationsAdjusted net income. We believe that investors understanding of our performance is enhanced by disclosing this performance measure. Reconciliations of U.S. GAAP reported net income attributable to Zoetis to non-GAAP Adjusted net income for the nine months ended September 30, 2012 and October 2, 2011, as well as reconciliations of the years ended December 31, 2011, 2010 and 2009, are provided in Managements discussion and analysis of financial condition and results of operationsAdjusted net income. The Adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis. |
46
Unaudited pro forma condensed combined financial statements
The following unaudited pro forma condensed combined financial statements should be read in conjunction with the section entitled Managements discussion and analysis of financial condition and results of operations and our audited combined annual and unaudited condensed combined interim financial statements and accompanying notes included elsewhere in this prospectus.
Our unaudited pro forma condensed combined financial statements consist of unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2012 and for the year ended December 31, 2011, and an unaudited pro forma condensed combined balance sheet as of September 30, 2012. The unaudited pro forma condensed combined financial statements are based on and have been derived from our historical combined annual and condensed combined interim financial statements included elsewhere in this prospectus.
In managements opinion, the unaudited pro forma condensed combined financial statements reflect certain adjustments that are necessary to present fairly our unaudited pro forma condensed combined results of operations and our unaudited pro forma condensed combined balance sheet as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the transactions described below, (ii) factually supportable; and, with respect to the statement of operations, (iii) expected to have a continuing impact on us. The pro forma adjustments are based on assumptions that management believes are reasonable given the best information currently available.
The unaudited pro forma condensed combined financial statements are for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had we operated as a standalone public company during the periods presented or if the transactions described below had actually occurred as of the dates indicated. The unaudited pro forma condensed combined financial statements should not be considered indicative of our future results of operations or financial position as a standalone public company.
The unaudited pro forma condensed combined financial statements give effect to the following transactions, which we refer to as the Transactions, as if they each had occurred on January 1, 2011 for the unaudited pro forma condensed combined statements of operations and on September 30, 2012 for the unaudited pro forma condensed combined balance sheet:
|
Pfizers transfer to us of its subsidiaries holding substantially all of the assets and liabilities of its animal health business in consideration for (i) all of the shares of our Class A common stock; (ii) all of the shares of our Class B common stock; (iii) $ aggregate principal amount of our senior indebtedness; and (iv) $ of cash. This cash will be paid from the proceeds received in the debt financing and/or cash on hand; |
|
the incurrence of $ aggregate principal amount of long-term debt (in addition to the long-term debt issued to Pfizer, as mentioned above) in the debt financing with a rate of interest of %; |
|
the incurrence of $ million of costs related to the issuance of the long-term debt in the debt financing and the establishment of a $1.0 billion five-year revolving credit facility; and |
|
certain transactions contemplated by certain agreements between us and Pfizer described in Certain relationships and related party transactionsRelationship with Pfizer, and the provisions contained therein. |
Due to local regulatory and operational requirements, in certain non-U.S. jurisdictions, the transfer of certain subsidiaries holding the assets and liabilities of Pfizers animal health business may not legally occur prior to this offering. We have not adjusted the accompanying unaudited pro forma condensed combined balance sheet for the potential impact of the delayed transfers because these jurisdictions are not material to our unaudited pro forma condensed combined financial statements, individually or in the aggregate.
47
Our historical condensed combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. Following this offering, pursuant to agreements with Pfizer, we expect that Pfizer will continue to provide us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we expect to incur other costs to replace the services and resources that will not be provided by Pfizer. We will also incur additional costs related to being a standalone public company. As a standalone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Pfizer. We estimate that these costs may exceed the allocated amounts for full year 2011 by a range of approximately $15 million to $25 million in 2013. In addition, we expect to incur internal costs to implement certain new systems, including infrastructure and an enterprise resource planning system, while our legacy systems are being fully supported by Pfizer under the transitional services agreement. We expect these costs to range between approximately $30 million to $40 million in 2013 and 2014. We have not adjusted the accompanying unaudited pro forma condensed combined statements of operations for any of these estimated costs as they are projected amounts based on estimates and, therefore, are not factually supportable.
The unaudited pro forma condensed combined statements of operations exclude certain non-recurring costs that we expect to incur related to the separation, including new branding (which includes changes to the manufacturing process for new packaging required), the creation of a standalone infrastructure, site separation and certain legal registration and patent assignment costs. We expect these costs to range between approximately $190 million to $210 million in 2013 and $50 million to $70 million in 2014. These estimates exclude the impact of any depreciation or amortization of capitalized separation expenditures.
Some of our products are manufactured at sites that will be retained by Pfizer or that will be operated by Pfizer under a sale-leaseback arrangement. Following this offering, pursuant to the master manufacturing and supply agreement with Pfizer, we expect to purchase these products from Pfizer. The historical condensed combined statements of operations include allocations of certain manufacturing and supply costs incurred by the manufacturing sites that would not have been charged to us under the master manufacturing and supply agreement with Pfizer had such agreement been in effect in the periods presented, such as operating variances as well as purchase price and volume variances under a certain threshold. The costs allocated in the historical condensed combined statements of operations are higher than the amounts that would have been charged by Pfizer under the master manufacturing and supply agreement, had it been in effect during the periods presented, by approximately $10 million for the nine months ended September 30, 2012 and approximately $14 million for the year ended December 31, 2011. We have not adjusted the accompanying unaudited pro forma condensed combined statements of operations for the aforementioned differences. Such an adjustment is not factually supportable due to the unpredictability and variability of such costs, which could be gains or losses in any particular period, and due to the fact that, as a standalone company, we will operate under our own supply manufacturing network, which may be different than the one operated by Pfizer.
48
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2012
(MILLIONS, EXCEPT PER SHARE AMOUNTS) | Historical |
Pro Forma
Adjustments |
Notes |
Pro
Forma |
||||||||||||||||
|
||||||||||||||||||||
Revenues |
$ | 3,160 | $ | $ | ||||||||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales (1) |
1,130 | |||||||||||||||||||
Selling, general and administrative expenses (1) |
1,017 | |||||||||||||||||||
Research and development expenses (1) |
288 | |||||||||||||||||||
Amortization of intangible assets |
48 | |||||||||||||||||||
Restructuring charges and certain acquisition-related costs |
55 | |||||||||||||||||||
Other incomenet |
(14 | ) | (23 | ) | (a | ),(b) | ||||||||||||||
|
||||||||||||||||||||
Income before provision for taxes on income |
636 | |||||||||||||||||||
Provision for taxes on income |
190 | 9 | (c | ) | ||||||||||||||||
|
||||||||||||||||||||
Net income before allocation to noncontrolling interests |
446 | |||||||||||||||||||
Less: Net income attributable to noncontrolling interests |
| |||||||||||||||||||
|
||||||||||||||||||||
Net income attributable to Zoetis |
$ | 446 | $ | $ | ||||||||||||||||
|
||||||||||||||||||||
Earnings per common sharebasic |
$ | (d | ) | |||||||||||||||||
Earnings per common sharefully diluted |
$ | (d | ) | |||||||||||||||||
|
||||||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
(d | ) | ||||||||||||||||||
Diluted |
(d | ) | ||||||||||||||||||
|
(1) | Exclusive of amortization of intangible assets, except as disclosed in Note 8 C . Goodwill and Other Intangible Assets : Amortization in the Notes to Unaudited Condensed Combined Financial Statements. |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
49
ZOETIS INC.
(T HE A NIMAL H EALTH B USINESS U NIT OF P FIZER I NC .)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2011
(MILLIONS, EXCEPT PER SHARE AMOUNTS) | Historical (1) |
Pro Forma
Adjustments |
Notes |
Pro
Forma |
||||||||||||
|
||||||||||||||||
Revenues |
$ | 4,233 | $ | $ | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales (2) |
1,652 | |||||||||||||||
Selling, general and administrative expenses (2) |
1,453 | |||||||||||||||
Research and development expenses (2) |
427 | |||||||||||||||
Amortization of intangible assets |
69 | |||||||||||||||
Restructuring charges and certain acquisition-related costs |
154 | |||||||||||||||
Other deductionsnet |
84 | (36 | ) | (a),(b) | ||||||||||||
|
||||||||||||||||
Income before provision for taxes on income |
394 | |||||||||||||||
Provision for taxes on income |
146 | 14 | (c) | |||||||||||||
|
||||||||||||||||
Net income before allocation to noncontrolling interests |
248 | |||||||||||||||
Less: Net income attributable to noncontrolling interests |
3 | |||||||||||||||
|
||||||||||||||||
Net income attributable to Zoetis |
$ | 245 | $ | $ | ||||||||||||
|
||||||||||||||||
Earnings per common sharebasic |
$ | (d) | ||||||||||||||
Earnings per common sharefully diluted |
$ | (d) | ||||||||||||||
|
||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
(d) | |||||||||||||||
Diluted |
(d) | |||||||||||||||
|
(1) | Includes revenues and expenses from acquisitions from the acquisition date, see Note 2 . Basis of Presentation in the Notes to Combined Financial Statements. |
(2) | Exclusive of amortization of intangible assets, except as disclosed in Note 3J . Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets in the Notes to Combined Financial Statements. |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
50
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2012
(MILLIONS, EXCEPT PER SHARE AMOUNTS) | Historical |
Pro Forma
Adjustments |
Notes |
Pro
Forma |
||||||||||
|
||||||||||||||
Assets |
||||||||||||||
Cash and cash equivalents |
$ | 133 | $ | (m),(n) | $ | |||||||||
Accounts receivable, less allowance for doubtful accounts |
848 | 848 | ||||||||||||
Inventories |
1,272 | (136 | ) | (e),(f) | 1,136 | |||||||||
Current deferred tax assets |
72 | (4 | ) | (e),(f) | 68 | |||||||||
Other current assets |
230 | (5 | ) | (e),(f) | 225 | |||||||||
|
||||||||||||||
Total current assets |
2,555 | |||||||||||||
Property, plant and equipment, less accumulated depreciation |
1,204 | 29 | (e),(f) | 1,233 | ||||||||||
Identifiable intangible assets, less accumulated amortization |
877 | 877 | ||||||||||||
Goodwill |
981 | 981 | ||||||||||||
Noncurrent deferred tax assets |
218 | (118 | ) | (e),(h),(i),(k) | 100 | |||||||||
Other noncurrent assets |
69 | (21 | ) | (i),(l),(m) | ||||||||||
|
||||||||||||||
Total assets |
$ | 5,904 | $ | $ | ||||||||||
|
||||||||||||||
Liabilities and Equity |
||||||||||||||
Accounts payable |
$ | 195 | $ | (3 | ) | (e) | $ | 192 | ||||||
Income taxes payable |
42 | 3 | (i) | 45 | ||||||||||
Accrued compensation and related items |
145 | (4 | ) | (e) | 141 | |||||||||
Other current liabilities |
355 | (14 | ) | (e),(l) | 341 | |||||||||
|
||||||||||||||
Total current liabilities |
737 | |||||||||||||
Allocated long-term debt |
580 | (580 | ) | (l) | | |||||||||
Long-term debt |
| (m),(n) | ||||||||||||
Noncurrent deferred tax liabilities |
299 | (45 | ) | (e),(g),(h),(j),(k) | 254 | |||||||||
Other taxes payable |
88 | (65 | ) | (i) | 23 | |||||||||
Other noncurrent liabilities |
91 | 51 | (e),(g) | 142 | ||||||||||
|
||||||||||||||
Total liabilities |
1,795 | |||||||||||||
|
||||||||||||||
Commitments and Contingencies |
||||||||||||||
Business unit equity |
4,263 | 428 |
(e),(f),(g),(h),
(i),(j),(k),(l),(n) |
|||||||||||
Common stock, $0.01 par value, authorized shares; issued and outstanding on a pro forma basis |
| (n) | ||||||||||||
Additional paid-in capital |
| (n) | ||||||||||||
Accumulated other comprehensive loss |
(169 | ) | (26 | ) | (g) | (195 | ) | |||||||
|
||||||||||||||
Total Zoetis equity |
4,094 | |||||||||||||
Equity attributable to noncontrolling interests |
15 | | 15 | |||||||||||
|
||||||||||||||
Total equity |
4,109 | |||||||||||||
|
||||||||||||||
Total liabilities and equity |
$ | 5,904 | $ | $ | ||||||||||
|
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
51
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
N OTES TO U NAUDITED P RO F ORMA C ONDENSED C OMBINED F INANCIAL S TATEMENTS
Certain amounts and percentages may reflect rounding adjustments.
(a) | Reflects the elimination of net interest expense of $23 million and $36 million for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, related to the portion of Pfizers net interest expense allocated to us and included in our historical combined statements of operations. The associated Allocated long-term debt will be retained by Pfizer following the completion of the Transactions. |
(b) | Reflects the addition of interest expense of $ and $ for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, related to the long-term debt incurred in the debt financing. The amount of interest expense includes the amortization of deferred debt issuance costs. |
(c) | Reflects the tax effect of the pre-tax pro forma adjustments impacting Income before provision for taxes on income , calculated using the applicable statutory tax rate in the relevant jurisdictions. |
(d) | The weighted-average number of shares used to compute pro forma basic and diluted earnings per share is , which is also the number of shares of our common stock outstanding immediately following the completion of the Transactions. |
(e) | Reflects the elimination of assets and liabilities at certain manufacturing sites that will be retained by Pfizer following the completion of the Transactions. These assets and liabilities are included in the historical condensed combined balance sheet as they are specifically identifiable to the animal health business. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
Debit/
|
|||
|
||||
Inventories |
$ | (98 | ) | |
Current deferred tax assets* |
(3 | ) | ||
Other current assets |
(3 | ) | ||
Property, plant and equipment, less accumulated depreciation |
(28 | ) | ||
Noncurrent deferred tax assets* |
(1 | ) | ||
Accounts payable |
3 | |||
Accrued compensation and related items |
4 | |||
Other current liabilities |
8 | |||
Noncurrent deferred tax liabilities* |
2 | |||
Other noncurrent liabilities |
7 | |||
Business unit equity |
109 | |||
|
||||
$ | | |||
|
* | Calculated using the applicable statutory tax rate in the relevant jurisdictions. |
(f) |
Reflects the addition of property, plant and equipment (PP&E) at the Guarulhos, Brazil manufacturing site, that will be transferred to us by Pfizer and then leased back to Pfizer under operating leases, and the elimination of inventory, at that site, that will be retained by Pfizer, following the completion of the Transactions. The PP&E are excluded from the historical condensed combined balance sheet as they are not specifically identifiable to the animal health business, while the inventory is included as it is specifically identifiable to the animal health business. Pfizer will use the site to manufacture, among other things, animal health products for us pursuant to the master manufacturing and supply agreement. Pfizer will pay us lease income equivalent to the depreciation expense that we expect to record for the PP&E and, as such, we do |
52
not expect the arrangement to have a significant impact on our combined statements of operations. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
Debit/
|
|||
|
||||
Inventories |
$ | (38 | ) | |
Current deferred tax assets* |
(1 | ) | ||
Other current assets |
(2 | ) | ||
Property, plant and equipment, less accumulated depreciation |
57 | |||
Business unit equity |
(16 | ) | ||
|
||||
$ | | |||
|
* | Calculated using the applicable statutory tax rate in the relevant jurisdictions. |
(g) | Reflects the addition of net benefit plan liabilities that will be transferred to us by Pfizer following the completion of the Transactions. These net benefit plan liabilities are excluded from the historical condensed combined balance sheet as the related benefit plans are not dedicated to animal health employees. The benefit plan expenses associated with these liabilities are included in our historical condensed combined statements of operations. Specifically, this adjustment reflects the transfer of certain defined benefit pension liabilities, net of related assets, in several countries outside the U.S., as well as certain unfunded postretirement benefit liabilities in the U.S. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
|
Debit/
(Credit) |
|
|
|
||||
Noncurrent deferred tax liabilities* |
$ | 19 | ||
Other noncurrent liabilities |
(58 | ) | ||
Business unit equity |
13 | |||
Accumulated other comprehensive loss |
26 | |||
|
||||
$ | | |||
|
* | Calculated using the applicable statutory tax rate in the relevant jurisdictions. |
(h) | Represents the elimination of noncurrent deferred tax assets (which may be included within noncurrent deferred tax liabilities due to jurisdictional netting) related to net operating loss and tax credit carryforwards that will be retained by Pfizer following the completion of the Transactions. These tax assets are included in the historical condensed combined balance sheet as they are considered in the computation of the historical provision for taxes on income. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
|
Debit/
(Credit) |
|
|
|
||||
Noncurrent deferred tax assets |
$ | (139 | ) | |
Noncurrent deferred tax liabilities |
(66 | ) | ||
Business unit equity |
205 | |||
|
||||
$ | | |||
|
(i) | Reflects the elimination of net tax liabilities associated with uncertain tax positions that will be retained by Pfizer following the completion of the Transactions. These tax liabilities are included in the historical condensed combined balance sheet as they are considered in the computation of the historical provision for taxes on income. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
|
Debit/
(Credit) |
|
|
|
||||
Noncurrent deferred tax assets |
$ | 4 | ||
Other noncurrent assets |
(19 | ) | ||
Income taxes payable |
(3 | ) | ||
Other taxes payable |
65 | |||
Business unit equity |
(47 | ) | ||
|
||||
$ | | |||
|
53
(j) | Reflects the elimination of noncurrent deferred tax liabilities relating to deferred income taxes on unremitted earnings that will be retained by Pfizer following the completion of the Transactions. These tax liabilities are included in the historical condensed combined balance sheet as they are considered in the computation of the historical provision for taxes on income. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
|
Debit/
(Credit) |
|
|
|
||||
Noncurrent deferred tax liabilities |
$ | 86 | ||
Business unit equity |
(86 | ) | ||
|
||||
$ | | |||
|
(k) | Reflects the recognition of deferred tax assets, on the temporary differences between the financial reporting and tax bases of certain assets and liabilities, that will be created as a result of various legal entity reorganization transactions within Pfizer. These reorganization transactions are performed in preparation for the legal transfer to us of Pfizer subsidiaries that hold substantially all of the assets and liabilities of Pfizers animal health business. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
Debit/
(Credit) |
|||
|
||||
Noncurrent deferred tax assets |
$ | 18 | ||
Noncurrent deferred tax liabilities |
4 | |||
Business unit equity |
(22 | ) | ||
|
||||
$ | | |||
|
(l) | Reflects the elimination of allocated long-term debt, allocated accrued interest payable and allocated unamortized deferred debt issuance costs that will be retained by Pfizer following the completion of the Transactions. These assets and liabilities are included in the historical condensed combined balance sheet. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
Debit/
|
|||
|
||||
Other noncurrent assets |
$ | (2 | ) | |
Other current liabilities |
6 | |||
Allocated long-term debt |
580 | |||
Business unit equity |
(584 | ) | ||
|
||||
$ | | |||
|
(m) | Reflects the incurrence of $ aggregate principal amount of long-term debt in the debt financing at a weighted-average interest rate of % and the deferred costs associated with both the incurrence of the long-term debt and the establishment of a $1.0 billion five-year revolving credit facility. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
Debit/
|
|||
|
||||
Cash and cash equivalents |
$ | |||
Other noncurrent assets |
||||
Long-term debt |
||||
|
||||
$ | | |||
|
54
(n) | Reflects the legal transfer to us of Pfizers subsidiaries holding substantially all of the assets and liabilities of Pfizers animal health business in consideration for (i) all of the shares of our Class A common stock; (ii) all of the shares of our Class B common stock; (iii) $ aggregate principal amount of our senior indebtedness, which Pfizer disposed of in the debt financing; and (iv) $ of cash. The adjustment follows: |
|
||||
(MILLIONS OF DOLLARS) |
Debit/
(Credit) |
|||
|
||||
Cash and cash equivalents |
$ | |||
Long-term debt |
||||
Business unit equity |
||||
Common stock |
||||
Additional paid-in capital |
||||
|
||||
$ | | |||
|
55
The Separation and Distribution transactions
The Separation
Pfizer formed Zoetis in July 2012. Prior to the completion of this offering, we will be a wholly-owned subsidiary of Pfizer, and all of our outstanding shares of common stock will be owned by Pfizer. In addition, as a result of a series of steps which occurred prior to the date of the debt financing, Pfizer transferred substantially all of the assets and liabilities of its animal health business to various segregated subsidiaries.
In connection with this offering, we and Pfizer intend to enter into, or have entered into, agreements and take certain actions to transfer the assets and liabilities of Pfizers animal health business to us and separate our business from Pfizer. We refer to these separation transactions, collectively, as the Separation. The following are the principal steps of the Separation:
|
In September 2012, the agreements related to our facility in Brazil described in Certain relationships and related party transactionsRelationship with PfizerBrazil lease agreements were entered into. |
|
In October 2012, the master manufacturing and supply agreements described in Certain relationships and related party transactionsRelationship with PfizerMaster manufacturing and supply agreements were entered into. |
|
Prior to the completion of the debt financing, Pfizer transferred to us its subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we transferred or will transfer to Pfizer: (i) all of the shares of our Class A common stock; (ii) all of the shares of our Class B common stock; (iii) $ aggregate principal amount of our senior indebtedness, which Pfizer disposed of in the debt financing; and (iv) $ of the proceeds received in the debt financing and/or cash on hand, which amount will be paid immediately prior to the completion of this offering. |
|
Immediately prior to the completion of this offering, we intend to enter into the additional agreements with Pfizer described in Certain relationships and related party transactionsRelationship with Pfizer. |
|
Following this offering, Pfizer intends to transfer to us certain assets and liabilities of the animal health business that, due to business, regulatory or other legal constraints, could not be transferred prior to this offering. |
Following the Separation, we will own or have the right to use substantially all of the assets that were used, or held for use, exclusively in Pfizers animal health business, including the following:
|
Intellectual Property . As part of the Separation, Pfizer will assign to us ownership of approximately 4,000 patents, 2,000 pending patent applications, and more than 9,500 trademark applications and registrations. In addition, Pfizer will license to us the right to use certain intellectual property rights in the animal health field. We will license to Pfizer the right to use certain of our trademarks and substantially all of our other intellectual property rights in the human health field and all other fields outside of animal health. In addition, Pfizer will grant us a transitional license to use certain of Pfizers trademarks and we will grant Pfizer a transitional license to use certain of our trademarks for a period of time following the completion of this offering. |
|
Manufacturing Facilities . Our global manufacturing network consists of 13 anchor manufacturing sites and 16 satellite manufacturing sites. Ownership of, or the existing leasehold interest in, these facilities will be conveyed to us by Pfizer as part of the Separation. Among these 29 manufacturing sites is our facility in Guarulhos, Brazil, which we will lease back to Pfizer. Certain of our products are currently manufactured at 14 manufacturing sites that will be retained by Pfizer. The products manufactured by Pfizer at these sites and at our Guarulhos, Brazil facility will continue to be supplied to us under the terms of a manufacturing and supply agreement we entered into with Pfizer. |
|
R&D Facilities . We have R&D operations co-located with certain of our manufacturing sites in Australia, Brazil, Belgium, Canada, China, Spain and the United States to facilitate the efficient transfer of production |
56
processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations at non-manufacturing locations in Brazil, Belgium, India and the United States. As part of the Separation, Pfizer will convey to us its interest in each of these R&D facilities. |
|
Employees . Following the Separation, we expect that we will have more than 9,500 employees worldwide. We expect that as part of the Separation, substantially all employees of Pfizer who were substantially dedicated to the animal health business will become our employees. However, labor and employment laws or other business considerations in some jurisdictions may impede or delay Pfizer from transferring to us employees who are substantially dedicated to the animal health business. In those instances, to the extent permissible under applicable law, we and Pfizer intend to enter into a mutually-acceptable arrangement, such as a staffing agreement, to provide for continued operation of the business until such time as the employees in those jurisdictions can be transitioned to us. |
For more information regarding the agreements we and Pfizer intend to enter into, or have entered into, see Certain relationships and related party transactionsRelationship with Pfizer.
The Distribution
Pfizer has informed us that, following this offering, it may make a tax-free distribution to its stockholders of all or a portion of its remaining equity interest in us, which may include one or more distributions effected as a dividend to all Pfizer stockholders, one or more distributions in exchange for Pfizer shares or other securities, or any combination thereof. We refer to any such potential distribution as the Distribution.
Pfizer has no obligation to pursue or consummate any further dispositions of its ownership interest in us, including through the Distribution, by any specified date or at all. If pursued, the Distribution would be subject to various conditions, including receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the continuing application of Pfizers private letter ruling from the IRS and the receipt of an opinion of counsel to the effect that such Distribution would be tax-free to Pfizer and its stockholders. The conditions to the Distribution may not be satisfied, Pfizer may decide not to consummate the Distribution even if the conditions are satisfied or Pfizer may decide to waive one or more of these conditions and consummate the Distribution even if all of the conditions are not satisfied.
57
Managements discussion and analysis of
financial condition and results of operations
Introduction
Our managements discussion and analysis of financial condition and results of operations, or MD&A, is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. This MD&A should be read in conjunction with our combined financial statements and notes thereto included elsewhere in this prospectus. The discussion in this MD&A contains a description of our historical performance for periods in which we operated as a business unit of Pfizer. Our future results could differ materially from historical performance as a result of various factors such as those discussed in Risk factors, The Separation and Distribution transactions and Comparability of historical results.
This MD&A is organized as follows:
|
Overview of our business . This section, beginning on page 59, provides a general description of our business and the industry in which we operate. For more information regarding our business and the animal health industry, see Business and Industry. |
|
Factors affecting our performance . This section, beginning on page 59, provides information regarding certain factors that may affect our financial performance. |
|
Components of revenues and costs and expenses . This section, beginning on page 62, provides an explanation of the components of our combined statements of operations. |
|
Comparability of historical results and our relationship with Pfizer . This section, beginning on page 63, provides information about the limitations of the predictive value of the combined financial statements. |
|
Analysis of the combined statements of operations . This section, beginning on page 65, consists of the following for all periods presented: |
|
Revenues. This section, beginning on page 66, provides an analysis of our revenues in total, by operating segment and by sector. |
|
Costs and expenses . This section, beginning on page 72, provides a discussion about the drivers of our costs and expenses. |
|
Provision for taxes on income. This section, beginning on page 77, provides a discussion of items impacting our effective tax rates. |
|
Adjusted net income . This section, beginning on page 79, provides a discussion of Adjusted net income, an alternative view of performance used by management. Adjusted net income is a non-GAAP financial measure. |
|
Analysis of the combined statements of comprehensive income/(loss ). This section, beginning on page 83, provides an analysis of the components of comprehensive income for all periods presented. |
|
Analysis of the combined balance sheets . This section, beginning on page 83, provides a discussion of changes in certain balance sheet accounts for all balance sheets presented. |
|
Analysis of the combined statements of cash flows. This section, beginning on page 84, provides an analysis of the drivers of our operating, investing and financing cash flows for all periods presented. |
|
Analysis of financial condition, liquidity and capital resources . This section, beginning on page 86, provides an analysis of our ability to meet our short-term and long-term financing needs. |
|
New accounting standards . This section, beginning on page 89, discusses accounting standards that we have recently adopted. |
|
Significant accounting policies and application of critical accounting estimates . This section, beginning on page 89, discusses those accounting policies and estimates that we consider important to an understanding our combined financial statements. |
58
|
Contingencies. This section, beginning on page 92, discusses contingencies related to legal and tax matters. |
|
Qualitative and quantitative disclosures about market risk. This section, beginning on page 93, discusses financial risk management, specifically with respect to foreign currency risk. |
Overview of our business
We are a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. For more than 60 years, as a business unit of Pfizer, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. Measured by our revenues of $4.2 billion for the year ended December 31, 2011, we are the largest animal health medicines and vaccines business, with our products sold in more than 120 countries.
The animal health medicines and vaccines industry is characterized by meaningful differences in customer needs across different regions. As a result of these differences, among other things, we manage our operations through four geographic regions. Within each of these regional segments, we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on local and regional trends and customer needs. Our four regional operating segments are the United States (U.S.), Europe/Africa/Middle East (EuAfME), Canada/Latin America (CLAR) and Asia/Pacific (APAC). See Notes to Combined Financial Statements Note 16. Segment, Geographic and Revenue Information .
With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and Latin America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, we believe we are the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. Emerging markets contributed 27% of our revenues for the year ended December 31, 2011. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.
We believe our investments in the industrys largest sales organization, including our extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, has led to enduring and valued relationships with our customers. Our R&D efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers.
For the year ended December 31, 2011, our revenues, Adjusted net income (a non-GAAP financial measure, see page 79) and Net income attributable to Zoetis were $4.2 billion, $503 million and $245 million, respectively; for the year ended December 31, 2010, our revenues, Adjusted net income and Net income attributable to Zoetis were $3.6 billion, $275 million and $110 million, respectively. As a result, growth in revenue, Adjusted net income and Net income attributable to Zoetis in 2011 were 18%, 83% and 123%, respectively, when compared to 2010.
Factors affecting our performance
Industry growth
According to Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine, the animal health medicines and vaccines market for livestock and companion animals represented a global market of $22 billion, as measured by 2011 revenues. The market grew at a compound annual growth rate, or CAGR, of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, the market is projected to grow at a CAGR of 6% per year between 2011 and 2016. As discussed below, we believe several trends have supported and will continue to support this growth.
59
The livestock medicines and vaccines sector represented $13.1 billion of sales in 2011, or 60% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 7% between 2006 and 2011 and, excluding the impact of foreign exchange, this sector is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis. Factors influencing growth in demand for livestock medicines and vaccines include:
|
human population growth and increasing standards of living, particularly in many emerging markets; |
|
consequently increasing demand for improved nutrition, particularly animal protein; |
|
natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet this increased demand for animal protein; and |
|
increased focus on food safety. |
The companion animal medicines and vaccines sector represented $8.9 billion of sales in 2011, or 40% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, this sector is projected to grow at a CAGR of 5% per year between 2011 and 2016, according to Vetnosis. Factors influencing growth in demand for companion animal medicines and vaccines include:
|
economic development and related increases in disposable income, particularly in many emerging markets; |
|
increasing pet ownership; and |
|
companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines. |
Product development initiatives
Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition. We believe we are an industry leader in animal health R&D, with a track record of generating new products and brand lifecycle developments. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.
Perceptions of product quality, safety and reliability
We believe that animal health medicines and vaccines customers value high-quality manufacturing and reliability of supply. The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty, which we believe often continues after the loss of patent-based and regulatory exclusivity. We depend on positive perceptions of the safety and quality of our products, and animal health products generally, by our customers, veterinarians and end-users.
The issue of the potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens, and the causality of that transfer, are the subject of global scientific and regulatory discussion. In some countries, this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals, regardless of the route of administration (topical, oral, intramuscular/subcutaneous injections, or intravenous). These restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take restrictive actions even when there is scientific uncertainty. Historically, antibacterials for livestock have represented a significant portion of our revenues. We cannot predict whether antibacterial resistance concerns will result in additional restrictions or bans, expanded regulations or public pressure to discontinue or reduce use of antibacterials in food-producing animals.
60
The overall economic environment
In addition to industry-specific factors, we, like other businesses, continue to face the effects of the current challenging economic environment. Growth in both the livestock and companion animal sectors is driven by overall economic development and related growth, particularly in many emerging markets. Certain of our customers and suppliers have been affected directly by the economic downturn, which could decrease the demand for our products or hinder our ability to collect amounts due from customers.
However, the cost of medicines and vaccines to our livestock producer customers is small relative to other production costs, including feed, and the use of these products improves livestock producers economic outcomes. As a result, demand for our products has typically been more stable than demand for other production inputs. Similarly, industry sources report that pet owners indicate a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on petcare.
Weather conditions and the availability of natural resources
The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, as usage of our products follows varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
In addition, livestock producers depend on the availability of natural resources, including large supplies of fresh water. Their animals health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, livestock producers may purchase less of our products.
For example, the current drought impacting the United States is considered the worst in many years, impacting both the supply of corn and the availability of grazing pasture. The decrease in harvested corn has resulted in higher corn prices, which has impacted the profitability of livestock producers of cattle, pork and poultry. Higher corn prices may contribute to reductions in herd or flock size that may result in reduced spending on animal health products. Reduced availability of grazing pasture may also force cattle producers to cull their herds. Fewer heads of cattle would result in reduced demand for our products. A prolonged drought could have a material adverse effect on our operating results and financial condition. Our current expectations are that the drought will have an impact on our performance through the first half of 2013 with second half recovery dependent on a normalization of weather patterns.
Competition
The animal health industry is competitive. Although our business is the largest by revenues in the animal health medicines and vaccines industry, we face competition in the regions and sectors in which we compete. Principal methods of competition vary depending on the particular region, species, product category or individual product. Some of these methods include new product development, quality, price, service and promotion to veterinary professionals, pet owners and livestock producers. Our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses. In addition to competition from established market participants, there could be new entrants to the animal health medicines and vaccines industry in the future. In certain markets, we also compete with companies that produce generic products, but the level of competition from generic products varies from market to market. For example, the level of generic competition is higher in Europe and certain emerging markets than in the United States. However, there is no large, well-capitalized company focused on generic animal health products that exists as a global competitor in the industry.
Disease outbreaks in livestock
Our livestock products could be adversely affected by the outbreak of disease carried by animals. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce
61
demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere.
Foreign exchange rates
Significant portions of our revenues and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 120 countries and, as a result, our revenues are influenced by changes in foreign exchange rates. In 2011, approximately 61% of our revenues were denominated in foreign currencies. As a business unit of Pfizer and under Pfizers global cash management system, we have sought to manage our foreign exchange risk in part through operating means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Going forward, we will evaluate if a similar approach to managing foreign exchange risk is appropriate for our company. As we operate in multiple foreign currencies, including the euro, the Brazilian real, the Australian dollar and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses, and consequently, net income. Exchange rate fluctuations may also have an impact beyond our reported financials and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances. Approximately 39% of our total revenues occur in U.S. dollars and, in 2011 our year-over-year revenue growth benefited by 3% from changes in foreign currency values relative to the U.S. dollar. In the first nine months of 2012, our period-over-period revenue growth was unfavorably impacted by 4% from changes in foreign currency.
Execution of our growth strategies
We seek to enhance the health of animals and to bring solutions to our customers who raise and care for them. We have a global presence in both developed and emerging markets and we intend to grow our business by pursuing the following core strategies:
|
leverage our direct local presence and strong customer relationships Through our direct selling commercial model, we can deepen our understanding of our customers businesses and can encourage the adoption of more sophisticated animal health products; |
|
further penetrate emerging markets We seek to maximize our presence where economic development is driving increased demand for animal protein and increased demand for and spending on companion animals; |
|
pursue new product development and value-added brand lifecycle development to extend our product portfolio New product R&D and brand lifecycle development enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. We seek to leverage our strong direct presence in many regions and cost-effectively develop new products; |
|
remain the partner of choice for access to new products and technologies We seek to continue to support cutting-edge research and secure the right to develop and commercialize new products and technologies; |
|
continue to provide high-quality products and improve manufacturing production margins We believe our manufacturing and supply chain provides us with a global platform for continued expansion, including in emerging markets, and that our quality and reliability differentiate us from our competitors; and |
|
expand into complementary businesses to become a more complete, trusted partner in providing solutions We believe we have the potential to generate incremental and complementary revenues, in the areas of diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting, which could also enhance the loyalty of our customer base and may lead to increased product sales. |
For additional discussion of our growth strategies, see BusinessOur growth strategies.
Components of revenues and costs and expenses
Our revenues, costs and expenses are reported for the fiscal year ended December 31 for each year presented, except for operations outside the U.S., for which the financial information is included in our combined financial statements for the fiscal year ended November 30 for each year presented.
62
Revenues
Our revenues are primarily derived from our diversified product portfolio of medicines and vaccines used to treat livestock and companion animals. Our portfolio contains more than 300 product lines. Generally, our products are sold to veterinarians and livestock producers, by our sales organization which includes sales representatives and technical and veterinary operations specialists. The depth of our product portfolio enables us to address the varying needs of different customers. In 2011, our top selling product line, the ceftiofur line, contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues. For additional information regarding our products, including descriptions of our product lines that each represented approximately 1% or more of our revenues in 2011, see BusinessOur products.
Costs and expenses
Costs of sales consist primarily of cost of materials, facilities and other infrastructure used to manufacture our medicine and vaccine products and royalty expenses associated with the intellectual property of our products, when relevant.
Selling, general and administrative , or SG&A, expenses consist of, among other things, the internal and external costs of marketing, promotion, advertising and shipping and handling as well as certain costs related to business technology, facilities, legal, finance, human resources, business development, public affairs and procurement.
Research and development , or R&D, expenses consist primarily of project costs specific to new product R&D and brand lifecycle development, overhead costs associated with R&D operations and investments that support local market clinical trials for approved indications. We do not disaggregate R&D expenses by research stage or by therapeutic area for purposes of managing our business.
Amortization of intangible assets consists primarily of the amortization expense for identifiable finite-life intangible assets that have been acquired through business combinations. These assets consist of, but are not limited to, developed technology, brands and trademarks.
Restructuring charges and certain acquisition-related costs consist of all restructuring charges (those associated with acquisition activity and those associated with cost reduction/productivity initiatives) as well as costs associated with acquiring and integrating businesses. Restructuring charges are associated with employees, assets and activities that will not continue in the company. Acquisition-related costs are associated with acquiring and integrating acquired businesses, such as the King Animal Health business in 2011 and the Fort Dodge Animal Health business in 2009 and may include transaction costs and expenditures for consulting and the integration of systems and processes.
Other (income)/deductions net consist primarily of various items including net interest (income)/expense, net (gains)/losses on asset disposals, royalty-related income and certain asset impairment charges.
Comparability of historical results and our relationship with Pfizer
We currently operate as a business unit of Pfizer. The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. These combined financial statements do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as a standalone public company during the periods presented.
For a detailed description of the basis of presentation and an understanding of the limitations of the predictive value of the historical combined financial statements, see Notes to Combined Financial Statements Note 2. Basis of Presentation and see Notes to Unaudited Condensed Combined Financial Statements Note 1. Basis of Presentation .
63
In addition, the historical combined financial statements may not be reflective of what our results of operations, comprehensive income/(loss), financial position, equity or cash flows might be in the future as a standalone public company.
For example, our historical expenses are not necessarily indicative of the expenses we may incur in the future as a standalone public company. In connection with this offering and the Separation, we and Pfizer intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with Pfizer. See Certain relationships and related party transactionsRelationship with Pfizer.
With respect to support functions, for example, our historical condensed combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. Following this offering, pursuant to agreements with Pfizer, we expect that Pfizer will continue to provide us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we expect to incur other costs to replace the services and resources that will not be provided by Pfizer. We will also incur additional costs as a standalone public company. As a standalone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Pfizer. We estimate that these costs may exceed the allocated amounts for full year 2011 by a range of approximately $15 million to $25 million in 2013. In addition, we expect to incur internal costs to implement certain new systems, including infrastructure and an enterprise resource planning system, while our legacy systems are being fully supported by Pfizer under the transitional services agreement. We estimate these costs to range between approximately $30 million to $40 million in 2013 and 2014.
Another example is that the historical balance sheets may not be comparable to the opening balance sheet of the standalone company, which we expect will reflect the transfer by Pfizer of substantially all of its animal health business to us. Non-comparable elements will include, for example, the allocation of Pfizer debt, which will not be transferred, and may include, for example, cash and cash equivalents, which may be adjusted other than by operations prior to or concurrently with the completion of this offering. For a detailed description of our unaudited pro forma condensed combined financial statements, see Unaudited pro forma condensed combined financial statements .
Compensation
We expect to institute competitive compensation policies and programs as a standalone public company, the expense for which may differ from the compensation expense allocated by Pfizer in our combined financial statements. For a detailed description of our current compensation policies as a business unit of Pfizer and anticipated compensation policies following this offering, see ManagementCompensation discussion and analysis.
Public company expenses
As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. We will have additional procedures and practices to establish as a standalone public company. As a result, we will incur additional costs including internal audit, investor relations, stock administration and regulatory compliance costs.
Recent significant acquisitions and government-mandated divestitures
The assets, liabilities, operating results and cash flows of acquired businesses are included in our results commencing from their respective acquisition dates.
|
The King Animal Health business, or KAH, was acquired by Pfizer as part of its acquisition of King Pharmaceuticals, Inc. (acquired on January 31, 2011), strengthening our position in the poultry business with a medicinal feed additives business and other poultry products and further strengthening our position in |
64
the cattle and swine businesses. See Notes to Combined Financial Statements Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health . |
|
The Fort Dodge Animal Health business, or FDAH, was acquired by Pfizer as part of its acquisition of Wyeth (acquired on October 15, 2009), adding to our portfolio a broad array of companion animal and livestock brands and strengthening our vaccine portfolio, including a complementary poultry vaccines business. In connection with this acquisition, we made certain government-mandated divestitures. See Notes to Combined Financial Statements Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health and Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures . |
Our combined financial statements for the year ended December 31, 2011 reflect eleven months of KAHs U.S. operations and ten months of KAHs international operations and for the nine months ended October 2, 2011 our unaudited condensed combined financial statements reflect eight months of KAHs U.S. operations and seven months of KAHs international operations. Our combined financial statements for the year ended December 31, 2009 reflect approximately two-and-a-half months of FDAHs U.S. operations and approximately one-and-a-half months of FDAHs international operations.
Analysis of the combined statements of operations
The following discussion and analysis of our combined statements of operations should be read along with our combined financial statements and the notes thereto as well as our unaudited condensed combined financial statements and the notes thereto included elsewhere in this prospectus, which reflect the results of operations of the business transferred to us from Pfizer. For more information on the carve-out basis of presentation, see Notes to Combined Financial Statements Note 2. Basis of Presentation and see Notes to Unaudited Condensed Combined Financial Statements Note 1. Basis of Presentation .
Nine Months
Ended |
%
Change |
Year Ended
December 31, |
%
Change |
|||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 (a) |
October 2,
2011 (a) |
12/11 | 2011 (a) | 2010 (a) | 2009 (a) | 11/10 | 10/09 | ||||||||||||||||||||||||
Revenues |
$ | 3,160 | $ | 3,106 | 2 | $ | 4,233 | $ | 3,582 | $ | 2,760 | 18 | 30 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Cost of sales (b) |
1,130 | 1,233 | (8 | ) | 1,652 | 1,444 | 1,078 | 14 | 34 | |||||||||||||||||||||||
% of revenues |
36 | % | 40 | % | 39 | % | 40 | % | 39 | % | ||||||||||||||||||||||
Selling, general and administrative expenses (b) |
1,017 | 1,026 | (1 | ) | 1,453 | 1,382 | 1,066 | 5 | 30 | |||||||||||||||||||||||
% of revenues |
32 | % | 33 | % | 34 | % | 39 | % | 39 | % | ||||||||||||||||||||||
Research and development expenses (b) |
288 | 308 | (6 | ) | 427 | 411 | 368 | 4 | 12 | |||||||||||||||||||||||
% of revenues |
9 | % | 10 | % | 10 | % | 11 | % | 13 | % | ||||||||||||||||||||||
Amortization of intangible assets |
48 | 51 | (6 | ) | 69 | 58 | 33 | 19 | 76 | |||||||||||||||||||||||
Restructuring charges and certain acquisition-related costs |
55 | 108 | (49 | ) | 154 | 202 | 340 | (24 | ) | (41 | ) | |||||||||||||||||||||
Other (income)/deductionsnet (c) |
(14 | ) | 16 | * | 84 | (93 | ) | 23 | * | * | ||||||||||||||||||||||
Income/(loss) before provision/(benefit) for taxes on income |
$ | 636 | $ | 364 | 75 | $ | 394 | $ | 178 | ($148 | ) | 121 | * | |||||||||||||||||||
% of revenues |
20 | % | 12 | % | 9 | % | 5 | % | (5 | %) | ||||||||||||||||||||||
Provision/(benefit) for taxes on income/(loss) |
190 | 126 | 51 | 146 | 67 | (47 | ) | 118 | * | |||||||||||||||||||||||
Effective tax rate |
29.9 | % | 34.6 | % | 37.1 | % | 37.6 | % | (31.8 | %) | ||||||||||||||||||||||
Net income/(loss) before allocation to noncontrolling interests |
$ | 446 | $ | 238 | 87 | $ | 248 | $ | 111 | ($101 | ) | 123 | * | |||||||||||||||||||
Less: Net income/(loss) attributable to noncontrolling interests |
| 2 | * | 3 | 1 | (1 | ) | 200 | * | |||||||||||||||||||||||
Net income/(loss) attributable to Zoetis |
446 | 236 | 89 | 245 | 110 | (100 | ) | 123 | * | |||||||||||||||||||||||
% of revenues |
14 | % | 8 | % | 6 | % | 3 | % | (4 | %) |
Certain amounts and percentages may reflect rounding adjustments.
65
* | Calculation not meaningful. |
(a) | Includes revenues and expenses from acquisitions from the acquisition date. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 2. Basis of Presentation and for the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 1. Basis of Presentation . |
(b) | Exclusive of amortization of intangible assets, except as disclosed in Notes to Combined Financial Statements Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets . |
(c) | Includes interest expense on allocated long-term debt of $36 million, $37 million and $26 million for the years ended December 31, 2011, 2010 and 2009, respectively. See Notes to Combined Financial Statements Note 6. Other (Income)/DeductionsNet. For the nine months ended September 30, 2012 and October 2, 2011 includes interest expense on allocated long-term debt of $23 million and $27 million, respectively. See Notes to Unaudited Condensed Combined Financial Statements Note 4. Other (Income)/DeductionsNet. |
Revenues
Revenues-Overview
Global revenues by operating segment were as follows:
Nine Months
Ended |
% Change |
Year Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
U.S. |
$ | 1,294 | $ | 1,210 | 7 | $ | 1,659 | $ | 1,384 | $ | 1,105 | 20 | 25 | |||||||||||||||||||
EuAfME |
799 | 851 | (6 | ) | 1,144 | 1,020 | 880 | 12 | 16 | |||||||||||||||||||||||
CLAR |
549 | 565 | (3 | ) | 788 | 664 | 451 | 19 | 47 | |||||||||||||||||||||||
APAC |
518 | 480 | 8 | 642 | 514 | 324 | 25 | 59 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 3,160 | $ | 3,106 | 2 | $ | 4,233 | $ | 3,582 | $ | 2,760 | 18 | 30 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
On a global basis, the mix of our revenues between livestock and companion animal products was as follows:
Nine Months
Ended |
% Change |
Year Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Livestock |
$ | 2,015 | $ | 2,017 | | $ | 2,778 | $ | 2,233 | $ | 1,686 | 24 | 32 | |||||||||||||||||||
Companion Animal |
1,145 | 1,089 | 5 | 1,455 | 1,349 | 1,074 | 8 | 26 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 3,160 | $ | 3,106 | 2 | $ | 4,233 | $ | 3,582 | $ | 2,760 | 18 | 30 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
66
As a result of the impact of recent significant acquisitions and the related government-mandated divestitures on the revenue numbers in our statement of operations, during the nine months ended September 30, 2012 and October 2, 2011 and the years ended December 31, 2011, 2010 and 2009 the growth trend on our existing portfolio from year to year is not readily apparent. We believe that it is not only important to understand overall revenue growth, but also existing portfolio growth year over year. As such, we utilize base revenue growth. Base revenue growth is defined as revenue growth excluding the impact of incremental revenues from recent significant acquisitions, government-mandated divestitures and foreign exchange.
% Change in Revenue: increases/(decreases) |
Reported |
Resulting from
Base Revenue Growth (a) |
Resulting
from Acquisitions (b) |
Resulting
from Government- Mandated Divestitures (c) |
Resulting
from Foreign Exchange |
|||||||||||||||||||
First nine months of 2012 vs. first nine months of 2011 |
||||||||||||||||||||||||
Total revenues |
2 | 5 | 1 | | (4 | ) | ||||||||||||||||||
U.S. |
7 | 6 | 1 | | | |||||||||||||||||||
EuAfME |
(6 | ) | | 1 | | (7 | ) | |||||||||||||||||
CLAR |
(3 | ) | 4 | 1 | | (8 | ) | |||||||||||||||||
APAC |
8 | 8 | 2 | | (2 | ) | ||||||||||||||||||
2011 vs. 2010 |
||||||||||||||||||||||||
Total revenues |
18 | 7 | 9 | (1 | ) | 3 | ||||||||||||||||||
U.S. |
20 | 7 | 13 | | | |||||||||||||||||||
EuAfME |
12 | 3 | 6 | | 3 | |||||||||||||||||||
CLAR |
19 | 9 | 7 | (1 | ) | 4 | ||||||||||||||||||
APAC |
25 | 12 | 7 | (2 | ) | 8 | ||||||||||||||||||
2010 vs. 2009 |
||||||||||||||||||||||||
Total revenues |
30 | 7 | 23 | (3 | ) | 3 | ||||||||||||||||||
U.S. |
25 | 13 | 13 | (1 | ) | | ||||||||||||||||||
EuAfME |
16 | (1 | ) | 26 | (8 | ) | (1 | ) | ||||||||||||||||
CLAR |
47 | 5 | 32 | | 10 | |||||||||||||||||||
APAC |
59 | 15 | 36 | (2 | ) | 10 |
Certain amounts and percentages may reflect rounding adjustments.
(a) | Reflects changes in reported growth excluding the impact of incremental revenues from recent significant acquisitions, government-mandated divestitures and foreign exchange. |
(b) | Reflects the acquisition of KAH, acquired by Pfizer on January 31, 2011, and FDAH, acquired by Pfizer on October 15, 2009. |
(c) | Reflects government-mandated divestitures of legacy FDAH and our legacy products in connection with the FDAH acquisition. |
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Total revenues increased $54 million, or 2%, in the first nine months of 2012 compared to the first nine months of 2011, due to:
|
base revenue growth of $136 million, or 5%, primarily from growth in the U.S., APAC and CLAR segments; and |
|
the inclusion of an incremental one month of U.S. and two months of international revenues of $37 million, or 1%, from the KAH acquisition; |
partially offset by:
|
the unfavorable impact of foreign exchange, which decreased revenues by approximately $119 million, or (4%). |
2011 vs. 2010
Total revenues increased $651 million, or 18%, in 2011 compared to 2010, due to:
|
base revenue growth of $239 million, or 7%, from growth across all operating segments; |
|
the inclusion of revenues of $329 million, or 9%, from the acquisition of KAH; and |
|
the favorable impact of foreign exchange, which increased revenues by approximately $104 million, or 3%; |
67
partially offset by:
|
the unfavorable impact of government-mandated divestitures of $21 million, or (1%). |
2010 vs. 2009
Total revenues increased, $822 million, or 30%, in 2010 compared to 2009, due to:
|
base revenue growth of $208 million, or 7%, primarily from growth in the U.S. and APAC segments; |
|
the inclusion of incremental revenues of $640 million, or 23%, from the full year impact of the acquisition of FDAH; and |
|
the favorable impact of foreign exchange, which increased revenues by approximately $69 million, or 3%; |
partially offset by:
|
the unfavorable impact of government-mandated divestitures of $95 million, or (3%). |
Revenues-Operating segment
Nine months ended September 30, 2012 vs. Nine months ended October 2, 2011
U.S. operating segment
U.S. segment revenues increased by $84 million, or 7%, in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $70 million, or 6%, of which approximately $23 million in growth came from livestock products and approximately $47 million in growth came from companion animal products.
|
Livestock product revenue growth was due principally to increased demand for medicinal feed additives in swine, which was partially due to an outbreak of gut infections in late stage pigs. There was also increased demand for premium anti-infectives in cattle and swine as a result of new promotional campaigns focused on superior efficacy supported by economic outcomes studies. Additionally, revenue growth was positively impacted by the launch of an improved formulation of a swine vaccine that prevents porcine circovirus type 2. This revenue growth was partially offset by the impact of the drought in the U.S. |
|
Companion animal product revenue growth was driven by parasiticides, benefiting from an extended flea and tick season caused by unusually warm weather and by a temporary competitor supply disruption. Companion animal products also benefited from continued growth in canine vaccines and the success of targeted marketing efforts for anti-infectives and other pharmaceutical products. |
Segment revenues were also favorably impacted by the inclusion of $14 million, or 1%, attributable to an additional one month of revenues from KAH.
EuAfME operating segment
EuAfME segment revenues decreased by $52 million, or (6%), in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $3 million, or less than 1%, of which $1 million in decline came from livestock products and was more than offset by approximately $4 million in growth from companion animal products.
|
Livestock product revenues were negatively impacted by continued adverse macroeconomic conditions throughout Western Europe and pressure from the ongoing restrictions on the use of certain antibacterials. Results were partially offset by performance in emerging markets, which continue to benefit from growing demand for animal protein. |
|
Companion animal product revenues were favorably impacted by parasiticides and the launch of new branded generic products throughout the region. Revenue was also favorably impacted by equine vaccines due to a temporary competitor supply disruption. Results were partially offset by continued adverse macroeconomic conditions throughout Western Europe. |
68
Segment revenues were also favorably impacted by the inclusion of $8 million, or 1%, attributable to an additional two months of revenues from KAH. Additionally, revenues were unfavorably impacted by 7% due to foreign exchange.
CLAR operating segment
CLAR segment revenues decreased by $16 million, or (3%), in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $25 million, or 4%, of which approximately $7 million in growth came from livestock products and approximately $18 million in growth came from companion animal products.
|
Livestock product revenues were favorably impacted by swine vaccines, which benefited from the launch in multiple markets, of an improved formulation of a swine vaccine that prevents porcine circovirus type 2. Swine vaccines also benefited from continued demand for Improvac/Improvest, a product that reduces boar taint without the need for surgical castration, in Brazil. Additionally, marketing initiatives focused on legacy KAH Products drove increased demand for poultry medicinal feed additives in Brazil. Results were partially offset by increased competition in the Brazil cattle market. Also, certain markets within the region continue to feel the impact of the North American drought. |
|
Companion animal product revenue growth was attributable to canine vaccines especially in Brazil and parasiticides in Canada. Parasiticides in Canada benefited from an extended flea and tick season caused by unusually warm weather and by a temporary competitor supply disruption. |
Segment revenues were also favorably impacted by the inclusion of $7 million, or 1%, attributable to an additional two months of revenues from KAH. Additionally, revenues were unfavorably impacted by 8% due to foreign exchange.
APAC operating segment
APAC segment revenues increased by $38 million, or 8%, in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $38 million, or 8%, of which approximately $21 million in growth came from livestock products and approximately $17 million in growth came from companion animal products.
|
Livestock product revenues were favorably impacted by growth in Australia, China and India. Australia experienced growth in the dairy cattle segment due to higher sales of intramammary products. Increased sales force presence in China drove growth in premium priced swine products. The launch, in multiple markets, of an improved formulation of a swine vaccine that prevents porcine circovirus type 2 was also a key growth driver. |
|
Companion animal product revenues benefited from promotional campaigns in Japan and the resulting increased adoption of our products into veterinarian treatment protocols. Australia benefited from growth in parasiticides as a result of focused sales force efforts that drove demand for these products. China experienced growth in canine vaccines due to expansion of the sales organization. |
Segment revenues were also favorably impacted by the inclusion of $8 million, or 2%, attributable to an additional two months of revenues from KAH. Additionally, revenues were unfavorably impacted by 2% due to foreign exchange.
2011 vs. 2010
U.S. operating segment
U.S. segment revenues increased by $275 million, or 20%, in 2011 compared to 2010. Base revenue growth was $89 million, or 7%, of which approximately $65 million in growth came from livestock products and approximately $24 million came from growth in companion animal products.
|
Livestock product revenue growth was in large part due to increased demand for anti-infectives in cattle and swine as a result of new promotional campaigns focused on superior efficacy supported by economic |
69
outcomes studies, as well as general growth in the cattle market. Cattle vaccine growth was driven by FDA approvals for new treatment indications. Additionally, the re-launch of Inovocox, a poultry vaccine, contributed to growth. |
|
Companion animal product revenue growth was primarily attributable to Rimadyl, an anti-inflammatory, Convenia, a single-injection anti-infective, and canine respiratory vaccines. In addition, we benefited from the full year impact of contracts signed with large veterinary clinic networks during 2010. |
Segment revenues were also favorably impacted by the inclusion of $186 million, or 13%, from the acquisition of KAH.
EuAfME operating segment
EuAfME segment revenues increased by $124 million, or 12%, in 2011 compared to 2010. Base revenue growth in the EuAfME operating segment was $31 million, or 3%, of which approximately $13 million in growth came from livestock products and approximately $18 million in growth came from companion animal products. Adverse macroeconomic conditions throughout Western Europe negatively impacted growth rates for both livestock and companion animal product sales.
|
Livestock product revenues were driven by emerging markets, including Turkey, Russia and North Africa, due to strong demand for animal health products used in swine and poultry production. Additionally, growth was driven by Draxxin, a premium anti-infective used in cattle and swine. Livestock product revenues were negatively impacted by $22 million due to the loss of government subsidies of a FDAH product in France, Germany and Spain for the eradication of blue tongue virus in cattle and sheep. |
|
Companion animal product revenue growth was primarily driven by increased use of Convenia and Clavamox across the region, and by other anti-infective medicines in Germany, France and emerging markets. Increases in vaccine utilization drove additional growth in the U.K. and emerging markets. |
Segment revenues were also favorably impacted by the inclusion of $59 million, or 6%, from the acquisition of KAH. Additionally, revenues were favorably impacted by 3% due to foreign exchange.
CLAR operating segment
CLAR segment revenues increased by $124 million, or 19%, in 2011 compared to 2010. Base revenue growth was $56 million, or 9%, of which approximately $38 million in growth came from livestock products and approximately $18 million in growth came from companion animal products.
|
Livestock product revenue growth was driven by the demand for Improvac/Improvest, a product that reduces boar taint without the need for surgical castration, in Brazil and Colombia. Growth also resulted from the implementation of marketing initiatives in Brazil and Mexico, which increased demand for Draxxin and Lincospectin for cattle and poultry, respectively, across the region. |
|
Companion animal product revenue growth was driven by the demand for canine vaccines, primarily in Brazil and other emerging Latin America markets, and demand for parasiticides in Brazil and Canada. |
Segment revenues were also favorably impacted by the inclusion of $49 million, or 7%, from the acquisition of KAH and were negatively impacted by government-mandated divestitures in 2011 related to the acquisition of FDAH, which decreased revenues by 1%. Additionally, revenues were favorably impacted by 4% due to foreign exchange.
70
APAC operating segment
APAC segment revenues increased $128 million, or 25%, in 2011 compared to 2010. Base revenue growth in the APAC operating segment was $63 million, or 12%, of which approximately $38 million in growth came from livestock products and approximately $25 million in growth came from companion animal products.
|
Livestock product revenue growth was broad-based, driven by both developed and emerging markets. Sales organization investments in China and India further accelerated growth in anti-infectives and vaccines in these two countries. Growth also continued in sheep and cattle vaccines in Australia. |
|
Companion animal product revenue growth was impacted by broad-based demand for parasiticides, canine vaccines and anti-infectives due to favorable market conditions in developed and emerging markets. |
Segment revenues were also favorably impacted by the inclusion of $35 million, or 7%, from the acquisition of KAH and were negatively impacted by government-mandated divestitures in 2011 related to the acquisition of FDAH, which decreased revenues by 2%. Additionally, revenues were favorably impacted by 8% due to foreign exchange.
2010 vs. 2009
U.S. operating segment
U.S. segment revenues increased by $279 million, or 25%, in 2010 compared to 2009. Base revenue growth was $145 million, or 13%, of which approximately $117 million in growth came from livestock products and approximately $28 million came from companion animal products.
|
Livestock product revenue growth was driven by rising beef prices and a strong export market, which resulted in increased utilization of cattle products across all product categories. Increased demand for Draxxin by cattle producers was an additional driver of segment growth. |
|
Companion animal product revenue growth was driven by promotional efforts targeted toward veterinarians, which increased demand for vaccines, parasiticides and anti-infectives. Revenues were unfavorably impacted by weakness in pain and sedation medicines due to a one-time supply disruption. |
Segment revenues were also favorably impacted by the inclusion of an incremental $147 million, or 13%, from the acquisition of FDAH and were negatively impacted by government-mandated divestitures in 2010 related to the acquisition of FDAH, which decreased revenues by 1%.
EuAfME operating segment
EuAfME segment revenues increased by $140 million, or 16%, in 2010 compared to 2009. Base revenue decline was $9 million, or (1%), of which approximately $10 million of the decline came from livestock products partially offset by a growth of approximately $1 million in companion animal products.
|
Livestock product revenues were unfavorably impacted by weak economic conditions in Western Europe and declining cattle and sheep populations. This was partially offset by growth in emerging markets including Russia, Turkey and North Africa. |
|
Companion animal product revenues were favorably impacted by growth in Convenia/Cefovecin primarily in Germany and the U.K. Segment performance also benefited from growth in Mavacoxib, a pain medicine, in Germany, Italy and emerging markets. This was partially offset by macro-economic conditions in Western Europe, which resulted in the contraction of the overall market. |
Segment revenues were also favorably impacted by the inclusion of an incremental $229 million, or 26%, from the acquisition of FDAH and were negatively impacted by government-mandated divestitures in 2010 related to the FDAH acquisition, which decreased revenues by 8%. Additionally, revenues were unfavorably impacted by 1% due to foreign exchange.
71
CLAR operating segment
CLAR segment revenues increased by $213 million, or 47%, in 2010 compared to 2009. Base revenue growth was $23 million, or 5%, of which approximately $8 million in growth came from livestock products and approximately $15 million in growth came from companion animal products.
|
Livestock product revenue growth was driven by the continued expansion of the domestic and export-oriented cattle market in Brazil. |
|
Companion animal product revenue growth was driven by increased sales of canine vaccines and parasiticides, resulting from promotional efforts in Brazil focused on the rapidly growing petcare market. Revenue growth was also driven by increased sales of canine parasiticides in Canada due to an extended flea and tick season. |
Segment revenues were also favorably impacted by the inclusion of an incremental $146 million, or 32%, from the acquisition of FDAH. Additionally, revenues were favorably impacted by 10% due to foreign exchange.
APAC operating segment
APAC segment revenues increased by $190 million, or 59%, in 2010 compared to 2009. Base revenue growth in the APAC operating segment was $49 million, or 15%, of which approximately $45 million in growth came from livestock products and approximately $4 million in growth came from companion animal products.
|
Livestock product revenue growth was particularly strong in Australia across all species and product categories. Additionally, emerging market investments in our sales organization and marketing initiatives drove growth in anti-infectives for swine, poultry and cattle. China continued to contribute to segment growth as a result of the continued progression of industrialization of livestock production. |
|
Companion animal product revenue growth was primarily driven by increased sales of anti-infectives in Japan and Australia, as well as increased sales of parasiticides in Japan and emerging markets in Asia. |
Segment revenues were also favorably impacted by the inclusion of an incremental $118 million, or 36% from the acquisition of FDAH and were negatively impacted by government-mandated divestitures in 2010 related to the acquisition of FDAH, which decreased revenues by 2%. Additionally, revenues were favorably impacted by 10% due to foreign exchange.
Costs and expenses
Cost of sales
Nine Months
Ended |
% Change |
Year
Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Cost of sales(a) |
$ | 1,130 | $ | 1,233 | (8 | ) | $ | 1,652 | $ | 1,444 | $ | 1,078 | 14 | 34 | ||||||||||||||||||
% of revenues |
36 | % | 40 | % | 39 | % | 40 | % | 39 | % |
Certain amounts and percentages may reflect rounding adjustments.
(a) | Allocation of corporate enabling functions was: $1 million and $2 million in the first nine months of 2012 and 2011, respectively, and $3 million in 2011, $6 million in 2010 and $0 million in 2009. |
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Cost of sales decreased $103 million, or (8%), in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:
|
the non-recurrence of approximately $24 million of incremental purchase accounting charges in 2011 reflecting the fair value adjustments to inventory acquired from KAH that was subsequently sold in 2011; |
72
|
the non-recurrence of a $12 million inventory write-off in 2011 related to suspended sales of 3-Nitro; |
|
favorable product mix; |
|
increased operational efficiencies and savings associated with margin improvement initiatives, including plant network optimization, yield improvements and overall cost reductions; and |
|
favorable foreign exchange. |
2011 vs. 2010
Cost of sales increased $208 million, or 14%, in 2011 compared to 2010, primarily as a result of:
|
the addition of approximately $200 million in costs associated with KAH products inclusive of incremental purchase accounting charges of $24 million reflecting the fair value adjustments to inventory acquired from KAH that was subsequently sold; |
|
base revenue growth; and |
|
unfavorable product mix between our legacy portfolio and KAH portfolio; |
partially offset by:
|
increased operational efficiencies and savings associated with margin improvement initiatives, including plant network optimization, yield improvements and overall cost reductions. |
2010 vs. 2009
Cost of sales increased $366 million, or 34%, in 2010 compared to 2009, primarily as a result of:
|
the addition of approximately $300 million in costs associated with the inclusion of FDAH products, for a full year in 2010 compared to a partial year in 2009 inclusive of purchase accounting charges of $66 million reflecting the fair value adjustments to inventory acquired from FDAH that was subsequently sold; and |
|
unfavorable product mix between our legacy portfolio and FDAH portfolio; |
partially offset by:
|
increased operational efficiencies and savings associated with margin improvement initiatives, including plant network optimization, yield improvements and overall cost reductions. |
Selling, general and administrative expenses
Nine Months
Ended |
% Change |
Year
Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Selling, general and administrative expenses(a) |
$ | 1,017 | $ | 1,026 | (1 | ) | $ | 1,453 | $ | 1,382 | $ | 1,066 | 5 | 30 | ||||||||||||||||||
% of revenues |
32 | % | 33 | % | 34 | % | 39 | % | 39 | % |
Certain amounts and percentages may reflect rounding adjustments.
(a) | Allocation of corporate enabling functions was: $185 million and $199 million in the first nine months of 2012 and 2011, respectively, and $268 million in 2011, $260 million in 2010 and $219 million in 2009. |
73
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
SG&A expenses decreased by $9 million, or (1%), in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:
|
reductions in costs due to both acquisition-related synergies and cost reduction initiatives, which are also reflected in the decreased allocation of corporate enabling functions; and |
|
favorable foreign exchange; |
partially offset by:
|
the inclusion of an incremental one month of U.S. and two months of international KAH operations; and |
|
initiatives to increase our direct sales and marketing presence in certain emerging markets. |
2011 vs. 2010
SG&A expenses increased $71 million, or 5%, in 2011 compared to 2010, primarily as a result of:
|
the addition of KAH operations, eleven months in the U.S. and ten months internationally; and |
|
initiatives to increase our direct sales and marketing presence in certain emerging markets; |
partially offset by:
|
reductions in costs due to both acquisition-related synergies and cost reduction initiatives. |
2010 vs. 2009
SG&A expenses increased $316 million, or 30%, in 2010 compared to 2009, primarily as a result of:
|
the addition of a full year of FDAH operations; and |
|
promotional efforts to increase awareness of recently acquired FDAH products; |
partially offset by:
|
reductions in costs due to cost reduction initiatives. |
Research and development expenses
Nine Months Ended | % Change |
Year Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Research and development expenses(a) |
$ | 288 | $ | 308 | (6 | ) | $ | 427 | $ | 411 | $ | 368 | 4 | 12 | ||||||||||||||||||
% of revenues |
9 | % | 10 | % | 10 | % | 11 | % | 13 | % |
Certain amounts and percentages may reflect rounding adjustments.
(a) | Allocation of corporate enabling functions was: $43 million and $48 million in the first nine months of 2012 and 2011, respectively, and $64 million in 2011, $79 million in 2010 and $72 million in 2009. |
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
R&D expenses decreased $20 million, or (6%), in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:
|
cost reduction initiatives including a decreased allocation of enabling functions; and |
|
favorable foreign exchange. |
74
2011 vs. 2010
R&D expenses increased $16 million, or 4% in 2011 compared to 2010, primarily as a result of $19 million in accelerated depreciation related to the closing of an R&D facility in the U.K. Also, the incremental $10 million of R&D expenses from the acquisition of KAH and the acquisition of a diagnostics business (in December 2010) contributed to the increase in R&D expenses. These expenses were partially offset by reductions in costs due to acquisition related synergies and cost reduction initiatives.
2010 vs. 2009
R&D expenses increased $43 million, or 12%, in 2010 compared to 2009, primarily as a result of the inclusion of a full year of FDAH R&D costs.
Amortization of intangible assets
Certain amounts and percentages may reflect rounding adjustments.
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Amortization of intangible assets decreased $3 million, or (6%), in the first nine months of 2012 compared to the first nine months of 2011, which includes the impact of impairments taken at the end of 2011.
2011 vs. 2010
Amortization of intangible assets increased $11 million, or 19%, in 2011 compared to 2010, primarily as a result of the addition of finite-lived intangible assets acquired as part of our acquisition of KAH.
2010 vs. 2009
Amortization of intangible assets increased $25 million, or 76%, in 2010 compared to 2009, primarily as a result of a full year of amortization related to the finite-lived intangible assets acquired as part of our acquisition of FDAH.
Restructuring charges and certain acquisition-related costs
Nine Months Ended | % Change |
Year Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Restructuring charges and certain acquisition-related costs(a) |
$ | 55 | $ | 108 | (49) | $ | 154 | $ | 202 | $ | 340 | (24 | ) | (41 | ) |
Certain amounts and percentages may reflect rounding adjustments.
(a) | Allocation of Restructuring charges and certain acquisition-related costs was: $47 million and $51 million in the first nine months of 2012 and 2011, respectively, and $70 million in 2011, $104 million in 2010 and $121 million in 2009. |
We have incurred significant direct costs for restructuring and integrating acquired businesses, such as KAH on January 31, 2011 and FDAH on October 15, 2009, among others, and, to a lesser extent, in connection with our ongoing cost reduction/productivity initiatives.
75
Our acquisition-related costs primarily relate to restructuring charges for employees, assets and activities that will not continue in the combined company. The majority of these charges are termination costs, but we also exited a number of distributor and other contracts and performed some facility rationalization efforts. Our integration costs are generally comprised of consulting costs related to the integration of systems and processes. As our acquired businesses are substantively integrated, we are no longer incurring significant acquisition-related costs.
The costs associated with our cost reduction/productivity initiatives are predominately termination costs associated with plant closings initiated by Pfizers manufacturing division. These cost reduction/productivity initiatives are ongoing.
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Restructuring charges and certain acquisition-related costs decreased $53 million, or (49%), primarily as a result of:
|
a net $49 million decrease in employee termination expenses which results from terminations related to acquisitions; and |
|
a $17 million decrease in integration costs primarily related to the KAH acquisition; |
partially offset by:
|
a $9 million increase in asset impairment charges primarily from the allocation of the impairment of a Pfizer facility. |
2011 vs. 2010
Restructuring charges and certain acquisition-related costs decreased $48 million, or (24)%, in 2011 compared to 2010, primarily as a result of lower integration and restructuring costs related to the KAH acquisition in 2011 and the integration and restructuring costs related to FDAH in 2010 as the FDAH acquisition was significantly larger and more complex than the KAH acquisition.
2010 vs. 2009
Restructuring charges and certain acquisition-related costs decreased $138 million, or (41)%, in 2010, compared to 2009, primarily as a result of:
|
a $167 million decrease in restructuring costs related to employee termination costs in 2010 compared to 2009 primarily, due to the higher level of restructuring costs associated with the FDAH acquisition that occurred in 2009; and |
|
the non-recurrence of $23 million in allocated FDAH transaction costs recorded in 2009; |
partially offset by:
|
a $65 million increase in 2010 integration and exit costs related to the FDAH acquisition. |
Other (income)/deductionsnet
Nine Months Ended | % Change |
Year Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Other (income)/deductionsnet |
$ | (14) | $ | 16 | * | $ | 84 | ($ | 93 | ) | $ | 23 | * | * |
Certain amounts may reflect rounding adjustments.
* | Calculation not meaningful. |
76
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
The change in other (income)/deductionsnet had a favorable impact of $30 million on net income attributable to Zoetis in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:
|
a favorable $14 million settlement in the first nine months of 2012 regarding an intellectual property matter, as well as a $7 million change in an estimate for an environmental-related reserve; and |
|
lower asset impairment charges of identifiable intangible assets of approximately $4 million. See Notes to Unaudited Condensed Combined Financial Statements Note 4. Other (Income)/DeductionsNet . |
2011 vs. 2010
The change in other (income)/deductionsnet had an unfavorable impact of $177 million on net income attributable to Zoetis in 2011 compared to 2010, primarily as a result of:
|
the non-recurrence of net gains of $104 million on asset disposals included in 2010 on government-mandated divestitures in connection with the acquisition of FDAH; and |
|
asset impairment charges of identifiable intangible assets of $69 million. See Notes to Combined Financial Statements Note 6 . Other (Income)/DeductionsNet . |
2010 vs. 2009
The change in other (income)/deductionsnet had a favorable impact of $116 million on net income attributable to Zoetis in 2010 compared to 2009, primarily as a result of:
|
net gains of $104 million on sales of government-mandated divestitures in connection with the acquisition of FDAH. See Notes to Combined Financial Statements Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures ; and |
|
the incremental impact of royalty related income of $25 million resulting from agreements from FDAH; |
partially offset by:
|
the full-year impact of interest expense on allocated long-term debt of Pfizer of $11 million. See Notes to Combined Financial Statements Note 6. Other (Income)/DeductionsNet . |
Provision for taxes on income
Nine Months Ended | % Change |
Year Ended
December 31, |
% Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Provision/(benefit) for taxes on income |
$ | 190 | $ | 126 | 51 | $ | 146 | $ | 67 | ($47 | ) | 118 | * | |||||||||||||||||||
Effective tax rate |
29.9 | % | 34.6 | % | 37.1 | % | 37.6 | % | (31.8 | %) |
Certain | amounts and percentages may reflect rounding adjustments. |
* | Calculation not meaningful. |
During the third quarter of 2012, Pfizer reached a settlement with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Pfizer Inc. tax returns for the years 2006 through 2008. The settlement resulted in an income tax benefit to Zoetis of approximately $29.3 million, representing tax and interest.
During the first quarter of 2011, Pfizer reached a settlement with the IRS with respect to the audits of the Wyeth tax returns for the years 2002 through 2005. The settlement resulted in an income tax benefit to Zoetis of approximately $9.5 million, representing tax and interest.
77
During the fourth quarter of 2010, Pfizer reached a settlement with the IRS related to issues Pfizer had appealed with respect to the audits of the Pfizer Inc. tax returns for the years 2002 through 2005, as well as the Pharmacia audit for the year 2003 through the date of merger with Pfizer (April 16, 2003). As a result of settling these audit years, in the fourth quarter of 2010, we reduced our unrecognized tax benefits by approximately $25.5 million and recorded a corresponding tax benefit for Zoetis. The full year 2010 effective tax rate of Zoetis was also favorably impacted by the reversal of $7.9 million of accruals related to interest on these unrecognized tax benefits.
For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 5A. Tax Matters: Taxes on Income . For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 7A. Tax Matters: Taxes on Income .
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
The lower effective tax rate in the first nine months of 2012 compared to the first nine months of 2011 is primarily due to:
|
the tax benefit resulting from the aforementioned $29.3 million settlement in 2012; and |
|
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures; |
partially offset by:
|
the non-recurrence of the aforementioned $9.5 million settlement in 2011; and |
|
the expiration of the U.S. research and development credit. |
2011 vs. 2010
The lower effective tax rate in 2011 compared to 2010 is primarily due to:
|
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures; |
|
the aforementioned $9.5 million reduction in unrecognized tax benefits in 2011, which were recorded as a result of the favorable tax audit settlement pertaining to prior years; and |
|
the non-recurrence of the write-off of a deferred tax asset of approximately $21.3 million in 2010 to record the impact of the U.S. healthcare legislation concerning the tax treatment of the Medicare Part D subsidy for retiree prescription drug coverage; |
partially offset by:
|
the non-recurrence of the aforementioned $25.5 million reduction in our unrecognized tax benefits and $7.9 million in interest on those unrecognized tax benefits in 2010 resulting from the resolution of certain tax positions which were recorded as a result of the favorable tax audit settlement pertaining to prior years. |
78
2010 vs. 2009
The higher effective tax rate in 2010 compared to 2009 is primarily due to:
|
the write-off of a deferred tax asset of approximately $21.3 million to record the impact of the U.S. healthcare legislation concerning the tax treatment of the Medicare Part D subsidy for retiree prescription drug coverage; and |
|
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures; |
partially offset by:
|
the aforementioned $25.5 million reduction in our unrecognized tax benefits and $7.9 million in interest on those unrecognized tax benefits in 2010 resulting from the resolution of certain tax positions which were recorded as a result of the favorable tax audit settlement pertaining to prior years. |
Adjusted net income
General description of Adjusted net income (a non-GAAP financial measure)
Adjusted net income is an alternative view of performance used by management, and we believe that investors understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted net income to portray the results of our major operations, the discovery, development, manufacture and commercialization of animal health medicine and vaccine products, prior to considering certain income statement elements. We have defined Adjusted net income as net income attributable to Zoetis before the impact of purchase accounting adjustments, acquisition-related costs and certain significant items. The Adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis.
The Adjusted net income measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the Adjusted net income measure is utilized:
|
senior management receives a monthly analysis of our operating results that is prepared on an Adjusted net income basis; |
|
our annual budgets are prepared on an Adjusted net income basis; and |
|
other goal setting and performance measurements. |
Despite the importance of this measure to management in goal setting and performance measurement, Adjusted net income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted net income, unlike U.S. GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted net income is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the Adjusted net income measure has limitations, and we do not restrict our performance-management process solely to this metric. A limitation of the Adjusted net income measure is that it provides a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies. We also use other specifically tailored tools designed to achieve the highest levels of performance.
79
Purchase accounting adjustments
Adjusted net income is calculated prior to considering certain significant purchase accounting impacts that result from business combinations and net asset acquisitions. These impacts, primarily associated with the Pharmacia Animal Health business (acquired in 2003), FDAH (acquired in 2009) and KAH (acquired in 2011), include the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value, amortization related to the increase in fair value of the acquired finite-lived intangible assets and depreciation related to the increase/decrease in fair value of the acquired fixed assets. Therefore, the Adjusted net income measure includes the revenues earned upon the sale of the acquired products without considering the aforementioned significant charges.
While certain purchase accounting adjustments can occur through 20 or more years, this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors an alternative view of our business results by providing a degree of parity to internally developed intangible assets for which R&D costs previously have been expensed.
A completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through Adjusted net income. These components of Adjusted net income are derived solely from the impact of the items listed above. We have not factored in the impact of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our R&D costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting revenues, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our Adjusted net income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.
Acquisition-related costs
Adjusted net income is calculated prior to considering transaction, integration, restructuring and additional depreciation costs associated with significant business combinations or net-asset acquisitions because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate certain businesses as a result of the acquisition decision. We have made no adjustments for the resulting synergies.
We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employeesa natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in the ordinary course of business.
The integration and restructuring costs associated with a business combination may occur over several years, with the more significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the regulated nature of the animal health medicines and vaccines business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDA and/or other regulatory authorities.
Certain significant items
Adjusted net income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to
80
occur as part of our normal business on a regular basis; items that would be non-recurring; or items that relate to products that we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be a major non-acquisition-related restructuring charge and associated implementation costs for a program that is specific in nature with a defined term, such as those related to our non-acquisition-related cost-reduction and productivity initiatives; amounts related to disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; adjustments related to the resolution of certain tax positions; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 10. Segment, Geographic and Revenue Information . For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 16. Segment, Geographic and Revenue Information . Our normal, ongoing defense costs or settlements of and accruals on legal matters made in the normal course of our business would not be considered certain significant items.
Reconciliation and detailed descriptions
A reconciliation of net income attributable to Zoetis, as reported under U.S. GAAP, to Adjusted net income follows:
Nine Months Ended | Year Ended December 31, | |||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
2011 | 2010 | 2009 | |||||||||||||||
Reported net income attributable to Zoetis |
$ | 446 | $ | 236 | $ | 245 | $ | 110 | $ | (100 | ) | |||||||||
Purchase accounting adjustmentsnet of tax |
26 | 46 | 55 | 103 | 27 | |||||||||||||||
Acquisition-related costsnet of tax |
23 | 57 | 78 | 145 | 168 | |||||||||||||||
Certain significant itemsnet of tax |
(13 | ) | 42 | 125 | (83 | ) | 94 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted net income |
$ | 482 | $ | 381 | $ | 503 | $ | 275 | $ | 189 |
The effective tax rate on Adjusted pre-tax income is 34.6% and 33.7% in the first nine months of 2012 and 2011, respectively. The higher effective tax rate in the first nine months of 2012 is due to the non-recurrence of approximately $9.5 million reduction in unrecognized tax benefits in 2011, which were recorded as a result of a favorable tax audit settlement pertaining to prior years, and the expiration of the U.S. research and development credit; partially offset by the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
The effective tax rate on Adjusted pre-tax income is 34.3%, 39.9% and 36.5% for full year 2011, 2010 and 2009, respectively. The lower effective tax rate for the full year 2011 is primarily due to a reduction in unrecognized tax benefits in 2011, which were recorded as a result of a favorable tax audit settlement pertaining to prior years, the non-recurrence of the write-off in 2010 of a deferred tax asset to record the impact of the U.S. healthcare legislation concerning the tax treatment of the Medicare Part D subsidy for retiree prescription drug coverage, as well as the change in the jurisdictional mix of earnings.
Throughout 2012, we have undertaken a number of internal reorganization steps designed to improve our operational efficiency and reduce costs. As a result of these actions, which will change our jurisdictional mix of earnings, among other impacts, we expect that our future effective tax rate on Adjusted pre-tax income will be lower than historical levels.
Adjusted net income includes the following charges for each of the periods presented:
Nine Months Ended | Year Ended December 31, | |||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
2011 | 2010 | 2009 | |||||||||||||||
Interest |
$ | 23 | $ | 27 | $ | 36 | $ | 37 | $ | 26 | ||||||||||
Taxes |
255 | 195 | 264 | 183 | 108 | |||||||||||||||
Depreciation |
93 | 85 | 117 | 103 | 86 | |||||||||||||||
Amortization |
14 | 15 | 20 | 19 | 17 |
81
Adjusted net income, as shown above, excludes the following items:
Nine Months Ended |
Year
Ended
December 31, |
|||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
2011 | 2010 | 2009 | |||||||||||||||
Purchase accounting adjustments: |
||||||||||||||||||||
Amortization and depreciation (a) |
$ | 36 | $ | 36 | $ | 48 | $ | 41 | $ | 16 | ||||||||||
Cost of sales, primarily related to fair value adjustments of acquired inventory (b) |
3 | 33 | 34 | 107 | 24 | |||||||||||||||
|
||||||||||||||||||||
Total purchase accounting adjustments, pre-tax |
39 | 69 | 82 | 148 | 40 | |||||||||||||||
Income taxes (k) |
13 | 23 | 27 | 45 | 13 | |||||||||||||||
|
||||||||||||||||||||
Total purchase accounting adjustmentsnet of tax |
26 | 46 | 55 | 103 | 27 | |||||||||||||||
|
||||||||||||||||||||
Acquisition-related costs (c) : |
||||||||||||||||||||
Transaction costs ( d ) |
| 1 | 2 | 1 | 23 | |||||||||||||||
Integration costs ( d ) |
31 | 47 | 71 | 92 | 46 | |||||||||||||||
Restructuring charges ( d ) |
(8 | ) | 35 | 41 | 107 | 178 | ||||||||||||||
Additional depreciationasset restructuring (g) |
11 | 4 | 8 | 17 | | |||||||||||||||
|
||||||||||||||||||||
Total acquisition-related costs, pre-tax |
34 | 87 | 122 | 217 | 247 | |||||||||||||||
Income taxes (k) |
11 | 30 | 44 | 72 | 79 | |||||||||||||||
|
||||||||||||||||||||
Total acquisition-related costsnet of tax |
23 | 57 | 78 | 145 | 168 | |||||||||||||||
|
||||||||||||||||||||
Certain significant items ( e ) : |
||||||||||||||||||||
Restructuring charges (f ) |
32 | 24 | 40 | 2 | 93 | |||||||||||||||
Implementation costs and additional depreciationasset restructuring ( g ) |
14 | 13 | 22 | | 66 | |||||||||||||||
Certain asset impairment charges ( h ) |
| 9 | 69 | | | |||||||||||||||
Inventory write-off (in Cost of sales ) |
| 12 | 12 | 13 | | |||||||||||||||
Net gains on sale of assets ( i ) |
| | | (104 | ) | (2 | ) | |||||||||||||
Other (j) |
(18 | ) | | 29 | 5 | | ||||||||||||||
|
||||||||||||||||||||
Total certain significant items, pre-tax |
28 | 58 | 172 | (84 | ) | 157 | ||||||||||||||
Income taxes ( k ) |
41 | 16 | 47 | (1 | ) | 63 | ||||||||||||||
|
||||||||||||||||||||
Total certain significant itemsnet of tax |
(13 | ) | 42 | 125 | (83 | ) | 94 | |||||||||||||
|
||||||||||||||||||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant itemsnet of tax |
$ | 36 | $ | 145 | $ | 258 | $ | 165 | $ | 289 |
Certain amounts and percentages may reflect rounding adjustments.
(a) | Amortization and depreciation expense related to purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment were distributed as follows in the first nine months of 2012, in the first nine months of 2011, and in 2011, 2010 and 2009, respectively: $37 million, $37 million, $49 million, $41 million and $17 million in Amortization of intangible assets ; $0 million, $0 million, $1 million, $0 million and $0 million in Research and development expenses ; $1 million income, $1 million income, $2 million income, $0 million, $1 million income in Selling, general and administrative expenses . |
(b) | Also includes depreciation expense in Cost of Sales of $3 million, $9 million, $10 million, $22 million and $5 million in the first nine months of 2012, in the first nine months of 2011 and in 2011, 2010 and 2009 respectively. |
(c) | Acquisition-related costs were distributed as follows in the first nine months of 2012, in the first nine months of 2011, and in 2011, 2010 and 2009, respectively: $9 million, $3 million, $6 million, $0 million and $0 million in Cost of sale s; $2 million, $2 million, $3 million, $17 million and $0 million in Selling, general and administrative expenses ; $0 million, $1 million income, $1 million income, $0 million and $0 million in Other (income)/deductionsnet; $23 million, $83 million, $114 million, $200 million and $247 million in Restructuring charges and certain acquisition related costs . |
(d) | Included in Restructuring charges and certain acquisition-related costs . For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. |
82
(e) | Certain significant items were distributed as follows in the first nine months of 2012, in the first nine months of 2011, and in 2011, 2010 and 2009, respectively: $4 million income, $12 million, $31 million, $19 million and $53 million in Cost of sales ; $4 million, $2 million, $5 million, $0 million and $10 million in Selling, general and administrative expenses ; $10 million, $11 million, $19 million, $0 million and $3 million in Research and development expenses ; $14 million income, $9 million, $77 million, $105 million income and $2 million income in Other (income)/deductionsnet ; $32 million, $24 million, $40 million, $2 million and $93 million in Restructuring charges and certain acquisition-related costs . |
(f) | Represents restructuring charges incurred for our cost-reduction/productivity initiatives. Included in Restructuring charges and certain acquisition-related costs . For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. |
(g) | Amounts in certain significant items relate to our cost-reduction/productivity initiatives and amounts in acquisition-related costs relate to our acquisition activity. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. |
(h) | Included in Other (income)/deductionsnet . For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 4. Other (Income)/DeductionsNet. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 6. Other (Income)/DeductionsNet. |
(i) | Included in Other (income)/deductionsnet . See Notes to Combined Financial Statements Note 6. Other (Income)/DeductionsNet for more information. |
(j) | In the nine months ended September 30, 2012, certain significant items included income related to a favorable legal settlement for an intellectual property matter of $14 million and $4 million income related to a change in estimate with respect to transitional manufacturing agreements associated with divestitures. See Notes to Unaudited Condensed Combined Financial Statements Note 4. Other (Income)/DeductionsNet . For the years ended December 31, 2011 and 2010, significantly all reflected charges are related to transitional manufacturing purchase agreements associated with divestitures. See Notes to Combined Financial Statements Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures . |
(k) | Included in Provision/(benefit) for taxes on income/(loss) . Income taxes includes the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdictions applicable tax rate. In addition, income taxes for Certain significant items in the nine months ended September 30, 2012 includes a $29.3 million tax benefit and for the year ended December 31, 2010 includes a $33 million tax benefit recorded in the fourth quarter, both as a result of settlements of certain audits. For the nine months ended September 30, 2012 and the nine months ended October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements Note 5A. Tax Matters: Taxes on Income . For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements Note 7A. Tax Matters: Taxes on Income. |
Analysis of the combined statements of comprehensive income/(loss)
Discussion of changes
Virtually all changes in other comprehensive income for all periods presented are related to foreign currency translation adjustments. These changes result from the strengthening or weakening of the U.S. dollar as compared to the currencies in the countries, in which we do business. The gains and losses associated with these changes are deferred on the balance sheet in Accumulated other comprehensive loss until realized. Specifically, the changes to Accumulated other comprehensive loss for the nine months of 2012 reflect the strengthening of the U.S. dollar against the euro and the Brazilian real. The changes for the nine months of 2011 reflect the weakening of the U.S. dollar against the Australian dollar and the Brazilian real partially offset by the strengthening of the U.S. dollar against the euro.
Analysis of the combined balance sheets
Discussion of changes
September 30, 2012 vs. December 31, 2011
Virtually all changes in our assets and liabilities as of September 30, 2012 compared to December 31, 2011, reflect, among other things, decreases due to the impact of foreign exchange.
For information about certain of our financial assets and liabilities, including Cash and cash equivalents , Accounts receivable, less allowance for doubtful accounts and Allocated long-term debt , see Analysis of financial condition, liquidity and capital resources below.
83
For Inventories , the change also reflects the annual inventory build of cattle products in advance of seasonal movements and the establishment of higher targeted inventory levels for certain products.
For Other current liabilities , the change also reflects a decrease in restructuring liabilities.
For Other non-current liabilities , the change also reflects the movement of certain balances to Other current liabilities and certain changes to estimates related to contingency reserves.
December 31, 2011 vs. December 31, 2010
Virtually all changes in our assets and liabilities as of December 31, 2011 compared to December 31, 2010 reflect, among other things, increases associated with our acquisition of KAH. See Notes to Combined Financial Statements Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health .
For information about certain of our financial assets and liabilities, including Cash and cash equivalents , Accounts receivable, less allowance for doubtful accounts, Current portion of allocated long-term debt and Allocated long-term debt , see Analysis of financial condition, liquidity and capital resources below. In addition, changes in Current portion of allocated long-term debt , and Allocated long-term debt reflects scheduled principal payments as well as the call on December 31, 2011 of a senior unsecured note due in March 2012.
For Accounts receivable, less allowance for doubtful accounts, the change also reflects an increase due to increased sales at the end of 2011, as compared to the end of 2010.
For Goodwill , the change also reflects the goodwill recorded as a result of the formation of the Jilin Pfizer Guoyuan joint venture. See Notes to Combined Financial Statements Note 4E . Acquisitions, Divestitures and Certain Investments: Certain Investments .
For Identifiable intangible assets, less accumulated amortization, the change also includes the impact of impairments of certain assets. See Notes to Combined Financial Statements Note 6 . Other (Income)/DeductionsNet .
Analysis of the combined statements of cash flows
Nine Months Ended | % Change | Year Ended December 31, | % Change | |||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
October 2,
2011 |
12/11 | 2011 | 2010 | 2009 | 11/10 | 10/09 | ||||||||||||||||||||||||
Cash provided by/(used in): |
||||||||||||||||||||||||||||||||
Operating activities |
$ | 144 | $ | 383 | (62 | ) | $ | 497 | $ | 254 | $ | 98 | 96 | 159 | ||||||||||||||||||
Investing activities |
(89 | ) | (423 | ) | (79 | ) | (449 | ) | (9 | ) | (1,821 | ) | * | * | ||||||||||||||||||
Financing activities |
| 122 | * | (30 | ) | (277 | ) | 1,823 | * | * | ||||||||||||||||||||||
Effect of exchange-rate changes on cash and cash equivalents |
(1 | ) | (1 | ) | * | (2 | ) | (4 | ) | (7 | ) | * | * | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||
Net increase/(decrease) in cash and cash equivalents |
$ | 54 | $ | 81 | (33 | ) | $ | 16 | $ | (36 | ) | $ | 93 | * | * | |||||||||||||||||
|
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
* | Calculation not meaningful. |
84
Operating activities
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Our net cash provided by operating activities was $144 million in the first nine months of 2012 compared to $383 million in the first nine months of 2011. This decrease in operating cash flows was primarily attributable to:
|
increased pre-tax earnings; |
more than offset by:
|
the annual inventory build of cattle products in advance of seasonal movements and the establishment of higher targeted inventory levels for certain products ; and |
|
higher net payments for income taxes. |
The change in the line item called Other changes in assets and liabilities, net of acquisitions and divestitures reflects the change in inventory described above.
2011 vs. 2010
Our net cash provided by operating activities was $497 million in 2011 compared to $254 million in 2010. The increase in operating cash flows was primarily attributable to:
|
the inclusion of operating cash flows from KAH acquired on January 31, 2011; and |
|
the timing of receipts and payments in the ordinary course of business. |
2010 vs. 2009
Our net cash provided in operating activities was $254 million in 2010 compared to $98 million in 2009. The increase in operating cash flows was primarily attributable to:
|
the inclusion of a full year of operating cash flows from FDAH acquired on October 15, 2009; and |
|
the timing of receipts and payments in the ordinary course of business. |
Investing activities
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Our net cash used in investing activities was $89 million in the first nine months of 2012 compared to $423 million in the first nine months of 2011. In the first nine months of 2011, Pfizer acquired KAH for $345 million in cash. See Notes to Combined Financial Statements Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health .
2011 vs. 2010
Our net cash used in investing activities was $449 million in 2011 compared to $9 million in 2010. The increase in net cash used by investing activities was primarily attributable to:
|
net cash of $345 million paid for the acquisition of KAH; and |
|
higher 2010 proceeds of $169 million from sales of assets. |
See Notes to Combined Financial Statements Note 4. Acquisitions, Divestitures and Certain Investments .
85
2010 vs. 2009
Our net cash used in investing activities was $9 million in 2010 compared to $1.8 billion in 2009. The decrease in net cash used by investing activities was primarily attributable to:
|
net cash of $2.3 billion paid in 2009 for the acquisition of FDAH; |
partially offset by:
|
lower cash proceeds of $369 million from the sale of assets. |
See Notes to Combined Financial Statements Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health .
Financing activities
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
Our net cash provided by financing activities was less than $1 million in the first nine months 2012 compared to $122 million in the first nine months of 2011. The decrease in net cash provided by financing activities was attributable to a decrease in net financing from Pfizer.
2011 vs. 2010
Our net cash used in financing activities was $30 million in 2011 compared to $277 million in 2010. The decrease in net cash used in 2011 was primarily attributable to:
|
an increase in our financing activities with Pfizer of $596 million primarily related to the acquisition of KAH in 2011; |
partially offset by:
|
an allocation of principal payments of long-term debt of $143 million; and |
|
an increase in dividends paid of $209 million. |
2010 vs. 2009
Our net cash used in financing activities was $277 million in 2010 compared to cash provided by financing activities of $1.8 billion in 2009. The decrease in net cash provided by financing activities was primarily attributable to:
|
proceeds of $719 million in 2009 from allocated long-term debt from Pfizer; |
|
a decrease of $1.3 billion in our financing activities with Pfizer related to the acquisition of FDAH in 2009; and |
|
an increase in dividends paid of $106 million. |
Analysis of financial condition, liquidity and capital resources
While we believe our cash on hand, our operating cash flows and our anticipated financing arrangements will be sufficient to support our future cash needs, we can provide no assurance that our liquidity and capital resources will meet future funding requirements. Risks to our meeting future funding requirements include global economic conditions described in the following paragraph.
The global financial markets recently have undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic,
86
business and financial disruptions may arise. As markets change, we will continue to monitor our liquidity position, and there can be no assurance that the challenging economic environment or a further economic downturn would not impact our liquidity or our ability to obtain future financing.
Selected measures of liquidity and capital resources
Certain relevant measures of our liquidity and capital resources follow:
Nine Months
Ended |
As of
December 31, |
|||||||||||
(MILLIONS OF DOLLARS) |
September 30,
2012 |
2011 | 2010 | |||||||||
Cash and debt |
||||||||||||
Cash and cash equivalents |
$ | 133 | $ | 79 | $ | 63 | ||||||
Current portion of allocated long-term debt |
| | 38 | |||||||||
Allocated long-term debt |
580 | 575 | 673 | |||||||||
Accounts receivable, less allowance for doubtful accounts: 2011$29 and 2010$26 |
848 | 871 | 773 | |||||||||
Working capital |
1,818 | 1,468 | 1,308 | |||||||||
Ratio of current assets to current liabilities |
3.47:1 | 2.74:1 | 2.62:1 |
Certain amounts may reflect rounding adjustments.
We participate in Pfizers centralized cash management system, and generally all of our excess cash is transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities are funded as needed by Pfizer. The cash and cash equivalents presented here are amounts recorded on legal entities that are dedicated to Zoetis.
The combined financial statements include an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none are specifically related to our operations.
For additional information about the sources and uses of our funds, see Analysis of the combined balance sheets and Analysis of the combined statements of cash flows.
In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility. The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the effective date of the credit facility certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains other customary covenants. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. See Description of certain indebtednessCredit facility.
In , we incurred approximately $ aggregate principal amount of our senior indebtedness, including the $ of our senior indebtedness that was transferred to Pfizer and subsequently sold by Pfizer. We refer to this as the debt financing. Immediately prior to the completion of this offering, we will transfer $ of the proceeds received in the debt financing and/or cash on hand to Pfizer. The debt financing will result in a change to our balance sheet as it will replace the Current portion of allocated long-term debt and Allocated long-term debt presented in the table above. In 2013, we anticipate the Current portion of long-term debt to be $ and the Long-term debt to be $ .
Accounts receivable are usually collected over a period of 60 to 90 days . For the nine months ended September 30, 2012 and for the years ended December 31, 2011 and 2010, we have achieved an overall reduction
87
in the number of days that accounts receivables are outstanding. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
Contractual obligations
Payments due under contractual obligations as of December 31, 2011 set forth below:
Total | Years | |||||||||||||||||||
(MILLIONS OF DOLLARS) | 2012 |
2013-
2014 |
2015-
2016 |
Thereafter | ||||||||||||||||
Allocated long-term debt, including allocated interest obligations (a) |
$ | 1,040 | $ | 31 | $ | 135 | $ | 312 | $ | 562 | ||||||||||
Other long-term liabilities reflected on our combined balance sheet under U.S. GAAP (b) |
10 | 2 | 2 | 2 | 4 | |||||||||||||||
Operating lease commitments |
62 | 16 | 21 | 11 | 14 | |||||||||||||||
Purchase obligations and other (c) |
202 | 68 | 65 | 21 | 48 | |||||||||||||||
Uncertain tax positions (d) |
| | | | |
Certain amounts may reflect rounding adjustments.
(a) | Allocated long-term debt obligations include both expected principal and interest obligations of Pfizer that have been allocated to Zoetis in the combined financial statements. The allocated debt is comprised of U.S. dollar and foreign currency denominated senior unsecured notes issued by Pfizer to partially finance the acquisition of FDAH. Our calculations of expected interest payments incorporate only current period assumptions for interest rates, foreign currency translation rates and Pfizer hedging strategies, see Notes to Combined Financial Statements Note 9D. Financial Instruments: Allocated Long-Term Debt . |
(b) | Includes expected payments relating to our future benefit payments net of plan assets (included in determination of the projected benefit obligation) for pension plans that are dedicated to Zoetis employees in the Netherlands, Germany, India, the Philippines and Korea. Excludes approximately $120 million of liabilities related to employee terminations, legal and environmental contingencies and other matters, most of which do not represent contractual obligations. See Notes to Combined Financial Statements Note 5 . Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives and Note 15 . Commitments and Contingencies . |
(c) | Includes agreements to purchase goods and services that are enforceable and legally binding and includes amounts relating to advertising, information technology services, employee benefit administration services, and potential milestone payments deemed reasonably likely to occur. |
(d) | Except for amounts reflected in Income taxes payable , we are unable to predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation. |
The table above excludes amounts for potential milestone payments unless the payments are deemed reasonably likely to occur. Payments under these agreements generally become due and payable only upon the achievement of certain development, regulatory and/or commercialization milestones, which may span several years and/or which may never occur. Our historical contractual obligations in the table above are not necessarily indicative of our contractual obligations in the future as a standalone public company.
The debt financing will result in a change to our contractual obligations as it will replace Allocated long-term debt presented in the table above. After the debt financing, our Long-term debt , including interest obligations, will be $ in 2013 through 2014, $ in 2015 through 2016 and $ thereafter, resulting in a total contractual obligation of $ .
Off-balance sheet arrangements
We do not currently use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.
In the ordinary course of business and in connection with the sale of assets and businesses, we may indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to
88
activities prior to a transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters, and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of September 30, 2012 or December 31, 2011, recorded amounts for the estimated fair value of these indemnifications are not significant.
New accounting standards
For discussion of our new accounting standards, see Notes to Combined Financial Statements Note 3A. Significant Accounting Policies: New Accounting Standards .
Significant accounting policies and application of critical accounting estimates
In presenting our financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.
We believe that the following accounting policies are critical to an understanding of our combined financial statements as they require the application of the most difficult, subjective and complex judgments and, therefore, could have the greatest impact on our financial statements: (i) acquisitions and fair value; (ii) revenues; and (iii) impairment reviewslong-lived assets, including goodwill and other intangible assets.
Below are some of our more critical accounting estimates.
For more information regarding our significant accounting policies, estimates and assumptions, see Notes to Combined Financial Statements Note 3. Significant Accounting Policies .
Acquisitions and fair value
For a discussion about the application of fair value to our recent acquisitions, see Notes to Combined Financial Statements Note 4 . Acquisitions, Divestitures and Certain Investments .
For a discussion about the application of fair value to our allocated long-term debt, see Notes to Combined Financial Statements Note 9D . Financial Instruments: Allocated Long-Term Debt .
For a discussion about the application of fair value to our asset impairment reviews, see Notes to Combined Financial Statements Note 6. Other (Income)/DeductionsNet and Unaudited Condensed Combined Financial Statements Note 4. Other (Income)/DeductionsNet .
Revenues
Our gross product revenues are subject to deductions that are generally estimated and recorded in the same period that the revenues are recognized and primarily represent sales returns and revenue incentives. For example:
|
for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; returns as a percentage of revenues; an understanding of the reasons for past returns; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and |
|
for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenues. |
89
If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. Although the amounts recorded for these revenue deductions are heavily dependent on estimates and assumptions, historically our adjustments to actual results have not been material. The sensitivity of our estimates can vary by program, type of customer and geographic location.
Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For further information about the risks associated with estimates and assumptions, see Notes to Combined Financial Statements Note 3B. Significant Accounting Policies: Estimates and Assumptions .
Impairment reviewslong-lived assets
We review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever impairment indicators are present. In addition, we perform detailed impairment testing for goodwill and indefinite-lived assets at least annually. When necessary, we record charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.
Our impairment review processes are described in Notes to Combined Financial Statements Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets and, for deferred tax assets, in Note 3M. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies .
Examples of events or circumstances that may be indicative of impairment include:
|
a significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the regulatory authorities could affect our ability to manufacture or sell a product. |
|
a projection or forecast that demonstrates losses or reduced profits associated with an asset. This could result, for example, from the introduction of a competitors product that results in a significant loss of market share or the inability to achieve the previously projected revenue growth, or from the lack of acceptance of a product by customers. |
Our impairment reviews of most of our long-lived assets depend heavily on the determination of fair value, as defined by U.S. GAAP, and these judgments can materially impact our results of operations. A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Notes to Combined Financial Statements Note 3B. Significant Accounting Policies: Estimates and Assumptions .
Intangible assets other than goodwillimpairment discussion
As a result of our intangible asset impairment review work, described in detail below, we recognized a number of impairments of identifiable intangible assets other than goodwill.
We recorded the following identifiable intangible asset impairment charges in Other (income)/deductionsnet :
|
In the first nine months of 2012, the asset impairment charges include (i) approximately $2 million of finite-lived companion animal developed technology rights; (ii) approximately $1 million of finite-lived trademarks related to genetic testing services; and (iii) approximately $2 million of finite-lived patents related to poultry technology. The intangible asset impairment charges for 2012 reflect, among other things, the loss of revenues as a result of negative market conditions and, with respect to the poultry technology, a re-assessment of economic viability. |
90
|
In 2011, the asset impairment charges include: (i) approximately $30 million of finite-lived intangible assets related to parasiticides technology as a result of declining gross margins and increased competition; (ii) approximately $12 million of finite-lived intangible assets related to equine influenza and tetanus technology due to third-party supply issues; (iii) approximately $10 million of finite-lived intangible assets related to genetic testing services that did not find consumer acceptance; and (iv) approximately $17 million related to IPR&D projects (acquired from Vetnex in 2010 and from FDAH in 2009), as a result of the termination of the development programs due to a re-assessment of their economic viability. |
|
In 2009, the asset impairment charges include: (i) approximately $3 million write-off related to an equine licensing arrangement, which was required to be surrendered in connection with Pfizers acquisition of Wyeth; and (ii) approximately $2 million write-off of finite-lived intangible assets related to a canine product that could not find consumer acceptance. |
For a description of our accounting policy, see Notes to Combined Financial Statements Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets .
When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply an asset-specific discount rate to arrive at a net present value. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the projections, the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.
While all identifiable intangible assets can be impacted by events and thus lead to impairment, in general, identifiable intangible assets that are at the highest risk of impairment include IPR&D assets and newly acquired or recently impaired indefinite-lived brand assets. IPR&D assets are higher-risk assets, because R&D is an inherently risky activity. Newly acquired and recently impaired indefinite-lived assets are more vulnerable to impairment because the assets are recorded at fair value and are then subsequently measured at the lower of fair value or carrying value at the end of each reporting period. As such, immediately after acquisition or impairment, even small declines in the outlook for these assets can negatively impact our ability to recover the carrying value and can result in an impairment charge.
Goodwillimpairment discussion
As a result of our goodwill impairment review work, described in detail below, we concluded that none of our goodwill is impaired as of September 30, 2012 and December 31, 2011, and we do not believe the risk of impairment is significant at this time.
For a description of our accounting policy, see Notes to Combined Financial Statements Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets .
In determining the fair value of each reporting unit, the income approach was used. The income approach is a forward-looking approach to estimating fair value and relies primarily on internal forecasts. Within the income approach, the method that we use is the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then we apply a reporting unit-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of technological risk and competitive, legal and/or regulatory forces on the projections, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.
91
While all reporting units can confront events and circumstances that can lead to impairment, we do not believe that the risk of goodwill impairment for any of our reporting units is significant at this time.
For all of our reporting units, there are a number of future events and factors that may impact future results and that could potentially have an impact on the outcome of subsequent goodwill impairment testing. For a list of these factors, see Factors affecting our performance.
Contingencies
Legal matters
We are subject to numerous contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, environmental claims and proceedings, patent litigation and government investigations. See Notes to Combined Financial Statements Note 15A. Commitments and Contingencies: Legal Proceedings and see Unaudited Condensed Combined Financial Statements Note 9A. Commitments and Contingencies: Legal Proceedings.
Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.
We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.
We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
Tax matters
We account for income tax contingencies using a benefit recognition model. See Notes to Combined Financial Statements Note 3M. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies . If our initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit if: (i) there are changes in tax law, analogous case law or there is new information that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) the statute of limitations expires; or (iii) there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, and changes in tax law or receipt of new information that would either increase or decrease the technical merits of a position relative to the more-likely-than-not standard.
Our assessments concerning uncertain tax positions are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible changes related to our
92
uncertain tax positions, and such changes could be significant. See Notes to Unaudited Condensed Combined Financial Statements Note 5B. Tax Matters: Tax Contingencies and Notes to Combined Statements Note 7C. Tax Matters: Tax Contingencies .
Qualitative and quantitative disclosures about market risk
Foreign exchange risk
A significant portion of our revenues and costs are exposed to changes in foreign exchange rates. Our primary net foreign currency translation exposures are the euro, the Brazilian real and the Australian dollar. As a business unit of Pfizer and under Pfizers risk management umbrella, we seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Additionally, as a standalone public company, we may implement a foreign currency hedging strategy to limit our foreign exchange risk.
93
Overview
The animal health industry, which focuses on both livestock and companion animals, is a growing industry that impacts billions of people worldwide. The demand for animal protein to feed the world continues to increase, even as arable land, fresh water and other natural resources important to global animal protein production become more scarce. In addition, threats to human health associated with livestock are of growing concern to consumers, livestock producers and regulators. Therefore, increasing the efficiency of livestock production and keeping herds and flocks free from disease, including through the use of medicines and vaccines, is a key market need. Growth in the companion animal products category is driven by economic development and related increases in disposable income, increasing pet ownership and companion animals living longer. Therefore, increasing medical treatment of companion animals and advances in animal health medicines and vaccines, is a key market need. Pet ownership continues to be popular, with approximately 62% of households in the United States having at least one pet, according to the American Pet Products Association, or APPA.
Broadly defined, as measured by revenues, the approximately $100 billion animal health industry includes all products and services, other than livestock feed and pet food, that promote livestock productivity and health and companion animal health, such as medicines and vaccines, diagnostics, medical devices, pet supplies, nutritional supplements, veterinary services and other related services. Within this broad market, medicines and vaccines, our core area of operation, represented a global market of $22 billion, as measured by 2011 revenues, grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis.
Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. According to Vetnosis, as measured by revenues in 2011, we are the largest business in the animal health medicines and vaccines business, and we are the market leader in all of the major regions in which we operate, with the exception of Western Europe, where we hold the number two position. Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines.
Our business is diversified across many regions, species and product categories. Our products are sold in more than 120 countries, including developed markets and emerging markets, and our products are primarily used in eight different types of animals, which we refer to as species.
We believe we have the largest and most customer-focused sales organization in the industry and a reputation for providing value-added products, high-quality manufacturing and reliability of supply, with high brand recognition and strong brand loyalty. We have a track record of developing products that meet the needs of our customers, and we believe we are a leader in animal health R&D. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. We believe these strengths are important drivers of our leadership in the animal health industry.
94
2011 revenues for top animal health businesses, in millions |
Sources: Zoetis combined financial statements for Zoetis revenues and Vetnosis for other animal health businesses revenues.
Livestock
The primary livestock species for the production of animal protein are cattle (both beef and dairy), swine, poultry, sheep and fish. Livestock health and production are essential to meeting the growing demand for animal protein of a global population that is increasing in size and standard of living, particularly in many emerging markets. As part of the global ecosystem, livestock health is critical to assuring a safe, sustainable global food supply and reducing the outbreak of infectious disease in both humans and animals. The livestock medicines and vaccines sector represented $13.1 billion of sales in 2011, or 60% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 7% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis.
Factors influencing growth in demand for livestock medicines and vaccines include:
|
human population growth and increasing standards of living, particularly in many emerging markets; |
|
consequently increasing demand for improved nutrition, particularly animal protein; |
|
natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet this increased demand for animal protein; and |
|
increased focus on food safety. |
These and other factors have increased the demand for animal protein and the need for greater livestock production efficiency. The global population continues to grow in both size and standard of living, with people consuming an increasing amount of animal protein and dairy per capita. Recent projections by the United Nations suggest that the world will add over two billion people by 2050, mostly in developing countries.
Since the early 1960s, per capita consumption of milk in certain developed markets has almost doubled, meat consumption has more than tripled, and egg consumption has increased fivefold, according to the Food and
95
Agriculture Organization of the United Nations, or the FAO. Current per capita consumption of animal protein and dairy products in emerging markets, including China, are a fraction of the consumption levels in developed markets. When coupled with increasing pressures on natural resources, this rising animal protein demand must be met more efficiently, using fewer production resources.
Animal health medicines and vaccines have contributed to improvements in production efficiency over the last 50 years by improving feed conversion ratios, production yields and cycle times and by reducing disease in animals. We believe that improvements in production efficiency will continue to depend on effective animal health products, such as vaccines to protect herds from disease, medicines to treat diseases and limit their spread and automated high-throughput devices, such as those used to vaccinate poultry eggs. Because of this dependence, we believe that animal health medicines and vaccines will continue to be among the most important tools used by livestock producers to meet their productivity imperative.
Livestock producers are exposed to (a) commodity price fluctuations, such as livestock feed prices, (b) the market price for animal protein products and (c) changes in the regulatory environment. Additionally, diseases in herds and flocks are a significant threat to livestock producer economics. The cost to livestock producers of animal health medicines and vaccines is small relative to other livestock production costs, including feed, and animal health medicines and vaccines help protect producers investments by treating and preventing diseases in herds and flocks before they become widespread, thus improving economic outcomes for producers. As a result, demand for animal health medicines and vaccines has typically been more stable than demand for other production inputs.
Threats to human health associated with the livestock industry are of growing concern to consumers, livestock producers and regulators and are another key area of concern that animal health medicines and vaccines help to address. These threats come in two basic formszoonotic diseases and foodborne illnesses.
Zoonotic diseases are diseases that can be transmitted between animals and humans, including potentially pandemic viruses, such as influenza, as well as infectious diseases, such as rabies, brucellosis and anthrax. Approximately 75% of the new diseases that have affected humans over the past ten years have been caused by zoonotic pathogens originating from animals or from products of animal origin, according to the FAO. Products that address the risk of zoonotic diseases include vaccines that protect animals against Lyme disease or rabies and parasiticides that kill intestinal parasites in animals, such as roundworms or hookworms.
Foodborne illness can arise from disease agents or contaminants that enter the food chain during the production and processing of animal-based foods. The Centers for Disease Control and Prevention estimates that approximately one in six Americans suffers from foodborne diseases each year. Products that help address the risk of foodborne illnesses include anti-infectives, such as those used to treat salmonella or E. coli infections in animals, and vaccines, such as those used to prevent salmonella in poultry. In the United States, outbreaks of foodborne illnesses linked to animal sources are estimated to create a loss of more than $8 billion per year due to illness, deaths and lost productivity, according to the FAO.
Companion animals
The primary companion animal species are dogs, cats and horses. Industry sources indicate that companion animals improve the physical and emotional well-being of pet owners. Pet ownership and spending per pet are increasing globally, and industry sources report that pet owners indicate a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on petcare. The companion animal medicines and vaccines sector represented $8.9 billion of sales in 2011, or 40% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 5% per year between 2011 and 2016, according to Vetnosis.
96
Factors influencing growth in demand for companion animal medicines and vaccines include:
|
economic development and related increases in disposable income, particularly in many emerging markets; |
|
increasing pet ownership; and |
|
companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines. |
Approximately 78% of dog owners in the United States gave their dog(s) medications in 2010 as compared to 50% in 1998, and approximately 47% of cat owners in the United States treated their cat(s) with medications in 2010 as compared to 31% in 1998, according to the APPA. Further, economic development in many emerging markets is driving significant growth in pet ownership and spending in many of those markets. For example, pet ownership in Latin America (including Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela) grew at a CAGR of 3% between 2007 and 2012, according to Euromonitor International data as of June 2012. Pet spending, which includes spending on pet food and non-prescription pet products, grew at a CAGR of 3% in the United States and a CAGR of 14% in Latin America between 2007 and 2012, according to Euromonitor International data as of June 2012.
The companion animal sector has been experiencing the use of more aggressive and expensive medical interventions, including an increase in the use of medicines and vaccines. Companion animal medicines and vaccines improve the quality of and extend the life of pets and help veterinarians achieve better medical outcomes. Advances in medicines and vaccines have created new opportunities for chronic care in pets for diseases associated with old age, such as dermatological infections, cardiovascular diseases, osteoarthritis and cancer. In addition, animal health medicines and vaccines businesses can increase convenience and compliance for pet owners by introducing medicines and vaccines with simplified dosage forms and delivery mechanisms.
Animal health industry distinctions from human health industry
The business of developing and marketing animal health medicines and vaccines shares a number of characteristics with the business of developing medicines and vaccines for human health. These similarities include complex and regulated product manufacturing, products that must be proven efficacious and safe in clinical trials to be approved by regulators, a reliance on new product development through R&D and products that are marketed based on labeled claims regarding impacts on health. However, there are also significant differences between the animal health medicines and vaccines and human health businesses, including:
|
animal health generally has faster, less expensive and more predictable R&D processes as well as more sustainable R&D pipelines; |
|
animal health businesses often have more diversified product portfolios; |
|
animal health sales representatives have better access to customer decision makers and generally spend more time with a customer on a sales visit; |
|
animal health primarily has a self-pay nature; and |
|
animal health products have less generic competition and higher brand loyalty. |
R&D is faster, less expensive and more predictable and sustainable
The R&D for animal health are generally faster and less expensive than for human health because they require fewer clinical studies, involves fewer subjects and is conducted directly in the target species. Because there is no need to bridge from pre-clinical investigations in one species to the final target species, decisions on the potential efficacy and safety of products often can be made more quickly, and the likelihood of success often can be established earlier in development than in human health R&D.
97
There are also differences in the composition of animal health R&D pipelines. While the development of new chemical and biological entities through new product R&D continues to play an important role, the majority of animal health R&D investment is focused on brand lifecycle development. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Brand lifecycle development leverages existing animal health products by adding new species or claims, achieving approvals in new markets and creating new combinations and reformulations. The ability to leverage both the prior discoveries of other industries and of existing animal health R&D generally yields faster, less expensive and more predictable R&D processes and more sustainable R&D pipelines as compared to human health.
More diverse product portfolios
Animal health medicines and vaccines businesses have generally diversified product portfolios across many products and, in general, animal health medicines and vaccines businesses are less reliant on a small number of top selling key products than human health businesses. This contrasts with many large human health businesses that have significant product sales concentration. Animal health products are developed for multiple species, leading to greater product diversification than in human health. In addition, products are sold across different regions, which may have environmental, cultural, epidemiological and other differences that contribute to distinct product requirements in each region. As a result, animal health products often have a smaller market size, and the performance of any single product typically has less impact on an animal health medicines and vaccines business as compared to human health businesses. For example, in 2011, our top selling product line contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues.
Partnership relationships with customers
The animal health medicines and vaccines industry typically uses a combination of sales representatives to inform customers about the attributes of animal health products and technical and veterinary operations specialists to provide advice regarding local, regional and global trends in animal health. These direct relationships allow animal health medicines and vaccines businesses to understand the needs of their customers and develop products to better meet those needs. Additionally, sales representatives focus on partnering with their customers to educate and support them on topics such as local disease awareness and to help them adopt new and more sophisticated animal health medicines and vaccines solutions, including the use of medicines and vaccines. As a result of these relationships, sales and consulting visits are typically longer and more meaningful, and sales representatives have better access to customer decision makers as compared to human health. However, some industry participants do continue to rely on distributors to market and sell their products, particularly in certain emerging markets.
Primarily self-pay
Livestock producers and pet owners generally pay for animal healthcare out-of-pocket. Purchasers make decisions without the influence of insurance companies or government payors that are often involved in product and pricing decisions in human healthcare. We believe that this dynamic results in less pricing pressure than in human health.
Livestock producers and veterinarians make the product and therapy decisions for livestock. Livestock producers more readily adopt new technologies and products that improve their profitability. Livestock producers are able to see measurable economic outcomes related to the use of animal health medicines and vaccines, as compared to human health in which outcomes can be less certain and more difficult to demonstrate. Therefore, we believe that animal health medicines and vaccines businesses can market new technologies and products at attractive price points.
Companion animal veterinarians continue to be key decision-makers and dispensers of medicines and vaccines for companion animals. Pet owners often purchase medicines and vaccines directly from veterinarians. As a result, the sale of animal health products directly to pet owners is a meaningful contributor to veterinary practice economics.
98
Strong brand loyalty and less generic competition
There is no large, well-capitalized company principally focused on generic animal health products that exists as a global competitor in the industry. The reasons for this include the smaller average market size of each product opportunity, the importance of direct distribution and education to veterinarians and livestock producers and the primarily self-pay nature of the business. In addition, companion animal health products are often directly prescribed and dispensed by veterinarians. We believe that this dynamic results in less pricing pressure than in human health. For example, although Rimadyl lost patent exclusivity in the United States in 2001, our revenues from Rimadyl have increased 35% since 2001 despite generic competition.
The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty. As a result, we believe that significant brand loyalty to products often continues after the loss of patent-based and regulatory exclusivity.
Regional differences in animal health markets
The animal health medicines and vaccines market is characterized by meaningful differences in customer needs across different regions. This variability of needs means that the breadth of a businesss product portfolio and a real-time understanding of regional and local trends are key success factors for animal health medicines and vaccines businesses. Variability is due to a number of factors, including:
|
Economic differences. In developed markets, there are generally higher standards of living and a greater degree of disposable income. Emerging markets are generally characterized by a higher level of economic growth leading to a rapidly growing middle class with increasing disposable income. Higher levels of economic development are generally correlated with higher levels of consumption of animal protein as well as increased pet ownership and spending per pet. |
|
Cultural differences . Dietary preferences and restrictions based on cultural traditions and trends shape livestock production and animal protein choices. The human-pet relationship also varies according to differing social norms and traditions, leading to differences in pet ownership and petcare standards. |
|
Epidemiological differences . Degree of urbanization, endemic diseases, animal housing practices and veterinary public health standards can vary across regions. These factors can result in differences in the prevalence of certain bacterial and viral strains and disease dynamics. |
|
Treatment differences. Utilization of different types of medicines and vaccines, in particular high technology products, differs across markets. In many emerging markets, as compared to developed markets, the level of sophistication in livestock production is lower but is becoming more industrialized and the medical treatment for companion animals is less established but is advancing. We have observed that the use of medicines and vaccines, including more sophisticated products, is increasing in many emerging markets, in both the livestock and companion animal sectors, to more closely resemble activity in developed markets. |
|
Environmental differences . Differences in climate, in particular rainfall and temperature, and the availability of arable land and fresh water, can have meaningful impacts on livestock productivity. Climate conditions and seasonal weather patterns also influence infectious disease and parasite prevalence. |
|
Regulatory differences . Regulatory standards differ across markets and impact the ability to introduce, market, manufacture and distribute certain types of animal health products. |
We believe these regional differences are reflected in differing growth rates of sales of animal health medicines and vaccines in various markets.
99
Overview
Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. For more than 60 years, as a business unit of Pfizer, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. Measured by our revenues of $4.2 billion for the year ended December 31, 2011, we are the largest animal health medicines and vaccines business. We market a diverse range of products across four regions: the United States, Europe/Africa/Middle East, Canada/Latin America and Asia/Pacific; eight core species: the livestock species of cattle, swine, poultry, sheep, and fish, and the companion animal species of dogs, cats and horses; and five major product categories: vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceutical.
With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and Latin America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, emerging markets contributed 27% of our revenues for the year ended December 31, 2011, which we believe makes us the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.
We believe our investments in the industrys largest sales organization, which includes an extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, lead to enduring and valued relationships with our customers. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.
We believe our ability to successfully position our diverse portfolio of products with high brand recognition in attractive markets and execute our operating plan has contributed to our financial performance over the last several years. For the nine months ended September 30, 2012, our revenues were $3.2 billion, reflecting growth of 2% compared to the nine months ended October 2, 2011. In 2011 and 2010, our revenues were $4.2 billion and $3.6 billion, reflecting growth of 18% and 30% compared to the prior year periods.
As a result of the impact of recent significant acquisitions and the related government-mandated divestitures on the revenue numbers in our statement of operations, during the nine months ended September 30, 2012 and October 2, 2011 and the years ended December 31, 2011, 2010 and 2009, the growth trend on our existing portfolio from year to year is not readily apparent. We believe that it is not only important to understand overall revenue growth, but also existing portfolio growth year over year. As such, we utilize base revenue growth. Base revenue growth is defined as revenue growth excluding the impact of incremental revenues from recent significant acquisitions, government-mandated divestitures and foreign exchange. Our base revenue growth was 5% in the nine months ended September 30, 2012, 7% in 2011 and 7% in 2010 compared to the prior year periods. For a more complete description of base revenue growth, see Managements discussion and analysis of financial condition and results of operationsAnalysis of the combined statements of operations.
For the nine months ended September 30, 2012, our Adjusted net income (a non-GAAP financial measure) was $482 million, reflecting growth of 27% compared to the nine months ended October 2, 2011. In 2011 and 2010, our
100
Adjusted net income was $503 million and $275 million, reflecting growth of 83% and 46% compared to the prior year periods. For the nine months ended September 30, 2012, our net income attributable to Zoetis was $446 million, reflecting growth of 89% compared to the nine months ended October 2, 2011. In 2011 and 2010, our net income attributable to Zoetis was $245 million and $110 million, reflecting growth of 123% and 210% compared to the prior year periods. For a reconciliation of Adjusted net income to net income attributable to Zoetis, see Managements discussion and analysis of financial condition and results of operationsAdjusted net income.
We organize and operate our business in four regions, and our products are sold in more than 120 countries. Within each of these regional segments we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on regional and local trends and customer needs.
Our livestock products primarily prevent or treat conditions, enabling the cost-effective production of safe, high-quality animal protein. Growth in the livestock medicines and vaccines sector is driven by human population growth and increasing standards of living, consequently increasing demand for improved nutrition, particularly animal protein, increasing natural resource constraints driving a need for enhanced productivity, and increased focus on food safety. Livestock products represented approximately 66% of our revenues for the year ended December 31, 2011.
Our companion animal products improve the quality of and extend the life of pets, increase convenience and compliance for pet owners and help veterinarians improve the quality of care they provide. Growth in the companion animal medicines and vaccines sector is driven by economic development and related increases in disposable income, increasing pet ownership, companion animals living longer, increasing medical treatment of companion animals and advances in animal health medicines and vaccines. Companion animal products represented approximately 34% of our revenues for the year ended December 31, 2011.
We have a diversified product portfolio with revenues generated in different regions for different species by different product categories. We refer to a single product brand in all of its dosage forms for all species as a product line. Our global product portfolio is diversified across more than 300 product lines. In 2011, our top selling product line, the ceftiofur line, contributed less than 8% of our revenues, and our top ten product lines contributed less than 38% of our revenues.
Our vaccine products prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce an immune response. Our parasiticide products prevent or eliminate external and internal parasites such as fleas, ticks and worms. Our anti-infective products prevent, kill or slow the growth of bacteria, fungi or protozoa. We also provide medicines, nutrients and probiotics to livestock through our medicinal feed additive products. Our other pharmaceutical products include pain and sedation, oncology and antiemetic products. Our product portfolio is enhanced by complementary businesses, including diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting.
101
|
Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines. Our largest competitors are all captive divisions of large pharmaceutical companies in which animal health sales comprise a relatively small portion of the overall business. By becoming a separate public company, we will be able to focus exclusively on our animal health business with increased strategic and operational flexibility.
While the development of new chemical and biological entities through new product R&D continues to play an important role in our growth strategies, the majority of our R&D investment is focused on brand lifecycle development. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Our brand lifecycle development leverages our existing product portfolio to expand our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations.
102
Our ability to leverage both the discoveries of other industries and of our existing R&D generally yields a faster, less expensive and more predictable R&D process and a more sustainable R&D pipeline as compared to human health.
We believe we are the industry leader in animal health R&D. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.
Our business segments
The animal health medicines and vaccines market is characterized by meaningful differences in customer needs across different regions. This is due to a variety of factors, including:
|
economic differences, such as standards of living in developed markets as compared to emerging markets; |
|
cultural differences, such as dietary preferences for different animal proteins, pet ownership preferences and petcare standards; |
|
epidemiological differences, such as the prevalence of certain bacterial and viral strains and disease dynamics; |
|
treatment differences, such as utilization of different types of medicines and vaccines, in particular high technology products; |
|
environmental differences, such as seasonality, climate and the availability of arable land and fresh water; and |
|
regulatory differences, such as standards for product approval and manufacturing. |
As a result of these differences, among other things, we organize and operate our business in four regions: the United States, Europe/Africa/Middle East, Canada/Latin America and Asia/Pacific. Within each of these regional segments, we offer a diversified product portfolio for both livestock and companion animal customers so that we can capitalize on local trends and customer needs. Our business segments are:
|
United States with revenues of $1,294 million and $1,659 million that represented 41% and 39% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. |
|
Europe/Africa/Middle East with revenues of $799 million and $1,144 million that represented 25% and 27% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include the United Kingdom, Germany and France. Key emerging markets in this segment include Russia, Turkey and South Africa. |
|
Canada/Latin America with revenues of $549 million and $788 million that represented 18% and 19% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The developed market in this segment is Canada. Key emerging markets in this segment include Brazil and Mexico. |
|
Asia/Pacific with revenues of $518 million and $642 million that represented 16% and 15% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include Australia, Japan, New Zealand and South Korea. Key emerging markets in this segment include India and China. |
For additional information regarding our performance in each of these regional segments and the impact of foreign exchange rates as well as significant acquisitions that Pfizer completed in recent years, see Managements discussion and analysis of financial condition and results of operations.
103
Our global scale and scope enable us to leverage our diversified product portfolio as well as our understanding of animal health industry trends across different regions and customer types. Our global product portfolio is diversified across more than 300 product lines, and our products are sold in more than 120 countries, with operations in developed markets and emerging markets. The markets we consider to be emerging markets contributed approximately 27% of our revenues for the year ended December 31, 2011. Continuing to expand in emerging markets is a core element of our growth strategy, which we believe will continue to make us the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole.
Our history
As a business unit of Pfizer, our business has been built over the course of more than 60 years, with key developments including the following:
Year |
Event(s) |
|
1952 | Pfizer established the Agricultural Division to promote Terramycin | |
1988 |
Agricultural Division renamed Pfizer Animal Health |
|
1995 | Pfizer acquired SmithKline Beecham Animal Health, expanding our business into vaccines and companion animal markets | |
1997 |
Launched Rimadyl, the first approved non-steroidal anti-inflammatory for dogs; although Rimadyl lost patent exclusivity in the United States in 2001, our revenues from Rimadyl have increased 35% since 2001 despite generic competition
Launched Clavamox, an anti-infective for dogs and cats; although Clavamox lost patent exclusivity in the United States in 2002, our revenues from Clavamox have increased 51% since 2002 despite generic competition |
|
2003 |
Pfizer acquired Pharmacia Corporation, which added a variety of animal health assets, most notably strengthening our cattle portfolio
Established dedicated R&D headquarters in Kalamazoo, Michigan
Pfizer acquired CSL Animal Health, strengthening our global pipeline and portfolio of vaccines in Australia and New Zealand |
|
2004 | Launched Draxxin, a premium anti-infective for livestock delivering a full course of therapy in one dose | |
2006 | Launched Convenia, the first antibiotic for skin infections in dogs and cats that provides an entire course of therapy in one injection | |
2007 |
Pfizer acquired Embrex, Inc., expanding our business into poultry devices and vaccines
Launched Cerenia, the first antiemetic therapy developed specifically for dogs |
|
2008 | Pfizer acquired Catapult Pty Ltd. and Bovigen LLC, expanding our business into animal genetics | |
2009 |
Pfizer acquired Wyeth, and with it Fort Dodge Animal Health, providing key brands such as ProHeart for dogs, Synovex for cattle and Innovator/Duvaxyn West Nile Virus vaccine for horses, as well as a complementary poultry vaccines business
Pfizer acquired Vetnex Animal Health Ltd. in India, further expanding in a key emerging market |
|
2010 |
Pfizer acquired Microtek International, Inc., expanding our business into aquaculture vaccines
Pfizer acquired Synbiotics Corporation, strengthening our position in veterinary diagnostics |
|
2011 |
Pfizer acquired King Pharmaceuticals, Inc. and with it Alpharma, strengthening our position in the poultry business with a medicinal feed additives business and further strengthening our position in the cattle and swine businesses
Established vaccine manufacturing capabilities in China through formation of the Jilin Pfizer Guoyuan joint venture
Launched Improvest in the United States, the first product to reduce boar taint without the need for surgical castration |
104
Our competitive strengths
We believe that the following strengths create sustainable competitive advantages that will enable us to continue our growth as a leader in the animal health medicines and vaccines industry:
Global leader with scale and scope
Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines. Measured by revenues, we would have been the largest animal health medicines and vaccines business in the world in 2011. We had approximately $3.2 billion and $4.2 billion in revenues and $446 million and $245 million of net income attributable to Zoetis for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively.
According to Vetnosis, as measured by revenues in 2011, we were the market leader in all of the major regions in which we operate, with the exception of Western Europe, where we held the number two position. We believe we have an industry-leading global footprint, with products sold in more than 120 countries and direct operations in approximately 70 countries, which provides us with direct access to our customer base through customer relationships and with early knowledge of local emerging trends and customer needs.
Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines. By becoming a separate public company, we will be able to focus exclusively on our animal health business with increased strategic and operational flexibility.
Established direct presence in emerging markets
We have an established direct presence in many important emerging markets, and we are a leader in many of the emerging markets in which we operate. We believe this direct presence has enabled us to become the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. Emerging markets contributed approximately 27% of our revenues for the year ended December 31, 2011. In 2011, we experienced 12% base revenue growth in our Asia/Pacific segment and 9% base revenue growth in our Canada/Latin America segment.
For example, we have a strong direct presence in Brazil where we have manufacturing sites in Guarulhos and Campinas and an R&D site in São Paulo. We believe this direct presence has contributed to our role as a market leader in Latin America and allows us to meet the needs of our customers in Brazil and in other emerging markets in this region.
In addition, we have more than thirty years of direct presence in India and currently maintain a strong commercial and manufacturing presence in India with specialized livestock and companion animal operations. We have a manufacturing site in Haridwar, India and an R&D site in Thane, India, where we are developing products specifically for the Indian market, as well as products for other regions. Through the acquisition of Vetnex Animal Health Ltd. in 2009, we further expanded our presence in India.
We also have a strong direct presence in China. We have three manufacturing sites in China and we believe that we have the largest sales organization of any multinational animal health medicines and vaccines business in China. In 2011, we established the Jilin Pfizer Guoyuan joint venture in China, which will provide us with biological manufacturing capabilities and access to local swine vaccine candidates.
Diversified product portfolio
We market products across eight core species and five major product categories. Livestock products represented approximately 66% of our revenues and companion animals products represented approximately 34% of our revenues for the year ended December 31, 2011.
105
Generally, because we have lower product sales concentration than many of our competitors, the performance of any single product has less impact on our company as compared to other, less-diversified animal health businesses. In 2011, our top selling product line contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues.
According to Vetnosis, as measured by revenues in 2011 on a global basis, our product portfolio ranked number one in anti-infectives, which represented approximately 31% of our revenues, number two in medicinal feed additives, which represented approximately 8% of our revenues, number two in vaccines, which represented approximately 26% of our revenues, and number three in parasiticides, which represented approximately 15% of our revenues.
The depth of our product portfolio enables us to address the varying needs of different customers with a high degree of expertise. Our medicines and vaccines portfolio is enhanced by complementary businesses, including diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting.
Leader in direct sales and marketing with strong customer relationships
We believe our sales organization, consisting of approximately 3,400 employees, is the largest in our industry, with direct operations in approximately 70 countries. Our sales organization is supported by our technical and veterinary operations specialists, who advise our customers with in-depth technical and medical expertise and disease education. This allows us to offer animal healthcare solutions for both livestock producers and veterinarians and simultaneously strengthen our partnership relationships with these customers. In addition, our direct global presence supports specialized local R&D initiatives, allows us to rapidly capitalize on market-specific situations and provides a global platform for R&D and business expansion.
Our commercial model emphasizes direct selling, and we believe we are less reliant on distributors than our competitors. We believe we achieve both stronger customer relationships and better economic returns on our products by emphasizing these direct relationships with veterinarians and livestock producers. Our direct relationships create a high level of regional and local specialization and allow us to focus on partnering with our customers to educate and support them on topics such as disease awareness and to help them adopt new and more sophisticated animal health solutions, including the use of medicines and vaccines. As a result, we believe veterinarians and livestock producers increasingly view us as advisors.
Leader in product developmentnew product R&D and brand lifecycle development
We believe that we are a leader in animal health R&D, both through our own product development capabilities as well as through our leverage of external product development partnerships. We have a track record of developing products that meet the needs of our customers. For example, for the convenience of livestock producers and veterinarians, we have introduced Draxxin, which delivers a full course of antibiotics in one injection. Similarly, we have introduced injectable products that we believe to be more convenient for veterinarians and pet owners, including Convenia, which provides a full course of antibiotics in one injection, and ProHeart 6, which provides six months of heartworm prevention in one injection.
From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. While the development of new chemical and biological entities through new product R&D continues to play an important role in our growth strategies, the majority of our R&D investment is focused on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Our ability to leverage both the discoveries of other industries and of our existing R&D generally yields a faster, less expensive and more predictable R&D process and a more sustainable R&D pipeline as compared to human health.
106
High-quality products delivered reliably by our world-class manufacturing operations
We believe that we are a leader in manufacturing quality and in supply reliability. We have strong globally managed and coordinated quality control and quality assurance programs in place at our manufacturing sites, and conduct internal and external inspections and audits at these sites. Our manufacturing sites experienced approximately 170 regulatory inspections globally between 2007 and 2011, with no findings that required material remediation or other penalties. In addition, our regional and global manufacturing teams seek to ensure that all of our CMOs adhere to our standards of manufacturing quality, and they are regularly audited.
We utilize a diversified network of proprietary manufacturing sites and CMOs to maximize operational efficiencies and to help meet demand for our products. Our proprietary manufacturing network is based on centralized oversight of a system of anchor and satellite sites to maximize cost efficiencies. Additionally, we co-locate R&D centers at many of our manufacturing sites in order to embed production design into the R&D process and to facilitate the efficient transfer of R&D projects to commercial-scale manufacturing.
The breadth and reliability of our manufacturing and supply chain enable us to produce medicines and vaccines for distribution in all major regions globally. Our manufacturing and supply chain provide us with a global platform for continued expansion. Due to the geographic breadth of our manufacturing operations, we believe that we are able to introduce products quickly and efficiently.
Dedicated employees and experienced management team
Our employees include skilled animal healthcare professionals helping to sustain and grow our business. Our research team has an average tenure of more than ten years, and our sales organization employees have, on average, been with us for more than five years. Additionally, with our veterinarians and veterinary researchers, we believe that we have more professionally educated animal health experts on our team than any of our competitors.
Several members of our executive team lead and have led important and influential animal health industry organizations, such as the International Federation for Animal Health and the Animal Health Institute, helping to ensure that we are a leader in identifying and addressing key market trends and challenges.
Track record of top-line revenue growth and significant cash flow generation
We have generated revenue growth at a CAGR of 24% over the three years ended December 31, 2011, and base revenue growth of 7% and 7% for the years ended December 31, 2011 and December 31, 2010, respectively. For the nine months ended September 30, 2012, we generated revenue growth of 2% and base revenue growth of 5% as compared to the nine months ended October 2, 2011. Our revenue growth has been driven by increased demand across our diversified product portfolio and acquisitions. For a description of base revenue growth, see Managements discussion and analysis of financial condition and results of operationsAnalysis of the combined statements of operations.
Our business is diversified across many regions, species and product categories. In 2011, our top selling product line contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues. Our revenue growth, driven by a diverse product portfolio, has generated significant cash flow.
Our growth strategies
We are committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. We intend to continue to grow our business by pursuing the following core strategies:
Leverage our direct local presence and strong customer relationships
With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries and provide
107
additional support through our technical and veterinary operations specialists. We believe this model and the brand loyalty enjoyed by our existing products provide us with operational efficiencies and access to an array of new growth opportunities, including a platform to encourage the adoption of more sophisticated animal health products. We believe our close contact with customers provides us with an in-depth understanding of their businesses, which allows us to develop products that address unmet customer needs.
We also believe that we have a high degree of specialized knowledge of our markets and that our local sales organization, regional R&D presence, global supply chain infrastructure and reliable delivery of high-quality products that are relevant for local diseases and challenges will continue to differentiate us from our competitors. Our brand lifecycle development R&D projects are a result of, among other things, our ability to leverage our global platform of direct selling and strong customer relationships.
Further penetrate emerging markets
Human population and economic development are also driving increased demand for animal protein in many emerging markets. In addition, rising standards of living in many emerging markets are associated with an increase in pet ownership and spending per pet.
We believe we are well-positioned in many emerging markets, based on our diverse product portfolio and our regional and local focus, and that we have further opportunities to expand in emerging markets by reaching new customers, by introducing more of our products and by supporting the adoption of more sophisticated animal health products, such as new vaccines and single-injection anti-infectives, including Draxxin for livestock and Convenia for companion animals. Furthermore, we believe that consolidation of livestock producers in certain emerging markets will drive adoption of our products, as they seek to achieve greater benefits of scale.
We believe we will be able to efficiently develop and market new products that respond to the needs of our emerging market customers and provide strong customer service and technical support in these markets.
Pursue new product development and value-added brand lifecycle development to extend our product portfolio
We intend to continue to develop and grow our product portfolio by developing new chemical and biological entities through new product R&D as well as by expanding our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. For example, the periodic emergence of novel bacterial and viral strains provides opportunities for new product R&D and brand lifecycle development of our existing product lines. Our R&D efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. We leverage our strong direct presence in many regions, which we believe allows us to cost-effectively develop and introduce new products, including brand lifecycle development products.
The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations. Subject to certain restrictions, we also expect to maintain access to Pfizers proprietary compound library and database to develop new products pursuant to the R&D collaboration and license agreement.
Remain the partner of choice for access to new products and technologies
We intend to continue to expand our extensive network of research partnerships around the globe in order to gain access to new technologies, pharmaceutical targets and vaccine antigens. Through participation in over 100 research alliances with leading universities and research institutes, we support cutting-edge research and secure the right to develop and commercialize new products and technologies. We participate as the sole industry partner in a number of multi-institution research alliances that are supported by an investment of over $100
108
million from local or regional government funds. Examples of these key research alliances include our partnership with several European universities in a research consortium that was awarded approximately $11 million from the European Union to progress research into a number of economically important parasite vaccines, as well as our 2010 partnership with the Easter Bush Research Consortium, an alliance of four top research centers in the U.K. focused on progressing research for the prevention and treatment of livestock diseases. In addition, once we become a standalone public company, we intend to explore opportunities to enter into collaboration agreements and external alliances with other parties, including parties that may have chosen not to collaborate with us while we were a business unit of Pfizer.
In the past we have benefited from Pfizers acquisitions of large pharmaceutical companies with animal health operations. In the future, we intend to continue to grow our business through smaller scale acquisitions, asset purchases, in-licensing transactions, supply and distribution agreements and other strategic partnerships. We have completed numerous business development transactions in the last five years to support our growth. In 2007, we entered into the poultry segment through the acquisition of Embrex, Inc., a biotechnology company with a focus on in ovo delivery of poultry vaccines. In 2009, we licensed novel food safety vaccines for livestock from Epitopix LLC. Through the acquisition of Vetnex Animal Health Ltd. in 2009, we expanded our presence in India and gained access to branded generics manufacturing and development. In 2011, we established the Jilin Pfizer Guoyuan joint venture in China, which will provide us with biological manufacturing capabilities and access to local swine vaccine candidates.
Continue to provide high-quality products and improve manufacturing production margins
Our global commercial and manufacturing teams collaborate on various operational efficiency initiatives, including yield improvements, procurement, site and area synergies and manufacturing support rationalization, intended to improve our manufacturing production margins. These operational efficiency initiatives have delivered consistent gross margin improvements for our legacy products, and as we have integrated acquisitions we have also applied these operational efficiency initiatives to improve production margins. Following this offering, we intend to continue our efficiency improvement programs, including Six Sigma and Lean capabilities.
We believe that we are a leader in manufacturing quality and in supply reliability. Our manufacturing and supply chain provide us with a global platform for continued expansion, including in emerging markets, and we believe that we will continue to increase our production efficiencies and expand production margins as our business grows.
Expand into complementary businesses to become a more complete, trusted partner in providing solutions
We intend to continue to expand our presence in complementary businesses, including diagnostics, genetics, devices and services. As part of our 2007 acquisition of Embrex, Inc., we entered into the business of poultry devices, which facilitate in ovo vaccine delivery. In 2008, we entered the livestock genetics business through the acquisition of Bovigen LLC and Catapult Pty Ltd. In 2010, we entered the complementary business of animal diagnostics through the acquisition of Synbiotics Corporation.
We also intend to expand our complementary services, including dairy data management, e-learning and professional consulting, to help our customers improve their practice management capabilities and production efficiencies. We believe that these expanded offerings, supported by our technical expertise, will drive an outcomes-based approach to animal healthcare that has the potential to generate incremental revenues, as well as increase customer loyalty and sales of our products.
Our products
Since the inception of our business, we have focused on developing a broad portfolio of animal health products. Our product portfolio has grown to a total of more than 300 product lines. We have comprehensive product lines for both livestock and companion animals across each of our major product categories.
109
Our major product categories are:
|
vaccines: biological preparations that prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response; |
|
parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms; |
|
anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa; |
|
medicinal feed additives: products that provide medicines, nutrients and probiotics to livestock; and |
|
other pharmaceutical: complementary products, such as pain and sedation, oncology and antiemetic products. |
Our remaining revenues are derived from other product categories, such as nutritionals and agribusiness, as well as products in complementary areas, including diagnostics, genetics, devices and services. We believe many of these complementary areas represent potential growth opportunities for our business to expand in the future.
Historically, a substantial portion of our products and revenues have been the result of brand lifecycle development. For example, the first product in our ceftiofur line was an anti-infective approved for treating Bovine Respiratory Disease in cattle that was administered via intramuscular injection. Through follow-on studies and reformulations, we have expanded the product line into additional cattle claims and administration routes as well as other species and regions. Several products in the line provide a full course of therapy in one injection. The ceftiofur product line currently includes the brands Excede, Excenel and Naxcel.
In addition to brand lifecycle development, we also pursue the development of new chemical and biological entities through new product R&D as part of our growth strategies. Examples of our first-in-class or best-in-class products that we have launched in the past ten years and products that we believe may represent platforms for future brand lifecycle development include:
|
Draxxin, a novel antibiotic for livestock that delivers a full course of therapy in one dose, launched in 2003; |
|
Inforce, the first and only respiratory vaccine for cattle that prevents respiratory disease caused by bovine respiratory syncytial virus (BRSV) while also aiding in the prevention of infectious bovine rhinotracheitis (IBR) and parainfluenza3 (PI3), launched in 2010; |
|
Improvac/Improvest, the only product that reduces boar taint in male swine without surgical castration, launched in 2004 in Australia and New Zealand and in 2011 in the United States; |
|
Convenia, the first single-injection anti-infective for common bacterial skin infections in cats and dogs, launched in 2006; and |
|
Palladia, the first drug to be approved by the FDA for treating cancer in dogs, launched in 2009. |
We pursue the development of new vaccines for emerging infectious diseases, with an operating philosophy of first to know and fast to market. Examples of the successful execution of this strategy include the first equine vaccine for West Nile Virus in the United States and European Union and the first swine vaccine for Pandemic H1N1 Influenza Virus in the United States.
110
Our product lines and products that represented approximately 1% or more of our revenues in 2011 include:
Livestock products
Product line / product |
Description |
Primary species |
||
Vaccines |
||||
Bovishield line | Aid in preventing diseases, including infectious bovine rhinotracheitis (IBR), bovine viral diarrhea (BVD, Types 1 and 2), parainfluenza3 (PI3) virus and bovine respiratory syncytial virus (BRSV), Leptospira borgpetersenii , L. pomona , L. grippotyphosa , L. canicola and L. icterohaemorrhagiae , depending on formulation | Cattle | ||
Improvac / Improvest | Vaccination to reduce boar taint, as an alternative to surgical castration | Swine | ||
RespiSure line | Aid in preventing chronic pneumonia caused by Mycoplasma hyopneumoniae | Swine | ||
Rispoval line | Aid in preventing three key viruses involved in cattle pneumoniaBRSV, PI3 and BVDas well as other respiratory diseases, depending on formulation | Cattle | ||
Parasiticides |
||||
Cydectin | Injectable or pour-on endectocide to treat and control internal and external cattle parasites, including gastrointestinal roundworms, lungworms, cattle grubs, mites and lice | Cattle, sheep | ||
Dectomax | Injectable or pour-on endectocide, characterized by extended duration of activity, for the treatment and control of internal and external parasite infections | Cattle, swine | ||
Anti-infectives |
||||
Aureomycin | Provides livestock producers treatment and convenience against a wide range of respiratory, enteric and reproductive diseases | Cattle, poultry, sheep, swine | ||
BMD | Aid in preventing and controlling enteritis, thereby increasing rate of weight gain and improving feed efficiency | Cattle, poultry, swine | ||
Ceftiofur line | Broad-spectrum cephalosporin antibiotic active against Gram-positive and Gram-negative bacteria, including ß-lactamase-producing strains, with some formulations producing a single course of therapy in one injection | Cattle, horses, sheep, swine | ||
Draxxin | Single-dose low-volume antibiotic for the treatment and prevention of bovine and swine respiratory disease, infectious bovine kerato conjunctivitis and bovine foot rot | Cattle, swine | ||
Lincomycin line | Aid in preventing and treating Chronic Respiratory Disease associated with Mycoplasma and coliform infections in growing chickens and for the treatment of swine dysentery (bloody scours) associated with Brachyspira (Serpulina) hyodysenteriae | Swine, poultry | ||
Spectramast | Aid in preventing and treating mastitis, delivered via intramammary administration. Same active ingredient as the ceftiofur line | Cattle | ||
Terramycin | Antibiotic for the treatment of susceptible infections | Cattle, poultry, sheep, swine |
111
Product line / product |
Description |
Primary species |
||
Other |
||||
Eazi-Breed CIDR | Progesterone-releasing device for the control of the estrus cycle | Cattle, sheep | ||
Embrex devices | Devices for enhancing hatchery operations efficiency through in ovo detection and vaccination | Poultry | ||
Lutalyse | For estrus control or in the induction of parturition or abortion | Cattle, swine |
Companion animal products
Product line / product |
Description |
Primary species |
||
Vaccines |
||||
Vanguard 4-way Lepto | Compatible with Vanguard High Titer and protects against leptospirosis caused by Leptospira canicola , L. grippotyphosa , L. icterohaemorrhagiae and L. pomona | Dogs | ||
Vanguard High Titer | Aid in preventing canine distemper caused by canine distemper virus, infectious canine hepatitis caused by canine adenovirus type 1, respiratory disease caused by canine adenovirus type 2, canine parainfluenza caused by canine parainfluenza virus and canine parvoviral enteritis caused by canine parvovirus | Dogs | ||
Parasiticides |
||||
Revolution | Protects against adult fleas, flea larvae, heartworm, ear mites and other parasites such as sarcoptic mites and American ticks for dogs and roundworms and hookworms for cats | Cats, dogs | ||
Anti-infectives |
||||
Clavamox / Synulox | A broad-spectrum antibiotic and the first and only potentiated penicillin approved for use in dogs and cats | Cats, dogs | ||
Convenia | Anti-infective for the treatment of common bacterial skin infections that provides a course of treatment in a single injection | Cats, dogs | ||
Terramycin | Antibiotic for the treatment of susceptible ophthalmic infections | Cats, dogs, horses | ||
Other |
||||
Rimadyl | For the relief of pain and inflammation associated with osteoarthritis and for the control of postoperative pain associated with soft tissue and orthopedic surgeries | Dogs |
Sales and marketing
Our sales organization includes sales representatives and technical and veterinary operations specialists. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.
Our sales representatives visit our customers, including veterinarians and livestock producers, to inform, promote and sell our products and services. Our technical and veterinary operations specialists provide scientific consulting focused on disease management and herd management, training and education on diverse topics, including responsible product use, and generally have advanced veterinary medicine degrees. These direct relationships with customers allow us to understand their needs. Additionally, our sales representatives and technical and veterinary operations specialists focus on partnering with our customers to educate and support them on topics such as local disease awareness and to help them adopt new and more sophisticated animal health
112
solutions, including through the use of our products. As a result of these relationships, our sales and consulting visits are typically longer, more meaningful and provide us with better access to customer decision makers as compared to human health. As of September 2012, our sales organization consisted of 3,400 employees.
Our livestock and companion animal products are primarily available by prescription through a veterinarian. On a more limited basis, in certain markets, we sell certain products through local agricultural and farming retail outlets, pharmacies and pet stores. We also market our products by advertising to veterinarians, livestock producers and pet owners.
Customers
We consider veterinarians and a diverse set of livestock producers, including beef and dairy farmers as well as pork and poultry operations, to be the primary customers of our livestock products. We sell our livestock products directly to livestock producers (including aquaculture operations) and we also sell our products to veterinarians, third-party veterinary distributors and retail outlets that typically then sell the products to livestock producers. We also consider veterinarians to be the primary customers of our companion animal products. We primarily sell our companion animal products to veterinarians or to third-party veterinary distributors that typically then sell our products to veterinarians, and in each case veterinarians then typically sell our products to pet owners. Our two largest customers, both distributors, each represented approximately 8% of our revenues for the nine months ended September 30, 2012 and no other customer represented more than 6% of our revenues for the same period.
Research and development
Our R&D operations are comprised of our dedicated veterinary medicine research and development organization, research alliances and other operations focused on the development of our products.
While the development of new chemical and biological entities through new product R&D continues to play an important role in our growth strategies, the majority of our R&D investment is focused on brand lifecycle development. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Our brand lifecycle development leverages our existing product portfolio to expand our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. Our ability to leverage both the discoveries of other industries and of our existing R&D generally yields a faster, less expensive and more predictable R&D process and a more sustainable R&D pipeline as compared to human health. In addition, our other R&D activities include the development of branded generic products, genetics and diagnostics, as well as biodevices and engineering investments for in ovo applications.
We prioritize our R&D spending on an annual basis with the goal of transparency and alignment of research and business objectives and do not disaggregate our R&D operations by research stage or by therapeutic area for purposes of managing our business. Instead, we allocate capital based on return on investment criteria, taking into account customer needs, revenues and profitability potential, the probability of technical and regulatory success, and timing of launch. A centralized portfolio management function links development plans with financial systems to build a comprehensive view of the status of project progression and spend without a focus on spending by research stage or by therapeutic area. This comprehensive view facilitates our ability to set targets for project timing and goals for investment efficiency.
Following this offering, we will continue to offer our existing products, and pursuant to the R&D collaboration and license agreement, subject to certain restrictions, we also expect to maintain access to Pfizers proprietary compound library and database to develop new products. In addition, once we become a standalone public company, we intend to explore opportunities to enter into collaboration agreements and external alliances with other parties, including parties that may have chosen not to collaborate with us while we were a business unit of Pfizer. As a result, we will continue to offer and develop products that add value for veterinary professionals, livestock producers and pet owners.
As of September 30, 2012, we employed over 1,000 individuals in our global R&D operations, with over 100 research veterinarians and 175 scientists with PhDs. Our R&D headquarters is located in Kalamazoo, Michigan. We have R&D operations co-located with manufacturing sites in Melbourne, Australia, Louvain-la-Neuve,
113
Belgium, Guarulhos, Brazil, Jilin, China, Olot, Spain and San Diego, California, Charles City, Iowa, and Lincoln, Nebraska in the United States. We co-located R&D operations with manufacturing sites to facilitate the efficient transfer of production processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations in Zaventem, Belgium, Sao Paulo, Brazil, Mumbai, India, New Delhi, India and Durham, North Carolina in the United States. As part of the Separation, Pfizer will convey to us its interest in each of these R&D facilities. Each site is designed to meet the regulatory requirements for working with chemical or infectious disease agents.
Our regional research operations are based in Australia, Belgium, Brazil, Canada, China, India, Spain and the United States, which enables local and regional development and the cultivation of relationships with academic institutions and non-government research organizations. Regional hubs are essential for local and regional development, particularly for vaccines that contain antigens unique to a region. We have a significant investment in a pharmaceutical sciences operation in India, including a good manufacturing practices-compliant pilot plant, with an extensive vendor network to support cost-effective external development activities.
Many of our research programs involve an external partnership, often with funding from a non-governmental organization or a government grant. We are generally responsible for providing technical direction and supplemental direct and indirect expertise in, as well as investment for, such external partnerships. Depending on the nature of the agreement, we may act as the commercialization partner for discoveries that originate during the period of collaborative research, or we may own or have exclusive rights to any intellectual property that enables the development of proprietary products or models.
Manufacturing and supply chain
Prior to the Separation, our products have been manufactured at both sites operated by Pfizer and sites operated by third-party contract manufacturing organizations, which we refer to as CMOs.
In connection with the Separation, Pfizer will transfer 29 manufacturing sites to us. These 29 sites consist of all of the sites operated by Pfizer that, immediately prior to the Separation, predominately manufactured animal health products. We refer to these 29 sites as our global manufacturing network. See Certain relationships and related party transactionsRelationship with PfizerGlobal separation agreement.
Our global manufacturing network utilizes centralized oversight of a system of 13 anchor and 16 satellite manufacturing sites to maximize cost efficiencies. In the year ended December 31, 2011, products that represented 58% of our cost of goods sold were manufactured at our global manufacturing network sites.
Our global manufacturing network is comprised of the following sites:
Anchor Sites |
Satellite Sites |
|||||
Site |
Location |
Site |
Location |
|||
Catania |
Italy | Campinas | Brazil | |||
Charles City |
Iowa, U.S. | Durham | North Carolina, U.S. | |||
Chicago Heights |
Illinois, U.S. |
Eagle Grove | Iowa, U.S. | |||
Guarulhos* |
Brazil |
Hannibal | Missouri, U.S. | |||
Haridwar |
India |
Hsinchu | Taiwan | |||
Jilin** |
China | Laurinburg | North Carolina, U.S. | |||
Kalamazoo*** |
Michigan, U.S. |
Longmont | Colorado, U.S. | |||
Lincoln |
Nebraska, U.S. |
Medolla | Italy | |||
Louvain-la-Neuve |
Belgium |
Salisbury | Maryland, U.S. | |||
Melbourne |
Australia |
San Diego | California, U.S. | |||
Olot |
Spain |
Shenzhou | China | |||
Suzhou |
China |
Van Buren | Arkansas, U.S. | |||
Willow Island |
West Virginia, U.S. |
Victoria | British Columbia, Canada | |||
Wellington | New Zealand | |||||
White Hall | Illinois, U.S. | |||||
Yantai | China |
114
* | This site is subject to a sale-leaseback arrangement with Pfizer, pursuant to which Pfizer will continue to operate the manufacturing operations at the site for a period of time. See Certain relationships and related party transactionsRelationship with PfizerBrazil lease agreements. |
** | This site is operated by the Jilin Pfizer Guoyuan joint venture. |
*** | Prior to the Separation, Pfizers manufacturing site in Kalamazoo manufactured both human health and animal health products. After the Separation, we will own the portions of this site that predominantly manufacture animal health products and Pfizer will own the portions of this site that predominantly manufacture human health products. |
Ownership of these facilities will be conveyed to us by Pfizer as part of the Separation, with the exception of our facilities Hannibal, Missouri and San Diego, California, both of which are leased sites. The leasehold interests in these sites will be conveyed to us by Pfizer as part of the Separation.
Following the Separation, in addition to our global manufacturing network, Pfizer will continue to manufacture products for us at 14 Pfizer sites located in 13 countries pursuant to a master manufacturing and supply agreement. Included in these 14 Pfizer sites is our facility in Guarulhos, Brazil, where Pfizer will continue its manufacturing operations for a period of time. These 14 Pfizer sites consist of sites operated by Pfizer that, immediately prior to the Separation, predominately manufactured human health products. The decision to continue manufacturing our products at Pfizer sites will be reevaluated in the future based on several factors, including manufacturing costs and the needs of our business. See Certain relationships and related party transactionsRelationship with PfizerMaster manufacturing and supply agreement.
The Pfizer sites that will continue to manufacture products for us following this offering pursuant to a master manufacturing and supply agreement are:
Site |
Location |
|
Amboise |
France | |
Andover |
Massachusetts, U.S. | |
Ascoli |
Italy | |
Cairo |
Egypt | |
El Jadida |
Morocco | |
Guarulhos* |
Brazil | |
Istanbul |
Turkey | |
Jakarta |
Indonesia | |
Kalamazoo** |
Michigan, U.S. | |
Nagoya |
Japan | |
Puurs |
Belgium | |
Ringaskiddy |
Ireland | |
Valencia |
Venezuela | |
West Ryde |
Australia |
* | This site is subject to a sale-leaseback arrangement with Pfizer, pursuant to which Pfizer will continue to operate the manufacturing operations at the site for a period of time. See Certain relationships and related party transactionsRelationship with PfizerBrazil lease agreements. |
** | Prior to the Separation, Pfizers manufacturing site in Kalamazoo manufactured both human health and animal health products. After the Separation, we will own the portions of this site that predominantly manufacture animal health products and Pfizer will own the portions of this site that predominantly manufacture human health products. |
Additionally, following the Separation, our global manufacturing network will continue to be supplemented by approximately 200 CMOs. We select CMOs based on capacity and financial efficiency analyses, and our regional and global manufacturing teams seek to ensure that all of the CMOs we use adhere to our standards of manufacturing quality and are regularly audited.
We purchase certain raw materials necessary for the commercial production of our products from a variety of third-party suppliers. We utilize distributors as a part of our global supply chain, primarily for shipping and logistics support.
115
We intend to continue our efficiency improvement programs in our manufacturing and supply chain organization, including Six Sigma and Lean capabilities, which are processes intended to improve manufacturing efficiency. We have strong globally managed and coordinated quality control and quality assurance programs in place at our global manufacturing network sites, and we regularly inspect and audit our global manufacturing network and CMO sites.
Our global manufacturing network sites experienced approximately 170 regulatory inspections globally between 2007 and 2011, conducted by the FDA, the USDA and similar agencies in areas outside of the United States. These inspections resulted in no findings that required material remediation or other penalties.
Competition
Although our business is the largest by revenues in the animal health medicines and vaccines industry, we face competition in the regions and sectors in which we compete. Principal methods of competition vary depending on the particular region, species, product category or individual product. Some of these methods include new product development, quality, price, service and promotion to veterinary professionals, pet owners and livestock producers.
Our primary competitors include animal health medicines and vaccines companies such as Merck Animal Health, the animal health division of Merck & Co., Inc. (formerly known as Intervet/Schering-Plough); Merial, the animal health division of Sanofi S.A.; Elanco, the animal health division of Eli Lilly and Company; Bayer Animal Health, the animal health division of Bayer AG; Novartis Animal Health, the animal health division of Novartis AG; and Boehringer Ingelheim Animal Health, the animal health division of Boehringer Ingelheim GmbH. In addition, we compete with hundreds of other animal health product producers throughout the world.
The level of competition from generic products varies from market to market. For example, the level of generic competition is higher in Europe and certain emerging markets than in the United States. However, there is no large, well-capitalized company focused on generic animal health products that exists as a global competitor in the industry. The reasons for this include the smaller average market size of each product opportunity, the importance of direct distribution and education to veterinarians and livestock producers and the primarily self-pay nature of the business. In addition, companion animal health products are often directly prescribed and dispensed by veterinarians.
Our livestock products tend to experience lower generic competition than our companion animal products for several reasons:
|
livestock producers tend to be loyal to medicines and vaccines that have been demonstrated to be efficacious; as medicines and vaccines are a small portion of a livestock producers total production costs and ineffective medicines and vaccines could result in the loss of animals, causing disproportionate harm to such producers investment. Therefore we believe that livestock producers value brand name medicines and vaccines and are reluctant to try alternatives to methods that have already been proven to be reliably effective; |
|
the economic benefits of our livestock medicines and vaccines are easier to measure because livestock production success can be measured solely in economic terms, with the goal of livestock medicines and vaccines tied to better food production; and |
|
the success of medicines and vaccines used on livestock is generally observed more quickly. |
The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty. As a result, we believe that significant brand loyalty to products often continues after the loss of patent-based and regulatory exclusivity.
116
Intellectual property
Our technology, brands and other intellectual property are important elements of our business. We rely on patent, trademark, copyright and trade secret laws, as well as regulatory exclusivity periods and non-disclosure agreements to protect our intellectual property rights. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property, as appropriate.
Our product portfolio enjoys the protection of approximately 4,000 patents and 2,000 pending patent applications, filed in more than 60 countries, with concentration in our major market countries as well as other countries with strong patent systems, such as Australia, Brazil, Canada, Europe, Japan and the United States. Many of the patents and patent applications in our portfolio are the result of our own and Pfizers work, while other patents and patent applications in our portfolio were at least partially developed by, and are licensed to us, by third parties.
Patents for individual products extend for varying periods depending on the date of the patent filing or grant and the legal term of patents in the countries where such patents are obtained. Several patents cover the ceftiofur product line, including formulation and use patents that begin expiring in the United States in 2015, with others extending until 2024. Draxxin and Convenia are covered by patents in the United States with terms that expire in 2021 and 2023, respectively. The compound patent on doramectin, which is the active ingredient in Dectomax, an antiparasitic, has expired in all regions; however, process patents and the injectable formulation patent for this product do not expire in the United States until 2020 and 2016, respectively. The compound patent on selamectin, which is active in Revolution, a parasiticide, expires in the United States, Canada and Europe in 2014.
Additionally, many of our vaccine products are based on proprietary master seeds and proprietary or patented adjuvant formulations. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, including by seeking to require our employees, consultants, advisors and partners to enter into confidentiality agreements and other arrangements upon the commencement of their employment or engagement.
In order to facilitate the Separation and allow Pfizer and our operations to continue with minimal interruption, Pfizer will license to us the right to use certain intellectual property rights in the animal health field. We will license to Pfizer the right to use certain of our trademarks and substantially all of our other intellectual property rights in the human health field and all other fields outside of animal health. In addition, Pfizer will grant us a transitional license to use certain of Pfizers trademarks and we will grant Pfizer a transitional license to use certain of our trademarks for a period of time following the completion of this offering.
Prior to the Separation, as a business unit of Pfizer, we had the ability to leverage Pfizers proprietary compound library and database to identify, research and develop compounds suitable as new product candidates for the animal health field. As part of the Separation, we intend to enter into an R&D collaboration and license agreement with Pfizer. Pursuant to the R&D collaboration and license agreement, we will have continued access to Pfizers compound library and database for a period of seven years and will have, subject to Pfizers approval, the possibility to exclusively license compounds from Pfizer that we develop under the R&D collaboration and license agreement using portions of Pfizers proprietary compound library and database. We believe that this agreement may help bolster our own post-Separation R&D capability to support the continued long-term viability of our product pipeline for animal health.
We seek to file and maintain trademarks around the world based on commercial activities in most regions where we have, or desire to have, a business presence for a particular product or service. We currently maintain more than 9,500 trademark applications and registrations in major regions, identifying goods and services dedicated to the care of livestock and companion animals.
Regulatory
The sale of animal health products is governed by the laws and regulations specific to each country in which we sell our products. To maintain compliance with these regulatory requirements, we have established processes,
117
systems and dedicated resources with end-to-end involvement from product concept to launch and maintenance in the market. Our regulatory function actively seeks to engage in dialogue with various global agencies regarding their policies that relate to animal health products. In the majority of our markets, the relevant health authority is separate from those governing human medicinal products.
United States
United States Food and Drug Administration. The regulatory body that is responsible for the regulation of animal health pharmaceuticals in the United States is the Center for Veterinary Medicine, or the CVM, housed within the FDA. All manufacturers of animal health pharmaceuticals must show their products to be safe, effective and produced by a consistent method of manufacture as defined under the Federal Food, Drug and Cosmetic Act. The Agencys basis for approving a drug application is documented in a Freedom of Information Summary. Post-approval monitoring of products is required by law, with reports being provided to the CVMs Surveillance and Compliance group. Reports of product quality defects, adverse events or unexpected results are produced in accordance with the law. Additionally, we are required to submit all new information for a product, regardless of the source.
United States Department of Agriculture. The regulatory body in the United States for veterinary vaccines is the USDA. The USDAs Center for Veterinary Biologics is responsible for the regulation of animal health vaccines, including immunotherapeutics. All manufacturers of animal health biologicals must show their products to be pure, safe, effective and produced by a consistent method of manufacture as defined under the Virus Serum Toxin Act. Post-approval monitoring of products is required. Reports of product quality defects, adverse events or unexpected results are produced in accordance with the agency requirements.
Environmental Protection Agency. The main regulatory body in the United States for veterinary pesticides is the Environmental Protection Agency, or the EPA. The EPAs Office of Pesticide Programs is responsible for the regulation of pesticide products applied to animals. All manufacturers of animal health pesticides must show their products will not cause unreasonable adverse effects to man or the environment as stated in the Federal Insecticide, Fungicide, and Rodenticide Act. Within the United States, pesticide products that are approved by the EPA must also be approved by individual state pesticide authorities before distribution in that state. Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies.
Outside of the United States
European Union. The European Medicines Agency, or EMA, is a decentralized agency of the EU, located in London. The agency is responsible for the scientific evaluation of medicines developed by pharmaceutical companies for use in the European Union. The agency has a veterinary review section distinct from the medical review section. The Committee for Veterinary Medicinal Products is responsible for scientific review of the submissions for pharmaceuticals and vaccines. The EMA makes the final decision on the approval of products. Once granted by the European Commission, a centralized marketing authorization is valid in all EU and European Economic Area-European Free Trade Association states. A series of Directives, Guidelines and EU Pharmacopeia Monographs provide the requirements for approval in the EU. In general, these requirements are similar to those in the United States, requiring demonstrated evidence of purity, safety, efficacy, and consistency of manufacturing processes.
Brazil. The Ministry of Agriculture, Livestock Production and Supply, or MAPA, is the regulatory body in Brazil that is responsible for the regulation and control of pharmaceuticals, biologicals and medicinal feed additives for animal use. MAPAs regulatory activities are conducted through the Secretary of Agricultural Defense and its Livestock Products Inspection Department. In addition, regulatory activities are conducted at a local level through the Federal Agriculture Superintendence. These activities include the inspection and licensing of both manufacturing and commercial establishments for veterinary products, as well as the submission, review and
118
approval of pharmaceuticals, biologicals and medicinal feed additives. MAPA is one of the most active regulatory agencies in Latin America, having permanent seats at several international animal health forums, such as Codex Alimentarius, World Organization for Animal Health and Committee of Veterinary Medicines for the Americas. MAPA was also recently invited to be a Latin American representative at International Cooperation on Harmonisation of Technical Requirements for Registration of Veterinary Medicinal Products, or VICH, meetings. Several normative instructions issued by MAPA have set regulatory trends in Latin America.
Australia. The Australian Pesticides and Veterinary Medicines Authority, or APVMA, is an Australian government statutory authority established in 1993 to centralize the registration of all agricultural and veterinary products into the Australian marketplace. Previously each State and Territory government had its own system of registration. The APVMA assesses applications from companies and individuals seeking registration so they can supply their product to the marketplace. Applications undergo rigorous assessment using the expertise of the APVMAs scientific staff and drawing on the technical knowledge of other relevant scientific organizations, Commonwealth government departments and state agriculture departments. If the product works as intended and the scientific data confirms that when used as directed on the product label it will have no harmful or unintended effects on people, animals, the environment or international trade, the APVMA will register the product. As well as registering new agricultural and veterinary products, the APVMA reviews older products that have been on the market for a substantial period of time to ensure they still do the job users expect and are safe to use. The APVMA also reviews registered products when particular concerns are raised about their safety and effectiveness. The review of a product may result in confirmation of its registration or it may see registration continue with some changes to the way the product can be used. In some cases the review may result in the registration of a product being cancelled and the product taken off the market.
Rest of world. Country-specific regulatory laws have provisions that include requirements for certain labeling, safety, efficacy and manufacturers quality control procedures (to assure the consistency of the products), as well as company records and reports. With the exception of the European Union, most other countries regulatory agencies will generally refer to the FDA, USDA, European Union and other international animal health entities, including the World Organization for Animal Health, Codex Alimentarius, in establishing standards and regulations for veterinary pharmaceuticals and vaccines.
Global policy and guidance
Joint FAO/WHO Expert Committee on Food Additives. The Joint FAO/WHO Expert Committee on Food Additives is an international expert scientific committee that is administered jointly by the FAO and the World Health Organization, or WHO. They provide a risk assessment/safety evaluation of residues of veterinary drugs in animal products, exposure and residue definition and maximum residue limit proposals for veterinary drugs. We work with them to establish acceptable safe levels of residual product in food-producing animals after treatment. This in turn enables the calculation of appropriate withdrawal times for our products prior to an animal entering the food chain.
Advertising and promotion review. Promotion of ethical animal health products is controlled by regulations in many countries. These rules generally restrict advertising and promotion to those claims and uses that have been reviewed and endorsed by the applicable agency. We conduct a review of promotion material for compliance with the local and regional requirements in the markets where we sell animal health products.
Food Safety Inspection Service / generally recognized as safe. The FDA is authorized to determine the safety of substances (including generally recognized as safe substances, food additives and color additives), as well as prescribing safe conditions of use. However, although the FDA has the responsibility for determining the safety of substances, the Food Safety and Inspection Service, the public health agency in the USDA, still retains, under the tenets of the Federal Meat Inspection Act and the Poultry Products Inspection Act and their implementing regulations, the authority to determine that new substances and new uses of previously approved substances are suitable for use in meat and poultry products.
119
Employees
We expect we will have more than 9,500 employees worldwide following the Separation, which we expect will include approximately 3,900 employees in the United States and approximately 5,600 in other jurisdictions. We anticipate, that approximately 3,400 and 4,000 of these employees will be sales or manufacturing employees, respectively. Some of these employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements, including approximately 50 union employees in the United States.
Properties
We have R&D operations co-located with certain of our manufacturing sites in Australia, Brazil, Belgium, Canada, China, Spain and the United States to facilitate the efficient transfer of production processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations at non-manufacturing locations in Brazil, Belgium, India and the United States. As part of the Separation, Pfizer will convey to us its interest in each of these R&D facilities. Our largest R&D facility is our owned United States research and development site located in Kalamazoo, Michigan, which represented approximately 1.4 million square feet. None of our other non-manufacturing sites is more than 0.2 million square feet.
The location of our principal executive offices will be determined prior to the consummation of this offering.
Following the Separation, our global manufacturing network will be comprised of 13 anchor and 16 satellite manufacturing sites and Pfizer will continue to manufacture products for us at 14 Pfizer sites located in 13 countries. The largest manufacturing site in our global manufacturing network is our manufacturing site located in Kalamazoo, MI, which represented approximately 0.6 million square feet. No other site in our global manufacturing network was more than 0.6 million square feet. In addition, our global manufacturing network will continue to be supplemented by approximately 200 CMOs. See Manufacturing and supply chain and Certain relationships and related party transactionsRelationship with PfizerMaster manufacturing and supply agreement.
We own or lease various additional properties for other business purposes including office space, warehouses and logistics centers. In addition, under the transitional services agreement, Pfizer will provide us with continued access to certain of its premises currently occupied by our employees.
We believe that our existing properties, as supplemented by manufacturing by CMOs, including Pfizer, and access to Pfizer facilities provided under the transitional services agreement are adequate for our current requirements and for our operations in the foreseeable future.
Environmental, health and safety
We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. Due to our operations, these laws and regulations also require us to obtain, and comply with, permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.
Certain environmental laws, such as CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment, including at third party sites or offsite disposal locations, or that currently own or operate (or formerly owned or operated)
120
sites where such a release occurred. In addition to clean-up actions brought by federal, state, local and foreign governmental entities, private parties could raise personal injury or other claims against us due to the presence of, or exposure to, hazardous materials on, from or otherwise relating to such a property.
We have made, and intend to continue to make, necessary expenditures for compliance with applicable environmental, health and safety laws and regulations. We are also a party to proceedings in which the primary relief sought is the cost of past and/or future remediation, or remedial measures to mitigate or remediate pollution. In connection with such proceedings, and otherwise, we are investigating and cleaning up environmental contamination from past industrial activity at certain sites, or financing other parties completion of such activities. However, we may not have identified all of the potential environmental liabilities relating to our current and former properties, or those liabilities associated with off-site disposal locations. Such liability could materially adversely affect our operating results and financial condition. Furthermore, regulatory agencies are showing increasing concern over the impact of animal health products and livestock operations on the environment. This increased regulatory scrutiny may necessitate that additional time and resources be spent to address these concerns in both new and existing products.
In connection with past acquisitions and divestitures, we have undertaken certain indemnification obligations that require us, or may require us in the future, to conduct or finance environmental cleanups at sites that we no longer own or operate. We have also entered into indemnification agreements in which we are being indemnified for various environmental cleanups; however, such indemnities are limited in both time and scope and may be further limited in the presence of new information, or may not be available at all.
While we cannot predict with certainty our future capital expenditures or operating costs for environmental compliance or remediation of contaminated sites, we have no reason to believe that they will have a material adverse effect on our operating results or financial condition.
Legal proceedings
We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of United States and foreign competition law, labor laws, consumer protection laws, and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. We operate in multiple jurisdictions and, as a result, a claim in one jurisdiction may lead to claims or regulatory penalties in other jurisdictions. We intend to defend vigorously against any pending or future claims and litigation. For a description of certain legal proceedings, see Notes to Combined Financial Statements Note 15A. Commitments and Contingencies: Legal Proceedings and Notes to Unaudited Condensed Combined Financial Statements Note 9A. Commitments and Contingencies: Legal Proceedings .
At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert managements attention and may materially adversely affect our reputation, even if resolved in our favor.
121
Directors and executive officers
The following table sets forth information regarding our directors, nominees for director and executive officers upon completion of this offering. Upon completion of this offering, our board of directors will consist of nine members.
Name |
Age |
Position |
||||
Juan Ramón Alaix |
61 | Chief Executive Officer, Director | ||||
Richard A. Passov |
54 | Executive Vice President and Chief Financial Officer | ||||
Sandra J. Beaty |
52 | Executive Vice President of Corporate Affairs | ||||
Alejandro Bernal |
40 | Executive Vice President and Area President of the Europe, Africa and Middle East region | ||||
Heidi C. Chen |
46 | Executive Vice President, General Counsel and Corporate Secretary | ||||
Catherine A. Knupp |
52 | Executive Vice President and President of Research and Development | ||||
Roxanne Lagano |
48 | Executive Vice President and Chief Human Resources Officer | ||||
Joyce J. Lee |
40 | Executive Vice President and Area President of the Canada and Latin America region | ||||
Clinton A. Lewis, Jr. |
46 | Executive Vice President and President of U.S. Operations | ||||
Kristin C. Peck |
41 | Executive Vice President and Group President | ||||
Stefan Weiskopf |
53 | Executive Vice President and Area President of the Asia Pacific region | ||||
Frank A. DAmelio |
55 | Chairman and Director | ||||
Geno J. Germano |
52 | Director | ||||
Douglas E. Giordano |
50 | Director | ||||
Charles H. Hill |
56 | Director | ||||
Amy W. Schulman |
52 | Director | ||||
Director Nominee |
||||||
Director Nominee |
||||||
Director Nominee |
Set forth below is information concerning our directors and executive officers as of the date of this prospectus.
Juan Ram ó n Alaix has served as our Chief Executive Officer and director since July 2012 and as President of Pfizers animal health business unit since 2006. Mr. Alaix joined Pfizer in 2003 and held various positions, including Regional President of Central/Southern Europe for Pfizers pharmaceutical business. Mr. Alaix held various positions, including Market President, Spain at Pharmacia Spain from 1998 until its acquisition by Pfizer in 2003. Mr. Alaix currently serves as President and as a member of the board of directors and the executive committee of the International Federation for Animal Health.
Mr. Alaixs experience described above, including his knowledge and leadership of our company, his business and management experience and his experience in the animal health industry, provides him with the qualifications and skills to serve as a director on our board.
122
Richard A. Passov has served as our Executive Vice President and Chief Financial Officer since July 2012. Mr. Passov joined Pfizer in 1997 and served as Senior Vice President and Treasurer for Pfizer from 2001 to 2012 and served as Assistant Treasurer from 1997 to 2001.
Sandra J. Beaty has served as our Executive Vice President of Corporate Affairs since October 2012. Ms. Beaty joined Pfizer in 1996 and held various positions, including Senior Vice President of Public Affairs and Chief of Staff to the former Pfizer Chairman and CEO.
Alejandro Bernal has served as our Executive Vice President and Area President of the Europe, Africa and Middle East region since October 2012 and as Area President of that region for Pfizers animal health business unit since 2010. Mr. Bernal joined Pfizer in 2000 and held various positions, including Area President Canada and Latin America region; Regional Director of Southwest and Central Latin America; Division Director for Central America and Colombia; Swine and Poultry Team Leader for Mexico; and Swine Product Manager for Northern Latin America for Pfizers animal health business unit.
Heidi C. Chen has served as our Executive Vice President and General Counsel since October 2012, as our Corporate Secretary since July 2012 and as Vice President and Chief Counsel of Pfizers animal health business unit since 2009. Ms. Chen joined Pfizer in 1998 and held various legal and compliance positions, including lead counsel for Pfizers Established Products business unit.
Catherine A. Knupp has served as our Executive Vice President and President of Research and Development since October 2012 and as Vice President of Pfizers Veterinary Medicine Research and Development since September 2005. Dr. Knupp joined Pfizer in July 2001 and held various positions, including Vice President of Pfizers Michigan laboratories for Pharmacokinetics, Dynamics and Metabolism.
Roxanne Lagano has served as our Executive Vice President and Chief Human Resources Officer since October 2012. Ms. Lagano joined Pfizer in 1997 and held various positions, including Senior Vice President, Pfizer Global Compensation, Benefits and Wellness and Senior Director, Business Transactions, Pfizer Worldwide Human Resources.
Joyce J. Lee has served as our Executive Vice President and Area President of the Canada and Latin America region since October 2012 and as Area President of the same region for Pfizers animal health business unit since December 2010. Ms. Lee joined Pfizer in 2003 with the acquisition of Pharmacia and held various positions, including Vice President of Global Poultry and Vice President of Global Business Technology for Pfizers animal health business unit.
Clinton A. Lewis, Jr. has served as our Executive Vice President and President of U.S. Operations since October 2012 and as President of U.S. Operations for Pfizers animal health business unit since 2007. Mr. Lewis joined Pfizer in 1988 and held various positions across sales, marketing and general management including Senior Vice President of Sales, U.S.; General Manager, Pfizer Caribbean; and General Manager, U.S. Anti-Infectives.
Kristin C. Peck has served as our Executive Vice President and Group President since October 2012. Ms. Peck joined Pfizer in 2004 and held various positions, including Executive Vice President, Worldwide Business Development and Innovation; Senior Vice President of Worldwide Business Development, Strategy and Innovation; Senior Vice President, Worldwide Strategy and Innovation; Vice President, Strategic Planning; Chief of Staff to the Vice Chairman; and Senior Director, Strategic Planning. Ms. Peck also served as a member of Pfizers Executive Leadership Team.
Stefan Weiskopf has served as our Executive Vice President and Area President of the Asia Pacific region, which expands to Australia and New Zealand, since October 2012 and as Area President of that region for Pfizers animal health unit since 2007. Mr. Weiskopf joined Pfizer in 1988 and held various positions, including Division Director Animal Health for Germany, Austria and Switzerland.
123
Frank A. DAmelio has served as a member of our board since July 2012 and as Executive Vice President, Chief Financial Officer and Business Operations for Pfizer since December 2010. Mr. DAmelio joined Pfizer in September 2007 and held various positions, including Senior Vice President and Chief Financial Officer. From November 2006 to August 2007, Mr. DAmelio held the position of Senior Executive Vice President of Integration and Chief Administrative Officer at Alcatel-Lucent, S.A. Mr. DAmelio currently serves on the board of directors of Humana Inc. and is Chair of the Humana Inc. Audit Committee. Mr. DAmelio also currently serves as a member of the National Advisory Board of JPMorgan Chase & Co.
Mr. DAmelios experience described above, including his business, management and leadership experience and his experience serving on the board of another public company, provides him with the qualifications and skills to serve as a member of our board.
Geno J. Germano has served as a member of our board since July 2012 and as President and General Manager, Specialty Care and Oncology for Pfizer since December 2010. Mr. Germano joined Pfizer in October 2009 and held various positions, including President and General Manager, Specialty Care. From 2004, Mr. Germano held various positions with Wyeth, including President, U.S. Pharmaceuticals Business Units; Executive Vice President and General Manager for Wyeth Global Vaccines; Managing Director, Wyeth Australia and New Zealand; and Executive Vice President and General Manager of the Wyeth Pharmaceutical Business Unit, until Pfizers acquisition of Wyeth in October 2009.
Mr. Germanos experience described above, including his business, operational and management experience and his many years of leadership roles in the pharmaceutical industry, provides him with the qualifications and skills to serve as a member of our board.
Douglas E. Giordano has served as a member of our board since July 2012 and as Senior Vice President, Worldwide Business Development for Pfizer since June 2010. Mr. Giordano joined Pfizer in 1991 and held various positions in finance, manufacturing, operations and business development, including Vice President, Worldwide Business Development; and Vice President, U.S. Planning and Business Development.
Mr. Giordanos experience described above, including his knowledge of our company, his leadership experience, his experience in the pharmaceutical industry and his business development and management background, provides him with the qualifications and skills to serve as a member of our board.
Charles H. Hill has served as a member of our board since July 2012 and as Executive Vice President, Worldwide Human Resources for Pfizer since December 2010. Mr. Hill joined Pfizer in 1987 and held various positions, including Senior Vice President of Human Resources for Pfizers Worldwide Biopharmaceuticals Businesses; Vice President, Human Resources, Worldwide Pharmaceuticals Operations; Vice President, Human Resources, Pfizer Global Pharmaceuticals in the Europe/Canada, AfME (which includes South America, Central America, Mexico, Africa and the Middle East) and Latin America regions; Vice President, Corporate Finance; and Director of Human Resources, Health & Safety and Community Relations, Pfizer Global Manufacturing.
Mr. Hills experience described above, including his business and leadership experience, his experience in the pharmaceutical industry and his extensive experience as an executive officer at Pfizer, provides him with the qualifications and skills to serve as a director on our board.
Amy W. Schulman has served as a member of our board since July 2012, as Executive Vice President and General Counsel for Pfizer since December 2010 and as Business Unit Lead, Consumer Healthcare for Pfizer since August 2012. Ms. Schulman joined Pfizer in June 2008 and held various positions, including Senior Vice President and General Counsel and President and General Manager, Nutrition. Prior to joining Pfizer, from 1997 to June 2008, Ms. Schulman was a partner at DLA Piper LLP (US).
Ms. Schulmans experience described above, including her business and leadership experience, her experience in the pharmaceutical industry and her legal expertise, provides her with the qualifications and skills to serve as a member of our board.
124
Composition of board; classes of directors
Upon completion of this offering, our board of directors will consist of nine members.
We expect that our board of directors will comply with the applicable standards of the NYSE and the Exchange Act. Upon effectiveness of this registration statement, at least one member of our board of directors will be independent under the applicable rules of the NYSE and the Exchange Act. In addition, within 90 days of our listing on the NYSE, our board of directors will include two directors who will be independent under the applicable rules of the NYSE and the Exchange Act and within one year of our listing on the NYSE, our board of directors will include three directors who will be independent under the NYSE standards and the Exchange Act.
After this offering, Pfizer will continue to beneficially own a majority of our outstanding common stock and we will be a controlled company under the corporate governance rules of the NYSE. As a controlled company, we will be eligible for exemptions from some of the requirements of these rules, including:
|
the requirement that a majority of the board of directors consist of independent directors; |
|
the requirement that our corporate governance committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; |
|
the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
|
the requirement for an annual performance evaluation of our corporate governance and compensation committees. |
While Pfizer continues to control a majority of our outstanding common stock, we may not have a majority of independent directors or corporate governance and compensation committees consisting entirely of independent directors and we will not be required to have written charters addressing these committees purposes and responsibilities or have annual performance evaluations of these committees. In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these requirements after specified transition periods. Following the Distribution, if any, we may no longer be a controlled company.
Our board of directors is divided into three classes, denominated as class I, class II and class III. Members of each class will hold office for staggered three-year terms. At each annual meeting of our stockholders beginning in 2014, the successors to the directors whose term expires at that meeting will be elected to serve until the third annual meeting after their election or until their successors have been elected and qualified. , and will serve as class I directors whose terms expire at the 2014 annual meeting of stockholders. , and will serve as class II directors whose terms expire at the 2015 annual meeting of stockholders. , and will serve as class III directors whose terms expire at the 2016 annual meeting of stockholders.
Committees of the board of directors
The standing committees of our board of directors are described below.
Audit Committee
The Audit Committee will initially be composed of three directors, (Chairman), and , who are not otherwise currently employed by either us or Pfizer. qualifies as an audit committee financial expert as such term is defined in the regulations under the Exchange Act. We expect that the Audit
125
Committee will comply with the applicable standards of the NYSE and the Exchange Act. The Audit Committee is responsible for, among other things, the oversight of the integrity of our financial statements and system of internal controls, the qualifications and independence of our independent registered accounting firm and the performance of our internal auditor and independent auditor. The Audit Committee also has the sole authority and responsibility to select, determine the compensation of, evaluate and, when appropriate, replace our independent registered public accounting firm. In addition, the Audit Committee will review reports from management, legal counsel and third parties relating to the status of compliance with laws, regulations and internal procedures. The Audit Committee will also be responsible for reviewing and discussing with management our policies with respect to risk assessment and risk management. For so long as the controlled company exception applies to our company, the Audit Committee will be responsible for administering policies and procedures regarding related persons transactions.
A copy of our Audit Committee Charter will be available on our website upon consummation of this offering.
Corporate Governance Committee
The Corporate Governance Committee will initially be composed of (Chairman), and . The Corporate Governance Committee is responsible for, among other things, matters of corporate governance and matters relating to the practices, policies and procedures of the board of directors, identifying and recommending candidates for election to our board of directors and each committee of our board of directors, and reviewing, at least annually, our corporate governance principles. The Corporate Governance Committee will also advise on and recommend director compensation, which will be approved by the full board of directors. As a controlled company, we will not be required to have a corporate governance committee comprised entirely of independent directors. After the controlled company exception no longer applies to our company, the Corporate Governance Committee will be responsible for administering policies and procedures regarding related persons transactions.
A copy of our Corporate Governance Committee Charter will be available on our website upon consummation of this offering.
Compensation Committee
The Compensation Committee will initially be composed of (Chairman), and . The Compensation Committee is responsible for, among other things, reviewing and approving our overall compensation philosophy and overseeing the administration of related compensation benefit programs, policies and practices. The Compensation Committee is also responsible for annually reviewing and approving the corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers and evaluating their performance in light of these goals, reviewing the compensation of our executive officers and other appropriate officers, and administering our incentive and equity-based compensation plans. As a controlled company, we will not be required to have a compensation committee comprised entirely of independent directors.
A copy of our Compensation Committee Charter will be available on our website upon consummation of this offering.
Compensation Committee interlocks and insider participation
We do not have any interlocking relationships between any member of our Compensation Committee and any of our executive officers that would require disclosure under the applicable rules promulgated under the federal securities laws.
126
Compensation discussion and analysis
Introduction
For purposes of this prospectus, our executive officers whose compensation is discussed in this compensation discussion and analysis, or CD&A, and who we refer to as our named executive officers, or NEOs, are Juan Ramón Alaix, Chief Executive Officer, or CEO; Richard A. Passov, Executive Vice President and Chief Financial Officer, or CFO; Kristin C. Peck, Executive Vice President and Group President; Catherine A. Knupp, Executive Vice President and President of Research and Development; and Clinton A. Lewis, Jr., Executive Vice President and President of U.S. Operations. We are currently in the process of determining the composition of the Compensation Committee of our board of directors and the philosophy and design of our compensation plans and programs. We will include the relevant disclosures in subsequent amendments to this prospectus.
Background
We currently operate as a business unit of Pfizer and will continue to do so until the completion of this offering. As a result, Pfizer has determined the 2012 compensation of our employees, including our NEOs, and will continue to do so until the completion of this offering. Accordingly, the compensation arrangements discussed in this CD&A are those of Pfizer. Because our NEOs (other than Ms. Peck) were not executive officers of Pfizer, their cash compensation was initially determined by Pfizers senior management in accordance with the philosophy adopted by the Compensation Committee of Pfizers Board of Directors, but was not specifically determined or reviewed by the Compensation Committee of Pfizers Board of Directors. As a member of Pfizers Executive Leadership Team, Ms. Pecks cash compensation was reviewed and determined by Pfizers Compensation Committee, with the advice of the Committees independent consultant.
Philosophy, goals and principles of Pfizers executive compensation program
Pfizers executive compensation philosophy, which is set by the Compensation Committee of Pfizers Board of Directors, is to align each executives compensation with Pfizers short-term and long-term performance and to provide the compensation and incentives needed to attract, motivate and retain key executives who are crucial to Pfizers long-term success. A significant portion of the total compensation opportunity for each of Pfizers executives (including our NEOs) is directly related to Pfizers stock price performance and to other performance factors that measure progress against the goals of Pfizers strategic and operating plans, as well as Pfizers performance against that of the pharmaceutical peer group described below.
Pfizer seeks to implement its compensation philosophy and achieve the goals of its program by following three key principles:
|
positioning total direct compensation and each compensation element at approximately the median of its peer companies, with emphasis on pharmaceutical companies with large market capitalization; |
|
aligning annual short-term incentive awards with annual operating and financial objectives; and |
|
rewarding absolute and relative performance in total shareholder return through long-term equity incentive awards. |
Pfizers executive compensation framework
In support of its compensation philosophy, Pfizer targets the median compensation values of both a peer group of pharmaceutical companies and a general industry comparator group to determine an appropriate total value and mix of pay for our executives. Pfizers Compensation Committee reviews these peer groups on an annual basis.
Pfizers pharmaceutical peer group for 2012 consisted of the following companies, which were selected based on their size and market capitalization and the complexity of their businesses, as well as the availability of comparative data. Pfizers Compensation Committee recognizes that while data is available on the performance of Pfizers non-U.S.-based peer companies, the compensation data is limited in terms of comparable benchmarks and other information as compared to peers based in the United States.
127
Pfizers 2012 pharmaceutical peer group
Abbott Laboratories |
Johnson & Johnson | |
Amgen |
Merck | |
AstraZeneca |
Novartis | |
Bristol-Myers Squibb |
Roche | |
Eli Lilly |
Sanofi-Aventis | |
GlaxoSmithKline |
The general industry comparator group for 2012 was selected by Pfizers Compensation Committee from other industry sectors based on the same criteria as described above.
Pfizers 2012 general industry comparator group
Alcoa | Honeywell | |
Altria Group | IBM | |
Boeing | Lockheed Martin | |
Caterpillar | PepsiCo | |
Chevron | Procter & Gamble | |
Coca-Cola | TimeWarner | |
Comcast | United Parcel Service | |
Dell | United Technologies | |
Dow Chemical | UnitedHealth Group | |
DuPont | Verizon | |
FedEx | Walt Disney | |
General Electric |
Given the differences between Pfizer and us in industry focus, market capitalization and other factors that impact executive compensation, we expect that our Compensation Committee will select a different group of peer companies as described under Our anticipated compensation program following this offering.
Applying Pfizers compensation framework to executive positions
Pfizer uses median compensation data for similar positions in its pharmaceutical peer and general industry comparator groups, as well as an evaluation of internal equity among Pfizer executives, as a guide in setting compensation targets for each of its executives, including our NEOs. Each compensation target is assigned a numbered salary grade to simplify the compensation administration process and help maintain internal equity.
Pfizer uses salary grades to determine the preliminary salary recommendation, target annual incentive award opportunity, and target long-term equity incentive award value for each executive position. Each salary grade is expressed as a range, with minimum, midpoint, and maximum salary levels. Minimum and maximum salary range levels for each grade are set 25% below and above the salary range midpoint, which is intended to approximate the bottom and top quartiles for positions assigned to that grade. This framework provides a guide for Pfizers Compensation Committee determinations. The actual total compensation and/or amount of each compensation element for an individual executive may be more or less than this median.
Overview of Pfizers compensation program design
This section will explain how Pfizer determined the design of its 2012 executive compensation program as it relates to our NEOs.
128
Role of Pfizers compensation consultant . Since 2003, Pfizers Compensation Committee has engaged the firm of Frederic W. Cook & Co., represented by George Paulin, its Chief Executive Officer, as the Committees independent compensation consultant. Below are some of the consultants primary responsibilities:
|
advise Pfizers Compensation Committee on management proposals, as requested; |
|
attend Pfizers Compensation Committee meetings; |
|
review Pfizers compensation philosophy, peer group and competitive positioning and advise Pfizers Compensation Committee on their reasonableness and appropriateness; |
|
review Pfizers executive compensation program and advise Pfizers Compensation Committee of plans or practices that might be changed to improve effectiveness; |
|
review the selected peer group and survey data for competitive comparisons; |
|
oversee and review survey data on executive pay practices and amounts that come before Pfizers Compensation Committee; |
|
provide market data and recommendations on Chief Executive Officer compensation without prior review by management (except for necessary fact-checking); and |
|
proactively advise Pfizers Compensation Committee on best-practice approaches for governance of executive compensation as well as areas of concern and risk in Pfizers program. |
Elements of pay
Base salary . In accordance with Pfizer practice, base salaries for our NEOs have generally been determined by evaluating the responsibilities of the executives position, the executives experience and the competitive marketplace. The competitive marketplace has been determined with the use of survey data, as described under Role of Pfizers compensation consultant. Future base salary adjustments for our NEOs are expected to take into account changes in the executives responsibilities, the executives performance and changes in the competitive marketplace.
Annual incentive plan . For 2012, eligible employees, including our NEOs, participate in Pfizers annual incentive programthe Global Performance Plan, or GPP. The GPP utilizes a funded pool based on Pfizers performance on three financial metrics: total revenues (revenues), weighted 40%; adjusted diluted earnings per share, weighted 40%; and cash flow from operations (cash flow), weighted 20%. The pool funding percentage ranges from 0% to 200% of target award levels; however, the pool is not funded unless performance exceeds a threshold level. Earned individual payouts also range from 0% to 200% of target and reflect allocations from the available earned pool based on corporate, business unit/function, and individual performance. The incentive awards earned by our NEOs under the GPP for 2012 have not yet been determined. We will provide the relevant disclosures following the determination of the 2012 incentive awards, which will occur in February 2013.
Our NEOs 2012 annual incentives will be based on:
|
the financial performance of Pfizer (measured by revenues, adjusted diluted earnings per share and cash flow, as described above); |
|
the financial performance of their respective business unit/function measured by annual budgets for revenues and income before adjustments; |
|
the achievement of selected strategic and operational goals for their respective business unit/function; and |
|
an assessment by Pfizers Chief Executive Officer (and Pfizers Compensation Committee with respect to Ms. Peck) of each executives individual performance. |
The 2012 annual incentives for Messrs. Alaix and Passov will be recommended by the appropriate member of Pfizers Executive Leadership Team (which includes the heads of Pfizers principal business and corporate
129
functions, who report directly to Pfizers Chief Executive Officer). With respect to Dr. Knupp and Mr. Lewis, their 2012 annual incentives will be recommended by Mr. Alaix, as head of the Pfizer Animal Health business. Our NEOs (other than Ms. Pecks) 2012 annual incentives will be further reviewed and approved by Pfizers Chief Executive Officer. Other than with respect to Ms. Peck, Pfizers Compensation Committee is not involved in making the specific annual incentive awards to our NEOs. Ms. Pecks 2012 annual incentives will be reviewed and approved by Pfizers Compensation Committee.
2012 strategic and operational objectives . As President of the Pfizer Animal Health business, Mr. Alaixs 2012 strategic and operational objectives included: (i) improving effectiveness of field force and veterinary operations; (ii) growing income before taxes faster than revenue; (iii) expanding the product portfolio through superior research and development and targeted business development and global alliances; (iv) realizing targeted savings in operational expenses; (v) improving the engagement of Pfizer Animal Health colleagues at all levels; and (vi) realizing operational readiness for the Pfizer Animal Health strategic alternatives review.
As Treasurer of Pfizer, Mr. Passovs 2012 strategic and operational objectives included: (i) contributing at least $250 million of income from portfolio and pension plan initiatives; (ii) establishing a debt refinancing program; (iii) maximizing the EPS impact of the share repurchases; and (iv) maximizing the value of any potential transaction involving Pfizer Animal Health.
As Executive Vice President, Worldwide Business Development and Innovation of Pfizer, Ms. Pecks 2012 strategic and operational objectives included: (i) identifying and closing key business development acquisition, licensing and partnership opportunities; (ii) increasing the return and reducing the risk of Pfizers R&D portfolio through creative partnerships and business development; (iii) maximizing the value of business units and assets identified for divestiture to create optimal shareholder value; (iv) developing an enterprise-wide digital strategy that will create opportunities to drive growth and efficiency and add value for Pfizers key stakeholders; and (v) supporting initiatives to reduce costs and ensure efficiency in Pfizers commercial operating model.
As head of Veterinary Medicine Research and Development of the Pfizer Animal Health business, Dr. Knupps 2012 strategic and operational objectives included: (i) delivering the product portfolio by implementing investment strategies across all segments (vaccines and medicines) and stages; (ii) creating opportunities to position new businesses (genetics, diagnostics, etc.) and emerging markets for value generation; (iii) ensuring ongoing success of the global research organization in a new operating model; and (iv) ensuring business stability through the Pfizer Animal Health strategic alternatives review.
As head of U.S. Operations for Pfizer Animal Health, Mr. Lewis 2012 strategic and operational objectives included: (i) achieving revenue targets of $1.6 billion; (ii) developing a plan to expand coverage of the Inside Sales Team; (iii) continuing to strengthen colleague engagement; (iv) ensuring the successful integration of new business/service platforms into a comprehensive solutions offering; and (v) supporting the Pfizer Animal Health strategic alternatives review.
2012 long-term equity incentives . A key element of Pfizers compensation program is long-term equity incentive awards granted under the Pfizer Inc. 2004 Stock Plan, as amended and restated, or the 2004 Stock Plan. In 2012, our employees received equity awards under the 2004 Stock Plan intended to:
|
align the interests of our executives with Pfizers stockholders; |
|
focus our executives efforts on improving Pfizers total shareholder return, both on an absolute and relative basis; and |
|
promote retention through the use of multi-year vesting schedules. |
The 2012 grants to our NEOs were made in the form of (1) restricted stock units, or RSUs, (2) 5- and 7-year total shareholder return units, or TSRUs, and (3) performance share awards, or PSAs.
130
RSUs represent the right to receive shares of Pfizer common stock in the future, subject to continued service with Pfizer. Pfizer RSUs vest on the third anniversary of the date of grant. Dividend equivalent units, or DEUs, are accumulated during the vesting period. Both RSUs and DEUs are payable in shares of Pfizer common stock, and only on vesting.
TSRUs vest in three years and are settled on the fifth or seventh anniversary of the date of grant. The number of shares that may be earned for each TSRU is equal to the difference between the settlement price (the 20-day average of the closing prices of Pfizer common stock prior to settlement) and the grant price (the closing price of Pfizer common stock on the date of grant) plus the value of dividend equivalents accumulated over the term, subject to the results being positive.
PSAs vest in three years and provide an opportunity for executives to receive shares of Pfizer common stock contingent upon corporate performance in relation to the performance of the Pfizer pharmaceutical peer group over a designated period of time (generally, three years). The number of shares that may be earned under the PSAs over the performance period is based on Pfizers Total Shareholder Return, or TSR (defined as change in stock price plus dividends), relative to the TSR of the Pfizer pharmaceutical peer group and ranges from 0% to 200% of the initial award. Dividend equivalents are applied to the shares actually earned.
Prior to this offering, the amounts, terms and conditions of the equity awards granted to our NEOs have been determined by Pfizer. Our equity awards going forward will be determined by our Compensation Committee.
Treatment of outstanding Pfizer equity awards
Following the offering, the equity awards previously granted to our NEOs will continue to relate to Pfizer equity, provided that service with Zoetis will be counted as service with Pfizer for all purposes. Upon the Distribution, if any, it is intended that each outstanding, unvested Pfizer stock option will vest and, in general, Pfizer stock options will be exercisable for Pfizer common stock until the earliest to occur of (i) the three year anniversary of the Distribution, (ii) the option-holders termination of employment from Zoetis and (iii) the expiration of the stock option. Upon the Distribution, Pfizer may determine to accelerate the vesting and, in some cases the settlement, of certain of the equity awards, subject, in each case, to the requirements of Section 409A of the Code, the terms of the Pfizer Stock Plan and the applicable award agreements and any outstanding deferral elections.
Employment and retirement benefits
Deferred compensation . Pfizer permits its executives, including our NEOs, to defer receipt of earned annual incentives and any shares earned under PSAs. Annual incentives may be deferred into either a Pfizer stock unit fund or a cash fund earning interest at 120% of the applicable federal long-term rate (which fluctuated between 2.59% and 3.42% in 2012). The Pfizer stock unit fund is credited with reinvested dividend equivalent units. PSAs may be deferred only into Pfizer common stock units. Certain RSUs are mandatorily deferred on vesting if payment would result in the loss of a tax deduction for Pfizer, see Tax deductibility of NEO compensation.
Insurance plans . Pfizer provides a number of health and family security benefits, such as medical insurance, dental insurance, life insurance and long-term disability insurance. These benefits are available to all U.S. and Puerto Rico-based employees, including our NEOs, and are comparable to those provided by the companies in the Pfizer pharmaceutical and general industry comparator groups. These programs are designed to provide certain basic quality of life benefits and protections to Pfizer employees, including our NEOs, and at the same time enhance Pfizers attractiveness as an employer of choice. The annual cost of benefits for each of our NEOs for these Pfizer benefits ranges from approximately $13,000 to $25,000.
Pension and savings plans . Pfizer maintains qualified defined benefit pension plans for the benefit of all its eligible U.S. and Puerto Rico-based employees, including our NEOs, hired prior to January 1, 2011. For those U.S. employees earning in excess of the Code limit ($250,000 for 2012), including our NEOs, Pfizer maintains related supplemental benefit restoration plans. The provisions and features of the qualified defined benefit pension plans
131
and the related supplemental benefit restoration plans apply to all participants in those plans, including our NEOs. Pfizer also maintains savings plans that permit participants to make pre-tax, after-tax and/or Roth contributions of a portion of their eligible pay, up to certain limits. In addition, Pfizer maintains non-qualified savings plans that permit eligible participants to make pre-tax contributions in excess of tax law limitations on qualified plans. Pfizer provides matching contributions with respect to employee contributions, up to certain limits. The provisions and features of the qualified savings plans and the related non-qualified supplemental savings plans apply to all participants in those plans, including our NEOs. These plans are described in the narrative accompanying the 2012 pension benefits table and the 2012 non-qualified deferred compensation table below.
Post-employment compensation . Pfizers Senior Leadership Council Separation Plan, or the SLC Separation Plan, provides a competitive level of severance protection for certain senior executives to help Pfizer attract and retain key talent. Our NEOs participate in the SLC Separation Plan, which provides severance upon a termination of employment without cause, equal to the sum of one-times pay (defined as base salary and target bonus). In addition, the executive would be eligible for 12 months of health and insurance benefits continuation at active rates, plus outplacement assistance as offered by Pfizer.
Effective November 1, 2012, Pfizer adopted a severance plan, the Sale of Business Severance Plan, to cover certain of our executives, including each of our NEOs, in the event of a sale of the Pfizer Animal Health business. The Sale of Business Severance Plan is intended to give key executives assurances as to severance pay and benefits in the event of a sale of the Pfizer Animal Health business to a third party, in order to allow them to focus on making decisions that are in the best overall interests of Pfizer and Zoetis. The Sale of Business Severance Plan provides benefits in the event that an executives employment is involuntarily terminated other than for cause or the executive resigns for good reason within two years following the consummation of a sale to a third party. The Sale of Business Severance Plan would not be triggered by an initial public offering of Zoetis or the Distribution. For our NEOs, the severance plan provides for a cash payment equal to the sum of two times the executives base salary, plus two times the executives bonus target (each determined as of the date of termination). In addition, the executive would be eligible for 12 months of health and insurance benefits continuation at active rates, plus outplacement assistance as offered by Pfizer. Payments made under the Sale of Business Severance Plan would be offset to the extent that severance is payable under either the SLC Separation Plan, in order to avoid duplication of benefits. Severance payments and benefits for our NEOs under the SLC Separation Plan, and the Sale of Business Severance Plan, are described in Estimated benefits upon termination.
Our anticipated compensation program following this offering
The following section describes the compensation program we anticipate implementing for our senior executives, including our NEOs, following the completion of this offering. Pfizer has engaged Compensation Advisory Partners (CAP), on our behalf, to assist in designing our anticipated executive compensation program. Following the offering, our Compensation Committee is expected to retain its own compensation consultant to advise the Compensation Committee in its compensation planning decisions.
Zoetis Compensation Committee
Following this offering, our Compensation Committee, which will be appointed by our Board of Directors, will determine the appropriate compensation plans and programs for our executives. Our Compensation Committee will review and evaluate our executive compensation plans and programs to ensure they are aligned with our compensation philosophy.
132
Peer group analysis
Based upon the advice of CAP, we have identified the following eleven companies as our core peers:
Based on their sales and market capitalization, as well as the nature of their businesses, histories, industries and the availability of relevant comparative compensation data, we believe this core peer group is appropriate given the unique nature of our business and industry.
In addition to these eleven core peer companies, we have identified six additional companies (Bio-Rad Laboratories, Celgene, Hospira, Mettler-Toledo International, PerkinElmer, and Perrigo) that have similar sales and market capitalization, but do not have readily available comparative compensation data, that we will use as supplemental peer companies, as appropriate. We will utilize the proxy data for these supplemental peer companies for purposes of determining comparative compensation for certain of our executives.
In addition to the data from these peer companies, additional data from similarly-sized companies in life sciences and general industry may be used for benchmarking purposes to ensure robust data.
Proposed Zoetis 2013 equity and incentive plan
The following is a brief description of the material features of the proposed Zoetis 2013 Equity and Incentive Plan (the Equity Plan). This description is qualified in its entirety by reference to the full text of the proposed Equity Plan, a copy of which is filed as an exhibit to the registration statement of which this prospectus forms a part. The Equity Plan is a comprehensive incentive compensation plan that will permit us to grant both equity-based and non-equity based compensation awards to employees of Zoetis (and its subsidiaries) and to our directors. The purpose of the plan is to attract, motivate and retain such persons and to encourage stock ownership by such persons, thereby aligning their interest with those of our stockholders.
The Equity Plan will be effective as of the offering. Unless earlier terminated, the Equity Plan will terminate on the tenth anniversary of the effective date, provided, however, that any grant that was made prior to the termination of the Equity Plan will remain outstanding in accordance with its terms.
Awards under the Equity Plan may be in the form of stock options, or other stock-based awards, including awards of restricted stock, restricted stock units and performance share awards. The Equity Plan also provides for the grant of cash awards. The following is a summary of the principal types of stock-based awards available under the Equity Plan:
|
Stock Options. Stock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than 100% of the fair market value of the common stock on the date of grant. Stock options will have a maximum term of ten years from the date of grant. Stock options granted may include those intended to be incentive stock options within the meaning of Section 422 of the Code. |
|
Restricted Stock and Restricted Stock Units. Restricted stock is a share of our common stock that is subject to a risk of forfeiture or other restrictions that will lapse subject to the recipients continued employment, the |
133
attainment of performance goals, or both. Restricted stock units represent the right to receive shares of our common stock in the future (or cash determined by reference to the value of our common stock), subject to the recipients continued employment, the attainment of performance goals, or both. |
|
Performance-Based Awards. Our Compensation Committee may grant performance awards, which may be awards of a specified cash amount or may be equity-based awards. Generally, performance awards will require satisfaction of pre-established performance goals, consisting of one or more business criteria (discussed in greater detail below) and a targeted performance level with respect to such criteria as a condition of awards vesting or being settled. Performance may be measured over a period of any length specified by our Compensation Committee. |
|
Other Equity-Based or Cash-Based Awards. Our Compensation Committee will be authorized to grant awards in the form of other equity-based awards or other cash-based awards, as deemed to be consistent with the purposes of the Equity Plan. The maximum value of the aggregate payment with respect to cash-based awards under the Equity Plan in respect of an annual performance period will be $10 million. |
The maximum number of shares reserved for the grant or settlement of awards under the Equity Plan will be equal to five percent (5%) of the number of all outstanding shares as of the effective date of the Equity Plan. Not more than 1.5 million shares subject to options or stock appreciation rights and not more than 1.5 million shares subject to awards other than options and stock appreciation rights may be granted to any participant under the Equity Plan in any twelve-month period. The shares subject to the plan and to the individual award limitations are subject in each case to adjustment in the event of a dividend or other distribution, recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange or other similar corporate transaction. Any shares subject to awards that are cancelled, forfeited or otherwise terminated without the issuance of shares will again be available for grants under the Equity Plan.
Our Compensation Committee will administer the Equity Plan, which will include designating participant eligibility; selecting the types of awards to be granted; determining the terms and conditions of awards, including the number of shares, the purchase price of awards (if applicable), and restrictions and performance goals relating to any award; establishing the time when the awards and/or restrictions become exercisable, vest or lapse; determining whether options will be incentive stock options; and making all other determinations deemed necessary or advisable for the administration of the Equity Plan. In the event of a change in control of our company, which would not be triggered by the Distribution, the Equity Plan provides for unvested awards to become fully vested and/or exercisable upon certain terminations of employment within 24 months, and if an acquiring company does not assume or otherwise substitute awards, unvested awards will immediately become vested and/or exercisable upon the change in control.
As noted above, certain awards granted under the Equity Plan may be contingent upon the achievement of pre-established performance goals. The performance goals may be based upon one or more of the following performance goals established by our Compensation Committee (in each case, as determined in accordance with generally accepted accounting principles, if applicable): (i) net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation, (D) amortization and (E) non-cash equity-based compensation expense); (ii) gross or net sales or revenue; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit; (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets; (viii) return on capital; (ix) return on stockholders equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii) earnings per share; (xviii) adjusted earnings per share; (xix) price per share; (xx) implementation or completion of critical projects; (xxi) market share; (xxii) debt levels or reduction; (xxiii) customer retention; (xxiv) sales-related goals; (xxv) customer satisfaction and/or growth; (xxvi) research and development achievements; (xxvii) financing and other capital raising transactions; (xxviii) capital expenditures; and (xxix) economic profit, any of which may be measured in absolute terms for Zoetis or any operating unit of Zoetis or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicator or indices.
134
Performance goals may be expressed in terms of our overall performance or the performance of an affiliate or one or more divisions, business units or product lines. In addition, such performance goals may be based upon the attainment of specified levels of performance under one or more of the measures described above relative to the performance of other corporations or the performance of an index, survey or other benchmark. Further, the Compensation Committee may provide objectively determinable adjustments be made to one or more of the performance goals. Such adjustments may include: (i) items related to a change in accounting principle; (ii) items relating to financing activities; (iii) expenses for restructuring or productivity initiatives; (iv) other non-operating items; (v) items related to acquisitions; (vi) items attributable to the business operations of any entity acquired by us during the performance period; (vii) items related to the disposal or sale of a business or segment of a business; (viii) items related to discontinued operations that do not qualify as a segment of a business under applicable accounting standards; (ix) items attributable to any stock dividend, stock split, combination or exchange of stock occurring during the performance period; (x) any other items of significant income or expense which are determined to be appropriate adjustments; (xi) items relating to unusual or extraordinary corporate transactions, events or developments; (xii) items related to amortization of acquired intangible assets; (xiii) items that are outside the scope of our core, on-going business activities; (xiv) items related to acquired in-process research and development; (xv) items relating to changes in tax laws; (xvi) items relating to major licensing or partnership arrangements; (xvii) items relating to asset impairment charges; (xviii) items relating to gains or losses for litigation, arbitration and contractual settlements; or (xix) items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions.
To the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), our Compensation Committee may adjust, modify or amend the aforementioned performance criteria.
Under the Equity Plan, awards generally will be nontransferable other than by will or by the laws of descent and distribution. However, our Compensation Committee, in its sole discretion, may grant transferable nonqualified stock options or other transferable awards.
Our Compensation Committee may grant dividend equivalent rights. These are rights to payments equal in value to the amount of dividends paid on a specified number of shares. These amounts may be in the form of cash or rights to receive additional awards or additional shares equal in value to the cash amount.
Our Board of Directors, on the recommendation of our Compensation Committee, may amend, alter or discontinue the Equity Plan, but no amendment, alteration or discontinuation will be made that would impair the rights of a participant under any award previously granted without such participants consent. In addition, stockholder approval may be required with respect to certain amendments, due to stock exchange rules or requirements of applicable law. The Board of Directors may amend or terminate the Equity Plan, but may not, without the prior approval of our stockholders, increase the maximum number of shares of common stock that may be issued under the Equity Plan or the number of shares of common stock that may be issued to any one participant; extend the term of the Equity Plan or of options granted under the Equity Plan; grant options with an exercise price below the fair market value of the common stock on the date of grant; or take any other action that requires stockholder approval to comply with any tax or other regulatory requirement.
In order to provide incentive and retention for our employees going forward, we expect to make grants of stock options and restricted stock units under the Equity Plan to our NEOs and other employees, with the allocation between award types, option exercise prices and vesting periods of these awards to be determined by our Compensation Committee. It is not feasible to identify the amounts and terms of the awards to be granted to our NEOs or other executives as this time.
Stock ownership and holding requirements
Zoetis intends to adopt share ownership guidelines for our NEOs. Our guidelines are expected to require Mr. Alaix to hold Zoetis shares with a value of times his annual base salary and that all remaining senior
135
executives hold Zoetis shares with a value of times their respective base salaries, before they can sell any shares upon the exercise of options or the vesting of restricted stock units. Once these share ownership guidelines are attained, the executive must retain % of all net shares acquired following any subsequent option exercises or vesting of restricted stock units for a period of year. Our NEOs will have years following the completion of this offering to meet our share ownership guidelines.
Clawback policy
We are developing a clawback policy whereby our Compensation Committee may, if permitted by law, make retroactive adjustments to any cash- or equity-based incentive compensation paid to NEOs and other executives where a payment is predicated upon the achievement of specified financial results that are the subject of a subsequent restatement. Where applicable, we may seek to recover any amount determined to have been inappropriately received by the individual executive officer. In addition, we expect that all of the equity incentive awards that we grant will contain such compensation recovery provisions. Our Compensation Committee will monitor the regulatory developments related to clawbacks and expects to modify its policy, to the extent necessary, once final rules are issued.
Hedging policy
We intend to adopt a policy prohibiting any of our directors or employees, including the NEOs, from hedging their ownership in shares of our common stock or other equity-based interests in our company, including by engaging in short sales or trading in derivative securities relating to our common stock.
Tax deductibility of NEO compensation
Section 162(m) of the Code generally disallows a tax deduction to public corporations for compensation greater than $1 million paid in any fiscal year to the CEO and four other most highly compensated executive officers, other than the CFO, as of the end of any fiscal year. None of the compensation paid to our NEOs in 2012 was subject to the limitations on deductibility under Section 162(m), because our NEOs were not among the executives of Pfizer who were subject to Section 162(m).
We generally intend to structure our equity-based and cash-based incentive awards to meet the exception under Section 162(m) for performance-based compensation, taking advantage of transitional rules under Section 162(m) that will apply to Zoetis, such that these amounts are fully deductible for tax purposes. RSUs do not qualify as performance-based compensation. Consequently, certain of our NEOs may be required to defer the receipt of RSUs. However, to maintain flexibility in compensating our executives, we do not have a policy requiring compensation to be deductible.
Compensation tables
Unless otherwise stated, the compensation tables included in this section reflect amounts paid or payable or awards granted to our NEOs by Pfizer under Pfizers compensation plans and programs. Following the completion of this offering, the NEOs will receive compensation and benefits under our compensation programs and plans.
136
2012 summary compensation table
Name and principal
|
Year |
Salary(1)
($) |
Bonus
($) |
Stock
awards(2) ($) |
Option
awards(3) ($) |
Non-equity
incentive plan compensation(4) ($) |
Change in
pension value and non- qualified deferred compensation earnings(5) ($) |
All other
compensation(6) ($) |
Total
($) |
|||||||||||||||||||||||
Juan Ramón Alaix Chief Executive Officer |
2012 | 613,533 | 438,013 | 441,787 | 544,675 | 48,533 | 2,086,541 | |||||||||||||||||||||||||
Richard A. Passov Executive Vice President and Chief Financial Officer |
2012 | 587,875 | 297,322 | 299,889 | 572,840 | 42,830 | 1,800,756 | |||||||||||||||||||||||||
Kristin C. Peck
|
2012 | 526,250 | 421,189 | 424,843 | 262,413 | 42,336 | 1,677,031 | |||||||||||||||||||||||||
Clinton A. Lewis Jr. Executive Vice President and President of U.S. Operations |
2012 | 373,800 | 128,830 | 129,951 | 384,147 | 11,250 | 1,027,978 | |||||||||||||||||||||||||
Catherine A. Knupp Executive Vice President and President of Research and Development |
2012 | 362,733 | 123,867 | 124,954 | 208,798 | 25,375 | 845,727 |
(1) | The amount shown in the Salary column represents actual amounts paid to the NEOs through November 30, 2012, plus estimated amount through December 31, 2012 based on the officers current rate of base salary. |
(2) | The amounts shown in this column represent the aggregate grant date fair values for the RSUs and PSAs granted in 2012. Further information regarding the 2012 awards is included in the 2012 grants of plan-based awards table and 2012 outstanding equity awards at fiscal year-end table. The aggregate grant date fair values of the PSAs reflected in this column are the target payouts based on the probable outcome of the performance condition, determined as of the grant date. The maximum potential values of the 2012 PSAs would be as follows: Mr. Alaix$438,013, Mr. Passov$297,322, Ms. Peck$421,189, Mr. Lewis$128,830 and Dr. Knupp$123,867. Additional information related to the PSAs is included in 2012 long-term equity incentives. The aggregate grant date fair values have been determined based on the assumptions and methodologies set forth in Pfizers 2012 Financial Report (Note 13, Share-Based Payments). |
(3) | The amounts shown in this column represent the aggregate grant date fair values of the TSRUs awarded in 2012. The aggregate grant date fair values have been determined based on the assumptions and methodologies set forth in Pfizers 2012 Financial Report (Note 13, Share-Based Payments). |
(4) | Awards earned during 2012 are not calculable until after the performance period ends on December 31, 2012. The awards will be determined in February of 2013. |
(5) | Pfizer does not pay above market interest on non-qualified deferred compensation to employees; therefore, this column reflects pension accruals only. The 2012 pension accrual amounts represent the difference between the December 31, 2012 and December 31, 2011 present values of age 65 accrued pensions under the Pfizer Retirement Plan and supplemental retirement plan, based on the pension plan assumptions for each year, as shown in the footnotes to the Pension plan assumptions table. Further information regarding pension plans is included in the 2012 pension benefits table. |
(6) | The amounts shown in this column represent, as of December 31, 2012, the sum of Pfizers Savings Plan and Supplemental Savings Plan matching contributions and for Mr. Alaix, gross-up payments of $1,124 related to taxes due on relocation benefits. The savings plan matching contributions include matching funds under the Pfizer Savings Plan (a tax-qualified retirement savings plan) and under the related Supplemental Savings Plan. These plans are discussed in more detail in the 2012 non-qualified deferred compensation table. |
137
The following 2012 grants of plan-based awards table provides additional information about non-equity incentive awards and long-term incentive awards granted to our NEOs by Pfizer during the year ended December 31, 2012. The long-term incentive awards were made under the 2004 Stock Plan, as amended and restated, and are described in 2012 long-term equity incentives.
2012 grants of plan-based awards table
Estimated future
payouts
under non-equity incentive plan awards |
Estimated future
payouts
under equity incentive plan awards |
|||||||||||||||||||||||||||||||||||||||||||
Name (A) |
Grant
date (B) |
Threshold
($) (C) |
Target
($) (D) |
Maximum
($) (E) |
Threshold
(#) (F) |
Target
(#)(1) (G) |
Maximum
(#) (H) |
All
other stock awards: number of shares of stock or units(1) (#) (I) |
All
other
TSRU awards: number of securities underlying TSRUs(1) (#) (J) |
Exercise
or base price of TSRU awards ($/Sh) (K) |
Grant
date fair value of stock and TSRUs(2) ($) (L) |
|||||||||||||||||||||||||||||||||
Juan Ramón Alaix |
2/23/2012 | 0 | (3) | 344,800 | (3) | 689,600 | (3) | 53,635 | 21.03 | 219,904 | ||||||||||||||||||||||||||||||||||
45,468 | 21.03 | 221,884 | ||||||||||||||||||||||||||||||||||||||||||
10,414 | 219,006 | |||||||||||||||||||||||||||||||||||||||||||
0 | (4) | 10,414 | (4) | 20,828 | (4) | 219,006 | ||||||||||||||||||||||||||||||||||||||
Richard A. Passov |
2/23/2012 | 0 | (3) | 258,200 | (3) | 516,400 | (3) | 36,408 | 21.03 | 149,273 | ||||||||||||||||||||||||||||||||||
30,864 | 21.03 | 150,616 | ||||||||||||||||||||||||||||||||||||||||||
7,069 | 148,661 | |||||||||||||||||||||||||||||||||||||||||||
0 | (4) | 7,069 | (4) | 14,138 | (4) | 148,661 | ||||||||||||||||||||||||||||||||||||||
Kristin C. Peck |
2/23/2012 | 0 | (3) | 344,800 | (3) | 689,600 | (3) | 51,578 | 21.03 | 211,470 | ||||||||||||||||||||||||||||||||||
43,724 | 21.03 | 213,373 | ||||||||||||||||||||||||||||||||||||||||||
10,014 | 210,594 | |||||||||||||||||||||||||||||||||||||||||||
0 | (4) | 10,014 | (4) | 20,028 | (4) | 210,594 | ||||||||||||||||||||||||||||||||||||||
Clinton A.
|
2/23/2012 | 0 | (3) | 139,200 | (3) | 278,400 | (3) | 15,777 | 21.03 | 64,686 | ||||||||||||||||||||||||||||||||||
13,374 | 21.03 | 65,265 | ||||||||||||||||||||||||||||||||||||||||||
3,063 | 64,415 | |||||||||||||||||||||||||||||||||||||||||||
0 | (4) | 3,063 | (4) | 6,126 | (4) | 64,415 | ||||||||||||||||||||||||||||||||||||||
Catherine A. Knupp |
2/23/2012 | 0 | (3) | 139,200 | (3) | 278,400 | (3) | 15,170 | 21.03 | 62,197 | ||||||||||||||||||||||||||||||||||
12,860 | 21.03 | 62,757 | ||||||||||||||||||||||||||||||||||||||||||
2,945 | 61,933 | |||||||||||||||||||||||||||||||||||||||||||
0 | (4) | 2,945 | (4) | 5,890 | (4) | 61,933 |
(1) | The PSA and RSU award values were converted to units using the Pfizer closing stock price of $21.22 on February 21, 2012; the 5-Year and 7-Year TSRU values were converted using $4.12, and $4.86, respectively, the estimated value using the Monte Carlo Simulation model as of February 21, 2012. |
(2) | The amounts shown in this column represent the award values as of the grant dates. The values of RSUs, PSAs and 5-Year and 7-Year TSRUs are shown at the respective fair values of $21.03, $21.03, $4.10 and $4.88, as of February 23, 2012. |
(3) | The amounts represent the threshold, target and maximum non-equity incentive plan awards under the GPP for 2012. |
(4) | The amounts represent the threshold, target, and maximum share payouts under the Pfizer Performance Share Award Program for the January 1, 2012December 31, 2014 performance period. The payment for threshold performance is 0%. |
138
The following table summarizes the equity awards Pfizer made to our NEOs that are expected to be outstanding as of December 31, 2012 based on awards held as of November 30, 2012 and assuming the TSRUs granted on December 31, 2009 will vest on December 31, 2012 and the RSUs granted on December 31, 2009 will be settled to each of the NEOs, if applicable, on December 31, 2012.
2012 outstanding equity awards at fiscal year-end table
Name (a) |
Option/SAR awards(2) | Stock awards(3) | ||||||||||||||||||||||||||||||||||||||||||
Grant
Date Perf Share Period(1) |
Number of
Securities Underlying Unexercised Options (#) Exercisable (b) |
Number of
Securities Underlying Unexercised Options (#) Unexercisable (c) |
Number of
Securities Under lying Unexercised SARs (#) Vested (d) |
Number
of Securities Underlying Unexercised SARs (#) Unvested (e) |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)(f) |
Option
Exercise Price ($) (g) |
Option
Expiration Date (h) |
Number
of Shares or Units of Stock That Have Not Vested (#) (i) |
Market
Value of Shares or Units of Stock That Have Not Vested ($) (j) |
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (k) |
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (l) |
|||||||||||||||||||||||||||||||||
Juan Ramón Alaix |
4/30/2003 | 49,000 | 30.74 | 4/29/2013 | ||||||||||||||||||||||||||||||||||||||||
2/26/2004 | 40,000 | 37.15 | 2/25/2014 | |||||||||||||||||||||||||||||||||||||||||
2/24/2005 | 49,500 | 26.20 | 2/23/2015 | |||||||||||||||||||||||||||||||||||||||||
2/23/2006 | 80,000 | 26.20 | 2/22/2016 | |||||||||||||||||||||||||||||||||||||||||
2/28/2007 | 63,500 | 25.87 | 2/21/2017 | |||||||||||||||||||||||||||||||||||||||||
2/28/2008 | 23,595 | 22.55 | 2/28/2013 | |||||||||||||||||||||||||||||||||||||||||
2/26/2009 | 38,557 | 12.70 | 2/26/2014 | |||||||||||||||||||||||||||||||||||||||||
12/31/2009 | 37,473 | 18.19 | 12/31/2014 | |||||||||||||||||||||||||||||||||||||||||
2/25/2010 | 36,599 | 17.69 | 2/25/2015 | 10,122 | $ | 248,294.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 42,348 | 18.90 | 2/24/2016 | 10,280 | $ | 252,157.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 35,058 | 18.90 | 2/24/2018 | $ | 262,643.00 | |||||||||||||||||||||||||||||||||||||||
2/23/2012 | 53,635 | 21.03 | 2/23/2017 | 10,707 | ||||||||||||||||||||||||||||||||||||||||
2/23/2012 | 45,468 | 21.03 | 2/23/2019 | |||||||||||||||||||||||||||||||||||||||||
|
1/1/2010-
12/31/2012 |
|
9,053 | $ | 222,070.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2011-
12/31/2013 |
|
9,595 | $ | 255,365.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2012-
12/33/2014 |
|
10,414 | $ | 255,455.00 | |||||||||||||||||||||||||||||||||||||||
Richard A. Passov |
2/27/2003 | 70,000 | 29.33 | 2/26/2013 | ||||||||||||||||||||||||||||||||||||||||
2/26/2004 | 80,000 | 37.15 | 2/25/2014 | |||||||||||||||||||||||||||||||||||||||||
2/24/2005 | 79,000 | 26.20 | 2/23/2015 | |||||||||||||||||||||||||||||||||||||||||
2/23/2006 | 97,000 | 26.20 | 2/22/2016 | |||||||||||||||||||||||||||||||||||||||||
2/22/2007 | 63,000 | 25.87 | 2/21/2017 | |||||||||||||||||||||||||||||||||||||||||
2/28/2008 | 36,946 | 22.55 | 2/28/2013 | |||||||||||||||||||||||||||||||||||||||||
2/26/2009 | 40,423 | 12.70 | 2/26/2014 | |||||||||||||||||||||||||||||||||||||||||
2/25/2010 | 32,939 | 17.69 | 2/25/2015 | 9,110 | $ | 223,473.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 34,171 | 18.90 | 2/24/2016 | 8,294 | $ | 203,460.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 28,288 | 18.90 | 2/24/2018 | |||||||||||||||||||||||||||||||||||||||||
2/23/2012 | 36,408 | 21.03 | 2/23/2017 | 7,268 | $ | 178,281.00 | ||||||||||||||||||||||||||||||||||||||
2/23/2012 | 30,864 | 21.03 | 2/23/2019 | |||||||||||||||||||||||||||||||||||||||||
|
1/1/2010-
12/31/2012 |
|
8,148 | $ | 199,870.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2011-
12/31/2013 |
|
7,742 | $ | 189,911.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2012-
12/31/2014 |
|
7,069 | $ | 173.403.00 |
139
Name (a) |
Option/SAR/TSRU awards(2) | Stock awards(2) | ||||||||||||||||||||||||||||||||||||||||||
Grant
Date Perf Share Period(1) |
Number of
Securities Underlying Unexercised Options (#) Exercisable (b) |
Number of
Securities Underlying Unexercised Options (#) Unexercisable (c) |
Number of
Securities Under lying Unexercised SARs (#) Vested (d) |
Number
of Securities Underlying Unexercised SARs (#) Unvested (e) |
Equity
Incentive Plan Awards: Number of Securities Under lying Unexercised Unearned Options (#)(f) |
Option/
Exercise Price ($) (g) |
Option/
Expiration Date (h) |
Number
of Shares or Units of Stock That Have Not Vested (#) (i) |
Market
Value of Shares or Units of Stock That Have Not Vested ($) (j) |
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (k) |
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (l) |
|||||||||||||||||||||||||||||||||
Kristin C. Peck |
2/9/2004 | 7,000 | 38.32 | 2/8/2014 | ||||||||||||||||||||||||||||||||||||||||
2/24/2005 | 5,000 | 26.20 | 2/23/2015 | |||||||||||||||||||||||||||||||||||||||||
2/23/2006 | 8,500 | 26.20 | 2//22/2016 | |||||||||||||||||||||||||||||||||||||||||
2/22/2007 | 14,500 | 25.87 | 2/21/2017 | |||||||||||||||||||||||||||||||||||||||||
2/28/2008 | 15,768 | 22.55 | 2/28/2013 | |||||||||||||||||||||||||||||||||||||||||
2/26/2009 | 24,493 | 12.70 | 2/26/2014 | |||||||||||||||||||||||||||||||||||||||||
12/31/2009 | 26,767 | 18.19 | 12/31/2014 | |||||||||||||||||||||||||||||||||||||||||
2/25/2010 | 28,857 | 17.69 | 2/25/2015 | 7,981 | $ | 195,772.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 34,171 | 18.90 | 2/24/2016 | 8,294 | $ | 203,460.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 28,288 | 18.90 | 2/24/2018 | |||||||||||||||||||||||||||||||||||||||||
2/23/2012 | 51,578 | 21.03 | 2/23/2017 | 10,296 | $ | 252,555.00 | ||||||||||||||||||||||||||||||||||||||
2/23/2012 | 43,724 | 21.03 | 2/23/2019 | |||||||||||||||||||||||||||||||||||||||||
|
1/1/2010-
12/31/2012 |
|
7,138 | $ | 175,095.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2011-
12/31/2013 |
|
7,742 | $ | 189,911.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2012-
12/31/2014 |
|
10,014 | $ | 245,643.00 | |||||||||||||||||||||||||||||||||||||||
Clinton A. Lewis, Jr. |
2/27/2003 | 33,700 | 29.33 | 2/26/2013 | ||||||||||||||||||||||||||||||||||||||||
2/26/2004 | 27,000 | 37.15 | 2/25/2014 | |||||||||||||||||||||||||||||||||||||||||
2/24/2005 | 15,000 | 26.20 | 2/23/2015 | |||||||||||||||||||||||||||||||||||||||||
2/23/2006 | 33,000 | 26.20 | 2/22/2016 | |||||||||||||||||||||||||||||||||||||||||
2/22/2007 | 28,000 | 25.87 | 2/21/2017 | |||||||||||||||||||||||||||||||||||||||||
2/28/2008 | 9,208 | 22.55 | 2/28/2013 | |||||||||||||||||||||||||||||||||||||||||
2/26/2009 | 11,940 | 12.70 | 2/26/2014 | |||||||||||||||||||||||||||||||||||||||||
12/31/2009 | 10,707 | 18.19 | 12/31/2014 | |||||||||||||||||||||||||||||||||||||||||
2/25/2010 | 11,655 | 17.69 | 2/25/2015 | 3,223 | $ | 79,071.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 11,682 | 18.90 | 2/24/2016 | 2,836 | $ | 69,563.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 9,671 | 18.90 | 2/24/2018 | |||||||||||||||||||||||||||||||||||||||||
2/23/2012 | 15,777 | 21.03 | 2/23/2017 | 3,149 | $ | 77,249.00 | ||||||||||||||||||||||||||||||||||||||
2/23/2012 | 13,374 | 21.03 | 2/23/2019 | |||||||||||||||||||||||||||||||||||||||||
|
1/1/2010-
12/31/2012 |
|
2,883 | $ | 70,720.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2011-
12/31/2013 |
|
2,647 | $ | 64,931.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2012-
12/31/2014 |
|
3,063 | $ | 75,135.00 | |||||||||||||||||||||||||||||||||||||||
Catherine A. Knupp |
2/27/2003 | 26,000 | 29.33 | 2/26/2013 | ||||||||||||||||||||||||||||||||||||||||
2/26/2004 | 27,500 | 37.15 | 2/25/2014 | |||||||||||||||||||||||||||||||||||||||||
2/24/2005 | 21,700 | 26.20 | 2/23/2013 | |||||||||||||||||||||||||||||||||||||||||
2/25/2006 | 30,000 | 26.20 | 2/22/2016 | |||||||||||||||||||||||||||||||||||||||||
2/22/2007 | 20,000 | 25.87 | 2/21/2017 | |||||||||||||||||||||||||||||||||||||||||
2/28/2008 | 7,021 | 22.55 | 2/28/2013 | |||||||||||||||||||||||||||||||||||||||||
2/36/2009 | 9,204 | 12.70 | 2/26/2014 | |||||||||||||||||||||||||||||||||||||||||
12/31/2009 | 16,060 | 18.19 | 12/31/2014 | |||||||||||||||||||||||||||||||||||||||||
2/25/2010 | 10,417 | 17.69 | 2/25/2015 | 2,881 | $ | 70,679.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 11,682 | 18.90 | 2/24/2016 | 2,836 | $ | 69,563.00 | ||||||||||||||||||||||||||||||||||||||
2/24/2011 | 9,671 | 18.90 | 2/24/2018 | $ | 74,273.00 | |||||||||||||||||||||||||||||||||||||||
2/23/2012 | 15,170 | 21.03 | 2/23/2017 | 3,028 | ||||||||||||||||||||||||||||||||||||||||
2/23/2012 | 12,860 | 21.03 | 2/23/2019 | |||||||||||||||||||||||||||||||||||||||||
|
1/1/2010-
12/31/2012 |
|
2,577 | $ | 63,214.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2011-
12/31/2013 |
|
2,647 | $ | 64,931.00 | |||||||||||||||||||||||||||||||||||||||
|
1/1/2012-
12/31/2014 |
|
2,945 | $ | 72,241.00 |
140
(1) | For better understanding of this table, we have included an additional column showing the grant date of stock options, stock appreciation rights and restricted stock units and the associated performance period for the performance share awards. |
(2) | Stock options become exercisable in accordance with the vesting schedule below: |
Grant Date |
Vesting | |
2/27/2003 |
1/3 per year in years 3, 4 and 5 | |
4/30/2003 |
Full vesting after 3 years | |
2/9/2004 |
Full vesting after 3 years | |
2/26/2004 |
1/3 per year in years 3, 4 and 5 | |
2/24/2005 |
Full vesting after 3 years | |
2/23/2006 |
Full vesting after 3 years | |
2/22/2007 |
Full vesting after 3 years | |
2/28/2008 |
Full vesting after 3 years |
Stock Appreciation Rights (SARs) vest in accordance with the schedule below:
2/28/2008 |
Full Vesting after 3 years and become payable after 5 years | |
2/26/2009 |
Full Vesting after 3 years and become payable after 5 years | |
12/31/2009 |
Full Vesting after 3 years and become payable after 5 years | |
2/25/2010 |
Full Vesting after 3 years and become payable after 5 years | |
2/24/2011 |
Full Vesting after 3 years and become payable after 5 years and 7 years | |
2/23/2012 |
Full Vesting after 3 years and become payable after 5 years and 7 years |
Restricted Stock Units vest in accordance with the schedule below:
Grant Date |
Vesting | |
2/25/2010 |
3 year cliff vesting | |
2/24/2011 |
3 year cliff vesting | |
2/23/2012 |
3 year cliff vesting |
(3) | The values provide are based on the closing price of $24.53 on November 23, 2012. |
The following 2012 option exercises and stock vested table provides additional information about the value realized by the NEOs on option award exercises, the vesting of stock/unit awards during the year ended December 31, 2012. This table does not reflect activity between November 30, 2012 and December 31, 2012.
2012 option exercises and stock vested table
Option
awards |
Restricted stock/
restricted stock units(1) |
Performance shares
2009-2011 paid February 2012(2) |
||||||||||||||||||||||||||
Name |
Number
of shares acquired on exercise (#) |
Value
realized on exercise ($) |
Number
of shares acquired on vesting (#) |
Number
of shares withheld to cover taxes (#) |
Value realized
on vesting ($) |
Number
of shares acquired on vesting (#) |
Number
of shares withheld to cover taxes (#) |
Value realized
on vesting ($) |
||||||||||||||||||||
Juan Ramón Alaix |
24,089 | 9,490 | $ | 546,608.00 | 12,959 | (3) | - | $ | 274,472.00 | |||||||||||||||||||
Richard A. Passov |
25,811 | 9,380 | $ | 546,702.00 | 13,587 | 4,922 | $ | 287,773.00 | ||||||||||||||||||||
Kristin C. Peck |
16,161 | 5,856 | $ | 368,302.00 | 8,233 | 2,983 | $ | 174,375.00 | ||||||||||||||||||||
Clinton A. Lewis, Jr. |
7,812 | 2,666 | $ | 181,075.00 | 3,093 | 953 | $ | 65,510.00 | ||||||||||||||||||||
Catherine A. Knupp |
7,199 | 2,677 | $ | 162,885.00 | 4,013 | 1,395 | $ | 84,995.00 |
(1) | The shares and amounts shown in this column assume the vesting of the RSUs granted on December 31, 2009 which will not vest until December 31, 2012. |
(2) | The performance shares in this table have been determined according to the 2009-2011 performance periods and were paid in February 2012. The performance share payouts for the 2010-2012 performance period will not be available until 2013. |
(3) | These shares were deferred per Mr. Alaixs election. |
141
The following 2012 pension benefits table shows the estimated present value of accumulated benefits payable to each of our NEOs under the Pfizer Consolidated Pension Plan, or the Pfizer Retirement Plan, which for 2012 retained the pension formula under the Pfizer Retirement Annuity Plan, or the PRAP, and the related non-funded Pfizer Supplemental Retirement Plan, or the Supplemental Retirement Plan.
2012 pension benefits table
Name |
Plan name |
Number of
years of credited service (#) |
Present
value of accumulated benefit(1) ($) |
Payments
during last fiscal year ($) |
||||||||||
Juan Ramón Alaix(2) |
Pfizer Retirement Plan | 14 | 643,637 | 0 | ||||||||||
Supplemental Retirement Plan |
2,360,662 | 0 | ||||||||||||
Richard A. Passov |
Pfizer Retirement Plan | 15 | 537,484 | 0 | ||||||||||
Supplemental Retirement Plan |
2,042,894 | 0 | ||||||||||||
Kristin C. Peck |
Pfizer Retirement Plan | 8 | 177,805 | 0 | ||||||||||
Supplemental Retirement Plan | 435,483 | 0 | ||||||||||||
Clinton A. Lewis, Jr. |
Pfizer Retirement Plan | 24 | 594,918 | 0 | ||||||||||
Supplemental Retirement Plan | 843,042 | 0 | ||||||||||||
Catherine A. Knupp |
Pfizer Retirement Plan | 11 | 373,173 | 0 | ||||||||||
Supplemental Retirement Plan | 364,963 | 0 |
(1) | The present value of these benefits is based on the December 31, 2011 assumptions as shown below, used in determining Pfizers annual pension expense for fiscal 2012 and target annual cash incentive amounts for 2012. |
(2) | Amounts shown here for Mr. Alaix will be offset by retirement benefits accrued under the Plan de Pensiones de los Empleados de Pharmacia Spain, S.A. during his service with Pfizer in Spain (formerly Pharmacia Spain) from July 1998 until August 2003. A portion of this accrued benefit was transferred to an individual account in accordance with Spanish pension regulations and the remainder of the benefit is payable under an insurance contract in the form of an annuity calculated at age 65. |
The Pfizer retirement plan
The Pfizer Retirement Plan is a funded, tax-qualified, non-contributory defined benefit pension plan that covers certain employees, including our NEOs, hired prior to January 1, 2011.
Pfizer Retirement Plan (PRAP formula) and Supplemental Retirement Plan . Benefits under the Pfizer Retirement Plan (PRAP formula) are based on the employees years of service and highest average earnings for a five calendar-year period and are payable after retirement in the form of an annuity or a lump sum.
Benefits under the Pfizer Retirement Plan are calculated as an annuity equal to the greater of:
|
1.4% of the employees highest final average earnings for a five-year calendar period multiplied by years of service; or |
|
1.75% of such earnings less 1.5% of the primary Social Security benefit multiplied by years of service. |
Years of service under these formulas cannot exceed 35.
Compensation covered by the Pfizer Retirement Plan and the related Supplemental Retirement Plan for the NEOs for 2012 equals the sum of the amounts set forth for 2012 in the Salary and Non-equity incentive plan compensation columns of the 2012 summary compensation table. The values disclosed in the 2012 pension benefits table are based on the NEOs 2012 target annual incentive awards. Covered compensation for Mr. Passov also includes restricted stock awards granted on or prior to April 26, 2001. After the payment of the awards for the five-year period ended on December 31, 2004, no further performance-based share awards are included in the determination of pensions under the Pfizer Retirement Plan or the Supplemental Retirement Plan.
142
Pfizer Retirement Plan Dr. Knupp
Prior to January 1, 2012, Dr. Knupp earned pension benefits under the Warner-Lambert formula in the Pfizer Retirement Plan and the related Warner-Lambert nonqualified supplemental retirement plan. As of January 1, 2012, Dr. Knupp began earning pension benefits under the PRAP formula and ceased earning additional accruals under the Warner-Lambert formula. Dr. Knupps total retirement benefit will reflect the Warner-Lambert formula for service prior to 2012 and the PRAP formula for service after 2011.
Benefits under the Warner-Lambert formula are based on the employees years of service and pensionable earnings and are payable after retirement in the form of an annuity.
Benefits under the Warner Lambert formula are calculated based on the following:
|
for each year of plan participation, a participant earns two types of retirement credits: Earnings-Related Credits and Service-Related Credits; the benefit under the Warner-Lambert formula is the sum of these two credits; |
|
Earnings-Related Credits are equal to 1.5% of Annual Earnings; |
|
Service-Related Credits are equal to $96 x years of service; |
|
there was an update as of December 31, 2011, which can increase a participants accrued benefit at December 31, 2011; |
|
the update formula is 1.2% of Average Earnings up to the Covered Compensation Level plus 1.5% of Average Earnings in excess of the Covered Compensation Level, times Update Service as of December 31, 2011; and |
|
years of service under these formulas is not capped. |
General . Contributions to the Pfizer Retirement Plan are made entirely by Pfizer and are paid into a trust fund from which benefits are paid.
The amount of annual earnings that may be considered in calculating benefits under the Pfizer Retirement Plan is limited by the Code. For 2012, the annual limitation was $250,000. The Code also limits the amount of pension that can be paid under the Pfizer Retirement Plan to a 2012 annual maximum of $200,000, payable at age 65 in accordance with the Code requirements. Under the Supplemental Retirement Plan, Pfizer provides, out of its general assets, amounts substantially equal to the difference between the amount that may be paid under the Pfizer Retirement Plan and the amount that would be paid in the absence of these Code limits. The Supplemental Retirement Plan is non-funded.
143
The present value of accumulated benefits has been computed based on the assumptions as of December 31, 2011 in the following table, which were used in developing Pfizers financial statement disclosures:
Pension plan assumptions(1)
Assumptions as of |
12/31/2011 |
|
Discount Rate |
5.10% for qualified pension plans, 5.00% for non-qualified pension plans | |
Lump Sum Interest Rate |
1.90% for annuity payments expected to be made during first 5 years; 4.30% for payments made between 5 and 20 years; and 5.10% for payments made after 20 years prior. | |
Percent Electing Lump Sum |
80%/70%(2) - Pfizer | |
Mortality Table for Lumps Sums |
For Pfizer, unisex mortality table specified by IRS Revenue Ruling 2007-67, based on RP 2000 table, with projected mortality improvements (7-15 years). | |
Mortality Table for Annuities |
Separate annuitant and non-annuitant rates for the 2012 plan year, as set forth in regulation 1.412(l)(7)-1 |
(1) | These assumptions are also used to determine the change in pension value in the 2012 Summary Compensation Table. |
(2) | 80% relates to the Pfizer Retirement Plan and 70% relates to the Supplemental Retirement Plan. Only applies to the extent the executive is eligible to receive a lump sum. |
Early retirement provisions . Under the Pfizer Retirement Plan and Supplemental Retirement Plan, the normal retirement age is 65. Under the Pfizer Retirement Plan (PRAP formula), if a participant terminates employment with an age and years of service combination equal to or greater than 90, the employee is entitled to receive either an annuity or a lump sum that is unreduced under the terms of the Pfizer Retirement Plan or the Supplemental Retirement Plan for early payment. If an employee retires on or after age 55 with 10 or more years of service, that participant may elect to receive either an early retirement annuity payment reduced by 4% per year (prorated for partial years) for each year between benefit commencement and age 65, or such amount in a lump sum payment. If an employee does not satisfy any of the above criteria and has three years of vesting service under the Retirement Plan, that participant may elect to receive an annuity starting on or after age 55, which is reduced by 6% per year for each year (prorated for partial years) prior to age 65; a lump sum payment is not available.
For Dr. Knupp, under the Warner-Lambert formula the normal retirement age is 65. If she terminates employment after age 55 with 5 or more years of service, she may elect to receive an early retirement annuity payment where the benefit Earning-Related Credits accrued will be reduced by 3% per year from age 60 to 62, or 6% for each year from age 55 to age 60; there is no reduction if payments start at or after age 62.
The following 2012 non-qualified deferred compensation table summarizes activity during 2012 and account balances in the various Pfizer non-qualified savings and deferral plans for our NEOs as of October 31, 2012 (except as otherwise provided below). The following plans and programs permit the executives to defer amounts previously earned on a pre-tax basis: Pfizers Non-Funded Deferred Compensation and Supplemental Savings Plan, or the PSSP; Pfizers Deferred Compensation Plan for GPP, PSAs, and STI Shift Awards. RSUs are also subject to mandatory deferral if the executive is subject to, or is likely to be subject to, Section 162(m) of the Code. The PSSP is a non-qualified supplemental savings plan that provides for the deferral of compensation that otherwise could have been deferred under the related tax-qualified 401(k) plans but for the application of certain Code limitations and for company matching contributions based on the executives contributions. Other than the matching contributions (and the earnings thereon) in the PSSP, the account balances in these plans are generally attributable to deferrals of previously earned compensation and the earnings on those amounts.
144
2012 non-qualified deferred compensation table(1)
Name |
Plan(2) |
Executive
contributions in 2012 ($) |
Company
contributions in 2012 ($) |
Aggregate
earnings in 2012 ($) |
Aggregate
withdrawals/ distributions ($) |
Aggregate
balance at 12/31/12 ($) |
||||||||||||||
Juan Ramón Alaix |
PSSP | 123,141 | 34,634 | 78,989 | 1,108,610 | |||||||||||||||
Deferred GPP | 168,000 | 27,965 | 1,180,719 | |||||||||||||||||
Deferred PSA | 274,472 | 342,512 | 1,951,659 | |||||||||||||||||
Deferred STI
Shift |
16,277 | 662,058 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Total: | 565,613 | 34,634 | 465,743 | 4,903,046 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Richard A. Passov |
PSSP | 143,759 | 32,346 | 89,087 | 2,533,429 | |||||||||||||||
Deferred GPP | 268,000 | 5,017 | 273,017 | |||||||||||||||||
Deferred PSA | 343,563 | 1,975,369 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Total: | 411,759 | 32,346 | 437,667 | 4,781,815 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Kristin C. Peck |
PSSP | 38,775 | 29,081 | 28,702 | 333,998 | |||||||||||||||
Deferred GPP | ||||||||||||||||||||
Deferred PSA | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Total: | 38,775 | 29,081 | 28,702 | 333,998 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Clinton A. Lewis, Jr. |
PSSP | |||||||||||||||||||
Deferred GPP | ||||||||||||||||||||
Deferred PSA | 23,768 | 136,659 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Total: | 23,768 | 136,659 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Catherine A. Knupp |
PSSP | 41,139 | 14,285 | 34,818 | 497,163 | |||||||||||||||
Deferred GPP | ||||||||||||||||||||
Deferred PSA | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
Total: | 41,139 | 14,285 | 34,818 | 497,163 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
(1) | Contribution amounts reflected in this table are reflected in the 2012 summary compensation table. Aggregate earnings are not reflected in the 2012 summary compensation table. |
(2) | The PSSP contributions were based on the executives deferral election and the salary shown in the 2012 summary compensation table, as well as annual incentive awards paid in 2012, previously reported. PSSP amounts shown reflect actual contributions and aggregate earnings through November 15, 2012 and estimated employee and employer contributions through December 31, 2012 based on the officers current covered compensation and deferral rates. |
Pfizer savings plans
Pfizer provides the Pfizer Savings Plan, or the Savings Plan, to U.S.-based employees of Pfizer and the PSSP to employees who meet the eligibility requirements, including our NEOs. Contribution amounts are reflected in the 2012 summary compensation table. Earnings have not been included. These plans are described below.
The Savings Plan is a tax-qualified retirement savings plan. Participating employees may contribute up to 20% of regular earnings on a before-tax basis, Roth 401(k) basis and after-tax basis, into their Savings Plan accounts. Regular earnings for the Savings Plan include both salary and bonus or annual incentive awards. In addition, under the Savings Plan, Pfizer generally matches an amount equal to one dollar for each dollar contributed by participating employees on the first 3% of their regular earnings, and fifty cents for each additional dollar contributed on the next 3% of their regular earnings. Matching contributions generally are invested in Pfizer common stock. Plan participants have the ability to immediately diversify the matching contribution investments.
145
Pursuant to tax law limitations, effective for 2012, the Pfizer Savings Plan limits the additions that can be made to a participating employees account to $49,000 per year. Additions include Pfizer matching contributions, before-tax contributions, Roth 401(k) contributions and after-tax contributions.
The Code limits the amounts that may be allocated to tax-qualified savings plans and the amount of compensation that can be taken into account in computing benefits under the Savings Plan. The 2012 maximum before-tax and Roth 401(k) contribution limit was $17,000 per year (or $22,000 per year for eligible participants age 50 and over). In addition, no more than $250,000 of annual compensation may be taken into account in computing benefits under the Savings Plan.
The PSSP is intended to pay, out of the general assets of Pfizer, an amount substantially equal to the difference between the amount that would have been allocated to an employees account as before-tax contributions, Pfizer matching contributions and the amount actually allocated under the Savings Plan in the absence of if the limits described in the preceding paragraph. Under the PSSP, participants can elect to defer up to 20% of eligible wages on a before-tax basis. Generally, under the PSSP, participants can elect to receive payments as a lump sum or in one to twenty annual installments following termination from service. Participants who do not make an election receive lump sum payments. In certain circumstances, Pfizer has established and funded trusts to secure its obligations to make payments under the PSSP.
Amounts deferred, if any, under the PSSP by the NEOs for 2012 are included in the Salary and Non-equity incentive plan compensation columns of the 2012 summary compensation table. In the 2012 non-qualified deferred compensation table, PSSP values are shown for each NEO. Executive contributions reflect the percent of salary and bonus the executive has elected to defer under the PSSP. The Pfizer matching contributions are shown in the Company contributions column of the table. For the NEOs, Pfizers matching contributions under the Savings Plan and the PSSP are shown in the All other compensation column of the 2012 summary compensation table. The Aggregate Earnings column in the table above represents the amount by which the PSSP balance changed in the past fiscal year, net of employee and employer contributions.
Estimated benefits upon termination
The following table shows the estimated benefits payable upon a hypothetical termination of employment under Pfizers SLC Separation Plan and the Sale of Business Plan under various termination scenarios as of December 31, 2012. Severance benefits under the severance plans are subject to the execution of a release agreement.
Estimated benefits upon various termination scenarios
Termination Without Cause |
Sale of Business
Severance (4) |
Termination on Change
in Control |
Death or
Disability |
|||||||||||||||||||||||||||||
Name |
Severance(1)
(A) ($) |
Other(2)
(B) ($) |
Long-Term
Award Payouts(3) (C) ($) |
Total
(A+B+C) ($) |
(D)($) |
Long-Term
Award Payouts(5) (E) ($) |
Total
(B+D+E) ($) |
Long-Term
Award Payouts(6) ($) |
||||||||||||||||||||||||
Juan Ramón Alaix |
1,094,800 | 17,136 | 2,866,571 | 3,978,507 | 2,189,600 | 3,719,822 | 5,926,558 | 3,719,822 | ||||||||||||||||||||||||
Richard A. Passov |
873,200 | 23,355 | 2,218,384 | 3,114,939 | 1,746,400 | 3,012,232 | 4,781,987 | 3,012,232 | ||||||||||||||||||||||||
Kristin C. Peck |
949,800 | 20,205 | 2,097,368 | 3,067,373 | 1,899,600 | 3,068,320 | 4,988,125 | 3,068,320 | ||||||||||||||||||||||||
Clinton A. Lewis, Jr. |
539,200 | 23,034 | 834,531 | 1,396,765 | 1,078,400 | 1,146,246 | 2,247,680 | 1,146,246 | ||||||||||||||||||||||||
Catherine A. Knupp |
539,200 | 21,185 | 801,208 | 1,361,593 | 1,078,400 | 1,104,276 | 2,203,861 | 1,104,276 |
(1) | These amounts represent severance payable under the SLC Separation Plan, equal to one years pay (defined as base salary and target bonus). |
(2) | These amounts represent the cost of 12 months of active employee medical and life insurance coverage. In addition, executives would be entitled to education and outplacement assistance. |
(3) | These amounts represent the value of long-term incentive awards which vest on termination of employment without cause using our closing stock price of $24.53 on November 23, 2012. |
146
(4) | These amounts represent severance equal to 2 times the NEOs annualized base salary plus target bonus, payable under the Sale of Business Severance Plan. |
(5) | These amounts represent the value of long-term incentive awards which vest following a change in control using Pfizers closing stock price of $24.53 on November 23, 2012. |
(6) | These amounts represent the value of long-term incentive awards which vest on termination of employment due to death or disability using Pfizers closing stock price of $24.53 on November 23, 2012. |
Payments made upon disability . Under the Pfizer flexible benefits program, eligible employees, are provided with company-paid long-term disability coverage of 50% of total pay, and may buy an increased level of coverage of up to 70% of total pay, subject to a $500,000 annual benefit limit. Beginning January 1, 2012, health and life insurance benefits will be provided for 24 months and Pfizer Retirement Plan benefits will not continue to accrue to those who begin to receive long-term disability benefits.
Under the 2004 Stock Plan, in the event of disability, PSAs are paid out at target; RSUs are paid in full; SARs/TSRUs vest and are settled on the fifth or seventh anniversary of the date of grant; and outstanding stock options continue to vest and become exercisable for the full option term, provided the executive remains permanently and totally disabled.
Payments made upon death . Under the Pfizer flexible benefits program, eligible employees, have the ability to purchase life insurance benefits of eight times pay (subject to evidence of insurability requirements) up to a maximum of $4.0 million. Pfizer provides an amount equal to base pay with a maximum cap of $2.0 million paid by Pfizer. The deceased executives pension and deferred compensation are also payable in accordance with the plans and the executives election.
Under the 2004 Stock Plan, in the event of death, PSAs are paid out at target; RSUs are paid in full; SARs/TSRUs vest and are immediately settled; and outstanding stock options are exercisable for the remainder of the option term if the participant is eligible for retirement; if not, the stock options remain exercisable for up to two years.
Payments made upon retirement . Under the 2004 Stock Plan, if a participant retires (after attaining age 55 with at least 10 years of service) after the first anniversary of the grant date, RSUs are prorated based on service subsequent to the grant date; SARs/TSRUs continue to vest and are settled on the fifth or seventh anniversary of the grant date; and outstanding stock options are exercisable for the full term of the option. PSAs are prorated at the end of the performance period if the participant is employed through December 31 of the year of grant. If the retirement takes place prior to the first anniversary of the grant date, these long-term awards are forfeited. Based on age and years of service, Mr. Alaix is the only NEO eligible for retirement treatment and would receive approximately $2,579,000 under his long-term awards as of December 31, 2012 in the event of his retirement.
See Employment and retirement benefits for further information on health care, retirement and savings plan benefits under Pfizers plans.
Payments made upon change in control. Under the 2004 Stock Plan, if a participants employment is terminated within 24 months of a change in control, PSAs are paid out at target; RSUs are paid in full; unvested SARs/TSRUs vest and are immediately settled; vested SARs/TSRUs are settled on the fifth or seventh anniversary of the date of grant; and outstanding stock options are exercisable for the remainder of the option term.
Director compensation
We are currently developing a compensation program for members of our board of directors other than those who are employed by Pfizer or us. We will include the relevant disclosures in subsequent amendments to this prospectus.
147
Principal and selling stockholder
The following table sets forth certain information regarding beneficial ownership of our common stock as of , 2012, and as adjusted to reflect the sale of the shares of Class A common stock in this offering, for:
|
each person known to us to be the beneficial owner of more than 5% of our common stock; |
|
each named executive officer; |
|
each of our directors and director nominees; and |
|
all of our executive officers and directors as a group. |
For U.S. securities law purposes, Pfizer, in its capacity as selling stockholder, is offering all the shares of our Class A common stock it owns. Instead of selling shares of our Class A common stock directly to the underwriters for cash, Pfizer will first exchange the shares of our Class A common stock to be sold in this offering with certain of the underwriters, which we refer to, in such role, as the debt exchange parties, for outstanding indebtedness of Pfizer held by the debt exchange parties. The debt exchange parties will then sell the shares to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of this offering immediately prior to the settlement of the debt exchange parties sale of the shares to the underwriters. If the underwriters exercise their option to purchase additional shares of Class A common stock from the debt exchange parties, Pfizer will convert shares of Class B common stock into shares of Class A common stock and exchange such shares of Class A common stock with the debt exchange parties. The debt exchange parties will then sell such shares of Class A common stock to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of such option exercise immediately prior to the settlement of the debt exchange parties sale of such shares to the underwriters. See UnderwritingThe debt-for-equity exchange. Prior to completion of this offering, we will be a wholly-owned subsidiary of Pfizer.
Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o Pfizer, 235 East 42 nd Street, New York, New York 10017. We have determined beneficial ownership in accordance with the rules of the SEC. We believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own. The table does not reflect any shares of Class A common stock that our directors and executive officers may purchase in this offering, including through the directed share program, as described under UnderwritingDirected share program.
Beneficial ownership representing less than 1% is denoted with an asterisk (*).
Common stock beneficially owned
prior
to the completion of this offering |
Common stock beneficially
owned
following the completion of this offering |
|||||||||||||||
Class A
common stock |
Class B
common stock |
Class A
common stock |
Class B
common stock |
|||||||||||||
Name of beneficial owner |
Number
of shares |
Percentage
of class |
Number
of shares |
Percentage
of class |
Number
of shares |
Percentage
of class |
Number
of shares |
Percentage
of class |
||||||||
5% Beneficial Owner: |
||||||||||||||||
Pfizer Inc. |
||||||||||||||||
Directors and Executive Officers: |
||||||||||||||||
Juan Ramón Alaix |
||||||||||||||||
Richard A. Passov |
||||||||||||||||
Catherine A. Knupp |
||||||||||||||||
Clinton A. Lewis, Jr. |
||||||||||||||||
Kristin C. Peck |
||||||||||||||||
Frank A. DAmelio |
||||||||||||||||
Geno J. Germano |
||||||||||||||||
Douglas E. Giordano |
||||||||||||||||
Charles H. Hill |
||||||||||||||||
Amy W. Schulman |
||||||||||||||||
Directors and executive officers as a group ( persons) |
148
Certain relationships and related party transactions
Relationship with Pfizer
Prior to the completion of the debt financing, Pfizer transferred to us subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we transferred or will transfer to Pfizer: (i) all of the shares of our Class A common stock; (ii) all of the shares of our Class B common stock; (iii) $ aggregate principal amount of our senior indebtedness, which Pfizer disposed of in the debt financing; and (iv) $ of the proceeds received in the debt financing and/or cash on hand, which amount will be paid immediately prior to the completion of this offering. Prior to the completion of this offering, all of our outstanding shares of common stock will be owned by Pfizer. Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer % of the economic interest and combined voting power in shares of our outstanding common stock other than with respect to the election of directors and % of the combined voting power of our outstanding common stock with respect to the election of directors (or % and %, respectively, if the underwriters exercise their option to purchase additional shares in full). See Risk factorsRisks related to our relationship with Pfizer and The Separation and Distribution transactions.
In connection with this offering and the Separation, we and Pfizer intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with Pfizer. Of the agreements summarized below, the material agreements will be filed as exhibits to the registration statement of which this prospectus is a part, and the summaries of these agreements set forth the terms of the agreements that we believe are material. These summaries are qualified in their entirety by reference to the full text of such agreements.
Global separation agreement
We intend to enter into a global separation agreement with Pfizer immediately prior to the completion of this offering that will govern the relationship between Pfizer and us following this offering.
Allocation of assets and liabilities. Notwithstanding the transfer of assets and assumption of liabilities that occurred prior to the completion of the debt financing, the global separation agreement generally allocates assets and liabilities to us and Pfizer according to the business to which such assets or liabilities relate. In general, Pfizer has conveyed to us ownership of all assets that are used exclusively or held for use exclusively in Pfizers animal health business and we have assumed all of Pfizers historical and future liabilities to the extent relating to, arising out of or resulting from, the operation of the animal health business (whether before, on or after the consummation of this offering), including:
|
warranty obligations created as part of the animal health business; |
|
product liability claims with respect to any animal health product; |
|
environmental liabilities relating to the animal health business and environmental liabilities at the real property that we acquired from Pfizer; |
|
liabilities related to animal health businesses or operations that were discontinued or divested by Pfizer; |
|
litigation liabilities; and |
|
our debt obligations, including under the debt financing. |
Indemnification . Generally, each party will indemnify, defend and hold harmless the other party and its subsidiaries (and each of their affiliates) and their respective officers, employees and agents from and against any
and all losses relating to, arising out of or resulting from: (i) liabilities assumed by the indemnifying party and (ii) any breach by the indemnifying party or its subsidiaries of the global separation agreement and the other
149
agreements described in this section (unless such agreement provides for separate indemnification). The global separation agreement also specifies procedures with respect to claims subject to indemnification.
Delayed transfers and further assurances. To the extent transfers of assets and assumptions of liabilities related to our business have not been completed because of a necessary consent or governmental approval or because a condition precedent to any such transfer was not satisfied or any related relevant fact was not realized, the parties will cooperate to effect such transfers or assumptions as promptly as practicable.
Each of the parties will agree to cooperate with the other party and use commercially reasonable best efforts to take or to cause to be taken all actions, and to do, or to cause to be done, all things reasonably necessary, proper or advisable under applicable law, regulations and agreements to consummate and make effective the transactions contemplated by the global separation agreement and the other agreements described in this section.
Mutual releases . Generally, each of Pfizer and us will release the other party from any and all liabilities. The liabilities released include liabilities arising under any contract or agreement, existing or arising from any acts or events occurring or failing to occur or any conditions existing before the completion of this offering.
Insurance . Our directors and officers will obtain coverage under a directors and officers insurance program to be established by us at our expense, but otherwise we will continue to enjoy coverage under Pfizers existing insurance program following the completion of this offering. After the date on which Pfizer and its affiliates hold 50% or less of our then outstanding common stock, pursuant to either the Distribution or any other disposition, we will arrange for our own insurance policies and will not benefit from any of Pfizers or its affiliates insurance policies that may provide any such coverage.
The agreement will also set forth procedures for the administration of insured claims and will allocate the right to claim coverage and control over the prosecution and defense of claims.
Covenants . We will agree to certain covenants, including covenants regarding:
|
disclosure of information about our financial controls to Pfizer for so long as Pfizer is required to consolidate our results of operations and financial position or to account for its investment in us under the equity method of accounting; |
|
delivery of quarterly and annual financial information to Pfizer for so long as Pfizer is required to consolidate our results of operations and financial position or to account for its investment in us under the equity method of accounting; |
|
restrictions on incurring any debt obligations without Pfizers prior written consent, following the consummation of this offering and through the date of the final transfer pursuant to the Distribution, if effected, or of any other disposition that results in Pfizer and its affiliates holding 50% or less of our then outstanding common stock; and |
|
restrictions on issuance of our capital stock without Pfizers prior written consent through the date of the final transfer pursuant to the Distribution, if effected, or of any other disposition that results in Pfizer and its affiliates holding 50% or less of our then outstanding common stock. |
Pfizer will be entitled to nominate directors for election to our board. The number of such Pfizer designees will depend on the level of beneficial ownership by Pfizer and its subsidiaries of the total voting power of all classes of our then outstanding capital stock entitled to vote generally with respect to the election of directors.
Term. Following the completion of this offering, the global separation agreement will continue unless terminated by us and Pfizer, although certain rights and obligations may terminate upon a reduction in Pfizers ownership of our outstanding common stock.
150
Transitional services agreement
We intend to enter into a transitional services agreement with Pfizer immediately prior to the completion of this offering that will grant us the right to continue to use certain of Pfizers services and resources related to our corporate functions, such as business technology, facilities, finance, human resources, public affairs and procurement. We refer to these services and resources, collectively, as the Pfizer services.
We will pay Pfizer mutually agreed-upon fees for the Pfizer services, which will be based on Pfizers costs of providing the Pfizer services. During the two years following the completion of this offering, the markup for these services will be 0% and, for the remainder of the term of the agreement, Pfizer may introduce a markup of 7%. We will be able to request good faith negotiations of the applicable fees if we believe that the fees materially overcompensate Pfizer for any of the Pfizer services and Pfizer has reciprocal rights if it believes the fees materially undercompensate Pfizer. Third party costs will be passed through to us at Pfizers or its affiliates cost. Prior to the Distribution, if effected, Pfizer will have the unilateral right to resolve disputes under the transitional services agreement.
Under the agreement we will be able to use the Pfizer services for a fixed term established on a service-by-service basis. However, we generally will have the right to terminate a service earlier if we give notice to Pfizer. Partial reduction in the provision of any service requires Pfizers consent. In addition, either party will be able to terminate the agreement due to a material breach of the other party, subject to limited cure periods.
Tax matters agreement
Allocation of taxes . We intend to enter into a tax matters agreement with Pfizer immediately prior to the completion of this offering that will govern the parties respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. In general, under the agreement:
|
Pfizer will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to our business) reportable on a consolidated, combined or unitary return that includes Pfizer or any of its subsidiaries (and us and/or any of our subsidiaries) for any periods or portions thereof ending on or prior to December 31, 2012. We will be responsible for the portion of any such taxes for periods or portions thereof beginning on or after January 1, 2013, as would be applicable to us if we filed the relevant tax returns on a standalone basis. |
|
We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of this offering. |
|
Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the Separation. |
We will not generally be entitled to receive payment from Pfizer in respect of any of our tax attributes or tax benefits or any reduction of taxes of Pfizer. Neither partys obligations under the agreement will be limited in amount or subject to any cap. The agreement will also assign responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.
Pfizer will be primarily responsible for preparing and filing any tax return with respect to the Pfizer affiliated group for U.S. federal income tax purposes and with respect to any consolidated, combined, unitary or similar group for U.S. state or local or foreign income tax purposes or U.S. state or local non-income tax purposes that
151
includes Pfizer or any of its subsidiaries, including those that also include us and/or any of our subsidiaries. We will generally be responsible for preparing and filing any tax returns that include only us and/or any of our subsidiaries.
The party responsible for preparing and filing a given tax return will generally have exclusive authority to control tax contests related to any such tax return. We will generally have exclusive authority to control tax contests with respect to tax returns that include only us and/or any of our subsidiaries.
Preservation of the tax-free status of certain aspects of the Separation . We and Pfizer intend the Separation, the debt financing, the debt-for-equity exchange and the potential Distribution to qualify as a reorganization pursuant to which no gain or loss is recognized by Pfizer or its shareholders for federal income tax purposes under Sections 355, 368(a)(1)(D) and related provisions of the Code. In addition, we and Pfizer intend for the Separation, the debt financing, the debt-for-equity exchange, the potential Distribution and certain related transactions to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax law.
Pfizer has received a private letter ruling from the IRS to the effect that, among other things, the Separation, the debt financing, the debt-for-equity exchange and the potential Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. In addition, Pfizer has received and will receive opinions from its outside tax advisors regarding the tax-free status of these transactions and certain related transactions. In connection with the ruling and the opinions, we and Pfizer have made and will make certain representations regarding the past and future conduct of our respective businesses and certain other matters.
We will also agree to certain covenants that contain restrictions intended to preserve the tax-free status of the Separation, the debt financing, the debt-for-equity exchange, the potential Distribution and certain related transactions. Such covenants will generally restrict our ability to pre-pay, pay down, redeem, retire or otherwise acquire, however effected, including pursuant to the terms thereof, any of the senior indebtedness that we transferred to Pfizer, and Pfizer subsequently disposed of in the debt financing, prior to stated maturity of such senior indebtedness or to take or permit to be taken any action at any time, including, without limitation, any modification to the terms of such senior indebtedness that could jeopardize, directly or indirectly, the qualification, in whole or part, of any of such senior indebtedness as securities within the meaning of Section 361(a) of the Code. We may take certain actions prohibited by these covenants only if Pfizer receives a private letter ruling from the IRS or we obtain and provide to Pfizer an opinion from a U.S. tax counsel or accountant of recognized national standing, in either case acceptable to Pfizer in its sole and absolute discretion, to the effect that such action would not jeopardize the tax-free status of these transactions. We will be barred from taking any action, or failing to take any action, where such action or failure to act adversely affects or could reasonably be expected to adversely affect the tax-free status of these transactions, for all time periods. In addition, during the time period ending two years after the date of the potential Distribution these covenants will include specific restrictions on our:
|
issuance or sale of stock or other securities (including securities convertible into our stock but excluding certain compensatory arrangements); |
|
sales of assets outside the ordinary course of business; and |
|
entering into any other corporate transaction which would cause us to undergo a 40% or greater change in our stock ownership. |
We will generally agree to indemnify Pfizer and its affiliates against any and all tax-related liabilities incurred by them relating to the Separation, the debt financing, the debt-for-equity exchange, the potential Distribution and/or certain related transactions to the extent caused by an acquisition of our stock or assets or by other action of ours. This indemnification provision will apply even if Pfizer has permitted us to take an action that would otherwise have been prohibited under the tax-related covenants described above.
152
Research and development collaboration and license agreement
We intend to enter into an R&D collaboration and license agreement with Pfizer immediately prior to the completion of this offering. Under the agreement, certain of our employees will be able to review a Pfizer database to identify compounds that may be of interest to the animal health field, and upon identifying any such compounds, we will be able to request permission (known as intent to access) to conduct certain limited research activities. If Pfizer grants intent to access, the scope of permitted research activities will be specified on a case-by-case basis by Pfizer and may include screening the Pfizer compound library. To conduct further research and development on the class of compounds identified during intent to access, we must request permission (known as approval in principle) from a joint steering committee described below and any approval will be subject to any restrictions specified by the joint steering committee. Certain compounds that we began researching prior to the completion of this offering will be granted approval in principle as of the completion of this offering.
Upon granting approval in principle, Pfizer will grant us an option to enter into a license agreement, which will be exercisable no later than five years after the approval in principle is granted. Prior to exercising the option, our license from Pfizer under the agreement will be non-exclusive, except with respect to patents and know-how that we develop, for which our license will be exclusive (except as to Pfizer and its affiliates). Accordingly, in the case of non-exclusive licenses, Pfizer could itself, or could enable a third party to, conduct research on compounds that are the same or similar to those that we are researching. If we exercise the option and enter into the license agreement for a particular compound, our license to research, develop and commercialize products with such compounds for the animal health field will be exclusive, subject to any restrictions imposed by Pfizer and the joint steering committee. Except for certain compounds we began researching prior to the completion of this offering, pursuant to any such license agreement, we will pay Pfizer an upfront payment, a milestone payment upon obtaining regulatory approval in a major market country and royalties on net sales. Our obligation to pay royalties will expire on a product-by-product and country-by-country basis upon the later of: (i) the expiration of the related patents and data exclusivity or (ii) ten years after the first commercial sale of such product.
During the term of the agreement, we will be required to reimburse Pfizers and its affiliates costs in connection with the agreement. Certain of such costs will be paid in the form of an annual access fee and others will be invoiced on a quarterly basis.
The joint steering committee will be comprised of an equal number of representatives from each party and will act by consensus. If consensus cannot be reached, the matter will be referred to each partys alliance manager to propose potential solutions. If the alliance managers fail to propose such a solution, the matter will be referred to senior executives of each party. If the senior executives do not resolve the matter, Pfizer will have final decision making authority.
Pfizer will own all intellectual property invented or generated under the agreement (subject to any third party rights) and will have sole discretion regarding filing, prosecuting and maintaining such intellectual property, subject to our rights, in certain instances, to request that Pfizer file or continue to maintain patents at our cost. Pfizer will have sole discretion regarding enforcement of any intellectual property licensed to us under the agreement.
We will have confidentiality and other obligations related to the security of intellectual property and other confidential information and materials. If Pfizer reasonably believes that we violated these provisions, Pfizer will be able to deny our access to such intellectual property and other confidential information and materials.
The term of the agreement will be seven years, subject to extension by mutual agreement. The agreement will terminate with respect to particular compounds if intent to access or approval in principle is denied or we fail to exercise our license option. Pfizer will also be able to terminate our rights under the agreement or any related
153
license agreement (as applicable) with respect to any compound for which approval in principle has been granted (including compounds for which we have exercised the option and entered into a license agreement) if Pfizer pays us an agreed upon amount which is intended to reflect the fair market value of the compound under our license. This right will expire on a compound-by-compound basis when we submit a regulatory approval application for each compound in a major market country and will not apply to compounds for which approval in principal was granted prior to the completion of this offering.
In the event of either partys uncured material breach, the other party will be able to terminate the agreement. If the material breach concerns any security measures or confidentiality or use restrictions and such breach is the result of bad faith, gross negligence or willful misconduct, such breach will be deemed to not be curable and, in addition to the agreement terminating, Pfizer will be able to terminate any license agreements that we have entered into after exercising our option (except to the extent any license agreement relates to a commercial product).
The agreement will terminate automatically if we enter into an agreement resulting in our change of control, we assign or another party assumes this agreement without Pfizers consent or we are otherwise acquired by a third party, or if either party becomes insolvent or certain other events related to our bankruptcy or indebtedness occur. If we acquire a certain interest in, or assets of, a human health company, Pfizer will be able to terminate the agreement, and if Pfizer acquires or is acquired by a company with an animal health business of a certain size, either party will be able to terminate the agreement. Following expiration and termination for specific reasons, we will be granted a non-exclusive license to any intellectual property that we developed under the agreement to conduct research in the animal health field, subject to certain exclusions (which exclusions will include the compounds that we researched and developed under the agreement and other compounds designated by Pfizer on a case-by-case basis). Except as set forth above, license agreements entered into pursuant to the R&D collaboration and license agreement will not terminate if the R&D collaboration and license agreement terminates.
Employee matters agreement
We intend to enter into an employee matters agreement with Pfizer immediately prior to the completion of this offering. The employee matters agreement will govern Pfizers, our and the parties respective subsidiaries and affiliates rights, responsibilities and obligations after this offering with respect to the following matters in connection with the animal health business:
|
employees and former employees (and their respective dependents and beneficiaries) who are or were associated with Pfizer, us or the parties respective subsidiaries or affiliates; |
|
the allocation of assets and liabilities generally relating to employees, employment or service-related matters and employee benefit plans; and |
|
other human resources, employment and employee benefits matters. |
Employment . We intend to offer employment, prior to the completion of this offering, to employees who are providing services to our business and who are not otherwise transferring to our entities by operation of law. To the extent that severance obligations are triggered by such transfers, we anticipate that Pfizer will administer the severance pay obligations in accordance with the terms and conditions of the applicable Pfizer severance pay plan or policy. Our employees who were providing services to our business and are on long-term disability on the applicable employee transfer date will remain employees of Pfizer to the extent permissible under applicable law, collective bargaining agreements, trade union agreements or work council agreements.
Benefit plans generally . Prior to the completion of this offering, except to the extent provided in respect of certain jurisdictions, we will become a participating employer in the Pfizer benefit plans (including legacy King Pharmaceuticals, Inc. benefit plans where applicable). We will cease to be a participating employer in the Pfizer
154
plans and will adopt our own benefit plans on a date following the completion of this offering, which will be determined by the parties, which we refer to as the Plan Transition Date, and which may vary by benefit plan and by country. An appropriate allocation of our costs incurred under Pfizer benefit plans prior to the Plan Transition Date shall be charged back to Pfizer. Pfizer will retain the right to amend or terminate the plans for our employees.
Credited service . We anticipate causing our employee benefit plans to credit service with Pfizer prior to the Plan Transition Date for all purposes, except as otherwise specified in the employee matters agreement.
Defined benefit and retiree medical plans . Our employees will cease to participate in the Pfizer U.S. qualified defined benefit pension plan and the U.S. retiree medical plan effective December 31, 2012, and liabilities allocable to our employees under such plans will be retained by Pfizer. Our employees under the U.S. qualified defined benefit pension plan will be 100% vested in their accrued benefits as of December 31, 2012. Pfizer will continue crediting employees service with us generally through December 31, 2017 (or termination of employment from us, if earlier) for certain early retirement benefits with respect to the defined benefit pension plan, and for plan eligibility with respect to the retiree medical plan. Outside of the United States, we intend that Pfizer will transfer its defined benefit plans pension assets and liabilities allocable to the employees transferring to us in the certain countries as described in any applicable local separation agreement. In certain countries, it is anticipated that liabilities with respect to past service with Pfizer will be retained by Pfizer.
Nonqualified defined benefit pension plans . We will cease to be a participating employer in the Pfizer U.S. nonqualified defined benefit pension plans on December 31, 2012 and Pfizer will continue crediting employees service with us through December 31, 2017 (or termination of employment from us if earlier) for certain early retirement benefits. Our employees under the U.S. nonqualified defined benefit pension plan will be 100% vested in their accrued benefits as of December 31, 2012. It is anticipated that Pfizer will retain the liabilities allocable to our employees under the U.S. nonqualified pension plans.
Defined contribution plans . The employee matters agreement provides for the transfer from the U.S. Pfizer qualified defined contribution plan to a U.S. Zoetis qualified defined contribution plan on the Plan Transition Date, with assets and liabilities allocable to the participants transferring to us. Our employees under the Pfizer
qualified defined contribution benefit plan will be 100% vested in their account balances as of the Plan Transition Date. Outside of the United States, we generally intend that Pfizer will transfer to our defined contribution plans assets and liabilities allocable to the employees transferring to us in the certain countries as described in any applicable local separation agreement.
Deferred compensation plans . With respect to the supplemental savings plan in the U.S., we intend that Pfizer will transfer liabilities allocable to the employees transferring to us as described in the employee matters agreement. Liabilities allocable to our employees under other Pfizer nonqualified plans will be retained by Pfizer.
Health and welfare plans . We generally expect to establish or continue (or assume the obligation of contributing to) health and welfare plans or arrangements in every country where we have employees. We anticipate that health and welfare liabilities allocable to our employees prior to the Plan Transition Date will be retained by Pfizer and the allocated cost for these plans will be charged to us.
Master manufacturing and supply agreements
We have entered into two master manufacturing and supply agreements with Pfizer. Under one of these agreements, Pfizer will manufacture and supply us with animal health products, which we refer to as the Pfizer-supplied products. Under this agreement, our manufacturing and supply chain leadership will have oversight responsibility over product quality and other key aspects of the manufacturing process with respect to the Pfizer-supplied products. For a list of the Pfizer sites that will manufacture and supply us with the Pfizer-supplied products pursuant to this agreement and a list of manufacturing sites that will be transferred to us pursuant to the
155
global separation agreement, see BusinessManufacturing and supply chain. Under the other agreement, we will manufacture and supply Pfizer with human health products, which we refer to as the Zoetis-supplied products. Only our Kalamazoo manufacturing site will manufacture Zoetis-supplied products. Following the termination of the lease agreements related to our Guarulhos manufacturing site and subject to the receipt of various regulatory approvals in Brazil, we expect that the Guarulhos site may also manufacture Zoetis-supplied products pursuant to this agreement. See Brazil lease agreements. We do not expect that any of our other sites will manufacture products for Pfizer.
Under the agreement related to the Pfizer-supplied products, our supply price is Pfizers costs plus a percentage markup. Subject to limited exceptions, during the two years following the completion of this offering, the markup will be 0% and, for the remainder of the term of the agreement, the markup will be 15%. The cost of each Pfizer-supplied product is subject to annual review, and there is a year-end true-up mechanism with respect to differences between budgeted and actual amounts. The agreement related to the Zoetis-supplied products contains reciprocal payment provisions pursuant to which Pfizer will make payments related to the Zoetis-supplied products.
These agreements will expire five years following the completion of this offering, with limited exceptions. In addition, these agreements require that Pfizer or us, as the case may be, use commercially reasonable efforts to develop the capabilities and facilities to manufacture the applicable products on its own behalf or to establish alternative sources of supply reasonably prior to expiration of the applicable agreement. The party purchasing products under the agreement may terminate the agreement with respect to any manufacturing site upon at least six months prior notice. Also, either party may terminate for customary reasons, including for material breach of the other party (subject to a 90-day cure period) or for a force majeure event affecting the other party that continues for at least 30 days.
Environmental matters agreement
We intend to enter into an environmental matters agreement with Pfizer immediately prior to the completion of this offering. The agreement will set forth standards for each partys performance of remedial actions for liabilities allocated to each party under the global separation agreement, address our substitution for Pfizer with respect to animal health assets and remedial actions allocated to us (including substitution related to, for example, permits, financial assurances and consent orders), allow our conditional use of Pfizers consultants and contractors to assist in the conduct of remedial actions and address the exchange of related information between the parties.
The agreement will also set forth standards of conduct for remedial activities at the co-located facilities: Guarulhos, Brazil; Catania, Italy; Hsinchu, Taiwan; and Kalamazoo, Michigan in the United States. In addition, the agreement will set forth site-specific terms to govern conduct at several of these co-located facilities. The agreement will last perpetually; however, the agreement will terminate automatically if the global separation agreement terminates.
Screening services agreement
We intend to enter into an agreement with Pfizer immediately prior to the completion of this offering, pursuant to which we will provide certain high throughput screening services to Pfizers R&D organization. Pfizer will pay us agreed-upon fees for these services.
Intellectual property license agreements
Immediately prior the completion of this offering, we intend to enter into license agreements with Pfizer, pursuant to which: (i) Pfizer and certain of its affiliates will license to us and certain of our affiliates the right to use certain intellectual property rights in the animal health field; and (ii) we will license to Pfizer and certain of its affiliates certain rights to intellectual property in all fields outside of the animal health field.
156
Patent and know-how license agreement (Pfizer as licensor) . Immediately prior to the completion of this offering, we intend to enter into a patent and know-how license agreement with Pfizer. Pursuant to the agreement, Pfizer will grant us a royalty-free, fully paid-up, sublicensable (subject to certain restrictions), worldwide, exclusive license to certain patents and know-how to research, develop and commercialize certain commercial, development-stage, and early stage products. We will not have rights to use most of these patents and know-how with any compounds other than those for which we are expressly licensed.
Pfizer will also grant us a royalty-free, fully paid-up, sublicensable (subject to certain restrictions) non-exclusive license to certain other Pfizer patents and know-how to research, develop and commercialize certain other products in the animal health field. Under the agreement, we also are granted a royalty-free, fully paid-up, sublicensable (subject to certain restrictions) license for the animal health field to certain know-how that is not compound-related, which license will be exclusive for certain know-how that we believe provides us with an advantage in the animal health field and non-exclusive for certain other general know-how in our possession.
Pfizer will also grant us a sublicense of certain third party intellectual property for use in the animal health field, the terms of which will be royalty-free and fully paid-up as between us and Pfizer, but will otherwise vary based on each third party agreement. With respect to certain of such third party intellectual property, Pfizer will have a right of first negotiation with us for an exclusive license to improvements of such third party intellectual property and improvements of other related patents that we own.
Pfizer controls filing, prosecuting and maintaining patents licensed to us, except we are able to file patent applications covering certain know-how licensed to us and certain know-how invented by us at our cost. We will grant Pfizer a royalty-free, fully paid-up, sublicensable, exclusive license for the human health field to any such know-how that we own. We will be required to pay certain costs associated with filing and maintaining the patents exclusively licensed to us, or our license will convert to a non-exclusive license.
Pfizer will have the right to forego, and cease paying for, prosecution and maintenance of the licensed patents and it may delegate responsibility to prosecute and maintain exclusively licensed patents to us or assign such patents to us. If Pfizer assigns such patents to us, we will grant Pfizer a royalty-free license to the assigned patents in all fields of use, but this license will exclude (and we will retain) all rights that Pfizer exclusively licensed to us under the agreement before assigning the patents to us.
Pfizer will have the right to enforce against third party infringements all patents licensed to us and patents that it may later assign to us if the infringement is within the scope of Pfizers license to such patents, unless Pfizer does not pay for certain prosecution and maintenance costs and the patents are exclusively licensed or assigned to us, in which case, we will have rights to enforce such patents against third party infringements within the scope of our exclusive rights. We also will have the right to enforce new patents that we file and own.
The agreement will expire, with respect to licensed patents, upon expiration of the last to expire patent right that Pfizer owns, with respect to third party intellectual property, upon expiration or termination of the agreement pursuant to which such third party intellectual property is licensed to Pfizer and with respect to know-how that Pfizer owns, upon the thirtieth anniversary of the agreement. Upon expiration of the agreement in its entirety, our licenses to know-how owned by Pfizer convert to fully paid-up, perpetual licenses. We will be able to terminate the agreement in whole or in part upon prior written notice to Pfizer. In the event of either partys uncured material breach, the other party will be able to terminate the agreement. The agreement will also provide that insolvency of either party and the occurrence of certain other events related to each partys bankruptcy or indebtedness will also result in automatic termination. In addition, in circumstances where Pfizer has an interest in the licensed intellectual property in connection with its human health development programs, our rights to use the licensed intellectual property are restricted and/or in limited instances, subject to Pfizers right to terminate such license at will. Pfizer also will have the ability to terminate the license agreement with respect to any third party agreements that it is sublicensing to.
157
Patent and know-how license agreement (Zoetis as licensor) . Immediately prior to the completion of this offering, we intend to enter into a patent and know-how license agreement with Pfizer. Pursuant to the agreement, we will grant Pfizer a royalty-free, fully paid-up, sublicensable (subject to certain restrictions), exclusive license to all patents and know-how that we own or have been licensed from third parties as of this offering (excluding any patents and know-how licensed from third parties to which our rights are limited to animal health) for Pfizer to research, develop, and commercialize any products throughout the world in all fields except the animal health field. Under the agreement, we will also grant Pfizer a royalty-free, fully paid-up, perpetual, sublicensable (subject to certain restrictions), non-exclusive license to certain patents filed within a certain period of time following this offering that cover know-how that we own. Pfizer will be permitted to use such patents in connection with its research, development, and commercialization of products outside the animal health field.
Upon notice from Pfizer, we will be required to file patent applications covering know-how licensed to Pfizer or continue to prosecute and maintain patents that have already been filed. In each case, Pfizer reimburses us for related costs, which vary depending on whether patents are filed at the time of Pfizers notice.
We will have the sole right to enforce patents that are licensed to Pfizer under this agreement in the animal health field. Pfizer will have rights to enforce the licensed patents in all other fields (including the human health field) only if it reimburses us for certain costs related to prosecution and maintenance of such patents. If Pfizer decides that it will not reimburse us for such costs, we will have the right to enforce in such fields.
The agreement will expire, with respect to licensed patents that we own, upon the expiration of the last to expire patent right, with respect to third party intellectual property, upon the expiration or termination of the agreement pursuant to which such third party intellectual property is licensed to us and with respect to know-how that we own, upon the thirtieth anniversary of the agreement. Upon expiration of the agreement in its entirety, Pfizers licenses to any know-how owned by us will convert to fully paid-up, perpetual licenses. Pfizer will be able to terminate the agreement in whole or in part upon prior notice to us. In the event of either partys uncured material breach, the other party will be able to terminate the agreement. The agreement will also provide that the insolvency of either party and the occurrence of certain other events related to bankruptcy or indebtedness will also result in automatic termination. Upon termination of the agreement, all licenses terminate.
Trademark and copyright license agreements . Immediately prior to the completion of this offering, we intend to enter into a trademark and copyright license agreement with Pfizer, pursuant to which Pfizer will grant us rights with respect to certain trademarks and copyrighted works. Specifically, Pfizer will grant us an exclusive, worldwide, royalty-free, perpetual and fully paid-up license to use certain scheduled trademarks in the same manner that we used such trademarks as a business unit of Pfizer and in connection with any modifications or line extensions of products with which such trademarks were used as a business unit of Pfizer. We will be able to sublicense such trademarks to third parties with Pfizers prior written consent, which Pfizer will not be able to unreasonably withhold, but such consent will not be required for sublicenses granted to our customers and distributors in the ordinary course of business. We will not have the right to register domain names that incorporate the trademarks or use the trademarks in the address of any social media or use the trademarks in any trade name, corporate name or doing business as name.
Pfizer will also grant us a non-exclusive, worldwide, royalty-free, perpetual and fully paid-up license to use, copy and distribute to ourselves and our affiliates copyrights in certain policies and guidelines, and any related derivative works, that are necessary for us to continue to conduct certain aspects of our business in the same manner as they were conducted when we were a business unit of Pfizer.
The agreement will terminate on a trademark-by-trademark or copyrighted work-by-copyrighted work basis upon our written notice to Pfizer that we have ceased bona fide commercial use of such trademark or copyrighted work and it will terminate as to one of our affiliates if such affiliates ceases being an affiliate of us.
We will grant a similar license to Pfizer to use the Aureomycin trademark and variants thereof in connection with Pfizers human health business.
158
Registration rights agreement
We intend to enter into a registration rights agreement with Pfizer immediately prior to the completion of this offering, pursuant to which we will agree that, upon the request of Pfizer, we will use our reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of our common stock retained by Pfizer following this offering.
Demand registration . Pfizer will be able to request registration under the Securities Act of all or any portion of our shares covered by the agreement and we will be obligated, subject to limited exceptions, to register such shares as requested by Pfizer. Pfizer will be able to request that we complete two demand registrations and four underwritten offerings in a twelve month period subject to limitations on minimum offering size. Pfizer will be able to designate the terms of each offering effected pursuant to a demand registration, which may take any form, including a shelf registration.
Piggy-back registration . If we at any time intend to file on our behalf or on behalf of any of our other security holders a registration statement in connection with a public offering of any of our securities on a form and in a manner that would permit the registration for offer and sale of our common stock held by Pfizer, Pfizer will have the right to include its shares of our common stock in that offering.
Registration expenses . We will be generally responsible for all registration expenses in connection with the performance of our obligations under the registration rights provisions in the registration rights agreement. Pfizer is responsible for its own internal fees and expenses, any applicable underwriting discounts or commissions and any stock transfer taxes.
Indemnification . Generally, the agreement will contain indemnification and contribution provisions by us for the benefit of Pfizer and, in limited situations, by Pfizer for the benefit of us with respect to the information provided by Pfizer included in any registration statement, prospectus or related document.
Transfer . If Pfizer transfers shares covered by the agreement, it will be able to transfer the benefits of the registration rights agreement to transferees of 5% of the shares of our common stock outstanding immediately following the completion of this offering, provided that each transferee agrees to be bound by the terms of the registration rights agreement.
Term . The registration rights will remain in effect with respect to any shares covered by the agreement until:
|
such shares have been sold pursuant to an effective registration statement under the Securities Act; |
|
such shares have been sold to the public pursuant to Rule 144 under the Securities Act; |
|
such shares may be sold to the public pursuant to Rule 144 under the Securities Act without being subject to the volume restrictions in such rule; or |
|
such shares have been sold in a transaction in which the transferee is not entitled to the benefits of the registration rights agreement. |
Brazil lease agreements
In September 2012, Pfizers subsidiary, Laboratórios Pfizer Ltda. (Laboratórios), as lessee, and our subsidiary, PAH Brasil Participações Ltda (PAH Brasil), as lessor, entered into: (i) the Private Instrument of Non Residential Lease Agreement and Others, which establishes and regulates the use of the real property at our Guarulhos, Brazil facility (the Real Property Lease) and (ii) the Private Instrument of Lease Agreement Movable Assets and Others, which establishes the terms of the use of the fixed assets at the same site (the Fixed Asset Lease and, together with the Real Property Lease, the Brazil Leases). As a result of a merger of PAH Brasil into Fort Dodge Saúde Animal Ltda. (Fort Dodge Brazil) with Fort Dodge Brazil surviving, the Brazil Leases were assigned to Fort Dodge Brazil.
159
Rent, rent adjustment and penalty . The monthly rent under the Brazil Leases corresponds to the amount of depreciation of the fixed assets and real property covered by the leases. During the first month that the leases were in effect, the rent under the Fixed Asset Lease was R$752,459 (approximately $0.4 million) and the rent under the Real Property Lease was R$479,977 (approximately $0.2 million). In subsequent periods, the parties will adjust these amounts to reflect the anticipated monthly depreciation amount and previously paid amounts may be adjusted if the amounts paid differ from actual depreciation. Late payments under Brazil Leases are subject to an adjustment plus a penalty equal to 2% and interest on arrears of 1% per month. A breach of either of the Brazil Leases that is not cured within 30 days from receipt of notice thereof is subject to a penalty equal to three monthly rent payments under the applicable lease. In addition to the rent, Laboratórios will pay expenses related to water consumption, sewerage and electricity as well as all taxes levied on the property.
Covenants and obligations. Laboratórios is required to maintain the fixed assets and real property in the same condition as they were received, except for normal wear and tear and any improvements thereon, and is responsible for the repair of any damage. Improvements on the existing fixed assets and investments in new fixed assets are permitted under the Fixed Asset Lease, provided Fort Dodge Brazil is given notice thereof and consents to Laboratórios proposal. Costs for such improvements are paid or reimbursed by Fort Dodge Brazil unless the fixed asset is used solely to manufacture human health products, in which case the cost shall be the responsibility of Laboratórios and, in the event a new asset is purchased, exclusive ownership shall be retained by Laboratórios. The Real Property Lease also permits improvements on the property to be implemented by Laboratórios as long as Fort Dodge Brazil provides its written consent. Laboratórios is entitled to reimbursement for any related costs as long as Fort Dodge Brazil consented to the implementation of the improvements.
Term and termination. The Brazil Leases will last for a period of five years commencing in September 2012. The Real Property Lease provides for automatic renewals for successive periods of one year at Laboratórioss discretion, unless notice of non-renewal is provided by Laboratórios. The Fixed Asset Lease can be extended for additional terms of five years by executing an amendment to such lease.
The Brazil Leases terminate at any time if agreed upon by the parties. The Brazil Leases also terminate upon satisfaction of certain regulatory conditions that will permit the animal health manufacturing operations of Laboratórios to be transferred to Fort Dodge Brazil and the human pharmaceutical manufacturing operations to be transferred to another facility or party. The Fixed Asset Lease automatically terminates upon the termination of the Real Property Lease or the master manufacturing and supply agreement that provides for Zoetis-supplied products. The Real Property Lease automatically terminates upon the termination of the Fixed Asset Lease or the expropriation of the property and cannot be terminated by Fort Dodge Brazil prior to termination of the master manufacturing and supply agreement that provides for Zoetis-supplied products. In the event the property is partially or completely destroyed, Laboratórios has the option to terminate the Real Property Lease.
Local market distribution agreements
In many markets throughout the world, the regulatory process of transferring marketing authorizations and product registrations for animal health products to Zoetis legal entities will not be completed for several months following the completion of this offering. In many of those markets, we expect to enter into distribution agreements with Pfizer legal entities to enable continued sales of the impacted products in such markets until the regulatory process is completed.
Policy concerning related person transactions
Prior to the consummation of this offering, our board of directors will adopt a written policy, which we refer to as the related person transaction approval policy, for the review of any transaction, arrangement or relationship in which we are a participant, if the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or beneficial holders of more than 5% of our total equity (or their immediate family members), each of whom we refer to as a related person, has a direct or indirect material interest. This policy was not in effect when we entered into the transactions described above.
160
Each of the agreements between us and Pfizer and its subsidiaries that have been entered into prior to the completion of this offering, and any transactions contemplated thereby, will be deemed to be approved and not subject to the terms of such policy. If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a related person transaction, the related person must report the proposed related person transaction to the chairman of our Audit Committee for so long as the controlled company exception applies and the Corporate Governance Committee thereafter (for purposes of this section only, we refer to each of these committees as the Committee). The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by the Committee. In approving or rejecting such proposed transactions, the Committee will be required to consider relevant facts and circumstances. The Committee will approve only those transactions that, in light of known circumstances, are deemed to be in our best interests. In the event that any member of the Committee is not a disinterested person with respect to the related person transaction under review, that member will be excluded from the review and approval or rejection of such related person transaction; provided, however, that such Committee member may be counted in determining the presence of a quorum at the meeting of the Committee at which such transaction is considered. If we become aware of an existing related person transaction which has not been approved under the policy, the matter will be referred to the Committee. The Committee will evaluate all options available, including ratification, revision or termination of such transaction. In the event that management determines that it is impractical or undesirable to wait until a meeting of the Committee to consummate a related person transaction, the chairman of the Committee may approve such transaction in accordance with the related person transaction approval policy. Any such approval must be reported to the Committee at its next regularly scheduled meeting.
A copy of our related person transaction approval policy will be available on our website upon consummation of this offering.
161
Description of certain indebtedness
The debt financing
In , we incurred approximately $ aggregate principal amount of our senior indebtedness, including the $ of our senior indebtedness that was transferred to Pfizer and subsequently sold by Pfizer. We refer to this as the debt financing. Immediately prior to the completion of this offering, we will transfer $ of the proceeds received in the debt financing and/or cash on hand to Pfizer.
Credit facility
In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility, which we refer to as the credit facility. The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied, which we refer to as the credit facility effective date. We expect that these conditions will be met concurrently with the completion of this offering. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. The credit facility is not guaranteed by our subsidiaries.
The credit facility bears interest, at our option, equal to either: (a) a base rate determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A., (ii) the federal funds rate plus 0.50% and (iii) a Eurodollar rate for a one month interest period plus 1.00%, plus, in each case, an applicable margin; or (b) a Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin. Additionally, we will pay a facility fee on the commitments under the credit facility, regardless of whether borrowings are outstanding under the credit facility. The applicable margins and the facility fee are determined based on public ratings of our senior unsecured non-credit enhanced long-term debt. Interest on borrowings and the facility fee are generally payable quarterly in arrears; however, for loans bearing interest based on a Eurodollar rate with a term shorter than three months, interest is payable at the end of such term.
We may voluntarily prepay loans and/or reduce the commitment under the credit facility, in whole or in part, without penalty or premium, subject to certain minimum amounts and increments and the payment of customary breakage costs. No mandatory prepayment is required under the credit facility.
The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the credit facility effective date certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains customary affirmative and negative covenants that, among other things, limit or restrict our and our subsidiaries ability, subject to certain exceptions, to incur liens, merge, consolidate or sell, transfer or lease assets, transact with subsidiaries and incur priority indebtedness. The credit facility also contains customary events of default.
Commercial paper program
We expect to enter into a commercial paper program with a capacity of up to $1.0 billion prior to or concurrently with the completion of this offering. While we do not anticipate that any commercial paper will be issued under the commercial paper program at the time of this offering, we may incur indebtedness under this program in the future.
162
In connection with this offering, we will amend and restate our certificate of incorporation and by-laws. Copies of the forms of our amended and restated certificate of incorporation and by-laws are filed as exhibits to the registration statement of which this prospectus forms a part. The provisions of our certificate of incorporation and by-laws and relevant sections of the Delaware General Corporation Law, or the DGCL, are summarized below. The following summary is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and by-laws and is subject to the applicable provisions of the DGCL.
General
Upon completion of this offering, our authorized capital stock will consist of shares of common stock, consisting of shares of Class A common stock, par value $0.01 per share, and shares of Class B common stock, par value $0.01 per share, and shares of preferred stock, par value $0.01 per share. Upon the completion of this offering, we will have shares of Class A common stock outstanding, shares of Class B common stock outstanding and no shares of preferred stock outstanding.
Common stock
Our certificate of incorporation provides that, except with respect to voting rights and conversion rights applicable to the Class B common stock, the Class A common stock and Class B common stock will have identical rights, powers, preferences and privileges.
Voting rights
On all matters submitted to a vote of stockholders other than election of directors, holders of Class A common stock and Class B common stock will each be entitled to one vote per share. With respect to election of directors, holders of Class A common stock will be entitled to one vote per share while holders of Class B common stock will be entitled to ten votes per share.
No common stockholder will be entitled to exercise any right of cumulative voting.
Conversion rights
Each share of Class B common stock held by Pfizer or a subsidiary of Pfizer will be convertible at any time at the option of the holder, but only to the extent such holder is Pfizer or a subsidiary of Pfizer, into one share of Class A common stock. Subject to the paragraph below, each share of Class B common stock held by any holder other than Pfizer will not be convertible at any time into any shares of Class A common stock. Shares of our Class A common stock are not convertible into any other shares of our capital stock.
Our board of directors may in the future propose to convert Class B common stock to Class A common stock on a share-for-share basis, subject to approval by our stockholders. If the proposal is approved by our board of directors and presented to our stockholders, a vote by (i) a majority of the shares of Class A common stock and Class B common stock, voting together as a single class, and (ii) a majority of the shares of the Class B common stock, voting as a separate class, is and will be required for the proposal to be approved. There will be no binding commitment by the board to, and it is possible that our board of directors may not elect to, consider the issue or resolve to present any such proposal to our stockholders at any stockholders meeting. Moreover, if presented, our stockholders may not approve any such conversion.
Dividends
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our Class A common stock and Class B common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board of directors may determine from time to time.
163
Other rights
Upon the liquidation, dissolution or winding up of our company, the holders of our common stock will be entitled to receive their ratable share of our net assets available after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. If we enter into a reorganization or into any merger, share exchange, consolidation or combination with one or more other entities (whether or not our company is the surviving entity), each holder of Class A common stock shall receive the same kind and amount of consideration received by a holder of Class B common stock, and each holder of Class B common stock shall receive the same kind and amount of consideration received by a holder of Class A common stock, upon such reorganization, merger, share exchange, consolidation or other combination. Holders of our common stock will have no preemptive, subscription or redemption rights. The outstanding shares of our common stock are fully paid and non-assessable.
Amendment of certificate of incorporation
For so long as any shares of Class A common stock are outstanding, we will not, without the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class A common stock, amend, alter or repeal any provision of our certificate of incorporation so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Class A common stock as compared to those of the Class B common stock.
For so long as any shares of Class B common stock are outstanding, we will not, without the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class B common stock, amend, alter or repeal any provision of our certificate of incorporation so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Class B common stock as compared to those of the Class A common stock.
For the foregoing purposes, any alteration or change with respect to, and any provision for, the voluntary, mandatory or other conversion or exchange of the Class B common stock into or for Class A common stock on a one-for-one basis will be deemed not to adversely affect the rights of the Class A common stock.
Preferred stock
Our board of directors will have the authority, without any further vote or action by the stockholders, to issue preferred stock in one or more series and to fix the preferences, limitations and rights of the shares of each series, including:
|
dividend rates; |
|
conversion rights; |
|
voting rights; |
|
terms of redemption and liquidation preferences; and |
|
the number of shares constituting each series. |
Anti-takeover effects of provisions of our certificate of incorporation and by-laws, and of delaware law
The rights of our stockholders and related matters are governed by the DGCL, our certificate of incorporation and by-laws, certain provisions of which may discourage or make more difficult a takeover attempt that a stockholder might consider in his or her best interest by means of a tender offer or proxy contest or removal of our incumbent officers or directors. These provisions may also adversely affect prevailing market prices for our common stock. However, we believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unsolicited proposal to acquire or restructure us and outweigh the disadvantage of discouraging those proposals because negotiation of the proposals could result in an improvement of their terms.
164
Classified board of directors
Our certificate of incorporation will provide that our board of directors will be classified with approximately one-third of the directors elected each year. The number of directors will be fixed from time to time by a majority of the total number of directors that we would have at the time such number is fixed if there were no vacancies. The directors will be divided into three classes, designated class I, class II and class III. Each class will consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire board. , and will serve as class I directors whose terms expire at the 2014 annual meeting of stockholders. , and will serve as class II directors whose terms expire at the 2015 annual meeting of stockholders. , and will serve as class III directors whose terms expire at the 2016 annual meeting of stockholders or, in each case, upon such directors earlier death, resignation or removal. At each annual meeting of stockholders beginning in 2014, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term and until their successors are duly elected and qualified. In addition, if the number of directors is changed, any increase or decrease will be apportioned by the board of directors among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class or from the removal from office, death, disability, resignation or disqualification of a director or other cause will hold office for a term that will coincide with the remaining term of that class, but in no case will a decrease in the number of directors have the effect of removing or shortening the term of any incumbent director.
Dual-class structure
As discussed above, our Class B common stock will have ten votes per share with respect to election of directors, while our Class A common stock, which is the class of stock we are selling in this offering and which will be the only class of our stock which is publicly traded immediately after this offering, will have only one vote per share with respect to such matters. On all matters submitted to a vote of stockholders other than election of directors, holders of Class A common stock and Class B common stock will each be entitled to one vote per share. Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer % of the economic interest and combined voting power in shares of our outstanding common stock other than with respect to the election of directors and % of the combined voting power of our outstanding common stock with respect to the election of directors (or % and %, respectively, if the underwriters exercise their option to purchase additional shares in full). Because of our dual-class structure, Pfizer will be able to control the election of our directors even if it and its affiliates come to own significantly less than 50% of the shares of our outstanding common stock. This concentrated control could discourage others from initiating any potential takeover or other change of control transaction that other stockholders may view as beneficial.
Stockholder action by written consent; special meetings
Our certificate of incorporation will permit stockholders to take action by written consent in lieu of an annual or special meeting until the first date on which Pfizer ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of capital stock entitled to vote (on matters other than the election of directors) if such consent or consents, in writing, setting forth the action so taken, is signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Thereafter, stockholders will only be able to take action at an annual or special meeting called in accordance with our by-laws.
Our by-laws will provide that special meetings of stockholders may only be called by:
|
the chairman of the board, or |
|
by the chairman of the board or by our corporate secretary at the request in writing of a majority of the board of directors. |
165
Advance notice requirements for stockholder proposals related to director nominations
Our by-laws will contain advance notice procedures with regard to stockholder proposals related to the nomination of candidates for election as directors. These procedures will provide that notice of stockholder proposals related to stockholder nominations for the election of directors must be received by our corporate secretary, in the case of an annual meeting, not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 25 days before or after that anniversary date, notice by the stockholder in order to be timely must be received not later than the close of business on the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever occurs first. If no annual meeting was held in the previous year, then a stockholders notice, in order to be considered timely, must be received by our corporate secretary not later than the later of the close of business on the 90 th day prior to such annual meeting or the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure of such date was made. Stockholder nominations for the election of directors at a special meeting at which directors are elected must be received by our corporate secretary no later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first.
A stockholders notice to our corporate secretary must be in proper written form and must set forth some information related to the stockholder giving the notice and to the beneficial owner, if any, on whose behalf the nomination is being made, including:
|
the name and address of that stockholder and any beneficial owner, if any, and of any holder of record of the stockholders shares as they appear on our books; |
|
the class and number of shares of each class of our capital stock which are owned beneficially and of record by that stockholder or by the beneficial owner, if any, as of the date of the stockholders notice, and a representation that the stockholder will notify us in writing of the class and number of such shares owned of record and beneficially by each such person as of the record date for the meeting not later than five business days following the later of the record date or the date notice of the record date is first publicly disclosed and the name of each nominee holder of shares of our stock owned but not of record by such person or any affiliates or associates of such person, and the number of shares of stock held by such nominee holder; |
|
a description of any transaction, agreement, arrangement or understanding with respect to such nomination between or among the stockholder and any beneficial owner and any of its affiliates or associates, and any others (including their names) acting in concert with any of the foregoing, and a representation that the stockholder will notify us in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting not later than five business days following the later of the record date or the date notice of the record date is first publicly disclosed; |
|
a description of any transaction, agreement, arrangement or understanding (including any derivatives, swaps, warrants, short positions, profit interests, options, hedging transactions, borrowed or loaned shares or other transactions) that has been entered into as of the date of the stockholders notice by, or on behalf of, the stockholder or any beneficial owner or any of its affiliates or associates, and a representation that the stockholder will notify us in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting not later than five business days following the later of the record date or the date notice of the record date is first publicly disclosed; |
|
a representation that the stockholder is a holder of record or beneficial owner of shares of our stock entitled to vote at that meeting and that the stockholder intends to appear in person or by proxy at the meeting to bring that nomination before the meeting; |
|
a representation whether the stockholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of outstanding shares of our stock required to elect the nominee and/or otherwise to solicit proxies from stockholders in support of the nomination; and |
166
|
any other information relating to the stockholder or beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitations of proxies for election of directors pursuant to the Exchange Act, and the rules and regulations promulgated thereunder. |
Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. We may require any proposed nominee to furnish such other information as we may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of Zoetis or that could be material to a reasonable stockholders understanding of the independence, or lack thereof, of such nominee.
As to each person whom the stockholder proposes to nominate for election as a director, the stockholders notice must set forth:
|
the name, age, business and residence address, and the principal occupation and employment of the person; |
|
the class and number of shares of each class of our capital stock which are owned beneficially or of record by the person; |
|
a statement whether such nominee, if elected, intends to tender, promptly following such persons failure to receive the required vote for election or reelection at the next meeting at which such person would face election or reelection, an irrevocable resignation effective upon acceptance of such resignation by the board of directors; |
|
a completed and signed questionnaire, representation and agreement with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is made; and |
|
any other information relating to the nominee that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitations of proxies for election of directors pursuant to the Exchange Act, and the rules and regulations promulgated thereunder. |
The stockholder providing the notice is required to update and supplement such notice as of the record date of the meeting.
Supermajority voting
From and after the first date on which Pfizer ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of our capital stock entitled to vote (on matters other than the election of directors), the vote of the holders of not less than 80% of the votes entitled to be cast is required to amend our by-laws and the provisions relating to conflicts of interest and our classified board in our certificate of incorporation. The foregoing provisions may discourage attempts by others to acquire control of us without negotiation with our board of directors. This enhances our board of directors ability to attempt to promote the interests of all of our stockholders. However, to the extent that these provisions make us a less attractive takeover candidate, they may not always be in our best interests or in the best interests of our stockholders.
Anti-takeover legislation
As a Delaware corporation, we will be subject to the restrictions under Section 203 of the DGCL regarding corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless:
|
prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
167
|
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time such transaction commenced, excluding, for purposes of determining the number of shares outstanding, (1) shares owned by persons who are directors and also officers of the corporation and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
|
on or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not wholly-owned by the interested stockholder. |
In this context, a business combination includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status owned, 15% or more of a corporations outstanding voting stock.
A Delaware corporation may opt out of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from amendments approved by holders of at least a majority of the corporations outstanding voting shares. We will not elect to opt out of Section 203. However, Pfizer and its affiliates have been approved as an interested stockholder and therefore are not subject to Section 203. For so long as Pfizer owns a majority of the voting shares entitled to be cast in elections of directors, and therefore has the ability to designate a majority of our board of directors, directors designated by Pfizer to serve on our board of directors would have the ability to pre-approve other parties, including potential transferees of Pfizers shares of our company, so that Section 203 would not apply to such other parties.
Undesignated preferred stock
The authority possessed by our board of directors to issue preferred stock with voting or other rights or preferences could be potentially used to discourage attempts by third parties to obtain control of us through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. The provision in our certificate of incorporation authorizing such preferred stock may have the effect of deferring hostile takeovers or delaying changes of control of our management.
Forum selection clause
Our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any actual or purported derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any or our directors or officers to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any other action asserting a claim governed by the internal affairs doctrine. Our certificate of incorporation further provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above.
Certificate of incorporation provision relating to corporate opportunities and interested directors
In order to address potential conflicts of interest between us and Pfizer, our certificate of incorporation will contain provisions regulating and defining the conduct of our affairs as they may involve Pfizer and its officers and directors, and our powers, rights, duties and liabilities and those of our officers, directors and stockholders in connection with our relationship with Pfizer. In general, these provisions recognize that we and Pfizer may
168
engage in the same or similar business activities and lines of business, have an interest in the same areas of corporate opportunities and that we and Pfizer will continue to have contractual and business relations with each other, including officers and directors of Pfizer serving as our directors.
Our certificate of incorporation will provide that, subject to any contractual provision to the contrary, Pfizer will have no duty to refrain from:
|
engaging in the same or similar business activities or lines of business as us; |
|
doing business with any of our customers; or |
|
employing or otherwise engaging any of our officers or employees. |
Under our certificate of incorporation, neither Pfizer nor any officer or director of Pfizer, except as described in the following paragraph, will be liable to us or our stockholders for breach of any fiduciary duty by reason of any such activities. Our certificate of incorporation will provide that Pfizer is not under any duty to present any corporate opportunity to us which may be a corporate opportunity for Pfizer and us, and Pfizer will not be liable to us or our stockholders for breach of any fiduciary duty as our stockholder by reason of the fact that Pfizer pursues or acquires that corporate opportunity for itself, directs that corporate opportunity to another person or does not present that corporate opportunity to us.
When one of our directors or officers who is also a director or officer of Pfizer learns of a potential transaction or matter that may be a corporate opportunity for both us and Pfizer, the certificate of incorporation will provide that the director or officer:
|
will have fully satisfied his or her fiduciary duties to us and our stockholders with respect to that corporate opportunity; |
|
will not be liable to us or our stockholders for breach of fiduciary duty by reason of Pfizers actions with respect to that corporate opportunity; |
|
will be deemed to have acted in good faith and in a manner he or she believed to be in, and not opposed to, our best interests for purposes of our certificate of incorporation; and |
|
will be deemed not to have breached his or her duty of loyalty to us or our stockholders and not to have derived an improper personal benefit therefrom for purposes of our certificate of incorporation, if he or she acts in good faith in a manner consistent with the following policy: |
|
a corporate opportunity offered to any of our officers who is also a director, but not an officer, of Pfizer will belong to us, unless that opportunity is expressly offered to that person solely in his or her capacity as a director of Pfizer, in which case that opportunity will belong to Pfizer; |
|
a corporate opportunity offered to any of our directors who is not one of our officers and who is also a director or an officer of Pfizer will belong to us only if that opportunity is expressly offered to that person solely in his or her capacity as our director, and otherwise will belong to Pfizer; and |
|
a corporate opportunity offered to any of our officers who is also an officer of Pfizer will belong to Pfizer, unless that opportunity is expressly offered to that person solely in his or her capacity as our officer, in which case that opportunity will belong to us. |
For purposes of the certificate of incorporation, corporate opportunities will include business opportunities that we are financially able to undertake, that are, from their nature, in our line of business, are of practical advantage to us and are ones in which we have an interest or a reasonable expectancy, and in which, by embracing the opportunities, the self-interest of Pfizer or its officers or directors will be brought into conflict with our self-interest. After such time that Pfizer ceases to own 20% of votes entitled to be cast on matters other than elections of directors by the holders of the then outstanding shares of our common stock, the provisions of the certificate of incorporation described in this paragraph will become inoperative. Thereafter, the approval or allocation of
169
corporate opportunities would depend on the facts and circumstances of the particular situation analyzed under the corporate opportunity doctrine. The Delaware courts have found that a director or officer may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporations line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the director or officer will thereby be placed in a position inimicable to his duties to the corporation. On the other hand, a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. A director or officer may also present an opportunity to the board of directors of a corporation to determine whether such opportunity belongs to the corporation and thereby be protected from inference of usurpation of corporate opportunity.
The certificate of incorporation will also provide that no contract, agreement, arrangement or transaction between us and Pfizer will be void or voidable solely for the reason that Pfizer is a party to such agreement and Pfizer and its directors and officers:
|
will have fully satisfied and fulfilled its fiduciary duties to us and our stockholders with respect to the contract, agreement, arrangement or transaction; |
|
will not be liable to us or our stockholders for breach of fiduciary duty by reason of entering into, performance or consummation of any such contract, agreement, arrangements or transaction; |
|
will be deemed to have acted in good faith and in a manner it reasonably believed to be in, and not opposed to, the best interests of us for purposes of the certificate of incorporation; and |
|
will be deemed not to have breached its duty of loyalty to us and our stockholders and not to have derived an improper personal benefit therefrom for purposes of the certificate of incorporation; if: |
|
the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to our board of directors or the committee of our board that authorizes the contract, agreement, arrangement or transaction and our board of directors or that committee in good faith authorizes the contract, agreement, arrangement or transaction by the affirmative vote of a majority of the disinterested directors; |
|
the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to the holders of our shares entitled to vote on such contract, agreement, arrangement or transaction and the contract, agreement, arrangement or transaction is specifically approved in good faith by vote of the holders of a majority of the votes entitled to be cast by the holders of our common stock then outstanding not owned by Pfizer or a related entity; or |
|
the contract, agreement, arrangement or transaction, judged according to the circumstances at the time of the commitment, is fair to us. |
Any person purchasing or otherwise acquiring any interest in any shares of our capital stock will be deemed to have consented to these provisions of the certificate of incorporation.
Limitation of liability of directors
Our certificate of incorporation will provide that none of our directors will be liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except to the extent otherwise required by the DGCL. The effect of this provision is to eliminate our rights, and our stockholders rights, to recover monetary damages against a director for breach of a fiduciary duty of care as a director. This provision does not limit or eliminate our right, or the right of any stockholder, to seek non-monetary relief, such as an injunction or rescission in the event of a breach of a directors duty of care. In addition, our certificate of incorporation will
170
provide that if the DGCL is amended to authorize the further elimination or limitation of the liability of a director, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. These provisions will not alter the liability of directors under federal or state securities laws. Our certificate of incorporation will also include provisions for the indemnification of our directors and officers to the fullest extent authorized or permitted by law. We also intend to maintain director and officer liability insurance, if available on reasonable terms.
Listing
We intend to apply for listing of our Class A common stock on the NYSE under the symbol ZTS.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
171
Shares eligible for future sale
We cannot predict with certainty the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price prevailing from time to time. We also cannot predict with certainty whether or when the Distribution will occur or if Pfizer will otherwise sell its remaining shares of our common stock. The sale of substantial amounts of our common stock in the public market or the perception that such sales could occur could adversely affect the prevailing market price of the Class A common stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have shares of Class A common stock and shares of Class B common stock outstanding. As a result of the lock-up agreements, other contractual restrictions on resale and the provisions of Rule 144, described below, our common stock will be available for sale in the public market as follows:
Number of shares |
Date |
|
shares of Class A common stock |
On the date of this prospectus. | |
shares of Class A common stock |
At various times after 180 days from the date of this prospectus (subject, in some cases, to volume limitations). | |
shares of Class B common stock |
At various times after 180 days from the date of this prospectus (subject, in some cases, to volume limitations). |
Sale of restricted shares
All of the shares of Class A common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by or owned by our affiliates, as that term is defined in Rule 144 under the Securities Act, may generally only be sold publicly in compliance with the limitations of Rule 144 described below. As defined in Rule 144, an affiliate of an issuer is a person that directly or indirectly, through one or more intermediaries, controls, or is controlled by or is under common control with, such issuer. Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer % of the economic interest and combined voting power in shares of our outstanding common stock other than with respect to the election of directors and % of the combined voting power of our outstanding common stock with respect to the election of directors (or % and %, respectively, if the underwriters exercise their option to purchase additional shares in full). Shares held by Pfizer will be restricted securities as that term is used in Rule 144. Subject to contractual restrictions, including the lock-up agreements described below, Pfizer will be entitled to sell these shares in the public market only if the sale of such shares is registered with the SEC or if the sale of such shares qualifies for an exemption from registration under Rule 144 or any other applicable exemption under the Securities Act. At such time as these restricted shares become unrestricted and available for sale, the sale of these restricted shares, whether pursuant to Rule 144 or otherwise, may have a negative effect on the price of our common stock.
S-8 registration statement
We intend to file a registration statement on Form S-8 to register the issuance of an aggregate of shares of our Class A common stock reserved for issuance under our equity incentive and stock purchase programs to be adopted in connection with this offering. Such registration statement will become effective upon filing with the SEC, and shares of our common stock covered by such registration statement will be eligible for resale in the public market immediately after the effective date of such registration statement, subject to the lock-up agreements described in this prospectus.
172
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this offering, a person who is not one of our affiliates who has beneficially owned shares of our common stock for at least six months may sell shares without restriction, provided the current public information requirements of Rule 144 continue to be satisfied. In addition, any person who is not one of our affiliates at any time during the three months immediately preceding a proposed sale, and who has beneficially owned shares of our common stock for at least one year, would be entitled to sell an unlimited number of shares without restriction. Our affiliates who have beneficially owned shares of our common stock for at least six months are entitled to sell within any three-month period a number of shares that does not exceed the greater of:
|
1% of the number of shares of our Class A common stock then outstanding, which will equal approximately shares immediately after this offering; and |
|
the average weekly trading volume of our Class A common stock on the NYSE during the four calendar weeks immediately preceding the filing of a notice on Form 144 with respect to the sale. |
Sales of restricted shares under Rule 144 are also subject to requirements regarding the manner of sale, notice, and the availability of current public information about us. Rule 144 also provides that affiliates relying on Rule 144 to sell shares of our Class A common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.
Lock-up agreements
We, our officers and directors and Pfizer have agreed with the underwriters that, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up. See Underwriting.
Registration rights
Pursuant to the registration rights agreement, Pfizer will be able to require us to effect the registration under the Securities Act of shares of our common stock that it will own after this offering. See Certain relationships and related party transactionsRelationship with PfizerRegistration rights agreement.
173
Material United States federal income and estate tax
consequences to non-U.S. holders
The following is a summary of material United States federal income and estate tax consequences of the purchase, ownership and disposition of Class A common stock as of the date hereof. Except where noted, this summary deals only with Class A common stock that is held as a capital asset by a non-U.S. holder.
A non-U.S. holder means a person (other than a partnership or any other entity treated as a partnership for United States federal income tax purposes) that is not for United States federal income tax purposes any of the following:
|
an individual citizen or resident of the United States; |
|
a corporation (or any other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
|
an estate the income of which is subject to United States federal income taxation regardless of its source; or |
|
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations (Treasury Regulations) to be treated as a United States person. |
This summary is based upon provisions of the Code and regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income and estate tax consequences different from those summarized below. This summary does not address all aspects of United States federal income and estate taxes and does not deal with tax considerations resulting from the Distribution or with foreign, state, local or other tax considerations that may be relevant to non-U.S. holders in light of their personal circumstances. In addition, it does not represent a detailed description of the United States federal income tax consequences applicable to holders that are subject to special treatment under the United States federal income tax laws (including a holder that is a United States expatriate, controlled foreign corporation, passive foreign investment company or a partnership or other pass-through entity for United States federal income tax purposes). We cannot provide assurance that a change in law will not alter significantly the tax considerations that we describe in this summary.
If a partnership holds Class A common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Non-U.S. holders that are partners of a partnership holding Class A common stock should consult their tax advisors.
Non-U.S. holders considering the purchase of Class A common stock should consult their own tax advisors concerning the particular United States federal income and estate tax consequences of the ownership of the Class A common stock, as well as the consequences arising under the laws of any other taxing jurisdiction.
Dividends
Distributions paid on Class A common stock will be taxable as dividends to the extent paid out of current or accumulated earnings and profits, as determined under United States federal income tax principles. Dividends paid to a non-U.S. holder of Class A common stock generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, if required by an applicable income tax treaty, are attributable to a United States permanent establishment) are not subject to withholding tax, provided certain certification and disclosure requirements are satisfied. Instead, such dividends are subject to United States federal income tax on a net income basis in the same manner as if the non-U.S. holder were a United States person as defined under the
174
Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
A non-U.S. holder of Class A common stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to complete IRS Form W-8BEN (or other applicable form) and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if Class A common stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable Treasury Regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities rather than corporations or individuals.
A non-U.S. holder of Class A common stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Gain on disposition of common stock
Any gain realized on the disposition of Class A common stock by a non-U.S. holder generally will not be subject to United States federal income tax unless:
|
the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment of the non-U.S. holder); |
|
the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or |
|
we are or have been a United States real property holding corporation for United States federal income tax purposes at any time during the shorter of the five-year period ending on the date of the disposition or such non-U.S. holders holding period for Class A common stock and such non-U.S. holder held (at any time during the shorter of the five-year period ending on the date of the disposition or such non-U.S. holders holding period) more than 5% of Class A common stock. |
An individual non-U.S. holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. An individual non-U.S. holder described in the second bullet point immediately above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses, even though the individual is not considered a resident of the United States. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.
We believe we have not been and are not currently a United States real property holding corporation for United States federal income tax purposes; however, no assurance can be given that we will not become one in the future. If, however, we are or become a United States real property holding corporation, so long as Class A common stock continues to be regularly traded on an established securities market, only a non-U.S. holder who holds, or held (at any time during the shorter of the five-year period ending on the date of disposition or the non-U.S. holders holding period) more than 5% of Class A common stock will be subject to United States federal income tax on the disposition of Class A common stock. Non-U.S. holders should consult their own tax advisors about the consequences that could result if we are, or become, a United States real property holding corporation.
175
United States federal estate tax
Common stock held by an individual non-U.S. holder at the time of death will be included in such holders gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information reporting and backup withholding
We must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.
A non-U.S. holder will be subject to backup withholding for dividends paid to such holder unless such holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a United States person as defined under the Code), or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale of Class A common stock within the United States or conducted through certain United States-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holders United States federal income tax liability provided the required information is furnished to the IRS.
Additional withholding requirements
Recently enacted legislation will require, after December 31, 2013, withholding at a rate of 30% on dividends in respect of, and, after December 31, 2016, gross proceeds from the sale of, our Class A common stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to accounts in the institution held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations, may modify these requirements. Accordingly, the entity through which our Class A common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale of, our Class A common stock held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which we will in turn provide to the Secretary of the Treasury. Non-U.S. holders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in our Class A common stock.
176
The debt exchange parties are offering the shares of Class A common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC are acting as joint book running managers of the offering and as representatives of the underwriters. We, Pfizer and the debt exchange parties have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, the debt exchange parties have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of Class A common stock listed next to its name in the following table:
Name |
Number of shares | |
J.P. Morgan Securities LLC |
||
Merrill Lynch, Pierce, Fenner &
Smith
|
||
Morgan Stanley & Co. LLC |
||
|
||
Total |
||
|
The underwriters are committed to purchase all the shares of Class A common stock offered if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The underwriters propose to offer the shares of Class A common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters.
Pursuant to the underwriting agreement, the underwriters have an option to buy up to additional shares of Class A common stock from the debt exchange parties to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. If the underwriters exercise the option to purchase additional shares as described above, the debt exchange parties will acquire these additional shares from Pfizer in exchange for debt obligations of Pfizer held by the debt exchange parties and sell the additional shares to the underwriters. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, on behalf of the underwriters, have 30 days from the date of this prospectus to exercise this option. If any shares are purchased with this option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of Class A common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
The underwriting discounts and commissions are equal to the public offering price per share of Class A common stock less the amount paid by the underwriters to the debt exchange parties per share of Class A common stock. The underwriting discounts and commissions are $ per share. The following table shows the per share and total underwriting discounts and commissions assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
Per share | Total | |||||||||||||||
Without
option exercise |
With full
option exercise |
Without
option exercise |
With full
option exercise |
|||||||||||||
Underwriting discounts and commissions paid by the debt exchange parties(1) |
$ | $ | $ | $ |
177
(1) | The debt exchange parties will acquire the total number of shares being sold in this offering, including any shares sold pursuant to the underwriters option to purchase additional shares, in the debt-for-equity exchange. For purposes of determining the amount of Pfizer indebtedness that Pfizer will receive from the debt exchange parties in exchange for such shares, Pfizer expects that the debt obligations will be valued at the fair market value on the date of this prospectus (or, in the case of shares sold pursuant to the underwriters option, on the date of the debt-for-equity exchange for such shares), and the aggregate fair market value of the debt obligations to be exchanged will equal the aggregate initial public offering price of such shares less the aggregate underwriting discounts and commissions for such shares, each as shown on the cover page of this prospectus. Pfizer may be deemed to have paid such underwriting discounts and commissions for U.S. securities law purposes. |
We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $ , of which Pfizer will pay approximately $ .
A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We have agreed that we will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing (other than filings on Form S-8 relating to our stock plans), or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities (regardless of whether any of these transactions described in clause (i) or (ii) above are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise), in each case without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC for a period of 180 days after the date of this prospectus, other than the shares of our Class A common stock to be sold hereunder or upon the exercise of options granted under our stock plans. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
Pfizer, our directors and our executive officers have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition (including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors and executive officers in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant) or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities (regardless of whether any of these transactions described in clause (i) or (ii) above are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise) or (iii) make any demand for or exercise any right with respect to the registration of any shares of our common
178
stock or any security convertible into or exercisable or exchangeable for our common stock. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
We, Pfizer and the debt exchange parties have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
We will apply to have our Class A common stock approved for listing on the NYSE under the symbol ZTS.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of Class A common stock in the open market for the purpose of preventing or retarding a decline in the market price of the Class A common stock while this offering is in progress. These stabilizing transactions may include making short sales of the Class A common stock, which involves the sale by the underwriters of a greater number of shares of Class A common stock than they are required to purchase in this offering, and purchasing shares of Class A common stock on the open market to cover positions created by short sales. Short sales may be covered shorts, which are short positions in an amount not greater than the underwriters option to purchase additional shares referred to above, or may be naked shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares from the debt exchange parties, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the Class A common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase Class A common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the Class A common stock or preventing or retarding a decline in the market price of the Class A common stock, and, as a result, the price of the Class A common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the NYSE, in the over the counter market or otherwise.
Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price will be determined by negotiations between us, Pfizer, the debt exchange parties and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:
|
the information set forth in this prospectus and otherwise available to the representatives; |
|
our prospects and the history and prospects for the industry in which we compete; |
|
an assessment of our management; |
|
our prospects for future earnings; |
179
|
the general condition of the securities markets at the time of this offering; |
|
the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and |
|
other factors deemed relevant by the underwriters and us. |
Neither we nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Certain of the underwriters and their affiliates have provided in the past to Pfizer and its affiliates, including us, and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for Pfizer, us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments. In addition, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC will be the debt exchange parties in the debt-for-equity exchange described below for which they will receive fees in the amount of $ million.
Directed share program
At our request, the underwriters have reserved % of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to our directors and employees, and Pfizers directors. If purchased by these persons, these shares will be subject to a 180-day lock-up restriction. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.
The debt-for-equity exchange
It is expected that Pfizer, the debt exchange parties and, for limited purposes, we, will enter into a debt-for-equity exchange agreement. Under the debt-for-equity exchange agreement, subject to certain conditions, the debt exchange parties, as principals for their own account, will exchange debt obligations of Pfizer held by the debt exchange parties for the shares of our Class A common stock to be sold in this offering. The debt exchange parties will then sell the shares to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of this offering immediately prior to the settlement of the debt exchange parties sale of the shares to the underwriters. If the underwriters exercise their option to purchase additional shares of Class A common stock from the debt exchange parties, Pfizer will convert shares of Class B common stock into shares of
180
Class A common stock and exchange such shares of Class A common stock with the debt exchange parties. The debt exchange parties will then sell such shares of Class A common stock to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of such option exercise immediately prior to the settlement of the debt exchange parties sale of such shares to the underwriters.
We expect that the debt exchange parties will hold indebtedness of Pfizer having an aggregate principal amount of at least $ based on a maximum assumed initial public offering price of $ per share, which is the high point of the price range set forth on the cover of this prospectus. The amount of indebtedness of Pfizer held by the debt exchange parties is expected to be sufficient to acquire all of the shares of our Class A common stock to be sold in this offering, inclusive of the shares of our Class A common stock that may be sold pursuant to the underwriters option to purchase additional shares. In the debt-for-equity exchange, the debt exchange parties will acquire the total number of shares being sold in this offering. For purposes of determining the amount of Pfizer indebtedness that Pfizer will receive from the debt exchange parties in exchange for such shares, Pfizer expects that the debt obligations will be valued at the fair market value on the date of this prospectus, and the aggregate fair market value of the debt obligations to be exchanged will equal the aggregate initial public offering price less the aggregate underwriting discounts and commissions for such shares, each as shown on the cover page of this prospectus. If the underwriters exercise their option to purchase additional shares as described above, the debt exchange parties will also acquire the additional shares in exchange for debt obligations of Pfizer held by the debt exchange parties. For purposes of determining the amount of Pfizer indebtedness that Pfizer will receive from the debt exchange parties in exchange for the additional shares, the debt obligations will be valued at the fair market value on the date of this prospectus, and the aggregate fair market value of the debt obligations to be exchanged will equal the aggregate initial public offering price less the aggregate underwriting discounts and commissions for such shares, each as shown on the cover page of this prospectus multiplied by the number of the additional shares acquired, less underwriting discounts and commissions. The debt exchange parties will acquire and sell the shares as principals for their own account, rather than on Pfizers behalf. If Pfizer and the debt exchange parties enter into the debt-for-equity exchange agreement, as described above, the debt exchange parties will become the owner of our shares of Class A common stock they acquire in the debt-for-equity exchange, regardless of whether this offering is completed. The debt exchange parties, and not Pfizer, will receive the net proceeds from the sale of the shares in this offering.
For purposes of the U.S. securities laws, each of Pfizer and the debt exchange parties will be deemed to be an underwriter of the shares of our Class A common stock sold in this offering; however, references to the underwriters in this prospectus refer only to the underwriters listed in the first paragraph of this Underwriting section.
None of Pfizer, the debt exchange parties or us have an obligation to participate in the debt-for-equity exchange. Regardless of whether the debt-for-equity exchange does or does not occur, the debt exchange parties will pay their own expenses in connection with the shares acquired by them in the debt-for-equity exchange.
Conflicts of interest
The offering is being conducted in accordance with the applicable provisions of Rule 5121 of the FINRA Conduct Rules because certain of the underwriters will have a conflict of interest pursuant to Rule 5121(f)(5)(C)(ii) by virtue of their role as debt exchange parties, since all of the net proceeds of this offering will be received by the debt exchange parties. As such, any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. Rule 5121 requires that a qualified independent underwriter as defined in Rule 5121 must participate in the preparations of the prospectus and perform its usual standard of diligence with respect to the registration statement and this prospectus. Accordingly, is assuming the responsibilities of acting as the qualified independent underwriter in the offering.
181
Selling restrictions
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), from and including the date on which the European Union Prospectus Directive (the EU Prospectus Directive) was implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities described in this prospectus may not be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of securities described in this prospectus may be made to the public in that Relevant Member State at any time:
|
to any legal entity which is a qualified investor as defined under the EU Prospectus Directive; |
|
to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive); or |
in any other circumstances falling within Article 3(2) of the EU Prospectus Directive, provided that no such offer of securities described in this prospectus shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the EU Prospectus Directive. For the purposes of this provision, the expression an offer of securities to the public in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State. The expression EU Prospectus Directive means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, us or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
United Arab Emirates
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other
182
person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
United Kingdom
This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
183
Certain legal matters, including the legality of the shares being offered herein, will be passed upon by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, and certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell LLP, New York, New York.
The combined financial statements of Zoetis as of December 31, 2011 and 2010, and for each of the years in the three-year period ended December 31, 2011 have been included herein in reliance upon the reports of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the nine month periods ended October 2, 2011 and September 30, 2012 included herein, KPMG LLP has reported that they applied limited procedures in accordance with professional standards for reviews of such information. However, their separate reports, included herein, state that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the 1933 Act) for their reports on the unaudited interim financial information because those reports are not reports or a part of the registration statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the 1933 Act.
Where you can find more information
We have filed a registration statement on Form S-1 with the SEC regarding this offering. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement, and you should refer to the registration statement and its exhibits to read that information. References in this prospectus to any of our contracts or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. Following the completion of this offering, we will be subject to the information reporting requirements of the Exchange Act and we will file reports, proxy statements and other information with the SEC.
You may read and copy the registration statement and the related exhibits, and the reports, proxy statements and other information we will file with the SEC, at the SECs public reference room maintained by the SEC at Room 1580, 100 F Street N.E., Washington, D.C. 20549. You can also request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The sites Internet address is www.sec.gov.
184
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
I NDEX TO F INANCIAL S TATEMENTS
Page | ||||
Audited Combined Financial Statements of Zoetis Inc. (the animal health business unit of Pfizer Inc.): |
||||
F-2 | ||||
Combined Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009 |
F-3 | |||
F-4 | ||||
F-5 | ||||
Combined Statements of Equity for the Years Ended December 31, 2011, 2010 and 2009 |
F-6 | |||
Combined Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009 |
F-7 | |||
F-8 | ||||
Unaudited Condensed Combined Financial Statements of Zoetis Inc. (the animal health business unit of Pfizer Inc.): |
||||
Review Report of Independent Registered Public Accounting Firm |
F-51 | |||
F-52 | ||||
F-53 | ||||
Unaudited Condensed Combined Balance Sheets as of September 30, 2012 and December 31, 2011 |
F-54 | |||
F-55 | ||||
F-56 | ||||
F-57 |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
Pfizer Inc.:
We have audited the accompanying combined balance sheets of Zoetis Inc., (the animal health business unit of Pfizer Inc., (the Company)) as of December 31, 2011 and 2010, and the related combined statements of operations, comprehensive income/(loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These combined financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
August 10, 2012
F-2
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 (a) | 2010 (a) | 2009 (a) | |||||||||
Revenues |
$ | 4,233 | $ | 3,582 | $ | 2,760 | ||||||
Costs and expenses: |
||||||||||||
Cost of sales ( b) |
1,652 | 1,444 | 1,078 | |||||||||
Selling, general and administrative expenses (b) |
1,453 | 1,382 | 1,066 | |||||||||
Research and development expenses (b) |
427 | 411 | 368 | |||||||||
Amortization of intangible assets |
69 | 58 | 33 | |||||||||
Restructuring charges and certain acquisition-related costs |
154 | 202 | 340 | |||||||||
Other (income)/deductionsnet |
84 | (93 | ) | 23 | ||||||||
Income/(loss) before provision/(benefit) for taxes on income |
394 | 178 | (148) | |||||||||
Provision/(benefit) for taxes on income/(loss) |
146 | 67 | (47) | |||||||||
Net income/(loss) before allocation to noncontrolling interests |
248 | 111 | (101) | |||||||||
Less: Net income/(loss) attributable to noncontrolling interests |
3 | 1 | (1) | |||||||||
Net income/(loss) attributable to Zoetis |
$ | 245 | $ | 110 | $ | (100) | ||||||
(a) |
Includes revenues and expenses from acquisitions from the acquisition date, see Note 2. Basis of Presentation. |
(b) |
Exclusive of amortization of intangible assets, except as disclosed in Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets. |
See Notes to Combined Financial Statements, which are an integral part of these statements.
F-3
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
Net income/(loss) before allocation to noncontrolling interests |
$ | 248 | $ | 111 | $ | (101) | ||||||
Other comprehensive income/(loss), net of taxes: |
||||||||||||
Foreign currency translation adjustments, net ( a ) |
4 | (121 | ) | 210 | ||||||||
Benefit plans: Actuarial gains/(losses), net ( a ) |
5 | (8 | ) | (2) | ||||||||
Total other comprehensive income/(loss), net of taxes |
9 | (129 | ) | 208 | ||||||||
Comprehensive income/(loss) before allocation to noncontrolling interests |
257 | (18 | ) | 107 | ||||||||
Less: Comprehensive income/(loss) attributable to noncontrolling interests |
3 | 1 | (1) | |||||||||
Comprehensive income/(loss) attributable to Zoetis |
$ | 254 | $ | (19 | ) | $ | 108 | |||||
(a) |
Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. |
See Notes to Combined Financial Statements, which are an integral part of these statements.
F-4
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
COMBINED BALANCE SHEETS
As of December 31, | ||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 79 | $ | 63 | ||||
Accounts receivable, less allowance for doubtful accounts: 2011$29 and 2010$26 |
871 | 773 | ||||||
Inventories |
1,063 | 995 | ||||||
Current deferred tax assets |
96 | 97 | ||||||
Other current assets |
202 | 188 | ||||||
Total current assets |
2,311 | 2,116 | ||||||
Property, plant and equipment, less accumulated depreciation |
1,243 | 1,148 | ||||||
Identifiable intangible assets, less accumulated amortization |
928 | 924 | ||||||
Goodwill |
989 | 934 | ||||||
Noncurrent deferred tax assets |
143 | 70 | ||||||
Other noncurrent assets |
97 | 92 | ||||||
Total assets |
$ | 5,711 | $ | 5,284 | ||||
Liabilities and Equity |
||||||||
Current portion of allocated long-term debt |
$ | | $ | 38 | ||||
Accounts payable |
214 | 206 | ||||||
Income taxes payable |
18 | 24 | ||||||
Accrued compensation and related items |
150 | 144 | ||||||
Other current liabilities |
461 | 396 | ||||||
Total current liabilities |
843 | 808 | ||||||
Allocated long-term debt |
575 | 673 | ||||||
Noncurrent deferred tax liabilities |
311 | 218 | ||||||
Other taxes payable |
122 | 100 | ||||||
Other noncurrent liabilities |
124 | 141 | ||||||
Total liabilities |
1,975 | 1,940 | ||||||
Commitments and Contingencies |
||||||||
Business unit equity |
3,785 | 3,418 | ||||||
Accumulated other comprehensive loss |
(65) | (74) | ||||||
Total Zoetis equity |
3,720 | 3,344 | ||||||
Equity attributable to noncontrolling interests |
16 | | ||||||
Total equity |
3,736 | 3,344 | ||||||
Total liabilities and equity |
$ | 5,711 | $ | 5,284 | ||||
|
See Notes to Combined Financial Statements, which are an integral part of these statements.
F-5
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
COMBINED STATEMENTS OF EQUITY
Zoetis |
Equity Attributable to Noncontrolling Interests |
Total Equity |
||||||||||||||||||
( MILLIONS OF DOLLARS ) |
Business
Unit
|
Accumulated Other Comp.
Income/
|
Total Business
Unit
|
|||||||||||||||||
Balance, December 31, 2008 |
$ | 2,525 | $ | (153 | ) | $ | 2,372 | $ | | $ | 2,372 | |||||||||
Comprehensive income/(loss) |
(100 | ) | 208 | 108 | (1 | ) | 107 | |||||||||||||
Share-based compensation expense |
15 | | 15 | | 15 | |||||||||||||||
Acquisition of Fort Dodge Animal Health |
| | | 4 | 4 | |||||||||||||||
Dividends declared and paid |
(101 | ) | | (101 | ) | | (101) | |||||||||||||
Net transfersPfizer (a) |
1,177 | | 1,177 | | 1,177 | |||||||||||||||
|
||||||||||||||||||||
Balance, December 31, 2009 |
3,516 | 55 | 3,571 | 3 | 3,574 | |||||||||||||||
Comprehensive income/(loss) |
110 | (129 | ) | (19 | ) | 1 | (18) | |||||||||||||
Share-based compensation expense |
16 | | 16 | | 16 | |||||||||||||||
Dividends declared and paid |
(206 | ) | | (206 | ) | (1 | ) | (207) | ||||||||||||
Net transfers between Pfizer and noncontrolling interests |
1 | | 1 | (1 | ) | | ||||||||||||||
Purchase of subsidiary shares from noncontrolling interests |
(1 | ) | | (1 | ) | (2 | ) | (3) | ||||||||||||
Net transfersPfizer |
(18 | ) | | (18 | ) | | (18) | |||||||||||||
|
||||||||||||||||||||
Balance, December 31, 2010 |
3,418 | (74 | ) | 3,344 | | 3,344 | ||||||||||||||
Comprehensive income |
245 | 9 | 254 | 3 | 257 | |||||||||||||||
Share-based compensation expense |
19 | | 19 | | 19 | |||||||||||||||
Investment in Jilin Pfizer Guoyuan Animal Health |
| | | 16 | 16 | |||||||||||||||
Dividends declared and paid |
(416 | ) | | (416 | ) | | (416) | |||||||||||||
Net transfers between Pfizer and noncontrolling interests |
3 | | 3 | (3 | ) | | ||||||||||||||
Net transfersPfizer (a) |
516 | | 516 | | 516 | |||||||||||||||
|
||||||||||||||||||||
Balance, December 31, 2011 |
$ | 3,785 | $ | (65 | ) | $ | 3,720 | $ | 16 | $ | 3,736 | |||||||||
|
(a) |
For 2009, see Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health and for 2011 , see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health. |
See Notes to Combined Financial Statements, which are an integral part of these statements.
F-6
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
COMBINED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
Operating activities |
||||||||||||
Net income/(loss) before allocation to noncontrolling interests |
$ | 248 | $ | 111 | $ | (101) | ||||||
Adjustments to reconcile net income/(loss) before noncontrolling interests to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization expense |
205 | 185 | 124 | |||||||||
Share-based compensation expense |
19 | 16 | 15 | |||||||||
Asset write-offs and impairments |
78 | 16 | 29 | |||||||||
Net gains on sales of assets |
(1 | ) | (101 | ) | (2) | |||||||
Deferred taxes |
65 | (68 | ) | (334) | ||||||||
Other non-cash adjustments |
| (5 | ) | 10 | ||||||||
Other changes in assets and liabilities, net of acquisitions and divestitures: |
||||||||||||
Accounts receivable |
(85 | ) | 30 | 112 | ||||||||
Inventories |
40 | 117 | (16) | |||||||||
Other assets |
11 | (19 | ) | 29 | ||||||||
Accounts payable |
(16 | ) | 25 | 38 | ||||||||
Other liabilities |
(15 | ) | 5 | 172 | ||||||||
Other tax accounts, net |
(52 | ) | (58 | ) | 22 | |||||||
|
||||||||||||
Net cash provided by operating activities |
497 | 254 | 98 | |||||||||
|
||||||||||||
Investing activities |
||||||||||||
Purchases of property, plant and equipment |
(135 | ) | (124 | ) | (135) | |||||||
Net proceeds from sales of assets |
34 | 203 | 572 | |||||||||
Acquisitions, net of cash acquired |
(345 | ) | (81 | ) | (2,254) | |||||||
Other investing activities |
(3 | ) | (7 | ) | (4) | |||||||
|
||||||||||||
Net cash used in investing activities |
(449 | ) | (9 | ) | (1,821) | |||||||
|
||||||||||||
Financing activities |
||||||||||||
Allocated proceeds from issuances of long-term debt |
| | 719 | |||||||||
Allocated principal payments on long-term debt |
(143 | ) | | | ||||||||
Cash dividends paid (a) |
(416 | ) | (207 | ) | (101) | |||||||
Purchase of subsidiary shares from noncontrolling interests |
| (3 | ) | | ||||||||
Net financing activities with Pfizer |
529 | (67 | ) | 1,205 | ||||||||
|
||||||||||||
Net cash provided by/(used in) financing activities |
(30 | ) | (277 | ) | 1,823 | |||||||
|
||||||||||||
Effect of exchange-rate changes on cash and cash equivalents |
(2 | ) | (4 | ) | (7) | |||||||
|
||||||||||||
Net increase/(decrease) in cash and cash equivalents |
16 | (36 | ) | 93 | ||||||||
Cash and cash equivalents, as of beginning of year |
63 | 99 | 6 | |||||||||
|
||||||||||||
Cash and cash equivalents, as of end of year |
$ | 79 | $ | 63 | $ | 99 | ||||||
Supplemental cash flow information |
||||||||||||
Cash paid during the period for: |
||||||||||||
Income taxes, net |
$ | 142 | $ | 209 | $ | 264 | ||||||
Interest |
$ | 37 | $ | 37 | $ | | ||||||
|
(a) |
Payments to other non-Zoetis entities. |
See Notes to Combined Financial Statements, which are an integral part of these statements.
F-7
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Business Description
The accompanying combined financial statements include the accounts of all operations that comprise the animal health operations of Pfizer Inc. (collectively, Zoetis, the company, we, us and our). We are a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals.
We organize and operate our business in four geographic regions: the United States (U.S.); Europe/Africa/Middle East (EuAfME); Canada/Latin America (CLAR); and Asia/Pacific (APAC).
We market our products in more than 120 countries, including developed markets and emerging markets. Our revenues are mostly generated in the U.S. and EuAfME. We have a diversified business, marketing products across eight core species: cattle, swine, poultry, fish and sheep (collectively, livestock) and dogs, cats and horses (collectively, companion animals) and within five major product categories (vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceuticals).
Pfizer formed Zoetis to ultimately acquire, own, and operate the animal health operations of Pfizer Inc., (Pfizer), which are set forth in these combined financial statements. See also Note 2. Basis of Presentation . As part of the potential separation of the animal health operations from Pfizer, Pfizer expects to transfer substantially all of its animal health business to Zoetis.
2. Basis of Presentation
The combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and present the combined balance sheets of Zoetis as of December 31, 2011 and 2010 and the related combined statements of operations, comprehensive income/(loss), equity and cash flows of Zoetis for each of the years in the three-year period ended December 31, 2011. For operations outside the U.S., the combined financial information is included as of and for the fiscal year ended November 30 for each year presented. All significant intercompany balances and transactions between the legal entities that comprise Zoetis have been eliminated. Balances due to or due from Pfizer have been presented as a component of business unit equity. For those subsidiaries included in these combined financial statements where our ownership is less than 100%, the minority interests have been shown in equity as Equity attributable to noncontrolling interests .
On January 31, 2011 (the acquisition date), Pfizer completed the tender offer for the outstanding shares of common stock of King Pharmaceuticals, Inc. (King), including the King Animal Health business (KAH), and acquired approximately 92.5% of Kings outstanding shares. On February 28, 2011, Pfizer acquired all of the remaining shares of King. Commencing from the acquisition date, our combined financial statements include the assets, liabilities, operations and cash flows associated with KAH. As a result, and in accordance with our domestic and international reporting periods, our combined financial statements for the year ended December 31, 2011 reflect approximately eleven months of the U.S. operations of KAH and approximately ten months of the international operations of KAH. For additional information, see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health .
On October 15, 2009 (the acquisition date), Pfizer acquired all of the outstanding equity of Wyeth, including the Fort Dodge Animal Health business (FDAH). Commencing from the acquisition date, our combined financial statements include the assets, liabilities, operations and cash flows associated with FDAH. As a result, and in accordance with our domestic and international reporting periods, our combined financial statements for the year ended December 31, 2009 reflect approximately two-and-a-half months of the U.S. operations of FDAH and
F-8
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
approximately one-and-a-half months of the international operations of FDAH. For additional information, see Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health.
The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. These combined financial statements do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as a standalone public company during the periods presented.
|
The combined statements of operations include allocations from certain support functions (Enabling Functions) that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods (e.g., using third-party sales, headcount, etc.), depending on the nature of the services. |
We allocated the costs associated with business technology mostly using proportional allocation methods; for facilities and human resources, predominately using proportional allocation methods; and for legal and finance, mostly using specific identification. In all cases, for support function costs where proportional allocation methods were used, we determined whether the costs are primarily influenced by headcount (such as a significant majority of facilities and human resources costs) or by the size of the business (such as most business technology costs) and we also determined whether the associated scope of those services provided are global, regional or local. Based on those analyses, we then allocated the costs based on our share of worldwide revenues, domestic revenues, international revenues, regional revenues, country revenues, worldwide headcount, country headcount or site headcount, as appropriate.
As a result, costs associated with business technology and legal that were not specifically identified were mostly allocated based on revenue drivers and, to a lesser extent, based on headcount drivers; costs associated with finance that were not specifically identified were all allocated based on revenue drivers; and costs associated with facilities and human resources that were not specifically identified were predominately allocated based on headcount drivers.
|
The combined statements of operations include allocations of certain manufacturing and supply costs incurred by manufacturing plants that are shared with other Pfizer business units, Pfizers global external supply group and Pfizers global logistics and support group (collectively, PGS). These costs may include manufacturing variances and changes in the standard costs of inventory, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods, such as animal health identified manufacturing costs, depending on the nature of the costs. |
|
The combined statements of operations also include allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives, see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives . |
|
The combined statements of operations include an allocation of transaction costs related to acquired businesses. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of transaction costs, see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives . |
F-9
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
|
The combined statements of operations include an allocation of share-based compensation expense and certain other compensation expense items, such as certain fringe benefit expenses, maintained on a centralized basis within Pfizer. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of share-based payments, see Note 14. Share-Based Payments . |
|
The combined balance sheets reflect all of the assets and liabilities of Pfizer that are either specifically identifiable or are directly attributable to Zoetis and its operations. For benefit plans, the combined balance sheets only include the assets and liabilities of benefit plans dedicated to animal health employees. For debt, see below. |
|
The combined financial statements include an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt and associated interest-related expenses, including the effect of hedging activities, have been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none is specifically related to our operations. |
Management believes that the allocations are a reasonable reflection of the services received or the costs incurred on behalf of Zoetis and its operations and that the combined statements of operations reflect all of the costs of the animal health business of Pfizer. The allocated expenses from Pfizer include the following:
|
Enabling Functions operating expensesApproximately $335 million in 2011, $345 million in 2010 and $291 million in 2009 ($3 million, $6 million and $0 million in Cost of sales ; $268 million, $260 million and $219 million in Selling, general and administrative expenses ; and $64 million, $79 million and $72 million in Research and development expenses ). |
|
PGS manufacturing costsApproximately $34 million in 2011, $42 million in 2010 and $37 million in 2009 (in Cost of sales). |
|
Restructuring charges and certain acquisition-related costsApproximately $70 million in 2011, $104 million in 2010 and $121 million in 2009 (in Restructuring charges and certain acquisition-related costs ). |
|
Other costs associated with cost reduction/productivity initiativesAdditional depreciation associated with asset restructuringApproximately $20 million in 2011, $17 million in 2010 and $43 million in 2009 ($0 million, $0 million and $39 million in Cost of sales ; $1 million, $17 million and $4 million in Selling, general and administrative expenses ; and $19 million, $0 million and $0 million in Research and development expenses ). |
|
Other costs associated with cost reduction/productivity initiativesImplementation costsApproximately $14 million in 2009 ($8 million in Cost of sales and $6 million in Selling, general and administrative expenses ). |
|
Share-based compensation expenseApproximately $25 million in 2011, $22 million in 2010 and $22 million in 2009 ($5 million, $3 million and $4 million in Cost of sales ; $16 million, $15 million and $13 million in Selling, general and administrative expenses ; and $4 million, $4 million and $5 million in Research and development expenses ). |
|
Transaction costsApproximately $2 million in 2011, $1 million in 2010 and $23 million in 2009 (in Restructuring charges and certain acquisition-related costs ). |
|
Compensation-related expensesApproximately $6 million in 2011, $17 million in 2010 and $43 million in 2009 ($2 million, $5 million and $11 million in Cost of sales ; $3 million, $7 million and $21 million in Selling, general and administrative expenses ; and $1 million, $5 million and $11 million in Research and development expenses ). |
|
Interest expenseApproximately $36 million in 2011, $37 million in 2010 and $26 million in 2009 (in Other (income)/deductionsnet) . |
F-10
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
The income tax provision/(benefit) in the combined statements of operations has been calculated as if Zoetis filed a separate tax return.
We participate in Pfizers centralized cash management system and generally all excess cash is transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities are funded as needed by Pfizer. We also participate in Pfizers centralized hedging and offsetting programs. As such, in the combined statements of operations, we include the impact of Pfizers derivative financial instruments used for offsetting changes in foreign currency rates net of the related exchange gains and losses for the portion that is deemed to be associated with the animal health operations. Such gains and losses were not material to the combined financial statements for all periods presented.
All balances and transactions among Zoetis and Pfizer and its subsidiaries, which can include dividends as well as intercompany activities, are shown in business unit equity in the combined balance sheets, for all periods presented. As the books and records of Zoetis are not kept on a separate company basis, the determination of the average net balance due to or from Pfizer is not practicable. See also Note 17. Related Party Transactions.
3. Significant Accounting Policies
A. New Accounting Standards
As of January 1, 2011, we adopted the provisions of the new amendment to the guidelines that address the accounting for multiple-deliverable arrangements to enable companies to account for certain products or services separately rather than as a combined unit. The adoption did not have a significant impact on our combined financial statements.
B. Estimates and Assumptions
In preparing the combined financial statements, we use certain estimates and assumptions that affect reported amounts and disclosures, including amounts recorded in connection with acquisitions. These estimates and underlying assumptions can impact all elements of our combined financial statements. For example, in the combined statements of operations, in addition to estimates used in determining the allocations of costs and expenses from Pfizer, estimates are used when accounting for deductions from revenues (such as rebates, sales allowances, product returns and discounts), determining cost of sales, allocating cost in the form of depreciation and amortization and estimating restructuring charges and the impact of contingencies. On the combined balance sheets, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, goodwill and other identifiable intangible assets, and estimates are used in determining the reported amounts of liabilities, such as taxes payable, benefit obligations, the impact of contingencies, deductions from revenues and restructuring reserves, all of which also impact the combined statements of operations.
Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable but that can be inherently uncertain and unpredictable. If our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted.
As future events and their effects cannot be determined with precision, our estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. We are subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in competition, litigation, legislation and regulations. We regularly
F-11
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
evaluate our estimates and assumptions using historical experience and expectations about the future. We adjust our estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our combined financial statements on a prospective basis unless they are required to be treated retrospectively under relevant accounting standards. It is possible that others, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
C. Acquisitions
Our combined financial statements include the operations of acquired businesses from the date of acquisition. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in-process research and development (IPR&D) be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When we acquire net assets that do not constitute a business as defined in U.S. GAAP, no goodwill is recognized.
Amounts recorded for acquisitions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions .
D. Fair Value
Certain assets and liabilities are required to be measured at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively in the initial recognition of net assets acquired in a business combination. Fair value is estimated using an exit price approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of assets and, for liabilities, assuming that the risk of non-performance will be the same before and after the transfer.
When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following approaches:
|
Income approach, which is based on the present value of a future stream of net cash flows. |
|
Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities. |
|
Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence. |
These fair value methodologies depend on the following types of inputs:
|
Quoted prices for identical assets or liabilities in active markets (Level 1 inputs). |
|
Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs). |
|
Unobservable inputs that reflect estimates and assumptions (Level 3 inputs). |
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions .
F-12
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
E. Foreign Currency Translation
For most of our international operations, local currencies have been determined to be the functional currencies. We translate functional currency assets and liabilities to their U.S. dollar equivalents at exchange rates in effect at the balance sheet date and we translate functional currency income and expense amounts to their U.S. dollar equivalents at average exchange rates for the period. The U.S. dollar effects that arise from changing translation rates are recorded in Other comprehensive income/(loss), net of taxes. The effects of converting non-functional currency assets and liabilities into the functional currency are recorded in Other (income)/deductionsnet. For operations in highly inflationary economies, we translate monetary items at rates in effect at the balance sheet date, with translation adjustments recorded in Other (income)/deductionsnet , and we translate non-monetary items at historical rates.
F. Revenues, Deductions from Revenues and the Allowance for Doubtful Accounts
We record revenues from product sales when the goods are shipped and title and risk of loss passes to the customer. At the time of sale, we also record estimates for a variety of deductions from revenues, such as rebates, sales allowances, product returns and discounts. Sales deductions are estimated and recorded at the time that related revenues are recorded except for sales incentives, which are estimated and recorded at the time the related revenues are recorded or when the incentive is offered, whichever is later. As applicable, our estimates are generally based on contractual terms or historical experience, adjusted as necessary to reflect our expectations about the future. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenues.
As of December 31, 2011 and 2010, accruals for sales deductions included in Other current liabilities are approximately $122 million and $107 million, respectively.
We also record estimates for bad debts. We periodically assess the adequacy of the allowance for doubtful accounts by evaluating the collectability of outstanding receivables based on such factors such as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
As of December 31, 2011 and 2010, accruals for the allowance for doubtful accounts included in Accounts receivable, less allowance for doubtful accounts are approximately $29 million and $26 million, respectively.
Amounts recorded for sales deductions and bad debts can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
G. Cost of Sales and Inventories
Inventories are carried at the lower of cost or market. The cost of finished goods, work-in-process and raw materials is determined using average actual cost. We regularly review our inventories for impairment, and adjustments are recorded when necessary.
H. Selling, General and Administrative Expenses
Selling, general and administrative costs are expensed as incurred. Among other things, these expenses include the internal and external costs of marketing, advertising, and shipping and handling as well as certain costs related to business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others.
F-13
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Advertising expenses relating to production costs are expensed as incurred, and the costs of space in publications are expensed when the related advertising occurs. Advertising and promotion expenses totaled approximately $134 million in 2011, $132 million in 2010 and $87 million in 2009.
Shipping and handling costs, including warehousing expenses, totaled approximately $66 million in 2011, $46 million in 2010 and $29 million in 2009.
I. Research and Development Expenses
Research and development (R&D) costs are expensed as incurred. Research is the effort associated with the discovery of new knowledge that will be useful in developing a new product or in significantly improving an existing product. Development is the implementation of the research findings. Before a compound receives regulatory approval, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Once a compound receives regulatory approval in a major market, we record any milestone payments in Identifiable intangible assets, less accumulated amortization and, unless the assets are determined to have an indefinite life, we amortize them on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter.
J. Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets
Long-lived assets include:
|
Goodwill Goodwill represents the excess of the consideration transferred for an acquired business over the assigned values of its net assets. Goodwill is not amortized. |
|
Identifiable intangible assets, less accumulated amortization These acquired assets are recorded at our cost. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Identifiable intangible assets with indefinite lives that are associated with marketed products are not amortized until a useful life can be determined. Identifiable intangible assets associated with IPR&D projects are not amortized until regulatory approval is obtained. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated. |
|
Property, plant and equipment, less accumulated depreciation These assets are recorded at our cost and are increased by the cost of any significant improvements after purchase. Property, plant and equipment assets, other than land and construction-in-progress, are depreciated on a straight-line basis over the estimated useful life of the individual assets. Depreciation begins when the asset is ready for its intended use. For tax purposes, accelerated depreciation methods are used as allowed by tax laws. |
Amortization expense related to finite-lived identifiable intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property are included in Amortization of intangible assets as they benefit multiple business functions. Amortization expense related to intangible assets that are associated with a single function and depreciation of property, plant and equipment are included in Cost of sales , Selling, general and administrative expenses and Research and development expenses , as appropriate.
F-14
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
We review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever impairment indicators are present. In addition, we perform detailed impairment testing for goodwill and indefinite-lived assets at least annually. When necessary, we record charges for impairments. Specifically:
|
For finite-lived identifiable intangible assets, such as developed technology rights, and for other long-lived assets, such as property, plant and equipment, whenever impairment indicators are present, we calculate the undiscounted value of the projected cash flows associated with the asset, or asset group, and compare this estimated amount to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate. |
|
For indefinite-lived identifiable intangible assets, such as brands and IPR&D assets, annually, and whenever impairment indicators are present, we determine the fair value of the asset and record an impairment loss, if any, for the excess of book value over fair value. In addition, in all cases of an impairment review other than for IPR&D assets, we re-evaluate whether continuing to characterize the asset as indefinite-lived is appropriate. |
|
For goodwill, annually and whenever impairment indicators are present, we determine the fair value of each reporting unit and compare the fair value to its estimated book value. If the carrying amount is found to be greater, we then determine the implied fair value of goodwill by subtracting the fair value of all the identifiable net assets other than goodwill from the fair value of the reporting unit and record an impairment loss for the excess, if any, of book value of goodwill over the implied fair value. |
Impairment reviews can involve a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
K. Restructuring Charges and Certain Acquisition-Related Costs
We may incur restructuring charges in connection with acquisitions when we implement plans to restructure and integrate the acquired operations or in connection with cost-reduction and productivity initiatives. Included in Restructuring charges and certain acquisition-related costs are all restructuring charges and certain costs associated with acquiring and integrating an acquired business. Transaction costs and integration costs are expensed as incurred. Termination costs are a significant component of restructuring charges and are generally recorded when the actions are probable and estimable.
As of December 31, 2011 and 2010, accruals for direct restructuring liabilities included in Other current liabilities are approximately $53 million and $59 million, respectively, and included in Other noncurrent liabilities are approximately $28 million and $42 million, respectively.
Amounts recorded for restructuring charges and other associated costs can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions .
L. 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.
F-15
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
M. Deferred Tax Assets and Liabilities and Income Tax Contingencies
Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws. We provide a valuation allowance when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies.
We account for income tax contingencies using a benefit recognition model. If we consider that a tax position is more likely than not to be sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. Under the benefit recognition model, if the initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit: (i) if there are changes in tax law, analogous case law or there is new information that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) if the statute of limitations expires; or (iii) if there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, changes in tax law or receipt of new information that would either increase or decrease the technical merits of a position relative to the more-likely-than-not standard. Liabilities associated with uncertain tax positions are classified as current only when we expect to pay cash within the next 12 months. Interest and penalties, if any, are recorded in Provision/(benefit) for taxes on income/(loss) and are classified on our combined balance sheet with the related tax liability.
Amounts recorded for valuation allowances and income tax contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
N. Benefit Plans
Generally, most of our employees are eligible to participate in Pfizers pension plans. The combined statements of operations include all of the benefit plan expenses attributable to the animal health operations of Pfizer, including expenses associated with pension plans, postretirement plans and defined contribution plans. The expenses include allocations of direct expenses as well as expenses that have been deemed attributable to the animal health operations. The combined balance sheets include the benefit plan assets and liabilities of only those plans that are dedicated to animal health employees.
For the dedicated plans, we recognize the overfunded or underfunded status of defined benefit plans as an asset or liability on the combined balance sheets and the obligations generally are measured at the actuarial present value of all benefits attributable to employee service rendered, as provided by the applicable benefit formula. Pension obligations may include assumptions such as long-term rate of return on plan assets, expected employee turnover, participant mortality, and future compensation levels. Plan assets are measured at fair value. Net periodic benefit costs are recognized, as required, into Cost of sales, Selling, general and administrative expenses and Research and development expenses , as appropriate.
Amounts recorded for benefit plans can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
F-16
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
O. Asset Retirement Obligations
We record accruals for the legal obligations associated with the retirement of tangible long-lived assets, including obligations under the doctrine of promissory estoppel and those that are conditioned upon the occurrence of future events. These obligations generally result from the acquisition, construction, development and/or normal operation of long-lived assets. We recognize the fair value of these obligations in the period in which they are incurred by increasing the carrying amount of the related asset. Over time, we recognize expense for the accretion of the liability and for the amortization of the asset.
As of December 31, 2011 and 2010, accruals for direct asset retirement obligations included in Other current liabilities are $1 million and $1 million, respectively, and included in Other noncurrent liabilities are approximately $13 million and $9 million, respectively.
Amounts recorded for asset retirement obligations can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
P. Legal and Environmental Contingencies
We are subject to numerous contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, patent litigation, environmental claims and proceedings, government investigations and guarantees and indemnifications. We record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, we accrue that amount. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, we accrue the lowest amount in the range. We record anticipated recoveries under existing insurance contracts when recovery is assured.
Amounts recorded for contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
Q. Share-Based Payments
Our compensation programs include grants under Pfizers share-based payment plans. All grants under share-based payment programs are accounted for at fair value and such amounts generally are amortized on a straight-line basis over the vesting term to Cost of sales, Selling, general and administrative expenses, and Research and development expenses , as appropriate.
Amounts recorded for share-based compensation can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions .
R. Business Unit Equity
Total business unit equity represents Pfizers equity investment in the company and the net amounts due to or due from Pfizer. Recorded amounts reflect capital contributions and/or dividends as well as the results of operations and other comprehensive income/(loss).
F-17
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
4. Acquisitions, Divestitures and Certain Investments
A. Acquisition of King Animal Health
Description of the Transaction and Fair Value of Consideration Transferred
On January 31, 2011 (the acquisition date), Pfizer completed its tender offer for the outstanding shares of common stock of King, including KAH, at a purchase price of $14.25 per share in cash and acquired approximately 92.5% of the outstanding shares. On February 28, 2011, Pfizer acquired all of the remaining shares of King for $14.25 per share in cash. As a result, the total fair value of consideration transferred by Pfizer for King was approximately $3.6 billion in cash ($3.2 billion, net of cash acquired), of which we estimate that approximately $345 million relates to KAH.
Recording of Assets Acquired and Liabilities Assumed
The assets acquired and liabilities assumed from King for KAH follow:
( MILLIONS OF DOLLARS ) |
Amounts recognized
|
|||
Working capital deficit, excluding inventories (a) |
$(11) | |||
Inventories |
104 | |||
Property, plant and equipment |
94 | |||
Identifiable intangible assets |
130 | |||
Net tax accounts |
(10) | |||
All other noncurrent assets and liabilities, net |
(7) | |||
|
||||
Total identifiable net assets |
300 | |||
Goodwill (b) |
45 | |||
|
||||
Net assets acquired/total consideration transferred |
$345 | |||
|
(a) |
Includes accounts receivable, other current assets, accounts payable and other current liabilities. |
(b) |
Goodwill recognized as of the acquisition date was attributable to all four of our geographic area operating segments. See Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information. |
As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $52 million, virtually all of which was expected to be collected.
As part of the acquisition, we assumed liabilities for environmental, legal and tax matters, as well as guarantees and indemnifications that KAH incurred in the ordinary course of business. As of the acquisition date, we recorded approximately $11 million for environmental matters (including $4 million for asset retirement obligations), $9 million related to legal contingencies and $18 million related to uncertain tax positions.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of KAH includes the following:
|
the expected synergies and other benefits that we believe will result from combining the operations of KAH with the operations of Zoetis; |
|
any intangible assets that do not qualify for separate recognition, as well as future, as yet unidentified projects and products; and |
|
the value of the going-concern element of KAHs existing businesses (the higher rate of return on the assembled collection of net assets than if we had acquired all of the net assets separately). |
F-18
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Goodwill is not amortized and is not deductible for tax purposes (see Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information).
Actual and Pro Forma Impact of Acquisition
In 2011, from the acquisition date of January 31, 2011, KAH contributed $329 million in revenues. We are unable to provide the results of operations attributable to KAH as those operations were substantially integrated by mid-2011.
Assuming that the acquisition of KAH had occurred on January 1, 2010 (rather than the actual acquisition date of January 31, 2011), the unaudited pro forma combined revenues of Zoetis and KAH would have been $4,275 million in 2011 and $3,958 million in 2010. The unaudited pro forma combined revenues are based on the historical financial information of Zoetis and KAH, reflecting Zoetis and KAH revenues for a 12-month period and do not purport to project the future revenues of the combined company. We are unable to provide the unaudited pro forma net income/(loss) attributable to Zoetis for 2011 or 2010 as it is impracticable to determine the full year results of KAH, a former division of King, on a U.S. GAAP basis.
B. Acquisition of Fort Dodge Animal Health
Description of the Transaction and Fair Value of Consideration Transferred
On October 15, 2009 (the acquisition date), Pfizer acquired all of the outstanding equity of Wyeth, including FDAH, in a cash-and-stock transaction, valued at the acquisition date at approximately $68.2 billion, of which we estimate that approximately $2.3 billion relates to FDAH. In connection with the regulatory approval process, we were required to divest certain animal health assets (see Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures) .
Recording of Assets Acquired and Liabilities Assumed
The assets acquired and liabilities assumed from Wyeth for FDAH follow:
( MILLIONS OF DOLLARS ) |
Amounts recognized as of the acquisition date |
|||
Working capital, excluding inventories (a) |
$ 191 | |||
Inventories |
344 | |||
Assets held for sale |
652 | |||
Property, plant and equipment |
394 | |||
Identifiable intangible assets (including $25 million of IPR&D assets) |
444 | |||
Net tax accounts |
(424) | |||
All other noncurrent assets and liabilities, net |
(14) | |||
|
||||
Total identifiable net assets |
1,587 | |||
Goodwill (b) |
738 | |||
|
||||
Net assets acquired |
2,325 | |||
Less: Amounts attributable to noncontrolling interests |
4 | |||
|
||||
Total consideration transferred |
$ 2,321 | |||
|
(a) |
Includes cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities. |
(b) |
Goodwill recognized as of the acquisition date was attributable to all four of our geographic area operating segments. See Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information. |
F-19
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $281 million, of which $20 million was not expected to be collected.
As part of the acquisition, we assumed liabilities for environmental, legal and tax matters, as well as guarantees and indemnifications that FDAH incurred in the ordinary course of business.
|
Environmental Matters All liabilities for environmental matters were measured at fair value and approximated $18 million as of the acquisition date (including $4 million of asset retirement obligations). |
|
Legal Matters Due to the uncertainty of the variables and assumptions involved in assessing the possible outcomes of events related to legal contingencies, an estimate of fair value was not determinable. As such, these contingencies were measured using managements best estimate of probable losses and approximated $14 million as of the acquisition date. |
|
Tax Matters Liabilities for tax matters are not required to be measured at fair value. As such, these contingencies were measured under a benefit recognition model. Net liabilities for income taxes approximated $424 million as of the acquisition date, which included $51 million for uncertain tax positions. |
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of FDAH includes the following:
|
the expected synergies and other benefits that we believe will result from combining the operations of FDAH with the operations of Zoetis; |
|
any intangible assets that do not qualify for separate recognition, as well as future, as yet unidentified projects and products; and |
|
the value of the going-concern element of FDAHs existing businesses (the higher rate of return on the assembled collection of net assets than if we had acquired all of the net assets separately). |
Goodwill is not amortized and is not deductible for tax purposes (see Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information).
Actual and Pro Forma Impact of the Acquisition
In 2009, from the acquisition date of October 15, 2009, FDAH contributed $78 million in revenues and incurred a net loss of $145 million. The loss includes purchase accounting adjustments related to the fair value adjustments for acquisition-date inventory that has been sold ($19 million pre-tax), amortization of identifiable intangible assets and depreciation of fair value adjustments on property, plant and equipment ($9 million pre-tax), and restructuring charges and additional depreciation associated with asset restructuring ($164 million pre-tax).
Assuming that the acquisition of FDAH had occurred on January 1, 2009 (rather than the actual acquisition date of October 15, 2009), without adjusting for assets divested subsequent to acquisition date, the unaudited proforma combined revenues of Zoetis and FDAH would have been $3,628 million. The unaudited pro forma combined revenues are based on the historical financial information of Zoetis and FDAH, reflecting Zoetis and FDAH revenues for a 12-month period and do not purport to project the future revenues of the combined company. We are unable to provide the unaudited pro forma net income/(loss) attributable to Zoetis for 2009 as it is impracticable to determine the full year results of FDAH, a former division of Wyeth, on a U.S. GAAP basis.
F-20
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
C. Other Acquisitions
In December 2010, Pfizer acquired Synbiotics Corporation (Synbiotics), a privately-owned company that was a leader in the development, manufacture and marketing of immunodiagnostic tests for companion and food production animals. The total consideration for this acquisition was approximately $20 million plus $4 million in assumed debt. In connection with this acquisition, we recorded approximately $9 million in Identifiable intangible assets , consisting of $8 million of developed technology rights and $1 million of in-process research and development, and approximately $10 million in Goodwill .
In May 2010, Pfizer acquired Microtek International, Inc. (Microtek), a company focused on delivering aquatic vaccines and diagnostics used in fish farming. The total consideration for this acquisition was approximately $6 million, which consisted of an upfront payment of $4 million and contingent consideration with an estimated acquisition-date fair value of about $2 million. In connection with this acquisition, we recorded approximately $4 million in Identifiable intangible assets , consisting of approximately $2 million in developed technology rights, and $2 million of in-process research and development.
In December 2009 (fiscal 2010), Pfizer acquired Vetnex Animal Health Ltd. (Vetnex), a privately-owned company focusing on poultry, livestock and companion animal healthcare in India. The total consideration for this acquisition was approximately $57 million plus $8 million in assumed debt. In connection with this acquisition, we recorded approximately $47 million in Identifiable intangible assets , consisting of approximately $38 million of developed technology rights and $9 million of in-process research and development, and approximately $19 million in Goodwill .
In August 2009, Pfizer acquired a business from Qvax Pty Ltd. (Qvax), a privately-owned company focusing on cattle vaccines. The total consideration for this acquisition was approximately $5 million. In connection with this acquisition, we recorded approximately $4 million in Identifiable intangible assets , consisting of approximately $3 million of developed technology rights and $1 million of in-process research and development, and approximately $1 million in Goodwill .
D. Divestitures
In connection with the regulatory approval process of the Pfizer acquisition of Wyeth on October 15, 2009 (the acquisition date), we were required to divest certain animal health assets:
|
In 2009, immediately following the acquisition date, we sold certain animal health products in the U.S., Canada, and to a lesser extent, Australia and South Africa, including intellectual property rights exclusive to North America as well as some manufacturing facilities and finished goods inventory. The transaction as it related to Europe closed in 2010. The product portfolio was composed of both livestock and companion animal products, virtually all of which were acquired from legacy Wyeth. The proceeds from the sale were approximately $580 million, net of transaction costs, and we recognized a $2 million gain as most of the assets sold had been recorded at fair value on the acquisition date. In 2010, we recognized a $15 million gain in Other (income)/deductionsnet as a result of the resolution of the contingent consideration as prescribed in the agreement. |
|
In early 2010, we sold certain animal health products in Australia, including intellectual property rights exclusive to Australia as well as a biological manufacturing facility and finished goods inventory. The product portfolio was composed of livestock products, all acquired from legacy Wyeth. The proceeds from the sale were approximately $10 million, net of transaction costs, and we recognized a $19 million loss on the sale in Other (income)/deductionsnet , related to the inventory included in the transaction. |
F-21
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
|
In mid-2010, we sold certain animal health products in Europe, including intellectual property rights exclusive to Europe as well as a manufacturing facility and finished goods inventory. The product portfolio was composed of both livestock and companion animal products from both legacy Wyeth and legacy Pfizer. The proceeds from the sale were approximately $145 million, net of transaction costs, and we recognized a $71 million gain in Other (income)/deductionsnet on the sale related to the legacy Pfizer assets. In connection with this divestiture, we entered into transitional manufacturing service agreements with the buyer, which included certain purchasing and investment commitments related to the divested manufacturing facility. The incremental charges associated with these commitments were included in Cost of sales ($20 million in 2011 and $5 million in 2010) and Other (income)/deductionsnet ($7 million in 2011). |
|
In mid-2010, we sold certain animal health products in China. The product portfolio was composed of livestock vaccines from legacy Pfizer. The proceeds from the sale were approximately $38 million, net of transaction costs, and we recognized a $37 million gain in Other (income)/deductionsnet on the sale. |
In addition, there were smaller asset sales of products acquired from legacy Wyeth in Mexico (2010) and Korea (2011), for combined proceeds of about $2 million, with no gain or loss included in the financial statements.
All of the divestiture transactions required transitional supply and service agreements, including technology transfers, where necessary and appropriate, as well as other customary ancillary agreements.
It is possible that additional divestitures of animal health assets may be required based on the ongoing regulatory reviews in other jurisdictions, but they are not expected to be significant to our business.
E. Certain Investments
Formation of Jilin Pfizer Guoyuan Animal Health Co., Ltd.
In October 2011, Pfizer and Jilin Guoyuan Animal Health Company, Ltd. created a new company, Jilin Pfizer Guoyuan Animal Health Co., Ltd. (Jilin), which will focus on swine vaccine development and commercialization in China. In exchange for payments of approximately $14 million, we acquired a 45% equity interest in Jilin. We have determined that Jilin is a variable interest entity and that Zoetis is the primary beneficiary of Jilin since Zoetis (i) has the power to direct the activities of Jilin that most significantly impact Jilins economic performance, (ii) has the right to appoint the majority of the board of directors and (iii) has the obligation to absorb losses of Jilin that could potentially be significant to Jilin and the right to receive benefits from Jilin that could potentially be significant to Jilin. As such, since the formation of Jilin, we have included all of the operating results, assets, liabilities and cash flows of Jilin in our combined financial statements. The 55% interest held by Jilin Guoyuan Animal Health Company is reflected in our combined balance sheet as a noncontrolling interest. In connection with this investment, we recorded approximately $3 million in Identifiable intangible assets , consisting of a manufacturing license and an industrial land-use right in China, and approximately $10 million in Goodwill .
5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
The combined statements of operations include significant costs associated with Pfizers cost-reduction initiatives (several programs initiated since 2005) and the acquisitions of FDAH on October 15, 2009 and KAH on January 31, 2011. The expenses include direct costs and charges as well as an allocation of indirect costs and
F-22
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
charges that have been deemed attributable to the operations of the company. The combined balance sheets reflect the accrued restructuring charges directly attributable to the animal health operations. For example:
|
In connection with cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and |
|
In connection with acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, and restructuring the combined company, which may include charges related to employees, assets and activities that will not continue in the combined company. |
All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as support functions such as business technology, shared services and corporate operations.
The components of costs incurred in connection with acquisitions and cost-reduction/productivity initiatives follow:
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
Restructuring Charges and Certain Acquisition-Related Costs: |
||||||||||||
Integration costs (a) |
$ | 30 | $ | 43 | $ | 31 | ||||||
Restructuring charges: (b) |
||||||||||||
Employee termination costs |
53 | 15 | 160 | |||||||||
Asset impairment charges |
| 5 | 11 | |||||||||
Exit costs |
1 | 35 | 17 | |||||||||
|
||||||||||||
Total Direct |
84 | 98 | 219 | |||||||||
|
||||||||||||
Transaction costs (c) |
2 | 1 | 23 | |||||||||
Integration costs (a) |
41 | 49 | 15 | |||||||||
Restructuring charges: (b) |
||||||||||||
Employee termination costs |
20 | 25 | 47 | |||||||||
Asset impairment charges |
7 | 13 | 21 | |||||||||
Exit costs |
| 16 | 15 | |||||||||
|
||||||||||||
Total Allocated |
70 | 104 | 121 | |||||||||
|
||||||||||||
Total Restructuring charges and certain acquisition-related costs |
154 | 202 | 340 | |||||||||
Other Costs Associated with Cost-Reduction/Productivity Initiatives: |
||||||||||||
Additional depreciation associated with asset restructuringdirect (d) |
9 | | | |||||||||
Additional depreciation associated with asset restructuringallocated (d) |
20 | 17 | 43 | |||||||||
Implementation costsdirect (e) |
3 | | 9 | |||||||||
Implementation costsallocated (e) |
| | 14 | |||||||||
|
||||||||||||
Total costs associated with acquisitions and cost-reduction/productivity initiatives |
$ | 186 | $ | 219 | $ | 406 | ||||||
|
(a) |
Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes. |
(b) |
Restructuring charges are primarily related to the integration of KAH in 2011 and FDAH in 2009. |
F-23
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
The direct restructuring charges are associated with the following:
|
2011 DirectU.S. ($2 million), EuAfME ($33 million), CLAR ($2 million), APAC ($2 million income) and manufacturing/research/corporate ($19 million). |
|
2010 DirectU.S. ($14 million income), EuAfME ($24 million), CLAR ($4 million), APAC ($10 million) and manufacturing/research/corporate ($31 million). |
|
2009 DirectU.S. ($77 million), EuAfME ($65 million), CLAR ($6 million), APAC ($13 million) and manufacturing/research/corporate ($27 million). |
(c) |
Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services, including in 2009, an allocation of fees related to Pfizer debt used to partially fund the acquisition of Wyeth. |
(d) |
Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions. In 2011, included in Cost of sales ($6 million), Selling, general and administrative expenses ($4 million) and Research and development expenses ($19 million). In 2010, included in Selling, general and administrative expenses ($17 million). In 2009, included in Cost of sales ($39 million) and Selling, general and administrative expenses ($4 million). |
(e) |
Implementation costs, represent external, incremental costs directly related to implementing cost-reduction/productivity initiatives, and primarily include expenditures related to system and process standardization and the expansion of shared services . In 2011, included in Selling, general and administrative expenses ($2 million) and Research and development expenses ($1 million). In 2009, included in Cost of sales ($14 million), Selling, general and administrative expenses ($7 million) and Research and development expenses ($2 million). |
The components and activity of our direct restructuring charges identified with Zoetis follow:
( MILLIONS OF DOLLARS ) |
Employee Termination Costs |
Asset Impairment Charges |
Exit
Costs |
Accrual | ||||||||||||
Balance, December 31, 2008 |
$ | 26 | $ | | $ | | $ | 26 | ||||||||
Provision |
160 | 11 | 17 | 188 | ||||||||||||
Utilization and other (a) |
(6 | ) | (11 | ) | (12 | ) | (29) | |||||||||
Balance, December 31, 2009 |
180 | | 5 | 185 | ||||||||||||
Provision |
15 | 5 | 35 | 55 | ||||||||||||
Utilization and other (a) |
(105 | ) | (5 | ) | (29 | ) | (139) | |||||||||
Balance, December 31, 2010 (b) |
90 | | 11 | 101 | ||||||||||||
Provision |
53 | | 1 | 54 | ||||||||||||
Utilization and other (a) |
(73 | ) | | (1 | ) | (74) | ||||||||||
Balance, December 31, 2011 (b) |
$ | 70 | $ | | $ | 11 | $ | 81 | ||||||||
|
(a) |
Includes adjustments for foreign currency translation. |
(b) |
At December 31, 2011 and 2010, included in Other current liabilities ($53 million and $59 million, respectively) and Other noncurrent liabilities ($28 million and $42 million, respectively). |
F-24
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
6. Other (Income)/DeductionsNet
The components of Other (income)/deductionsnet follow:
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
Interest expense on allocated long-term debt (a) |
$ | 36 | $ | 37 | $ | 26 | ||||||
Royalty-related income (b) |
(26 | ) | (30 | ) | (5) | |||||||
Net gains on sales of certain assets (c) |
| (104 | ) | (2) | ||||||||
Identifiable intangible asset impairment charges (d) |
69 | | 5 | |||||||||
Other, net |
5 | 4 | (1) | |||||||||
Other (income)/deductionsnet |
$ | 84 | $ | (93 | ) | $ | 23 | |||||
|
(a) |
The interest expense on allocated long-term debt reflects an allocation of Pfizers weighted-average effective interest rate on the Wyeth/FDAH-related acquisition debt, issued in March and June of 2009, of 5.1% in 2011, 5.1% in 2010 and 4.1% in 2009. See also Note 9D. Financial Instruments: Allocated Long-Term Debt. |
(b) |
The increase in royalty-related income in 2011 and 2010 relates to royalty agreements of FDAH, which was acquired in late 2009. |
(c) |
Represents net gains on the sales of certain animal health assets divested in connection with Pfizers 2009 acquisition of Wyeth/FDAH. See also Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures. |
(d) |
In 2011, the asset impairment charges include (i) approximately $30 million of finite-lived intangible assets related to parasiticides technology as a result of declining gross margins and increased competition; (ii) approximately $12 million of finite-lived intangible assets related to equine influenza and tetanus technology due to third-party supply issues; (iii) approximately $10 million of finite-lived intangible assets related to genetic testing services that did not find consumer acceptance; and (iv) approximately $17 million related to in-process research and development projects (acquired from Vetnex in 2010 and from FDAH in 2009), as a result of the termination of the development programs due to a re-assessment of economic viability. In 2009, the asset impairment charges include (i) approximately $3 million write-off related to an equine licensing arrangement, which was required to be surrendered in connection with Pfizers acquisition of Wyeth, and (ii) approximately $2 million write-off of finite-lived intangible assets related to a canine product that could not find consumer acceptance. |
7. Tax Matters
A. Taxes on Income
During the periods presented in the combined financial statements, Zoetis did not generally file separate tax returns, as Zoetis was generally included in the tax grouping of other Pfizer entities within the respective entitys tax jurisdiction. The income tax provision/(benefit) included in these combined financial statements has been calculated using the separate return basis, as if Zoetis filed a separate tax return.
The components of Income/(loss) before provision/(benefit) for taxes on income follow:
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
United States |
$ | (239 | ) | $ | (349 | ) | $ | (542) | ||||
International |
633 | 527 | 394 | |||||||||
|
||||||||||||
Income/(loss) before provision/(benefit) for taxes on income (a), (b) |
$ | 394 | $ | 178 | $ | (148) | ||||||
|
(a) |
2011 vs. 2010The decrease in the domestic loss was primarily due to lower integration and restructuring costs and cost reductions due to both acquisition related synergies and initiatives undertaken during the year, partially offset by the non-recurrence of gains related to FDAH divestitures. The increase in the international income was due to cost reductions which were the result of both acquisition related synergies and initiatives undertaken during the year. |
(b) |
2010 vs. 2009The decrease in the domestic loss in 2010 was primarily due to divestiture gains recorded in connection with the acquisition of FDAH and cost reductions which were the result of both acquisition related synergies and initiatives undertaken during the year. The increase in the international income in 2010 was also due to cost reductions which were the result of both acquisition related synergies and initiatives undertaken during the year. |
F-25
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
The components of Provision/(benefit) for taxes on income/(loss) based on the location of the taxing authorities, follow:
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
United States: |
||||||||||||
Current income taxes: |
||||||||||||
Federal |
$ | (3 | ) | $ | (22 | ) | $ | 9 | ||||
State and local |
(1 | ) | (3 | ) | 1 | |||||||
Deferred income taxes: |
||||||||||||
Federal |
(19 | ) | (11 | ) | (183 | ) | ||||||
State and local |
(3 | ) | (8 | ) | (34 | ) | ||||||
Total U.S. tax benefit (a), (b) |
(26 | ) | (44 | ) | (207 | ) | ||||||
International: |
||||||||||||
Current income taxes |
85 | 160 | 277 | |||||||||
Deferred income taxes |
87 | (49 | ) | (117 | ) | |||||||
Total international tax provision |
172 | 111 | 160 | |||||||||
Provision/(benefit) for taxes on income/(loss) (c), (d) |
$ | 146 | $ | 67 | $ | (47 | ) | |||||
|
(a) |
In 2011, the U.S. deferred income tax benefit is primarily due to a decrease in deferred tax liabilities related to fair value adjustments recorded in connection with our acquisitions of FDAH and KAH and an increase in deferred tax assets for the U.S. research tax credit, partially offset by approximately $9 million, as a result of providing U.S. deferred income taxes on certain current-year funds earned outside of the U.S. that will not be permanently reinvested overseas (See Note 7B. Tax Matters: Deferred Taxes ). In addition, the U.S. current income tax benefit is primarily due to the tax benefit recorded in connection with the settlement of certain audits with the U.S. Internal Revenue Service (See Note 7C. Tax Matters: Tax Contingencies ). |
(b) |
In 2010, the U.S. current income tax benefit is primarily due to the tax benefit recorded in connection with our $25.5 million settlement with the U.S. Internal Revenue Service and the reversal of $7.9 million of accruals related to interest on these unrecognized tax benefits (see Note 7A. Tax Matters: Taxes on Income ). The U.S. deferred income tax benefit is primarily due to a decrease in deferred tax liabilities related to fair value adjustments recorded in connection with our acquisition of FDAH and the establishment of deferred tax assets for the U.S. research tax credit carryforward, partially offset by approximately $21.3 million related to the write-off of deferred tax assets to record the impact of the U.S. healthcare legislation concerning the tax treatment of Medicare Part D subsidy for retiree prescription drug coverage and deferred income tax expense of approximately $39 million as a result of providing U.S. deferred income taxes on certain current-year funds earned outside of the U.S. that will not be permanently reinvested overseas (see Note 7B. Tax Matters: Deferred Taxes ). |
(c) |
In 2009, the deferred tax benefit is primarily due to the establishment of deferred tax assets for net operating losses and tax credit carryforwards and to a lesser extent due to a reduction in deferred tax liabilities related to fair value adjustments recorded in connection with our acquisition of FDAH, partially offset by deferred income tax expense of approximately $31 million as a result of providing U.S. deferred income taxes on certain current-year funds earned outside of the U.S. that will not be permanently reinvested overseas (see Note 7B. Tax Matters: Deferred Taxes ). |
(d) |
In 2011, federal, state and international net tax liabilities assumed or established on the date of the acquisition primarily of KAH are excluded. In 2010 and 2009, federal, state and international net tax liabilities assumed or established on the date of the acquisition primarily of FDAH are excluded (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health and Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health ). |
Settlements and Other Items Impacting Provision/(Benefit) for Taxes on Income/(Loss)
The Provision/(benefit) for taxes on income/(loss) was impacted by the following:
|
2011A tax benefit of approximately $9.5 million, inclusive of interest, related to an audit settlement with the U.S. Internal Revenue Service with respect to the audits of the Wyeth tax returns for the years 2002 through 2005. |
F-26
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
|
2010A tax benefit of approximately $25.5 million recorded in the fourth quarter, related to an audit settlement with the U.S. Internal Revenue Service regarding issues Pfizer had appealed with respect to the audits of the Pfizer Inc. tax returns for the years 2002 through 2005, as well as the Pharmacia audit for the year 2003 through the date of merger with Pfizer (April 16, 2003) and the reversal of approximately $7.9 million of accruals related to interest on these unrecognized tax benefits; and |
|
2010The write-off of approximately $21.3 million of deferred tax assets related to the Medicare Part D subsidy for retiree prescription drug coverage, resulting from the provisions of the U.S. healthcare legislation enacted in March 2010 concerning the tax treatment of that subsidy effective for tax years beginning after December 31, 2012. |
|
2009We incurred certain costs of approximately $18 million associated with the FDAH acquisition that are not deductible for tax purposes (non-deductible items). |
See also Note 7C. Tax Matters: Tax Contingencies.
Tax Rate Reconciliation
The reconciliation of the U.S. statutory income tax rate to our effective tax rate for income/(loss) follows:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
|
||||||||||||
U.S. statutory income tax rate |
35.0 | % | 35.0 | % | (35.0)% | |||||||
State and local taxes, net of federal benefits (a) |
(0.2 | ) | (2.3 | ) | (12.5) | |||||||
Taxation of non-U.S. operations (b) (c) |
2.7 | 8.2 | 9.7 | |||||||||
Settlements of certain tax positions (d) |
(2.4 | ) | (18.7 | ) | | |||||||
U.S. healthcare legislation (e) |
0.3 | 12.0 | | |||||||||
U.S. research tax credit and manufacturing deduction (f) |
(2.3 | ) | (3.1 | ) | (1.6) | |||||||
Non-deductible items (g) |
2.1 | 4.2 | 9.4 | |||||||||
All othernet |
1.9 | 2.3 | (1.8) | |||||||||
|
||||||||||||
Effective tax rate for income/(loss) |
37.1 | % | 37.6 | % | (31.8)% | |||||||
|
(a) |
The rate impact of this component is influenced by the specific level of U.S. earnings in a specific year. In 2009 and 2010, we established deferred tax assets for state net operating losses and credit carryforwards. See above in this Note 7A. Tax Matters: Taxes on Income . |
(b) |
For taxation of non-U.S. operations, this rate impact reflects the income tax rates and relative earnings in the locations where we do business outside of the United States, together with the cost of repatriation decisions, as well as changes in uncertain tax positions not included in the reconciling item called Settlements of certain tax positions: (i) the jurisdictional location of earnings is a component of our effective tax rate each year as tax rates outside of the U.S. are generally lower than the U.S. statutory income tax rate. The rate impact of the jurisdictional location of earnings is influenced by the specific location of non-U.S. earnings and the level of such earnings as compared to our total earnings. This rate impact is then offset or more than offset by the cost of repatriation decisions and other U.S. tax implications of our foreign operations, which may significantly impact the taxation of non-U.S. operations; and (ii) the impact of changes in uncertain tax positions not included in the reconciling item called Settlements of certain tax positions is a component of our effective tax rate each year that can result in either an increase or decrease to our effective tax rate. The jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, can vary as a result of the repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures. |
(c) |
The rate impact of taxation of non-U.S. operations was an increase to our effective tax rate in all periods presented due to (i) the cost of repatriation decisions and other U.S. tax implications that more than offsets the impact of the generally lower tax rates outside the U.S.; (ii) the tax impact of non-deductible items in those jurisdictions; and (iii) the tax impact of changes in uncertain tax positions related to our non-U.S. operations (see also the reconciliation of our gross unrecognized tax benefits in Note 7C. Tax Matters: Tax Contingencies , for current and prior period increases to uncertain tax positions). |
(d) |
For a discussion about settlements of certain tax positions, see Note 7A. Tax Matters: Taxes on Income . |
F-27
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
(e) |
For a discussion about the impact of U.S. healthcare legislation, see Settlements and Other Items Impacting Provision/(Benefit) for Taxes on Income/(Loss) above in this Note 7A. Tax Matters: Taxes on Income . |
(f) |
For a discussion about the U.S. research tax credit and manufacturing deduction, see the components of Provision/(benefit) for taxes on income/(loss) above in this Note 7A. Tax Matters: Taxes on Income. As of December 31, 2011, the U.S. Research Tax Credit has expired. |
(g) |
For a discussion about non-deductible items, see Settlements and Other Items Impacting Provision/(Benefit) for Taxes on Income/(Loss) above in this Note 7A. Tax Matters: Taxes on Income . |
We have manufacturing operations in Singapore, where we benefit from manufacturing incentive tax rates effective through 2031 on income from those operations.
B. Deferred Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between financial reporting and tax bases of assets and liabilities using enacted tax laws and rates.
The components of our deferred tax assets and liabilities, shown before jurisdictional netting, follow:
2011 Deferred Tax | 2010 Deferred Tax | |||||||||||||||
( MILLIONS OF DOLLARS ) | Assets | (Liabilities) | Assets | (Liabilities) | ||||||||||||
|
||||||||||||||||
Prepaid/deferred items |
$ | 80 | $ | (4 | ) | $ | 57 | $ | (2 | ) | ||||||
Inventories |
46 | (5 | ) | 31 | (1 | ) | ||||||||||
Intangibles |
5 | (273 | ) | 8 | (253 | ) | ||||||||||
Property, plant and equipment |
1 | (122 | ) | | (115 | ) | ||||||||||
Employee benefits |
34 | | 38 | | ||||||||||||
Restructuring and other charges |
51 | (1 | ) | 53 | (1 | ) | ||||||||||
Net operating loss/credit carryforwards |
212 | | 221 | | ||||||||||||
Unremitted earnings |
| (93 | ) | | (84 | ) | ||||||||||
Miscellaneous |
3 | (1 | ) | | | |||||||||||
|
||||||||||||||||
Subtotal |
432 | (499 | ) | 408 | (456 | ) | ||||||||||
Valuation allowance |
(5 | ) | | (4 | ) | | ||||||||||
|
||||||||||||||||
Total deferred taxes |
427 | (499 | ) | 404 | (456 | ) | ||||||||||
|
||||||||||||||||
Net deferred tax liability (a), (b) |
$ | (72 | ) | $ | (52 | ) | ||||||||||
|
(a) |
2011 vs. 2010The net deferred tax liability position in 2011 reflects an increase in noncurrent deferred tax liabilities related to intangibles established in connection with our acquisition of King and an increase in noncurrent deferred tax liabilities on unremitted earnings, partially offset by the reduction in noncurrent deferred tax liabilities related to the amortization of identifiable intangibles. |
(b) |
In 2011, included in Current deferred tax assets ($96 million), Noncurrent deferred tax assets ($143 million) and Noncurrent deferred tax liabilities ($311 million). In 2010, included in Current deferred tax assets ($97 million), Noncurrent deferred tax assets ($70 million), Other current liabilities ($1 million) and Noncurrent deferred tax liabilities ($218 million). |
We have carryforwards, primarily related to foreign tax credits, research and development tax credits and net operating losses, which are available to reduce future U.S. federal and state, as well as international income taxes payable with either an indefinite life or expiring at various times from 2012 to 2031. Certain of our U.S. net operating losses are subject to limitations under Internal Revenue Code Section 382.
Valuation allowances are provided when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies.
As of December 31, 2011, we have not made a U.S. tax provision on approximately $1.9 billion of unremitted earnings of our international subsidiaries. As of December 31, 2011, as these earnings are intended to be permanently reinvested overseas, the determination of a hypothetical unrecognized deferred tax liability is not practicable.
F-28
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
C. Tax Contingencies
We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. For a description of our accounting policies associated with accounting for income tax contingencies, see Note 3M. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies. For a description of the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
Uncertain Tax Positions
As tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit. As of December 31, 2011 and 2010, we had approximately $82 million and $66 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest:
|
Tax assets associated with uncertain tax positions primarily represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities, as required by tax treaties to minimize double taxation, commonly referred to as the competent authority process. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction. As of December 31, 2011 and 2010, we had approximately $32 million and $27 million, respectively, in assets associated with uncertain tax positions recorded in Other noncurrent assets . |
|
Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate. |
The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
Balance, January 1 |
$ | (93 | ) | $ | (143 | ) | $ | (86) | ||||
Acquisitions (a) |
(19 | ) | | (49) | ||||||||
Increases based on tax positions taken during a prior period (b) |
| (4 | ) | (3) | ||||||||
Decreases based on tax positions taken during a prior period (b), (c) |
1 | 37 | 4 | |||||||||
Decreases based on cash payments for a prior period |
7 | 11 | | |||||||||
Increases based on tax positions taken during the current period (b) |
(10 | ) | (10 | ) | (9) | |||||||
Decreases based on tax positions taken during the current period |
| 16 | | |||||||||
Impact of foreign exchange |
| | | |||||||||
Other, net |
| | | |||||||||
|
||||||||||||
Balance, December 31 ( d ) |
$ | (114 | ) | $ | (93 | ) | $ | (143) | ||||
|
(a) |
The amount in 2011 primarily relates to the acquisition of KAH and the amounts in 2009 primarily relates to the acquisition of FDAH. |
(b) |
Primarily included in Provision/(benefit) for taxes on income/(loss). |
(c) |
In 2011, 2010, and 2009, the decreases are primarily a result of effectively settling certain issues with the U.S. and foreign tax authorities. See discussions below . |
(d) |
In 2011, included in Noncurrent deferred tax assets ($(6) million) and Other taxes payable ($108 million). In 2010, included in Other taxes payable ($93 million). |
F-29
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
|
Interest related to our unrecognized tax benefits is recorded in accordance with the laws of each jurisdiction and is recorded in Provision/(benefit) for taxes on income/(loss) in our combined statements of operations. In 2011, interest expense was de minimis and in 2010 and 2009, we recorded a net interest benefit of $5 million and net interest expense of $2 million, respectively. Gross accrued interest totaled $14 million and $7 million as of December 31, 2011 and 2010, respectively. Accrued penalties are not significant. In 2011, these amounts were included in Other taxes payable ($14 million). In 2010, these amounts were included in Other taxes payable ($7 million). |
Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions
The United States is one of our major tax jurisdictions:
|
With respect to Pfizer, the tax years 2006-2010 are currently under audit and the tax year 2011 is open but not under audit. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations. |
|
With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed. |
|
With respect to King, Kings tax year 2008 and Alpharma, Inc.s (an animal health related company acquired through the KAH acquisition) tax years 2005-2007 are currently under audit. Tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. Kings tax years prior to 2008 have been settled with the IRS. |
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (1998-2011), Japan (2006-2011), Europe (2002-2011, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany) and Puerto Rico (2007-2011).
Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. We estimate that it is reasonably possible that within the next twelve months, our gross unrecognized tax benefits, exclusive of interest, could decrease by as much as $0.3 million, as a result of settlements with taxing authorities or the expiration of the statute of limitations. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change related to our uncertain tax positions, and such changes could be significant.
F-30
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
8. Accumulated Other Comprehensive Income/(Loss)
Changes, net of tax, in accumulated other comprehensive income/(loss) follow:
Net Unrealized Gains/(Losses) | Benefit Plans | |||||||||||
( MILLIONS OF DOLLARS ) |
Currency Translation Adjustment |
Actuarial Gains/(Losses) |
Accumulated Other Comprehensive Income/(Loss) |
|||||||||
Balance, December 31, 2008 |
$(152) | $ (1) | $(153) | |||||||||
Other comprehensive income |
210 | (2) | 208 | |||||||||
Balance, December 31, 2009 |
58 | (3) | 55 | |||||||||
Other comprehensive loss |
(121) | (8) | (129) | |||||||||
Balance, December 31, 2010 |
(63) | (11) | (74) | |||||||||
Other comprehensive income |
4 | 5 | 9 | |||||||||
Balance, December 31, 2011 |
$ (59) | $ (6) | $ (65) | |||||||||
9. Financial Instruments
The combined balance sheets include the financial assets and liabilities that are directly attributable to the animal health operations of Pfizer, except that the combined balance sheets also include an allocation of long-term debt from Pfizer, see Note 2. Basis of Presentation.
A. Financial Assets and Liabilities
As of December 31, 2011 and 2010, financial assets and liabilities consist primarily of cash and cash equivalents, accounts receivable, accounts payable and an allocation of long-term debt.
The recorded amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. For an estimate of the fair value of our long-term debt, see Note 9D. Financial Instruments: Allocated Long-Term Debt .
B. Accounts Receivable
As of December 31, 2011 and 2010, Accounts receivable, less allowance for doubtful accounts, of $871 million and $773 million, respectively, includes approximately $48 million and $82 million of other receivables, such as trade notes receivable and royalty receivables, among others. The amount of other receivables in 2010 includes approximately $30 million related to receivables recorded in connection with the business required to be divested as part of the acquisition of Wyeth (see Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures ).
C. Available Lines of Credit
We have available lines of credit with banks and other financial intermediaries. As of December 31, 2011, we had access to $22 million of lines of credit, of which $19 million expire within one year. Of these lines of credit, $22 million are unused. These lines are denominated in various foreign currencies to support general operating needs in their respective countries. None of these lines have been drawn as of December 31, 2011 and December 31, 2010.
F-31
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
D. Allocated Long-Term Debt
Long-term debt, including the current portion, as of December 31, 2011 and 2010 of $575 million and $711 million, respectively, represents an allocation of Pfizer debt that was issued to partially finance the acquisition of Wyeth (including FDAH) and that has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. The allocated long-term debt has a weighted-average interest rate of approximately 5.7% and 5.3% as of December 31, 2011 and 2010, respectively. On December 31, 2011, one of the allocated debt instruments was called by Pfizer.
The allocated long-term debt is carried at historical proceeds as adjusted for any gains or losses associated with changes in interest rates since Pfizer holds derivative financial instruments designated and qualifying as fair value hedging instruments for interest rate risk.
As of December 31, 2011 and 2010, the fair value of the allocated long-term debt is $690 million and $780 million, respectively. The fair value of the allocated long-term debt is determined using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data and Pfizers credit rating. The fair value of the allocated long-term debt does not purport to reflect the fair value that might have been determined if Zoetis had operated as a standalone public company for the periods presented or if we had used Zoetiss credit rating in the calculation.
The annual maturity of the allocated long-term debt outstanding as of December 31, 2011 follows:
( MILLIONS OF DOLLARS ) | 2012 | 2013 | 2014 | 2015 | 2016 | After 2016 | Total | |||||||||||||||||||||
Maturities |
$ | | $ | 72 | $ | | $ | 92 | $ | 77 | $ | 334 | $ | 575 | ||||||||||||||
|
10. Inventories
The combined balance sheets include all of the inventory directly attributable to the animal health operations of Pfizer.
The components of inventory follow:
As of
December 31, |
||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | ||||||
Finished goods |
$ | 608 | $ | 598 | ||||
Work-in-process |
284 | 241 | ||||||
Raw materials and supplies |
171 | 156 | ||||||
|
||||||||
Inventories (a) |
$ | 1,063 | $ | 995 | ||||
|
(a) |
The increase in total inventories is primarily due to the acquisition of KAH (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health) . |
F-32
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
11. Property, Plant and Equipment
The combined balance sheets include the property, plant and equipment specifically identifiable with the animal health operations of Pfizer. The combined statements of operations include all of the depreciation and amortization charges deemed attributable to the animal health operations.
The components of property, plant and equipment follow:
( MILLIONS OF DOLLARS ) |
Useful Lives (Years) |
As of December 31, | ||||||||
2011 | 2010 | |||||||||
Land |
| $ | 31 | $ | 25 | |||||
Buildings |
33 1 / 3 -50 | 822 | 759 | |||||||
Machinery and equipment |
8-20 | 1,021 | 904 | |||||||
Furniture, fixtures and other |
3-12 1 / 2 | 124 | 130 | |||||||
Construction-in-progress |
| 151 | 87 | |||||||
|
||||||||||
2,149 | 1,905 | |||||||||
Less: Accumulated depreciation |
906 | 757 | ||||||||
|
||||||||||
Property, plant and equipment (a) |
$ | 1,243 | $ | 1,148 | ||||||
|
(a) |
The increase in total property, plant and equipment is primarily due to the acquisition of KAH (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health) , capital additions and the impact of foreign exchange, partially offset by depreciation and disposals. |
12. Goodwill and Other Intangible Assets
The combined balance sheets include all of the goodwill and other intangible assets directly attributable to the animal health operations of Pfizer. The combined statements of operations include all of the amortization expense and impairment charges associated with these intangible assets.
A. Goodwill
The components and changes in the carrying amount of goodwill follow:
( MILLIONS OF DOLLARS ) | U.S. | EuAfME | CLAR | APAC | Total | |||||||||||||||
Goodwill, gross carrying amount |
$ | 738 | $ | 231 | $ | 240 | $ | 240 | $ | 1,449 | ||||||||||
Cumulative Impairments (a) |
(273) | (85) | (89) | (89) | (536) | |||||||||||||||
Balance, December 31, 2009 |
465 | 146 | 151 | 151 | 913 | |||||||||||||||
Additions (b) |
15 | 4 | 5 | 5 | 29 | |||||||||||||||
Other (c) |
(4) | (2) | (1) | (1) | (8) | |||||||||||||||
Balance, December 31, 2010 |
476 | 148 | 155 | 155 | 934 | |||||||||||||||
Additions (d) |
28 | 9 | 9 | 9 | 55 | |||||||||||||||
Balance, December 31, 2011 |
$ | 504 | $ | 157 | $ | 164 | $ | 164 | $ | 989 | ||||||||||
(a) |
As a result of adopting an accounting standard in fiscal 2002 related to the accounting for goodwill after initial recognition, we recorded a goodwill impairment charge of approximately $536 million as the cumulative effect of an accounting change. After recording this impairment charge in fiscal 2002, there was no goodwill associated with any of our operating segments. |
(b) |
Reflects the acquisitions of Synbiotics and Vetnex (see Note 4C. Acquisitions, Divestitures and Certain Investments: Other Acquisitions). |
(c) |
Primarily reflects adjustments for foreign currency translation. |
(d) |
Primarily reflects the acquisition of KAH and the formation of Jilin (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health and Note 4E. Acquisitions, Divestitures and Certain Investments: Certain Investments ). |
F-33
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
B. Other Intangible Assets
The components of identifiable intangible assets follow:
As of December 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
( MILLIONS OF DOLLARS ) |
Gross Carrying Amount |
Accumulated Amortization |
Identifiable Intangible Assets, Less Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Identifiable Intangible Assets, Less Accumulated Amortization |
||||||||||||||||||
Finite-lived intangible assets: |
||||||||||||||||||||||||
Developed technology rights |
$ | 755 | $ | (128 | ) | $ | 627 | $ | 661 | $ (80 | ) | $581 | ||||||||||||
Brands |
216 | (77 | ) | 139 | 216 | (65 | ) | 151 | ||||||||||||||||
Trademarks and tradenames |
54 | (30 | ) | 24 | 55 | (24 | ) | 31 | ||||||||||||||||
Other |
129 | (118 | ) | 11 | 134 | (116 | ) | 18 | ||||||||||||||||
Total finite-lived intangible assets |
1,154 | (353 | ) | 801 | 1,066 | (285 | ) | 781 | ||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||||||||||
Brands |
39 | | 39 | 39 | | 39 | ||||||||||||||||||
Trademarks and tradenames |
67 | | 67 | 67 | | 67 | ||||||||||||||||||
In-process research and development |
21 | | 21 | 37 | | 37 | ||||||||||||||||||
Total indefinite-lived intangible assets |
127 | | 127 | 143 | | 143 | ||||||||||||||||||
Identifiable intangible assets (a) |
$ | 1,281 | $ | (353 | ) | $ | 928 | $ | 1,209 | $(285 | ) | $924 | ||||||||||||
(a) |
The net increase reflects the assets acquired as part of the acquisition of KAH in January 2011 (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health) and adjustments for foreign currency translation, offset by amortization and impairment charges (see Note 6. Other (Income)/DeductionsNet). |
Developed Technology Rights
Developed technology rights represent the amortized cost associated with developed technology, which has been acquired from third parties and which can include the right to develop, use, market, sell and/or offer for sale the product, compounds and intellectual property that we have acquired with respect to products, compounds and/or processes that have been completed. These assets include technologies related to the care and treatment of cattle, swine, poultry, fish, sheep, dogs, cats and horses.
Brands
Brands represent the amortized or unamortized cost associated with product name recognition, as the products themselves do not receive patent protection. The more significant finite-lived brands are Excenel, Lutalyse and Spirovac and the more significant indefinite-lived brands are the Linco family products and Mastitis.
Trademarks and Tradenames
Trademarks and tradenames represent the amortized or unamortized cost associated with legal trademarks and tradenames. The more significant components of indefinite-lived trademarks and tradenames are indefinite-lived trademarks and tradenames acquired from SmithKlineBeecham. The more significant finite-lived trademarks and tradenames are finite-lived trademarks and tradenames for vaccines acquired from CSL.
F-34
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
In-Process Research and Development
IPR&D assets represent research and development assets that have not yet received regulatory approval in a major market. The majority of these IPR&D assets were acquired in connection with our acquisition of FDAH.
IPR&D assets are required to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development effort. Accordingly, during the development period after the date of acquisition, these assets will not be amortized until approval is obtained in a major market, typically either the U.S. or the EU, or in a series of other countries, subject to certain specified conditions and management judgment. At that time, we will determine the useful life of the asset, reclassify the asset out of in-process research and development and begin amortization. If the associated research and development effort is abandoned, the related IPR&D assets will be written-off, and we will record an impairment charge.
For IPR&D assets, there can be no certainty that these assets ultimately will yield a successful product.
C. Amortization
The weighted-average life of our total finite-lived intangible assets, developed technology rights, and finite-lived brands is approximately 14 years, 14 years and 16 years, respectively. Total amortization expense for finite-lived intangible assets was $70 million in 2011, $58 million in 2010 and $34 million in 2009.
The annual amortization expense expected for the years 2012 through 2016 is as follows:
( MILLIONS OF DOLLARS ) | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||
Amortization expense |
$ | 66 | $ | 62 | $ | 62 | $ | 62 | $ | 62 | ||||||||||
D. Impairments
For information about intangible asset impairments, see Note 6. Other (Income)/DeductionsNet.
13. Benefit Plans
The combined statements of operations include all of the benefit plan expenses attributable to the animal health operations of Pfizer, including expenses associated with pension plans, postretirement plans and defined contribution plans. The expenses include allocations of direct expenses as well as expenses that have been deemed attributable to the animal health operations. The combined balance sheets include the benefit plan assets and liabilities of only those plans that are dedicated to animal health employees. All dedicated benefit plans are pension plans.
A. Pension Plans
Generally, most of our employees are eligible to participate in Pfizers pension plans. An employees benefits are determined based on a combination of years of service and average earnings, as defined in the specific plans. Participants vest in some of their benefits after five years of service.
Pension expense, associated with the U.S. and certain significant international locations, totaled approximately $64 million in 2011, $64 million in 2010 and $66 million in 2009.
F-35
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Below, we have provided additional information about the expenses, assets and liabilities of the pension plans in the Netherlands, Germany, India, the Philippines and Korea as these plans are dedicated to animal health employees.
Information about these dedicated pension plans is provided in the tables below.
Net Periodic Benefit Costs and Other CostsDedicated Plans
The net periodic benefit cost associated with dedicated pension plans recognized in our combined statements of operations is approximately $3 million in 2011, $2 million 2010 and $0 million in 2009, virtually all of which relate to service cost and interest cost.
The other changes associated with dedicated pension plans recognized in our combined statements of comprehensive income/(loss) are approximately $5 million income in 2011, $8 million expense in 2010 and $2 million expense in 2009. These other changes are primarily due to changes in actuarial assumptions.
The amount in Accumulated other comprehensive loss expected to be amortized into 2012 net periodic benefit cost is $0.2 million attributable to the amortization of previously unrecognized actuarial losses.
Actuarial AssumptionsDedicated Plans
The following table provides the weighted-average actuarial assumptions for the dedicated pension plans:
As of December 31, | ||||||||||||
(P ERCENTAGES ) | 2011 | 2010 | 2009 | |||||||||
Weighted-average assumptions used to determine benefit obligations: |
||||||||||||
Discount rate |
5.8 | % | 5.1 | % | 6.0% | |||||||
Rate of compensation increase |
2.7 | 2.7 | 2.6 | |||||||||
Weighted-average assumptions used to determine net benefit cost: |
||||||||||||
Discount rate |
5.1 | % | 6.0 | % | 9.0% | |||||||
Expected return on plan assets |
3.6 | 4.0 | 4.5 | |||||||||
Rate of compensation increase |
2.7 | 2.6 | 5.0 | |||||||||
The assumptions above are used to develop the benefit obligations at the end of the year and to develop the net periodic benefit cost for the following year. Therefore, the assumptions used to determine the net periodic benefit cost for each year are established at the end of each previous year, while the assumptions used to determine the benefit obligations are established at each year-end. The net periodic benefit cost and the benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The assumptions are revised based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement benefits.
Virtually all of Zoetiss dedicated pension plan assets are associated with Zoetiss dedicated pension plan in the Netherlands. The Netherlands plan is financed through an insurance contract for which the insurer is responsible for the investment of the plan assets. The insurance contract covers certain investment and mortality risks in relation to accrued benefits earned in the plan. The assets held in the insurance contract are predominantly fixed income securities. The expected return on assets is determined based on the yields available on those assets.
F-36
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Actuarial and other assumptions for pension plans can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For a description of the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions .
Obligations and Funded StatusDedicated Plans
An analysis of the changes in our benefit obligations, plan assets and funded status of our dedicated plans follows:
As of and for
the
Year Ended December 31, |
||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | ||||||
|
|
|
|
|
||||
Change in Benefit Obligation: |
||||||||
Projected benefit obligation, beginning |
$39 | $34 | ||||||
Changes in actuarial assumptions and other |
(5 | ) | 9 | |||||
Adjustments for foreign currency translation |
2 | (5 | ) | |||||
Othernet |
1 | 1 | ||||||
|
|
|
|
|
||||
Benefit obligation, ending |
37 | 39 | ||||||
|
|
|
|
|
||||
Change in Plan Assets: |
||||||||
Fair value of plan assets, beginning |
31 | 33 | ||||||
Actual return on plan assets |
1 | 2 | ||||||
Company contributions |
2 | 3 | ||||||
Adjustments for foreign currency translation |
1 | (5 | ) | |||||
Othernet |
(2 | ) | (2 | ) | ||||
|
|
|
|
|
||||
Fair value of plan assets, ending |
33 | 31 | ||||||
|
|
|
|
|
||||
Funded statusProjected benefit obligation in excess of plan assets at end of year (a) |
$(4 | ) | $(8 | ) | ||||
|
(a) |
Included in Other noncurrent liabilities. |
Actuarial gains/losses totaled approximately $6 million loss at December 31, 2011 and $11 million loss at December 31, 2010. The actuarial gains and losses primarily represent the cumulative difference between the actuarial assumptions and actual return on plan assets, changes in discount rates and changes in other assumptions used in measuring the benefit obligations. These actuarial gains and losses are recognized in Accumulated other comprehensive income/(loss) and are amortized into net periodic benefit costs over an average period of 17.8 years.
Information related to the funded status of selected plans follows:
As of December 31, | ||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | ||||||
|
|
|
|
|
||||
Pension plans with an accumulated benefit obligation in excess of plan assets: |
||||||||
Fair value of plan assets |
$ | $30 | ||||||
Accumulated benefit obligation |
2 | 33 | ||||||
Pension plans with a projected benefit obligation in excess of plan assets: |
||||||||
Fair value of plan assets |
33 | 31 | ||||||
Projected benefit obligation |
37 | 39 | ||||||
|
F-37
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Plan Assets Dedicated Plans
The components of plan assets follow:
As of December 31, | ||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | ||||||||
Cash and cash equivalents |
$ | 1 | $ | | ||||||
Equity securities: Equity commingled funds |
4 | 6 | ||||||||
Debt securities: Government bonds |
26 | 23 | ||||||||
Other Investments |
2 | 2 | ||||||||
Total (a) |
$ | 33 | $ | 31 | ||||||
|
(a) |
Fair values are determined based on valuation inputs categorized as Level 1, 2 or 3 (see Note 3D. Significant Accounting Policies: Fair Value ). All investment plan assets are valued using Level 2 inputs, except that the equity commingled funds are valued using Level 1 inputs. |
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
Specifically, the following methods and assumptions were used to estimate the fair value of our pension assets:
|
Equity commingled fundsquoted market prices. |
|
Government bonds and other investments quoted prices for similar assets in active markets or quoted prices for identical or similar assets in markets that are not active or are directly or indirectly observable. |
The long-term target asset allocations and the percentage of the fair value of plans assets for dedicated benefit plans follow:
As of December 31, | ||||||||||||||
Target
allocation percentage |
Percentage of Plan Assets |
|||||||||||||
(P ERCENTAGES ) | 2011 | 2011 | 2010 | |||||||||||
Cash and cash equivalents |
0-20 | % | 2.7 | % | 1.3% | |||||||||
Equity securities |
0-20 | 13.3 | 20.2 | |||||||||||
Debt securities |
65-80 | 78.2 | 74.8 | |||||||||||
Other investments |
0-20 | 5.8 | 3.7 | |||||||||||
Total |
100.0 | % | 100.0 | % | 100.0% | |||||||||
|
The insurer utilizes long-term asset allocation ranges in the management of our plans invested assets. Long-term return expectations are developed based on the insurers investment strategy, which takes into account historical experience, as well as the impact of portfolio diversification, active portfolio management, and the insurers view of current and future economic and financial market conditions. As market conditions and other factors change, the insurer may adjust the targets accordingly and actual asset allocations may vary from the target allocations.
The insurers long-term asset allocation ranges reflect its asset class return expectations and tolerance for investment risk within the context of the respective plans long-term benefit obligations. These ranges are supported by an analysis that incorporates historical and expected returns by asset class, as well as volatilities and
F-38
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
correlations across asset classes and our liability profile. This analysis, referred to as an asset-liability analysis, also provides an estimate of expected returns on plan assets, as well as a forecast of potential future asset and liability balances.
The insurer reviews investment performance with Zoetis on a quarterly basis in total, as well as by asset class, relative to one or more benchmarks.
Cash FlowsDedicated Plans
Our plans are generally funded in amounts that are at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax and other laws.
We expect to contribute $2 million to our dedicated pension plans in 2012. The expected benefit payment for each of the next ten years is approximately $1 million per year. These expected benefit payments reflect the future plan benefits projected to be paid from the plans or from the general assets of Zoetis entities in the Netherlands, Germany, India, the Philippines and Korea under the current actuarial assumptions used for the calculation of the projected benefit obligation and, therefore, actual benefit payments may differ from projected benefit payments.
B. Postretirement Plans
Many of our employees are eligible to participate in postretirement plans sponsored by Pfizer. Pfizer does not fund postretirement plans, but contributes to the plans as benefits are paid.
Postretirement benefit expense, associated with the U.S. and certain significant international locations, totaled approximately $17 million in 2011, $19 million in 2010 and $15 million in 2009.
C. Defined Contribution Plans
Our U.S. employees are eligible to participate in Pfizers defined contribution plans, whereby employees contribute a portion of their compensation, which is partially matched by Pfizer. Once the contributions have been paid, Pfizer has no further payment obligations.
Contribution expense, associated with the U.S. defined contribution plan, totaled approximately $18 million in 2011, $15 million in 2010 and $15 million in 2009.
14. Share-Based Payments
Our compensation programs include grants under Pfizers share-based payment programs. The combined statements of operations include all of the share-based payment expenses directly attributable to the animal health operations of Pfizer. The expenses include allocations of direct expenses as well as expenses that have been deemed attributable to the animal health operations.
Compensation programs can include share-based payments under various Pfizer employee stock and incentive plans. The primary share-based compensation programs and their general terms and conditions are as follows:
|
Stock options, which when vested, entitle the holder to purchase a specified number of shares of Pfizer common stock at a price per share equal to the market price of Pfizer common stock on the date of grant. |
F-39
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
|
Restricted Stock Units (RSUs), which when vested, entitle the holder to receive a specified number of shares of Pfizer common stock, including shares resulting from dividend equivalents paid on such RSUs. |
|
Total Shareholder Return Units (TSRUs), which when vested, entitle the holder to receive, two years after the end of the three-year vesting term, a number of shares of Pfizer common stock with a value equal to the difference between the defined settlement price and the closing price of Pfizer common stock on the date of grant, plus accumulated dividend equivalents through the payment date, if and to the extent the total value is positive. |
|
Performance Share Awards (PSAs), which when vested, entitle the holder to receive a number of shares of Pfizer common stock, within a range of shares from zero to a specified maximum, calculated using a non-discretionary formula that measures Pfizers performance relative to an industry peer group. Dividend equivalents accumulate on PSAs and are paid at the end of the vesting term in respect of any shares that are paid. |
A. Impact on Net Income
The components of share-based compensation expense and the associated tax benefit follow:
Year Ended December 31 , | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
Stock option expense |
$ | 8 | $ | 7 | $ | 7 | ||||||
RSU expense |
10 | 8 | 8 | |||||||||
TSRU/PSA expense |
1 | 1 | | |||||||||
Share-based compensation expensedirect |
19 | 16 | 15 | |||||||||
Share-based compensation expenseallocated |
6 | 6 | 7 | |||||||||
Share-based compensation expensetotal |
25 | 22 | 22 | |||||||||
Tax benefit for share-based compensation expense |
(6 | ) | (7 | ) | (7) | |||||||
Share-based compensation expense, net of tax |
$ | 19 | $ | 15 | $ | 15 | ||||||
|
B. Stock Options
Stock options are accounted for using a fair-value-based method at the date of grant in the combined statements of operations. The values determined through this fair-value-based method generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, and Research and development expenses, as appropriate.
All eligible employees may receive Pfizer stock option grants. In virtually all instances, Pfizer stock options granted vest after three years of continuous service from the grant date and have a contractual term of 10 years. In most cases, Pfizer stock options must be held for at least one year from the grant date before any vesting may occur. In the event of a divestiture or restructuring, Pfizer stock options held by employees are immediately vested and are exercisable for a period from three months to their remaining term, depending on various conditions.
F-40
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
The fair-value-based method for valuing each Pfizer stock option grant on the grant date uses, for virtually all grants, the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Expected dividend yield (a) |
4.14 | % | 4.00 | % | 4.90 | % | ||||||
Risk-free interest rate (b) |
2.59 | % | 2.87 | % | 2.69 | % | ||||||
Expected stock price volatility (c) |
25.55 | % | 26.85 | % | 41.36 | % | ||||||
Expected term (d) (years) |
6.25 | 6.25 | 6.00 | |||||||||
|
(a) |
Determined using a constant dividend yield during the expected term of the Pfizer stock option. |
(b) |
Determined using the interpolated yield on U.S. Treasury zero-coupon issues. |
(c) |
Determined using implied volatility, after consideration of historical volatility for Pfizer stock. |
(d) |
Determined using historical exercise and post-vesting termination patterns. |
The Pfizer stock option activity for direct Zoetis employees under Pfizer plans follows:
Shares (T HOUSANDS ) |
Weighted-average Exercise Price Per Share |
Weighted-average Remaining Contractual Term (Y EARS ) |
Aggregate Intrinsic Value ( a ) (M ILLIONS ) |
|||||||||||||
Outstanding, December 31, 2008 |
14,791 | $ | 31.66 | |||||||||||||
Granted |
2,091 | 12.78 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(12 | ) | 21.93 | |||||||||||||
Canceled |
(1,188 | ) | 40.70 | |||||||||||||
Outstanding, December 31, 2009 |
15,682 | 28.47 | ||||||||||||||
Granted |
2,723 | 17.61 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(6 | ) | 17.47 | |||||||||||||
Canceled |
(620 | ) | 32.39 | |||||||||||||
Outstanding, December 31, 2010 |
17,779 | 26.67 | ||||||||||||||
Granted |
3,196 | 18.97 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(11 | ) | 18.90 | |||||||||||||
Canceled |
(1,347 | ) | 41.60 | |||||||||||||
Outstanding, December 31, 2011 |
19,617 | $ | 24.40 | 5.2 | $ | 38 | ||||||||||
Vested and expected to vest (b) , December 31, 2011 |
19,215 | $ | 24.55 | 5.2 | $ | 36 | ||||||||||
Exercisable, December 31, 2011 |
11,558 | $ | 29.61 | 3.1 | $ | | ||||||||||
|
(a) |
Market price of underlying Pfizer common stock less exercise price. |
(b) |
The number of options expected to vest takes into account an estimate of expected forfeitures. |
F-41
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Data related to Pfizer stock option activity for direct Zoetis employees under Pfizer plans follows:
Year Ended/As of December 31, | ||||||||||||
( MILLIONS OF DOLLARS , EXCEPT PER STOCK OPTION AMOUNTS ) | 2011 | 2010 | 2009 | |||||||||
Weighted-average grant date fair value per stock option |
$ | 3.15 | $ | 3.24 | $ | 3.30 | ||||||
Aggregate intrinsic value on exercise |
| | | |||||||||
Cash received upon exercise |
| | | |||||||||
Tax benefits realized related to exercise |
| | | |||||||||
Total compensation cost related to nonvested stock options
|
$ | 9 | $ | 8 | $ | 6 | ||||||
Weighted-average period in years over which stock option compensation cost
|
1.8 | 1.8 | 1.8 | |||||||||
|
C. Restricted Stock Units (RSUs)
RSUs are accounted for using a fair-value-based method that utilizes the closing price of Pfizer common stock on the date of grant. In virtually all instances, the units vest after three years of continuous service from the grant date and the values determined using the fair-value-based method are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, and Research and development expenses, as appropriate.
The RSU activity for direct Zoetis employees under Pfizer plans follows:
Weighted-Average | ||||||||
Shares | Grant Date Fair Value | |||||||
(T HOUSANDS ) | Per Share | |||||||
Nonvested, December 31, 2008 |
1,085 | $24.57 | ||||||
Granted |
505 | 13.32 | ||||||
Vested |
(166 | ) | 26.20 | |||||
Reinvested dividend equivalents |
64 | 19.34 | ||||||
Forfeited |
(2 | ) | 23.96 | |||||
Nonvested, December 31, 2009 |
1,486 | 20.53 | ||||||
Granted |
599 | 17.53 | ||||||
Vested |
(489 | ) | 25.86 | |||||
Reinvested dividend equivalents |
61 | 17.92 | ||||||
Forfeited |
(1 | ) | 18.42 | |||||
Nonvested, December 31, 2010 |
1,656 | 17.79 | ||||||
Granted |
699 | 18.83 | ||||||
Vested |
(508 | ) | 22.91 | |||||
Reinvested dividend equivalents |
75 | 18.44 | ||||||
Forfeited |
(1 | ) | 16.59 | |||||
Nonvested, December 31, 2011 |
1,921 | $16.78 | ||||||
|
F-42
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Data related to all RSU activity for direct Zoetis employees under Pfizer plans follows:
Year Ended
December 31, |
||||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||||
Total grant date fair-value-based amount of shares vested |
$ | 12 | $ | 13 | $ | 4 | ||||||||
Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax |
$ | 12 | $ | 8 | $ | 7 | ||||||||
Weighted-average period over which RSU cost is expected to be recognized (years) |
1.9 | 1.9 | 1.6 | |||||||||||
|
15. Commitments and Contingencies
We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 7C. Tax Matters: Tax Contingencies .
A. Legal Proceedings
Our non-tax contingencies include, among others, the following:
|
Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims. |
|
Commercial and other litigation, which can include product-pricing claims and environmental claims and proceedings. |
|
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes. |
|
Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries. |
Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.
We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.
We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.
F-43
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a readers judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.
Roxarsone ® (3-Nitro)
We are defendants in nine actions involving more than 137 plaintiffs that allege that the distribution of the medicinal feed additive Roxarsone allegedly caused various diseases in the plaintiffs, including cancers and neurological diseases. Other defendants, including various poultry companies, are also named in these lawsuits. Compensatory and punitive damages are sought in unspecified amounts.
In September 2006, the Circuit Court of Washington County returned a defense verdict in one of the lawsuits, Mary Green, et al. v. Alpharma, Inc. et al. In 2008, this verdict was appealed and affirmed by the Arkansas Supreme Court. Certain summary judgments favoring the poultry company co-defendants in Mary Green, et al. v. Alpharma, Inc. et al. were reversed by the Arkansas Supreme Court in 2008. These claims were retried in 2009 and that trial also resulted in a defense verdict, which was affirmed by the Arkansas Supreme Court in April 2011. The next lawsuit in the group of actions is set for trial in October 2012.
In June 2011, we announced that we would suspend sales in the U.S. of 3-Nitro (Roxarsone) in response to a request by the U.S. FDA and we subsequently stopped sales of 3-Nitro in several international markets.
PregSure ®
We have received in total approximately 75 claims in Europe and New Zealand seeking damages related to calves claimed to have died of Bovine Neonatal Pancytopenia (BNP) on farms where PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD) was used. BNP is a rare syndrome that first emerged in cattle in Europe in 2006. Studies of BNP suggest a potential association between the administration of PregSure and the development of BNP, although no causal connection has been established. The cause of BNP is not known.
In 2010, we voluntarily stopped sales of PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD) in Europe, and recalled the product at wholesalers while investigations into possible causes of BNP continue. In 2011, after incidences of BNP were reported in New Zealand, we voluntarily withdrew the marketing authorization for PregSure throughout the world.
We have settled approximately 20 of these claims for amounts that are not material individually or in the aggregate. Investigations into possible causes of BNP continue and these settlements may not be representative of any future claims resolutions.
F-44
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Advocin
On January 30, 2012, Bayer filed a complaint against Pfizer alleging infringement and inducement of infringement of Bayer patent US 5,756,506 covering, among other things, a process for treating bovine respiratory disease (BRD) by administering a single high dose of fluoroquinolone. The complaint was filed after Pfizers product Advocin ® was approved as a single dose treatment of BRD, in addition to its previous approval as a multi-dose treatment. Bayer seeks a permanent injunction, damages and a recovery of attorneys fees, and has demanded a jury trial. Discovery is ongoing, and the trial is currently scheduled for October 2012. We believe we have strong defenses against the claim.
Ulianopolis, Brazil
In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda (FDSAL) and five other large companies alleging that waste sent to a local waste incinerator for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.
The Municipality is seeking recovery of cleanup costs purportedly related to FDSALs share of all waste accumulated at the waste incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.
At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipalitys actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the local incineration facility.
B. Guarantees and Indemnifications
In the ordinary course of business and in connection with the sale of assets and businesses, we often indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of December 31, 2011, recorded amounts for the estimated fair value of these indemnifications are not significant.
C. Purchase Commitments
As of December 31, 2011, we have agreements totaling $202 million to purchase goods and services that are enforceable and legally binding and include amounts relating to contract manufacturing and information technology services. Included in this amount are approximately $5 million of potential milestone payments that are deemed reasonably likely to occur.
F-45
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
16. Segment, Geographic and Revenue Information
A. Segment Information
The animal health medicines and vaccines industry is characterized by meaningful differences in customer needs across different regions. As a result of these differences, among other things, we manage our operations through four geographic regions. Each operating segment has responsibility for its commercial activities. Within each these regional operating segments, we offer a diversified product portfolio, including vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceuticals, for both livestock and companion animal customers.
Operating Segments
|
The United States (U.S.) |
|
Europe/Africa/Middle East (EuAfME)Includes, among others, the United Kingdom, Germany, France, Italy, Spain, Northern Europe and Central Europe as well as Russia, Turkey and South Africa. |
|
Canada/Latin America (CLAR)Includes Canada, Brazil, Mexico, Central America and Other South America. |
|
Asia/Pacific (APAC)Includes Australia, Japan, New Zealand, South Korea, India, China/Hong Kong, Northeast Asia, Southeast Asia and South Asia. |
Our chief operating decision maker uses the revenues and earnings of the four operating segments, among other factors, for performance evaluation and resource allocation.
Other Costs and Business Activities
Certain costs are not allocated to our operating segment results, such as costs associated with the following:
|
Research and Development (R&D), which is generally responsible for research projects. |
|
Corporate, which is responsible for platform functions such as business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. These costs also include compensation costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense. |
|
Certain transactions and events such as (i) purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) acquisition-related activities, where we incur costs for restructuring and integration; and (iii) certain significant items, which include non-acquisition-related restructuring charges, certain asset impairment charges and costs associated with cost reduction/productivity initiatives. |
Segment Assets
We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. As of December 31, 2011 and 2010, total assets were approximately $5.7 billion and $5.3 billion, respectively.
F-46
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
Selected Statement of Operations Information
Selected statement of operations information follows:
( MILLIONS OF DOLLARS ) | Revenues (a) | Earnings (b) |
Depreciation
and Amortization (c ) |
|||||||||
Year ended December 31, 2011 (d) : |
||||||||||||
U.S. |
$ | 1,659 | $ | 820 | $ | 26 | ||||||
EuAfME |
1,144 | 365 | 25 | |||||||||
CLAR |
788 | 275 | 25 | |||||||||
APAC |
642 | 196 | 15 | |||||||||
Total reportable segments |
4,233 | 1,656 | 91 | |||||||||
Other business activities (e) |
| (279 | ) | 15 | ||||||||
Reconciling Items: |
||||||||||||
Corporate (f) |
| (504 | ) | 31 | ||||||||
Purchase accounting adjustments (g) |
| (82 | ) | 59 | ||||||||
Acquisition-related costs (h) |
| (122 | ) | 6 | ||||||||
Certain significant items (i) |
| (172 | ) | 3 | ||||||||
Other unallocated (j) |
| (103 | ) | | ||||||||
$ | 4,233 | $ | 394 | $ | 205 | |||||||
Year ended December 31, 2010: |
||||||||||||
U.S. |
$ | 1,384 | $ | 656 | $ | 13 | ||||||
EuAfME |
1,020 | 328 | 25 | |||||||||
CLAR |
664 | 203 | 19 | |||||||||
APAC |
514 | 146 | 14 | |||||||||
Total reportable segments |
3,582 | 1,333 | 71 | |||||||||
Other business activities (e) |
| (264 | ) | 17 | ||||||||
Reconciling Items: |
||||||||||||
Corporate (f) |
| (533 | ) | 34 | ||||||||
Purchase accounting adjustments (g) |
| (148 | ) | 63 | ||||||||
Acquisition-related costs (h) |
| (217 | ) | | ||||||||
Certain significant items (i) |
| 84 | | |||||||||
Other unallocated (j) |
| (77 | ) | | ||||||||
$ | 3,582 | $ | 178 | $ | 185 | |||||||
Year ended December 31, 2009 (d) : |
||||||||||||
U.S. |
$ | 1,105 | $ | 529 | $ | 13 | ||||||
EuAfME |
880 | 315 | 21 | |||||||||
CLAR |
451 | 153 | 15 | |||||||||
APAC |
324 | 89 | 7 | |||||||||
Total reportable segments |
2,760 | 1,086 | 56 | |||||||||
Other business activities (e) |
| (224 | ) | 12 | ||||||||
Reconciling Items: |
||||||||||||
Corporate (f) |
| (496 | ) | 35 | ||||||||
Purchase accounting adjustments (g) |
| (40 | ) | 21 | ||||||||
Acquisition-related costs (h) |
| (247 | ) | | ||||||||
Certain significant items (i) |
| (157 | ) | | ||||||||
Other unallocated (j) |
| (70 | ) | | ||||||||
$ | 2,760 | $ | (148 | ) | $ | 124 | ||||||
F-47
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
(a) |
Revenues denominated in euros were approximately $710 million in 2011, $680 million in 2010 and $594 million in 2009. |
(b) |
Defined as income/(loss) before provision/(benefit) for taxes on income. |
(c) |
Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized. |
(d) |
For 2011, includes KAH commencing from the acquisition date of January 31, 2011. For 2009, includes FDAH commencing from the acquisition date of October 15, 2009. |
(e) |
Other business activities reflect the research and development costs managed by our Research and Development organization. |
(f) |
Corporate includes, among other things, administration expenses, allocated interest expense, certain compensation and other costs not charged to our operating segments. |
(g) |
Purchase accounting adjustments include certain charges related to the fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments. |
(h) |
Acquisition-related costs can include costs associated with acquiring, integrating and restructuring newly acquired businesses, such as allocated transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring (see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives for additional information). |
(i) |
Certain significant items are substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, the impact of certain asset impairments, inventory write-offs and divestiture-related gains and losses (see Note 4. Acquisitions, Divestitures and Certain Investments, Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives, and Note 6. Other (Income)/DeductionsNet, for additional information). |
|
For 2011, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $62 million, (ii) certain asset impairment charges of $69 million; (iii) certain charges to write-off inventory of $12 million; (iv) charges related to transitional manufacturing purchase agreements associated with divestitures of $27 million; and (v) other costs of $2 million. |
|
For 2010, certain significant items includes: (i) net gains on sales of businesses of $104 million, (ii) charges related to transitional manufacturing purchase agreements associated with divestitures of $4 million, (iii) certain charges to write-off inventory of $13 million; and (iv) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $3 million. |
|
For 2009, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $159 million; and (ii) net gains on sales of businesses of $2 million. |
(j) |
Includes overhead expenses associated with our manufacturing operations. |
B. Geographic Information
Revenues exceeded $100 million in each of eight countries outside the U.S. in 2011 and 2010, and five countries outside of the U.S. in 2009. The U.S. was the only country to contribute more than 10% of total revenues in each year.
Long-lived assets by geographic region follow:
As of December 31, | ||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | ||||||
|
||||||||
Property, plant and equipment, less accumulated depreciation: |
||||||||
U.S. |
$ | 787 | $ | 722 | ||||
EuAfME |
229 | 223 | ||||||
CLAR |
75 | 68 | ||||||
APAC |
152 | 135 | ||||||
|
||||||||
Property, plant and equipment, less accumulated depreciation |
$ | 1,243 | $ | 1,148 | ||||
|
F-48
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
C. Other Revenue Information
Significant Customers
We sell our livestock products primarily to veterinarians and livestock producers as well as third-party veterinary distributors, and retail outlets who generally sell the products to livestock producers. We sell our companion animal products primarily to veterinarians who then sell the products to pet owners. There was no single customer that accounted for 10% or more of our total revenues in 2011 or 2010.
Revenues by Species
Significant species revenues are as follows:
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
|
||||||||||||
Livestock: |
||||||||||||
Cattle |
$ | 1,617 | $ | 1,464 | $ | 1,126 | ||||||
Swine |
562 | 433 | 388 | |||||||||
Poultry |
501 | 265 | 125 | |||||||||
Other (Fish and Sheep) |
98 | 71 | 47 | |||||||||
|
||||||||||||
2,778 | 2,233 | 1,686 | ||||||||||
|
||||||||||||
Companion Animal: |
||||||||||||
Horses |
168 | 159 | 80 | |||||||||
Dogs and Cats |
1,287 | 1,190 | 994 | |||||||||
|
||||||||||||
1,455 | 1,349 | 1,074 | ||||||||||
|
||||||||||||
Total revenues (a), (b) |
$ | 4,233 | $ | 3,582 | $ | 2,760 | ||||||
|
(a) |
In accordance with our domestic and international year-ends, 2011 includes approximately eleven months of KAHs U.S. operations and approximately ten months of KAHs international operations. |
(b) |
In accordance with our domestic and international year-ends, 2009 includes approximately two-and-a-half months of FDAHs U.S. operations and approximately one-and-a-half months of FDAHs international operations. |
Revenues by Major Product Category
Significant revenues by major product category are as follows:
Year Ended December 31, | ||||||||||||
( MILLIONS OF DOLLARS ) | 2011 | 2010 | 2009 | |||||||||
|
||||||||||||
Anti-infectives |
$ | 1,311 | $ | 1,117 | $ | 983 | ||||||
Vaccines |
1,077 | 1,014 | 677 | |||||||||
Parasiticides |
645 | 602 | 432 | |||||||||
Medicinal feed additives |
347 | 86 | 85 | |||||||||
Other pharmaceuticals |
724 | 653 | 484 | |||||||||
Other non-pharmaceuticals |
129 | 110 | 99 | |||||||||
|
||||||||||||
Total revenues (a) , (b) |
$ | 4,233 | $ | 3,582 | $ | 2,760 | ||||||
|
(a) |
In accordance with our domestic and international year-ends, 2011 includes approximately eleven months of KAHs U.S. operations and approximately ten months of KAHs international operations. |
(b) |
In accordance with our domestic and international year-ends, 2009 includes approximately two-and-a-half months of FDAHs U.S. operations and approximately one-and-a-half months of FDAHs international operations. |
F-49
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO COMBINED FINANCIAL STATEMENTS
17. Related Party Transactions
These financial statements include related party transactions:
|
We did not have sales to Pfizer and its subsidiaries during any of the periods presented. |
|
The costs of goods manufactured in manufacturing plants that are shared with other Pfizer business units were approximately $340 million in 2011, $350 million in 2010 and $470 million in 2009. |
|
Historically, Pfizer has provided significant corporate, manufacturing and shared services functions and resources to us. Our combined financial statements reflect an allocation of these costs. For further information about the cost allocations for these services and resources, see Note 2. Basis of Presentation . Management believes that these allocations are a reasonable reflection of the services received. However, these allocations may not reflect the expenses that would have been incurred if we had operated as a standalone public company for the periods presented. The costs for these services as a standalone public company would depend on a number of factors, including how we chose to organize as a company, our employee sourcing decisions and strategic decisions in areas such as information technology systems and infrastructure. |
Pfizer uses a centralized approach to cash management and financing its operations. During the periods covered by these financial statements, cash deposits were remitted to Pfizer on a regular basis and are reflected within equity in the financial statements. Similarly, Zoetiss cash disbursements were funded through Pfizers cash accounts and are reflected within equity in combined financial statements.
18. Commitments under Operating Leases
We have facilities, vehicles and office equipment under various non-cancellable operating leases with third parties. Total rent expense, net of sublease rental income was approximately $21 million in 2011 and $19 million in both 2010 and 2009.
Future minimum lease payments under non-cancellable operating leases as of December 31, 2011 follow:
( MILLIONS OF DOLLARS ) | 2012 | 2013 | 2014 | 2015 | 2016 | After 2016 | Total | |||||||||
Minimum lease payments |
$16 | $12 | $9 | $7 | $4 | $14 | $ | 62 | ||||||||
|
19. Subsequent Events
On June 7, 2012, Pfizer announced its intention to file a registration statement in the United States for a potential public offering of a minority ownership stake in our company.
F-50
Review Report of Independent Registered Public Accounting Firm
The Board of Directors
Pfizer Inc.:
We have reviewed the accompanying condensed combined balance sheet of Zoetis Inc. (the animal health business unit of Pfizer Inc. (the Company)) as of September 30, 2012 and the related condensed combined statements of operations, comprehensive income, equity, and cash flows for the nine-month periods ended September 30, 2012, and October 2, 2011. These condensed combined financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed combined financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the combined balance sheet of the Company as of December 31, 2011, and the related combined statements of operations, comprehensive income, equity, and cash flows for the year then ended (presented elsewhere in this prospectus); and in our report dated August 10, 2012, we expressed an unqualified opinion on those combined financial statements. In our opinion, the information set forth in the accompanying condensed combined balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
December 28, 2012
F-51
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
October 2, 2011 |
||||||
Revenues |
$ | 3,160 | $ | 3,106 | ||||
Costs and expenses: |
||||||||
Cost of sales (a) |
1,130 | 1,233 | ||||||
Selling, general and administrative expenses (a) |
1,017 | 1,026 | ||||||
Research and development expenses (a) |
288 | 308 | ||||||
Amortization of intangible assets |
48 | 51 | ||||||
Restructuring charges and certain acquisition-related costs |
55 | 108 | ||||||
Other (income)/deductionsnet |
(14 | ) | 16 | |||||
Income before provision for taxes on income |
636 | 364 | ||||||
Provision for taxes on income |
190 | 126 | ||||||
Net income before allocation to noncontrolling interests |
446 | 238 | ||||||
Less: Net income attributable to noncontrolling interests |
| 2 | ||||||
Net income attributable to Zoetis |
$ | 446 | $ | 236 | ||||
(a) |
Exclusive of amortization of intangible assets, except as disclosed in Note 8. Goodwill and Other Intangible Assets . |
See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.
F-52
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
October 2, 2011 |
||||||
Net income before allocation to noncontrolling interests |
$ | 446 | $ | 238 | ||||
Other comprehensive income/(loss), net of taxes: |
||||||||
Foreign currency translation adjustments, net (a) |
(106 | ) | 126 | |||||
Benefit plans: Actuarial gains, net (a) |
2 | | ||||||
Total other comprehensive income/(loss), net of taxes |
(104 | ) | 126 | |||||
Comprehensive income before allocation to noncontrolling interests |
342 | 364 | ||||||
Less: Comprehensive income attributable to noncontrolling interests |
| 2 | ||||||
Comprehensive income attributable to Zoetis |
$ | 342 | $ | 362 | ||||
(a) |
Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. |
See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.
F-53
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
As of | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
December 31, 2011 |
||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 133 | $ | 79 | ||||
Accounts receivable, less allowance for doubtful accounts |
848 | 871 | ||||||
Inventories |
1,272 | 1,063 | ||||||
Current deferred tax assets |
72 | 96 | ||||||
Other current assets |
230 | 202 | ||||||
Total current assets |
2,555 | 2,311 | ||||||
Property, plant and equipment, less accumulated depreciation |
1,204 | 1,243 | ||||||
Identifiable intangible assets, less accumulated amortization |
877 | 928 | ||||||
Goodwill |
981 | 989 | ||||||
Noncurrent deferred tax assets |
218 | 143 | ||||||
Other noncurrent assets |
69 | 97 | ||||||
Total assets |
$ | 5,904 | $ | 5,711 | ||||
Liabilities and Equity |
||||||||
Accounts payable |
$ | 195 | $ | 214 | ||||
Income taxes payable |
42 | 18 | ||||||
Accrued compensation and related items |
145 | 150 | ||||||
Other current liabilities |
355 | 461 | ||||||
Total current liabilities |
737 | 843 | ||||||
Allocated long-term debt |
580 | 575 | ||||||
Noncurrent deferred tax liabilities |
299 | 311 | ||||||
Other taxes payable |
88 | 122 | ||||||
Other noncurrent liabilities |
91 | 124 | ||||||
Total liabilities |
1,795 | 1,975 | ||||||
Commitments and Contingencies |
||||||||
Business unit equity |
4,263 | 3,785 | ||||||
Accumulated other comprehensive loss |
(169 | ) | (65) | |||||
Total Zoetis equity |
4,094 | 3,720 | ||||||
Equity attributable to noncontrolling interests |
15 | 16 | ||||||
Total equity |
4,109 | 3,736 | ||||||
Total liabilities and equity |
$ | 5,904 | $ | 5,711 | ||||
|
See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.
F-54
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
CONDENSED COMBINED STATEMENTS OF EQUITY
(UNAUDITED)
Zoetis | ||||||||||||||||||||
( MILLIONS OF DOLLARS ) |
Business
Unit Equity |
Accumulated
Other Comp. Income/ (Loss) |
Total
Business Unit Equity |
Equity
Attributable to Noncontrolling Interests |
Total Equity |
|||||||||||||||
Balance, December 31, 2010 |
$ | 3,418 | $ | (74 | ) | $ | 3,344 | $ | | $ | 3,344 | |||||||||
Nine Months Ended October 2, 2011 |
||||||||||||||||||||
Comprehensive income |
236 | 126 | 362 | 2 | 364 | |||||||||||||||
Share-based compensation expense |
15 | | 15 | | 15 | |||||||||||||||
Dividends declared and paid |
(49 | ) | | (49 | ) | | (49) | |||||||||||||
Net transfers between Pfizer and noncontrolling interests |
2 | | 2 | (2 | ) | | ||||||||||||||
Net transfersPfizer |
194 | | 194 | | 194 | |||||||||||||||
|
||||||||||||||||||||
Balance, October 2, 2011 |
$ | 3,816 | $ | 52 | $ | 3,868 | $ | | $ | 3,868 | ||||||||||
|
||||||||||||||||||||
Balance, December 31, 2011 |
$ | 3,785 | $ | (65 | ) | $ | 3,720 | $ | 16 | $ | 3,736 | |||||||||
Nine Months Ended September 30, 2012 |
||||||||||||||||||||
Comprehensive income/(loss) |
446 | (104 | ) | 342 | | 342 | ||||||||||||||
Share-based compensation expense |
18 | | 18 | | 18 | |||||||||||||||
Dividends declared and paid |
(63 | ) | | (63 | ) | | (63) | |||||||||||||
Net transfers between Pfizer and noncontrolling interests |
1 | | 1 | (1 | ) | | ||||||||||||||
Net transfersPfizer |
76 | | 76 | | 76 | |||||||||||||||
|
||||||||||||||||||||
Balance, September 30, 2012 |
$ | 4,263 | $ | (169 | ) | $ | 4,094 | $ | 15 | $ | 4,109 | |||||||||
|
See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.
F-55
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
October 2,
2011 |
||||||
Operating Activities |
||||||||
Net income before allocation to noncontrolling interests |
$ | 446 | $ | 238 | ||||
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
156 | 151 | ||||||
Share-based compensation expense |
18 | 15 | ||||||
Asset write-offs and impairments |
9 | 12 | ||||||
Net gains on sales of assets |
(1 | ) | (1 | ) | ||||
Deferred taxes |
(81 | ) | 73 | |||||
Other non-cash adjustments |
(1 | ) | 2 | |||||
Other changes in assets and liabilities, net of acquisitions and divestitures |
(402 | ) | (107 | ) | ||||
|
||||||||
Net cash provided by operating activities |
144 | 383 | ||||||
|
||||||||
Investing Activities |
||||||||
Purchases of property, plant and equipment |
(81 | ) | (81 | ) | ||||
Acquisitions, net of cash acquired |
| (345 | ) | |||||
Other investing activities |
(8 | ) | 3 | |||||
|
||||||||
Net cash used in investing activities |
(89 | ) | (423 | ) | ||||
|
||||||||
Financing Activities |
||||||||
Allocated principal payments on long-term debt |
| (38 | ) | |||||
Cash dividends paid (a) |
(63 | ) | (49 | ) | ||||
Net financing activities with Pfizer |
63 | 209 | ||||||
|
||||||||
Net cash provided by financing activities |
| 122 | ||||||
|
||||||||
Effect of exchange-rate changes on cash and cash equivalents |
(1 | ) | (1 | ) | ||||
|
||||||||
Net increase in cash and cash equivalents |
54 | 81 | ||||||
Cash and cash equivalents, as of beginning of period |
79 | 63 | ||||||
|
||||||||
Cash and cash equivalents, as of end of period |
$ | 133 | $ | 144 | ||||
Supplemental cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Income taxes, net |
$ | 276 | $ | 39 | ||||
Interest |
31 | 38 | ||||||
|
(a) |
Payments to other non-Zoetis entities. |
See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.
F-56
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
We prepared the condensed combined financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the nine-month periods ended August 26, 2012, and August 28, 2011.
On August 13, 2012, we filed a registration statement in the United States for a potential public offering of a minority ownership stake in our company.
On January 31, 2011 (the acquisition date), Pfizer completed the tender offer for the outstanding shares of common stock of King Pharmaceuticals, Inc. (King), including the King Animal Health business (KAH), and acquired approximately 92.5% of Kings outstanding shares. On February 28, 2011, Pfizer acquired all of the remaining shares of King. Commencing from the acquisition date, our combined financial statements include the assets, liabilities, operations and cash flows associated with KAH. As a result, and in accordance with our domestic and international reporting periods, our unaudited condensed combined financial statements for the nine months ended October 2, 2011 reflect approximately eight months of the U.S. operations of KAH and approximately seven months of the international operations of KAH.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.
We are responsible for the unaudited condensed combined financial statements included in this document. The unaudited condensed combined financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.
The information included in this interim report should be read in conjunction with the combined financial statements and accompanying notes as of December 31, 2011 included elsewhere in this prospectus.
The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. These combined financial statements do not purport to reflect what the results of operations, comprehensive income, financial position, equity or cash flows would have been had we operated as a standalone public company during the periods presented.
|
The combined statements of operations include allocations from certain support functions (Enabling Functions) that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods (e.g., using third-party sales, headcount, etc.), depending on the nature of the services. |
|
The combined statements of operations include allocations of certain manufacturing and supply costs incurred by manufacturing plants that are shared with other Pfizer business units, Pfizers global external supply group and Pfizers global logistics and support group (collectively, PGS). These costs may include manufacturing variances and changes in the standard costs of inventory, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific |
F-57
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
identification basis or, when specific identification is not practicable, proportional allocation methods, such as animal health identified manufacturing costs, depending on the nature of the costs. |
|
The condensed combined statements of operations also include allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives, see Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives . |
|
The condensed combined statements of operations include an allocation of shared-based compensation expense and certain other compensation expense items, such as certain fringe benefit expenses, maintained on a centralized basis within Pfizer. Pfizer does not routinely allocate these costs to any of its business units. |
|
The condensed combined balance sheets reflect all of the assets and liabilities of Pfizer that are either specifically identifiable or directly attributable to Zoetis and its operations. For benefit plans, the combined balance sheets only include the assets and liabilities of benefit plans dedicated to animal health employees. For debt, see below. |
|
The condensed combined financial statements include an allocation of long-term debt that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt and associated interest-related expenses, including the effect of hedging activities, have been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none is specifically related to our operations. |
Management believes that the allocations are a reasonable reflection of the services received or the costs incurred on behalf of Zoetis and its operations and that the condensed combined statements of operations reflect all of the costs of the animal health business of Pfizer. The allocated expenses from Pfizer Inc. include the following:
|
Enabling Functions operating expensesApproximately $229 million in the nine months ended September 30, 2012 and $249 million in the nine months ended October 2, 2011 ($1 million and $2 million in Cost of sales ; $185 million and $199 million in Selling, general and administrative expenses ; and $43 million and $48 million in Research and development expenses ). |
|
PGS manufacturing costsApproximately $14 million in the nine months ended September 30, 2012 and $35 million in the nine months ended October 2, 2011 (in Cost of sales). |
|
Restructuring charges and certain acquisition-related costsApproximately $47 million in the nine months ended September 30, 2012 and $51 million in the nine months ended October 2, 2011 (in Restructuring charges and certain acquisition-related costs ). |
|
Other costs associated with our acquisitions and cost reduction/productivity initiativesAdditional depreciation associated with asset restructuringApproximately $10 million in the nine months ended September 30, 2012 (in Research and development expenses ) and $12 million in the nine months ended October 2, 2011 ($11 million in Research and development expenses; and $1 million in Selling, general and administrative expenses ). |
|
Other costs associated with cost reduction/productivity initiativesImplementation costsApproximately $4 million in the nine months ended September 30, 2012 (in Selling, general and administrative expenses ). |
|
Share-based compensation expenseApproximately $22 million in the nine months ended September 30, 2012 and $20 million in the nine months ended October 2, 2011 ($5 million and $4 million in Cost of sales ; |
F-58
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
$14 million and $13 million in Selling, general and administrative expense s; and $3 million and $3 million in Research and development expenses ). |
|
Transaction costsApproximately $1 million in the nine months ended October 2, 2011 (in Restructuring charges and certain acquisition-related costs ). |
|
Compensation-related expensesApproximately $16 million in the nine months ended September 30, 2012 and $7 million in the nine months ended October 2, 2011 ($5 million and $2 million in Cost of sales ; $7 million and $3 million in Selling, general and administrative expenses ; and $4 million and $2 million in Research and development expenses ). |
|
Interest expenseApproximately $23 million in the nine months ended September 30, 2012 and $27 million in the nine months ended October 2, 2011 (in Other (income)/deductionsnet). |
The income tax provision in the combined statements of operations has been calculated as if Zoetis filed a separate tax return.
We participate in Pfizers centralized cash management system and generally all excess cash is transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities are funded as needed by Pfizer. We also participate in Pfizers centralized hedging and offsetting programs. As such, in the condensed combined statements of operations, we include the impact of Pfizers derivative financial instruments used for offsetting changes in foreign currency rates net of the related exchange gains and losses for the portion that is deemed to be associated with the animal health operations. Such gains and losses were not material to the combined financial statements for all periods presented.
All balances and transactions among Zoetis and Pfizer and its subsidiaries, which can include dividends as well as intercompany activities, are shown as business unit equity in the combined balance sheets, for all periods presented. As the books and records of Zoetis were not kept on a separate company basis, the determination of the average net balance due to or from Pfizer is not practicable. See also Note 11. Related Party Transactions .
These combined financial statements do not purport to reflect what the results of operations, comprehensive income, financial position, or cash flows would have been had we operated as a standalone public company during the period.
2. Adoption of New Accounting Policies
As of January 1, 2012, we adopted an amendment to the guidelines on the measurement and disclosure of fair value that is consistent between U.S. GAAP and International Financial Reporting Standards. The adoption of this new standard did not have a significant impact on our combined financial statements.
3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
We incurred significant costs in connection with Pfizers cost-reduction initiatives (several programs initiated since 2005) and the acquisitions of FDAH on October 15, 2009 and KAH on January 31, 2011.
For example:
|
in connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and |
F-59
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
|
in connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, and restructuring of the combined company, which may include charges related to employees, assets and activities that will not continue in the combined company. |
All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as functions such as business technology, shared services and corporate operations.
The components of costs incurred in connection with our acquisitions and cost-reduction/productivity initiatives follow:
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
October 2,
2011 |
||||||
Restructuring Charges and Certain Acquisition-Related Costs: |
||||||||
Integration costs (a) |
$ | 15 | $ | 17 | ||||
Restructuring charges: (b) |
||||||||
Employee termination costs |
(10 | ) | 42 | |||||
Asset impairment charges |
2 | (1 | ) | |||||
Exit costs |
1 | (1 | ) | |||||
|
||||||||
Total Direct |
8 | 57 | ||||||
|
||||||||
Transaction costs (c) |
| 1 | ||||||
Integration costs (a) |
16 | 31 | ||||||
Restructuring charges: (b) |
||||||||
Employee termination costs |
19 | 16 | ||||||
Asset impairment charges |
8 | 2 | ||||||
Exit costs |
4 | 1 | ||||||
|
||||||||
Total Allocated |
47 | 51 | ||||||
|
||||||||
Total Restructuring charges and certain acquisition-related costs |
55 | 108 | ||||||
Other Costs Associated With Our Acquisitions and Cost-Reduction/Productivity Initiatives: |
||||||||
Additional depreciation associated with asset restructuringdirect (d) |
10 | 6 | ||||||
Additional depreciation associated with asset restructuringallocated (d) |
10 | 12 | ||||||
Implementation costsallocated (e) |
4 | | ||||||
|
||||||||
Total costs associated with acquisitions and cost-reduction/productivity initiatives |
$ | 79 | $ | 126 | ||||
|
(a) |
Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes. |
(b) |
Restructuring charges for the nine months ended September 30, 2012 are primarily related to cost-reduction/productivity initiatives. Restructuring charges for the nine months ended October 2, 2011 are primarily related to the integration of FDAH and KAH. |
The direct restructuring charges are associated with the following:
|
For the nine months ended September 30, 2012U.S. ($3 million), EuAfME ($2 million), CLAR ($1 million), and manufacturing/research/corporate ($13 million income, resulting from the sale of a manufacturing plant). |
|
For the nine months ended October 2, 2011U.S. ($2 million), EuAfME ($21 million), CLAR ($1 million), and manufacturing/research/corporate ($16 million). |
F-60
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
( c ) |
Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services. |
( d ) |
Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions. In the nine months ended September 30, 2012, included in Cost of sales ($9 million), Selling, general and administrative expenses ($1 million) and Research and development expenses ($10 million). In the nine months ended October 2, 2011, included in Cost of Sales ($3 million), Selling, general and administrative expenses ($4 million), and Research and development expenses ($11 million). |
(e ) |
Implementation costs represent external, incremental costs directly related to implementing cost reduction/productivity initiatives, and primarily include expenditures related to system and process standardization and the expansion of shared services. In the nine months ended September 30, 2012, included in Selling, general and administrative expenses ($4 million). |
The components and activity of our direct restructuring charges identified with Zoetis follow:
( MILLIONS OF DOLLARS ) |
Employee
Termination Costs |
Asset
Impairment Charges |
Exit
Costs |
Accrual | ||||||||||||
Balance, December 31, 2011 |
$ | 70 | $ | | $ | 11 | $ | 81 | ||||||||
Provision (a) |
(10 | ) | 2 | 1 | (7) | |||||||||||
Utilization and other (b) |
(40 | ) | (2 | ) | (3 | ) | (45) | |||||||||
Balance, September 30, 2012 (c) |
$ | 20 | $ | | $ | 9 | $ | 29 | ||||||||
|
(a) |
The provision for termination costs during the nine months ended September 30, 2012 includes a change in the liability for employee termination costs in the third quarter resulting from the sale of a manufacturing plant ($16 million income). |
(b) |
Includes adjustments for foreign currency translation. |
(c) |
Included in Other current liabilities ($18 million) and Other noncurrent liabilities ($11 million). |
4. Other (Income)/DeductionsNet
The components of Other (income)/deductionsnet follow:
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
October 2, 2011 |
||||||
Interest expense on allocated long-term debt |
$ | 23 | $ | 27 | ||||
Royalty-related income |
(24 | ) | (19 | ) | ||||
Identifiable intangible asset impairment charges (a) |
5 | 9 | ||||||
Certain legal matters, net (b) |
(19 | ) | | |||||
Other, net |
1 | (1 | ) | |||||
|
||||||||
Other (income)/deductionsnet |
$ | (14 | ) | $ | 16 | |||
|
(a) |
In 2012, the asset impairment charges include (i) approximately $2 million of finite-lived companion animal developed technology rights; (ii) approximately $1 million of finite-lived trademarks related to genetic testing services; and (iii) approximately $2 million of finite-lived patents related to poultry technology. The intangible asset impairment charges for 2012 reflect, among other things, loss of revenues as a result of negative market conditions and, with respect to the poultry technology, a re-assessment of economic viability. In 2011, the asset impairment charges reflect approximately $9 million related to in-process research and development projects acquired from Vetnex in 2010, as a result of the termination of the development programs due to a re-assessment of economic viability. |
(b) |
Represents income from a favorable legal settlement related to an intellectual property matter ($14 million) and a change in estimate for an environmental-related reserve ($7 million income), partially offset by litigation-related charges ($2 million), all in the second quarter of 2012. |
F-61
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
5. Tax Matters
The income tax provision in the combined statements of operations and the associated tax accounts in the combined balance sheets have been calculated as if Zoetis filed a separate tax return.
A. Taxes on Income
Our effective tax rate was 29.9% for the nine months ended September 30, 2012, compared to 34.6% for the nine months ended October 2, 2011. The lower effective tax rate in the first nine months of 2012 compared to the first nine months of 2011 is primarily due to:
|
during the third quarter of 2012, Pfizer reached a settlement with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Pfizer Inc. tax returns for the years 2006 through 2008. The settlement resulted in an income tax benefit to Zoetis of approximately $29.3 million for tax and interest. |
|
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures. |
partially offset by:
|
the non-recurrence of approximately $9.5 million reduction in unrecognized tax benefits in 2011, which were recorded as a result of the favorable tax audit settlement pertaining to prior years (see discussion below); and |
|
the expiration of the U.S. research and development credit. |
During the nine months ended October 2, 2011, a settlement was reached with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Wyeth tax returns for the years 2002 through 2005. The settlement resulted in an income tax benefit to Zoetis of approximately $9.5 million for tax and interest.
B. Tax Contingencies
We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation.
Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions
The United States is one of our major tax jurisdictions and we are regularly audited by the IRS:
|
With respect to Pfizer Inc., tax years 2009-2010 are currently under audit. Tax years 2011-2012 are not yet under audit. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations. |
|
With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed. |
|
With respect to King, tax years 2005-2007 for Alpharma Inc. (an animal health related company acquired through the KAH acquisition) are currently under audit. Tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. All other tax years are closed. |
F-62
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2012), Japan (2007-2012), Europe (2007-2012, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany) and Puerto Rico (2007-2012).
6. Accumulated Other Comprehensive Income/(Loss)
Changes, net of tax, in accumulated other comprehensive loss follow:
Net Unrealized Loss |
Benefit Plans | |||||||||||
( MILLIONS OF DOLLARS ) |
Currency Translation Adjustment |
Actuarial Losses |
Accumulated
Other Comprehensive Loss |
|||||||||
Balance, December 31, 2011 |
$ (59) | $ | (6) | $ | (65) | |||||||
Other comprehensive expense |
(106) | 2 | (104) | |||||||||
|
||||||||||||
Balance, September 30, 2012 |
$(165) | $ | (4) | $ | (169) | |||||||
|
7. Inventories
The components of inventory follow:
As of | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
December 31, 2011 |
||||||
Finished goods |
$ | 767 | $ | 608 | ||||
Work-in-process |
316 | 284 | ||||||
Raw materials and supplies |
189 | 171 | ||||||
|
||||||||
Inventories |
$ | 1,272 | $ | 1,063 | ||||
|
8. Goodwill and Other Intangible Assets
A. Goodwill
The components and changes in the carrying amount of goodwill follow:
( MILLIONS OF DOLLARS ) | U.S. | EuAfME | CLAR | APAC | Total | |||||||||||||||
Balance, December 31, 2011 |
$ | 504 | $ | 157 | $ | 164 | $ | 164 | $ | 989 | ||||||||||
Other (a) |
(4) | (1) | (1) | (2) | (8) | |||||||||||||||
Balance, September 30, 2012 |
$ | 500 | $ | 156 | $ | 163 | $ | 162 | $ | 981 | ||||||||||
|
(a) |
Primarily reflects adjustments for foreign currency translation. |
F-63
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
B. Other Intangible Assets
The components of identifiable intangible assets follow:
As of | ||||||||||||||||||||||||
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
( MILLIONS OF DOLLARS ) |
Gross
Carrying Amount |
Accumulated
Amortization |
Identifiable
Intangible Assets, Less Accumulated Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
Identifiable
Intangible Assets, Less Accumulated Amortization |
||||||||||||||||||
Finite-lived intangible assets: |
||||||||||||||||||||||||
Developed technology rights |
$ | 755 | $ | (162 | ) | $ | 593 | $ | 755 | $ | (128 | ) | $ | 627 | ||||||||||
Brands |
216 | (85 | ) | 131 | 216 | (77 | ) | 139 | ||||||||||||||||
Trademarks and tradenames |
53 | (34 | ) | 19 | 54 | (30 | ) | 24 | ||||||||||||||||
Other |
123 | (115 | ) | 8 | 129 | (118 | ) | 11 | ||||||||||||||||
Total finite-lived intangible assets |
1,147 | (396 | ) | 751 | 1,154 | (353 | ) | 801 | ||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||||||||||
Brands |
39 | | 39 | 39 | | 39 | ||||||||||||||||||
Trademarks and tradenames |
67 | | 67 | 67 | | 67 | ||||||||||||||||||
In-process research and development |
20 | | 20 | 21 | | 21 | ||||||||||||||||||
Total indefinite-lived intangible assets |
126 | | 126 | 127 | | 127 | ||||||||||||||||||
Identifiable intangible assets (a) |
$ | 1,273 | $ | (396 | ) | $ | 877 | $ | 1,281 | $ | (353 | ) | $ | 928 | ||||||||||
|
(a) |
The net decrease reflects amortization, adjustments for foreign currency translation and impairment charges (see Note 4. Other Income/DeductionsNet ), partially offset by asset acquisitions. |
C. Amortization
Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses and Research and development expenses , as appropriate. Total amortization expense for finite-lived intangible assets was $51 million in the nine months ended September 30, 2012 and $52 million in the nine months ended October 2, 2011.
9. Commitments and Contingencies
We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 5B. Tax Matters: Tax Contingencies .
A. Legal Proceedings
Our non-tax contingencies include, among others, the following:
|
Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims. |
|
Commercial and other litigation, which can include product-pricing claims and environmental claims and proceedings. |
F-64
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
|
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes. |
|
Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries. |
Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.
We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.
We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a readers judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.
Roxarsone ® (3-Nitro)
We are defendants in nine actions involving more than 137 plaintiffs that allege that the distribution of the medicinal feed additive Roxarsone allegedly caused various diseases in the plaintiffs, including cancers and neurological diseases. Other defendants, including various poultry companies, are also named in these lawsuits. Compensatory and punitive damages are sought in unspecified amounts.
In September 2006, the Circuit Court of Washington County returned a defense verdict in one of the lawsuits, Mary Green, et al. v. Alpharma, Inc. et al. In 2008, this verdict was appealed and affirmed by the Arkansas Supreme Court. Certain summary judgments favoring the poultry company co-defendants in Mary Green, et al. v. Alpharma, Inc. et al. were reversed by the Arkansas Supreme Court in 2008. These claims were retried in 2009 and that trial also resulted in a defense verdict, which was affirmed by the Arkansas Supreme Court in April
F-65
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
2011. In October, we entered into an agreement to resolve these cases. The resolution is subject to the execution of full releases or dismissals with prejudice by all of the claimants or our waiver of these requirements. A trial previously scheduled for October 2012 has been postponed pending the outcome of the proposed settlement.
In June 2011, we announced that we would suspend sales in the U.S. of Roxarsone in response to a request by the U.S. FDA and subsequently stopped sales in several international markets.
Following our decision to suspend sales of Roxarsone in June 2011, Zhejiang Rongyao Chemical Co., Ltd., the supplier of certain materials used in the production of Roxarsone, filed a lawsuit in the U.S. District Court for the District of New Jersey alleging that we are liable for damages it suffered as a result of the decision to suspend sales.
In September 2012, we were named as defendants in a purported class action in the Circuit Court of Arkansas County, Arkansas. The lawsuit alleges that the distribution of medicinal feed additives, including Roxarsone, caused chickens to produce manure that contains an arsenical compound, which, when used as agricultural fertilizer by rice farmers, degrades into inorganic arsenic and allegedly caused contamination of rice produced by Arkansas farmers. Other defendants, including various poultry companies, are also named in these lawsuits. Compensatory damages, punitive damages, and attorney fees are sought in an unspecified amount.
PregSure ®
We have received in total approximately 80 claims in Europe and New Zealand seeking damages related to calves claimed to have died of Bovine Neonatal Pancytopenia (BNP) on farms where PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD) was used. BNP is a rare syndrome that first emerged in cattle in Europe in 2006. Studies of BNP suggest a potential association between the administration of PregSure and the development of BNP, although no causal connection has been established. The cause of BNP is not known.
In 2010, we voluntarily stopped sales of PregSure BVD, a vaccine against BVD in Europe, and recalled the product at wholesalers while investigations into possible causes of BNP continue. In 2011, after incidences of BNP were reported in New Zealand, we voluntarily withdrew the marketing authorization for PregSure throughout the world.
We have settled approximately 20 of these claims for amounts that are not material individually or in the aggregate. Investigations into possible causes of BNP continue and these settlements may not be representative of any future claims resolutions.
Advocin
On January 30, 2012, Bayer filed a complaint against Pfizer alleging infringement and inducement of infringement of Bayer patent US 5,756,506 covering, among other things, a process for treating bovine respiratory disease (BRD) by administering a single high dose of fluoroquinolone. The complaint was filed after Pfizers product Advocin ® was approved as a single dose treatment of BRD, in addition to its previous approval as a multi-dose treatment of BRD. Bayer seeks a permanent injunction, damages and a recovery of attorneys fees, and has demanded a jury trial. Discovery is ongoing, and the trial is currently scheduled for April 2013. We believe we have strong defenses against the claim.
F-66
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
Ulianopolis, Brazil
In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda (FDSAL) and five other large companies alleging that waste sent to a local waste incinerator for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.
The Municipality is seeking recovery of cleanup costs purportedly related to FDSALs share of all waste accumulated at the waste incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.
At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipalitys actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the local incineration facility.
B. Guarantees and Indemnifications
In the ordinary course of business and in connection with the sale of assets and businesses, we often indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of September 30, 2012, recorded amounts for the estimated fair value of these indemnifications are not significant.
F-67
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
10. Segment, Geographic and Revenue Information
A. Segment Information
Segment Assets
We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. As of September 30, 2012, total assets were $5.9 billion.
Selected Statement of Operations Information
Selected statement of operations information follows:
( MILLIONS OF DOLLARS ) | Revenues (a) | Earnings (b) |
Depreciation
and Amortization (c) |
|||||||||
Nine months ended September 30, 2012 |
||||||||||||
U.S. |
$ | 1,294 | $ | 676 | $ | 26 | ||||||
EuAfME |
799 | 283 | 21 | |||||||||
CLAR |
549 | 184 | 17 | |||||||||
APAC |
518 | 193 | 13 | |||||||||
Total reportable segments |
3,160 | 1,336 | 77 | |||||||||
Other business activities ( e) |
| (191 | ) | 12 | ||||||||
Reconciling Items: |
||||||||||||
Corporate (f) |
| (346 | ) | 18 | ||||||||
Purchase accounting adjustments (g) |
| (39 | ) | 39 | ||||||||
Acquisition-related costs ( h) |
| (34 | ) | 10 | ||||||||
Certain significant items (i) |
| (28 | ) | | ||||||||
Other unallocated (j) |
| (62 | ) | | ||||||||
$ | 3,160 | $ | 636 | $ | 156 | |||||||
|
||||||||||||
Nine months ended October 2, 2011 (d) |
||||||||||||
U.S. |
$ | 1,210 | $ | 600 | $ | 22 | ||||||
EuAfME |
851 | 284 | 18 | |||||||||
CLAR |
565 | 191 | 15 | |||||||||
APAC |
480 | 159 | 10 | |||||||||
Total reportable segments |
3,106 | 1,234 | 65 | |||||||||
Other business activities (e) |
| (212 | ) | 13 | ||||||||
Reconciling Items: |
||||||||||||
Corporate (f) |
| (369 | ) | 22 | ||||||||
Purchase accounting adjustments (g) |
| (69 | ) | 45 | ||||||||
Acquisition-related costs (h) |
| (87 | ) | 6 | ||||||||
Certain significant items (i) |
| (58 | ) | | ||||||||
Other unallocated (j) |
| (75 | ) | | ||||||||
$ | 3,106 | $ | 364 | $ | 151 | |||||||
|
(a) |
Revenues denominated in euros were $464 million in the nine months ended September 30, 2012 and $529 million in the nine months ended October 2, 2011. |
(b) |
Defined as income before provision for taxes on income. |
(c) |
Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized. |
F-68
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(d) |
For 2011, includes KAH commencing on the acquisition date of January 31, 2011. |
(e) |
Other business activities reflect the research and development costs managed by our Research and Development organization. |
(f) |
Corporate includes, among other things, administration expenses, allocated interest expense, certain compensation and other costs not charged to our operating segments. |
(g) |
Purchase accounting adjustments include certain charges related to the fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments. |
(h) |
Acquisition-related costs can include costs associated with acquiring, integrating and restructuring newly acquired businesses, such as allocated transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring (see Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives , for additional information). |
(i) |
Certain significant items are substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition and the impact of divestiture-related gains and losses (see Note 3. Restructuring Charges and Other Costs Associated with Acquisition and Cost-Reduction/Productivity Initiatives , for additional information). |
|
In the nine months ended September 30, 2012, certain significant items includes: (i) income related to a favorable legal settlement for an intellectual property matter of $14 million; (ii) $4 million income due to a change in estimate related to transitional manufacturing purchase agreements associated with divestitures; and (iii) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $46 million. |
|
In the nine months ended October 2, 2011, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $37 million; (ii) certain charges to write-off inventory of $12 million; and (iii) certain asset impairment charges of $9 million. |
(j) |
Includes overhead expenses associated with our manufacturing operations. |
B. Other Revenue Information
Revenues by Species
Significant species revenues are as follows:
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30,
2012 |
October 2,
2011 |
||||||
Livestock: |
||||||||
Cattle |
$ | 1,136 | $ | 1,158 | ||||
Swine |
425 | 412 | ||||||
Poultry |
375 | 378 | ||||||
Other (Fish and Sheep) |
79 | 69 | ||||||
|
||||||||
2,015 | 2,017 | |||||||
|
||||||||
Companion Animal: |
||||||||
Horses |
130 | 123 | ||||||
Dogs and Cats |
1,015 | 966 | ||||||
|
||||||||
1,145 | 1,089 | |||||||
|
||||||||
Total revenues (a) |
$ | 3,160 | $ | 3,106 | ||||
|
(a) |
In accordance with our domestic and international year-ends, 2011 includes approximately eight months of KAHs U.S. operations and approximately seven months of KAHs international operations. |
F-69
ZOETIS INC.
( THE ANIMAL HEALTH BUSINESS UNIT OF P FIZER I NC .)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
Revenues by Major Product Category
Significant revenues by major product category are as follows:
Nine Months Ended | ||||||||
( MILLIONS OF DOLLARS ) |
September 30, 2012 |
October 2 2011 |
||||||
Anti-infectives |
$ | 882 | $ | 924 | ||||
Vaccines |
812 | 801 | ||||||
Parasiticides |
532 | 503 | ||||||
Medicinal feed additives |
298 | 247 | ||||||
Other pharmaceuticals |
529 | 537 | ||||||
Other non-pharmaceuticals |
107 | 94 | ||||||
|
||||||||
Total revenues (a) |
$ | 3,160 | $ | 3,106 | ||||
|
(a) |
In accordance with our domestic and international year-ends, 2011 includes approximately eight months of KAHs U.S. operations and approximately seven months of KAHs international operations. |
11. Related Party Transactions
These financial statements include related party transactions:
|
We did not have sales to Pfizer and its subsidiaries during any of the periods presented. |
|
The costs of goods manufactured in manufacturing plants that are shared with other Pfizer business units were approximately $320 million in the nine months ended September 30, 2012 and $260 million in the nine months ended October 2, 2011. |
|
Historically, Pfizer has provided significant corporate, manufacturing and shared services functions and resources to us. Our combined financial statements reflect an allocation of these costs. For further information about the cost allocations for these services and resources, see Note 1. Basis of Presentation . Management believes that these allocations are a reasonable reflection of the services received. However, these allocations may not reflect the expenses that would have been incurred if we had operated as a standalone company for the periods presented. The costs for these services as a standalone company would depend on a number of factors, including how we chose to organize as a company, our employee sourcing decisions and strategic decisions in areas such as information technology systems and infrastructure. |
12. Subsequent Event
In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility, which we refer to as the credit facility. The credit facility will not be effective and available for borrowings until certain conditions, including the completion of an initial public offering of a portion of our common stock and the receipt of certain investment grade ratings, are satisfied. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the effective date of the credit facility certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains other customary covenants. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion.
F-70
shares
Class A common stock
Prospectus
J.P. Morgan
BofA Merrill Lynch
Morgan Stanley
, 2012
Until , 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Part II
Information not required in prospectus
Item 13. | Other expenses of issuance and distribution |
The following table sets forth the various expenses, other than underwriting discounts and commissions, payable in connection with the offering contemplated by this registration statement. All of the fees set forth below are estimates except for the SEC registration fee, the FINRA fee and the stock exchange listing fee.
Payable by Pfizer | Payable by the registrant | |||||||
SEC registration fee |
$11,460 | $ | | |||||
FINRA fee |
15,500 | | ||||||
Stock exchange listing fee |
* | | ||||||
Blue Sky fees and expenses |
* | | ||||||
Printing expenses |
* | | ||||||
Legal fees and expenses |
* | | ||||||
Accounting fees and expenses |
* | | ||||||
Transfer agent and registrar fees |
* | | ||||||
Miscellaneous fees and expenses |
* | * | ||||||
|
|
|
|
|||||
Total |
$ | * | $ | * | ||||
|
|
|
|
* | To be completed by amendment |
Item 14. | Indemnification of directors and officers |
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any by-laws, agreement, vote of stockholders or disinterested directors or otherwise. The registrants certificate of incorporation and by-laws provide for indemnification by the registrant of its directors, officers and employees to the fullest extent authorized or permitted by law.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the directors duty of loyalty to the corporation or its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; or (4) for any transaction from which the director derived an improper personal benefit. The registrants certificate of incorporation and by-laws provide for such limitation of liability to the fullest extent permitted by the Delaware General Corporation Law.
The registrant will on its own, or in conjunction with its controlling stockholder, maintain industry standard policies of insurance under which coverage is provided to its directors and officers against legal liability for loss which is not indemnified arising from claims made by reason of breach of duty or other wrongful act while acting in their capacity as directors and officers of the registrant.
The proposed form of underwriting agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification of directors and certain officers of the registrant by the underwriters against certain liabilities.
II-1
Item 15. | Recent sales of unregistered securities |
We have not sold any securities, registered or otherwise, within the past three years, except for the shares issued to our sole stockholder, Pfizer.
Item 16. | Exhibits and financial statements schedules |
(a) | Exhibits |
Exhibit
|
Description |
|
1.1 | Form of Underwriting Agreement | |
1.2 | Form of Debt-for-Equity Exchange Agreement | |
3.1 | Form of Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 | Form of Amended and Restated By-laws of the Registrant | |
4.1 | Specimen Class A Common Stock Certificate | |
5.1 | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP | |
10.1 | Form of Global Separation Agreement | |
10.2 | Form of Transitional Services Agreement | |
10.3 | Form of Tax Matters Agreement | |
10.4 | Form of Research and Development Collaboration and License Agreement | |
10.5 | Form of Employee Matters Agreement | |
10.6 |
Pfizer Inc. 2004 Stock Plan, as Amended and Restated |
|
10.7 | Pfizer Inc. Amended and Restated Nonfunded Supplemental Retirement Plan, together with all material Amendments | |
10.8 | Form of Patent and Know-How License Agreement (Zoetis as licensor) | |
10.9 | Form of Patent and Know-How License Agreement (Pfizer as licensor) | |
10.10 | Form of Trademark and Copyright License Agreement | |
10.11 | Private Instrument of Non Residential Lease Agreement and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda. | |
10.12 | Private Instrument of Lease Agreement Movable Assets and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda. | |
10.13 | Form of Environmental Matters Agreement | |
10.14 | Master Manufacturing and Supply Agreement, dated October 1, 2012, by and between Pfizer Inc. and Zoetis Inc. (Pfizer as manufacturer) | |
10.15 | Form of Registration Rights Agreement | |
10.16 |
Formof Zoetis Inc. 2013 Equity and Incentive Plan |
|
10.17 |
Formof Pfizer Inc. Sale of Business Plan |
|
10.18 | Revolving Credit Agreement, dated as of December 21, 2012, among Zoetis Inc., the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent | |
15.1 | Letter regarding unaudited interim financial information | |
21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of KPMG LLP |
II-2
Exhibit
|
Description |
|
23.2 | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in its opinion filed as Exhibit 5.1 hereto) | |
24.1 | Powers of Attorney (included on signature page to registration statement) |
| To be filed by amendment. |
| Previously filed. |
(b) Financial Statement Schedules. Schedules are omitted because they are not required or because the information is provided elsewhere in the financial statements.
II-3
Item 17. | Undertakings |
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(i) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(ii) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-4
Signatures
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of December 2012.
Zoetis Inc. | ||
By: |
/ S / J UAN R AMÓN A LAIX |
|
Name: Juan Ramón Alaix |
||
Title: Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Name |
Title |
Date |
||
/ S / J UAN R AMÓN A LAIX Juan Ramón Alaix |
Chief Executive Officer and Director (Principal Executive Officer) |
December 28, 2012 | ||
* Richard A. Passov |
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
December 28, 2012 | ||
* Frank A. DAmelio |
Chairman and Director |
December 28, 2012 | ||
* Geno J. Germano |
Director |
December 28, 2012 | ||
* Douglas E. Giordano |
Director |
December 28, 2012 | ||
* Charles H. Hill |
Director |
December 28, 2012 | ||
* Amy W. Schulman |
Director |
December 28, 2012 |
*By: |
/ S / J UAN R AMÓN A LAIX | |||
Juan Ramón Alaix Attorney-in-fact |
II-5
Exhibit index
Exhibit
|
Description |
|
1.1 | Form of Underwriting Agreement | |
1.2 | Form of Debt-for-Equity Exchange Agreement | |
3.1 | Form of Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 | Form of Amended and Restated By-laws of the Registrant | |
4.1 | Specimen Class A Common Stock Certificate | |
5.1 | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP | |
10.1 | Form of Global Separation Agreement | |
10.2 | Form of Transitional Services Agreement | |
10.3 | Form of Tax Matters Agreement | |
10.4 | Form of Research and Development Collaboration and License Agreement | |
10.5 | Form of Employee Matters Agreement | |
10.6 |
Pfizer Inc. 2004 Stock Plan, as Amended and Restated |
|
10.7 |
Pfizer Inc. Amended and Restated Nonfunded Supplemental Retirement Plan, together with all material Amendments |
|
10.8 | Form of Patent and Know-How License Agreement (Zoetis as licensor) | |
10.9 | Form of Patent and Know-How License Agreement (Pfizer as licensor) | |
10.10 | Form of Trademark and Copyright License Agreement | |
10.11 | Private Instrument of Non Residential Lease Agreement and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda. | |
10.12 | Private Instrument of Lease Agreement Movable Assets and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda. | |
10.13 | Form of Environmental Matters Agreement | |
10.14 | Master Manufacturing and Supply Agreement, dated October 1, 2012, by and between Pfizer Inc. and Zoetis Inc. (Pfizer as manufacturer) | |
10.15 |
Form of Registration Rights Agreement |
|
10.16 |
Formof Zoetis Inc. 2013 Equity and Incentive Plan |
|
10.17 |
Formof Pfizer Inc. Sale of Business Plan |
|
10.18 | Revolving Credit Agreement, dated as of December 21, 2012, among Zoetis Inc., the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent | |
15.1 | Letter regarding unaudited interim financial information | |
21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of KPMG LLP | |
23.2 | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in its opinion filed as Exhibit 5.1 hereto) | |
24.1 | Powers of Attorney (included on signature page to registration statement) |
| To be filed by amendment. |
| Previously filed. |
II-6
Exhibit 10.3
FORM OF
TAX MATTERS AGREEMENT
This TAX MATTERS AGREEMENT (this Agreement ) is entered into as of [ ], by and among Pfizer Inc., a Delaware corporation ( Pfizer ), and Zoetis Inc. a Delaware corporation and a wholly owned subsidiary of Pfizer ( Zoetis ) (Pfizer and Zoetis are sometimes collectively referred to herein as the Companies and, as the context requires, individually referred to herein as the Company ).
RECITALS
WHEREAS, the Board of Directors of Pfizer has determined that it would be appropriate and desirable to separate completely the Animal Health Business (as defined below) from Pfizer;
WHEREAS, as of the date hereof, Pfizer is the common parent of an affiliated group of corporations, including Zoetis, which has elected to file consolidated Federal income tax returns;
WHEREAS, pursuant to the Contribution Agreement (as defined below), Pfizer and Zoetis have undertaken the transfer of certain of the Animal Health Assets, including the stock or other equity interests of certain of Pfizers Subsidiaries owning Animal Health Assets and/or dedicated to the Animal Health Business, by Pfizer to Zoetis and the assumption of certain Animal Health Liabilities by Zoetis;
WHEREAS, the Companies have undertaken the Debt-for-Debt Exchange and agreed to undertake the Debt-for-Equity Exchange, each as described in the Separation Agreement (as defined below) and may undertake the Distribution;
WHEREAS, the parties desire to provide for and agree upon the allocation between the parties of liabilities for certain Taxes arising prior to, at the time of, and subsequent to the IPO, and to provide for and agree upon other matters relating to Taxes;
NOW THEREFORE, in consideration of the mutual agreements contained herein, the parties hereby agree as follows:
Section 1. Definition of Terms . For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings, and capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Separation Agreement:
Active Trade or Business means, with respect to Zoetis, the active conduct (as defined in Section 355(b)(2) of the Code and the regulations thereunder) of the Animal Health Business as conducted immediately prior to the IPO, or, with respect to another Separation Transaction intended to qualify as tax-free pursuant to Section 355 of the Code or analogous provisions of state or local law, the active conduct (as defined in Section 355(b)(2) of the Code and the regulations thereunder, or the analogous provisions of state or local law) by the relevant Zoetis Entity of the Animal Health Business relating to such Zoetis Entity as conducted immediately prior to such Separation Transaction.
Adjustment Request means any formal or informal claim or request filed with any Tax Authority, or with any administrative agency or court, for the adjustment, refund, or credit of Taxes, including (i) any amended Tax Return claiming adjustment to the Taxes as reported on the Tax Return or, if applicable, as previously adjusted, (ii) any claim for equitable recoupment or other offset, and (iii) any claim for refund or credit of Taxes previously paid.
Affiliate has the meaning set forth in the Separation Agreement.
Agreement means this Tax Matters Agreement.
Animal Health Assets has the meaning set forth in the Separation Agreement.
Animal Health Business has the meaning set forth in the Separation Agreement.
Animal Health Liabilities has the meaning set forth in the Separation Agreement.
Board Certificate has the meaning set forth in Section 6.01(d) of this Agreement.
Business Day has the meaning set forth in the Separation Agreement.
Code means the U.S. Internal Revenue Code of 1986, as amended.
Companies and Company have the meaning provided in the first sentence of this Agreement.
Contribution has the meaning set forth in the Separation Agreement.
Contribution Agreement has the meaning set forth in the Separation Agreement.
Controlling Party has the meaning set forth in Section 9.02(c) of this Agreement.
Debt-for-Debt Exchange has the meaning set forth in the Separation Agreement.
Debt-for-Equity Exchange has the meaning set forth in the Separation Agreement.
Deconsolidation Date means the last date on which Zoetis qualifies as a member of the affiliated group (as defined in Section 1504 of the Code) of which Pfizer is the common parent.
DGCL means the Delaware General Corporation Law.
Dispute has the meaning set forth in Section 13 of this Agreement.
Distribution has the meaning set forth in the Separation Agreement.
Distribution Date means the date or dates on which the Distribution occurs.
2
Employee Matters Agreement means the Employee Matters Agreement, dated as of [ ], by and among Pfizer and Zoetis.
Employment Tax means any Tax the liability or responsibility for which is allocated pursuant to the Employee Matters Agreement.
Federal Income Tax means any Tax imposed by Subtitle A of the Code other than an Employment Tax, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
Fifty Percent or Greater Interest has the meaning ascribed to such term for purposes of Sections 355(d) and (e) of the Code.
Filing Date has the meaning set forth in Section 6.04(d) of this Agreement.
Final Determination means the final resolution of liability for any Specified Tax, which resolution may be for a specific issue or adjustment or for a taxable period, (i) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by a comparable form under the laws of a State, local, or foreign taxing jurisdiction, except that a Form 870 or 870-AD or comparable form shall not constitute a Final Determination to the extent that it reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund or the right of the Tax Authority to assert a further deficiency in respect of such issue or adjustment or for such taxable period (as the case may be); (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Sections 7121 or 7122 of the Code, or a comparable agreement under the laws of a State, local, or foreign taxing jurisdiction; (iv) by any allowance of a refund or credit in respect of an overpayment of a Specified Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the jurisdiction imposing such Specified Tax; (v) by a final settlement resulting from a treaty-based competent authority determination; or (vi) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the parties.
Foreign Income Tax means any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or United States possession, which is an income tax as defined in Treasury Regulation Section 1.901-2, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
Gain Recognition Agreement means a gain recognition agreement as described in Treasury Regulations Section 1.367(a)-8 or any successor provision thereto.
Group means the Pfizer Group or the Zoetis Group, or both, as the context requires.
Income Tax means any Federal Income Tax, State Income Tax or Foreign Income Tax.
Indemnitee has the meaning set forth in Section 12.02 of this Agreement.
Indemnitor has the meaning set forth in Section 12.02 of this Agreement.
3
Internal Restructuring has the meaning set forth in Section 6.01(e) of this Agreement.
IPO has the meaning set forth in the Separation Agreement.
IRS means the United States Internal Revenue Service.
Joint Return means any Tax Return that actually includes, by election or otherwise, one or more members of the Pfizer Group together with one or more members of the Zoetis Group.
Local Separation Agreements has the meaning set forth in the Separation Agreement.
Non-Controlling Party has the meaning set forth in Section 9.02(c) of this Agreement.
Notified Action has the meaning set forth in Section 6.03(a) of this Agreement.
Other Disposition has the meaning set forth in the Separation Agreement.
Past Practices has the meaning set forth in Section 3.04(b) of this Agreement.
Payment Date means (i) with respect to any Pfizer Federal Consolidated Income Tax Return, (A) the due date for any required installment of estimated taxes determined under Section 6655 of the Code, (B) the due date (determined without regard to extensions) for filing the return determined under Section 6072 of the Code, or (C) the date the return is filed, as the case may be, and (ii) with respect to any other Tax Return, the corresponding dates determined under the applicable Tax Law.
Payor has the meaning set forth in Section 4.03 of this Agreement.
Person means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof, without regard to whether any entity is treated as disregarded for U.S. federal income tax purposes.
Pfizer has the meaning provided in the first sentence of this Agreement.
Pfizer Affiliated Group means the affiliated group (as that term is defined in Section 1504 of the Code and the regulations thereunder) of which Pfizer is the common parent.
Pfizer Business has the meaning provided in the Separation Agreement.
Pfizer Federal Consolidated Income Tax Return means any United States federal Income Tax Return for the Pfizer Affiliated Group.
Pfizer Group means Pfizer and its Affiliates, excluding any entity that is a member of the Zoetis Group, as determined immediately after the IPO.
4
Pfizer Separate Return means any Tax Return of or including any member of the Pfizer Group (including any consolidated, combined or unitary return) that does not include any member of the Zoetis Group.
Post-2012 Period means any Tax Period beginning after December 31, 2012 and, in the case of any Straddle Period, the portion of such Straddle Period beginning January 1, 2013.
Post-Deconsolidation Period means any Tax Period beginning after the Deconsolidation Date and, in the case of any Tax Period beginning before the Deconsolidation Date and ending after the Deconsolidation Date, the portion of such Tax Period beginning on the day after the Deconsolidation Date.
Pre-2013 Period means any Tax Period ending on or before December 31, 2012, and, in the case of any Straddle Period, the portion of such Straddle Period ending on December 31, 2012.
Pre-Deconsolidation Period means any Tax Period ending on or before the Deconsolidation Date and, in the case of any Straddle Period, the portion of such Straddle Period ending on the Deconsolidation Date.
Preliminary Tax Advisor has the meaning set forth in Section 13.03 of this Agreement.
Prime Rate means the base rate on corporate loans charged by Citibank, N.A. from time to time, compounded daily on the basis of a year of 365 or 366 (as applicable) days and actual days elapsed.
Privilege means any privilege that may be asserted under applicable law, including, any privilege arising under or relating to the attorney-client relationship (including the attorney-client and work product privileges), the accountant-client privilege and any privilege relating to internal evaluation processes.
Proposed Acquisition Transaction means a transaction or series of transactions (or any agreement, understanding or arrangement, within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7, or any other regulations promulgated thereunder, to enter into a transaction or series of transactions), whether such transaction is supported by Zoetis management or shareholders, is a hostile acquisition, or otherwise, as a result of which Zoetis would merge or consolidate with any other Person or as a result of which any Person or any group of related Persons would (directly or indirectly) acquire, or have the right to acquire, from Zoetis and/or one or more holders of outstanding shares of Zoetis Capital Stock, a number of shares of Zoetis Capital Stock that would, when combined with any other changes in ownership of Zoetis Capital Stock pertinent for purposes of Section 355(e) of the Code, comprise 40% or more of (i) the value of all outstanding shares of stock of Zoetis as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series, or (ii) the total combined voting power of all outstanding shares of voting stock of Zoetis as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series. Notwithstanding the foregoing, a Proposed Acquisition Transaction shall not include (i) the adoption by Zoetis of a shareholder rights plan or (ii) issuances by Zoetis that satisfy Safe
5
Harbor VIII (relating to acquisitions in connection with a persons performance of services) or Safe Harbor IX (relating to acquisitions by a retirement plan of an employer) of Treasury Regulation Section 1.355-7(d). For purposes of determining whether a transaction constitutes an indirect acquisition, any recapitalization resulting in a shift of voting power or any redemption of shares of stock shall be treated as an indirect acquisition of shares of stock by the non-exchanging shareholders. This definition and the application thereof is intended to monitor compliance with Section 355(e) of the Code and shall be interpreted accordingly. Any clarification of, or change in, the statute or regulations promulgated under Section 355(e) of the Code shall be incorporated in this definition and its interpretation.
Representation Letters means the statements of facts and representations, officers certificates, representation letters and any other materials (including, without limitation, a Ruling Request and any related supplemental submissions to the IRS or other Tax Authority) delivered or deliverable by Pfizer, its Affiliates or representatives thereof in connection with the rendering by Tax Advisors, and/or the issuance by the IRS or other Tax Authority, of the Tax Opinions/Rulings.
Required Action has the meaning set forth in Section 6.01(f) of this Agreement.
Required Party has the meaning set forth in Section 4.03 of this Agreement.
Responsible Company means, with respect to any Tax Return, the Company having responsibility for preparing and filing such Tax Return under this Agreement.
Retention Date has the meaning set forth in Section 8.01 of this Agreement.
Ruling means a private letter ruling issued by the IRS to Pfizer in connection with the Contribution and Distribution.
Ruling Request means any letter filed by Pfizer with the IRS or other Tax Authority requesting a ruling regarding certain tax consequences of the Separation Transactions (including all attachments, exhibits, and other materials submitted with such ruling request letter) and any amendment or supplement to such ruling request letter.
Section 6.01(d) Acquisition Transaction means any transaction or series of transactions that is not a Proposed Acquisition Transaction but would be a Proposed Acquisition Transaction if the percentage reflected in the definition of Proposed Acquisition Transaction were 25% instead of 40%.
Separate Return means a Pfizer Separate Return or a Zoetis Separate Return, as the case may be.
Separation has the meaning set forth in the Separation Agreement.
Separation Agreement means the Global Separation Agreement, as amended from time to time, by and among Pfizer and Zoetis dated [ ].
Separation Plan means, collectively, (i) the Animal Health Global Macro Step Plan dated [ ], attached hereto as Exhibit A-1, and (ii) the External Transactions Step Plan dated [ ], attached hereto as Exhibit A-2.
6
Separation Transactions means those transactions undertaken by the Companies and their Affiliates pursuant to the Separation Plan to separate ownership of the Animal Health Business from ownership of the Pfizer Business.
Separation Taxes means those Taxes shown on Exhibit B hereto, identified by the jurisdiction imposing such Tax, the step in the Separation Plan with respect to which such Tax is triggered, and a description of the nature of such Tax. Dollar amounts shown on Exhibit B reflect the current estimate of the amount of such Separation Taxes, where available; the indemnification obligations of Pfizer pursuant to Section 2.08 hereof with respect to such Separation Taxes shall be determined based upon the final amount of such Separation Taxes as determined under applicable Tax Law rather than upon the estimated amounts set forth on Exhibit B. For the avoidance of doubt, Separation Taxes shall include only those Taxes shown on Exhibit B, and shall not include any other Taxes.
Specified Taxes means those Taxes described in Section 2.01 through Section 2.04 of this Agreement, as well as those Taxes described in Section 2.07 or Section 2.08 of this Agreement.
State Income Tax means any Tax imposed by any State of the United States or by any political subdivision of any such State which is imposed on or measured by net income, including state or local franchise or similar Taxes measured by net income, as well as any state or local franchise, capital or similar Taxes imposed in lieu of a tax imposed on or measured by net income, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
State Other Tax means any Tax imposed by any State of the United States or by any political subdivision of any such State other than any State Income Taxes or Employment Taxes, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
Straddle Period means any Tax Period that begins before and ends after December 31, 2012.
Tax or Taxes means any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers compensation, unemployment, disability, property, ad valorem, value added, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, alternative minimum, estimated or other tax (including any fee, assessment, or other charge in the nature of or in lieu of any tax), imposed by any governmental entity or political subdivision thereof, and any interest, penalty, additions to tax, or additional amounts in respect of the foregoing.
Tax Advisor means a tax counsel or accountant of recognized national standing.
Tax Attribute or Attribute means a net operating loss, net capital loss, unused investment credit, unused foreign tax credit, excess charitable contribution, general business credit, research and development credit or any other Tax Item that could reduce a Tax or create a Tax Benefit.
7
Tax Authority means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision.
Tax Benefit means any refund, credit, or other reduction in otherwise required liability for Taxes.
Tax Contest means an audit, review, examination, or any other administrative or judicial proceeding with the purpose or effect of redetermining Taxes (including any administrative or judicial review of any claim for refund).
Tax Control means the definition of control set forth in Section 368(c) of the Code (or in any successor statute or provision), as such definition may be amended from time to time.
Tax-Free Status means the qualification of the Contribution, the Debt-for Debt Exchange, the Debt-for-Equity Exchange and the Distribution, taken together, (i) as a reorganization described in Sections 355(a) and 368(a)(1)(D) of the Code, (ii) as a transaction in which the stock distributed thereby is qualified property for purposes of Sections 355(d), 355(e) and 361(c) of the Code and in which the Zoetis Securities are securities within the meaning of Section 361(a) of the Code, and (iii) as a transaction in which Pfizer, Zoetis and the shareholders of Pfizer recognize no income or gain for U.S. federal income tax purposes pursuant to Sections 355, 361 and 1032 of the Code, other than, in the case of Pfizer and Zoetis, intercompany items or excess loss accounts taken into account pursuant to the Treasury Regulations promulgated pursuant to Section 1502 of the Code.
Tax Item means, with respect to any Income Tax, any item of income, gain, loss, deduction, or credit.
Tax Law means the law of any governmental entity or political subdivision thereof relating to any Tax.
Tax Opinions/Rulings means the opinions of Tax Advisors and/or the rulings by the IRS or other Tax Authorities deliverable to Pfizer in connection with the Contribution and the Distribution or otherwise with respect to the Separation Transactions.
Tax Period means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law.
Tax Records means any (i) Tax Returns, (ii) Tax Return workpapers, (iii) documentation relating to any Tax Contests, and (iv) any other books of account or records (whether or not in written, electronic or other tangible or intangible forms and whether or not stored on electronic or any other medium) required to be maintained under the Code or other applicable Tax Laws or under any record retention agreement with any Tax Authority, in each case filed with respect to or otherwise relating to Specified Taxes.
Tax-Related Losses means (i) all Taxes (including interest and penalties thereon) imposed pursuant to any settlement, Final Determination, judgment or otherwise; (ii) all accounting, legal and other professional fees, and court costs incurred in connection with such
8
Taxes, as well as any other out-of-pocket costs incurred in connection with such Taxes; and (iii) all costs, expenses and damages associated with stockholder litigation or controversies and any amount paid by Pfizer (or any Pfizer Affiliate) or Zoetis (or any Zoetis Affiliate) in respect of the liability of shareholders, whether paid to shareholders or to the IRS or any other Tax Authority, in each case, resulting from the failure of the Contribution, the Debt-for-Debt Exchange, the Debt-for-Equity Exchange and the Distribution to have Tax-Free Status or from the failure of a Separation Transaction to have the tax treatment described in the Tax Opinions/Rulings.
Tax Return or Return means any report of Specified Taxes due, any claim for refund of Specified Taxes paid, any information return with respect to Specified Taxes, or any other similar report, statement, declaration, or document required to be filed under the Code or other Tax Law with respect to Specified Taxes, including any attachments, exhibits, or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing.
Transfer Pricing Adjustment means any proposed or actual allocation by a Tax Authority of any Tax Item between or among any member of the Pfizer Group and any member of the Zoetis Group with respect to any Tax Period ending prior to or including the final Distribution Date or the date of any Other Disposition, as the case may be.
Treasury Regulations means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Period.
Unqualified Tax Opinion means an unqualified will opinion of a Tax Advisor, which Tax Advisor is acceptable to Pfizer, on which Pfizer may rely to the effect that a transaction will not affect the Tax-Free Status. Any such opinion must assume that the Contribution, the Debt-for-Debt Exchange, the Debt-for-Equity Exchange and the Distribution would have qualified for Tax-Free Status if the transaction in question did not occur.
Zoetis has the meaning provided in the first sentence of this Agreement.
Zoetis Capital Stock means all classes or series of capital stock of Zoetis, including (i) the Zoetis Common Stock, (ii) all options, warrants and other rights to acquire such capital stock and (iii) all instruments properly treated as stock in Zoetis for U.S. federal income tax purposes.
Zoetis Carryback means any net operating loss, net capital loss, excess tax credit, or other similar Tax item of any member of the Zoetis Group which may or must be carried from one Tax Period to another prior Tax Period under the Code or other applicable Tax Law.
Zoetis Common Stock has the meaning given to the term Company Common Stock in the Separation Agreement.
Zoetis Entity means an entity which will be a member of the Zoetis Group immediately after the IPO.
Zoetis Group means (i) Zoetis and its Affiliates, as determined immediately after the IPO, as well as (ii) any entity which (A) was an Affiliate of Pfizer or an Affiliate of a member of the Zoetis Group, (B) conducted solely or predominantly the Animal Health Business, and (C) is no longer an Affiliate of Pfizer as of the IPO.
9
Zoetis Separate Return means any Tax Return of or including any member of the Zoetis Group (including any consolidated, combined or unitary return) that does not include any member of the Pfizer Group.
Zoetis Securities has the meaning given to the term Debt-for-Debt Senior Indebtedness in the Separation Agreement.
Section 2. Allocation of Tax Liabilities.
Section 2.01 General Rule.
(a) Pfizer Liability . Pfizer shall be liable for, and shall indemnify and hold harmless the Zoetis Group from and against any liability for, Taxes which are allocated to Pfizer under this Section 2 .
(b) Zoetis Liability . Zoetis shall be liable for, and shall indemnify and hold harmless the Pfizer Group from and against any liability for, Taxes which are allocated to Zoetis under this Section 2 .
Section 2.02 Allocation of United States Federal Income Tax . Except as provided in Section 2.05 , Section 2.07 or Section 2.08 , Federal Income Tax shall be allocated as follows:
(a) Allocation of Federal Income Tax Relating to Joint Returns
(i) Allocation for Pre-2013 Periods . With respect to any Joint Return, Pfizer shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any such Income Tax Return (including any increase in such Tax as a result of a Final Determination) for all Pre-2013 Periods.
(ii) Allocation to Zoetis for Post-2012 Periods . Zoetis shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) which Taxes are attributable to the Animal Health Business for all Post-2012 Periods, as determined pursuant to Section 2.06 .
(iii) Allocation to Pfizer for Post-2012 Periods . Pfizer shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) other than those Federal Income Taxes described in Section 2.02(a)(ii) for all Post-2012 Periods.
(b) Allocation of Federal Income Tax Relating to Separate Returns .
(i) Pfizer shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any Pfizer Separate Return (including any increase in such Tax as a result of a Final Determination) for all Tax Periods.
10
(ii) Zoetis shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any Zoetis Separate Return (including any increase in such Tax as a result of a Final Determination) for all Tax Periods.
Section 2.03 Allocation of State Income and State Other Taxes. Except as provided in Section 2.05 , Section 2.07 or Section 2.08 , State Income Tax and State Other Tax shall be allocated as follows:
(a) Allocation of State Income Tax Relating to Joint Returns
(i) Allocation for Pre-2013 Periods . Pfizer shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) for all Pre-2013 Periods.
(ii) Allocation to Zoetis for Post-2012 Periods . Zoetis shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) which Taxes are attributable to the Animal Health Business for all Post-2012 Periods, as determined pursuant to Section 2.06 .
(iii) Allocation to Pfizer for Post-2012 Periods . Pfizer shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) other than those State Income Taxes described in Section 2.03(a)(ii) for all Post-2012 Periods.
(b) Allocation of State Income Tax Relating to Separate Returns .
(i) Pfizer shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Pfizer Separate Return (including any increase in such Tax as a result of a Final Determination) for all Tax Periods.
(ii) Zoetis shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Zoetis Separate Return (including any increase in such Tax as a result of a Final Determination) for all Tax Periods.
(c) Allocation of State Other Tax Relating to Joint Returns .
(i) Allocation for Pre-2013 Periods . Pfizer shall be responsible for any and all State Other Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) for all Pre-2013 Periods.
11
(ii) Allocation to Zoetis for Post-2012 Periods . Zoetis shall be responsible for any and all State Other Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) which Taxes are attributable to the Animal Health Business for all Post-2012 Periods.
(iii) Allocation to Pfizer for Post-2012 Periods . Pfizer shall be responsible for any and all State Other Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) other than those State Other Taxes described in Section 2.03(c)(ii) for all Post-2012 Periods.
(d) Allocation of State Other Tax Relating to Separate Returns .
(i) Zoetis shall be responsible for any and all State Other Taxes due with respect to or required to be reported on any Zoetis Separate Return (including any increase in such Tax as a result of a Final Determination) for all Tax Periods.
(ii) Pfizer shall be responsible for any and all State Other Taxes due with respect to or required to be reported on any Pfizer Separate Return (including any increase in such Tax as a result of a Final Determination) for all Tax Periods.
Section 2.04 Allocation of Foreign Income Taxes . Except as provided in Section 2.05 , Section 2.07 or Section 2.08 , Foreign Income Tax shall be allocated as follows:
(a) Allocation of Foreign Income Tax Relating to Joint Returns
(i) Allocation for Pre-2013 Periods . Pfizer shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) for all Pre-2013 Periods.
(ii) Allocation to Zoetis for Post-2012 Periods . Zoetis shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) which Taxes are attributable to the Animal Health Business for all Post-2012 Periods, as determined pursuant to Section 2.06 .
(iii) Allocation to Pfizer for Post-2012 Periods . Pfizer shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Joint Return (including any increase in such Tax as a result of a Final Determination) other than those Foreign Income Taxes described in Section 2.04(a)(ii) for all Post-2012 Periods.
(b) Allocation of Foreign Income Tax Relating to Separate Returns .
12
(i) Pfizer shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Pfizer Separate Return, including any Foreign Income Tax of Pfizer or any member of the Pfizer Group imposed by way of withholding by a member of the Zoetis Group (and including any increase in such Foreign Income Tax as a result of a Final Determination) for all Tax Periods.
(ii) Zoetis shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Zoetis Separate Return, including any Foreign Income Tax of Zoetis or any member of the Zoetis Group imposed by way of withholding by a member of the Pfizer Group (and including any increase in such Foreign Income Tax as a result of a Final Determination) for all Tax Periods.
Section 2.05 Certain Employment and Other Taxes.
(a) Allocation of Employment Taxes . Notwithstanding anything contained herein to the contrary, this Agreement, including Section 2 hereof, shall not apply with respect to Employment Taxes. Employment Taxes shall be allocated as provided in the Employee Matters Agreement.
(b) Allocation of Taxes other than Specified Taxes . All Taxes other than Specified Taxes and Employment Taxes shall be allocated pursuant to the Separation Agreement, unless otherwise allocated pursuant to an Ancillary Agreement (other than this Agreement).
Section 2.06 Determination of Tax Attributable to the Animal Health Business.
(a) United States Federal Income Tax . For purposes of Section 2.02(a)(ii) , the amount of Federal Income Taxes attributable to the Animal Health Business shall be as determined by Pfizer on a pro forma Zoetis Group consolidated return prepared:
(i) assuming that the members of the Zoetis Group were not included in the Pfizer Affiliated Group;
(ii) including only Tax Items of members of the Zoetis Group that were included in the relevant Pfizer Federal Consolidated Income Tax Return;
(iii) except as provided in Section 2.06(a)(v) hereof, using all elections, accounting methods and conventions used on the Pfizer Federal Consolidated Income Tax Return for such period;
(iv) applying the highest statutory marginal corporate income Tax rate in effect for such taxable period;
(v) assuming that the Zoetis Group elects not to carry back any net operating losses; and
13
(vi) assuming that the Zoetis Groups utilization of any Tax Attribute carryforward or carryback is limited to the Tax Attributes of the Zoetis Group that would be available if the Federal Income Tax of the Zoetis Group for each taxable year ending after December 31, 2012 were determined in accordance with this Section 2.06(a) .
(b) State Income Tax . For purposes of Section 2.03(a)(ii) , the amount of State Income Taxes attributable to the Animal Health Business shall be as determined by Pfizer in a manner consistent with the principles set forth in Section 2.06(a) .
(c) Foreign Income Tax . For purposes of Section 2.04(a)(ii) , the amount of Foreign Income Taxes attributable to the Animal Health Business shall be as determined by Pfizer in a manner consistent with the principles set forth in Section 2.06(a) .
(d) Limitation . The amount of Federal Income Taxes, State Income Taxes or Foreign Income Taxes attributable to the Animal Health Business for any Tax Period shall not be less than zero.
Section 2.07 Zoetis Liability. Zoetis shall be liable for, and shall indemnify and hold harmless the Pfizer Group from and against, any liability for:
(a) any Tax resulting from a breach by Zoetis of any covenant in this Agreement, the Separation Agreement or any Ancillary Agreement; and
(b) any Tax-Related Losses for which Zoetis is responsible pursuant to Section 6.04 of this Agreement.
Section 2.08 Pfizer Liability. Pfizer shall be liable for, and shall indemnify and hold harmless the Zoetis Group from and against, any liability for:
(a) any Separation Tax;
(b) any Tax resulting from a breach by Pfizer of any covenant in this Agreement, the Separation Agreement or any Ancillary Agreement; and
(c) any Tax-Related Losses for which Pfizer is responsible pursuant to Section 6.04 of this Agreement.
Section 3. Preparation and Filing of Tax Returns.
Section 3.01 Pfizers Responsibility. Pfizer has the exclusive obligation and right to prepare and file, or to cause to be prepared and filed:
(a) All Joint Returns; and
(b) Pfizer Separate Returns.
14
Section 3.02 Zoetiss Responsibility. Zoetis shall prepare and file, or shall cause to be prepared and filed, all Tax Returns required to be filed by or with respect to members of the Zoetis Group other than those Tax Returns which Pfizer is required to prepare and file under Section 3.01 or Section 3.03 . The Tax Returns required to be prepared and filed by Zoetis under this Section 3.02 shall include any Zoetis Separate Returns.
Section 3.03 Tax Returns for Separation Taxes. Tax Returns relating to Separation Taxes shall be prepared and filed when due (including extensions) by the person obligated to file such Tax Returns under applicable Tax Law. The Companies shall provide, and shall cause their Affiliates to provide, assistance and cooperation to one another in accordance with Section 7 with respect to the preparation and filing of Tax Returns, including providing information required to be provided in Section 7 .
Section 3.04 Tax Reporting Practices.
(a) Pfizer General Rule . Except as provided in Section 3.04(c) , Pfizer shall prepare any Tax Return which it has the obligation and right to prepare and file, or cause to be prepared and filed, under Section 3.01 , in accordance with reasonable Tax accounting practices selected by Pfizer.
(b) Zoetis General Rule . Except as provided in Section 3.04(c) , with respect to any Tax Return that Zoetis has the obligation and right to prepare and file, or cause to be prepared and filed, under Section 3.02 , such Tax Return shall be prepared in accordance with past practices, accounting methods, elections or conventions ( Past Practices ) used with respect to the Tax Returns in question (unless there is no reasonable basis for the use of such Past Practices or unless there is no adverse effect to Pfizer), and to the extent any items are not covered by Past Practices (or in the event that there is no reasonable basis for the use of such Past Practices or there is no adverse effect to Pfizer), in accordance with reasonable Tax accounting practices selected by Zoetis.
(c) Reporting of Separation Transactions . The Tax treatment of the Separation Transactions reported on any Tax Return shall be consistent with the treatment thereof in the Ruling Requests and the Tax Opinions/Rulings, taking into account the jurisdiction in which such Tax Returns are filed, unless there is no reasonable basis for such Tax treatment. Such treatment reported on any Tax Return for which Zoetis is the Responsible Company shall be consistent with that on any Tax Return filed or to be filed by Pfizer or any member of the Pfizer Group or caused or to be caused to be filed by Pfizer, unless there is no reasonable basis for such Tax treatment. In the event that a Company shall determine that there is no reasonable basis for the Tax treatment described in either of the preceding two sentences, such Company shall notify the other Company 20 Business Days prior to filing the relevant Tax Return and the Companies shall attempt in good faith to agree on the manner in which the relevant portion of the Separation Transactions shall be reported.
Section 3.05 Consolidated or Combined Tax Returns. Zoetis will elect and join, and will cause its respective Affiliates to elect and join, in filing any Joint Returns that Pfizer determines are required to be filed or that Pfizer chooses to file pursuant to Section 3.01(b) .
15
Section 3.06 Right to Review Tax Returns.
(a) General. The Responsible Company with respect to any material Tax Return shall make the portion of such Tax Return and related workpapers which are relevant to the determination of the other Companys rights or obligations under this Agreement available for review by the other Company, if requested, to the extent (i) such Tax Return relates to Taxes for which the requesting party would reasonably be expected to be liable, (ii) such Tax Return relates to Taxes and the requesting party would reasonably be expected to be liable in whole or in part for any additional Taxes owing as a result of adjustments to the amount of such Taxes reported on such Tax Return, (iii) such Tax Return relates to Taxes for which the requesting party would reasonably be expected to have a claim for Tax Benefits under this Agreement, or (iv) the requesting party reasonably determines that it must inspect such Tax Return to confirm compliance with the terms of this Agreement. The Responsible Company shall (i) use its reasonable best efforts to make such portion of such Tax Return available for review as required under this paragraph sufficiently in advance of the due date for filing of such Tax Return to provide the requesting party with a meaningful opportunity to analyze and comment on such Tax Return and (ii) use reasonable efforts to have such Tax Return modified before filing, taking into account the person responsible for payment of the Tax (if any) reported on such Tax Return and whether the amount of Tax liability allocable to the requesting party with respect to such Tax Return is material. The Companies shall attempt in good faith to resolve any issues arising out of the review of such Tax Return.
(b) Material Tax Returns. For purposes of Section 3.06(a) , a Tax Return is material if it could reasonably be expected to reflect (A) Tax liability equal to or in excess of $1 million, (B) a credit or credits equal to or in excess of $1 million or (C) a loss or losses equal to or in excess of $3 million, in each case with respect to the requesting party.
Section 3.07 Zoetis Carrybacks and Claims for Refund. Zoetis hereby agrees that, unless Pfizer consents in writing, (i) no Adjustment Request with respect to any Joint Return shall be filed, and (ii) any available elections to waive the right to claim in any Pre-Deconsolidation Period with respect to any Joint Return any Zoetis Carryback arising in a Post-Deconsolidation Period shall be made, and no affirmative election shall be made to claim any such Zoetis Carryback.
Section 3.08 Apportionment of Tax Attributes. Pfizer shall in good faith advise Zoetis in writing of the amount, if any, of any Tax Attributes, which Pfizer determines, in its sole and absolute discretion, shall be allocated or apportioned to the Zoetis Group under applicable law, provided that this Section 3.08 shall not be construed as obligating Pfizer to undertake any such determination. Zoetis and all members of the Zoetis Group shall prepare all Tax Returns in accordance with such written notice. Zoetis agrees that it shall not dispute Pfizers allocation or apportionment of Tax Attributes. Zoetis may request that Pfizer undertake a determination of the portion, if any, of any particular Tax Attribute to be allocated or apportioned to the Zoetis Group under applicable law; to the extent that Pfizer determines, in its sole and absolute discretion, not to undertake such determination, or does not otherwise advise Zoetis of its intention to undertake such determination within 20 Business Days of the receipt of such request, Zoetis shall be permitted to undertake such determination at its own cost and expense and shall notify Pfizer of its determination, which determination shall not be binding upon Pfizer.
16
Section 4. Tax Payments.
Section 4.01 Payment of Taxes With Respect to Certain Joint Returns. In the case of any Joint Return:
(a) Computation and Payment of Tax Due. At least three Business Days prior to any Payment Date for any such Tax Return, the Responsible Company shall compute the amount of Tax required to be paid to the applicable Tax Authority (taking into account the requirements of Section 3.04 relating to consistent accounting practices, as applicable) with respect to such Tax Return on such Payment Date. The Responsible Company shall pay such amount to such Tax Authority on or before such Payment Date (and provide notice and proof of payment to the other Company).
(b) Computation and Payment of Liability With Respect To Tax Due. Within 20 Business Days following the earlier of (i) the due date (including extensions) for filing any such Tax Return (excluding any Tax Return with respect to payment of estimated Taxes or Taxes due with a request for extension of time to file) or (ii) the date on which such Tax Return is filed, if Pfizer is the Responsible Company, then Zoetis shall pay to Pfizer the amount allocable to the Zoetis Group under the provisions of Section 2 , and if Zoetis is the Responsible Company, then Pfizer shall pay to Zoetis the amount allocable to the Pfizer Group under the provisions of Section 2 , in each case, plus interest computed at the Prime Rate on the amount of the payment based on the number of days from the earlier of (i) the due date of the Tax Return (including extensions) or (ii) the date on which such Tax Return is filed, to the date of payment.
(c) Adjustments Resulting in Underpayments. In the case of any adjustment pursuant to a Final Determination with respect to any such Tax Return, the Responsible Company shall pay to the applicable Tax Authority when due any additional Tax due with respect to such Return required to be paid as a result of such adjustment pursuant to a Final Determination. The Responsible Company shall compute the amount attributable to the Zoetis Group in accordance with Section 2 and Zoetis shall pay to Pfizer any amount due Pfizer (or Pfizer shall pay Zoetis any amount due Zoetis) under Section 2 within 20 Business Days from the later of (i) the date the additional Tax was paid by the Responsible Company or (ii) the date of receipt of a written notice and demand from the Responsible Company for payment of the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. Any payments required under this Section 4.01(c) shall include interest computed at the Prime Rate based on the number of days from the date the additional Tax was paid by the Responsible Company to the date of the payment under this Section 4.01(c) .
Section 4.02 Payment of Separate Company Taxes. Each Company shall pay, or shall cause to be paid, to the applicable Tax Authority when due all Taxes owed by such Company or a member of such Companys Group with respect to a Separate Return.
Section 4.03 Indemnification Payments.
(a) If any Company (the Payor ) is required under applicable Tax Law to pay to a Tax Authority a Tax that another Company (the Required Party ) is liable for under this
17
Agreement, the Required Party shall reimburse the Payor within 20 Business Days of delivery by the Payor to the Required Party of an invoice for the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. The reimbursement shall include interest on the Tax payment computed at the Prime Rate based on the number of days from the date of the payment to the Tax Authority to the date of reimbursement under this Section 4.03 .
(b) All indemnification payments under this Agreement shall be made by Pfizer directly to Zoetis and by Zoetis directly to Pfizer; provided, however , that if the Companies mutually agree with respect to any such indemnification payment, any member of the Pfizer Group, on the one hand, may make such indemnification payment to any member of the Zoetis Group, on the other hand, and vice versa. All indemnification payments shall be treated in the manner described in Section 12.01 .
Section 5. Tax Refunds.
Section 5.01 Tax Refunds. Pfizer shall be entitled to any refund (and any interest thereon received from the applicable Tax Authority) of Specified Taxes for which Pfizer is liable hereunder, Zoetis shall be entitled to any refund (and any interest thereon received from the applicable Tax Authority) of Specified Taxes for which Zoetis is liable hereunder and a Company receiving a refund to which another Company is entitled hereunder shall pay over such refund to such other Company within 20 Business Days after such refund is received (together with interest computed at the Prime Rate based on the number of days from the date the refund was received to the date the refund was paid over).
Section 6. Tax-Free Status.
Section 6.01 Restrictions on Zoetis.
(a) Zoetis agrees that it will not take or fail to take, or permit any Zoetis Affiliate, as the case may be, to take or fail to take, any action where such action or failure to act would be inconsistent with or cause to be untrue any statement, information, covenant or representation in any Representation Letters or Tax Opinions/Rulings. Zoetis agrees that it will not take or fail to take, or permit any Zoetis Affiliate, as the case may be, to take or fail to take, any action which adversely affects or could reasonably be expected to adversely affect (A) the Tax-Free Status of the Contribution, the Debt-for-Debt Exchange, the Debt-for-Equity Exchange and the Distribution, or (B) the qualification of any Separation Transaction under U.S. federal, state, local or non-U.S. Tax Law as wholly or partially tax-free or tax-deferred (including, but not limited to, those transactions described in any of the Tax Opinions/Rulings received with respect to such Separation Transaction).
(b) Zoetis agrees that, from the date hereof until the first Business Day after the two-year anniversary of the final Distribution Date, it will (i) maintain its status as a company engaged in the Active Trade or Business for purposes of Section 355(b)(2) of the Code, (ii) not engage in any transaction that would result in it ceasing to be a company engaged in the Active Trade or Business for purposes of Section 355(b)(2) of the Code, (iii) cause each Zoetis Affiliate whose Active Trade or Business is relied upon in the Tax Opinions/Rulings for purposes of
18
qualifying a transaction as tax-free pursuant to Section 355 of the Code or other Tax Law to maintain its status as a company engaged in such Active Trade or Business for purposes of Section 355(b)(2) of the Code and any such other applicable Tax Law, (iv) not engage in any transaction or permit a Zoetis Affiliate to engage in any transaction that would result in a Zoetis Affiliate described in clause (iii) hereof ceasing to be a company engaged in the relevant Active Trade or Business for purposes of Section 355(b)(2) or such other applicable Tax Law, taking into account Section 355(b)(3) of the Code for purposes of clauses (i) through (iv) hereof, and (v) not dispose of or permit a Zoetis Affiliate to dispose of, directly or indirectly, any interest in a Zoetis Affiliate described in clause (iii) hereof or permit any such Zoetis Affiliate to make or revoke any election under Treasury Regulation Section 301.7701-3.
(c) Zoetis agrees that, from the date hereof until the first Business Day after the two-year anniversary of the final Distribution Date, it will not and will not permit any Zoetis Affiliate described in clause (iii) of Section 6.01(b) to (i) enter into any Proposed Acquisition Transaction or, to the extent Zoetis has the right to prohibit any Proposed Acquisition Transaction, permit any Proposed Acquisition Transaction to occur (whether by (a) redeeming rights under a shareholder rights plan, (b) finding a tender offer to be a permitted offer under any such plan or otherwise causing any such plan to be inapplicable or neutralized with respect to any Proposed Acquisition Transaction, (c) approving any Proposed Acquisition Transaction, whether for purposes of Section 203 of the DGCL or any similar corporate statute, any fair price or other provision of Zoetiss charter or bylaws, (d) amending its certificate of incorporation to declassify its Board of Directors or approving any such amendment, or otherwise), (ii) merge or consolidate with any other Person or liquidate or partially liquidate, (iii) in a single transaction or series of transactions sell or transfer (other than sales or transfers of inventory in the ordinary course of business) all or substantially all of the assets that were transferred to Zoetis pursuant to the Contribution or sell or transfer 25% or more of the gross assets of any Active Trade or Business or 25% or more of the consolidated gross assets of Zoetis and its Affiliates (such percentages to be measured based on fair market value as of the initial Distribution Date), (iv) redeem or otherwise repurchase (directly or through a Zoetis Affiliate) any Zoetis stock, or rights to acquire stock, except to the extent such repurchases satisfy Section 4.05(1)(b) of Revenue Procedure 96-30 (as in effect prior to the amendment of such Revenue Procedure by Revenue Procedure 2003-48), (v) amend its certificate of incorporation (or other organizational documents), or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of Zoetis Capital Stock (including, without limitation, through the conversion of one class of Zoetis Capital Stock into another class of Zoetis Capital Stock) or (vi) take any other action or actions (including any action or transaction that would be reasonably likely to be inconsistent with any representation made in the Representation Letters or the Tax Opinions/Rulings) which in the aggregate (and taking into account any other transactions described in this subparagraph (d)) would be reasonably likely to have the effect of causing or permitting one or more persons (whether or not acting in concert) to acquire directly or indirectly stock representing a Fifty-Percent or Greater Interest in Zoetis or otherwise jeopardize the Tax-Free Status, unless prior to taking any such action set forth in the foregoing clauses (i) through (vi), (A) Zoetis shall have requested that Pfizer obtain a Ruling in accordance with Section 6.04(b) and (d) of this Agreement to the effect that such transaction will not affect the Tax-Free Status and Pfizer shall have received such a Ruling in form and substance satisfactory to Pfizer in its sole and absolute discretion, or (B) Zoetis shall provide Pfizer with an Unqualified Tax Opinion in form and substance satisfactory to Pfizer in its sole and absolute discretion (and in determining whether an
19
opinion is satisfactory, Pfizer may consider, among other factors, the appropriateness of any underlying assumptions and managements representations if used as a basis for the opinion and Pfizer may determine that no opinion would be acceptable to Pfizer) or (C) Pfizer shall have waived the requirement to obtain such Ruling or Unqualified Tax Opinion.
(d) Certain Issuances of Zoetis Capital Stock . If Zoetis proposes to enter into any Section 6.01(d) Acquisition Transaction or, to the extent Zoetis has the right to prohibit any Section 6.01(d) Acquisition Transaction, proposes to permit any Section 6.01(d) Acquisition Transaction to occur, in each case, during the period from the date hereof until the first Business Day after the two-year anniversary of the final Distribution Date, Zoetis shall provide Pfizer, no later than ten Business Days following the signing of any written agreement with respect to the Section 6.01(d) Acquisition Transaction, with a written description of such transaction (including the type and amount of Zoetis Capital Stock to be issued in such transaction) and a certificate of the Board of Directors of Zoetis to the effect that the Section 6.01(d) Acquisition Transaction is not a Proposed Acquisition Transaction or any other transaction to which the requirements of Section 6.01(c) apply (a Board Certificate ).
(e) Zoetis Internal Restructuring . Zoetis shall not engage in, cause or permit any internal restructuring (including by making or revoking any election under Treasury Regulation Section 301.7701-3) involving a member of the Zoetis Group or any contribution, sale or other transfer of any of the assets directly or indirectly contributed to Zoetis as described in the Separation Agreement, to Zoetis or any of its Affiliates, apart from sales in the ordinary course of business (any such action, an Internal Restructuring ) during or with respect to any Tax Period (or portion thereof) ending on or prior to the final Distribution Date without obtaining the prior written consent of Pfizer. Zoetis shall provide written notice to Pfizer describing any Internal Restructuring proposed to be taken during or with respect to any Tax Period (or portion thereof) beginning after the final Distribution Date and ending on or prior to the two-year anniversary of such Distribution Date, and shall consult with Pfizer regarding any such proposed actions reasonably in advance of taking any such proposed actions and shall consider in good faith any comments from Pfizer relating thereto.
(f) Zoetis Securities . Zoetis shall not, directly or indirectly, (i) pre-pay, pay down, redeem, retire or otherwise acquire, however effected including pursuant to the terms thereof, any of the Zoetis Securities prior to their stated maturity or permit any member of the Zoetis Group to take any such action), or (ii) take or permit to be taken any action at any time, including, without limitation, any modification to the terms of the Zoetis Securities that could jeopardize, directly or indirectly, the qualification, in whole or part, of any of the Zoetis Securities as securities within the meaning of Section 361(a) of the Code (or permit any member of the Zoetis Group to take or permit to be taken any such action), unless prior to taking any such action set forth in the foregoing clauses (i) or (ii), (A) Zoetis shall have requested that Pfizer obtain a Ruling in accordance with Section 6.04(b) and (d) of this Agreement to the effect that such transaction will not affect the Tax-Free Status and Pfizer shall have received such a Ruling in form and substance satisfactory to Pfizer in its sole and absolute discretion, (B) Zoetis shall provide Pfizer with an Unqualified Tax Opinion in form and substance satisfactory to Pfizer in its sole and absolute discretion (and in determining whether an opinion is satisfactory, Pfizer may consider, among other factors, the appropriateness of any underlying assumptions and managements representations if used as a basis for the opinion and Pfizer may determine that no opinion would be acceptable to Pfizer) or (C) Pfizer shall have waived the requirement to obtain such Ruling or Unqualified Tax Opinion. Notwithstanding the foregoing, and subject to and without limiting or modifying Zoetis indemnification obligations under Section 6.04 , Zoetis or a Zoetis Affiliate may take, cause to be taken, or permit to be taken an action described in this Section 6.01(f) if failure to take such action would violate the terms of the Zoetis Securities or any of the documents entered into in connection therewith (a Required Action ).
20
(g) Gain Recognition Agreements . Zoetis shall not (i) take any action (including, but not limited to, the sale or disposition of any stock, securities, or other assets), (ii) permit any member of the Zoetis Group to take any such action, (iii) fail to take any action, or (iv) permit any member of the Zoetis Group to fail to take any action, in each case that would cause Pfizer or any member of the Pfizer Group to recognize gain under any Gain Recognition Agreement. In addition, Zoetis shall file, and shall cause any member of the Zoetis Group to file, any Gain Recognition Agreement reasonably requested by Pfizer which Gain Recognition Agreement is determined by Pfizer to be necessary so as to (i) allow for or preserve the tax-free or tax-deferred nature, in whole or part, of any Separation Transaction, or (ii) avoid Pfizer or any member of the Pfizer Group recognizing gain under any Gain Recognition Agreement.
Section 6.02 Restrictions on Pfizer. Pfizer agrees that it will not take or fail to take, or permit any Pfizer Affiliate, as the case may be, to take or fail to take, any action (i) where such action or failure to act would be inconsistent with or cause to be untrue any statement, information, covenant or representation in any Representation Letters or Tax Opinions/Rulings, or (ii) which adversely affects or could reasonably be expected to adversely affect (A) the Tax-Free Status of the Contribution, the Debt-for-Debt Exchange, the Debt-for-Equity Exchange and the Distribution, or (B) the qualification of any Separation Transaction under U.S. federal, state, local or non-U.S. Tax Law as tax free (including, but not limited to, those transactions described in any of the Tax Opinions/Rulings received with respect to such Separation Transaction) from so qualifying; provided, however , that this Section 6.02 shall not be construed as obligating Pfizer to consummate the Distribution nor shall it be construed as preventing Pfizer from terminating the Separation Agreement pursuant to Section 10.1 thereof.
Section 6.03 Procedures Regarding Opinions and Rulings.
(a) If Zoetis notifies Pfizer that it desires to take one of the actions described in clause (i) or (ii) of Section 6.01(c) or clauses (i) through (iv) or Section 6.01(f) (a Notified Action ), Pfizer and Zoetis shall reasonably cooperate to attempt to obtain the Ruling or Unqualified Tax Opinion referred to in Section 6.01(c) or (f) , unless Pfizer shall have waived the requirement to obtain such Ruling or Unqualified Tax Opinion.
(b) Rulings or Unqualified Tax Opinions at Zoetiss Request . Pfizer agrees that at the reasonable request of Zoetis pursuant to Section 6.01(c) or (f) , Pfizer shall cooperate with Zoetis and use its reasonable best efforts to seek to obtain, as expeditiously as possible, a Ruling from the IRS or an Unqualified Tax Opinion for the purpose of permitting Zoetis to take the Notified Action. Further, in no event shall Pfizer be required to file any Ruling Request under this Section 6.03(b) unless Zoetis represents that (A) it has read the Ruling Request, and (B) all information and representations, if any, relating to any member of the Zoetis Group, contained in the Ruling Request documents are (subject to any qualifications therein) true, correct and complete. Zoetis shall reimburse Pfizer for all reasonable costs and expenses, including expenses relating to the utilization of Pfizer personnel, incurred by the Pfizer Group in obtaining a Ruling or Unqualified Tax Opinion requested by Zoetis within ten Business Days after receiving an invoice from Pfizer therefor.
21
(c) Rulings or Unqualified Tax Opinions at Pfizers Request . Pfizer shall have the right to obtain a Ruling or an Unqualified Tax Opinion at any time in its sole and absolute discretion. If Pfizer determines to obtain a Ruling or an Unqualified Tax Opinion, Zoetis shall (and shall cause each Affiliate of Zoetis to) cooperate with Pfizer and take any and all actions reasonably requested by Pfizer in connection with obtaining the Ruling or Unqualified Tax Opinion (including, without limitation, by making any representation or covenant or providing any materials or information requested by the IRS or Tax Advisor; provided that Zoetis shall not be required to make (or cause any Affiliate of Zoetis to make) any representation or covenant that is inconsistent with historical facts or as to future matters or events over which it has no control). Pfizer shall reimburse Zoetis for all reasonable costs and expenses, including expenses relating to the utilization of Zoetis personnel, incurred by the Zoetis Group in connection with such cooperation within ten Business Days after receiving an invoice from Zoetis therefor.
(d) Zoetis hereby agrees that Pfizer shall have sole and exclusive control over the process of obtaining any Ruling, and that only Pfizer shall apply for a Ruling. In connection with obtaining a Ruling pursuant to Section 6.03(b) , (A) Pfizer shall keep Zoetis informed in a timely manner of all material actions taken or proposed to be taken by Pfizer in connection therewith; (B) Pfizer shall (1) reasonably in advance of the submission of any Ruling Request documents provide Zoetis with a draft copy thereof, (2) reasonably consider Zoetiss comments on such draft copy, and (3) provide Zoetis with a final copy; and (C) Pfizer shall provide Zoetis with notice reasonably in advance of, and Zoetis shall have the right to attend, any formally scheduled meetings with the IRS (subject to the approval of the IRS) that relate to such Ruling. Neither Zoetis nor any Zoetis Affiliate directly or indirectly controlled by Zoetis shall seek any guidance from the IRS or any other Tax Authority (whether written, verbal or otherwise) at any time concerning the Contribution, the Debt-for-Debt Exchange, the Debt-for-Equity Exchange or the Distribution (including the impact of any transaction on the Contribution, the Debt-for-Debt Exchange, the Debt-for-Equity Exchange or the Distribution).
Section 6.04 Liability for Tax-Related Losses.
(a) Notwithstanding anything in this Agreement or the Separation Agreement to the contrary (and in each case regardless of whether a Ruling, Unqualified Tax Opinion or waiver described in clause (A), (B) or (C) of Section 6.01(c) or a Ruling, Unqualified Tax Opinion or waiver described in clause (A), (B) or (C) of Section 6.01(f) may have been provided, and regardless of whether an action may be a Required Action), subject to Section 6.04(c) , Zoetis shall be responsible for, and shall indemnify and hold harmless Pfizer and its Affiliates and each of their respective officers, directors and employees from and against, one hundred percent (100%) of any Tax-Related Losses that are attributable to or result from any one or more of the following: (A) the acquisition (other than pursuant to the Contribution, the Debt-for-Equity Exchange, the IPO, or the Distribution) of all or a portion of Zoetiss stock and/or its or its subsidiaries assets by any means whatsoever by any Person, (B) any negotiations, understandings, agreements or arrangements by Zoetis with respect to transactions or events (including, without limitation, stock issuances, pursuant to the exercise of stock options or otherwise, option grants, capital contributions or acquisitions, or a series of such transactions or events) that cause the Distribution to be treated as part of a plan pursuant to which one or more Persons acquire directly or indirectly stock of Zoetis representing a Fifty-Percent or Greater Interest therein, (C) any action or failure to act by Zoetis after the Distribution (including, without limitation, any amendment to Zoetiss certificate of incorporation (or other
22
organizational documents), whether through a stockholder vote or otherwise) affecting the voting rights of Zoetis stock (including, without limitation, through the conversion of one class of Zoetis Capital Stock into another class of Zoetis Capital Stock), (D) any act or failure to act by Zoetis or any Zoetis Affiliate described in Section 6.01 (regardless whether such act or failure to act may be a Required Action or may be covered by a Ruling, Unqualified Tax Opinion or waiver described in clause (A), (B) or (C) of Section 6.01(c) , a Board Certificate described in Section 6.01(d) , a consent described in Section 6.01(e) , or a Ruling, Unqualified Tax Opinion or waiver described in clause (A), (B) or (C) of Section 6.01(f) ) or (E) any breach by Zoetis of its agreement and representation set forth in Section 6.01(a) .
(b) Notwithstanding anything in this Agreement or the Separation Agreement to the contrary, subject to Section 6.04(c) , Pfizer shall be responsible for, and shall indemnify and hold harmless Zoetis and its Affiliates and each of their respective officers, directors and employees from and against, one hundred percent (100%) of any Tax-Related Losses that are attributable to, or result from any one or more of the following: (A) the acquisition (other than pursuant to the Contribution, the Debt-for-Equity Exchange, the IPO, or the Distribution) of all or a portion of Pfizers stock and/or its assets by any means whatsoever by any Person, (B) any negotiations, agreements or arrangements by Pfizer with respect to transactions or events (including, without limitation, stock issuances, pursuant to the exercise of stock options or otherwise, option grants, capital contributions or acquisitions, or a series of such transactions or events) that cause the Distribution to be treated as part of a plan pursuant to which one or more Persons acquire directly or indirectly stock of Pfizer representing a Fifty-Percent or Greater Interest therein, (C) any act or failure to act by Pfizer or a member of the Pfizer Group described in Section 6.02 or any breach by Pfizer of its agreement and representation set forth in Section 6.02 .
(c)
(i) To the extent that any Tax-Related Loss is subject to indemnity under both Sections 6.04(a) and (b) , responsibility for such Tax-Related Loss shall be shared by Pfizer and Zoetis according to relative fault.
(ii) Notwithstanding anything in Section 6.04(b) or (c)(i) or any other provision of this Agreement or the Separation Agreement to the contrary:
(A) with respect to (I) any Tax-Related Loss resulting from Section 355(e) of the Code (other than as a result of an acquisition of a Fifty-Percent or Greater Interest in Pfizer) and (II) any other Tax-Related Loss resulting (for the absence of doubt, in whole or in part) from an acquisition after the Distribution of any stock or assets of Zoetis (or any Zoetis Affiliate) by any means whatsoever by any Person or any action or failure to act by Zoetis affecting the voting rights of Zoetis stock, Zoetis shall be responsible for, and shall indemnify and hold harmless Pfizer and its Affiliates and each of their respective officers, directors and employees from and against, one hundred percent (100%) of such Tax-Related Loss; and
23
(B) for purposes of calculating the amount and timing of any Tax-Related Loss for which Zoetis is responsible under this Section 6.04 , Tax-Related Losses shall be calculated by assuming that Pfizer, the Pfizer Affiliated Group and each member of the Pfizer Group (I) pay Tax at the highest marginal corporate Tax rates in effect in each relevant taxable year and (II) have no Tax Attributes in any relevant taxable year.
(iii) Notwithstanding anything in Section 6.04(a) or (c)(i) or any other provision of this Agreement or the Separation Agreement to the contrary, with respect to (I) any Tax-Related Loss resulting from Section 355(e) of the Code (other than as a result of an acquisition of a Fifty-Percent or Greater Interest in Zoetis) and (II) any other Tax-Related Loss resulting (for the absence of doubt, in whole or in part) from an acquisition after the Distribution of any stock or assets of Pfizer (or any Pfizer Affiliate) by any means whatsoever by any Person, Pfizer shall be responsible for, and shall indemnify and hold harmless Zoetis and its Affiliates and each of their respective officers, directors and employees from and against, one hundred percent (100%) of such Tax-Related Loss.
(d) Zoetis shall pay Pfizer the amount of any Tax-Related Losses for which Zoetis is responsible under this Section 6.04 : (A) in the case of Tax-Related Losses described in clause (i) of the definition of Tax-Related Losses no later than two Business Days prior to the date Pfizer files, or causes to be filed, the applicable Tax Return for the year of the Contribution or Distribution, as applicable (the Filing Date ) (provided that if such Tax-Related Losses arise pursuant to a Final Determination described in clause (a), (b) or (c) of the definition of Final Determination, then Zoetis shall pay Pfizer no later than two Business Days after the date of such Final Determination with interest calculated at the Prime Rate plus two percent, compounded semiannually, from the date that is two Business Days prior to the Filing Date through the date of such Final Determination) and (B) in the case of Tax-Related Losses described in clause (ii) or (iii) of the definition of Tax-Related Losses, no later than two Business Days after the date Pfizer pays such Tax-Related Losses. Pfizer shall pay Zoetis the amount of any Tax-Related Losses (described in clause (ii) or (iii) of the definition of Tax-Related Loss) for which Pfizer is responsible under this Section 6.04 no later than two Business Days after the date Zoetis pays such Tax-Related Losses.
Section 7. Assistance and Cooperation.
Section 7.01 Assistance and Cooperation.
(a) The Companies shall cooperate (and cause their respective Affiliates to cooperate) with each other and with each others agents, including accounting firms and legal counsel, in connection with Tax matters relating to the Companies and their Affiliates including (i) preparation and filing of Tax Returns, (ii) determining the liability for and amount of any Specified Taxes due (including estimated Taxes) or the right to and amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Specified Taxes assessed or proposed to be assessed. Such cooperation shall include making all information and documents in their possession relating to the other Company and its Affiliates available to such other Company as provided in Section 8 . Each of the Companies
24
shall also make available to the other, as reasonably requested and available, personnel (including officers, directors, employees and agents of the Companies or their respective Affiliates) responsible for preparing, maintaining, and interpreting information and documents relevant to Specified Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Specified Taxes. In the event that a member of the Pfizer Group, on the one hand, or a member of the Zoetis Group, on the other hand, suffers a Tax detriment as a result of a Transfer Pricing Adjustment, the Companies shall cooperate pursuant to this Section 7 to seek any competent authority relief that may be available with respect to such Transfer Pricing Adjustment. Zoetis shall cooperate with Pfizer and take any and all actions reasonably requested by Pfizer in connection with obtaining the Tax Opinions/Rulings (including, without limitation, by making any new representation or covenant, confirming any previously made representation or covenant or providing any materials or information requested by any Tax Advisor or Tax Authority; provided that, Zoetis shall not be required to make or confirm any representation or covenant that is inconsistent with historical facts or as to future matters or events over which it has no control).
(b) Any information or documents provided under this Section 7 shall be kept confidential by the Company receiving the information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any administrative or judicial proceedings relating to Taxes. Notwithstanding any other provision of this Agreement or any other agreement, (i) neither Pfizer nor any Pfizer Affiliate shall be required to provide Zoetis or any Zoetis Affiliate or any other Person access to or copies of any information or procedures (including the proceedings of any Tax Contest) other than information or procedures that relate to Zoetis, the business or assets of Zoetis or any Zoetis Affiliate and (ii) in no event shall Pfizer or any Pfizer Affiliate be required to provide Zoetis, any Zoetis Affiliate or any other Person access to or copies of any information if such action could reasonably be expected to result in the waiver of any Privilege. In addition, in the event that Pfizer determines that the provision of any information to Zoetis or any Zoetis Affiliate could be commercially detrimental, violate any law or agreement or waive any Privilege, the parties shall use reasonable best efforts to permit compliance with its obligations under this Section 7 in a manner that avoids any such harm or consequence.
Section 7.02 Income Tax Return Information . Zoetis and Pfizer acknowledge that time is of the essence in relation to any request for information, assistance or cooperation made by Pfizer or Zoetis pursuant to Section 7.01 or this Section 7.02 . Zoetis and Pfizer acknowledge that failure to conform to the reasonable deadlines set by Pfizer or Zoetis could cause irreparable harm. Each Company shall provide to the other Company information and documents relating to its Group required by the other Company to prepare Tax Returns, including, but not limited to, any pro forma returns required by the Responsible Company for purposes of preparing such Tax Returns. Any information or documents the Responsible Company requires to prepare such Tax Returns shall be provided in such form as the Responsible Company reasonably requests and at or prior to the time reasonably specified by the Responsible Company so as to enable the Responsible Company to file such Tax Returns on a timely basis.
Section 7.03 Reliance by Pfizer . If any member of the Zoetis Group supplies information to a member of the Pfizer Group in connection with a Tax liability and an officer of a member of the Pfizer Group signs a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then upon the written request of such member of the Pfizer Group identifying the information being so relied upon, the chief financial officer of Zoetis (or any officer of Zoetis as designated by the chief financial officer of Zoetis) shall certify in writing that to his or her knowledge (based upon consultation with appropriate employees) the information so supplied is accurate and complete.
25
Section 7.04 Reliance by Zoetis . If any member of the Pfizer Group supplies information to a member of the Zoetis Group in connection with a Tax liability and an officer of a member of the Zoetis Group signs a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then upon the written request of such member of the Zoetis Group identifying the information being so relied upon, the chief financial officer of Pfizer (or any officer of Pfizer as designated by the chief financial officer of Pfizer) shall certify in writing that to his or her knowledge (based upon consultation with appropriate employees) the information so supplied is accurate and complete.
Section 8. Tax Records.
Section 8.01 Retention of Tax Records . Each Company shall preserve and keep all Tax Records exclusively relating to the assets and activities of its Group for Pre-Deconsolidation Periods, and Pfizer shall preserve and keep all other Tax Records relating to Taxes of the Groups for Pre-Deconsolidation Tax Periods, for so long as the contents thereof may become material in the administration of any matter under the Code or other applicable Tax Law, but in any event until the later of (i) the expiration of any applicable statutes of limitations, or (ii) seven years after the Deconsolidation Date (such later date, the Retention Date ). After the Retention Date, each Company may dispose of such Tax Records upon 60 Business Days prior written notice to the other Company. If, prior to the Retention Date, (a) a Company reasonably determines that any Tax Records which it would otherwise be required to preserve and keep under this Section 8 are no longer material in the administration of any matter under the Code or other applicable Tax Law and the other Company agrees, then such first Company may dispose of such Tax Records upon 60 Business Days prior notice to the other Company. Any notice of an intent to dispose given pursuant to this Section 8.01 shall include a list of the Tax Records to be disposed of describing in reasonable detail each file, book, or other record accumulation being disposed. The notified Company shall have the opportunity, at its cost and expense, to copy or remove, within such 60 Business Day period, all or any part of such Tax Records. If, at any time prior to the Retention Date, Zoetis determines to decomission or otherwise discontinue any computer program or information technology system used to access or store any Tax Records, then Zoetis may decomission or discontinue such program or system upon 90 days prior notice to Pfizer and Pfizer shall have the opportunity, at its cost and expense, to copy, within such 60 Business Day period, all or any part of the underlying data relating to the Tax Records accessed by or stored on such program or system.
Section 8.02 Access to Tax Records . The Companies and their respective Affiliates shall make available to each other for inspection and copying during normal business hours upon reasonable notice all Tax Records (and, for the avoidance of doubt, any pertinent underlying data accessed or stored on any computer program or information technology system) in their possession and shall permit the other Company and its Affiliates, authorized agents and representatives and any representative of a Taxing Authority or other Tax auditor direct access, at the cost and expense of such other Company, during normal business hours upon reasonable notice to any computer program or information technology system used to access or store any Tax Records, in each case to the extent reasonably required by the other Company in connection with the preparation of Tax Returns or financial accounting statements, audits, litigation, or the resolution of items under this Agreement.
26
Section 8.03 Preservation of Privilege . No member of the Zoetis Group shall provide access to, copies of, or otherwise disclose to any Person any documentation relating to Specified Taxes existing as of the date hereof to which Privilege may reasonably be asserted without the prior written consent of Pfizer, such consent not to be unreasonably withheld.
Section 9. Tax Contests.
Section 9.01 Notice . Each of the Companies shall provide prompt notice to the other Company of any written communication from a Tax Authority regarding any pending Tax audit, assessment or proceeding or other Tax Contest of which it becomes aware related to Taxes for Tax Periods for which it is indemnified by the other Company hereunder or for which it may be required to indemnify the other Company hereunder. Such notice shall attach copies of the pertinent portion of any written communication from a Tax Authority and contain factual information (to the extent known) describing any asserted Tax liability in reasonable detail and shall be accompanied by copies of any notice and other documents received from any Tax Authority in respect of any such matters. If an indemnified party has knowledge of an asserted Tax liability with respect to a matter for which it is to be indemnified hereunder and such party fails to give the indemnifying party prompt notice of such asserted Tax liability and the indemnifying party is entitled under this Agreement to contest the asserted Tax liability, then (i) if the indemnifying party is precluded from contesting the asserted Tax liability in any forum as a result of the failure to give prompt notice, the indemnifying party shall have no obligation to indemnify the indemnified party for any Taxes arising out of such asserted Tax liability, and (ii) if the indemnifying party is not precluded from contesting the asserted Tax liability in any forum, but such failure to give prompt notice results in a material monetary detriment to the indemnifying party, then any amount which the indemnifying party is otherwise required to pay the indemnified party pursuant to this Agreement shall be reduced by the amount of such detriment.
Section 9.02 Control of Tax Contests.
(a) Separate Returns. In the case of any Tax Contest with respect to any Separate Return, the Company having liability for the Tax pursuant to Section 2 hereof shall have exclusive control over the Tax Contest, including exclusive authority with respect to any settlement of such Tax liability, subject to Sections 9.02(c) and (d) below.
(b) Joint Return . In the case of any Tax Contest with respect to any Joint Return, Pfizer shall have exclusive control over the Tax Contest, including exclusive authority with respect to any settlement of such Tax liability, subject to Sections 9.02(c) and (d) below.
(c) Settlement Rights . The Controlling Party shall have the sole right to contest, litigate, compromise and settle any Tax Contest without obtaining the prior consent of the Non-Controlling Party. Unless waived by the parties in writing, in connection with any potential adjustment in a Tax Contest as a result of which adjustment the Non-Controlling Party may reasonably be expected to become liable to make any indemnification payment to the Controlling Party under this Agreement: (i) the Controlling Party shall keep the Non-Controlling Party informed in a timely manner of all actions taken or proposed to be taken by the Controlling Party with respect to such potential adjustment in such Tax Contest; (ii) the Controlling Party shall
27
timely provide the Non-Controlling Party copies of any written materials relating to such potential adjustment in such Tax Contest received from any Tax Authority; (iii) the Controlling Party shall timely provide the Non-Controlling Party with copies of any correspondence or filings submitted to any Tax Authority or judicial authority in connection with such potential adjustment in such Tax Contest; (iv) the Controlling Party shall consult with the Non-Controlling Party and offer the Non-Controlling Party a reasonable opportunity to comment before submitting any written materials prepared or furnished in connection with such potential adjustment in such Tax Contest; and (v) the Controlling Party shall defend such Tax Contest diligently and in good faith. The failure of the Controlling Party to take any action specified in the preceding sentence with respect to the Non-Controlling Party shall not relieve the Non-Controlling Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Non-Controlling Party was actually harmed by such failure, and in no event shall such failure relieve the Non-Controlling Party from any other liability or obligation which it may have to the Controlling Party. In the case of any Tax Contest described in Section 9.02(a) or (b) , Controlling Party means the Company entitled to control the Tax Contest under such Section and Non-Controlling Party means the other Company.
(d) Tax Contest Participation . Unless waived by the parties in writing, the Controlling Party shall provide the Non-Controlling Party with written notice reasonably in advance of, and the Non-Controlling Party shall have the right to attend, any formally scheduled meetings with Tax Authorities or hearings or proceedings before any judicial authorities in connection with any potential adjustment in a Tax Contest pursuant to which the Non-Controlling Party may reasonably be expected to become liable to make any indemnification payment to the Controlling Party under this Agreement. The failure of the Controlling Party to provide any notice specified in this Section 9.02(d) to the Non-Controlling Party shall not relieve the Non-Controlling Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Non-Controlling Party was actually harmed by such failure, and in no event shall such failure relieve the Non-Controlling Party from any other liability or obligation which it may have to the Controlling Party.
(e) Power of Attorney . Each member of the Zoetis Group shall execute and deliver to Pfizer (or such member of the Pfizer Group as Pfizer shall designate) any power of attorney or other similar document reasonably requested by Pfizer (or such designee) in connection with any Tax Contest (as to which Pfizer is the Controlling Party) described in this Section 9 . Each member of the Pfizer Group shall execute and deliver to Zoetis (or such member of the Zoetis Group as Zoetis shall designate) any power of attorney or other similar document requested by Zoetis (or such designee) in connection with any Tax Contest (as to which Zoetis is the Controlling Party) described in this Section 9 .
Section 10. Effective Date . This Agreement shall be effective as of the date hereof.
Section 11. Survival of Obligations . The representations, warranties, covenants and agreements set forth in this Agreement shall be unconditional and absolute and shall remain in effect without limitation as to time.
28
Section 12. Treatment of Payments .
Section 12.01 Treatment of Tax Indemnity Payments . In the absence of any change in Tax treatment under the Code or except as otherwise required by other applicable Tax Law, any Tax indemnity payments made by a Company under this Agreement shall be reported for Tax purposes by the payor and the recipient as distributions or capital contributions, as appropriate, occurring immediately before the Deconsolidation (but only to the extent the payment does not relate to a Tax allocated to the payor in accordance with Section 1552 of the Code or the regulations thereunder or Treasury Regulation Section 1.1502-33(d) (or under corresponding principles of other applicable Tax Laws)) or as payments of an assumed or retained liability. Except to the extent provided in Section 12.02 , any Tax indemnity payment made by a Company under this Agreement shall be increased as necessary so that after making all payments in respect to Taxes imposed on or attributable to such indemnity payment, the recipient Company receives an amount equal to the sum it would have received had no such Taxes been imposed.
Section 12.02 Interest Under This Agreement . Anything herein to the contrary notwithstanding, to the extent one Company ( Indemnitor ) makes a payment of interest to another Company ( Indemnitee ) under this Agreement with respect to the period from the date that the Indemnitee made a payment of Tax to a Tax Authority to the date that the Indemnitor reimbursed the Indemnitee for such Tax payment, the interest payment shall be treated as interest expense to the Indemnitor (deductible to the extent provided by law) and as interest income by the Indemnitee (includible in income to the extent provided by law). The amount of the payment shall not be adjusted to take into account any associated Tax Benefit to the Indemnitor or increase in Tax to the Indemnitee.
Section 13. Disagreements .
Section 13.01 Discussion . The Companies mutually desire that friendly collaboration will continue between them. Accordingly, they will try, and they will cause their respective Group members to try, to resolve in an amicable manner all disagreements and misunderstandings connected with their respective rights and obligations under this Agreement, including any amendments hereto. In furtherance thereof, in the event of any dispute or disagreement (a Dispute ) between any member of the Pfizer Group and any member of the Zoetis Group as to the interpretation of any provision of this Agreement or the performance of obligations hereunder, the Tax departments of the Companies shall negotiate in good faith to resolve the Dispute.
Section 13.02 Escalation . If such good faith negotiations do not resolve the Dispute, then the matter, upon written request of either Company, will be referred for resolution to representatives of the parties at a senior level of management of the parties pursuant to the procedures set forth in Section 8.02(a) of the Separation Agreement.
Section 13.03 Referral to Tax Advisor . If the parties are not able to resolve the Dispute through the escalation process referred to above, then the matter will be referred to a Tax Advisor acceptable to each of the Companies to act as an arbitrator in order to resolve the Dispute. In the event that the Companies are unable to agree upon a Tax Advisor within 15 Business Days following the completion of the escalation process, the Companies shall each separately retain an independent, nationally recognized law or accounting firm (each, a Preliminary Tax Advisor ), which Preliminary Tax Advisors shall jointly select a Tax
29
Advisor on behalf of the Companies to act as an arbitrator in order to resolve the Dispute. The Tax Advisor may, in its discretion, obtain the services of any third-party appraiser, accounting firm or consultant that the Tax Advisor deems necessary to assist it in resolving such disagreement. The Tax Advisor shall furnish written notice to the Companies of its resolution of any such Dispute as soon as practical, but in any event no later than 30 Business Days after its acceptance of the matter for resolution. Any such resolution by the Tax Advisor will be conclusive and binding on the Companies. Following receipt of the Tax Advisors written notice to the Companies of its resolution of the Dispute, the Companies shall each take or cause to be taken any action necessary to implement such resolution of the Tax Advisor. Each Company shall pay its own fees and expenses (including the fees and expenses of its representatives) incurred in connection with the referral of the matter to the Tax Advisor (and the Preliminary Tax Advisors, if any). All fees and expenses of the Tax Advisor (and the Preliminary Tax Advisors, if any) in connection with such referral shall be shared equally by the Companies.
Section 13.04 Injunctive Relief . Nothing in this Section 13 will prevent either Company from seeking injunctive relief if any delay resulting from the efforts to resolve the Dispute through the process set forth above could result in serious and irreparable injury to either Company. Notwithstanding anything to the contrary in this Agreement, Pfizer and Zoetis are the only members of their respective Group entitled to commence a dispute resolution procedure under this Agreement, and each of Pfizer and Zoetis will cause its respective Group members not to commence any dispute resolution procedure other than through such party as provided in this Section 13 .
Section 14. Late Payments . Any amount owed by one party to another party under this Agreement which is not paid when due shall bear interest at the Prime Rate plus two percent, compounded semiannually, from the due date of the payment to the date paid. To the extent interest required to be paid under this Section 14 duplicates interest required to be paid under any other provision of this Agreement, interest shall be computed at the higher of the interest rate provided under this Section 14 or the interest rate provided under such other provision.
Section 15. Expenses . Except as otherwise provided in this Agreement, each party and its Affiliates shall bear their own expenses incurred in connection with preparation of Tax Returns, Tax Contests, and other matters related to Taxes under the provisions of this Agreement.
Section 16. General Provisions .
Section 16.01 Addresses and Notices . Each party giving any notice required or permitted under this Agreement will give the notice in writing and use one of the following methods of delivery to the party to be notified, at the address set forth below or another address of which the sending party has been notified in accordance with this Section 16.01 : (a) personal delivery; (b) facsimile or telecopy transmission with a reasonable method of confirming transmission; (c) commercial overnight courier with a reasonable method of confirming delivery; or (d) pre-paid, United States of America certified or registered mail, return receipt requested. Notice to a party is effective for purposes of this Agreement only if given as provided in this Section 16.01 and shall be deemed given on the date that the intended addressee actually receives the notice.
30
If to Pfizer :
Pfizer Inc.
235 East 42nd Street
New York, NY 10017
Attention: [ ]
with a copy to:
[ ]
If to the Company to:
Zoetis Inc.
[ ]
[with a copy to:
[ ]]
A party may change the address for receiving notices under this Agreement by providing written notice of the change of address to the other parties.
Section 16.02 Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns.
Section 16.03 Waiver . The parties may waive a provision of this Agreement only by a writing signed by the party intended to be bound by the waiver. A party is not prevented from enforcing any right, remedy or condition in the partys favor because of any failure or delay in exercising any right or remedy or in requiring satisfaction of any condition, except to the extent that the party specifically waives the same in writing. A written waiver given for one matter or occasion is effective only in that instance and only for the purpose stated. A waiver once given is not to be construed as a waiver for any other matter or occasion. Any enumeration of a partys rights and remedies in this Agreement is not intended to be exclusive, and a partys rights and remedies are intended to be cumulative to the extent permitted by law and include any rights and remedies authorized in law or in equity.
Section 16.04 Severability . If any provision of this Agreement is determined to be invalid, illegal or unenforceable, the remaining provisions of this Agreement remain in full force, if the essential terms and conditions of this Agreement for each party remain valid, binding and enforceable.
Section 16.05 Authority . Each of the parties represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate or other action, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it
31
in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors rights generally and general equity principles.
Section 16.06 Further Action . The parties shall execute and deliver all documents, provide all information, and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement, including the execution and delivery to the other parties and their Affiliates and representatives of such powers of attorney or other authorizing documentation as is reasonably necessary or appropriate in connection with Tax Contests (or portions thereof) under the control of such other parties in accordance with Section 9 .
Section 16.07 Integration . This Agreement, together with each of the exhibits and schedules appended hereto, contains the entire agreement between the Companies with respect to the subject matter hereof and supersedes all other agreements, whether or not written, in respect of any Specified Tax between or among any member or members of the Pfizer Group, on the one hand, and any member or members of the Zoetis Group, on the other hand. All such other agreements, including, but not limited to, that certain Tax Sharing Agreement by and among Pfizer and certain of its subsidiaries, dated December 31, 2003, shall be of no further effect between the Companies and any rights or obligations existing thereunder shall be fully and finally settled, calculated as of the date hereof. In the event of any inconsistency between this Agreement and the Separation Agreement or any of the Local Separation Agreements, or any other agreements relating to the transactions contemplated by the Separation Agreement, with respect to the subject matter hereof, the provisions of this Agreement shall control.
Section 16.08 Construction . The language in all parts of this Agreement shall in all cases be construed according to its fair meaning and shall not be strictly construed for or against any party. The captions, titles and headings included in this Agreement are for convenience only, and do not affect this Agreements construction or interpretation. Unless otherwise indicated, all Section references in this Agreement are to sections of this Agreement.
Section 16.09 No Double Recovery . No provision of this Agreement shall be construed to provide an indemnity or other recovery for any costs, damages, or other amounts for which the damaged party has been fully compensated under any other provision of this Agreement or under any other agreement or action at law or equity. Unless expressly required in this Agreement, a party shall not be required to exhaust all remedies available under other agreements or at law or equity before recovering under the remedies provided in this Agreement.
Section 16.10 Counterparts . The parties may execute this Agreement in multiple counterparts, each of which constitutes an original as against the party that signed it, and all of which together constitute one agreement. This Agreement is effective upon delivery of one executed counterpart from each party to the other party. The signatures of the parties need not appear on the same counterpart. The delivery of signed counterparts by facsimile or email transmission that includes a copy of the sending partys signature is as effective as signing and delivering the counterpart in person.
32
Section 16.11 Governing Law . The internal laws of the State of New York (without reference to its principles of conflicts of law) govern the construction, interpretation and other matters arising out of or in connection with this Agreement and each of the exhibits and schedules hereto and thereto (whether arising in contract, tort, equity or otherwise).
Section 16.12 Jurisdiction . If any dispute arises out of or in connection with this Agreement, except as expressly contemplated by another provision of this Agreement, the parties irrevocably (and the parties will cause each other member of their respective Group to irrevocably) (a) consent and submit to the exclusive jurisdiction of federal and state courts located in Delaware, (b) waive any objection to that choice of forum based on venue or to the effect that the forum is not convenient, and (c) WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO TRIAL OR ADJUDICATION BY JURY.
Section 16.13 Amendment . The parties may amend this Agreement only by a written agreement signed by each party to be bound by the amendment and that identifies itself as an amendment to this Agreement.
Section 16.14 Zoetis Subsidiaries . If, at any time, Zoetis acquires or creates one or more subsidiaries that are includable in the Zoetis Group, they shall be subject to this Agreement and all references to the Zoetis Group herein shall thereafter include a reference to such subsidiaries.
Section 16.15 Successors . This Agreement shall be binding on and inure to the benefit of any successor by merger, acquisition of assets, or otherwise, to any of the parties hereto (including but not limited to any successor of Pfizer or Zoetis succeeding to the Tax attributes of either under Section 381 of the Code), to the same extent as if such successor had been an original party to this Agreement.
Section 16.16 Injunctions . The parties acknowledge that irreparable damage would occur in the event that any of the provisions of this Agreement, including Section 6.01 , were not performed in accordance with its specific terms or were otherwise breached. The parties hereto shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement, including Section 6.01 , and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which they may be entitled at law or in equity.
33
IN WITNESS WHEREOF, each party has caused this Agreement to be executed on its behalf by a duly authorized officer on the date first set forth above.
PFIZER INC., a Delaware corporation | ||
By: |
|
|
Name: | ||
Title: | ||
ZOETIS INC., a Delaware corporation | ||
By: |
|
|
Name: | ||
Title: |
[Signature Page to Tax Matters Agreement]
Exhibit 10.5
FORM OF
EMPLOYEE MATTERS AGREEMENT
This EMPLOYEE MATTERS AGREEMENT (this Agreement ) dated as of [ ], 201[ ], is by and among PFIZER INC., a Delaware corporation ( Pfizer ) and ZOETIS INC., a Delaware corporation (the Company ). Pfizer and the Company are sometimes referred to herein individually as a Party and collectively as the Parties .
RECITALS:
WHEREAS, the Board of Directors of Pfizer has determined that it is in the best interests of Pfizer and its stockholders to separate the Animal Health Business (as such term is defined in the Global Separation Agreement, dated as of the date hereof (the Separation Agreement )) from the other businesses conducted by Pfizer and its Subsidiaries (as defined in the Separation Agreement);
WHEREAS, the Parties have entered into that certain Contribution Agreement, dated as of [ ] (the Contribution Agreement ) pursuant to which Pfizer and its Subsidiaries transferred the capital stock and equity interests of the Transferred Entities (as defined in the Separation Agreement) to the Company in exchange for the Companys issuance to Pfizer of Company common stock and certain securities and the Companys payment to Pfizer of cash, as more fully described in the Contribution Agreement;
WHEREAS, the Separation Agreement sets forth the terms and conditions applicable to the IPO (as defined in the Separation Agreement);
WHEREAS, after the IPO, Pfizer may determine to proceed with the Distribution or Other Disposition (each, as defined in the Separation Agreement); and
WHEREAS, in furtherance of the foregoing, the Parties have entered into this Agreement, which is an Ancillary Agreement (as defined in the Separation Agreement) to the Separation Agreement, to govern the rights and obligations of the Parties with respect to employment, compensation, employee benefits and related matters in connection with the Transactions (as defined in the Separation Agreement), and to ratify actions previously taken in connection with the Contribution (as defined in the Separation Agreement), as set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows:
ARTICLE I
SCOPE OF AGREEMENT; DEFINITIONS
Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Separation Agreement. For purposes of this Agreement the terms set forth below shall have the following meanings:
1.1 Company Deferred Compensation Plan shall have the meaning set forth in Subsection 7.1(c)(ii).
1
1.2 Company Employee means any individual who is (i) employed by Pfizer or a Subsidiary immediately prior to the applicable Employee Transfer Date and primarily devoting his or her working time to the Animal Health Business (excluding each R&D Employee) or (ii) employed by the Company immediately following the applicable Employee Transfer Date.
1.4 Company Flexible Benefits Plans means the Company Health Care Spending Account Plan and the Company Dependent Care Spending Account Plan to be established by the Company pursuant to Section 3.2 to accept a spin-off of the flexible spending reimbursement accounts of Company Transferred Employees under the respective Pfizer Flexible Spending Account Plans in accordance with Section 8.4.
1.5 Company Group means the Company, each Transferred Entity, each other Subsidiary of the Company and each other Person that either (i) is controlled directly or indirectly by the Company immediately after the Effective Date or (ii) becomes controlled by the Company following the Effective Date.
1.6 Company Supplemental Savings Plan shall have the meaning set forth in Subsection 7.1(b)(ii).
1.7 Company Transferred Employee means any Company Employee (i) whose employment transferred from a member of the Pfizer Group to a member of the Company Group by operation of law or (ii) who accepted an offer of employment from a member of the Company Group, in each case as of the applicable Employee Transfer Date; provided, however, that any Company Employee receiving long-term disability benefits shall not transfer and shall remain employed by a member of the Pfizer Group unless otherwise required by applicable Law, and provided, further, that any Inactive Company Employee shall become a Company Transferred Employee on such employees Return Date and until such time shall remain employed by a member of the Pfizer Group.
1.8 Company WC Claims shall have the meaning set forth in Subsection 8.8(b)(i).
1.9 COBRA means the continuation coverage requirements for group health plans under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended from time to time, and as codified in Code Section 4980B and ERISA Sections 601 through 608.
1.10 Disposition Date means the earlier to occur of the Distribution or Other Disposition such that Pfizer and its Affiliates cease to hold in excess of 50% of the outstanding shares of Company common stock.
1.11 DOL means the United States Department of Labor.
1.12 Employee Transfer Date means the date by which Company Employees will have transferred or accepted offers of employment from a member of the Company Group; for U.S. employees, this date is October 1, 2012 or such other date that a Pfizer Employee is offered employment by the Company and transfers employment to the Company, and for non-U.S. employees this date is December 1, 2012, or such other date as agreed upon by the Parties in respect of specified jurisdictions.
2
1.13 Effective Date has the meaning set forth in the Separation Agreement.
1.14 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time.
1.15 Final Determination means the final resolution of liability for any tax, which resolution may be for a specific issue or adjustment or for a taxable period, (i) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by a comparable form under the laws of a state, local, or foreign taxing jurisdiction, except that a Form 870 or 870-AD or comparable form shall not constitute a Final Determination to the extent that it reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund or the right of the tax authority to assert a further deficiency in respect of such issue or adjustment or for such taxable period (as the case may be); (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Sections 7121 or 7122 of the Internal Revenue Code, or a comparable agreement under the laws of a state, local, or foreign taxing jurisdiction.
1.16 FMLA means the Family and Medical Leave Act of 1993, as amended from time to time.
1.17 Former Company Employee means any individual (i) whose employment with Pfizer and its Subsidiaries terminated prior to the Employee Transfer Date and who was, immediately prior to such termination, primarily devoting his or her working time to the Animal Health Business, or (ii) is designated as a Former Company Employee on Exhibit B hereto.
1.18 Fringe Benefits means, when immediately preceded by Pfizer, the Pfizer or legacy King Pharmaceuticals, Inc. employee assistance program, the educational assistance program and other fringe benefits, plans, programs and arrangements sponsored and maintained by Pfizer and, when immediately preceded by Company, any fringe benefits, plans, programs and arrangements to be established by the Company.
1.19 Health and Welfare Plans means, when immediately preceded by Pfizer, the Pfizer or King Pharmaceuticals, Inc. health plans, the Pfizer Health and Insurance Program , and the other health and welfare plans established and maintained by Pfizer or a Subsidiary and, when immediately preceded by Company, the Company Health Plans, the Company Flexible Benefits Plans, and the other health and welfare plans to be established by the Company pursuant to Section 3.2.
1.20 Health Plans means, when immediately preceded by Pfizer, the group health plans and such other health plans or programs, including medical, prescription drug, dental and vision plans and programs established and maintained by Pfizer or a Subsidiary and, when immediately preceded by Company, the health plans, programs and arrangements to be established by the Company pursuant to Section 3.2.
3
1.21 Inactive Company Employee means any Company Employee and who is not actively at work on the Employee Transfer Date because he or she is on approved short-term disability or other approved leave in accordance (excluding long-term disability) with the applicable Pfizer Leave of Absence Program.
1.22 Leave of Absence Programs means, when immediately preceded by Pfizer, the personal, medical, military and FMLA leave and other leaves of absence required by applicable Law or offered from time to time under the personnel policies and practices of Pfizer and when immediately preceded by Company, the leave of absence programs to be established by the Company pursuant to Section 3.2 that correspond to the respective Pfizer Leave of Absence Program.
1.23 Legacy Defined Benefit Plan means the Alpharma Inc., Pension Plan and the Faulding Inc. Pension Plan.
1.24 Legacy Retiree Medical Plan means the Alpharma Retiree Medical Plan.
1.25 Legacy Savings Plan means the King Pharmaceuticals Inc., 401(k) Savings Plan.
1.26 Legacy SERP means the Supplemental Executive Retirement Plan, the Warner Lambert Supplemental Pension Income Plan, and the Pharmacia, Corp. Supplemental Pension Plan.
1.27 Life Insurance Plan means, when immediately preceded by Pfizer, the life insurance plan of Pfizer and any similar legacy King Pharmaceuticals, Inc. plan, and when immediately preceded by Company, the life insurance plan to be established by the Company pursuant to Section 3.2 that corresponds to the respective Pfizer Life Insurance Plan.
1.28 Local Separation Agreement has the meaning set forth in the Separation Agreement.
1.29 Long-Term Disability Plan means, when immediately preceded by Pfizer, the Pfizer Long-Term Disability Plan or any similar legacy King Pharmaceuticals, Inc. plan and when immediately preceded by Company, the long-term disability plan to be established by the Company pursuant to Section 3.2.
1.30 Nonqualified Plans means when immediately preceded by Pfizer, the Nonfunded Deferred Compensation and Supplemental Savings Plan, the Nonfunded Supplemental Retirement Plan, the Deferred Compensation Plan, and the Wyeth Plans, and, when immediately preceded by Company, the Supplemental Savings Plan to be established by the Company pursuant to Sections 3.2 and 7.1.
1.31 Option means an option to purchase Pfizer common stock pursuant to the Pfizer Stock Plan.
1.32 Participating Company means, with respect to any Plan: (i) any Person (other than an individual) that Pfizer has approved for participation in, has accepted participation in, and which is participating in, a Plan sponsored by Pfizer; or (ii) any Person (other than an individual) which, by the terms of such Plan, participates in such Plan or any employees of which, by the terms of such Plan, participate in or are covered by such Plan.
4
1.33 Pfizer Employee means an employee other than a Company Employee who, on the Employee Transfer Date, is: (i) either actively employed by, or on leave of absence from, any member of the Pfizer Group or (ii) an R&D Employee.
1.34 Pfizer Flexible Benefits Plans means the Pfizer Health Care Spending Account Plan and the Pfizer Dependent Care Spending Account Plan and the King Pharmaceuticals, Inc. flexible spending plans.
1.35 Pfizer Group means Pfizer, each other Subsidiary of Pfizer involved in the Transactions and each other Person that either (x) is controlled directly or indirectly by Pfizer immediately after the Effective Date or (y) becomes controlled by Pfizer following the Effective Date; provided, however, that neither the Company nor any other member of the Company Group shall be members of the Pfizer Group.
1.36 Pfizer Retirement Plan means the Pfizer Consolidated Pension Plan.
1.37 Pfizer Stock Plan means the Pfizer Inc. 2004 Stock Plan, any other plan, program or arrangement, pursuant to which employees and other service providers hold Options, Restricted Stock Units or other Pfizer equity incentives.
1.38 Plan means any written or unwritten plan, policy, program, payroll practice, arrangement, contract, trust, insurance policy, or any agreement or funding vehicle providing compensation or benefits to employees, former employees or directors of a member of the Pfizer Group or the Company Group; when immediately preceded by Pfizer, the Pfizer Plans and when immediately preceded by Company, the plans to be established by the Company.
1.39 Plan Transition Date means, except as agreed upon by the Parties in respect of specified jurisdictions, the date that is the earlier to occur of (i) the date that the Company is no longer a member of the controlled group of corporations of Pfizer (as defined in Section 414(b) of the Code) or (ii) the date, which Pfizer and the Company shall mutually agree in writing upon which the Company shall cease to be a Participating Company in the Pfizer Plans and shall establish the Company Plans, as set forth herein.
1.40 PSA means a Performance Share Award, which is an award to receive shares of Pfizer common stock that is subject to corporate performance criteria, issued pursuant to the Pfizer Stock Plan.
1.41 QDRO means a domestic relations order which qualifies under Section 414(p) of the Code and ERISA Section 206(d) and which creates or recognizes an alternate payees right to, or assigns to an alternate payee, all or a portion of the benefits payable to a participant under a plan qualified under Section 401(a) of the Code.
1.42 QMCSO means a medical child support order which qualifies under ERISA Section 609(a) and which creates or recognizes the existence of an alternate recipients right to, or assigns to an alternate recipient the right to, receive benefits for which a participant or beneficiary is eligible under any of the Health Plans.
5
1.43 R&D Employee means any individual designated as a Curator in the Research and Development Collaboration and License Agreement, pursuant to which such individual is employed by Pfizer and who will provide services to a member of the Company Group.
1.44 Restricted Stock Unit means a contractual right to receive shares of Pfizer common stock or the cash value thereof, which right is subject to transfer restrictions or to employment and/or performance vesting conditions, issued pursuant to the Pfizer Stock Plan.
1.45 Retiree Programs means the Pfizer Retiree Medical Plan, and the Legacy Retiree Medical Plan.
1.46 Return Date means the date on which an Inactive Company Employee returns to active employment.
1.47 Savings Plan means when immediately preceded by Pfizer, means the Pfizer Savings Plan, a defined contribution plan and when immediately preceded by Company, means the defined contribution plan funded by a trust that is qualified under Code Section 401(a) and exempt from taxation under Code Section 501(a)(1), to be established by the Company pursuant to Section 3.2 and Article 6.
1.48 Separation Agreement has the meaning set forth in the recitals.
1.49 Short-Term Disability Plan means when immediately preceded by Pfizer, the Pfizer Short-Term Disability policy or any similar legacy King Pharmaceuticals, Inc. plan or policy (or, where an employee works in a state that offers a statutory state short-term disability plan, then Short-Term Disability Plan refers to the alternative voluntary state disability plan offered under the Short-Term Disability Plan) and when immediately preceded by Company, means the short-term disability plan to be established by the Company pursuant to Section 3.2.
1.50 TSRU means a Total Shareholder Return Unit, which is a contractual right to receive an award of shares of Pfizer common stock with a value equal to the change in the stock price of Pfizer common stock over the applicable settlement period, as well as accrued dividend equivalents, subject to certain restrictions and issued pursuant to the Pfizer Stock Plan.
1.51 Wyeth Plans means the Wyeth Deferred Compensation Plan, the Wyeth Supplemental Executive Retirement Plan and the Wyeth Supplemental Employee Savings Plan.
ARTICLE II
GLOBAL PROVISION; GENERAL ALLOCATION OF LIABILITIES
2.1 In General . All provisions herein shall be subject to the requirements of all applicable Law and any collective bargaining, works council or similar agreement or arrangement with any labor union. The provisions of this Agreement shall apply in respect of all jurisdictions wherever situated; provided, however, that to the extent a Local Separation
6
Agreement or an appendix attached hereto addresses employment, compensation and employee benefit matters, the terms of such Local Separation Agreement or such appendix shall govern in respect of matters relating to employees employed in the applicable jurisdiction.
2.2 Employee Liabilities . On the applicable Employee Transfer Date, the Company or another member of the Company Group shall assume and thereafter shall pay, perform, fulfill, and discharge, except as expressly provided in this Agreement, (i) all employment or service-related Liabilities with respect to all Company Transferred Employees (and their dependents and beneficiaries) accrued and arising on and after the applicable Employee Transfer Date, and (ii) any Liabilities expressly transferred to the Company or a Company Group member under this Agreement.
2.3 Plan Liabilities . Except as expressly set forth herein, Pfizer and the Company intend that Pfizer and/or the applicable Pfizer Plan shall retain and be responsible for any Liabilities incurred by Company Transferred Employees under all Pfizer Plans prior to the applicable Plan Transition Date, or such earlier date specified herein in respect of certain Plans. An appropriate allocation of the Company costs incurred prior to the Plan Transition Date shall be charged back to the Company.
ARTICLE III
GENERAL PLAN MATTERS
3.1 Pfizer Plans.
(a) Employee Participation . Except as otherwise set forth herein, effective as of the applicable Plan Transition Date, all Company Transferred Employees shall cease participating in any Pfizer Plans and shall cease accruing benefits in respect of such plans.
(b) Company Participation in Pfizer Plans . Except as otherwise set forth herein, or except as otherwise agreed upon by the Parties, until the applicable Plan Transition Date, the Company shall continue to be a Participating Company in the Pfizer Health and Welfare Plans, the Pfizer Savings Plan, the Pfizer Fringe Benefits, the Pfizer Life Insurance Plan, the Pfizer Long-Term Disability Plan and such other Pfizer Plans in which the Company Transferred Employees participate, subject to the terms and conditions provided herein and in said Plans.
(c) Pfizers General Obligations as Plan Sponsor . Pfizer shall continue to administer, or cause to be administered, the Pfizer Plans, and shall have the sole and absolute discretion and authority to interpret the Pfizer Plans, as set forth therein, subject to the specific arrangements provided in this Agreement. Pfizer shall administer all claims incurred under the Pfizer Plans before the Plan Transition Date. Any determination made or settlements entered into by Pfizer with respect to such claims shall be final and binding.
(d) Companys General Obligations as Participating Company . With respect to any Pfizer Plan that provides benefits to a Company Transferred Employee, the Company will cooperate with Pfizer on a timely basis with respect to such Plans, and the Company shall comply with the terms as set forth in such Plans or any procedures adopted pursuant thereto,
7
including (without limitation): (i) assisting in the administration of claims, to the extent requested by the claims administrator of said Pfizer Plan; (ii) cooperating fully with Pfizer Plan auditors; (iii) the provision of payroll processing support; (iv) the qualification and administration of QDROs; (v) preserving the confidentiality of all financial arrangements Pfizer has or may have with any entity or individual with whom Pfizer has entered into an agreement relating to said Pfizer Plan; and (vi) preserving the confidentiality of participant information to the extent not specified otherwise in this Agreement. In addition, the Company shall provide, or cause to be provided, all participant information that is necessary or appropriate for the efficient and accurate administration of each Pfizer Plan or program that provides or has provided benefits to a Company Transferred Employee during the respective period applicable to such Plan. Pfizer and its respective authorized agents shall, subject to applicable laws of confidentiality and data protection, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party or its agents, to the extent necessary or appropriate for the administration of said Plans or programs.
(e) Reporting and Disclosing Communications to Participants . While the Company is a Participating Company in the Pfizer Plans, Pfizer shall take, or cause to be taken, all actions necessary or appropriate to facilitate the distribution of all Pfizer Plan-related communications and materials to participating the Company Employees and their beneficiaries, including (without limitation) notices and enrollment material for the Pfizer Plans. To the extent that Pfizer fails to take such action which results in the failure of a distribution of required disclosure materials in connection with a Pfizer Plan which results in any Liability to the Company, Pfizer shall indemnify the Company for such Liability. The Company shall provide all information needed by Pfizer to facilitate such Pfizer Plan-related communications. The Company shall take, or cause to be taken, all actions necessary or appropriate to facilitate the distribution of all Pfizer Plan-related communications and materials to participating Company Transferred Employees and their beneficiaries. To the extent that the Company fails to take such action which results in the failure of a distribution of required disclosure materials in connection with a Pfizer Plan which results in any Liability to Pfizer, the Company shall indemnify Pfizer for such Liability.
(f) Pfizer Under No Obligation to Maintain Plans . Nothing in this Agreement shall preclude Pfizer, at any time, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Pfizer Plan, any benefit under any Pfizer Plan or any trust, insurance policy or funding vehicle related to any Pfizer Plan. To the extent that any such amendment, modification, termination or elimination of a Pfizer Plan results in any Liability to the Company, Pfizer shall indemnify the Company for such Liability.
3.2 Company Plans .
(a) Establishment of Company Plans . Except as otherwise set forth herein, or except as otherwise agreed upon by the Parties, effective as of the applicable Plan Transition Date, the Parties shall cause the Company to cease being a Participating Company in the Pfizer Plans and the Company, or another member of the Company Group, shall adopt the Company Health and Welfare Plans, the Company Savings Plan, the Company Fringe Benefits, the Company Life Insurance Plan, the Company Long-Term Disability Plan, the Company Short-Term Disability Plan, the Company Nonqualified Plans and such other Company Plans as may
8
be determined to be appropriate by the Parties, which Plans shall generally correspond to the Pfizer Plans in which the Company Employees participated immediately prior to the Plan Transition Date; provided, however, that the Company shall not be required to adopt any defined benefit pension plan, retirement medical plan or nonqualified plans except to the extent required by Law or any collective bargaining agreement.
(b) Cooperation in Establishment of Company Plans . Prior to the applicable Plan Transition Date, Pfizer and the Company shall cooperate to establish the Company Plans and the related insurance contracts, third party service provider agreements and other related agreements and arrangements.
(c) Company Under No Obligation to Maintain Plans . Nothing in this Agreement shall preclude the Company, at any time after the applicable Plan Transition Date, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Company Plan, any benefit under any Company Plan or any trust, insurance policy or funding vehicle related to any Company Plan. To the extent that any such amendment, modification, termination or elimination of a Company Plan results in any Liability to any member of the Pfizer Group, the Company shall indemnify such Pfizer Group member for such Liability.
(d) Transfers of Plan Assets . Except as otherwise specified in this Agreement, nothing in this Agreement shall require Pfizer to transfer any Assets of any member of the Pfizer Group or any Pfizer Plan.
3.3 Terms of Participation by Company Transferred Employees in Company Plans .
(a) Non-Duplication of Benefits . The Company Plans shall be, with respect to Company Transferred Employees, in all respects the successors in interest to, and shall not provide benefits that duplicate benefits provided by, the corresponding Pfizer Plans. Pfizer and the Company shall agree on methods and procedures, including amending the respective Plan documents, to prevent Company Transferred Employees from receiving duplicate benefits from the Pfizer Plans and the Company Plans.
(b) Service Credit . The Company shall credit service under the Company Plans accrued by Company Transferred Employees with, or otherwise recognized for purposes of benefit plans, programs, policies or arrangements by Pfizer as of the applicable Plan Transition Date for all purposes (other than for benefit accrual purposes under any defined benefit pension plan of the Company). The service crediting provisions shall be subject to any respectively applicable service bridging, break in service, employment date, or eligibility date rules under the Company Plans and the corresponding Pfizer Plans.
9
ARTICLE IV
EMPLOYMENT MATTERS FOR COMPANY TRANSFERRED EMPLOYEES
4.1 Liabilities Related to Transfers of Employment .
(a) No Acceleration of Entitlements; No Severance . No provision of this Agreement, the Separation Agreement, or any Ancillary Agreement shall be construed to create any right, or accelerate entitlement, to any compensation or benefit whatsoever on the part of any Company Employee, Company Transferred Employee or other future, present or former employee of Pfizer or the Company under any Pfizer Plan or Company Plan, applicable Law or otherwise.
(b) Assumption of Liability . Pfizer shall retain and be solely responsible for the administration of severance, indemnity or other termination pay or other similar benefits in accordance with the terms and conditions of the applicable Pfizer severance plan or policy in effect as of the date of the applicable termination of employment (i) relating to or resulting from the Company Groups failure to offer employment to any Company Employee as of the applicable Employee Transfer Date (or failure to continue the employment of any Company Employee prior to the Plan Transition Date) or failure to offer or continue employment on terms and conditions which would preclude any claims of constructive dismissal or similar claims under any applicable Law or other failure to comply with the terms of this Agreement prior to the Plan Transition Date or (ii) where such severance, indemnity or termination pay or other benefits are required to be paid under applicable Law or a Pfizer Plan upon the Employee Transfer Date without regard to such terms and conditions or such continuation of employment.
4.2 Assumption of Employment Agreements; Certain Other Terms of Employment . As of the applicable Employee Transfer Date, the Company or another member of the Company Group shall have used reasonable efforts to assume all employment agreements, individual supplemental benefit agreements and other individual agreements entered into between a Company Transferred Employee and a member of the Pfizer Group, and the Company shall indemnify and hold harmless Pfizer and each member of the Pfizer Group against any Liabilities pursuant to any such agreement. Each Company Transferred Employee shall be required at the request of the Company to execute a new agreement regarding confidential information and proprietary developments in a form approved by the Company. In addition, nothing in the Separation Agreement, this Agreement or any Ancillary Agreement should be construed to change the at-will status of any of the employees of the Pfizer Group or the Company Group.
4.3 Consultation with Unions; Collective Bargaining Agreements . The Parties shall cooperate to inform and consult with any union representatives to the extent required by Law or an applicable collective bargaining, works council or similar agreement or arrangement with any labor union or works council or which covers the Company Transferred Employees as of the Employee Transfer Date. As of the Employee Transfer Date, the Company, or another member of the Company Group, shall have assumed any collective bargaining agreements in effect with respect to any Company Transferred Employee, and the Company shall indemnify and hold harmless Pfizer and each member of the Pfizer Group against any Liabilities pursuant to any such agreement.
4.4 Employees with Work Visas or Permits; License to Do Business . Notwithstanding anything to the contrary in Section 4.1, Company Employees who, on the Employee Transfer Date, are employed pursuant to a work or training visa or permit which authorizes employment only by a member of the Pfizer Group shall, to the extent required by applicable Law, remain employed by such member of the Pfizer Group (providing services to the
10
Company by secondment agreement to be entered into between the Parties) until the visa or permit is amended or a new visa or permit is granted to authorize employment by a member of the Company Group. At the time such amended or new visa is issued, such Company Employees shall become Company Transferred Employees.
4.5 Warn Act and Other Notices . The Company shall provide any required notice under the Worker Adjustment and Retraining Notification Act (WARN) and any similar foreign, state, local or other applicable Law and otherwise to comply with any such requirement with respect to any plant closing or mass layoff (as defined in WARN) or similar event occurring on or after the Employee Transfer Date and affecting Company Employees. The Company shall indemnify and hold harmless the members of the Pfizer Group against any such Liabilities relating to WARN and any similar state or other applicable Law with respect to any events occurring on or after the Employee Transfer Date.
ARTICLE V
DEFINED BENEFIT PLANS
5.1 United States Defined Benefit Plans .
(a) No Assumption of Defined Benefit Plan Liabilities . No member of the Company Group shall assume any Liability with respect to the Pfizer Retirement Plan or the Legacy Defined Benefit Plan. Following December 31, 2012, no Company Employee shall accrue any additional benefits under the Pfizer Retirement Plan or the Legacy Defined Benefit Plan, except as contemplated under Subsection 5.1(b).
(b) Separation from Service; Vesting; Grow-in . Pfizer or another member of the Pfizer Group shall amend the Pfizer Retirement Plan and the Legacy Defined Benefit Plan to provide that, (i) Company Transferred Employees shall be 100% vested in their accrued benefits under the Pfizer Retirement Plan and the Legacy Defined Benefit Plan as of December 31, 2012; and (ii) until the date that is earlier to occur of (A) the Company Transferred Employees termination of employment, (B) December 31, 2017, and (C) the commencement of benefits under the Pfizer Retirement Plan and the Legacy Defined Benefit Plan, as applicable, Company Transferred Employees shall be given credit for service with members of the Company Group for purposes of eligibility for early retirement, early retirement subsidies and Rule of 90 benefits under the Pfizer Retirement Plan and the Legacy Defined Benefit Plan (but not for purposes of accruing additional benefits under the Pfizer Retirement Plan or the Legacy Defined Benefit Plan following December 31, 2012).
(c) No Company Group member shall assume any Liability allocable to the Company Transferred Employees under the Pfizer Retirement Plan or the Legacy Defined Benefit Plan; provided, however, that, to the extent that (i) any act or omission of the Company directly results in the inability of Pfizer to administer the Pfizer Retirement Plan or the Legacy Defined Benefit Plan in compliance with the respective plan terms with respect to any Company Transferred Employee who participated under the Pfizer Retirement Plan or the Legacy Defined Benefit Plan and (ii) any related Liability is imposed on any member of the Pfizer Group, the Company shall indemnify such Pfizer Group member for such Liability. To the extent that (i)
11
any act or omission of Pfizer directly results in the inability of Pfizer to administer the Pfizer Retirement Plan or the Legacy Defined Benefit Plan in compliance with the respective plan terms with respect to any Company Transferred Employee who participated under the Pfizer Retirement Plan or the Legacy Defined Benefit Plan and (ii) any related Liability is imposed on any member of the Company Group, Pfizer shall indemnify such Company Group member for such Liability.
ARTICLE VI
DEFINED CONTRIBUTION PLANS
6.1 United States Defined Contribution Plan .
(a) Pfizer Savings Plan . Pfizer or another member of the Pfizer Group shall amend the Pfizer Savings Plan to provide that: (i) Company Transferred Employees shall be 100% vested in their account balances under the Pfizer Savings Plan as of the Plan Transition Date; and (ii) effective December 31, 2012, Company Transferred Employees shall not be eligible for a Retirement Savings Contribution (as defined in the Pfizer Savings Plan) with respect to benefits earned for services rendered in 2013 and thereafter.
(b) Company Savings Plan . The Company shall establish a qualified defined contribution plan (the Company Savings Plan ), effective as of the Plan Transition Date. The Company shall be responsible for taking all necessary, reasonable and appropriate action to establish, maintain and administer the Company Savings Plan so that it is qualified under Section 401(a) of the Code and that the related trust thereunder is exempt under Section 501(a) of the Code, and as soon as reasonably practicable following the Plan Transition Date, the Company shall take all steps reasonably necessary to obtain a favorable determination from the IRS or obtain an opinion as to such qualification. Immediately prior to the Plan Transition Date, the Company Transferred Employees shall cease to participate in the Pfizer Savings Plan and in the Legacy Savings Plan, and upon the Plan Transition Date, the Company Transferred Employees shall be eligible to commence participation in the Company Savings Plan. Any minimum age or service requirements contained in the Company Savings Plan with respect to eligibility to participate generally or eligibility to share in any employer contributions under such plan shall be waived or deemed satisfied for Company Transferred Employees to the extent waived or satisfied under the Pfizer Savings Plan and Legacy Savings Plan immediately prior to the Plan Transition Date.
(c) Transfer of Pfizer Savings Plan Assets . Not later than thirty (30) days following the Plan Transition Date (or such later time as mutually agreed by the Parties), Pfizer shall cause the accounts (including any outstanding participant loan balances) in the Pfizer Savings Plan and the Legacy Savings Plan attributable, in each case, to Company Transferred Employees as of the Plan Transition Date and all of the Assets in the Pfizer Savings Plan and the Legacy Savings Plan related thereto to be transferred in-kind to the Company Savings Plan, and the Company shall cause the Company Savings Plan to accept such transfer of accounts and underlying Assets and, effective as of the date of such transfer, to assume and to fully perform, pay and discharge, all obligations of the Pfizer Savings Plan and the Legacy Savings Plan relating to the accounts of Company Transferred Employees (to the extent the Assets related to
12
those accounts are actually transferred from the Pfizer Savings Plan and the Legacy Savings Plan to the Company Savings Plan). The transfer of Assets shall be conducted in accordance with Section 414(l) of the Code, Treasury Regulation Section 1.414(1)-1 and Section 208 of ERISA. During the period after the Plan Transition Date and before such transfer of Assets, with respect to any Company Transferred Employee who has an outstanding participant loan balance under the Pfizer Savings Plan or the Legacy Savings Plan, the Company shall provide that such amounts as are required to make payments on such loan in accordance with its terms are timely remitted as directed by the administrator of the Pfizer Savings Plan or the Legacy Savings Plan for crediting under the Pfizer Savings Plan or the Legacy Savings Plan in respect of such loan, and Pfizer shall cause such administrator to apply such amounts in satisfaction of such loan.
(d) Form 5310-A . No later than thirty (30) days prior to the Plan Transition Date, Pfizer and the Company shall, to the extent necessary, file IRS Form 5310-A regarding the transfer of Assets and Liabilities from the Pfizer Savings Plan and the Legacy Savings Plan to the Company Savings Plan as provided in this Article 6.
(e) Employer Securities . Pfizer and the Company each presently intend to preserve the right, for a period of time, of Company Transferred Employees and Pfizer Employees to receive distributions in kind from, respectively, the Company Savings Plan and the Pfizer Savings Plan and the Legacy Savings Plan, if, and to the extent, investments under such plans are comprised of Company common stock or Pfizer common stock. Each of the Company and Pfizer shall determine the extent to which and when Pfizer common stock (in the case of the Company Savings Plan) and Company common stock (in the case of the Pfizer Savings Plan and the Legacy Savings Plan) shall cease to be investment alternatives thereunder.
ARTICLE VII
NON-QUALIFIED PLANS
7.1 Pfizer Nonqualified Plans .
(a) In General . Except as set forth in Section 7.1(b), no member of the Company Group shall assume any Liability with respect to any Pfizer Nonqualified Plan. The treatment of benefits under any Nonqualified Plan shall comply with Section 409A of the Code, to the extent subject thereto, and shall be paid in accordance with such plan.
(b) Nonfunded Deferred Compensation and Supplemental Savings Plan and Wyeth Supplemental Employee Savings Plan .
(i) Pfizer or another member of the Pfizer Group shall amend the Pfizer Nonfunded Deferred Compensation and Supplemental Savings Plan and the Wyeth Supplemental Employee Savings Plan to provide that: (i) Company Transferred Employees shall be 100% vested in their account balances under the Pfizer Nonfunded Deferred Compensation and Supplemental Savings Plan and the Wyeth Supplemental Employee Savings Plan as of the Plan Transition Date; and (ii) effective December 31, 2012, Company Transferred Employees shall not be eligible for a Retirement Savings Contribution (as defined in the Pfizer Savings Plan) with respect to benefits earned for services rendered in 2013 and thereafter.
13
(ii) Effective as of the Plan Transition Date, the Company shall adopt a supplemental savings plan to benefit eligible Company Transferred Employees who were participants in, or were eligible to accrue benefits under, the Pfizer Nonfunded Deferred Compensation and Supplemental Savings Plan and the Wyeth Supplemental Employee Savings Plan, the terms of which shall generally correspond to the benefits provided under the Pfizer Nonfunded Deferred Compensation and Supplemental Savings Plan and the Wyeth Supplemental Employee Savings Plan (the Company Supplemental Savings Plan ). Effective as of the Plan Transition Date, the Company shall assume all Liabilities allocable to the Company Transferred Employees under the Pfizer Nonqualified Deferred Compensation and Supplemental Savings Plan and the Wyeth Supplemental Employee Savings Plan.
(iii) Effective as of the Plan Transition Date, to the extent permitted by applicable Law, the Company shall cause the Company Supplemental Savings Plan to recognize and maintain all elections (including deferral, distribution and investment elections) and beneficiary designations with respect to the Company Transferred Employees who participated under the Pfizer Nonfunded Deferred Compensation and Supplemental Savings Plan and the Wyeth Supplemental Employee Savings Plan, to the extent such elections or designations are available under the Company Supplemental Savings Plan, until a new election that by its terms supersedes such original election is made by the Company Transferred Employee in accordance with applicable Law and the terms and conditions of the Company Supplemental Savings Plan.
(c) Deferred Compensation Plan and Wyeth Deferred Compensation Plan .
(i) Effective as of the Plan Transition Date, the Company shall adopt a deferred compensation plan to benefit eligible Company Transferred Employees , the terms of which shall generally correspond to the benefits provided under the Pfizer Deferred Compensation Plan and the Wyeth Deferred Compensation Plan (the Company Deferred Compensation Plan ). To the extent permitted or required by applicable Law, the Company shall cause the Company Deferred Compensation Plan to recognize and maintain all elections (including deferral, distribution and investment elections) and beneficiary designations with respect to the Company Transferred Employees who participated under the Pfizer Deferred Compensation Plan and the Wyeth Deferred Compensation Plan, to the extent such elections or designations are available under the Company Deferred Compensation Plan, until a new election that by its terms supersedes such original election is made by the Company Transferred Employee in accordance with applicable Law and the terms and conditions of the Company Deferred Compensation Plan.
(ii) No Company Group member shall assume any Liability allocable to the Company Transferred Employees under the Pfizer Deferred Compensation Plan or the Wyeth Deferred Compensation Plan; provided, however, that, to the extent that (i) any act or omission of the Company directly results in the inability of Pfizer to administer the
14
Pfizer Deferred Compensation Plan or the Wyeth Deferred Compensation Plan in compliance with Section 409A of the Code or any other Law or regulation and the terms of the respective Plan with respect to any Company Transferred Employee who participated under the Pfizer Deferred Compensation Plan or the Wyeth Deferred Compensation Plan and (ii) any related Liability is imposed on any member of the Pfizer Group, the Company shall indemnify such Pfizer Group member for such Liability. To the extent that (i) any act or omission of Pfizer directly results in the inability of Pfizer to administer the Pfizer Deferred Compensation Plan or the Wyeth Deferred Compensation Plan in compliance with Section 409A of the Code or any other Law or regulation and the terms of the respective Plan with respect to any Company Transferred Employee who participated under the Pfizer Deferred Compensation Plan or the Wyeth Deferred Compensation Plan and (ii) any related Liability is imposed on any member of the Company Group, Pfizer shall indemnify such Company Group member for such Liability.
(d) Nonfunded Supplemental Retirement Plan and Legacy SERPs .
(i) Except as set forth in this Section 7.1(d), no Company Employee shall accrue any additional benefits under the Pfizer Nonfunded Supplemental Retirement Plan or any Legacy SERPs following December 31, 2012. Pfizer or another member of the Pfizer Group shall amend the Nonfunded Supplemental Retirement Plan and the Legacy SERPs to provide that, (i) Company Transferred Employees shall be 100% vested in their accrued benefits under such Plans as of December 31, 2012; and (iii) until the date that is earlier to occur of (A) the Company Transferred Employees termination of employment, (B) December 31, 2017, and (C) the commencement of benefits under the Pfizer Retirement Plan, or a Legacy Retirement Plan, as the case may be. Company Transferred Employees shall be given credit for service with members of the Company Group for purposes of vesting and eligibility for early retirement, early retirement subsidies and Rule of 90 benefits under such Plans (but not for purposes of accruing additional benefits following December 31, 2012).
(ii) No Company Group member shall assume any Liability allocable to the Company Transferred Employees under the Pfizer Nonfunded Supplemental Retirement Plan or any Legacy SERPs; provided, however, that, to the extent that (i) any act or omission of the Company directly results in the inability of Pfizer to administer the Pfizer Nonfunded Supplemental Retirement Plan or Legacy SERPs in compliance with Section 409A of the Code or any other Law or regulation and the terms of the respective Plan with respect to any Company Transferred Employee who participated under the Pfizer Nonfunded Supplemental Retirement Plan or any Legacy SERPs and (ii) any related Liability is imposed on any member of the Pfizer Group, the Company shall indemnify such Pfizer Group member for such Liability. To the extent that (i) any act or omission of Pfizer directly results in the inability of Pfizer to administer the Pfizer Nonfunded Supplemental Retirement Plan or Legacy SERPs in compliance with Section 409A of the Code or any other Law or regulation and the terms of the respective Plan with respect to any Company Transferred Employee who participated under the Pfizer Nonfunded Supplemental Retirement Plan or any Legacy SERPs and (ii) any related Liability is imposed on any member of the Company Group, Pfizer shall indemnify such Company Group member for such Liability.
15
ARTICLE VIII
HEALTH AND WELFARE PLANS
8.1 Allocation of Life Insurance Liabilities . Each Pfizer Life Insurance Plan shall retain all Liabilities with respect to covered life insurance claims incurred prior to the Plan Transition Date by Company Transferred Employees and their dependents. The applicable Company Life Insurance Plan shall be responsible for all Liabilities with respect to life insurance claims incurred after the Plan Transition Date by Company Transferred Employees and their dependents, it being understood that the provisions of this Section 8.1 shall not require any member of the Company Group to maintain a plan providing life insurance benefits. For these purposes, a claim shall be deemed to have occurred on the date of the death of the insured person.
8.2 Health and Welfare Plan Liabilities . The Pfizer Health and Welfare Plans (but not including the Pfizer Flexible Benefits Plans) shall retain all Liabilities with respect to covered claims incurred prior to the Plan Transition Date by Company Transferred Employees and their dependents. The Company Health and Welfare Plans shall assume all Liabilities with respect to covered claims incurred on or after the Plan Transition Date by all Company Transferred Employees and their dependents. For these purposes, a claim shall be deemed to have occurred at the time professional services, equipment or prescription drugs covered by the applicable plan are obtained by the insured person.
8.3 Post-Separation Transitional Arrangements .
(a) Coverage and Contribution Elections . As of the Plan Transition Date, the Company shall cause the Company Health and Welfare Plans (including the Company Flexible Benefits Plans) to recognize and maintain all coverage and contribution elections made by Company Transferred Employees under the corresponding Pfizer Health and Welfare Plans (including the Pfizer Flexible Benefits Plans) and apply such elections under the Company Health and Welfare Plans for the remainder of the period or periods for which such elections are by their terms applicable. All waiting periods and pre-existing condition exclusions and actively-at-work requirements shall be waived with respect to the Company Transferred Employees who were not subject to any such waiting periods, exclusions or requirements under a Pfizer Health and Welfare Plan in which such employees participate immediately prior to the Plan Transition Date. For the avoidance of doubt, nothing herein shall prevent the Company from conducting open enrollment and accepting elections under Company Health and Welfare Plans.
(b) Deductibles and Out-of-Pocket Maximums . On and after the Plan Transition Date, the Company shall use commercially reasonable efforts to cause the Company Health Plans to recognize and give credit for or take into account all amounts applied to deductibles, out-of-pocket maximums and co-payments with respect to which such expenses have been incurred by Company Transferred Employees under the Pfizer Health Plans for the remainder of the calendar year in which the Plan Transition Date occurs.
8.4 Flexible Benefits Plans Spin-Off . The Parties shall take all steps necessary or appropriate so that the account balances (whether positive or negative) (the Transferred Account Balances ) under the Pfizer Flexible Benefits Plans of each Company Transferred
16
Employee who has elected to participate therein in the year in which the Plan Transition Date occurs shall be transferred, as soon as practicable after the Plan Transition Date, from the Pfizer Flexible Benefits Plans to the corresponding Company Flexible Benefits Plans. The Company Flexible Benefits Plans shall assume responsibility as of the Plan Transition Date for all outstanding dependent care and medical care claims under the Pfizer Flexible Benefits Plans of each Company Transferred Employee for the year in which the Plan Transition Date occurs and shall assume and agree to perform the obligations of the analogous Pfizer Flexible Benefits Plans from and after the Plan Transition Date. As soon as practicable after the Plan Transition Date, and in any event within 30 days after the amount of the Transferred Account Balances is determined or such later date as mutually agreed upon by the Parties, the Company shall pay Pfizer the net aggregate amount of the Transferred Account Balances, if such amount is positive, and Pfizer shall pay the Company the net aggregate amount of the Transferred Account Balances, if such amount is negative.
8.5 COBRA . The Pfizer Group shall be responsible for compliance with the health care continuation coverage requirements of COBRA and the Pfizer Health and Welfare Plans with respect to Former Company Employees and qualified beneficiaries (as such term is defined under COBRA) who become eligible and elect to receive continuation health care coverage prior to the Plan Transition Date. The Company or another member of the Company Group shall provide Pfizer with all necessary employee change notices and related information for covered dependents, spouses, qualified beneficiaries, and alternate recipients pursuant to QMCSO, in accordance with applicable Pfizer COBRA policies and procedures. Effective as of the Plan Transition Date, the Company Group shall be solely responsible for compliance with the health care continuation coverage requirements of COBRA and the Company Health and Welfare Plans for Company Employees and their qualified beneficiaries who become eligible or elect to receive continuation health care coverage on or following the Plan Transition Date.
8.6 Disability Plans . Pfizer shall retain all Liabilities with respect to Company Transferred Employees who become eligible for benefits under the Pfizer Long-Term Disability Plan after the Employee Transfer Date and before the Plan Transition Date.
8.7 Leave of Absence Programs and FMLA . Effective as of the Plan Transition Date, (i) the Company Group shall honor all terms and conditions of leaves of absence that have been granted by Pfizer to any Company Transferred Employee under a Pfizer Leave of Absence Program or FMLA or other applicable Law regarding leave of absence before the Plan Transition Date, including such leaves that are to commence after the Plan Transition Date; (ii) the Company Group shall be solely responsible for administering any such leave of absence and complying with FMLA and other applicable laws regarding leave of absence with respect to Company Transferred Employees; and (iii) the Company Group shall recognize all periods of service of Company Transferred Employees with the members of the Pfizer Group, as applicable, to the extent such service is recognized by the members of the Pfizer Group for the purpose of eligibility for leave entitlement under the Pfizer Leave of Absence Programs and FMLA and other applicable Laws; provided, however, that no duplication of benefits shall be required by the foregoing.
17
8.8 Pfizer Workers Compensation Program .
(a) Assumption of Liabilities . The Company shall procure workers compensation insurance policies on behalf of the Company Transferred Employees, to be effective as of the Plan Transition Date. The Company shall assume all Liabilities with respect to workers compensation claims made before, on or after the Plan Transition Date by all Company Transferred Employees. For these purposes, a claim shall be deemed to have been made at the time the covered person applies for benefits.
(b) Administration of Claims .
(i) Through the Plan Transition Date, the Pfizer Group shall continue to be responsible for the administration of all workers compensation claims that are, or have been, made before the Plan Transition Date by Company Employees ( Company WC Claims ) and have been historically administered by Pfizer or its third party administrator. The Company Group shall promptly reimburse the Pfizer Group for any and all direct and indirect costs and expenses related to any such administration.
(ii) Effective as of the Plan Transition Date, the Company Group shall, to the extent legally permissible under the applicable states workers compensation Laws, be responsible for the administration of all Company WC Claims, and if not legally permissible, the Pfizer Group shall be responsible for the administration of all Company WC Claims not administered by the Company pursuant to this Subsection 8.8(b)(ii). Any determination made, or settlement entered into, by or on behalf of either party or its insurance company with respect to Company WC Claims for which it is administratively responsible shall be final and binding upon the other party. The Company Group shall promptly reimburse the Pfizer Group for any and all direct and indirect costs and expenses related to any such settlement.
ARTICLE IX
RETIREE PROGRAMS
9.1 Retiree Programs . No member of the Company Group shall assume any Liability with respect to any Retiree Programs. Following December 31, 2012, no Company Employee shall accrue any additional benefits under the Retiree Programs, except as contemplated in this Section 9.1. Pfizer shall provide or cause to be provided to each Company Transferred Employee (and his or her eligible dependents) who was eligible to retire on or immediately prior to the Plan Transition Date and, upon such retirement, would have satisfied the eligibility requirements for retiree welfare coverage set forth in the applicable Retiree Program, with retiree welfare benefits and coverage following such Company Transferred Employees retirement from the Company Group, with such benefits to be provided under the Retiree Program that was applicable to such Company Transferred Employee immediately prior to the Plan Transition Date, as such applicable Retiree Program may be amended from time to time following the Effective Date as if such Company Transferred Employee had remained employed with Pfizer through the applicable retirement date. In addition, Pfizer or another member of the Pfizer Group shall amend the Retiree Programs to provide that until the date that is earlier to occur of (A) the Company Transferred Employees termination of employment and (B) December 31, 2017, Company Transferred Employees shall be given credit for service with
18
members of the Company Group for purposes of eligibility for participation in the Retiree Programs, but not for purposes of the retiree medical subsidy under the Pfizer Retiree Medical Plan. The provisions of this Section 9.1 shall not be construed to require any member of the Pfizer Group to maintain a Retiree Program or to prevent the amendment in any manner of any Retiree Program. The participation by any Company Transferred Employee in a Retiree Program shall be subject to such right of amendment or termination.
ARTICLE X
CASH BONUS PLANS
10.1 Annual Incentive Plans . Pfizer shall retain and perform all Liabilities with respect to the participation of each Company Transferred Employee who is participating in any cash-based annual bonus or other annual incentive compensation plan of a Pfizer Group member with respect to performance periods that are ongoing as of December 31, 2012 and completed performance periods as of December 31, 2012. Effective as of January 1, 2013, the Company shall establish an annual bonus or other cash-based annual incentive compensation plan for the benefit of eligible Company Transferred Employees and shall be responsible for the annual bonus payable to the Company Transferred Employees in respect of the full 2013 calendar year.
ARTICLE XI
EQUITY COMPENSATION
11.1 Pfizer Equity .
(a) Options . Each outstanding Option held by a Company Transferred Employee that is unvested immediately prior to the Disposition Date shall vest on the Disposition Date. All vested Options shall be exercisable for Pfizer common stock (i) in accordance with the terms of the Pfizer Stock Plan and the applicable award agreement in respect of retirement-eligible Option-holders (determined as of the Disposition Date) or (ii) in respect of Option-holders who are not eligible for retirement as of the Disposition Date, until the earliest to occur of (A) the three year anniversary of the Disposition Date, (B) the Option-holders termination of employment from the Company, and (C) the expiration of the Option. Prior to the Disposition Date, Pfizer may take such actions, including but not limited to, adjustment of Options and/or modifications of any applicable Option terms as it deems appropriate.
(b) Restricted Stock Units, TSRUs, PSAs . At the Disposition Date, each Restricted Stock Unit, TSRU and PSA held by Company Transferred Employees shall continue to be a right to receive Pfizer common stock or the cash value thereof, subject to the terms and conditions (including the same vesting schedule and circumstances) set forth in the Pfizer Stock Plan and in the applicable award agreement. Prior to the Disposition Date, Pfizer may take such actions, including but not limited to, adjustment of Restricted Stock Units, TSRUs or PSAs and/or modifications of any applicable terms of such awards as it deems appropriate. At the Disposition Date, Pfizer may determine to accelerate the vesting and, in some cases the settlement, of certain of the awards, subject, in each case, to the requirements of Section 409A of the Code, the terms of the Pfizer Stock Plan and the applicable award agreements and any elections to defer.
19
(c) No Company Group member shall assume any Liability allocable to the Company Transferred Employees in connection with awards under the Pfizer Stock Plan; provided, however, that to the extent that (i) any act or omission of the Company directly results in the inability of Pfizer to administer such awards in compliance with Section 409A of the Code or any other Law or regulation and the respective plan terms with respect to any Company Transferred Employee and (ii) any related Liability is imposed on any member of the Pfizer Group, the Company shall indemnify such Pfizer Group member for such Liability. To the extent that (i) any act or omission of Pfizer directly results in the inability of Pfizer to administer such awards in compliance with Section 409A of the Code or any other Law or regulation and the respective plan terms with respect to any Company Transferred Employee and (ii) any related Liability is imposed on any member of the Company Group, Pfizer shall indemnify such Company Group member for such Liability.
11.2 Equity-Related Tax Matters . Pfizer shall be entitled to claim any compensation deduction associated with the exercise by a holder of a Pfizer Option, or the vesting of a Pfizer Restricted Stock Unit, TSRU and PSA, as the case may be, on any duly filed US federal, state, local or foreign income tax return for the year of exercise or vesting, and neither the Company nor any of its Affiliates shall take any inconsistent position in connection therewith. If, notwithstanding the foregoing, a Final Determination shall provide that the benefit of a tax deduction related to the payment of such compensation shall not belong to Pfizer but to the Company, then with respect to any such compensation claimed during the taxable year or years covered by such Final Determination as well as any such compensation deduction claimed during subsequent taxable years on any previously filed income tax return, the Company (i) shall be entitled to claim the benefit of the deduction on any applicable income tax return (including any amended income tax return) and (ii) shall, in any event, pay to Pfizer within 30 days from the date of such Final Determination an amount equal to the incremental income tax payable by Pfizer as a result of the loss of such deduction, as well as any interest payable by Pfizer with respect to such incremental income tax, each as determined by Pfizer in its reasonable judgment. To the extent that any Pfizer Option that is subject to this Agreement has not yet been exercised, or any Pfizer Restricted Stock Unit, TSRU or PSA that is subject to this Agreement has not yet vested, in each case at the time such Final Determination occurs, then to the extent that such Final Determination would be inconsistent with Pfizer receiving the benefit of any tax deduction related to the payment of such compensation upon such exercise or vesting, (i) Pfizer shall not claim the benefit of any associated deduction on its tax return for the year of exercise or vesting, (ii) the Company shall be entitled to claim the benefit of the deduction on any applicable income tax return for the year of exercise or vesting and (iii) in any event, the Company shall pay to Pfizer within 30 days of the such exercise or vesting an amount equal to the product of (x) the tax deduction resulting from such compensation and (y) the combined federal, state and local tax rates applicable to Pfizer for the year of such exercise or vesting, in each case as determined by Pfizer in its reasonable judgment.
20
ARTICLE XII
SEPARATION PAY; VACATION; UNEMPLOYMENT INSURANCE
12.1 Separation Pay . Except as specified otherwise in this Agreement, the Company shall assume and be solely responsible for all Liabilities with respect to severance benefits attributable to the termination of employment after the Employee Transfer Date of Company Transferred Employees, to the extent such individual is eligible for severance pursuant to the terms of the applicable Pfizer or Company severance pay plan or policy as in effect as of the date of the employees termination of employment.
12.2 Paid Time Off Benefits . The Company or another member of the Company Group shall assume and honor all paid time off accrued but not yet taken by Company Transferred Employees as of the Employee Transfer Date (including banked vacation).
12.3 Unemployment Insurance Program . No later than the Plan Transition Date, the Company shall use its commercially reasonable best efforts to procure an agreement with an unemployment insurance vendor to provide unemployment insurance for Company Transferred Employees.
ARTICLE XIII
OTHER EMPLOYMENT-RELATED MATTERS
13.1 Confidentiality and Proprietary Information . No provision of the Separation Agreement or any Ancillary Agreement shall be deemed to release any individual for any violation of the Pfizer non-competition guidelines or any agreement or policy pertaining to confidential or proprietary information of any member of the Pfizer Group, or otherwise relieve any individual of his or her obligations under such non-competition guidelines, agreement or policy.
ARTICLE XIV
CERTAIN PAYROLL AND TAX MATTERS
14.1 Payroll and Withholding .
(a) Accrued Payroll . Pfizer shall retain all Liabilities related to payroll with respect to the Company Transferred Employees, to the extent such Liabilities relate to service prior to the Plan Transition Date, and shall pay such amounts on or after the Plan Transition Date in accordance with its standard payroll practices. Effective as of the Plan Transition Date, the Company Group shall establish its own payroll system for Company Transferred Employees.
(b) Income Reporting, Withholding . Pfizer and the Company shall, to the extent practicable, (i) treat the Company (or a member of the Company Group designated by the Company) as a successor employer and Pfizer (or the appropriate Pfizer Group member) as a predecessor, within the meaning of Sections 3121(a)(1) and 3306(b)(1) of the Code, with respect to Company Transferred Employees for purposes of taxes imposed under the United
21
States Federal Unemployment Tax Act or the United States Federal Insurance Contributions Act, and (ii) cooperate with each other to avoid, to the extent possible, the filing of the more than one IRS Form W-2 with respect to each Company Transferred Employee for the year in which the Effective Date occurs. Without limiting in any manner the obligations and Liabilities of the parties under the Tax Matters Agreement, Pfizer, each Pfizer Group member, the Company and each Company Group member shall each bear its responsibility for payroll tax obligations and for the proper reporting to the appropriate governmental authorities of compensation earned by their respective employees after the Employee Transfer Date, including compensation related to the exercise of options or the vesting or exercise of other equity awards, subject to Section 11.2 hereof.
(c) Delivery of, and Access to, Documents and Other Information . Concurrently with the Employee Transfer Date, Pfizer shall cause to be delivered to the Company the employee information set forth on all withholding certificates executed by Company Transferred Employees as of the Employee Transfer Date. For such period as Pfizer and the Company may mutually agree in writing, Pfizer shall make reasonably available to the Company all forms, documents or information, no matter in what format stored, relating to compensation or payments made to any Company Transferred Employee. Such information may include, but is not limited to, information concerning employee payroll deductions, payroll adjustments, records of time worked, tax records (e.g., Forms W-2, 1099, W-4, 940 and 941 and applicable counterparts in other jurisdictions), and information concerning garnishment of wages or other payments.
(d) Consistency of Tax Positions; Duplication . Pfizer and the Company shall individually and collectively make commercially reasonable best efforts to avoid unnecessarily duplicated federal, state or local payroll taxes, insurance or workers compensation contributions, or unemployment contributions arising on or after the Employee Transfer Date. Pfizer and the Company shall cooperate with a view toward taking consistent reporting and withholding positions with respect to any such taxes or contributions.
14.2 Personnel and Pay Records . Notwithstanding anything to the contrary in the Separation Agreement, to the extent permitted by applicable Law, the original of all records created prior to the Employee Transfer Date (or such later date of transfer of employment, as applicable) set forth in the personnel files of the Company Transferred Employees (including, but not limited to, information regarding such employees ranking or promotions, the existence and nature of garnishment orders or other judicial or administrative actions or orders affecting the employees compensation, and performance evaluations) shall be transferred to the applicable member of the Company Group as of the Employee Transfer Date (or such later date of transfer of employment, as applicable). The originals of all personnel records of all Former Company Employees shall remain with the applicable member of the Pfizer Group; provided that Pfizer shall permit the Company or its Affiliates or successors or their authorized representatives to have full access to all such personnel records to the extent reasonably necessary in order for the members of the Company Group or its successors to respond to a subpoena, court order, audit, investigation or otherwise as required by applicable Law or in connection with any pending or threatened lawsuits, actions, arbitrations, claims, complaints, investigations or other proceedings. The Company or its Affiliates (or their respective successors) shall retain the personnel records for a period of at least ten (10) years following the IPO. The members of the Company Group
22
shall permit Pfizer and its authorized representatives to have full access upon reasonable notice during normal business hours to all the personnel records during the ten (10) year retention period in order for the members of the Pfizer Group to respond to a subpoena, court order, audit or investigation, to obtain data for pension or other benefits, or otherwise as required by applicable Law, and the members of the Company Group shall provide Pfizer, upon the reasonable request of Pfizer and at the expense of Pfizer, with copies of such personnel records.
ARTICLE XV
ADMINISTRATIVE PROVISIONS
15.1 Sharing of Participant Information . In addition to the responsibilities and obligations of Pfizer and the Company specified in the Separation Agreement and the schedules thereto, Pfizer and the Company shall share, or cause to be shared, all participant information that is necessary or appropriate for the efficient and accurate administration of each of the Pfizer Plans and the Company Plans during the respective periods applicable to such Plans as the Company and Pfizer may mutually agree, subject to applicable Laws (including those with respect to privacy, confidentiality and data protection). Subject to such Laws, Pfizer and the Company and their respective authorized agents shall be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party or its agents, to the extent necessary or appropriate for such administration.
15.2 Audits Regarding Vendor Contracts . From the period beginning on the Plan Transition Date and ending on such date as Pfizer and the Company may mutually agree in writing, Pfizer and the Company and their duly authorized representatives shall have the right to conduct joint audits with respect to any vendor contracts that relate to both the Pfizer Health and Welfare Plans and the Company Health and Welfare Plans. The scope of such audits shall encompass the review of all correspondence, account records, claim forms, canceled drafts (unless retained by the bank), provider bills, medical records submitted with claims, billing corrections, vendors internal corrections of previous errors and any other documents or instruments relating to the services performed by the vendor under the applicable vendor contracts. Pfizer and the Company shall agree on the performance standards, audit methodology, auditing policy and quality measures, reporting requirements, and the manner in which costs incurred in connection with such audits will be shared.
15.3 Regulatory Matters . Pfizer and the Company shall make such filings and applications to regulatory agencies, including the IRS and DOL, as may be necessary or appropriate in connection with the transactions contemplated by this Agreement. The Company and Pfizer shall cooperate fully with one another on any issue relating to the transactions contemplated by this Agreement for which Pfizer and/or the Company elects to seek a determination letter or private letter ruling from the IRS, an advisory opinion from the DOL or other ruling from a local regulatory agency.
15.4 Fiduciary Matters . Pfizer and the Company each acknowledge that actions contemplated to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable Law, and no party shall be deemed to be in violation of this Agreement if such party fails to comply with any provisions hereof based upon such partys good faith determination that to do so would violate such a fiduciary duty or standard.
23
15.5 Consent of Third Parties . If any provision of this Agreement is dependent on the consent of any third party (such as a vendor) and such consent is withheld, Pfizer and the Company shall use their commercially reasonable best efforts to implement the applicable provision. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, Pfizer and the Company shall negotiate in good faith to implement the provision in a mutually satisfactory manner.
ARTICLE XVI
GENERAL PROVISIONS
16.1 Cooperation .
(a) Duties of Company . Following the Effective Date, the Company shall cooperate, and shall cause the members of the Company Group to cooperate, fully with the members of the Pfizer Group in the prosecution, defense and settlement of any claims for which any member of the Pfizer Group retains Liability under this Agreement. Such cooperation shall include (i) affording the applicable member of the Pfizer Group, its counsel and its other representatives reasonable access, upon reasonable written notice during normal business hours, to all relevant personnel, properties, books, contracts, commitments and records, (ii) furnishing promptly to the applicable member of the Pfizer Group, its counsel and its other representatives such information as they reasonably requested, and (iii) providing any other assistance to the applicable member of the Pfizer Group, its counsel and its other representatives as they reasonably request. Pfizer shall reimburse the Company for reasonable costs and expenses incurred in assisting Pfizer pursuant to this Subsection 16.1(a).
(b) Duties of Pfizer . Following the Effective Date, Pfizer shall cooperate, and shall cause the members of the Pfizer Group to cooperate, fully with the members of the Company Group in the prosecution, defense and settlement of any claims for which any member of the Company Group assumes Liability under this Agreement. Such cooperation shall include (i) affording the applicable member of the Company Group, its counsel and its other representatives reasonable access, upon reasonable written notice during normal business hours, to all relevant personnel, properties, books, contracts, commitments and records, (ii) furnishing promptly to the applicable member of the Company Group, its counsel and its other representatives such information as they reasonably request, and (iii) providing any other assistance to the applicable member of the Company Group, its counsel and its other representatives as they reasonably request. The Company shall reimburse Pfizer for reasonable costs and expenses incurred in assisting the Company pursuant to this Subsection 16.1(b).
16.2 Relationship of Parties . Nothing in this Agreement shall be deemed or construed by the Parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the Parties, the understanding and agreement being that no provision contained herein, and no act of the Parties, shall be deemed to create any relationship between the Parties other than the relationship set forth herein.
24
16.3 Affiliates . Each of Pfizer and the Company shall cause to be performed, and hereby guarantee the performance of, any and all actions of the members of the Pfizer Group or the Company Group, respectively.
16.4 No Third Party Remedies . The provisions of this Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person (including employees of the Parties hereto) except the Parties any rights or remedies hereunder, and there are no third party beneficiaries of this Agreement and this Agreement shall not provide any third person (including employees of the Parties) with any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.
16.5 Governing Law . This Agreement shall be governed by and construed and interpreted in accordance with the Laws of the State of New York, without regard to the conflict of laws principles thereof that would result in the application of any Law other than the Laws of the State of New York.
16.6 Severability . If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
16.7 Amendment and Termination . This Agreement may be amended or terminated at any time prior to the Disposition Date by and in the sole discretion of Pfizer without the approval of the Company. This Agreement may be amended at any time on after the Disposition Date by mutual consent in writing of Pfizer and the Company.
16.8 Conflict . Except as otherwise set forth in Section 2.1 herein, in the event of any conflict between the provisions of this Agreement and the Separation Agreement, any Ancillary Agreement, or Plan, the provisions of this Agreement shall control.
16.9 Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party. Execution of this Agreement or any other documents pursuant to this Agreement by facsimile or other electronic copy of a signature shall be deemed to be, and shall have the same effect as, executed by an original signature.
25
IN WITNESS WHEREOF, each of the Parties have caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written.
By: |
|
|
Name: | ||
Title: | ||
By: |
|
|
Name: | ||
Title: |
26
Exhibt 10.16
FORM OF
ZOETIS INC.
2013 EQUITY AND INCENTIVE PLAN
ARTICLE I
PURPOSE
The purposes of the Zoetis Inc. 2013 Equity and Incentive Plan (as it may be amended, the Plan) are to provide long-term incentives to those individuals with significant responsibility for the success and growth of the Company and its Affiliates, to align the interests of such individuals with those of the Companys stockholders, to assist the Company in recruiting, retaining and motivating qualified employees and to provide an effective means to link pay to performance for such employees.
ARTICLE II
DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1 Administrator shall have the meaning provided in Section 12.1 hereof.
2.2 Affiliate shall mean (i) any Parent or Subsidiary, (ii) any entity that, directly or through one or more intermediaries, is controlled by the Company, or (iii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.
2.3 Applicable Accounting Standards shall mean Generally Accepted Accounting Principles in the United States, International Financial Reporting Standards or such other accounting principles or standards as may apply to the Companys financial statements under United States federal securities laws from time to time.
2.4 Award shall mean an Option, a Restricted Stock award, a Restricted Stock Unit award, a Performance Award (which includes, but is not limited to, cash bonuses as set forth in Article IX), a Dividend Equivalent award, a Stock Payment award, an award of Stock Appreciation Rights, or Other Incentive Award, which may be awarded or granted under the Plan.
2.5 Award Agreement shall mean the written notice, agreement, contract or other instrument or document evidencing an Award, including through an electronic medium, which shall contain such terms and conditions with respect to an Award as the Administrator shall determine, consistent with the Plan.
2.6 Beneficial Owner (or any variant thereof) has the meaning defined in Rule 13d-3 under the Exchange Act.
2.7 Board shall mean the Board of Directors of the Company.
2.8 Change in Capitalization shall have the meaning provided in Section 3.2(a) hereof.
2.9 Change in Control shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred:
(a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including the securities beneficially owned by such Person or any securities acquired directly from the Company or any Affiliate thereof) representing 20% or more of the combined voting power of the Companys then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to, a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Companys stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(c) there is consummated a merger, amalgamation or consolidation of the Company or any Subsidiary thereof with any other corporation, other than (1) a merger, amalgamation or consolidation which results in the voting securities of the Company outstanding immediately prior to such merger, amalgamation or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, amalgamation or consolidation or (2) a merger, amalgamation or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Companys then outstanding securities; or
2
(d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than (1) a sale or disposition by the Company of all or substantially all of the Companys assets to an entity, at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by stockholders of the Company following the completion of such transaction in substantially the same proportions as their ownership of the Company immediately prior to such sale or (2) a sale or disposition of all or substantially all of the Companys assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or, if such entity is a subsidiary, the ultimate parent thereof.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred by virtue of (i) the consummation of any transaction or series of integrated transactions immediately following which the holders of Common Stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions, or (ii) the consummation of the Distribution (as such term is defined in that certain Global Separation Agreement entered into between Pfizer Inc. and the Company).
For each Award that constitutes deferred compensation under Section 409A of the Code, a Change in Control shall be deemed to have occurred under the Plan with respect to such Award, resulting in the payment of such Award, only if a change in the ownership or effective control of the Company or a change in ownership of a substantial portion of the assets of the Company shall also be deemed to have occurred under Section 409A of the Code.
2.10 Code shall mean the Internal Revenue Code of 1986, as amended.
2.11 Committee shall mean the Compensation Committee of the Board, or another committee or subcommittee of the Board described in Article XII hereof.
2.12 Common Stock shall mean the common stock of the Company, par value $0.01 per share.
2.13 Company shall mean Zoetis Inc., a Delaware corporation, and any successor corporation.
2.14 Covered Employee shall mean any Employee who is a covered employee within the meaning of Section 162(m) of the Code.
2.15 Director or Non-Employee Director shall mean a non-employee member of the Board, as constituted from time to time.
2.16 Disaffiliation means a Subsidiarys or Affiliates ceasing to be a Subsidiary or Affiliate for any reason (including, without limitation, as a result of a public offering, or a spinoff or sale by the Company, of the stock of the Subsidiary or Affiliate) or a sale of a division of the Company or its Affiliates.
3
2.17 Dividend Equivalent shall mean a right to receive the equivalent value (in cash or Shares) of dividends paid on Shares, awarded under Section 9.2 hereof.
2.18 Effective Date shall mean [ ].
2.19 Eligible Individual shall mean any natural person who is an Employee or a Non-Employee Director, as determined by the Administrator.
2.20 Employee shall mean any officer or other employee (as determined in accordance with Section 3401(c) of the Code) of the Company or any Affiliate.
2.21 Exchange Act shall mean the Securities Exchange Act of 1934, as amended from time to time.
2.22 Fair Market Value shall mean, as of any given date, the value of a Share determined as follows:
(a) if the Common Stock is (i) listed on any established securities exchange (such as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select Market), (ii) listed on any national market system or (iii) listed, quoted or traded on any automated quotation system, its Fair Market Value shall be the closing sales price for a Share as quoted on such exchange or system for such date or, if there is no closing sales price for a Share on the date in question, the closing sales price for a Share on the last preceding date for which such quotation exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(b) if the Common Stock is traded only otherwise than on a securities exchange and is not quoted on the NASDAQ, the closing quoted selling price of the Common Stock on such date as quoted in pink sheets published by the National Daily Quotation Bureau;
(c) if the Common Stock is not listed on an established securities exchange, national market system or automated quotation system, but the Common Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices for a Share on such date, the high bid and low asked prices for a Share on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or
(d) if the Common Stock is neither listed on an established securities exchange, national market system or automated quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be established by the Committee in good faith on the date awarded.
2.23 Greater Than 10% Stockholder shall mean an individual then-owning (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any parent corporation or subsidiary corporation (as defined in Sections 424(e) and 424(f) of the Code, respectively).
4
2.24 Incentive Stock Option shall mean an Option that is intended to qualify as an incentive stock option and conforms to the applicable provisions of Section 422 of the Code.
2.25 Individual Award Limit shall mean the cash and Share limits applicable to Awards granted under the Plan, as set forth in Section 3.3 hereof.
2.26 Non-Qualified Stock Option shall mean an Option that is not an Incentive Stock Option or which is designated as an Incentive Stock Option but does not meet the applicable requirements of the Code.
2.27 Option shall mean a right to purchase Shares at a specified exercise price, granted under Article VI hereof. An Option shall be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to Non-Employee Directors shall only be Non-Qualified Stock Options.
2.28 Other Incentive Award shall mean an Award denominated in, linked to or derived from Shares or value metrics related to Shares, granted pursuant to Section 9.4 hereof.
2.29 Parent shall mean any entity (other than the Company), whether domestic or foreign, in an unbroken chain of entities ending with the Company if each of the entities other than the Company beneficially owns, at the time of the determination, securities or interests representing more than fifty percent (50%) of the total combined voting power of all classes of securities or interests in one of the other entities in such chain.
2.30 Participant shall mean an Eligible Individual who has been granted an Award.
2.31 Performance Award shall mean an Award that is granted under Section 9.1 hereof.
2.32 Performance-Based Compensation shall mean any compensation that is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code.
2.33 Performance Goals shall mean the performance goals (and adjustments) established by the Committee for a Performance Period, based on one or more of the following criteria:
(a)(i) net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation, (D) amortization and (E) non-cash equity-based compensation expense); (ii) gross or net sales or revenue; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit; (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets; (viii) return on capital; (ix) return on stockholders equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii) earnings per Share; (xviii) adjusted earnings per Share; (xix) price per Share; (xx) implementation or completion of critical projects; (xxi) market share; (xxii) debt
5
levels or reduction; (xxiii) customer retention; (xxiv) sales-related goals; (xxv) customer satisfaction and/or growth; (xxvi) research and development achievements; (xxvii) financing and other capital raising transactions; (xxviii) capital expenditures, and (xxix) economic profit, any of which may be measured either in absolute terms for the Company or any operating unit of the Company or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices.
(b) Performance Goals may be expressed in terms of overall Company performance, or the performance of an Affiliate or one or more divisions, business units or product lines. In addition, such Performance Goals may be based upon the attainment of specified levels of performance under one or more of the measures described above relative to the performance of other corporations or the performance of an index, survey or other benchmark.
(c) The Committee may, in its sole discretion, provide that one or more objectively determinable adjustments shall be made to one or more of the Performance Goals. Such adjustments may include, but are not limited to, one or more of the following: (i) items related to a change in accounting principles; (ii) items relating to financing activities; (iii) expenses for restructuring or productivity initiatives; (iv) other non-operating items; (v) items related to acquisitions; (vi) items attributable to the business operations of any entity acquired by the Company during the Performance Period; (vii) items related to the disposal or sale of a business or segment of a business; (viii) items related to discontinued operations that do not qualify as a segment of a business under Applicable Accounting Standards; (ix) items attributable to any stock dividend, stock split, combination or exchange of stock occurring during the Performance Period; (x) any other items of significant income or expense which are determined to be appropriate adjustments; (xi) items relating to unusual or extraordinary corporate transactions, events or developments; (xii) items related to amortization of acquired intangible assets; (xiii) items that are outside the scope of the Companys core, on-going business activities; (xiv) items related to acquired in-process research and development; (xv) items relating to changes in tax laws; (xvi) items relating to major licensing or partnership arrangements; (xvii) items relating to asset impairment charges; (xviii) items relating to gains or losses for litigation, arbitration and contractual settlements; or (xix) items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions.
2.34 Performance Period shall mean one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participants right to, and the payment of, a Performance Award. Notwithstanding the foregoing, in no event shall the Performance Period be less than one (1) year in duration.
2.35 Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any Subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Shares of the Company.
6
2.36 Plan shall have the meaning set forth in Article I.
2.37 Restricted Stock shall mean an Award of Shares made under Article VII hereof that is subject to certain restrictions and may be subject to risk of forfeiture or repurchase.
2.38 Restricted Stock Unit shall mean a contractual right awarded under Article VIII hereof to receive in cash or Shares the Fair Market Value of a Share of Common Stock.
2.39 Restriction Period shall mean the period of time specified by the Administrator during which an Award of Restricted Stock shall be subject to restrictions.
2.40 Securities Act shall mean the Securities Act of 1933, as amended.
2.41 Share Limit shall have the meaning provided in Section 3.1(a) hereof.
2.42 Shares shall mean shares of Common Stock.
2.43 Stock Appreciation Right shall mean a stock appreciation right granted under Article X hereof.
2.44 Stock Payment shall mean a payment in the form of Shares awarded under Section 9.3 hereof.
2.45 Subsidiary shall mean any entity (other than the Company), whether domestic or foreign, in an unbroken chain of entities beginning with the Company if each of the entities other than the last entity in the unbroken chain beneficially owns, at the time of the determination, securities or interests representing more than fifty percent (50%) of the total combined voting power of all classes of securities or interests in one of the other entities in such chain.
2.46 Substitute Award means any Award granted in assumption of, or in substitution for, an award of a company or business (that is not, prior to the applicable transaction, a Subsidiary or Affiliate of the Company) acquired by the Company or a Subsidiary or Affiliate or with which the Company or a Subsidiary or Affiliate combines.
2.47 Termination of Employment shall mean, unless otherwise provided in the Award Agreement, the termination of the applicable Participants employment with, or performance of services for, the Company and any of its Subsidiaries or Affiliates. Unless otherwise determined by the Committee, a Participant employed by, or performing services for, a Subsidiary or an Affiliate or a division of the Company or its Affiliates shall be deemed to incur a Termination of Employment if, as a result of a Disaffiliation, such Subsidiary, Affiliate, or division ceases to be a Subsidiary, Affiliate or division, as the case may be, and the Participant does not immediately become an employee of, or service provider for, the Company or another Subsidiary or Affiliate. Temporary absences from employment because of illness, vacation, or
7
leave of absence, and transfers among the Company and its Subsidiaries and Affiliates, shall not be considered Terminations of Employment. Notwithstanding the foregoing, with respect to any Award that constitutes nonqualified deferred compensation within the meaning of Section 409A of the Code, Termination of Employment shall mean a separation from service as defined under Section 409A of the Code.
2.48 Vesting Period shall mean the period of time before unrestricted Shares become non-forfeitable and issuable to a Participant pursuant to the applicable Award Agreement.
ARTICLE III
SHARES SUBJECT TO THE PLAN
3.1 Number of Shares .
(a) Subject to Sections 3.2 hereof, the maximum aggregate number of Shares available for issuance under the Plan (the Share Limit) shall be equal shall be equal to five percent (5%) of the number of all outstanding Shares as of the Effective Date. Notwithstanding the generality of the foregoing, subject to Sections 3.2 hereof, the maximum number of Shares available for issuance under the Plan with respect to Incentive Stock Options shall be the number of Shares that is equal to fifty percent (50%) of the Share Limit. Any Shares granted in connection with Options and Stock Appreciation Rights shall be counted against this limit as one (1) Share for every one (1) Option or Stock Appreciation Right awarded. Any Shares granted in connection with Awards other than Options and Stock Appreciation Rights shall be counted against this limit as one (1) Share for every one (1) Share granted in connection with such Award or by which the Award is valued by reference.
(b) Shares issued under the Plan may, in whole or in part, be authorized but unissued Shares or Shares that shall have been or may be reacquired by the Company in the open market, in private transactions, or otherwise. If any Shares subject to an Award are forfeited, cancelled, exchanged or surrendered or if an Award otherwise terminates or expires without a distribution of Shares to the Participant, the Shares with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Awards under the Plan. Notwithstanding the foregoing, Shares surrendered or withheld as payment of either the exercise price of an Award and/or withholding taxes in respect of an Award shall no longer be available for grant under the Plan. In addition, in the case of any Substitute Award, Shares delivered or deliverable in connection with such Substitute Award shall not be deemed granted or issued under the Plan for purposes of Sections 3.1 or 3.3.
3.2 Adjustments .
(a) In the event of any stock dividend, stock split, combination or exchange of Shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, amalgamation, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase or other reorganization or corporate transaction or
8
event, or any other change affecting the Shares or the Share price (any such occurrence or event, a Change in Capitalization), the Administrator shall make equitable adjustments, if any, to reflect such change with respect to (i) the aggregate number and kind of Shares that may be issued under the Plan (including, but not limited to, adjustments of the Share Limit and Individual Award Limits); (ii) the number and kind of Shares (or other securities or property) subject to outstanding Awards; (iii) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect thereto); and/or (iv) the grant or exercise price per Share for any outstanding Awards under the Plan; provided, however, that the Administrator shall make such equitable adjustments as it determines to be appropriate and equitable, in its sole discretion, to prevent dilution or enlargement of rights. Without limiting the generality of the foregoing, in connection with a Change in Capitalization, the Administrator may provide, in its sole discretion, for the cancellation of any outstanding Award granted hereunder in exchange for payment in cash or other property having an aggregate Fair Market Value of the Shares covered by such award, reduced by the aggregate exercise price or purchase price thereof, if any. In the case where the exercise price per Share of an Option or Stock Appreciation Right exceeds the Fair Market Value per Share, the Administrator may cancel, in its sole discretion, such Option or Stock Appreciation Right for no payment. The Administrators determinations pursuant to this Section 3.2(a) shall be final, binding and conclusive.
(b) Any adjustment affecting an Award intended as Performance-Based Compensation shall be made consistent with the requirements of Section 162(m) of the Code unless otherwise determined by the Administrator. No action shall be taken under this Section 3.2(b) which shall cause an Award to fail to comply with Section 409A of the Code or an exemption therefrom, in either case, to the extent applicable to such Award.
3.3 Individual Award Limits . Notwithstanding any provision in the Plan to the contrary, and subject to Section 3.2, to the extent required to comply with Section 162(m):
(a) the aggregate number of Shares subject to Options and Stock Appreciation Rights awarded to any one Participant during any calendar year may not exceed 1.5 million Shares;
(b) the aggregate number of Shares subject to Awards other than Options and Stock Appreciation Rights (excluding Awards referenced in Section 3.3(c) below) awarded to any one Participant during any calendar year may not exceed 1.5 million Shares;
(c) the aggregate amount of compensation to be paid to any one Participant in respect to all Awards that are intended to constitute Performance-Based Compensation denominated in cash in any calendar year is $10 million; and
(d) the aggregate grant date fair value (computed as of the date of grant in accordance with applicable financial accounting rules) of all Awards granted to any Director during any single calendar year shall not exceed $500,000.
9
ARTICLE IV
GRANTING OF AWARDS
4.1 Participation . The Committee may, from time to time, select from among all Eligible Individuals, those to whom one or more Awards shall be granted and shall determine the nature and amount of each Award, which shall not be inconsistent with the requirements of the Plan. No Eligible Individual shall have any right to be granted an Award pursuant to the Plan.
4.2 Award Agreement . Each Award shall be evidenced by an Award Agreement stating the terms and conditions applicable to such Award, consistent with the requirements of the Plan.
4.3 Stand-Alone and Tandem Awards . Awards granted pursuant to the Plan may, in the sole discretion of the Administrator, be granted either alone, in addition to or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
ARTICLE V
PROVISIONS APPLICABLE TO AWARDS INTENDED TO QUALIFY AS PERFORMANCE-BASED COMPENSATION
5.1 Purpose . The Committee, in its sole discretion, may determine whether any Award is intended to qualify as Performance-Based Compensation. If the Committee, in its sole discretion, decides to grant an Award to an Eligible Individual that is intended to qualify as Performance-Based Compensation, then the provisions of this Article V shall control over any contrary provision contained in the Plan. The Administrator may in its sole discretion grant Awards to Eligible Individuals that are based on Performance Goals but that do not satisfy the requirements of this Article V and that are not intended to qualify as Performance-Based Compensation.
5.2 Payment of Performance-Based Awards . Performance Awards shall be paid, unless otherwise determined by the Committee, no later than 2 1 / 2 months after the tax year in which the Performance Award vests, consistent with the requirements of Section 409A of the Code. Unless otherwise provided in the applicable Performance Goals or Award Agreement, a Participant shall be eligible to receive payment pursuant to such Awards for a Performance Period only if and to the extent the Performance Goals for such applicable Performance Period are achieved. The achievement of each Performance Goal shall be (i) determined in accordance with Applicable Accounting Standards, to the extent applicable and (ii) for all Awards intended to qualify as Performance-Based Compensation, certified in accordance with the requirements of Section 162(m) of the Code.
5.3 Additional Limitations . Notwithstanding any other provision of the Plan and except as otherwise determined by the Committee, any Award which is granted to an Eligible Individual and is intended to qualify as Performance-Based Compensation shall be
10
subject to any additional limitations imposed under Section 162(m) of the Code that are requirements for qualification as Performance-Based Compensation, and the Plan and the Award Agreement shall be deemed amended to the extent necessary to conform to such requirements. Determinations by the Committee in respect of all Awards intended to qualify as Performance-Based Compensation shall be made within the time prescribed by, and otherwise in compliance with, Section 162(m) of the Code, and payment in respect of such Awards may be decreased, but not increased, in the discretion of the Committee.
ARTICLE VI
OPTIONS
6.1 Granting of Options to Eligible Individuals . The Administrator is authorized to grant Options to Eligible Individuals from time to time, in its sole discretion, on such terms and conditions as it may determine which shall not be inconsistent with the Plan.
6.2 Eligibility for Incentive Stock Options . No Incentive Stock Option shall be granted to any individual who is not an Employee of the Company or any parent corporation or subsidiary corporation of the Company (as defined in Sections 424(e) and 424(f) of the Code, respectively).
6.3 Option Exercise Price . The exercise price per Share subject to each Option shall be set by the Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted (or, as to Incentive Stock Options, on the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code). In addition, in the case of Incentive Stock Options granted to a Greater Than 10% Stockholder, such price shall not be less than one hundred ten percent (110%) of the Fair Market Value of a Share on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code).
6.4 Option Term . The term of each Option shall be set forth in the Award Agreement; provided, however, that the term shall not be more than ten (10) years from the date the Option is granted, or five (5) years from the date an Incentive Stock Option is granted to a Greater Than 10% Stockholder. The Award Agreement shall set forth the time period, including the time period following a Termination of Employment, during which the Participant has the right to exercise the vested Options, which time period may not extend beyond the stated term of the Option. Except as limited by the requirements of Section 409A or Section 422 of the Code, the Administrator may extend the term of any outstanding Option, and may extend the time period during which vested Options may be exercised, and, subject to Section 13.1 hereof, may amend any other term or condition of such Option relating to a Termination of Employment.
6.5 Option Vesting .
(a) The terms and conditions pursuant to which an Option vests in the Participant and becomes exercisable shall be set forth in the applicable Award Agreement. Such vesting may be based on service with the Company or any Affiliate, attainment of one or more of the Performance Goals, or any other criteria selected by the Administrator. At any time after the
11
grant of an Option, the Administrator may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the vesting of the Option, including following a Termination of Employment; provided, that in no event shall an Option become exercisable following its expiration, termination or forfeiture.
(b) No portion of an Option which is unexercisable at a Participants Termination of Employment shall thereafter become exercisable, except as may be otherwise provided in the applicable Award Agreement or by action of the Administrator following the grant of the Option.
6.6 Treatment of Options upon Certain Events . The applicable Award Agreement shall provide for the treatment of each Option upon a Termination of Employment.
6.7 Substitution of Stock Appreciation Rights . The Administrator may, in its sole discretion, substitute an Award of Stock Appreciation Rights for an outstanding Option at any time prior to or upon exercise of such Option; provided, however, that such Stock Appreciation Rights shall be exercisable with respect to the same number of Shares for which such substituted Option would have been exercisable, and shall also have the same exercise price and remaining term as the substituted Option.
6.8 Partial Exercise of Options . An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional Shares and the Administrator may require that, by the terms of the Option, a partial exercise must be with respect to a minimum number of Shares.
6.9 Manner of Exercise of Options . A Participant may exercise an exercisable Option, subject to applicable requirements, by paying the full exercise price and applicable withholding taxes to the stock administrator of the Company for the Shares with respect to which the Option, or portion thereof, is exercised, in one or more of the following manners: (i) cash or check, (ii) Shares (including, in the case of payment of the exercise price of an Option, Shares issuable pursuant to the exercise of the Option), in each case, having a Fair Market Value on the date of delivery equal to the aggregate payments required, or (iii) other form of legal consideration acceptable to the Administrator (including cashless exercise via a broker). Notwithstanding any other provision of the Plan to the contrary, no Participant who is a Director or an executive officer of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to make payment with respect to any Awards granted under the Plan, or continue any extension of credit with respect to such payment, with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.
6.10 Notification Regarding Disposition . The Participant shall give the Company prompt written or electronic notice of any disposition of Shares acquired by exercise of an Incentive Stock Option which occurs within (a) two (2) years from the date of granting (including the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code) such Option to such Participant, or (b) one (1) year after the transfer of such Shares to such Participant.
12
ARTICLE VII
RESTRICTED STOCK
7.1 Award of Restricted Stock .
(a) The Administrator is authorized to grant Restricted Stock to Eligible Individuals, and shall determine the terms and conditions, including the restrictions, applicable to each award of Restricted Stock, which terms and conditions shall be set forth in the Award Agreement and shall not be inconsistent with the Plan, and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate.
(b) The Award Agreement shall set forth the purchase price, if any, and form of payment for Restricted Stock; provided, however, that if a purchase price is charged, such purchase price shall be no less than the par value of the Shares to be purchased, unless otherwise permitted by applicable law. In all cases, legal consideration shall be required for each issuance of Restricted Stock to the extent required by applicable law.
(c) The Award Agreement shall set forth the treatment of each Award of Restricted Stock upon a Termination of Employment.
7.2 Rights as Stockholders . Upon issuance of Restricted Stock, the Participant shall have, unless otherwise provided herein or in the Award Agreement, all the rights of a stockholder with respect to said Shares. This includes, but is not limited to, the right to vote Shares of Restricted Stock as the record owner thereof, and the right to receive dividends and other distributions payable to an Eligible Individual during the restriction period; provided, however, that, the Award Agreement may provide that any distributions with respect to the Shares shall be subject to the restrictions set forth in Section 7.3 hereof.
7.3 Restrictions . All Shares of Restricted Stock (including any Shares received by Participants thereof with respect to Shares of Restricted Stock as a result of a Change in Capitalization) shall be subject to restrictions and vesting requirements as set forth in the Award Agreement. Such restrictions may include, without limitation, restrictions concerning voting rights and transferability. Such restrictions may lapse separately or in combination at such times and pursuant to such circumstances or based on such criteria as set forth in the Award Agreement, including, without limitation, criteria based on the Participants duration of employment or directorship with the Company, the Performance Goals, Company or Affiliate performance, individual performance or other criteria set forth in the Award Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire.
7.4 Restriction Period . All Shares of Restricted Stock shall have a Restriction Period of not less than three (3) years, which may include pro-rata lapsing of restrictions thereon. Notwithstanding the foregoing, Awards covering up to five (5) percent of the total number of Shares that may be issued or delivered under the Plan and any Awards made in respect of or in substitution for Pfizer Inc. equity awards, may contain no restrictions or be subject to a Restriction Period of less than three (3) years.
13
7.5 Certificates for Restricted Stock . Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Administrator shall determine. Certificates or book entries evidencing Shares of Restricted Stock must include an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, in it sole discretion, retain physical possession of any stock certificate until such time as all applicable restrictions lapse.
7.6 Section 83(b) Election . If a Participant makes an election under Section 83(b) of the Code to be taxed with respect to the Restricted Stock as of the date of transfer of the Restricted Stock rather than as of the date or dates upon which the Participant would otherwise be taxable under Section 83(a) of the Code, the Participant shall be required to deliver a copy of such election to the Company promptly after filing such election with the Internal Revenue Service.
ARTICLE VIII
RESTRICTED STOCK UNITS
8.1 Award of Restricted Stock Units .
(a) The Administrator is authorized to grant Restricted Stock Units to Eligible Individuals, and shall determine the terms and conditions, including the restrictions, applicable to each award of Restricted Stock Units, which terms and conditions shall be set forth in the Award Agreement and shall not be inconsistent with the Plan, and may impose such conditions on the issuance of such Restricted Stock Units as it deems appropriate. The Award Agreement shall set forth the time and form of payment of each Award of Restricted Stock Units.
(b) All Restricted Stock Units shall have a Vesting Period of not less than three (3) years, which may include pro-rata lapsing of restrictions thereon. Notwithstanding the foregoing, Awards covering up to five (5) percent of the total number of Shares that may be issued or delivered under the Plan and any Awards made in respect of or in substitution for Pfizer Inc. equity awards, may contain no restrictions or be subject to a Vesting Period of less than three (3) years.
(c) The Administrator shall specify, or permit the Participant to elect, the conditions and dates upon which the Shares underlying the Restricted Stock Units shall be issued (or cash in lieu thereof shall be paid), which dates shall not be earlier than the date as of which the Restricted Stock Units vest and become nonforfeitable. Such conditions and dates shall be established in accordance with the applicable provisions of Section 409A of the Code or an exemption therefrom.
(d) The Award Agreement shall set forth the treatment of each Award of Restricted Stock Units upon a Termination of Employment.
(e) On the distribution dates, the Company shall issue to the Participant one unrestricted, fully transferable Share (or if provided in the Award Agreement, the Fair Market Value of one such Share in cash) for each vested and nonforfeitable Restricted Stock Unit.
14
ARTICLE IX
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, STOCK PAYMENTS, OTHER INCENTIVE AWARDS
9.1 Performance Awards .
(a) The Administrator is authorized to grant Performance Awards to any Eligible Individual and to determine whether such Performance Awards shall be Performance-Based Compensation per Article V of this Plan. The vesting and value of Performance Awards may be linked to any one or more of the Performance Goals or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods as set forth in the applicable Award Agreement. Performance Awards may be paid in cash, Shares or a combination of both.
(b) Without limiting Section 9.1(a) hereof, the Administrator may grant Performance Awards to any Eligible Individual in the form of a cash bonus payable upon the attainment of objective Performance Goals, or such other criteria, whether or not objective, which are established by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Any such cash bonuses paid to a Participant which are intended to be Performance-Based Compensation shall be based upon objectively determinable bonus formulas established in accordance with the provisions of Article V hereof.
9.2 Dividend Equivalents .
(a) Subject to Section 9.2(b) hereof, Dividend Equivalents may be granted by the Administrator, either alone or in tandem with another Award, based on dividends declared on the Common Stock, to be credited as of dividend payment dates during the period between the date the Dividend Equivalents are granted to a Participant and the date such Dividend Equivalents terminate or expire, as determined by the Administrator. Such Dividend Equivalents shall be converted to cash or additional Shares by such formula, at such time and subject to such limitations as set forth in the applicable Award Agreement. In addition, the Award Agreement may provide that Dividend Equivalents with respect to Shares covered by an Award shall only be paid out to the Participant at the same time or times and to the same extent that the vesting conditions and/or performance goals, if any, are subsequently satisfied and the Award vests with respect to such Shares.
(b) Notwithstanding the foregoing, no Dividend Equivalents shall be payable with respect to Options or Stock Appreciation Rights, unless otherwise determined by the Administrator.
9.3 Stock Payments . The Administrator is authorized to make one or more Stock Payments to any Eligible Individual. The number or value of Shares of any Stock Payment shall be determined by the Administrator and may be based upon one or more Performance Goals or any other specific criteria, including service to the Company or any Affiliate, determined by the Administrator.
15
9.4 Other Incentive Awards . The Administrator is authorized to grant Other Incentive Awards to any Eligible Individual, which Awards may cover Shares or the right to purchase Shares or have a value derived from the value of, or an exercise or conversion privilege at a price related to, or that are otherwise payable in or based on, Shares, stockholder value or stockholder return, in each case, on a specified date or dates or over any period or periods determined by the Administrator. The terms and conditions applicable to such Other Incentive Awards shall be set forth in the applicable Award Agreement. Other Incentive Awards may be linked to any one or more of the Performance Goals or other specific criteria determined appropriate by the Administrator and may be payable in cash or Shares.
9.5 Other Terms and Conditions . All applicable terms and conditions of each Award described in this Article IX, including without limitation, as applicable, the term, vesting conditions and exercise/purchase price applicable to the Award, shall be set by the Administrator in its sole discretion, provided, however, that the value of the consideration paid by a Participant for an Award shall not be less than the par value of a Share, unless otherwise permitted by applicable law. The rights of Participants granted Performance Awards, Dividend Equivalents, or Other Incentive Awards upon Termination of Employment shall be set forth in the Award Agreement.
ARTICLE X
STOCK APPRECIATION RIGHTS
10.1 Grant of Stock Appreciation Rights .
(a) The Administrator is authorized to grant Awards of Stock Appreciation Rights to Eligible Individuals from time to time, in its sole discretion, on such terms and conditions as it may determine consistent with the Plan.
(b) Each Award of Stock Appreciation Rights shall entitle the Participant (or other individual entitled to exercise the Award of Stock Appreciation Rights pursuant to the Plan) to exercise all or a specified portion of the Award of Stock Appreciation Rights (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per Share of the Stock Appreciation Rights from the Fair Market Value on the date of exercise of the Stock Appreciation Right by the number of Stock Appreciation Rights that shall have been exercised, subject to any limitations the Administrator may impose or set forth in the Award Agreement. Such amount shall be payable in Shares or in cash, as determined by the Administrator. The exercise price per Share subject to each Award of Stock Appreciation Rights shall be set by the Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value on the date the Stock Appreciation Rights are granted.
(c) The Award Agreement shall set forth the treatment of each Award of Stock Appreciation Rights upon a Termination of Employment.
16
10.2 Stock Appreciation Right Vesting .
(a) The Award Agreement shall set forth the period during which a Participant shall vest in an Award of Stock Appreciation Rights and have the right to exercise such Stock Appreciation Rights (subject to Section 10.4 hereof) in whole or in part. Such vesting may be based on service with the Company or any Affiliate, any of the Performance Goals or any other criteria selected by the Administrator. At any time after grant of an Award of Stock Appreciation Rights, the Administrator may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the period during which the Stock Appreciation Rights vest.
(b) No portion of an Award of Stock Appreciation Rights which is unexercisable upon Termination of Employment shall thereafter become exercisable, except as may be otherwise provided in an Award Agreement or by action of the Administrator following the grant of the Stock Appreciation Rights; provided, that in no event shall an Award of Stock Appreciation Rights become exercisable following its expiration, termination or forfeiture.
10.3 Manner of Exercise . A Participant may exercise an exercisable Stock Appreciation Right as follows, subject to applicable requirements established by the Administrator; full payment of the applicable withholding taxes shall be made to the stock administrator of the Company for the Shares with respect to which the Stock Appreciation Rights, or portion thereof, are exercised, in a manner permitted by Section 6.9 in respect of Options.
10.4 Stock Appreciation Right Term . The term of each Award of Stock Appreciation Rights shall be set forth in the Award Agreement; provided, however, that the term shall not be more than ten (10) years from the date the Stock Appreciation Rights are granted. The Award Agreement shall set forth the time period, including any time period following a Termination of Employment, during which the Participant has the right to exercise any vested Stock Appreciation Rights, which time period may not extend beyond the expiration date of the Award term. Except as limited by the requirements of Section 409A of the Code, the Administrator may extend the term of any outstanding Stock Appreciation Rights, and may extend the time period during which vested Stock Appreciation Rights may be exercised in connection with any Termination of Employment, and, subject to Section 13.1 hereof, may amend any other term or condition of such Stock Appreciation Rights relating to such a Termination of Employment.
ARTICLE XI
ADDITIONAL TERMS OF AWARDS
11.1 Change in Control . Unless otherwise set forth in an Award Agreement, in the event of a Change in Control:
(a) With respect to each outstanding Award that is assumed or substituted in connection with a Change in Control, in the event the Participant incurs a Termination of Employment other than for cause, as defined in the applicable Award
17
Agreement, during the 24-month period following such Change in Control, on the date of such Termination of Employment (i) such Award shall become fully vested and, if applicable, exercisable, (ii) the restrictions, payment conditions, and forfeiture conditions applicable to any such Award granted shall lapse and (iii) and any performance conditions imposed with respect to such Award shall be deemed to be achieved at target performance levels.
(b) With respect to each outstanding Award that is not assumed or substituted in connection with a Change in Control, immediately upon the occurrence of the Change in Control (i) such Award shall become fully vested and, if applicable, exercisable, (ii) the restrictions, payment conditions, and forfeiture conditions applicable to any such Award granted shall lapse and (iii) and any performance conditions imposed with respect to such Award shall be deemed to be achieved at target performance levels.
(c) For purposes of this Section 11.1, an Award shall be considered assumed or substituted for if, following the Change in Control, the Award is of comparable value and remains subject to the same terms and conditions that were applicable to the Award immediately prior to the Change in Control except that, if the Award related to Shares, the Award instead confers the right to receive common stock of the acquiring entity or in the case of an amalgamation, the amalgamated company or its parent.
(d) Notwithstanding the foregoing, if any Award is subject to Section 409A of the Code, this Section 11.1 shall be applicable only to the extent specifically provided in the Award Agreement and as permitted pursuant to Section 13.5.
11.2 Tax Withholding . The Company and its Affiliates shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company or an Affiliate, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participants social security, Medicare and any other employment tax obligation) required by law to be withheld with respect to any taxable event concerning a Participant arising in connection with any Award. The Administrator may in its sole discretion and in satisfaction of the foregoing requirement allow a Participant to elect to have the Company or an Affiliate withhold Shares otherwise issuable under an Award (or allow the surrender of Shares), provided that the number of Shares which may be so withheld or surrendered shall be limited to the number of Shares which have a Fair Market Value on the date of withholding no greater than the amount necessary to satisfy the minimum statutory withholding requirements.
11.3 Transferability of Awards .
(a) No Award under the Plan may be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution;
(b) No Award or interest or right therein shall be liable for the debts, contracts or engagements of the Participant or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) unless and until such Award has been exercised, or the
18
Shares underlying such Award have been issued, and all restrictions applicable to such Shares have lapsed, and any attempted disposition of an Award prior to the satisfaction of these conditions shall be null and void and of no effect;
(c) During the lifetime of the Participant, only the Participant may exercise an Award (or any portion thereof) granted to him or her under the Plan. After the death of the Participant, any exercisable portion of an Award may, prior to the time when such portion becomes unexercisable under the Plan or Award Agreement, be exercised by his personal representative or by any individual empowered to do so under the deceased Participants will or under the then-applicable laws of descent and distribution; and
(d) Notwithstanding the foregoing, the Administrator may, in its sole discretion, permit (on such terms, conditions and limitations as it may establish) Non-Qualified Stock Options and/or Shares issued in connection with an Option or a Stock Appreciation Right exercise that are subject to restrictions on transferability, to be transferred to a member of a Participants immediate family or to a trust or similar vehicle for the benefit of a Participants immediate family members.
11.4 Conditions to Issuance of Shares .
(a) Notwithstanding anything herein to the contrary, neither the Company nor its Affiliates shall be required to issue or deliver any certificates or make any book entries evidencing Shares pursuant to the exercise of any Award, unless and until the Administrator has determined, with advice of counsel, that the issuance of such Shares is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any exchange on which the Shares are listed or traded, and the Shares are covered by an effective registration statement or applicable exemption from registration. In addition to the terms and conditions provided herein, the Administrator may require that a Participant make such reasonable covenants, agreements, and representations as the Administrator, in its discretion, deems advisable in order to comply with any laws, regulations, or requirements.
(b) All Share certificates delivered pursuant to the Plan and all Shares issued pursuant to book entry procedures are subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with federal, state, or foreign securities or other laws, rules and regulations and the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted, or traded. The Administrator may place legends on any Share certificate or book entry to reference restrictions applicable to the Shares.
(c) The Administrator shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement, distribution or exercise of any Award, including a window-period limitation, as may be imposed in the sole discretion of the Administrator.
19
(d) No fractional Shares shall be issued and the Administrator shall determine, in its sole discretion, whether cash shall be given in lieu of fractional Shares or whether such fractional Shares shall be eliminated by rounding down.
(e) Notwithstanding any other provision of the Plan, unless otherwise determined by the Administrator or required by any applicable law, rule or regulation, the Company and/or its Affiliates may, in lieu of delivering to any Participant certificates evidencing Shares issued in connection with any Award, record the issuance of Shares in the books of the Company (or, as applicable, its transfer agent or stock plan administrator).
11.5 Forfeiture and Recoupment Provisions . Pursuant to its general authority to determine the terms and conditions applicable to Awards under the Plan, the Administrator shall have the right to provide, in the terms of Awards made under the Plan, or to require a Participant to agree by separate written or electronic instrument, that: any proceeds, gains or other economic benefit must be paid to the Company, and the Award shall terminate and any unexercised portion of the Award (whether or not vested) shall be forfeited, if (i) a Termination of Employment occurs prior to a specified date, or within a specified time period following receipt or exercise of the Award, (ii) the Participant at any time, or during a specified time period, engages in any activity which violates any applicable restrictive covenants of the Company, as may be further specified in the Award Agreement or (iii) the Participant incurs a Termination of Employment for cause, as defined in the applicable Award Agreement. In addition, all Awards made under the Plan shall be subject to any clawback or recoupment policies of the Company, as in effect from time to time, or as otherwise required by law.
11.6 Prohibition on Repricing . Subject to limitations imposed by Section 409A of the Code or other applicable law and the limitations contained in Section 13.1 below, in no event shall the exercise price with respect to an Award be reduced following the grant of an Award, nor shall an Award be cancelled in exchange for a replacement Award with a lower exercise price or in exchange for another type of Award or cash payment without stockholder approval.
11.7 Leave of Absence . Unless the Administrator provides otherwise, vesting of Awards granted hereunder shall be suspended during any unpaid leave of absence. A Participant shall not cease to be considered an Employee or Non-Employee Director, as applicable, in the case of any (a) leave of absence approved by the Company, or (b) transfer between locations of the Company or between the Company and any of its Affiliates or any successor thereof.
ARTICLE XII
ADMINISTRATION
12.1 Administrator . The Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under the Plan) shall administer the Plan (except as otherwise permitted herein) and shall be referred to herein as the Administrator. Unless otherwise determined by the Board, the Committee shall consist solely of two or more
20
Non-Employee Directors appointed by and holding office at the pleasure of the Board, each of whom is intended to qualify as a non-employee director as defined by Rule 16b-3 of the Exchange Act, an outside director for purposes of Section 162(m) of the Code and an independent director under the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded, in each case, to the extent required under such provision; provided, however, that any action taken by the Committee shall be valid and effective, whether or not members of the Committee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section 12.l or otherwise provided in any charter of the Committee. Notwithstanding the foregoing, (a) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Awards granted to Non-Employee Directors and (b) the Board or Committee may delegate its authority hereunder to the extent permitted by Section 12.5 hereof.
12.2 Duties and Powers of Administrator . It shall be the duty of the Administrator to conduct the general administration of the Plan in accordance with its provisions. The Administrator shall have the power to interpret the Plan and all Award Agreements, and to adopt such rules for the administration, interpretation and application of the Plan as are not inconsistent with the Plan, to interpret, amend or revoke any such rules and to amend any Award Agreement, provided that the rights or obligations of the holder of the Award that is the subject of any such Award Agreement are not affected adversely by such amendment unless the consent of the Participant is obtained or such amendment is otherwise permitted under Section 13.1 hereof. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, or the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded are required to be determined in the sole discretion of the Committee.
12.3 Authority of Administrator . Subject to any specific designation in the Plan, the Administrator has the exclusive power, authority and sole discretion to:
(a) Designate Eligible Individuals to receive Awards;
(b) Determine the type or types of Awards to be granted to Eligible Individuals;
(c) Determine the number of Awards to be granted and the number of Shares to which an Award will relate;
(d) Determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the exercise price, grant price, or purchase price, any performance criteria, any restrictions or limitations on the Award, any schedule for vesting, lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, and any provisions related to non-competition and recapture of gain on an Award, based in each case on such considerations as the Administrator in its sole discretion determines;
21
(e) Determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of an Award may be paid in cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(g) Decide all other matters that must be determined in connection with an Award;
(h) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;
(i) Interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement; and
(j) Make all other decisions and determinations that may be required pursuant to the Plan or as the Administrator deems necessary or advisable to administer the Plan.
12.4 Decisions Binding . The Administrators interpretation of the Plan, any Awards granted pursuant to the Plan or any Award Agreement and all decisions and determinations by the Administrator with respect to the Plan are final, binding, and conclusive on all parties.
12.5 Delegation of Authority . To the extent permitted by applicable law or the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded, the Board or Committee may from time to time delegate to a committee of one or more members of the Board, to one or more officers of the Company the authority to grant or amend Awards or to take other administrative actions pursuant to this Article XII; provided, however, that in no event shall an officer of the Company be delegated the authority to grant Awards to, or amend Awards held by, the following individuals: (a) individuals who are subject to Section 16 of the Exchange Act, (b) Covered Employees with respect to Awards intended to constitute Performance-Based Compensation, or (c) officers of the Company (or Directors) to whom authority to grant or amend Awards has been delegated hereunder; provided further, that any delegation of administrative authority shall only be permitted to the extent it is permissible under Section 162(m) of the Code and applicable securities laws or the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded. Any delegation hereunder shall be subject to the restrictions and limits that the Board or Committee specifies at the time of such delegation, and the Board may at any time rescind the authority so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section 12.5 shall serve in such capacity at the pleasure of the Board and the Committee.
22
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 Amendment, Suspension or Termination of the Plan . The Plan may be amended or terminated at any time by action of the Board. However, no amendment may, without stockholder approval, except as set forth in Section 3.2 herein, (i) increase the aggregate number of Shares available for Awards, (ii) extend the term of the Plan, (iii) materially expand the types of awards available under the Plan, (iv) change the definition of Eligible Individual to add a category or categories of individuals who are eligible to participate in the Plan, (v) delete or limit the prohibition against repricing of Awards contained in Section 11.6, or (vi) make other changes which require approval by the stockholders of the Company in order to comply with applicable law or applicable stock market rules. No amendment or termination of the Plan may adversely modify any individuals rights under an outstanding Award unless such individual consents to the modification in writing.
13.2 Paperless Administration . In the event that the Company establishes, for itself or using the services of a third party, an automated system for the documentation, granting or exercise of Awards, such as a system using an internet website or interactive voice response, then the paperless documentation, granting or exercise of Awards by a Participant may be permitted through the use of such an automated system.
13.3 Titles and Headings, References to Sections of the Code or Exchange Act . The titles and headings of the sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. References to sections of the Code or the Exchange Act shall include any amendment or successor thereto.
13.4 Governing Law . The Plan and any programs and agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts of laws thereof.
13.5 Section 409A . The intent of the parties is that payments and benefits under the Plan comply with Section 409A of the Code to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Plan shall be interpreted and be administered to be in compliance therewith. Any payments described in the Plan that are due within the short-term deferral period as defined in Section 409A of the Code shall not be treated as deferred compensation unless applicable law requires otherwise. Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, the Participant shall not be considered to have terminated employment with the Company for purposes of the Plan and no payment shall be due to the Participant under the Plan or any Award until the Participant would be considered to have incurred a separation from service from the Company within the meaning of Section 409A of the Code. Notwithstanding anything to the contrary in the Plan, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Plan during the six (6) month period immediately following the Participants Termination of
23
Employment shall instead be paid on the first business day after the date that is six (6) months following the Participants separation from service (or upon the Participants death, if earlier). In addition, for purposes of the Plan, each amount to be paid or benefit to be provided to the Participant pursuant to the Plan, which constitute deferred compensation subject to Section 409A of the Code, shall be construed as a separate identified payment for purposes of Section 409A of the Code.
13.6 No Rights to Awards . No Eligible Individual or other individual shall have any claim to be granted any Award pursuant to the Plan, and neither the Company nor the Administrator is obligated to treat Eligible Individuals, Participants or any other individuals uniformly.
13.7 Foreign Employees and Foreign Law Considerations . The Administrator may grant Awards to Eligible Individuals who are foreign nationals, who are located outside the United States, who are United States citizens or resident aliens on global assignments in foreign nations, who are not compensated from a payroll maintained in the United States, or who are otherwise subject to (or could cause the Company to be subject to) legal or regulatory provisions of countries or jurisdictions outside the United States, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Administrator, be necessary or desirable to foster and promote achievement of the purposes of the Plan, and, in furtherance of such purposes, the Administrator may make such modifications, amendments, procedures, or subplans as may be necessary or advisable to comply with such legal or regulatory provisions.
13.8 Unfunded Status of Awards . The Plan is intended to be an unfunded plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Affiliate.
13.9 Indemnification . To the extent allowable pursuant to applicable law, each member of the Board and any officer or other employee to whom authority to administer any component of the Plan is delegated shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided, however, that he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such individuals may be entitled pursuant to the Companys Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
13.10 Relationship to other Benefits . No payment pursuant to the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare, or other benefit plan of the Company or any Affiliate except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
24
13.11 Successors . The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company.
13.12 Expenses . The expenses of administering the Plan shall be borne by the Company and its Affiliates.
13.13 Term of Plan . The Plan shall terminate on the tenth anniversary of the Effective Date; provided, however, any Awards that are outstanding as of the date of the Plans termination shall remain in effect, and the terms of the Plan shall apply until such Awards terminate as provided in the applicable Award Agreements.
25
Exhibit 10.17
Form of
Sale of Business Plan
1. | INTRODUCTION |
1.1. | The Sale of Business Plan (the Plan), effective November 1, 2012, is intended to provide severance benefits to certain designated employees of Zoetis Inc. (the Company), a wholly-owned subsidiary of Pfizer Inc., who meet the eligibility requirements below. |
2. | ELIGIBILITY |
2.1. | Employees of the Company who are eligible to participate in the Plan (the Designated Employees) include the Companys Chief Executive Officer, executive officers and other key executives who are designated by the Companys Chief Executive Officer as eligible for benefits under the Plan. |
3. | POLICY |
3.1. | Subject to Section 5 hereof, severance benefits are payable to a Designated Employee pursuant to this Plan upon (i) the Designated Employees involuntary termination of employment by the Company, other than a termination by reason of death, disability or for Cause or (ii) the Designated Employees resignation of employment with the Company for Good Reason, in each case that occurs within two years of a sale of the Company (a Triggering Event). The date upon which a Designated Employee incurs a Triggering Event shall be the Termination Date. |
(a) | For purposes of this Plan, a sale of the Company means the closing of a corporate transaction (other than an initial public offering or a follow-on split-off or spin-off) by which Pfizer Inc. divests its interest or virtually all of its interest in the Company. |
(b) | Cause includes, but is not limited to, (i) significant breach of Company policy or Pfizer Inc. policy, (ii) inadequate work performance due to intentional or deliberate misconduct or intentional or deliberate failure to act, (iii) destruction of the Companys or Pfizer Inc.s property, and (iv) commission of unlawful acts against or reflecting on the Company or Pfizer Inc. |
(c) | Good Reason means (i) the assignment of duties that are materially and adversely inconsistent with the Designated Employees current, primary duties, (ii) being given substantially diminished responsibility, (iii) being removed from his or her current, primary position, (iv) a change in the level of the Designated Employees reporting relationship (determined based on the executives overall position in the Company prior to the sale of the Company), (v) a relocation of primary place of business that increases the Designated Employees commute by more than 25 miles, or (vi) receiving a material reduction in compensation opportunity or a material reduction in benefits, excluding a reduction in benefits generally applicable to all similarly-situated employees. |
1
3.2. | For purposes of this Plan, termination of employment means a separation from service within the meaning of Internal Revenue Code (Code) Section 409A and applicable regulations and guidance promulgated thereunder (Section 409A). |
4. | EXCLUSIONS |
4.1. | A Designated Employee shall not be entitled to severance benefits and no severance benefits shall be payable or provided pursuant to this Plan in the following circumstances: |
(a) | If a Designated Employee is terminated for Cause. |
(b) | If a Designated Employee voluntarily resigns without Good Reason from his or her employment, retires, abandons his or her job, or fails to return to work after the expiration of an approved leave of absence. |
(c) | If a Designated Employee dies while in active service or prior to the execution of a written release (the Release Agreement) pursuant to Section 5 hereof. |
(d) | If a Designated Employee becomes disabled (as defined by the terms of the disability plan in which he or she participates) while in active service, or prior to the execution of a Release Agreement pursuant to Section 5 hereof. If the Designated Employee returns to active service, he or she may be eligible to receive benefits as provided hereunder as if he or she was not disabled. |
(e) | If a Designated Employee violates any confidentiality or other restrictive covenant to which the Designated Employee is a party prior to the date of payment as reasonably determined by the Plan Administrator. |
5. | RELEASE AND NOTICE PERIOD |
5.1. | No Designated Employee who incurs a Triggering Event shall be eligible to receive any payments or other benefits under the Plan unless he or she first executes a Release Agreement. Such Release Agreement shall be substantially similar to the release agreement generally used by the Company immediately prior to the Termination Date. |
5.2. | The Designated Employee shall be given the necessary amount of time during which to consider and sign such Release Agreement: (i) for an individual termination action, at least 28 calendar days of notice, and (ii) for a group termination action, at least 52 calendar days of notice (the Notice Period). Group actions are actions that involve two or more employees, as determined by the Plan Administrator. The Designated Employee can be required to work through the Notice Period at the discretion of the Company. |
2
5.3. | If a Designated Employee ceases to provide services during the Notice Period as a result of Company action, and the Designated Employee was being paid during the Notice Period then the Designated Employee shall be paid for the remainder of the Notice Period in addition to his or her benefits under this Plan. If a Designated Employee ceases to provide appropriate services on his or her own initiative during the Notice Period and the Designated Employee was being paid during the Notice Period, all Notice Period payments shall end and the Designated Employee shall only receive benefits in accordance with the terms of this Plan. During the Notice Period, and subject to the continued provision of appropriate services during such Notice Period described above, the Designated Employee shall be paid his or her current base salary or wages as in effect on the date of the start of the Notice Period, excluding any bonus, stock and stock unit grants of any type, stock option income, short-term shift cash awards, premium pay, holiday bonuses, one-time payments, allowances, contest awards and other similar payments. |
6. | BENEFITS |
Subject to Section 5 hereof, the following severance benefits payable under this Plan:
6.1. | Cash Severance . A Designated Employee who incurs a Triggering Event shall receive cash severance in an amount determined using the formula set forth on Schedule A attached hereto. The cash severance shall not be included as earnings under any other Company or Pfizer Inc. plan. Such amounts shall not be adjusted for interest or earnings. |
6.2. | Payment Date . The cash severance amount shall be paid in a lump sum, in cash, within thirty (30) days after the Release Agreement described in Section 5 becomes effective and irrevocable in accordance with its terms (but in all events within sixty (60) days of the Termination Date, provided that in the event the designated 60-day period begins in one taxable year and ends in the next taxable year, the amount shall be payable in the second taxable year). |
6.3. | Health Coverage . If the Designated Employee does not meet the requirements for retiree medical coverage at the time of the Termination Date but is enrolled in a Company-sponsored medical, dental and/or vision plan, he or she may continue to participate in such plan(s) in the Plan Administrators sole discretion, for up to twelve (12) months immediately following his Termination Date. To receive this coverage, the Designated Employee must waive the right to COBRA continuation coverage. However, after the 12 months of active rate coverage, the individual is eligible to continue to participate in the medical plan for up to an additional 18 months at full cost pursuant to COBRA (100% of the cost to the employee and employer). |
3
6.4. | Life Insurance . The Designated Employee may continue group term life insurance coverage at active employee rates in the Plan Administrators sole discretion, for up to 12 months immediately following his Termination Date at the current coverage amount. Subject to applicable state laws and availability by the vendor, conversion to an individual policy may be available when this coverage terminates. |
6.5. | Outplacement and Education Assistance Services . Each Designated Employee who incurs a Triggering Event shall, immediately following the Termination Date, receive outplacement services and education assistance as designated by the Plan Administrator. |
6.6. |
Accrued but Unpaid Bonus . Notwithstanding the benefits payable under this Plan, the Designated Employee shall remain entitled to any annual cash bonus payable with respect to services performed in the year prior to the year in which his or her Termination Date occurs to the extent not yet paid (and such bonus shall be paid by March 15 th of the year in which his or her Termination Date occurs). |
6.7. | Other Benefits . Benefits under all Company benefit plans and programs shall terminate in accordance with the terms of those plans as they are normally applied to employees who resign or are terminated from their employment with the Company other than as specifically set forth above, and active-service benefits shall cease on the Designated Employees Termination Date, except as set forth above. |
6.8. | All benefits hereunder shall be reduced by any outstanding debt owed by the Designated Employee to the Company. All benefits hereunder shall be reduced by applicable withholding and shall be subject to applicable tax reporting, as determined by the Plan Administrator. |
7. | ADMINISTRATION AND RESPONSIBILITY |
7.1. |
The Plan Administrator is the Senior Vice President, Human Resources, Pfizer Inc., 235 East 42 nd Street, New York, NY 10017, telephone 212-733-2323. |
7.2. | The Plan Administrator may, in his or her reasonable discretion, and subject to the provisions of the Plan, from time to time establish such rules and regulations and delegate any or all of his or her authority to administer the Plan to any other persons or committee he or she deems necessary or appropriate for the proper administration of the Plan. |
7.3. |
Benefits under this Plan shall be paid only if the Plan Administrator decides in his or her reasonable discretion that a Designated Employee is entitled to them. The Plan Administrator shall make, in his or her reasonable discretion, all determinations arising in the administration, construction or interpretation of the Plan including the right to construe disputed Plan terms and provisions, and any such determination shall be conclusive and binding on all persons, except as otherwise provided by law. The Plan Administrator is authorized to approve |
4
exceptions to this Plan, in his or her reasonable discretion, within the limits prescribed by Section 409A, the Employee Retirement Income Security Act of 1974 (ERISA) as amended from time to time, and other applicable laws. This Plan is intended to constitute a welfare benefit plan under ERISA, and shall be interpreted strictly in accordance with such foregoing intent. The Company reserves the right to decide whether the circumstances justify the payment of benefits under this Plan in any particular case, and the decision of the Company is final. The Company may delegate any or all its authority under the Plan to any other persons or committee it deems necessary or appropriate. |
8. | CLAIMS AND APPEALS PROCEDURE |
8.1. | Applications for Benefits and Inquiries . Any application for benefits, inquiries about the Plan or inquiries about present or future rights under the Plan must be submitted to the Plan Administrator in writing. |
8.2. | Denial of Claims . In the event that any application for benefits is denied in whole or in part, the Plan Administrator must notify the applicant, in writing, of the denial of the application, and of the applicants right to review the denial. The written notice of denial shall be set forth in a manner designed to be understood by the applicant, and shall include specific reasons for the denial, specific references to the Plan provision upon which the denial is based, a description of any information or material that the Plan Administrator needs to complete the review and an explanation as to why such material or information is necessary, and an explanation of the Plans review procedure and the time limits applicable to such procedures, including a statement of the applicants right to bring a civil action under section 502(a) of ERISA following an adverse benefit determination on review. |
This written notice shall be given to the employee within ninety (90) days after the Plan Administrator receives the application, unless special circumstances require an extension of time, in which case, the Plan Administrator has up to an additional ninety (90) days for processing the application. If an extension of time for processing is required, written notice of the extension shall be furnished to the applicant before the end of the initial ninety (90) day period.
This notice of extension shall describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render his or her decision on the application. If written notice of denial of the application for benefits is not furnished within the specified time, the application shall be deemed to be denied. The applicant shall then be permitted to appeal the denial in accordance with the Review Procedure described below.
8.3. |
Request for a Review . Any person (or that persons authorized representative) for whom an application for benefits is denied (or deemed denied), in whole or in part, may appeal the denial by submitting a request for a review to the Plan Administrator within 60 days after the application is denied (or deemed denied). |
5
The Plan Administrator shall give the applicant (or his or her representative) an opportunity to review pertinent documents in preparing a request for a review and submit written comments, documents, records and other information relating to the claim. A request for a review shall be in writing and shall be addressed to the Plan Administrator. |
A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels are pertinent. The Plan Administrator may require the applicant to submit additional facts, documents or other material as he or she may find necessary or appropriate in making his or her review.
8.4. | Decision on Review . The Plan Administrator shall act on each request for review within sixty (60) days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional sixty (60) days), for processing the request for a review. If an extension for review is required, written notice of the extension shall be furnished to the applicant within the initial sixty (60)-day period. The Plan Administrator shall give prompt, written notice of his or her decision to the applicant. In the event that the Plan Administrator confirms the denial of the application for benefits in whole or in part, the notice shall outline, in a manner calculated to be understood by the applicant, the specific reason or reasons for the decision, the specific Plan provisions upon which the decision is based, a statement of the applicants right to receive, upon request and without charge, reasonable access to, and copies of, all documents, records and other information relevant to the applicants claim for benefits, and a statement of the applicants right to bring a civil action under section 502(a) of ERISA. If written notice of the Plan Administrators decision is not given to the applicant within the time prescribed in this Section 8.4 the application shall be deemed denied on review. |
8.5. | Rules and Procedures . The Plan Administrator may establish rules and procedures, consistent with the Plan and with ERISA, as necessary and appropriate in carrying out his or her responsibilities in reviewing benefit claims. The Plan Administrator may require an applicant who wishes to submit additional information in connection with an appeal from the denial (or deemed denial) of benefits to do so at the applicants own expense. |
8.6. | Exhaustion of Remedies . No legal action for benefits under the Plan may be brought until the claimant (a) has submitted a written application for benefits in accordance with the procedures described by Section 8.1 above, (b) has been notified by the Plan Administrator that the application is denied (or the application is deemed denied due to the Plan Administrators failure to act on it within the established time period), (c) has filed a written request for a review of the application in accordance with the appeal procedure described in Section 8.3 above and (d) has been notified in writing that the Plan Administrator has denied the appeal (or the appeal is deemed to be denied due to the Plan Administrators failure to take any action on the claim within the time prescribed by Section 8.4 above). |
6
9. | AMENDMENT AND TERMINATION |
9.1. | The Plan may be amended or terminated by Pfizer Inc. at any time for any reason, without or without notice. Pfizer Inc. reserves the right, by action of the Compensation Committee of Pfizer Inc.s Board of Directors, or by any duly appointed successor committee or team, to amend, modify, suspend or terminate this Plan and to disqualify employees from eligibility under the Plan at any time for any reason or for no reason with or without notice. Any such action is not contingent upon the financial condition of Pfizer Inc. |
10. | SECTION 409A |
10.1. | The intent of the parties is that payments and benefits under this Plan be exempt from, and alternatively comply with, Section 409A and, accordingly, to the maximum extent permitted, this Plan shall be interpreted to be in compliance therewith. Notwithstanding anything contained herein to the contrary, the Designated Employee shall not be considered to have terminated employment with the Company for purposes of any payments under this Plan which are subject to Section 409A until the Designated Employee has incurred a separation from service from the Company within the meaning of Section 409A. Each amount to be paid or benefit to be provided under this Plan shall be construed as a separate identified payment for purposes of Section 409A. Without limiting the foregoing and notwithstanding anything contained herein to the contrary, to the extent required in order to avoid an accelerated or additional tax under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Plan during the six-month period immediately following the Designated Employees separation from service shall instead be paid on the first business day after the date that is six months following the Designated Employees separation from service (or, if earlier, the Designated Employees date of death). To the extent required to avoid an accelerated or additional tax under Section 409A, amounts reimbursable to the Designated Employee shall be paid to the Designated Employee on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in kind benefits provided to the Designated Employee) during one year may not affect amounts reimbursable or provided in any subsequent year. The Company makes no representation that any or all of the payments described in this Plan will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to any such payment. |
11. | GENERAL PROVISIONS |
11.1. |
Except as otherwise provided herein or by law, no right or interest of any Designated Employee under the Plan shall be assignable or transferable, in whole |
7
or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Designated Employee under the Plan shall be liable for, or subject to, any obligation or liability of such Designated Employee. |
11.2. | The Plan shall not be required to be funded. Regardless of whether the Plan is funded, no Designated Employee shall have any right to, or interest in, any assets of Pfizer Inc. which may be applied by Pfizer Inc. to the payment of benefits or other rights under this Plan. |
11.3. | Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Designated Employee, or any person whomsoever, the right to be retained in the service of Pfizer Inc. or the Company or any subsidiary thereof, and all Designated Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. |
11.4. | If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. |
11.5. | This Plan shall inure to the benefit of and be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Designated Employee, present and future, and any successor to the Company. If a severed employee shall die while any amount would still be payable to such severed employee hereunder if the severed employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to the executor, personal representative or administrators of the severed employees estate. |
11.6. | The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. |
11.7. | The provisions of the Plan shall be construed, regulated and administered according to the federal laws governing employee benefit plans and according to the internal substantive laws (and not the choice of law provisions) of the State of New York where such laws are not preempted by the federal laws. |
8
SCHEDULE A
Zoetis Position |
Cash Severance Benefit* |
|
Chief Executive Officer | 2 times annualized Base Salary plus an amount equal to target annual bonus for the fiscal year in which termination occurs | |
Executive Officers, Chief Information Officer and President, Zoetis Global Supply |
||
Other Select Key Executives | 1 times annualized Base Salary plus an amount equal to target annual bonus for the fiscal year in which termination occurs |
* | Base Salary is the Designated Employees annual base salary determined as of the Termination Date. |
9
Exhibit 10.18
Execution Version
U.S. $1,000,000,000
REVOLVING CREDIT AGREEMENT
dated as of December 21, 2012,
among
ZOETIS INC.,
THE LENDERS NAMED HEREIN
and
JPMORGAN CHASE BANK, N.A.,
as Administrative Agent
CITIBANK, N.A.
BANK OF AMERICA, N.A.,
BARCLAYS BANK PLC,
DEUTSCHE BANK SECURITIES INC., AND
MORGAN STANLEY MUFG LOAN PARTNERS, LLC
Syndication Agents
J.P. MORGAN SECURITIES LLC,
CITIGROUP GLOBAL MARKETS INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
BARCLAYS BANK PLC,
DEUTSCHE BANK SECURITIES INC., AND
MORGAN STANLEY MUFG LOAN PARTNERS, LLC
Joint Lead Arrangers and Joint Bookrunners
TABLE OF CONTENTS
P AGE | ||||||
ARTICLE 1 | ||||||
D EFINITIONS AND A CCOUNTING M ATTERS | ||||||
Section 1.01. |
Certain Defined Terms |
1 | ||||
Section 1.02. |
Accounting Terms and Determinations |
22 | ||||
Section 1.03. |
Computation of Time Periods |
22 | ||||
Section 1.04. |
Terms Generally |
22 | ||||
ARTICLE 2 | ||||||
A MOUNTS AND T ERMS OF THE L OANS | ||||||
Section 2.01. |
Commitments |
23 | ||||
Section 2.02. |
Loans and Borrowings |
23 | ||||
Section 2.03. |
Requests for Revolving Borrowings |
23 | ||||
Section 2.04. |
Swingline Loans |
24 | ||||
Section 2.05. |
Letters of Credit |
25 | ||||
Section 2.06. |
Funding of Borrowings |
29 | ||||
Section 2.07. |
Changes of Commitments |
30 | ||||
Section 2.08. |
Fees |
33 | ||||
Section 2.09. |
Repayment of Loans |
34 | ||||
Section 2.10. |
Interest on Loans |
34 | ||||
Section 2.11. |
Interest Rate Determination |
35 | ||||
Section 2.12. |
Optional Conversion of Loans |
36 | ||||
Section 2.13. |
Optional Prepayments of Loans |
37 | ||||
Section 2.14. |
Payments and Computations |
37 | ||||
Section 2.15. |
Sharing of Payments Etc |
38 | ||||
Section 2.16. |
Additional Costs |
39 | ||||
Section 2.17. |
Illegality |
41 | ||||
Section 2.18. |
Taxes |
42 | ||||
Section 2.19. |
Defaulting Lenders |
44 | ||||
Section 2.20. |
Substitution of Lender |
46 | ||||
ARTICLE 3 | ||||||
C ONDITIONS | ||||||
Section 3.01. |
Conditions Precedent to Closing Date |
46 | ||||
Section 3.02. |
Conditions Precedent to Effective Date |
47 | ||||
Section 3.03. |
Conditions Precedent to Initial and Subsequent Credit Extensions |
47 |
ARTICLE 4 | ||||
R EPRESENTATIONS AND W ARRANTIES |
i
Section 4.01. |
Organization; Powers; Binding Effect |
48 | ||||
Section 4.02. |
Contravention |
48 | ||||
Section 4.03. |
Authorization |
49 | ||||
Section 4.04. |
Financial Statements; Material Adverse Change |
49 | ||||
Section 4.05. |
Federal Reserve Regulations |
49 | ||||
Section 4.06. |
Investment Company Status |
49 | ||||
Section 4.07. |
Litigation |
49 | ||||
Section 4.08. |
Compliance with ERISA |
50 | ||||
Section 4.09. |
Compliance with Law |
50 | ||||
Section 4.10. |
Environmental Matters |
50 | ||||
Section 4.11. |
Taxes |
50 | ||||
Section 4.12. |
Full Disclosure |
51 | ||||
ARTICLE 5 | ||||||
A FFIRMATIVE C OVENANTS | ||||||
Section 5.01. |
Financial Statements and Other Information |
51 | ||||
Section 5.02. |
Inspection of Property, Books and Records |
52 | ||||
Section 5.03. |
Existence; Nature of Business |
53 | ||||
Section 5.04. |
Payment of Obligations |
53 | ||||
Section 5.05. |
Maintenance of Properties; Insurance |
53 | ||||
Section 5.06. |
Compliance with Laws |
53 | ||||
Section 5.07. |
Use of Proceeds |
53 | ||||
ARTICLE 6 | ||||||
N EGATIVE C OVENANTS | ||||||
Section 6.01. |
Mergers; Fundamental Changes |
54 | ||||
Section 6.02. |
Limitations on Liens |
54 | ||||
Section 6.03. |
Priority Indebtedness |
54 | ||||
Section 6.04. |
Transactions with Affiliates |
55 | ||||
Section 6.05. |
Financial Covenants |
55 | ||||
ARTICLE 7 | ||||||
E VENTS OF D EFAULT | ||||||
Section 7.01. |
Events of Default |
55 | ||||
ARTICLE 8 | ||||||
T HE A DMINISTRATIVE A GENT | ||||||
Section 8.01. |
Authorization and Action |
58 | ||||
Section 8.02. |
Administrative Agents Reliance, Etc |
59 | ||||
Section 8.03. |
JPMCB and Affiliates |
59 | ||||
Section 8.04. |
Lender Credit Decision |
60 | ||||
Section 8.05. |
Indemnification |
60 | ||||
Section 8.06. |
Successor Administrative Agent |
60 |
ii
ARTICLE 9 | ||||||
M ISCELLANEOUS | ||||||
Section 9.01. |
No Waiver; Remedies |
61 | ||||
Section 9.02. |
Notices, Etc |
62 | ||||
Section 9.03. |
Amendments, Etc |
64 | ||||
Section 9.04. |
Costs and Expenses; Indemnity |
64 | ||||
Section 9.05. |
Binding Effect |
67 | ||||
Section 9.06. |
Assignments and Participations |
67 | ||||
Section 9.07. |
Governing Law |
71 | ||||
Section 9.08. |
Execution in Counterparts |
71 | ||||
Section 9.09. |
Successors and Assigns |
71 | ||||
Section 9.10. |
Captions |
71 | ||||
Section 9.11. |
Confidentiality |
71 | ||||
Section 9.12. |
Jurisdiction, Service of Process, Etc |
72 | ||||
Section 9.13. |
Waiver of Jury Trial |
73 | ||||
Section 9.14. |
[Reserved] |
73 | ||||
Section 9.15. |
USA PATRIOT Act |
73 | ||||
Section 9.16. |
No Fiduciary Duty |
73 | ||||
Section 9.17. |
Right of Set-off |
74 | ||||
Section 9.18. |
Integration |
74 |
SCHEDULES
Schedule 2.01 |
| Initial Lenders; Commitments |
EXHIBITS
Exhibit A | | Form of Assignment and Acceptance | ||
Exhibit B | | Form of Assumption Agreement | ||
Exhibit C | | Form of Note |
ANNEXES
Annex I |
| Pricing Grid |
iii
REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT dated as of December 21, 2012 among:
ZOETIS INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the Borrower );
The lenders (the Initial Lenders ) listed on the signature pages hereof and the Lenders (as hereinafter defined) becoming party hereto after the date hereof; and
JPMORGAN CHASE BANK, N.A. ( JPMCB ), as administrative agent (in such capacity, together with its successors in such capacity, the Administrative Agent ) for the Lenders.
The parties hereby agree as follows:
ARTICLE 1
D EFINITIONS AND A CCOUNTING M ATTERS
Section 1.01. Certain Defined Terms . As used herein, the following terms shall have the following meanings (all terms defined in this Article 1 or in other provisions of this Agreement in the singular to have the same meanings when in the plural and vice versa ):
Additional Costs shall have the meaning assigned to that term in Section 2.16(a).
Adjusted Consolidated EBITDA means, for any period, Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) Consolidated Interest Expense for such period, (ii) Consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period, (iv) any other non-cash charges for such period, (v) any loss for such period of any joint venture accounted for on the equity method (except to the extent the Borrower or a Subsidiary actually made an investment in such joint venture during such period to offset such loss), and (vi) any Start-Up Adjustments for such period in an aggregate amount not to exceed (x) $200,000,000 for fiscal year 2013 and (y) $325,000,000 through fiscal year 2015 and minus (b) without duplication and to the extent included in determining such Consolidated Net Income, any income of any such joint venture for such period, except to the extent that dividends or other distributions were actually paid by such joint venture to the Borrower or a Subsidiary during such period, all determined on a consolidated basis in accordance with GAAP. For the purposes of calculating the Leverage Ratio as of the end of any period, if during such period the applicable Person or any of its Subsidiaries shall have consummated a Specified Transaction (as defined below), Adjusted Consolidated EBITDA for such period shall be calculated after giving pro forma effect thereto as if such Specified Transaction occurred on the first day of such period. For purposes hereof, Specified Transaction means any transaction or series of related
transactions occurring after the date of this Agreement, resulting in (a) the acquisition or disposition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition or disposition of in excess of 50% of the Equity Interests of any Person or (c) a merger or consolidation or any other combination with another Person (other than the Borrower or any of its Subsidiaries); provided that the transactions described in the Registration Statement in connection with the initial public offering of common stock of the Borrower shall be deemed a Specified Transaction.
Administrative Agent shall have the meaning assigned to that term in the introduction hereto. The Administrative Agent may perform any of its obligations hereunder through such Affiliates or branches thereof as it shall from time to time designate by notice to the Borrower and the Lenders for the purpose of performing any of its obligations hereunder or under the Loan Documents, and the term Administrative Agent shall include such branches or Affiliates.
Administrative Agents Account shall mean the account of the Administrative Agent most recently designated by it as such account by notice to the Lenders and the Borrower.
Administrative Questionnaire shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent.
Affiliate shall mean, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For purposes of this definition, the term control (including the terms controlling, controlled by and under common control with) of a Person means the possession, direct or indirect, of the power to vote 20% or more of the Voting Stock of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by contract or otherwise.
Agreement shall mean this Revolving Credit Agreement, as amended, restated, supplemented, extended or otherwise modified from time to time.
Applicable Lending Office shall mean, with respect to each Lender, such Lenders Domestic Lending Office in the case of a Base Rate Loan and such Lenders Eurodollar Lending Office in the case of a Eurodollar Rate Loan.
Applicable Percentage means, with respect to any Lender, the percentage of the total Commitments represented by such Lenders Commitment; provided that in the case of Section 2.19 when a Defaulting Lender shall exist, Applicable Percentage shall mean the percentage of the total Commitments (disregarding any Defaulting Lenders Commitment) represented by such Lenders Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments and to any Lenders status as a Defaulting Lender at the time of determination.
Assignment and Acceptance shall mean an instrument in substantially the form of Exhibit A hereto.
2
Assuming Lender shall mean an Eligible Assignee not previously a Lender that becomes a Lender hereunder pursuant to Section 2.07(c).
Assumption Agreement shall mean an agreement, in substantially the form of Exhibit B hereto, pursuant to which an Eligible Assignee agrees to become an Assuming Lender hereunder pursuant to Section 2.07(c) and agrees to be bound by all obligations of a Lender under this Agreement.
Availability Period shall mean the period from the Effective Date until the Commitment Termination Date.
Bankruptcy Code shall mean the United States Bankruptcy Code of 1978, as amended from time to time.
Base Rate shall mean, for any day, a rate per annum equal to the greatest of (a) the rate of interest announced publicly by JPMCB in New York, New York, from time to time, as JPMCBs prime rate in effect on such day (each change in JPMCBs prime rate shall be effective from and including the date such change is publicly announced as being effective), (b) the Federal Funds Effective Rate in effect on such day plus 1 / 2 of 1.00% per annum and (c) the Eurodollar Rate for Loans denominated in U.S. Dollars for a one-month Interest Period beginning on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1.00% per annum. Any change in the Base Rate due to a change in JPMCBs prime rate referred to in clause (a) above, the Federal Funds Effective Rate or the Eurodollar Rate shall be effective from and including the effective date of such change in JPMCBs prime rate, the Federal Funds Effective Rate or the Eurodollar Rate, respectively.
Base Rate Loan shall mean a Loan that bears interest as provided in Section 2.10(a)(i).
Base Rate Margin shall mean, on any date, the rate per annum set forth under the caption Base Rate Margin for such date determined in accordance with the Pricing Grid.
Board of Directors shall mean the board of directors of the Borrower.
Board of Governors shall mean the Board of Governors of the Federal Reserve System of the United States of America.
Borrower shall have the meaning assigned to that term in the introduction hereto.
Borrower SEC Documents shall mean all registration statements, prospectuses, forms, reports, definitive proxy statements, schedules, exhibits, statements and documents filed by the Borrower under the Securities Act or the Exchange Act, as the case may be, and publicly available on the website of the SEC at www.sec.gov, together with all certifications required pursuant to the Sarbanes-Oxley Act.
3
Borrowing shall mean (a) Revolving Loans of the same Type, Converted or continued on the same date and, in the case of Eurodollar Rate Loans, as to which a single Interest Period is in effect or (b) a Swingline Loan.
Business Day shall mean (a) any day other than a day on which commercial banks are authorized by Law or required to remain closed in New York City and (b) if such day relates to any Eurodollar Rate Loan, that is also a day on which dealings in U.S. Dollar deposits are carried out in the London interbank market.
Capital Lease shall mean a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board).
Cash Equivalents shall mean:
(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of issuance thereof;
(b) investments in commercial paper maturing within 270 days from the date of issuance thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moodys;
(c) investments in certificates of deposit, bankers acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, the Administrative Agent or any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000 and that issues (or the parent of which issues) commercial paper rated at least Prime 1 (or the then equivalent grade) by Moodys or A 1 (or the then equivalent grade) by S&P;
(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria of clause (c) above;
(e) investments in money market funds within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above; and
(f) other short-term investments utilized by foreign subsidiaries in accordance with normal investment practices for cash management in investments of a type analogous to the foregoing.
4
Capital Lease Obligations shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a Capital Lease and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board).
Change of Control shall mean (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Exchange Act and the rules of the SEC thereunder as in effect on the date hereof) (other than Pfizer Inc. and its Subsidiaries), of Equity Interests representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower; provided, however , that a transaction will not be deemed to involve a Change of Control if (i) the Borrower becomes a direct or indirect wholly owned subsidiary of a holding company and (ii)(A) the holders of the voting stock of such holding company immediately following that transaction are substantially the same as the holders of the Borrowers voting stock immediately prior to that transaction or (B) such transaction does not involve the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Exchange Act and the rules of the SEC thereunder as in effect on the date hereof) (other than Pfizer Inc. and its Subsidiaries), of Equity Interests representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of such holding company; or (b) occupation of a majority of the seats (other than vacant seats) on the Board of Directors by Persons who were neither (i) members of the Board of Directors on the Effective Date, nor (ii) nominated by the Board of Directors, nor (iii) appointed by directors so nominated.
Class when used in reference to any Borrowing refers to whether Loans comprising such Borrowing are Revolving Loans or Swingline Loans.
Closing Date shall have the meaning set forth in Section 3.01.
Code shall mean the Internal Revenue Code of 1986.
Commitment means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lenders Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.07, (b) increased from time to time pursuant to Section 2.07 and (c) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.06. The initial amount of each Lenders Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders Commitments is $1,000,000,000.
Commitment Documents shall mean (a) the Five Year Revolving Credit Facility Commitment Letter, dated November 20, 2012, among the Borrower, JPMCB
5
and J.P. Morgan Securities LLC, and (b) the Five Year Revolving Credit Facility Fee Letter, dated as of November 20, 2012, among the Borrower, JPMCB and J.P. Morgan Securities LLC.
Commitment Increase shall have the meaning assigned to that term in Section 2.07(c)(i).
Commitment Increase Date shall have the meaning assigned to that term in Section 2.07(c)(i).
Commitment Termination Date shall mean the earlier of (a) the Maturity Date and (b) the date of termination in whole of the Commitments pursuant to Section 2.07(b) or Article 7.
Communications shall have the meaning assigned to that term in Section 9.02(b)(i).
Consolidated shall mean, with respect to any Person, the consolidation of accounts of such Person and its Subsidiaries in accordance with GAAP.
Consolidated Net Debt means at any date all Debt of the Borrower and its Subsidiaries at such date, less the amount of unrestricted cash and Cash Equivalents of the Borrower and its Subsidiaries at such date, all determined on a Consolidated basis.
Consolidated Net Income for any period means the net income of the Borrower and its Subsidiaries on a Consolidated basis for such period taken as a single accounting period determined in accordance with GAAP but excluding in any event:
(a) any gains or losses on the sale or other disposition of investments or fixed or capital assets out of the ordinary course of business, and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses;
(b) net earnings and losses of any Subsidiary accrued prior to the date it became a Subsidiary;
(c) net earnings and losses of any corporation or other entity (other than a Subsidiary), substantially all the assets of which have been acquired in any manner by the Borrower or any Subsidiary, realized by such corporation or other entity prior to the date of such acquisition;
(d) net earnings and losses of any corporation or other entity (other than a Subsidiary) with which the Borrower or any Subsidiary shall have consolidated or which shall have merged into or with the Borrower or any Subsidiary prior to the date of such consolidation or merger;
(e) any gains or losses resulting from the termination of any Plan, and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; and
6
(f) any other net extraordinary gain or net extraordinary loss.
Consolidated Net Tangible Assets shall mean the total amount of assets (less applicable reserves and other properly deductible items) after deducting (a) all current liabilities (excluding the amount of those which are by their terms extendable or renewable at the option of the obligor to a date more than 12 months after the date as of which the amount is being determined) and (b) all goodwill, tradenames, trademarks, patents, unamortized debt discount and expense and other like intangible assets, all as set forth on the most recent balance sheet of the Borrower and its Consolidated Subsidiaries and determined in accordance with GAAP.
Constituent Documents shall mean, with respect to any Person, (a) the articles of incorporation, certificate of incorporation, constitution or certificate of formation (or the equivalent organizational documents) of such Person, (b) the by-laws or operating agreement (or the equivalent governing documents) of such Person and (c) any document setting forth the manner of election or duties of the directors or managing members of such Person (if any) and the designation, amount or relative rights, limitations and preferences of any class or series of such Persons Equity Interests.
Convert , Conversion and Converted shall each refer to a conversion of Loans of one Type into Loans of the other Type pursuant to Sections 2.11, 2.12 or 2.17.
Credit Extension shall have the meaning set forth in Section 3.03.
Debt of any Person shall mean the sum of the following (without duplication): (a) all obligations of such Person for borrowed money, under Repurchase Agreements, Disqualified Stock or evidenced by bonds, debentures, notes or other similar instruments (other than any such obligations to the extent that such obligations result from the requirement to return collateral posted to such Person by a counterparty pursuant to a Hedging Contract); (b) all obligations of such Person to pay the deferred purchase price of property, assets or services, except trade accounts payable arising in the ordinary course of business; (c) all Capital Lease Obligations of such Person; (d) all Debt of others secured by a Lien on any property or asset of such Person, whether or not such Debt is assumed by such Person; (e) all Debt of others Guaranteed by such Person; and (f) all reimbursement obligations or other obligations (other than contingent obligations) with respect to bankers acceptances or letters of credit or similar instruments created or issued at the request of such Person.
Default shall mean any Event of Default or any event that with notice, lapse of time or both would, unless cured or waived, become an Event of Default.
Defaulting Lender shall mean any Lender, as reasonably determined by the Administrative Agent, that has (a) failed, within two Business Days of the date required to be funded or paid, to (i) fund all or any portion of its Loans, (ii) fund all or any portion of its participations in Letters of Credit or Swingline Loans or (iii) pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Lender notifies the Administrative
7
Agent and the Borrower in writing that such failure is the result of such Lenders reasonable determination that a condition precedent to funding (specifically identified and including the particular default, if any) has not been satisfied, (b) notified the Borrower, the Administrative Agent or any Lender in writing that it does not intend to comply with any of its funding obligations under this Agreement or has made a public statement to the effect that it does not intend to comply with its funding obligations under this Agreement or generally under other agreements in which it has committed to extend credit (unless such writing or public statement relates to such Lenders obligation to fund a Loan hereunder and states that such position is based on such Lenders reasonable determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) failed, within three Business Days after written request by the Administrative Agent, to confirm that it will comply with the terms of this Agreement relating to its funding obligations; provided that any such Lender shall cease to be a Defaulting Lender under this clause (c) upon receipt of such confirmation by the Administrative Agent, or (d) (i) been, or has a parent that has been, adjudicated as, or determined by any Governmental Authority having regulatory authority over such Person or its assets to be, insolvent or (ii) become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian, appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment or has a parent company that has become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any Equity Interest in such Lender or a parent company thereof by a Governmental Authority or an instrumentality thereof or the exercise of control over such Lender or parent company by a Governmental Authority or instrumentality thereof.
Dispose shall refer to the sale, transfer, license, lease or other disposition (including any sale and lease-back transaction) of any property or assets by any Person (or the granting of any option or other right to do any of the foregoing), including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith; provided that the term Dispose shall not include any loss of or damage to, or any condemnation or other taking of, any property or assets.
Disqualified Stock shall mean with respect to any Person, any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is exchangeable for Debt of such Person, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is five years after the Maturity Date.
8
Domestic Lending Office shall mean, with respect to any Lender, the office of such Lender specified as its Domestic Lending Office in its Administrative Questionnaire, or such other office of such Lender as such Lender may from time to time notify the Borrower and the Administrative Agent.
Effective Date shall have the meaning assigned to that term in Section 3.02.
Eligible Assignee shall mean (a) a Lender; (b) a commercial bank organized under the Laws of the United States, or any State thereof, and having total assets in excess of $10,000,000,000; (c) a commercial bank organized under the Laws of any other country that is a member of the Organization for Economic Cooperation and Development or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or a political subdivision of any such country, and having total assets in excess of $10,000,000,000 or its equivalent in the relevant foreign currency, so long as such bank is acting through a branch or agency located in the country in which it is organized or another country that is described in this clause (c); (d) the central bank of any country that is a member of the Organization for Economic Cooperation and Development; and (e) any other Person approved by the Administrative Agent, each Issuing Bank, the Swingline Lender and, unless an Event of Default shall have occurred and be continuing, the Borrower, such approval not to be unreasonably withheld or delayed; provided that none of the Borrower, any Affiliate of the Borrower or an individual shall qualify as an Eligible Assignee.
Environmental Laws means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the protection of environment, preservation or reclamation of natural resources, or the management, release or threatened release of any Hazardous Material.
Environmental Liability means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
Equity Interests shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.
ERISA shall mean the Employee Retirement Income Security Act of 1974, and the regulations promulgated and rulings issued thereunder.
9
ERISA Affiliate shall mean any Person that for purposes of Title IV of ERISA is a member of the Borrowers controlled group, or under common control with the Borrower, within the meaning of Section 414 of the Code.
ERISA Event shall mean (a) the occurrence with respect to a Plan of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the Pension Benefit Guaranty Corporation (or any successor) ( PBGC ); (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of the Borrower or any of its ERISA Affiliates in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by the Borrower or any of its ERISA Affiliates from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions set forth in Section 430(e) of the Code or Section 303(k)(1)(A) and (B) of ERISA to the creation of a lien upon property or assets or rights to property or assets of the Borrower or any of its ERISA Affiliates for failure to make a required payment to a Plan are satisfied; (g) the termination of a Plan by the PBGC pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan; (h) any failure by any Plan to satisfy the minimum funding standards, within the meaning of Sections 412 or 430 of the Code or Section 302 of ERISA, whether or not waived; (i) the determination that any Plan is or is expected to be in at-risk status, within the meaning of Section 430 of the Code or Section 303 of ERISA or (j) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of liability with respect to the withdrawal or partial withdrawal from a Multiemployer Plan or a determination that a Multiemployer Plan is, or is expected to be insolvent (within the meaning of Section 4245 of ERISA), in reorganization (within the meaning of Section 4241 of ERISA) or in endangered or critical status (within the meaning of Section 432 of the Code or Section 305 of ERISA).
Eurodollar Lending Office shall mean, with respect to any Lender, the office of such Lender specified as its Eurodollar Lending Office in its Administrative Questionnaire (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time notify the Borrower and the Administrative Agent.
Eurodollar Margin shall mean, on any date, the rate per annum set forth under the caption Eurodollar Margin for such date determined in accordance with the Pricing Grid.
Eurodollar Rate shall mean, for any Interest Period for any Eurodollar Rate Loan, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate for deposits in U.S. Dollars having a maturity closest to such Interest Period which
10
appears on the Screen Page as of 11:00 A.M., London time, on the day two London Banking Days prior to the first day of such Interest Period ( provided that, if such rate does not appear on the relevant Screen Page for such Interest Period, the Eurodollar Rate for that Interest Period will be the arithmetic mean of quotations obtained by the Administrative Agent from the Reference Banks for the rate at which deposits in U.S. Dollars having a maturity closest to such Interest Period are offered by the principal London office of such Reference Bank at approximately 11:00 A.M., London time, on the day that is two London Banking Days preceding the first day of such Interest Period to other prime banks in the London interbank market in a principal amount of $5,000,000 by (b) an amount equal to the difference of 1.00 minus the Reserve Requirement for such Interest Period.
Eurodollar Rate Loan shall mean a Loan that bears interest as provided in Section 2.10(a)(ii).
Events of Default shall have the meaning assigned to that term in Article 7.
Evergreen Letter of Credit means a Letter of Credit that is automatically extended unless the Issuing Bank gives notice to the beneficiary thereof stating that such Letter of Credit will not be extended.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
Excluded Taxes shall mean, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder or under any other Loan Document, (a) Taxes imposed on (or measured by) its net income by the United States of America (including any political subdivision thereof) or by any other jurisdiction (including any political subdivision of any thereof) under the Laws of which such recipient is organized, in which its principal office is located or in which it conducts any business (other than solely on account of the execution and performance of or the receipt of any payment under, this Agreement or any other Loan Document) or, in the case of any Lender, in which its Applicable Lending Office is located, (b) any branch profits Taxes imposed by the United States of America or any comparable Tax imposed by any foreign jurisdiction, (c) (other than an assignee pursuant to a demand by the Borrower under Sections 2.20 or 9.06(c)), any withholding Tax, except withholding Taxes imposed as a result of a change in Law occurring after the time such recipient becomes a party to this Agreement or designates a new Applicable Lending Office, (d) any U.S. withholding Tax that is attributable to such recipients failure to furnish documentation described in Section 2.18(f), except to the extent such recipients failure is due to a change in Law occurring after the date on which such recipient becomes a party hereunder or designates a different Applicable Lending Office and such change in Law requires the recipient to deliver documentation that would require the disclosure of materially different information than the documentation that is or would be required with respect to such recipient under Section 2.18(f) as of the date such recipient becomes a party hereunder or designates a different Applicable Lending Office and except to the extent that such recipient (or its assignor, if any) was entitled, at the time of designation of a different Applicable Lending Office, to receive additional
11
amounts from the Borrower with respect to such withholding Tax pursuant to Section 2.18(a), and (e) any Taxes imposed by FATCA.
Facility Fee Rate shall mean, on any date, the rate per annum set forth under the caption Facility Fee Rate for such date determined in accordance with the Pricing Grid.
FATCA shall mean Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 1471(b)(1) of the Code.
Federal Funds Effective Rate shall mean, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1.00%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1.00%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.
Financial Officer shall mean (a) the Controller of the Borrower, (b) the Chief Financial Officer of the Borrower, (c) the Treasurer of the Borrower or (d) any officer of the Borrower who succeeds to all or substantially all of the responsibilities of an officer identified in clause (a), (b) or (c) above.
Fitch shall mean Fitch, Inc., and any successor to its rating agency business.
Foreign Lender shall mean any Lender that is organized under the Laws of a jurisdiction other than the United States of America. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
GAAP shall mean generally accepted accounting principles in the United States of America.
Governmental Approval means any written permit, license, variance, certification, consent, no-action letter, clearance, exemption or other approval granted by a Governmental Authority.
Governmental Authority shall mean the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
12
Guarantee of any Person shall mean any obligation of such Person directly guaranteeing any Debt of any other Person or otherwise providing for the payment of any Debt of any Person, provided that the term Guarantee shall not include endorsements for collection or deposits in the ordinary course of business. The term Guarantee used as a verb has a correlative meaning.
Hazardous Materials means all explosive or radioactive substances or wastes and all substances, wastes or other pollutants listed, defined, regulated or classified as hazardous or toxic, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated as such pursuant to any Environmental Law.
Hedging Contracts shall mean all interest rate contracts, foreign exchange contracts, currency swap or option agreements, forward contracts, commodity swap, purchase or option agreements, other commodity price hedging arrangements and all other similar agreements or arrangements designed to mitigate the risks of any Person arising from fluctuations in interest rates, currency values or commodity prices.
Increasing Lender shall have the meaning assigned to that term in Section 2.07(c)(i).
Indemnified Taxes shall mean Taxes other than Excluded Taxes.
Indemnitee shall have the meaning assigned to that term in Section 9.04(c).
Information shall have the meaning assigned to that term in Section 4.12.
Initial Financial Statements shall mean the (a) audited Consolidated balance sheet of the Borrower and the related audited Consolidated statements of income, shareholders equity and cash flows and the related footnotes as of and for the year ended December 31, 2011 and (b) the unaudited condensed Consolidated balance sheet of the Borrower and the related unaudited condensed Consolidated statements of income and cash flows and related footnotes for the six months ended July 1, 2012.
Initial Lenders shall have the meaning assigned to that term in the introduction hereto.
Intercompany Debt means (i) with respect to any Subsidiary, Debt of such Subsidiary to the Borrower or to another Subsidiary and (ii) with respect to the Borrower, Debt of the Borrower to a Subsidiary.
Interest Expense for any period means all interest and all amortization of debt discount and expense (including, without limitation, all commissions, fees and other charges owed with respect to letters of credit and bankers acceptances) on any particular Debt (including, without limitation, payment-in-kind, zero coupon and other like Securities) for which such calculations are being made.
13
Interest Coverage Ratio shall mean, for any period, the ratio of Adjusted Consolidated EBITDA for such period to the Consolidated Interest Expense of the Borrower and its Subsidiaries for such period.
Interest Period shall mean, for each Eurodollar Rate Loan comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Loan (or the date of the Conversion of any Base Rate Loan into such Eurodollar Rate Loan) and ending on the last day of the period selected by the Borrower pursuant to the provisions contained herein and, thereafter, with respect to Eurodollar Rate Loans, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions contained herein. The duration of each such Interest Period for each Eurodollar Rate Loan comprising part of the same Borrowing shall be one, two, three or six months, or if available as determined by all Lenders, nine or twelve months or any other period agreed upon by the Administrative Agent, each of the Lenders and the Borrower, in each case as the Borrower may select, upon notice received by the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the first day of such Interest Period. Notwithstanding the foregoing:
(i) if any Interest Period would otherwise commence before and end after the Commitment Termination Date, such Interest Period shall end on the Commitment Termination Date;
(ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day);
(iii) each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; and
(iv) Interest Periods commencing on the same date for Eurodollar Rate Loans comprising part of the same Borrowing shall be of the same duration.
Issuing Bank shall mean each of JPMCB (or an affiliate) and any other Lender that may agree, upon the request of the Borrower, to issue Letters of Credit hereunder. Reference to the Issuing Bank in relation to any Letter of Credit is to the particular Issuing Bank that shall have issued, or that shall have been requested to issue, such Letter of Credit.
Joint Lead Arrangers shall mean the Persons so identified on the cover page hereof, in such capacity.
14
JPMCB shall have the meaning assigned to that term in the introduction hereto.
JPMCB Parties shall have the meaning assigned to that term in Section 9.02(b)(v).
Law shall mean any federal, state, local, national or supranational or foreign law (including common law), statute, ordinance, rule, regulation, Order, code ruling, decree, arbitration award, agency requirement, license or permit of any Governmental Authority.
LC Disbursement means a payment made by the Issuing Bank pursuant to a Letter of Credit.
LC Exposure means, at any time, the sum of (a) the aggregate amount of the undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time.
Lenders shall mean (i) the Initial Lenders, (ii) each Assuming Lender that shall become a party hereto pursuant to Section 2.07(c) and (iii) each Eligible Assignee that shall become a party hereto pursuant to Section 9.06(a), other than any Person that shall have ceased to be a Lender hereunder pursuant to Section 9.06. Unless the context otherwise requires, references to Lenders shall include the Swingline Lender and each Issuing Bank.
Letter of Credit means a letter of credit issued hereunder by the Issuing Bank on or after the Effective Date.
Leverage Ratio shall mean, for any period of four consecutive fiscal quarters, the ratio of Consolidated Net Debt as of the last day of such period to Adjusted Consolidated EBITDA for such period.
Lien shall mean, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such property or asset.
Loan shall mean a loan by a Lender to the Borrower pursuant to this Agreement.
Loan Documents shall mean, collectively, this Agreement, the Commitment Documents, the Notes and each Assumption Agreement.
London Banking Day shall mean any day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in London.
15
Material Adverse Change shall mean any material adverse change in any of (a) the business, financial position or results of operations of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its material obligations under this Agreement or the other Loan Documents or (c) the rights of or benefits available to the Lenders or the Administrative Agent under this Agreement or any other Loan Document.
Material Adverse Effect shall mean an effect that results in or causes, or could reasonably be expected to result in or cause, a Material Adverse Change.
Material Subsidiary shall mean any Subsidiary (a) for which the Consolidated gross revenues for the four fiscal quarter period ending on the last day of the most recently ended fiscal quarter of the Borrower for which financial statements have been delivered pursuant to clauses (a) or (b), as applicable, of Section 5.01 (or prior to such delivery, as of December 31, 2011) exceed 5.00% of the Consolidated gross revenues of the Borrower for such period, in each case determined in accordance with GAAP, or (b) for which the Consolidated total assets (after intercompany eliminations) as of the last day of the most recently ended fiscal quarter of the Borrower for which financial statements have been delivered pursuant to clauses (a) or (b), as applicable, of Section 5.01 (or prior to such delivery, as of December 31, 2011) exceed 5.00% of the Consolidated total assets of the Borrower as of such date, in each case determined in accordance with GAAP.
Maturity Date shall mean the date that is five years after the date of this Agreement, provided that, if such date shall not be a Business Day, the Maturity Date shall be the immediately preceding Business Day.
Moodys shall mean Moodys Investors Service, Inc., and any successor to its rating agency business.
Multiemployer Plan shall mean a multiemployer plan, as defined in Section 3(37) or Section 4001(a)(3) of ERISA, as applicable, in respect of which the Borrower or any ERISA Affiliate could have any obligation or liability, contingent or otherwise.
Multiple Employer Plan shall mean a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and at least one Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.
Note shall mean a promissory note of the Borrower payable to any Lender and its registered assigns, in substantially the form of Exhibit C hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from one or more Loans made by such Lender.
Obligations shall mean the Loans and all other amounts, obligations, covenants and duties owing by the Borrower to the Administrative Agent, any Lender, any Affiliate
16
of any of them or any Indemnitee, of every type and description (whether by reason of an extension of credit, payment of any draft drawn or other payment thereunder, loan, guaranty, indemnification or otherwise), present or future, arising under this Agreement or any other Loan Document, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired and whether or not evidenced by any note, guaranty or other instrument or for the payment of money, including all fees, interest, charges, expenses, attorneys fees and disbursements and other sums chargeable to the Borrower under this Agreement and any other Loan Document (including any such sums accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding).
Order shall mean any order, judgment or injunction.
Other Taxes shall mean any and all present or future stamp or documentary Taxes or any other excise or property Taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, the Loan Documents that are imposed by any Governmental Authority in a jurisdiction in which the relevant Borrower is incorporated, organized, managed and controlled or otherwise has a connection.
Participant Register shall have the meaning assigned to that term in Section 9.06(f).
Patriot Act shall mean the USA PATRIOT Act of 2001 (31 U.S.C. 5318 et seq.).
PBGC shall have the meaning assigned to that term in the definition of ERISA Event.
Permitted Liens shall mean: (a) Liens imposed by Law for Taxes that are not yet due or are being contested in compliance with Section 5.04; (b) carriers, warehousemens, mechanics, materialmens, repairmens and other like Liens imposed by Law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days (or if more than 30 days overdue, are unfiled and no other action has been taken to enforce such Liens) or are being contested in compliance with Section 5.04; (c) pledges and deposits made in the ordinary course of business (i) in compliance with workers compensation, unemployment insurance and other social security Laws or regulations or (ii) securing liability for reimbursement or indemnification obligations of (including obligations in respect of letters of credit or bank guarantees for the benefit of) insurance carriers providing property, casualty or liability insurance to the Borrower or any Subsidiary; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature (including those to secure health, safety and environmental obligations), in each case in the ordinary course of business; (e) judgment Liens in respect of judgments that do not constitute an Event of Default under Section 7(e); (f) easements, zoning restrictions, rights of way and similar encumbrances
17
on real property imposed by Law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower and its Subsidiaries; (g) Liens (i) of a collection bank on the items in the course of collection, (ii) attaching to trading accounts or brokerage accounts incurred in the ordinary course of business, (iii) in favor of a banking or other financial institution arising as a matter of Law encumbering deposits or other funds maintained with a financial institution (including the right of set off) or which are customary in the banking industry, (iv) attaching to other prepayments, deposits or earnest money in the ordinary course of business and (v) attaching to cash collateral posted pursuant to a Hedging Contract, or a letter of credit agreement, entered into in the ordinary course of business; (h) Liens on insurance policies and the proceeds thereof securing the financing of the premiums with respect thereto; (i) Liens on specific items of inventory or other goods and the proceeds thereof securing such Persons obligations in respect of documentary letters of credit or bankers acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or goods; (j) interest or title of a lessor, lessee, sublessor or sublessee under any lease or sublease permitted hereunder (other than any Capital Lease) and any interest or title of a licensor, licensee, sublicensor or sublicensee under any license or sublicense permitted hereunder; (k) Liens solely on any cash earnest money deposits, escrow arrangements or similar arrangements made by the Borrower or any Subsidiary in connection with any letter of intent or purchase agreement permitted hereunder; (l) purported Liens evidenced by the filing of precautionary Uniform Commercial Code financing statements (or any similar precautionary filings) relating solely to operating leases of personal property entered into in the ordinary course of business; (m) Liens in favor of customs and revenue authorities arising as a matter of Law to secure payment of customs duties in connection with importation of goods; and (n) any zoning or similar Law or right reserved to or vested in any Governmental Authority to control or regulate the use of any real property.
Permitted Refinancing shall mean any extension, refinancing, renewal, replacement or defeasement of any Debt that (a) does not exceed the principal amount of such Debt (plus all accrued interest thereon and the amount of all Taxes, fees, costs, expenses and premiums incurred in connection therewith), (b) has a weighted average maturity and final maturity (measured as of the date of such extension, refinancing, renewal, replacement or defeasance) that is no earlier than the earlier of (x) the Commitment Termination Date and (y) the original weighted average maturity and final maturity of such Debt and (c) is not secured by any Lien other than a Lien securing such Debt and does not represent Debt of any Person except a Person obligated in respect of such Debt.
Person shall mean an individual, a corporation, a company, a voluntary association, a partnership, a trust, a joint venture, a limited liability company, an unincorporated organization, or a government or any agency, instrumentality or political subdivision thereof.
Pfizer Separation Agreements shall mean the global separation agreement, the transitional services agreement, the tax matters agreement, the research and development
18
collaboration and license agreement, the employee matters agreement, the two master manufacturing and supply agreements, the environmental matters agreement, the screening services agreement, the various intellectual property license agreements, the registration rights agreement, the Brazil agreements and the local market distribution agreements or any other aggreement listed under the heading Certain relationships and related party transactions in the Registration Statement, in each case as described in the Registration Statement.
Plan shall mean a Single Employer Plan, a Multiple Employer Plan or a Multiemployer Plan.
Platform shall have the meaning assigned to that term in Section 9.02(b)(ii).
Pricing Grid shall mean the Pricing Grid based on the Borrowers Ratings attached as Annex I hereto.
Quarterly Date shall mean the last day of each March, June, September and December in each year, the first of which shall be the first such day after the date hereof; provided that, if any such day is not a Business Day, then such Quarterly Date shall be the next preceding Business Day.
Rating Agencies shall mean Moodys and S&P.
Ratings shall mean, at any time, the public ratings of the Borrowers senior unsecured non-credit enhanced long-term debt by Moodys and S&P at such time.
Reference Banks shall mean JPMCB and Citibank, N.A. or any replacement Reference Bank designated pursuant to Section 2.11(f).
Register shall have the meaning assigned to that term in Section 9.06(e).
Registration Statement shall mean the registration statement on Form S-1 filed by the Borrower with the SEC pursuant to the Securities Act in connection with the initial public offering of common stock of the Borrower, as initially filed and as amended from time to time.
Regulations A, D, U and X shall mean, respectively, Regulations A, D, U and X of the Board of Governors (or any successor), as the same may be amended or supplemented from time to time.
Regulatory Change shall mean any change after the date of this Agreement in United States Federal, state or foreign Law or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks, including the Administrative Agent or any Lender, of or under any United States Federal, state or foreign Law or regulations (whether or not having the force of Law) by any court or governmental or monetary authority charged with the interpretation or administration thereof; provided that, notwithstanding anything herein to the contrary, (a) the Dodd-Frank Wall Street Reform and Consumer Protection Act and
19
all requests, rules, guidelines or directives thereunder or issued in connection therewith and (b) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor similar authority) or the United States regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a Regulatory Change, regardless of the date enacted, adopted, promulgated or issued.
Related Party shall mean, with respect to any specified Person, such Persons Affiliates and the respective partners, directors, officers, employees, members, trustees, agents and sub-agents of such Person and such Persons Affiliates.
Repurchase Agreement shall mean an agreement by the Borrower or any Subsidiary to sell securities to another Person coupled with an agreement to purchase such securities from such Person at a specified price on a later date.
Required Lenders shall mean, at any time, Lenders having more than 50% of the Commitments or, if no Commitments are then outstanding, Lenders owed more than 50% of the then aggregate unpaid principal amount of all outstanding Loans.
Requisite Amount shall have the meaning assigned to that term in Section 7.01(e).
Reserve Requirement shall mean, for any Interest Period for any Eurodollar Rate Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 against Eurocurrency Liabilities (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (a) any category of liabilities that includes deposits by reference to which the Eurodollar Rate is to be determined or (b) any category of extensions of credit or other assets that includes Eurodollar Rate Loans.
Revolving Credit Exposure means, with respect to any Lender at any time, the sum of the aggregate outstanding principal amount of such Lenders Revolving Loans and the aggregate Amount of its LC Exposure and Swingline Exposure at such time.
Revolving Loan shall mean a Loan made pursuant to Section 2.01.
S&P shall mean Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor to its rating agency business.
Sarbanes-Oxley Act shall mean the Sarbanes-Oxley Act of 2002.
Screen Page shall mean the Reuters LIBOR01 screen displaying British Bankers Association Interest Settlement Rates for U.S. Dollars (or any successor or substitute screen provided by Reuters, or any successor to or substitute for such service,
20
providing rate quotations comparable to those currently provided on such screen, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to deposits in U.S. Dollars in the London interbank market).
SEC shall mean the United States Securities and Exchange Commission.
Secured Debt shall mean any Debt under any Repurchase Agreement and any other Debt the obligations with respect to which are secured by a Lien.
Securities Act shall mean the Securities Act of 1933, as amended.
Single Employer Plan shall mean a single employer plan, as defined in Section 3(41) or Section 4001(a)(15) of ERISA, as applicable, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and no Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.
Start-Up Adjustments shall mean the following tax-adjusted one-time cost adjustments in connection with the initial public offering of the Borrower: (i) manufacturing, regulatory, and legal transfer costs, (ii) other start-up costs, (iii) carve-out start-up costs and (iv) incremental enabling function stand-up costs.
Subsidiary shall mean, with respect to any Person, any corporation, partnership, limited liability company or other business entity of which at least a majority of the outstanding shares of Voting Stock is at the time directly or indirectly owned or controlled by such Person or one or more of the Subsidiaries of such Person. Unless the context shall otherwise require, Subsidiary refers to a Subsidiary of the Borrower.
Swingline Exposure means, at any time, the aggregate amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time.
Swingline Lender means JPMCB, in its capacity as lender of Swingline Loans hereunder.
Swingline Loan means a Loan made pursuant to Section 2.04.
Taxes shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges, liabilities or withholdings (including interest, fines, penalties or additions to tax) imposed by any Governmental Authority.
Type , when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Eurodollar Rate or the Base Rate.
21
United States and United States Person shall have the meaning assigned to that term in Section 7701 of the Code.
U.S. Dollars and $ shall mean the lawful money of the United States of America.
Voting Stock shall mean Equity Interests of any Person having ordinary power to vote in the election of members of the board of directors, managers, trustees or other controlling Persons, of such Person (irrespective of whether, at the time, Equity Interests of any other class or classes of such entity shall have or might have voting power by reason of the happening of a contingency).
Withholding Agent shall mean the Borrower and the Administrative Agent.
Section 1.02. Accounting Terms and Determinations . Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Administrative Agent or any Lender hereunder shall be prepared, in accordance with GAAP as in effect from time to time, applied on a basis consistent with the audited Consolidated financial statements of the Borrower for the Borrowers fiscal year ended December 31, 2011 (except for changes concurred with by the Borrowers independent public accountants).
Section 1.03. Computation of Time Periods . In this Agreement in the computation of periods of time from a specified date to a later specified date, the word from means from and including and the words to and until each mean to but excluding.
Section 1.04. Terms Generally . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words include, includes and including shall be deemed to be followed by the phrase without limitation. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein (including this Agreement) shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Persons successors and assigns (subject to any restrictions on assignment set forth herein) and, in the case of any Governmental Authority, any other Governmental Authority that shall have succeeded to any or all functions thereof, (c) any definition of or reference to any statute, rule or regulation shall be construed as referring thereto as from time to time amended, supplemented or otherwise modified (including by succession of comparable successor Laws), (d) the words herein, hereof and hereunder, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof and (e) all references herein to Articles, Sections,
22
Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. ARTICLE 2
A MOUNTS AND T ERMS OF THE L OANS
Section 2.01. Commitments . Subject to the terms and conditions set forth herein, each Lender agrees to make loans to the Borrower from time to time during the Availability Period; provided that, immediately after each such Loan is made, the amount of each Lenders Revolving Credit Exposure shall not exceed such Lenders Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans.
Section 2.02. Loans and Borrowings . (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lenders failure to make Loans as required.
(b) Subject to Section 2.17, each Revolving Borrowing shall be comprised entirely of Base Rate Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Rate Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.
(c) At the time that any Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is not less than $5,000,000 and an integral multiple of $1,000,000; provided that a Base Rate Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e). Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of ten Eurodollar Rate Borrowings outstanding.
Section 2.03. Requests for Revolving Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request (a) in the case of a Eurodollar Rate Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing, or (b) in the case of a Base Rate Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing. Each such Borrowing Request shall be irrevocable and shall specify the following information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
23
(iii) whether such Borrowing is to be a Base Rate Borrowing or a Eurodollar Rate Borrowing;
(iv) in the case of a Eurodollar Rate Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term Interest Period; and
(v) the location and number of the Borrowers account to which funds are to be disbursed.
If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be a Base Rate Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Rate Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one months duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lenders Loan to be made as part of the requested Borrowing.
Section 2.04. Swingline Loans. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $50,000,000 or (ii) the Revolving Credit Exposure of any Lender exceeding its Commitment; provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans.
(b) To request a Swingline Loan, the Borrower shall notify the Swingline Lender (with a copy to the Administrative Agent) of such request not later than 1:00 p.m., New York City time, on the day of the proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan and the location and number of the Borrowers account to which the funds are to be disbursed. Each Swingline Loan shall be a Base Rate Loan in an amount that is an integral multiple of $100,000 and not less than $500,000. The Swingline Lender shall make each Swingline Loan to be made by it available to the Borrower by means of a credit to the account designated by the Borrower for such purpose (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e), by remittance to the Issuing Bank) by 4:00 p.m., New York City time, on the requested date of such Swingline Loan.
(c) The Swingline Lender may by written notice given to the Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day, require the Lenders to acquire participations on Business Day in all or a portion of the Swingline Loans then outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Lender, specifying in such notice
24
such Lenders Applicable Percentage of such Swingline Loan or Swingline Loans. Each Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of such Swingline Lender, such Lenders Applicable Percentage of such Swingline Loan or Swingline Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis , to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to such Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower in respect of a Swingline Loan after receipt by such Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear; provided that any such payment so remitted shall be repaid to the Swingline Lender or to the Administrative Agent, as applicable, if and to the extent such payment is required to be refunded to the Borrower for any reason. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any default in the payment thereof.
Section 2.05. Letters of Credit. (a) General . Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit denominated in U.S. Dollars for its own account in a form acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions . To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall notify the Issuing Bank and the Administrative Agent reasonably in advance of the requested date of issuance, amendment, renewal or extension, describing the Letter of Credit to be issued, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (d) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend,
25
renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Banks standard form (with such changes thereto as the parties may agree upon) in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $200,000,000, and (ii) the Revolving Credit Exposure of each Lender shall not exceed its Commitment.
(c) Expiration Date . Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit or, in the case of any renewal or extension thereof, one year after such renewal or extension (or, if any such day is not a Business Day, the next preceding Business Day) and (ii) the date that is five Business Days prior to the Maturity Date. The expiry date of any Letter of Credit may be extended from time to time (i) at the Borrowers request in accordance with (c) above or (ii) in the case of an Evergreen Letter of Credit, automatically, in each case so long as such extension is for a period not exceeding one year, does not extend beyond the date referred to in clause (ii) of the immediately preceding sentence and is granted (or the last day on which notice can be given to prevent such extension occurs) no earlier than three months before the then existing expiry date thereof.
(d) Participations . By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lenders Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lenders Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.
(e) Reimbursement . If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 2:00 p.m., New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 9:00 a.m., New York City time, on such date, or, if such notice has not been received by the
26
Borrower prior to such time on such date, then not later than 2:00 p.m., New York City time, on the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.04 that such payment be financed with in the case of LC Disbursements, a Base Rate Revolving Borrowing (of not less than $10,000,000) or a Swingline Loan (of not less than $500,000) in an equal amount and, to the extent so financed, the Borrowers obligation to make such payment shall be discharged and replaced by the resulting Base Rate Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lenders Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis , to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of Base Rate Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement.
(f) Obligations Absolute . The Borrowers obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrowers obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or
27
any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Banks failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.
(g) Disbursement Procedures . The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement.
(h) Interim Interest . If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to Base Rate Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then 2% per annum shall be added to the applicable rate specified above. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment.
(i) Cash Collateralization . If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent given upon request of the Lenders with LC Exposure representing greater than 50% of the total LC Exposure demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to 103% of the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash
28
collateral will become effective immediately, and such deposit will become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (i) or (j) of Article 7. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Borrower hereby grants a lien and security interest in, and sole and exclusive dominion and control, including the exclusive right of withdrawal, over such account to the Administrative Agent. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrowers risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived free and clear of all Liens created hereunder.
Section 2.06. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof not later than 1:00 p.m. (New York City time), in funds immediately available in New York City, to the account of the Administrative Agent most recently designated for such purpose by notice to the Lenders; provided that Swingline Loans shall be made as provided in Section 2.04.
(b) The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower designated by the Borrower in the applicable Borrowing Request; provided that Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be remitted by the Administrative Agent to the Issuing Bank.
(c) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lenders share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate.
29
Section 2.07. Changes of Commitments . (a) Termination on the Maturity Date . Unless theretofore reduced to such amount pursuant to Section 2.07(b), the Commitments of the Lenders shall automatically be reduced to zero on the close of banking business on the Maturity Date.
(b) Ratable Termination or Reduction . The Borrower shall have the right, at any time or from time to time, upon at least three Business Days notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders, provided that (i) each partial reduction shall be in the minimum amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of Loans in accordance herewith, the aggregate Revolving Credit Exposure would exceed the aggregate amount of the Commitments; provided further that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. The aggregate amount of the Commitments, once reduced as provided in this Section 2.07(b), may not be reinstated, except as provided in Section 2.07(c) below.
(c) Increase . (i) The Borrower may at any time, by notice to the Administrative Agent not less than three Business Days prior to a Commitment Increase Date (as defined below), propose that the aggregate amount of the Commitments be increased (each such proposed increase being a Commitment Increase ), through an increase of the Commitment or Commitments of one or more existing Lenders and/or the addition of one or more Persons (who shall be Eligible Assignees) as Assuming Lenders, as the Borrower may determine, all effective as of a date (the Commitment Increase Date ) that shall be specified in such notice and that shall be prior to the Commitment Termination Date; provided that
(A) the proposed Commitment Increase in respect of the Commitment of either (1) any Increasing Lender or (2) any Assuming Lender shall for each Commitment Increase Date be in the aggregate amount of no less than $25,000,000 and an integral multiple of $1,000,000 in excess thereof,
(B) in no event shall the aggregate amount of the Commitments at any time exceed $1,500,000,000,
(C) no Default shall have occurred and be continuing on such Commitment Increase Date or shall result from the proposed Commitment Increase,
(D) the representations and warranties contained in Article 4 shall be accurate in all material respects on and as of the Commitment Increase Date as if made on and as of such date (except to the extent any
30
such representation or warranty (1) relates solely to an earlier date, in which case it shall be accurate as of such earlier date, or (2) is qualified by materiality or subject to a Material Adverse Effect qualification, in which case it shall be accurate in all respects on and as of the Commitment Increase Date or such earlier date as specified in clause (1) above), and
(E) no Commitment Increase may be effected other than on a day (x) on which no Eurodollar Rate Loans are outstanding or (y) that is the last day of an Interest Period for all outstanding Eurodollar Rate Loans.
The Administrative Agent shall notify the Lenders of a proposed Commitment Increase promptly upon its receipt of any notice from the Borrower with respect to such proposed Commitment Increase. It shall be in each Lenders sole discretion whether to agree to increase its Commitment hereunder in connection with any proposed Commitment Increase. No later than 10 Business Days after its receipt of the Borrowers notice proposing a Commitment Increase, each Lender that is willing to increase its Commitment hereunder (each such Lender being an Increasing Lender ) shall deliver to the Administrative Agent a notice in which such Lender shall set forth the maximum increase in its Commitment to which such Lender is willing to agree, and the Administrative Agent shall promptly provide to the Borrower a copy of such Increasing Lenders notice. Any Lender failing to provide such notice shall be deemed to have declined to increase its Commitment. The Administrative Agent, or an Affiliate of the Administrative Agent, shall cooperate with the Borrower in discussions with the Lenders and Eligible Assignees with a view to arranging any proposed Commitment Increase through the increase of the Commitments of one or more of the Lenders and/or the addition of one or more Eligible Assignees as Assuming Lenders ( provided that any such addition of an Eligible Assignee as an Assuming Lender shall be subject to the consent of the Administrative Agent, which consent shall not be unreasonably withheld or delayed) and as parties to this Agreement; provided , that any allocations of any increase of Commitments hereunder (including any allocation as between Increasing Lenders and Assuming Lenders) shall be determined by the Borrower in its sole discretion, subject to the limitations set forth in this clause (i) of Section 2.07(c).
(ii) If agreement is reached prior to the relevant Commitment Increase Date with any Increasing Lenders and Assuming Lenders, if any, as to a Commitment Increase (the amount of which may be less than (subject to the limitation set forth in clause (i)(A) of this Section 2.07(c)) but not greater than that amount specified in the applicable notice from the Borrower), the Borrower shall deliver, no later than one Business Day prior to such Commitment Increase Date, a notice thereof in reasonable detail to the Administrative Agent (and the Administrative Agent shall give notice thereof to the Lenders, including any Assuming Lenders). The Assuming Lenders, if any, shall become Lenders hereunder as of such Commitment Increase Date and the Commitments of any Increasing Lenders and such Assuming Lenders shall be increased by or shall be, as the case may be, as of such Commitment Increase Date, the amounts specified
31
in the notice delivered by the Borrower to the Administrative Agent; provided that:
(A) the Administrative Agent shall have received at or prior to 9:00 A.M. (New York City time) on such Commitment Increase Date (1) a duly executed Note (to the extent requested by the relevant Lender), dated as of such Commitment Increase Date and in substantially the form of Exhibit C hereto for each Assuming Lender, and dated the date to which interest on the existing Notes shall have been paid and in substantially the form of Exhibit C hereto for each Increasing Lender, in each case in an amount equal to the Commitment of each such Assuming Lender and each such Increasing Lender after giving effect to such Commitment Increase, (2) a certificate of a duly authorized officer of the Borrower stating that each of the applicable conditions to such Commitment Increase set forth in Section 2.07(c)(i)(C) and 2.07(c)(i)(D) has been satisfied and (3) to the extent reasonably requested by the Administrative Agent documents, consistent with those delivered under Sections 3.01(a)(ii), 3.01(a)(iii) and 3.01(a)(iv) as to the corporate power and authority of the Borrower to borrow hereunder after giving effect to such increase;
(B) with respect to each Assuming Lender, the Administrative Agent shall have received, at or prior to 9:00 A.M. (New York City time) on such Commitment Increase Date, an Assumption Agreement in substantially the form of Exhibit B hereto, duly executed by such Assuming Lender and the Borrower and acknowledged by the Administrative Agent; and
(C) each Increasing Lender shall have delivered to the Administrative Agent, at or prior to 9:00 A.M. (New York City time) on such Commitment Increase Date, confirmation in writing satisfactory to the Administrative Agent as to its increased Commitment, with a copy of such confirmation to the Borrower.
(iii) Upon its receipt of confirmation from a Lender that it is increasing its Commitment hereunder, together with the appropriate Note (if applicable) and documents referred to in clause (ii)(A) above, the Administrative Agent shall (A) record the information contained therein in the Register and (B) give prompt notice thereof to the Borrower. Upon its receipt of an Assumption Agreement executed by an Assuming Lender representing that it is an Eligible Assignee, together with the appropriate Note (if applicable) and documents referred to in clause (ii)(A) above, the Administrative Agent shall, if such Assumption Agreement has been completed and is in substantially the form of Exhibit B hereto, (x) accept such Assumption Agreement, (y) record the information contained therein in the Register and (z) give prompt notice thereof to the Borrower.
32
(iv) In the event that the Administrative Agent shall not have received notice from the Borrower as to any agreement with respect to a Commitment Increase on or prior to the relevant Commitment Increase Date or the Borrower shall, by notice to the Administrative Agent prior to such Commitment Increase Date, withdraw its proposal for a Commitment Increase or any of the actions provided for above in clauses (ii)(A) through (ii)(C) shall not have occurred by 9:00 A.M. (New York City time) on such Commitment Increase Date, such proposal by the Borrower shall be deemed not to have been made. In such event, any actions theretofore taken under clauses (ii)(A) through (ii)(C) above shall be deemed to be of no effect and all the rights and obligations of the parties shall continue as if no such proposal had been made.
(v) In the event that the Administrative Agent shall have received notice from the Borrower as to any agreement with respect to a Commitment Increase on or prior to the relevant Commitment Increase Date and the action provided for in clauses (ii)(A) through (ii)(C) above shall have occurred by 9:00 A.M. (New York City time) on such Commitment Increase Date, the Administrative Agent shall notify the Lenders (including any Assuming Lenders) of the occurrence of such Commitment Increase Date promptly and in any event by 10:00 A.M. (New York City time) on such date by facsimile transmission or electronic messaging system. Each Increasing Lender and each Assuming Lender shall, before 11:00 A.M. (New York City time) on such Commitment Increase Date, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agents Account, in same day funds, an amount equal to such Increasing Lenders or such Assuming Lenders ratable portion of the Revolving Borrowings then outstanding (calculated based on its Commitment as a percentage of the aggregate Commitments outstanding after giving effect to the relevant Commitment Increase). After the Administrative Agents receipt of such funds, the Administrative Agent will promptly thereafter cause to be distributed like funds to the Lenders for the account of their respective Applicable Lending Offices in an amount to each Lender such that the aggregate amount of the outstanding Revolving Loans owing to each Lender after giving effect to such distribution equals such Lenders ratable portion of the Revolving Borrowings then outstanding (calculated based on its Commitment as a percentage of the aggregate Commitments outstanding after giving effect to the relevant Commitment Increase). In addition, on and as of each Commitment Increase Date, the respective LC Exposures and Swingline Exposures of the Lenders shall be redetermined based on their respective Commitments after giving effect to the relevant Commitment Increase.
Section 2.08. Fees . (a) Facility Fee . The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee on the daily average amount of such Lenders Commitment (whether used or unsued), for each day during the period from the Closing Date until the Commitment Termination Date at a rate per annum equal to the Facility Fee Rate. The accrued facility fee shall be payable in arrears on each Quarterly Date and, without duplication, on the Commitment Termination Date. If for any reason any Revolving Credit Exposure remains outstanding on or after the
33
Commitment Termination Date, the facility fee shall accrue from the Termination Date until the date on which no Revolving Credit Exposure remains outstanding, on the aggregate amount of Revolving Credit Exposure from time to time outstanding, payable on demand.
(b) Letter of Credit Fees . The Borrower agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at a rate per annum equal to the Eurodollar Margin on such Lenders daily LC Exposure during the period from and including the Effective Date to but excluding the later of the date on which such Lenders Commitment terminates and the date on which such Lender ceases to have any LC Exposure and (ii) to each Issuing Bank a fronting fee, which shall accrue at the rate per annum mutually agreed by the Borrower and the Issuing Bank on the average daily LC Exposure with respect to Letters of Credit issued by it during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any such LC Exposure, as well as the Issuing Banks standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees shall be payable on each Quarterly Date; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand.
(c) Administrative Agents Fee . The Borrower shall pay to the Administrative Agent for its own account such fees as may from time to time be agreed in writing by and between the Borrower and the Administrative Agent.
Section 2.09. Repayment of Loans . (a) The Borrower hereby promises to pay to the Administrative Agent for account of each Lender the full principal amount of each Revolving Loan made by such Lender to the Borrower, and each Revolving Loan shall mature, on the Commitment Termination Date.
(b) The Borrower hereby promises to pay to the Swingline Lender (or, in the circumstances contemplated by Section 2.03, to the Administrative Agent for the account of the Lenders) the full principal amount of each Swingline Loan on the 10 th Business Day following the date on which such Loan is made or, if earlier, on the Commitment Termination Date.
Section 2.10. Interest on Loans . (a) Scheduled Interest . The Borrower shall pay interest on the unpaid principal amount of each Loan owing to each Lender from the date of such Loan until such principal amount shall be paid in full, at the following rates per annum:
(i) Base Rate Loans . During such periods as such Loan is a Base Rate Loan, a rate per annum equal to the sum of (x) the Base Rate plus (y) the Base Rate Margin in effect from time to time, payable in arrears on each Quarterly
34
Date during such periods and, without duplication, on the date such Base Rate Loan shall be Converted or paid in full.
(ii) Eurodollar Rate Loans . During such periods as such Loan is a Eurodollar Rate Loan, a rate per annum equal at all times during each Interest Period for such Loan to the sum of (x) the Eurodollar Rate for such Interest Period for such Loan plus (y) the Eurodollar Margin in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and, without duplication, on the date such Eurodollar Rate Loan shall be Converted or paid in full.
(b) Default Interest . Upon the occurrence and during the continuance of any default in the payment of any amount due and payable hereunder, the Borrower shall pay interest on such overdue amount from the date such amount shall have become due until such amount shall be paid in full, payable in arrears on demand and on the date such amount shall be paid in full, at a rate per annum equal at all times to 2.00% per annum above the rate per annum required to be paid on Base Rate Loans pursuant to clause (a)(i) above.
Section 2.11. Interest Rate Determination . (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information to the extent necessary for the purpose of determining each Eurodollar Rate. If either of the Reference Banks shall not furnish such timely information to the Administrative Agent for the purpose of determining any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the other Reference Bank. The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.10(a)(ii). Each determination by the Administrative Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.
(b) If, with respect to any Eurodollar Rate Loans, the Required Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Loans will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Loans for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each such Loan will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Loan, and (ii) the obligation of the Lenders to make, or to Convert Loans into, such Loans shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist (as determined by the Required Lenders), which notice shall be given promptly after such circumstances cease to exist (as determined by the Required Lenders).
35
(c) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Loans in accordance with the provisions contained in the definition of Interest Period in Section 1.01, such Interest Period shall have a duration of one month.
(d) Upon the occurrence and during the continuance of any Event of Default under Section 7.01(a), (i) each Eurodollar Rate Loan will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Loan and (ii) the obligation of the Lenders to make, or to Convert Loans into, Eurodollar Rate Loans shall be suspended.
(e) If the Eurodollar Rate for any Eurodollar Rate Loans cannot be determined in accordance with the definition of such term, including because of the unavailability of rates quoted on the applicable Screen Page or by the Reference Banks,
(i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Loans,
(ii) with respect to Eurodollar Rate Loans, each such Loan will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Loan (or, if such Loan is then a Base Rate Loan, will not be eligible for Conversion into a Eurodollar Rate Loan), and
(iii) the obligation of the Lenders to make Eurodollar Rate Loans or to Convert Loans into Eurodollar Rate Loans shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, which notice shall be given promptly after such circumstances cease to exist.
(f) If any Reference Banks Commitment shall terminate or all of its rights and obligations under this Agreement shall be assigned for any reason whatsoever, such Reference Bank shall cease to be a Reference Bank and shall be discharged from its duties and obligations under this Agreement, and the Administrative Agent (after consultation with the Borrower) shall, by notice to the Borrower and the Lenders, designate another Lender as a Reference Bank, which Lender shall become a Reference Bank upon the execution and delivery to the Administrative Agent and the Borrower of an undertaking pursuant to which such Lender shall agree to be bound by and to perform all obligations of a Reference Bank as set forth in this Agreement.
Section 2.12. Optional Conversion of Loans . The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.11 and 2.17, Convert all Revolving Loans of one Type comprising the same Borrowing into Revolving Loans of the other Type; provided that any Conversion of Eurodollar Rate Loans into Base Rate Loans shall be made only on the last day of an Interest Period for such Eurodollar Rate Loans, any Conversion of Base Rate Loans into Eurodollar Rate Loans shall be in an
36
amount not less than the minimum borrowing amount specified in Section 2.02 and no Conversion of any Loans shall result in more separate Borrowings than permitted under Section 2.02. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Loans to be Converted and (iii) if such Conversion is into Eurodollar Rate Loans, the duration of the initial Interest Period for each such Loan. Each notice of Conversion shall be irrevocable and binding on the Borrower and the relevant Borrower.
Section 2.13. Optional Prepayments of Loans . The Borrower may, upon notice to the Administrative Agent (and, in the case of prepayment of any Swingline Loan, the Swingline Lender) stating the proposed date and aggregate principal amount of the prepayment, given not later than 10:00 A.M. (New York City time) (a) three Business Days before such proposed prepayment in the case of Eurodollar Rate Loans and (b) on the day of such proposed prepayment in the case of Base Rate Loans, and, if such notice is given, the Borrower shall, prepay without penalty the outstanding principal amount of the Loans comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid, provided that in the event of any such prepayment of a Eurodollar Rate Loan other than on the last day of the Interest Period therefor, such Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(b); provided further that if a notice of optional prepayment is given in connection with a conditional termination of the Commitments as contemplated by Section 2.07(b), then such notice of prepayment may be revoked in accordance with Section 2.07(b) (subject to, for the avoidance of doubt, compliance with the immediately preceding sentence). Each prepayment of Revolving Loans hereunder shall be in a minimum amount of $10,000,000 or any whole multiple of $1,000,000 in excess thereof.
Section 2.14. Payments and Computations . (a) The Borrower shall make each payment hereunder and under the Notes to the Administrative Agent at the Administrative Agents Account in same day funds, without any set-off, recoupment or counterclaim, not later than 12:00 Noon (Local Time) on the due date of such payment (each such payment made after such time on such date to be deemed to have been made on the next Business Day). The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or unused commitment fees ratably (other than amounts payable pursuant to Section 2.07(c), 2.16, 2.18 or 9.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.06(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance (which shall not include the Borrower) shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. Upon any Assuming Lender becoming a Lender hereunder as a result of the effectiveness of a Commitment Increase pursuant to
37
Section 2.07(c), and upon the Administrative Agents receipt of such Lenders Assumption Agreement and recording the information contained therein in the Register, from and after the Commitment Increase Date, the Administrative Agent shall make all payments hereunder in respect of the interest assumed thereby to such Assuming Lender.
(b) All computations of interest based on JPMCBs prime rate (referred to in clause (a) of the definition of Base Rate) shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Effective Rate, of Letter of Credit participation fees and of facility fees, shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or such fees, are payable.
(c) Subject to the proviso in the definition of the term Maturity Date, whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or unused commitment fee, as the case may be; provided that, if such extension would cause payment of interest on or principal of Eurodollar Rate Loans to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.
(d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Effective Rate.
Section 2.15. Sharing of Payments Etc . (a) If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Revolving Credit Exposure owing to it (other than pursuant to Section 2.07(c)(v), 2.16, 2.18 or 9.04(b)) in excess of its ratable share of payments on account of the Revolving Credit Exposure obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Revolving Credit Exposure owing to such other Lenders as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and each such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an
38
amount equal to such Lenders ratable share (according to the proportion of (i) the amount of such Lenders required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by Law, exercise all its rights of payment with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.
(b) Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower.
Section 2.16. Additional Costs . (a) The Borrower shall, within 30 days following demand by a Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender from time to time such amounts as such Lender may reasonably determine to be necessary to compensate it for any costs that such Lender determines are attributable to its making, funding or maintaining any Eurodollar Rate Loans or its issuing or participating in any Letter of Credit hereunder or its obligation to make any Eurodollar Rate Loans hereunder or to issue or participate in any Letter of Credit hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any such Loans, any such LC Exposure or any such obligation (excluding amounts attributable to Taxes applicable to payments made by the Borrower hereunder and Other Taxes, which shall be governed solely and exclusively by Section 2.18) (such increases in costs and reductions in amounts receivable being herein called Additional Costs ), resulting from any Regulatory Change that: (i) imposes or modifies any reserve, special deposit, minimum capital, capital ratio or similar requirements (other than the Reserve Requirement utilized in the determination of the Eurodollar Rate for such Loans) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including any such Loans or any deposits of the type referred to in the definition of Eurodollar Rate in Section 1.01), or the Commitment of such Lender or (ii) imposes any other condition affecting this Agreement or such Lenders Notes (or any of such extensions of credit or liabilities) or Commitment; provided that the Borrower shall not be obligated to pay to such Lender such Additional Costs unless such Lender at such time shall be generally assessing such amounts on a non-discriminatory basis against borrowers under agreements having provisions similar to this paragraph; and provided further that any such Additional Costs allocated to any Loans or the Commitment of such Lender shall not exceed the Borrowers pro rata share of all costs attributable to all loans or advances or commitments to all borrowers by such Lender that collectively result in the consequences for which such Lender is to be compensated by the Borrower. Any Lender seeking compensation hereunder shall make reasonable efforts to notify the Borrower of the enactment of any Regulatory Change that would entitle such Lender to compensation pursuant to this Section 2.16(a) as promptly as practicable after obtaining knowledge thereof and the date of effectiveness of such Regulatory Change; provided that failure to provide such notice shall not in any way reduce the Borrowers liability
39
therefor. As soon thereafter as such Lender shall have determined to request such compensation, such Lender shall notify the Borrower thereof and shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) (i) to designate a different Applicable Lending Office for the Loans of such Lender affected by such Regulatory Change if such designation will avoid the need for, or reduce the amount of, such compensation, and will not, in the reasonable opinion of such Lender, be otherwise disadvantageous to such Lender and (ii) to otherwise minimize any such compensation payable by the Borrower hereunder. Notwithstanding anything in this Section 2.16(a) to the contrary, the Borrowers obligation to reimburse such Lender for Additional Costs pursuant to this Section 2.16(a) shall be limited as follows:
(x) In the event of a Regulatory Change with an effective date occurring on or after its date of enactment, the Borrower shall be obligated to pay to such Lender only such amounts attributable to the period commencing on the later of the effective date of such Regulatory Change or the date of such Lenders notice of determination to request compensation hereunder; and
(y) In the event of a Regulatory Change with an effective date retroactive from its date of enactment, the Borrower shall be obligated to pay only such amounts attributable to a period commencing up to 60 days prior to such Lenders notice of enactment of the Regulatory Change and its request for compensation hereunder.
(b) Without limiting the effect of the foregoing provisions of this Section 2.16 (but without duplication), the Borrower shall, within 30 days following a demand by a Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender from time to time such amounts as such Lender may reasonably determine to be necessary to compensate such Lender for any costs (excluding amounts attributable to Taxes applicable to payments made by the Borrower hereunder and Other Taxes, which shall be governed solely and exclusively by Section 2.18) that it determines are attributable to the maintenance by such Lender (or any Applicable Lending Office of such Lender), pursuant to any Law or regulation or any interpretation, directive or request (whether or not having the force of law) of any court or governmental or monetary authority following any Regulatory Change, of capital or liquidity in respect of its Commitment (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office of such Lender) to a level below that which such Lender (or any Applicable Lending Office of such Lender) could have achieved but for such Law, regulation, interpretation, directive or request); provided that the Borrower shall not be obligated to pay to such Lender such additional amounts unless such Lender at such time shall be generally assessing such amounts on a nondiscriminatory basis against borrowers under agreements having provisions similar to this paragraph; and (ii) any such additional amounts allocated to the Commitment of such Lender shall not exceed the Borrowers pro rata share of all costs attributable to all commitments to all borrowers by such Lender that collectively result in the consequences for which such Lender is to be compensated by the Borrower. Each Lender will notify the Borrower that it is entitled to compensation pursuant to this Section 2.16(b) as promptly as practicable
40
after it determines to request such compensation; provided that, in the event of (x) any Regulatory Change with an effective date occurring on or after its enactment, the Borrower shall be obligated to pay to such Lender only such amounts attributable to the period commencing on the later of the effective date of such Regulatory Change or the date of such Lenders notice of determination to request compensation hereunder; and (y) any Regulatory Change with an effective date retroactive from its date of enactment, such request arises from a Law, regulation, directive or request of a court or governmental or monetary authority that contains an effective date retroactive from its date of enactment, the Borrower shall be obligated to pay such Lender only such amounts attributable to the period commencing up to 60 days prior to the date of such Lenders notice.
(c) Determinations and allocations by a Lender for purposes of this Section 2.16 of the effect of any Regulatory Change pursuant to Section 2.16(a), or of the effect of capital maintained pursuant to Section 2.16(b), on its costs or rate of return of maintaining Loans or LC Exposure or its obligation to make Loans or incur LC Exposure, or on amounts receivable by it in respect of the foregoing, and of the amounts required to compensate such Lender under this Section 2.16, shall be conclusive and binding for all purposes, provided that such determinations and allocations are made on a reasonable basis. Any Lender requesting compensation under this Section 2.16 will furnish the Borrower with a certificate setting forth the basis and amount of such request for compensation.
Section 2.17. Illegality . (a) Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any Law or regulation makes it unlawful, or any central bank or other Governmental Authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Loans or to fund or maintain Eurodollar Rate Loans hereunder, (i) each Eurodollar Rate Loan will automatically, upon such demand, Convert into a Base Rate Loan and (ii) the obligation of the Lenders to make Eurodollar Rate Loans or to Convert Loans into Eurodollar Rate Loans shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, which notice shall be given promptly after such circumstances cease to exist.
(b) Each Lender agrees that, before making a demand under subsection (a) above, it shall (i) use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Eurodollar Lending Office for the Eurodollar Rate Loans of such Lender if such designation will avoid the need for the Conversion of or for the suspension of the obligation of any Lender or Lenders to make Eurodollar Rate Loans as described in subsection (a) above and will not, in the opinion of such Lender, be otherwise disadvantageous to such Lender and (ii) failing such efforts and if legally permissible, cause such demand to be made on the last day of the applicable Interest Period for each Eurodollar Rate Loan then outstanding, as the case may be.
Section 2.18. Taxes .
41
(a) Any and all payments by or on account of any Obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required by Law to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.18) the Administrative Agent and each Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable Law.
(b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable Law.
(c) The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes on or attributable to amounts payable under this Section 2.18) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by a Governmental Authority. A certificate setting forth in reasonable detail the basis for and calculation of the amount of such payment or liability delivered to the Borrower by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be presumptive evidence of such payment or liability absent manifest error.
(d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to any Governmental Authority, and in any event within 60 days of such payment, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(e) Each Lender shall severally indemnify, within 10 days after written demand therefor, (i) the Administrative Agent for the full amount of any Taxes (but, in the case of any Indemnified Taxes, only to the extent that the Borrower has not already indemnified the Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Borrower to do so) and (ii) the Borrower for any Excluded Taxes, in each case, attributable to such Lender paid or payable by the Administrative Agent or the Borrower (as applicable) in connection herewith or with any other Loan Document and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes or Excluded Taxes were correctly or legally imposed or asserted by a Governmental Authority. A certificate setting forth in reasonable detail the basis for and calculation of the amount of such payment or liability delivered to the applicable Lender by the Administrative Agent or the Borrower (as applicable) shall be presumptive evidence of such payment or liability absent manifest error.
42
(f) (i) The Administrative Agent and each Lender, including any Foreign Lender, that is entitled to an exemption from or reduction of withholding Tax under the Law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement or any other Loan Document shall deliver to the Withholding Agent such properly completed and executed documentation (including Internal Revenue Service forms W-8 and W-9) as reasonably requested by the Withholding Agent and as may be necessary or appropriate to permit the Withholding Agent to make payments under this Agreement or any Loan Document without withholding Tax or at a reduced withholding Tax rate.
(ii) If a payment made to the Administrative Agent or a Lender under any Loan Document would be subject to U.S. Federal withholding Tax imposed by FATCA if the Administrative Agent or such Lender, as applicable, were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), the Administrative Agent or such Lender, as applicable, shall deliver to the Withholding Agent, at the time or times prescribed by applicable Law and at such time or times reasonably requested by the Withholding Agent, such documentation prescribed by applicable Law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Withholding Agent as may be necessary for the Withholding Agent to comply with its obligations under FATCA, to determine that the Administrative Agent or such Lender, as applicable, has or has not complied with its obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this Section 2.18(f)(ii), FATCA shall include any amendments made to FATCA after the date of this Agreement.
(iii) The Administrative Agent and each Lender shall deliver to the Withholding Agent such other documentation prescribed by applicable Law or reasonably requested by the Withholding Agent as will enable the Withholding Agent to determine whether or not the Administrative Agent or such Lender, as applicable, is subject to backup withholding or information reporting requirements.
(iv) The Administrative Agent and each Lender shall provide the appropriate documentation described in clauses (i), (ii) and (iii) of this Section 2.18(f) at the following times (A) prior to the first payment date after becoming a party to this Agreement, (B) upon a change in circumstances or, upon reasonable request by the Withholding Agent, upon a change in Law, in each case, requiring or making appropriate a new or additional form, certificate or documentation, (C) upon reasonable request by the Withholding Agent, upon or before the expiration, obsolescence or invalidity of any documentation previously provided to the Withholding Agent and (D) upon reasonable request by the Withholding Agent. The Administrative Agent and each Lender shall provide to the Withholding Agent such forms or certificates as the Withholding Agent may reasonably request to establish the Administrative Agents or such Lenders, as applicable, entitlement to an exemption from or reduction of Taxes imposed by a non-U.S.
43
jurisdiction; provided , however , neither the Administrative Agent, nor any Lender shall be required to provide any such form or certificate if it determines in its discretion that the provision of such form or certificate could materially adversely affect it or it is not legally entitled to provide such form or certificate.
(g) Each Lender agrees that, before making a demand under this Section 2.18, it shall use reasonable efforts (consistent with its legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation will avoid the need for, or reduce the amount of, any additional amounts that would otherwise thereafter accrue and will not, in the judgment of such Lender, require such Lender to incur a loss, and would not otherwise be disadvantageous to the Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. Upon any such change in any Applicable Lending Office, such Lender shall provide to the Administrative Agent and the Borrower the appropriate form specified in this Section 2.18.
Section 2.19. Defaulting Lenders . If any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:
(a) commencing on the date that such Lender becomes a Defaulting Lender, fees under Section 2.08(a) shall cease to accrue on the unused portion of the Commitment of such Defaulting Lender;
(b) the Commitment and Revolving Loans of such Defaulting Lender shall not be included in determining whether the Required Lenders or other requisite Lenders have taken or may take any action hereunder (including any consent to any amendment or waiver pursuant to Section 9.03), provided that any waiver, amendment or modification requiring the consent of all Lenders or each affected Lender shall require the consent of such Defaulting Lender;
(c) if any Swingline Exposure or LC Exposure exists at the time such Lender becomes a Defaulting Lender then:
(i) provided no Default shall have occurred and be continuing, the Swingline Exposure and LC Exposure of such Defaulting Lender shall be automatically reallocated among the non-Defaulting Lenders in accordance with their respective Applicable Percentages but only to the extent the sum of all non-Defaulting Lenders Revolving Credit Exposures plus such Defaulting Lenders Swingline Exposure and LC Exposure does not exceed the total of all non-Defaulting Lenders Commitments;
(ii) if the reallocation described in clause (i) above cannot, or can only partially, be effected, the Borrower shall within three Domestic Business Days following notice by the Administrative Agent (x) first , prepay such Swingline Exposure and (y) second , either (A) procure the reduction or termination of the Defaulting Lenders LC Exposure (after giving effect to any partial reallocation
44
pursuant to clause (i) above) or (B) cash collateralize for the benefit of the Issuing Bank only the Borrowers obligations corresponding to such Defaulting Lenders LC Exposure (after giving effect to any partial reallocation pursuant to clause (i) above) in accordance with the procedures set forth in Section 2.04(i) for so long as such LC Exposure is outstanding;
(iii) if the Borrower cash collateralizes any portion of such Defaulting Lenders LC Exposure pursuant to clause (ii) above, the Borrower shall not be required to pay any letter of credit participation fees to such Defaulting Lender pursuant to Section 2.08(b) with respect to such Defaulting Lenders LC Exposure during the period such Defaulting Lenders LC Exposure is cash collateralized;
(iv) to the extent that the LC Exposure of the non-Defaulting Lenders is reallocated pursuant to clause (i) above, then the letter of credit participation fees payable to the Lenders pursuant to Section 2.08(b) shall to the same extent be adjusted in accordance with such non-Defaulting Lenders Applicable Percentages; and
(v) if all or any portion of such Defaulting Lenders LC Exposure is not reallocated, reduced, terminated nor cash collateralized pursuant to clause (i) or (ii) above, then, without prejudice to any rights or remedies of the Issuing Bank or any other Lender hereunder, all letter of credit participation fees payable under Section 2.08(b) with respect to such Defaulting Lenders LC Exposure shall be payable to the Issuing Bank until and to the extent that such LC Exposure is reallocated, reduced, terminated and/or cash collateralized; and
(d) so long as such Lender is a Defaulting Lender, the Swingline Lender shall not be required to fund any Swingline Loan and no Issuing Bank shall be required to issue, amend, renew or extend any Letter of Credit, unless the Defaulting Lenders then outstanding Swingline Exposure and LC Exposure after giving effect thereto will be 100% covered by the Commitments of the non-Defaulting Lenders and/or prepaid, reduced, terminated and/or cash collateralized in accordance with Section 2.19(c), and participating interests in any newly made Swingline Loan or any newly issued or increased Letter of Credit shall be allocated among non-Defaulting Lenders in a manner consistent with Section 2.19(c)(i) (and such Defaulting Lender shall not participate therein).
If the Swingline Lender or any Issuing Bank has a good faith belief that any Lender has defaulted in fulfilling its funding obligations under one or more other agreements in which such Lender commits to extend credit, the Swingline Lender shall not be required to fund any Swingline Loan and no Issuing Bank shall be required to issue, amend, renew or extend any Letter of Credit, unless the Swingline Lender or the Issuing Bank, as the case may be, shall have entered into arrangements with the Borrower or such Lender, reasonably satisfactory to the Swingline Lender or the Issuing Bank, as the case may be, to defease any risk to the Swingline Lender or the Issuing Bank in respect of such Lender hereunder relating to Swingline Exposure and/or LC Exposure.
45
In the event that the Administrative Agent, the Borrower, the Swingline Lender and the Issuing Banks reasonably determine that a Defaulting Lender has adequately remedied all matters that caused such Lender to be a Defaulting Lender, then the Swingline Exposure and LC Exposure of the Lenders shall be readjusted to reflect the inclusion of such Lenders Commitment and on such date such Lender shall purchase at par such of the Loans of the other Lenders (other than Swingline Loans) as the Administrative Agent shall determine is necessary in order for such Lender to hold such Loans in accordance with its Applicable Percentage; provided that there shall be no retroactive effect on fees reallocated pursuant to Section 2.19(c)(iv) and (v).
Section 2.20. Substitution of Lender . If (a) the obligation of any Lender to make Eurodollar Rate Loans has been suspended pursuant to Section 2.11, (b) any Lender has demanded compensation or the Borrower is otherwise required to pay additional amounts under Section 2.16 or 2.18 or (c) such Lender is a Defaulting Lender, the Borrower shall have, in addition to the right to seek a substitute lender or lenders who qualify as Eligible Assignees to assume, in accordance with the provisions of Section 9.06, the Commitment of such Lender, the right to terminate the unused Commitment of such Lender.
ARTICLE 3
C ONDITIONS
Section 3.01. Conditions Precedent to Closing Date . 1 The closing of this Agreement shall occur on the date (the Closing Date ) on which the following conditions precedent shall have been satisfied:
(a) The Administrative Agent (or its counsel) shall have received from each applicable party the following, each dated such day (unless otherwise specified):
(i) A counterpart of this Agreement and each Note (if requested by any Lender) signed on behalf of each party thereto.
(ii) A copy of the articles or certificate of incorporation (or equivalent Constituent Document) of the Borrower, certified as of a recent date by the Secretary of State of the state of organization of the Borrower, together with a certificate of such official attesting to the good standing of the Borrower.
(iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of each officer of the Borrower who is authorized to sign this Agreement and the other Loan Documents on the Borrowers behalf, (B) the by-laws (or equivalent Constituent Document) of the Borrower as in effect on the date of such certification, (C) that there have been no changes in the certificate of incorporation (or equivalent Constituent Document) of the Borrower from the certificate of incorporation (or equivalent Constituent Document) delivered pursuant to clause (ii) above and (D)
1 Indicative ratings from Moodys and S&P will be posted to the Lenders prior to the Closing Date as agreed by the Company and JPM.
46
the resolutions of the Board of Directors approving and authorizing the execution, delivery and performance of each Loan Document to which it is a party.
(iv) An opinion of in-house counsel for the Borrower reasonably acceptable to the Administrative Agent.
(b) The Borrower shall have paid such fees as the Borrower shall have agreed to pay to any Joint Lead Arranger, any Lender or the Administrative Agent in connection herewith, including the reasonable and documented fees and expenses of Davis Polk & Wardwell LLP, special New York counsel to the Administrative Agent, in connection with the negotiation, preparation, execution and delivery of the Loan Documents, the extensions of credit hereunder and the syndication of the credit facility provided hereby (to the extent such fees and expenses are due and statements for such fees and expenses have been delivered to the Borrower).
(c) The Lenders shall have received all documentation and other information required by bank regulatory authorities under applicable know your customer and anti-money laundering rules and regulations, including the Patriot Act, as reasonably requested by the Lenders.
Section 3.02. Conditions Precedent to Effective Date . The Commitments shall become effective and available for drawing hereunder on the date (the Effective Date ) which shall be no later than June 30, 2013, on which the following conditions precedent shall have been satisfied:
(a) The Closing Date shall have occurred;
(b) The Borrower shall have received Ratings of BBB- or better from S&P and Baa3 or better from Moodys; and
(c) (i) No Default shall have occurred and be continuing as of such date, (ii) the representations and warranties contained in Article 4 shall be accurate on and as of such date as if made on and as of such date, (iii) no injunction affecting the execution, delivery or performance of the Loan Documents shall have been issued and remain in effect on the Effective Date, (iv) the initial public offering of common stock of the Borrower as contemplated by the Registration Statement shall have been completed and (v) the Administrative Agent shall have received a certificate of a duly authorized officer of the Borrower, dated the Effective Date, stating that each of the conditions precedent set forth in clauses (i)-(iv) of this Section 3.02(b) have been satisfied.
The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding.
Section 3.03. Conditions Precedent to Initial and Subsequent Credit Extensions . The obligation of each Lender to make a Loan hereunder on the occasion of each Borrowing and of each Issuing Bank to issue, amend, renew or extend any Letter of Credit (each, a Credit Extension ) shall be subject to the further conditions precedent that (i) the Effective Date shall have occurred and (ii) on the date of such Credit
47
Extension and after giving effect thereto, the following statement shall be accurate (and each of the giving of the applicable request pursuant to Section 2.02 or 2.04 and the acceptance by the Borrower of the proceeds of such Borrowing or of such Letter of Credit shall constitute a representation and warranty by the Borrower that on the date of such Credit Extension such statement is accurate): (x) the representations and warranties contained in Article 4 (other than those set forth in Section 4.04(b) and in Section 4.07) are accurate in all material respects on and as of such date as if made on and as of such date, except to the extent any such representation or warranty (1) relates solely to an earlier date, in which case it shall be accurate as of such earlier date, or (2) is qualified by materiality or subject to a Material Adverse Effect qualification, in which case it shall be accurate in all respects on and as of such date or such earlier date as specified in clause (1) above and (y) no Default has occurred and is continuing or would result from such Credit Extension or the application of any proceeds thereof.
ARTICLE 4
R EPRESENTATIONS AND W ARRANTIES
The Borrower represents and warrants to the Administrative Agent and the Lenders as follows:
Section 4.01. Organization; Powers; Binding Effect . The Borrower is duly incorporated or organized and validly existing under the Laws of the state of its incorporation or organization and has the necessary corporate or other power and authority to enter into this Agreement and the other Loan Documents, to borrow hereunder and to perform and observe its obligations hereunder and thereunder, all corporate or other action required to authorize the execution and delivery of this Agreement and the other Loan Documents and the performance by the Borrower of its obligations hereunder and under the other Loan Documents has been duly taken, and this Agreement and the other Loan Documents have been duly executed and delivered and constitute, and, when executed and delivered, each of the Notes shall have been duly executed and delivered and shall constitute, valid, legal and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors rights and to general equity principles.
Section 4.02. Contravention . Neither (a) the certificate of incorporation, by-laws or other Constituent Documents of the Borrower, (b) any provision of any existing material mortgage, trust deed, contract, license, franchise, concession or agreement or any other material contractual obligation by which the Borrower or any of its Subsidiaries or any of their property or assets is bound, nor (c) any Law, regulation, judgment, injunction or other Order or award of any judicial, administrative, governmental or other authority or of any arbitrator binding on the Borrower or any of its Subsidiaries, conflicts or would conflict with or be contravened in any respect by the execution and delivery of the Loan Documents or would conflict with or be contravened by the Borrowers or its Subsidiaries performance or observance of any of its obligations under the Loan Documents, except, in the case of clauses (b) and (c) above, for any such conflict or
48
contravention that could not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect.
Section 4.03. Authorization . There are no authorizations, approvals, licenses, registrations or consents of any Governmental Authority necessary for the execution and delivery by the Borrower of any Loan Document, the performance by the Borrower of the obligations expressed to be assumed by it in or pursuant to the Loan Documents and the payment of any amounts hereunder or under the other Loan Documents in accordance with their terms or to render this Agreement or any other Loan Document legal, valid, binding, enforceable and admissible in evidence.
Section 4.04. Financial Statements; Material Adverse Change . (a) The Initial Financial Statements were prepared in accordance with GAAP, consistently applied, except as otherwise noted therein, and such Initial Financial Statements present fairly, in all material respects, the Consolidated financial position and results of operations and cash flows of the Borrower and its Subsidiaries in accordance with GAAP, as at the end of, and for, the respective periods covered thereby.
(b) Except as disclosed in the Borrower SEC Documents as filed prior to the Effective Date (but excluding any risk factor disclosures contained under the heading Risk Factors, any disclosure of risks included in any forward looking statements disclaimer or any other statements that are similarly non-specific or predictive or forward looking in nature, but in each case, other than any specific factual information contained therein), there has been no material adverse change in the financial position or results of operations of the Borrower and its Subsidiaries taken as a whole since December 31, 2011.
Section 4.05. Federal Reserve Regulations . (a) None of the Borrower or its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying margin stock (as defined in Regulation U).
(b) No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally, or ultimately, for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U and X and all official rulings and interpretations thereunder or thereof.
Section 4.06. Investment Company Status . Neither the Borrower nor any of its Subsidiaries is an investment company or controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended.
Section 4.07. Litigation . Except as disclosed in the Borrower SEC Documents (but excluding any risk factor disclosures contained under the heading Risk Factors, any disclosure of risks included in any forward looking statements disclaimer or any other statements that are similarly non-specific or predictive or forward looking in nature, but other than any specific factual information contained therein) as filed prior to the Effective Date, there is no pending or (to the knowledge of the Borrower) threatened
49
action, investigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator (i) that is reasonably likely to have a Material Adverse Effect or (ii) that could be reasonably expected to affect the legality, validity or enforceability of any Loan Document.
Section 4.08. Compliance with ERISA . Except for matters which could not reasonably be expected to have a Material Adverse Effect, (a) the Borrower and each ERISA Affiliate has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance with the currently applicable provisions of ERISA and the Code with respect to each Plan and (b) no ERISA Event has occurred.
Section 4.09. Compliance with Law . Neither the Borrower nor any of its Subsidiaries is in violation of any Law or regulation to which it is subject is in default with respect to any Order or has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its property or to the conduct of its business which violation, default or failure to obtain could reasonably be expected to have a Material Adverse Effect.
Section 4.10. Environmental Matters . Except with respect to any matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect and except as disclosed in the Borrower SEC Documents (but excluding any risk factor disclosures contained under the heading Risk Factors, any disclosure of risks included in any forward looking statements disclaimer or any other statements that are similarly non-specific or predictive or forward looking in nature, but other than any specific factual information contained therein) as filed prior to the Effective Date, the Borrower and its Subsidiaries (i) are in compliance with all applicable Environmental Laws and have obtained, maintained and are in compliance with any permit, license or other approval required under any applicable Environmental Law for their current operations, (ii) are not subject to any Environmental Liability, (iii) have not received written notice of any claim with respect to any Environmental Liability and (iv) do not have knowledge of any basis for any Environmental Liability.
Section 4.11. Taxes . The Borrower and its Subsidiaries have (a) filed all United States Federal income tax returns and all other tax returns which are required to be filed by them, except for state, local and foreign tax returns which the failure to file could not reasonably be expected to have a Material Adverse Effect and (b) paid all Taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary to the extent such Taxes, have become due and payable and before they have become delinquent, except for Taxes which are being contested in good faith by the Borrower or the relevant Subsidiary pursuant to appropriate actions or proceedings being diligently pursued and for which reserves adequate under GAAP have been made. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of Taxes are adequate in all material respects.
Section 4.12. Full Disclosure . All written information (other than financial projections and information of a general economic nature or general industry nature), as
50
modified or supplemented by any information provided to any Agent or Lender, by the Borrower in connection with the transactions contemplated hereby (the Information ) is and will be complete and correct in all material respects (after giving effect to all amendments and supplements thereto), when taken as a whole together with all such filings of the Borrower with the SEC, and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which such statements were or are made (after giving effect to all amendment sand supplements thereto).
ARTICLE 5
A FFIRMATIVE C OVENANTS
Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and no LC Exposure exists, the Borrower covenants and agrees with the Lenders that:
Section 5.01. Financial Statements and Other Information . The Borrower will furnish to the Administrative Agent and each Lender:
(a) on or before the date on which such financial statements are required to be filed with the SEC (after giving effect to any permitted extensions) or, if such financial statements are not required to be filed with the SEC, on or before the date that is 90 days after the end of each such fiscal year of the Borrower, its audited Consolidated balance sheet and related statements of income, cash flows, shareholders equity and footnotes as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by KPMG LLP or other independent registered public accounting firm of recognized national standing to the effect that such Consolidated financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its Consolidated Subsidiaries on a Consolidated basis in accordance with GAAP;
(b) on or before the date on which such financial statements are required to be filed with the SEC (after giving effect to any permitted extensions) with respect to each of the first three quarterly accounting periods in each fiscal year of the Borrower or, if such financial statements are not required to be filed with the SEC, on or before the date that is 45 days after the end of each such quarterly accounting period, its condensed Consolidated balance sheet and related statements of income, cash flows and footnotes as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly, in all material respects, the condensed financial position and results of operations and cash flows of the Borrower and its Consolidated Subsidiaries on a Consolidated basis in accordance with GAAP;
(c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a copy of a certificate of a Financial Officer of the
51
Borrower (the original signed version of which shall be delivered to the Administrative Agent) (i) setting forth in reasonable detail the calculations necessary to demonstrate compliance with the requirements of Section 6.05 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;
(d) within five Business Days after the Borrower first becomes aware of the occurrence of each Default continuing on the date of such statement, a written statement of a Financial Officer of the Borrower setting forth details of such Default and the action that the Borrower has taken and proposes to take with respect thereto;
(e) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission;
(f) except for matters which could not reasonably be expected to have a Material Adverse Effect, if an ERISA Event occurs, a certificate of a Financial Officer of the Borrower setting forth details as to such occurrence and the action, if any, which the Borrower or applicable ERISA Affiliate is required or proposes to take; and
(g) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Lender, may reasonably request.
Information required to be delivered pursuant to subsections (a), (b) and (e) of this Section 5.01 shall be deemed to have been delivered if such information, or one or more annual or quarterly or other reports or proxy statements containing such information shall have been posted and available on the website of the SEC at http://www.sec.gov or on the website of the Borrower at www.zoetis.com.
Section 5.02. Inspection of Property, Books and Records . The Borrower will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will, upon reasonable prior notice (or without notice during the continuance of an Event of Default), permit agents and representatives of the Administrative Agent and each Lender to, during regular business hours, (i) visit and inspect their respective properties, (ii) inspect and make reasonable extracts from and copies of their respective books and records and (iii) discuss, subject to reasonable availability, with their respective principal officers and auditors their respective affairs, finances and accounts, all at the expense of such Lender or the Administrative Agent, as the case may be, or, if such visit or other action is during the continuance of an Event of Default, at the expense of the Borrower.
Section 5.03. Existence; Nature of Business . (a) The Borrower will, and will cause each of its Subsidiaries to, preserve and keep in full force and effect its corporate or
52
other legal existence and all licenses and permits necessary to the proper conduct of its business, except that the foregoing shall not (i) prevent any transaction permitted by Section 6.02 or (ii) require the preservation of the legal existence of any Subsidiary or of any such license or permit the nonpreservation of which could not reasonably be expected to have a Material Adverse Effect.
(b) Neither the Borrower nor any of its Subsidiaries will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be principally engaged in by the Borrower and its Subsidiaries would be substantially changed from the general nature of the business engaged in by the Borrower and its Subsidiaries on the Effective Date and similar or related businesses or businesses ancillary or complementary thereto.
Section 5.04. Payment of Obligations . Except to the extent the failure to do so could not reasonably be expected to result in a Material Adverse Effect, the Borrower shall pay and discharge, and cause each Subsidiary to pay and discharge, before the same shall become delinquent, (i) all Taxes imposed upon it or upon its property or assets and (ii) all lawful claims that, if unpaid, might result in a Lien upon its property or assets; provided , however , that neither the Borrower nor any Subsidiary shall be required to pay or discharge any such Tax or claim that is being contested in good faith and by proper proceedings and as to which adequate reserves are being maintained in accordance with GAAP.
Section 5.05. Maintenance of Properties; Insurance . Except where the failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Borrower shall, and shall cause each of its Subsidiaries to, (a) keep and maintain all property or assets material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain insurance (if not self-insured for such risk), with financially sound and reputable insurance companies, in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations or substantially consistent with past practices of the Borrower and its Subsidiaries.
Section 5.06. Compliance with Laws . The Borrower shall, and shall cause each of its Subsidiaries to, comply, in all material respects, with all Laws, rules, regulations and Orders of any Governmental Authority applicable to it or its property or assets, except where (a) the necessity of compliance therewith is contested in good faith by appropriate proceedings or (b) noncompliance therewith, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.
Section 5.07. Use of Proceeds . The Borrower shall use the proceeds of the Loans and the Letters of Credit solely for general corporate purposes.
53
ARTICLE 6
N EGATIVE C OVENANTS
Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and no LC Exposure exists, the Borrower covenants and agrees with the Lenders that:
Section 6.01. Mergers; Fundamental Changes . The Borrower will not merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise Dispose of, and will not permit any Subsidiary to sell, transfer, lease or otherwise Dispose of, (in one transaction or in a series of transactions) all or substantially all of the property or assets of the Borrower and its Subsidiaries taken as a whole (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing or would result therefrom (i) any Person may merge into or consolidate with the Borrower in a transaction in which the Borrower is the surviving corporation and (ii) any Subsidiary may liquidate or dissolve if (A) the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower, and (B) such liquidation or dissolution is not materially disadvantageous to the Lenders.
Section 6.02. Limitations on Liens . The Borrower will not, and will not permit any of its Subsidiaries to, create or incur, or suffer to be incurred or to exist, any Lien on its property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, except:
(a) Permitted Liens;
(b) any Lien existing on any property prior to the acquisition thereof by the Borrower or any Subsidiary (or prior to the time the Person owning such property or asset becomes a Subsidiary); provided that such Lien is not created in contemplation of or in connection with such transaction;
(c) Liens securing Debt of the Borrower or any Subsidiary incurred to finance the acquisition of fixed or capital assets; provided that (i) such Liens do not encumber any property other than the property financed by such Debt and (ii) such Liens are incurred not later than 180 days after such acquisition;
(d) any Permitted Refinancing of any of the foregoing Secured Debt;
(e) Liens securing Intercompany Debt; and
(f) Liens securing Secured Debt permitted under Section 6.03.
Section 6.03. Priority Indebtedness . The Borrower will not at any time permit (a) the aggregate outstanding principal amount of Secured Debt (other than Secured Debt secured only by Liens permitted under paragraphs (a) through (e) of Section 6.02) plus
54
(b) all other Debt of all Subsidiaries (other than Intercompany Debt and Secured Debt), all determined on a Consolidated basis and without duplication, to exceed 15% of Consolidated Net Tangible Assets, all calculated as of the last day of each fiscal quarter of the Borrower.
Section 6.04. Transactions with Affiliates . The Borrower will not, and will not permit any of its Subsidiaries to, enter into or be a party to any material transaction or material arrangement (other than the Pfizer Separation Agreements) with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person other than an Affiliate.
Section 6.05. Financial Covenants . (a) The Leverage Ratio as of the last day of any fiscal quarter falling during any period set forth below shall not exceed the applicable ratio set forth below for such period:
Fiscal Quarter Ending | Maximum Ratio | |||
March 31, 2013-December 31, 2013 |
4.35:1.00 | |||
March 31, 2014-December 31, 2014 |
3.95:1.00 | |||
March 31, 2015-December 31, 2015 |
3.50:1.00 | |||
March 31, 2016 and thereafter |
3.00:1.00 |
(b) The Interest Coverage Ratio shall not for any period of four consecutive fiscal quarters be less than 3.50:1.00; provided that, if on the Effective Date the Borrower has Ratings of BBB or better from S&P and Baa2 or better from Moodys, this clause (b) shall become permanently inoperative and have no force and effect. For purposes of determining compliance with this paragraph prior to the completion of four full fiscal quarters commencing subsequent to the Effective Date, computation shall be based on annualized amounts determined with reference to any full fiscal quarter commencing and ending after the Effective Date.
ARTICLE 7
E VENTS OF D EFAULT
Section 7.01. Events of Default . If one or more of the following events (herein called Events of Default ) shall occur and be continuing:
(a) the Borrower shall default in the payment of any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when due; or
55
(b) the Borrower shall default in the payment of any interest on any Loan hereunder, any fee payable pursuant to Section 2.08 or any other amount payable under any Loan Document, and such default shall continue for three Business Days; or
(c) any representation, warranty or certification made or deemed made in any Loan Document, by or on behalf of the Borrower, or any certificate or other document furnished to the Administrative Agent or any Lender pursuant to the provisions hereof or of any other Loan Document, shall prove to have been false or misleading as of the time made or furnished in any material respect; or
(d) the Borrower or any Subsidiary shall default in the performance of (i) any of its obligations contained in Section 5.01(d), Section 5.03(a) (with respect to the Borrower only) or Article 6 or (ii) any of its other obligations under this Agreement or any other Loan Document and such default shall continue unremedied for a period of 30 days after written notice thereof to the Borrower by the Administrative Agent; or
(e) the Borrower or any Subsidiary shall fail to pay any principal of any Debt in an amount of at least $50,000,000 in the aggregate for the Borrower and all Subsidiaries (the Requisite Amount ) (but excluding Debt outstanding hereunder), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or
(f) the Borrower or any Subsidiary shall fail to observe or perform any term, covenant or condition on its part to be observed or performed under any agreement or instrument relating to any Debt in the Requisite Amount, when required to be observed or performed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure is to accelerate, or permit the acceleration of, the maturity of such Debt or such Debt has been accelerated; or any such Debt shall be required to be prepaid, defeased, purchased or otherwise acquired by the Borrower or any Subsidiary (other than by a regularly scheduled required prepayment or redemption and other than Secured Debt that becomes due as a result of the voluntary transfer of assets securing such Debt), prior to the stated maturity thereof; or
(g) any final judgment or Order for the payment of money in excess of the Requisite Amount shall be rendered against the Borrower or any Material Subsidiary and there shall be any period of 30 consecutive days during which a stay of enforcement of any such unsatisfied judgment or Order, by reason of bonding, a pending appeal or otherwise, shall not be in effect, provided , however , that any such judgment or Order shall not be an Event of Default under this Section 7.01(g) if and for so long as (i) the amount of such judgment or Order is covered by a valid and binding policy of insurance between the defendant and the insurer covering payment thereof and (ii) such insurer has been notified of, and has not disputed the claim made for payment of, the amount of such judgment or Order; or
56
(h) the Borrower or any ERISA Affiliate shall incur liability that would reasonably be expected to have a Material Adverse Effect as a result of one or more of the following: (i) the occurrence of any ERISA Event; (ii) the partial or complete withdrawal of the Borrower or such ERISA Affiliate from a Multiemployer Plan; or (iii) the reorganization or termination of a Multiemployer Plan; provided , however , that no Default under this Section 7.01(h) shall be deemed to have occurred if the Borrower or such ERISA Affiliate shall have made arrangements satisfactory to the Required Lenders to discharge or otherwise satisfy such liability (including the posting of a bond or other security); or
(i) the Borrower or any Material Subsidiary shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other Law relating to bankruptcy, insolvency, reorganization, winding up, or composition or readjustment of debts (in each case, relative to its own creditors or Debts), (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or
(j) a proceeding or case shall be commenced, without the application or consent of the Borrower or any Material Subsidiary, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding up, or the composition or readjustment of its Debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower or such Material Subsidiary or of all or any substantial part of its property and assets, or (iii) similar relief in respect of the Borrower or such Material Subsidiary under any Law relating to bankruptcy, insolvency, reorganization, winding up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an Order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 days; or an Order for relief against the Borrower or such Material Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or
(k) a Change of Control shall occur;
THEREUPON: (i) in the case of an Event of Default that has occurred and is continuing other than one referred to in clause (i) or (j) of this Section 7.01 with respect to the Borrower, the Administrative Agent (A) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, cancel the Commitments and (B) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the principal amount of, and the accrued interest on, the Loans then outstanding and all other amounts payable by the Borrower hereunder and under the other Loan Documents to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower; and (ii) in the case of the occurrence of an Event of Default referred to in clause (i) or (j) of
57
this Section 7.01 with respect to the Borrower, the Commitments shall be automatically cancelled and the principal amount of, and the accrued interest on, the Loans then outstanding and all other amounts payable by the Borrower hereunder and under the other Loan Documents shall become automatically due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower.
ARTICLE 8
T HE A DMINISTRATIVE A GENT
Section 8.01. Authorization and Action .
(a) Each Lender hereby irrevocably appoints the entity named as Administrative Agent in the heading of this Agreement and its successors to serve as Administrative Agent under the Loan Documents, and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Without limiting the foregoing, each Lender hereby authorizes the Administrative Agent to execute and deliver and to perform its obligations under each of the Loan Documents to which the Administrative Agent is a party and to exercise all rights, powers and remedies that the Administrative Agent may have under such Loan Documents.
(b) As to any matters not expressly provided for by this Agreement and the other Loan Documents (including enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the written instructions of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith to be necessary, under the circumstances as provided in Section 9.03), and such instructions shall be binding upon all Lenders and all holders of Notes; provided , however , that the Administrative Agent shall not be required to take any action that (i) the Administrative Agent in good faith believes exposes it to personal liability unless the Administrative Agent receives an indemnification satisfactory to it from the Lenders or (ii) is contrary to this Agreement or applicable Law. The Administrative Agent agrees to give to each Lender prompt notice of each written notice of borrowing, repayment, prepayment or Event of Default given to it by the Borrower pursuant to the terms of this Agreement or the other Loan Documents.
(c) In performing its functions and duties hereunder and under the other Loan Documents, the Administrative Agent is acting solely on behalf of the Lenders except to the limited extent provided in Section 9.06(e), and its duties are entirely administrative in nature. The Administrative Agent does not assume and shall not be deemed to have assumed any obligation other than as expressly set forth herein and in the other Loan Documents or any other relationship as the agent, fiduciary or trustee of or for any Lender or holder of any other obligation. The Administrative Agent may perform any of its duties under any Loan Document by or through its agents or employees.
58
(d) The Joint Lead Arrangers and the Persons named on the cover page hereof as Syndication Agents, Documentation Agents or Bookrunners shall have no obligations or duties whatsoever in such capacity under this Agreement and shall incur no liability hereunder in such capacity.
Section 8.02. Administrative Agents Reliance, Etc . Neither the Administrative Agent nor any of its Affiliates or any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or any other Loan Document, except for its or their own gross negligence or willful misconduct (as determined by a final, non-appealable judgment of a court of competent jurisdiction). Without limitation of the generality of the foregoing, the Administrative Agent: (i) may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender that is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 9.06; (ii) may rely on the Register to the extent set forth in Section 9.06(e), (iii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iv) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement or any other Loan Document; (v) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Loan Document on the part of the Borrower, as to the financial position of the Borrower or as to the existence or possible existence of any Default or to inspect the property (including the books and records) of the Borrower or any of its Subsidiaries; (vi) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vii) shall incur no liability under or in respect of this Agreement or any other Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by facsimile transmission, Internet or intranet website posting, any electronic messaging system or other distribution) believed by it to be genuine and signed, sent or otherwise authenticated by the proper party or parties.
Section 8.03. JPMCB and Affiliates . With respect to its Commitment, the Revolving Loans made by it and the Note issued to it, JPMCB shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Administrative Agent; and the term Lender or Lenders shall, unless otherwise expressly indicated, include JPMCB in its individual capacity. JPMCB and its Affiliates (including their respective directors, officers, agents or employees) may accept deposits from, lend money to, act as trustee under indentures of, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with, the Borrower, any Subsidiary and any Person who may do any kind of banking, trust or other business with or own securities of the Borrower or any Subsidiary, all as if JPMCB were not the Administrative Agent and without any duty to account therefor to the Lenders.
59
Section 8.04. Lender Credit Decision . Each Lender acknowledges that it shall, independently and without reliance upon the Administrative Agent, any Joint Lead Arranger or any other Lender, conduct its own independent investigation of the financial position and affairs of the Borrower in connection with the making and continuance of the Loans. Each Lender also acknowledges that it shall, independently and without reliance upon the Administrative Agent, any Joint Lead Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and other Loan Documents. Except for the documents expressly required by any Loan Document to be transmitted by the Administrative Agent to the Lenders, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrower or any Affiliate of the Borrower that may come into the possession of the Administrative Agent or any Affiliate thereof or any employee or agent of any of the foregoing.
Section 8.05. Indemnification . Each Lender agrees to indemnify the Administrative Agent and its Related Parties (to the extent not reimbursed by the Borrower and ratably according to the respective amount of such Lenders Commitment (or, if this indemnity under this paragraph is sought after the termination of the Commitments, such Lenders Commitment as most recently in effect)), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements (including fees, expenses and disbursements of financial and legal advisors) of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against, the Administrative Agent or any of its Related Parties in any way relating to or arising out of this Agreement or the other Loan Documents or any action taken or omitted by the Administrative Agent under this Agreement or the other Loan Documents; provided , however , that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agents or such Related Partys gross negligence or willful misconduct (as determined in a final and non-appealable judgment of a court of competent jurisdiction). Without limiting the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including fees, expenses and disbursements of financial and legal advisors) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of its rights or responsibilities under, this Agreement or the other Loan Documents, to the extent that the Administrative Agent is not reimbursed for such expenses by the Borrower or another Borrower.
Section 8.06. Successor Administrative Agent . The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent, subject to, if no Default shall have occurred and be continuing, the approval of the Borrower (which approval shall not be unreasonably withheld). If no successor Administrative Agent shall have been so appointed by the
60
Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agents giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the Laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000, subject to, if no Default shall have occurred and be continuing, the approval of the Borrower (which approval shall not be unreasonably withheld). In addition and without any obligation on the part of the retiring Administrative Agent to appoint, on behalf of the Lenders, a successor Administrative Agent, the retiring Administrative Agent may at any time upon or after the end of such 30-day period, notify the Borrower and the Lenders that no qualifying Person has accepted appointment as successor Administrative Agent and the effective date of such retiring Administrative Agents resignation (which effective date shall be no earlier than three Business Days after the date of such notice). Upon the resignation effective date established in such notice and regardless of whether a successor Administrative Agent has been appointed and accepted such appointment, the retiring Administrative Agents resignation shall nonetheless become effective and (i) the retiring Administrative Agent shall be discharged from its duties and obligations as Administrative Agent hereunder and under the other Loan Documents and (ii) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this paragraph. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement (if not already discharged therefrom as provided above in this paragraph). Prior to any retiring Administrative Agents resignation hereunder as Administrative Agent, the retiring Administrative Agent shall take such action as may be reasonably necessary to assign to the successor Administrative Agent its rights as Administrative Agent under the Loan Documents. After any retiring Administrative Agents resignation hereunder as Administrative Agent, the provisions of this Article 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement.
ARTICLE 9
M ISCELLANEOUS
Section 9.01. No Waiver; Remedies . No failure to exercise or delay in exercising any right, power or privilege in respect of this Agreement or any other Loan Document will be presumed to operate as a waiver, and no single or partial exercise of any right, power or privilege in respect of this Agreement or any other Loan Document will be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by Law.
61
Section 9.02. Notices, Etc . (a) Notices Generally . All notices and other communications provided for hereunder shall be in writing (including by facsimile transmission) and mailed, transmitted or delivered, if to the Borrower, at its address at Zoetis Inc., 235 East 42nd Street, New York, NY 10017; if to any Lender, at its address for notices recorded by the Administrative Agent in the Register; and if to the Administrative Agent, at its address at JPMorgan Chase Bank, N.A., 500 Stanton Christiana Road, Ops 2, Newark DE 19713, Attn: Jonathan Foucault, Phone: 302-634-1666; Fax: 302-634-1417, Email: jonathan.i.foucault@jpmorgan.com; or, as to the Borrower or the Administrative Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Administrative Agent. Without prejudice to clause (b)(iv) below, each such notice or communication will be deemed effective: (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by facsimile transmission or electronic mail, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the senders facsimile machine); or (iii) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted, except that notices and communications to the Administrative Agent pursuant to Article 2, 3 or 8 shall not be effective until received by the Administrative Agent. Delivery by facsimile or electronic mail of an executed counterpart of any amendment or waiver of any provision of this Agreement or any of the other Loan Documents or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof.
(b) Electronic Communications .
(i) Delivery of Communications by the Borrower . The Borrower agrees that, unless otherwise requested by the Administrative Agent, it will provide to the Administrative Agent all information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to this Agreement and the other Loan Documents, including all notices, requests, financial statements, financial and other reports, certificates and other information materials, but excluding any such communication that (A) relates to a request for a new, or a Conversion of an existing, Borrowing (including any election of an interest rate or Interest Period relating thereto), (B) relates to the payment of any principal or other amount due under this Agreement prior to the scheduled date therefor, (C) provides notice of any Default under this Agreement, (D) is required to be delivered to satisfy any condition precedent in Article 3 or (E) initiates or responds to legal process (all such non-excluded information being referred to herein collectively as the Communications ), by transmitting the Communications in an electronic/soft medium ( provided such Communications contain any required signatures) in a format acceptable to the Administrative Agent to jonathan.i.foucault@jpmorgan.com and tesfaye.a.anteneh@jpmorgan.com or such other e-mail address designated in writing by the Administrative Agent from time to time.
62
(ii) Use of Web Platforms . Each party hereto agrees that the Administrative Agent may make the Communications available to the Lenders by posting the Communications on IntraLinks or another similar website reasonably acceptable to the Borrower, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third party website or whether sponsored by the Administrative Agent) (the Platform ). Nothing in this Section 9.02 shall prejudice the right of the Administrative Agent to make the Communications available to the Lenders in any other manner specified in this Agreement. Each party hereto agrees that the Administrative Agent may, but (except as may be required by applicable Law) shall not be obligated to, store the Communications on the Platform in accordance with the Administrative Agents generally-applicable document retention procedures and policies.
(iii) E-mail Notification to Lenders . Each Lender agrees (unless separate arrangements have been made with the Administrative Agent) that e-mail notice to it (at the address provided pursuant to the next sentence and deemed delivered as provided in the next paragraph) specifying that Communications have been posted to the Platform shall constitute effective delivery of such Communications to such Lender for purposes of this Agreement. Each Lender agrees (A) to notify the Administrative Agent in writing (including by electronic communication) from time to time to ensure that the Administrative Agent has on record an effective e-mail address for such Lender to which the foregoing notice may be sent by electronic transmission, and (B) that the foregoing notice may be sent to such e-mail address.
(iv) Presumption as to Delivery of E-mail . Each party agrees that any electronic communication referred to in this Section 9.02 shall be deemed delivered upon the posting of a record of such communication as received in the e-mail system of the recipient; provided that if such communication is not so received during normal business hours, such communication shall be deemed delivered at the opening of business on the next Business Day.
(v) Waiver of Responsibility . Each party acknowledges that (A) although the Platform and its primary web portal are secured with generally-applicable security procedures and policies implemented or modified by the Administrative Agent from time to time (including, as of the Effective Date, a dual firewall and a User ID/Password Authorization System) and the Platform is secured through a single-user-per-deal authorization method whereby each user may access the Platform only on a deal-by-deal basis, the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution (and each party assumes the risks of such distribution), (B) the Communications and the Platform are provided as is and as available, (C) none of the Administrative Agent, its Affiliates nor any of their respective officers, directors, employees, members, trustees, agents, sub-agents, advisors or representatives (collectively, the JPMCB Parties ) warrants the adequacy, accuracy or completeness of the Communications or the Platform, and each JPMCB Party expressly disclaims
63
liability for errors or omissions in any Communications or the Platform, and (D) no warranty of any kind, express, implied or statutory, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by any JPMCB Party in connection with any Communications or the Platform.
Section 9.03. Amendments, Etc . No amendment or waiver of any provision of this Agreement or the other Loan Documents (except the Commitment Documents), nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no amendment, waiver or consent shall (a) increase the Commitment of any Lender, or subject any Lender to any additional obligations, without the prior written consent of such Lender, (b) reduce the principal of, or interest (or the rate of interest) on, the Loans of any Lender, or any fees (or the rate at which they accrue) or other amounts payable hereunder to any Lender, without the prior written consent of such Lender, (c) alter the manner in which Commitment reductions or payments or prepayments of principal, interest or other amounts hereunder shall be applied as among the Lenders without the prior written consent of all Lenders directly affected thereby, (d) postpone any date fixed for any payment of principal of, or interest on, the Loans of any Lender, or any fees or other amounts payable hereunder to any Lender, without the prior written consent of such Lender, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, that shall be required for the Lenders or any of them to take any action hereunder without the prior written consent of all Lenders affected thereby, (f) amend Section 2.15 or this Section 9.03 without the prior written consent of all Lenders adversely affected thereby, or (g) extend the commitment period of any Lender, or amend the definition of Commitment Termination Date with respect to any Lender, without the prior written consent of such Lender; provided further that no amendment, waiver or consent shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, any Issuing Bank or the Swingline Lender under any Loan Document without the prior written consent of the Administrative Agent, such Issuing Bank or the Swingline Lender, as the case may be and provided further , that the Administrative Agent may, with the written consent of the Borrower, amend, modify or supplement this Agreement to cure any ambiguity, omission, defect or inconsistency, so long as such amendment, modification or supplement does not adversely affect the rights of any Lender. Notwithstanding the foregoing, any amendment to the Pricing Grid pursuant to the final paragraph of Annex I shall not require the written consent of any Lender, but shall require the written consent of the Borrower and the Administrative Agent only.
Section 9.04. Costs and Expenses; Indemnity . (a) The Borrower agrees to pay, promptly following demand therefor, all reasonable and documented out-of-pocket costs and expenses of the Administrative Agent and the Joint Lead Arrangers in connection with the syndication of the credit facility provided for herein and the preparation, execution, delivery, administration, modification and amendment of this Agreement, the other Loan Documents and the other documents to be delivered hereunder and thereunder, including the reasonable and documented fees and expenses of counsel for
64
the Administrative Agent with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities under this Agreement with respect to issues arising after the date hereof and relating specifically to this Agreement. The Borrower further agrees to periodically pay, promptly following demand therefor, all reasonable and documented out-of-pocket costs and expenses of the Administrative Agent and the Lenders, if any (including reasonable and documented counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the other Loan Documents and the other documents to be delivered hereunder, including reasonable and documented fees and expenses of counsel for the Administrative Agent and each Lender in connection with the enforcement of rights under this Section 9.04(a). Notwithstanding the foregoing, nothing in this Section 9.04(a) shall require the Borrower to reimburse the Administrative Agent, any Joint Lead Arranger or any Lender for Taxes or Additional Costs paid pursuant to Section 2.16.
(b) If any payment or prepayment of principal of, or Conversion of, any Eurodollar Rate Loan is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Loan as a result of (i) a payment pursuant to this Agreement or a Conversion pursuant to Section 2.11, 2.13 or 2.17, (ii) a Commitment Increase pursuant to Section 2.07(c), (iii) a payment by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Loan upon an assignment of rights and obligations under this Agreement pursuant to Section 9.06 as a result of a demand by the Borrower pursuant to Sections 9.06(a) or 9.06(c), (iv) acceleration of the maturity of the Loans pursuant to Article 7, (v) any payment on the Commitment Termination Date with respect to any Loans for which the Interest Period is deemed to end on such Commitment Termination Date pursuant to clause (i) of the definition of Interest Period or (vi) any other reason, or if the Borrower shall fail to effect any Borrowing of a Loan (other than a Base Rate Loan) on the date specified for such Borrowing in the related Borrowing request (including by reason of the failure of any applicable condition set forth in Article 3 to be satisfied), or if the Borrower shall fail to prepay any Eurodollar Loan after notice has been given to any Lender pursuant to Section 2.13 , then the Borrower shall, within 10 days following demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment, prepayment or Conversion, or failure to borrow or prepay, including any loss (resulting from any interest rate differentials, excluding loss of anticipated margin), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Loan. Determinations by a Lender for purposes of this Section 9.04(b) of any loss, cost or expense shall be conclusive and binding for all purposes, provided that such determinations are made on a reasonable basis. Any Lender requesting compensation under this Section 9.04(b) will furnish the Borrower with a certificate setting forth the basis and amount of such request for compensation. Notwithstanding the foregoing, nothing in this Section 9.04(a) shall require the Borrower to reimburse the Administrative Agent, any Joint Lead Arranger or any Lender for Taxes or Additional Costs paid pursuant to Section 2.16.
65
(c) The Borrower shall indemnify the Administrative Agent, each Joint Lead Arranger, and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an Indemnitee ) on demand against, and hold each Indemnitee harmless from, any and all losses, claims, damages, penalties, actions, judgments, suits, costs, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing (including any such action, proceeding or investigation brought by or against any person, including stockholders, partners or other equity holders of the Borrower), whether based on contract, tort or any other theory and in any capacity regardless of whether any Indemnitee is a party thereto, in each case, whether or not such investigation, litigation, claim or proceeding is brought by the Borrower, any equity holders or creditors of the Borrower or an Indemnitee and whether or not any such Indemnitee is otherwise a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, penalties, actions, judgments, suits, costs, liabilities or related expenses are determined by final and nonappealable judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee in the performance of its obligations under the Loan Documents; provided , however , that in no event will such Indemnitee or such other parties have any liability for any indirect, consequential, special or punitive damages in connection with or as a result of such Indemnitees or such other parties activities related to the Loan Documents and the Borrower hereby waives, releases and agrees not to sue upon such claim or any such damages whether or not accrued or not known or suspected to exist in its favor. If for any reason the foregoing indemnification is unavailable to any Indemnitee or insufficient to hold it harmless, then the Borrower will contribute to the amount paid or payable by such Indemnitee, as the case may be, as a result of such loss, claim, damage, liability and related expenses in such proportion as is appropriate to reflect the relative economic interests of (i) the Borrower and their respective Affiliates, stockholders, partners or other equity holders on the one hand and (ii) such Indemnitee on the other hand in the matters contemplated by the Loan Documents as well as the relative fault of (i) the Borrower and their respective Affiliates, stockholders, partners or other equity holders and (ii) such Indemnitee with respect to such loss, claim, damage or liability and any other relevant equitable considerations.
(d) Without prejudice to the survival of any other agreement of the Borrower or the Lenders hereunder, the agreements and obligations of the Borrower contained in Sections 2.16, 2.18 and this Section 9.04, and the agreements and obligations of each Lender under Sections 8.05 and 9.11, shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes.
Section 9.05. Binding Effect . This Agreement shall become effective (other than (a) the obligations of the Lenders to make Credit Extensions hereunder, (b) the
66
representations and warranties in Sections 4.04, 4.05, 4.07, 4.08, 4.10 and 4.11 and (c) the covenants in Article 5 and Article 6, which shall, in each case, only become effective upon satisfaction of the conditions precedent set forth in Section 3.02) when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrower shall have no right to assign its rights hereunder or any interest herein without the prior written consent of all Lenders (except Defaulting Lenders), which consent shall not be unreasonably withheld or delayed, and any purported assignment without such consent shall be null and void.
Section 9.06. Assignments and Participations . (a) Each Lender may assign to one or more Lenders all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment, the Loans owing to it and any Notes held by it) with the consent of the Borrower (unless an Event of Default shall have occurred and be continuing, in which case the consent of the Borrower shall not be required), each Issuing Bank, the Swingline Lender and the Administrative Agent, in each case, which consent shall not be unreasonably withheld or delayed, and, if demanded by the Borrower (pursuant to clause (c) below), upon at least five Business Days notice to such Lender and the Administrative Agent, shall assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment, the Loans owing to it and any Notes held by it); provided that (i) each such assignment shall be of a constant, and not a varying percentage of all rights and obligations under this Agreement, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender or in the case of an assignment of all of a Lenders rights and obligations under this Agreement, the amount of the Commitment or Loan, as applicable, of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 or any whole multiple of $1,000,000 in excess thereof, (iii) each such assignment shall be to an Eligible Assignee or an Affiliate of a Lender of the type described in clause (y) of the second proviso below, (iv) each such assignment made as a result of a demand by the Borrower shall comply with clause (c) below, (v) the parties to each such assignment (which shall not include the Borrower) shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note subject to such assignment and a processing and recordation fee of $3,500 and (vi) the assignee, if not already a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; provided that the Borrower shall pay such processing and recordation fee if such assignment occurs as a result of a demand by the Borrower pursuant to Section 9.06(c)(i) or (ii); provided further that no consents shall be required (x) in the case of an assignment of the type described in clause (g) below, or (y) in the case of an assignment of a Commitment by a Lender to an Affiliate of such Lender if the long term deposit rating of such Affiliate is no less than the long term deposit rating of such Lender at the time of the assignment, subject to reassignment by such Affiliate to such Lender if at any time it ceases to be an Affiliate of such Lender and prior notification of any such assignment to the Borrower. Upon such
67
execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lenders rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Section 2.16, 2.18 and 9.04 with respect to facts and circumstances occurring prior to the effective date of such assignment.
(b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender (A) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto, other than the representation and warranty that it owns the interest being assigned, free and clear of any liens or encumbrances, and has taken all action necessary to consummate the transactions pursuant to such Assignment and Acceptance; and (B) makes no representation or warranty and assumes no responsibility with respect to the financial position of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; and (ii) such assignee (A) represents and warrants that it has taken all action necessary to consummate the transactions pursuant to such Assignment and Acceptance; (B) confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Sections 5.01(a) or 5.01(b) (or, prior to the first such delivery, the Initial Financial Statements) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (C) agrees that it will, independently and without reliance upon the Administrative Agent, any Arranger, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (D) confirms that it is an Eligible Assignee; (E) appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (F) agrees that it will perform in accordance with their terms all the obligations that by the terms of this Agreement are required to be performed by it as a Lender.
Anything herein to the contrary notwithstanding, the Borrower shall not be obligated to pay to any assignee any amounts under Section 2.16 or 2.18 in excess of the amount the Borrower would have been obligated to pay thereunder to the assigning
68
Lender in the absence of such assignment, unless such assignment is made at a time when the circumstances giving rise to such greater payments did not exist.
(c) Following (i) a demand by any Lender pursuant to, or the incurrence by the Borrower of an obligation to make a payment pursuant to, Section 2.16, 2.17 or 2.18, (ii) any Lender becoming a Defaulting Lender or (iii) in connection with any proposed amendment, modification, waiver or termination requiring the consent of all the Lenders or all affected Lenders, for which the consent of the Required Lenders has been obtained, the failure of any Lender whose consent is required but not obtained to vote in favor of such amendment, modification, waiver or termination, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.06(a)), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (w) the Borrower shall have received the prior written consent of each Issuing Bank, the Swingline Lender and the Administrative Agent, which consent shall not unreasonably be withheld or delayed, (x) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees (giving effect to Section 2.19 in the event such Lender is a Defaulting Lender) and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts), (y) in the case of any such assignment resulting from a claim or obligations under Section 2.16, 2.17 or 2.18, such assignment will result in a reduction in such compensation or payments and (z) no Default shall have occurred and be continuing. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
(d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Note (which shall be marked cancelled by the assigning Lender) a new Note to such Eligible Assignee in an amount equal to the Commitment or Loan, as applicable, assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment or Loan, as applicable, hereunder, a new Note to the assigning Lender in an amount equal to the Commitment or Loan, as applicable, retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit C hereto.
69
(e) The Administrative Agent, acting solely for this purpose as a non-fiduciary agent of the Borrower, shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance and each Assumption Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and the interest and principal amount of the Loans owing to, each Lender from time to time (the Register ). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.
(f) Each Lender may sell participations to one or more banks or other entities (other than the Borrower or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment, the Loans owing to it and any Notes held by it); provided , that (i) such Lenders obligations under this Agreement (including its Commitment hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lenders rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. Each Lender that sells a participation, acting solely for this purpose as a non-fiduciary agent of the Borrower, shall maintain a register for the recordation of the names and addresses of each Participant and the Commitment of, and the interest and principal amount of the Loans owing to, each Participant from time to time (the Participant Register ); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any Participant or any information relating to a Participants interest in any Commitments, Loans or its other obligations hereunder or under any other Loan Document) except to the extent that such disclosure is necessary to establish that such Commitment, Loan or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary.
(g) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including the Loans owing to it and the Notes held by it) in favor of any
70
Federal Reserve Bank or other Governmental Authority in accordance with any regulation of the Federal Reserve or other Governmental Authority. No such assignment shall release any Lender from its obligations hereunder.
Section 9.07. Governing Law . This Agreement and the other Loan Documents and any claim, controversy or dispute arising under or related to this Agreement, the Loan Documents, the relationship of the parties under any Loan Document, and/or the interpretation and enforcement of the rights and duties of the parties under any Loan Document shall be governed by, and construed in accordance with, the law of the State of New York without regard to conflict of laws principles thereof that would result in the application of any law other than the law of the State of New York.
Section 9.08. Execution in Counterparts . This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement.
Section 9.09. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assignees.
Section 9.10. Captions . Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement.
Section 9.11. Confidentiality . (a) The Administrative Agent, each Joint Lead Arranger and each Lender shall hold all non-public information regarding the Borrower and its Subsidiaries and their business identified as such by the Borrower and obtained by the Administrative Agent, such Joint Lead Arranger or Lender, as the case may be, pursuant to the requirements hereof in accordance with such Persons customary procedures for handling confidential information of such nature and only use such information in connection with its services to, and its relationship with, the Borrower, provided that nothing herein contained shall be construed to prevent the Administrative Agent or such Lender or Joint Lead Arranger from disclosing such information (i) to any Affiliate of the Administrative Agent or such Lender or Joint Lead Arranger or any officer, director or employee or agent or any attorney or accountant for the Administrative Agent or such Lender or Joint Lead Arranger that agrees to be similarly bound, (ii) to any bona fide or potential assignee, transferee or participant in connection with the contemplated assignment, transfer or participation of any Commitments or Loans or any participations therein or by any direct or indirect contractual counterparties (or the professional advisors thereto) to any swap or derivative transaction relating to the Borrower and its obligations or to any credit insurance provider relating to the Borrower and its obligations, in each case that agrees to be bound by the provisions of this Section 9.11, (iii) pursuant to any subpoena or upon the Order of any court or administrative agency or upon the request or demand of, or in connection with any investigation,
71
examination or audit by, any governmental agency or authority, whether or not such request or demand shall have the force of Law, upon notice to the Administrative Agent and the Lenders of such subpoena, Order, request or demand (unless such notice is not legally permissible), provided that, except with respect to any audit or examination conducted in the ordinary course by bank accountants or by any governmental bank regulatory authority exercising examination or supervisory authority, the Administrative Agent or such Lender or Joint Lead Arranger (as the case may be) shall have used commercially reasonable efforts to provide prompt notice to the Borrower (unless such notice is not legally permissible) of such subpoena, Order, request or demand or such investigation, examination or audit so as to enable the Borrower to seek a protective Order or other appropriate remedy and thereafter discloses only the minimum information required to be disclosed in order to comply with such subpoena, Order, request or demand of, or in connection with such investigation, examination or audit, (iv) that has been obtained from any Person that is not a party to this Agreement or an Affiliate of any such party and who was not similarly bound so far as such Person was aware, (v) to any rating agency when required by it, provided that, prior to any disclosure, such rating agency shall undertake in writing to preserve the confidentiality of any confidential information relating to the Borrower received by it from the Administrative Agent, any Joint Lead Arranger or any Lender, and (vi) in connection with the exercise of any remedy hereunder. Said authorization to disclose is subject to any federal or state securities Laws that reasonably require the parties to keep some or all aspects of the transaction contemplated herein confidential. Furthermore, nothing in this Section 9.11 shall be construed as a waiver of any applicable attorney client privilege or any privilege arising under section 7525 of the Code or any duty of confidentiality on the part of any attorney or accountant under any code of professional conduct that, in each case, relates to communications with respect to the transactions contemplated herein or the execution thereof.
Section 9.12. Jurisdiction, Service of Process, Etc . (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property and assets, to the exclusive jurisdiction of the Supreme Court of the State of New York and of the United States District Court of the Southern District of New York, in each case sitting in New York County, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto (subject, in the case of the Administrative Agent and each Lender, to the last sentence of this paragraph) hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding shall be heard and determined in any such New York State court or, to the extent permitted by Law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law.
(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents in any New York State or Federal
72
court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.02. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
Section 9.13. Waiver of Jury Trial . EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE ACTIONS OF THE ADMINISTRATIVE AGENT OR ANY LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
Section 9.14. [Reserved] .
Section 9.15. USA PATRIOT Act . Each Lender hereby notifies the Borrower that pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the names and addresses of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with said Act.
Section 9.16. No Fiduciary Duty . The Administrative Agent, each Joint Lead Arranger, each Lender and their Affiliates (collectively, solely for purposes of this paragraph, the Lenders ), may have economic interests that conflict with those of the Borrower. The Borrower agrees that nothing in the Loan Documents or otherwise will be deemed to create an advisory, fiduciary or agency relationship or fiduciary or other implied duty between the Lenders and the Borrower, its stockholders or its affiliates. The Borrower acknowledges and agrees that (i) the transactions contemplated by the Loan Documents are arms-length commercial transactions between the Lenders, on the one hand, and the Borrower, on the other, (ii) in connection therewith and with the process leading to such transaction each of the Lenders is acting solely as a principal and not the agent or fiduciary of the Borrower, its management, stockholders, creditors or any other person, (iii) no Lender has assumed an advisory or fiduciary responsibility in favor of the Borrower with respect to the transactions contemplated hereby or the process leading thereto (irrespective of whether any Lender or any of its affiliates has advised or is currently advising the Borrower on other matters) or any other obligation to the Borrower except the obligations expressly set forth in the Loan Documents and (iv) the Borrower has consulted its own legal and financial advisors to the extent it deemed appropriate. The Borrower further acknowledges and agrees that it is responsible for making its own independent judgment with respect to such transactions and the process leading thereto. The Borrower agrees that it will not claim that any Lender has rendered advisory services
73
of any nature or respect, or owes a fiduciary or similar duty to the Borrower, in connection with such transaction or the process leading thereto.
Section 9.17. Right of Set-off . Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified in Article 7 by the Required Lenders to authorize the Administrative Agent to declare the Loans due and payable pursuant to the provisions of Article 7 and notice to the Borrower as required under Article 7, each Lender and each Affiliate of a Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Debt at any time owing by such Lender or its Affiliates to or for the credit or the account of the Borrower against any and all of the Obligations now or hereafter existing whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and even though such Obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender or its Affiliates; provided , however , that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 9.17 are in addition to the other rights and remedies (including other rights of set-off) that such Lender may have.
Section 9.18. Integration . This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof, including the commitments of the Lenders and, if applicable, their Affiliates under the Commitment Documents and any commitment advices submitted by them (but do not supersede any other provisions of the Commitment Documents that do not by the terms of such documents terminate upon the effectiveness of this Agreement, all of which provisions shall remain in full force and effect, except where such provisions conflict with any provision in this Agreement, in which case the latter shall have effect).
74
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
ZOETIS INC. | ||
By: | /s/ Richard A. Passov | |
Name: Richard A. Passov | ||
Title: Executive Vice President, Chief Financial Officer |
[ Signature page to Zoetis Credit Agreement ]
JPMORGAN CHASE BANK, N.A., as a Lender, Issuing Bank, Swingline Lender and as Administrative Agent, | ||
By: |
/s/ Vanessa Chiu |
|
Name: Vanessa Chiu | ||
Title: Executive Director |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
BANK OF AMERICA, N.A.: | ||
By: |
/s/ Robert LaPorte |
|
Name: Robert LaPorte | ||
Title: Vice President |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Name of Institution: BARCLAYS BANK PLC | ||
By: |
/s/ Vanessa A. Kurbatskiy |
|
Name: Vanessa A. Kurbatskiy | ||
Title: Vice President |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Citibank, N.A., as a Lender: |
||
By: |
/s/ Patricia Guerra Heh |
|
Name: Patricia Guerra Heh | ||
Title: Vice President |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Name of Institution: Deutsche Bank AG New York Branch | ||
By: |
/s/ Ming K. Chu |
|
Name: Ming K. Chu | ||
Title: Vice President |
By: |
/s/ Heidi Sandquist |
|
Name: Heidi Sandquist | ||
Title: Director |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Name of Institution: BNP Paribas | ||
By: |
/s/ Michael Pearce |
|
Name: Michael Pearce | ||
Title: Managing Director |
Name of Institution: BNP Paribas | ||
By: |
/s/ Michael R. Hoffman |
|
Name: Michael R. Hoffman | ||
Title: Vice President |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
HSBC Bank USA, National Association | ||
By: |
/s/ Thomas A. Foley |
|
Name: Thomas A. Foley | ||
Title: Managing Director |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Royal Bank of Canada, as Lender | ||
By: |
/s/ Scott MacVicar |
|
Name: Scott MacVicar | ||
Title: Authorized Signatory |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Morgan Stanley Bank, N.A. | ||
By: |
/s/ Kelly Chin |
|
Name: Kelly Chin | ||
Title: Authorized Signatory |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Name of Institution: The Bank of Tokyo- Mitsubishi UFJ, Ltd. |
||
By: |
/s/ Brian McNany |
|
Name: B. McNany | ||
Title: Vice President |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
COÖPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., RABOBANK NEDERLAND NEW YORK BRANCH |
||
By: |
/s/ John L. Church |
|
Name: John L. Church | ||
Title: Managing Director | ||
By: |
/s/ Peter Glawe |
|
Name: Peter Glawe | ||
Title: Executive Director |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
STANDARD CHARTERED BANK: | ||
By: |
/s/ Karen Bershtein |
|
Name: Karen Bershtein | ||
Title: Director |
STANDARD CHARTERED BANK: | ||
By: |
/s/ Robert K. Reddington |
|
Name: Robert K. Reddington | ||
Title: Credit Documentation Manager |
[ Signature page to Zoetis Credit Agreement ]
SIGNATURE PAGE TO
ZOETIS INC. CREDIT AGREEMENT
Name of Institution: Bank of China, New York Branch |
||
By: |
/s/ Haifeng Xu | |
Name: Haifeng Xu | ||
Title: Executive Vice President |
[ Signature page to Zoetis Credit Agreement ]
ANNEX I
Pricing Grid
Level: |
Ratings
|
Base Rate
Margin (% per annum) |
Eurodollar
Margin (% per annum) |
Facility Fee
Rate (% per annum) |
||||||||||
Level 1 |
Greater than or equal to Baa1/BBB+ | 0 | 1.000 | 0.125 | ||||||||||
Level 2 |
Baa2/BBB | 0.10 | 1.100 | 0.150 | ||||||||||
Level 3 |
Baa3/BBB- | 0.300 | 1.300 | 0.200 | ||||||||||
Level 4 |
Ba1/BB+ | 0.475 | 1.475 | 0.275 | ||||||||||
Level 5 |
Less than Ba1/BB+ | 0.925 | 1.925 | 0.325 |
In the event of split Ratings from Moodys and S&P, the foregoing determinations will be based upon the Rating more favorable to the Borrower unless the Ratings differ by more than one Level, in which case the foregoing determinations will be based on the Level that is one Level below that of the more favorable Level (i.e., Level 2 is below Level 1).
For purposes of the foregoing: (a) if a Rating Agency shall merge with or into or be acquired by the other Rating Agency, or shall cease to be in the business of rating corporate debt obligations, or shall otherwise cease to have a Rating in effect, then Fitch will be substituted into the Pricing Grid for the Rating Agency from which a Rating is no longer available (with the Fitch equivalent ratings substituted) unless otherwise agreed by the Borrower and the Administrative Agent (on behalf of the Lenders), and if a Rating from Fitch is not available, the Borrower and the Administrative Agent (on behalf of the Lenders) shall negotiate in good faith to amend the Pricing Grid to replace the reference to the Rating of such Rating Agency with the rating of a rating agency registered with the SEC as a nationally recognized statistical rating organization and, pending the effectiveness of any such amendment, the foregoing determinations shall be determined by reference to the Rating of the other Rating Agency; provided that if no such agreement is reached after the Borrower and the Administrative Agent (on behalf of the Lenders) have negotiated in good faith for 90 days, then at the end of such 90 day period and thereafter (until an agreement is reached among the Borrower and the Administrative Agent (on behalf of the Lenders)) such Rating Agency shall be deemed to have a Rating available and such Rating shall be deemed to be in Level 5; (b) if any Rating Agency shall not have a Rating in effect for a reason other than one of the reasons set forth in the
Annex 1 - 1
preceding clause (a), such Rating Agency shall be deemed to have a Rating available and such Rating shall be deemed to be in Level 5; and (c) in the event neither Rating Agency has a Rating in effect, the foregoing determinations will be determined by reference to Level 5.
Annex 1 - 2
Exhibit 15.1
December 28, 2012
Pfizer Inc.
New York, New York
Re: Registration Statement (No. 333-183254) on Form S-1 of Zoetis Inc. (the animal health business unit of Pfizer Inc.)
With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated December 28, 2012 related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.
/s/ KPMG LLP
New York, New York
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Pfizer Inc.:
We consent to the use of our audit report dated August 10, 2012 on the combined financial statements of Zoetis Inc., (the animal health business unit of Pfizer Inc.) as of December 31, 2011 and 2010 and for each of the years in the three-year period ended December 31, 2011 included herein and to the reference to our firm under the heading Experts in the prospectus.
/s/ KPMG LLP
New York, New York
December 28, 2012