DOW CHEMICAL CO /DE/, 10-Q, 2000-11-13

DOW CHEMICAL CO /DE/
10-Q, 2000-11-13
CHEMICALS & ALLIED PRODUCTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE QUARTER ENDED September 30, 2000

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 incorporation or organization)		(I.R.S. Employer Identification No.)

2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 517-636-1000

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

Class		Outstanding at September 30, 2000
Common Stock, $2.50 par value		678,445,800 shares

THE DOW CHEMICAL COMPANY
TABLE OF CONTENTS

			PAGE
PART I—FINANCIAL INFORMATION
	Item 1. Financial Statements		3
		Consolidated Statements of Income	3
		Consolidated Balance Sheets	4
		Consolidated Statements of Cash Flows	6
		Consolidated Statements of Comprehensive Income	7
		Operating Segments and Geographic Areas	8
		Commitments and Contingent Liabilities	10
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		12
		Disclosure Regarding Forward-Looking Information	12
		Third Quarter Earnings Announcement	13
		Acquisitions and Divestitures	14
		Changes in Financial Condition	16
		Results of Operations	17
		Subsequent Event	23
		Accounting Policies	23
		Euro Conversion	24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		25
PART II—OTHER INFORMATION
	Item 1. Legal Proceedings		26
	Item 6. Exhibits and Reports on Form 8-K		31
SIGNATURE			32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Notes A and C)

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income

		Three Months Ended				Nine Months Ended
		Sept. 30, 2000		Sept. 30, 1999		Sept. 30, 2000		Sept. 30, 1999
		In millions, except for per share amounts (Unaudited)
Net Sales		$	5,514	$	4,693	$	16,525	$	13,729

	Cost of Sales		4,393		3,587		12,812		10,258
	Research and development expenses		222		203		653		618
	Selling, general and administrative expenses		392		381		1,174		1,145
	Amortization of intangibles		29		27		95		81
	Insurance and finance company operations, pretax income		16		21		54		82
	Equity in earnings of nonconsolidated affiliates		78		15		244		62
	Sundry income—net		58		53		230		210

Earnings before Interest, Income Taxes and Minority Interests			630		584		2,319		1,981

	Interest income		23		29		78		81
	Interest expense and amortization of debt discount		135		93		377		334

Income before Income Taxes and Minority Interests			518		520		2,020		1,728

	Provision for income taxes		177		182		701		613
	Minority interests' share in income		13		17		48		52
	Preferred stock dividends		—		1		1		4

Net Income Available for Common Stockholders		$	328	$	320	$	1,270	$	1,059

Share Data (Note B)
	Earnings per common share—basic	$	0.48	$	0.49	$	1.88	$	1.61
	Earnings per common share—diluted	$	0.48	$	0.48	$	1.86	$	1.58
	Common stock dividends declared per share	$	0.29	$	0.29	$	0.87	$	0.87
	Weighted-average common shares outstanding—basic		678.7		658.2		676.7		660.2
	Weighted-average common shares outstanding—diluted		681.5		672.0		682.9		672.6

Depreciation		$	298	$	273	$	858	$	830

Capital Expenditures		$	315	$	353	$	903	$	950

Notes to Financial Statements:

Note A: The unaudited interim financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. Certain reclassifications of prior year amounts have been made to conform to current year presentation. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1999. (Except as otherwise indicated by the context, the terms "Company" or "Dow" as used herein mean The Dow Chemical Company and its consolidated subsidiaries.)

Note B: On May 11, 2000, the Company's Board of Directors approved a three-for-one split of the Company's common stock, payable on June 16, 2000 to shareholders of record on May 23, 2000. All share data for prior periods has been restated to reflect the split.

Note C: The Consolidated Financial Statements reflect the consolidation of BSL effective June 1, 2000. For further detail, see Acquisitions and Divestitures on page 14.

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets

			Sept. 30, 2000		Dec. 31, 1999
			In millions (Unaudited)
Assets
Current Assets
	Cash and cash equivalents		$	210	$	506
	Marketable securities and interest-bearing deposits			90		706
	Accounts and notes receivable:
		Trade (net of allowance for doubtful receivables—2000: $93; 1999: $107)		2,907		2,631
		Other		2,426		1,983
	Inventories:
		Finished and work in process		2,708		2,264
		Materials and supplies		606		522
	Deferred income tax assets—current			74		235

	Total current assets			9,021		8,847

Investments
	Investment in nonconsolidated affiliates			1,090		1,359
	Other investments			2,609		2,872
	Noncurrent receivables			377		390

	Total investments			4,076		4,621

Property
	Property			24,830		24,276
	Less accumulated depreciation			15,971		15,786

	Net property			8,859		8,490

Other Assets
	Goodwill (net of accumulated amortization—2000: $380; 1999: $351)			1,835		1,834
	Deferred income tax assets—noncurrent			1,742		597
	Deferred charges and other assets			1,559		1,110

	Total other assets			5,136		3,541

Total Assets			$	27,092	$	25,499

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets

			Sept. 30, 2000			Dec. 31, 1999
			In millions (Unaudited)
Liabilities and Stockholders' Equity
Current Liabilities
	Notes payable		$	1,119		$	692
	Long-term debt due within one year			407			343
	Accounts payable:
		Trade		1,956			1,782
		Other		1,217			1,087
	Income taxes payable			225			178
	Deferred income tax liabilities—current			29			38
	Dividends payable			200			213
	Accrued and other current liabilities			2,285			1,962

	Total current liabilities			7,438			6,295

Long-Term Debt				4,790			5,022

Other Noncurrent Liabilities
	Deferred income tax liabilities—noncurrent			729			839
	Pension and other postretirement benefits—noncurrent			1,798			1,843
	Other noncurrent obligations			2,220			2,219

	Total other noncurrent liabilities			4,747			4,901

Minority Interest in Subsidiaries				404			408

Preferred Securities of Subsidiary				500			500

Temporary Equity
	Preferred stock at redemption value			—			114
	Guaranteed ESOP obligation			—			(64	)

	Total temporary equity			—			50

Stockholders' Equity
	Common stock			2,453			818
	Additional paid-in capital			12			1,321
	Guaranteed ESOP obligation			(64	)		—
	Retained earnings			14,024			13,445
	Accumulated other comprehensive income			(244	)		(251	)
	Treasury stock at cost			(6,968	)		(7,010	)

	Net stockholders' equity			9,213			8,323

Total Liabilities and Stockholders' Equity			$	27,092		$	25,499

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows

			Nine Months Ended
			Sept. 30, 2000			Sept. 30, 1999
			In millions (Unaudited)
Operating Activities
	Net income available for common stockholders		$	1,270		$	1,059
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		986			934
		Provision (credit) for deferred income tax		(180	)		164
		Undistributed earnings of nonconsolidated affiliates		(225	)		(33	)
		Minority interests' share in income		48			52
		Net gain on sale of consolidated companies		—			(22	)
		Net gain on sale of nonconsolidated affiliates		(13	)		—
		Net gain on sales of property		(4	)		(49	)
		Other net gain		(174	)		(89	)
		Tax benefit-nonqualified stock option exercises		23			39
	Changes in assets and liabilities that provided (used) cash:
		Accounts receivable		(922	)		455
		Inventories		(396	)		52
		Accounts payable		437			(86	)
		Other assets and liabilities		(87	)		232

	Cash provided by operating activities			763			2,708

Investing Activities
	Capital expenditures			(903	)		(950	)
	Proceeds from sales of property			19			102
	Purchases of consolidated companies			(452	)		(101	)
	Proceeds from sale of consolidated companies			—			35
	Proceeds from sale of nonconsolidated affiliates			47			—
	Investments in nonconsolidated affiliates			(82	)		(91	)
	Purchases of investments			(2,293	)		(2,744	)
	Proceeds from sales of investments			3,765			2,340

	Cash provided by (used in) investing activities			101			(1,409	)

Financing Activities
	Changes in short-term notes payable			(544	)		(578	)
	Payments on long-term debt			(379	)		(280	)
	Proceeds from issuance of long-term debt			312			300
	Purchases of treasury stock			(3	)		(428	)
	Proceeds from sales of common stock			111			149
	Purchase of subsidiary preferred stock			—			(102	)
	Proceeds from issuance of preferred securities of subsidiary			—			500
	Distributions to minority interests			(59	)		(32	)
	Dividends paid to stockholders			(586	)		(577	)

	Cash used in financing activities			(1,148	)		(1,048	)

Effect of Exchange Rate Changes on Cash				(12	)		(5	)

Summary
	Increase (decrease) in cash and cash equivalents			(296	)		246
	Cash and cash equivalents at beginning of year			506			123

	Cash and cash equivalents at end of period		$	210		$	369

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income

		Three Months Ended						Nine Months Ended
		Sept. 30, 2000			Sept. 30, 1999			Sept. 30, 2000			Sept. 30, 1999
		In millions (Unaudited)
Net Income Available for Common Stockholders		$	328		$	320		$	1,270		$	1,059

Other Comprehensive Income, Net of Tax
	Unrealized gains (losses) on investments		61			(41	)		127			59
	Cumulative translation adjustments		(52	)		(12	)		(121	)		(65	)
	Minimum pension liability		—			—			1			—

	Total other comprehensive income		9			(53	)		7			(6	)

Comprehensive Income		$	337		$	267		$	1,277		$	1,053

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries
Operating Segments and Geographic Areas

		Three Months Ended						Nine Months Ended
		Sept. 30, 2000			Sept. 30, 1999			Sept. 30, 2000			Sept. 30, 1999
		(Unaudited) In millons
Operating segment sales
	Performance Plastics	$	1,492		$	1,302		$	4,342		$	3,862
	Performance Chemicals		759			674			2,265			1,971
	Agricultural Products		430			399			1,722			1,732
	Plastics		1,435			1,170			4,163			3,110
	Chemicals		640			607			2,008			1,660
	Hydrocarbons and Energy		660			469			1,769			1,141
	Unallocated and Other		98			72			256			253

	Total	$	5,514		$	4,693		$	16,525		$	13,729

Operating segment EBIT
	Performance Plastics	$	196		$	248		$	593		$	815
	Performance Chemicals		82			108			283			381
	Agricultural Products		(23	)		(35	)		225			205
	Plastics		271			207			827			437
	Chemicals		105			101			444			290
	Hydrocarbons and Energy		(1	)		(17	)		14			(7	)
	Unallocated and Other		—			(28	)		(67	)		(140	)

	Total	$	630		$	584		$	2,319		$	1,981

Operating segment intersegment revenues
	Performance Plastics	$	3		$	3		$	9		$	9
	Performance Chemicals		4			3			19			10
	Plastics		—			(1	)		—			1
	Chemicals		8			5			24			19
	Unallocated and Other		(15	)		(10	)		(52	)		(39	)

	Total		—			—			—			—

Geographic area sales
	United States	$	2,092		$	1,821		$	6,445		$	5,577
	Europe		1,868			1,572			5,688			4,663
	Rest of World		1,554			1,300			4,392			3,489

	Total	$	5,514		$	4,693		$	16,525		$	13,729

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 3.

The Dow Chemical Company and Subsidiaries
Sales Volume and Price by Operating
Segment and Geographic Area

		Three Months Ended Sept. 30, 2000						Nine Months Ended Sept. 30, 2000
		Volume		Price		Total		Volume		Price		Total
		Percentage change from prior year
Operating segments
	Performance Plastics	12	%	3	%	15	%	12	%	—		12	%
	Performance Chemicals	14	%	(1	)%	13	%	18	%	(3	)%	15	%
	Agricultural Products	13	%	(5	)%	8	%	3	%	(4	)%	(1	)%
	Plastics	8	%	15	%	23	%	8	%	26	%	34	%
	Chemicals	(4	)%	9	%	5	%	—		21	%	21	%
	Hydrocarbons and Energy	4	%	37	%	41	%	5	%	50	%	55	%

	Total	9	%	8	%	17	%	9	%	11	%	20	%

Geographic areas
	United States	7	%	8	%	15	%	7	%	9	%	16	%
	Europe	10	%	9	%	19	%	10	%	12	%	22	%
	Rest of World	11	%	9	%	20	%	11	%	15	%	26	%

	Total	9	%	8	%	17	%	9	%	11	%	20	%

COMMITMENTS AND CONTINGENT LIABILITIES

In January 1994, Dow Corning Corporation (Dow Corning), in which the Company is a 50 percent shareholder, announced a pretax charge of $640 million ($415 million after tax) for the fourth quarter of 1993. In January 1995, Dow Corning announced a pretax charge of $241 million ($152 million after tax) for the fourth quarter of 1994. These charges included Dow Corning's best estimate of its potential liability for breast implant litigation based on a global Breast Implant Litigation Settlement Agreement (the Settlement Agreement); litigation and claims outside of the Settlement Agreement; and provisions for legal, administrative and research costs related to breast implants. The charges for 1993 and 1994 included pretax amounts of $1,240 million and $441 million less expected insurance recoveries of $600 million and $200 million, respectively. The 1993 amounts reported by Dow Corning were determined on a present value basis. On an undiscounted basis, the estimated liability noted above for 1993 was $2,300 million less expected insurance recoveries of $1,200 million.

As a result of the Dow Corning actions, the Company recorded its 50 percent share of the charges, net of tax benefits available to Dow. The impact on net income was a charge of $192 million for 1993 and $70 million for 1994.

Dow Corning reported an after-tax net loss of $167 million for the second quarter of 1995 as a result of a $221 million after-tax charge taken to reflect a change in accounting method from the present value basis noted above to an undiscounted basis resulting from the uncertainties associated with its voluntary filing for protection under Chapter 11 of the U.S. Bankruptcy Code on May 15, 1995. As a result of such loss and Chapter 11 filing, the Company recognized a pretax charge against income of $330 million for the second quarter of 1995, fully reserved its investment in Dow Corning, and is presently reserving its 50 percent share of equity earnings.

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.

On July 7, 1998, Dow Corning, the Company and Corning Incorporated (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 (collectively, the Shareholders). 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 (collectively, the Proponents) on November 9, 1998. On February 4, 1999, the Bankruptcy Court approved the disclosure statement describing the Joint Plan. Before the Joint Plan could become effective, however, it was subject to a vote by the claimants, a confirmation hearing and all relevant provisions of the Bankruptcy Code. Voting was completed on May 14, 1999 and the confirmation hearing concluded on July 30, 1999.

On November 30, 1999, the Bankruptcy Court issued an Order confirming the Joint Plan, but then issued an Opinion on December 21, 1999 that, in the view of the Proponents and the Shareholders, improperly interpreted or attempted to modify certain provisions of the Joint Plan affecting the resolution of tort claims involving Dow Corning's silicone medical products against various entities, including the Shareholders. Many of the parties in interest, including the Shareholders, filed various motions and appeals seeking, among other things, a clarification of the December 21, 1999 Opinion. The effectiveness of the Joint Plan remains subject to the resolution of these motions and appeals, which were heard by U. S. District Court Judge Denise Page Hood on April 12 and 13, 2000, but upon which she has not yet ruled. Accordingly, there can be no assurance 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 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.

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 obligations of $314 million at September 30, 2000 for environmental matters, including $11 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding

liability, and evolving technologies for handling site remediation and restoration. It is the opinion of the Company's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Company's consolidated financial statements.

In addition to the breast implant, DBCP and environmental remediation matters, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested.

Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage that 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 that expired in 1998 and one that 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 $92 million in 1999, $221 million in 1998 and $199 million in 1997.

At December 31, 1999, the Company had various outstanding commitments for take or pay and throughput agreements, including the Canadian subsidiary's ethylene contract, 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, 1999 (in millions)
2000	$	309
2001		296
2002		300
2003		281
2004		256
2005 through expiration of contracts		1,890

Total	$	3,332

In addition to the take or pay obligations at December 31, 1999, 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 $98 million. In general, such commitments were at prices not in excess of current market prices. The Company also had outstanding direct and indirect commitments for construction performance and lease payment guarantees and other obligations of $253 million. The Company is also committed to lease manufacturing facilities under construction in Argentina and the Netherlands.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of The Dow Chemical Company and its subsidiaries (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 (SEC). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company's expectations will be realized. The Company has no obligation to provide revisions to any forward-looking statements should circumstances change.

THIRD QUARTER EARNINGS ANNOUNCEMENT (OCTOBER 26, 2000)

DOW REPORTS EARNINGS OF $0.48 PER SHARE ON RECORD THIRD QUARTER SALES

Third Quarter of 2000 Highlights

•

EBIT increased 8 percent over last year—from $584 million to $630 million—despite a 46 percent rise in feedstock and energy costs that totaled nearly $600 million.

•

Dow achieved record third quarter sales of $5.5 billion, up 17 percent from a year ago, reflecting increases in all businesses and geographies.

•

Volume rose 9 percent and price rose 8 percent. The performance segments achieved double-digit gains in volume and the basics segments posted strong improvements in price, demonstrating the value of Dow's balanced portfolio.

	3 Months Ended September 30				9 Months Ended September 30
(In millions, except for per share amounts)	3 Months Ended September 30				9 Months Ended September 30
(In millions, except for per share amounts)	2000		1999		2000		1999
Net Sales	$	5,514	$	4,693	$	16,525	$	13,729
Earnings Before Interest, Income Taxes and Minority Interests (EBIT)		630		584		2,319		1,981
Earnings Per Common Share	$	0.48	$	0.48	$	1.86	$	1.58

Note: Earnings per share amounts for prior periods have been restated to reflect Dow's three-for-one stock split, which was effective June 16, 2000.

Review of Third Quarter Results

Reporting record third quarter sales of $5.5 billion, The Dow Chemical Company announced an 8 percent rise in earnings before interest, income taxes and minority interests (EBIT), compared with the same period a year ago, despite a 46 percent increase in feedstock and energy costs. The Company posted EBIT of $630 million, net income of $328 million and earnings per share of $0.48.

"We are pleased with these results which demonstrate Dow's inherent strengths in the face of surging raw material and energy costs," said J. Pedro Reinhard, executive vice president and chief financial officer. He noted that Dow overcame nearly $600 million in higher feedstock and energy costs, which outpaced the Company's $400 million increase in sales prices. "Our diversified business and geographic mix, combined with our leading business positions, enabled us to capitalize on strong volume growth around the world. Improved results from joint ventures and a continued focus on cost controls further strengthened our performance."

The 17 percent rise in sales, compared with third quarter 1999, reflected double-digit gains in all geographic areas and solid increases in all businesses.

Volume grew 9 percent, compared with the same period a year ago, led by a 13 percent increase in the performance segments. Substantial volume growth was recorded in all geographic areas, with double-digit gains in Europe and Latin America.

Price rose 8 percent compared with the same quarter in 1999. Increases in Chemicals, Plastics and Performance Plastics more than offset modest price declines in Performance Chemicals and Agricultural Products.

The performance segments achieved strong year-over-year volume growth, and price began to improve from second quarter 2000. Combined EBIT for these segments declined from a year ago, however, reflecting the escalating raw material costs.

In the basics segments, EBIT increased 22 percent from the same quarter in 1999. Plastics EBIT grew 31 percent on a 23 percent rise in sales, with gains in both volume and price. Chemicals also posted higher sales and EBIT, due largely to price improvements that offset a modest decline in volume.

"We remain confident that we will achieve measurably higher year-over-year earnings in 2000, though we continue to see challenging industry conditions, including volatile feedstock costs, some currency fluctuations and the potential for slower economic growth around the world," said Reinhard. "Our strategy continues to cushion Dow from the full impact of these challenges while positioning us to achieve our goal of growing earnings by 10 percent per year across the cycle."

ACQUISITIONS AND DIVESTITURES

In April 1995, the Company signed an agreement with Bundesanstalt für vereinigungsbedingte Sonderaufgaben (BvS) for the privatization of three state-owned chemical companies in eastern Germany, Buna Sow Leuna Olefinverbund (BSL). Economic transfer of business operations to the Company, through the privatization agreement and various service agreements, occurred in June 1995, and the Company began a reconstruction program of the sites. In September 1997, the Company acquired 80 percent ownership in BSL for an investment of $174 million; BvS maintained 20 percent ownership. The Company had a call option and BvS a put option for the remaining 20 percent of BSL after the reconstruction period. In May 2000, the Company announced the completion of the reconstruction program and, for an additional investment of $156 million, acquired the remaining 20 percent of BSL. On June 1, 2000, BSL became a wholly owned subsidiary of the Company and, beginning on that date, the financial results of BSL are fully consolidated.

BvS provided certain incentives during the reconstruction period to cover portions of the reconstruction program and has retained environmental cleanup obligations for existing facilities. Incentives related to property construction reduced the basis of such property. Incentives related to expenses during the reconstruction period were recognized as such expenses were incurred. During the reconstruction period, the Company included the financial results of BSL as a nonconsolidated affiliate.

In January 1998, the Company completed the sale of the DowBrands consumer products business to S.C. Johnson & Son, Inc. for $1.2 billion. This transaction resulted in a pretax gain of $816 million.

In February 1998, the Company entered into an agreement with Pronor Petroquimica S.A. (Pronor) to purchase a portion of its business. The new company, named Isopol, was acquired for the production and commercialization of toluene diisocyanate (TDI), used to manufacture durable goods such as cushioned furniture and mattresses, to supply the markets of the Mercosur countries of Latin America. The Company's total investment was $137 million.

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 million. In July 1998, as part of the Company's ongoing efforts to restructure its business portfolio, Radian was sold to Dames & Moore Group for $117 million.

In January 1996, DowElanco entered into agreements with Mycogen Corporation and the Lubrizol Corporation for transactions through which DowElanco, for a cash investment of $158 million, acquired a 47 percent equity stake in Mycogen and Mycogen acquired DowElanco's United Agriseeds subsidiary. In December 1996, DowElanco increased its equity stake in Mycogen to more than 50 percent. During the first quarter of 1998, Dow AgroSciences (formerly named DowElanco) invested an additional $121 million in Mycogen, increasing its ownership to 69 percent. In November 1998, following the expiration of a tender offer, the Company completed the acquisition of all remaining shares for $418 million. Mycogen is a diversified agribusiness and biotechnology company that develops and markets seeds and value-added traits for genetically enhanced crops.

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.

On August 4, 1999, the Company and Union Carbide Corporation announced a definitive merger agreement for a tax-free, stock-for-stock transaction. Under the agreement, Union Carbide stockholders will receive 1.611 shares of Dow stock (on a post-split basis) for each share of Union Carbide stock they own. Based upon Dow's closing price of $124¹¹/16 (pre-split) on August 3, 1999, the transaction was valued at $66.96 per Union Carbide share, or $11.6 billion in aggregate including the assumption of $2.3 billion of net debt. According to the agreement, the merger is subject to certain conditions including approval by Union Carbide stockholders and review by antitrust regulatory authorities in the United States, Europe and Canada. Union Carbide stockholders approved the merger on December 1, 1999. On May 3, 2000, the European Commission approved the merger subject to certain conditions. Antitrust reviews in the United States and Canada are in progress, and the Company expects to complete the merger in the near future. The transaction is expected to be accounted for as a pooling-of-interests.

In October 1999, the Company acquired CanStates Holdings, Inc. and its subsidiary, ANGUS Chemical, from TransCanada PipeLines Limited for approximately $350 million. ANGUS Chemical is a global leader in the manufacture and marketing of specialty nitroparaffins and their derivatives which are sold into over 40 industries. Allocation of the purchase price to the assets acquired and liabilities assumed has not been completed for this acquisition. Final determination of the fair values to be assigned may result in adjustments to the preliminary values assigned at the date of acquisition.

In February 2000, the Company acquired Flexible Products Company of Marietta, Georgia, for approximately $160 million. Flexible Products Company is one of the largest polyurethane systems suppliers in North America and a leader in custom polyurethane foam formulations and dispensing technology. This acquisition is consistent with Dow's growth goals in polyurethanes and its commitment to the global formulated products and systems business. Allocation of the purchase price to the assets acquired and liabilities assumed has not been completed for this acquisition. Final determination of the fair values to be assigned may result in adjustments to the preliminary values assigned at the date of acquisition.

On August 2, 2000, the Company announced it had signed an agreement to sell its 32.5 percent ownership interest in the Cochin pipeline system to a unit of Williams' energy services business. On October 23, 2000, NOVA Chemicals Corp., as one of the owners of Cochin, announced that it exercised its right of first refusal as provided in the contractual agreements among the Cochin owners. NOVA plans to purchase the Company's 32.5 percent interest in the pipeline under the same terms and conditions that had been negotiated with Williams with respect to the pipeline. The transaction is anticipated to close in the fourth quarter of 2000.

CHANGES IN FINANCIAL CONDITION

The following tables represent total debt and working capital at September 30, 2000 versus December 31, 1999:

		Sept. 30, 2000		Dec. 31, 1999		Increase (Decrease)
		In millions
Notes payable		$	1,119	$	692	$	427
Long-term debt due within one year			407		343		64
Long-term debt			4,790		5,022		(232	)

	Total debt	$	6,316	$	6,057	$	259

At September 30, 2000, the Company had unused and available credit facilities with various U.S. and foreign banks totaling $3.1 billion in support of its working capital requirements and commercial paper borrowings. Additional unused credit facilities totaling approximately $1.1 billion are available for use by foreign subsidiaries.

			Sept. 30, 2000		Dec. 31, 1999		Increase (Decrease)
			In millions
Cash and cash equivalents			$	210	$	506	$	(296	)
Marketable securities and interest-bearing deposits				90		706		(616	)
Accounts and notes receivable—net				5,333		4,614		719
Inventories:
	Finished and work in process			2,708		2,264		444
	Materials and supplies			606		522		84
Deferred income tax assets—current				74		235		(161	)

		Total current assets		9,021		8,847		174

		Total current liabilities		7,438		6,295		1,143

		Working capital	$	1,583	$	2,552	$	(969	)

Operating activities provided cash of $763 million for the nine months ended September 30, 2000. Additional cash of $1.5 billion was generated by sales of available-for-sale securities in excess of purchases of similar securities. Cash was used primarily for acquisitions (Flexible Products Company, General Latex and BSL), to reduce long-term debt, to pay dividends and for capital expenditures. See the Consolidated Statements of Cash Flows and the Acquisitions and Divestitures section (above) for more detail.

Balance Sheet Ratios	Sept. 30, 2000		Dec. 31, 1999
Current assets over current liabilities	1.2:1		1.4:1
Days-sales-outstanding-in-receivables	42		45
Days-sales-in-inventory	74		66
Debt as a percentage of total capitalization	38.4	%	39.5	%

At December 31, 1999, the balance of preferred stock issued to the employee stock ownership plan (ESOP) by the Company was 1.3 million shares. The preferred stock was redeemable in whole or in part at the Company's option any time after January 1, 2000 at $86.125 per share plus an amount equal to all accrued and unpaid dividends. On February 9, 2000, the Company exercised its option to redeem the preferred stock. On that same date, the trustee of the ESOP elected to convert the preferred stock into common stock at a ratio of 1:1.

During the past three years, the Company repurchased 31.4 million shares of its common stock as part of its overall stock repurchase program, and at year-end 1999, net shares outstanding had been reduced by 19 percent since the beginning of 1995. Due to the pending merger with Union Carbide Corporation, the Company's 1997 authorization to repurchase Dow stock was terminated by the Board of Directors on August 3, 1999. In December 1999, the Company sold 3.5 million shares of common stock held in treasury in the open market for $431 million to facilitate the accounting treatment of the merger with Union Carbide as a pooling-of-interests, which is a condition to the completion of the merger.

On May 11, 2000, stockholders approved a measure to increase the number of authorized common shares from 500 million to 1.5 billion at the Company's 103rd Annual Meeting, and Dow's Board of Directors approved a three-for-one split of the Company's common stock. On June 16, 2000, Dow stockholders received two additional shares of stock for each share they owned on the record date of May 23, 2000. On a post-split basis, average shares outstanding for the first nine months of 2000 were 677 million, an increase of 3 percent compared with the average shares outstanding for the first nine months of 1999. The par value of $2.50 per common share remains unchanged.

On October 30, 2000, the Company paid a quarterly dividend of 29 cents per share (equivalent to 87 cents per share on a pre-split basis) to shareholders of record on September 29, 2000. This was the 355th consecutive quarterly dividend since 1912 and in each instance Dow has maintained or increased the dividend.

RESULTS OF OPERATIONS

Following are selected data for the three months and nine months ended September 30, 2000 and 1999:

	Three Months Ended						Nine Months Ended
	Sept. 30, 2000			Sept. 30, 1999			Sept. 30, 2000			Sept. 30, 1999
	Dollars in millions, except for share amounts
Sales	$	5,514		$	4,693		$	16,525		$	13,729
Cost of sales		4,393			3,587			12,812			10,258
% of sales		80	%		76	%		78	%		75	%
Research and development, selling, general and administrative expenses		614			584			1,827			1,763
Earnings before interest, income taxes and minority interests (EBIT)		630			584			2,319			1,981
% of sales		11	%		12	%		14	%		14	%
Effective tax rate		34.2	%		35.0	%		34.7	%		35.5	%
Net income available for common stockholders	$	328		$	320		$	1,270		$	1,059
Earnings per common share—basic	$	0.48		$	0.49		$	1.88		$	1.61
Earnings per common share—diluted	$	0.48		$	0.48		$	1.86		$	1.58
Operating rate percentage		85	%		91	%		87	%		88	%

Net sales for the third quarter of 2000 were $5.5 billion, a new all-time record for third quarter sales. Compared with $4.7 billion in the third quarter of 1999, net sales were up $821 million, or 17 percent, with volume growth of 9 percent and increased prices of 8 percent. Volume was particularly strong in the performance segments, with Performance Plastics, Performance Chemicals and Agricultural Products all reporting double-digit volume growth. Substantial volume growth was recorded in all geographic areas, led by Latin America, up 15 percent, and Europe, up 10 percent. Sales prices improved approximately $400 million in total for the Company, driven by significant increases in the basics segments, reflecting a steep rise in feedstock and energy costs. Prices rose in all geographic

areas, with increases ranging from 7 to 10 percent. Year to date, net sales of $16.5 billion were up 20 percent from $13.7 billion last year due to price increases of 11 percent and volume growth of 9 percent.

Operating expenses (research and development, and selling, general and administrative expenses) were $614 million for the third quarter, up $30 million from $584 million for the same quarter last year. Compared with last year, operating expenses for the first nine months of the year were up $64 million, or 4 percent, reflecting the Company's planned support of new business growth initiatives and recent acquisitions. Excluding growth initiatives and acquisitions, operating expenses were down 4 percent for the quarter and 3 percent for the year, compared with 1999.

Net income for the third quarter was $328 million or $0.48 per share (diluted), compared with $320 million or $0.48 per share (diluted) for the third quarter of 1999, despite a 46 percent increase in feedstock and energy costs that amounted to nearly $600 million. Net income for the first nine months of 2000 was $1.3 billion, up 20 percent from $1.1 billion for the same period last year. Year to date, feedstock and energy costs were up sharply, $1.9 billion (almost 60 percent) over last year. Overcoming the increase in raw material costs, net income improved for the quarter and the year through increased selling prices, strong volume gains, the Company's diverse business portfolio and geographic presence, and improved contributions from joint ventures around the world.

PERFORMANCE PLASTICS

Performance Plastics sales of $1,492 million for the third quarter were up 15 percent from $1,302 million in the third quarter of 1999, on a 12 percent increase in volume and a 3 percent increase in price. Excluding acquisitions, volume was up 7 percent. EBIT for the segment was $196 million, down from $248 million last year, primarily due to a significant increase in raw material costs.

Dow Automotive, the Company's first industry-focused global business unit, reported good results for the third quarter of 2000, with sales up 15 percent from a year ago. The increase in sales was driven by volume growth, up significantly on the strength of the global automotive industry and Dow's increased participation in this industry. Prices were down slightly due to the negative impact of currency on sales in Europe. Third quarter EBIT for the business was relatively flat with last year as increased raw material costs offset volume growth.

Engineering Plastics sales for the quarter were up 15 percent from the same quarter last year, with volume growth of 7 percent and price improvement of 8 percent. Volume was particularly strong for nylon and polycarbonate in North America and Asia Pacific. EBIT for the quarter improved significantly from the third quarter of 1999 as increases in sales volume and price exceeded higher raw material costs.

Sales of Epoxy Products and Intermediates were up 18 percent from last year, with volume growth of 10 percent and price improvement of 8 percent. Demand was particularly strong for allylics, phenolics and converted resins in North America. Prices, up in all geographic areas except Europe, improved 10 percent in Latin America and 9 percent in North America. EBIT for the quarter was up compared with the same quarter last year due to increased volume and prices.

Fabricated Products sales for the third quarter of 2000 were up 5 percent compared with last year. While volume was up 6 percent, demand growth moderated with year-to-date housing starts in the United States down 5 percent. Volume in Europe improved with the consolidation of BSL. While there was some improvement in local prices, price was down 1 percent in total, due to the negative impact of currency on sales in Europe. EBIT for the third quarter was down versus the third quarter of last year, impacted by higher raw material costs and the cost of converting blowing agent equipment.

Polyurethanes sales for the third quarter were up 17 percent compared with the third quarter of 1999, driven by volume growth of 16 percent. Excluding acquisitions (Flexible Products Company and

General Latex), volume was up 4 percent. Overall, volume was particularly strong in North America (due to acquisitions) and Asia Pacific. Product demand was led by methylene diphenyl diisocyanate (MDI), up 10 percent. Local prices were up 5 percent overall compared with last year, but offset by the negative impact of currency on sales in Europe. Raw material costs for the business increased significantly year over year, with propylene up 65 percent over last year's cost and benzene up more than 50 percent. Margins continued to be squeezed by the hydrocarbon cost increases, resulting in a substantial decrease in EBIT for the business versus last year.

For the first nine months of the year, Performance Plastics sales were $4,342 million, up 12 percent from $3,862 million for the same period last year, due entirely to volume growth. Prices overall were flat with last year. Excluding acquisitions, volume was up 10 percent. Year to date, EBIT was $593 million compared with $815 million last year, reflecting the impact of increased raw material costs.

PERFORMANCE CHEMICALS

Performance Chemicals sales for the third quarter were $759 million, up significantly from $674 million for the third quarter of 1999, as volume grew 14 percent and prices declined 1 percent. Roughly one-third of the increase in volume came from acquisitions. Third quarter EBIT for the segment was down from $108 million last year to $82 million this year, as the combination of lower selling prices and higher raw material costs more than offset volume growth.

Specialty Chemicals sales for the quarter were up 14 percent, with a 17 percent increase in volume and a 3 percent decline in prices versus the same quarter last year. Net of the acquisition of ANGUS Chemical, volume was up 11 percent. Volume improved in all geographic areas, led by strong growth in Europe and Asia Pacific. From a product standpoint, demand was particularly strong for biocides, alkanolamines and FilmTec membranes. Volume for Methocel cellulose ethers was down slightly from last year. Overall, local prices were relatively flat due to competitive pressure, but declined, in total, due to the negative impact of currency on sales in Europe. EBIT for the third quarter was down versus last year as higher raw material costs, increased operating expenses due to acquisitions and lower selling prices more than offset volume growth.

Emulsion Polymers sales increased 9 percent versus the third quarter of 1999 on an 8 percent increase in volume. Volume increased significantly for SB latex sales into the coated paper industry around the world. Local prices improved 6 percent, but were offset by a 5 percent negative currency impact. EBIT for the quarter was down from last year due to higher styrene monomer and butadiene costs, both up over 50 percent from third quarter 1999.

Performance Chemicals sales for the first nine months of 2000 were $2,265 million, up 15 percent from $1,971 million, on an 18 percent increase in volume partially offset by a 3 percent decline in prices. Year to date, EBIT for the segment was $283 million, down from $381 million last year due to lower selling prices and higher raw material costs.

AGRICULTURAL PRODUCTS

Sales of Agricultural Products for third quarter 2000 were $430 million, up 8 percent from $399 million last year. Volume for the segment grew 13 percent, while prices declined 5 percent. Demand was especially strong in Brazil for weed management products, up more than 50 percent from the third quarter of 1999. Demand was also strong for seeds and new products, including spinosad insect control products and glyphosate. Prices were down versus last year due to competitive pressure and the negative impact of currency on sales in Europe. EBIT for the quarter was a loss of $23 million, compared with a loss of $35 million in the third quarter of 1999. Growth in new products and continued improvement from Dow AgroSciences' cost reduction and business restructuring program announced last November mitigated the impact of lower prices and supported continued research investment in biotechnology. See the section entitled "1999 Special Charge" on page 18 for further details on Dow AgroSciences' restructuring program.

In June 2000, Dow AgroSciences reached agreement with the U.S. Environmental Protection Agency on changes in the use of insecticides containing chlorpyrifos. These changes are not expected to have a material impact on the Company's results.

Sales for the segment were $1,722 million for the first nine months of this year, down slightly from $1,732 million in 1999. While volume improved 3 percent, prices declined 4 percent. Year to date, EBIT was $225 million, up 10 percent compared $205 million for the same period last year, reflecting the business' restructuring efforts.

PLASTICS

Plastics sales in the third quarter of 2000 were $1,435 million, up 23 percent from $1,170 million a year ago. Volume grew 8 percent; prices rose 15 percent. EBIT for the quarter was $271 million, up significantly from $207 million in the third quarter of 1999, due to increases in selling prices that outpaced the significant rise in hydrocarbon and energy costs.

Polyethylene sales were up 14 percent versus the same quarter last year, with volume growth of 10 percent and price increases of 4 percent. Volume was up significantly in all geographic areas except North America, where volume was basically flat in the United States and down slightly in Canada. Demand was particularly strong for Affinity polyolefin plastomers, low density polyethylene and solution polyethylene. Year-over-year price increases moderated following four quarters of year-over-year price increases that ranged from 12 to 28 percent. EBIT for the business was down slightly, reflecting a decrease in margins as increases in selling prices moderated against a continued increase in feedstock costs.

Sales of polyethylene terephthalate (PET) and purified terephthalic acid (PTA) for the third quarter were up 26 percent over the third quarter of last year, due to an increase in selling prices in Europe. Volume compared with last year was relatively flat. EBIT improved versus last year, reflecting the significant increase in selling prices.

Polypropylene sales for the third quarter of 2000 continued a strong upward trend due to improved pricing and volume versus the same quarter last year. Volume was particularly strong in Europe, up 60 percent from last year. EBIT improved versus last year due to higher selling prices and improved customer/product mix.

Polystyrene sales increased 44 percent in the third quarter versus the same quarter of 1999, entirely on increased prices. Volume during the quarter was flat. Selling prices increased sharply compared with last year, driven by styrene monomer pricing. EBIT for the business was up significantly compared with the third quarter of 1999, as price increases outpaced feedstock costs.

Plastics sales for the first nine months of 2000 were $4,163 million compared with $3,110 million last year, an increase of 34 percent. Year to date, volume grew 8 percent and prices increased 26 percent. EBIT for the period was $827 million, up significantly from $437 million for the first nine months of 1999, as volume growth and increased prices outpaced a sharp rise in hydrocarbon and energy costs.

CHEMICALS

Third quarter sales for the Chemicals segment were $640 million, up 5 percent from $607 million in the third quarter of 1999. Prices rose 9 percent compared with last year, with increases reported in all geographic areas except Asia Pacific. Volume, down 4 percent overall, was strong in Europe, up 12 percent, but down in the rest of the world. Vinyl chloride monomer (VCM) sales were up significantly year over year due to price increases. Caustic sales were up versus last year on strong demand and price increases. Ethylene glycol (EG) sales were down for the quarter, with volume down roughly 20 percent due to delayed antifreeze demand. Volume for propylene glycol (PG) was strong during the quarter, but prices remained under pressure, especially in North America. EBIT for the

segment was $105 million, up slightly from $101 million in the third quarter of 1999. EBIT improved as higher selling prices offset the increase in feedstock and energy costs.

For the first nine months of 2000, sales for the Chemicals segment were $2,008 million, up from $1,660 million last year due to a 21 percent improvement in selling prices. EBIT for the period was $444 million compared with $290 million for 1999. While this segment was significantly impacted by higher feedstock and energy costs, EBIT improved due to increased selling prices.

HYDROCARBONS AND ENERGY

Hydrocarbons and Energy sales were up $191 million from $469 million in the third quarter of 1999 to $660 million, an increase of 41 percent driven by higher prices. Refinery sales prices were up in the quarter, reflecting significantly higher crude oil costs and tight supply conditions. Hydrocarbon feedstock costs continued to rise during the quarter, negatively impacting the results of several of the Company's businesses. EBIT for the quarter was a loss of $1 million compared with a loss of $17 million in the third quarter of 1999.

Sales for the first nine months of 2000 were $1,769 million, up sharply from $1,141 million last year, largely due to a 50 percent rise in selling prices. Volume was up 5 percent. EBIT for the first nine months was $14 million compared with a loss of $7 million for the same period last year.

UNALLOCATED AND OTHER

Unallocated and Other includes research and development expenses in the Company's growth platforms, overhead cost recovery variances that are not allocated to the operating segments, results of Dow's insurance and finance company operations, gains and losses on sales of financial investments, and foreign exchange hedging results.

EBIT for the quarter was at breakeven compared with a loss of $28 million for the third quarter of 1999. This improvement was due in part to favorable results in the Company's economic hedging program, positive recovery variances for overhead expenses and gains on sales of financial instruments. Year to date, EBIT was a loss of $67 million compared with a loss of $140 million for the nine months of 1999.

COMPANY SUMMARY

Operating Rate

The Company's global plant operating rate for its chemicals and plastics businesses was 85 percent, compared with 91 percent in the third quarter of 1999, primarily due to outages for maintenance in several of the Company's hydrocarbons and energy facilities. Year to date, the Company's operating rate was 87 percent, down slightly from 88 percent for the first nine months of last year.

Equity in Earnings of Nonconsolidated Affiliates

Equity in earnings of nonconsolidated affiliates was $78 million in the third quarter, up from $15 million in the same quarter last year due to improved earnings by several of the Company's joint ventures around the world. These improvements included strong performance by several plastics joint ventures in Asia Pacific and Latin America, and improved results from several hydrocarbons joint ventures in North America. Third quarter results also included final resolution of BSL matters relating to the reconstruction period. Year to date, equity earnings were $244 million compared with $62 million in 1999.

During the reconstruction period, the Company included the financial results of BSL as a nonconsolidated affiliate. On June 1, 2000, BSL became a wholly owned subsidiary of the Company and, beginning on that date, the financial results of BSL are fully consolidated.

Sundry Income—Net

Sundry income includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income for the third quarter of 2000 was $58 million compared with $53 million in the third quarter of 1999. Sundry income for the quarter included positive economic hedging results, which helped offset some of the negative impact of currency on reported net sales, and gains on sales of available-for-sale securities. Year to date, sundry income was $230 million compared with $210 million last year.

Interest Income and Expense

The net total of interest expense (net of capitalized interest) and interest income was $112 million for the third quarter compared with $64 million for the third quarter of 1999. Generally consistent with previous quarters of this year, net interest expense was up compared with last year due to an increase in total debt, an increase in short-term interest rates and a decrease in short-term investments.

Provision for Taxes on Income

The effective tax rate for the third quarter was 34.2 percent compared with 35.0 percent for the same quarter of 1999. Year to date, the effective tax rate was 34.7 percent compared with 35.5 percent last year.

1999 Special Charge

In the fourth quarter of 1999, a special charge of $94 million was recorded for a cost reduction and business restructuring program in the Agricultural Products segment. The program, which was announced in November 1999, impacts operations in the United States, Europe, Middle East/Africa and Latin America, and is expected to be completed in 2000. The fourth quarter charge included severance of $51 million for approximately 700 employees, inventory write-offs of $17 million, and asset write-offs of $26 million. During the first nine months of 2000, $38 million of the severance reserve was used to reduce headcount by 492 individuals, leaving a balance of $13 million for an estimated additional headcount reduction of approximately 235. Seeds inventory was written off during the first quarter, fully utilizing the inventory reserve. The quarter-end balance for additional asset write-offs related to the plan was $20 million.

Outlook

The macroeconomic environment for the fourth quarter of 2000 is quite different from that of a year ago. Energy prices are significantly higher and much more volatile. Last year, U.S. growth was strong and growth in Asia Pacific and Latin America was accelerating. The economic outlook for the fourth quarter is less certain. While Dow's businesses did not experience a general reduction in growth in the third quarter of 2000, global growth is expected to be a bit lower in 2001 than in 2000, and the impact of this slower growth may begin in the fourth quarter of 2000.

The strength of the global economy should continue to help the chemical industry, although continued margin pressure from high hydrocarbon and energy costs is anticipated, along with some short-term weakening in certain industry fundamentals. The impact of capacity additions in the ethylene chain may result in price pressure for polyethylene and other ethylene derivatives for the next few quarters, although higher demand driven by continued economic strength should reduce this pressure somewhat. Supply/demand is relatively balanced in the chlor-alkali and styrene business chains.

Stabilizing hydrocarbon and energy prices are anticipated in the fourth quarter of 2000, with average oil and gas prices below current levels but somewhat higher than the third quarter averages. Strong product demand is also expected to continue.

Year to date, most Dow products have experienced very strong volume growth, with double-digit increases in Performance Plastics and Performance Chemicals. Margin on increased volume has helped offset hydrocarbon and energy cost increases, which have outstripped sales price increases by over $300 million so far this year. Price momentum has turned modestly positive for the performance businesses, but has slowed or turned negative for some ethylene derivatives.

Given an expectation of modest sequential increases in raw material costs and year-over-year volume growth in the 5 to10 percent range, the performance businesses should generally show improvement versus third quarter results, but may fall short of last year's fourth quarter levels. Results in the basics businesses may also be below fourth quarter 1999, with higher caustic prices and stronger ethylene glycol demand mitigating somewhat weaker supply/demand fundamentals in vinyl and certain ethylene derivatives.

It is very difficult to forecast results in such an uncertain environment of volatile feedstock pricing, currency fluctuations and the potential for slower economic growth. Published analysts' estimates for Dow's fourth quarter results currently range from $0.34 to $0.46 per share. Given the dates of the estimates, some of those numbers may include expectations of declining feedstock pricing. While that range may be reasonable, if oil and gas prices do not decline somewhat, the upper end of that range will be difficult to achieve.

SUBSEQUENT EVENT

On October 12, 2000, the Company announced it had reached an agreement with Gurit-Heberlein AG to acquire the 50 percent interest in Gurit-Essex AG that it does not currently own. Dow became a 50:50 partner with Gurit-Heberlein in 1988 when the Company purchased Essex Chemical. Gurit-Essex is the largest European supplier of automotive adhesives, sealants and body engineered systems for the automotive OEM and aftermarket. The acquisition will globalize Dow Automotive's product availability and double the Company's adhesives, sealants and body engineered systems business. Pending regulatory approvals, the transaction is expected to close by the end of the first quarter of 2001.

ACCOUNTING POLICIES

In 1999, the Company adopted the following new accounting pronouncements:

•: The American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," requires capitalization of certain internal-use computer software costs. SOP 98-1 was adopted by the Company on January 1, 1999. The Company's previous accounting policy was to expense such costs as incurred; therefore, adoption of this statement resulted in a favorable, though immaterial, initial impact on earnings.
•: SOP 98-5, "Reporting on the Costs of Start-Up Activities," provides guidance on the financial reporting of start-up costs and organization costs, requiring those costs to be expensed as incurred. The Company's previous policy regarding the treatment of these costs was substantially consistent with SOP 98-5; therefore, adoption of this standard on January 1, 1999 resulted in an immaterial impact on the Company's consolidated financial statements.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," which summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition. Implementation of SAB 101 is required no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company has completed its assessment

of SAB 101 and has determined that the bulletin's revenue recognition guidelines are consistent with the Company's existing revenue recognition policies; therefore, SAB 101 will not have a material impact on its consolidated financial statements.

In May 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus with respect to EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF 00-10 recognizes the inconsistencies in practice of the recording of shipping and handling costs incurred by most companies that sell goods. The Company currently treats freight and any directly related associated cost of transporting finished product to market as a reduction of net sales. Following the guidance of EITF 00-10, the Company will reclassify freight on sales in its Form 10-K for 2000, including the restatement of prior periods. As a result, reported net sales will increase approximately 5 percent, with a corresponding increase in cost of sales.

The FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. SFAS No. 133 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No. 133. Based on the revised effective date, the Company will adopt SFAS No. 133, as amended by SFAS No. 138, on January 1, 2001. Upon adoption, the Company expects to increase other assets and current liabilities for the fair value of its financial derivatives that qualify for hedge accounting treatment, with an offsetting increase to accumulated other comprehensive income. The use of the short-cut method under SFAS No. 133, where applicable, will result in an immaterial net impact on assets, liabilities, and the income statement. If the Company had adopted SFAS No. 133 on October 1, 2000, based on its ending third quarter balances, the impact on other assets and current liabilities would have been immaterial. The accumulated other comprehensive income component of equity would have increased approximately $200 million. The Company does not believe that the transition adjustments upon adoption of SFAS No. 133 will have a material impact on the income statement, although the impact could be material in future periods due to market volatility. The Company anticipates volatility in accumulated other comprehensive income from its cash flow hedges; the amount of volatility will vary with the level of derivative activities during any period. A global team, formed to assess the impact of adopting the new standard, is executing its implementation plan.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement, which replaces FASB Statement No. 125, revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It is effective for recognition and reclassifications of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company will comply with the disclosure requirements of SFAS No. 140 in its Form 10-K for 2000, and believes the statement will not have a material impact on its consolidated financial statements.

EURO CONVERSION

On January 1, 1999, the Euro was adopted as the national currency of 11 European Union member nations. During a three-year transition period, the Euro will be used as a non-cash transactional currency. The Company began conducting business in the Euro on January 1, 1999, and will change its functional currencies during the three-year transition period. The conversion to the Euro is not expected to have a significant operational impact or a material impact on the results of operations, financial position, or liquidity of its European businesses.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Dow's business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which 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 basis, 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 and Japanese yen; and economic exposure derived from the risk that currency fluctuations could affect the U.S. dollar value of future cash flows. The majority of the foreign exchange exposure is related to the Japanese yen and European currencies.

The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, "swaptions" and exchange traded instruments to accomplish this objective. The Company's primary exposure is to the U.S. dollar yield curve.

Inherent in Dow's business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. 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 relatively insignificant in comparison to the size of the equity and earnings of the Company. The VAR methodology used by Dow is based primarily on the variance/covariance statistical model. The following table is given as an example:

Average Daily VAR at December 31*

In millions	1999		1998
Foreign exchange	$	5	$	4
Interest rate		40		23
Equity exposures, net of hedges		13		6

*: Using a 95 percent confidence level

Management believes there have been no material changes in market risk or in risk management policies since December 31, 1999.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Breast Implant Matters

The Company and Corning Incorporated (Corning) are each 50 percent stockholders in Dow Corning Corporation (Dow Corning). Dow Corning, the Company and/or Corning have been sued in a number of individual and class actions by plaintiffs seeking damages, punitive damages and injunctive relief in connection with injuries purportedly resulting from alleged defects in silicone breast implants. In addition, certain stockholders of the Company have filed separate consolidated class action complaints in the federal district court for the Southern District of New York alleging that the Company, Dow Corning or some of their respective Directors violated duties imposed by the federal securities laws regarding disclosure of alleged defects in silicone breast implants. All individual defendants in this case have been dismissed without prejudice. The Company and one of its former officers were also sued in two separate class action complaints (subsequently consolidated in the federal district court for the Eastern District of Michigan under the caption ZSA v. Dow Chemical) alleging that the defendants violated duties imposed by the federal securities laws regarding disclosure of information material to a reasonable investor's assessment of the magnitude of the Company's exposure to direct liability in silicone breast implant litigation. On February 1, 1999, the Court entered a Stipulated Order in ZSA v. Dow Chemical dismissing the claims of the named plaintiffs with prejudice and dismissing the claims of the class, which had never been certified, without prejudice.

On May 15, 1995, Dow Corning announced that it had voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code. Under Chapter 11, all claims against Dow Corning (although not against its co-defendants) are automatically stayed.

It is impossible to predict the outcome of each of the above-described legal actions. However, it is the opinion of the Company's management that the possibility that these actions will have a material adverse impact on the Company's consolidated financial statements is remote, except as described below.

In January 1994, Dow Corning announced a pretax charge of $640 million ($415 million after tax) for the fourth quarter of 1993. In January 1995, Dow Corning announced a pretax charge of $241 million ($152 million after tax) for the fourth quarter of 1994. These charges included Dow Corning's best estimate of its potential liability for breast implant litigation based on a global Breast Implant Litigation Settlement Agreement (the Settlement Agreement); litigation and claims outside the Settlement Agreement; and provisions for legal, administrative and research costs related to breast implants. The charges for 1993 and 1994 included pretax amounts of $1,240 million and $441 million, respectively, less expected insurance recoveries of $600 million and $200 million, respectively. The 1993 amounts reported by Dow Corning were determined on a present value basis. On an undiscounted basis, the estimated liability noted above for 1993 was $2,300 million less expected insurance recoveries of $1,200 million. As a result of the Dow Corning actions, the Company recorded its 50 percent share of the charges, net of tax benefits available to the Company. The impact on the Company's net income was a charge of $192 million for 1993 and a charge of $70 million for 1994.

Dow Corning reported an after-tax net loss of $167 million for the second quarter of 1995, of which the Company's share amounted to $83 million. Dow Corning's second quarter loss was a result of a $221 million after-tax charge taken to reflect a change in accounting method from the present value basis noted above to an undiscounted basis resulting from the uncertainties associated with its Chapter 11 filing. As a result of Dow Corning's 1995 second quarter loss and Chapter 11 filing, the Company recognized a pretax charge against income of $330 million for the second quarter of 1995, fully reserved its investment in Dow Corning and is presently reserving its 50 percent share of equity earnings.

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.

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 4^th 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. On September 14, 1999, the Michigan Court of Appeals affirmed summary judgment in Maples v. The Dow Chemical Company, a case determinative of all cases pending in Michigan state court. The time for filing a petition for leave to appeal to the Michigan Supreme Court has passed with no petition having been filed. Pursuant to a stipulated order, all cases that were pending on the state court docket will now be dismissed with prejudice. Since federal courts in diversity

cases are bound to apply state court interpretations of state law questions, the Maples affirmance should also result in dismissal of all claims against the Company pending in federal court and governed by Michigan law. 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. The parties have since entered into a confidential settlement, the terms of which are dependent on the outcome of the appeal and are reflected, in part, in the Joint Plan (defined below). Any settlement amounts paid by the Company will be reimbursed by Dow Corning in accordance with the terms of the Joint Plan if the Joint Plan becomes effective. Further action in the Spitzfaden case itself will commence, if at all, only after the resolution of the pending appeal. 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 appropriate responsibility for the injuries judged to be caused by its product. In certain jurisdictions, the Company has also filed cross-claims and/or third party claims against Corning. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the Harris County product liability cases.

In an order dated December 1, 1994, Judge Frank Andrews, presiding in the consolidated breast implant cases in Dallas County, Texas, granted the Company's motion for summary judgment "in all respects except as to theories of conspiracy and strict liability as a component supplier." As a result, the Company remains a defendant as to such claims in the Dallas County product liability cases. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of these actions.

In addition to the jury findings in the first phase of the Louisiana state case noted above, three breast implant product liability cases brought against the Company have now been tried to judgment. In February 1995, a Harris County jury exonerated the Company in one case and found the Company jointly and severally liable with Dow Corning for $5.23 million on a single count in a second case. After the verdict, however, the Court overturned the jury's verdict and entered judgment for the Company. On October 30, 1995, a state court jury in Reno, Nevada found the Company liable for $4.15 million in compensatory damages and $10 million in punitive damages. On December 31, 1998, the Nevada Supreme Court reversed and vacated the $10 million punitive damages award and affirmed the $4.15 million compensatory damages award. The Company filed a motion asking the Court to reconsider that portion of its opinion affirming the compensatory damages award. On February 12, 1999, that motion was denied. Subsequently, the parties negotiated a confidential settlement and the case has been dismissed with prejudice. The Company will be reimbursed by Dow Corning for all settlement amounts paid, in accordance with the terms of the Joint Plan if the Joint Plan becomes effective.

On May 13, 1997, United States District Court Judge Denise Page Hood ordered that all breast implant claims currently pending against the Company as to which judgment had not been entered, whether pending in state or federal courts, be transferred to the United States District Court, Eastern District of Michigan pursuant to a decision issued by the United States Court of Appeals for the Sixth Circuit on May 8, 1997. On August 1, 1997, Judge Hood issued her case management order with respect to the transferred claims, and ordered that all implant claims later filed in federal or state courts against the Company should likewise be transferred. On August 5, 1997, the Tort Committee in Dow Corning's bankruptcy case filed a petition for a writ of certiorari with the United States Supreme Court seeking review of the May 8, 1997 decision of the Sixth Circuit. On November 10, 1997, the Supreme Court denied the Tort Committee's petition.

Judge Hood's May 13, 1997 order transferred the Louisiana state court breast implant case, Spitzfaden v. Dow Corning, et al., to the United States District Court, Eastern District of Michigan. The plaintiffs in that case filed an emergency motion to transfer, or abstain and remand, the case back to the Louisiana state court. On May 21, 1997, Judge Hood "abstain(ed) from the claims involved in Phases I and II" of that case resulting in its return to the Louisiana state court and the resumption of the trial. The Company sought review of Judge Hood's May 21 decision by the United States Court of Appeals for the Sixth Circuit. On June 25, 1998, the Sixth Circuit rejected the Company's argument that Judge Hood's May 21, 1997 order returning Phases I and II of the Spitzfaden proceeding to Louisiana was an abuse of her discretion.

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 (collectively, the Shareholders). 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 (collectively, the Proponents) on November 9, 1998. On February 4, 1999, the Bankruptcy Court approved the disclosure statement describing the Joint Plan. Before the Joint Plan could become effective, however, it was subject to a vote by the claimants, a confirmation hearing and all relevant provisions of the Bankruptcy Code. Voting was completed on May 14, 1999 and the confirmation hearing concluded on July 30, 1999.

It is the opinion of the Company's management that the possibility is remote that plaintiffs will prevail on the theory that the Company should be liable in the breast implant litigation because of its stockholder relationship with Dow Corning. The Company's management believes that there is no merit to plaintiffs' claims that the Company is liable for alleged defects in Dow Corning's silicone products because of the Company's alleged direct participation in the development of those products, and the Company intends to contest those claims vigorously. Management believes that the possibility is remote that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, will have a material adverse impact on the Company's financial position or cash flows. Nevertheless, in light of Judge Pointer's April 25, 1995 ruling, it is possible that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, could have a material adverse impact on the Company's net income for a particular period, although it is impossible at this time to estimate the range or amount of any such impact.

Environmental Matters

On July 6, 2000, the California Regional Water Quality Control Board (the Board) issued a Complaint charging the Company with two violations of a 1998 Waste Discharge Order (the 1998 Order) issued by the Board. The Complaint alleges that the Company failed to timely comply with two aspects of the 1998 Order and, as a result, caused the discharge of contaminated groundwater into a river adjacent to the Company's Pittsburg, California facility. On October 4, 2000, the Board proposed a civil penalty of $182,000, 80 percent of which will be covered by a wetlands project. The Company has agreed to the proposal.

On September 27, 1999, the Environmental Protection Agency (EPA) filed a Complaint with the Administrator of EPA Region IX charging the Company with three violations of the Federal Insecticide, Fungicide, and Rodenticide Act and nine violations of the Emergency Planning and Community Right-to-Know Act, all at the Company's Pittsburg, California facility. The violations were discovered during an EPA multi-media audit in 1998. After several months of investigation and negotiation, an EPA Administrative Law Judge ordered Dow to pay a civil penalty of $115,500, which the Company paid on October 6, 2000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits

Exhibit No.		Description of Exhibit
27		Financial Data Schedule

(b): Reports on Form 8-K.

The following Current Reports on Form 8-K were filed by the Company during the third quarter of 2000:

On July 24, 2000, the Company filed a Current Report on Form 8-K attaching a letter agreement executed by Union Carbide Corporation and the Company stating that each of the parties agrees not to exercise any right it may have to terminate their merger agreement pursuant to Section 8.2(i) thereof prior to September 30, 2000.

On September 5, 2000, the Company filed a Current Report on Form 8-K that included a press release issued on the same date announcing a quarterly dividend of 29 cents per share, payable on October 30, 2000, to stockholders of record on September 29, 2000.

On September 27, 2000, the Company filed a Current Report on Form 8-K attaching a letter agreement executed by Union Carbide Corporation and the Company stating that each of the parties agrees not to exercise any right it may have to terminate their merger agreement pursuant to Section 8.2(i) thereof prior to December 31, 2000.

The following trademarks of The Dow Chemical Company appear in this report: Affinity, Methocel

The following trademark of FilmTec Corporation appears in this report: FilmTec

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.