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 March 31, 1998 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: (612) 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 March 31, 1998, there were 404,530,985 shares of the
Registrant's common stock outstanding.
This document contains 23 pages.
The exhibit index is set forth on page 20.
Minnesota Mining and Manufacturing Company and Subsidiaries
PART I. Financial Information
Consolidated Statement of Income
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended
March 31
1998 1997
Net sales $3,700 $3,714
Operating expenses
Cost of goods sold 2,096 2,089
Selling, general and
administrative expenses 924 937
Total 3,020 3,026
Operating income 680 688
Other income and expense
Interest expense 34 23
Investment and other
income - net (11) (12)
Total 23 11
Income before income taxes
and minority interest 657 677
Provision for income taxes 237 244
Minority interest 20 23
Net income $ 400 $ 410
Weighted average common
shares outstanding 404.4 416.6
Earnings per share - basic $ 0.99 $ 0.99
Weighted average common
and common equivalent
shares outstanding 410.0 423.1
Earnings per share - diluted $ 0.98 $ 0.97
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)
March 31,
1998 December 31,
(Unaudited) 1997
Assets
Current assets
Cash and cash equivalents $ 180 $ 230
Other securities 248 247
Accounts receivable - net 2,583 2,434
Inventories
Finished goods 1,346 1,293
Work in process 642 605
Raw materials and supplies 491 501
Total inventories 2,479 2,399
Other current assets 882 858
Total current assets 6,372 6,168
Investments 590 613
Property, plant and equipment 12,328 12,098
Less accumulated depreciation (7,174) (7,064)
Property, plant and equipment - net 5,154 5,034
Other assets 1,541 1,423
Total $13,657 $13,238
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 846 $ 898
Payroll 339 306
Income taxes 411 238
Short-term debt 1,521 1,499
Other current liabilities 1,095 1,042
Total current liabilities 4,212 3,983
Other liabilities 2,216 2,314
Long-term debt 1,216 1,015
Stockholders' equity - net 6,013 5,926
Shares outstanding
March 31, 1998, 404,530,985
December 31, 1997, 404,724,947
________ ________
Total $13,657 $13,238
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in millions, except per-share amounts)
(Unaudited)
Three months ended
March 31
1998 1997
Common stock and capital in excess of par value at
beginning and end of period $ 296 $ 296
Retained earnings
Balance at beginning of year 9,848 8,756
Net income (A) 400 410
Dividends paid (per share: $.55, $.53) (222) (221)
Stock option plans and other (56) (24)
Balance at end of period 9,970 8,921
Accumulated other comprehensive income - net
Balance at beginning of year
Cumulative foreign currency translation adjustments (547) (178)
Unrealized gain on securities - net 8 15
Other comprehensive income
Foreign currency translation and other adjustments (B) (42) (156)
Unrealized loss on securities - net (C) (1) (7)
Balance at end of period
Cumulative foreign currency translation adjustments (589) (334)
Unrealized gain on securities - net 7 8
Balance at end of period (582) (326)
Unearned compensation - ESOP
Balance at beginning of year (379) (412)
Amortization 9 7
Balance at end of period (370) (405)
Treasury stock, at cost
Balance at beginning of year (67.3, 55.2) (3,300) (2,193)
Reacquired stock (millions of shares: 2.2, 2.9) (187) (249)
Issuances pursuant to stock option plans
(millions of shares: 2.0, 2.3) 186 192
Balance at end of period (3,301) (2,250)
(millions of shares: 67.5, 55.8)
Stockholders' equity - net $ 6,013 $ 6,236
Total comprehensive income (A + B + C) $ 357 $ 247
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
(Unaudited)
Three months ended
March 31
1998 1997
Cash Flows from Operating Activities
Net income $ 400 $ 410
Adjustments to reconcile net income
to net cash provided by operating activities
Implant litigation - net (91) (19)
Depreciation and amortization 213 217
Working capital and other changes - net (147) (171)
Net cash provided by continuing operations 375 437
Net cash used by discontinued operations -- (55)
Net cash provided by operating activities 375 382
Cash Flows from Investing Activities
Capital expenditures (338) (296)
Other changes - net (63) (2)
Net cash used in investing activities (401) (298)
Cash Flows from Financing Activities
Change in short-term debt - net (55) 258
Repayment of long-term debt (20) (219)
Proceeds from long-term debt 333 6
Purchases of treasury stock (187) (249)
Reissuances of treasury stock 127 119
Payment of dividends (222) (221)
Net cash used in financing activities (24) (306)
Effect of exchange rate changes on cash -- 12
Net decrease in cash and cash equivalents (50) (210)
Cash and cash equivalents at beginning of year 230 583
Cash and cash equivalents at end of period $ 180 $ 373
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The interim 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. The results of operations for any interim period are not
necessarily indicative of results for the full year. The condensed
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 1997 Annual Report on Form 10-K.
Comprehensive income:
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
Total comprehensive income and the components of accumulated other
comprehensive income are presented in the Consolidated Statement of
Changes in Stockholders' Equity.
Earnings per share:
The difference in the weighted average shares outstanding for
calculating basic and diluted earnings per share is solely
attributable to the assumed exercise of the Management Stock
Ownership Program stock options for the three months ended March 31,
1998 and 1997, and also includes the effect of the assumed exercise of
General Employees' Stock Purchase Plan (GESPP) options for the three
months ended March 31, 1997. Effective July 1997, all GESPP options
are exercised on the last business day of each month of grant, resulting
in no dilutive effect.
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 Consolidated Financial Statements and Notes.
Coopers & Lybrand L.L.P., the company's independent auditors, have
performed a review of the unaudited interim financial statements
included herein and their report thereon accompanies this filing.
Review Report of Independent Auditors
To the Stockholders of Minnesota Mining and Manufacturing Company:
We have reviewed the accompanying condensed consolidated balance
sheet of Minnesota Mining and Manufacturing Company and Subsidiaries
as of March 31, 1998, and the related condensed consolidated
statements of income, changes in stockholders' equity and cash flows
for the three-month periods ended March 31, 1998 and 1997. 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 condensed 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,
1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 9, 1998, except
for the last paragraph under Debt in the Notes to Consolidated
Financial Statements, as to which the date is February 18, 1998, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31,
1997, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
April 28, 1998
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
First Quarter
Worldwide sales for the first quarter totaled $3.700 billion, down
slightly from the first quarter last year. Excluding changes in
currency exchange rates, sales rose about 5 percent, primarily driven
by increases in volume of 4 percent. Worldwide selling prices were
up about 1 percent.
In the United States, sales were down about 1 percent to $1.739
billion. Adjusting for the third-quarter 1997 sale of the outdoor
advertising business, sales rose about 2 percent. The company
experienced soft demand in a few U.S. markets, including
transportation safety, electronics and autobody repair. 3M's
transportation safety business was affected by uncertainty over
government funding of highway projects. It is expected that new
funding bills, if approved, will contribute to future growth in this
area. While demand for 3M microflex circuits remained strong, other
3M product lines that serve electronic customers were affected by
industry softness. The company also experienced softness in the
autobody repair market. Among better growth performers in the U.S.
were 3M's pharmaceuticals, telecommunications, occupational health
and safety, and construction products businesses.
Internationally, sales totaled $1.961 billion. Volume increased
about 8 percent and selling prices were up 2 percent. The selling
price increases were largely in the Asia region and in Latin America,
where they offset part of the large currency devaluations. Currency
translation reduced international sales by about 10 percent,
offsetting the local-currency sales growth. In 3M's international
operations overall, sales in local currencies grew at a double-digit
rate for the seventh consecutive quarter. In Europe, volume
increased 12 percent, with solid volume gains in Italy, France,
Germany and most other countries. In the Asia Pacific area, volume
decreased about 2 percent. In Japan, volume growth this quarter was
basically flat, due to a comparison against strong growth in the year-
earlier quarter and continued economic softness there. In Asia
outside Japan, volume declined about 4 percent. While solid sales
gains were achieved in the China region and Singapore, overall volume
growth in the region was negatively affected by the economic turmoil
in Korea, Thailand and Indonesia. In Latin America, volume increased
14 percent, with strong growth in Mexico, Argentina and most other
Latin American countries. In Brazil, the company experienced a
resumption of growth, with volume there up about 10 percent. In
Canada, volume increased about 6 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.6 percent of sales, up slightly
from the first quarter last year. Gross margins benefited from solid
international volume growth, higher selling prices and lower raw
material costs. However, changes in currency exchange rates reduced
gross margins by about one percentage point. This margin effect
relates to the impact of currency fluctuations on the transfer of
goods between 3M operations in the United States and abroad.
Selling, general and administrative spending was 25.0 percent of
sales, down two-tenths of a point from the same quarter last year.
Productivity improvements and emphasis on cost control had a positive
effect on these costs.
Worldwide operating income was 18.4 percent of sales, similar to the
first quarter last year, and up seven-tenths of a percentage point
from total year 1997. Operating income was $680 million, down 1.3
percent from the year-earlier quarter. Currency reduced operating
income by about $75 million, or 11 percent. In the United States,
operating income was 16.5 percent of sales, down 1.2 percentage
points from the first quarter last year. Internationally, operating
income was 20.1 percent, the highest level there in many quarters.
3M's European and Latin American operations drove this advance.
First quarter interest expense of $34 million was up $11 million from
the same quarter last year, reflecting the company's strategy to
lower its cost of capital by moderately increasing its financial
leverage. This strategy may increase interest expense as much as $70
million in 1998. In the first quarter, the earnings per share
benefit from fewer shares outstanding more than offset the impact of
higher interest expense. Net investment and other income was $11
million, down $1 million from the year-earlier quarter.
The worldwide effective income tax rate for the quarter was 36.0
percent, the same as in the first quarter last year.
Net income totaled $400 million, or $.98 per diluted share, compared
with $410 million, or $.97 per diluted share, in the first quarter of
1997. The company estimates that changes in the value of the U.S.
dollar decreased earnings for the quarter by about 10 cents per share
compared with the first quarter of 1997. 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 in countries not considered to be highly
inflationary.
Legal proceedings are discussed in the Legal Proceedings section in
Part II, Item 1, of this Form 10-Q. 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. See
discussion of breast implant litigation in Legal Proceedings, Part
II, Item 1.)
FUTURE OUTLOOK
3M expects continued sales and earnings growth in 1998, with the
strongest earnings gains in the second half of the year. The strong
U.S. dollar will continue to negatively affect the company,
particularly in the second quarter, but the effects are expected to
lessen in the second half of 1998. Based on exchange rates as of
April 24, 1998, currency effects could reduce 1998 earnings by about
30 cents per share.
The company is not able to project what all the consequences of the
turmoil in Asia may be. The company is monitoring business
conditions closely and will implement adjustments in pricing, costs
and investments as appropriate. Overall, the company does not expect
any contributions to earnings growth from Asia in 1998.
The company expects results to benefit from reasonable worldwide
economic growth, a strong flow of new products, customer-satisfaction
efforts, and continued emphasis on cost control and productivity
improvement. A generally favorable raw material picture should also
help 3M's 1998 results. Raw material costs are expected to be down
close to 2 percent for the year as a whole.
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 below, 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
which 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, particularly in Japan and the Asia
Pacific region; raw materials, including shortages and increases in
the costs of key raw materials; impact of the Year 2000 issue (see
discussion of the Year 2000 issue in Part I, Item 7 of the company's
1997 Form 10-K); 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 decreased $25 million to $2.160 billion at March 31,
1998, compared to $2.185 billion at year-end 1997. The accounts
receivable average days' sales outstanding was 57 days, down 1 day
from year-end. The company's key inventory index was 4.1 months,
compared to 3.8 months at year-end. The company's current ratio was
1.5, unchanged from year-end.
Total debt increased $223 million from year-end 1997 to $2.737
billion. In line with the company's strategy to lower its cost of
capital, total debt could increase from an average of about $2
billion in 1997 to more than $3 billion, on average, in 1998. As of
March 31, 1998, total debt was 31 percent of total capital.
The company's strong credit rating provides ready and ample access to
funds in global capital markets. In February 1998, the company
issued $330 million of 30-year, 6.375 percent debentures. At March
31, 1998, the company had available short-term lines of credit
totaling about $600 million.
Net cash provided by operating activities from continuing operations
totaled $375 million in the first three months of the year, down $62
million from the same period last year. Cash outflows from mammary
implant litigation were $72 million higher than 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.
Net cash used by operating activities from discontinued operations
was $55 million in the first three months of 1997. Payments made in
1997 were primarily severance payments related to discontinued
operations.
Cash used in investing activities was $401 million in the first three
months of the year, compared to $298 million in the same period last
year. Capital expenditures for the first three months of 1998 were
$338 million, an increase of 14 percent compared with the same period
last year.
Treasury stock repurchases for the first three months of 1998 were
$187 million, compared with repurchases in the same period last year
of $249 million. Financing activities for both short-term and long-
term debt provided net cash inflows of $258 million, compared with
net cash inflows of $45 million in the first three months last year.
The company repurchased about 2.2 million shares of common stock in
the first three months of 1998, compared with 2.9 million shares in
the same period last year. In November 1997, the Board of Directors
authorized the repurchase of up to 25 million shares of 3M common
stock through December 31, 1998. As of March 31, 1998, 20.4 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 $222 million in the first
quarter of this year, compared with $221 million in the same period
last year. In February 1998, the quarterly dividend was increased to
55 cents a share.
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 March 31, 1998, the company had been named as a defendant,
often with multiple co-defendants, in 7,711 lawsuits and 142 claims
in various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 27,634 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. 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.
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.
Plaintiffs' writ for an emergency appeal from the decertification
has been denied by the Louisiana Supreme Court. A normal appeal
remains pending.
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.
Appeals related to the Revised Settlement Program are pending.
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 as supplemented now includes both
foreign and domestic class members with implants manufactured by
certain manufacturer defendants, including Baxter International,
Bristol Meyers-Squibb, 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
foreign claimants and 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 domestic claimants
with 3M implants. Post 8/84 McGhan implant benefits are payable by
the company, Union Carbide Corporation and McGhan Medical
Corporation.
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, will not be
affected by the number of class members electing 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 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. 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) or who are current foreign claimants will range from
$10,000 to $50,000. Benefits to foreign registrants other than
current foreign claimants will be developed by the Foreign Claimants
Committee in consultation with the Court.
The company's obligations to fund Long-Term Benefits for eligible
claimants with 3M implants are cancelable if certain provisions of
the Revised Settlement Program are disapproved on appeal. Pending
appeal, the company will pay Long-Term Benefits to eligible
claimants, providing it receives appropriate releases. The company
expects to fund benefits for claimants with only Post 8/84 McGhan
implants beginning in the second quarter of 1998 as all appeals of
this aspect of the Revised Settlement Program have been dismissed.
As of the date of this filing, the company believes that approximately
90% 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 March 31, 1998 the company has paid
$191 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.
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 1996, the company increased its estimate of
the minimum probable liabilities and associated expenses to
approximately $991 million. This amount represents the company's
best estimate of the cost and expense of the Revised Settlement
Program and the cost and expense of resolving opt-out claims. After
subtracting payments of $793 million as of March 31, 1998, for
defense and other costs and settlements with litigants and
claimants, the company had accrued liabilities of $198 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 as scheduled by the court.
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 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
believes that conflicting rulings now exist that need to be
clarified by the court and reconciled with applicable law. Motions
to clarify the allocation methodology of triggered policies under
these rulings are pending. Court options include clarification,
further trial followed by additional rulings or certification for
interlocutory (while the case is still pending) appeal.
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 March 31, 1998, the company had accrued receivables for
insurance recoveries of $664 million, substantially all of which is
contested by the insurance carriers. 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.
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 of 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.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this
Report.
(12) A statement regarding the calculation of the ratio of
earnings to fixed charges. Page 22.
(15) A letter from the company's independent auditors
regarding unaudited interim financial statements.
Page 23.
(27) Financial data schedule (EDGAR filing only).
(b) Reports on Form 8-K:
The company filed a report on Form 8-K dated February 18, 1998.
Item 5. Other Events. 3M's long-term debt was rated Aaa and AAA by
Moody's Investors Service, Inc. ("Moody's") and Standard and Poor's
Corporation ("S&P"), respectively. On February 4, 1998, Moody's
lowered its assigned rating to Aa1, and on February 10, 1998, S&P
lowered its assigned rating to AA. Publications of Moody's indicate
that it assigns the Aa rating to debt securities that are judged to
be of high quality by all standards and are considered high grade
bonds. Publications of S&P indicate that an obligor rated AA has very
strong capacity to meet its financial commitments. The downgrade in
ratings is based on the outlook for continued growth in leverage at
3M resulting from management's decision to alter 3M's capital
structure through increased share repurchases and debt issuances.
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended March 31, 1998.
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: May 5, 1998
/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.)