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 September 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 past 90 days. Yes [X] No [ ].
Outstanding at
Class September 30, 1998
----- ------------------
Common Stock, $2.50 par value 221,340,159 shares
<PAGE>
--- Page 1 ---
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
Disclosure Regarding Forward-Looking Information 8
Third Quarter Earnings Announcement 8
Acquisitions and Divestitures 9
Changes in Financial Condition 10
Results of Operations 11
Subsequent Events 17
Accounting Policies 17
Year 2000 17
Euro Conversion 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit 3(ii) 25
Exhibit 27 36
<PAGE>
--- Page 2 ---
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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millions, except for share amounts (Unaudited) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $4,314 $4,857 $14,000 $15,215
- --------------------------------------------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,258 3,530 10,451 10,981
Insurance and finance company
operations, pretax income (25) (35) (83) (71)
Research and development expenses 198 197 580 583
Selling, general and administrative expenses 401 478 1,244 1,434
Amortization of intangibles 23 17 62 41
Purchased in-process research and development (Note B) - - 350 -
Special charge (Note C) (24) - 306 -
---------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,831 4,187 12,910 12,968
- --------------------------------------------------------------------------------------------------------
Operating Income 483 670 1,090 2,247
- --------------------------------------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates 28 (18) 78 21
Interest expense and amortization of debt discount (121) (113) (370) (359)
Interest income and foreign exchange - net 37 23 99 167
Sundry income - net (Note D) 50 98 908 378
---------------------------------------------------------------------------------------------------
Total other income (expense) (6) (10) 715 207
- --------------------------------------------------------------------------------------------------------
Income before Provision for Taxes on Income and Minority Interests 477 660 1,805 2,454
- --------------------------------------------------------------------------------------------------------
Provision for Taxes on Income 158 236 632 895
- --------------------------------------------------------------------------------------------------------
Minority Interests' Share in Income 4 - 9 109
- --------------------------------------------------------------------------------------------------------
Preferred Stock Dividends 1 2 4 5
- --------------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $314 $422 $1,160 $1,445
- --------------------------------------------------------------------------------------------------------
Weighted-average Common Shares Outstanding 222.7 227.9 224.3 231.9
- --------------------------------------------------------------------------------------------------------
Per Share Data
Earnings per common share $1.41 $1.85 $5.17 $6.23
Earnings per common share - assuming dilution $1.40 $1.82 $5.10 $6.15
Common stock dividends declared per share $0.87 $0.87 $2.61 $2.49
- --------------------------------------------------------------------------------------------------------
Depreciation $272 $287 $814 $890
- --------------------------------------------------------------------------------------------------------
Capital Expenditures $365 $310 $994 $802
- --------------------------------------------------------------------------------------------------------
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. (Except as otherwise indicated by
the context, the terms "Company" or "Dow" as used herein mean The Dow Chemical Company and its
consolidated subsidiaries.)
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. In the third quarter of 1998, this
charge was reduced by $24 million.
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>
<PAGE>
--- Page 3 ---
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Sept. 30, Dec. 31,
In millions (Unaudited) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- --------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $226 $235
Marketable securities and interest-bearing deposits 558 302
Accounts and notes receivable:
Trade (less allowance for doubtful receivables - 1998, $91; 1997, $73) 2,864 3,257
Other 1,738 1,701
Inventories: Finished and work in process 2,183 2,309
Material and supplies 568 612
Deferred income tax assets - current 358 224
----------------------------------------------------------------------------------------------------
Total current assets 8,495 8,640
- --------------------------------------------------------------------------------------------------------
Investments
Investment in nonconsolidated affiliates 1,262 1,206
Other investments 2,127 2,529
Noncurrent receivables 346 400
----------------------------------------------------------------------------------------------------
Total investments 3,735 4,135
- --------------------------------------------------------------------------------------------------------
Property
Property 24,267 23,345
Less accumulated depreciation 16,027 15,293
----------------------------------------------------------------------------------------------------
Net property 8,240 8,052
- --------------------------------------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization - 1998, $227; 1997, $211) 1,408 1,762
Deferred income tax assets - noncurrent 513 452
Deferred charges and other assets 978 999
----------------------------------------------------------------------------------------------------
Total other assets 2,899 3,213
- --------------------------------------------------------------------------------------------------------
Total Assets $23,369 $24,040
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $1,263 $1,656
Long-term debt due within one year 249 406
Accounts payable: Trade 1,422 1,731
Other 958 960
Income taxes payable 676 521
Deferred income tax liabilities - current 45 100
Dividends payable 199 200
Accrued and other current liabilities 1,736 1,766
---------------------------------------------------------------------------------------------------
Total current liabilities 6,548 7,340
- --------------------------------------------------------------------------------------------------------
Long-Term Debt 4,259 4,196
- --------------------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 795 649
Pension and other postretirement benefits - noncurrent 1,850 1,840
Other noncurrent obligations 1,725 1,664
---------------------------------------------------------------------------------------------------
Total other noncurrent liabilities 4,370 4,153
- -------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 586 676
- --------------------------------------------------------------------------------------------------------
Temporary Equity
Temporary equity - other 23 9
Preferred stock at redemption value 118 124
Guaranteed ESOP obligation (84) (84)
---------------------------------------------------------------------------------------------------
Total temporary equity 57 49
- --------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 685 532
Retained earnings 12,932 12,357
Accumulated other comprehensive income (349) (146)
Treasury stock, at cost (6,537) (5,935)
---------------------------------------------------------------------------------------------------
Net stockholders' equity 7,549 7,626
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,369 $24,040
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
--- Page 4 ---
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Nine Months Ended
Sept. 30, Sept. 30,
In millions (Unaudited) 1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------------------------
Operating Activities
Net income available for common stockholders $1,160 $1,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 877 948
Provision for deferred income tax 21 130
Undistributed earnings of nonconsolidated affiliates (64) 4
Minority interests' share in income 9 109
Net gain on sale of consolidated companies (816) (186)
Net gain on sales of property (38) (33)
Other net gain (loss) 9 (39)
Purchased in-process research & development 350 -
Special charge 306 -
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 370 (213)
Inventories 105 111
Accounts payable (292) (88)
Other assets and liabilities (100) 598
--------------------------------------------------------------------------------------
Cash provided by operating activities 1,897 2,786
- -------------------------------------------------------------------------------------------
Investing Activities
Purchases of property (994) (802)
Proceeds from sales of property 82 51
Purchases of consolidated companies (357) (1,270)
Proceeds from sale of consolidated companies 1,300 907
Proceeds from outside investors in limited partnership 200 -
Purchases from outside investors in limited partnership (210) (909)
Investments in nonconsolidated affiliates (41) (201)
Purchases of investments (3,084) (1,977)
Proceeds from sales of investments 3,031 1,805
--------------------------------------------------------------------------------------
Cash used in investing activities (73) (2,396)
- -------------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable (545) 283
Proceeds from issuance of long-term debt 256 244
Payments on long-term debt (431) (621)
Purchases of treasury stock (604) (1,444)
Proceeds from sales of common stock 112 146
Distributions to minority interests (23) (64)
Dividends paid to stockholders (590) (553)
--------------------------------------------------------------------------------------
Cash used in financing activities (1,825) (2,009)
- -------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (8) (7)
- -------------------------------------------------------------------------------------------
Summary
Decrease in cash and cash equivalents (9) (1,626)
Cash and cash equivalents at beginning of year 235 1,903
--------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $226 $277
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millions (Unaudited) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $314 $422 $1,160 $1,445
- -------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on investments (153) 91 (212) 163
Cumulative translation adjustments 14 10 9 (33)
Minimum Pension Liability - - - -
--------------------------------------------------------------------------------------
Total other comprehensive income (139) 101 (203) 130
- -------------------------------------------------------------------------------------------
Comprehensive Income $175 $523 $957 $1,575
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
--- Page 5 ---
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
14,000 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
<PAGE>
--- Page 6 ---
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 $380 million at
September 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 business 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.
<PAGE>
--- Page 7 ---
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The Private Secruities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements made by or on behalf
of the Company. 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, as well as issues related
to Year 2000 and the Euro conversion. Accordingly, there is no
assurance that the Company's expectations will be realized.
THIRD QUARTER EARNINGS ANNOUNCEMENT (OCTOBER 22, 1998)
DOW REPORTS THIRD QUARTER EARNINGS OF $1.40 PER SHARE
- --------------------------------------------------------------------
Third Quarter of 1998 Highlights
- - Earnings per share were $1.40 compared with $1.82 for the same
period in 1997.
- - Third quarter sales were $4.3 billion versus $4.9 billion a
year ago due to lower prices.
- - Sales and operating income improved for the Performance
segments, which partially offset significant declines in Plastics
and Chemicals & Metals.
- --------------------------------------------------------------------
(In millions, except for per share amounts)
3 Months Ended 9 Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $4,314 $4,857 $14,000 $15,215
Net Income Available for $ 314 $ 422 $ 1,160 $ 1,445
Common Stockholders
Earnings Per Common Share $ 1.41 $ 1.85 $ 5.17 $ 6.23
Earnings Per Common Share -
Diluted $ 1.40 $ 1.82 $ 5.10 $ 6.15
- --------------------------------------------------------------------
Review of Third Quarter Results
The Dow Chemical Company today announced sales of $4.3 billion,
operating income of $483 million, and diluted earnings per share
of $1.40 for the third quarter of 1998.
Sales declined 11 percent as prices fell $555 million due to
weak business conditions in Asia Pacific and industry overcapacity
in the basic segments. Sales volume increased 1 percent in the
third quarter versus the same period a year ago, net of
acquisitions and divestitures. Operating income decreased $187
million as price declines were not offset by lower feedstock costs
and reductions in selling, general and administrative expenses.
Vinyl chloride monomer and other chlorine derivatives suffered
price declines as significantly reduced demand in Asia Pacific led
to surplus supply in that geographic region and globally. As a
result, Chemicals and Metals had $139 million in price erosion,
contributing to decreases of 21 percent for sales and 77 percent
for operating income. Lower prices for polyethylene contributed
to Plastics having a 13 percent decline in sales and a 55 percent
decrease in operating income. Dow's polyethylene volume growth
reflected strong global demand for its differentiated products.
Performance Plastics and Performance Chemicals had a combined
gain of 9 percent in operating income, demonstrating the less
cyclical nature of these segments and the impact of recent
portfolio changes. These businesses contributed $363 million or
75 percent of the company's operating income in the third quarter.
"We are pleased to see that our investments in performance
products are helping us weather challenging business conditions,"
said J. Pedro Reinhard, Dow executive vice president and chief
financial officer.
<PAGE>
--- Page 8 ---
Third Quarter Earnings Announcement (October 22, 1998) (Continued)
Dow continued to restructure its portfolio by acquiring the
outstanding shares of Mycogen Corporation, entering into several
biotechnology alliances including one with Biosource Technologies,
Inc., forming two Performance Plastics joint ventures, and
creating an alliance for nylon with Solutia Inc., as well as
selling some nonstrategic assets.
"Our diverse business and geographic mix combined with
productivity improvements, portfolio restructuring and growth
initiatives give us the ability to succeed as we face a
challenging economic environment," Reinhard said. "Dow is on
track to meet its financial objectives."
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 fuer 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 $149 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.
In January 1998, the Company completed the sale of the
DowBrands business to S.C. Johnson & Son, Inc. for $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. The Company's total investment will
be $162 million, $81 million of which will be paid over the next
three years.
In January 1998, Hartford Steam Boiler Inspection and
Insurance Company (HSB) exercised a put option requiring the
Company to purchase HSB's 40 percent interest in Radian
International LLC (Radian) 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.
During the first quarter of 1998, Dow AgroSciences 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. On September 4, 1998, the
Company made a tender offer to acquire the remaining shares of
Mycogen for $28.00 per share. In October 1998, following the
expiration of the tender offer, the Company had purchased
approximately 14.7 million shares of Mycogen common stock. On
November 2, 1998, the Company announced that it had completed the
acquisition of all remaining shares. Mycogen is a diversified
agribusiness and biotechnology company that develops and markets
seeds and value-added traits for genetically enhanced crops and
provides crop protection products and services.
<PAGE>
--- Page 9 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital at
September 30, 1998 versus December 31, 1997.
Sept. 30, Dec. 31, Increase
In millions 1998 1997 (Decrease)
- ------------------------------------------------------------------
Notes payable $1,263 $1,656 $(393)
Long-term debt due within one year 249 406 (157)
Long-term debt 4,259 4,196 63
- ------------------------------------------------------------------
Total debt $5,771 $6,258 $(487)
- ------------------------------------------------------------------
At September 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 $1.1 billion are available for use by foreign
subsidiaries.
Sept. 30, Dec. 31, Increase
In millions 1998 1997 (Decrease)
- ------------------------------------------------------------------
Cash and cash equivalents $ 226 $ 235 $ (9)
Marketable securities and
interest-bearing deposits 558 302 256
Accounts and notes receivable-net 4,602 4,958 (356)
Inventories:
Finished and work in process 2,183 2,309 (126)
Materials and supplies 568 612 (44)
Deferred income tax assets-current 358 224 134
- ------------------------------------------------------------------
Total current assets 8,495 8,640 (145)
- ------------------------------------------------------------------
Total current liabilities 6,548 7,340 (792)
- ------------------------------------------------------------------
Working capital $1,947 $1,300 $ 647
- ------------------------------------------------------------------
Operating activities provided cash of $1.9 billion for the nine
months ended September 30, 1998. The divestitures of the
DowBrands business in the first quarter and Radian in the third
quarter provided a further $1.3 billion. Cash was used to
repurchase shares of the Company's common stock, to reduce total
debt, to pay Hartford Steam Boiler Inspection and Insurance
Company (HSB) for the exercise of Radian put options, to purchase
additional ownership interest in Mycogen, to purchase an
ownership interest in Isopol from Pronor, and for other normal
activities. This resulted in an increase in marketable securities
and interest-bearing deposits of $256 million. (See the
Consolidated Statements of Cash Flows and the Acquisitions and
Divestitures section for more detail).
Goodwill decreased $354 million to $1,408 million in the first
nine months of 1998, primarily the result of finalizing the
allocation of the purchase price associated with the acquisition
of Eli Lilly and Company's 40 percent ownership interest in
DowElanco.
Sept. 30, Dec. 31,
Balance Sheet Ratios 1998 1997
- ------------------------------------------------------------------
Current assets over current liabilities 1.3:1 1.2:1
Days-sales-outstanding-in-receivables 47 47
Days-sales-in-inventory 89 84
Debt as a percentage of total capitalization 41.3 42.8
- ------------------------------------------------------------------
The Company purchased 3 million shares of common stock during
the third quarter of 1998 as part of its overall stock repurchase
program, bringing the year-to-date total to 6.6 million shares.
The Company's average shares outstanding for the first nine
months of 1998 were 224 million, a decrease of 3 percent from the
average shares outstanding for the first nine months of 1997.
On October 30, 1998, the Company paid a quarterly dividend of
87 cents per share to shareholders of record on September 30,
1998. This was the 347th consecutive quarterly dividend since
1912 and in each instance Dow has maintained or increased the
dividend.
<PAGE>
--- Page 10 ---
RESULTS OF OPERATIONS
<TABLE>
The Dow Chemical Company and Subsidiaries
Industry Segments and Geographic Areas
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millons (Unaudited) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industry segment sales
Performance Plastics $1,260 $1,345 $3,828 $3,950
Performance Chemicals 1,087 986 3,796 3,514
Plastics 909 1,040 2,877 3,106
Chemicals and Metals 555 706 1,817 2,201
Hydrocarbons and Energy 367 503 1,153 1,696
Diversified Businesses and Unallocated 136 277 529 748
- -------------------------------------------------------------------------------------------
Total $4,314 $4,857 $14,000 $15,215
- -------------------------------------------------------------------------------------------
Industry segment operating income (loss)
Performance Plastics $267 $241 $807 $709
Performance Chemicals 96 92 166 537
Plastics 97 217 488 660
Chemicals and Metals 32 141 125 509
Hydrocarbons and Energy 19 (3) (6) (9)
Diversified Businesses and Unallocated (28) (18) (490) (159)
- -------------------------------------------------------------------------------------------
Total $483 $670 $1,090 $2,247
- -------------------------------------------------------------------------------------------
Geographic sales
United States $1,743 $2,094 $5,710 $6,718
Europe 1,427 1,466 4,830 4,682
Rest of World 1,144 1,297 3,460 3,815
- -------------------------------------------------------------------------------------------
Total $4,314 $4,857 $14,000 $15,215
- -------------------------------------------------------------------------------------------
Geographic operating income
United States $271 $235 $170 $871
Europe 171 250 593 706
Rest of World 41 185 327 670
- -------------------------------------------------------------------------------------------
Total $483 $670 $1,090 $2,247
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Sales Volume and Price by Industry Segment and Geographic Area
- -------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1998
Percentage change from prior year Volume Price Total Volume Price Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industry segments
Performance Plastics (1)% (5)% (6)% 4% (7)% (3)%
Performance Chemicals 14% (4)% 10% 12% (4)% 8%
Plastics 7% (20)% (13)% 8% (15)% (7)%
Chemicals and Metals (2)% (19)% (21)% (2)% (15)% (17)%
Hydrocarbons and Energy (8)% (19)% (27)% (15)% (17)% (32)%
Diversified Businesses
and Unallocated (51)% 0% (51)% (30)% 1% (29)%
- -------------------------------------------------------------------------------------------
Total 0% (11)% (11)% 2% (10)% (8)%
- -------------------------------------------------------------------------------------------
Geographic areas
United States (7)% (10)% (17)% (8)% (7)% (15)%
Europe 10% (13)% (3)% 15% (12)% 3%
Rest of World 2% (14)% (12)% 3% (12)% (9)%
- -------------------------------------------------------------------------------------------
Total 0% (11)% (11)% 2% (10)% (8)%
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--- Page 11 ---
Results of Operations (Continued)
Following are selected data for the three months and nine months
ended September 30, 1998 and 1997:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30,Sept. 30,
Dollars in millions,
except for share amounts 1998 1997 1998 1997
- ------------------------- ---- ---- ---- ----
Cost of sales $3,258 $3,530 $10,451 $10,981
% of sales 76% 73% 75% 72%
Research and development, selling,
general and administrative expenses 599 675 1,824 2,017
Operating income 483 670 1,090 2,247
% of sales 11% 14% 8% 15%
Operating income excluding unusual items 459 670 1,866 2,335
% of sales 11% 14% 13% 15%
Minority Interests' Share in Income 4 - 9 109
Effective tax rate 33.1% 35.8% 35.0% 36.5%
Net income available for common
stockholders $314 $422 $1,160 $1,445
Earnings per common share $1.41 $1.85 $5.17 $6.23
Earnings per common share -
assuming dilution $1.40 $1.82 $5.10 $6.15
Operating rate percentage 83% 90% 86% 90%
Net sales for third quarter 1998 were $4.3 billion, down 11
percent from $4.9 billion in the third quarter of 1997. Sales
volume was flat versus the same quarter last year; prices were
down 11 percent, with 1 percentage point of the price decline due
to the negative impact of currency. The acquisition of Sentrachem
late last year generated new sales for 1998, while the
divestitures of DowBrands (first quarter 1998) and Destec (second
quarter 1997) reduced sales versus a year ago. Excluding major
acquisitions and divestitures, volume for the third quarter was
up 1 percent from the same period last year. Volume was
particularly strong in Performance Chemicals (due to the
additions of Hampshire Chemical and Sanachem from the Sentrachem
acquisition), up 14 percent, and in Plastics, up 7 percent.
Volume was down for Diversified Businesses and Unallocated due to
the sale of the DowBrands business, partly offset by new volume
from the Sentrachem acquisition. Volume was up in Europe largely
due to the addition of Sentrachem in Africa, down in the United
States due to the absence of DowBrands, and up slightly in the
rest of world. Prices were down in all segments and all
geographic regions. Net sales for the first three quarters of the
year were $14.0 billion, down 8 percent from $15.2 billion for
the same period last year. While volume grew 2 percent, prices
declined 10 percent or $1.5 billion.
Expenses, which include research and development, selling
(including promotion and advertising), general and administrative
expenses, were $599 million, down $76 million from the third
quarter of 1997. Expenses for the first nine months of the year
were $1,824, down $193 million, or 10 percent, from the same
period last year. The decrease reflects the reduction of
expenses, including the elimination of promotion and advertising
associated with the DowBrands business, partially offset by the
addition of Sentrachem's expenses.
Year-to-date minority interests' share in income of $9 million
decreased significantly from $109 million for the same period
last year 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 third quarter was $314 million or $1.40 per
share (diluted), down from $422 million or $1.82 per share
(diluted) for the third quarter of 1997. Net income was
negatively impacted by lower local prices and unfavorable
currency, partially offset by lower hydrocarbon and energy costs.
For the nine months ended September 30, 1998, net income of
$1,160 million or $5.10 per share (diluted) included the net
positive impact of $0.11 per share for unusual items. These items
included a gain of the sale of the DowBrands business offset by
charges for purchased in-process research and development related
to recent acquisitions; severance costs; asset write-downs; and
environmental remediation costs. Net income for the first nine
months of 1997 of $1,445 million or $6.15 per share (diluted)
included a net positive impact of $0.23 per share from one-time
events: a gain of the sale of Destec, charges related to
insurance restructuring and 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 12 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,260 million were down 6 percent
versus third quarter 1997, mostly due to lower sales prices.
Volume was down slightly, while prices declined 5 percent, with 1
percentage point of the price decline due to the negative impact
of currency. Despite lower prices, operating income for the
segment increased 11 percent to $267 million, from $241 million a
year ago.
Polyurethanes sales for third quarter were down 9 percent
versus the third quarter of 1997. Volume was down 3 percent,
mostly due to a falloff in Asia Pacific sales. Prices were down 6
percent, with declines in all geographic regions. Operating
income was down versus the third quarter of last year due to the
price declines and start-up expenses for two new plants.
Sales of epoxies and intermediates were down 12 percent from a
year ago. Volume and prices declined 5 percent and 7 percent,
respectively, with 1 percent of the sales decline due to the
impact of currency. Weak demand led to volume declines in all
geographic regions except Europe, where volume was up 11 percent.
The Asian crisis significantly impacted sales in the region
causing volume to be down. Despite volume and price declines,
operating income for the business was up slightly versus last
year primarily due to lower hydrocarbon costs for propylene and
cumene.
Engineering plastics sales for the quarter were up 1 percent
from the same quarter last year, with volume up 3 percent and
prices down 2 percent. Demand remained strong in all geographic
regions, except Europe where volume was down 4 percent. Volume
was particularly strong for polycarbonate, up 18 percent in the
United States following a plant expansion. Engineering plastics
sales were hurt by weak automotive sales resulting from the
strike at General Motors. Operating income for the quarter was up
substantially versus the third quarter of 1997 due to improved
product mix and reductions in selling, administrative, and
research and development expenses.
Adhesives, sealants and coatings sales for the third quarter
were up 15 percent versus the third quarter of 1997, with a 16
percent increase in volume slightly offset by a 1 percent price
decline due to currency. Volume increases were the result of
plant/market expansions in Europe and Latin America. Third
quarter operating income for this growth business was up
significantly when compared with last year, due to higher volumes
and continued cost control.
Fabricated products sales for the third quarter of 1998 were
down 6 percent versus a year ago. While volume was up slightly,
prices were down 6 percent, with 4 percent due to a decline in
local prices and 2 percent due to currency. Volume was strong in
Europe and North America, but weak in Asia Pacific. Operating
income was up considerably versus third quarter 1997 due to lower
raw material costs and reduced spending for selling,
administrative, and research and development activities.
For the first nine months of 1998, sales in Performance
Plastics were $3,828 million, down 3 percent from $3,950 million
in the same period last year. Volume growth of 4 percent for this
period was more than offset by lower local prices, down 5
percent, and a 2 percent unfavorable currency impact. Operating
income was $807 million for the first nine months of 1998, up 14
percent from $709 million last year, due primarily to strong
volume and lower hydrocarbon and energy costs.
PERFORMANCE CHEMICALS
Third quarter sales for Performance Chemicals were $1,087
million, an increase of 10 percent from $986 million in the third
quarter of 1997. Volume increased 14 percent, helped by the
acquisition of Sentrachem, while prices declined 4 percent. Third
quarter operating income for the segment was up 4 percent to $96
million from $92 million a year ago.
Specialty chemicals sales for the quarter were up 9 percent,
with 11 percent volume growth offset by a 2 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 and superabsorbents. Volume was
strong in the United States and Europe, but fell in Asia Pacific
due to the severe economic conditions there. Operating income for
the third quarter was up due to lower raw material costs and the
addition of Hampshire Chemical.
Emulsion polymers sales decreased 1 percent for the quarter
versus the third quarter of 1997 as volume growth of 3 percent
was more than offset by a 4 percent decline in prices. Volume, up
in all geographic regions except the United States, was
particularly strong in Europe. Prices were down in all
geographies, but not as much as feedstock costs; therefore,
margins improved. Operating income for the third quarter improved
23 percent versus last year.
<PAGE>
--- Page 13 ---
Results of Operations (Continued)
Sales of agricultural products for third quarter 1998 were 18
percent above the same quarter of 1997, with strong volume
growth, up 24 percent, offset by a 4 percent decline in local
prices and a 2 percent reduction in sales due to currency. Third
quarter sales included the sales of Sanachem (from the Sentrachem
acquisition), accounting for 6 percent of the increase in volume.
New product sales, including Tracer, First Rate and Sentricon,
were up significantly. Operating results for the third quarter
were down substantially from last year due to increased research
and field selling expenses in biotechnology, additional costs
from Sanachem and higher amortization costs associated with
acquisitions. These expenses are up year-to-year, in line with
the Company's strategy to invest in this high growth arena.
Sales for the first nine months of 1998 for this segment were
$3,796 million, up 8 percent from $3,514 million for the same
period of 1997. Sales volume grew 12 percent, largely due to the
addition of Hampshire Chemical and Sanachem, while prices
declined 4 percent. Operating income of $166 million year-to-date
included the $364 million impact of several unusual items
recorded during the first quarter: a charge for purchased in-
process research and development related to the additional
investments in Dow AgroSciences and Mycogen, severance costs and
environmental remediation costs. Operating income of $537 million
for the first nine 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 $530 million compared with $557 million for 1997.
PLASTICS
Plastics sales in the third quarter of 1998 were $909 million,
down 13 percent from $1,040 million a year ago. While volume
increased 7 percent, prices fell 20 percent. Plastics operating
income for the quarter was $97 million, down 55 percent from $217
million in third quarter 1997.
Polyethylene sales were down 15 percent in the third quarter
versus the same quarter last year, as prices fell 23 percent.
Price declines were experienced around the globe. Volume, up 8
percent, was strong in all geographic regions except Asia Pacific
where volume was down 2 percent. Volume growth for Affinity was
particularly strong. Third quarter operating income for
polyethylene was down from the third quarter of 1997 as
significant price declines were only partly offset by volume
growth and lower ethylene costs.
Polystyrene sales decreased 12 percent in the third quarter
versus the same quarter of 1997 with a 1 percent volume decline
and a 11 percent decline in prices. While volume improved in
North America and Europe, the gains were more than offset by
lower demand in Asia Pacific and volume declines in Latin America
brought on by financial instability in the region. Prices were
dramatically lower in all regions of the globe. Despite the
decline in prices, operating income for the business was up 75
percent compared with third quarter 1997, primarily due to lower
styrene monomer costs.
Polypropylene sales continued a strong growth trend, with
volume up significantly in the third quarter. This volume growth
was the result of new capacity that came on stream in Europe
during the second quarter. Pricing was weak in the third quarter
versus the same period last year. As this business continues to
build, third quarter operating income was down slightly versus
last year primarily due to price declines.
Sales for the nine months of 1998 for Plastics were $2,877
million, down 7 percent from $3,106 million for the same period
of 1997. Volume grew 8 percent, but was more than offset by a 15
percent decline in prices. Operating income for the period was
$488 million, down from $660 million for the first nine months of
1997.
CHEMICALS AND METALS
Chemical and Metals sales in the third quarter of 1998 were $555
million, down from $706 million in the third quarter of 1997.
Sales were severely impacted by steep price declines (20 percent)
and lower volume stemming from reduced export demand from North
America, as well as lower domestic sales. Vinyl chloride monomer
pricing was down 48 percent from third quarter 1997. Ethylene
glycol volume was up 9 percent, but prices were down 34 percent
from the same period last year. Caustic volume remained stable
with prices up 39 percent from the third quarter of 1997;
however, this price benefit was overshadowed by price declines
for other products. Accordingly, operating income was down
significantly from $141 million last year to $32 million for the
quarter. In late September 1998, the Company declared force
majeure to its magnesium customers following serious storm damage
to its magnesium plant in Freeport, Texas. It is uncertain as to
when force majeure will be lifted.
Sales for this segment year-to-date were $1,817 million, down
17 percent from $2,201 million in the first nine months of 1997.
Volume was down 2 percent while prices declined 15 percent.
Operating income for the first nine months of the year of $125
million included $55 million of unusual items, primarily
environmental remediation charges. Excluding the unusual items,
operating income was $180 million versus $509 million for the
same period of 1997. This decline in operating income was the
result of overall lower prices and higher costs associated with
plant outages.
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in the third quarter of 1998
were $367 million, a decrease of 27 percent from $503 million for
the same period a year ago. Sales volume was down 8 percent
mainly due to a plant closure in the fourth quarter of last year.
Prices declined 19 percent as lower crude oil costs resulted in
lower refinery prices. Operating income for the quarter was $19
million compared with an operating loss for the third quarter of
1997 of $3 million.
Sales for the first nine months of 1998 were $1,153 million
versus $1,696 million for the same period of 1997. Volume was
down 15 percent, largely due to the absence of Destec which was
sold in the second quarter of 1997. Prices were down 17 percent.
Operating loss for the first nine months of the year was $6
million, including $11 million of unusual items (environmental
remediation costs) recorded in the first quarter. Operating loss
for the same period last year was $9 million, including a
property write-down of $15 million recorded in the second quarter
of 1997.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses and Unallocated sales for the third
quarter of 1998 were $136 million, down 51 percent from $277
million in the third quarter of 1997, as the reduction of sales
due to the first quarter divestiture of the DowBrands business
and the current quarter divestiture of Radian was not offset by
the addition of Sentrachem sales (those not assigned to other
segments). Operating income for this segment was a loss of $28
million, compared with an operating loss of $18 million for the
third quarter of 1997. This decrease was primarily due to lower
results from the insurance companies and the absence of the
operating income from DowBrands, partially offset by lower
severance costs and a favorable special charge adjustment.
Sales for the first nine months of 1998 were $529 million, a
decrease from $748 million. Operating income for this period
declined from a loss of $159 million last year to a loss of $490
million, including $327 million of unusual charges for purchased
in-process research and development 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 nine months was a loss of
$163 million compared with a loss of $107 million for the first
nine months of last year.
COMPANY SUMMARY
Operating Rate
The Company's global plant operating rate for its chemicals and
plastics businesses was 83 percent, down from 90 percent in the
third 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 Mycogen's acquisition of
Dinamilho Carol Productos Agricolas, a Brazilian seed company.
<PAGE>
--- Page 15 ---
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 1,800 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. In the third quarter, a
$24 million adjustment to the reduced values of the assets to be
disposed was recorded, bringing the year-to-date special charge
to $306 million.
During the third quarter of 1998, $15 million in severance
payments were charged against the severance liability. Program-to-
date, $41 million in severance payments have been charged against
the severance liability, and the reduction in headcount has been
831.
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates was up $46
million in the third quarter of 1998 versus the same quarter last
year, primarily due to the improvement in Asia Pacific joint
ventures that were negatively impacted by currency last year.
Net financial expense, which is the total of interest expense,
interest income and foreign exchange, was down $6 million this
quarter from $90 million in the third quarter of 1997. The
decrease in net financial expense was mainly attributable to an
improvement in foreign exchange.
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 $50 million versus $98 million for the same
period last year. Year-to-date, sundry income was $908 million,
reflecting the $816 million gain recorded in the first quarter
for the sale of the DowBrands business, versus $378 million for
the same period last year, which included the $189 million gain
on the sale of Destec.
Provision for Taxes on Income
The effective tax rate for the third quarter was 33.1 percent
versus 35.8 percent for the third quarter of 1997. The lower tax
rate this quarter was the result of changes in foreign tax laws.
Year-to-date, the effective tax rate was 35.0 percent.
Outlook
Global economic growth slowed in the third quarter as the impact
of the crisis in Asia Pacific affected other geographic regions.
The U.S. economy, while still stable, is expected to slow in
1999. Economic activity in Europe has continued at a high level,
but is expected to moderate.
Supply/demand imbalances in Asia Pacific are producing
historically low industry pricing. The situation has particularly
influenced global basic chemical prices, especially chlor-alkali
and its derivatives. Latin America is also being affected by the
international financial crisis with prices under pressure, even
though Dow's volumes continue to grow. Overall, slightly lower
global economic growth is anticipated in 1999 versus 1998.
The decline in hydrocarbons and energy feedstock costs is
expected to moderate. While the Company's end-product prices have
fallen by more than $1.5 billion during this period, most of the
Performance businesses have been able to increase margins,
staying ahead of the feedstock decline. Looking forward,
hydrocarbon and energy costs are expected to stabilize.
The rest of the year and into 1999 is expected to be a
challenging period. Virtually all basic products are approaching
trough-level pricing. Weakening economic conditions are
anticipated to restrict volume growth. However, the Company will
continue to follow its strategy to gain productivity
improvements, develop value growth opportunities and further
refine its portfolio toward performance businesses.
<PAGE>
--- Page 16 ---
SUBSEQUENT EVENTS
The Company announced on October 5, 1998 it had purchased 14.7
million shares of common stock of Mycogen Corporation that were
validly tendered in response to a $28.00 per share tender offer.
On November 2, 1998, the Company announced that it has completed
the acquisition of all remaining shares. Allocation of the
purchase price to the assets acquired and liabilities assumed may
result in a material charge for purchased in-process research and
development.
On October 28, 1998, the Company and United Technologies
Corporation announced an agreement to sell the business and
assets of their 50:50 joint venture, Dow-United Technologies
Composite Products, Inc., to GKN Westland Aerospace, Inc., a unit
of GKN plc, of the United Kingdom. The transaction, subject to
regulatory and government approval, is expected to close near
year-end. This transaction is not expected to have a material
effect on the Company's consolidated financial statements.
ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board (FASB)
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 FASB 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. The Company will comply with the new disclosure
requirements of this standard in its 1998 Annual Report on Form
10-K.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which was effective January 1, 1998. SFAS No. 132 modifies the
required disclosures related to pensions and other postretirement
benefits. The Company will comply with the new disclosure
requirements of this standard, as required, in its 1998 Annual
Report on Form 10-K.
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This standard requires capitalization
of certain internal-use computer software costs. SOP 98-1,
effective for fiscal years beginning after December 15, 1998,
will be adopted by the Company January 1, 1999. The Company
currently expenses such costs as incurred; therefore, adoption of
this statement will result in a favorable initial impact on
earnings, though the effect is expected to be immaterial.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance
on the financial reporting of start-up costs and organization
costs, requiring those costs to be expensed as incurred. The
Company's current policy regarding the treatment of these costs
is substantially consistent with SOP 98-5; therefore, adoption of
this standard is not expected to have a material impact on the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133,
which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, requires an entity to recognize
all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. The Company will adopt this standard by January 1, 2000
and has not yet determined the impact of adoption on its
consolidated financial statements.
YEAR 2000
State of Readiness
The Company's Year 2000 (Y2K) project, which began in early 1997,
is a global effort covering information systems, process control
and embedded systems for all of the Company's businesses. The
project is led by a senior director of Information Systems who
reports to the CIO and an executive steering team, and is managed
by a global team consisting of technical, functional and business
leaders. Since early 1997, the Audit Committee of the Company's
Board of Directors has received quarterly reports on the team's
plan and progress. Several strategic systems have already been
upgraded and tested, and project completion is anticipated in the
first half of 1999.
<PAGE>
--- Page 17 ---
Year 2000 (Continued)
The Information Systems infrastructure team is responsible for
the hardware, systems software and telecommunications network
assessments and remediation activities. This work is more than 65
percent complete and is on schedule to be completed by
approximately March 31, 1999.
The Information Systems applications software organization is
responsible for the remediation and upgrade of applications and
Y2K testing, and as of October 31, 1998, these tasks were more
than 50 percent complete. Upgrade of all business-critical
applications is expected to be completed by mid-1999. The
Company's implementation of enterprise-wide financial and
operational systems and standardized desktop computing during the
last several years has facilitated this effort. Two critical
replacement projects are in progress and are on target to be
completed by mid-1999. Contingency plans have been established
should either of these projects miss the scheduled completion
dates.
The Company has common process control systems in more than 80
percent of its plants globally and is upgrading these systems
with Y2K-ready software. The remaining 20 percent of the process
control systems are commercial systems; these have been assessed
and are being remediated and tested during scheduled plant
shutdowns. It is anticipated that work on all critical process
control systems will be completed by mid-year 1999.
The Company's embedded systems, such as laboratory equipment,
air conditioners, elevators, etc., have been assessed and are
being upgraded, as necessary.
Costs
Project costs are expected to range from $50 million to $70
million, over three years, and are not considered material to the
Company's consolidated financial statements. Total project costs
incurred to date are approximately $30 million. The Y2K effort is
being supported by a reallocation of existing resources.
Risks
Failure to adequately address critical Y2K issues by the Company,
its suppliers and/or customers could result in interruptions of
normal business work operations. Such interruptions could
materially and adversely affect the Company's results of
operations, liquidity and financial condition; however, the
Company's program is on schedule to meet a completion date ahead
of the year 2000. The Company is assessing external sources of
risk and developing appropriate contingency plans to address both
internal and external identifiable risks through commercially
reasonable efforts.
The Company's assessment of customer readiness is in progress,
with completion anticipated early in the first quarter of 1999.
The Company's assessment of critical suppliers is complete and
risk management actions and contingency plans have been
developed, where necessary. Work is ongoing with a number of
critical suppliers, primarily in Asia Pacific, Latin America and
Eastern Europe, who have indicated that they may not be Y2K
compliant before the year 2000. Contingency plans, including such
actions as building inventories and switching suppliers, will be
completed by the end of 1998 and will be executed in 1999, if
necessary.
The Company's risk assessment data plus recent conclusions of
the U.S. Senate Year 2000 sub-committee indicate that electric
power may be a significant external source of risk. Efforts are
underway to validate the impact on the Company's operations and
to develop specific contingency plans for those sites found to be
at higher risk. Telecommunications providers in certain Asian,
Latin American and Eastern European countries have also been
identified as a source of risk. To manage this risk, technical
alternatives are being assessed where economically justified and
manual workarounds will be implemented, if necessary.
The Company's internal Y2K project is anticipated to be
completed by mid-1999, with the exception of two recent
acquisitions where Y2K programs had not been initiated prior to
being acquired by the Company. The nature of the Y2K issues for
these companies will be better understood once the initial
assessments are completed. These acquisitions represent an
immaterial portion of the Company's total revenues and profits.
While the risks discussed herein have a possible material
impact, the risk management actions and contingency plans that
have been developed and are being implemented will significantly
reduce the probability and potential impact of these identified
risks.
Contingency Plans
In addition to the specific risk management actions and
contingency plans outlined in the previous sections, a generic
contingency planning process is currently in progress to update
the Company's existing site and computer disaster recovery plans
and to identify additional prudent steps that may be necessary to
prepare for unexpected, but credible, scenarios. A draft of these
additional plans will be completed by the end of 1998.
<PAGE>
--- Page 18 ---
EURO CONVERSION
On January 1, 1999, the Euro will be adopted as the national
currency of 11 European Union member nations. The Euro will be
used as a non-cash transactional currency for a three-year
transition period. The Company established a steering team in
November 1996 to study and address the implications of this
change. Issues addressed included such matters as pricing,
continuity of contracts, accounting and financial reporting,
competitive implications, tax, treasury activities and computer
systems. The Company anticipates it will be prepared to conduct
business in the Euro as of the effective date, and does not
expect the conversion to the Euro to have a significant
operational impact. Additionally, the Company does not expect the
conversion to the Euro to have a material impact on results of
operations, financial position, or liquidity of its European
businesses.
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. The Company
uses interest rate swaps, "swaptions" and exchange traded
instruments to accomplish this objective. Primary exposure is to
the U.S. dollar yield curve.
Inherent in the Company'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.
The Company 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 the Company 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 14,000
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.
ITEM 5. OTHER INFORMATION
Amendment to the Bylaws Regarding Notice Requirements
On October 8, 1998, the Board of Directors amended the Company's
Bylaws in response to recent changes in Rule 14a-4 of the
Securities Exchange Act of 1934. The amended Bylaws provide that
the Secretary of the Company must receive written notification
describing any business proposed to be presented by a stockholder
at an annual meeting at least 60 days before the date on which
the Company first mailed its proxy materials for the prior year's
annual meeting, unless the annual meeting is called for a date
that is not within 30 days before or after the anniversary of the
prior year's annual meeting. In case of such a change in the
meeting date, notice must be received by the tenth day after
notice of the meeting was mailed or the meeting date was publicly
disclosed, whichever occurs first. The amendments adopted by the
Board of Directors include corresponding changes in the notice
procedures for the nomination of Directors.
The amendments to the Bylaws became effective upon adoption by
the Board of Directors and will apply to the 1999 Annual Meeting
of Stockholders. Under the new provisions, notification must be
received by the Secretary not later than January 24, 1999, unless
the meeting date changes by more than 30 days from the 1998
meeting date of May 14. The amended Bylaws contain additional
requirements that apply to stockholders who wish to bring
business or Director nominations before an annual meeting or call
a special meeting of stockholders. These requirements are
included in the complete copy of the amended Bylaws filed as
Exhibit No. 3(ii) to this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3(ii) A copy of the Bylaws of The Dow Chemical Company,
as amended on October 8, 1998.
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 third quarter of 1998.
The following trademarks of The Dow Chemical Company appear in
this report: Affinity, Methocel.
The following trademarks of Dow AgroSciences or its
affiliates appear in this report: First Rate, Sentricon,
Tracer.
<PAGE>
--- Page 23 ---
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: November 4, 1998
G. Michael Lynch
----------------
G. Michael Lynch
Vice President & Controller
<PAGE>
--- Page 24 ---
EXHIBIT 3(ii)
THE DOW CHEMICAL COMPANY
BYLAWS*
(As re-adopted in full on November 21, 1985, effective December
1, 1985; and as amended February 13, 1986; October 9, 1986; May
14, 1987; November 12, 1987; July 11, 1991; November 12, 1992;
April 8, 1993; February 10, 1994; April 14, 1994; July 14, 1994;
February 8, 1996; February 13, 1997; March 9, 1998, effective
March 1, 1998; and October 8, 1998)
Section I
CAPITAL STOCK
Section 1.1. Certificates. Every holder of stock in the
Company shall be entitled to have a certificate signed in the
name of the Company by the Chairman of the Board of Directors or
the President or an Executive Vice President or a Vice President,
and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Company, representing the number
of shares registered in certificate form. Any or all the
signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Company with
the same effect as if such person were such officer, transfer
agent or registrar at the date of issue. (As amended February 8,
1996.)
Section 1.2. Record Ownership. The certificates of each class
or series of a class of stock shall be numbered consecutively. A
record of the name and address of the holder of each certificate,
the number of shares represented thereby and the date of issue
thereof shall be made on the Company's books. The Company shall
be entitled to treat the holder of record of any share of stock
as the holder in fact thereof, and accordingly shall not be bound
to recognize any equitable or other claim to or interest in any
share on the part of any other person, whether or not it shall
have express or other notice thereof, except as required by the
laws of the State of Delaware.
Section 1.3. Transfer of Record Ownership. Transfers of stock
shall be made on the books of the Company only by direction of
the person named in the certificate or such person's attorney,
lawfully constituted in writing, and only upon the surrender of
the certificate therefor and a written assignment of the shares
evidenced thereby, which certificate shall be canceled before the
new certificate is issued.
Section 1.4. Lost Certificates. Any person claiming a stock
certificate in lieu of one lost, stolen or destroyed shall give
the Company an affidavit as to such person's ownership of the
certificate and of the facts which go to prove its loss, theft or
destruction. Such person shall also, if required by policies
adopted by the Board of Directors, give the Company a bond, in
such form as may be approved by the General Counsel or his or her
staff, sufficient to indemnify the Company against any claim that
may be made against it on account of the alleged loss of the
certificate or the issuance of a new certificate.
Section 1.5. Transfer Agents; Registrars; Rules Respecting
Certificates. The Board of Directors may appoint, or authorize
any officer or officers to appoint, one or more transfer agents
and one or more registrars. The Board of Directors may make such
further rules and regulations as it may deem expedient concerning
the issue, transfer and registration of stock certificates of the
Company.
Section 1.6. Record Date. The Board of Directors may fix in
advance a date, not exceeding sixty days preceding the date of
any meeting of stockholders, payment of dividend or other
distribution, allotment of rights or change, conversion or
exchange of capital stock or for the purpose of any other lawful
action, as the record date for determination of the stockholders
entitled to notice of and to vote at any such meeting and any
adjournment thereof, or to receive any such dividend or other
distribution or allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of capital
stock, or to participate in any such other lawful action, and in
such case such stockholders and only such stockholders as shall
be stockholders of record on the date so fixed shall be entitled
to such notice of and to vote at such meeting and any adjournment
thereof, or to receive such dividend or other distribution or
allotment of rights, or to exercise such rights, or to
participate in any such other lawful action, as the case may be,
notwithstanding any transfer of any stock on the books of the
Company after any such record date fixed as aforesaid.
<PAGE>
--- Page 25 ---
Bylaws (Continued)
Section II
MEETINGS OF STOCKHOLDERS
Section 2.1. Annual. The annual meeting of stockholders for
the election of Directors and the transaction of such other
proper business shall be held during the month of May each year
at a time and place, within or without Delaware, as determined by
the Board of Directors.
Section 2.2. Special. Special meetings of stockholders for
any purpose or purposes may be called only by the Board of
Directors, pursuant to a resolution adopted by a majority of the
entire Board of Directors, either upon motion of a Director or
upon written request by the holders of at least fifty percent of
the voting power of all the shares of capital stock of the
Company then outstanding and entitled to vote generally in the
election of Directors. Any such request by stockholders shall be
delivered to, or mailed and received by, the Secretary of the
Company at the Company's principal executive offices, shall set
forth the purpose or purposes of the meeting, and shall be in
proper form. To be proper form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder(s)
propose(s) to bring before the meeting:
(a) The name and record address of each such stockholder;
(b) The class or series and number of shares of capital
stock of the Company that are owned beneficially or of
record by each such stockholder;
(c) A brief description of each proposed item of business
desired to be brought before the meeting, including the text
of any proposed amendment to the Certificate of
Incorporation or these Bylaws;
(d) A description of all arrangements or understandings
between each such stockholder and any other person or
persons (including their names) in connection with the
proposal of such business by such stockholder and any
material interests of such stockholder in such business; and
(e) A representation that such stockholder intends to
appear in person or by proxy at the meeting to bring such
business before the meeting.
At any such special meeting, only such business may be
transacted as is related to the purpose or purposes set forth in
the notice of meeting. Special meetings may be held at any
place, within or without Delaware. (As amended February 13,
1997, and October 8, 1998.)
Section 2.3. Notice. Written notice of each meeting of
stockholders, stating the time, place and purpose thereof, shall
be mailed by the Secretary or an Assistant Secretary not less
than ten days nor more than sixty days before such meeting to
every stockholder entitled to vote thereat.
Section 2.4. List of Stockholders. A complete list of the
stockholders entitled to vote at any meeting of stockholders,
arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of
each stockholder, shall be prepared by the Secretary and shall be
open to the examination of any stockholder, either at a place
within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held, for at
least ten days before the meeting and at the place of the meeting
during the whole time of the meeting.
Section 2.5. Quorum. The holders of at least fifty percent of
the issued and outstanding stock of the Company entitled to vote
with respect to any one of the purposes for which the meeting is
called, present in person or represented by proxy, shall
constitute a quorum, except as otherwise required by the General
Corporation Law of Delaware. In the event of a lack of quorum,
the chairman of the meeting or a majority in interest of the
stockholders present in person or represented by proxy may
adjourn the meeting from time to time without notice other than
announcement at the meeting, until a quorum shall be obtained.
At any such adjourned meeting at which there is a quorum, any
business may be transacted that might have been transacted at the
meeting originally called. (As amended February 10, 1994.)
<PAGE>
--- Page 26 ---
Bylaws (Continued)
Section 2.6. Organization. The Chairman of the Board, or, in
the absence of the Chairman of the Board, the President, or, in
the absence of both, any Executive Vice President or Vice
President, shall preside at meetings of stockholders as chairman
of the meeting. The Secretary of the Company shall act as
secretary, but in the absence of the Secretary, the chairman of
the meeting may appoint a secretary. Rules governing the
procedures and conduct of meetings of stockholders shall be
determined by the chairman of the meeting. (As amended March 9,
1998, effective March 1, 1998.)
Section 2.7. Voting. Subject to all of the rights of the
Preferred Stock provided for by resolution or resolutions of the
Board of Directors pursuant to Article IV of the Certificate of
Incorporation or by the General Corporation Law of Delaware, each
stockholder shall be entitled to one vote, in person or by
written proxy, for each voting share held of record by such
stockholder. The votes for the election of Directors and, upon
the demand of any stockholder, the vote upon any matter before
the meeting shall be by written ballot. Except as otherwise
required by the General Corporation Law of Delaware or as
specifically provided for in the Certificate of Incorporation or
these Bylaws, in any question or matter brought before any
meeting of stockholders (other than the election of Directors),
the affirmative vote of the holders of voting shares present in
person or by proxy representing a majority of the votes actually
cast on any such question or matter shall be the act of the
stockholders. Directors shall be elected by a plurality of the
votes of the voting shares present in person or represented by
proxy at the meeting and entitled to vote and actually cast on
the election of Directors. (As amended February 13, 1986,
effective May 8, 1986; and February 10, 1994.)
Section 2.8. Inspectors of Election. In advance of any
meeting of stockholders, the Board of Directors or the chairman
of the meeting shall appoint one or more inspectors to act at the
meeting and make a written report thereof. The chairman of the
meeting may designate one or more persons as alternate inspectors
to replace any inspector who fails or is unable to act. Each
inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the
best of his or her ability. The inspector(s) shall ascertain the
number of shares outstanding and the voting power of each,
determine the shares represented at the meeting and the validity
of proxies and ballots, count all votes and
ballots, determine and retain for a reasonable period a record of
the disposition of any challenges made to any determination by
the inspector(s), and certify the inspectors' determination of
the number of shares represented at the meeting and the count of
all votes and ballots. The inspector(s) may appoint or retain
other persons or entities to assist the inspector(s) in the
performance of the duties of the inspector(s). (As amended
February 8, 1996.)
Section 2.9. Notification of Annual Meeting Business. Any
stockholder may bring business before an annual meeting only if:
(a) Such stockholder is a stockholder of record on the date
of giving notice as provided for in this Section 2.9 and on
the record date for the determination of stockholders
entitled to vote at such annual meeting;
(b) Such business is properly before the meeting pursuant
to the laws of the State of Delaware; and
(c) Such stockholder complies with the notice procedures
set forth in this Section 2.9. In addition to any other
applicable requirements, for business to be properly brought
before an annual meeting by a stockholder, such stockholder
must have given timely written notice thereof in proper form
to the Secretary of the Company. To be timely, a
stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of
the Company not less than 60 days nor more than 120 days
prior to the date on which the Company first mailed its
proxy materials for the prior year's annual meeting of
stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within 30
days before or after the anniversary of the prior year's
annual meeting, notice by the stockholder in order to be
timely must be so received not later than the close of
business on the tenth day following the day on which such
notice of the date of the annual meeting was mailed or
public disclosure of the date of the annual meeting was
made, whichever first occurs. In no event shall the public
disclosure of an adjournment of an annual meeting commence a
new time period for the giving of a stockholder's notice as
described above. For purposes of Sections 2.9 and 3.10 of
these Bylaws, "public disclosure" shall mean disclosure in a
press release reported by the Dow Jones News Service,
Associated Press, or comparable national news service or any
document publicly filed by the Company with the Securities
and Exchange
<PAGE>
--- Page 27 ---
Bylaws (Continued)
Commission pursuant to Section 13, 14 or 15(d) of the
Securities Exchange Act of 1934. To be in proper form, a
stockholder's notice to the Secretary must comply with all
the same requirements that apply to special meetings of
stockholders as set forth in Section 2.2 of these Bylaws.
No business shall be conducted at an annual meeting of
stockholders except business brought before the meeting in
accordance with the procedures set forth in this Section 2.9. If
the person presiding at an annual meeting determines that
business was not properly brought before the annual meeting in
accordance with the foregoing procedures, he or she shall declare
to the meeting that the business was not properly brought before
the meeting and such business shall not be transacted. (As
adopted February 13, 1997, and amended October 8, 1998.)
Section III
BOARD OF DIRECTORS
Section 3.1. Number and Qualifications. The business and
affairs of the Company shall be managed by or under the direction
of its Board of Directors. The number of Directors constituting
the entire Board of Directors shall be not less than six nor more
than twenty-one, as authorized from time to time exclusively by a
vote of a majority of the entire Board of Directors. As used in
these Bylaws,* the term "entire Board of Directors" means the
total authorized number of Directors that the Company would have
if there were no vacancies. Each Director shall at all times be
a holder of Common Stock of the Company. (As amended February
13, 1997.)
Section 3.2. Resignation. A Director may resign at any time
by giving written notice to the Chairman of the Board, to the
President or the Secretary. Unless otherwise stated in such
notice of resignation, the acceptance thereof shall not be
necessary to make it effective; and such resignation shall take
effect at the time specified therein or, in the absence of such
specification, it shall take effect upon the receipt thereof.
Section 3.3. Regular Meetings. Regular meetings of the Board
of Directors may be held without further notice at such time and
place as shall from time to time be determined by the Board of
Directors. A meeting of the Board of Directors for the election
of officers and the transaction of such other business as may
come before it may be held without notice immediately following
the annual meeting of stockholders.
Section 3.4. Special Meetings. Special meetings of the Board
of Directors may be called by the Chairman of the Board or the
President or at the request in writing of one-third of the
Directors then in office.
Section 3.5. Notice of Special Meetings. Notice of the time
and place of each special meeting shall be mailed to each
Director at least two days before the meeting or telegraphed or
telecopied to such Director at least one day before the meeting.
The notice need not state the purposes of the special meeting.
Section 3.6. Place of Meetings. The Directors may hold their
meetings and have an office or offices outside of Delaware.
Section 3.7 Quorum. A majority of the total number of
Directors then holding office shall constitute a quorum. In the
event of lack of a quorum, a majority of the Directors present
may adjourn the meeting from time to time without notice, other
than announcement at the meeting, until a quorum shall be
obtained.
Section 3.8. Organization. The Chairman of the Board, or, in
the absence of the Chairman of the Board, the President, or, in
the absence of both, a member of the Board selected by the
members present, shall preside at meetings of the Board. The
Secretary or an Assistant Secretary of the Company shall act as
secretary, but in the absence of the Secretary or an Assistant
Secretary, the presiding officer may appoint a secretary. (As
amended February 13, 1997.)
Section 3.9. Compensation of Directors. Directors shall
receive such compensation for their services as the Compensation
Committee may determine pursuant to Section 4.4(a) of these
Bylaws,* or as the Board of Directors may determine. Any
Director may serve the Company in any other capacity and receive
compensation therefor. (As amended July 14, 1994.)
<PAGE>
--- Page 28 ---
Bylaws (Continued)
Section 3.10. Notification of Nominations. Nominations for
the election of Directors may be made by the Board of Directors
or by any stockholder entitled to vote for the election of
Directors. Any stockholder entitled to vote for the election of
Directors at a meeting may nominate persons for election as
Directors only if such stockholder complies with all the same
requirements that apply to business to be brought before an
annual meeting of stockholders as set forth in Section 2.9, and
with respect to an election to be held at an annual meeting of
stockholders within the time limits specified in such Section,
but with respect to an election to be held at a special meeting
of stockholders for election of Directors, by the close of
business on the seventh day following the date on which notice of
such meeting is first given to stockholders. In addition to the
information required by Section 2.9, the required notice shall
include:
(a) A description of all arrangements or understandings
between such stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by
such stockholder;
(b) Such other information regarding each nominee proposed
by such stockholder as would have been required to be
included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each
nominee been nominated, or intended to be nominated, by the
Board of Directors; and
(c) The consent of each nominee to serve as a Director of
the Company if elected.
The person presiding at any meeting of stockholders may refuse
to acknowledge the nomination of any person not made in full
compliance with the foregoing procedure. (As adopted February
10, 1994, and amended February 13, 1997, and October 8, 1998.)
Section IV
COMMITTEES OF THE BOARD
Section 4.1. Creation and Organization. The standing
committees of the Board of Directors shall be an Executive
Committee; an Audit Committee; a Compensation Committee; a
Committee on Directors; an Environment, Health, Safety and Public
Policy Committee; a Finance Committee; and an Investment Policy
Committee, having the respective duties assigned to each in this
Section IV and any other duties assigned to such committee by
resolution passed by a majority of the entire Board of Directors
from time to time. Each such standing committee shall consist of
one or more Directors and such other ex officio members as the
Board of Directors shall from time to time determine. The
chairman of each standing committee shall be one of such
committee's members who shall be designated as that committee's
chairman by a majority of the entire Board of Directors. Members
of each standing committee shall be elected by a majority of the
entire Board of Directors. Vacancies in any standing committee
shall be filled by a majority vote of the entire Board of
Directors. The Board of Directors may appoint management
employees of the Company or its subsidiaries to be ex officio
members of any standing committee except the Executive Committee.
Ex officio members of standing committees shall be entitled to be
present at all meetings of their respective committees and to
participate in committee discussions, but shall not be entitled
to vote or be counted for quorum purposes. Each standing
committee shall fix its own rules of procedure and shall meet
where and as provided by such rules, but the presence of a
majority of its members shall be necessary to constitute a
quorum. The Board of Directors may from time to time appoint
such special committees with such powers and such members as it
may designate in a resolution or resolutions adopted by a
majority of the entire Board of Directors. (As amended February
8, 1996, and March 9, 1998, effective March 1, 1998.)
Section 4.2. Executive Committee. During the intervals
between the meetings of the Board of Directors, the Executive
Committee shall possess and may exercise all the powers of the
Board of Directors in the management and direction of the
business and affairs of the Company to the fullest extent allowed
by the General Corporation Law of Delaware, including the power
and authority:
(a) To authorize the issuance of stock;
<PAGE>
--- Page 29 ---
Bylaws (Continued)
(b) To the extent authorized in a resolution or resolutions
providing for the issuance of shares of Preferred Stock
adopted by the Board of Directors, to fix the designations
and any of the preferences or rights of such shares relating
to dividends, redemption, dissolution, any distribution of
assets of the Company or the conversion into, or the
exchange of such shares for, shares of any other class or
any other series of any class of stock of the Company, to
fix the number of shares of any series of Preferred Stock or
to authorize the increase or decrease of the shares of any
series of Preferred Stock;
(c) To declare dividends on stock; and
(d) To adopt a certificate of ownership and merger in
accordance with the General Corporation Law of Delaware.
The Executive Committee shall consist of the officer who serves
as the chief executive officer pursuant to Section 5.17 and not
fewer than three other Directors. The Executive Committee shall
keep minutes of its meetings. (As amended April 14, 1994, and
February 13, 1997.)
Section 4.3. Audit Committee. The Audit Committee shall:
(a) Prior to each annual meeting of stockholders, submit a
recommendation in writing to the Board of Directors for the
selection of independent auditors to be appointed by the
Board of Directors in advance of the annual meeting of
stockholders and to be submitted for ratification or
rejection at such meeting;
(b) Annually consult with the independent auditors with
regard to the proposed plan of audit and from time to time
consult privately with them and also with the Corporate
Auditor and the Controller with regard to the adequacy of
internal controls; and
(c) Upon completion of the report of audit by the
independent auditors and before the date of the annual
meeting of stockholders, (i) review the financial statements
of the Company, and (ii) meet with the independent auditors
and review with them the results of their audit and any
recommendations made to the management. (As amended April
8, 1993.)
Section 4.4. Compensation Committee. The Compensation
Committee shall consist of two or more members, all of whom shall
be "non-employee Directors" as defined in Rule 16b-3 of the
General Rules and Regulations under the Securities Exchange Act
of 1934, as amended, or any future rule of the Securities and
Exchange Commission with respect to the same subject matter, and
who also comply with the rules for eligibility to serve as
members of the award and option committees hereinafter described.
The Compensation Committee may, with the consent of the Board of
Directors, delegate any portion of its authority to a
subcommittee consisting of two or more of its members.
(a) The Compensation Committee may establish rates of
salary, bonuses, retirement and other compensation for all
Directors and executive officers of the Company for purposes
of the Securities Exchange Act of 1934, as amended, or the
regulations of the Securities and Exchange Commission, and
for such other personnel as the Board of Directors may from
time to time delegate to it; provided, however, that no
member of the Committee may vote upon his or her own rate of
salary or his or her own bonus, retirement or other
compensation except for such items as are applicable to a
group that also includes personnel who are not Directors or
officers, or where his or her participation in such items is
determined by formula; and
(b) The Compensation Committee shall exercise all functions
of the award and option committees under the Company's
incentive and option plans. (As amended July 14, 1994, and
February 13, 1997.)
Section 4.5. Committee on Directors. The Committee on
Directors shall:
(a) Recommend to the Board the individuals to constitute
the nominees of the Board of Directors for election at the
next annual meeting of stockholders and who will be named as
such nominees in the proxy statement used for solicitation
of proxies by the Board;
<PAGE>
--- Page 30 ---
Bylaws (Continued)
(b) Recommend and nominate an individual for Director to
fill the unexpired term of any vacancy existing in the Board
of Directors or created by an increase in the size of the
Board;
(c) Conduct continuing studies of the size and composition
of the Board of Directors and from time to time make
recommendations to the Board for enlargement or reduction in
size of the Board; and
(d) Recommend and nominate individuals for election as
officers and members of Board committees. (As amended
February 13, 1997.)
Section 4.6. Environment, Health, Safety and Public Policy
Committee. The Environment, Health, Safety and Public Policy
Committee shall have the authority and responsibility to assess
all aspects of the Company's environment, health and safety
policies and performance, and to make recommendations to the
Board of Directors and the management of the Company with regard
to promoting and maintaining superior standards of performance.
It shall have the authority to assess any and all aspects of the
Company's decisions to determine their social impact.
Recognizing that positive perceptions of the Company's policies
and actions among its several constituencies are extremely
valuable assets, the Committee will keep itself informed of these
perceptions and will recommend to the Board and management
actions directed at continually enhancing the Company's public
image. (As amended April 8, 1993, and March 9, 1998,
effective March 1, 1998.)
Section 4.7. Finance Committee. The Finance Committee shall
have the responsibility of periodically reviewing the financial
affairs of the Company and making recommendations to the Board of
Directors concerning the financial needs of the Company and the
methods of providing funds for such needs.
Section 4.8. Investment Policy Committee. The Investment
Policy Committee shall have the authority and responsibility to:
(a) Establish investment policy for The Dow Employees'
Pension Plan or any other retirement plan or fund maintained
by the Company for its employees or employees of its
subsidiaries ("Plans");
(b) Employ, replace, discharge and supervise, and review
the performance of trustees and investment advisers acting
pursuant to the Plans;
(c) Enter into, modify, alter, amend or revoke any existing
or future trust agreement or trust relating to the Plans;
(d) Review and advise upon the investment policy of, and
performance of trustees and investment advisers acting
pursuant to or on behalf of, any retirement plan or fund
maintained by any directly or indirectly wholly owned
subsidiary or subsidiaries of the Company for the benefit of
its or their employees or the employees of its or their
subsidiaries; and
(e) Perform similar duties with respect to such other
retirement or investment plan or fund, or on behalf of such
other entities affiliated with the Company, as the Board of
Directors from time to time shall designate. (As amended
November 12, 1992, and February 13, 1997.)
Section 4.9. Powers Reserved to the Board. No committee of
the Board of Directors shall have the power or authority to:
(a) Approve or adopt, or recommend to stockholders, any
action or matter expressly required by the General
Corporation Law of Delaware to be submitted to stockholders
for approval; or
(b) Adopt, amend, or repeal these Bylaws.
No committee of the Board of Directors shall take any action
that is required by these Bylaws,* the Certificate of
Incorporation or the General Corporation Law of Delaware to be
taken by a vote of a specified proportion of the entire Board of
Directors. (As amended February 13, 1997, and renumbered March
9, 1998, effective March 1, 1998.)
<PAGE>
--- Page 31 ---
Bylaws (Continued)
Section V
OFFICERS
Section 5.1. Designation. The officers of the Company shall
be a Chairman of the Board, a President, one or more Executive
Vice Presidents, one or more Vice Presidents, a Treasurer, one or
more Assistant Treasurers, a Secretary, one or more Assistant
Secretaries, a Controller, one or more Assistant Controllers and
a General Counsel. The Board of Directors also may elect or
appoint, or provide for the appointment of, such other officers
or agents as may from time to time appear necessary or advisable
in the conduct of the business and affairs of the Company. (As
amended February 13, 1986.)
Section 5.2. Election and Term. At its first meeting after
each annual meeting of stockholders, the Board of Directors shall
elect the officers. The term of each officer shall be until the
first meeting of the Board of Directors following the next annual
meeting of stockholders and until such officer's successor is
chosen and qualified.
Section 5.3. Resignation. Any officer may resign at any time
by giving written notice to the President or the Secretary.
Unless otherwise stated in such notice of resignation, the
acceptance thereof shall not be necessary to make it effective;
and such resignation shall take effect at the time specified
therein or, in the absence of such specification, it shall take
effect upon the receipt thereof.
Section 5.4. Removal. Except where otherwise expressly
provided in a contract authorized by the Board of Directors, any
officer elected or appointed by the Board of Directors may be
removed at any time with or without cause by the affirmative vote
of a majority of the entire Board of Directors. (As amended
February 13, 1997.)
Section 5.5. Vacancies. A vacancy in any office may be filled
for the unexpired portion of the term by the Board of Directors.
Section 5.6. Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the Board of Directors and shall
have such other powers and perform such other duties as may be
assigned by the Board of Directors. (As amended May 14, 1987;
November 12, 1987; November 12, 1992, effective December 1, 1992;
and April 14, 1994.)
Section 5.7. President. The President shall have such other
powers and perform such other duties as may be assigned by the
Board of Directors. (As amended May 14, 1987; November 12, 1987;
November 12, 1992, effective April 1, 1993; and April 14, 1994.)
Section 5.8. Executive Vice Presidents. The Executive Vice
Presidents shall assist the President in the management of the
business and affairs of the Company and shall perform such other
duties as may be assigned by the President or the Board of
Directors.
Section 5.9. Vice Presidents. Each Vice President shall have
such powers and perform such duties as may be assigned by the
President or the Board of Directors. The Board of Directors may
designate a Financial Vice President and one or more Vice
Presidents as Senior Vice Presidents or Group Vice Presidents.
Section 5.10. Treasurer. The Treasurer shall have charge of
all funds of the Company and shall perform all acts incident to
the position of Treasurer, subject to the control of the Board of
Directors.
Section 5.11. Assistant Treasurers. Each Assistant Treasurer
shall have such powers and perform such duties as may be assigned
by the Treasurer or the Board of Directors.
Section 5.12. Secretary. The Secretary or an Assistant
Secretary shall keep the minutes and give notices of all meetings
of stockholders and Directors and of such committees as directed
by the Board of Directors. The Secretary shall have charge of
such books and papers as the Board of Directors may require. The
Secretary or any Assistant Secretary is authorized to certify
copies of extracts from minutes and of documents in the
Secretary's charge, and anyone may rely on such certified copies
to the same effect as if such copies were originals and may rely
upon any statement of fact concerning the Company certified by
the Secretary or any Assistant Secretary. The Secretary shall
perform all acts incident to the office of Secretary, subject to
the control of the Board of Directors. (As amended February 13,
1997.)
<PAGE>
--- Page 32 ---
Bylaws (Continued)
Section 5.13. Assistant Secretaries. Each Assistant Secretary
shall have such powers and perform such duties as may be assigned
by the Secretary or the Board of Directors.
Section 5.14. Controller. The Controller shall be in charge
of the accounts of the Company. The Controller shall have such
other powers and perform such other duties as may be assigned by
the Board of Directors and shall submit such reports and records
to the Board of Directors as it may request.
Section 5.15. Assistant Controllers. Each Assistant
Controller shall have such powers and perform such duties as may
be assigned by the Controller or the Board of Directors. (As
adopted on February 13, 1986.)
Section 5.16. General Counsel. The General Counsel shall be
in charge of all matters concerning the Company involving
litigation or legal counseling. The General Counsel shall have
such other powers and perform such other duties as may be
assigned by the Board of Directors and shall submit such reports
to the Board of Directors as it may request. (As renumbered on
February 13, 1986.)
Section 5.17. Designation of an Officer as the Chief Executive
Officer. The Board of Directors shall designate one of the
elected officers as the chief executive officer of the Company.
The chief executive officer shall be in general and active charge
of the business and affairs of the Company. (As adopted April
14, 1994, and amended February 8, 1996.)
Section 5.18. Designation of an Officer as the Chief Operating
Officer. The Board of Directors may designate one of the elected
officers the chief operating officer of the Company with such
powers and duties as may be assigned by the Board of Directors.
(As adopted on April 14, 1994.)
Section 5.19. Compensation of Officers. The officers of the
Company shall receive such compensation for their services as the
Compensation Committee may determine pursuant to Section 4.4(a)
of these Bylaws.* (As renumbered on February 13, 1986, and April
14, 1994.)
Section VI
INDEMNIFICATION
Section 6.1. Mandatory Indemnification of Directors, Officers
and Employees. The Company shall indemnify, to the full extent
permitted by the laws of the State of Delaware, any person who
was or is a defendant or is threatened to be made a defendant to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of the fact that such person:
(a) Is or was a Director, officer or employee of the
Company; or
(b) Is or was a Director, officer or employee of the
Company and is or was serving at the request of the Company
as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such
action, suit or proceeding.
Any repeal, amendment or modification of this Section 6.1
shall not affect any rights or obligations then existing between
the Company and any then incumbent or former Director, officer or
employee with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon such state of
facts. (As amended February 13, 1986, effective May 8, 1986; and
July 11, 1991.)
Section 6.2. Permitted Indemnification of Directors, Officers,
Employees and Agents. The Company may indemnify, to the full
extent permitted by the laws of the State of Delaware, any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of the fact that such person:
<PAGE>
--- Page 33 ---
Bylaws (Continued)
(a) Is or was a Director, officer, employee or agent of the
Company; or
(b) Is or was a Director, officer, employee or agent of the
Company and is or was serving at the request of the Company
as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such
action, suit or proceeding.
(As amended February 13, 1986, effective May 8, 1986.)
Section 6.3. Judicial Determination of Indemnification. Any
incumbent or former Director, officer or employee may apply to
any court of competent jurisdiction in the State of Delaware to
order indemnification to the extent mandated under Section 6.1
above. The basis of such order of indemnification by a court
shall be a determination by such court that indemnification of
the incumbent or former Director, officer or employee is proper
in the circumstances. Notice of any application for
indemnification pursuant to this Section 6.3 shall be given to
the Company promptly upon the filing of such application. (As
amended February 13, 1986, effective May 8, 1986; and July 11,
1991.)
Section 6.4. Expenses Payable in Advance. Expenses incurred
by any Director or officer in defending or investigating a
threatened or pending action, suit or proceeding shall be paid by
the Company in advance of the final disposition of such action,
suit or proceeding, upon receipt of an undertaking by or on
behalf of the Director or officer to repay such amount if it
ultimately shall be determined that the Director or officer is
not entitled to be indemnified by the Company as authorized in
this Section VI. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate. (As amended February
13, 1986, effective May 8, 1986; and October 9, 1986.)
Section 6.5. Nonexclusivity. The indemnification and
advancement of expenses mandated or permitted by, or granted
pursuant to, this Section VI shall not be deemed exclusive of any
other rights to which those seeking indemnification or
advancement of expenses may be entitled under any Bylaw,*
agreement, contract, vote of stockholders or disinterested
Directors or pursuant to the direction (howsoever embodied) of
any court of competent jurisdiction or otherwise both as to
action by the person in an official capacity and as to action in
another capacity while holding such office, it being the policy
of the Company that indemnification of the persons specified in
Sections 6.1 or 6.2 above as defendants shall be made to the
fullest extent permitted by the laws of the State of Delaware.
The provisions of this Section VI shall not be deemed to preclude
the indemnification of any person who is not specified in
Sections 6.1 or 6.2 above, but whom the Company has the power or
obligation to indemnify under the laws of the State of Delaware
or otherwise. (As amended February 13, 1986, effective May 8,
1986; and October 9, 1986.)
Section 6.6. Insurance. The Company may purchase and maintain
insurance on behalf of any person who is or was a Director,
officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against and
incurred by such person in any such capacity, or arising out of
the person's status as such, whether or not the Company would
have the power or the obligation to indemnify the Director,
officer, employee or agent of the Company against such liability
under the provisions of this Section VI. (As amended February
13, 1986, effective May 8, 1986.)
Section 6.7. Definitions. For the purposes of this Section
VI references to "the Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have
had power and authority to indemnify its directors, officers and
employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Section
VI with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if
its separate existence had continued. The term "other
enterprise" as used in this Section VI shall include employee
benefit plans. References to "fines" in this Section VI shall
include excise taxes assessed on a person with respect to an
employee benefit plan. The phrase "serving at the request of the
Company" shall include any service as a Director,
<PAGE>
--- Page 34 ---
Bylaws (Continued)
officer, employee or agent of the Company that imposes duties on,
or involves services by, such Director, officer, employee or
agent with respect to any employee benefit plan, its participants
or beneficiaries. (As amended February 13, 1986, effective May
8, 1986.)
Section 6.8. Survival. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Section VI
shall continue as to a person who has ceased to be a Director,
officer, employee or agent of the Company and shall inure to the
benefit of the heirs, executors and administrators of such
person. (As amended October 9, 1986.)
Section VII
MISCELLANEOUS
Section 7.1. Seal. The corporate seal shall have inscribed
upon it the name of the Company, the year "1947" and the words
"Corporate Seal" and "Delaware." The Secretary shall be in
charge of the seal and may authorize a duplicate seal to be kept
and used by any other officer or person.
Section 7.2. Waiver of Notice. Whenever any notice is
required to be given, a waiver thereof in writing, signed by the
person or persons entitled to the notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
Section 7.3. Voting of Stock Owned by the Company. Powers of
attorney, proxies, waivers of notice of meeting, consents and
other instruments relating to securities owned by the Company may
be executed in the name of and on behalf of the Company by the
President, any Executive Vice President, any Vice President or
the General Counsel. Any such officer may, in the name of and on
behalf of the Company, take all such action as any such officer
may deem advisable to vote in person or by proxy at any meeting
of security holders of any corporation in which the Company may
own securities and at any such meeting shall possess and may
exercise any and all rights and powers incident to the ownership
of such securities and which, as the owner thereof, the Company
might have exercised and possessed if present. The Board of
Directors may from time to time confer like powers upon any other
person or persons.
Section 7.4. Executive Office. The principal executive office
of the Company shall be located in the City of Midland, County of
Midland, State of Michigan, where the books of account and
records shall be kept. The Company also may have offices at such
other places, both within and without Delaware, as the Board of
Directors from time to time shall determine or the business and
affairs of the Company may require.
Section VIII
AMENDMENT OF BYLAWS*
Section 8.1. The Board of Directors shall have power to amend,
alter, change, adopt and repeal the Bylaws* of the Company at any
regular or special meeting. The stockholders also shall have
power to amend, alter, change, adopt and repeal the Bylaws* of
the Company at any annual or special meeting subject to the
requirements of the Certificate of Incorporation.
* Spelling as amended April 8, 1993.
<PAGE>
--- Page 35 ---
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 226
<SECURITIES> 558
<RECEIVABLES> 2,955
<ALLOWANCES> 91
<INVENTORY> 2,751
<CURRENT-ASSETS> 8,495
<PP&E> 24,267
<DEPRECIATION> 16,027
<TOTAL-ASSETS> 23,369
<CURRENT-LIABILITIES> 6,548
<BONDS> 4,259
<COMMON> 818
118
0
<OTHER-SE> 6,731
<TOTAL-LIABILITY-AND-EQUITY> 23,369
<SALES> 14,000
<TOTAL-REVENUES> 14,000
<CGS> 10,451
<TOTAL-COSTS> 12,910
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (370)
<INCOME-PRETAX> 1,805
<INCOME-TAX> 632
<INCOME-CONTINUING> 1,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,160
<EPS-PRIMARY> 5.17
<EPS-DILUTED> 5.10
</TABLE>
