SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $2.50 per share Common Stock registered on the
New York, Chicago and Pacific
Stock Exchanges
Debentures, 6.85%, final maturity 2013 Debentures registered on the
New York Stock Exchange
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 [ ].
The aggregate market value of voting stock held by nonaffiliates as of
January 29, 1999, (based upon the closing price of $88.0625 per common
share as quoted on the New York Stock Exchange) is approximately $19,180
million. For purposes of this computation, the shares of voting stock
held by Directors, Officers and the Dow Employees' Pension Plan Trust
were deemed to be stock held by affiliates. Nonaffiliated common stock
outstanding at January 29, 1999 numbered 217,801,809 shares. Total common
stock outstanding at January 29, 1999 numbered 220,238,161.
Documents Incorporated by Reference
-----------------------------------
Part III: Proxy Statement for the Annual Meeting of Stockholders to be
held on May 13, 1999.
<PAGE>
--- Page 1 ---
THE DOW CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and Management 55
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 55
SIGNATURES 58
<PAGE>
--- Page 2 ---
PART I
ITEM 1. BUSINESS
THE COMPANY
The Dow Chemical Company was incorporated in 1947 under Delaware law
and is the successor to a Michigan corporation, of the same name,
organized in 1897. The Company is engaged in the manufacture and sale
of chemicals, plastic materials, agricultural and other specialized
products and services. Its principal executive offices are located at
2030 Dow Center, Midland, Michigan 48674, telephone 517-636-1000.
Except as otherwise indicated by the context, the terms "Company" or
"Dow" as used herein mean The Dow Chemical Company and its
consolidated subsidiaries.
BUSINESS AND PRODUCTS
Corporate Profile
The Dow Chemical Company is a global science and technology based
company that develops and manufactures a portfolio of chemicals,
plastics and agricultural products and services for customers in 168
countries around the world. With annual sales of more than $18
billion, Dow conducts its operations through 14 global businesses
employing 39,000 people. The company has 121 manufacturing sites in 32
countries and supplies more than 3,500 products grouped within the
operating segments listed on the following pages. The Corporate
Profile is an integral part of Note R to the Financial Statements.
PERFORMANCE PLASTICS
ADHESIVES, SEALANTS AND COATINGS business enables customers to
reduce overall systems costs, enhance product performance and
optimize manufacturing processing through custom solutions based
on Dow's line of adhesives, sealants and coatings. The Adhesives,
Sealants and Coatings business includes Polyurethane Systems
Houses, Essex Specialty Products, Inc. and Advanced Surface
Treatments.
- Applications: Acoustical systems, flexible and rigid foam,
footwear, glass bonding systems, modular construction components,
structural reinforcing composites
- Products: Betaseal glass bonding adhesive systems, Customized
adhesives and sealants, Polyurethane systems, Specialty coatings,
Surface treatments
ENGINEERING PLASTICS business offers one of the broadest ranges of
engineering plastics of any global plastics supplier. Dow's
Engineering Plastics portfolio is backed by technical expertise
and a commitment to delivering improved economics and performance.
- Applications: Automotive interiors, exteriors and powertrains;
building and construction; communications technology; computer
housings and accessories; electrical and electronic connectors;
footwear; medical devices; packaging; sports and recreation equipment
- Products: Calibre polycarbonate resins, Isoplast engineering
thermoplastic polyurethane resins, Magnum ABS resins, Pellethane
thermoplastic polyurethane elastomers, Prevail engineering
thermoplastic resins, Pulse engineering resins, Questra crystalline
polymers, Tyril SAN resins, Vydyne nylon
EPOXY PRODUCTS AND INTERMEDIATES business manufactures a variety
of basic epoxy products, as well as intermediates used by other
major epoxy producers. Dow is a leading global producer of basic
epoxy products, supported by high-quality raw materials, technical
service and production capabilities.
- Applications: Civil engineering, construction, electrical
laminates, food and beverage containers, heavy duty marine, industrial
protection, pharmaceuticals, water treatment
- Products: Acrylic monomers, Allylics, Composite resins,
Converted resins, D.E.H. epoxy catalyst resins, D.E.N. epoxy novolac
resins, D.E.R. epoxy resins (liquid and powder), Derakane epoxy vinyl
ester resins, Optim glycerine, Phenolics
FABRICATED PRODUCTS business manufactures and markets an extensive
line of plastic film and foam products. Fabricated Products sets
the competitive standard by creating high-performance solutions in
industries ranging from packaging and construction to
telecommunications, automotive and medical.
- Applications: Building insulation, medical packaging, protective
packaging, refrigerated shipping, telecommunication cables, water
drainage systems, window envelopes
- Products: Dow window film, Ethafoam polyethylene foam, Instill
vacuum insulation core, Integral adhesive film, Polystyrene film,
Styrofoam brand insulation, Zetabon coated metal cable armor
<PAGE>
--- Page 3 ---
Business and Products - Corporate Profile, Performance Plastics (Continued)
POLYURETHANES business is a leading global producer of
polyurethane raw materials. Differentiated by its ability to
globally supply a high-quality, consistent and complete product
range, the Polyurethanes business emphasizes new business
developments while facilitating customer success with a global
market and technology network.
- Applications: Appliance insulation, automotive seating and
instrument panels, bedding mattresses, biocomposite binders and
services, carpeting, flooring, furniture padding, office furniture,
roofing
- Products: Curithane liquid catalysts, The Enhancer carpeting
backing, Isobind isocyanate binders, Isonate pure and modified MDI
products, Lifespan polyurethane carpet backing, Optimax composite
board technology, Papi polymeric MDI (PMDI), Specflex polyurethane
components, Spectrim reaction moldable products, Syntegra polyurethane
dispersions, Toluene diisocyanate, Voranate specialty isocyanates,
Voranol polyether polyols and copolymers
PERFORMANCE CHEMICALS
SPECIALTY CHEMICALS business provides products used as functional
ingredients or as processing aids in the manufacture of a diverse
range of products. It also includes contract manufacturing
services for other specialty chemical, pharmaceutical and
agricultural chemical producers.
- Applications: Building materials, food processing, household and
personal care products, pharmaceuticals, pulp and paper manufacturing,
water treatment
- Products: Dowanol glycol ethers, Dowex ion exchange resins,
Dowfax surfactants, Dowicil antimicrobials, Dowtherm synthetic organic
fluids, Drytech superabsorbent polymers, Ethocel ethylcellulose
resins, Ethyleneamines, FilmTec membranes, Gas/Spec specialty amines,
Hamposyl surfactants, Methocel cellulose ethers, Polyethylene glycols,
Polypropylene glycols, Synalox fluids, Versene chelating agents
EMULSION POLYMERS business includes both synthetic latex and
rubber. Dow is the largest, most globally diverse of the styrene
butadiene latex suppliers. Global reach, technology leadership and
customer knowledge support the development of new technologies and
the rapid commercialization of differentiated products.
- Applications: Coated paper and paperboard, plastics
modification, residential and commercial carpeting, specialty
applications, tires
- Products: Acrylate latex, Polybutadiene rubber, Polystyrene
latex, Styrene acrylate latex, Styrene butadiene emulsion rubber,
Styrene butadiene (S/B) latex
AGRICULTURAL PRODUCTS
DOW AGROSCIENCES is a global leader in the agriculture industry
which develops, manufactures and markets products for crop
production, weed, insect and plant disease management, and
industrial and commercial pest management. Through strategic
acquisitions, such as Mycogen Corporation, alliances and research
agreements, as well as investment in internal capabilities, Dow
AgroSciences is aggressively building a leading biotechnology
business in crop seeds, traits and value-added grains.
- Applications: Disease control, insect control, seeds, traits,
urban pest management, value-added grains, weed control
- Products: Clincher herbicide; Dursban insecticides; FirstRate
herbicide; Fortress fungicide; Lorsban insecticides; NatureGard
seeds; Starane herbicide; Sentricon termite colony elimination
system; Spider herbicide; Spinosad insect control products,
including Success Naturalyte insect control and Tracer Naturalyte
insect control
PLASTICS
POLYETHYLENE business supplies polyethylene-based solutions
through sustainable product differentiation. Dow is the world's
leading producer of polyethylene resins, one of the most versatile
plastic materials. Also included in the business are polyethylene
terephthalate (PET), purified terephthalic acid (PTA), and several
specialty resins.
- Applications: Agricultural films; bottles; tubes and drums;
consumer bags and packaging; fibers; food packaging and coating;
health and hygiene films and nonwovens; heavy-duty sacks; oil tanks
and road equipment; pipe; sheets and membranes; shrink films; stretch
films; toys and play equipment; wire and cable
- Products: Affinity polyolefin plastomers, Aspun fiber grade
resins, Attane ultra low density polyethylene copolymers, Dowlex
linear low density polyethylene resins, Elite enhanced polyethylene
resins, High density polyethylene resins (HDPE), Lighter C PET, Low
density polyethylene resins (LDPE), Primacor copolymers, PTA, Saran
PVDC resins and films
<PAGE>
--- Page 4 ---
Business and Products - Corporate Profile, Plastics (Continued)
POLYSTYRENE business is the global leader in the production of
polystyrene resins, uniquely positioned with geographic breadth
and broad industry experience to meet a diverse range of customer
needs. By implementing breakthrough proprietary technology, Dow
continues to improve efficiencies and product performance.
- Applications: Appliances, building and construction, consumer
electronics, consumer goods, films, housewares, information
technology, packaging, toys
- Products: Aim advanced styrenic resins, EcoPLA renewable
biodegradable polymers, Styrenic alloys, Styron general purpose
polystyrene resins, Styron high impact polystyrene resins, Styron
ignition resistant polystyrene resins
POLYPROPYLENE (PP) is leveraging Dow's innovative manufacturing
technology, research and product development expertise to become a
major global PP supplier. Polypropylene is managed through the
Engineering Plastics business.
- Applications: Appliance housings, automotive parts and trim,
carpeting, disposable diaper liners, flexible and rigid packaging,
housewares, luggage, outdoor furniture, textiles, toys
- Products: Inspire polypropylene resins
INSITE TECHNOLOGY is a proprietary catalyst technology that
enables Dow and its customers to improve the performance of a
variety of plastics. Insite Technology is leveraged to develop new
products and strategic business opportunities through licensing. A
new Dow innovation, Index interpolymers, was developed from Insite
Technology. DuPont Dow Elastomers L.L.C., a 50:50 joint venture,
leverages Insite Technology into elastomeric products.
CHEMICALS
CHEMICALS business is a leading global producer of each of its
basic chemical products. These products are sold to many
industries worldwide and also serve as key raw materials in the
production of many of Dow's performance and plastics products.
- Applications: Automotive antifreeze; chemical processing;
coolant systems; dry cleaning; household cleaners; paints, coatings
and adhesives; personal care products; petroleum refining; pipe; pulp
and paper manufacturing; water treatment
- Products: Carbon tetrachloride, Caustic soda, Chlorine,
Chloroform, Dowper dry cleaning solvent, Ethylene dichloride (EDC),
Ethylene glycol (EG), Ethylene oxide (EO), Liquidow liquid calcium
chloride, Maxistab stabilizers for chlorinated solvents, Methyl
chloride, Methylene chloride, Peladow calcium chloride pellets,
Perchloroethylene, Propylene glycol, Propylene oxide (PO), Safe-tainer
closed loop delivery system, Trichloroethylene, Vinyl chloride monomer
(VCM)
HYDROCARBONS AND ENERGY
HYDROCARBONS AND ENERGY business encompasses the procurement of
fuels and crude oil-based raw materials, as well as the supply of
products and power for use in the Company's global operations. The
world leader in the production of olefins and styrene, the
Hydrocarbons and Energy business supplies integrated and purchased
feedstocks and energy.
- Applications: Polymer and chemical production
- Products: Butadiene, Ethylene, Power and steam, Propylene, Styrene
New Businesses includes technology licensing, advanced materials
for electronics, industrial biotechnology, venture capital and new
developments with a focus on identifying and pursuing emerging
commercial and technology opportunities. The results for New
Businesses are included in UNALLOCATED AND OTEHR.
Industry Segments and Geographic Area Results
See Note R to the Financial Statements for disclosure of
information by operating segment and geographic area.
Number of Products
Dow manufactures and supplies more than 3,500 products and services,
and no single one accounted for more than 5 percent of the Company's
consolidated sales in 1998. No significant portion of the business of
any operating segment is dependent upon a single customer.
Competition
The Company experiences substantial competition in each of its
industry segments. During 1998, the Company was the second largest
chemical company in the United States and in the top five worldwide,
in terms of sales. The chemical industry has been historically
competitive and this condition is expected to continue. The chemical
divisions of the major international oil companies also provide
substantial competition both in the United States and abroad. The
Company competes worldwide on the basis of quality, price and customer
service.
<PAGE>
--- Page 5 ---
Business and Products (Continued)
Raw Materials
The Company operates in an integrated manufacturing environment. Basic
raw materials are processed through many stages to produce a number of
products that are sold as finished goods at various points in those
processes.
The two major raw material streams that feed the integrated
production of the Company's finished goods are chlorine- and
hydrocarbon- based raw materials.
Salt, limestone and natural brine are the base raw materials used in
the production of Chlor-Alkali products and derivatives. The Company
owns salt deposits in Louisiana, Michigan and Texas; Alberta, Canada;
Brazil; and Germany. The Company also owns natural brine deposits in
Michigan and limestone deposits in Texas.
Hydrocarbon raw materials include liquefied petroleum gases (LPG),
crude oil, naphtha, natural gas, benzene, and condensate. These raw
materials are used in the production of both saleable products and
energy. The Company also purchases electric power, ethylene and
styrene to supplement internal production. Expenditures for
hydrocarbons and energy accounted for 24% of the Company's operating
costs and expenses for the year ended December 31, 1998. These raw
materials are purchased by the Company both on long-term contracts and
as they become available on a global basis.
Other significant raw materials include ammonia, acrylonitrile,
aniline, bisphenol, cellulose, organic acids, and toluene diamine.
These raw materials are purchased by the Company both on long-term
contracts and as they become available on a global basis.
The Company has, and expects to continue to have, adequate supplies
of raw materials during 1999 and subsequent years.
Method of Distribution
All products and services are marketed primarily through the Company's
sales force, although in some instances more emphasis is placed upon
saless through distributors. No significant portion of the business of
any operating segment is dependent upon a single customer.
Research and Development
The Company is engaged in a continuous program of basic and applied
research to develop new products and processes, to improve and refine
existing products and processes and to develop new applications for
existing products. Research and Development expenses were $807 million
in 1998 compared with $785 million in 1997 and $761 million in 1996.
The Company employs approximately 5,400 people in various research and
development activities.
Patents, Licenses and Trademarks
The Company consistently applies for and obtains United States and
foreign patents. At December 31, 1998 the Company owned approximately
2,660 active United States patents and approximately 7,300 active
foreign patents, which can be classified as follows: chemicals, 600
United States and 1,200 foreign; plastics, 1,100 United States and
2,700 foreign; agricultural products, 260 United States and 1,200
foreign; fabricated products, 200 United States and 800 foreign; and
new businesses, 500 United States and 1,400 foreign. Dow's primary
purpose in obtaining patents is to protect the results of its research
for use in operations and licensing. Dow is also party to a
substantial number of patent licenses and other technology agreements.
The Company had patent and technology royalty income of $32 million in
1998, $47 million in 1997 and $26 million in 1996, and incurred
royalties to others of $3 million in 1998, $5 million in 1997 and $5
million in 1996. Dow also has a substantial number of trademarks and
trademark registrations in the United States and in other countries,
including the "Dow in Diamond" trademark. Although the Company
considers that, in the aggregate, its patents, licenses and trademarks
constitute a valuable asset, it does not regard its business as being
materially dependent upon any single patent, license or trademark.
Principal Partly Owned Companies
Principal companies in which Dow owns a 50 percent interest include
DuPont Dow Elastomers L.L.C., which manufactures and markets thermoset
and thermoplastic elastomer products; Gurit-Essex, A.G., a Swiss
company, which supplies European automobile manufacturers with
proprietary specialty products; and Dow Corning Corporation, a
manufacturer of silicone and silicone products, which voluntarily
filed for protection under Chapter 11 of the United States Bankruptcy
Code (see Note P to the Financial Statements). Dow has a 45 percent
interest in Total Raffinaderij Nederland N.V., which provides
feedstocks for Dow's major petrochemical site at Terneuzen, the
Netherlands, and also services the Benelux and nearby countries. Dow
also owns an 80 percent interest in Buna Sow Leuna Olefinverbund
(BSL), a former East German integrated chemical complex. Bundesanstalt
fuer vereinigungsbedingte Sonderaufgaben (BvS) will maintain a 20
percent ownership until the end of the restructuring period, which is
expected to be June 2000. The Company expects to include the financial
results of BSL as a nonconsolidated affiliate until the end of the
restructuring period. This acquisition, completed in 1997, will offer
Dow both new products (e.g. polypropylene, acrylic acid and synthetic
rubber) and expanded geographic reach for core chlorine- and
hydrocarbon-based chemicals and plastics.
<PAGE>
--- Page 6 ---
Business and Products (Continued)
Financial Information About Foreign and Domestic Operations and Export
Sales
In 1998, the Company derived 60 percent of its sales and had 50
percent of its property investment outside the United States. While
the Company's international operations may be subject to a number of
additional risks, such as changes in currency exchange rates, the
Company does not regard its foreign operations, on the whole, as
carrying any greater risk than its operations in the United States.
Information on sales and long-lived assets by geographic area for each
of the last three years appears in Note R to the Financial Statements,
and discussions of the Company's risk management program for foreign
exchange and interest rate risk management appear in Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Note J to the Financial Statements.
Protection of the Environment
Matters pertaining to the environment are discussed in Legal
Proceedings, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and Notes A and P to the
Financial Statements.
Employees
The personnel count at December 31, 1998 was 39,029 versus 42,861 at
the end of 1997, and 40,289 at the end of 1996.
Other Activities
Dow engages in the property and casualty insurance and reinsurance
business primarily through its Liana Limited subsidiaries.
ITEM 2. PROPERTIES
The Company operates 121 manufacturing sites in 32 countries. The
Company considers that its properties are in good operating condition
and that its machinery and equipment have been well maintained. The
Company's chemicals and plastics production facilities and plants
operated at approximately 86 percent of capacity during 1998. The
following are the major production sites:
United States: Midland, Michigan; Freeport, Texas; Pittsburg,
California; Plaquemine, Louisiana.
Canada: Sarnia, Ontario; Fort Saskatchewan, Alberta.
Germany: Stade; Rheinmuenster.
France: Drusenheim.
The Netherlands: Terneuzen.
Spain: Tarragona.
Argentina: Bahia Blanca.
Brazil: Aratu.
Including the major production sites, the Company has plants and
holdings in the following geographic areas:
United States: 36 manufacturing locations in 19 states.
Canada: 5 manufacturing locations in 3 provinces.
Europe: 41 manufacturing locations in 15 countries.
Latin America: 23 manufacturing locations in 6 countries.
Pacific: 16 manufacturing locations in 9 countries.
All of Dow's plants are owned or leased, subject to certain
easements of other persons which, in the opinion of Management, do not
substantially interfere with the continued use of such properties or
materially affect their value.
A summary of properties, classified by type, is contained in Note G
to the Financial Statements.
<PAGE>
--- Page 7 ---
ITEM 3. 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.
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
<PAGE>
--- Page 8 ---
Legal Proceedings (Continued)
could conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an interlocutory
opinion issued on April 25, 1995, Judge Pointer affirmed his December
1993 ruling as to plaintiffs' corporate control claims but vacated
that ruling as to plaintiffs' direct participation claims.
In his opinion, Judge Pointer reaffirmed the view he had expressed
in his December 1993 ruling that the Company is a separate,
independent entity from Dow Corning and therefore has no legal
responsibility as a result of its ownership of Dow Corning stock for
Dow Corning's breast implant business. However, Judge Pointer stated
that, under the law of at least some states (although not necessarily
all states), actions allegedly taken by the Company independent of its
role as a stockholder in Dow Corning could give rise to liability
under a negligence theory. Judge Pointer declined to address
plaintiffs' other legal theories, including strict liability, fraud,
aiding and abetting, conspiracy and concert of action. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of the federal product liability cases. The
Company has filed claims with insurance carriers to recover in the
event it is held liable in the federal (or any other) breast implant
litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California ruling
was final and was appealed. On September 25, 1996, the California
Court of Appeal for the 4th District affirmed the trial court's order
granting summary judgment to the Company. On July 9, 1998, the
California Supreme Court affirmed the decision of the Court of Appeal,
and the California summary judgment order in favor of the Company is
now final. The Michigan ruling was made final on March 20, 1997. This
decision has been appealed by plaintiffs. The New Jersey ruling has
been reconsidered and all claims were again dismissed, except the
negligence claim. Plaintiffs in New York filed a motion to reconsider
based on Judge Pointer's April 25, 1995 ruling. On September 22, 1995,
Judge Lobis, presiding over the consolidated New York breast implant
litigation, dismissed all counts of all cases filed against the
Company in New York on the ground that no reasonable jury could find
against the Company. On May 28, 1996, the New York Supreme Court
Appellate Division affirmed the lower court's dismissal of all claims
against the Company. New York's highest court subsequently denied
plaintiffs' petition for review, and the order dismissing all claims
against the Company is now final. Other rulings that are not final
decisions are also subject to reconsideration. On October 20, 1996, in
a Louisiana state court breast implant case styled Spitzfaden v. Dow
Corning, et al., the court entered an order maintaining certification
of a class of Louisiana plaintiffs consisting of recipients of Dow
Corning breast implants who, as of January 15, 1997, (i) are residents
of Louisiana, (ii) are former residents of Louisiana who are
represented by Louisiana counsel, or (iii) received their implants in
Louisiana and are represented by Louisiana counsel, together with the
spouses and children of such plaintiffs, and representatives of the
estates of class members who are deceased. On August 18, 1997, at the
conclusion of the first of four phases of this case, the jury found in
part that the Company had been negligent in the testing and/or
research of silicone, had misrepresented and concealed unspecified
hazards associated with using silicone in the human body and had
conspired with Dow Corning to misrepresent or conceal such hazards.
The Company has appealed the jury's verdict. On December 1, 1997, the
trial court decertified the class. Further action in the Spitzfaden
case will commence, if at all, only after the resolution of pending
appeals. The Company remains a defendant in other breast implant
product liability cases originally brought in state courts and
continues to be named as a defendant as cases are filed in various
courts which are then transferred to the United States District Court,
Eastern District of Michigan. It is impossible to predict the outcome
or to estimate the cost to the Company of resolving any of the product
liability cases described above.
The Company was also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning. Federal
District Court Judge Paul A. Magnuson has been appointed by the
Federal Judicial Panel on Multidistrict Litigation to oversee all of
the product liability cases involving silicone jaw implants filed in
the U.S. federal courts. On March 31, 1995, Judge Magnuson granted the
Company's motion for summary judgment, concluding, based on virtually
the same arguments that were presented to Judge Pointer, that no
reasonable jury could find in favor of plaintiffs on any of their
claims against the Company. On June 13, 1995, Judge Magnuson denied
plaintiffs' motion to reconsider his ruling based on Judge Pointer's
April 25, 1995 decision, and granted the Company's request to enter a
final judgment in its favor. The United States Court of Appeals for
the Eighth Circuit affirmed the summary judgment in favor of the
Company on May 16, 1997. That judgment is now final.
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
<PAGE>
--- Page 9 ---
Legal Proceedings (Continued)
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. The Company intends to file a petition for a writ of
certiorari with the United States Supreme Court regarding this case.
The Company has filed a claim in Dow Corning's bankruptcy proceedings
to recover from Dow Corning its share of any monies the Company might
pay as a result of the Nevada verdict or any other adverse decision
related to Dow Corning's products.
On May 13, 1997, United States District Court Judge Denise Page Hood
ordered that all breast implant claims currently pending against the
Company as to which judgment had not been entered, whether pending in
state or federal courts, be transferred to the United States District
Court, Eastern District of Michigan pursuant to a decision issued by
the United States Court of Appeals for the Sixth Circuit on May 8,
1997. On August 1, 1997, Judge Hood issued her case management order
with respect to the transferred claims, and ordered that all implant
claims later filed in federal or state courts against the Company
should likewise be transferred. On August 5, 1997, the Tort Committee
in Dow Corning's bankruptcy case filed a petition for a writ of
certiorari with the United States Supreme Court seeking review of the
May 8, 1997 decision of the Sixth Circuit. On November 10, 1997, the
Supreme Court denied the Tort Committee's petition.
Judge Hood's May 13, 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.
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.
<PAGE>
--- Page 10 ---
Legal Proceedings (Continued)
Environmental Matters
On March 19, 1998, the United States Environmental Protection Agency
(the "EPA") filed a complaint against the Company alleging violations
of the Comprehensive Environmental Response, Compensation and
Liability Act and the Emergency Planning and Community Right-to-Know
Act. The complaint sought civil fines totaling $110,000. On September
14, 1998, the EPA withdrew the complaint with prejudice.
On March 25, 1998, Dow AgroSciences LLC, a wholly owned subsidiary
of the Company, made a written inquiry to the EPA with regard to
alleged violations of the Federal Insecticide, Fungicide and
Rodenticide Act for which the EPA has verbally indicated that it is
seeking a civil penalty in the amount of $792,000.
On November 13, 1998, the Michigan Department of Environmental
Quality ("MDEQ") commenced an investigation of alleged unpermitted
release and improper storage of material containing dioxin and furans
at Radian International LLC's ("Radian") waste treatment facility which
is located within the Company's Michigan Operations manufacturing site.
This waste treatment facility processes dried tertiary pond solids for
transport to the Company's incinerator under an agreement with the State
of Michigan. The Company has been included in the MDEQ investigation even
though the waste treatment facility in question is owned and operated
by Radian. At this juncture, a fine in excess of $100,000
against both companies is possible, although the Company may
ultimately have indemnification rights against Radian.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information related to the Company's executive
officers as of March 15, 1999.
ARNOLD A. ALLEMANG, 56. DOW VICE PRESIDENT, OPERATIONS. DIRECTOR
SINCE 1996. Employee of Dow since 1965. Director of Technology
Centers, Dow U.S.A. 1989-92. Manufacturing General Manager, Dow
Benelux N.V.* 1992-93. Regional Vice President, Manufacturing and
Administration, Dow Benelux N.V.* 1993. Vice President, Manufacturing
Operations, Dow Europe S.A.* 1993-95. Dow Vice President and Director
of Manufacturing and Engineering 1996-97. Dow Vice President,
Operations 1997 to date. Director of Liana Limited.* Representative
on the Members Committees of DuPont Dow Elastomers L.L.C.* President
of Dow Environmental Inc.* Member of the American Chemical Society
and the Advisory Board, Center for Chemical Process Safety, American
Institute of Chemical Engineers.
ANTHONY J. CARBONE, 58. DOW EXECUTIVE VICE PRESIDENT. DIRECTOR SINCE
1995. Employee of Dow since 1962. Dow Latin America Marketing
Director for Plastics 1974-76. Dow Business Manager for Styrofoam
1976-80, Director of Marketing for Functional Products and Systems
1980-83. Dow U.S.A. General Manager of the Coatings and Resins
Department 1983-86, General Manager of Separation Systems 1986-87,
Vice President Dow Plastics 1987-91. Dow North America Group Vice
President for Plastics 1991-93. Group Vice President, Global Plastics
1993-95. Group Vice President - Global Plastics, Hydrocarbons and
Energy 1995-96. Executive Vice President, 1996 to date. Board member
of the Society of Plastics Industries and the American Plastics
Council. Member of the American Chemical Society.
RICHARD M. GROSS, 51. DOW VICE PRESIDENT AND DIRECTOR OF RESEARCH AND
DEVELOPMENT. Employee of Dow since 1974. Research and Development
Director, North American Chemicals and Metals/Hydrocarbons 1992-95.
Director of Core Technologies Research and Development 1995-98.
Director of Continental Operations 1995-97. Vice President of Dow
North America and Director of Michigan Operations 1997-98. Vice
President and Director of Research and Development 1998 to date.
Recipient of 1996 Genesis Award for Excellence in People Development.
Member of the American Chemical Society, the American Institute of
Chemical Engineers, and National Chemical Sciences Roundtable. Past
member of the Governing Board and Executive Committee, the Council for
Chemical Research. Member and past chair, External Advisory Board,
Chemical Engineering Department, Georgia Institute of Technology.
G. MICHAEL LYNCH, 55. DOW VICE PRESIDENT AND CONTROLLER. Employee of
Dow since 1997. Controller for Plastics and Trim Division, Ford Motor
Company 1991-93. Assistant Corporate Controller, International
Automotive Group and Financial Services, Ford Motor Company 1993-94.
Controller, Automotive Components Division, Ford Motor Company 1994-
97. Vice President and Controller, The Dow Chemical Company, 1997 to
date. Director of Dow Credit Corporation;* Dow Holdings, Inc.;* Dow
Financial Holding, Inc.;* and Diamond Capital Management, Inc.*
<PAGE>
--- Page 11 ---
Executive Officers of the Registrant (Continued)
GEOFFERY E. MERSZEI, 47. DOW VICE PRESIDENT AND TREASURER. Employee
of Dow since 1978. Director of Finance, Dow Chemical (Hong Kong)
Limited* 1989-92. Director of Finance, Dow Europe S.A.* 1992-96.
Vice President and Treasurer, The Dow Chemical Company 1996 to date.
Member of the Conference Board's Council of Financial Executives.
Chairman of the Committee on Corporate Finance for the Financial
Executive Institute. Member of the Citibank Advisory Board.
MICHAEL D. PARKER, 52. DOW EXECUTIVE VICE PRESIDENT AND PRESIDENT OF
DOW NORTH AMERICA. DIRECTOR SINCE 1995. Employee of Dow since 1968.
Dow Europe S.A.* Product Marketing Manager for Epoxy Resins 1977-79.
Director of Marketing for Inorganic Chemicals 1979-82. Director of
Marketing for Organic Chemicals 1982-83. Commercial Director for the
Functional Products Department 1983-84. Dow U.S.A. General Manager of
the Specialty Chemicals Department 1984-87. Dow Chemical Pacific
Limited* Commercial Vice President 1987-88, President 1988-93. Dow
Group Vice President 1993-96. Group Vice President - Chemicals and
Hydrocarbons 1993-95. Vice President for Chemicals and Metals 1995 to
date. President Dow North America 1995 to date. Executive Vice
President 1996 to date. Director, Destec Energy, Inc. 1995-97.
Director of the National Association of Manufacturers, the National
Legal Center for the Public Interest and the Chlorine Chemistry
Council.
FRANK P. POPOFF, 63. CHAIRMAN OF THE DOW BOARD OF DIRECTORS.
DIRECTOR SINCE 1982. Employee of Dow since 1959. Dow Europe S.A.*
Executive Vice President 1980-81, President 1981-85. Dow Executive
Vice President 1985-87, President 1987-93, President and Chief
Operating Officer 1987, Chief Executive Officer 1987-95, Chairman of
the Board 1992 to date. Director of American Express Company; U S
WEST, Inc.; Chemical Financial Corporation; United Technologies
Corporation; the Indiana University Foundation; and the Michigan
Molecular Institute. Past Chairman of the Chemical Manufacturers
Association. Member of The Business Council, The Conference Board,
and the American Chemical Society.
J. PEDRO REINHARD, 53. DOW EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER. DIRECTOR SINCE 1995. Employee of Dow since 1970.
Dow Brazil Area Finance Director 1978-81. Dow Europe S.A.* Finance
Director 1981-85. Dow Assistant Treasurer 1984-85. Dow Europe S.A.*
Vice President 1985-88. Managing Director, Dow Italy 1985-88. Dow
Treasurer 1988-96, Vice President 1990-95, Financial Vice President
1995-96, Chief Financial Officer 1995 to date, Executive Vice
President 1996 to date. Chairman of the Board of Liana Limited.*
Representative on the Members Committee, Dow AgroSciences LLC.*
Member of the Financial Accounting Standards Advisory Council, the
Financial Executives Institute and The Conference Board's Council of
Financial Executives.
JOHN SCRIVEN, 56. DOW VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY.
Employee of Dow since 1975. General Counsel, Dow Europe S.A.* 1983-
93. Vice President, Dow Europe S.A.* 1986-93. Associate General
Counsel 1993-94. Vice President and General Counsel, 1994 to date.
Secretary 1996 to date. Chairman, Global Ethics & Compliance
Committee 1998 to date. Solicitor, Supreme Court of the United
Kingdom, Member, State Bar of Michigan. Visiting Professor at
McGeorge School of Law, University of the Pacific, Sacramento,
California. Guest Lecturer to the Swiss Banking Institute, Zurich,
Switzerland. Member, North America Board of Advisors of the Swiss
American Chamber of Commerce. Member, Board of Directors of the
American Arbitration Association.
WILLIAM S. STAVROPOULOS, 59. DOW PRESIDENT AND CHIEF EXECUTIVE
OFFICER. DIRECTOR SINCE 1990. Employee of Dow since 1967. President
of Dow Latin America 1984-85. Dow U.S.A. Commercial Vice President
for Basics and Hydrocarbons 1985-87. Group Vice President for
Plastics and Hydrocarbons 1987-90. President of Dow U.S.A. 1990-93.
Dow Vice President 1990-91, Senior Vice President 1991-93, Chief
Operating Officer 1993-95, President 1993 to date, Chief Executive
Officer 1995 to date. Director of Dow Corning Corporation,* NCR
Corporation, BellSouth Corporation, Chemical Financial Corporation,
and Chemical Bank and Trust Company. Representative on the Members
Committee, Dow AgroSciences LLC.* Member of the American Chemical
Society, The Business Council, The Business Roundtable, and the
Society of Chemical Industry. Serves on the Joint Automotive
Suppliers Governmental Action Council and the University of Notre Dame
Advisory Council for the College of Science. Board member of the
American Plastics Council, Chemical Manufacturers Association,
University of Washington Foundation, American Enterprise Institute for
Public Policy Research, Midland Community Center, and U.S. Council for
International Business.
<PAGE>
--- Page 12 ---
Executive Officers of the Registrant (Continued)
LAWRENCE J. WASHINGTON, JR., 53. DOW VICE PRESIDENT, ENVIRONMENT,
HEALTH & SAFETY, HUMAN RESOURCES AND PUBLIC AFFAIRS. Employee of Dow
since 1969. General Manager, Western Division 1987-90. Vice
President, Dow North America, and General Manager of the Michigan
Division 1990-94. Vice President, Human Resources 1994 to date. Vice
President, Environment, Health & Safety and Public Affairs 1997 to
date. Director of Chemical Bank and Trust Company and Liana Limited.*
Member of the National Advisory Board for Michigan Technological
University and the Advisory Council, College of Engineering and
Science, University of Detroit Mercy.
* A number of Company entities are referenced to in the biographies
and are defined as follows. (Some of these entities have had various
names over the years. The names and relationships to the Company,
unless otherwise indicated, are stated in this footnote as they
existed as of the Annual Meeting record date.) Dow Corning
Corporation and DuPont Dow Elastomers L.L.C. - companies ultimately 50
percent-owned by Dow. Dow AgroSciences LLC, Dow Benelux N.V., Dow
Chemical (Hong Kong) Limited, Dow Chemical Pacific Limited, Dow Credit
Corporation, Dow Environmental Inc., Dow Europe S.A., Dow Holdings,
Inc., Dow Financial Holding, Inc., Diamond Capital Management, Inc.,
and Liana Limited - all ultimately wholly owned subsidiaries of Dow.
Ownership by Dow described above may be either direct or indirect.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market for the Company's common stock is the New York
Stock Exchange. On February 11, 1999, the Company declared a cash
dividend of 87 cents per share, payable April 30, 1999, to
stockholders of record on March 31, 1999. This will be the 349th
consecutive quarterly dividend since 1912. There were 91,660 common
stockholders of record as of March 15, 1999. The Company estimates
that there were an additional 105,000 stockholders whose shares were
held in nominee names at December 31, 1998.
Quarterly market and dividend information can be found in Part II,
Item 8 (Financial Statements & Supplementary Data) on page 54.
<PAGE>
--- Page 13 ---
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The Dow Chemical Company and Subsidiaries
Five-year Summary of Selected Financial Data
<CAPTION>
In millions, except as noted (Unaudited) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations (1)
Net sales $18,441 $20,018 $20,053 $20,200 $16,742
Cost of sales 13,799 14,679 14,108 13,337 12,131
Insurance and finance company operations,
pretax income (112) (113) (78) (61) (40)
Research and development expenses 807 785 761 808 783
Promotion and advertising expenses 125 371 370 416 411
Selling and administrative expenses 1,541 1,509 1,766 1,771 1,594
Amortization of intangibles 88 61 39 38 43
Purchased in-process research and development 349 - - - -
Special charges 458 - - - -
-------------------------------------------------------------------------------------------------------------
Operating income 1,386 2,726 3,087 3,891 1,820
Other income (expense) 980 511 405 (222) 77
-------------------------------------------------------------------------------------------------------------
Earnings before interest, income taxes
and minority interests 2,366 3,237 3,492 3,669 1,897
Interest expense - net 354 289 204 140 271
-------------------------------------------------------------------------------------------------------------
Income before income taxes and minority
interests 2,012 2,948 3,288 3,529 1,626
Provision for income taxes 685 1,041 1,187 1,442 654
Minority interests' share in income 17 99 194 196 200
Preferred stock dividends 6 6 7 7 7
-------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,304 1,802 1,900 1,884 765
Discontinued operations net of income taxes - - - 187 166
-------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 1,304 $ 1,802 $ 1,900 $ 2,071 $ 931
-------------------------------------------------------------------------------------------------------------
Per share of common stock (dollars):
Income from continuing operations -
basic $5.83 $7.81 $7.71 $7.03 $2.77
Net income available for common
stockholders - basic $5.83 $7.81 $7.71 $7.72 $3.37
Income from continuing operations -
diluted $5.76 $7.70 $7.60 $6.93 $2.75
Net income available for common
stockholders - diluted $5.76 $7.70 $7.60 $7.61 $3.34
Cash dividends declared $3.48 $3.36 $3.00 $2.90 $2.60
Cash dividends paid $3.48 $3.24 $3.00 $2.80 $2.60
Weighted-average common shares outstanding 223.5 230.6 246.3 268.2 276.1
Convertible preferred shares outstanding 1.4 1.4 1.5 1.5 1.5
- --------------------------------------------------------------------------------------------------------------
Year-end Financial Position
Total assets $23,830 $24,040 $24,673 $23,582 $26,545
Working capital (2) 1,198 1,629 4,276 5,451 2,339
Property - gross 24,435 23,345 23,737 23,218 23,210
Property - net 8,447 8,052 8,484 8,113 8,726
Long-term obligations and redeemable
preferred stock 4,094 4,245 4,230 4,733 5,325
Total debt 5,877 6,258 5,468 5,403 6,578
Net stockholders' equity 7,429 7,626 7,954 7,361 8,212
- --------------------------------------------------------------------------------------------------------------
Financial Ratios
Research and development expenses as
percent of net sales (1) 4.4% 3.9% 3.8% 4.0% 4.7%
Income before income taxes and minority
interests as percent of net sales (1) 10.9% 14.7% 16.4% 17.5% 9.7%
Return on stockholders' equity 17.5% 23.5% 23.8% 26.9% 11.3%
Book value per share of common
stock (dollars) $33.91 $34.04 $33.13 $30.69 $29.71
Debt as a percent of total capitalization 42.3% 42.8% 35.2% 36.3% 38.0%
- --------------------------------------------------------------------------------------------------------------
General
Capital expenditures $1,546 $1,198 $1,344 $1,417 $1,183
Depreciation (1) 1,188 1,208 1,259 1,369 1,224
Salaries and wages paid 2,816 2,882 2,944 2,734 3,239
Cost of employee benefits 637 666 700 696 832
Number of employees at year-end (thousands) 39.0 44.1 40.3 39.5 53.7
Number of stockholders of record at
year-end (thousands) (3) 93.0 97.2 104.6 111.1 114.5
- --------------------------------------------------------------------------------------------------------------
(1) Restated for the sale of the pharmaceutical businesses in 1995.
(2) Prior years' amounts reclassified to conform to the presentation adopted for 1998.
(3) Stockholders of record as reported by the transfer agent. The Company estimates that there were
an additional 105,000 stockholders whose shares were held in nominee names at December 31, 1998.
<PAGE>
--- Page 14 ---
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
Dow's sales for 1998 were $18.4 billion, down 8 percent from $20.0
billion in 1997 and $20.1 billion in 1996. Lower selling prices
reduced sales for the year by 10 percent, or $2.0 billion, while
volume improved 2 percent from 1997 (see Sales Price and Volume table
on page 19). Compared with 1997, sales prices were lower in all
operating segments and all geographic areas as the chemical industry
approached trough-level pricing. Volume growth was strong for
Performance Chemicals and Agricultural Products as strategic
acquisitions offered new products and broader global presence.
Sales in the United States accounted for 40 percent of total sales
in 1998, down from 44 percent in 1997 and 1996, primarily due to the
sale of the DowBrands consumer products business in early 1998. Sales
and other information by operating segment and geographic area are
provided in Note R to the Financial Statements.
Dow continued to further restructure its portfolio toward
performance businesses in 1998. Changes included the acquisition of
Isopol for the production and commercialization of toluene
diisocyanate (TDI) in Latin America, the acquisition of the remaining
shares of Mycogen Corporation (Mycogen), the integration of Sentrachem
Limited (Sentrachem), and the divestitures of DowBrands, Radian
International LLC (Radian) and Dow-United Technologies Composite
Products, Inc. (Dow-UT). Details for these events are included in Note
C to the Financial Statements.
1998 was a challenging year, and Dow expects 1999 to be the same,
partly because the economy will continue to be affected by the
financial crisis in Asia Pacific. Weakening economic conditions are
anticipated to restrict volume growth. Prices are expected to
stabilize in the latter part of the year at trough levels. Dow
continues, however, to follow its strategy to achieve productivity
improvements, develop value-growth opportunities and further refine
its business portfolio, in order to achieve its objective of positive
results across the business cycle.
PERFORMANCE PLASTICS
Sales for Performance Plastics were $5.1 billion in 1998, compared
with $5.2 billion in 1997 and $5.3 billion in 1996. An overall volume
gain of 3 percent in 1998 partially offset a price decline of 5
percent versus the previous year. In 1997, the segment showed a 7
percent volume gain and an 8 percent price decline versus 1996.
Earnings before Interest, Income Taxes and Minority Interests (EBIT)
increased 5 percent to $1.1 billion in 1998 from $1.0 billion in 1997,
down from record EBIT of $1.2 billion in 1996. Lower raw material
costs and productivity improvements resulted in improved profitability
in 1998 compared with the prior year.
Sales for Adhesives, Sealants and Coatings were up 13 percent from
last year, primarily due to strong volume growth. In 1998, new Systems
House polyurethanes formulation capacity was added to meet growing
demand in Europe and Latin America, and a new operation was started up
in China.
Engineering Plastics sales were up 2 percent compared with the
prior year with volume up 5 percent and prices down 3 percent. Double
digit volume growth in polycarbonate was offset by weak results in
thermoplastic polyurethane (TPU) due to a slowdown in sales to the
athletic footwear and automotive industries. Reductions in conversion
costs and operating expenses combined with lower raw material costs
resulted in improved profitability.
Epoxy Products and Intermediates sales declined 7 percent from last
year. Prices were down 6 percent and volume was off 1 percent from
peak levels in 1997. Turmoil in the Asia Pacific economies
significantly reduced exports to the region and forced epoxy producers
in Asia Pacific to seek overseas markets for their products. These
factors contributed to price pressure globally.
In 1998, Fabricated Products posted a 2 percent volume increase,
partially offsetting a 6 percent price decline resulting from
competitive pressures in key markets. Lower raw material costs
combined with productivity improvements allowed the business to
maintain profits despite lower revenue. The business gained volume in
the North American commercial and roofing sectors and recorded 6
percent volume growth for building materials in Europe. Engineered
laminates and films experienced solid gains in both volume and
profitability.
Polyurethanes sales were down 5 percent in 1998 versus the prior
year. Prices were down 6 percent, with declines in most geographic
regions. The Asia Pacific crisis heavily impacted volume as demand was
down 19 percent in the region compared with 1997. This volume decline
was offset by volume increases in Latin America driven mainly by the
Isopol acquisition. To meet overall increasing global demand, Dow
started up a new copolymer polyol (CPP) plant in Terneuzen, the
Netherlands. Additional CPP capacity will start up in Freeport, Texas,
in 1999.
<PAGE>
--- Page 15 ---
PERFORMANCE PLASTICS (Continued)
Outlook for 1999
The Performance Plastics segment expects continued solid performance
in 1999. Price pressure is expected to moderate and improved volume
growth is anticipated.
In 1999, Engineering Plastics expects higher sales volumes offset
by declining sales prices. The January 1999 start-up of Dow's second
polycarbonate train at Stade, Germany, is expected to ease supply
shortages and allow volume growth to continue at double digit rates in
Europe and Asia. However, the supply/demand imbalance for TPU will
likely continue into 1999. Dow will market nylon 6,6 for injection
molded applications on a worldwide basis starting in 1999 as part of a
marketing alliance with Solutia Inc.
The Epoxy Products and Intermediates business anticipates modest
volume growth and continued pressure on prices in 1999. Potential
consolidations in both the epoxy and global coatings businesses create
uncertainty regarding the future competitive balance in the global
epoxy business.
Sales volume for Fabricated Products is expected to grow as a
result of continued construction growth, geographic expansion and new
products. The overall business environment will likely remain very
competitive into 1999. Demand for Fabricated Products is expected to
continue to be influenced by general economic activity, including
housing starts, demand for durable goods and more stringent energy
insulation standards worldwide.
Polyurethanes expects solid volume growth overall despite the
continuation of depressed economic conditions in Asia Pacific.
Additional industry capacity is expected to continue to negatively
influence prices in 1999; however, reduced conversion costs and
operating expenses are expected to help offset the anticipated price
declines.
PERFORMANCE CHEMICALS
Sales of Performance Chemicals were $2.6 billion in 1998, compared
with $2.5 billion in 1997 and $2.4 billion in 1996. The segment
experienced a strong volume gain of 11 percent, along with a price
decline of 4 percent compared with 1997. In 1997, sales reflected an
11 percent volume gain with a 7 percent price decline versus 1996.
1998 EBIT was $427 million versus $399 million in 1997. EBIT
increased as higher volume and lower feedstock costs more than offset
the effect of price declines and additional costs associated with the
integration of Hampshire Chemical Corp., acquired through the
Sentrachem acquisition. In 1996, EBIT was $408 million.
In 1998, Emulsion Polymers posted a 4 percent increase in volume
compared with the previous year, largely offsetting a 5 percent price
decline. Overall profitability was maintained in 1998 as price
declines were offset by lower raw material costs. Demand for styrene
butadiene (S/B) latex for coated paper remained strong in most
geographies.
Specialty Chemicals volume grew 14 percent in 1998, primarily due
to the addition of Hampshire Chemical and strong demand for Methocel
cellulose ethers, polyglycols, superabsorbents and antimicrobials.
Prices declined 3 percent in 1998 primarily due to competitive
pressures in liquid separations, superabsorbents, polyglycols and
oxygenated solvents.
Outlook for 1999
Performance Chemicals' good performance is expected to continue in
1999, with solid volume growth anticipated by both of the segment's
businesses.
During 1998, the Emulsion Polymers business agreed to purchase
Shell's synthetic rubber business. The transaction, involving the
acquisition of two European plants, is expected to close in early
1999. This business will be combined with the existing synthetic
rubber volume supplied by Buna Sow Leuna Olefinverbund (BSL). Due to
this acquisition and higher S/B latex volume in North America and Asia
Pacific, the business expects significant volume growth in 1999.
Specialty Chemicals is anticipating another good year in 1999
despite a challenging economic environment. Volume growth will be
facilitated by capacity increases in polyglycols and superabsorbents,
and prior acquisitions such as a range of water soluble polymers
acquired from Courtaulds Chemicals.
AGRICULTURAL PRODUCTS
Agricultural Products sales rose 10 percent to $2.4 billion in 1998,
compared with $2.1 billion in 1997 and $1.9 billion in 1996. While
sales volume grew 13 percent, prices, including the unfavorable impact
of currency, fell 3 percent compared with 1997. The substantial volume
growth in 1998 resulted from the introduction of new products in all
markets, strength in the existing product portfolio, exceptional
demand in Latin America and the addition of Sanachem, through the
Sentrachem acquisition in December 1997. In 1997, sales volume grew 17
percent while prices declined 7 percent versus 1996.
EBIT, excluding unusual items, was $154 million in 1998 versus $233
million in 1997. The results of the agricultural business were lower
in 1998 as significant expenditures were made to build biotechnology
capabilities. Unusual items recorded in 1998 totaled $363 million and
included charges for purchased in-process research and development
(see Note B to the Financial Statements) related mainly to the
acquisitions of Sanachem, the remaining 40 percent share of DowElanco
(since renamed Dow AgroSciences LLC) owned by Eli Lilly and Company,
and the remaining shares in Mycogen, and environmental remediation
costs. Unusual items recorded in 1997 totaled $20 million and included
property write-downs and insurance restructuring related to the
purchase of the remaining 40 percent share of DowElanco. In 1996, EBIT
was $304 million.
<PAGE>
--- Page 16 ---
AGRICULTURAL PRODUCTS (Continued)
New products performed well in 1998, both in terms of efficacy and
market acceptance. Sales for spinosad insect control products were
triple that of 1997. The Sentricon Termite Colony Elimination System
continued to gain wide acceptance in urban pest applications and
experienced excellent growth in sales. The launch of FirstRate
herbicide was highly successful, resulting in significant new business
and sold-out capacity.
The business' plant genetics and biotechnology platform is focused
on three segments: seeds, traits and value-added grains. During the
year, the biotech strategy was significantly advanced through
strategic acquisitions, joint ventures, research agreements, alliances
and the buildup of internal capabilities. The outstanding shares of
Mycogen were purchased, providing significant benefits in advancing
our intellectual property, germplasm and research capabilities.
Through Mycogen, four seed companies in Brazil and one in Argentina
were acquired, and a joint venture was formed with J. G. Boswell
Company to develop and market cotton seeds globally. A research
agreement with Biosource Technologies, Inc. was entered into for the
development of a genomics program to identify and patent novel genes
for industrial and agricultural biotechnology at a pace significantly
faster than previous genomics programs. Research collaborations,
through Mycogen and Dow AgroSciences, with Rhone-Poulenc Agro were
announced to conduct research to develop genetically modified plants
and seed products containing multiple traits. A new company, Advanced
AgriTraits LLC, was formed to serve as a clearinghouse for companies
seeking to bolster their biotechnology offerings.
Outlook for 1999
Dow AgroSciences expects substantial growth in 1999 due to geographic
expansion of new products such as spinosad products, along with
additional new product launches and resumed growth in Asia Pacific.
Significant investment spending will continue for plant genetics and
biotechnology, including potential value-added alliances, acquisitions
and joint ventures to continue building a competitive capability.
PLASTICS
Plastics reported sales of $3.8 billion in 1998, down 9 percent from
1997. A volume increase of 7 percent was offset by a price decline of
16 percent. In 1997, Plastics reported sales up 6 percent from 1996
with a volume increase of 7 percent offset by a modest price decline
of 1 percent.
EBIT for Plastics decreased 32 percent to $607 million in 1998,
primarily due to a decline in selling prices which was only partially
offset by lower hydrocarbon feedstock costs. EBIT for 1997 was $892
million, up from $827 million in 1996, as stronger volumes more than
offset lower prices.
Polyethylene resins experienced an 8 percent increase in volume
globally with North America, Europe and Latin America more than
compensating for a drop in Asia Pacific. Overall, 1998 sales for
polyethylene resins declined 11 percent as the increase in volume was
more than offset by continued price pressure globally. Sales of Elite
enhanced polyethylene resins launched in 1997 more than doubled
globally in 1998. During the year, Dow started up a new polyethylene
plant in Fort Saskatchewan, Alberta, Canada, that is capable of
producing both traditional solution process polyethylene resins and
resins made via Insite Technology. Through the Sentrachem acquisition,
Dow acquired a 50 percent ownership in a high density slurry process
polyethylene facility in South Africa. During 1998, output from a new
BSL polyethylene plant in Germany became available and construction
was begun on a solution process polyethylene plant in Bahia Blanca,
Argentina.
BSL completed construction of a new polyethylene terephthalate
(PET) plant in 1998. Under a marketing and sales agreement, the output
of this plant became available to Dow. Lighter C enhanced PET for
bottles was introduced with the approval of major soft drink and
mineral water bottlers. Interest in licenses for purified terephthalic
acid (PTA) technology continued to be strong.
Polystyrene sales were down 9 percent from 1997 as volume growth
partially offset continued downward pricing pressure. Although the
crisis in Asia Pacific had a negative impact, lower demand in several
of the Asian countries was offset by an increased demand in China.
Cargill Dow Polymers LLC, a 50:50 limited liability company formed
in 1997 with Cargill, Inc., moved forward toward commercializing
polylactic acid (PLA), a new polymer platform with multiple
applications based on renewable agricultural resources such as corn,
wheat or sugar beets.
In the Polypropylene business, demand grew more than 7 percent over
1997 despite a substantial slowdown in Asia Pacific. Pricing came
under pressure during 1998 due to excess capacity with the addition of
industry capacity in Asia Pacific and North America. Dow's sales and
volume in 1998 more than doubled over 1997 as successful market
penetration in Europe and North America continued. Through the
Sentrachem acquisition, Dow acquired 50 percent ownership in a
polypropylene facility in South Africa. Polypropylene output from a
new BSL facility became available in 1998.
In 1998, DuPont Dow Elastomers L.L.C. (DDE), a 50:50 joint venture,
continued the commercial launch of its next generation EPDM product
line, Nordel IP hydrocarbon rubber, with significant progress in
market penetration due to the product's improved processibility versus
competitive materials. To lower fixed costs, DDE restructured its
operations in the fourth quarter resulting in lower profits for 1998.
<PAGE>
--- Page 17 ---
PLASTICS (Continued)
Outlook for 1999
It is expected that the Plastics segment will continue to experience
strong volume growth and downward pricing pressure.
Dow is planning to start up new plastics facilities in 1999
including a new polyethylene plant as part of the Dow-Siam Cement
joint venture in Map Ta Phut, Thailand. Styron polystyrene from a new
plant at BSL will become available in 1999. The addition of the new
PET facility at BSL will help Dow strengthen its PET position in
Central and Eastern Europe.
CHEMICALS
Chemicals sales were $2.4 billion in 1998, compared with $2.9 billion
in 1997 and $3.0 billion in 1996. Prices declined 17 percent due to
the economic crisis in Asia Pacific and heightened competitive
pressures. Volume fell 1 percent during the year. In 1997, prices
declined 2 percent while volume declined 2 percent versus 1996.
EBIT, excluding unusual items of $168 million, was $361 million in
1998 compared with $695 million in 1997, primarily due to lower
pricing in vinyl chloride monomer (VCM), ethylene dichloride (EDC) and
ethylene glycol (EG). In addition, magnesium plant storm-related
problems (and eventual shutdown) contributed to the decline in EBIT.
1998 unusual items recorded in this segment included write-offs
related to the shutdown of the magnesium business and environmental
remediation costs. EBIT of $695 million in 1997 was down from $755
million in 1996, due to lower prices and volume, and operating
problems in North American facilities.
1998 results for propylene oxide (PO) and derivatives were solid,
despite an increasingly competitive global environment. Price and
volume for PO and propylene glycol (PG) have remained strong compared
with 1997. In contrast, 1998 was a very challenging year for ethylene
oxide (EO) and EG in terms of price and volume, primarily due to
economic conditions in Asia Pacific.
Results for chlorinated organics in 1998 were improved versus 1997,
as reductions in raw material costs more than offset the reductions in
selling prices for finished products.
Market pricing for polyvinyl chloride (PVC) in North America
declined to more than 10 percent below the bottom of the 1991-1992
cycle despite demand growth of 5 percent versus 1997. This, combined
with steep pricing declines in key raw materials, moved the North
American VCM price to its lowest point in more than 20 years. Export
VCM shipments from North America were reduced to minimal levels during
the first half of 1998 due to the economic situation in Asia Pacific,
but improved during the second half.
Demand for caustic soda remained stable during the first half of
1998 while chlor-alkali production slowed, resulting in firm caustic
soda values. During the second half of the year, however, caustic soda
demand decreased and pricing started to decline.
In 1998, Dow added new chlorine capacity at its site in Stade,
Germany, and is continuing with previously announced plans for
expansions of membrane chlorine capacity in Freeport, Texas, in 1999
and 2000. The additional capacity is planned to meet the company's
increased internal chlorine demand supporting derivative businesses.
In late 1998, the company shut down its sole magnesium metal plant
in Freeport, Texas, and exited the magnesium business. A special
charge of $113 million was recorded relative to this shutdown in the
fourth quarter.
Outlook for 1999
Business conditions for EO/EG are expected to remain difficult through
1999. During 1998, demand was adversely impacted by the crisis in Asia
Pacific, particularly in fibers; as a consequence, EG prices fell
during 1998 and are anticipated to remain low during 1999. EG sales
volume, however, is expected to increase compared with 1998.
Demand for PO/PG remains fairly solid and 1999 volume is expected
to increase compared with 1998.
Excess supply for most chlorinated organics, partially caused by
the economic crisis in Asia Pacific, is expected to continue through
1999. Demand for carbon tetrachloride is expected to continue to
decline as a result of the impact of
the Montreal Protocol.
Continued unfavorable supply/demand balances and low chlorine and
ethylene prices are expected to keep VCM prices depressed throughout
1999. Lower demand for EDC and VCM in Asia Pacific is expected to
persist until the region's economic recovery begins in 2000 or beyond.
It is expected that volume and pricing for caustic soda and
chlorine will remain weak through 1999.
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales were $1.5 billion in 1998, compared with
$2.2 billion in 1997 and $2.4 billion in 1996. The segment experienced
a volume decline of 12 percent, mainly due to the sale of Destec
Energy, Inc. (Destec) in the second quarter of 1997. Prices declined
20 percent versus the previous year, in line with reductions in the
prices of crude oil and related hydrocarbon feedstocks. 1997 versus
1996 showed a volume decline of 13 percent and a price increase of 2
percent.
Hydrocarbons and Energy, which transfers materials to Dow's
derivative businesses at cost, reported EBIT of $(5) million for 1998,
compared with $220 million and $163 million in 1997 and 1996,
respectively. 1997 EBIT included the operating results of Destec and a
gain of $189 million from the sale of Destec in June 1997.
<PAGE>
--- Page 18 ---
HYDROCARBONS AND ENERGY (Continued)
The total cost of acquiring feedstock materials and energy for 1998
was reduced by $1.1 billion compared with 1997. In December 1997, the
combination of high inventory of crude oil and refinery products in
the industry and a reduction in demand in Asia Pacific caused a sharp
decline in crude oil prices which continued throughout 1998. Toward
the end of 1998, prices had declined to a 12-year low. In addition,
the average price for natural gas on the U.S. gulf coast declined
16 percent from 1997.
In 1998, Dow sold a power plant in Pittsburg, California, and
closed an ethylbenzene/styrene manufacturing plant in Sarnia, Ontario,
Canada. Also during 1998, Dow successfully brought on-line the
expansion of a light hydrocarbon plant at Fort Saskatchewan, Alberta,
Canada, and construction was begun on a new ethylene plant in Bahia
Blanca, Argentina.
Outlook for 1999
Crude oil and feedstock prices are expected to remain low in 1999, but
with high price volatility. Liberalization effects in Europe should
result in lower energy costs there. Cracker margins are expected to
remain under pressure similar to the second half of 1998. Ethylene,
styrene and propylene are expected to be in an oversupply situation in
1999.
UNALLOCATED AND OTHER
Sales were $731 million, $962 million and $1.1 billion in 1998, 1997
and 1996, respectively. Sales in 1998 decreased 24 percent from 1997,
primarily due to the divestitures of DowBrands and Radian. A gain on
the sale of DowBrands of $816 million, partially offset by asset write-
downs and other special charge items (primarily severance costs)
totaling $357 million, accounted for the majority of the increase in
EBIT to $264 million in 1998 (see Notes B and C to the Financial
Statements). EBIT was $(222) million in 1997 and $(189) million in
1996. Research and developmental costs in New Businesses, employee
severance costs, overhead cost variances not allocated to other
segments, results of insurance and finance company operations, and
several diversified businesses acquired in Dow's acquisition of
Sentrachem in December 1997, are included in these results.
New Businesses made significant changes in its portfolio, selling
Radian, Dow-UT and the Tungsten Carbide business. These businesses
were viewed as non-strategic to Dow. Significant resources are being
committed to the development of an integrated biotechnology business
platform. The focus of this effort is to build a sustainable
industrial business in specialty products using biotechnology
production tools and building on the use of renewable feedstocks.
COMPANY SUMMARY
Earnings before Interest, Income Taxes and Minority Interests (EBIT)
- --------------------------------------------------------------------
EBIT was $2.4 billion in 1998, down 27 percent from $3.2 billion in
1997 and 32 percent from $3.5 billion in 1996. Earnings for 1998 were
significantly reduced by several unusual items: purchased in-process
research and development costs of $349 million and special charges of
$458 million, as discussed in Note B to the Financial Statements, and
environmental remediation costs of $120 million. Gross margin
decreased $697 million versus 1997, as significant declines in selling
prices were only partially offset by lower feedstock and energy costs
and productivity improvements. 1997 gross margin decreased $606
million from 1996, primarily due to lower selling prices and
unfavorable currency exchange rates.
<TABLE>
<CAPTION>
Sales Price and Volume
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Percent change from prior year Price Volume Total Price Volume Total Price Volume Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Segments:
Performance Plastics (5)% 3% (2)% (8)% 7% (1)% (3)% 4% 1%
Performance Chemicals (4) 11 7 (7) 11 4 (6) 6 -
Agricultural Products (3) 13 10 (7) 17 10 (3) 2 (1)
Plastics (16) 7 (9) (1) 7 6 (18) 15 (3)
Chemicals (17) (1) (18) (2) (2) (4) (10) 4 (6)
Hydrocarbons and Energy (20) (12) (32) 2 (13) (11) (6) 9 3
Unallocated and Other - (24) (24) - (10) (10) 5 5 10
All Segments (10)% 2% (8)% (4)% 4% - (8)% 7% (1)%
- ---------------------------------------------------------------------------------------------------------------
Geographic Areas:
United States (7)% (8)% (15)% (1)% 1% - (6)% 3% (3)%
Europe (12) 16 4 (8) 5 (3)% (11) 10 (1)
Rest of World (13) 4 (9) (4) 8 4 (8) 11 3
All Areas (10)% 2% (8)% (4)% 4% - (8)% 7% (1)%
- ---------------------------------------------------------------------------------------------------------------
Sales price includes the impact of currency.
<PAGE>
--- Page 19 ---
</TABLE>
Earnings before Interest, Income Taxes and Minority Interests (EBIT)
(Continued)
Dow's global plant operating rate was 86 percent of capacity, down
from 89 percent in 1997 and 1996. Depreciation expense was $1.2
billion in 1998 and 1997, and $1.3 billion in 1996.
Operating expenses, which include research and development, and
selling, general and administrative expenses, were $2.5 billion in
1998, a decrease of $192 million from $2.7 billion in 1997 and $424
million from $2.9 billion in 1996. The lower expenses in 1998 were the
result of Dow's ongoing productivity improvements and changes in the
company's business portfolio.
Research and development expenses were $807 million for 1998, up 3
percent from $785 million in 1997 and 6 percent from $761 million in
1996. The increased expenses reflected the company's investment in
biotechnology research.
Selling, general and administrative expenses of $1.7 billion for
1998 were down $214 million versus 1997 and $470 million from $2.1
billion in 1996. Selling, general and administrative expenses
represented 9 percent of sales in 1998 and 1997, down from 11 percent
in 1996. Included in these expenses were promotion and advertising
expenses of $125 million for 1998, which were down significantly from
$371 million in 1997 and $370 million in 1996, primarily due to the
sale of DowBrands.
Operating Costs and Expenses
Cost components as a percent of total 1998 1997 1996
- ----------------------------------------------------------------------
Hydrocarbons and energy 24% 29% 28%
Salaries, wages and employee benefits 20 21 21
Maintenance 4 4 4
Depreciation 7 7 7
Supplies, services and other raw materials 45 39 40
- ----------------------------------------------------------------------
Total 100% 100% 100%
- ----------------------------------------------------------------------
Dow's share of the earnings of nonconsolidated affiliates amounted
to $64 million in 1998 compared with $75 million in 1997 and $66
million in 1996. The company has not recorded its share of equity
earnings in Dow Corning since the first quarter of 1995 due to Dow
Corning's filing for protection under Chapter 11 and the write-down of
the company's investment. See Note P to the Financial Statements for
further discussion of Dow Corning's breast implant litigation.
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 increased to $916 million in
1998 versus $436 million in 1997 and $339 million in 1996. Sundry
income for 1998 included a pretax gain of $816 million on the sale of
DowBrands. During the previous two years, Dow sold or restructured its
interest in a number of businesses, including Destec in 1997, which
resulted in a pretax gain of $189 million, and Boride Products,
Crestar Energy and Cynara in 1996. In addition, the company realized a
pretax gain of $120 million in 1996 from the sale of a portion of its
ownership in Oasis Pipeline.
Personnel count was 39,029 at December 31, 1998, 44,078 at the end
of 1997 and 40,289 at the end of 1996. The significant reduction in
employees during 1998 was due to the DowBrands and Radian divestitures
and severance plans adopted in the first quarter of the year (see
Notes B and C to the Financial Statements). The increase in 1997 over
1996 resulted from the addition of approximately 5,200 employees from
the Sentrachem acquisition.
Net Income
Net income available for common stockholders in 1998 was $1.3 billion
or $5.76 per share (diluted), compared with $1.8 billion or $7.70 per
share in 1997 and $1.9 billion or $7.60 per share in 1996.
The following table summarizes the impact of unusual items on
diluted earnings per common share:
1998 1997 1996
- ---------------------------------------------------------------------
Impact of sale of DowBrands and other
unusual charges $(.31) - -
Impact of sale of Destec Energy, Inc.
and other one-time events - $ .23 -
Other earnings 6.07 7.47 $7.60
- ---------------------------------------------------------------------
Earnings per common share - diluted $5.76 $7.70 $7.60
- ---------------------------------------------------------------------
Interest income in 1998 was $139 million, down 24 percent from $182
million in 1997 and 52 percent from $290 million in 1996. Higher
interest income in 1996 was primarily attributable to the investment
of the cash received from the sale of the pharmaceutical businesses in
1995. The decline in interest income for 1997 and 1998 resulted from
the company's use of cash for acquisitions. Acquisitions and
divestitures are discussed in Note C to the Financial Statements.
Interest expense (net of capitalized interest) and amortization of
debt discount were $493 million in 1998 compared with $471 million in
1997 and $494 million in 1996.
<PAGE>
--- Page 20 ---
Net Income (Continued)
The provision for income taxes was $685 million in 1998 versus $1
billion in 1997 and $1.2 billion in 1996. Dow's overall effective tax
rate for 1998 was 34 percent versus 35.3 percent for 1997 and 36.1
percent for 1996. The underlying factors affecting Dow's overall
effective tax rates are summarized in Note D to the Financial
Statements. U.S. and other tax law and rate changes during the year
did not have a material impact on Dow.
Minority interests' share of net income in 1998 was $17 million
compared with $99 million in 1997 and $194 million in 1996. The
decrease in minority interest versus prior years resulted from the
acquisition of the remaining 40 percent share in DowElanco, the
divestiture of Destec and the redemption of partners' capital accounts
in DowBrands L.P. (see Notes C and K to the Financial Statements).
Liquidity and Capital Resources
Operating activities provided $2.9 billion in cash in 1998, compared
with $3.7 billion in 1997 and $3.4 billion in 1996 (see the
Consolidated Statements of Cash Flows). The items affecting operating
activities are discussed in the EBIT and Net Income sections.
Investing activities used $1.1 billion in cash in 1998, $3.3 billion
in 1997 and $2.2 billion in 1996. The divestitures of DowBrands and
Radian provided additional net cash proceeds of $1.3 billion in 1998.
Cash was used to repurchase shares of the company's common stock, to
reduce total debt by $381 million, to purchase the remaining shares of
Mycogen and an ownership interest in Isopol, and for other normal
activities. In 1997, the sale of Destec generated additional net cash
proceeds of $907 million. The increased use of cash during 1997
resulted from the acquisition of the remaining 40 percent share in
DowElanco, the acquisition of Sentrachem, the purchase of 80 percent
interest in BSL and the redemption of partners' capital accounts in
DowBrands L.P. (see Notes C and K to the Financial Statements).
Total working capital at year-end was $1.2 billion versus $1.6
billion at the end of 1997. Cash, cash equivalents, marketable
securities and interest-bearing deposits decreased $147 million in
1998. Inventories and trade receivables decreased $581 million. Days-
sales-in-inventory for 1998 were 88 days, up versus 84 days in 1997
and 87 days in 1996. Days-sales-outstanding-in-receivables were 48
days, 47 days and 45 days for 1998, 1997 and 1996, respectively.
Goodwill at December 31, 1998, was $1.6 billion, a decrease of $121
million from year-end 1997, primarily due to the completion of the
allocations of the purchase prices of certain acquisitions, partially
offset by new acquisitions in 1998.
Short-term borrowings at December 31, 1998, were $1.5 billion, a
decrease of $130 million from year-end 1997. Long-term debt due within
one year decreased $106 million to $300 million at the end of 1998
compared with $406 million at the end of 1997. Long-term debt due in
1999 will be funded by operating cash flows. Accounts payable remained
relatively flat at $2.7 billion.
Long-term debt at year-end was $4.1 billion, down slightly from
1997. During the year, $218 million of new long-term debt was incurred
and $549 million of long-term debt was retired. Long-term debt due
within one year was $300 million at December 31, 1998.
Total debt was $5.9 billion, $6.3 billion and $5.5 billion at
December 31, 1998, 1997 and 1996, respectively. Net debt, which equals
total debt less cash, cash equivalents, marketable securities and
interest-bearing deposits, was $5.5 billion, $5.7 billion and $3.2
billion at December 31, 1998, 1997 and 1996, respectively. The debt to
total capitalization ratio of 42 percent at the end of 1998 was down
from 43 percent at year-end 1997, but up from 35 percent at year-end
1996.
During the last three years, the company has repurchased 42.6
million shares of its common stock. $742 million worth of common stock
was repurchased in 1998, $1.7 billion in 1997 and $1.2 billion in
1996. Since the beginning of 1995, net shares outstanding have been
reduced by 20 percent (see Note L to the Financial Statements).
At December 31, 1998, the company had unused and available credit
facilities with various U.S. and foreign banks totaling $2 billion in
support of its working capital requirements and commercial paper
borrowings. Additional unused credit facilities totaling $661 million
were available for use by foreign subsidiaries.
At December 31, 1998, there was a total of $1.4 billion in
available SEC registered debt securities between Dow and Dow Capital
plc., a wholly owned subsidiary, and 50 billion in available Japanese
yen (approximately $437 million) registered with Japan's Ministry of
Finance.
Minority interest in subsidiary companies decreased during the year
from $676 million in 1997 to $532 million at the end of 1998.
Capital Expenditures
Capital spending for the year was $1.5 billion, up 29 percent from
$1.2 billion in 1997 and 15 percent from $1.3 billion in 1996. In
1998, approximately 54 percent of the company's capital expenditures
was directed toward additional capacity for new and existing products,
while about 7 percent was committed to projects related to
environmental protection, safety, loss prevention and industrial
hygiene. These compare with 44 percent and 9 percent, respectively, in
1997. The remaining capital was utilized to maintain the company's
existing asset base, including projects related to productivity
improvements, energy conservation and facilities support.
<PAGE>
--- Page 21 ---
Capital Expenditures (Continued)
Major projects underway during 1998 included an expansion of the
polyethylene facilities in Fort Saskatchewan, Alberta, Canada; an
ethylene expansion in Terneuzen, the Netherlands; a polycarbonate
expansion in Stade, Germany; and epichlorohydrin and chlorine/caustic
soda expansions in Freeport, Texas. Because the company designs and
builds most of its capital projects in-house, it had no material
capital commitments, other than for the purchase of materials from
fabricators.
Dividends
The Board of Directors has announced a quarterly dividend of 87 cents
per share, payable April 30, 1999, to stockholders of record on March
31, 1999. This will be the 349th consecutive quarterly dividend since
1912. Dow has maintained or increased the dividend throughout that
time. The company declared dividends of $3.48 per share in 1998, $3.36
per share in 1997 and $3.00 per share in 1996.
OTHER MATTERS
Environment
In 1996, Dow announced a number of voluntary global Environment,
Health and Safety (EH&S) Goals for Year 2005, continuing the company's
long-term commitment to Responsible Care. Dow's EH&S goals for 2005
are ambitious performance targets to measure progress toward
sustainability, including targets to reduce chemical emissions, waste
and waste water by 50 percent. Equally aggressive are the goals to
reduce leaks, spills, fires, explosions, work-related injuries and
transportation incidents by 90 percent. Dow is on track or ahead of
schedule in most of these areas. More information on Dow's EH&S
policies, systems and performance can be found in the 1998 EH&S
Progress Report on the Internet at www.dow.com.
In addition to our voluntary commitments, Dow's global operations
are subject to increasingly stringent laws and government regulations
related to environmental protection and remediation. Dow's
environmental responsibilities and potential liabilities receive
direct and ongoing scrutiny by management to ensure compliance with
these laws and regulations. Dow's Environmental Management Standard
clearly defines the overall environmental systems, performance
objectives, and design requirements needed to minimize the long-term
cost of environmental protection and to comply with these laws and
regulations. It is Dow's stated policy that all global operations and
products meet Dow's Environmental Management Standard or their
country's laws and regulations, whichever is more stringent.
Assessments are used by management to continually measure and report
Dow's progress against this standard and its performance objectives.
At sites in Europe, Canada and the United States, the company also
receives third-party verification of Dow's compliance with Responsible
Care and with outside specifications such as ISO-14001.
It is Dow's policy to adhere to a waste management hierarchy that
minimizes the impact of wastes and emissions on the environment.
First, Dow works to eliminate or minimize the generation of waste and
emissions at the source through research, process design, plant
operations and maintenance. Second, Dow finds ways to reuse and
recycle materials. Finally, unusable or non-recyclable hazardous waste
is treated before disposal to eliminate or reduce the hazardous nature
and volume of the waste. Treatment may include destruction by
chemical, physical, biological or thermal (incineration) means.
Disposal of waste materials in landfills is considered only after all
other options have been thoroughly evaluated. Dow has specific
requirements for wastes that are transferred to non-Dow facilities.
Wastes that are recycled, treated or recovered for energy off-site
represent less than 2 percent of the total amount of wastes reported
as part of the Pollution Prevention Act.
Dow accrues the costs of site remediation for its facilities based
on current law and existing technologies. In the case of a landfill,
Dow accrues the costs over the useful life of the facility. The nature
of such remediation includes the cleanup of soil contamination and the
closure of landfills and other waste management facilities. The
policies adopted to properly reflect the monetary impacts of
environmental matters are discussed in Note A to the Financial
Statements. To assess the impact on the financial statements,
environmental experts review currently available facts to evaluate the
probability and scope of potential liabilities. Dedicated Dow joint
ventures provide strategic management to identify cost-effective
solutions for certain remediation liabilities at the company's U.S.
manufacturing locations. Inherent uncertainties exist in such
evaluations primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and evolving
technologies for handling site remediation and restoration. These
liabilities are adjusted periodically as remediation efforts progress
or as additional technical or legal information becomes available.
Dow is named as a potentially responsible party (PRP) under federal
or state Superfund statutes at approximately 20 sites. Dow readily
cooperates in remediation where its liability is clear, thereby
minimizing legal and administrative costs. This approach, coupled with
Dow's long-standing preference for on-site waste treatment, has
resulted in a substantial decrease in the number of Superfund sites in
which Dow is involved.
<PAGE>
--- Page 22 ---
Environment (Continued)
Because current law imposes joint and several liability upon each
party at a Superfund site, Dow has evaluated its potential liability
in light of the number of other companies which have also been named
PRPs at each site, the estimated apportionment of costs among all
PRPs, and the financial ability and commitment of each to pay its
expected share. Management estimated that the company's remaining
liability for the remediation of Superfund sites at December 31, 1998,
was $9 million.
Receivables of $14 million for probable third-party recoveries from
other PRPs have been recorded related to Superfund sites. In addition,
Dow reached settlement with several insurance carriers in 1998 for
recovery of past Superfund expenditures. The company is currently
involved in litigation with numerous other insurance carriers seeking
additional recoveries.
In addition to Superfund-related liability, Dow had an accrued
liability of $355 million at December 31, 1998, related to the
remediation of current or former Dow-owned sites. The company had not
recorded as a receivable any third-party recovery related to these
sites.
In total, Dow's accrued liability for probable environmental
remediation and restoration costs was $364 million at December 31,
1998, compared with $283 million at the end of 1997. 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. It is the opinion of Dow 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.
The amounts charged to income on a pretax basis related to
environmental remediation totaled $149 million in 1998, $90 million in
1997 and $60 million in 1996. Capital expenditures for environmental
protection were $72 million in 1998, $77 million in 1997 and $80
million in 1996.
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 65 percent complete at
the end of 1998 and is expected to be complete by mid-1999.
The Information Systems applications software organization is
responsible for the remediation of applications and, at the end of
1998, the remediation phase was more than 60 percent complete.
Remediation of all business-critical applications is expected to be
completed by mid-1999. The company's implementation of enterprise-wide
financial and operational systems and standardized desktop computing
during the last several years has facilitated this effort. Two
critical replacement projects are in progress and are on target to be
completed by mid-1999. A contingency plan has been established for one
of these projects, and a plan is being developed for the other, should
either of these projects miss the scheduled completion dates.
The company has common process control systems in more than 80
percent of its plants globally, and during the project study, the
company determined that 10 percent of the common systems needed to be
upgraded with Y2K ready software. Approximately 20 percent of the
company's process control systems are commercial systems, and these
have been assessed, and those requiring upgrades are being remediated
during scheduled plant shutdowns. 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 may extend into the third quarter of 1999 due to plant
shutdown schedules.
<PAGE>
--- Page 23 ---
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 75
percent complete at the end of 1998 and are expected to be completed
by mid-1999.
The Y2K assessment of two recently acquired companies, for which
Y2K programs had not been initiated prior to the date of acquisition,
is now complete, and the company expects that all critical Y2K
preparations will be completed before 2000.
The company's assessment of critical material suppliers is ongoing,
and risk management actions and contingency plans are being developed,
as necessary. Approximately 75 percent of critical material suppliers
had responded to requests for information at year-end 1998, 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
material suppliers during the first quarter 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 at year-end
1998 were approximately $34 million. 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.
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 has been named to lead this business contingency planning
effort during 1999.
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.
<PAGE>
--- Page 24 ---
ITEM 7A. 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.
<PAGE>
--- Page 25 ---
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Responsibility for Financial Statements and Independent Auditors' Report
- -------------------------------------------------------------------------------
Management Statement of Responsibility
The management of The Dow Chemical Company and its subsidiaries
prepared the accompanying consolidated financial statements and has
responsibility for their integrity, objectivity and freedom from
material misstatement or error. These statements were prepared in
accordance with generally accepted accounting principles. The financial
statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information
in this annual report and is responsible for its accuracy and
consistency with the financial statements. The Board of Directors,
through its Audit Committee, assumes an oversight role with respect to
the preparation of the financial statements.
Management recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according
to the highest standards of personal and corporate conduct. Management
has established and maintains an internal control structure that
provides reasonable assurance as to the integrity and reliability of
the financial statements, the protection of assets from unauthorized
use or disposition, and the prevention and detection of fraudulent
financial reporting.
The internal control structure provides for appropriate division of
responsibility and is documented by written policies and procedures
that are communicated to employees with significant roles in the
financial reporting process and updated as necessary. Management
continually monitors internal controls for compliance. The Company
maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends
possible improvements.
Deloitte & Touche LLP, independent auditors, with direct access to
the Board of Directors through its Audit Committee, have audited the
consolidated financial statements prepared by the Company, and their
report follows.
Management has considered recommendations from the internal auditors
and Deloitte & Touche LLP concerning the internal control structure and
has taken actions that are cost-effective in the circumstances to
respond appropriately to these recommendations. Management further
believes the controls are adequate to accomplish the objectives
discussed herein.
- -------------------------------------------------------------------------------
Independent Auditors' Report
To the Stockholders and Board of Directors of
The Dow Chemical Company:
We have audited the accompanying consolidated balance sheets of The Dow
Chemical Company and its subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders'
equity, comprehensive income and cash flows for each of the three years
in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed at Item 14(a)2. These financial
statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The Dow
Chemical Company and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Midland, Michigan
February 10, 1999
<PAGE>
--- Page 26 ---
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
In millions, except for per share amounts 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $18,441 $20,018 $20,053
- --------------------------------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 13,799 14,679 14,108
Insurance and finance company operations, pretax income (112) (113) (78)
Research and development expenses 807 785 761
Selling, general and administrative expenses 1,666 1,880 2,136
Amortization of intangibles 88 61 39
Purchased in-process research and development 349 - -
Special charges 458 - -
------------------------------------------------------------------------------------------
Total operating costs and expenses 17,055 17,292 16,966
- --------------------------------------------------------------------------------------------
Operating Income 1,386 2,726 3,087
- --------------------------------------------------------------------------------------------
Other Income
Equity in earnings of nonconsolidated affiliates 64 75 66
Sundry income - net 916 436 339
------------------------------------------------------------------------------------------
Total other income 980 511 405
- --------------------------------------------------------------------------------------------
Earnings before Interest, Income Taxes and Minority Interests 2,366 3,237 3,492
- --------------------------------------------------------------------------------------------
Interest income (139) (182) (290)
Interest expense and amortization of debt discount 493 471 494
- --------------------------------------------------------------------------------------------
Income before Income Taxes and Minority Interests 2,012 2,948 3,288
- --------------------------------------------------------------------------------------------
Provision for income taxes 685 1,041 1,187
Minority interests' share in income 17 99 194
Preferred stock dividends 6 6 7
- --------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $1,304 $1,802 $1,900
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Weighted-average Common Shares Outstanding - Basic 223.5 230.6 246.3
Weighted-average Common Shares Outstanding - Diluted 227.3 234.8 250.9
- --------------------------------------------------------------------------------------------
Per Share Data
Earnings per common share - basic $5.83 $7.81 $7.71
Earnings per common share - diluted 5.76 7.70 7.60
Common stock dividends declared per share 3.48 3.36 3.00
- --------------------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
--- Page 27 ---
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31
In millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- --------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $123 $235
Marketable securities and interest-bearing deposits 267 302
Accounts and notes receivable:
Trade (less allowance for doubtful receivables -
1998, $93; 1997, $73) 2,787 3,257
Other 1,750 1,701
Inventories:
Finished and work in process 2,245 2,309
Materials and supplies 565 612
Deferred income tax assets - current 303 224
------------------------------------------------------------------------------------------
Total current assets 8,040 8,640
- --------------------------------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of nonconsolidated affiliates 1,311 1,206
Other investments 2,191 2,529
Noncurrent receivables 424 400
------------------------------------------------------------------------------------------
Total investments 3,926 4,135
- --------------------------------------------------------------------------------------------
Property
Property 24,435 23,345
Less accumulated depreciation 15,988 15,293
------------------------------------------------------------------------------------------
Net property 8,447 8,052
- --------------------------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization -
1998, $246; 1997, $211) 1,641 1,762
Deferred income tax assets - noncurrent 684 452
Deferred charges and other assets 1,092 999
------------------------------------------------------------------------------------------
Total other assets 3,417 3,213
- --------------------------------------------------------------------------------------------
Total Assets $23,830 $24,040
- --------------------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
--- Page 28 ---
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION> December 31
In millions, except for share amounts 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ 1,526 $ 1,656
Long-term debt due within one year 300 406
Accounts payable:
Trade 1,682 1,731
Other 981 960
Income taxes payable 290 192
Deferred income tax liabilities - current 71 100
Dividends payable 192 200
Accrued and other current liabilities 1,800 1,766
------------------------------------------------------------------------------------------
Total current liabilities 6,842 7,011
- --------------------------------------------------------------------------------------------
Long-Term Debt 4,051 4,196
- --------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 747 649
Pension and other postretirement benefits - noncurrent 1,903 1,840
Other noncurrent obligations 2,283 1,993
------------------------------------------------------------------------------------------
Total other noncurrent liabilities 4,933 4,482
- --------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 532 676
- --------------------------------------------------------------------------------------------
Temporary Equity
Temporary equity - other - 9
Preferred stock (authorized 250,000,000 shares of $1.00
par value each; issued Series A - 1998: 1,360,813;
1997: 1,438,084) at redemption value 117 124
Guaranteed ESOP obligation (74) (84)
------------------------------------------------------------------------------------------
Total temporary equity 43 49
- --------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock (authorized 500,000,000 shares of $2.50
par value each; issued 1998 and 1997: 327,125,854) 818 818
Additional paid-in capital 718 532
Retained earnings 12,887 12,357
Accumulated other comprehensive income (347) (146)
Treasury stock, at cost (shares 1998: 106,749,081;
1997: 101,658,109) (6,647) (5,935)
------------------------------------------------------------------------------------------
Net stockholders' equity 7,429 7,626
- --------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,830 $24,040
- --------------------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
--- Page 29 ---
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
In millions 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock
Balance at beginning and end of year $ 818 $ 818 $ 818
- --------------------------------------------------------------------------------------------
Additional Paid-in Capital
Balance at beginning of year 532 307 315
Issuance of treasury stock at more (less) than cost 185 220 (21)
Proceeds from sales of put options 1 5 13
------------------------------------------------------------------------------------------
Balance at end of year 718 532 307
- --------------------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 12,357 11,323 10,159
Net income before preferred stock dividends 1,310 1,808 1,907
Preferred stock dividends declared (6) (6) (7)
Common stock dividends declared (774) (768) (736)
------------------------------------------------------------------------------------------
Balance at end of year 12,887 12,357 11,323
- --------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income
Unrealized Gains on Investments
Balance at beginning of year 316 192 62
Unrealized gains (losses) (186) 124 130
------------------------------------------------------------------------------------------
Balance at end of year 130 316 192
------------------------------------------------------------------------------------------
Cumulative Translation Adjustments
Balance at beginning of year (429) (363) (349)
Translation adjustments 15 (66) (14)
------------------------------------------------------------------------------------------
Balance at end of year (414) (429) (363)
------------------------------------------------------------------------------------------
Minimum Pension Liability
Balance at beginning of year (33) (22) -
Adjustments (30) (11) (22)
------------------------------------------------------------------------------------------
Balance at end of year (63) (33) (22)
- --------------------------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year (5,935) (4,301) (3,644)
Purchases (742) (1,655) (1,243)
Reclassification related to put options 9 (9) 313
Issuance to employees and employee plans 21 30 273
------------------------------------------------------------------------------------------
Balance at end of year (6,647) (5,935) (4,301)
- --------------------------------------------------------------------------------------------
Net Stockholders' Equity $ 7,429 $ 7,626 $ 7,954
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
In millions 1998 1997 1996
- --------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $ 1,304 $ 1,802 $ 1,900
- --------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax (Tax amounts
shown below for 1998, 1997, 1996)
Unrealized gains on investments:
Unrealized holding gains (losses) during the period
(less tax of $(66), $56, $70) (193) 124 130
Less: Reclassification adjustments for net gains
included in net income (less tax of $4 for 1998) 7 - -
Cumulative translation adjustments
(less tax of $47, $(23), $(14) 15 (66) (14)
Minimum pension liability adjustments
(less tax of $(17), $(9), $(11) (30) (11) (22)
------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (201) 47 94
- --------------------------------------------------------------------------------------------
Comprehensive Income $ 1,103 $ 1,849 $ 1,994
- --------------------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
--- Page 30 ---
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
In millions 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income available for common stockholders $ 1,304 $ 1,802 $ 1,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,305 1,297 1,329
Purchased in-process research and development 349 - -
Provision for deferred income tax (15) 150 306
Undistributed earnings of nonconsolidated
affiliates (16) (21) 29
Minority interests' share in income 17 99 194
Net gain on sales of consolidated companies (726) (189) -
Net gain on sales of property (47) (49) (11)
Other net (gain) loss 10 (39) (67)
Changes in assets and liabilities that provided
(used) cash:
Accounts receivable 564 (275) (53)
Inventories 52 56 123
Accounts payable (10) 193 (54)
Other assets and liabilities 159 629 (297)
------------------------------------------------------------------------------------------
Cash provided by operating activities 2,946 3,653 3,399
- --------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (1,546) (1,198) (1,344)
Proceeds from sales of property 96 117 126
Purchases of consolidated companies (808) (1,692) (409)
Proceeds from sales of consolidated companies 1,300 907 -
Purchases from outside investors in limited partnerships (210) (909) -
Proceeds from outside investors in limited partnerships 200 - -
Investments in nonconsolidated affiliates (75) (218) (652)
Proceeds from sales of nonconsolidated affiliates - - 209
Purchases of investments (1,722) (1,920) (1,934)
Proceeds from sales of investments 1,670 1,630 1,805
------------------------------------------------------------------------------------------
Cash used in investing activities (1,095) (3,283) (2,199)
- --------------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable (206) 700 50
Payments on long-term debt (549) (665) (586)
Proceeds from issuance of long-term debt 218 238 298
Purchases of treasury stock (742) (1,655) (1,243)
Proceeds from sales of common stock 142 192 255
Distributions to minority interests (33) (72) (155)
Dividends paid to stockholders (786) (758) (749)
------------------------------------------------------------------------------------------
Cash used in financing activities (1,956) (2,020) (2,130)
- --------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (7) (18) (6)
- --------------------------------------------------------------------------------------------
Summary
Decrease in cash and cash equivalents (112) (1,668) (936)
Cash and cash equivalents at beginning of year 235 1,903 2,839
------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 123 $ 235 $ 1,903
- --------------------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
--- Page 31 ---
</TABLE>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
Table of Contents
Note Page
A Summary of Significant Accounting Policies and Accounting
Changes 32
B Purchased In-process Research and Development and Special
Charges 35
C Acquisitions and Divestitures 36
D Income Taxes 37
E Inventories 38
F Significant Nonconsolidated Affiliates and Related Company
Transactions 39
G Property 39
H Leased Property 40
I Notes Payable, Long-Term Debt and Available Credit Facilities
40
J Financial Instruments 41
K Limited Partnerships 43
L Stockholders' Equity 43
M Stock Compensation Plans 44
N Redeemable Preferred Stock 46
O Pension Plans and Other Postretirement Benefits 46
P Commitments and Contingent Liabilities 49
Q Supplementary Information 51
R Operating Segments and Geographic Areas 52
A Summary of Significant Accounting Policies and Accounting Changes
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of The Dow Chemical
Company and its subsidiaries (the Company) include the assets,
liabilities, revenues and expenses of all majority-owned subsidiaries
over which the Company exercises control, and for which control is
other than temporary. Intercompany transactions and balances are
eliminated in consolidation. Investments in nonconsolidated affiliates
(20-50 percent owned companies and majority-owned subsidiaries over
which the Company does not exercise control) are accounted for on the
equity basis.
Certain reclassifications of prior years' amounts have been made to
conform to the presentation adopted for 1998.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company's financial statements
include amounts that are based on management's best estimates and
judgments. Actual results could differ from those estimates.
Earnings per Common Share
The calculation of earnings per common share is based on the weighted-
average number of common shares outstanding during the applicable
period. The calculation for diluted earnings per common share reflects
the effect of all dilutive potential common shares that were
outstanding during the respective periods.
Foreign Currency Translation
The local currency has been primarily used as the functional currency
throughout the world. Translation gains and losses of those operations
that use local currency as the functional currency, and the effects of
exchange rate changes on transactions designated as hedges of net
foreign investments, are included in "Accumulated other comprehensive
income." Where the U.S. dollar is used as the functional currency,
foreign currency gains and losses are reflected in income.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and readily marketable
securities with original maturities of three months or less.
<PAGE>
--- Page 32 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
A Summary of Significant Accounting Policies and Accounting Changes
(Continued)
Financial Instruments
Interest differentials on swaps and forward rate agreements designated
as hedges of exposures to interest rate risk are recorded as
adjustments to expense over the contract periods. Premiums for early
termination of interest derivatives designated as hedges are amortized
as adjustments to expense over the original contract periods. Interest
derivatives not designated as hedges are marked-to-market at the end
of each accounting period.
Forward points on foreign exchange forward contracts designated as
hedges of foreign exchange risk are amortized over the lives of the
contracts. Realized and unrealized gains and losses on foreign
exchange transactions that are designated and effective as hedges are
recognized in the same period as the hedged transaction. The carrying
amounts of foreign currency options and option combinations are
adjusted for changes in fair value at each balance sheet date. Foreign
exchange contracts not designated as hedges are marked-to-market at
the end of each accounting period.
The Company enters into various commodity contracts, including
futures, options and swap agreements to hedge its purchase of
commodity products used in the Company's business. These contracts are
predominantly settled in cash. For those contracts that are designated
and effective as hedges, gains and losses are accounted for as part of
the basis of the related commodity purchases. For contracts accounted
for as hedges that are terminated before their maturity date, gains
and losses are deferred and included in the basis of the related
commodity purchases. Commodity contracts not accounted for as hedges
are marked-to-market at the end of each accounting period with the
related gains and losses recognized in income.
The Company calculates the fair value of financial instruments using
quoted market prices whenever available. When quoted market prices are
not available for various types of financial instruments (such as
forwards, options and swaps), the Company uses standard pricing
models, which take into account the present value of estimated future
cash flows.
Investments
Investments in debt and marketable equity securities, including
warrants, are classified as either trading, available-for-sale, or
held-to-maturity. Investments classified as trading are reported at
fair value with unrealized gains and losses included in income.
Investments classified as available-for-sale are reported at fair
value with unrealized gains and losses recorded in "Accumulated other
comprehensive income." Investments classified as held-to-maturity are
recorded at amortized cost.
The excess of the cost of investments in subsidiaries over the
values assigned to assets and liabilities acquired is shown as
goodwill, which is amortized on a straight-line basis over its
estimated useful life with a maximum of 40 years.
The Company evaluates long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
When it is probable that undiscounted future cash flows will not be
sufficient to recover an asset's carrying amount, the asset is written
down to its fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to
sell.
The cost of investments sold is determined by specific
identification.
Property
Land, buildings and equipment, including property under capital lease
agreements, are carried at cost less accumulated depreciation.
Depreciation is based on the estimated service lives of depreciable
assets and is generally provided using the declining balance method
for assets capitalized through 1996 and using the straight-line method
for assets capitalized beginning in 1997. Fully depreciated assets are
retained in property and depreciation accounts until they are removed
from service. In the case of disposals, assets and related
depreciation are removed from the accounts and the net amounts, less
proceeds from disposal, are included in income.
Environment
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. These accruals are adjusted periodically as assessment
and remediation efforts progress or as additional technical or legal
information becomes available. Accruals for environmental liabilities
are generally included in the balance sheet as "Other noncurrent
obligations" at undiscounted amounts. Accruals for related insurance
or other third party recoveries for environmental liabilities are
recorded when it is probable that a recovery will be realized, and are
included in the balance sheet as "Noncurrent receivables."
<PAGE>
--- Page 33 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
A Summary of Significant Accounting Policies and Accounting Changes
(Continued)
Environmental costs are capitalized if the costs extend the life of
the property, increase its capacity, and/or mitigate or prevent
contamination from future operations. Costs related to environmental
contamination treatment and cleanup are charged to expense. Estimated
future incremental operations, maintenance and management costs
directly related to remediation are accrued when such costs are
probable and estimable.
Inventories
Inventories are stated at the lower of cost or market. The method of
determining cost is used consistently from year to year at each
subsidiary and varies among the last-in, first-out (LIFO) method; the
first-in, first-out (FIFO) method; and the average cost method.
Income Taxes
The Company accounts for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities using enacted
rates.
Annual tax provisions include amounts considered sufficient to pay
assessments that may result from examinations of prior year tax
returns; however, the amount ultimately paid upon resolution of issues
raised may differ from the amounts accrued. Provision is made for
taxes on undistributed earnings of foreign subsidiaries and related
companies to the extent that such earnings are not deemed to be
permanently invested.
Accounting Changes
In 1998, the Company adopted the following new accounting
pronouncements:
- Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," establishes standards for reporting
and display of comprehensive income. Consolidated Statements of
Comprehensive Income are now included as part of the Company's
consolidated financial statements.
- SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," redefines how operating segments are determined
and requires disclosure of certain financial and descriptive
information. Prior periods have been restated to comply with the new
requirement. See Note R.
- SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," modifies the required disclosures related to
pensions and other postretirement benefits. See Note O.
In addition, the Company is evaluating the impact of certain
accounting standards that will be adopted in future reporting periods
as follows:
- The American Institute of Certified Public Accountants (AICPA)
has issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This
standard requires capitalization of certain internal-use computer
software costs. SOP 98-1, effective for fiscal years beginning after
December 15, 1998, was adopted by the Company on January 1, 1999. The
Company currently expenses such costs as incurred; therefore, adoption
of this statement will result in a favorable initial impact on
earnings, although the effect is expected to be immaterial.
- The AICPA has issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial
reporting of start-up costs and organization costs, requiring those
costs to be expensed as incurred. The Company's existing policy
regarding the treatment of these costs is substantially consistent
with SOP 98-5; therefore, adoption of this standard on January 1,
1999, is not expected to have a material impact on the Company's
consolidated financial statements.
- The Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, which is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, requires an entity to recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Company will adopt this standard on January 1, 2000, and has not yet
determined the impact of adoption on its consolidated financial
statements.
<PAGE>
--- Page 34 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
A Summary of Significant Accounting Policies and Accounting Changes
(Continued)
In 1997 and 1996, the Company adopted the following accounting
changes:
- For property released to operations beginning January 1, 1997,
the Company changed from an accelerated method to the straight-line
method of depreciation. The change reflects improvements in the
Company's engineering and maintenance practices which result in
property not being subject to high maintenance costs or substantially
reduced productivity in the later years of its useful life. In
addition, the change to the straight-line method conforms to
predominant industry practice. This change did not have a material
effect on 1997 income.
- SOP 96-1, "Environmental Remediation Liabilities," requires the
accrual of future incremental operations, maintenance and management
costs directly related to remediation. The Company's adoption of SOP
96-1 did not have a material effect on 1997 income.
- The Emerging Issues Task Force of the FASB reached consensus on
Issue No. 96-11, "Accounting for Forward Contracts and Purchased
Options to Acquire Securities Covered by SFAS No. 115." As a result,
in 1996 the Company began to account for its warrants to purchase 15
million shares of Schlumberger Limited stock at fair value as
available-for-sale securities. The impact of adopting this consensus
was to increase the carrying value of the warrants by $136, with a
corresponding increase in "Unrealized gains on investments" in
"Accumulated other comprehensive income" (net of deferred taxes of
$52).
B Purchased In-process Research and Development and Special Charges
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 meeting the above
stated criteria must be charged to expense as part of the allocation
of the purchase price of the business combination. Accordingly,
charges totaling $349 were recorded during 1998 as part of the
allocations of the purchase prices related to the acquisitions of
Sentrachem, additional common stock of Mycogen, several seed
companies, and the remaining 40 percent of DowElanco (since renamed
Dow AgroSciences LLC). 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 $55 reduction of previously recorded IPR&D
charges to comply with the SEC guidance.
The method used to determine the purchase price allocations for
IPR&D was an income or cash flow method. The calculations were based
on estimates of operating earnings, capital charges (representing the
effect of capital expenditures), trade name royalties, charges for
core technology, and working capital requirements to support the cash
flows attributed to the technologies. The after tax cash flows were
bifurcated to reflect the stage of development of each technology.
Discount rates reflecting the stage of development and the risk
associated with each technology were used to value IPR&D. The Company
has substantial experience in research and development projects for
new products, which enables it to establish realistic time frames for
the completion of such projects; therefore, the Company believes there
is limited risk that the projects described below will not be
concluded within reasonable proximity to the expected completion
dates.
The allocation of the purchase price of Sentrachem (see Note C)
resulted in the recording of an IPR&D charge of $50, which has been
included in the Performance Chemicals and Agricultural Products
segments (see Note R). Projects associated with the technology
acquired included process development of a selective herbicide,
nutrient concentrates and fine chemicals. These projects ranged from
25 percent to 40 percent complete, with expected completion in years
1999 through 2004 at an estimated expected cost of $35.
Additional shares of Mycogen were acquired in two steps in 1998 as
described in Note C. In allocating the purchase price for Mycogen and
its related acquisitions of several small seed companies, the Company
recorded a $79 IPR&D charge included in the Agricultural Products
segment (see Note R). Projects associated with the technology acquired
included Bt technology, an input trait used to protect crops from
insect pests, various biotechnology projects that will enhance crop
quality or output traits, and germplasm development. These projects
ranged from 1 percent to 38 percent complete, with expected completion
in years 2001 through 2007 at an estimated expected cost of $140.
<PAGE>
--- Page 35 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
B Purchased In-process Research and Development and Special Charges
(Continued)
In 1998, the Company completed the appraisal of the technology
acquired with the purchase of Eli Lilly and Company's 40 percent
interest in DowElanco and recorded an IPR&D charge of $220 as part of
the Agricultural Products segment (see Note R). Projects associated
with the technology included naturally derived insecticides,
herbicides and fungicides, and various biotechnology projects to
enhance crops and to protect them from disease and pests. Projects
ranged from 7 percent to 94 percent complete, with expected completion
in years 1998 through 2007 at an estimated expected cost of $196.
Special Charges
In the first quarter of 1998, a special charge of $330 was recorded,
including $218 for the write-down of several assets and $112 for
severance. The asset write-downs included Radian International LLC,
Dow-United Technologies Composite Products, Inc., both of which were
subsequently sold (see Note C), and an agricultural plant in Brazil
for which the Company had initiated a process of disposition. In the
third quarter, based on changes in the estimated fair values, a $24
adjustment to the reduced values of the assets to be disposed was
recorded. These amounts are included in Unallocated and Other in Note R.
In the fourth quarter of 1998, a special charge of $152 was
recorded, principally for the closure of the magnesium business and
the associated manufacturing plant in Freeport, Texas, and additional
severance costs. The restructuring charge for magnesium included fixed
asset write-offs of $42, demolition and site closure costs of $29,
inventory write-offs of $12, and $30 for severance and other
obligations. These amounts are included in the Chemicals segment in
Note R. The closure plan is expected to be completed in 1999.
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. The plans for North America and Europe were
complete at year-end. The plan for Sentrachem is expected to be
completed in 1999. During 1998, severance costs of $138 were incurred
relative to these plans, exceeding the initial severance accrual by
$39. 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, representing an anticipated
additional headcount reduction of 180.
C Acquisitions and Divestitures
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.
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, of which $81 will be
paid over the next three years.
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.
In December 1997, Dow acquired 100 percent of Sentrachem Limited, a
global chemical company based in South Africa, for $487. This
acquisition included Hampshire Chemical (Specialty Chemicals) and
Sanachem (Agricultural Products).
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. BvS will maintain a 20 percent ownership until
the end of the restructuring period, which is expected to be June
2000. After the restructuring period, the Company will have a call
option and BvS a put option for the remaining 20 percent of BSL for an
additional investment of approximately $149. 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.
<PAGE>
--- Page 36 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
C Acquisitions and Divestitures (Continued)
In June 1997, the Company purchased the outstanding 40 percent share
in DowElanco, an agricultural products joint venture, from Eli Lilly
and Company for $900 plus Lilly's share of undistributed earnings.
This transaction resulted in the Company owning 100 percent of
DowElanco (since renamed Dow AgroSciences LLC).
In June 1997, the Company completed the sale of its 45 million
shares of Destec Energy, Inc. to NGC Acquisition Corporation for $974
or $21.65 per share. This transaction resulted in a pretax gain of $189.
Through the sales of shares in Oasis Pipeline in June and November
1996, the Company reduced its ownership from 70 percent to 30 percent,
recognizing pretax gains of $43 and $77, respectively.
In April 1996, Dow and E.I. DuPont de Nemours and Company formed,
through the transfer of net assets and existing businesses, a 50:50
joint venture named DuPont Dow Elastomers L.L.C. This company focuses
on the discovery, development, production and sale of thermoset and
thermoplastic elastomer products. The book value of the net assets
transferred by the Company was $527.
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 to provide environmental services. In January 1998,
HSB exercised a put option requiring the Company to purchase HSB's
interest for $136. 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.
In January 1996, the Company acquired an 80 percent share in
EniChem's INCA International S.p.A. subsidiary, a producer of
polyethylene terephthalate (PET) resin and its major precursor,
purified terephthalic acid (PTA). The investment by the Company was
$155.
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, 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 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. 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.
See Note B regarding certain charges recorded during 1998 related to
acquisitions and divestitures.
D Income Taxes
Operating loss carryforwards at December 31, 1998, amounted to $895 of
which $91 is subject to expiration in the years 1999 through 2003. The
remaining balances expire in years beyond 2003 or have an indefinite
carryforward period.
Tax credit carryforwards at December 31, 1998, amounted to $53 of
which $48 is subject to expiration in the years 1999 through 2003. The
remaining balances expire in years beyond 2003 or have an indefinite
carryforward period.
Undistributed earnings of foreign subsidiaries and related companies
which are deemed to be permanently invested amounted to $3,266, $3,458
and $3,338 at December 31, 1998, 1997 and 1996, respectively. It is
not practicable to calculate the unrecognized deferred tax liability
on those earnings.
The valuation allowance decreased by $90 in 1998 primarily due to
the reversal of beginning of the year valuation allowances in Spain
and for Mycogen. Goodwill decreased by $49 as a result of the Mycogen
adjustment.
Domestic and Foreign Components of Income before
Income Taxes and Minority Interests
1998 1997 1996
- ----------------------------------------------------------------------------
Domestic $1,066 $1,683 $1,996
Foreign 946 1,265 1,292
- ----------------------------------------------------------------------------
Total $2,012 $2,948 $3,288
- ----------------------------------------------------------------------------
<PAGE>
--- Page 37 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
D Income Taxes (Continued)
Reconciliation to U.S. Statutory Rate
1998 1997 1996
- ----------------------------------------------------------------------------
Taxes at U.S. statutory rate $704 $1,032 $1,151
Adjustment of deferred taxes on basis differences - - 64
Amortization of nondeductible intangibles 13 13 17
Foreign rates other than 35% 21 80 45
U.S. tax effect of foreign earnings and dividends (82) (83) (75)
Other - net 29 (1) (15)
- ----------------------------------------------------------------------------
Total tax provision $685 $1,041 $1,187
- ----------------------------------------------------------------------------
Effective tax rate 34.0% 35.3% 36.1%
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Provision for Income Taxes
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $329 $(44) $285 $476 $ 55 $ 531 $499 $127 $ 626
State and local 23 15 38 13 5 18 35 11 46
Foreign 348 14 362 402 90 492 347 168 515
- -------------------------------------------------------------------------------------------------------------
Total $700 $(15) $685 $891 $150 $1,041 $881 $306 $1,187
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred Tax Balances at December 31
1998 1997
- ---------------------------------------------------------
Property $(881) $(893)
Tax loss and credit carryforwards 329 229
Long-term debt (19) (11)
Postretirement benefit obligations 578 577
Other accruals and reserves 254 228
Investments (1) (66)
Inventory 48 31
Other - net (138) (77)
- ---------------------------------------------------------
Subtotal $ 170 $ 18
Valuation allowance (1) (91)
- ---------------------------------------------------------
Total $ 169 $ (73)
- ---------------------------------------------------------
E Inventories
The reserves required to adjust inventories from the first-in, first-
out (FIFO) basis to the last-in, first-out (LIFO) basis at December
31, 1998 and 1997, amounted to an increase of $97 and a decrease of
$76, respectively. The inventories that were valued on a LIFO basis,
principally hydrocarbon and U.S. chemicals and plastics product
inventories, represented 35 and 34 percent of the total inventories at
December 31, 1998 and 1997, respectively.
A reduction of certain inventories resulted in the liquidation of
some quantities of LIFO inventory, which decreased pretax income by
$21 in 1998 and $1 in 1997 and increased pretax income by $40 in 1996.
<PAGE>
--- Page 38 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
F Significant Nonconsolidated Affiliates and Related Company Transactions
In May 1995, Dow Corning Corporation (Dow Corning), in which the
Company is a 50 percent shareholder, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. As a result, the Company 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 (see Note P).
The Company's investments in related companies accounted for by the
equity method at December 31, 1998 and 1997, were $1,311 and $1,206,
respectively. These amounts approximate the Company's equity in the
net assets of the companies accounted for by the equity method. The
excess of the Company's investments over its share of the investees'
net assets is considered goodwill and is amortized over the estimated
useful lives.
The summarized financial information below includes the combined
accounts of the principal companies accounted for by the equity
method: BSL, Dow Corning, DuPont Dow Elastomers L.L.C., Gurit-Essex
A.G. and Total Raffinaderij Nederland N.V. The Company's investment in
these companies was $941 and $866 at December 31, 1998 and 1997,
respectively, and its equity in their earnings was $74, $86 and $36 in
1998, 1997 and 1996, respectively, after not recognizing earnings
related to Dow Corning.
Summarized Balance Sheet Information at December 31
1998 1997
- --------------------------------------------------
Current assets $2,772 $2,759
Non-current assets 5,667 5,034
- --------------------------------------------------
Total assets $8,439 $7,793
- --------------------------------------------------
Current liabilities $1,854 $1,114
Non-current liabilities 4,028 4,466
- --------------------------------------------------
Total liabilities $5,882 $5,580
- --------------------------------------------------
Summarized Income Statement Information
1998 1997 1996
- ------------------------------------------------------------
Sales $4,492 $4,130 $3,672
Gross profit 1,047 1,203 1,159
Net income 319 402 313
- ------------------------------------------------------------
Dividends received from related companies were $48 in 1998, $53 in
1997 and $95 in 1996.
The Company has various service agreements with some of these
entities, including contracts to manage the operations of
manufacturing sites and the construction of new facilities; licensing
and technology agreements; and marketing, sales and purchase
agreements.
All other transactions with related companies, and balances due to
or from related companies, were not material.
G Property
Property at December 31 Estimated
Useful Lives
(Years) 1998 1997
- -----------------------------------------------------------------------
Land -- $ 366 $ 341
Land and waterway improvements 20-25 677 648
Buildings 5-50 2,212 2,147
Machinery and equipment 3-20 17,481 16,710
Utility and supply lines 5-20 1,419 1,380
Other 3-20 1,270 1,292
Construction in progress -- 1,010 827
- -----------------------------------------------------------------------
Total $24,435 $23,345
- -----------------------------------------------------------------------
Depreciation expense was $1,188, $1,208 and $1,259 in 1998, 1997 and
1996, respectively. Manufacturing maintenance and repair costs were
$648, $645 and $695 in 1998, 1997 and 1996, respectively. Capitalized
interest was $47, $31 and $35 in 1998, 1997 and 1996, respectively.
<PAGE>
--- Page 39 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
H Leased Property
The Company routinely leases premises for use as sales and
administrative offices, warehouses and tanks for product storage,
motor vehicles, railcars, computers, office machines and equipment
under operating leases. In addition, gas turbines at two U.S.
locations are leased and a Canadian subsidiary leases an ethylene
plant. The Company has the option to purchase the ethylene plant and
certain other leased equipment and buildings at the termination of the
leases.
Rental expenses under operating leases were $408, $406 and $414 for
1998, 1997 and 1996, respectively.
Minimum Operating Lease Commitments at December 31, 1998
- --------------------------------------------------------
1999 $ 244
2000 302
2001 166
2002 130
2003 108
2004 and thereafter 1,099
- --------------------------------------------------------
Total $2,049
- --------------------------------------------------------
I Notes Payable, Long-Term Debt and Available Credit Facilities
Notes payable consist primarily of obligations due to banks with a
variety of interest rates and maturities. The notes payable
outstanding at December 31, 1998 and 1997, were $1,526 and $1,656,
respectively. The year-end weighted-average interest rates for these
notes payable were 5.46 percent and 5.80 percent, respectively,
excluding the effects of short-term borrowings in highly inflationary
countries. Included in notes payable at December 31, 1998 and 1997,
were commercial paper amounts of $301 and $474, respectively.
The average interest rate on long-term debt was 7.13 percent in 1998
compared with 7.03 percent in 1997. Annual installments on long-term
debt for the next five years are as follows: 1999, $300; 2000, $214;
2001, $285; 2002, $612; 2003, $405.
The Company had unused and available credit facilities at December
31, 1998, with various U.S. and foreign banks totaling $1,988 which
required the payment of commitment fees. Additional unused credit
facilities totaling $661 at December 31, 1998, were available for use
by foreign subsidiaries. These facilities are available in support of
commercial paper borrowings and working capital requirements.
<PAGE>
--- Page 40 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
I Notes Payable, Long-Term Debt and Available Credit Facilities
(Continued)
Long-Term Debt at December 31 1998 1997
Average Average
Rate 1998 Rate 1997
- ------------------------------------------------------------------------------
Promissory notes and debentures:
Final maturity 2002 7.81% $ 539 7.81% $ 539
Final maturity 2003 7.13% 148 7.13% 148
Final maturity 2006 and thereafter 8.50% 1,384 8.50% 1,384
Foreign bonds:
Final maturity 1998, Japanese yen - - 4.00% 154
Final maturity 1999, German mark 5.00% 179 5.00% 167
Final maturity 2000, Swiss franc 4.63% 109 4.63% 103
Final maturity 2001, Japanese yen 6.38% 218 6.38% 192
Final maturity 2003, Euro 5.00% 175 - -
Other facilities - various rates and
maturities:
U.S. dollar loans - 163 - 400
Foreign currency loans - 112 - 225
Dow ESOP, final maturity 2004 9.42% 74 9.42% 84
Medium-term notes, varying
maturities 1999-2022 - 342 - 362
Pollution control/industrial revenue bonds,
varying maturities 1999-2028 - 856 - 831
Unexpended construction funds - - - (2)
Capital lease obligations - 53 - 16
Unamortized debt discount - (1) - (1)
Long-term debt due within one year - (300) - (406)
- ------------------------------------------------------------------------------
Total $4,051 $4,196
- ------------------------------------------------------------------------------
J Financial Instruments
Investments
The proceeds from sales of available-for-sale securities were $1,960
and $1,934 and the sales resulted in gross realized gains of $120 and
$137 and losses of $54 and $42 in 1998 and 1997, respectively.
The Company's investments in marketable securities are primarily
classified as available-for-sale. Maturities for the substantial
majority of debt securities were less than five years at December 31,
1998 and 1997.
Risk Management
The Company's risk management program for both interest rate risk and
foreign currency is based on fundamental, mathematical and technical
models that take into account the implicit cost of hedging. Risks
created by derivative instruments and the mark-to-market valuations of
positions are strictly monitored at all times. The Company uses value
at risk and stress tests to monitor risk. Because the counterparties
to these contracts are major international financial institutions,
credit risk arising from these contracts is not significant and the
Company does not anticipate any such losses. The net cash requirements
arising from risk management activities are not expected to be
material. The Company's overall financial strategies and impacts from
using derivatives in its risk management program are reviewed
periodically with the Finance Committee of the Company's Board of
Directors and revised as market conditions dictate.
The Company's global orientation in diverse businesses with a large
number of diverse customers and suppliers minimizes concentrations of
credit risk. No significant concentration of credit risk existed at
December 31, 1998.
Interest Rate Risk Management
The Company enters into various interest rate contracts with the
objective of lowering funding costs, diversifying sources of funding
or altering interest rate exposures related to debt and lease
obligations. In these contracts, the Company agrees with other parties
to exchange, at specified intervals, the difference between fixed and
floating interest amounts calculated on an agreed-upon notional
principal amount.
<PAGE>
--- Page 41 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
J Financial Instruments (Continued)
The notional principal amounts on all types of interest derivative
contracts at December 31, 1998 and 1997, totaled $2,673 and $2,858
with a weighted-average remaining life of 5.8 years and 2.9 years,
respectively. Interest rate derivatives representing hedges of debt-
related exposures resulted in unrealized gains of $11 and $5 and
losses of $55 and $21 in 1998 and 1997, respectively.
Interest Derivatives at December 31, 1998
Weighted-average Rate
Notional ---------------------
Amount Maturities Receive Pay
- -----------------------------------------------------------------------------
Receive fixed hedge $ 304 1999-2004 5.0% 4.4%
Receive floating hedge 1,595 1999-2022 5.8% 4.9%
Other 774 1999-2008 - -
- -----------------------------------------------------------------------------
Interest Derivatives at December 31, 1997
Weighted-average Rate
Notional ---------------------
Amount Maturities Receive Pay
- -----------------------------------------------------------------------------
Receive fixed hedge $ 801 1998-2004 6.8% 4.8%
Receive floating hedge 1,030 1998-2005 5.5% 6.9%
Other 1,027 1998-2001 - -
- -----------------------------------------------------------------------------
Foreign Currency Risk Management
The Company's global operations require active participation in
foreign exchange markets. The Company enters into foreign exchange
forward contracts and options to hedge various currency exposures or
create desired exposures. Exposures primarily relate to assets and
liabilities denominated in foreign currencies in Europe, Asia Pacific
and Canada; bonds denominated in foreign currencies; and economic
exposure derived from the risk that currency fluctuations could affect
the dollar value of future cash flows at the operating income level.
The primary business objective of the activity is to optimize the U.S.
dollar value of the Company's assets, liabilities and future cash
flows with respect to exchange rate fluctuations. Assets and
liabilities denominated in the same currency are netted and only the
net exposure is hedged.
At December 31, 1998 and 1997, the Company had forward contracts and
options outstanding with various expiration dates (primarily in
January of the next year) to buy, sell or exchange foreign currencies
with a U.S. dollar equivalent of $9,515 and $9,511, respectively. The
unrealized gains or losses on these contracts, based on the foreign
exchange rates at December 31, 1998 and 1997, were a loss of $7 and a
gain of $50, respectively. The effect of foreign exchange derivatives
is primarily recognized in "Sundry income-net." The effect of hedges
of net investments in subsidiaries is recognized in "Accumulated other
comprehensive income."
At December 31, 1997, the Company had cross-currency swaps
outstanding with notional principal amounts of $50 and unrealized
losses of $2. These were primarily recognized in "Sundry income-net"
and offset the gains and losses from the assets and liabilities being
hedged.
<TABLE>
<CAPTION>
Fair Value of Financial Instruments at December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 108 - - $ 108 $ 194 - - $ 194
Marketable securities:
Debt securities 1,409 $ 37 $ (10) 1,436 1,376 $ 30 $ (12) 1,394
Equity securities 488 119 (25) 582 467 91 (32) 526
Other 63 182 - 245 60 672 (150) 582
- ---------------------------------------------------------------------------------------------------------
Total $ 2,068 $338 $ (35) $ 2,371 $ 2,097 $793 $(194) $ 2,696
- ---------------------------------------------------------------------------------------------------------
Long-term debt including debt
due within one year $(4,351) - $(516) $(4,867) $(4,602) - $(422) $(5,024)
- ---------------------------------------------------------------------------------------------------------
Derivatives relating to:
Foreign currency - $ 90 $ (97) $ (7) - $135 $( 85) $ 50
Interest rates - 12 (59) (47) - 5 (21) (16)
Cross-currency swaps - - - - - - (2) (2)
- ---------------------------------------------------------------------------------------------------------
Cost approximates fair value for all other financial instruments.
</TABLE>
<PAGE>
--- Page 42 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
K Limited Partnerships
In April 1993, three wholly owned subsidiaries of the Company
contributed assets with an aggregate fair value of $977 to Chemtech
Royalty Associates L.P. (Chemtech), a then newly formed Delaware
limited partnership. In 1993, outside investors acquired limited
partner interests in Chemtech totaling 20 percent in exchange for
$200.
In early 1998, a subsidiary of the Company purchased the limited
partner interests of the outside investors in Chemtech for a fair
value of $210 in accordance with windup provisions in the partnership
agreement. The limited partnership was renamed Chemtech II L.P.
(Chemtech II). In June 1998, the Company contributed assets with an
aggregate fair value of $783 (through a wholly owned subsidiary) to
Chemtech II and an outside investor acquired a limited partner
interest in Chemtech II totaling 20 percent in exchange for $200.
Chemtech II is a separate and distinct legal entity from the Company
and its affiliates, and has separate assets, liabilities, business and
operations. The partnership has a general partner, a wholly owned
subsidiary of the Company, which directs business activities and has
fiduciary responsibilities to the partnership and its other members.
The outside investor in Chemtech II receives a cumulative annual
priority return of $13 on its investment and participates in residual
earnings.
Chemtech II will not terminate unless a termination or liquidation
event occurs. The outside investor may cause such an event to occur in
the year 2003. In addition, the partnership agreement provides for
various windup provisions wherein subsidiaries of the Company may
purchase at any time the limited partner interest of the outside
investor. Upon windup, liquidation or termination, the partners'
capital accounts will be redeemed at current fair values.
In December 1991, three wholly owned subsidiaries of the Company
contributed assets with an aggregate market value of $2 billion to
DowBrands L.P., a then newly formed Delaware limited partnership.
Outside investors made cash contributions of $45 in December 1991 and
$855 in June 1992 in exchange for an aggregate 31 percent limited
partner interest in DowBrands L.P. In July 1997, the outside
investors' limited partnership interests in DowBrands L.P. were
purchased by subsidiaries of the Company for $909.
For financial reporting purposes, the assets (other than
intercompany loans, which are eliminated), liabilities, results of
operations and cash flows of the partnerships and subsidiaries are
included in the Company's consolidated financial statements, and the
outside investors' limited partner interests are reflected as minority
interests.
L Stockholders' Equity
In 1997, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 20,000,000
shares of the Company's common stock. At December 31, 1998, the number
of shares purchased under this authorization was 12,451,000. From time
to time, the Company utilizes options as part of its stock repurchase
program. The Company's potential repurchase obligation related to
these options is reclassified from stockholders' equity to temporary
equity.
The number of treasury shares purchased, pursuant to authorization
of the Board of Directors in 1997 and prior years, was 8,099,000 in
1998, 19,538,000 in 1997 and 14,926,000 in 1996. The number of
treasury shares issued to employees under option and purchase programs
was 3,008,000 in 1998, 3,875,000 in 1997 and 5,108,000 in 1996.
There are no significant restrictions limiting the Company's ability
to pay dividends.
Gross undistributed earnings of nonconsolidated affiliates included
in retained earnings were $247 and $145 at December 31, 1998 and 1997,
respectively.
Reserved Treasury Stock at December 31
Shares (000's) 1998 1997 1996
- ---------------------------------------------------------------
Stock option plans 15,155 13,784 14,162
Employees' stock purchase plan 888 932 878
- ---------------------------------------------------------------
Total shares reserved 16,043 14,716 15,040
- ---------------------------------------------------------------
<PAGE>
--- Page 43 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
M Stock Compensation Plans
At December 31, 1998, the Company had stock-based compensation plans
under which shares or options could be granted to employees and non-
employee directors. These plans were approved by the Board of
Directors. The Company measures the compensation cost for these plans
using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Given the terms of the Company's plans, no
compensation cost has been recognized for its fixed stock option plans
and its stock purchase plan.
The Company's reported net income and earnings per share would have
been reduced had compensation cost for the Company's stock-based
compensation plans been determined using the fair value method of
accounting as set forth in SFAS No. 123, "Accounting for Stock-Based
Compensation." For purposes of estimating the fair value disclosures
below, the fair value of each stock option has been estimated on the
grant date with a binomial option-pricing model using the following
weighted-average assumptions:
1998 1997 1996
- -------------------------------------------------------------------------
Dividend yield 3.8% 4.0% 4.0%
Expected volatility 25.12% 18.36% 16.12%
Risk-free interest rate 4.54% 5.71% 6.35%
Expected life of stock option plans 7 years 7 years 7 years
Expected life of stock purchase plans .83 year .83 years .83 years
- -------------------------------------------------------------------------
The effects of using the fair value method of accounting are indicated
in the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
As Pro As Pro As Pro
Reported forma Reported forma Reported forma
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income available for
common stockholders $1,304 $1,263 $1,802 $1,774 $1,900 $1,873
Earnings per common 5.83 5.65 7.81 7.69 7.71 7.61
share - basic
Earnings per common 5.76 5.58 7.70 7.58 7.60 7.49
share - diluted
- ----------------------------------------------------------------------------------------------
</TABLE>
Employees' Stock Purchase Plans
Annually, the Board of Directors considers authorization of Employees'
Stock Purchase Plans. Most employees are eligible to purchase shares
of common stock of the Company valued at up to 10 percent of their
annual base earnings. The value is determined using the plan price
times the number of shares subscribed to by the employee. The plan
price of the stock is set at about 85 percent of market price.
Approximately 40 to 45 percent of eligible employees participated in
the plans during the last three years.
<TABLE>
<CAPTION>
Employees' Stock Purchase Plans
1998 1997 1996
- -------------------------------------------------------------------------------------------
Shares Exercise Shares Exercise Shares Exercise
(000's) Price* (000's) Price* (000's) Price*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 932 $69.00 878 $67.75 1,083 $55.00
Granted 1,157 82.50 1,338 69.00 1,229 67.75
Exercised (1,132) 71.47 (1,261) 68.13 (1,387) 57.79
Forfeited/Expired (69) 81.13 (23) 69.00 (47) 67.75
- -------------------------------------------------------------------------------------------
Outstanding and exercisable
at end of year 888 $82.50 932 $69.00 878 $67.75
- -------------------------------------------------------------------------------------------
Fair value of options granted
during the year $17.75 $15.26 $13.53
- -------------------------------------------------------------------------------------------
*Weighted-average
</TABLE>
<PAGE>
--- Page 44 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
M Stock Compensation Plans (Continued)
Stock Option Plans
Under the 1988 Award and Option Plan, a plan approved by stockholders,
the Company may grant options or shares of common stock to its
employees subject to certain annual and individual limits. Under the
1994 Non-Employee Directors' Stock Plan, the Company may grant up to
100,000 options or shares of common stock to non-employee directors.
Under both plans, the terms are fixed at the grant date. At December
31, 1998, there were 3,273,968 shares available for grant under the
1988 Plan and 90,700 shares available for grant under the 1994 Plan.
The exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is
10 years. Options under both plans vest from one to three years. In
addition, certain options granted under the 1988 Plan have performance-
based vesting provisions.
<TABLE>
<CAPTION>
Stock Options
1998 1997 1996
- -------------------------------------------------------------------------------------------
Shares Exercise Shares Exercise Shares Exercise
(000's) Price* (000's) Price* (000's) Price*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 10,348 $66.49 11,984 $62.69 15,020 $59.13
Granted 2,343 91.56 1,704 80.00 1,859 75.38
Exercised (1,794) 61.51 (3,322) 63.83 (4,682) 57.25
Forfeited/Expired (56) 61.51 (18) 63.83 (213) 42.45
- -------------------------------------------------------------------------------------------
Outstanding at end of year 10,841 $72.76 10,348 $66.49 11,984 $62.69
- -------------------------------------------------------------------------------------------
Exercisable at end of year 8,551 $67.73 8,652 $63.84 10,151 $60.42
- -------------------------------------------------------------------------------------------
Fair value of options
granted during the year $21.03 $14.52 $14.19
- -------------------------------------------------------------------------------------------
* Weighted-average
</TABLE>
<TABLE>
<CAPTION>
Stock Options at December 31, 1998
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------
Range of Shares Remaining Exercise Shares Exercise
Exercise Prices (000's) Contractual Life* Price* (000's) Price*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$41.00 to $53.00 978 3.59 years $50.40 978 $50.40
53.01 to 60.00 1,042 3.50 years 57.44 1,042 57.44
60.01 to 67.00 1,536 4.62 years 64.58 1,536 64.58
67.01 to 76.00 3,381 6.54 years 71.38 3,381 71.38
76.01 to 99.00 3,904 8.74 years 86.87 1,614 80.21
- ---------------------------------------------------------------------------------------
Total $41.00 to $99.00 10,841 6.50 years $72.76 8,551 $67.73
- ---------------------------------------------------------------------------------------
* Weighted-average
</TABLE>
Under the 1988 Plan, the Company grants deferred stock to certain
key employees. The grants vest either after a designated period of
time, generally five years, or when the Company attains specified
earnings targets. Compensation expense totaled $23, $26 and $8 for
1998, 1997 and 1996, respectively. The number of deferred shares
outstanding was 949,000, 1,293,000 and 1,216,000 for 1998, 1997 and
1996, respectively.
<PAGE>
--- Page 45 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
N Redeemable Preferred Stock
The Company has an employee stock ownership plan (the ESOP), which is
an integral part of the Salaried Employees Savings Plan.
The ESOP borrowed funds at a 9.42 percent interest rate with a final
maturity in 2004 and used the proceeds to purchase convertible
preferred stock from the Company. The preferred stock is convertible
into the Company's common stock either at a conversion rate of 1:1 if
the fair market value of the Company's common stock equals or exceeds
$86.125 per share, or at the number of shares of common stock
equivalent to $86.125 if common stock fair market value is less than
$86.125 per share, subject to the conversion conditions of the ESOP.
The preferred stock is redeemable in whole or in part at the option of
the Company at any time after January 1, 2000, at $86.125 per share,
plus an amount equal to all accrued and unpaid dividends. The dividend
yield on the preferred stock is 7.75 percent of the $86.125 redemption
value. If the Company consummates certain merger or consolidation
transactions involving the Company's common stock, the preferred stock
must be redeemed by the Company for cash at a redemption price equal
to 105 percent of the $86.125 per share redemption value, plus accrued
and unpaid dividends.
The convertible preferred stock issued to the ESOP is reported as
"Temporary Equity" in the balance sheet. Because the Company has
guaranteed the ESOP's borrowings, the principal amount of the ESOP
loan is reported as "Long-Term Debt" and a reduction of "Temporary
Equity" in the Company's balance sheet.
O Pension Plans and Other Postretirement Benefits
Pension Plans
The Company has defined benefit pension plans which cover employees in
the United States and a number of other countries. The Company's
funding policy is to contribute annually, at a rate that is intended
to approximate a level percentage of compensation for the covered
employees, to those plans where pension laws and economics either
require or encourage funding. Plan assets consist predominantly of
equity and fixed income securities of U.S. and foreign issuers, and
include Company common stock with a value of approximately $168 at
December 31, 1998.
The U.S. funded plan covering the parent company is the largest
plan. Its benefits are based on length of service and the employee's
three highest consecutive years of compensation. The weighted-average
discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit
obligations were 6.75 and 5 percent for 1998 and 7 and 5.5 percent for
1997. The assumed long-term rate of return on assets was 9.5 percent
for 1998 and 1997. All other pension plans used assumptions in
determining the actuarial present value of the projected benefit
obligations that are consistent with (but not identical to) those of
the U.S. plan.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $689, $596 and $55,
respectively, at December 31, 1998, and $587, $474 and $50,
respectively, at December 31, 1997.
U.S. employees are eligible to participate in defined contribution
plans (Employee Savings Plans) by contributing a portion of their
compensation which is matched by the Company. Defined contribution
plans also cover employees in some subsidiaries in other countries,
including Australia, France, Spain and the United Kingdom.
Contributions charged to income for defined contribution plans were
$90 in 1998, $90 in 1997 and $77 in 1996.
Other Postretirement Benefits
The Company provides certain health care and life insurance benefits
to retired employees. The Company funds most of the cost of these
health care and life insurance benefits as incurred.
The U.S. plan covering the parent company is the largest plan. The
plan provides health care benefits, including hospital, physicians'
services, drug and major medical expense coverage, and life insurance
benefits. For employees hired before January 1, 1993, the plan
provides benefits supplemental to Medicare when retirees are eligible
for these benefits. The cost of these benefits is shared by the
Company and the retiree, with the Company portion increasing as the
retiree has increased years of credited service. There is a cap on the
Company portion. The Company has the ability to change these benefits
at any time.
<PAGE>
--- Page 46 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
O Pension Plans and Other Postretirement Benefits (Continued)
For 1998, a discount rate of 6.75 percent and weighted-average medical
cost trend rates starting at 7.38 percent and declining gradually to
5.39 percent in 2004 were assumed. For 1997, the discount rate
assumption was 7 percent and the medical cost trend rate assumption
was 7.78 percent declining gradually to 5.39 percent in 2004. The
assumed long-term rate of return on assets was 9.5 percent for 1998
and 1997. All other postretirement benefit plans used assumptions in
determining the actuarial present value of accumulated postretirement
benefit obligations that are consistent with (but not identical to)
those of the U.S. parent company plan.
Increasing the assumed medical cost trend rate by 1 percentage point
in each year would increase the accumulated post-retirement benefit
obligation at December 31, 1998, by $15 and the net periodic
postretirement benefit cost for the year by $1. Decreasing the assumed
medical cost trend rate by 1 percentage point in each year would
decrease the accumulated post-retirement benefit obligation at
December 31, 1998, by $19 and the net periodic postretirement benefit
cost for the year by $1.
Net Periodic Cost for all Significant Plans
Defined Benefit Pension Plans Other Postretirement Benefits
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Service cost $ 163 $ 159 $ 160 $ 21 $ 19 $ 19
Interest cost 418 397 388 91 79 79
Expected return
on plan assets (532) (452) (423) (16) (11) (9)
Amortization of
transition obligation 7 8 8 - - -
Amortization of prior
service cost 18 19 20 (35) (39) (39)
Amortization of
unrecognized (gain) loss 11 8 11 (2) (15) (10)
- -------------------------------------------------------------------------------
Net periodic cost $ 85 $ 139 $ 164 $ 59 $ 33 $ 40
- -------------------------------------------------------------------------------
<PAGE>
--- Page 47 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
O Pension Plans and Other Postretirement Benefits (Continued)
<TABLE>
<CAPTION>
Change in Benefit Obligation, Plan Assets and Funded Status of all
Significant Plans
Other
Defined Benefit Pension Plans Postretirement Benefits
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 6,234 $5,909 $ 1,272 $ 1,138
Service cost 163 159 21 19
Interest cost 418 397 91 79
Plan participants' contributions 6 7 - -
Amendments (9) (24) 2 34
Actuarial changes in assumptions and experience 308 247 48 42
Acquisition/divestiture activity 11 62 (9) 38
Benefits paid (400) (343) (83) (76)
Currency impact 49 (180) (10) (2)
- ------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 6,780 $6,234 $ 1,332 $ 1,272
- ------------------------------------------------------------------------------------------------------------
Change in plan assets
Market value of plan assets at beginning of year $ 6,940 $5,879 $ 185 $ 123
Actual return of plan assets 938 1,151 23 22
Acquisition/divestiture activity 8 144 - -
Employer contributions 26 91 38 40
Plan participants' contributions 7 6 - -
Benefits paid (387) (331) - -
- ------------------------------------------------------------------------------------------------------------
Market value of plan assets at end of year $ 7,532 $6,940 $ 246 $ 185
- ------------------------------------------------------------------------------------------------------------
Funded status and net amount recognized
Plan assets in excess of (less than) benefit obligation $ 752 $ 706 $(1,086) $(1,087)
Unrecognized net transition obligation 23 31 1 1
Unrecognized prior service cost 156 177 (165) (215)
Unrecognized net gain (1,045) (934) (116) (164)
- ------------------------------------------------------------------------------------------------------------
Net amounts recognized in the consolidated balance sheets $ (114) $ (20) $(1,366) $(1,465)
- ------------------------------------------------------------------------------------------------------------
Net amounts recognized in the consolidated balance sheets consist of:
Accrued benefit liability $ (597) $ (480) $(1,366) $(1,465)
Prepaid benefit cost 340 379 - -
Additional minimum liability - intangible asset 44 29 - -
Accumulated other comprehensive income - pretax 99 52 - -
- ------------------------------------------------------------------------------------------------------------
Net amount recognized in the consolidated balance sheets $ (114) $ (20) $(1,366) $(1,465)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--- Page 48 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
P 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
($415 after tax) for the fourth quarter of 1993. In January 1995, Dow
Corning announced a pretax charge of $241 ($152 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 and $441, less expected insurance recoveries
of $600 and $200, 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 less
expected insurance recoveries of $1,200.
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 for 1993 and $70 for
1994.
Dow Corning reported an after tax net loss of $167 for the second
quarter of 1995 as a result of a $221 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 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.
<PAGE>
--- Page 49 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
P 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 $364 at December 31, 1998, for
environmental matters, including $9 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, $199 and
$221 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
- -------------------------------------------
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. 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.
<PAGE>
--- Page 50 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
Q Supplementary Information
Accrued and Other Current Liabilities at December 31
1998 1997
- ----------------------------------------------------
Accrued payroll $ 216 $ 334
Accrued vacations 185 188
Employee retirement plans 179 184
Interest payable 118 102
Accrued miscellaneous taxes 122 129
Insurance companies' reserves 236 194
Other 744 635
- ----------------------------------------------------
Total $1,800 $1,766
- ----------------------------------------------------
Sundry Income - Net
1998 1997 1996
- ------------------------------------------------------------
Royalty income $ 32 $ 47 $ 26
Gain on sales of assets
and securities* 841 331 249
Dividend income 1 8 25
Other - net 42 50 39
- ------------------------------------------------------------
Total $916 $436 $339
- ------------------------------------------------------------
*See Note C.
Other Supplementary Information
1998 1997 1996
- ------------------------------------------------------------
Cash payments for interest $522 $504 $496
Cash payments for income taxes 907 1,153 1,010
Provision for doubtful receivables 9 (10) 29
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Earnings Per Share Calculations
Shares in millions 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income available for
common stockholders $1,304 $1,304 $1,802 $1,802 $1,900 $1,900
Add back preferred stock
dividends - 6 - 6 - 7
- ------------------------------------------------------------------------------------------------------------
Net income for EPS calculations $1,304 $1,310 $1,802 $1,808 $1,900 $1,907
- ------------------------------------------------------------------------------------------------------------
Weighted-average common
shares outstanding 223.5 223.5 230.6 230.6 246.3 246.3
Add back effect of dilutive securities
Stock options and awards - 2.4 - 2.8 - 3.0
Converted preferred stock - 1.4 - 1.4 - 1.6
- ------------------------------------------------------------------------------------------------------------
Weighted-average common
shares for EPS calculations 223.5 227.3 230.6 234.8 246.3 250.9
- ------------------------------------------------------------------------------------------------------------
Earnings per common share $ 5.83 $ 5.76 $ 7.81 $ 7.70 $ 7.71 $ 7.60
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--- Page 51 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
R Operating Segments and Geographic Areas
The Company is a diversified, worldwide manufacturer and supplier of
more than 3,500 products. The Company's wide range of products are
used primarily as raw materials in the manufacture of customer
products and services. Industries served by the Company include
aerospace, appliance, automotive, agriculture, building and
construction, chemical processing, electronics, environmental
services, furniture, housewares, insurance and finance, oil and gas,
packaging, processed foods, pulp and paper, utilities and water
treatment.
The Company conducts its worldwide operations through 14 global
businesses, which have been aggregated into reportable operating
segments based on the nature of the products and production processes,
end-use markets, channels of distribution and regulatory environment.
The reportable operating segments are: Performance Plastics,
Performance Chemicals, Agricultural Products, Plastics, Chemicals, and
Hydrocarbons and Energy. (For a description of the operating segments
and how they are aggregated, see the Corporate Profile on pages 3-5,
which forms an integral part of the Financial Statements.) The
information shown below and on page 53 for 1996 and 1997 by operating
segment and geographic area has been restated to reflect the
implementation of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Transfers between operating segments are generally valued at cost.
Transfers of products to the Agricultural Products segment from the
other segments, however, are generally valued at market-based prices,
and the revenues generated by these transfers are shown in the table
below as "Intersegment revenues."
The Company operates 121 manufacturing sites in 32 countries. The
United States is home to 36 of these sites, representing 50 percent of
the Company's long-lived assets. The only other country with material
long-lived assets is Germany, with approximately 11 percent of the
Company's total.
The Unallocated and Other column in the table below contains the
reconciliation between the totals for reportable segments and the
Company totals. It represents the operating segments which do not meet
the quantitative threshold for determining reportable segments, New
Businesses and Consumer Products, and other corporate items not
allocated to the operating segments.
<TABLE>
<CAPTION>
Operating Segment Information
Performance Performance Agricultural Hydrocarbons Unallocated
Plastics Chemicals Products Plastics Chemicals and Energy and Other Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Sales to external
customers $5,076 $2,639 $2,352 $3,779 $2,385 $1,479 $ 731 $18,441
Intersegment revenues 15 10 - 2 42 - (69) -
Equity earnings -
nonconsolidated affiliates 20 6 (1) 14 21 9 (5) 64
IPR&D and special charges (1) - - 337 - 113 - 357 807
EBIT (2) 1,089 427 (209) 607 193 (5) 264 2,366
Total assets 4,501 2,177 3,938 3,922 2,448 1,849 4,995 23,830
Investment in nonconsolidated
affiliates 106 32 65 777 75 140 116 1,311
Depreciation and amortization 303 168 196 248 239 97 54 1,305
Capital expenditures 368 163 129 339 328 170 49 1,546
- -------------------------------------------------------------------------------------------------------------------------
1997
Sales to external customers $5,207 $2,457 $2,134 $4,170 $2,924 $2,164 $ 962 $20,018
Intersegment revenues 9 6 - 1 41 - (57) -
Equity earnings -
nonconsolidated affiliates 13 2 3 54 6 3 (6) 75
EBIT (2) 1,040 399 213 892 695 220 (222) 3,237
Total assets 4,250 1,844 3,157 4,031 2,705 2,153 5,900 24,040
Investment in nonconsolidated
affiliates 103 22 11 776 47 103 144 1,206
Depreciation and amortization 305 140 169 288 222 133 40 1,297
Capital expenditures 343 130 91 171 245 179 39 1,198
- -------------------------------------------------------------------------------------------------------------------------
1996
Sales to external customers $5,270 $2,375 $1,938 $3,929 $3,034 $2,442 $ 1,065 $20,053
Intersegment revenues 11 7 0 1 38 0 (57) -
Equity earnings -
nonconsolidated affiliates 15 4 (16) 37 1 31 (6) 66
EBIT (2) 1,224 408 304 827 755 163 (189) 3,492
Total assets 4,575 2,074 2,099 4,074 2,878 3,308 5,665 24,673
Investment in nonconsolidated
affiliates 117 11 14 625 - 465 155 1,387
Depreciation and amortization 308 173 126 272 240 161 49 1,329
Capital expenditures 251 106 135 129 319 362 42 1,344
- -------------------------------------------------------------------------------------------------------------------------
(1) See Note B for a discussion of Purchased In-Process Research and Development (IPR&D) and Special Charges.
(2) The reconciliation between "Earnings before Interest, Income Taxes and Minority Interests (EBIT)" and
"Income before Income Taxes and Minority Interests" consists of "Interest income" and "Interest expense
and amortization of debt discount," and can be found in the Consolidated Statements of Income on page 27.
</TABLE>
<PAGE>
--- Page 52 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- -------------------------------------------------------------------------------
R Operating Segments and Geographic Areas (Continued)
Geographic Area Information
Rest of
United States Europe World Total
- -------------------------------------------------------------------------------
1998
Sales to external customers $7,411 $6,355 $4,675 $18,441
Long-lived assets 4,246 2,400 1,801 8,447
- -------------------------------------------------------------------------------
1997
Sales to external customers $8,747 $6,140 $5,131 $20,018
Long-lived assets 4,219 2,334 1,499 8,052
- -------------------------------------------------------------------------------
1996
Sales to external customers $8,789 $6,351 $4,913 $20,053
Long-lived assets 4,603 2,377 1,504 8,484
- -------------------------------------------------------------------------------
<PAGE>
--- Page 53 ---
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------
Quarterly Statistics
In millions, except for per share amounts (Unaudited)
- -------------------------------------------------------------------------------
1998 1st 2nd 3rd 4th Year
- -------------------------------------------------------------------------------
Net sales $4,829 $4,857 $4,314 $4,441 $18,441
IPR&D and special charges 668 12 (24) 151 807
Operating income (loss) (112) 719 483 296 1,386
Earnings before interest, income
taxes and minority interests 751 760 564 291 2,366
Net income available for common
stockholders 421 425 314 144 1,304
Earnings per common share - basic* 1.87 1.89 1.41 .65 5.83
Earnings per common share - diluted* 1.84 1.86 1.40 .65 5.76
Common stock dividends declared
per share 0.87 0.87 0.87 0.87 3.48
Market price range of common stock:
High 101.44 101.06 98.94 100.81 101.44
Low 87.06 93.00 74.69 83.69 74.69
- -------------------------------------------------------------------------------
*Due to rounding and a declining share count, the sum of the four quarters of
1998 does not equal the earnings per common share amounts calculated for the
year.
- -------------------------------------------------------------------------------
1997 1st 2nd 3rd 4th Year
- -------------------------------------------------------------------------------
Net sales $4,992 $5,366 $4,857 $4,803 $20,018
Operating income 765 812 670 479 2,726
Earnings before interest, income
taxes and minority interests 863 1,057 741 576 3,237
Net income available for common
stockholders 452 571 422 357 1,802
Earnings per common share - basic 1.90 2.48 1.85 1.58 7.81
Earnings per common share - diluted 1.88 2.45 1.82 1.55 7.70
Common stock dividends declared
per share 0.75 0.87 0.87 0.87 3.36
Market price range of common stock:
High 84.75 90.25 95.81 102.63 102.63
Low 75.75 78.13 85.63 84.75 75.75
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
--- Page 54 ---
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no reported disagreement on any matter of accounting
principles or procedures or financial statement disclosure in 1998
with the Independent Auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors and executive officers of the
Company is contained in the definitive Proxy Statement for the Annual
Meeting of Stockholders of The Dow Chemical Company to be held on May
13, 1999, and is incorporated herein by reference. See also the
information concerning executive officers of the registrant set forth
in Part I under the caption "Executive Officers of the Registrant" in
reliance on General Instruction G to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is contained in the
definitive Proxy Statement for the Annual Meeting of Stockholders of
The Dow Chemical Company to be held on May 13, 1999, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to beneficial ownership of the common stock
as of January 30, 1999, by each Director and all Directors and
officers of the Company as a group is contained in the definitive
Proxy Statement for the Annual Meeting of Stockholders of The Dow
Chemical Company to be on held May 13, 1999, and is incorporated
herein by reference.
Information relating to any person who beneficially owns in excess
of 5 percent of the total outstanding shares of Dow common stock is
contained in the definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company to be on held May 13, 1999,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no such reportable relationships or related transactions in
1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The Company's 1998 Consolidated Financial Statements and the
Independent Auditors' Report are included in Item 8 of Part II.
2. Financial Statement Schedules.
The following Financial Statement Schedule should be read in
conjunction with the Financial Statements included in Item 8
of this Annual Report on Form 10-K:
Schedule II Valuation and Qualifying Accounts Page 57
Schedules other than the one listed above are omitted because of
the absence of the conditions under which they are required or
because the information called for is included in the Financial
Statements or Notes thereto.
<PAGE>
--- Page 55 ---
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K (Continued)
3. Exhibits -- See the Exhibit Index on pages 59 and 60 of
this Annual Report on Form 10-K for exhibits filed with this
Annual Report on Form 10-K (see below) and for exhibits
incorporated by reference.
The Company will provide a copy of any exhibit upon receipt of
a written request for the particular exhibit or exhibits
desired. All requests should be addressed to the Vice President
and Controller of the Company at the address of the Company's
principal executive offices.
The following exhibits listed on the Exhibit Index are filed
with this Annual Report on Form 10-K:
3(ii) A copy of the Bylaws of The Dow Chemical Company,
as re-adopted in full on February 11, 1999, effective
February 10, 1999.
10(p) A copy of a resolution adopted by the
Board of Directors of The Dow Chemical Company
on May 5, 1971, and most recently amended on
July 9, 1998, describing the employee
compensation program for decelerating Directors.
10(r) A copy of The Dow Chemical Company
Elective Deferral Plan as amended and restated
as of December 11, 1997.
21 Subsidiaries of The Dow Chemical Company.
23 Independent Auditors' Consent.
27.1 - 27.3 Financial Data Schedules.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1998.
The following trademarks of The Dow Chemical Company appear in this
report: Affinity, Aim, Aspun, Attane, Calibre, Curithane, D.E.H.,
D.E.N., D.E.R., Derakane, Dowanol, Dowex, Dowfax, Dowicil, Dowlex,
Dowper, Dowtherm, Drytech, Elite, The Enhancer, Ethafoam, Ethocel,
Gas/Spec, Index, Insite, Inspire, Instill, Integral, Isobind, Isonate,
Isoplast, Lifespan, Liquidow, Magnum, Maxistab, Methocel, Optim, Papi,
Peladow, Pellethane, Prevail, Primacor, Pulse, Questra, Safe-tainer,
Saran, Silk, Specflex, Spectrim, Styrofoam, Styron, Synalox, Syntegra,
Tyril, Versene, Vorante, Voranol, Zetabon
The following trademarks of Dow AgroSciences LLC appear in this
report: Clincher, Dursban, FirstRate, Fortress, Lorsban, Naturalyte,
Sentricon, Spider, Starane, Success, Supercede, Tracer
The following trademark of Dow Europe S.A. appears in this report:
Tector
The following trademark of Cargill Dow Polymers LLC apears in this
report: EcoPLA
The following registered service mark of the Chemical Manufacturers
Association appears in this report: Responsible Care
The following trademark of DuPont Dow Elastomers L.L.C. appears in
this report: Nordel
The following trademark of Essex Specialty Products, Inc., appears in
this report: Betaseal
The following trademark of FilmTec Corporation appears in this report:
FilmTec
The following trademark of Hampshire Chemical Corp. appears in this
report: Hamposyl
The following trademark of INCA International S.p.A. appears in this
report: Lighter
The following trademark of Mycogen Corporation appears in this report:
NatureGard
The following registered trademark of Solutia Inc. is used by The Dow
Chemical Company under license and appears in this report: Vydyne
<PAGE>
--- Page 56 ---
<TABLE>
SCHEDULE II
THE DOW CHEMICAL COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31
(In millions)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance Deductions Balance
at Beginning Additions to from at End
Description of Year Reserves Reserves of Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $ 73 $ 35 $15(b) $ 93
Other investments and noncurrent receivables 586 153(a) 27 712
Accumulated goodwill amortization 211 65 30 246
- --------------------------------------------------------------------------------------------------------
1997
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $ 71 $ 19 $17(b) $ 73
Other investments and noncurrent receivables 508 103(a) 25 586
Accumulated goodwill amortization 177 58 24 211
- --------------------------------------------------------------------------------------------------------
1996
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $ 53 $ 37 $19(b) $ 71
Other investments and noncurrent receivables 332 190(a) 14 508
Accumulated goodwill amortization 177 28 28 177
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
(a) Additions to reserve represent:
Charges to profit and loss $153 $103 $116
Miscellaneous other 0 0 74
-----------------------------------
$153 $103 $190
(b) Deductions represent:
Notes and accounts receivable written off $ 12 $ 9 $ 9
Credits to profit and loss 0 0 3
Miscellaneous other 3 8 7
-----------------------------------
$ 15 $ 17 $ 19
<PAGE>
--- Page 57 ---
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 15th day of March, 1999.
THE DOW CHEMICAL COMPANY
By: G. M. Lynch
----------------------------
G. M. Lynch, Vice President
and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed on the 15th day of
March, 1999 by the following persons in the capacities indicated:
F. P. Popoff W. D. Davis
- ----------------------------- ----------------------------
F. P. Popoff, Director and W. D. Davis, Director
Chairman of the Board
W. S. Stavropoulos J. L. Downey
- ----------------------------- ----------------------------
W. S. Stavropoulos, Director, J. L. Downey, Director
President and Chief Executive
Officer
J. P. Reinhard E. C. Falla
- ----------------------------- ----------------------------
J. P. Reinhard, Director, E. C. Falla, Director
Executive Vice President and
Chief Financial Officer
G. M. Lynch B. H. Franklin
- ----------------------------- ----------------------------
G. M. Lynch, Vice President B. H. Franklin, Director
and Controller
A. A. Allemang A. D. Gilmour
- ----------------------------- ----------------------------
A. A. Allemang, Director and A. D. Gilmour, Director
Vice President
J. K. Barton M. D. Parker
- ----------------------------- ----------------------------
J. K. Barton, Director M. D. Parker, Director and
Executive Vice President
D. T. Buzzelli H. T. Shapiro
- ----------------------------- ----------------------------
D. T. Buzzelli, Director H. T. Shapiro, Director
A. J. Carbone P. G. Stern
- ----------------------------- ----------------------------
A. J. Carbone, Director and P. G. Stern, Director
Executive Vice President
J. C. Danforth
- -----------------------------
J. C. Danforth, Director
<PAGE>
--- Page 58 ---
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3(i) Restated Certificate of Incorporation of The Dow Chemical
Company, incorporated by reference to Exhibit 3(a) to The
Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1992.
3(ii) A copy of the Bylaws of The Dow Chemical Company, as re-
adopted in full on February 11, 1999, effective February 10,
1999.
10(a) The Dow Chemical Company Executive Supplemental Retirement
Plan, incorporated by reference to Exhibit 10(a) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1992.
10(b) The Dow Chemical Company 1972 Option Plan, as amended
through December 31, 1982 (included as a part of and
incorporated by reference to the Prospectus contained in
Post-Effective Amendment No. 13 to The Dow Chemical
Company's Registration Statement on Form S-8, File No. 2-
44789, filed June 23, 1983).
10(c) The Dow Chemical Company 1979 Award and Option Plan, as
amended through May 1983 (included as part of and
incorporated by reference to the Prospectus contained in
Post-Effective Amendment No. 4 to The Dow Chemical Company's
Registration Statement on Form S-8, File No. 2-64560, filed
June 23, 1983), as amended April 12, 1984 (incorporated by
reference to Exhibit 10(ff) to The Dow Chemical Company
Annual Report on Form 10-K for the year ended December 31,
1984), as amended April 18, 1985 (incorporated by reference
to Exhibit 10(fff) to The Dow Chemical Company Annual Report
on Form 10-K for the year ended December 31, 1985), as
amended October 30, 1987 (incorporated by reference to
Exhibit 10(j) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1987).
10(d) The Dow Chemical Company Voluntary Deferred Compensation
Plan for Outside Directors, as amended effective as of July
1, 1994, incorporated by reference to Exhibit 10(f) to The
Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1994, as amended in the manner described
in the definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company held on May 14,
1998, incorporated by reference.
10(e) The Dow Chemical Company Executive Post Retirement Life
Insurance Program, incorporated by reference to Exhibit
10(g) to The Dow Chemical Company Annual Report on Form 10-K
for the year ended December 31, 1992.
10(f) The Dow Chemical Company Outside Directors' Pension Plan,
incorporated by reference to Exhibit 10(h) to The Dow
Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1992, as amended in the manner described
in the definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company held on May 14,
1998, incorporated by reference.
10(g) The Dow Chemical Company Dividend Unit Plan, incorporated by
reference to Exhibit 10(j) to The Dow Chemical Company
Annual Report on Form 10-K for the year ended December 31,
1992.
10(h) The Dow Chemical Company 1988 Award and Option Plan (included
as part of and incorporated by reference to the Prospectus
contained in The Dow Chemical Company's Registration
Statement on Form S-8, File No. 33-21748, filed May 16,
1988), as amended during 1991 (incorporated by reference to
Exhibit 10(k) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1991), as amended
effective as of January 1, 1997 (incorporated by reference to
Appendix A to the definitive Proxy Statement for the Annual
Meeting of Stockholders of The Dow Chemical Company held on
May 15, 1997).
10(i) The Dow Chemical Company Executive Split Dollar Life
Insurance Plan Agreement, as amended effective as of
December 19, 1994, incorporated by reference to Exhibit
10(m) to The Dow Chemical Company Annual Report on Form 10-K
for the year ended December 31, 1995.
<PAGE>
--- Page 59 ---
EXHIBIT INDEX (Continued)
EXHIBIT NO. DESCRIPTION
10(j) The Dow Chemical Company 1994 Executive Performance Plan,
incorporated by reference to the definitive Proxy Statement
for the Annual Meeting of Stockholders of The Dow Chemical
Company held on May 12, 1994.
10(k) The Dow Chemical Company 1994 Non-Employee Directors' Stock
Plan, incorporated by reference to Exhibit 10(o) to The Dow
Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1994.
10(l) A written description of the one-time grant of shares of the
common stock of The Dow Chemical Company to new non-employee
Directors, incorporated by reference to the definitive Proxy
Statement for the Annual Meeting of Stockholders of The Dow
Chemical Company held on May 11, 1995.
10(m) A written description of the 1998 Non-Employee Directors'
Stock Incentive Plan, incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company held on May 14,
1998.
10(n) A written description of compensation for Directors of The
Dow Chemical Company, incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company to be held on May
13, 1999.
10(o) A written description of the manner in which compensation is
set for the Executive Officers of The Dow Chemical Company,
incorporated by reference to the definitive Proxy Statement
for the Annual Meeting of Stockholders of The Dow Chemical
Company to be held on May 13, 1999.
10(p) A copy of a resolution adopted by the Board of Directors of
The Dow Chemical Company on May 5, 1971, and most recently
amended on July 9, 1998, describing the employee
compensation program for decelerating Directors.
10(q) The Dow Chemical Company Key Employee Insurance Program
("KEIP"), which provides benefits using insurance policies
that replace benefits otherwise payable under The Dow
Chemical Company Executive Supplemental Retirement Plan and
Company-Paid Life Insurance Plan, as referred to in the
definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company to be held on May
13, 1999, incorporated by reference.
10(r) A copy of The Dow Chemical Company Elective Deferral Plan as
amended and restated as of December 11, 1997.
21 Subsidiaries of The Dow Chemical Company.
23 Independent Auditors' Consent.
27.1 - 27.3
Financial Data Schedules.
<PAGE>
--- Page 60 ---
EXHIBIT 3 (ii)
THE DOW CHEMICAL COMPANY
BYLAWS
(As re-adopted in full on February 11, 1999, effective February 10,
1999.)
Section I
CAPITAL STOCK
Section 1.1. Certificates. Every holder of stock in the Company
shall be entitled to have a certificate signed in the name of the
Company by the Chairman of the Board of Directors or the President or
an Executive Vice President or a Vice President, and by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Company, representing the number of shares registered in
certificate form. Any or all the signatures on the certificate may be
a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Company
with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
Section 1.2. Record Ownership. The certificates of each class or
series of a class of stock shall be numbered consecutively. A record
of the name and address of the holder of each certificate, the number
of shares represented thereby and the date of issue thereof shall be
made on the Company's books. The Company shall be entitled to treat
the holder of record of any share of stock as the holder in fact
thereof, and accordingly shall not be bound to recognize any equitable
or other claim to or interest in any share on the part of any other
person, whether or not it shall have express or other notice thereof,
except as required by the laws of the State of Delaware.
Section 1.3. Transfer of Record Ownership. Transfers of stock shall
be made on the books of the Company only by direction of the person
named in the certificate or such person's attorney, lawfully
constituted in writing, and only upon the surrender of the certificate
therefor and a written assignment of the shares evidenced thereby,
which certificate shall be canceled before the new certificate is
issued.
Section 1.4. Lost Certificates. Any person claiming a stock
certificate in lieu of one lost, stolen or destroyed shall give the
Company an affidavit as to such person's ownership of the certificate
and of the facts which go to prove its loss, theft or destruction.
Such person shall also, if required by policies adopted by the Board
of Directors, give the Company a bond, in such form as may be approved
by the General Counsel or his or her staff, sufficient to indemnify
the Company against any claim that may be made against it on account
of the alleged loss of the certificate or the issuance of a new
certificate.
Section 1.5. Transfer Agents; Registrars; Rules Respecting
Certificates. The Board of Directors may appoint, or authorize any
officer or officers to appoint, one or more transfer agents and one or
more registrars. The Board of Directors may make such further rules
and regulations as it may deem expedient concerning the issue,
transfer and registration of stock certificates of the Company.
Section 1.6. Record Date. The Board of Directors may fix in advance
a date, not exceeding sixty days preceding the date of any meeting of
stockholders, payment of dividend or other distribution, allotment of
rights or change, conversion or exchange of capital stock or for the
purpose of any other lawful action, as the record date for
determination of the stockholders entitled to notice of and to vote at
any such meeting and any adjournment thereof, or to receive any such
dividend or other distribution or allotment of rights, or to exercise
the rights in respect of any such change, conversion or exchange of
capital stock, or to participate in any such other lawful action, and
in such case such stockholders and only such stockholders as shall be
stockholders of record on the date so fixed shall be entitled to such
notice of and to vote at such meeting and any adjournment thereof, or
to receive such dividend or other distribution or allotment of rights,
or to exercise such rights, or to participate in any such other lawful
action, as the case may be, notwithstanding any transfer of any stock
on the books of the Company after any such record date fixed as
aforesaid.
Section 2.1. Annual. The annual meeting of stockholders for the
election of Directors and the transaction of such other proper
business shall be held during the month of May each year at a time and
place, within or without Delaware, as determined by the Board of
Directors.
<PAGE>
--- Page 61 ---
Section II
MEETINGS OF STOCKHOLDERS
Section 2.2. Special. Special meetings of stockholders for any
purpose or purposes may be called only by the Board of Directors,
pursuant to a resolution adopted by a majority of the entire Board of
Directors, either upon motion of a Director or upon written request by
the holders of at least fifty percent of the voting power of all the
shares of capital stock of the Company then outstanding and entitled
to vote generally in the election of Directors. Any such request by
stockholders shall be delivered to, or mailed and received by, the
Secretary of the Company at the Company's principal executive offices,
shall set forth the purpose or purposes of the meeting, and shall be
in proper form. To be proper form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder(s)
propose(s) to bring before the meeting:
(a) The name and record address of each such stockholder;
(b) The class or series and number of shares of capital stock of
the Company that are owned beneficially or of record by each such
stockholder;
(c) A brief description of each proposed item of business
desired to be brought before the meeting, including the text of
any proposed amendment to the Certificate of Incorporation or
these Bylaws;
(d) A description of all arrangements or understandings between
each such stockholder and any other person or persons (including
their names) in connection with the proposal of such business by
such stockholder and any material interests of such stockholder
in such business; and
(e) A representation that such stockholder intends to appear in
person or by proxy at the meeting to bring such business before
the meeting.
At any such special meeting, only such business may be transacted as
is related to the purpose or purposes set forth in the notice of
meeting. Special meetings may be held at any place, within or without
Delaware.
Section 2.3. Notice. Written notice of each meeting of stockholders,
stating the time, place and purpose thereof, shall be mailed by the
Secretary or an Assistant Secretary not less than ten days nor more
than sixty days before such meeting to every stockholder entitled to
vote thereat.
Section 2.4. List of Stockholders. A complete list of the
stockholders entitled to vote at any meeting of stockholders, arranged
in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder, shall
be prepared by the Secretary and shall be open to the examination of
any stockholder, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to
be held, for at least ten days before the meeting and at the place of
the meeting during the whole time of the meeting.
Section 2.5. Quorum. The holders of at least fifty percent of the
issued and outstanding stock of the Company entitled to vote with
respect to any one of the purposes for which the meeting is called,
present in person or represented by proxy, shall constitute a quorum,
except as otherwise required by the General Corporation Law of
Delaware. In the event of a lack of quorum, the chairman of the
meeting or a majority in interest of the stockholders present in
person or represented by proxy may adjourn the meeting from time to
time without notice other than announcement at the meeting, until a
quorum shall be obtained. At any such adjourned meeting at which
there is a quorum, any business may be transacted that might have been
transacted at the meeting originally called.
Section 2.6. Organization. The Chairman of the Board, or, in the
absence of the Chairman of the Board, the President, or, in the
absence of both, any Executive Vice President or Vice President, shall
preside at meetings of stockholders as chairman of the meeting. The
Secretary of the Company shall act as secretary, but in the absence of
the Secretary, the chairman of the meeting may appoint a secretary.
Rules governing the procedures and conduct of meetings of stockholders
shall be determined by the chairman of the meeting.
<PAGE>
--- Page 62 ---
Section 2.7. Voting. Subject to all of the rights of the Preferred
Stock provided for by resolution or resolutions of the Board of
Directors pursuant to Article IV of the Certificate of Incorporation
or by the General Corporation Law of Delaware, each stockholder shall
be entitled to one vote, in person or by proxy (either written or as
otherwise permitted by the General Corporation Law of Delaware), for
each voting share held of record by such stockholder. The votes for
the election of Directors and, upon the demand of any stockholder the
vote upon any matter before the meeting, shall be by written ballot.
Except as otherwise required by the General Corporation Law of
Delaware or as specifically provided for in the Certificate of
Incorporation or these Bylaws, in any question or matter brought
before any meeting of stockholders (other than the election of
Directors), the affirmative vote of the holders of voting shares
present in person or by proxy representing a majority of the votes
actually cast on any such question or matter shall be the act of the
stockholders. Directors shall be elected by a plurality of the votes
of the voting shares present in person or represented by proxy at the
meeting and entitled to vote and actually cast on the election of
Directors.
Section 2.8. Inspectors of Election. In advance of any meeting of
stockholders, the Board of Directors or the chairman of the meeting
shall appoint one or more inspectors to act at the meeting and make a
written report thereof. The chairman of the meeting may designate one
or more persons as alternate inspectors to replace any inspector who
fails or is unable to act. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspector(s) shall
ascertain the number of shares outstanding and the voting power of
each, determine the shares represented at the meeting and the validity
of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspector(s), and certify
the inspectors' determination of the number of shares represented at
the meeting and the count of all votes and ballots. The inspector(s)
may appoint or retain other persons or entities to assist the
inspector(s) in the performance of the duties of the inspector(s).
Section 2.9. Notification of Annual Meeting Business. Any
stockholder may bring business before an annual meeting only if:
(a) Such stockholder is a stockholder of record on the date of
giving notice as provided for in this Section 2.9 and on the
record date for the determination of stockholders entitled to
vote at such annual meeting;
(b) Such business is properly before the meeting pursuant to the
laws of the State of Delaware; and
(c) Such stockholder complies with the notice procedures set
forth in this Section 2.9. In addition to any other applicable
requirements, for business to be properly brought before an
annual meeting by a stockholder, such stockholder must have given
timely written notice thereof in proper form to the Secretary of
the Company. To be timely, a stockholder's notice to the
Secretary must be delivered to or mailed and received at the
principal executive offices of the Company not less than 60 days
nor more than 120 days prior to the anniversary date on which the
Company first mailed its proxy materials for the prior year's
annual meeting of stockholders; provided, however, that in the
event that the annual meeting is called for a date that is not
within 30 days before or after the anniversary of the prior
year's annual meeting, notice by the stockholder in order to be
timely must be so received not later than the close of business
on the tenth day following the day on which such notice of the
date of the annual meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs. In
no event shall the public disclosure of an adjournment of an
annual meeting commence a new time period for the giving of a
stockholder's notice as described above. For purposes of
Sections 2.9 and 3.10 of these Bylaws, "public disclosure" shall
mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press, or comparable national news service or
any document publicly filed by the Company with the Securities
and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Securities Exchange Act of 1934. To be in proper form, a
stockholder's notice to the Secretary must comply with all the
same requirements that apply to special meetings of stockholders
as set forth in Section 2.2 of these Bylaws.
No business shall be conducted at an annual meeting of stockholders
except business brought before the meeting in accordance with the
procedures set forth in this Section 2.9. If the person presiding at
an annual meeting determines that business was not properly brought
before the annual meeting in accordance with the foregoing procedures,
he or she shall declare to the meeting that the business was not
properly brought before the meeting and such business shall not be
transacted.
<PAGE>
--- Page 63 ---
Section III
BOARD OF DIRECTORS
Section 3.1. Number and Qualifications. The business and affairs of
the Company shall be managed by or under the direction of its Board of
Directors. The number of Directors constituting the entire Board of
Directors shall be not less than six nor more than twenty-one, as
authorized from time to time exclusively by a vote of a majority of
the entire Board of Directors. As used in these Bylaws, the term
"entire Board of Directors" means the total authorized number of
Directors that the Company would have if there were no vacancies.
Each Director shall at all times be a holder of Common Stock of the
Company.
Section 3.2. Resignation. A Director may resign at any time by
giving written notice to the Chairman of the Board, to the President
or the Secretary. Unless otherwise stated in such notice of
resignation, the acceptance thereof shall not be necessary to make it
effective; and such resignation shall take effect at the time
specified therein or, in the absence of such specification, it shall
take effect upon the receipt thereof.
Section 3.3. Regular Meetings. Regular meetings of the Board of
Directors may be held without further notice at such time and place as
shall from time to time be determined by the Board of Directors. A
meeting of the Board of Directors for the election of officers and the
transaction of such other business as may come before it may be held
without notice immediately following the annual meeting of
stockholders.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President
or at the request in writing of one-third of the Directors then in
office.
Section 3.5. Notice of Special Meetings. Notice of the time and
place of each special meeting shall be mailed to each Director at
least two days before the meeting or telegraphed or telecopied to such
Director at least one day before the meeting. The notice need not
state the purposes of the special meeting.
Section 3.6. Place of Meetings. The Directors may hold their
meetings and have an office or offices outside of Delaware.
Section 3.7 Quorum. A majority of the total number of Directors then
holding office shall constitute a quorum. In the event of lack of a
quorum, a majority of the Directors present may adjourn the meeting
from time to time without notice, other than announcement at the
meeting, until a quorum shall be obtained.
Section 3.8. Organization. The Chairman of the Board, or, in the
absence of the Chairman of the Board, the President, or, in the
absence of both, a member of the Board selected by the members
present, shall preside at meetings of the Board. The Secretary or an
Assistant Secretary of the Company shall act as secretary, but in the
absence of the Secretary or an Assistant Secretary, the presiding
officer may appoint a secretary.
Section 3.9. Compensation of Directors. Directors shall receive such
compensation for their services as the Compensation Committee may
determine pursuant to Section 4.4(a) of these Bylaws, or as the Board
of Directors may determine. Any Director may serve the Company in any
other capacity and receive compensation therefor.
Section 3.10. Notification of Nominations. Nominations for the
election of Directors may be made by the Board of Directors or by any
stockholder entitled to vote for the election of Directors. Any
stockholder entitled to vote for the election of Directors at a
meeting may nominate persons for election as Directors only if such
stockholder complies with all the same requirements that apply to
business to be brought before an annual meeting of stockholders as set
forth in Section 2.9, and with respect to an election to be held at an
annual meeting of stockholders within the time limits specified in
such Section, but with respect to an election to be held at a special
meeting of stockholders for election of Directors, by the close of
business on the seventh day following the date on which notice of such
meeting is first given to stockholders. In addition to the
information required by Section 2.9, the required notice shall
include:
(a) A description of all arrangements or understandings between
such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination
or nominations are to be made by such stockholder;
(b) Such other information regarding each nominee proposed by
such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been
nominated, or intended to be nominated, by the Board of
Directors; and
<PAGE>
--- Page 64 ---
(c) The consent of each nominee to serve as a Director of the
Company if elected.
The person presiding at any meeting of stockholders may refuse to
acknowledge the nomination of any person not made in full compliance
with the foregoing procedure.
Section IV
COMMITTEES OF THE BOARD
Section 4.1. Creation and Organization. The standing committees of
the Board of Directors shall be an Executive Committee; an Audit
Committee; a Compensation Committee; a Committee on Directors; an
Environment, Health, Safety and Public Policy Committee; and a Finance
Committee, having the respective duties assigned to each in this
Section IV and any other duties assigned to such committee by
resolution passed by a majority of the entire Board of Directors from
time to time. Each such standing committee shall consist of one or
more Directors and such other ex officio members as the Board of
Directors shall from time to time determine. The chairman of each
standing committee shall be one of such committee's members who shall
be designated as that committee's chairman by a majority of the entire
Board of Directors. Members of each standing committee shall be
elected by a majority of the entire Board of Directors. Vacancies in
any standing committee shall be filled by a majority vote of the
entire Board of Directors. The Board of Directors may appoint
management employees of the Company or its subsidiaries to be ex
officio members of any standing committee except the Executive
Committee. Ex officio members of standing committees shall be
entitled to be present at all meetings of their respective committees
and to participate in committee discussions, but shall not be entitled
to vote or be counted for quorum purposes. Each standing committee
shall fix its own rules of procedure and shall meet where and as
provided by such rules, but the presence of a majority of its members
shall be necessary to constitute a quorum. The Board of Directors may
from time to time appoint such special committees with such powers and
such members as it may designate in a resolution or resolutions
adopted by a majority of the entire Board of Directors.
Section 4.2. Executive Committee. During the intervals between the
meetings of the Board of Directors, the Executive Committee shall
possess and may exercise all the powers of the Board of Directors in
the management and direction of the business and affairs of the
Company to the fullest extent allowed by the General Corporation Law
of Delaware, including the power and authority:
(a) To authorize the issuance of stock;
(b) To the extent authorized in a resolution or resolutions
providing for the issuance of shares of Preferred Stock adopted
by the Board of Directors, to fix the designations and any of the
preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the
Company or the conversion into, or the exchange of such shares
for, shares of any other class or any other series of any class
of stock of the Company, to fix the number of shares of any
series of Preferred Stock or to authorize the increase or
decrease of the shares of any series of Preferred Stock;
(c) To declare dividends on stock; and
(d) To adopt a certificate of ownership and merger in accordance
with the General Corporation Law of Delaware.
The Executive Committee shall consist of the officer who serves as the
chief executive officer pursuant to Section 5.17 and not fewer than
three other Directors. The Executive Committee shall keep minutes of
its meetings.
Section 4.3. Audit Committee. The Audit Committee shall:
(a) Prior to each annual meeting of stockholders, submit a
recommendation in writing to the Board of Directors for the
selection of independent auditors to be appointed by the Board of
Directors in advance of the annual meeting of stockholders and to
be submitted for ratification or rejection at such meeting;
(b) Annually consult with the independent auditors with regard
to the proposed plan of audit and from time to time consult
privately with them and also with the Corporate Auditor and the
Controller with regard to the adequacy of internal controls; and
<PAGE>
--- Page 65 ---
(c) Upon completion of the report of audit by the independent
auditors and before the date of the annual meeting of
stockholders, (i) review the financial statements of the Company,
and (ii) meet with the independent auditors and review with them
the results of their audit and any recommendations made to the
management.
Section 4.4. Compensation Committee. The Compensation Committee
shall consist of two or more members, all of whom shall be "non-
employee Directors" as defined in Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, or
any future rule of the Securities and Exchange Commission with respect
to the same subject matter, and who also comply with the rules for
eligibility to serve as members of the award and option committees
hereinafter described. The Compensation Committee may, with the
consent of the Board of Directors, delegate any portion of its
authority to a subcommittee consisting of two or more of its members.
(a) The Compensation Committee may establish rates of salary,
bonuses, retirement and other compensation for all Directors and
executive officers of the Company for purposes of the Securities
Exchange Act of 1934, as amended, or the regulations of the
Securities and Exchange Commission, and for such other personnel
as the Board of Directors may from time to time delegate to it;
provided, however, that no member of the Compensation Committee
may vote upon his or her own rate of salary or his or her own
bonus, retirement or other compensation except for such items as
are applicable to a group that also includes personnel who are
not Directors or officers, or where his or her participation in
such items is determined by formula; and
(b) The Compensation Committee shall exercise all functions of
the award and option committees under the Company's incentive and
option plans.
Section 4.5. Committee on Directors. The Committee on Directors
shall:
(a) Recommend to the Board the individuals to constitute the
nominees of the Board of Directors for election at the next
annual meeting of stockholders and who will be named as such
nominees in the proxy statement used for solicitation of proxies
by the Board;
(b) Recommend and nominate an individual for Director to fill
the unexpired term of any vacancy existing in the Board of
Directors or created by an increase in the size of the Board;
(c) Conduct continuing studies of the size and composition of
the Board of Directors and from time to time make recommendations
to the Board for enlargement or reduction in size of the Board;
and
(d) Recommend and nominate individuals for election as officers
and members of Board committees.
Section 4.6. Environment, Health, Safety and Public Policy Committee.
The Environment, Health, Safety and Public Policy Committee shall have
the authority and responsibility to assess all aspects of the
Company's environment, health and safety policies and performance, and
to make recommendations to the Board of Directors and the management
of the Company with regard to promoting and maintaining superior
standards of performance. The Environment, Health, Safety and Public
Policy Committee shall have the authority to assess any and all
aspects of the Company's decisions to determine their social impact.
Recognizing that positive perceptions of the Company's policies and
actions among its several constituencies are extremely valuable
assets, this committee will keep itself informed of these perceptions
and will recommend to the Board and management actions directed at
continually enhancing the Company's public image.
Section 4.7. Finance Committee. The Finance Committee shall have the
responsibility of periodically reviewing the financial affairs of the
Company and making recommendations to the Board of Directors
concerning the financial needs of the Company and the methods of
providing funds for such needs. The Finance Committee shall have the
authority and responsibility for each of the following, all or any of
which may be delegated to a committee of management employees of the
Company that is appointed by and reports at least three times a year
to the Finance Committee:
(a) Establish investment policy for the Dow Employees' Pension
Plan and any other pension plan or pension fund maintained by the
Company for its employees or employees of its subsidiaries
("Plans");
(b) Employ, replace, discharge and supervise, and review the
performance of trustees and investment advisers acting pursuant
to the Plans;
<PAGE>
--- Page 66 ---
(c) Enter into, modify, alter, amend and/or revoke any existing
and future trust agreement or trust relating to the Plans;
(d) Review and advise upon the investment policy of, and
performance of trustees and investment advisers acting pursuant
to or on behalf of, any pension plan or pension fund maintained
by any directly or indirectly wholly owned subsidiary or
subsidiaries of the Company for the benefit of its or their
employees or the employees of its or their subsidiaries; and
(e) Perform similar duties with respect to such other pension
plans and pension funds, and on behalf of such other entities
affiliated with the Company, as the Board of Directors from time
to time shall designate.
Section 4.8. Powers Reserved to the Board. No committee of the Board
of Directors shall have the power or authority to:
(a) Approve or adopt, or recommend to stockholders, any action
or matter expressly required by the General Corporation Law of
Delaware to be submitted to stockholders for approval; or
(b) Adopt, amend, or repeal these Bylaws.
No committee of the Board of Directors shall take any action that is
required by these Bylaws, the Certificate of Incorporation or the
General Corporation Law of Delaware to be taken by a vote of a
specified proportion of the entire Board of Directors.
Section V
OFFICERS
Section 5.1. Designation. The officers of the Company shall be a
Chairman of the Board, a President, one or more Executive Vice
Presidents, one or more Vice Presidents, a Treasurer, a Secretary, a
Controller, and a General Counsel. The Board of Directors also may
elect or appoint, or provide for the appointment of, such other
officers, assistant officers (including one or more Assistant
Treasurers, one or more Assistant Secretaries and one or more
Assistant Controllers) and agents as may from time to time appear
necessary or advisable in the conduct of the business and affairs of
the Company.
Section 5.2. Election and Term. At its first meeting after each
annual meeting of stockholders, the Board of Directors shall elect the
officers. The term of each officer shall be until the first meeting
of the Board of Directors following the next annual meeting of
stockholders and until such officer's successor is chosen and
qualified.
Section 5.3. Resignation. Any officer may resign at any time by
giving written notice to the President or the Secretary. Unless
otherwise stated in such notice of resignation, the acceptance thereof
shall not be necessary to make it effective; and such resignation
shall take effect at the time specified therein or, in the absence of
such specification, it shall take effect upon the receipt thereof.
Section 5.4. Removal. Except where otherwise expressly provided in a
contract authorized by the Board of Directors, any officer elected or
appointed by the Board of Directors may be removed at any time with or
without cause by the affirmative vote of a majority of the entire
Board of Directors.
Section 5.5. Vacancies. A vacancy in any office may be filled for
the unexpired portion of the term by the Board of Directors.
Section 5.6. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board of Directors and shall have such
other powers and perform such other duties as may be assigned by the
Board of Directors.
Section 5.7. President. The President shall have such other powers
and perform such other duties as may be assigned by the Board of
Directors.
Section 5.8. Executive Vice Presidents. The Executive Vice
Presidents shall assist the President in the management of the
business and affairs of the Company and shall perform such other
duties as may be assigned by the President or the Board of Directors.
<PAGE>
--- Page 67 ---
Section 5.9. Vice Presidents. Each Vice President shall have such
powers and perform such duties as may be assigned by the President or
the Board of Directors. The Board of Directors may designate a
Financial Vice President and one or more Vice Presidents as Senior
Vice Presidents or Group Vice Presidents.
Section 5.10. Treasurer. The Treasurer shall have charge of all
funds of the Company and shall perform all acts incident to the
position of Treasurer, subject to the control of the Board of
Directors.
Section 5.11. Assistant Treasurers. Each Assistant Treasurer shall
have such powers and perform such duties as may be assigned by the
Treasurer or the Board of Directors.
Section 5.12. Secretary. The Secretary or an Assistant Secretary
shall keep the minutes and give notices of all meetings of
stockholders and Directors and of such committees as directed by the
Board of Directors. The Secretary shall have charge of such books and
papers as the Board of Directors may require. The Secretary or any
Assistant Secretary is authorized to certify copies of extracts from
minutes and of documents in the Secretary's charge, and anyone may
rely on such certified copies to the same effect as if such copies
were originals and may rely upon any statement of fact concerning the
Company certified by the Secretary or any Assistant Secretary. The
Secretary shall perform all acts incident to the office of Secretary,
subject to the control of the Board of Directors.
Section 5.13. Assistant Secretaries. Each Assistant Secretary shall
have such powers and perform such duties as may be assigned by the
Secretary or the Board of Directors.
Section 5.14. Controller. The Controller shall be in charge of the
accounts of the Company. The Controller shall have such other powers
and perform such other duties as may be assigned by the Board of
Directors and shall submit such reports and records to the Board of
Directors as it may request.
Section 5.15. Assistant Controllers. Each Assistant Controller shall
have such powers and perform such duties as may be assigned by the
Controller or the Board of Directors.
Section 5.16. General Counsel. The General Counsel shall be in
charge of all matters concerning the Company involving litigation or
legal counseling. The General Counsel shall have such other powers
and perform such other duties as may be assigned by the Board of
Directors and shall submit such reports to the Board of Directors as
it may request.
Section 5.17. Designation of an Officer as the Chief Executive
Officer. The Board of Directors shall designate one of the elected
officers as the chief executive officer of the Company. The chief
executive officer shall be in general and active charge of the
business and affairs of the Company.
Section 5.18. Designation of an Officer as the Chief Operating
Officer. The Board of Directors may designate one of the elected
officers the chief operating officer of the Company with such powers
and duties as may be assigned by the Board of Directors.
Section 5.19. Compensation of Officers. The officers of the Company
shall receive such compensation for their services as the Compensation
Committee may determine pursuant to Section 4.4(a) of these Bylaws.
Section VI
INDEMNIFICATION
Section 6.1. Mandatory Indemnification of Directors, Officers and
Employees. The Company shall indemnify, to the full extent permitted
by the laws of the State of Delaware, any person who was or is a
defendant or is threatened to be made a defendant to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that
such person:
(a) Is or was a Director, officer or employee of the Company; or
<PAGE>
--- Page 68 ---
(b) Is or was a Director, officer or employee of the Company and
is or was serving at the request of the Company as a director,
trustee, member, officer, employee or agent of another
corporation, partnership, limited liability company, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection
with such action, suit or proceeding.
Any repeal, amendment or modification of this Section 6.1 shall not
affect any rights or obligations then existing between the Company and
any then incumbent or former Director, officer or employee with
respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in
whole or in part upon such state of facts.
Section 6.2. Permitted Indemnification of Directors, Officers,
Employees and Agents. The Company may indemnify, to the full extent
permitted by the laws of the State of Delaware, any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that
such person:
(a) Is or was a Director, officer, employee or agent of the
Company; or
(b) Is or was a Director, officer, employee or agent of the
Company and is or was serving at the request of the Company as a
director, trustee, member, officer, employee or agent of another
corporation, partnership, limited liability company, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection
with such action, suit or proceeding.
Section 6.3. Judicial Determination of Indemnification. Any
incumbent or former Director, officer or employee may apply to any
court of competent jurisdiction in the State of Delaware to order
indemnification to the extent mandated under Section 6.1 above. The
basis of such order of indemnification by a court shall be a
determination by such court that indemnification of the incumbent or
former Director, officer or employee is proper in the circumstances.
Notice of any application for indemnification pursuant to this Section
6.3 shall be given to the Company promptly upon the filing of such
application.
Section 6.4. Expenses Payable in Advance. Expenses incurred by any
Director or officer in defending or investigating a threatened or
pending action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding,
upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it ultimately shall be determined that
the Director or officer is not entitled to be indemnified by the
Company as authorized in this Section VI. Such expenses incurred by
other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
Section 6.5. Nonexclusivity. The indemnification and advancement of
expenses mandated or permitted by, or granted pursuant to, this
Section VI shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be
entitled under any Bylaw, agreement, contract, vote of stockholders or
disinterested Directors, or pursuant to the direction (howsoever
embodied) of any court of competent jurisdiction or otherwise both as
to action by the person in an official capacity and as to action in
another capacity while holding such office, it being the policy of the
Company that indemnification of the persons specified in Sections 6.1
or 6.2 above as defendants shall be made to the fullest extent
permitted by the laws of the State of Delaware. The provisions of
this Section VI shall not be deemed to preclude the indemnification of
any person who is not specified in Sections 6.1 or 6.2 above, but whom
the Company has the power or obligation to indemnify under the laws of
the State of Delaware or otherwise.
Section 6.6. Insurance. The Company may purchase and maintain
insurance on behalf of any person who is or was a Director, officer,
employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, trustee, member, employee or
agent of another corporation, partnership, limited liability company,
joint venture, trust or other enterprise against any liability
asserted against and incurred by such person in any such capacity, or
arising out of the person's status as such, whether or not the Company
would have the power or the obligation to indemnify the Director,
officer, employee or agent of the Company against such liability under
the provisions of this Section VI.
<PAGE>
--- Page 69 ---
Section 6.7. Definitions. For the purposes of this Section VI
references to "the Company" shall include, in addition to the
resulting company, any constituent company (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority
to indemnify its directors, officers, trustees, members, employees
and/or agents, so that any person who is or was a director, officer,
trustee, member, employee or agent of such constituent company, or is
or was serving at the request of such constituent company as a
director, officer, trustee, member, employee or agent of another
corporation, partnership, limited liability company, joint venture,
trust or other enterprise, shall stand in the same position under the
provisions of this Section VI with respect to the resulting or
surviving company as such person would have with respect to such
constituent company if its separate existence had continued. The term
"other enterprise" as used in this Section VI shall include employee
benefit plans. References to "fines" in this Section VI shall include
excise taxes assessed on a person with respect to an employee benefit
plan. The phrase "serving at the request of the Company" shall
include any service as a Director, officer, employee or agent of the
Company that imposes duties on, or involves services by, such
Director, officer, employee or agent with respect to any employee
benefit plan, its participants or beneficiaries.
Section 6.8. Survival. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Section VI shall
continue as to a person who has ceased to be a Director, officer,
employee or agent of the Company and shall inure to the benefit of the
heirs, executors and administrators of such person.
Section VII
MISCELLANEOUS
Section 7.1. Seal. The corporate seal shall have inscribed upon it
the name of the Company, the year "1947" and the words "Corporate
Seal" and "Delaware." The Secretary shall be in charge of the seal
and may authorize a duplicate seal to be kept and used by any other
officer or person.
Section 7.2. Waiver of Notice. Whenever any notice is required to be
given, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
Section 7.3. Voting of Stock Owned by the Company. Powers of
attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Company may be
executed in the name of and on behalf of the Company by the President,
any Executive Vice President, any Vice President or the General
Counsel. Any such officer may, in the name of and on behalf of the
Company, take all such action as any such officer may deem advisable
to vote in person or by proxy at any meeting of security holders of
any corporation in which the Company may own securities and at any
such meeting shall possess and may exercise any and all rights and
powers incident to the ownership of such securities and which, as the
owner thereof, the Company might have exercised and possessed if
present. The Board of Directors may from time to time confer like
powers upon any other person or persons.
Section 7.4. Executive Office. The principal executive office of the
Company shall be located in the City of Midland, County of Midland,
State of Michigan, where the books of account and records shall be
kept. The Company also may have offices at such other places, both
within and without Delaware, as the Board of Directors from time to
time shall determine or the business and affairs of the Company may
require.
Section VIII
AMENDMENT OF BYLAWS
Section 8.1. The Board of Directors shall have power to amend, alter,
change, adopt and repeal the Bylaws of the Company at any regular or
special meeting. The stockholders also shall have power to amend,
alter, change, adopt and repeal the Bylaws of the Company at any
annual or special meeting subject to the requirements of the
Certificate of Incorporation.
<PAGE>
--- Page 70 ---
EXHIBIT 10(p)
THE DOW CHEMICAL COMPANY
RETIREMENT POLICY FOR BOARD MEMBERS
(As re-adopted in full and restated on July 9, 1998.)
RESOLVED, that upon the recommendation of the Committee on Directors,
the following policy shall apply with respect to retirement of members
of the Board of Directors:
1. Each member of the Board of Directors who is an officer or
employee shall retire from line responsibility upon the later of
the following dates:
(a) As of the first day of the month following the Director's
sixtieth birthday; or
(b) If such an officer or employee shall have received a
significant promotion or promotions after his or her fifty-
fifth birthday, as of the first day of the month following
the fifth anniversary of the most recent such promotion, but
in no event beyond the first day of the month following his
or her sixty-fifth birthday.
2. Each member of the Board of Directors who is an officer or
employee shall have the option of retiring from his or her line
responsibility on the first of any month after attaining age
sixty, whether or not required to retire from such responsibility
pursuant to Paragraph 1 hereof.
3. Each person described in Paragraphs 1 or 2 hereof, upon retiring
from said line responsibility, shall while serving as a Director
of the Company remain on the payroll of the Company as an officer
or employee without line responsibility as a decelerating
Director, until the earlier of the following dates, such period
of time to be called deceleration:
(a) The fifth anniversary of retirement from said line
responsibility;
(b) The first day of the month following his or her sixty-fifth
birthday;
(c) The date of his or her death.
Each such person shall hold himself or herself available for
nomination to and service upon the Board of Directors at the sole
discretion of the Board during the period he or she remains on
the Company's payroll, provided that the Director's health
permits performance of such service and unless such other reason
acceptable to the Board prevents such service.
4. For services performed pursuant to Paragraph 3 hereof, the
Company shall compensate such person as follows, until the
termination of the period of service as described in Paragraph 3,
with Final Pay as a Line Employee defined as 175% of such
person's final annual base salary:
(a) First year: Ninety percent of Final Pay as a Line Employee;
(b) Second year: Eighty percent of Final Pay as a Line Employee;
(c) Third year: Seventy percent of Final Pay as a Line Employee;
(d) Fourth year: Sixty-five percent of Final Pay as a Line
Employee; and
(e) Fifth year: Sixty percent of Final Pay as a Line Employee.
<PAGE>
--- Page 71 ---
RETIREMENT POLICY FOR BOARD MEMBERS (Continued)
In any event, the compensation payable under Paragraph 4 (a)
through (e) for any Director shall not be less than the
Director's retirement benefit projected through the end of the
fifth year of deceleration, so long as service continues through
five full years of deceleration, under the applicable Dow defined
benefit retirement plan, with the same percent survivor benefit
as provided to other active employees by these plans. During
such period of service such person shall also be entitled to
participate in the same employee life and accident insurance
programs as he or she was already a participant of as of the date
deceleration began. For purposes of calculating such benefits,
the effective salary immediately prior to the date such person
relinquishes line responsibility shall be used.
In the event such person's retirement shall commence prior to the
end of the fifth year of the period of service, such person may
receive a lump sum payment in an amount equal to the net present
value of the difference, for the remaining period, between (i)
such individual's actual pension retirement benefit under the
applicable Dow defined benefit retirement plans, and (ii) the
projected retirement benefit under such plans, assuming service
through the end of the fifth year of deceleration. Under such
circumstances, such person may also receive a lump sum payment in
an amount equal to the net present value of the difference
between (i) the annual compensation payable under Paragraph 4 (a)
through (e) for the remaining period, and (ii) the actual annual
pension payable for each of such years for the remaining period.
The payments of any lump sum under this paragraph shall be
subject to the approval of the Chairman of the Compensation
Committee and the Chairman of the Board (or, the Board of
Directors in the event of any action relating to the Chairman of
the Board).
5. Each such person who shall commence services to the Company
pursuant to Paragraph 3 and who retires as an employee shall
receive retirement benefits under The Dow Chemical Company
Employees' Retirement Plan ("the Retirement Plan"), the
Retirement Supplement provided for in the resolution adopted by
this Board of Directors on December 8, 1977 ("the Retirement
Supplement Resolution"), and the Dow Employees' Stock Benefit
Plan ("DESBP"), or their successor plans subject, however, to the
following:
(a) Time spent as described in Paragraph 3 will be counted as
Credited Service under the Retirement Plan and as Vesting
Service under DESBP.
(b) Nonqualified Compensation, as determined under the
Retirement Supplement Resolution, shall be calculated for
such person as follows:
(i) The Company will determine a Theoretical Income,
defined as an estimate of the amount that such person's
salary and cash bonuses would have been if he or she
had retained line responsibility for each year during
such person's period of service as described in
Paragraph 3.
(ii) The amount of such Theoretical Income shall be used in
place of Average Annual Compensation, as defined in the
Retirement Plan, for the purpose of determining
Nonqualified Compensation, upon which a Supplement
shall be paid to such person pursuant to such
Retirement Supplement Resolution following such
person's retirement.
(c) If such person is not a member of the Retirement Plan and
DESBP but is covered by another retirement plan or plans
maintained by the Company or a subsidiary, he or she shall
receive retirement benefits from such other plan or plans. A
Supplement pursuant to the Retirement Supplement Resolution
may be computed and paid based as near as practicable upon
the principles set forth in (a) and (b) of this paragraph to
the extent that the same may be equitable.
6. Payments provided for in Paragraphs 3 and 4 hereof shall be
forfeited if the Executive Committee of the Company finds, after
a hearing at which such person shall be entitled to appear, that
such person has at any time engaged in any activity harmful to
the interests of or in competition with the Company or its
subsidiaries.
7. Each member of the Board shall retire from the Board of Directors
no later than the first day of the month following his or her
sixty-fifth birthday; provided, that a Director who has not at
any time served the Company as an officer or employee may at the
discretion of the Board of Directors continue as a member of the
Board of Directors subject to reelection by the Company's
stockholders until the annual meeting of stockholders next
succeeding his or her seventieth birthday.
<PAGE>
--- Page 72 ---
EXHIBIT 10(r)
THE DOW CHEMICAL COMPANY
ELECTIVE DEFERRAL PLAN
(Amended and Restated as of December 11, 1997
except as otherwise provided herein)
ARTICLE I
Definitions
1.1 Administrator shall mean the Retirement Board as more fully
defined in Article 13 of the Plan.
1.2 Annual Deferral shall mean the amount of Compensation which the
Participant elects to defer for a Plan Year pursuant to Articles 2 and
3 of the Plan.
1.3 Base Salary shall mean the Participant's annual basic rate of pay
from the Company (excluding Performance Awards, commissions,
relocation expenses, and other non-regular forms of compensation)
before reductions for deferrals under the Plan or the Savings Plan.
The Company may, in its sole and absolute discretion, permit portions
of severance pay to be deferred.
1.4 Beneficiary shall mean the person or persons or entity designated
as such in accordance with Article 14 of the Plan.
1.5 Change in Control shall mean either: (i) the dissolution or
liquidation of The Dow Chemical Company; (ii) a reorganization,
merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation; (iii) approval by the stockholders of the Company of
any sale, lease, exchange or other transfer (in one or a series of
transactions) of all or substantially all of the assets of the
Company; (iv) approval by the stockholders of the Company of any
merger or consolidation of the Company in which the holders of
voting stock of the Company immediately before the merger or
consolidation will not own fifty percent (50%) or more of the
outstanding voting shares of the continuing or surviving
corporation immediately after such merger or consolidation; or (v)
a change of fifty-one percent (51%) (rounded to the next whole
person) in the membership of the Board of Directors of the Company
within a twenty-four (24) month period, unless the election or
nomination for election by stockholders of each new director
within such period was approved by the vote of eighty-five percent
(85%) (rounded to the next whole person) of the directors then
still in office who were in office at the beginning of the twenty-
four month period.
1.6 Company shall mean The Dow Chemical Company.
1.7 Compensation shall mean the sum of the Participant's Base Salary
and Performance Awards for a Plan Year before reductions for
deferrals under the Plan or the Savings Plan, or other benefit
plans sponsored by the Company.
1.8 Crediting Rates shall mean either or both, as selected by the
Eligible Employee, of the following methods for determining gains
or losses on the Participant's Deferral Account, or such other
rate as determined by the Company:
(i) The Case Account Method shall mean an effective annual
rate equal to one hundred twenty-five percent (125%) of the one
hundred twenty (120) month rolling average of the Ten-Year
United States Treasury Note as determined by the Administrator
on September 30 of the preceding year. Notwithstanding the
preceding sentence, with respect to the first Plan Year, the
Crediting Rate shall be determined as of September 30, 1994.
(ii) The Stock Account Method shall mean any notional gains or
losses equal to those generated as if the Deferral Account
balance had been invested in the Common Stock of the Company,
including reinvestment of dividends, stock splits and without
brokerage fees. For purposes of determining the value of the
Common Stock of the Company, the market price and dividend rate
as of the last business day of each month shall be used
according to the rules and procedures determined by the
Administrator. Market price shall be the average of the high
and low share prices reported as of the last business day of
each month.
<PAGE>
--- Page 73 ---
ELECTIVE DEFERRAL PLAN (Continued)
The allocation of future deferrals among either or both of the
Crediting Rates shall be selected in whole increments of ten
percent (10%) by the Eligible Employee when submitting a
Participation Election. With each new Participation Election, the
Eligible Employee may elect a different allocation among the
Crediting Rates which shall apply only to the Annual Deferral
covered by that Participation Election. Once elected, the
Crediting Rates may not be changed for the Annual Deferrals
covered by the Participation Election, except as provided under
Article 6 and Article 8 of the Plan. The Participant's allocation
is solely for the purpose of calculating the Crediting Rates.
Notwithstanding the method of calculating the Crediting Rates, the
Company shall be under no obligation to purchase any investments
used for determining Crediting Rates.
1.9 Deferral Account shall mean the notional account established for
record keeping purposes for a Participant pursuant to Article 5 of
the Plan.
1.10 Disability shall mean any long-term disability as defined under
the Company's long-term disability plan. The Administrator, in its
complete and sole discretion, shall determine a Participant's
disability. The Administrator may require that the Participant
submit to an examination on an annual basis, at the expense of the
Company, by a competent physician or medical clinic selected by
the Administrator to confirm Disability. On the basis of such
medical evidence, the determination of the Administrator as to
whether or not a condition of Disability exists or continues shall
be conclusive.
1.11 Early Retirement Date shall mean the date a Participant becomes
eligible for an early retirement benefit as defined under the Dow
Employees' Pension Plan.
1.12 Elective Deferral Plan shall mean The Dow Chemical Company non-
qualified elective deferral compensation plan.
1.13 Eligible Employee shall mean a key employee of the Company or any
of its allied businesses designated as participating in the Plan
who: (i) is a United States employee or an expatriate who is
based and paid in the U.S., (ii) is a member of the functional
specialist/functional leader or global leadership job families,
(iii) has a job level of A1 or higher for Salary Plans U04, U05,
and U09; or has a job level of L2 or higher for all other Salary
Plans, (iv) is eligible for participation in the Savings Plan, (v)
is designated by the Administrator as eligible to participate in
the Plan as of September 30 for deferral of Base Salary and
Performance Awards (subject to the restriction in Articles 10.2,
11.2 and 12.2 of the Plan, and (vi) qualifies as a member of the
"select group of management or highly compensated employees" under
ERISA.
1.14 Enrollment Period shall mean the periods designated by the
Administrator for open enrollments and (i) approximately November
1-30 for elections to defer Base Salary and Performance Awards and
(ii) other such times as may be determined in the sole discretion
of the Administrator.
1.15 ERISA shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.16 Executive Awards shall mean Performance Awards paid in cash to
the Participant by the Company in the form of an annual incentive
bonus.
1.17 Financial Hardship shall mean an unexpected need for cash arising
from an illness, Disability, casualty loss, sudden financial
reversal, or other such unforeseeable occurrence as determined by
the Administrator. Cash needs arising from foreseeable events
such as the purchase of a residence or education expenses for
children shall not, alone, be considered a Financial Hardship.
1.18 Job Family shall mean the grouping of jobs within the Company
that are similar in the type of work carried out and associated
with the Eligible Employee under the Company's People Success
System.
1.19 Job Level shall mean the developmental stage of competencies
associated with the Eligible Employee under the Company's People
Success System.
1.20 Matching Credit shall mean the Company's credit to the
Participant's Deferral Account under Article 4.
1.21 Normal Retirement Date shall mean the date on which a Participant
attains age 65.
<PAGE>
--- Page 74 ---
ELECTIVE DEFERRAL PLAN (Continued)
1.22 Participant shall mean an Eligible Employee who has elected
to participate and has completed a Participation Election pursuant to
Article 2 of the Plan and shall include persons actively employed by
the Company as well as those who have terminated employment following
Normal or Early Retirement Date.
1.23 Participation Election shall mean the Participant's election to
participate in the Plan in the manner prescribed by the
Administrator, either on a form provided for enrollment or through
an automated phone enrollment system.
1.24 Performance Awards shall mean amounts paid in cash to the
Participant by the Company in the form of annual incentive
bonuses, including Executive Awards, before reductions for
deferrals under the Plan or the Savings Plan.
1.25 Plan Year shall mean the calendar year, with the first Plan Year
commencing January 1, 1995.
1.26 Other Incentive Awards shall mean incentive awards paid in cash
which are not Performance Awards or Executive Awards and which the
Administrator, in its sole and absolute discretion, may permit or
may require to be deferred.
1.27 Retirement shall mean a termination of employment following
Normal or Early Retirement Date.
1.28 Retirement Board shall mean the Board appointed under the
Dow Employees' Pension Plan and as more fully defined in Article 13.
1.29 Salary Plan shall mean a grouping of jobs based on market salary
similarities and/or related job requirements associated with the
Eligible Employee.
1.30 Savings Plan shall mean The Dow Chemical Company Salaried
Employees' Savings Plan as it currently exists and as it may
subsequently be amended.
1.31 Scheduled Withdrawal shall mean a distribution of all or a
portion of the entire amount of Annual Deferrals and Matching
Credits credited to the Participant's Deferral Account as elected
by the Participant pursuant to the provisions of Article 11 of the
Plan.
1.32 Statutory Limit shall mean any statutory or regulatory limit on
salary reduction contributions to the Savings Plan, or on
compensation taken into account in calculating employer or
employee contributions to the Savings Plan. The impact of such
limits on the Participants shall be determined by the Company
based upon its best estimates and according to procedures
determined by the Administrator. Once the Company has determined
the impact of the Statutory Limits, no adjustment shall be made to
increase deferrals or Matching Credits under this Plan as a result
of any adjustments ultimately required under the Savings Plan due
to actual employee contributions or other factors.
1.33 Termination of Employment shall mean the Participant's employment
with the Company ceases for any reason whatsoever, whether
voluntary or involuntary, other than Retirement or death.
1.34 Unscheduled Withdrawal shall mean a distribution of all or a
portion of the vested amount credited to the Participant's
Deferral Account as requested by the Participant pursuant to the
provisions of Article 11 of the Plan.
1.35 Valuation Date shall mean the last business day of the month in
which Termination of Employment, death, Scheduled Withdrawal, or
Unscheduled Withdrawal occurs. In the event of Retirement, the
Valuation Date shall mean the December 31 of the year preceding
the Plan Year in which benefit payments are to be made.
1.36 Vesting shall mean the Participant's right to receive
Compensation deferred, Matching Credits, and/or earnings thereon.
In the event of an involuntary Termination of Employment without
cause, the Company retains the right to accelerate vesting to one
hundred percent (100%).
<PAGE>
--- Page 75 ---
ELECTIVE DEFERRAL PLAN (Continued)
ARTICLE 2
Participation
2.1 Participation Election. An Eligible Employee shall become a
Participant in the Plan on the first day of the Plan Year
coincident with or next following the date the employee becomes an
Eligible Employee, provided such Eligible Employee has submitted
to the Administrator a Participation Election. To be effective,
the Eligible Employee must submit the Participation Election to
the Administrator during the Enrollment Period designated by the
Administrator. Notwithstanding the foregoing, the Administrator,
in its sole discretion, may permit a newly Eligible Employee to
submit a Participation Election within 30 days of that employee
becoming eligible, and deferrals shall commence as soon as
practical thereafter.
2.2 Annual Deferral. In the Participation Election, and subject to
the restrictions in Article 3, the Eligible Employee shall
designate the percentage rate of the Annual Deferral for the next
Plan Year. The Participation Election shall apply to compensation
earned after the date of the election and paid in the following
Plan Year. For the Plan Year commencing in 1995, the designated
percentage may be expressed in tenths of a percent. In subsequent
Plan Years, the designated percentage must be expressed in whole
percentages.
2.3 Duration of Annual Deferral. Annual Deferrals shall commence
January 1 of the covered Plan Year and shall continue through
December 31 of that Plan Year.
2.4 Continuation of Participation. An Eligible Employee who has
elected to participate in the Plan by making an Annual Deferral
shall continue as a Participant in the Plan until such employee
ceases to be an Eligible Employee. A Participant shall not be
eligible to elect a new Annual Deferral unless the Participant is
an Eligible Employee for the Plan Year for which the election is
made. In the event a Participant transfers to a subsidiary of The
Dow Chemical Company and that subsidiary does not participate in
the Plan, the Participant's Annual Deferral shall cease, and the
Participant's Deferral Account shall remain in effect until such
time as the benefits are distributed as originally elected by the
Participant in the Participation Election.
2.5 Participant Fees. An Eligible Employee who has elected to
participate in the Plan agrees to an administrative fee of twenty-
five ($25.00) per quarter that will be deducted from the
Participant's Deferral Account.
ARTICLE 3
Employee Deferrals
3.1 Deferral Election. A Participant who has elected to make pre-tax
contributions under the Savings Plan may elect an Annual Deferral
under this Plan. Such election shall designate a specified
percentage of either Base Salary and/or Performance Awards and/or
Other Incentive Awards to be deferred. Annual Deferrals under
this Plan shall be irrevocable, except as provided under Articles
9, 10, 11, and 12 of the Plan. For deferrals to occur from
Performance Awards, the Participant must be actively employed or
an eligible retiree at the time the award is paid.
3.2 Minimum Annual Deferral. The Annual Deferral must equal or exceed
a minimum established by the Administrator. Initially, the
minimum deferral from Base Salary is $2,000.00 for the first Plan
Year and 2% in subsequent Plan Years, and the minimum deferral
from Performance Awards is 2%.
3.3 Maximum Annual Deferral. The Annual Deferral from Base Salary for
a Plan Year may not exceed fifty percent (50%) of Base Salary.
The Annual Deferral from Performance Awards for a Plan Year may be
less than or equal to one hundred percent (100%) of Performance
Awards. Eligible Employees who elect to defer one hundred percent
(100%) of Performance Awards will have their Deferral Account
credited with an amount net of Social Security tax withholding.
<PAGE>
--- Page 76 ---
ELECTIVE DEFERRAL PLAN (Continued)
3.4 Election to Transfer Account Balance. Participants in the
Company's prior deferred compensation plan have the opportunity once,
upon initial eligibility and according to procedures established by
the Administrator, to transfer an existing account balance under the
previous Deferred Cash Account from the prior plan to this Elective
Deferral Plan. The transfer shall take effect as of the first day of
the Plan Year following initial eligibility. In the event of
Termination of Employment, death, or Retirement within 13 months after
the election, benefits shall be paid in accordance with the election
made by the Participant under the prior plan and not under the
Elective Deferral Plan.
3.5 Vesting. The Participant's right to receive compensation deferred
under this Article 3 shall be one hundred percent (100%) vested at
all times. For purposes of the Election to Transfer Account
Balance under Article 3.4, the amount transferred shall be one
hundred percent (100%) vested as of the date of the transfer.
ARTICLE 4
Company Matching Credits
4.1 Amount. The Company's Matching Credit in each Plan Year shall
equal fifty percent (50%) of the first six percent (6%) of Base
Salary deferred, reduced by the employer matching contributions
credited to the Participant's account under the Savings Plan.
Notwithstanding the foregoing, the sum of the Matching Credits
under the Plan plus the employer matching contributions under the
Savings Plan may not exceed fifteen thousand dollars ($15,000.00)
in each Plan Year.
4.2 Discontinuance of Matching Credits. Notwithstanding the
foregoing, if the Participant ceases maximum matchable pre-tax
contributions to the Savings Plan in any Plan Year, additional
Matching Credit shall not be credited to the Participant's
Deferral Account for the remainder of that Plan Year.
4.3 Vesting. The Participant's right to receive Matching Credits
earned in any Plan Year shall be one hundred percent (100%) vested
as of January 1 of the next Plan Year or upon death, Disability,
Retirement, Change in Control, or Termination of Plan.
ARTICLE 5
Deferral Accounts
5.1 Deferral Accounts. Solely for record keeping purposes, the
Company shall maintain a Deferral Account for each Participant.
5.2 Timing of Credits.
5.2.1 Annual Deferrals. The Company shall credit to the
Deferral Account the Annual Deferrals under Article 3 as
follows:
(i) For the Cash Account Method, the Company shall credit to
the Deferral Account the Annual Deferrals at the time
the deferrals would otherwise have been paid to the
Participant but for the Participation Election.
(ii) For the Stock Account Method, the Company shall
credit to the Deferral Account the Annual Deferrals as
of the last business day of the month in which the
deferrals would otherwise have been paid to the
Participant but for the Participation Election.
5.2.2 Matching Credits. Matching Credits under Article 4
shall be credited to the Deferral Account as of January 1 of
the following Plan Year.
<PAGE>
--- Page 77 ---
ELECTIVE DEFERRAL PLAN (Continued)
5.2.3 Crediting Rates. The Company shall credit gains or
losses to the Deferral Account as follows:
(i) Earnings under the Cash Account Method will be
compounded daily as of the date the Annual Deferrals and
Matching Credits are credited to the Deferral Account.
(ii) The Stock Account Method will be valued based upon
the market price and dividend rate of the Common Stock
as of the last business day of each month.
(iii) Matching Credits under the Stock Account Method will be
valued based upon the market price and dividend rate of
the Common Stock as of the last business day of the
preceding December.
5.2.4 Vesting. The Participant's right to receive Crediting
Rates earned in any Plan Year shall be one hundred percent
(100%) vested as of January 1 of the next Plan Year or upon
death, Disability, Retirement, Change in Control or
Termination of Plan.
5.3 Statement of Accounts. The Administrator shall provide
periodically to each Participant a statement setting forth the
balance of the Deferral Account maintained for such Participant.
ARTICLE 6
Retirement Benefits
6.1 Amount. Upon Retirement, the Company shall pay to the Participant
a retirement benefit in the form provided in Article 6.2 of the
Plan, based on the balance of the Deferral Account as of the
Valuation Date. If paid as a lump sum, the retirement benefit
shall be equal to such balance. If paid in installments, the
installments shall be paid in amounts that will amortize such
balance with interest credited at the Crediting Rates over the
period of time benefits are to be paid. For purposes of
calculation installments, the Deferral Account shall be valued as
of December 31 each year, and the subsequent installments will be
adjusted for the next Plan Year according to procedures
established by the Administrator.
6.2 Form of Retirement Benefits. The retirement benefit shall be paid
monthly over a period of one hundred eighty (180) months or, at
the discretion of the Administrator, the number of whole months
required to result in a monthly benefit of three hundred dollars
($300.00), if less. Notwithstanding anything herein to the
contrary, the Participant may elect in the Participation Election
to have the retirement benefit paid:
(i) In a lump sum, or
(ii) In installments paid monthly over a period of sixty (60) or
one hundred twenty (120) months, or
(iii) In a lump sum of a portion of the Deferral Account upon
Retirement with the balance in installments paid monthly over
a period of sixty (60), one hundred twenty (120), or one
hundred eighty (180) months.
6.3 Commencement of Benefits. Payments shall be made or shall begin
within the month of January next following the Participant's
Retirement, or within ninety (90) days of Retirement, if later.
Should payments commence after January, the Participant will
receive in that Plan Year the total amount of benefits that would
otherwise have been paid had payments commenced in January.
6.4 Changing Form of Benefit. Participants may elect an alternative
form of payout as available under this Article 6.2 by written
election filed with the Administrator; provided, however, that if
the Participant files the election less than thirteen (13) months
prior to the date benefit payments are to commence, the
Participant may choose either to (i) have the Deferral Account
reduced by ten percent (10%) at the valuation date immediately
prior to commencement of payments, or (ii) withdraw the election
to change the form of benefit, in which case the previous election
shall govern. The submission of a new election shall cancel all
prior elections with respect to form of benefit.
<PAGE>
--- Page 78 ---
ELECTIVE DEFERRAL PLAN (Continued)
6.5 Changing Crediting Rates. Upon Retirement, a Participant may
elect to change the Crediting Rates on the Deferral Account by
submitting an election for such change in writing to the Company.
The change in Crediting Rates shall take effect on the last
business day of the month in which the election is received. The
election to change Crediting Rates is available only once and must
be made within one hundred eighty (180) days after Retirement.
6.6 Small Benefit Exception. Notwithstanding any of the foregoing, if
the sum of all benefits payable to the Participant is less than or
equal to ten thousand dollars ($10,000.00), the Administrator may,
in its sole discretion, elect to pay such benefits in a single
lump sum.
ARTICLE 7
Termination Benefits
7.1 Amount. Within ninety (90) days after Termination of Employment,
the Company shall pay to the Participant a termination benefit
equal to the balance of the Deferral Account as of the Valuation
Date.
7.2 Form of Termination of Benefits. The Company shall pay the
termination benefits in a single lump sum.
7.3 Sale of Business Exception. Notwithstanding any of the foregoing,
if the Termination of Employment occurs as a direct result of a
merger, joint venture or sale, of a subsidiary, division, business
or other unit of the Company, as determined by the Administrator,
the Administrator may, in its sole discretion, elect to waive the
lump sum distribution of benefits for an entire class of affected
employees. In cases where this election is made by the
Administrator, the Participant's Annual Deferrals shall cease and
the Participant's Deferral Account shall remain in effect until
such time as the benefits are distributed according to the
following schedule:
(i) Payments to Participants who have attained age 50 as of the
closing of the merger, joint venture or sale shall be made
according to the retirement distribution elected by the
Participant during an Enrollment Period and shall be made or
shall begin within the month of January next following the
closing date for the merger, joint venture or sale, or within
ninety (90) days of such closing, if later.
(ii) Payments to Participants who have not attained age 50 as of
the closing of the merger, joint venture or sale shall be made
according to the retirement distribution elected by the
Participant during an Enrollment Period and shall be made or
shall begin within the month of January next following the
Participant's 50th birthday.
ARTICLE 8
Survivor Benefits
8.1 Pre-Retirement Survivor Benefit. If the Participant dies prior to
Retirement, the Company shall pay to the Participant's Beneficiary
within ninety (90) days after the Participant's death a benefit
according to the form elected by the Participant as part of the
Participation Election. Participants may elect either (i) a lump
sum, or (ii) installments paid monthly over a period of sixty
(60), one hundred twenty (120), or one hundred eighty (180)
months. In the event that installment payments are elected, the
Company shall continue to credit interest on the unpaid balance of
the Deferral Account at the Crediting Rates previously elected by
the Participant. Participants may change the form of benefit by
submitting an election for such change in writing to the Company.
8.2 Post-Retirement Survivor Benefit. If the Participant dies after
Retirement, the Company shall pay to the Participant's Beneficiary an
amount equal to the remaining benefits payable to the Participant
under the Plan over the same period such benefits would have been paid
to the Participant, in which event the Company shall continue to
credit interest on the unpaid balance of the Deferral Account at the
Crediting Rates previously elected by the Participant.
<PAGE>
--- Page 79 ---
ELECTIVE DEFERRAL PLAN (Continued)
8.3 Changing Crediting Rates. Notwithstanding the foregoing,
beneficiaries may change the Crediting Rates on the Deferral
Account within one hundred eighty (180) days following the
Participant's death by submitting a request for such a change in
writing to the Company. The Crediting Rates may be changed only
once following the Participant's death.
8.4 Changing Form of Benefit. Beneficiaries may petition the Company
once, and only after the death of the Participant, for a change in
the form of Retirement Benefits. The Administrator may, in its
sole and absolute discretion, choose to grant or deny such a
petition, and in the case of installment payments, may reduce the
period to the number of whole months required to result in a
monthly benefit of at least three hundred dollars ($300.00).
8.5 Small Benefit Exception. Notwithstanding any of the foregoing, in
the event the sum of all benefits payable to the Beneficiary is
less than or equal to ten thousand dollars ($10,000.00), the
Administrator may, in its sole discretion, elect to pay such
benefits in a single lump sum.
ARTICLE 9
Disability
If a Participant suffers a Disability, the Participant's Annual
Deferrals shall cease, and the Company shall pay the benefit described
in Article 6 to the Participant as of the Participant's Normal Retirement Date.
ARTICLE 10
Change in Control
10.1 Election. An Eligible Employee may, when completing a
Participation Election during the Enrollment Period, elect that,
if a Change in Control occurs, the Participant (or after the
Participant's death the Participant's Beneficiary) shall receive a
lump sum payment of the balance of the Deferral Account within
thirty (30) days after the Change in Control. This election, once
made, shall be irrevocable and shall apply to the entire Deferral
Account both before and after Retirement. The Deferral Account
balance shall be determined as of the last business day of the
month thirty (30) days prior to the month in which the Change of
Control occurs.
10.2 Benefit Reduction on Withdrawal. If a Participant has not made
the election described in Article 10.1 above and, within two years
after a Change of Control, the Participant (or Beneficiary) elects
in writing to receive a distribution of the balance of the
Deferral Account (determined as described in paragraph 10.1
herein), the lump sum payment shall be reduced by an amount equal
to five percent (5%) of the total balance of the Deferral Account
(instead of the ten percent (10%) reduction otherwise provided for
in Article 11). If a Participant elects such a withdrawal, any on-
going Annual Deferral shall cease, and the Participant may not
again be designated as an Eligible Employee until one entire Plan
Year following the Plan Year in which such withdrawal was made has
elapsed.
ARTICLE 11
Scheduled and Unscheduled Withdrawals
11.1 Scheduled Withdrawals.
11.1.1 Election. An Eligible Employee may, when making a
Participation Election, elect to receive a distribution
while employed of all or a percentage of the Annual
Deferrals and Matching Credits thereon, if any, to be made
in the subsequent Plan Year at a specified year in the
future. The election of a Scheduled Withdrawal shall be
irrevocable and shall apply only to prospective Annual
Deferrals and Matching Credits thereon, but not to any
previous Annual Deferrals or earnings thereon. Such amounts
will remain in the Participant's Deferral Account.
<PAGE>
--- Page 80 ---
ELECTIVE DEFERRAL PLAN (Continued)
11.1.2 Timing and Form of Withdrawal. The year specified for
the Scheduled Withdrawal must be at least one entire Plan
Year after the Plan Year in which the Annual Deferrals
covered by the Participation Election commenced. For
example, Annual Deferrals deposited in 1995 may not be
withdrawn until 1997. The Company shall make a lump sum
distribution of the amount elected in February of the Plan
Year specified.
11.1.3 Remaining Deferral Account. The remainder, if any, of
the Participant's Deferral Account shall continue in effect
and shall be distributed in the future according to the
terms of the Plan.
11.1.4 Contingent Upon Employment. A Participant must be
actively employed by the Company to receive a Scheduled
Withdrawal. In the event of a Participant's death,
Retirement, or Termination of Employment, the Scheduled
Withdrawal shall become void.
11.2 Unscheduled Withdrawals.
11.2.1 Election. A Participant (or Beneficiary if the
Participant is deceased) may request in writing at any time
an Unscheduled Withdrawal of all or a portion of the entire
vested amount credited to the Participant's Deferral
Account, which shall be paid in a single lump sum; provided,
however, (i) that the minimum withdrawal shall be twenty-
five percent (25%) of the Deferral Account balance, and (ii)
that an election to withdraw seventy-five percent (75%) or
more of the balance shall be deemed to be an election to
withdraw the entire balance, and (iii) such an election may
be made only once in a Plan Year.
11.2.2 Withdrawal Penalty. There shall be a penalty deducted
from the Deferral Account prior to an Unscheduled Withdrawal
equal to ten percent (10%) of the amount of the Unscheduled
Withdrawal. If a Participant elects such a withdrawal, any
on-going Annual Deferral shall cease, and the Participant
may not again be designated as an Eligible Employee until
one entire Plan Year following the Plan Year in which such
withdrawal was made has elapsed.
11.2.3 Small Benefit Exception. Notwithstanding any of the
foregoing, if the sum of all benefits payable to the
Participant or Beneficiary who has requested the Unscheduled
Withdrawal is less than or equal to ten thousand dollars
($10,000.00), the Company may, in its sole discretion, elect
to pay out the entire Deferral Account (reduced by the ten
percent (10%) penalty) in a single lump sum.
ARTICLE 12
Conditions Related to Benefits
12.1 Nonassignability. The benefits provided under the Plan may not
be alienated, assigned, transferred, pledged or hypothecated by or
to any person or entity, at any time or any manner whatsoever.
These benefits shall be exempt from the claims of credits of any
Participant or other claimants and from all orders, decrees,
levies, garnishment or executions against any Participant to the
fullest extent allowed by law.
12.2 Financial Hardship Distribution. Upon a finding that the
Participant or the Beneficiary has suffered a Financial Hardship,
the Administrator may in its sole discretion, permit the
Participant to cease any on-going deferrals and accelerate
distribution of benefits under the Plan in the amount reasonably
necessary to alleviate such Financial Hardship. If a distribution
is to be made to a Participant on account of Financial Hardship,
the Participant may not make deferrals under the Plan until one
entire Plan Year following the Plan Year in which a distribution
based on Financial Hardship was made has elapsed.
12.3 No Right to Company Assets. The benefits paid under the Plan
shall be paid from the general funds of the Company, and the
Participant and any Beneficiary shall be no more than unsecured
general creditors of the Company with no special or prior right to
any assets of the Company for payment of any obligations
hereunder.
12.4 Protective Provisions. The Participant shall cooperate with the
Company by furnishing any and all information requested by the
Administrator, in order to facilitate the payment of benefits
hereunder. If the Participant refuses to cooperate, the Company
shall have no further obligation to the Participant under the Plan.
<PAGE>
--- Page 81 ---
ELECTIVE DEFERRAL PLAN (Continued)
12.5 Withholding. The Participant or the Beneficiary shall make
appropriate arrangements with the Company for satisfaction of any
federal, state or local income tax withholding requirements and
Social Security or other employee tax requirements applicable to
the payment of benefits under the Plan. If no other arrangements
are made, the Company may provide, at its discretion, for such
withholding and tax payments as may be required.
ARTICLE 13
Administration of Plan
The general administration of the Plan and the responsibility for
carrying out its provisions shall be vested in the Retirement Board,
as Plan Administrator.
The Administrator shall administer the Plan and interpret, construe
and apply its provisions in accordance with its terms. The
Administrator shall further establish, adopt or revise such rules and
regulations as it may deem necessary or advisable for the
administration of the Plan. All decisions of the Administrator shall
be final and binding. The individuals serving on the committee shall,
except as prohibited by law, be indemnified and held harmless by the
Company from any and all liabilities, costs, and expenses (including
legal fees), to the extent not covered by liability insurance arising
out of any action taken by any member of the committee with respect to
the Plan, unless such liability arises from the individual's own gross
negligence or willful misconduct.
ARTICLE 14
Beneficiary Designation
The Participant shall have the right, at any time, to designate any
person or persons as Beneficiary (both primary and contingent) to whom
payment under the Plan shall be made in the event of the Participant's
death. The Beneficiary designation shall be effective when it is
submitted to the Administrator during the Participant's lifetime
either on a form prescribed by the Administrator or through an
automated phone designation system. The submission of a new
Beneficiary designation shall cancel all prior Beneficiary
designations.
If a Participant fails to designate a Beneficiary as provided above,
or if the Beneficiary designation is revoked by marriage, divorce, or
otherwise without execution of a new designation, or if every person
designated as Beneficiary predeceases the Participant or dies prior to
complete distribution of the Participant's benefits, then the
Administrator shall direct the distribution of such benefits to the
Participant's estate.
ARTICLE 15
Amendment and Termination of Plan
15.1 Amendment of Plan. The Company may at any time amend the Plan in
whole or in part, provided, however, that such amendment (i) shall
not decrease the balance of the Participant's Deferral Account at
the time of such amendment and (ii) shall not retroactively
decrease the applicable Crediting Rates of the Plan prior to the
time of such amendment. The Company may amend the Crediting Rates
of the Plan prospectively, in which case the Company shall notify
the Participant of such amendment in writing within thirty (30)
days after such amendment.
15.2 Termination of Plan. The Company may at any time terminate
the Plan. If the Company terminates the Plan, the date of such
termination shall be treated as the date of Termination of Employment
for the purpose of calculating Plan benefits, and the Company shall
pay to the Participant the benefits the Participant is entitled to
receive under the Plan as monthly installments over a three (3) year
period commencing within ninety (90) days.
<PAGE>
--- Page 82 ---
ELECTIVE DEFERRAL PLAN (Continued)
15.3 Constructive Receipt Termination. In the event the Administrator
determines that amounts deferred under the Plan have been
constructively received by the Participants and must be recognized
as income for federal income tax purposes, the Plan shall
terminate and distributions shall be made to Participants in
accordance with the provisions of Article 15.2 or as may be
determined by the Administrator. The determination of the
Administrator under this Article 15.3 shall be binding and
conclusive.
ARTICLE 16
Miscellaneous
16.1 Successors of the Company. The rights and obligations of the
Company under the Plan shall inure to the benefit of, and shall be
binding upon, the successors and assigns of the Company.
16.2 ERISA Plan. The Plan is intended to be an unfunded plan
maintained primarily to provide deferred compensation benefits for
"a select group of management or highly compensated employees"
within the meaning of Sections 201, 301 and 401 of ERISA and
therefore to be exempt from Parts 2, 3 and 4 of Title I of ERISA.
16.3 Trust. The Company shall be responsible for the payment of all
benefits under the Plan. At its discretion, the Company may
establish one or more grantor trusts for the purpose of providing
for payment of benefits under the Plan. Such trust or trusts may
be irrevocable, but the assets thereof shall be subject to the
claims of the Company's creditors. Benefits paid to the
Participant from any such trust shall be considered paid by the
Company for purposes of meeting the obligations of the Company
under the Plan.
16.4 Employment Not Guaranteed. Nothing contained in the Plan nor any
action taken hereunder shall be construed as a contract of
employment or as giving any Participant any right to continued
employment with the Company.
16.5 Gender, Singular and Plural. All pronouns and variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as
the identity of the person or persons may require. As the context
may require, the singular may be read as the plural and the plural
as the singular.
16.6 Captions. The captions of the articles and paragraphs of the
Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
16.7 Validity. If any provision of the Plan is held invalid, void
or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provisions of the Plan.
16.8 Waiver of Breach. The waiver by the Company of any breach of any
provision of the Plan by the Participant shall not operate or be
construed as a waiver of any subsequent breach by the Participant.
16.9 Notice. Any notice or filing required or permitted to be given
to the Company under the Plan shall be sufficient if in writing
and hand-delivered, or sent by first class mail to the principal
office of the Company, directed to the attention of the
Administrator. Such notice shall be deemed given as of the date
of delivery, or, if delivery is made by mail, as of the date shown
on the postmark.
ARTICLE 17
Claims and Review Procedures
17.1 Claims Procedure. The Plan Administrator or its designee shall
notify a Participant in writing, within ninety (90) days after his
or her written application for benefits, of his or her eligibility
or noneligibility for benefits under the Plan. If the Plan
Administrator or its designee Company determines that a
Participant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial,
(2) a specific reference to the provisions of the Plan on which
the denial is based, (3) a description of any additional
information or material necessary for the claimant to perfect his
other claim, and a description of why it is needed, and (4) an
explanation of the Plan's claim
<PAGE>
--- Page 83 ---
ELECTIVE DEFERRAL PLAN (Continued)
review procedure and other appropriate information as to the steps
to be taken if the Participant wishes to have the claim reviewed.
If the Plan Administrator of its designee determines that there
are special circumstances requiring additional time to make a
decision, the Plan Administrator or its designee shall notify the
Participant of the special circumstances and the date by which a
decision is expected to be made, and may extend the time for up to
an additional ninety-day period.
17.2 Review Procedure. If a Participant is determined by the Plan
Administrator not to be eligible for benefits, or if the
Participant believes that he or she is entitled to greater or
different benefits, the Participant shall have the opportunity to
have such claim reviewed by the Plan Administrator by filing a
petition for review with the Plan Administrator within sixty (60)
days after receipt of the notice issued by the Plan Administrator.
Said petition shall state the specific reasons which the
Participant believes entitle him or her to benefits or to greater
or different benefits. The Plan Administrator shall notify the
Participant of its decision in writing within the sixty-day
period, stating specifically the basis of its decision, written in
a manner calculated to be understood by the Participant and the
specific provisions of the Plan on which the decision is based.
If, because of the need for additional information, the sixty-day
period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Plan
Administrator, but notice of this deferral shall be given to the
Participant. In the event of the death of the Participant, the
same procedures shall apply to the Participant's Beneficiaries.
<PAGE>
--- Page 84 ---
EXHIBIT 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE DOW CHEMICAL COMPANY
At December 31, 1998
Location of Percent
Incorporation Ownership
or Organization*
<S> <C> <C>
The Dow Chemical Company Delaware
Arabian Chemical Company Limited (1) Saudi Arabia 50
Arabian Chemical Company (Latex) Ltd. (1) Saudi Arabia 50
Arakawa Europe GmbH Germany 60
CD Polymers Inc. Delaware 100
Cargill Dow Polymers LLC (1) Delaware 50
Centen Ag Inc. Delaware 100
Dow AgroSciences LLC (11) Delaware 43
Mycogen Corporation (19) California 13
Chemars Inc. Delaware 100
DC Partnership Management Inc. Delaware 100
DowBrands L.P. (6) Delaware 42
DCOMCO, Inc. Delaware 100
DCU/LB Trust (1) California 50
Denmerco Inc. Delaware 100
Dexco Polymers (1) Texas 50
Diamond Capital Management Inc. Delaware 100
Diamond Technology Partnership Company (7) Delaware 88
Chemtech Portfolio Inc. (13) Texas 70
Dofinco, Inc. Delaware 100
Dow Austria Ges. mbH Austria 100
Dow Centroamerica, Sociedad Anonima Costa Rica 100
Dow Centroamerica S/A Guatemala 100
Dow Chemical (Australia) Limited Australia 100
Dow Australia Superannuation Fund A Pty Limited Australia 100
Dow Australia Superannuation Fund B Pty Limited Australia 100
Polystyrene Australia Pty Ltd (1) Australia 50
Dow Chemical Canada Inc. Canada 100
1069284 Ontario Inc. Canada 100
Dow Capital B.V. Netherlands 100
Dow International Financial Services Ireland 100
Dow Capital Public Limited Company Ireland 100
Dow International Service Center, N.V. Belgium 100
Dow Pipeline Ltd. Canada 100
DowBrands Canada Inc. Canada 100
DBCI Financial LLC Delaware 100
Fort Saskatchewan Ethylene Storage Limited Partership (1) Canada 50
H-D Tech Inc. (1) Canada 50
Dow Chemical (China) Investment Company Ltd. China 100
Dow Distribution Center (Zhangjiagang) Co., Ltd. (16) China 10
Dow S/B Latex (Zhangjiagang) Co. Ltd. (15) China 10
SAL Petrochemical (Zhangjiagang) Company Limited (1) (18) China 10
Dow Chemical (China) Ltd. Delaware 100
Dow Chemical Company Limited United Kingdom 100
Cromarty Petroleum Company Limited (1) United Kingdom 50
Dow Chemical Delaware Corp. Delaware 100
Chemtech II L.P. (8) Delaware 73
Chemtech Portfolio Inc. (13) Texas 30
<PAGE>
--- Page 85 ---
Chemtech Portfolio II Inc. Michigan 100
Dow Chemical (Hong Kong) Limited Hong Kong 100
Dow Chemical (India) Pvt. Ltd. India 100
Dow (India) Systems Pvt. Ltd. India 100
Dow Chemical International Ltd. Delaware 100
Dow Chemical Thailand Limited Thailand 100
Petroquimica-Dow S.A. (Petrodow) Chile 70
Dow Chemical Japan Limited (10) Japan 89
Dow Polyurethanes Japan Ltd. Japan 100
Dow Chemical Korea Limited Korea 100
Dow Chemical (NZ) Limited New Zealand 100
Dow Chemical Pacific Limited Hong Kong 100
Ulsan Pacific Chemical Corporation (14) Korea 80
Dow Chemical Pacific (Singapore) Private Limited Singapore 100
Dow Chemical (Guangzhou) Company Limited China 100
Dow Financial Holdings Singapore Pte Ltd. Singapore 100
Dow Distribution Center (Zhangjiagang) Co., Ltd. (16) China 90
Dow S/B Latex (Zhangjiagang) Co. Ltd. (15) China 90
SAL Petrochemical (Zhangjiagang) Company Limited (1) (18) China 40
G.Z. Holdings Pte. Ltd. Singapore 100
S.H.A. Holdings Pte. Ltd. Singapore 100
Dow Chemical (Singapore) Private Limited Singapore 100
Dow Chemical Taiwan Limited Republic of China 100
Dow Chemical Telecommunications Corp. Delaware 100
Dow Credit Corporation Delaware 100
Dow Deutschland Inc. Delaware/Germany 100
Dow Chemical Inter-American Limited Delaware 100
Dow Quimica de Colombia S.A. (5) Colombia 10
Dow Deutschland Anlagengesellschaft mbH Germany 100
Dow Hungary Kft. Hungary 100
Dow Portugal Produtos Quimicos S.A. Portugal 100
Dow Turkiye A.S. (3) Turkey 5
Epoxital S.R.L. (1) Italy 50
Safechem Umwelt Service GmbH Germany 100
Dow Engineering Company Delaware 100
Dow Engineering, Inc. Michigan 100
Dow Environmental Inc. Delaware 100
Dow Europe Holding N.V. Netherlands 100
Buna Sow Leuna Olefinverbund GmbH (23) Germany 80
BSL Pipeline Gesellschaft mbH & Co. KG (23) Germany 80
BSL Pipeline Verwaltungsgesellschaft mbh (23) Germany 80
Dow Belgium, N.V. Belgium 100
Dow Benelux N.V. Netherlands 100
C&P Botlek International B.V. Netherlands 100
C&P Botlek International C.V. (4) Netherlands 10
C&P Botlek International C.V. (4) Netherlands 90
Inkoopcombinatie ELSTA V.O.F. (1) Netherlands 50
Polyol Belgium, N.V. (12) Belgium 1
Rofan Automation and Information Systems B.V. Netherlands 100
Dow Chemical Iberica S.A. Spain 99
DowBrands Espanola S.A. Spain 100
<PAGE>
--- Page 86 ---
Dow France S.A. France 100
Dow InterBranch B.V. Netherlands 100
Dow Danmark A/S Denmark 100
Dow Norge A/S Norway 100
Dow Italia S.p.A. Italy 100
Dow Mideast Systems (JSC) (2) Egypt 1
Dow Polska Sp.z.o.o. Poland 100
Dow Southern Africa (Pty) Ltd. South Africa 100
Dow Suomi OY Finland 100
Dow Sverige AB Sweden 100
DowBrands Holding GmbH Germany 100
Polyol International B.V. Netherlands 100
Polyol Belgium, N.V. (12) Belgium 99
Dow Europe S.A. Switzerland 100
Dow Export S.A. Switzerland 100
Dow Mideast Systems (JSC) (2) Egypt 1
Dow Turkiye A.S. (3) Turkey 1
Dow Factoring Company S.A. Switzerland 100
Dow Financial Holdings Inc. Delaware 100
Dow Holdings Inc. Delaware 100
Dow Corning Corporation (1) Michigan 50
Dow Hydrocarbons and Resources Inc. Delaware 100
Cayuse Pipeline, Inc. Texas 100
Dow Intrastate Gas Company Louisiana 100
Dow Pipeline Company Texas 100
Midland Pipeline Corp. Delaware 100
Fort Saskatchewan Ethylene Storage Corporation (1) Canada 50
Tier One Properties Inc. Delaware 99
DowBrands L.P. (6) Delaware 58
Dow Financial Services Inc. Delaware 100
Dow Hellas A.E. Greece 100
Dow International B.V. Netherlands 100
Dow Investment Argentina S.A. Argentina 100
Petroquimica Bahia Blanca S.A.I.C. Argentina 63
Polisur S.A. Argentina 70
Dow Kakoh Kabushiki Kaisha Japan 65
Dow Mideast Systems (JSC) (2) Egypt 98
Dow Quimica Argentina S.A. Argentina 100
Dow Quimica Chilena S.A. Chile 100
Dow Quimica de Colombia S.A. (5) Colombia 90
Dow Quimica Latin America S.A. Uruguay 100
Dow Quimica Mexicana S.A. de C.V. Mexico 100
Dow Internacional Mexicana S.A. de C.V. Mexico 100
Dow Quimica S.A. Brazil 100
Branco Dow Compostos de Engenharia S.A. (1) Brazil 50
Dow Especialidades Quimicas Ltda. Brazil 100
Dow Quimica do Nordeste LTDA. Brazil 100
EDN-Estireno do Nordeste S.A. Brazil 68
EDN-Distribuidora do Nordeste Ltda. Brazil 100
EDN-Poliestireno do sul Limitada Brazil 100
Isopol Produtos Quimicos S.A. Brazil 51
<PAGE>
--- Page 87 ---
Keytil Sociedad Anonima Uruguay 100
Primera-Industria e Comercio Ltda. Brazil 100
Spuma Pac S.A. Brazil 100
Dow South Africa Holdings (Pty.) Ltd. South Africa 100
Sentrachem Limited South Africa 100
Academy Plastic (Pty) Ltd. South Africa 100
Academy Plastic Specialists (Pty) Ltd. South Africa 100
African Amines (Pty) Ltd. (1) South Africa 50
Agrihold (Pty) Ltd. South Africa 100
Aquachlor (Pty) Ltd. (1) South Africa 50
Chemotech (Pty) Ltd. South Africa 100
Chrome International SA (Pty) Ltd. (1) South Africa 50
Cisvaal (Pty) Ltd. South Africa 100
Jakkalsbessie Beleggings (EDMS) Bpk. South Africa 100
Farm-Ag Ltd. South Africa 100
Peskor (Pty) Ltd. South Africa 100
Sanachem (Pty) Ltd. (9) South Africa 50
Fedsen (Pty) Ltd. (1) South Africa 50
ICT 2000 (Pty) Ltd. South Africa 100
IFIC Holdings Ltd. Virgin Islands 100
IMIC Holdings Inc. Virgin Islands 100
Minchem International Inc. South Africa 100
Sanachem Holdings Inc. Panama 100
Agrofarm Israel Ltd. Israel 100
Chemexport Inc. (1) Cayman Islands 50
LC International (SARL) France 100
Mermaid Containers Ltd. Jersey Channel Islands 100
Sanachem Austria (GmbH) Austria 100
Sanachem do Brasil Comercial Ltda. Brazil 100
Sanachem International Ltd. United Kingdom 100
Sanachem Italia SpA Italy 100
Sanachem USA, Inc. Delaware 100
Alsan Research (1) Iowa 50
Suchem Ltd. Mauritius 100
Velsimex, S.A. DE C.V. (1) Mexico 50
Seetrade Ltd. Guernsey Channel Island 100
Seetrade Trading Ltd. Guernsey Channel Island 100
Sentrachem International Holdings Ltd. Jersey Channel Islnd 100
Bonkem Inc. Panama 100
Hampshire Chemical do Brasil Ltda. Brazil 100
IMIC Chem Trading Inc. Panama 100
NCP Holdings Ltd. Jersey Channel Islands 100
Biocitric (Pty) Ltd. (1) Jersey Channel Islands 50
Sentrachem International Ltd. (BVI) Virgin Islands 100
Sentrachem International Ltd. (UK) United Kingdom 100
Sentraflow Ltd. Jersey Channel Islands 100
Swisschem Ltd. Jersey Channel Islands 100
International Fruit Container Organisation (Pty.) LTD South Africa 100
Invesen Finance (Pty) Ltd. South Africa 100
Investment Facility Company 184 (Pty) Ltd. South Africa 100
Investment Facility Company 185 (Pty) Ltd. South Africa 100
<PAGE>
--- Page 88 ---
Investment Facility Company 188 (Pty) Ltd. South Africa 100
Investment Facility Company 189 (Pty) Ltd. South Africa 100
Mega Plastics Properties (Pty) Ltd. South Africa 100
Monomer Distribution (Pty) Ltd. South Africa 100
National Chemical Products Ltd. South Africa 100
NCP Marketing Corporation (Pty) Ltd. South Africa 100
Nedchem Finance (Pty) Ltd. (1) South Africa 50
Orchem (Pty) Ltd. South Africa 70
Pearlaflex Packaging (Pty) Ltd. South Africa 100
PGM Chemicals (Pty) Ltd. South Africa 100
Profinans (EDMS) Bpk. (1) South Africa 50
PRP Resins (Pty) Ltd. South Africa 100
Rumevite (Pty) Ltd. South Africa 100
Safripol (Pty) Ltd. (1) South Africa 50
Salt and Chemicals (Pty) Ltd. Namibia 100
Sanachem (Pty) Ltd. Australia 100
Sanachem (Pty) Ltd. (9) South Africa 50
Agbro (Pty) Ltd. South Africa 100
Agroserve (Pty) Ltd. South Africa 100
Brenn-O-Kem (Pty) Ltd. (1) South Africa 50
Farmpak (Pty) Ltd. South Africa 100
Hyperchemicals International (Pty) Ltd. South Africa 100
Learstraat Beleggings (EDMS) Bpk. South Africa 100
Plant Chemicals Swaziland (Pty) Ltd. Swaziland 100
World Trading Company (Pty) Ltd. South Africa 100
Senmin (Pty) Ltd. South Africa 100
Sentrachem Gardens (Pty) Ltd. South Africa 100
Sentrachem Pty Limited Australia 100
Singer and Hersch Industrial Development (Pty) Ltd. South Africa 100
Spunchem Holdings (Pty) Ltd. (1) South Africa 50
Syntheta (Pty) Ltd. South Africa 100
Randjespark Property Holdings (Pty.) Ltd. South Africa 100
The Synthetic Latex Company (Pty.) Ltd. South Africa 51
Walvis Bay Salt Refiners (Pty) Ltd. Namibia 100
Wonder Horticultural Products (Pty) Ltd. South Africa 100
Dow Trading PRC Inc. Delaware 100
Dow Trading S.A. Switzerland 100
Dow Turkiye A.S. (3) Turkey 94
Dow Venezuela, C.A. Venezuela 100
CV Services Ltd. Cayman Islands 100
Dow-United Technologies Composite Products, Inc. (1) Delaware 50
DowBrands Inc. (20) Delaware 79
El Dorado Terminals Company (1) New Jersey 50
Essex Chemical Corporation New Jersey 100
Essex Specialty Products, Inc. New Jersey 100
American Mortell Corporation Texas 100
Mortell Company Delaware 100
Anabond Essex India Private Limited (1) India 50
Diamond Technology Partnership Company (7) Delaware 12
Essex Do Brasil Industria E Comercio Ltda. Brazil 100
Essex de Hermosillo, S.A. de C.V. (1) Mexico 50
<PAGE>
--- Page 89 ---
Essex Specialty Products, Inc., Canada Canada 100
Essex Specialty Products Korea Limited Korea 100
Expandite-Essex Pty. Limited (1) Australia 50
Gurit-Essex AG (1) Switzerland 50
Sound Alliance LLC Delaware 60
Wuhan Essex-Tigers Chemical Co., Ltd. China 51
Etoxilados del Plata S.A. Argentina 100
FilmTec Corporation Delaware 100
Forbanco Inc. Delaware 100
Great Western Pipeline Company, Inc. California 100
Ifco Inc. Delaware 100
Chemtech II L.P. (8) Delaware 7
INCA International S.p.A. Italy 80
Intarsia Corporation Delaware 80
Joliet Marine Terminal Trust Estate (1) Illinois 50
Lepetit International Inc. Panama 100
Liana Limited Delaware 100
Dorinco Insurance (Ireland) Ltd. Ireland 100
Dorinco Reinsurance Company Michigan 100
Dorintal Reinsurance Limited Bermuda 100
Timber Insurance Limited Bermuda 100
P.T. Dow Polymers Indonesia Indonesia 80
P.T. Pacific Indomas Plastic Indonesia (1) Indonesia 50
Petrochemical Investment Company (1) Cayman Islands 50
Productos Quimicos Peruanos S.A. Peru 100
Quixtor Technologies Corporation Delaware 100
Raven Group Ltd. Delaware 85
RavenWorks Ltd. Delaware 100
Rofan Services Inc. Delaware 100
DH Compounding Company (1) Delaware 50
Dow AgroSciences LLC (11) Delaware 6
Mycogen Corporation (19) California 87
Byosementes Ltda. Brazil 100
Dinamilho Carol Produtos Agricolas Ltda. Brazil 100
FT Biogenetica de Milho Ltda. Brazil 100
Hibridos Colorado Ltda. Brazil 100
Hibridos Hata Ltda. Brazil 100
Sementes Hata Ltda. Brazil 100
Dow AgroSciences LLC (11) Delaware 51
Advanced AgriTraits LLC Delaware 100
D.E. United (Private) Limited (1) Pakistan 50
DERe Insurance Company Vermont 100
Dintec Agrichemicals Indiana 66
Dow AgroSciences Agricultural Products Limited Mauritius 100
DE-NOCIL Crop Protection Limited India 51
Dow AgroSciences B.V. Netherlands 100
Agrodea S.A. (1) Argentina 50
ChacoDAS S.A. (1) Argentina 50
DAS Ihara K.K. (1) Japan 50
Desab S.A. (1) Argentina 50
Dintec Agroquimica Produtos Quimicos Lda. Portugal 66
<PAGE>
--- Page 90 ---
Distribuidora de Agroquimicos del Sureste de la
Republica S.A. de C.V. (1) Mexico 50
Dow AgroSciences (Malaysia) Sdn Bhd Malaysia 100
Dow AgroSciences (NZ) Limited New Zealand 100
Dow AgroSciences A.S. Turkey 100
Dow AgroSciences Argentina S.A. Argentina 100
Dow AgroSciences Asia Sdn Bhd Malaysia 100
Dow AgroSciences Australia Limited Australia 100
Dow AgroSciences Bolivia S.A. Bolivia 100
Dow AgroSciences Canada Inc. Canada 100
Dow AgroSciences Chile S.A. Chile 100
Dow AgroSciences Costa Rica S.A. Costa Rica 100
Dow AgroSciences Danmark A/S Denmark 100
Dow AgroSciences de Colombia S.A. Colombia 100
Dow AgroSciences de Mexico S.A. de C.V. Mexico 100
Dow AgroSciences Export S.A. France 100
Dow AgroSciences GmbH Germany 100
Dow AgroSciences Guatemala S.A. Guatemala 100
Dow AgroSciences Iberica S.A. Spain 100
Dow AgroSciences Industrial Ltda. Brazil 100
Dow AgroSciences Limited United Kingdom 100
Dow AgroSciences Pacific Limited Hong Kong 100
Dow AgroSciences Paraguay S.A. Paraguay 100
Dow AgroSciences Polska Sp. z.o.o. Poland 100
Dow AgroSciences S.A. France 100
Dow AgroSciences s.r.o. Czech Republic 100
Dow AgroSciences Southern Africa (Pty.) Ltd. South Africa 100
Dow AgroSciences Sverige A/B Sweden 100
Dow AgroSciences Taiwan Ltd. Republic of China 100
Dow AgroSciences Uruguay S.A. Uruguay 100
Dow AgroSciences Venezuela C.A. Venezuela 100
Dow AgroSciences Vertriebs GmbH Austria 100
Dow Chemical Japan Limited (10) Japan 11
Fedea S.A. (1) Argentina 50
JV Agro S.A. (1) Argentina 50
Lima Delta Ltd. (1) Israel 50
P.T. Pacific Chemicals Indonesia Indonesia 80
Pentec - Productos Quimicos, Lda. (1) Portugal 50
Zoo-Agro de Venezuela, C.A. (1) Venezuela 50
Dow AgroSciences Barbados Limited Barbados 100
Dow AgroSciences China Ltd. Delaware 100
Dow AgroSciences International Ltd. Delaware 100
Dow AgroSciences (Thailand) Ltd. Thailand 100
DowBrands Inc. (20) Delaware 21
OCI DAS Co., Ltd. (1) Korea 50
Mycogen Crop Protection, Inc. California 100
Mycogen Far East Asia Corporation California 100
Mycogen S.A. de C.V. Mexico 100
Parasitix Corporation California 100
SoilServ Inc. California 100
Mycogen Plant Science, Inc. Delaware 100
Agrigenetics, Inc. Delaware 100
<PAGE>
--- Page 91 ---
M.V.B. (21) France 60
Mycogen Canada Inc. Canada 100
Mycogen Seeds - Puerto Rico Corporation Delaware 100
Mycoyen S.A. Argentina 100
Corporacion de Inversiones Frutihorticolas S.A. Argentina 100
V.M.O. S.A.S. (22) France 50
Verneuil Holdings S.A. (1) (24) France 35
M.V.B. (21) France 40
V.M.O. S.A.S. (22) France 50
Mycosub/BA, Inc. California 100
MJT BA L.P. (1) California 50
Mycosub/BH, Inc California 100
MJT BH/BT L.P. (1) California 50
Phytogen Seed Company, LLC Delaware 51
Wenben Inc. Delaware 100
Dupont Dow Elastomers L.L.C. (1) Delaware 50
Scotdril Midland Inc. Michigan 100
Scotdril Offshore Company (17) United Kingdom 2
Scotdril Offshore Company (17) United Kingdom 98
Sentrachem US, Inc. Delaware 100
Hampshire Holdings, Inc. Delaware 100
Hampshire Chemical Corp. Delaware 100
Hampshire Chemical AB Sweden 100
Hampshire Chemical Ltd. United Kingdom 100
Hampshire Chemical Finance Corp. Delaware 100
Styron Asia Limited (1) Hong Kong 50
Sumitomo Dow Ltd. (1) Japan 50
TCM Technologies Inc. Delaware 100
Ulsan Pacific Chemical Corporation (14) Korea 20
Yokkaichi MDI Limited (1) Japan 50
Zhejiang Pacific Chemical Corporation China 100
*Primary location of organization is reported for partnerships.
<PAGE>
--- Page 92 ---
</TABLE>
(1) These companies are nonconsolidated affiliates of The Dow
Chemical Company and are accounted for on the equity basis. Separate
financial statements for these companies are not included in this Form
10-K. These companies are not controlled, directly or indirectly, by
The Dow Chemical Company. Subsidiaries of these companies, if any,
are not listed in this Exhibit 21.
(2) The Dow Chemical Company's effective ownership of Dow
Mideast Systems (JSC) is 100% of which The Dow Chemical Company owns
98%, Dow Europe Holding N.V. owns 1% and Dow Europe S.A. owns 1%.
(3) The Dow Chemical Company's effective ownership of Dow
Turkiye A.S. is 100% of which The Dow Chemical Company owns 94%, Dow
Deutschland Inc. owns 5% and Dow Europe S.A. owns 1%.
(4) The Dow Chemical Company's effective ownership of C&P Botlek
International C.V. is 100% of which Dow Benelux N.V. owns 90% and C&P
Botlek International B.V. owns 10%.
(5) The Dow Chemical Company's effective ownership of Dow
Quimica de Colombia S.A. is 100% of which The Dow Chemical Company
owns 90% and Dow Chemical Inter-American Limited owns 10%.
(6) The Dow Chemical Company's effective ownership of DowBrands
L.P. is 100% of which Dow Financial Holdings Inc. owns 58% and DC
Partnership Management Inc. owns 42%.
(7) The Dow Chemical Company's effective ownership of Diamond
Technology Partnership Company is 100% of which The Dow Chemical
Company owns 88% and Essex Specialty Products, Inc. owns 12%.
(8) The Dow Chemical Company's effective ownership of Chemtech
II L.P. is 80% of which Dow Chemical Delaware Corp. owns 73% and Ifco
Inc. owns 7%.
(9) The Dow Chemical Company's effective ownership in Sanachem
(Pty) Ltd. is 100% of which Peskor (Pty) Ltd. owns 50% and Setrachem
Limited owns 50%.
(10) The Dow Chemical Company's effective ownership of Dow
Chemical Japan Limited is 100% of which The Dow Chemical Company owns
89% and Dow AgroSciences B.V. owns 11%.
(11) The Dow Chemical Company's effective ownership of Dow
AgroSciences LLC is 100% of which Mycogen Corporation owns 51%, Centen
Ag Inc. owns 43% and Rofan Services Inc. owns 6%.
(12) The Dow Chemical Company's effective ownership of Polyol
Belgium, N.V. is 100% of which Polyol International B.V. owns 99% and
Dow Benelux N.V. owns 1%.
(13) The Dow Chemical Company's effective ownership of Chemtech
Portfolio Inc. is 94% of which Diamond Technology Partnership Company
owns 70% and Chemtech II L.P. owns 30% (see note 8 for the effective
ownership of Chemtech II L.P. and note 7 for the effective ownership
of Diamond Technology Partnership Company).
(14) The Dow Chemical Company's effective ownership in Ulsan
Pacific Chemical Corporation is 100% of which Dow Chemical Pacific
Limited owns 80% and The Dow Chemical Company owns 20%.
(15) The Dow Chemical Company's effective ownership of Dow S/B
Latex (Zhangjiagang) Co. Ltd. is 100% of which Dow Financial Holdings
Singapore Pte Ltd. owns 90% and Dow Chemical (China) Investment
Company Ltd. owns 10%.
(16) The Dow Chemical Company's effective ownership of Dow
Distribution Center (Zhangjiagang) Co., Ltd. is 100% of which Dow
Financial Holdings Singapore Pte Ltd. owns 90% and Dow Chemical
(China) Investment Company Ltd. owns 10%.
(17) The Dow Chemical Company's effective ownership of Scotdril
Offshore Company is 100% of which The Dow Chemical Company owns 98%
and Scotdril Midland Inc. owns 2%.
(18) The Dow Chemical Company's effective ownership of SAL
Petrochemical (Zhangjiagang) Company Limited is 50% of which Dow
Financial Holdings Singapore Pte Ltd. owns 40% and Dow Chemical
(China) Investment Company Ltd. owns 10%.
(19) The Dow Chemical Company's effective ownership of Mycogen
Corporation is 100% of which Rofan Services Inc. owns 87% and Centen
Ag Inc. owns 13%.
(20) The Dow Chemical Company's effective ownership in DowBrands
Inc. is 100% of which The Dow Chemical Company owns 79% and Dow
AgroSciences LLC owns 21%.
(21) The Dow Chemical Company's effective ownership in M.V.B. is
74% of which Agrigenetics, Inc. owns 60% and Verneuil Holdings S.A.
owns 40%. The Dow Chemical Company's effective ownership in Verneuil
Holdings S.A. is 35%.
(22) The Dow Chemical Company's effective ownership in V.M.O.
S.A.S is 67.5% of which Agrigenetics, Inc. owns 50% and Verneuil
Holdings S.A. owns 50%. The Dow Chemical Company's effective
ownership in Verneuil Holdings S.A. is 35%.
(23) These companies are not controlled, directly or indirectly,
by The Dow Chemical Company.
(24) The subsidiaries of Verneuil Holdings S.A. are included in
this Exhibit 21 because a portion of the ownership interest of those
subsidiaries is held by companies listed elsewhere in this Exhibit 21.
<PAGE>
--- Page 93 ---
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Dow Chemical Company:
We consent to the incorporation by reference of our report dated
February 10, 1999 appearing in this Annual Report on Form 10-K of
The Dow Chemical Company for the year ended December 31, 1998,
in the following Registration Statements of The Dow Chemical
Company:
Form S-3:
Nos. 33-37052
33-44369
33-51673
33-52980
Form S-8:
Nos. 2-44789
2-64560
33-21748
33-37345
33-51453
33-52841
33-56138
33-56140
33-58205
33-61795
333-27379
333-27381
333-40271
333-49183
333-52991
333-52993
DELOITTE & TOUCHE LLP
Midland, Michigan
March 23, 1999
<PAGE>
--- Page 94 ---
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 123
<SECURITIES> 267
<RECEIVABLES> 2,880
<ALLOWANCES> 93
<INVENTORY> 2,810
<CURRENT-ASSETS> 8,040
<PP&E> 24,435
<DEPRECIATION> 15,988
<TOTAL-ASSETS> 23,830
<CURRENT-LIABILITIES> 6,842
<BONDS> 4,051
117
0
<COMMON> 818
<OTHER-SE> 6,611
<TOTAL-LIABILITY-AND-EQUITY> 23,830
<SALES> 18,441
<TOTAL-REVENUES> 18,441
<CGS> 13,799
<TOTAL-COSTS> 17,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (493)
<INCOME-PRETAX> 2,012
<INCOME-TAX> 685
<INCOME-CONTINUING> 1,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,304
<EPS-PRIMARY> 5.83
<EPS-DILUTED> 5.76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<CASH> 235 277 1,186 1,881 1,903
<SECURITIES> 302 194 194 357 399
<RECEIVABLES> 3,330 2,957 3,195 3,183 3,056
<ALLOWANCES> 73 70 70 71 71
<INVENTORY> 2,921 2,685 2,649 2,777 2,815
<CURRENT-ASSETS> 8,640 7,949 8,885 9,940 9,830
<PP&E> 23,345 22,960 22,954 23,356 23,737
<DEPRECIATION> 15,293 15,243 15,196 15,157 15,253
<TOTAL-ASSETS> 24,040 22,745 23,321 24,386 24,673
<CURRENT-LIABILITIES> 7,011 5,470 5,357 5,832 5,554
<BONDS> 4,196 4,318 4,141 4,156 4,196
124 125 126 127 128
0 0 0 0 0
<COMMON> 818 818 818 818 818
<OTHER-SE> 6,808 6,878 6,686 6,661 7,136
<TOTAL-LIABILITY-AND-EQUITY> 24,040 22,745 23,321 24,386 24,673
<SALES> 20,018 15,215 10,358 4,992 20,053
<TOTAL-REVENUES> 20,018 15,215 10,358 4,992 20,053
<CGS> 14,679 10,981 7,451 3,615 14,108
<TOTAL-COSTS> 17,292 12,968 8,781 4,227 16,966
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 (4) 17
<INTEREST-EXPENSE> (471) (359) (246) (122) (494)
<INCOME-PRETAX> 2,948 2,454 1,794 804 3,288
<INCOME-TAX> 1,041 895 659 289 1,187
<INCOME-CONTINUING> 1,802 1,445 1,023 452 1,900
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 1,802 1,445 1,023 452 1,900
<EPS-PRIMARY> 7.81 6.23 4.38 1.90 7.71
<EPS-DILUTED> 7.70 6.15 4.33 1.88 7.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 JUN-30-1998 MAR-31-1998
<CASH> 226 374 371
<SECURITIES> 558 781 327
<RECEIVABLES> 2,955 3,182 3,396
<ALLOWANCES> 91 73 73
<INVENTORY> 2,751 2,631 2,762
<CURRENT-ASSETS> 8,495 8,700 8,685
<PP&E> 24,267 23,570 22,990
<DEPRECIATION> 16,027 15,524 15,130
<TOTAL-ASSETS> 23,369 23,591 23,524
<CURRENT-LIABILITIES> 6,067 5,947 6,264
<BONDS> 4,259 4,258 4,081
818 818 818
118 119 120
<COMMON> 0 0 0
<OTHER-SE> 6,731 7,016 6,988
<TOTAL-LIABILITY-AND-EQUITY> 23,369 23,591 23,524
<SALES> 14,000 9,686 4,829
<TOTAL-REVENUES> 14,000 9,686 4,829
<CGS> 10,451 7,193 3,691
<TOTAL-COSTS> 12,910 9,079 4,941
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (370) (249) (120)
<INCOME-PRETAX> 1,805 1,328 666
<INCOME-TAX> 632 474 242
<INCOME-CONTINUING> 1,160 846 421
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,160 846 421
<EPS-PRIMARY> 5.17 3.76 1.87
<EPS-DILUTED> 5.10 3.70 1.84
</TABLE>
