3M 2010 Annual Report Download - page 81

75
3M may redeem its 30-year zero-coupon senior notes (the “Convertible Notes”) at any time in whole or in part at the
accreted conversion price; however, bondholders may convert upon notification of redemption each of the notes into
9.4602 shares of 3M common stock (which 3M would intend to payout in cash). Holders of the 30-year zero-coupon
senior notes have the option to require 3M to purchase their notes at accreted value on November 21 in the years
2005, 2007, 2012, 2017, 2022 and 2027. In November 2005, 22,506 of the 639,000 in outstanding bonds were
redeemed, resulting in a payout from 3M of approximately $20 million. In November 2007, an additional 364,598
outstanding bonds were redeemed resulting in a payout from 3M of approximately $322 million. These payouts
reduced the Convertible Notes’ face value at maturity to $252 million, which equates to a book value of
approximately $226 million at December 31, 2010. As disclosed in a Form 8-K in November 2005, 3M amended the
terms of these securities to pay cash at a rate of 2.40% per annum of the principal amount at maturity of the
Company’s Convertible Notes, which equated to 2.75% per annum of the notes’ accreted value on November 21,
2005. The cash interest payments were made semiannually in arrears on May 22, 2006, November 22, 2006,
May 22, 2007 and November 22, 2007 to holders of record on the 15th calendar day preceding each such interest
payment date. Effective November 22, 2007, the effective interest rate reverted back to the original yield of 0.50%.
3M originally sold $639 million in aggregate face amount of these “Convertible Notes” on November 15, 2002, which
are convertible into shares of 3M common stock. The gross proceeds from the offering, to be used for general
corporate purposes, were $550 million ($540 million net of issuance costs). In accordance with accounting standards
applicable to convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement), the Company recognized additional interest expense essentially equivalent to the portion of issuance
proceeds allocated to the instrument’s equity component over the period from the Convertible Notes’ issuance on
November 15, 2002 through November 15, 2005 (the first date holders of these Notes had the ability to put them
back to 3M). Debt issuance costs were amortized on a straight-line basis over a three-year period beginning in
November 2002. Debt issue costs allocated to the Notes’ equity component were not material. On February 14,
2003, 3M registered these Convertible Notes in a registration statement filed with the Securities and Exchange
Commission. The terms of the Convertible Notes include a yield to maturity of 0.50% and an initial conversion
premium of 40 percent over the $65.00 (split-adjusted) closing price of 3M common stock on November 14, 2002. If
certain conditions for conversion (relating to the closing common stock prices of 3M exceeding the conversion trigger
price for specified periods) are met, holders may convert each of the 30-year zero-coupon senior notes into 9.4602
shares of 3M common stock in any calendar quarter commencing after March 31, 2003. The conversion trigger price
for the fourth quarter of 2010 was $123.04 per share. If the conditions for conversion are met, and 3M elects not to
settle in cash, the 30-year zero-coupon senior notes will be convertible in the aggregate into approximately 2.4
million shares of 3M common stock. The conditions for conversion related to the Company’s Convertible Notes have
never been met. If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock;
however, if this occurs, the Company has the intent and ability to settle this debt security in cash. Accordingly, there
was no impact on 3M’s diluted earnings per share.