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 THE QUARTER ENDED June 30, 1998
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
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 the past 90 days. Yes [X] No [ ].
Outstanding at
Class June 30, 1998
_____ ______________
Common Stock, $2.50 par value 224,118,662 shares
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THE DOW CHEMICAL COMPANY
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Comprehensive Income 5
Commitments and Contingent Liabilities 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Second Quarter Earnings Announcement 8
Acquisitions and Divestitures 10
Changes in Financial Condition 11
Results of Operations 12
Accounting Policies 18
Year 2000 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit 27 26
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Note A)
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millions, except for share amounts (Unaudited) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $4,857 $5,366 $9,686 $10,358
- ----------------------------------------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,502 3,836 7,193 7,451
Insurance and finance company
operations, pretax income (26) (8) (58) (36)
Research and development expenses 190 199 382 386
Selling, general and administrative expenses 440 516 843 956
Amortization of intangibles 20 11 39 24
Purchased in-process research and development (Note B) 12 - 350 -
Special charge (Note C) - - 330 -
-----------------------------------------------------------------------------------------------
Total operating costs and expenses 4,138 4,554 9,079 8,781
- ----------------------------------------------------------------------------------------------------
Operating Income 719 812 607 1,577
- ----------------------------------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates 27 25 50 39
Interest expense and amortization of debt discount (129) (124) (249) (246)
Interest income and foreign exchange - net 29 60 62 144
Sundry income - net (Note D) 16 217 858 280
-----------------------------------------------------------------------------------------------
Total other income (expense) (57) 178 721 217
- ----------------------------------------------------------------------------------------------------
Income before Provision for Taxes on Income and Minority Interests 662 990 1,328 1,794
- ----------------------------------------------------------------------------------------------------
Provision for Taxes on Income 232 370 474 659
- ----------------------------------------------------------------------------------------------------
Minority Interests' Share in Income 3 48 5 109
- ----------------------------------------------------------------------------------------------------
Preferred Stock Dividends 2 1 3 3
- ----------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $425 $571 $846 $1,023
- ----------------------------------------------------------------------------------------------------
Weighted-average Common Shares Outstanding 224.8 229.9 225.1 233.8
- ----------------------------------------------------------------------------------------------------
Per Share Data
Earnings per common share $1.89 $2.48 $3.76 $4.38
Earnings per common share - assuming dilution $1.86 $2.45 $3.70 $4.33
Common stock dividends declared per share $0.87 $0.87 $1.74 $1.62
- ----------------------------------------------------------------------------------------------------
Depreciation $272 $309 $542 $603
- ----------------------------------------------------------------------------------------------------
Capital Expenditures $328 $247 $629 $492
- ----------------------------------------------------------------------------------------------------
Notes to Financial Statements
- -----------------------------
Note A: The unaudited interim financial statements reflect all adjustments (consisting of normal
recurring accruals) which, in the opinion of management, are considered necessary for a fair
presentation of the results for the periods covered. Certain reclassifications of prior year
amounts have been made to conform to current year presentation. These statements should be
read in conjunction with the financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1997.
Note B: During the first quarter of 1998, a pretax charge of $338 million was recorded for purchased
in-process research and development costs associated with the recent acquisitions of Dow
AgroSciences, Mycogen and Sentrachem Limited.
Note C: During the first quarter of 1998, a pretax special charge of $330 million was recorded,
principally for severance costs and asset write-downs.
Note D: In January 1998, the Company completed the sale of the DowBrands business to S.C. Johnson &
Son, Inc. The sale resulted in a pretax gain of $816 million.
In June 1997, the Company completed the sale of Destec Energy, Inc. to NGC Acquisition
Corporation, resulting in a pretax gain of $189 million.
</TABLE>
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<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
June 30, Dec. 31,
In millions (Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $374 $235
Marketable securities and interest-bearing deposits 781 302
Accounts and notes receivable:
Trade (less allowance for doubtful receivables - 1998, $73; 1997, $73) 3,109 3,257
Other 1,448 1,701
Inventories: Finished and work in process 2,096 2,309
Material and supplies 535 612
Deferred income tax assets - current 357 224
-----------------------------------------------------------------------------------------------
Total current assets 8,700 8,640
- ----------------------------------------------------------------------------------------------------
Investments
Investment in nonconsolidated affiliates 1,196 1,206
Other investments 2,421 2,529
Noncurrent receivables 362 400
-----------------------------------------------------------------------------------------------
Total investments 3,979 4,135
- ----------------------------------------------------------------------------------------------------
Property
Property 23,570 23,345
Less accumulated depreciation 15,524 15,293
-----------------------------------------------------------------------------------------------
Net property 8,046 8,052
- ----------------------------------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization - 1998, $223; 1997, $211) 1,402 1,762
Deferred income tax assets - noncurrent 514 452
Deferred charges and other assets 950 999
-----------------------------------------------------------------------------------------------
Total other assets 2,866 3,213
- ----------------------------------------------------------------------------------------------------
Total Assets $23,591 $24,040
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $1,226 $1,656
Long-term debt due within one year 227 406
Accounts payable: Trade 1,458 1,731
Other 883 960
Income taxes payable 676 521
Deferred income tax liabilities - current 42 100
Dividends payable 201 200
Accrued and other current liabilities 1,692 1,766
-----------------------------------------------------------------------------------------------
Total current liabilities 6,405 7,340
- ----------------------------------------------------------------------------------------------------
Long-Term Debt 4,258 4,196
- ----------------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 873 649
Pension and other postretirement benefits - noncurrent 1,827 1,840
Other noncurrent obligations 1,761 1,664
-----------------------------------------------------------------------------------------------
Total other noncurrent liabilities 4,461 4,153
- ----------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 598 676
- ----------------------------------------------------------------------------------------------------
Temporary Equity
Temporary equity - other - 9
Preferred stock at redemption value 119 124
Guaranteed ESOP obligation (84) (84)
-----------------------------------------------------------------------------------------------
Total temporary equity 35 49
- ----------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 672 532
Retained earnings 12,811 12,357
Accumulated other comprehensive income (210) (146)
Treasury stock, at cost (6,257) (5,935)
-----------------------------------------------------------------------------------------------
Net stockholders' equity 7,834 7,626
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,591 $24,040
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
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<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Six Months Ended
June 30, June 30,
In millions (Unaudited) 1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net income available for common stockholders $846 $1,023
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 583 644
Provision (credit) for deferred income tax 68 (48)
Undistributed earnings of nonconsolidated affiliates (38) (24)
Minority interests' share in income 5 109
Net gain on sale of consolidated companies (816) (186)
Net gain on sales of property (5) (15)
Other net gain 5 16
Purchased in-process research & development 350 -
Special charge 330 -
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 291 (217)
Inventories 225 149
Accounts payable (317) (206)
Other assets and liabilities 316 718
-----------------------------------------------------------------------------------------------
Cash provided by operating activities 1,843 1,963
- ----------------------------------------------------------------------------------------------------
Investing Activities
Purchases of property (652) (492)
Proceeds from sales of property 27 31
Purchases of consolidated companies (355) (1,257)
Proceeds from sale of consolidated companies 1,183 907
Proceeds from outside investors in limited partnership 200 -
Purchases from outside investors in limited partnership (210) -
Investments in nonconsolidated affiliates (39) (12)
Purchases of investments (1,759) (1,251)
Proceeds from sales of investments 1,343 1,302
-----------------------------------------------------------------------------------------------
Cash used in investing activities (262) (772)
- ----------------------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable (592) 13
Proceeds from issuance of long-term debt 222 29
Payments on long-term debt (420) (388)
Purchases of treasury stock (341) (1,253)
Proceeds from sales of common stock 105 111
Distributions to minority interests (11) (55)
Dividends paid to stockholders (395) (359)
-----------------------------------------------------------------------------------------------
Cash used in financing activities (1,432) (1,902)
- ----------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (10) (6)
- ----------------------------------------------------------------------------------------------------
Summary
Increase (decrease) in cash and cash equivalents 139 (717)
Cash and cash equivalents at beginning of year 235 1,903
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $374 $1,186
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millions (Unaudited) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $425 $571 $846 $1,023
- ----------------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on investments (56) 96 (59) 72
Cumulative translation adjustments 3 (31) (5) (43)
Minimum Pension Liability - - - -
-----------------------------------------------------------------------------------------------
Total other comprehensive income (53) 65 (64) 29
- ----------------------------------------------------------------------------------------------------
Comprehensive Income $372 $636 $782 $1,052
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
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COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in which
the Company is a 50 percent shareholder, announced a pretax charge
of $640 million ($415 million after tax) for the fourth quarter of
1993. In January 1995, Dow Corning announced a pretax charge of
$241 million ($152 million after tax) for the fourth quarter of
1994. These charges included Dow Corning's best estimate of its
potential liability for breast implant litigation based on a global
Breast Implant Litigation Settlement Agreement (the Settlement
Agreement); litigation and claims outside of the Settlement
Agreement; and provisions for legal, administrative and research
costs related to breast implants. The charges for 1993 and 1994
included pretax amounts of $1,240 million and $441 million, less
expected insurance recoveries of $600 million and $200 million,
respectively. The 1993 amounts reported by Dow Corning were
determined on a present value basis. On an undiscounted basis, the
estimated liability noted above for 1993 was $2,300 million less
expected insurance recoveries of $1,200 million.
As a result of the Dow Corning actions, the Company recorded its
50 percent share of the charges, net of tax benefits available to
Dow. The impact on net income was a charge of $192 million for 1993
and $70 million for 1994.
Dow Corning reported an after tax net loss of $167 million for
the second quarter of 1995 as a result of a $221 million after tax
charge taken to reflect a change in accounting method from the
present value basis noted above to an undiscounted basis resulting
from the uncertainties associated with its voluntary filing for
protection under Chapter 11 of the U.S. Bankruptcy Code on May 15,
1995. As a result of such loss and Chapter 11 filing, the Company
recognized a pretax charge against income of $330 million for the
second quarter of 1995, fully reserved its investment in Dow
Corning and is not recognizing its 50 percent share of equity
earnings while Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the U.S.
District Court for the Northern District of Alabama approved the
Settlement Agreement, pursuant to which plaintiffs choosing to
participate in the Settlement Agreement released the Company from
liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On
October 7, 1995, Judge Pointer issued an order which concluded that
the Settlement Agreement was not workable in its then-current form
because the funds committed to it by industry participants were
inadequate. The order provided that plaintiffs who had previously
agreed to participate in the Settlement Agreement could opt out
after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its investment
in Dow Corning which, after the second quarter of 1995 charge noted
above, is zero. As a result, any future charges by Dow Corning
related to such claims or as a result of the Chapter 11 proceeding
would not have an adverse impact on the Company's consolidated
financial statements.
The Company is separately named as a defendant in more than
13,000 breast implant product liability cases. In these situations,
plaintiffs have alleged that the Company should be liable for Dow
Corning's alleged torts based on the Company's 50 percent stock
ownership in Dow Corning and that the Company should be liable by
virtue of alleged "direct participation" by the Company or its
agents in Dow Corning's breast implant business. These latter,
direct participation claims include counts sounding in strict
liability, fraud, aiding and abetting, conspiracy, concert of
action and negligence.
Judge Pointer was appointed by the Federal Judicial Panel on
Multidistrict Litigation to oversee all of the product liability
cases involving silicone breast implants filed in the U.S. federal
courts. Initially, in a ruling issued on December 1, 1993, Judge
Pointer granted the Company's motion for summary judgment, finding
that there was no basis on which a jury could conclude that the
Company was liable for any claimed defects in the breast implants
manufactured by Dow Corning. In an interlocutory opinion issued on
April 25, 1995, Judge Pointer affirmed his earlier ruling as to
plaintiffs' corporate control claims but vacated that ruling as to
plaintiffs' direct participation claims.
On July 7, 1998, Dow Corning, the Company and Corning, on the one
hand, and the Tort Claimants' Committee in Dow Corning's bankruptcy
on the other, agreed on a binding Term Sheet to resolve all tort
claims involving Dow Corning's silicone medical products, including
the claims against Corning and the Company. The agreement contained
in the Term Sheet will be effectuated by the filing of a plan of
reorganization in Dow Corning's bankruptcy embodying its terms.
Before such a plan can become effective, it will be subject to a
disclosure statement hearing, a vote by the claimants, a
confirmation hearing and all relevant provisions of the Bankruptcy
Code. Accordingly, there can be no assurances at this time that
such a plan will become effective.
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the theory
that the Company should be liable in the breast implant litigation
because of its shareholder relationship with Dow Corning. The
Company's management believes that there is no merit to plaintiffs'
claims that the Company is liable for alleged defects in Dow
Corning's silicone products because of the Company's alleged direct
participation in the development of those products, and the Company
intends to contest those claims vigorously. Management believes
that the possibility is remote that a resolution of plaintiffs'
direct participation claims, including the vigorous defense against
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Commitments and Contingent Liabilities (Continued)
those claims, would have a material adverse impact on the Company's
financial position or cash flows. Nevertheless, in light of Judge
Pointer's April 25, 1995, ruling, it is possible that a resolution
of plaintiffs' direct participation claims, including the vigorous
defense against those claims, could have a material adverse impact
on the Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of any such
impact.
Numerous lawsuits have been brought against the Company and other
chemical companies alleging that the manufacture, distribution or
use of pesticides containing dibromochloropropane (DBCP) has
caused, among other things, property damage, including
contamination of groundwater. To date, there have been no verdicts
or judgments against the Company in connection with these
allegations. It is the opinion of the Company's management that the
possibility is remote that the resolution of such lawsuits will
have a material adverse impact on the Company's consolidated
financial statements.
Accruals for environmental matters are recorded when it is
probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, based on current law and
existing technologies. The Company had accrued $389 million at June
30, 1998, for environmental matters, including $10 million for the
remediation of Superfund sites. This is management's best estimate
of the costs for remediation and restoration with respect to
environmental matters for which the Company has accrued
liabilities, although the ultimate cost with respect to these
particular matters could range up to twice that amount. Inherent
uncertainties exist in these estimates primarily due to unknown
conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies for handling site
remediation and restoration. It is the opinion of the Company's
management that the possibility is remote that costs in excess of
those accrued or disclosed will have a material adverse impact on
the Company's consolidated financial statements.
In addition to the breast implant, DBCP and environmental
remediation matters, the Company is party to a number of other
claims and lawsuits arising out of the normal course of business
with respect to commercial matters, including product liability,
governmental regulation and other actions. Certain of these actions
purport to be class actions and seek damages in very large amounts.
All such claims are being contested.
Dow has an active risk management program consisting of numerous
insurance policies secured from many carriers at various times.
These policies provide coverage which will be utilized to minimize
the impact, if any, of the contingencies described above.
Except for the possible effect on the Company's net income for
breast implant litigation described above, it is the opinion of the
Company's management that the possibility is remote that the
aggregate of all claims and lawsuits will have a material adverse
impact on the Company's consolidated financial statements.
A Canadian subsidiary has entered into two 20-year agreements,
which expire in 1998 and 2004, to purchase ethylene. The purchase
price is determined on a cost-of-service basis which, in addition
to covering all operating expenses and debt service costs, provides
the owner of the manufacturing plants with a specified return on
capital. Total purchases under the agreements were $199 million,
$221 million and $204 million in 1997, 1996 and 1995, respectively.
At December 31, 1997, the Company had various outstanding
commitments for take or pay and throughput agreements, including
the Canadian subsidiary's ethylene contracts, for terms extending
from one to 20 years. In general, such commitments were at prices
not in excess of current market prices.
Fixed and Determinable Portion of Take or Pay and
Throughput Obligations at December 31, 1997 (in millions)
- -------------------------------------------------------
1998 $ 215
1999 179
2000 168
2001 157
2002 148
2003 through expiration of contracts 1,270
- -------------------------------------------------------
Total $2,137
- -------------------------------------------------------
In addition to the take or pay obligations at December 31, 1997,
the Company had outstanding purchase commitments which range from
one to 18 years for steam, electrical power, materials, property,
and other items used in the normal course of business of
approximately $178 million. In general, such commitments were at
prices not in excess of current market prices. The Company also had
outstanding direct and indirect commitments for construction
performance and lease payment guarantees and other obligations of
$226 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussions in this quarterly report contain both historical
information and forward-looking statements. The forward-looking
statements involve risks and uncertainties that affect the
Company's operations, markets, products, services, prices and
factors as discussed in the Company's filings with the Securities
and Exchange Commission. These risks and uncertainties include,
but are not limited to, economic, competitive, governmental and
technological factors. Accordingly, there is no assurance that
the Company's expectations will be realized.
SECOND QUARTER EARNINGS ANNOUNCEMENT (JULY 23, 1998)
DOW REPORTS SECOND QUARTER EARNING
- ---------------------------------------------------------------------
Second Quarter of 1998 Highlights
Diluted earnings per share were $1.86 for the quarter.
Excluding unusual items, earnings per share for the same period a
year ago were $2.22.
Strong sales volume and a 7 percent increase in operating
income for the combined Performance segments helped offset a
marked decline in Chemicals & Metals' results largely due to
lower prices and volume.
Overall, improved productivity, lower feedstock costs and
higher volume helped counter the unfavorable impact of declining
prices, a strong dollar and deteriorating conditions in Asia
Pacific.
- ---------------------------------------------------------------------
(In millions, except for per share amounts)
3 Months Ended 6 Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $4,857 $5,366 $9,686 $10,358
Net Income Available for
Common Stockholders $ 425 $ 571 $ 846 $ 1,023
Earnings Per Common Share $ 1.89 $ 2.48 $ 3.76 $ 4.38
Earnings Per Common Share -
Diluted $ 1.86 $ 2.45 $ 3.70 $ 4.33
- ---------------------------------------------------------------------
NOTE: Earnings per share amounts in the following text are
diluted. (See Highlights and Financial Statements for basic
earnings per share amounts.)
Review of Second Quarter Results
The Dow Chemical Company today reported second quarter sales of
$4.9 billion, net income of $425 million and diluted earnings per
share of $1.86.
Year-to-year earnings per share comparisons reflect the impact of
the sale of Destec Energy and other one-time events in the second
quarter of 1997 that contributed a net of 23 cents to earnings
per share of $2.45. Excluding these one-time events, earnings
per share in the second quarter of 1997 were $2.22.
Sales in the second quarter of 1998 were $4.9 billion compared
with $5.4 billion a year ago. The decrease was primarily due to
the unfavorable impact of price and currency. Operating income
was $719 million compared with $812 million for the same period a
year ago.
Lower local prices, a strong dollar and deteriorating conditions
in Asia Pacific reduced selling prices by more than $500 million
and outweighed the favorable effects of lower feedstock costs and
a 2 percent volume gain, excluding changes in volume due to
recent acquisitions and divestitures. Overall, prices declined
by 10 percent as a result of weaker pricing for basic products,
as well as unfavorable currency impacts in Asia Pacific and
Europe.
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Second Quarter Earnings Announcement (July 23, 1998) (Continued)
"Dow's second quarter results are above expectations, reflecting
ongoing efforts to strengthen our business portfolio, improve
productivity and reduce structural costs," said William S.
Stavropoulos, president and chief executive officer. "Improved
results in Dow's Performance Plastics and Performance Chemicals
segments have helped us weather an increasingly adverse pricing
environment in basic products, intensified by conditions in Asia
Pacific."
The combined Performance segments reported sales of $2.7 billion,
up slightly from the same period a year ago, and a 7 percent
increase in operating income. These segments contributed more
than two-thirds of Dow's total operating income.
Performance Plastics improved operating income by 11 percent,
with notable gains in Engineering Plastics, Epoxy Products &
Intermediates and Fabricated Products. Overall, a 2 percent
volume increase for the segment helped offset a 5 percent decline
in price and currency.
In the Performance Chemicals segment, sales increased by 6
percent, and operating income was up 3 percent. Results in
Agricultural Products were favorable as a strong performance by
the traditional business offset strategic resource spending in
biotechnology. A 10 percent increase in volume for the segment
outweighed a 4 percent price decline, mostly due to currency.
Plastics recorded sales of $987 million, down 7 percent from the
second quarter of 1997. Volume increased 11 percent, helped by
the introduction of new products made using INSITE* Technology;
however, prices declined 18 percent. Both the Polyethylene and
Polystyrene businesses performed better than expected given the
current economic conditions.
Sales for Chemicals & Metals fell 22 percent versus a year ago,
and operating income was down substantially. Volume declined 6
percent, reflecting weaker economic conditions in Asia Pacific.
Significant price declines in vinyl chloride monomer and ethylene
glycol were only partially offset by higher caustic soda prices.
"Our businesses have performed well so far this year,"
Stavropoulos said. "Looking forward, we expect continued
challenges, but we're confident that our focus on productivity,
growth and capital discipline will allow us to meet our
objectives."
For more news and information about Dow, please visit our web
site at www.dow.com.
* Trademark of The Dow Chemical Company
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ACQUISITIONS AND DIVESTITURES
In June 1997, the Company purchased the outstanding 40 percent
share in DowElanco, an agricultural chemicals joint venture, from
Eli Lilly and Company for $900 million plus Lilly's share of
undistributed earnings. This transaction resulted in the Company
owning 100 percent of DowElanco (since renamed Dow AgroSciences
LLC). During the first quarter of 1998, the Company recorded a
$220 million charge for purchased in-process research and
development as part of the final allocation of the purchase price
related to this acquisition.
In June 1997, the Company completed the sale of its 45 million
shares of Destec Energy, Inc. to NGC Acquisition Corporation for
$974 million or $21.65 per share. This transaction resulted in a
pretax gain of $189 million.
In April 1995, the Company signed an agreement with
Bundesanstalt fr vereinigungsbedingte Sonderaufgaben (BvS) for
the privatization of three state-owned chemical companies in
eastern Germany (Buna Sow Leuna Olefinverbund, referred to herein
as BSL). Economic transfer of business operations to the Company,
through the privatization agreement and various service
agreements, occurred in June 1995. In September 1997, the Company
acquired 80 percent ownership in BSL for an investment of $174
million. BvS will maintain a 20 percent ownership until the end
of the restructuring period, which is expected to be June 2000.
After the restructuring period, the Company will have a call
option and BvS a put option for the remaining 20 percent of BSL
for an additional investment of approximately $138 million. BvS
is providing certain incentives during the restructuring period
to cover portions of the reconstruction program and has retained
environmental cleanup obligations for existing facilities.
Incentives relating to property construction reduce the basis of
such property. Incentives relating to expenses during the
reconstruction period are recognized as such expenses are
incurred. The Company expects to include the financial results of
BSL as a nonconsolidated affiliate until the end of the
restructuring period.
In December 1997, Dow acquired Sentrachem Limited, a global
chemical company based in South Africa, for $487 million.
Sentrachem's major businesses are specialty and agricultural
chemicals. During the first quarter of 1998, the Company recorded
a $50 million charge for purchased in-process research and
development as part of the allocation of the purchase price
related to this acquisition. Allocation of the purchase price to
the assets acquired and liabilities assumed has not yet been
completed for the Sentrachem acquisition. Final determination of
the fair values to be assigned may result in adjustments to the
preliminary values assigned at the date of acquisition.
In January 1998, the Company completed the sale of the
DowBrands business to S.C. Johnson & Son, Inc. for approximately
$1.2 billion. This transaction resulted in a pretax gain of $816
million.
In February 1998, the Company entered into an agreement with
Pronor Petroquimica S.A. (Pronor) to purchase a portion of its
business. The new company, named Isopol, was formed for the
production and commercialization of toluene diisocyanate (TDI),
used to manufacture durable goods such as cushioned furniture and
mattresses, and will primarily supply the markets of the Mercosur
countries of Latin America. According to the agreement, the
Company's total investment is $162 million, $81 million of which
will be paid over the next three years.
In January 1996, DowElanco entered into agreements with
Mycogen Corporation and the Lubrizol Corporation for transactions
through which DowElanco, for a cash investment of $158 million,
acquired a 47 percent equity stake in Mycogen and Mycogen
acquired DowElanco's United Agriseeds subsidiary. In December
1996, DowElanco increased its equity stake in Mycogen to more
than 50 percent. During the first quarter of 1998, Dow
AgroSciences (formerly DowElanco) invested an additional $121
million in Mycogen, increasing its ownership to 69 percent, and
the Company recorded a $56 million charge for purchased in-
process research and development as part of the allocation of
this purchase price. In April 1998, Dow AgroSciences requested an
amendment to the 1996 agreement with Mycogen which generally
states that Dow AgroSciences cannot acquire the remaining shares
of Mycogen before February 1999. In July 1998, the agreement was
amended, allowing Dow AgroSciences to discuss and negotiate terms
regarding the purchase of Mycogen's minority shareholders'
interests through August 31, 1998. Mycogen is a world leader in
agricultural biotechnology.
In January 1996, the Company and The Hartford Steam Boiler
Inspection and Insurance Company (HSB) formed, through the
transfer of net assets and existing businesses, a 60:40 joint
venture named Radian International LLC (Radian). This company
provides environmental, information technology and strategic
chemical management services to industries and governments
worldwide. The book value of the net assets transferred by the
Company was $33 million. In January 1998, HSB exercised a put
option requiring the Company to purchase HSB's interest for $136
million, thus increasing the Company's ownership to 100 percent.
On July 31, 1998, as part of the Company's ongoing efforts to
restructure its business portfolio, Radian was sold to Dames &
Moore Group for $117 million.
<PAGE>
--- Page 10 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital at
June 30, 1998 versus December 31, 1997.
June 30, Dec. 31, Increase
In millions 1998 1997 (Decrease)
- ---------------------------------------------------------------------
Notes payable $1,226 $1,656 $(430)
Long-term debt due within one year 227 406 (179)
Long-term debt 4,258 4,196 62
- ---------------------------------------------------------------------
Total debt $5,711 $6,258 $(547)
- ---------------------------------------------------------------------
At June 30 1998, the Company had unused and available credit
facilities with various U.S. and foreign banks totaling $1.8
billion in support of its working capital requirements and
commercial paper borrowings. Additional unused credit facilities
totaling $1 billion are available for use by foreign
subsidiaries.
June 30, Dec. 31, Increase
In millions 1998 1997 (Decrease)
- ---------------------------------------------------------------------
Cash and cash equivalents $ 374 $ 235 $ 139
Marketable securities and
interest-bearing deposits 781 302 479
Accounts and notes receivable - net 4,557 4,958 (401)
Inventories:
Finished and work in process 2,096 2,309 (213)
Materials and supplies 535 612 (77)
Deferred income tax assets - current 357 224 133
- ---------------------------------------------------------------------
Total current assets 8,700 8,640 60
- ---------------------------------------------------------------------
Total current liabilities 6,405 7,340 (935)
- ---------------------------------------------------------------------
Working capital $2,295 $1,300 $ 995
- ---------------------------------------------------------------------
Operating activities provided cash of $1.8 billion for the six
months ended June 30, 1998. The sale of the DowBrands business in
the first quarter provided a further $1.2 billion. Cash was used
to reduce total debt by $547 million, to pay Hartford Steam
Boiler Inspection and Insurance Company (HSB) $136 million for
the exercise of Radian put options, to purchase additional
ownership interest in Mycogen for $121 million, to purchase an
ownership interest in Isopol from Pronor for an initial payment
of $81 million, to repurchase shares of the Company's common
stock for $341 million, and for other normal activities. This
resulted in increases in cash and cash equivalents of $139
million and marketable securities and interest-bearing deposits
of $479 million. (See the Consolidated Statements of Cash Flows
and the Acquisitions and Divestitures section for more detail).
Goodwill decreased $360 million to $1,402 million in the first
six months of 1998, primarily the result of finalizing, during
the first quarter, the allocation of the purchase price
associated with the acquisition of Eli Lilly and Company's 40
percent ownership interest in DowElanco.
June 30, Dec. 31,
Balance Sheet Ratios 1998 1997
- ---------------------------------------------------------------------
Current assets over current liabilities 1.4:1 1.2:1
Days-sales-outstanding-in-receivables 49 47
Days-sales-in-inventory 82 84
Debt as a percentage of total capitalization 40.3 42.8
- ---------------------------------------------------------------------
The Company purchased 2.7 million shares of common stock during
the second quarter of 1998 as part of its overall stock
repurchase program, bringing the year to date total to 3.6
million shares. The Company's average shares outstanding for the
first six months of 1998 were 225 million, a decrease of 4
percent from the average shares outstanding for the first six
months of 1997. Since the beginning of 1995, the Company has
purchased approximately 67 million shares or about 24 percent of
its outstanding shares.
On July 30, 1998, the Company paid a quarterly dividend of 87
cents per share to shareholders of record on June 30, 1998. This
was the 346th consecutive quarterly dividend since 1912 and in
each instance Dow has maintained or increased the dividend.
<PAGE>
--- Page 11 ---
RESULTS OF OPERATIONS
<TABLE>
The Dow Chemical Company and Subsidiaries
Industry and Geographic Segments
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millons (Unaudited) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industry segment sales
Performance Plastics $1,302 $1,340 $2,568 $2,605
Performance Chemicals 1,391 1,316 2,709 2,528
Plastics 987 1,056 1,968 2,066
Chemicals and Metals 612 788 1,262 1,495
Hydrocarbons and Energy 363 616 786 1,193
Diversified Businesses and Unallocated 202 250 393 471
- ---------------------------------------------------------------------------------------
Total $4,857 $5,366 $9,686 $10,358
- ---------------------------------------------------------------------------------------
Industry segment operating income (loss)
Performance Plastics $284 $257 $540 $468
Performance Chemicals 241 233 70 445
Plastics 183 222 391 443
Chemicals and Metals 40 207 93 368
Hydrocarbons and Energy (34) - (25) (6)
Diversified Businesses and Unallocated 5 (107) (462) (141)
- ---------------------------------------------------------------------------------------
Total $719 $812 $607 $1,577
- ---------------------------------------------------------------------------------------
Geographic sales
United States $2,013 $2,416 $3,967 $4,624
Europe 1,681 1,629 3,403 3,216
Rest of World 1,163 1,321 2,316 2,518
- ---------------------------------------------------------------------------------------
Total $4,857 $5,366 $9,686 $10,358
- ---------------------------------------------------------------------------------------
Geographic operating income (loss)
United States $352 $305 ($101) $636
Europe 231 225 422 456
Rest of World 136 282 286 485
- ---------------------------------------------------------------------------------------
Total $719 $812 $607 $1,577
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Industry and Geographic Segment Sales Volume and Price
- ---------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
Percentage change from prior year Volume Price Total Volume Price Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industry segment
Performance Plastics 2% (5)% (3)% 6% (7)% (1)%
Performance Chemicals 10% (4)% 6% 12% (5)% 7%
Plastics 11% (18)% (7)% 9% (14)% (5)%
Chemicals and Metals (6)% (16)% (22)% (4)% (12)% (16)%
Hydrocarbons and Energy (23)% (18)% (41)% (19)% (15)% (34)%
Diversified Businesses
and Unallocated (19)% (0)% (19)% (17)% 0% (17)%
- ---------------------------------------------------------------------------------------
Total 1% (10)% (9)% 3% (9)% (6)%
- ---------------------------------------------------------------------------------------
Geographic segment
United States (10)% (7)% (17)% (8)% (6)% (14)%
Europe 16% (13)% 3% 18% (12)% 6%
Rest of World 1% (13)% (12)% 3% (11)% (8)%
- ---------------------------------------------------------------------------------------
Total 1% (10)% (9)% 3% (9)% (6)%
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--- Page 12 ---
Results of Operations (Continued)
Following are selected data for the three months and six months
ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
Dollars in millions, 1998 1997 1998 1997
except for share amounts ---- ---- ---- ----
- -------------------------
Cost of sales $3,502 $3,836 $7,193 $7,451
% of sales 72% 71% 74% 72%
Research and development, selling,
general and administrative expenses 630 715 1,225 1,342
Operating income 719 812 607 1,577
% of sales 15% 15% 6% 15%
Operating income excluding unusual items 719 853 1,395 1,665
% of sales 15% 22% 14% 16%
Minority Interests' Share in Income 3 48 5 109
Effective tax rate 35.0% 37.4% 35.7% 36.7%
Net income available for common
stockholders 425 571 846 1,023
Earnings per common share $ 1.89 $ 2.48 $ 3.76 $ 4.38
Earnings per common share -
assuming dilution $ 1.86 $ 2.45 $ 3.70 $ 4.33
Operating rate percentage 86% 89% 87% 89%
Net sales for second quarter 1998 were $4.9 billion, down 9
percent from $5.4 billion in the second quarter of 1997. Sales
volume was up slightly versus a year ago, while prices were down
10 percent, with about 2 percentage points of the price decline
due to the negative impact of currency. The acquisition of
Sentrachem late last year has generated new sales for 1998, while
the divestitures of DowBrands (first quarter 1998) and Destec
(second quarter 1997) have reduced sales versus a year ago.
Considering the effect of acquisitions and divestitures on the
second quarter versus the previous year, volume improved 2
percent. Volume was particularly strong in Performance Chemicals
(due to the additions of Hampshire Chemical and Sanachem), up 10
percent, and in Plastics, up 11 percent. The sharp decline in
volume for Hydrocarbons and Energy was due to the sale of Destec
last year. Likewise, the volume decline in Diversified and
Unallocated Businesses was due to the sale of DowBrands in the
first quarter. Volume was up in Europe largely due to the
addition of Sentrachem, down in the United States due to the
absence of DowBrands and Destec, and relatively flat in the rest
of world. Prices were down in all segments and all geographic
regions. Net sales for the first half of the year were $9.7
billion, down 6 percent from $10.4 billion for the same period
last year. While volume grew 3 percent, prices declined 9
percent.
Expenses, which include research and development, selling
(including promotion and advertising), general and administrative
expenses, were $630 million, down $85 million from the second
quarter of 1997. The reduction reflects the elimination of
expenses, most significantly promotion and advertising,
associated with the DowBrands business, partially offset by the
addition of Sentrachem's expenses.
Operating income for the second quarter of 1998 was $719
million, down from $812 million for the second quarter of 1997.
Operating income was negatively impacted by approximately $540
million in lower local sales prices and unfavorable currency,
partially offset by $195 million in lower hydrocarbon and energy
costs. Year to date, operating income was $607 million, including
$788 million in charges recorded during the first quarter for
purchased in-process research and development related to recent
acquisitions, severance costs, asset write-downs, and
environmental remediation costs. Lower prices negatively impacted
year to date operating income by approximately $940 million and
was only partially offset by about $480 million in lower
hydrocarbon and energy costs, the favorable effect of currency on
costs, and lower promotion and advertising expenses following the
sale of the DowBrands business. For the first six months of 1997,
operating income was $1,577 million, including $88 million in
charges recorded in second quarter 1997 for insurance
restructuring, the shutdown of an ethylene cracker in Texas, and
property write-downs taken by DowElanco at the time of the
purchase of Eli Lilly's share.
<PAGE>
--- Page 13 ---
Results of Operations (Continued)
Minority interests' share in income of $3 million for the
quarter decreased significantly from $48 million a year ago, and
will continue to be lower in future quarters due to the
acquisition of Eli Lilly's 40 percent stake in DowElanco, the
divestiture of Destec and the redemption of outside partners'
capital accounts in DowBrands L.P.
Net income for the second quarter was $425 million or $1.89
per share (basic) versus $571 million or $2.48 per share (basic)
for the second quarter of 1997. Last year's second quarter
results included a positive impact of $0.23 per share from one-
time events: a gain on the sale of Destec and the $88 million in
charges previously noted.
PERFORMANCE PLASTICS
Performance Plastics sales of $1,302 million were down 3 percent
versus second quarter 1997. Volume was up 2 percent, but was more
than offset by a 5 percent decline in prices, with 2 percentage
points of the price decline due to the negative impact of
currency. Despite lower prices, operating income for the segment
increased 11 percent to $284 million, from $257 million a year
ago.
Polyurethanes sales for second quarter were flat versus the
second quarter of 1997. Volume improved 6 percent, mostly due to
the addition of Isopol sales, but was offset by a 6 percent
decline in sales prices. Second quarter volumes in Asia Pacific
were down 12 percent versus second quarter 1997. Deteriorating
conditions in Asia Pacific are affecting all polyurethane
products and have begun to affect sales prices in the United
States and Europe. Operating income was negatively impacted by
operational problems at two new plants, but remained flat with
results for the same quarter last year.
Sales of epoxies and intermediates were down 10 percent from a
year ago. Volume declined 6 percent. Prices declined 4 percent,
with 2 percent due to the impact of currency. Weak demand led to
volume declines in the United States and Latin America versus
last year. Volume was flat in Europe. The Asian crisis
significantly impacted sales in the region causing volume to be
down 15 percent versus the second quarter of 1997. Operating
income for the business was up 25 percent versus last year,
mainly due to lower hydrocarbon costs.
Engineering plastics sales for the quarter were down 2 percent
from the same quarter last year, with both volume and prices down
slightly. Demand remained strong for most products. Polycarbonate
was on strict allocation in most markets. Sales of TPU were hurt
by a slowdown in the footwear and automotive industries. The
General Motors strike did not hit hard in the second quarter, but
may have more impact in the third quarter. Operating income for
the quarter was up 14 percent versus the second quarter of 1997
due to lower costs.
Adhesives, sealants and coatings sales for the second quarter
were up 11 percent versus the second quarter of 1997, with a 12
percent increase in volume slightly offset by a 1 percent price
decline. Volume increases were the result of plant/market
expansions in Europe and Latin America. Record production levels
were achieved at all plant sites across Europe. Second quarter
operating income for this growth business was down slightly from
the same quarter last year.
Fabricated products sales for the second quarter of 1998 were
down 7 percent versus a year ago. While volume was up slightly,
prices were down 7 percent, with 4 percent due to a decline in
local prices and 3 percent due to currency. Styrofoam volumes
were strong in Europe and North America, but declined in Asia
Pacific due to the general condition of the Japanese economy and,
in particular, the continuing decline in housing and
constructions starts. Operating income was up 20 percent versus
second quarter 1997 due to lower raw material costs and site
relocation expenses that impacted last year's second quarter
results.
For the first six months of 1998, sales in Performance Plastics
were $2,568 million, down 1 percent from $2,605 million in the
same period last year. Volume growth of 6 percent for this period
was more than offset by falling prices, down 4 percent, and a 3
percent unfavorable currency impact. Operating income was $540
million for the first half of 1998, up 15 percent from $468
million last year, due primarily to strong volume and lower
hydrocarbon and energy costs.
PERFORMANCE CHEMICALS
Second quarter sales for Performance Chemicals were $1,391
million, an increase of 6 percent from $1,316 million in the same
quarter last year. Volume increased 10 percent for the segment
while prices declined 4 percent, largely due to the negative
effect of currency. Operating income for the segment was up 3
percent to $241 million for the second quarter of this year from
$233 million a year ago, excluding $20 million in charges for one-
time events recorded in the second quarter of 1997.
Specialty chemicals sales for the quarter were up 8 percent,
with 14 percent volume growth offset by a 6 percent price decline
versus the same quarter last year. Volume increased due to the
addition of Hampshire Chemical, from the Sentrachem acquisition,
and strong demand for Methocel, superabsorbents and polyglycols.
Volume was strong in the United States, Europe and Latin America,
but fell off in Asia Pacific due to the severe economic
conditions there. Operating income was up 3 percent.
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
Emulsion polymers sales increased 2 percent for the quarter
compared to the second quarter of 1997 as volume growth of 7
percent was partially offset by a 5 percent decline in prices due
to currency. Volume was particularly strong in Europe and steady
in North America. Pricing was mixed, ending flat, with pricing
pressure anticipated for third quarter. Operating income for the
second quarter improved 26 percent versus a year ago, due to
strong volume and monomer costs falling faster than prices.
Sales of agricultural products for second quarter 1998 were 6
percent above the same quarter last year, with volume up 8
percent, local prices up 2 percent, and currency unfavorable 4
percent. Second quarter sales included sales of Sanachem, which
were not in the second quarter of 1997, accounting for 4 percent
of the volume increase. The base business, agricultural chemicals
and urban pesticides, performed well in the second quarter,
fueled by strong new product growth. Tracer, the cotton
insecticide, has met exceptional acceptance by growers in its
second year. Sentricon sales doubled from 1997 levels. First Rate
demand exceeded production capacity as it has been found to be
highly effective as a post-emergent herbicide on soybeans. Second
quarter operating income was down slightly from last year,
adversely affected by exchange rates and the Company's ongoing
investment in biotechnology research. Biotechnology research
expenses are up year-to-year, in line with our strategy to invest
in this high growth arena.
Sales for the first half of 1998 for this segment were $2,709
million, up 7 percent from $2,528 million for the same period of
1997. Sales volume grew 12 percent, due to the addition of
Hampshire Chemical and Sanachem, while prices declined 5 percent,
mostly the result of exchange rates. Operating income of $70
million for the first half of 1998 included the impact of several
unusual items recorded during the first quarter: a charge for
purchased in-process research and development related to the
additional investment in Dow AgroSciences and Mycogen, severance
costs and environmental remediation costs. Operating income of
$445 million for the first six months of 1997 included $20
million in one-time charges for insurance restructuring and
property write-downs. Excluding these items, year to date
operating income for 1998 was $434 million compared with $465
million for 1997.
PLASTICS
Plastics sales in the second quarter of 1998 were $987 million,
down 7 percent from $1,056 million a year ago. Volume increased
11 percent while prices declined 18 percent. Plastics operating
income for the quarter was $183 million, down 18 percent from
$222 million in second quarter 1997.
Polyethylene sales were down 9 percent in the second quarter
versus the same quarter last year. Volume was very strong, with a
10 percent increase over last year, setting a record. Prices
declined sharply, 19 percent, from last year's high. Volume gains
were most significant at Polisur, a 70 percent owned joint
venture in Argentina, and in several products globally: Affinity,
LDPE and Solution, the latter resulting from the startup of new
capacity at BSL. Second quarter operating income for polyethylene
was down 24 percent from the second quarter of 1997 due to the
effects of price and currency declines, only partially offset by
lower ethylene costs.
Polystyrene sales decreased 5 percent in the second quarter
versus the same quarter last year with a 4 percent volume gain
offset by a 9 percent price decline. North America, Europe and
Asia Pacific all showed strong volume growth, while Latin America
volumes fell 9 percent. Prices in Europe fell versus last quarter
with declining monomer prices. Pricing in North America ended the
quarter stable, but at low levels. Operating income for the
business was up 45 percent compared with second quarter 1997 due
to lower global styrene costs and reduced structural costs.
Polypropylene sales continued their strong growth trend, with
volume up significantly as new capacity came on stream in the
second quarter. Market development and customer relationships
have progressed well in both North America and Europe.
Sales for the first half of 1998 for Plastics were $1,968
million, down 5 percent from $2,066 million for the same period
of 1997. Volume grew 9 percent, but was more than offset by a 14
percent decline in sales prices. Operating income for the period
was $391 million, down from $443 million for the first six months
of 1997.
CHEMICALS AND METALS
Chemical and Metals sales in the second quarter of 1998 were $612
million, down from $788 million in the second quarter of 1997.
Sales were severely impacted by steep declines in pricing (16
percent) and lower volumes stemming from reduced export demand
from North America. Vinyl chloride monomer (VCM) pricing fell 18
percent from last quarter, down 46 percent from second quarter
1997. A drop off in demand for VCM and polyvinyl chloride in Asia
Pacific kept volumes normally exported from North America on
shore, upsetting the supply/demand balance. Significant industry
oversupply drove ethylene glycol (EG) prices down sharply.
Caustic remained strong with prices up 50 percent from the second
quarter of 1997, but the price benefit was overwhelmed by price
declines for other products. Accordingly, operating income was
down significantly from $207 million a year ago to $40 million
for this quarter.
<PAGE>
--- Page 15 ---
Results of Operations (Continued)
Sales for this segment for the first six months of 1998 were
$1,262 million, down 16 percent from $1,495 million in the first
half of 1997. Volume was down 4 percent while prices declined 12
percent. Operating income for the first half of the year was $93
million, significantly impacted by $55 million of unusual items,
primarily environmental remediation charges, recorded in the
first quarter. Excluding the unusual items, operating income was
$148 million versus $368 million for the first half of 1997. This
decline in operating income was the result of overall lower
prices and higher costs associated with plant outages.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in the second quarter of 1998
were $363 million, a decrease of 41 percent from $616 million for
the same period a year ago, largely due to the absence of Destec
which was sold in the second quarter of 1997. Sales prices were
down 18 percent. Operating loss for the quarter was $34 million
compared with breakeven operating income for second quarter 1997.
Second quarter results were negatively impacted by planned and
unplanned plant shutdowns. Despite these events, operating rates
remained high at 90 percent (97 percent year to date).
Sales for the first half of 1998 were $786 million versus
$1,193 million for the first half of 1997. Volume was down 19
percent, again, largely due to the absence of Destec, while
prices were down 15 percent. Operating loss for the first six
months of the year was $25 million, including $11 million of
unusual items (environmental remediation costs) recorded in the
first quarter. Operating loss for the same period last year was
$6 million, including a property write-down of $15 million
recorded in the second quarter of 1997.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses sales for the second quarter of 1998 were
$202 million, down 19 percent from $250 million in the second
quarter of 1997. The addition of Sentrachem sales (those not
assigned to other segments) largely offset the loss of DowBrands
sales due to the first quarter sale of the DowBrands business to
S.C. Johnson and Son, Inc. Operating income for this segment was
$5 million, compared with an operating loss of $107 million for
the second quarter of 1997. This increase was the result of
several factors: improvement in New Businesses, good results from
the insurance companies, lower severance costs following the
special charge taken during the first quarter, and the absence
this quarter of several one-time charges taken during second
quarter 1997.
Sales for the first six months of 1998 were $393 million, a
decrease from $471 million. Operating income for this period
declined from a loss of $141 million last year to a loss of $462
million, including $351 million of unusual charges recorded
during the first quarter for purchased in-process research and
development costs related to the acquisition of Sentrachem,
severance costs, asset write-downs and environmental remediation
costs. Last year's operating loss included charges for one-time
events totaling $52 million. Excluding the unusual items,
operating income for the first six months was a loss of $111
million compared with a loss of $89 million for the first half of
last year.
COMPANY SUMMARY
Operating Rate
The Company's global plant operating rate for its chemicals and
plastics businesses was 86 percent, down slightly from 89 percent
in the second quarter of 1997.
Purchased In-process Research and Development
Purchased in-process research and development represents the
value assigned in a purchase business combination to research and
development projects of the acquired business that had commenced
but had not yet been completed at the date of acquisition and
which have no alternative future use. In accordance with
Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," as interpreted by FASB
Interpretation No. 4, amounts assigned to purchased in-process
research and development meeting the above stated criteria must
be charged to expense as part of the allocation of the purchase
price of the business combination. Accordingly, a charge of $338
million was recorded during the first quarter of 1998 as part of
the allocations of the purchase prices related to the
acquisitions of Sentrachem, additional common stock of Mycogen,
and the remaining 40 percent of DowElanco (since renamed Dow
AgroSciences). An additional $12 million was recorded during the
second quarter of 1998 related to the Mycogen's acquisition of
Dinamilho Carol Productos Agricolas, a Brazilian seed company.
<PAGE>
--- Page 16 ---
Results of Operations (Continued)
Special Charge
In the first quarter of 1998, a special charge of $330 million
was recorded, including $110 million for severance and $220
million for the write-down of several assets. In the first
quarter, the Company adopted employee severance plans for North
America, Europe and Sentrachem, most of which will be completed
by the end of the year. The headcount reduction related to these
plans is expected to be about 1800 employees. The asset write-
downs recorded during the first quarter included Radian
International LLC, Dow-United Technologies Composite Products,
Inc. and an agricultural plant in Brazil.
During the second quarter of 1998, $26 million in severance
payments were paid to 691 employees, and charged against the
severance liability.
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates was up $2
million in the second quarter of 1998 versus the same quarter
last year.
Net financial expense, which is the total of interest expense,
interest income and foreign exchange, increased to $100 million
this quarter, compared with $64 million in the second quarter of
1997. The increase in net financial expense was mainly
attributable to a decrease in interest income resulting from
reduced cash and short-term investment balances.
Sundry income includes a variety of both income and expense
items including royalty income, dividends from investments, and
gains or losses on sales of investments and assets. Sundry income
for the quarter was $16 million versus $217 million for the same
period last year, down significantly due to the $186 million gain
on the sale of the Destec recorded in the second quarter of 1997.
Year to date, sundry income was $858 million, reflecting the $816
million gain recorded in the first quarter for the sale of the
DowBrands business.
Provision for Taxes on Income
The effective tax rate for the second quarter was 35.0 percent
versus 37.4 percent for the second quarter of 1997. Year to date,
the effective tax rate was 35.7 percent.
Expectations for the Remainder of 1998
Global economic growth is beginning to slow, and the major
impact of the crisis in Asia Pacific is starting to affect other
geographic regions. Since demand has slowed significantly in Asia
Pacific, exports to the region have declined, resulting in excess
supply levels of some key products in North America and Europe.
As a result, pricing is under pressure, especially in the basic
products of ethylene dichloride/VCM and EG. Greater impact from
Asia Pacific on total results was felt in the second quarter than
in the first,and this issue is expected to further impact results
in the near future.
To date, we are particularly pleased with the contribution from
the Performance businesses, our geographic diversity and downward
expense trend. In addition, we believe our continued capital
discipline is notable in the industry. On a different subject,
several recently announced industry consolidations are changing
the competitive profile. For the long term, Dow sees this as a
positive move.
As we look toward the second half of 1998, we expect to see
some decline in our overall results. The electronics,
construction and durables industries are showing signs of
weakness. However, the businesses are following through on their
goals and enacting appropriate contingency plans. We will
continue to refine our portfolio, restructure our new
acquisitions, and pursue our growth plans, especially in
Agricultural Products and Specialty Chemicals. We also expect that
hydrocarbon and energy prices will not be moving up significantly
for the remainder of the year.
<PAGE>
--- Page 17 ---
ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130 (Reporting Comprehensive Income), which was
effective January 1, 1998. Consolidated Statements of
Comprehensive Income have been included in Part I - Financial
Information, under Item 1. Financial Statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131 (Disclosures about Segments of an Enterprise and
Related Information), which was effective January 1, 1998. SFAS
No. 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has
not yet determined what changes, if any, will be made to its
segment structure as a result of this standard. This standard is
not expected to be adopted for interim financial reporting in
1998.
YEAR 2000
Since early 1997, a Year 2000 (Y2K) project team has been
dedicated to making the Company's systems and businesses,
worldwide, ready for the next millennium. The Company's process
of assuring Y2K compliance includes assessing all systems used by
the Company for Y2K impacts and costs to upgrade, upgrading
systems that are not Y2K ready, retiring systems which either do
not add significant value or are redundant with strategic
systems, and testing and monitoring systems for Y2K readiness.
The Company's implementation of enterprise financial and
operational systems and standardized desktop computing during
the last several years has facilitated this effort. The
assessment phase was completed in January 1998 and efforts
are now focused on upgrading or retiring systems that are not
Y2K ready. The project is on target for mid-1999 completion,
and the Company believes it will be fully compliant by 2000.
Since the beginning of 1997, the Audit Committee of the
Company's Board of Directors has reviewed the plan and progress
quarterly.
Project costs are expected to range from $50 million to $70
million to bring the Company's information system applications
into compliance, with approximately half incurred in 1998 and
the remainder in 1999. The Y2K effort is being supported by a
reallocation of existing resources. The required system
modifications are not expected to materially affect the
Company's consolidated financial statements.
The Company is contacting major suppliers to gain assurance
of their intent to be Y2K compliant by 2000, and customers
to advise them of our intent to be Y2K compliant by 2000. The
Company cannot control whether key third parties, including
governments, upon which the Company relies will be fully Y2K
compliant by 2000. Contingency plans are currently being
developed.
<PAGE>
--- Page 18 ---
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Dow's business operations give rise to market risk exposure due
to changes in foreign exchange rates, interest rates, commodity
prices and other market factors such as equity prices. To manage
such risks effectively, the Company enters into hedging
transactions, pursuant to established guidelines and policies,
that enable it to mitigate the adverse effects of financial
market risk. A secondary objective is to add value by creating
additional exposure within established limits and policies. The
potential impact of creating such additional exposures is not
material to the Company's results.
The global nature of Dow's business requires active
participation in the foreign exchange markets. As a result of
investments, production facilities and other operations on a
global scale, the Company has assets, liabilities and cash flows
in currencies other than the U.S. dollar. The primary objective
of the Company's foreign exchange risk management is to optimize
the U.S. dollar value of net assets and cash flows, keeping the
adverse impact of currency movements to a minimum. To achieve
this objective, the Company hedges on a net exposure basis using
foreign currency forward contracts and over-the-counter option
contracts. Main exposures are related to assets and liabilities
denominated in the currencies of Europe, Asia Pacific and Canada;
bonds denominated in foreign currencies - mainly the Deutsche
mark, Swiss franc and Japanese yen; and economic exposure derived
from the risk that currency fluctuations could affect the dollar
value of future cash flows. The majority of the foreign exchange
exposure is related to the Japanese yen, Deutsche mark, Dutch
guilder and other European currencies.
The main objective of interest rate risk management is to
reduce the total funding cost to the Company and to alter the
interest rate exposure to the desired risk profile. Dow uses
interest rate swaps, "swaptions" and exchange traded instruments
to accomplish this objective. The Company's primary exposure is
to the U.S. dollar yield curve.
Inherent in Dow's business is exposure to price changes for
several commodities. Some exposures can be hedged effectively
through liquid tradable financial instruments. Chemical
feedstocks and natural gas constitute the main commodity
exposures. Over-the-counter and exchange traded instruments are
used to hedge these risks when feasible. The risk of these
hedging instruments is not material.
As a result of acquisition and divestiture activity, the
Company has a portfolio of equity securities. The major part of
this exposure is related to restricted stock warrants. This
exposure is managed in a manner consistent with the Company's
market risk policies and procedures.
Dow uses value at risk (VAR) stress testing and scenario
analysis for risk measurement and control purposes. VAR estimates
the potential gain or loss in fair market values, given a certain
move in prices over a certain period of time, using specified
confidence levels. On an ongoing basis, the Company estimates the
maximum gain or loss that could arise in one day, given a two
standard deviation move in the respective price levels. These
amounts are relatively insignificant in comparison to the size of
the equity and earnings of the Company. The VAR methodology used
by Dow is based primarily on the variance/covariance statistical
model. As an example, the VAR for one day, using a 95 percent
confidence level at December 31, 1997, for foreign exchange,
interest rate and equity exposures, net of hedges was: foreign
exchange - $12 million; interest rate - $23 million; and equity -
$3 million. Management believes there have been no material
changes in market risk or in risk management policies subsequent
to December 31, 1997.
<PAGE>
--- Page 19 ---
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50
percent stockholders in Dow Corning Corporation ("Dow Corning").
Dow Corning, the Company and/or Corning have been sued in a
number of individual and class actions by plaintiffs seeking
damages, punitive damages and injunctive relief in connection
with injuries purportedly resulting from alleged defects in
silicone breast implants. In addition, certain stockholders of
the Company have filed separate consolidated class action
complaints alleging that the Company, Dow Corning or some of
their respective Directors violated duties imposed by the federal
securities laws regarding disclosure of alleged defects in
silicone breast implants. All individual defendants in this case
have been dismissed without prejudice. The Company and one of its
former officers have also been sued in two separate class action
complaints (now consolidated) alleging that the defendants
violated duties imposed by the federal securities laws regarding
disclosure of information material to a reasonable investor's
assessment of the magnitude of the Company's exposure to direct
liability in silicone breast implant litigation.
On May 15, 1995, Dow Corning announced that it had voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code. Under Chapter 11, all claims against Dow
Corning (although not against its co-defendants) are
automatically stayed.
It is impossible to predict the outcome of each of the above
described legal actions. However, it is the opinion of the
Company's management that the possibility that these actions will
have a material adverse impact on the Company's consolidated
financial statements is remote, except as described below.
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993.
In January 1995, Dow Corning announced a pretax charge of $241
million ($152 million after tax) for the fourth quarter of 1994.
These charges included Dow Corning's best estimate of its
potential liability for breast implant litigation based on a
global Breast Implant Litigation Settlement Agreement (the
"Settlement Agreement"); litigation and claims outside the
Settlement Agreement; and provisions for legal, administrative
and research costs related to breast implants. The charges for
1993 and 1994 included pretax amounts of $1,240 million and $441
million, respectively, less expected insurance recoveries of $600
million and $200 million, respectively. The 1993 amounts
reported by Dow Corning were determined on a present value basis.
On an undiscounted basis, the estimated liability noted above for
1993 was $2,300 million less expected insurance recoveries of
$1,200 million. As a result of the Dow Corning actions, the
Company recorded its 50 percent share of the charges, net of tax
benefits available to the Company. The impact on the Company's
net income was a charge of $192 million for 1993 and a charge of
$70 million for 1994.
Dow Corning reported an after-tax net loss of $167 million for
the second quarter of 1995, of which the Company's share amounted
to $83 million. Dow Corning's second quarter loss was a result
of a $221 million after-tax charge taken to reflect a change in
accounting method from the present value basis noted above to an
undiscounted basis resulting from the uncertainties associated
with its Chapter 11 filing. As a result of Dow Corning's 1995
second quarter loss and Chapter 11 filing, the Company recognized
a pretax charge against income of $330 million for the second
quarter of 1995, fully reserved its investment in Dow Corning and
is not recognizing its 50 percent share of equity earnings while
Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
approved the Settlement Agreement pursuant to which plaintiffs
choosing to participate in the Settlement Agreement released the
Company from liability. The Company was not a participant in the
Settlement Agreement nor was it required to contribute to the
settlement. On October 7, 1995, Judge Pointer issued an order
which concluded that the Settlement Agreement was not workable in
its then-current form because the funds committed to it by
industry participants were inadequate. The order provided that
plaintiffs who had previously agreed to participate in the
Settlement Agreement could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims asserted against Dow Corning is limited to its
investment in Dow Corning which, after the second quarter charge
noted above, is zero. As a result, any future charges by Dow
Corning related to such claims or as a result of the Chapter 11
proceeding would not have an adverse impact on the Company's
consolidated financial statements.
The Company is separately named as a defendant in over 13,000
breast implant product liability cases. In these situations,
plaintiffs have alleged that the Company should be liable for Dow
Corning's alleged torts based on the Company's 50 percent stock
ownership in Dow Corning and that the Company should be liable by
virtue of alleged "direct participation" by the Company or its
agents in Dow Corning's breast implant business. These latter,
direct participation claims include counts sounding in strict
liability, fraud, aiding and abetting, conspiracy, concert of
action and negligence.
<PAGE>
--- Page 20 ---
Legal Proceedings (Continued)
Judge Pointer has been appointed by the Federal Judicial Panel
on Multidistrict Litigation to oversee all of the product
liability cases involving silicone breast implants filed in the
U.S. federal courts. Initially, in a ruling issued on December 1,
1993, Judge Pointer granted the Company's motion for summary
judgment, finding that there was no basis on which a jury could
conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an
interlocutory opinion issued on April 25, 1995, Judge Pointer
affirmed his December 1993 ruling as to plaintiffs' corporate
control claims but vacated that ruling as to plaintiffs' direct
participation claims.
In his opinion, Judge Pointer reaffirmed the view he had
expressed in his December 1993 ruling that the Company is a
separate, independent entity from Dow Corning and therefore has
no legal responsibility as a result of its ownership of Dow
Corning stock for Dow Corning's breast implant business. However,
Judge Pointer stated that, under the law of at least some states
(although not necessarily all states), actions allegedly taken by
the Company independent of its role as a stockholder in Dow
Corning could give rise to liability under a negligence theory.
Judge Pointer declined to address plaintiffs' other legal
theories, including strict liability, fraud, aiding and abetting,
conspiracy and concert of action. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the federal product liability cases. The Company has filed
claims with insurance carriers to recover in the event it is held
liable in the federal (or any other) breast implant litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California
ruling was final and was appealed. On September 25, 1996, the
California Court of Appeal for the 4th District affirmed the
trial court's order granting summary judgment to the Company. On
July 9, 1998, the California Supreme Court affirmed the decision
of the Court of Appeal, and the California summary judgment order
in favor of the Company is now final. The Michigan ruling was
made final on March 20, 1997. This decision has been appealed by
plaintiffs. The New Jersey ruling has been reconsidered and all
claims were again dismissed, except the negligence claim.
Plaintiffs in New York filed a motion to reconsider based on
Judge Pointer's April 25, 1995 ruling. On September 22, 1995,
Judge Lobis, presiding over the consolidated New York breast
implant litigation, dismissed all counts of all cases filed
against the Company in New York on the ground that no reasonable
jury could find against the Company. On May 28, 1996, the New
York Supreme Court Appellate Division affirmed the lower court's
dismissal of all claims against the Company. New York's highest
court subsequently denied plaintiffs' petition for review, and
the order dismissing all claims against the Company is now final.
Other rulings that are not final decisions are also subject to
reconsideration. On October 20, 1996, in a Louisiana state court
breast implant case styled Spitzfaden v. Dow Corning, et al., the
court entered an order maintaining certification of a class of
Louisiana plaintiffs consisting of recipients of Dow Corning
breast implants who, as of January 15, 1997, (i) are residents of
Louisiana, (ii) are former residents of Louisiana who are
represented by Louisiana counsel, or (iii) received their
implants in Louisiana and are represented by Louisiana counsel,
together with the spouses and children of such plaintiffs, and
representatives of the estates of class members who are deceased.
On August 18, 1997, at the conclusion of the first of four phases
of this case, the jury found in part that the Company had been
negligent in the testing and/or research of silicone, had
misrepresented and concealed unspecified hazards associated with
using silicone in the human body and had conspired with Dow
Corning to misrepresent or conceal such hazards. The Company has
appealed the jury's verdict. On December 1, 1997, the trial court
decertified the class. Further action in the Spitzfaden case will
commence, if at all, only after the resolution of pending
appeals. The Company remains a defendant in other breast implant
product liability cases originally brought in state courts and
continues to be named as a defendant as cases are filed in
various courts which are then transferred to the United States
District Court, Eastern District of Michigan. It is impossible to
predict the outcome or to estimate the cost to the Company of
resolving any of the product liability cases described above.
The Company was also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning.
Federal District Court Judge Paul A. Magnuson has been appointed
by the Federal Judicial Panel on Multidistrict Litigation to
oversee all of the product liability cases involving silicone jaw
implants filed in the U.S. federal courts. On March 31, 1995,
Judge Magnuson granted the Company's motion for summary judgment,
concluding, based on virtually the same arguments that were
presented to Judge Pointer, that no reasonable jury could find in
favor of plaintiffs on any of their claims against the Company.
On June 13, 1995, Judge Magnuson denied plaintiffs' motion to
reconsider his ruling based on Judge Pointer's April 25, 1995
decision, and granted the Company's request to enter a final
judgment in its favor. The United States Court of Appeals for the
Eighth Circuit affirmed the summary judgment in favor of the
Company on May 16, 1997. That judgment is now final.
<PAGE>
--- Page 21 ---
Legal Proceedings (Continued)
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas,
granted in part and denied in part the Company's motion for
summary judgment. Judge Schneider granted the Company's motion as
to (i) all claims based on the Company's stockholder status in
Dow Corning, (ii) the claim that the Company was liable in
negligence for failing to supervise Dow Corning, and (iii)
plaintiffs' licensor-licensee claim. Judge Schneider denied the
Company's motion with regard to plaintiffs' claims sounding in
fraud, aiding and abetting, conspiracy, certain negligence claims
and a claim brought under the Texas Deceptive Trade Practices
Act. As a result, the Company remains a defendant as to such
claims in the Harris County product liability cases. In those
cases (and in cases brought in certain other jurisdictions
including those before Judge Pointer), the Company has filed
cross-claims against Dow Corning on the ground that if the
Company and Dow Corning are found jointly and severally liable,
Dow Corning should bear appropriate responsibility for the
injuries judged to be caused by its product. In certain
jurisdictions, the Company has also filed cross-claims and/or
third party claims against Corning. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the Harris County product liability cases.
In an order dated December 1, 1994, Judge Frank Andrews,
presiding in the consolidated breast implant cases in Dallas
County, Texas, granted the Company's motion for summary judgment
"in all respects except as to theories of conspiracy and strict
liability as a component supplier." As a result, the Company
remains a defendant as to such claims in the Dallas County
product liability cases. It is impossible to predict the outcome
or to estimate the cost to the Company of resolving any of these
actions.
In addition to the jury findings in the first phase of the
Louisiana state case noted above, three breast implant product
liability cases brought against the Company have now been tried
to judgment. In February 1995, a Harris County jury exonerated
the Company in one case and found the Company jointly and
severally liable with Dow Corning for $5.23 million on a single
count in a second case. After the verdict, however, the Court
overturned the jury's verdict and entered judgment for the
Company. On October 30, 1995 a state court jury in Reno, Nevada
found the Company liable for $4.15 million in compensatory
damages and $10 million in punitive damages. The Company has
appealed the verdict. The Company has filed a claim in Dow
Corning's bankruptcy proceedings to recover from Dow Corning its
share of any monies the Company might pay as a result of the
Nevada verdict or any other adverse decision related to Dow
Corning's products.
On May 13, 1997, United States District Court Judge Denise
Page Hood ordered that all breast implant claims currently
pending against the Company as to which judgment had not been
entered, whether pending in state or federal courts, be
transferred to the United States District Court, Eastern District
of Michigan pursuant to a decision issued by the United States
Court of Appeals for the Sixth Circuit on May 8, 1997. On August
1, 1997, Judge Hood issued her case management order with respect
to the transferred claims, and ordered that all implant claims
later filed in federal or state courts against the Company should
likewise be transferred. On August 5, 1997, the Tort Committee in
Dow Corning's bankruptcy case filed a petition for a writ of
certiorari with the United States Supreme Court seeking review of
the May 8, 1997 decision of the Sixth Circuit. On November 10,
1997, the Supreme Court denied the Tort Committee's petition.
Judge Hood's May 13 order transferred the Louisiana state
court breast implant case, Spitzfaden v. Dow Corning, et al., to
the United States District Court, Eastern District of Michigan.
The plaintiffs in that case filed an emergency motion to
transfer, or abstain and remand, the case back to the Louisiana
state court. On May 21, 1997, Judge Hood "abstain(ed) from the
claims involved in Phases I and II" of that case resulting in its
return to the Louisiana state court and the resumption of the
trial. The Company has sought review of Judge Hood's May 21
decision by the United States Court of Appeals for the Sixth
Circuit. On June 25, 1998, the Sixth Circuit rejected the
Company's argument that Judge Hood's May 21, 1997 order returning
Phases I and II of the Spitzfaden proceeding to Louisiana was an
abuse of her discretion.
On July 7, 1998, Dow Corning, the Company and Corning, on the
one hand, and the Tort Claimants' Committee in Dow Corning's
bankruptcy on the other, agreed on a binding Term Sheet to
resolve all tort claims involving Dow Corning's silicone medical
products, including the claims against Corning and the Company.
The agreement contained in the Term Sheet will be effectuated by
the filing of a plan of reorganization in Dow Corning's
bankruptcy embodying its terms. Before such a plan can become
effective, it will be subject to a disclosure statement hearing,
a vote by the claimants, a confirmation hearing and all relevant
provisions of the Bankruptcy Code. Accordingly, there can be no
assurances at this time that such a plan will become effective.
<PAGE>
--- Page 22 ---
Legal Proceedings (Continued)
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the theory
that the Company should be liable in the breast implant
litigation because of its stockholder relationship with Dow
Corning. The Company's management believes that there is no merit
to plaintiffs' claims that the Company is liable for alleged
defects in Dow Corning's silicone products because of the
Company's alleged direct participation in the development of
those products, and the Company intends to contest those claims
vigorously. Management believes that the possibility is remote
that a resolution of plaintiffs' direct participation claims,
including the vigorous defense against those claims, will have a
material adverse impact on the Company's financial position or
cash flows. Nevertheless, in light of Judge Pointer's April 25,
1995 ruling, it is possible that a resolution of plaintiffs'
direct participation claims, including the vigorous defense
against those claims, could have a material adverse impact on the
Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of any
such impact.
<PAGE>
--- Page 23 ---
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of The Dow Chemical Company
was held on May 14, 1998. At that meeting the following directors
were elected: Arnold A. Allemang, John C. Danforth, Enrique C.
Falla, Allan D. Gilmour, Frank P. Popoff and William S.
Stavropoulos. In addition, the terms of the following directors
continued after that meeting: Jacqueline K. Barton, David T.
Buzzelli, Anthony J. Carbone, Fred P. Corson, Willie D. Davis,
Michael L. Dow, Joseph L. Downey, Barbara H. Franklin, Michael D.
Parker, J. Pedro Reinhard, Harold T. Shapiro and Paul G. Stern.
The following table gives a brief description of each matter
voted upon at the above referenced annual meeting and, as
applicable, the number of votes cast for, against or withheld, as
well as the number of abstentions and broker nonvotes.
Description of Matter
- ---------------------
Broker
For Against Withheld Abstentions Nonvotes
--------------------------------------------------
1. Election of Directors:
Class III
---------
Arnold A. Allemang 186,723,249 n/a 4,829,846 n/a n/a
John C. Danforth 187,057,173 n/a 4,495,922 n/a n/a
Enrique C. Falla 186,798,020 n/a 4,755,075 n/a n/a
Allan D. Gilmour 186,984,659 n/a 4,568,436 n/a n/a
Frank P. Popoff 186,904,296 n/a 4,648,799 n/a n/a
William S. Stavropoulos 187,009,862 n/a 4,543,233 n/a n/a
2. Ratification of the
Selection of Deloitte &
Touche LLP as the
Company's Independent
Auditors for 1998 190,618,388 349,926 n/a 584,779 0
n/a - Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed by the Company
during the second quarter of 1998.
The following trademarks of The Dow Chemical Company appear in
this report: Affinity, Methocel, Styrofoam.
The following trademarks of Dow AgroSciences or its
affiliates appear in this report: First Rate, Sentricon,
Tracer.
<PAGE>
--- Page 24 ---
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.
THE DOW CHEMICAL COMPANY
------------------------
Registrant
Date: August 14, 1998
- ----
G. Michael Lynch
----------------
G. Michael Lynch
Vice President & Controller
(Chief Accounting Officer)
<PAGE>
--- Page 25 ---
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