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 March 31, 1999
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 March 31, 1999
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Common Stock, $2.50 par value 219,708,249 shares
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THE DOW CHEMICAL COMPANY
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income 6
Operating Segments and Geographic Areas 7
Commitments and Contingent Liabilities 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Disclosure Regarding Forward-Looking Information 10
First Quarter Earnings Announcement 10
Acquisitions and Divestitures 11
Changes in Financial Condition 12
Results of Operations 13
Accounting Policies 18
Year 2000 Readiness Disclosure 18
Euro Conversion 20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
Exhibit 27 26
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Note A)
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<CAPTION>
The Dow Chemical Company and Subsidiaries
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Consolidated Statements of Income Three Months Ended
Mar. 31, Mar. 31,
In millions, except for share amounts (Unaudited) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $4,417 $4,829
- ------------------------------------------------------------------------------------------------------
Cost of Sales 3,276 3,691
Research and development expenses 192 192
Selling, general and administrative expenses 390 403
Amortization of intangibles 27 19
Purchased in-process research and development charges (Note B) - 338
Special charges (Note C) - 330
Insurance and finance company operations, pretax income 30 32
Equity in earnings of nonconsolidated affiliates 25 23
Sundry income - net (Note D) 68 840
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Earnings before Interest, Income Taxes and Minority Interests 655 751
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Interest income 25 35
Interest expense and amortization of debt discount 120 120
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Income before Income Taxes and Minority Interests 560 666
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Provision for taxes on income 203 242
Minority interests' share in income 27 2
Preferred stock dividends 1 1
- ------------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $329 $421
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Share Data
Earnings per common share - basic $1.49 $1.87
Earnings per common share - diluted $1.47 $1.84
Common stock dividends declared per share $0.87 $0.87
Weighted-average common shares outstanding - basic 220.2 225.5
Weighted-average common shares outstanding - diluted 224.0 229.6
- ------------------------------------------------------------------------------------------------------
Depreciation $276 $270
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Capital Expenditures $250 $301
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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, 1998. (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 (IPR&D) costs associated with the acquisitions of Dow AgroSciences, Mycogen
and Sentrachem Limited. This amount was reduced in the fourth quarter of 1998 by $49 million, in
accordance with the SEC's clarified guidance on IPR&D.
Note C: During the first quarter of 1998, a pretax special charge of $330 million was recorded, principally for
severance costs and asset write-downs.
Note D: In January 1998, the Company completed the sale of the DowBrands business to S.C. Johnson & Son, Inc.
The sale resulted in a pretax gain of $816 million.
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
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Consolidated Balance Sheets
Mar. 31, Dec. 31,
In millions (Unaudited) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
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Current Assets
Cash and cash equivalents $155 $123
Marketable securities and interest-bearing deposits 246 267
Accounts and notes receivable:
Trade (less allowance for doubtful receivables - 1999, $112; 1998, $93) 2,513 2,787
Other 1,682 1,750
Inventories:
Finished and work in process 2,101 2,245
Material and supplies 523 565
Deferred income tax assets - current 294 303
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Total current assets 7,514 8,040
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Investments
Investment in nonconsolidated affiliates 1,350 1,311
Other investments 2,268 2,191
Noncurrent receivables 396 424
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Total investments 4,014 3,926
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Property
Property 23,954 24,435
Less accumulated depreciation 15,703 15,988
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Net property 8,251 8,447
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Other Assets
Goodwill (net of accumulated amortization - 1999, $236; 1998, $246) 1,617 1,641
Deferred income tax assets - noncurrent 640 684
Deferred charges and other assets 1,113 1,092
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Total other assets 3,370 3,417
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Total Assets $23,149 $23,830
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
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Consolidated Balance Sheets
Mar. 31, Dec. 31,
In millions (Unaudited) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $1,087 $1,526
Long-term debt due within one year 413 300
Accounts payable:
Trade 1,419 1,682
Other 1,075 981
Income taxes payable 320 290
Deferred income tax liabilities - current 66 71
Dividends payable 194 192
Accrued and other current liabilities 1,738 1,800
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Total current liabilities 6,312 6,842
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Long-Term Debt 4,003 4,051
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Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 750 747
Pension and other postretirement benefits - noncurrent 1,875 1,903
Other noncurrent obligations 2,190 2,283
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Total other noncurrent liabilities 4,815 4,933
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Minority Interest in Subsidiary Companies 432 532
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Temporary Equity
Preferred stock at redemption value 116 117
Guaranteed ESOP obligation (74) (74)
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Total temporary equity 42 43
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Stockholders' Equity
Common stock 818 818
Additional paid-in capital 759 718
Retained earnings 13,022 12,887
Accumulated other comprehensive income (294) (347)
Treasury stock, at cost (6,760) (6,647)
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Net stockholders' equity 7,545 7,429
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Total Liabilities and Stockholders' Equity $23,149 $23,830
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</TABLE>
See Notes to Financial Statements.
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
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Consolidated Statements of Cash Flows Three Months Ended
Mar. 31, Mar. 31,
In millions (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities Net income available for common stockholders $329 $421
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 310 287
Purchased in-process research & development - 338
Special charge - 330
Provision (credit) for deferred income tax 19 (60)
Undistributed earnings of nonconsolidated affiliates (20) (19)
Minority interests' share in income 27 2
Net gain on sale of consolidated companies - (816)
Net gain on sales of property (5) -
Other net (gain) loss (36) 3
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 181 17
Inventories 187 94
Accounts payable (160) (243)
Other assets and liabilities 157 423
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Cash provided by operating activities 989 777
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Investing Activities Capital expenditures (250) (301)
Proceeds from sales of property 10 -
Purchases of consolidated companies (4) (314)
Proceeds from sale of consolidated companies - 1,183
Purchases from outside investors in limited partnership - (201)
Investments in nonconsolidated affiliates (22) (18)
Purchases of investments (677) (854)
Proceeds from sales of investments 736 855
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Cash (used in) provided by investing activities (207) 350
- -------------------------------------------------------------------------------------------------------
Financing Activities Changes in short-term notes payable (406) (506)
Payments on long-term debt (105) (227)
Proceeds from issuance of long-term debt 169 -
Purchases of treasury stock (119) (82)
Proceeds from sales of common stock 32 29
Purchase of subsidiary preferred stock (102) -
Distributions to minority interests (25) (7)
Dividends paid to stockholders (191) (196)
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Cash used in financing activities (747) (989)
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Effect of Exchange Rate Changes on Cash (3) (2)
- -------------------------------------------------------------------------------------------------------
Summary Increase in cash and cash equivalents 32 136
Cash and cash equivalents at beginning of year 123 235
---------------------------------------------------------------------------------
Cash and cash equivalents at end of period $155 $371
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</TABLE>
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income Three Months Ended
Mar. 31, Mar. 31,
In millions (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income Available for Common Stockholders $329 $421
- -------------------------------------------------------------------------------------------------------
Other Comprehensive Unrealized gains (losses) on investments 81 (3)
Income, Net of Tax Cumulative translation adjustments (28) (8)
Minimum Pension Liability - -
---------------------------------------------------------------------------------
Total other comprehensive income 53 (11)
- -------------------------------------------------------------------------------------------------------
Comprehensive Income $382 $410
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See Notes to Financial Statements.
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
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Operating Segments and Geographic Areas Three Months Ended
Mar. 31, Mar. 31,
In millons (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating segment sales
Performance Plastics $1,263 $1,253
Performance Chemicals 641 640
Agricultural Products 669 678
Plastics 918 994
Chemicals 512 650
Hydrocarbons and Energy 309 423
Unallocated and Other 105 191
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Total $4,417 $4,829
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Operating segment EBIT
Performance Plastics $273 $258
Performance Chemicals 124 86
Agricultural Products 81 (261)
Plastics 141 216
Chemicals 100 83
Hydrocarbons and Energy (13) 16
Unallocated and Other (51) 353
- -------------------------------------------------------------------------------------------------------
Total $655 $751
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Operating segment intersegment revenues
Performance Plastics $4 $4
Performance Chemicals 3 2
Plastics 2 1
Chemicals 7 12
Unallocated and Other (16) (19)
- -------------------------------------------------------------------------------------------------------
Total - -
- -------------------------------------------------------------------------------------------------------
Geographic area sales
United States $1,834 $1,954
Europe 1,574 1,722
Rest of World 1,009 1,153
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Total $4,417 $4,829
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The reconciliation between "Earnings before Interest, Income Taxes and Minority Interests (EBIT)" and
"Income before Income Taxes and Minority Intersts" consists of "Interest income" and "Interest expense
and amortizaiton of debt discount," and can be found in the Consolidated Statements of Income on page 3.
</TABLE>
<TABLE>
<CAPTION>
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Sales Volume and Price by Operating Segment and Geographic Area Three Months Ended
Mar. 31, 1999
Percentage change from prior year Volume Price Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating segments
Performance Plastics 5% (4)% 1%
Performance Chemicals 2% (2)% 0%
Agricultural Products 1% (2)% (1)%
Plastics 13% (21)% (8)%
Chemicals (3)% (18)% (21)%
Hydrocarbons and Energy (6)% (21)% (27)%
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Total 2% (11)% (9)%
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Geographic areas
United States 2% (8)% (6)%
Europe 2% (11)% (9)%
Rest of World 1% (13)% (12)%
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Total 2% (11)% (9)%
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COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in which
the Company is a 50 percent shareholder, announced a pretax
charge of $640 million ($415 million after tax) for the fourth
quarter of 1993. In January 1995, Dow Corning announced a pretax
charge of $241 million ($152 million after tax) for the fourth
quarter of 1994. These charges included Dow Corning's best
estimate of its potential liability for breast implant litigation
based on a global Breast Implant Litigation Settlement Agreement
(the Settlement Agreement); litigation and claims outside of the
Settlement Agreement; and provisions for legal, administrative
and research costs related to breast implants. The charges for
1993 and 1994 included pretax amounts of $1,240 million and $441
million less expected insurance recoveries of $600 million and
$200 million, respectively. The 1993 amounts reported by Dow
Corning were determined on a present value basis. On an
undiscounted basis, the estimated liability noted above for 1993
was $2,300 million less expected insurance recoveries of $1,200
million.
As a result of the Dow Corning actions, the Company recorded
its 50 percent share of the charges, net of tax benefits
available to Dow. The impact on net income was a charge of $192
million for 1993 and $70 million for 1994.
Dow Corning reported an after tax net loss of $167 million for
the second quarter of 1995 as a result of a $221 million after
tax charge taken to reflect a change in accounting method from
the present value basis noted above to an undiscounted basis
resulting from the uncertainties associated with its voluntary
filing for protection under Chapter 11 of the U.S. Bankruptcy
Code on May 15, 1995. As a result of such loss and Chapter 11
filing, the Company recognized a pretax charge against income of
$330 million for the second quarter of 1995, fully reserved its
investment in Dow Corning and is not recognizing its 50 percent
share of equity earnings while Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the U.S.
District Court for the Northern District of Alabama approved the
Settlement Agreement, pursuant to which plaintiffs choosing to
participate in the Settlement Agreement released the Company from
liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On
October 7, 1995, Judge Pointer issued an order which concluded
that the Settlement Agreement was not workable in its then-
current form because the funds committed to it by industry
participants were inadequate. The order provided that plaintiffs
who had previously agreed to participate in the Settlement
Agreement could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its investment
in Dow Corning which, after the second quarter of 1995 charge
noted above, is zero. As a result, any future charges by Dow
Corning related to such claims or as a result of the Chapter 11
proceeding would not have an adverse impact on the Company's
consolidated financial statements.
The Company is separately named as a defendant in more than
14,000 breast implant product liability cases, of which
approximately 4,000 state cases are the subject of summary
judgments in favor of the Company. 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.
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 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.
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Commitments and Contingent Liabilities (Continued)
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 $339 million at
March 31, 1999, for environmental matters, including $7 million
for the remediation of Superfund sites. This is management's best
estimate of the costs for remediation and restoration with
respect to environmental matters for which the Company has
accrued liabilities, although the ultimate cost with respect to
these particular matters could range up to twice that amount.
Inherent uncertainties exist in these estimates primarily due to
unknown conditions, changing governmental regulations and legal
standards regarding liability, and evolving technologies for
handling site remediation and restoration. It is the opinion of
the Company's management that the possibility is remote that
costs in excess of those accrued or disclosed will have a
material adverse impact on the Company's consolidated financial
statements.
In addition to the breast implant, DBCP and environmental
remediation matters, the Company is party to a number of other
claims and lawsuits arising out of the normal course of business
with respect to commercial matters, including product liability,
governmental regulation and other actions. Certain of these
actions purport to be class actions and seek damages in very
large amounts. All such claims are being contested.
Dow has an active risk management program consisting of
numerous insurance policies secured from many carriers at various
times. These policies provide coverage which will be utilized to
minimize the impact, if any, of the contingencies described
above.
Except for the possible effect on the Company's net income for
breast implant litigation described above, it is the opinion of
the Company's management that the possibility is remote that the
aggregate of all claims and lawsuits will have a material adverse
impact on the Company's consolidated financial statements.
A Canadian subsidiary entered into two 20-year agreements, one
which expired in 1998 and one which expires in 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 $221 million, $199 million and $221 million
in 1998, 1997 and 1996, respectively.
At December 31, 1998, 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, 1998 (in millions)
- -------------------------------------------------
1999 $ 272
2000 253
2001 255
2002 248
2003 240
2004 through expiration of contracts 1,669
- -------------------------------------------------
Total $2,937
- -------------------------------------------------
In addition to the take or pay obligations at December 31,
1998, 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 $106 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 $307 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements made by or on behalf
of the Company. This section covers the current performance and
outlook of the Company and each of its operating segments. The
forward-looking statements contained in this section and in other
parts of this document involve risks and uncertainties that may
affect the Company's operations, markets, products, services,
prices and other factors as more fully discussed elsewhere and in
filings with the U.S. Securities and Exchange Commission. These
risks and uncertainties include, but are not limited to,
economic, competitive, legal, 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.
FIRST QUARTER EARNINGS ANNOUNCEMENT (APRIL 22, 1999)
DOW REPORTS FIRST QUARTER EARNINGS OF $1.47 PER SHARE
- ----------------------------------------------------------------------
First Quarter of 1999 Highlights
- - Earnings per share were $1.47 compared with $1.77, excluding
unusual items, for the same period in 1998.
- - The combined Performance Chemicals and Performance Plastics
segments had double-digit improvement in earnings compared with
both the first and fourth quarters of 1998.
- - Volume increased 4 percent, excluding the effects of
acquisitions and divestitures, versus the first quarter of 1998.
---------------------------------------------------------------------
3 Months Ended
(In millions, except for per share amounts March 31
- ----------------------------------------------------------------------
1999 1998
---- ----
Net Sales $ 4,417 $ 4,829
Earnings Before Interest and Taxes (EBIT) 655 751
Earnings Per Common Share 1.47 1.84
Excluding 1998 Unusual Items:
Earnings Before Interest and Taxes (EBIT) $ 655 $ 723
Earnings Per Common Share 1.47 1.77
- ----------------------------------------------------------------------
Dow's First Quarter 1999 Earnings
The Dow Chemical Company today reported first quarter sales of
$4.4 billion, net income of $329 million and earnings per share
of $1.47. Earnings before interest, taxes and minority interests
(EBIT) were $655 million, compared with $723 million in the first
quarter of 1998 excluding unusual items. These items in 1998
included a gain on the sale of the DowBrands business, largely
offset by purchased in-process research and development and other
charges.
An improved portfolio mix, lower structural costs and
increased volume partially offset price declines net of feedstock
and energy costs versus the same period a year ago. Volume rose
by 4 percent, excluding the effects of acquisitions and
divestitures.
"We are pleased with Dow's first quarter results, particularly
from the performance segments, despite challenging conditions in
the industry and a less-than-favorable economic environment
outside of North America," said J. Pedro Reinhard, executive vice
president and chief financial officer. He noted that results
were enhanced by stronger volume in most of Dow's businesses late
in the quarter.
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First Quarter Earnings Announcement (April 22, 1999) (Continued)
Dow's combined Performance Chemicals and Performance Plastics
segments showed double-digit increases in EBIT compared with both
the first and fourth quarters of 1998.
Both segments benefited from improved volume as well as lower
structural and raw material costs. Results for the Agricultural
Products segment were impacted by planned increases in expenses
associated with the build-up of research and development
capabilities in biotechnology as well as difficult conditions in
Brazil.
In the basics segments, Chemicals and Plastics, EBIT was down
versus first quarter 1998 primarily due to price declines for
caustic soda, vinyl chloride monomer and polyethylene. However,
Plastics prices showed some improvement by the end of the quarter
and the segment benefited from strong global volume growth.
Operating efficiency, combined with continued cost reductions,
mitigated the impact of lower pricing while the strength of Dow's
customer base contributed to increased volume.
Commenting on the outlook for the remainder of the year,
Reinhard said, "Overall, we are well on track to achieve Dow's
strategic and financial goals, including earning positive
economic profit at the trough of the chemical cycle."
ACQUISITIONS AND DIVESTITURES
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 $137 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 January 1998, the Company completed the sale of the
DowBrands consumer products 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 acquired 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 is
$137 million, of which $81 million will be paid over three years,
commencing in 1998.
In January 1996, DowElanco entered into agreements with
Mycogen Corporation and the Lubrizol Corporation for transactions
through which DowElanco, for a cash investment of $158 million,
acquired a 47 percent equity stake in Mycogen and Mycogen
acquired DowElanco's United Agriseeds subsidiary. In December
1996, DowElanco increased its equity stake in Mycogen to more
than 50 percent. During the first quarter of 1998, Dow
AgroSciences (formerly named DowElanco) invested an additional
$121 million in Mycogen, increasing its ownership to 69 percent.
In November 1998, following the expiration of a tender offer, the
Company completed the acquisition of all remaining shares for
$418 million. 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.
In January 1996, the Company and The Hartford Steam Boiler
Inspection and Insurance Company (HSB) formed, through the
transfer of net assets and existing businesses, a 60:40 joint
venture named Radian International LLC (Radian) to provide
environmental services. In January 1998, HSB exercised a put
option requiring the Company to purchase HSB's interest for $136
million. In July 1998, as part of the Company's ongoing efforts
to restructure its business portfolio, Radian was sold to Dames &
Moore Group for $117 million.
In December 1998, the Company and United Technologies
Corporation sold the business and certain 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 joint venture is expected to be dissolved in 1999,
with no material effect on the Company's consolidated financial
statements.
See the sections entitled "Purchased In-process Research and
Development" and "Special Charge" on page 16 regarding certain
charges recorded during 1998 related to acquisitions and
divestitures.
<PAGE>
--- Page 11 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital at
March 31, 1999 versus December 31, 1998.
Mar. 31, Dec. 31, Increase
In millions 1999 1998 (Decrease)
- ----------------------------------------------------------------------
Notes payable $1,087 $1,526 $(439)
Long-term debt due within one year 413 300 113
Long-term debt 4,003 4,051 (48)
- ----------------------------------------------------------------------
Total debt $5,503 $5,877 $(374)
- ----------------------------------------------------------------------
At March 31, 1999, the Company had unused and available credit
facilities with various U.S. and foreign banks totaling $1.3
billion in support of its working capital requirements and
commercial paper borrowings. Additional unused credit facilities
totaling $1.5 billion are available for use by foreign
subsidiaries.
Mar. 31, Dec. 31, Increase
In millions 1999 1998 (Decrease)
- ----------------------------------------------------------------------
Cash and cash equivalents $ 155 $ 123 $ 32
Marketable securities and
interest-bearing deposits 246 267 (21)
Accounts and notes receivable - net 4,195 4,537 (342)
Inventories:
Finished and work in process 2,101 2,245 (144)
Materials and supplies 523 565 (42)
Deferred income tax assets - current 294 303 (9)
- ----------------------------------------------------------------------
Total current assets 7,514 8,040 (526)
- ----------------------------------------------------------------------
Total current liabilities 6,312 6,842 (530)
- ----------------------------------------------------------------------
Working capital $1,202 $1,198 $ 4
- ----------------------------------------------------------------------
Operating activities provided cash of $989 million for the
three months ended March 31, 1999. Included in this amount was
the sale of U.S. trade receivables totaling $450 million in
March. Cash was used to reduce total debt $374 million, to
repurchase shares of the Company's common stock for $119 million,
and for other normal activities. (See the Consolidated Statements
of Cash Flows for more detail.)
Mar. 31, Dec. 31,
Balance Sheet Ratios 1999 1998
- -----------------------------------------------------------------------
Current assets over current liabilities 1.2:1 1.2:1
Days-sales-outstanding-in-receivables 48 49
Days-sales-in-inventory 86 85
Debt as a percentage of total capitalization 40.7% 42.3%
- ----------------------------------------------------------------------
The Company purchased 1 million shares of common stock during
the first quarter of 1999 as part of its overall stock repurchase
program. The Company's average shares outstanding for the first
three months of 1999 were 220 million, a decrease of 2 percent
from the average shares outstanding for the first three months of
1998.
On April 30, 1999, the Company paid a quarterly dividend of 87
cents per share to shareholders of record on March 31, 1999. This
was the 349th consecutive quarterly dividend since 1912 and in
each instance Dow has maintained or increased the dividend.
<PAGE>
--- Page 12 ---
RESULTS OF OPERATIONS
Following are selected data for the three months ended March 31, 1999 and 1998:
Three Months Ended
Mar. 31, Mar. 31,
Dollars in millions, except for share amounts 1999 1998
- --------------------------------------------- ---- ----
Cost of sales $3,276 $3,691
% of sales 74% 76%
Research and development, selling,
general and administrative expenses 582 595
Earnings before interest, income taxes and
minority interests (EBIT) 655 751
% of sales 15% 16%
Earnings before interest, income taxes and
minority interests excluding unusual items 655 723
% of sales 15% 15%
Minority interests' share in income 27 2
Effective tax rate 36.3% 36.3%
Net income available for common stockholders $329 $421
Earnings per common share - basic $1.49 $1.87
Earnings per common share - diluted $1.47 $1.84
Operating rate percentage 85% 88%
Net sales for the first quarter of 1999 were $4.4 billion, down 9
percent from $4.8 billion in the first quarter of last year.
Sales were up 2 percent versus the same quarter last year due to
increased volume, and down 11 percent, or $504 million, due to
declining prices. Considering the effect of acquisitions and
divestitures, volume for the first quarter improved 4 percent
from the same period last year. Volume was particularly strong in
Plastics, up 13 percent, due primarily to double-digit growth in
polyethylene. Volume was up 2 percent in the United States and
Europe, and 1 percent in Rest of World; prices were down in all
segments, most notably in Plastics, Chemicals and Hydrocarbons
and Energy, and in all geographic areas.
Expenses, which include research and development, selling,
general and administrative expenses, were $582 million, down $13
million from the first quarter of 1998. The decrease reflects the
Company's on-going efforts to reduce structural costs.
Minority interests' share in income was $27 million for the
first quarter of 1999, up significantly from $2 million for the
same period last year due primarily to the Company's acquisition
of the remaining shares of Mycogen (November 1998) and the 20
percent investment by an outside investor in Chemtech II (June
1998).
Net income for the first quarter was $329 million or $1.47 per
share (diluted), down from $421 million or $1.84 per share
(diluted) for the first quarter of 1998. Net income was
negatively impacted by lower selling prices, only partially
offset by volume increases and lower hydrocarbon and energy
costs. Last year's net income for the quarter included the gain
on the sale of the DowBrands business, offset by several unusual
charges. The unusual charges included charges for purchased in-
process research and development, severance costs, asset write-
downs and environmental remediation costs.
<PAGE>
--- Page 13 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,263 million were up slightly
versus the first quarter of 1998. While volume improved 5
percent, prices, net of a positive impact from currency, declined
4 percent. Despite lower prices, EBIT for the segment increased 3
percent to $273 million, from $264 million a year ago excluding
unusual charges of $6 million recorded in the first quarter of
1998.
Polyurethanes sales for first quarter were down 3 percent
versus the first quarter of 1998, driven by declining prices in
all geographic areas. Volume, flat versus the same period last
year, was particularly strong in North America and Latin America,
offsetting declines in Europe and Asia Pacific. EBIT was down
versus the first quarter of last year due to price declines and
start-up expenses associated with a new toluene diisocyanate
(TDI) plant.
Sales of Epoxies and Intermediates were down 6 percent from a
year ago, with price declines of 8 percent partially offset by a
2 percent gain in volume. While volume was relatively flat in the
U.S. and Europe, it was up significantly in the other geographic
areas. Despite price declines, EBIT for the business was up
compared with last year due to increased volume, lower
hydrocarbon costs, and reductions in selling, administrative, and
research and development expenses.
Engineering Plastics sales for the quarter were up 15 percent
from the same quarter last year, with volume up 18 percent and
prices down 3 percent. Volume, up significantly in all geographic
areas, was boosted by new sales of nylon from a marketing
agreement with Solutia. Demand was also strong for polycarbonate.
EBIT for the quarter was up substantially versus the first
quarter of 1998 due to the improved volume and lower raw material
costs.
Fabricated Products sales for the first quarter of 1999 were
down 4 percent versus a year ago due to lower prices and volume.
Prices, down 3 percent overall, were down in all geographic areas
except Asia Pacific. Volume was down 1 percent in total. Volume
for Styrofoam brand insulation was up significantly in North
America, but down in Europe where construction was off due to
poor winter weather. Despite lower prices and volume, EBIT was up
more than 50 percent from the same period last year, due to lower
raw material costs and reduced structural costs.
Adhesives, Sealants and Coatings sales for the first quarter
were up 15 percent versus the first quarter of 1998, driven
entirely by strong sales volume in all geographic areas. Volume
in the business' Systems Houses was up significantly with strong
growth in Europe and new sales in China and Brazil. Prices
overall held relatively flat with last year. First quarter EBIT
for this growth business was up significantly when compared with
last year, due to higher volumes and continued cost control.
PERFORMANCE CHEMICALS
First quarter sales for Performance Chemicals of $641 million
were flat versus $640 million in the first quarter of 1998, as
price declines of 2 percent offset volume gains of 2 percent.
Excluding unusual charges of $12 million recorded in the first
quarter of 1998, EBIT for the segment was up 27 percent to $124
million from $98 million last year.
Specialty Chemicals sales for the quarter were down slightly,
with a 1 percent increase in volume more than offset by a 2
percent decline in prices versus the same quarter last year.
Volume increased in all geographic areas except the United
States, where sales were down due to lower distributor demand.
While volume was down overall in the U.S., demand for Methocel
set a record for first quarter sales. Business in the Company's
Contract Manufacturing operations was also up. Despite the
relatively flat sales, EBIT for the first quarter improved versus
last year due to lower raw material costs and continued cost
control.
Emulsion Polymers sales increased 2 percent versus the first
quarter of 1998 as volume growth of 4 percent more than offset a
2 percent decline in prices. Volume was particularly strong in
the United States and Asia Pacific. Prices were down in all
geographies except Europe, where prices were flat compared with
the same quarter last year. EBIT for the quarter improved more
than 50 percent versus last year due to lower styrene monomer
costs and lower expenses.
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
AGRICULTURAL PRODUCTS
Sales of Agricultural Products for first quarter 1999 were down 1
percent compared with the same quarter of 1998, as volume growth
of 1 percent was more than offset by price declines of 2 percent.
While volume was negatively impacted by poor weather conditions
in Europe, it was helped by an early spring in the United States.
In Latin America, sales were severely impacted by the effects of
the Brazilian Real devaluation. FirstRate, a new product, showed
solid growth in the first quarter. EBIT of $81 million for the
quarter was down when compared with $91 million, excluding
unusual items, for the first quarter of 1998. The 11 percent
decline was due to the planned build up of research and
development capabilities in biotechnology, increased goodwill
amortization from acquisitions completed last year and difficult
conditions in Brazil. The biotechnology-related expenses are in
line with the Company's strategy to invest in this high growth
arena.
Unusual items, totaling $352 million, recorded in the first
quarter of 1998 included 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. (See sections entitled "Purchased In-process
Research and Development" and "Special Charge" in Management's
Discussion and Analysis of Financial Condition and Results of
Operations.)
PLASTICS
Plastics sales in the first quarter of 1999 were $918 million,
down 8 percent from $994 million a year ago. While volume
increased 13 percent, prices fell 21 percent. EBIT for the
quarter was $141 million, down 35 percent from $216 million in
first quarter 1998.
Polyethylene sales were down 9 percent in the first quarter
versus the same quarter last year, as prices fell 23 percent.
Price declines were experienced around the globe. Volume, up 14
percent overall, improved by double-digit percentages in all
geographic areas except Latin America, which was up 8 percent.
Volume growth for Elite enhanced polyethylene resins and
polyethylene terephthalate (PET) was particularly strong. First
quarter EBIT for polyethylene was down from the same quarter of
1998 as significant price declines were only partially offset by
higher volumes and lower ethylene costs.
Polystyrene sales decreased 11 percent in the first quarter
versus the same quarter of 1998. Prices declined 12 percent
compared with first quarter of last year; volumes grew 1 percent.
While prices were lower in all regions of the globe, they were
down most significantly in Europe due to excess supply. Demand
was strong in Europe, despite the oversupply situation, but down
in North America, due to a general slowdown in business, and down
in Latin America following the devaluation of the Brazilian Real.
EBIT for the business was down compared with first quarter 1998,
due to lower selling prices, only partly offset by lower styrene
monomer costs.
Polypropylene sales continued a strong growth trend, with
volume up significantly in the first quarter. First quarter
pricing was down versus the same period last year mostly due to
declining prices in Europe. EBIT was up significantly versus last
year due to the increase in volume.
Insite EBIT for the first quarter improved significantly
compared with the same period last year, primarily due to an
improvement in equity earnings from DuPont Dow Elastomers L.L.C.
on higher sales and lower structural costs.
CHEMICALS
Chemical and Metals sales in the first quarter of 1999 were $512
million, down from $650 million in the first quarter of 1998.
Sales continue to be negatively impacted by price declines (18
percent) globally. Volume, down 3 percent overall, was strong in
Asia Pacific and Latin America, but off in North America and
Europe. Net of the volume lost from exiting magnesium-related
businesses late last year, volume was up 5 percent. Vinyl
chloride monomer prices were down almost 20 percent from first
quarter 1998. Caustic volume was relatively flat compared with
last year, but prices were down almost 20 percent versus a year
ago. Weak pulp and paper, demand coupled with high operating
rates in the industry, left caustic supply long. Ethylene glycol
volume was up 32 percent, but prices were down almost the same
amount from the same period last year. EBIT for the segment was
$100 million for the quarter, down from $138 million for the same
period last year excluding $55 million of unusual items,
primarily environmental remediation charges, recorded in the
first quarter of 1998. (See section entitled "Special Charge" in
Management's Discussion and Analysis of Financial Condition and
Results of Operations.) The decline in EBIT was the result of
overall lower selling prices.
<PAGE>
--- Page 15 ---
Results of Operations (Continued)
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in the first quarter of 1999
were $309 million, a decrease of 27 percent from $423 million for
the same period a year ago. Sales volume was down 6 percent;
prices declined 21 percent as lower crude oil costs resulted in
lower refinery prices. EBIT for the quarter was a loss of $13
million compared with EBIT of $27 million, excluding $11 million
of charges for unusual items (environmental remediation costs),
for the first quarter of 1998. (See section entitled "Special
Charge" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
UNALLOCATED AND OTHER
EBIT for Unallocated and Other was a loss of $51 million for the
first quarter of 1999, compared with a loss of $111 million,
excluding an unusual gain of $464 million, for the first quarter
of 1998. Unusual items recorded in the first quarter of 1998
included: a gain on the sale of the DowBrands business, partially
offset by purchased in-process research and development costs
related to the acquisition of Sentrachem; severance costs; asset
write-downs; and environmental remediation costs. (See sections
entitled "Purchased In-process Research and Development" and
"Special Charge" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
COMPANY SUMMARY
Operating Rate
- --------------
The Company's global plant operating rate for its chemicals and
plastics businesses was 85 percent, down from 88 percent in the
first quarter of 1998.
Purchased In-process Research and Development
- ---------------------------------------------
Purchased in-process research and development (IPR&D) 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 SFAS No. 2, "Accounting for Research and
Development Costs," as clarified by FASB Interpretation No. 4,
amounts assigned to IPR&D 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). During the third and
fourth quarters of 1998, the U.S. Securities and Exchange
Commission (SEC) issued clarifying guidance on how these amounts
are to be determined. In light of this clarification, the Company
reviewed all IPR&D charges, and in the fourth quarter recorded a
$49 million reduction of the IPR&D charges recorded in the first
quarter of 1998 to comply with the SEC guidance.
Special Charge
- --------------
In the first quarter of 1998, a special charge of $330 million
was recorded, including $218 million for the write-down of
several assets and $112 million for severance. The asset write-
downs included Radian International LLC, Dow-United Technologies
Composite Products, Inc., both of which were subsequently sold
(see Acquisitions and Divestitures), and an agricultural plant in
Brazil. In the third quarter, based on changes in the estimated
fair values, a $24 million adjustment to the reduced values of
the assets to be disposed was recorded.
Severance plans were adopted by the Company in the first
quarter of 1998 for North America, Europe and Sentrachem,
resulting in the special charge of $112 million. The plans for
North America and Europe were complete at the end of 1998. The
plan for Sentrachem is expected to be completed during 1999.
During 1998, severance costs of $138 million were incurred
relative to these plans, exceeding the initial severance accrual
by $39 million. Total headcount reduction related to the
severance plans was 1,881 through December 31, 1998. At year-end,
the balance of the accrual for the Sentrachem plan was $13
million, representing an anticipated additional headcount
reduction of 180. During the first quarter of 1999, $7 million
related to the Sentrachem plan was paid to 96 individuals,
leaving a balance of $6 million for an anticipated additional
headcount reduction of 140.
<PAGE>
--- Page 16 ---
Results of Operations (Continued)
Equity in Earnings of Nonconsolidated Affiliates
- ------------------------------------------------
Equity in earnings of nonconsolidated affiliates was $25 million
in the first quarter of 1999, up slightly from $23 million in the
same quarter last year.
Sundry Income - Net
- -------------------
Sundry income includes a variety of income and expense items
including royalty income, the gain or loss on foreign currency
exchange, dividends from investments, and gains and losses on
sales of investments and assets. Sundry income for the first
quarter of 1998 included a pretax gain of $816 million on the
sale of DowBrands. Excluding this gain, sundry income increased
$44 million from $24 million in the first quarter of 1998 to $68
million this quarter, primarily due to favorable economic
exposure hedging.
Interest Income and Expense
- ---------------------------
Interest expense (net of capitalized interest) and interest
income totaled $95 million for the first quarter, up $10 million
from the first quarter of 1998. Net expense increased primarily
due to lower interest income.
Provision for Taxes on Income
- -----------------------------
The effective tax rate for the first quarter was 36.3 percent,
the same as the first quarter of 1998.
Outlook
- -------
Indications are that the worst of the Asian crisis is over. The
European economies are slowing with expectations that their
growth will improve by year-end. Brazil's devaluation has not
created regional instability, although Brazil is expected to see
a recession. The U.S. economy continues to perform strongly, but
is expected to slow from current high levels in the second half
of the year.
Ethylene is very tight in the U.S. due to strong demand and
some industry plant outages. If demand remains strong, ethylene
is expected to remain tight through year-end. This is supporting
price increases for derivative products, especially polyethylene.
New car builds are up, strengthening the auto industry; demand
for paper and carpet is healthy. Industry prices for basic
commodities - e.g., aluminum, pulp and paper, PVC - are improving
and this should be favorable for Dow. Hydrocarbon feedstock costs
are expected to increase in the second quarter versus first
quarter, based on higher oil prices.
The outlook for the second quarter is relatively positive, with
some outstanding questions. Higher Plastics pricing will be
offset by higher feedstock costs. Raw material cost increases
will also affect our performance segments in the second quarter,
but we still expect solid results from these segments, on volume
growth and relatively stable pricing. We are encouraged by
generally strong demand for Dow products in late March and into
April.
Agricultural Products should see its traditional seasonal
improvement. Sales of new products continue to grow in the Ag
Chem and Urban Pest businesses of Agricultural Products. Second
quarter is traditionally also the best quarter seasonally for
Fabricated Products due to the construction season.
We expect to see continued pricing pressure in Chemicals,
especially caustic soda. However, we have seen VCM turn the
corner with increased prices in the first quarter.
Overall, we expect improved sales and continued cost control in
the second quarter, keeping us on track to meet our financial
objectives, including earning the cost of capital at the trough
of the chemical cycle.
<PAGE>
--- Page 17 ---
ACCOUNTING POLICIES
Effective January 1, 1999, the Company adopted American Institute
of Certified Public Accountants (AICPA) 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.
The Company previously expensed such costs as incurred;
therefore, the adoption of this statement resulted in an
immaterial favorable impact on earnings in the first quarter of
1999. The effect on the full year is also expected to be
immaterial.
The Company also adopted AICPA SOP 98-5, "Reporting on the
Costs of Start-Up Activities," which provides guidance on the
financial reporting of start-up costs and organization costs,
requiring those costs to be expensed as incurred. The Company's
existing policy regarding the treatment of these costs was
substantially consistent with SOP 98-5; therefore, the adoption
of this standard on January 1, 1999 did not have a material
impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board (FASB) has 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 on January 1, 2000, and has not yet determined the
impact of adoption on its consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE
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 designed to address, through use of reasonable
commercial efforts, the risk that certain internal or external
systems may inaccurately interpret dates after December 31, 1999.
The project is led by a senior director of Information Systems
who reports to the Chief Information Officer 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. Many of the
Company's strategic business systems have already been upgraded
and tested and, except as noted below, project completion is
anticipated in the first half of 1999.
The first two phases of the Y2K project have been completed.
Phase I, the Business Study, established an awareness of the
problem and developed the overall strategy. During Phase II, the
Project Study, the Company inventoried and assessed applications,
infrastructure and embedded systems for Y2K problems; selected
the remediation tools; and prioritized the remediation projects.
The plans resulting from these studies continue to be updated as
new information becomes available.
Phase III, Remediation, includes the efforts to upgrade, test
for Y2K readiness and implement needed changes and new systems.
This phase is in progress and almost all elements, as noted
below, are expected to be complete by mid-year 1999. Phase IV,
Business Contingency Planning, is also in progress and, as
discussed below, any necessary plans will be implemented as
needed.
The Information Systems infrastructure team is responsible for
Y2K remediation of hardware, systems software and the
telecommunications network. The remediation phase was more than
80 percent complete at the end of the first quarter and
completion is expected by mid-1999.
The Information Systems applications software organization is
responsible for the remediation of applications and, at March 31,
1999, the remediation phase was approximately 85 percent
complete. Remediation of most 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 replacement
projects are in progress; one is expected to be completed during
the third quarter of 1999 and the other is expected to be completed
in October 1999. Neither of these projects is considered
mission-critical. Operational contingency plans have, however,
been developed should either of these projects miss its planned
completion date.
The Company has common process control systems in more than 80
percent of its plants globally, and during the project study, the
Company determined that approximately 10 percent of the common
systems needed to be remediated. Remediation of these systems is
progressing as planned and completion is anticipated by mid-1999.
The remaining 20 percent of the Company's process control systems
are commercial systems, which have been assessed; at the end of
the first quarter, more than 70 percent of the commercial control
systems had been remediated. It is anticipated that the
remediation phase for most critical process control systems will
be completed by mid-year 1999. However, remediation of some
process control systems will extend into the third quarter of
1999 due to plant shutdown schedules.
<PAGE>
--- Page 18 ---
Year 2000 Readiness Disclosure (Continued)
The Company's embedded systems, such as laboratory equipment,
air conditioners and elevators, have been assessed and are being
remediated as necessary. The remediation phase tasks were more
than 85 percent complete at the end of the first quarter and are
expected to be completed by mid-1999.
The Y2K assessment of a recently acquired company in South
Africa, for which a Y2K program had not been initiated prior to
the date of acquisition, is now complete and remediation is well
underway. The Company expects that all critical Y2K preparations
will be completed before 2000. The assessment phase and the
development of a remediation plan are still underway for the
Latin American operations of another recent acquisition. For the
rest of this acquisition, remediation efforts are anticipated to
be 80 percent complete by the end of June and 100 percent
complete by August.
The Company's assessment of critical suppliers is ongoing, and
risk management actions and contingency plans are being
developed, as necessary. Approximately 75 percent of critical
suppliers had been assessed at March 31, 1999, and 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 relative to suppliers, including such actions
as building inventories and switching suppliers, are anticipated
to be finalized for critical suppliers during the first half of
1999, and will be executed in 1999, if necessary.
The Company's assessment of customer readiness is in progress,
with completion anticipated by mid-1999.
Costs
- -----
Project costs are expected to be approximately $70 million, over
three years, and are not considered material to the Company's
consolidated financial statements. Total project costs incurred
to date were approximately $52 million at the end of the first
quarter of 1999. The Y2K effort is being supported by a
reallocation of existing resources. Capital equipment replacement
costs are expected to be an additional $5 million.
Risks
- -----
Failure to adequately address critical Y2K issues by the Company,
its suppliers and/or its 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 to address these is on schedule to meet a
completion date ahead of the year 2000. The Company is assessing
external sources of risk and developing contingency plans to
address both internal and external identifiable risks through
commercially reasonable efforts.
The Company's risk assessment data plus recent external
studies 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. As an example, we are currently
implementing satellite backup facilities in two countries where
we have significant manufacturing operations and where there is a
concern about the readiness of the telecommunications
infrastructure.
While the risks discussed herein have a possible material
impact, the risk management actions and contingency plans that
are being developed and 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 business
contingency planning process is currently in progress to update
the Company's existing business, site and computer disaster
recovery plans and to identify additional prudent steps that may
be necessary to prepare for unexpected, but credible, scenarios.
A senior supply-chain project manager is leading this business
contingency planning effort during 1999.
<PAGE>
--- Page 19 ---
EURO CONVERSION
On January 1, 1999, the Euro was adopted as the national currency
of 11 European Union member nations. During a three-year
transition period, the Euro will be used as a non-cash
transactional currency. The Company began conducting business in
the Euro on January 1, 1999, and will change its functional
currencies during the three-year transition period. The
conversion to the Euro is not expected to have a significant
operational impact or a material impact on the results of
operations, financial position, or liquidity of its European
businesses.
ITEM 3. QUANTITATIVE 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 Euro, 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 objectives of interest rate risk management are to
reduce the total funding cost to the Company and to alter the
interest rate exposure to the desired risk profile. Dow uses
interest rate swaps, "swaptions" and exchange traded instruments
to accomplish these objectives. The Company's primary exposure is
to the U.S. dollar yield curve.
Inherent in Dow's business is exposure to price changes for
several commodities. Some exposures can be hedged effectively
through liquid tradable financial instruments. Cracker 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.
Dow has a portfolio of equity securities derived from its
acquisition and divestiture activity. This exposure is managed in
a manner consistent with the Company's market risk policies and
procedures.
Dow uses value at risk (VAR), stress testing and scenario
analysis for risk measurement and control purposes. VAR estimates
the potential gain or loss in fair market values, given a certain
move in prices over a certain period of time, using specified
confidence levels. On an ongoing basis, the Company estimates the
maximum gain or loss that could arise in one day, given a two
standard deviation move in the respective price levels. These
amounts are immaterial in comparison to the equity and earnings
of the Company. The VAR methodology used by Dow is based
primarily on the variance/covariance statistical model. As an
example, the average daily VAR, using a 95 percent confidence
level at December 31, 1998 and 1997, for foreign exchange,
interest rate and equity exposures, net of hedges, was: foreign
exchange - $4 million and $12 million; interest rate - $23
million and $23 million; and equity - $6 million and $3 million,
respectively. Management believes there have been no material
changes in market risk or in risk management policies subsequent
to December 31, 1998.
<PAGE>
--- Page 20 ---
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 in the federal district court for the Southern
District of New York 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 were also sued in two separate class
action complaints (subsequently consolidated in the federal
district court for the Eastern District of Michigan under the
caption ZSA v. Dow Chemical) 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 February 1,
1999, the Court entered a Stipulated Order in ZSA v. Dow Chemical
dismissing the claims of the named plaintiffs with prejudice and
dismissing the claims of the class, which had never been
certified, without prejudice.
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 1995 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.
<PAGE>
--- Page 21 ---
Legal Proceedings (Continued)
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.
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.
<PAGE>
--- Page 22 ---
Legal Proceedings (Continued)
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.
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. On December 31,
1998, the Nevada Supreme Court reversed and vacated the $10
million punitive damages award and affirmed the $4.15 million
compensatory damages award. The Company filed a motion asking the
Court to reconsider that portion of its opinion affirming the
compensatory damages award. On February 12, 1999, that motion was
denied. Subsequently, the parties negotiated a confidential
settlement and have agreed to dismiss the case with prejudice.
The Company will be reimbursed by Dow Corning for all settlement
amounts paid, in accordance with the terms of the Joint Plan
(defined below) if the Joint Plan becomes effective.
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, 1997 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 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.
<PAGE>
--- Page 23 ---
Legal Proceedings (Continued)
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 set forth in the Term Sheet was memorialized in a
Joint Plan of Reorganization (the "Joint Plan") filed by Dow
Corning and the Tort Claimants' Committee on November 9, 1998. On
February 4, 1999, the court approved the disclosure statement
describing the Joint Plan. Before the Joint Plan can become
effective, however, it will be subject to 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 the Joint 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 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.
Environmental Matters
- ---------------------
On April 29, 1999, the United States Environmental Protection
Agency filed an administrative complaint against the Company. The
complaint alleges that reports made by the Company to emergency
response authorities regarding the release of certain hazardous
chemicals at the Company's Michigan Operations, occurring between
November 1997 and October 1998, were not made as promptly as
required. Proposed civil fines total $661,237.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed by the Company
during the first quarter of 1999.
The following trademarks of The Dow Chemical Company appear in
this report: Elite, Insite, Methocel, Styrofoam
The following trademark of Dow AgroSciences LLC appears in
this report: FirstRate
<PAGE>
--- Page 24 ---
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE DOW CHEMICAL COMPANY
------------------------
Registrant
Date: May 11, 1999
G. Michael Lynch
----------------
G. Michael Lynch
Vice President & Controller
<PAGE>
--- Page 25 ---
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