<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 1999 Commission file number: 1-3285
MINNESOTA MINING AND MANUFACTURING COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No. 41-0417775
Executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (651) 733-1110
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X . No .
On June 30, 1999, there were 402,746,806 shares of the
Registrant's common stock outstanding.
This document contains 31 pages.
The exhibit index is set forth on page 28.
<PAGE> 2
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
PART I. Financial Information
Consolidated Statement of Income
(Amounts in millions, except per-share amounts)
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $3,863 $3,770 $7,639 $7,470
Operating expenses
Cost of goods sold 2,188 2,162 4,350 4,258
Selling, general and
administrative expenses 871 967 1,836 1,891
Total 3,059 3,129 6,186 6,149
Operating income 804 641 1,453 1,321
Other income and expense
Interest expense 26 35 57 69
Investment and other
income - net (7) (11) (15) (22)
Total 19 24 42 47
Income before income taxes
and minority interest 785 617 1,411 1,274
Provision for income taxes 291 219 516 456
Minority interest 18 12 35 32
Net income $ 476 $ 386 $ 860 $ 786
Weighted average common
shares outstanding 403.2 404.3 402.8 404.3
Earnings per share - basic $ 1.18 $ .95 $ 2.14 $ 1.94
Weighted average common
and common equivalent
shares outstanding 407.4 410.0 406.5 409.8
Earnings per share - diluted $ 1.17 $ .94 $2.12 $1.92
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 3
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 258 $ 211
Other securities 217 237
Accounts receivable - net 2,712 2,666
Inventories
Finished goods 1,062 1,161
Work in process 536 613
Raw materials and supplies 423 445
Total inventories 2,021 2,219
Other current assets 1,030 985
Total current assets 6,238 6,318
Investments 357 623
Property, plant and equipment 13,216 13,397
Less accumulated depreciation (7,818) (7,831)
Property, plant and equipment - net 5,398 5,566
Other assets 1,374 1,646
Total $13,367 $14,153
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 885 $ 868
Payroll 397 487
Income taxes 596 261
Short-term debt 748 1,492
Other current liabilities 1,054 1,278
Total current liabilities 3,680 4,386
Other liabilities 1,961 2,217
Long-term debt 1,553 1,614
Stockholders' equity
Common stock, $.50 par value,
472,016,528 shares issued 236 236
Capital in excess of par value 60 60
Retained earnings 10,330 9,980
Treasury stock, at cost (3,446) (3,482)
June 30, 1999: 69,269,722 shares
December 31, 1998: 70,092,280 shares
Unearned compensation - ESOP (337) (350)
Accumulated other comprehensive income
Cumulative translation - net (728) (518)
Debt and equity securities,
unrealized gain - net 58 10
Total accumulated other comprehensive income (670) (508)
Stockholders' equity - net 6,173 5,936
Total $13,367 $14,153
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 4
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
(Unaudited)
<CAPTION>
Six months ended
June 30
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 860 $ 786
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 449 427
Implant litigation - net 57 (185)
Working capital and other changes - net 347 (261)
Net cash provided by operating activities 1,713 767
Cash Flows from Investing Activities
Capital expenditures (513) (712)
Proceeds from divestitures 203 7
Other changes - net (43) (63)
Net cash used in investing activities (353) (768)
Cash Flows from Financing Activities
Change in short-term debt - net (694) 269
Repayment of long-term debt (105) (22)
Proceeds from long-term debt 1 336
Purchases of treasury stock (223) (377)
Reissuances of treasury stock 200 213
Payment of dividends (452) (445)
Other (9) (19)
Net cash used in financing activities (1,282) (45)
Effect of exchange rate changes on cash (31) 35
Net increase (decrease) in cash and cash equivalents 47 (11)
Cash and cash equivalents at beginning of year 211 230
Cash and cash equivalents at end of period $ 258 $ 219
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 5
Minnesota Mining and Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The interim consolidated financial statements are unaudited but, in
the opinion of management, reflect all adjustments necessary for a
fair presentation of financial position, results of operations and
cash flows for the periods presented. These adjustments consist of
normal, recurring items, except for one-time items in the second
quarter of 1999 relating to gains on divestitures, net of an
investment valuation adjustment. The results of operations for any
interim period are not necessarily indicative of results for the full
year. The interim consolidated financial statements and notes are
presented as permitted by the requirements for Form 10-Q and do not
contain certain information included in the company's annual
consolidated financial statements and notes. This Form 10-Q should
be read in conjunction with the company's consolidated financial
statements and notes included in its 1998 Annual Report on Form 10-K.
Divestitures:
On June 30, 1999, the company closed on the sale of Eastern Heights
Bank, a subsidiary banking operation, and the sale of the assets of
its Cardiovascular Systems business. These divestitures generated
cash proceeds of $203 million, and net of an investment valuation
adjustment, resulted in a pre-tax gain of $104 million ($55 million
after tax). This pre-tax gain is recorded as a reduction of selling,
general and administrative expenses.
Restructuring Charge:
In 1998, the company recorded a restructuring charge of $493 million
($313 million after tax), which is discussed in the 1998 Form 10-K.
During the six months ended June 30, 1999, the company terminated
1,337 employees under the plan. Because certain employees can defer
receipt of termination benefits for up to 12 months, cash payments
relate to both current and previous terminations. The remaining
restructuring liability as of June 30, 1999, totaled $127 million.
Selected information relating to the restructuring charge follows.
<TABLE>
<CAPTION>
Restructuring Employee
Information Termination
(Millions) Benefits Other Total
<S> <C> <C> <C>
Restructuring liability as of
December 31, 1998 $232 $32 $264
1999 cash payments
First quarter (65) (1) (66)
Second quarter (69) (2) (71)
Restructuring liability as of
June 30, 1999 $ 98 $29 $127
</TABLE>
<PAGE> 6
Business Segments:
In the second quarter of 1999, the company reorganized its management
reporting structure by separating the Industrial and Consumer business
into two markets: Industrial and Electro; and Consumer and Office.
Prior period amounts have been restated for this change.
3M net sales and operating income by segment for the first two
quarters of 1999 and 1998 follow. Second quarter 1999 operating
income includes one-time net gains of $30 million in Health Care and
$74 million in Corporate and Unallocated.
<TABLE>
<CAPTION>
Business Transportation,
Segment Industrial Consumer Safety and Corporate
Information and and Specialty Health and Total
(Millions) Electro Office Material Care Unallocated Company
<S> <C> <C> <C> <C> <C> <C>
Net sales
Second quarter 1999 $1,321 $ 638 $1,098 $793 $13 $3,863
Second quarter 1998 1,282 625 1,059 784 20 3,770
First quarter 1999 1,284 638 1,069 768 17 3,776
First quarter 1998 1,287 619 1,017 759 18 3,700
Operating income
Second quarter 1999 $ 246 $ 98 $ 233 $196 $31 * $ 804
Second quarter 1998 208 87 200 143 3 * 641
First quarter 1999 232 89 205 145 (22)* 649
First quarter 1998 224 90 192 151 23 * 680
</TABLE>
Due to the change in number of segments, total year 1998, 1997 and
1996 sales and operating income have been restated as follows.
<TABLE>
<CAPTION>
Business Transportation,
Segment Industrial Consumer Safety and Corporate
Information and and Specialty Health and Total
(Millions) Electro Office Material Care Unallocated Company
<S> <S> <C> <C> <C> <C> <C> <C>
Net sales 1998 $5,101 $2,613 $4,126 $3,086 $ 95 $15,021
1997 5,158 2,616 4,202 3,004 90 15,070
1996 4,905 2,472 3,896 2,897 66 14,236
Operating 1998 $ 825 $ 398 $ 719 $ 571 $(474)* $ 2,039
income 1997 871 438 774 521 71 * 2,675
1996 769 425 778 545 (26)* 2,491
Assets** 1998 $3,571 $1,614 $3,764 $2,168 $3,036 $14,153
1997 3,469 1,561 3,296 2,042 2,870 13,238
1996 3,285 1,486 3,129 2,012 3,452 13,364
Depreciation 1998 $ 310 $ 136 $ 236 $ 161 $ 23 $ 866
and 1997 300 105 261 183 21 870
amortization 1996 321 104 270 160 28 883
Capital 1998 $ 498 $ 178 $ 517 $ 221 $ 16 $ 1,430
expenditures 1997 450 131 563 217 45 1,406
1996 309 121 445 216 18 1,109
<FN>
<F1>
*Corporate and Unallocated operating income principally includes
corporate investment gains and losses, certain derivative gains and
losses, insurance-related gains and losses, banking operations
(divested June 30, 1999), restructuring charges and other
miscellaneous items. Since this category includes a variety of
miscellaneous items, it is subject to fluctuation on a quarterly and
annual basis. Operating income for 1998 includes a $493 million
restructuring charge.
<F2>
**Segment assets primarily include accounts receivable; inventory;
property, plant and equipment - net; and other miscellaneous assets.
Assets included in Corporate and Unallocated principally are cash
and cash equivalents; other securities; insurance receivables;
deferred income taxes; certain investments and other assets; and
certain unallocated property, plant and equipment.
</FN>
</TABLE>
<PAGE> 7
Comprehensive Income:
The components of total comprehensive income are shown below.
<TABLE>
<CAPTION>
Total Comprehensive Income Three months ended Six months ended
June 30, June 30,
(Millions) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 476 $ 386 $ 860 $ 786
Other comprehensive income
Cumulative translation - net $ (26) $ (35) $(210) $ (77)
Debt and equity securities,
unrealized gain - net 37 1 48 --
Total comprehensive income $ 487 $ 352 $ 698 $ 709
</TABLE>
Earnings Per Share:
The difference in the weighted average shares outstanding for
calculating basic and diluted earnings per share is attributable to
the assumed exercise of the Management Stock Ownership Program (MSOP)
stock options for the three-month and six-month periods ended June
30, 1999 and 1998. Certain MSOP options were not included in the
computation of diluted earnings per share because they would not have
had a dilutive effect (16 million shares of common stock which were
outstanding at June 30, 1999, at an average price of about $93.00).
Other:
Discussion of legal matters is cross-referenced to this Form 10-Q,
Part II, Item 1, Legal Proceedings, and should be considered an
integral part of the interim consolidated financial statements.
PricewaterhouseCoopers LLP, the company's independent auditors, have
performed a review of the unaudited interim consolidated financial
statements included herein, and their review report thereon
accompanies this filing.
<PAGE> 8
Review Report of Independent Auditors
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
We have reviewed the accompanying consolidated balance sheet of
Minnesota Mining and Manufacturing Company and Subsidiaries as of
June 30, 1999, and the related consolidated statements of income for
the three-month and six-month periods ended June 30, 1999 and 1998,
and cash flows for the six-month periods ended June 30, 1999 and
1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, 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 consolidated financial statements referred
to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1998, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for the
year then ended (not presented herein); and in our report dated
February 8, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information
set forth in the accompanying consolidated balance sheet as of
December 31, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
August 4, 1999
<PAGE> 9
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Second Quarter
Worldwide sales for the second quarter totaled $3.863 billion, up 2.5
percent from the second quarter last year. Volume increased about
3.5 percent, while selling prices were up about half a percent.
Currency translation reduced worldwide sales by about 1.5 percent.
Currency, while positive in the Asia Pacific area, was negative in
Europe and Latin America.
In the United States, sales increased about 1 percent to $1.853
billion. Volume was up 2 percent, while selling prices were down
about 1 percent. The Industrial and Consumer business recently was
separated into two markets: Industrial and Electro Markets, and
Consumer and Office Markets. In Consumer and Office Markets, U.S.
unit sales increased 7 percent from the same quarter last year. All
major product lines, with the exception of overhead projectors and
supplies, registered solid growth. In Industrial and Electro Markets,
U.S. volume rose 3 percent. The company had strong growth in
telecommunications products and a pickup in sales of industrial
tapes. Overall growth was restrained by market softness in industrial
abrasives. In Transportation, Safety and Specialty Material Markets,
U.S. volume also increased 3 percent. Leading the growth in this
business area were 3M products serving the automotive and housing
industries. In Health Care Markets, U.S. unit sales declined about
1.5 percent. The company continued to see good growth in dental
products and health information systems, but the introduction of
generic alternatives to a branded 3M analgesic continued to affect
our overall U.S. health care growth.
Internationally, sales totaled $2.010 billion. Volume abroad
increased about 4.5 percent, while selling prices were up nearly 2
percent. Currency translation reduced international sales by about 3
percent. European volume, impacted by economic softness, increased a
little more than 2 percent. In Eastern Europe, unit sales increased
6 percent. In the Asia Pacific area, volume increased about 11
percent, the company's fastest growth in six quarters. Dollar sales
in the Asia Pacific area increased about 20 percent. In Japan, unit
sales rose more than 6 percent, despite continuing economic weakness.
In Asia outside Japan, volume rose about 19 percent, an acceleration
in the growth 3M posted in this year's first quarter. In Latin
America, volume was down about 3 percent, due to softness in
Argentina, Brazil and Venezuela. Mexico continued to be a bright
spot, with unit sales increasing about 20 percent. In Canada, volume
increased about 5 percent.
Worldwide, all market segments showed sales and operating income
growth. Sales growth was led by increases in telecommunication
products, products serving the automotive and housing industries,
dental products, and health information systems. Growth was
<PAGE> 10
restrained by soft sales in overhead projectors and supplies, market
softness in industrial abrasives, and was hurt by declines in
pharmaceuticals.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.6 percent of sales, down eight-
tenths of a percentage point from the second quarter last year, and
down seven-tenths of a percentage point from the first quarter this
year. Gross margins benefited from lower raw material costs and the
company's restructuring actions.
In the second quarter of 1999, the company realized a net gain for
one-time pre-tax items of $104 million ($55 million after tax).
These items related to gains on the divestitures of two businesses,
net of an investment valuation adjustment. This pre-tax gain was
recorded as a reduction of selling, general and administrative
expenses. The impact of this net gain on 3M's Consolidated Statement
of Income follows.
<TABLE>
Supplemental Consolidated Statement of Income Information (Unaudited)
Three months ended June 30, 1999
(Millions, except per-share amounts)
<CAPTION>
Excluding
one-time One-time Reported
items items total
<S> <C> <C> <C>
Operating income $ 700 $ 104 $ 804
Other income and expense 19 -- 19
Income before income taxes
and minority interest $ 681 $ 104 $ 785
Provision for income taxes 242 49 291
Effective tax rate 35.5% 46.9% 37.0%
Minority interest 18 -- 18
Net income $ 421 $ 55 $ 476
Earnings per share - diluted $1.03 $ .14 $1.17
</TABLE>
Selling, general and administrative expenses were 22.6 percent of
sales. Excluding one-time items, this spending totaled 25.3 percent
of sales, down three-tenths of a percentage point from the same
quarter last year, and down two-tenths of a percentage point from
this year's first quarter. This spending benefited from productivity
gains stemming from restructuring actions, and by continued spending
discipline.
Worldwide operating income was 20.8 percent of sales. Excluding one-
time items, operating income was 18.1 percent, up 1.1 percentage
points from the second quarter last year. In dollars, operating
income, excluding one-time items, increased 9.0 percent from the same
quarter last year.
Second-quarter interest expense of $26 million was down $9 million
from the same quarter last year, reflecting lower debt levels. Net
investment and other income was $7 million, in line with recent
quarters.
<PAGE> 11
Excluding one-time items, the worldwide effective income tax rate for
the quarter was 35.5 percent, the same as in the second quarter last
year. Including one-time items, the total 3M combined effective tax
rate was 37.0 percent for the second quarter of 1999.
Net income for the second quarter of 1999 totaled $476 million, or
$1.17 per diluted share. Excluding 1999 one-time items, net income
totaled $421 million, or $1.03 per diluted share, compared with $386
million, or $.94 per diluted share, in the second quarter of 1998.
The company estimates that changes in the value of the U.S. dollar
decreased earnings for the quarter by about 2 cents per share
compared with the second quarter of 1998. This estimate includes the
effect of translating profits from local currencies into U.S.
dollars; the impact of currency fluctuations on the transfer of goods
between 3M operations in the United States and abroad; and
transaction gains and losses.
Year-to-date
Worldwide sales for the first six months of 1999 totaled $7.639
billion, up 2.3 percent from the same period last year. Volume
increased about 3 percent, while selling prices were up slightly.
Currency translation reduced worldwide sales by about 1 percent.
In the United States, sales increased about 2 percent to $3.621
billion, driven by volume increases. Internationally, sales totaled
$4.018 billion. Volume abroad increased about 3 percent, while
selling prices were up about 2 percent, resulting in overall local-
currency sales gains of about 5 percent. Currency translation reduced
international sales by about 2 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.9 percent of sales, down
slightly from the first six months of last year. Gross margins
benefited from lower raw material costs and the company's
restructuring actions.
As discussed earlier, in the second quarter of 1999 the company
realized a net gain for one-time items of $104 million ($55 million
after tax). The impact of this net gain on 3M's Consolidated
Statement of Income follows.
<PAGE> 12
<TABLE>
Supplemental Consolidated Statement of Income Information (Unaudited)
Six months ended June 30, 1999
(Millions, except per-share amounts)
<CAPTION>
Excluding
one-time One-time Reported
items items total
<S> <C> <C> <C>
Operating income $1,349 $ 104 $1,453
Other income and expense 42 -- 42
Income before income taxes
and minority interest $1,307 $ 104 $1,411
Provision for income taxes 467 49 516
Effective tax rate 35.7% 46.9% 36.6%
Minority interest 35 -- 35
Net income $ 805 $ 55 $ 860
Earnings per share - diluted $1.98 $ .14 $ 2.12
</TABLE>
Selling, general and administrative expenses were 24.1 percent of
sales. Excluding one-time items, this spending totaled 25.4 percent
of sales, up slightly from the same period last year.
Worldwide operating income was 19.0 percent of sales. Excluding one-
time items, operating income was 17.7 percent, the same as in the
first six months last year. In dollars, operating income, excluding
one-time items, increased 2.1 percent from the same period last year.
The first six months interest expense of $57 million was down $12
million from the same period last year, reflecting lower debt levels.
Net investment and other income was $15 million, in line with recent
trends.
Excluding one-time items, the worldwide effective income tax rate for
the first six months of 1999 was 35.7 percent, essentially unchanged
from the same period last year. Including one-time items, the total
3M combined effective tax rate was 36.6 percent for the first six
months of 1999.
Net income for the first six months of 1999 totaled $860 million, or
$2.12 per diluted share. Excluding 1999 one-time items, net income
totaled $805 million, or $1.98 per diluted share, compared with $786
million, or $1.92 per diluted share, in the first half of 1998. The
company estimates that changes in the value of the U.S. dollar
decreased earnings for the first six months of 1999 by about 4 cents
per share compared with the same period of 1998.
FUTURE OUTLOOK
The company encountered a difficult set of challenges in 1998 - large
negative currency effects, economic contractions in many
international markets, and softness in a few key U.S. markets. To
improve productivity and reduce costs, the company is exiting certain
product lines, consolidating manufacturing operations, and
eliminating lower-value activities in corporate service functions.
Relating to these actions, the company recorded a restructuring
charge in the second half of 1998. This charge is discussed in the
1998 Form 10-K.
<PAGE> 13
The company announced in mid-1998, as part of its restructuring plan,
its intent to reduce about 4,500 positions by December 31, 1999. As
of July 29, 1999, employment has declined approximately 5,000 people
due to both the restructuring and attrition.
When fully implemented by the end of 1999, the restructuring plan is
expected to provide annual pre-tax savings of about $250 million. The
company anticipates implementation costs associated with this
restructuring plan to be about $35 million in 1999. These costs, not
included in the 1998 restructuring charge, include expenses for
relocating employees, inventory and equipment; unfavorable overhead
variances; and other expenses. If the company does not generate
adequate sales growth, normal increases in salaries and wages and
additional depreciation from capital expenditures will create offsets
to the annual savings.
In the second half of 1999, the company expects to increase
international sales in local currencies about 7 to 8 percent. In the
Asia Pacific area, the company expects to register double-digit local-
currency sales gains, driven by demand for new 3M products and
by gradually improving Asian economies. In Europe, the company
expects a slight acceleration in growth, with sales in local
currencies increasing about 4 to 5 percent. In Latin America, sales
in local currencies are expected to increase at a double-digit rate
in the second half of the year. Sales are expected to grow 3 to 4
percent in the United States.
The company is not able to project what the consequences will be from
the dynamic economies around the world. The company is monitoring
business conditions closely and is prepared to make adjustments in
costs, pricing and investments as appropriate.
Based on currency rates as of July 29, 1999, the company estimates
that currency would negatively impact second half earnings by less
than 5 cents per share.
Capital spending totaled $1.430 billion in 1998, and is expected to
total $1.1 billion for 1999. Excluding one-time items, the company
does not expect a significant change in its tax rate in 1999.
YEAR 2000 READINESS
The Year 2000 issue is the result of using only the last two digits
to indicate the year in computer hardware and software programs and
embedded technology such as micro-controllers. As a result, these
programs do not properly recognize a year that begins with "20"
instead of the familiar "19." If uncorrected, such programs will be
unable to interpret dates beyond the year 1999, which could cause
computer system failure or other errors disrupting normal business
operations.
<PAGE> 14
The company recognizes the importance of readiness for the Year 2000
and has given it high priority. In November 1996, the company
created a corporate-wide Year 2000 project team representing all
company business and staff units. The team's objective is to ensure
an uninterrupted transition to the year 2000 by assessing, testing
and modifying IT and non-IT systems (defined below) and date-
sensitive company products so that (a) they will perform as intended,
regardless of the date (before, during and after December 31, 1999),
and (b) dates (before, during and after December 31, 1999 and
including February 29, 2000) can be processed with expected results
("Year 2000 Compliant"). The scope of the Year 2000 compliance effort
includes (i) information technology ("IT") such as software and
hardware; (ii) non-IT systems or embedded technology such as micro-
controllers contained in various manufacturing and laboratory
equipment; environmental and safety systems, facilities and
utilities, (iii) date-sensitive company products; and (iv) the
readiness of key third parties, including suppliers and customers,
with whom the company has material business relationships.
The Year 2000 project team has taken an inventory of IT and non-IT
systems and date-sensitive company products that might malfunction or
fail as a result of using only the last two digits to indicate the
year. The project teams then categorized the potential date component
failures into three categories: "Vital" (stops the business operation
and no short-term solution is available); "Critical" (inconvenient to
the business operation and a short-term solution is available); and
"Marginal" (inconsequential to the business operation).
IT Systems - The company is using both internal and external
resources to remediate and test millions of lines of application
software code. As of June 30, 1999, approximately (i) 98 percent of
the core central IT application systems (e.g., general ledger,
payroll, procurement and order management), (ii) 95 percent of
central IT infrastructure systems (e.g., telecommunications,
electronic mail, databases, data centers, and system software), and
(iii) 94 percent of the other IT systems (e.g., systems that support
business and staff organizations) located in the United States that
are deemed "Vital" or "Critical" are believed to be Year 2000
Compliant. As of June 30, 1999, approximately 99 percent of the IT
systems in subsidiaries outside the United States that are deemed
"Vital" or "Critical" are believed to be Year 2000 Compliant.
Non-IT Systems - The company has more than 100 manufacturing and
laboratory locations worldwide with varying degrees of non-IT systems
(such as programmable logic controllers, gauging guidance and
adjustment systems and testing equipment). Assessment and testing of
non-IT systems for Year 2000 compliance has proven much more
difficult than assessing compliance of IT systems because testing of
non-IT systems often requires shutdown of the manufacturing
operations.
<PAGE> 15
As a result, the company has approached assessment and testing of non-
IT systems that are common to many of the company's facilities by (i)
contacting the suppliers of these non-IT systems and obtaining
statements that the systems are Year 2000 Compliant, and (ii) testing
components of non-IT systems when they are shut down for normal
maintenance. The company has also shut down manufacturing lines in
three of its facilities and tested non-IT systems that are common to
many of the company's facilities. These tests demonstrate that "time
intervals" instead of "dates" are used almost exclusively in these
non-IT systems and support the company's belief that potential
disruptions of such systems due to the Year 2000 issue should be
minimal.
As of June 30, 1999, approximately 96 percent of the non-IT systems
located in the United States that are deemed "Vital" or "Critical"
and approximately 99 percent of the non-IT systems in subsidiaries
outside the United States that are deemed "Vital" or "Critical" are
believed to be Year 2000 Compliant.
Company Products - The vast majority of the company's products are
not date-sensitive. The company has collected information on current
and discontinued date-sensitive products. The company's website
(http://www.3M.com) contains a section dedicated to communicating
year 2000 information to its customers. This website includes a
search feature to enable customers to determine whether certain 3M
products are Year 2000 compliant.
Material Third Party Relationships - In addition to internal Year
2000 IT and non-IT remediation activities, the company is in contact
with key suppliers, contract manufacturers and electronic commerce
customers to minimize potential disruptions in the relationships
between the company and these important third parties related to the
Year 2000 issue. The assessment process includes (i) initial survey,
(ii) risk assessment and contingency planning, and (iii) follow-up
reviews.
The company has also categorized supplies purchased from vendors into
three categories: "Vital" (disruption of supply stops the business
operation and no short-term solution is available); "Critical"
(disruption of supply is inconvenient to the business operation and a
short-term solution is available); and "Marginal" (disruption of
supply is inconsequential to the business operation). The company has
focused its efforts on those vendors that supply goods or services
deemed "Vital" to the company's business. The company has received
responses to its initial year 2000 readiness survey from most of its
Vital suppliers indicating that the suppliers are working on the year
2000 issue. While the company cannot guarantee compliance by third
parties, the company has developed contingency plans with its key
suppliers that includes the availability of appropriate inventories
of supplies in the event the supplier is not Year 2000 Compliant.
<PAGE> 16
As with suppliers, the readiness of customers to deal with year 2000
issues may affect their operations and their ability to order and pay
for products. Certain business units of the company have surveyed
their major direct customers about their year 2000 readiness in
critical areas of their operations. The responses have been generally
positive in favor of readiness. The company cannot determine at this
time how year 2000 issues may affect customer order patterns. As
customers prepare their businesses for the year 2000, they may either
delay or accelerate purchases of products from the company. As a
result, changes in customer order patterns in preparation for the
year 2000 may affect the company's future revenues and revenue
patterns. At this time, the company believes the greatest likelihood
of accelerated purchases of products is in the Health Care segment.
In other segments, early indications are that most customers are not
building inventories in anticipation of the year 2000.
Risks and Worst Case Scenarios - The company believes that its most
reasonably likely worst case scenarios regarding the year 2000 issue
involve the IT and non-IT systems of third parties rather than the IT
and non-IT systems and products of the company. Because the company
has far less control over assessing the year 2000 readiness of
certain third parties, the company believes the risks are greatest
with suppliers of electrical, telecommunications, and transportation
services, particularly suppliers of such services located outside the
United States. Contingency planning regarding the failure of such
services involves maintaining appropriate inventories of key raw
materials and products.
Contingency Planning - The company is preparing contingency plans
specifying what the company will do if failures occur in IT and non-
IT systems, or important third parties are not Year 2000 Compliant.
The process includes identifying and prioritizing risks, assessing
the business impact of those risks, creating notification procedures,
and preparing written contingency plans for those failures with the
greatest risk to the company. As of June 30, 1999, the company's
contingency plans were 90% complete for its IT and non-IT systems and
other high risk areas and 100% complete for its key suppliers.
Costs - Since inception of the company's efforts on the year 2000
issue through June 30, 1999, the company had spent approximately $60
million out of a total estimate of $76 million related to the Year
2000 readiness issue. These costs include the costs incurred for
external consultants and professional advisors and the costs for
software and hardware. The company's process for tracking internal
costs does not capture all of the costs incurred for each of the
teams working on the Year 2000 project. Such internal costs are
principally the related payroll costs for its information systems
group and other employees working on the Year 2000 project. The
company is expensing as incurred all costs related to the assessment
and remediation of the Year 2000 issue. These costs are being funded
through operating cash flows.
<PAGE> 17
The company's current estimates of the time and costs necessary to
remediate and test its computer systems are based on the facts and
circumstances existing at this time. The estimates were made using
assumptions of future events, including the continued availability of
certain resources, such as skilled IT personnel and infrastructure
(e.g., electrical supply and water and sewer service);
telecommunications, transportation supply chains, critical suppliers
of materials; and Year 2000 modification plans and implementation
success by key third-parties. New developments could affect the
company's estimates of the amount of time and costs needed to modify
and test its IT and non-IT systems for Year 2000 compliance and,
depending on the year 2000 readiness of certain third parties, could
affect the company's ability to conduct its business. These
developments include, but are not limited to: (i) the availability
and cost of personnel trained in this area; (ii) the ability to
locate and correct all relevant date-sensitive code in both IT and
non-IT systems; (iii) unanticipated failures in IT and non-IT
systems; (iv) the planning and Year 2000 compliance success that key
customers and suppliers attain; (v) failure or collapse of
infrastructure (e.g., disruptions of electrical supply and water and
sewer service), telecommunications, transportation supply chains, and
critical suppliers of materials, particularly those suppliers of such
services and goods located outside the United States; and (vi)
unforeseen product shortages due to hoarding of critical raw
materials.
The company cannot determine the impact of these potential
developments on the current estimate of probable costs of making its
products and IT and non-IT systems Year 2000 Compliant or the
financial impact on the company. Accordingly, the company is not able
to estimate possible future costs beyond the current estimates. As
new developments occur, these cost estimates may be revised to
reflect the impact of these developments on the costs to the company
of making its products and IT and non-IT systems Year 2000 Compliant.
Such cost revisions could have a material adverse impact on the
company's net income in the quarterly period in which they are
recorded. Although the company considers it unlikely, such revisions
could also have a material adverse effect on the consolidated
financial position or annual results of operations of the company.
Various of the company's disclosures and announcements concerning its
products and year 2000 programs are intended to constitute "Year 2000
Readiness Disclosures" as defined in the recently enacted Year 2000
Information and Readiness Disclosure Act. The Act provides added
protection from liability for certain public and private statements
concerning an entity's year 2000 readiness and the year 2000
readiness of its products and services. The Act also potentially
provides added protection from liability for certain types of year
2000 disclosures made after January 1, 1996 and before the date of
enactment of the Act.
<PAGE> 18
THE EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European
Union (EU) established fixed conversion rates through the European
Central Bank (ECB) between existing local currencies and the euro,
the EU's new single currency. The participating countries had agreed
to adopt the euro as their common legal currency on that date. From
that date, the euro has been traded on currency exchanges and
available for non-cash transactions.
Following introduction of the euro, local currencies will remain
legal tender until December 31, 2001. During this transition period,
goods and services may be paid for with the euro or the local
currency under the EU's "no compulsion, no prohibition" principle. If
cross-border payments are made in a local currency during this
transition period, the amount will be converted into euros and then
converted from euros into the second local currency at rates fixed by
the ECB. The participating countries will issue new euro-denominated
bills and coins for use in cash transactions at about December 31,
2001. By no later than July 1, 2002, participating countries will
withdraw all bills and coins denominated in local currencies, making
the euro conversion complete.
In February 1997, the company created a European Monetary Union (EMU)
Steering Committee and project teams representing all company
business and staff units in Europe. The common objective of these
teams is to ensure a smooth transition to EMU for the company and its
constituencies. The scope of the teams' efforts includes (i)
assessing the euro's impact on the company's business and pricing
strategies for customers and suppliers, and (ii) ensuring that the
company's business processes and information technology (IT) systems
can process transactions in euros and local currencies during the
transition period and achieve the conversion of all relevant local
currency data to the euro by December 31, 2001, in the participating
countries.
The European market contributed 26 percent of consolidated sales and
20 percent of consolidated operating income, excluding the
restructuring charge, in 1998. The participating countries accounted
for 79 percent of the company's sales in the European market in 1998.
The company believes that the euro will, over time, increase price
competition for the company's products across Europe due to cross-
border price transparency. The company also believes that the adverse
effects of increased price competition will be offset somewhat by new
business opportunities and efficiencies. The company, however, is not
able to estimate the anticipated net long-term impact of the euro
introduction on the company.
The company has, in preparation for EMU, made significant investments
in IT systems in Europe and these investments already enable the
company to manage customer orders, invoices, payments and accounts in
euros and in local currencies according to customer needs. The
company anticipates spending approximately $35-50 million to complete
the conversion of all its IT systems in Europe to the euro by
December 31, 2001. The company is developing appropriate contingency
plans in order that the euro adoption does not jeopardize the
operations of the company.
<PAGE> 19
The euro introduction is not expected to have a material impact on
the company's overall currency risk. Although the company engages in
significant trade within the EU, the impact to date of changes in
currency exchange rates on trade within the EU has not been material.
The company anticipates the euro will simplify financial issues
related to cross-border trade in the EU and reduce the transaction
costs and administrative time necessary to manage this trade and
related risks. The company believes that the associated savings will
not be material to corporate results.
The company has derivatives outstanding beyond June 30, 1999, in
several European currencies. Under the EU's "no compulsion, no
prohibition" principle, the outstanding derivative positions will
either mature as local currency contracts or convert to euro
contracts at no additional economic cost to the company. The company
believes that systems used to monitor derivative positions can be
appropriately modified for these changes. The company believes the
impact of the euro introduction on the company's derivative positions
will not be material.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly
Report on Form 10-Q contains forward-looking statements, which
reflect the company's current views with respect to future events and
financial performance.
These forward-looking statements are subject to certain risks and
uncertainties, including those identified here, which could cause
actual results to differ materially from historical results or those
anticipated. The words "aim," "believe," "expect," "anticipate,"
"intend," "estimate," "will," "should," "could" and other expressions
that indicate future events and trends identify forward-looking
statements.
Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of
factors, including, but not limited to: foreign exchange rates and
fluctuations in those rates; the effects of, and changes in,
worldwide economic conditions; the timing and market acceptance of
new product offerings; raw materials, including shortages and
increases in the costs of key raw materials; the impact of the Year
2000 issue; and legal proceedings (see discussion of Legal
Proceedings in Part II, Item 1 of this Form 10-Q).
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital increased $626 million to $2.558 billion at June 30,
1999, compared with $1.932 billion at year-end 1998. The company's
key inventory index was 3.2 months, down from 3.4 months at year-end.
The accounts receivable average days' sales outstanding was 59 days,
down slightly from year-end. The company's current ratio was 1.7, up
from 1.4 at year-end.
<PAGE> 20
Total debt decreased $805 million from year-end 1998 to $2.301 billion.
As of June 30, 1999, total debt was 27 percent of total capital.
The company's strong credit rating provides ready and ample access to
funds in global capital markets. At June 30, 1999, the company had
available short-term lines of credit totaling about $665 million.
Net cash provided by operating activities totaled $1.713 billion in
the first six months of the year, up $946 million from the same
period last year. The first six months of 1999 was helped by good
working capital management. Inventories declined about $450 million,
or 18 percent, compared to June 30, 1998. Working capital and other
changes in 1999 include a $134 million use of cash for the impact of
employee termination benefits paid in connection with restructuring
activities. Net cash inflows from mammary implant litigation were $57
million in the first six months of 1999, compared with $185 million
in net cash outflows in the same period last year.
Timing differences between payment of implant liabilities and receipt
of related insurance recoveries could affect the cash flows of future
periods. This is discussed in Part II, Item 1, Legal Proceedings, of
this Form 10-Q.
Cash used in investing activities was $353 million in the first six
months of the year, compared with $768 million in the same period
last year. Capital expenditures for the first six months of 1999 were
$513 million, a decrease of about 28 percent compared with the same
period last year. The company received cash proceeds in the second
quarter of 1999 of $203 million relating to its divestitures of
Eastern Heights Bank and the Cardiovascular Systems business.
Treasury stock repurchases for the first six months of 1999 were $223
million, compared with repurchases in the same period last year of
$377 million. Financing activities in the first six months of 1999
for both short-term and long-term debt included net cash outflows of
$798 million, compared with net cash inflows of $583 million in the
same period last year.
The company repurchased about 2.6 million shares of common stock in
the first six months of 1999, compared with 4.2 million shares in the
same period last year. In February 1999, the Board of Directors
authorized the repurchase of up to 12 million shares of 3M common
stock through December 31, 1999. As of June 30, 1999, 9.6 million
shares remained authorized for repurchase. Stock repurchases are
made to support employee stock purchase plans and for other corporate
purposes.
Cash dividends paid to shareholders totaled $452 million in the first
six months of this year, compared with $445 million in the same
period last year. In February 1999, the quarterly dividend was
increased to 56 cents a share.
Legal proceedings are discussed in the Legal Proceedings section in
Part II, Item 1, of this Form 10-Q.
<PAGE 21>
Minnesota Mining and Manufacturing Company and Subsidiaries
PART II. Other Information
Item 1. Legal Proceedings
The company and certain of its subsidiaries are named as defendants
in a number of actions, governmental proceedings and claims,
including environmental proceedings and products liability claims
involving products now or formerly manufactured and sold by the
company. In some actions, the claimants seek damages as well as
other relief, which, if granted, would require substantial
expenditures. The company has accrued certain liabilities, which
represent reasonable estimates of its probable liabilities for these
matters. The company also has recorded receivables for the probable
amount of insurance recoverable with respect to these matters.
Some of these matters raise difficult and complex factual and legal
issues, and are subject to many uncertainties, including, but not
limited to, the facts and circumstances of each particular action,
the jurisdiction and forum in which each action is proceeding and
differences in applicable law. Accordingly, the company is not always
able to estimate the amount of its possible future liabilities with
respect to such matters.
There can be no certainty that the company may not ultimately incur
charges, whether for governmental proceedings and claims, products
liability claims, environmental proceedings or other actions, in
excess of presently established accruals. While such future charges
could have a material adverse impact on the company's net income in
the quarterly period in which they are recorded, the company believes
that such additional charges, if any, would not have a material
adverse effect on the consolidated financial position or annual
results of operations of the company. (NOTE: The preceding sentence
applies to all legal proceedings involving the company except the
breast implant litigation, which is discussed separately in the next
section).
Breast Implant Litigation
As of June 30, 1999, the company had been named as a defendant, often
with multiple co-defendants, in 4,631 lawsuits and 117 claims in
various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 18,054 individual claimants. It is not yet
certain how many of these lawsuits and claims involve products
manufactured and sold by the company, as opposed to other
manufacturers, or how many of these lawsuits and claims involve
individuals who accepted benefits under the Revised Settlement
Program (as defined later). The company has confirmed that
approximately 850 of the above individual claimants have opted out of
the class action and have 3M implants. The company entered the
business of manufacturing breast implants in 1977 by purchasing
McGhan Medical Corporation. In 1984, the company sold the business
to a corporation that also was named McGhan Medical Corporation.
<PAGE> 22
The typical claim or lawsuit alleges the individual's breast implants
caused one or more of a wide variety of ailments and local
complications, including, but not limited to, non-specific autoimmune
disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia,
mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis,
polymyositis and chronic fatigue.
Plaintiffs in these cases typically seek monetary damages, often in
unspecified amounts, and also may seek certain types of equitable
relief, including requiring the company to fund the costs associated
with removal of the breast implants.
A number of breast implant claims and lawsuits seek to impose
liability on the company under various theories for personal injuries
allegedly caused by breast implants manufactured and sold by
manufacturers other than the company. These manufacturers include,
but are not limited to, McGhan Medical Corporation and manufacturers
that are no longer in business or that are insolvent, whose breast
implants may or may not have been used in conjunction with implants
manufactured and sold by the company. These claims raise many
difficult and complex factual and legal issues that are subject to
many uncertainties, including the facts and circumstances of each
particular claim, the jurisdiction in which each suit is brought, and
differences in applicable law and insurance coverage.
A number of breast implant lawsuits seek to recover punitive damages.
Any punitive damages that may be awarded against the company may or
may not be covered by certain insurance policies depending on the
language of the insurance policy, applicable law and agreements with
insurers.
In addition to individual suits against the company, a class action
on behalf of all women with breast implants filed against all
manufacturers of such implants has been conditionally certified and
is pending in the United States District Court for the Northern
District of Alabama (the "Court")(DANTE, ET AL., V. DOW CORNING, ET
AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN RE: SILICONE GEL
BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala.,
MDL 926, U.S.D.C., N. Dist. Ala., CV 92-P-10000-S; now held in
abeyance pending settlement proceedings in the settlement class
action LINDSEY, ET AL., V. DOW CORNING CORPORATION, ET AL., U.S.D.C.,
N. Dist., Ala., CV 94-P-11558-S). Class actions, some of which have
been certified, are pending in various state courts, including, among
others, Louisiana, Florida and Illinois, and in the British Columbia
courts in Canada. The Louisiana state court action (SPITZFADEN, ET
AL., v. DOW CORNING CORPORATION, ET AL., Dist. Ct., Parish of
Orleans, 92-2589) has been decertified by the trial court. The
Louisiana Supreme Court has denied plaintiffs' writ for an emergency
appeal from the decertification. A normal appeal remains pending.
<PAGE> 23
The company also has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero
and through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL.,
U.S.D.C., E. Dist. NY, 93-0146.) The suit names all breast implant
manufacturers as defendants and seeks to establish a medical-
monitoring fund.
On December 22, 1995, the Court approved a revised class action
settlement program for resolution of claims seeking damages for
personal injuries from allegedly defective breast implants (the
"Revised Settlement Program"). The Revised Settlement Program is a
revision of a previous settlement pursuant to a Breast Implant
Litigation Settlement Agreement (the "Settlement Agreement") reached
on April 8, 1994, and approved by the Court on September 1, 1994.
The Court ordered that, beginning after November 30, 1995, members of
the plaintiff class may choose to participate in the Revised
Settlement Program or opt out, which would then allow them to proceed
with separate products liability actions.
The Revised Settlement Program includes domestic class members with
implants manufactured by certain manufacturer defendants, including
Baxter International, Bristol-Myers Squibb Company, the company and
McGhan Medical Corporation. The company's obligations under the
Revised Settlement Program are limited to eligible claimants with
implants manufactured by the company or its predecessors ("3M
implants") or manufactured only by McGhan Medical Corporation after
its divestiture from the company on August 3, 1984 ("Post 8/84 McGhan
implants"). With respect to claimants with only Post 8/84 McGhan
implants (or only Post 8/84 McGhan implants plus certain other
manufacturers' implants), the benefits are more limited than for
claimants with 3M implants. Post 8/84 McGhan implant benefits are
payable in fixed shares by the company, Union Carbide Corporation and
McGhan Medical Corporation. McGhan Medical Corporation has defaulted
on its fixed share obligation (which does not affect 3M's obligation
to pay its share) and has a request for a mandatory class action
recently approved by the Court.
In general, the amounts payable to individual current claimants (as
defined in the Court's order) under the Revised Settlement Program,
and the company's obligations to make those payments, are not
affected by the number of class members who have elected to opt out
of the Revised Settlement Program or the number of class members
making claims under the Revised Settlement Program. In addition to
certain miscellaneous benefits, the Revised Settlement Program
provides for two compensation options for current claimants with 3M
implants.
Under the first option, denominated as Fixed Amount Benefits, current
claimants with 3M implants who satisfy disease criteria established
in the prior Settlement Agreement will receive amounts ranging from
$5,000 to $100,000, depending on disease severity or disability
level; whether the claimant can establish that her implants have
ruptured; and whether the claimant also has had implants manufactured
<PAGE> 24
by Dow Corning. Under the second option, denominated as Long-Term
Benefits, current claimants with 3M implants who satisfy more
restrictive disease and severity criteria specified under the Revised
Settlement Program can receive benefits ranging from $37,500 to
$250,000.
In addition, current claimants with 3M implants are eligible for (a)
a one-time payment of $3,000 upon removal of 3M implants during the
course of the class settlement, and (b) an advance payment of $5,000
against the above referenced benefits upon proof of having 3M
implants and upon waiving or not timely exercising the right to opt
out of the Revised Settlement Program. Current claimants with only
Post 8/84 McGhan implants (or only Post 8/84 McGhan implants plus
certain other manufacturers' implants) are eligible only for benefits
ranging from $10,000 to $50,000.
Eligible participants with 3M implants who did not file current
claims but are able to satisfy the more restrictive disease and
severity criteria during an ongoing period of 15 years will be
eligible for the Long-Term Benefits, subject to certain funding
limitations. Such participants also will be eligible for an advance
payment of $1,000 upon proof of having 3M implants and upon waiving
or not timely exercising the right to opt out of the Revised
Settlement Program or, as an elective option expiring on June 15,
1999, a payment of $3,500 in full settlement of all breast implant
claims including any claim for Long-Term Benefits under the Revised
Settlement Program. Benefit levels for eligible participants who are
not current claimants and have only Post 8/84 McGhan implants (or
only Post 8/84 McGhan implants plus certain other manufacturers'
implants) will range from $10,000 to $50,000.
On June 10, 1998, the Court approved the terms of a settlement
program offered by Baxter International, Bristol-Myers Squibb Company
and the company to eligible foreign implant recipients (the "Foreign
Settlement Program"). Notices and claim forms were mailed on June
15, 1998. Benefits to eligible foreign claimants range from $3,500
to $50,000.
As of the date of this filing, the company believes that
approximately 90 percent of the registrants, including those
claimants who filed current claims, have elected to participate in
the Revised Settlement Program. It is still unknown as to what
disease criteria all claimants have satisfied, and what options they
have chosen. As a result, the total amount and timing of the
company's prospective payments under the Revised Settlement Program
cannot be determined with precision at this time. As of June 30,
1999, the company has paid $276 million into the court-administered
fund as a reserve against costs of claims payable by the company
under the Revised Settlement Program (including a $5 million
administrative assessment). Additional payments will be made as
necessary. Payments to date have been consistent with the company's
estimates of the total liability for these claims.
<PAGE> 25
In the first quarter of 1994, the company took a pre-tax charge of
$35 million ($22 million after tax) in recognition of its then best
estimate of its probable liabilities and associated expenses, net of
the probable amount of insurance recoverable from its carriers. In
the second quarter of 1998, the company increased its estimate of the
minimum probable liabilities and associated expenses to approximately
$1.1 billion, with an offsetting increase in the probable amount of
insurance recoveries. This amount represents the company's best
estimate of the minimum amount to cover the cost and expense of the
Revised Settlement Program and the cost and expense of resolving opt-
out claims and recovering insurance proceeds. After subtracting
payments of $1.063 billion as of June 30, 1999, for defense and other
costs and settlements with litigants and claimants, the company had
accrued liabilities of $37 million.
The company has substantial primary and excess products liability
occurrence insurance coverage and claims-made products liability
insurance coverage, which it believes provide coverage for
substantially all of its current exposure for breast implant claims
and defense costs. Most insurers have alleged reservations of rights
to deny all or part of the coverage for differing reasons, including
each insurer's obligations in relation to the other insurers (i.e.
allocation) and which claims trigger both the various occurrence and
claims-made insurance policies. Some insurers have resolved and paid,
or committed to, their policy obligations. The company believes the
failure of many insurers to voluntarily perform as promised subjects
them to the company's claims for excess liability and damages for
breach of the insurers' obligation of good faith.
On September 22, 1994, three excess coverage occurrence insurers
initiated in the courts of the State of Minnesota a declaratory
judgment action against the company and numerous insurance carriers
seeking adjudication of certain coverage issues and allocation among
insurers. On December 9, 1994, the company initiated an action
against its occurrence insurers in the Texas State Court in and for
Harrison County, seeking a determination of responsibility among the
company's various occurrence insurers with applicable coverages. The
state of Texas has the most implant claims. This action has since
been removed to the U.S. District Court, Eastern District of Texas,
and stayed pending resolution of the litigation in the Minnesota
courts.
The insurers that are parties to these actions generally acknowledge
that they issued products liability insurance to the company and that
breast implant claims are products liability claims. The trial in
Minnesota to resolve the company's insurance coverage and the
financial responsibility of occurrence insurers for breast implant
claims and defense costs began on June 4, 1996, and is continuing in
phases. The most recent phase was completed on July 15, 1999.
<PAGE> 26
In mid-October 1995, the occurrence insurers that are parties to the
litigation in Minnesota filed more than 30 motions for summary
judgment or partial summary judgment. The insurers, through these
motions, attempted to shift all or a portion of the responsibility
for those claims the company believes fall within the period of
occurrence-based coverage (before 1986) into the period of claims-
made coverage (from and after January 1, 1986). The trial court
denied the insurers' motions, ruling that the key issues of trigger
and allocation raised in these motions would be resolved at trial. In
the trial's first phase in 1996, the court granted 3M partial
declaratory judgment on the question of when insurance coverage is
"triggered." The court also granted the insurers' motion for partial
declaratory judgment on the question of the allocation method to be
applied in the case. In July 1997, the trial court ruled further on
the trigger issue and on the general allocation method. That ruling
was consistent with and further supported the company's opinion as
stated in the following paragraph. In November 1997, upon
reconsideration, the court reversed a portion of its July ruling and
reinstated a portion of its previous ruling. The company believed
that conflicting rulings existed that needed to be clarified by the
court and reconciled with applicable law. Motions to clarify the
allocation methodology of triggered policies under these rulings were
filed and have been ruled upon by the Court. While the Court
clarified certain aspects of these rulings it also ruled that there
would be no allocation from and after January 1, 1986. This ruling is
consistent with the company's position on the allocation issue.
The company believes it ultimately will prevail in this insurance
litigation. The company's belief is based on an analysis of its
insurance policies; court decisions on these and similar issues;
reimbursement by insurers for these types of claims; and consultation
with outside counsel who are experts in insurance coverage matters.
If, however, the occurrence insurers ultimately prevail in this
insurance litigation, the company could be effectively deprived of
significant and potentially material insurance coverage for breast
implant claims. (See discussion of the accrued receivables for
insurance recoveries below.)
As of June 30, 1999, the company had accrued receivables for
insurance recoveries of $610 million, substantially all of which is
contested by the insurance carriers. During the first quarter of 1999
the company executed a settlement agreement with its lead occurrence
underwriter. Payments of settlement dollars of this and other
agreements were received in the second quarter of 1999. Various
factors could affect the timing and amount of proceeds to be received
under the company's various insurance policies, including (i) the
timing of payments made in settlement of claims; (ii) the outcome of
occurrence insurance litigation in the courts of Minnesota (as
discussed above) and Texas; (iii) potential arbitration with claims-
made insurers; (iv) delays in payment by insurers; and (v) the extent
to which insurers may become insolvent in the future. There can be no
absolute assurance that the company will collect all amounts accrued
as being probable of recovery from its insurers.
<PAGE> 27
The company's current estimate of the probable liabilities,
associated expenses and probable insurance recoveries related to the
breast implant claims is based on the facts and circumstances
existing at this time. New developments may occur that could affect
the company's estimates of probable liabilities (including associated
expenses) and the probable amount of insurance recoveries. These
developments include, but are not limited to, (i) the ultimate Fixed
Amount Benefit distribution to claimants in the Revised Settlement
Program; (ii) the success of and costs to the company in defending
opt-out claims, including claims involving breast implants not
manufactured or sold by the company; (iii) the outcome of the
occurrence insurance litigation in the courts of Minnesota and Texas;
and (iv) the outcome of potential arbitration with claims-made
insurers.
The company cannot determine the impact of these potential
developments on the current estimate of probable liabilities
(including associated expenses) and the probable amount of insurance
recoveries. Accordingly, the company is not able to estimate its
possible future liabilities and recoveries beyond the current
estimates of probable amounts. As new developments occur, these
estimates may be revised, or additional charges may be necessary to
reflect the impact of these developments on the costs to the company
of resolving breast implant litigation, claims and insurance
recoveries. Such revisions or additional future charges could have a
material adverse impact on the company's net income in the quarterly
period in which they are recorded. Although the company considers it
unlikely, such revisions or additional future charges could also have
a material adverse effect on the consolidated financial position or
annual results of operations of the company.
The company conducts ongoing reviews, assisted by outside counsel, to
determine the adequacy and extent of insurance coverage provided by
its occurrence and claims-made insurers. The company believes, based
on these ongoing reviews and the bases described in the fourth
preceding paragraph, it is probable that the collectible coverage
provided by its applicable insurance policies is sufficient to cover
substantially all of its current exposure for breast implant claims
and defense costs. Based on the availability of this insurance
coverage, the company believes that its uninsured financial exposure
has not materially changed since the first quarter of 1994.
Therefore, no recognition of additional charges has been made.
Environmental Matters
The company also is involved in a number of environmental proceedings
by governmental agencies and by private parties asserting liability
for past waste disposal and other alleged environmental damage. The
company conducts ongoing investigations, assisted by environmental
consultants, to determine accruals for the probable, estimable costs
of remediation. The remediation accruals are reviewed each quarter
and changes are made as appropriate.
<PAGE> 28
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on May
11, 1999.
(b) Proxies for the meeting were solicited pursuant to Regulation
14; there was no solicitation in opposition to management's nominees
as listed in the Proxy Statement and all such nominees were elected.
Three directors were elected to the year 2002 Class (Rozanne L.
Ridgway, Frank Shrontz and Louis W. Sullivan) and one director to
the year 2000 Class (Allen E. Murray).
Directors whose terms continue after the meeting were Ronald O.
Baukol, Edward A. Brennan, Livio D. DeSimone, Edward R. McCracken,
W. George Meredith, Aulana L. Peters and F. Alan Smith.
(c) The ratification of the appointment of PricewaterhouseCoopers
LLP, independent auditors, to audit 3M's books and accounts for the
year 1999.
For 331,232,699
Against 1,419,118
Abstain 2,102,926
(d) Amendments to the Executive Profit Sharing Plan.
For 307,745,895
Against 22,539,605
Abstain 4,469,243
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this
Report.
(12) A statement setting forth the calculation of the
ratio of earnings to fixed charges. Page 30.
(15) A letter from the company's independent auditors
regarding unaudited interim consolidated
financial statements. Page 31.
(27) Financial data schedule (EDGAR filing only).
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended June 30, 1999.
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
(Registrant)
Date: August 4, 1999
/s/ Giulio Agostini
Giulio Agostini, Senior Vice President and
Chief Financial Officer
(Mr. Agostini is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)
<PAGE> 30
<TABLE>
EXHIBIT 12
MINNESOTA MINING AND MANUFACTURING COMPANY AND SUBSIDIARIES
CALCULATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
(Unaudited)
<CAPTION>
Six Months
Ended
June 30, Year Year Year Year Year
1999 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing
operations before
income taxes, minority
interest and
extraordinary loss* $1,411 $1,952 $3,440 $2,479 $2,168 $2,011
Add:
Interest on debt 57 139 94 79 102 70
Interest component of the
ESOP benefit expense 10 29 32 34 37 39
Portion of rent under
operating leases
representative of the
interest component 19 41 41 46 51 46
Less: Equity in undistributed
income of 20-50% owned
companies 3 4 3 -- 1 2
------ ------- ------- ------- ------- -------
TOTAL EARNINGS AVAILABLE
FOR FIXED CHARGES $1,494 $2,157 $3,604 $2,638 $2,357 $2,164
====== ====== ====== ====== ====== ======
FIXED CHARGES
Interest on debt 57 139 94 79 102 70
Interest component of the
ESOP benefit expense 10 29 32 34 37 39
Portion of rent under
operating leases
representative of the
interest component 19 41 41 46 51 46
------ ------ ------ ------ ------ ------
TOTAL FIXED CHARGES $ 86 $ 209 $ 167 $ 159 $ 190 $ 155
====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO
FIXED CHARGES 17.37 10.32 21.58 16.59 12.41 13.96
<FN>
<F1>
*1999 includes one-time pre-tax net gains of $104 million, 1998 includes a
pre-tax restructuring charge of $493 million; 1997 includes a pre-tax gain
on the sale of National Advertising Company of $803 million.
</FN>
</TABLE>
<PAGE> 31
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 4, 1999, on our reviews of
interim consolidated financial information of Minnesota Mining and
Manufacturing Company and Subsidiaries (the Company) for the three-
month and six-month periods ended June 30, 1999 and 1998, and included
in the Company's Form 10-Q for the quarter ended June 30, 1999, is
incorporated by reference in the Company's registration statements on
Form S-8 (Registration Nos. 33-14791, 33-49842, 33-58767, 333-26957,
333-30689 and 333-30691), and Form S-3 (Registration No. 33-48089).
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
August 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET
AND RELATED NOTES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 258
<SECURITIES> 217
<RECEIVABLES> 2,712
<ALLOWANCES> 0
<INVENTORY> 2,021
<CURRENT-ASSETS> 6,238
<PP&E> 13,216
<DEPRECIATION> 7,818
<TOTAL-ASSETS> 13,367
<CURRENT-LIABILITIES> 3,680
<BONDS> 1,553
0
0
<COMMON> 236
<OTHER-SE> 5,937
<TOTAL-LIABILITY-AND-EQUITY> 13,367
<SALES> 7,639
<TOTAL-REVENUES> 7,639
<CGS> 4,350
<TOTAL-COSTS> 4,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 1,411
<INCOME-TAX> 516
<INCOME-CONTINUING> 860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860
<EPS-BASIC> 2.14
<EPS-DILUTED> 2.12
</TABLE>
