| Financial Highlights | Financial Review | | Management’s Report | Audit Committee’s Report | | Independent Auditors’ Report | Financial Statements | | Notes to Financial Statements | | Directors, Committees, and Officers | | Corporate and Shareholder Information |

	Notes to Consolidated Financial Statements (Section 2 of 7)
	On This Page: | 5. Financial Instruments |
	5. Financial Instruments Most of our financial instruments are recorded in the Balance Sheet. Several “derivative” financial instruments are “off-balance-sheet” items. A — Investments in Debt and Equity Securities Information about our investments follows: (millions of dollars) 1997 1996 1995  Amortized cost and fair value of   held-to-maturity debt securities:*    Corporate debt $    626 $    602 $    682     Certificates of deposit 655 657 350     Municipals 56 29 222     Other 104 81 186    Total held-to-maturity debt securities 1,441 1,369 1,440  Cost and fair value of available-for-sale   debt securities 686 636 —  Cost of available-for-sale equity   securities   81   81 68  Gross unrealized gains 106 73 50  Gross unrealized losses (4) (8) (8)  Fair value of available-for-sale equity   securities 183 146 110    Total investments $2,310 $2,151 $1,550    *Gross unrealized gains and losses are immaterial. These investments are in the following captions in the Balance Sheet: (millions of dollars) 1997 1996 1995  Cash and cash equivalents $    636 $    640 $    153  Short-term investments 712 487 1,109  Long-term loans and investments 962 1,024 288  Total investments $ 2,310 $ 2,151 $ 1,550  The contractual maturities of the held-to-maturity and available-for-sale debt securities as of December 31, 1997 were as follows:   Years     Over 1 Over 5     (millions of dollars) Within 1 to 5 to 10 Over 10 Total  Held-to-maturity debt   securities:     Corporate debt $   567 $   54 $    4 $   1 $  626      Certificates of deposit 646 9 — — 655      Municipals 56 — — — 56      Other 79 — 15 10 104  Available-for-sale   debt securities:     Certificates of deposit — 256 189 — 445      Corporate debt — 91 150 — 241      Total debt securities $1,348 $410 $358 $11 $2,127  Available-for-sale   equity securities          183  Total investments         $2,310  B — Short-Term Borrowings The weighted average effective interest rate on short-term borrowings outstanding at December 31 was 2.9% in 1997, 5.0% in 1996 and 5.2% in 1995. We had approximately $1.3 billion available to borrow under lines of credit at December 31, 1997. C — Long-Term Debt Information on long-term debt outstanding follows: (millions of dollars) 1997 1996 1995  Floating-rate unsecured notes $686 $ 636 $   —  Repurchase agreement obligation — — 499  61/2% Notes due 1997 — — 250  Other borrowings and mortgages 43 51 84  Total long-term debt $729 $687 $833  Current portion not included above $    6 $261 $277  The floating-rate unsecured notes mature on various dates from 2001 to 2005 and they bear interest at a defined variable rate based on the commercial paper borrowing rate. The weighted average interest rate was 6.0% at December 31, 1997. These notes minimize credit risk on certain available-for-sale debt securities that may be used to satisfy the notes at maturity. The securities had a fair value equal to the amount of the notes at December 31, 1997. The 1995 repurchase agreement related to a sale of securities that we were obligated to repurchase. The agreement was terminated in 1996 and the debt repaid. Long-term debt outstanding at December 31, 1997 matures as follows:             After (millions of dollars) 1999 2000 2001 2002 2002  Maturities $4 $3 $187 $161 $374  D — Derivative Financial Instruments Purpose “Forward-exchange contracts,” “currency swaps” and “purchased currency options” are used to reduce exposure to foreign exchange risks. Also, “interest rate swap” contracts are used to adjust interest rate exposures. Accounting Policies We consider derivative financial instruments to be “hedges” (that is, an offset of foreign exchange and interest rate risks) when certain criteria are met. Under hedge accounting for a purchased currency option, its impact on earnings is deferred until the recognition of the underlying hedged item (inventory) in earnings. We recognize the earnings impact of the other instruments during the terms of the contracts, along with the earnings impact of the items they offset. Purchased currency options are recorded at cost and amortized evenly to operations through the expected inventory delivery date. Unrealized gains at the transaction date are included in the cost of the related inventory purchased. As interest rates change, we accrue the difference between the debt interest rates recognized in the Statement of Income and the amounts payable to or receivable from counterparties under swap contracts. Likewise, amounts arising from currency swap contracts are accrued as exchange rates change. The Financial Statements include the following items related to derivative and other financial instruments serving as hedges or offsets: “Other assets, deferred taxes and deferred charges” include: purchased currency options net amounts receivable related to swap contracts “Other current liabilities” include: fair value of forward-exchange contracts net amounts payable related to swap contracts “Currency translation adjustment and other” include changes in the: foreign exchange translation of foreign debt fair value of forward-exchange contracts for net investment hedges “Other deductions — net” include: changes in the fair value of foreign exchange instruments and changes in foreign-denominated assets and liabilities payments under swap contracts to offset interest expense or foreign exchange losses amortization of discounts or premiums on currencies sold under forward-exchange contracts Our criteria to qualify for hedge accounting are: Foreign currency instruments The instrument must relate to a foreign currency asset, liability or an anticipated transaction that is probable and whose characteristics and terms have been identified. It must involve the same currency as the hedged item. It must reduce the risk of foreign currency exchange movements on our operations. Interest rate instruments The instrument must relate to an asset or a liability. It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa. If an existing instrument becomes ineffective (that is, it no longer meets the criteria described), it is reported at its fair value. The following table summarizes the exposures hedged or offset by the various instruments we use:     Maximum Maturity in Years Instrument Exposure 1997 1996 1995 Forward-exchange contracts Foreign currency assets and liabilities .5 .5 .5   Net investments — .25 — Purchase currency options Inventory purchases and sales 1 1 2 Currency swaps Debt principal — — 5   Loans 2 1 2 Interest rate swaps Debt interest 1 1 5 Instruments Outstanding The notional amounts of derivative financial instruments do not represent actual amounts exchanged by the parties, but instead represent the amount of the item on which the contracts are based. The notional amounts of our foreign currency and interest rate contracts follow: (millions of dollars) 1997 1996 1995  Foreign currency contracts:   Commitments to sell foreign currencies,   primarily in exchange for U.S. dollars:     U.K. pounds $    548 $    564 $    645      Japanese yen 224 94 40      German marks 158 131 67      French francs 134 193 238      Irish punt 107 112 104      Italian lira 75 47 16      Belgian francs 62 67 114      Other currencies 168 168 73      Net investment hedges:       Japanese yen — 615 —        Swiss francs — 342 —    Commitments to purchase foreign currencies,   primarily in exchange for U.S. dollars:     Swiss francs 187 154 1      Irish punt 92 21 35      German marks 73 54 79      U.K. pounds 60 128 283      Japanese yen 7 7 39      Other currencies 175 147 154    Total forward-exchange contracts $2,070 $2,844 $1,888    Currency swaps:     U.K. pounds $     40 $     — $   499      Other currencies — 45 60    Total currency swaps $     40 $     45 $   559    Purchased options, primarily for   U.S. dollars:     Japanese yen $   198 $   221 $   231      German marks 130 28 104      French francs 46 35 87      Belgian francs 29 25 56      Other currencies 61 58 19    Total purchased options $   464 $   367 $   497  Interest rate swap contracts:   Japanese yen $   814 $   932 $   350    Swiss francs 405 428 —    U.K. pounds — — 499    Other — — 25  Total interest rate swap contracts $1,219 $1,360 $   874  The 1995 U.K. pound currency and interest rate swaps related to a sale-and-repurchase financing agreement (see section C of this note) and effectively converted fixed rate U.K. pound debt to U.S. dollar variable rate debt. These contracts were terminated in December 1996 when the debt was repaid. The Japanese yen and Swiss franc interest rate swaps effectively fixed the interest rate on floating rate debt as follows: the Japanese yen debt at 1.4% in 1997, 0.7% in 1996 and 1.3% in 1995 the Swiss franc debt at 2.1% in 1997 and 1996 The floating interest rates were based on “LIBOR” rates related to the contract currencies. The contracts outstanding at December 31, 1996 matured in December 1997. E — Fair Value The following methods and assumptions were used to estimate the fair value of derivative and other financial instruments at the balance sheet date: short-term financial instruments (cash equivalents, accounts receivable and payable, forward-exchange contracts, short-term investments and borrowings) — cost approximates fair value because of the short maturity period loans — cost approximates fair value because of the short interest reset period long-term investments, long-term debt, forward-exchange contracts and purchased currency options — fair value is based on market or dealer quotes interest rate and currency swap agreements — fair value is based on estimated cost to terminate the agreements (taking into account broker quotes, current interest rates and the counterparties’ creditworthiness) The differences between fair and carrying values were not material at December 31, 1997, 1996 or 1995. F — Credit Risk We periodically review the creditworthiness of counterparties to foreign exchange and interest rate agreements and do not expect to incur a loss from failure of any counterparties to perform under the agreements. In general, there is no requirement for collateral from customers. There are no significant concentrations of credit risk related to our financial instruments.

	Advisory Information for Investors
	Copyright © 1997, 1998 Pfizer Inc All rights reserved.