DOW CHEMICAL CO /DE/, 10-Q, 2000-05-09

DOW CHEMICAL CO /DE/
10-Q, 2000-05-09
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 March 31, 2000

Commission file number 1-3433

THE DOW CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

38-1285128
(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 March 31, 2000
Common Stock, $2.50 par value		225,346,730 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
First Quarter Earnings Announcement		13
Acquisitions and Divestitures		14
Changes in Financial Condition		16
Results of Operations		17
Accounting Policies		22
Euro Conversion		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
PART II—OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 6. Exhibits and Reports on Form 8-K		28
SIGNATURE		30
Exhibit 27

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Note A)

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Income

	Three Months Ended
	Mar. 31, 2000		Mar. 31, 1999
	In millions, except for per share amounts (Unaudited)
Net Sales	$	5,381	$	4,417

Cost of Sales		4,169		3,276
Research and development expenses		212		192
Selling, general and administrative expenses		410		390
Amortization of intangibles		37		27
Insurance and finance company operations, pretax income		28		30
Equity in earnings of nonconsolidated affiliates		88		25
Sundry income—net		94		68

Earnings before Interest, Income Taxes and Minority Interests		763		655

Interest income		29		25
Interest expense and amortization of debt discount		118		120

Income before Income Taxes and Minority Interests		674		560

Provision for income taxes		242		203
Minority interests' share in income		16		27
Preferred stock dividends		1		1

Net Income Available for Common Stockholders	$	415	$	329

Share Data
Earnings per common share—basic	$	1.85	$	1.49
Earnings per common share—diluted	$	1.83	$	1.47
Common stock dividends declared per share	$	0.87	$	0.87
Weighted-average common shares outstanding—basic		224.4		220.2
Weighted-average common shares outstanding—diluted		227.4		224.0

Depreciation	$	270	$	276

Capital Expenditures	$	244	$	250

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.)

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

	Mar. 31, 2000		Dec. 31, 1999
	In millions (Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	228	$	506
Marketable securities and interest-bearing deposits		462		706
Accounts and notes receivable:
Trade (less allowance for doubtful receivables—2000: $117; 1999: $107)		2,806		2,631
Other		2,105		1,983
Inventories:
Finished and work in process		2,236		2,264
Material and supplies		568		522
Deferred income tax assets—current		270		235

Total current assets		8,675		8,847

Investments
Investment in nonconsolidated affiliates		1,439		1,359
Other investments		3,084		2,872
Noncurrent receivables		376		390

Total investments		4,899		4,621

Property
Property		24,194		24,276
Less accumulated depreciation		15,811		15,786

Net property		8,383		8,490

Other Assets
Goodwill (net of accumulated amortization—2000: $338; 1999: $351)		1,935		1,834
Deferred income tax assets—noncurrent		587		597
Deferred charges and other assets		1,203		1,110

Total other assets		3,725		3,541

Total Assets	$	25,682	$	25,499

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

	Mar. 31, 2000			Dec. 31, 1999
	In millions (Unaudited)
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable	$	921		$	692
Long-term debt due within one year		180			343
Accounts payable:
Trade		1,728			1,782
Other		1,233			1,087
Income taxes payable		262			178
Deferred income tax liabilities—current		50			38
Dividends payable		202			213
Accrued and other current liabilities		1,932			1,962

Total current liabilities		6,508			6,295

Long-Term Debt		4,800			5,022

Other Noncurrent Liabilities
Deferred income tax liabilities—noncurrent		821			839
Pension and other postretirement benefits—noncurrent		1,825			1,843
Other noncurrent obligations		2,091			2,219

Total other noncurrent liabilities		4,737			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		818			818
Additional paid-in capital		1,483			1,321
Guaranteed ESOP obligation		(64	)		—
Retained earnings		13,664			13,445
Accumulated other comprehensive income		(186	)		(251	)
Treasury stock at cost		(6,982	)		(7,010	)

Net stockholders' equity		8,733			8,323

Total Liabilities and Stockholders' Equity	$	25,682		$	25,499

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Cash Flows

	Three Months Ended
	Mar. 31, 2000			Mar. 31, 1999
	In millions (Unaudited)
Operating Activities
Net income available for common stockholders	$	415		$	329
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		316			310
Provision (credit) for deferred income tax		(16	)		19
Undistributed earnings of nonconsolidated affiliates		(84	)		(20	)
Minority interests' share in income		16			27
Net gain on sales of property		(2	)		(5	)
Other net gain		(17	)		(36	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(472	)		181
Inventories		(6	)		187
Accounts payable		134			(160	)
Other assets and liabilities		(47	)		157

Cash provided by operating activities		237			989

Investing Activities
Capital expenditures		(244	)		(250	)
Proceeds from sales of property		7			10
Purchases of consolidated companies		(197	)		(4	)
Investments in nonconsolidated affiliates		(30	)		(22	)
Purchases of investments		(859	)		(677	)
Proceeds from sales of investments		1,203			736

Cash used in investing activities		(120	)		(207	)

Financing Activities
Changes in short-term notes payable		140			(406	)
Payments on long-term debt		(364	)		(105	)
Proceeds from issuance of long-term debt		1			169
Purchases of treasury stock		(1	)		(119	)
Proceeds from sales of common stock		49			32
Purchase of subsidiary preferred stock		—			(102	)
Distributions to minority interests		(23	)		(25	)
Dividends paid to stockholders		(194	)		(191	)

Cash used in financing activities		(392	)		(747	)

Effect of Exchange Rate Changes on Cash		(3	)		(3	)

Summary
Increase (decrease) in cash and cash equivalents		(278	)		32
Cash and cash equivalents at beginning of year		506			123

Cash and cash equivalents at end of period	$	228		$	155

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Comprehensive Income

	Three Months Ended
	Mar. 31, 2000			Mar. 31, 1999
	In millions (Unaudited)
Net Income Available for Common Stockholders	$	415		$	329

Other Comprehensive Income, Net of Tax
Unrealized gains on investments		89			81
Cumulative translation adjustments		(25	)		(28	)
Minimum Pension Liability		1			—

Total other comprehensive income		65			53

Comprehensive Income	$	480		$	382

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Operating Segments and Geographic Areas

	Three Months Ended
	Mar. 31, 2000			Mar. 31, 1999
	In millons (Unaudited)
Operating segment sales
Performance Plastics	$	1,379		$	1,263
Performance Chemicals		740			641
Agricultural Products		615			669
Plastics		1,379			918
Chemicals		675			512
Hydrocarbons and Energy		522			309
Unallocated and Other		71			105

Total	$	5,381		$	4,417

Operating segment EBIT
Performance Plastics	$	208		$	273
Performance Chemicals		103			124
Agricultural Products		90			81
Plastics		256			141
Chemicals		164			100
Hydrocarbons and Energy		10			(13	)
Unallocated and Other		(68	)		(51	)

Total	$	763		$	655

Operating segment intersegment revenues
Performance Plastics	$	3		$	4
Performance Chemicals		8			3
Plastics		—			2
Chemicals		7			7
Unallocated and Other		(18	)		(16	)

Total		—			—

Geographic area sales
United States	$	2,069		$	1,834
Europe		1,932			1,574
Rest of World		1,380			1,009

Total	$	5,381		$	4,417

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 Mar. 31, 2000
	Volume		Price		Total
	Percentage change from prior year
Operating segments
Performance Plastics	14	%	(5	)%	9	%
Performance Chemicals	21	%	(6	)%	15	%
Agricultural Products	(5	)%	(3	)%	(8	)%
Plastics	18	%	32	%	50	%
Chemicals	1	%	31	%	32	%
Hydrocarbons and Energy	5	%	64	%	69	%

Total	10	%	12	%	22	%

Geographic areas
United States	3	%	10	%	13	%
Europe	12	%	11	%	23	%
Rest of World	17	%	20	%	37	%

Total	10	%	12	%	22	%

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 reserving its share of equity earnings while Dow Corning remains in Chapter 11.

On September 1, 1994, Judge Sam C. Pointer, Jr. of the U.S. District Court for the Northern District of Alabama approved the Settlement Agreement, pursuant to which plaintiffs choosing to participate in the Settlement Agreement released the Company from liability. The Company was not a participant in the Settlement Agreement nor was it required to contribute to the settlement. On October 7, 1995, Judge Pointer issued an order which concluded that the Settlement Agreement was not workable in its then-current form because the funds committed to it by industry participants were inadequate. The order provided that plaintiffs who had previously agreed to participate in the Settlement Agreement could opt out after November 30, 1995.

The Company's maximum exposure for breast implant product liability claims against Dow Corning is limited to its investment in Dow Corning which, after the second quarter of 1995 charge noted above, is zero. As a result, any future charges by Dow Corning related to such claims or as a result of the Chapter 11 proceeding would not have an adverse impact on the Company's consolidated financial statements.

The Company is separately named as a defendant in more than 14,000 breast implant product liability cases, of which approximately 4,000 state cases are the subject of summary judgments in favor of the Company. In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation" by the Company or its agents in Dow Corning's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence.

Judge Pointer was appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of the product liability cases involving silicone breast implants filed in the U.S. federal courts. Initially, in a ruling issued on December 1, 1993, Judge Pointer granted the Company's motion for summary judgment, finding that there was no basis on which a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Corning. In an interlocutory

opinion issued on April 25, 1995, Judge Pointer affirmed his earlier ruling as to plaintiffs' corporate control claims but vacated that ruling as to plaintiffs' direct participation claims.

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 $345 million at March 31, 2000 for environmental matters, including $16 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. 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.

FIRST QUARTER EARNINGS ANNOUNCEMENT (APRIL 27, 2000)

DOW ACHIEVES 24 PERCENT INCREASE IN EARNINGS PER SHARE ON RECORD FIRST QUARTER SALES

First Quarter of 2000 Highlights

•

Earnings per share increased 24 percent—$1.83 compared with $1.47 for the same period in 1999—continuing a positive trend in quarterly earnings year over year.

•

Setting a new record for the first quarter, Dow reported sales of $5.4 billion—an increase of nearly $1 billion from a year ago—on a 10 percent gain in volume and a 12 percent rise in prices.

•

EBIT rose 16 percent versus a year ago due to Dow's diverse business portfolio, despite higher raw material and energy costs that exceeded price increases.

•

The Company's broad geographic mix enabled it to capitalize on strong economic growth outside North America, with double-digit volume gains in Asia Pacific, Europe and Latin America.

	3 Months Ended March 31
	2000		1999
	(In millions, except for per share amounts)
Net Sales	$	5,381	$	4,417
Earnings Before Interest, Income Taxes and Minority Interests (EBIT)		763		655
Net Income Available for Common Shareholders		415		329
Earnings Per Common Share		1.83		1.47

Review of First Quarter Results

The Dow Chemical Company today announced a 24 percent increase in earnings per share compared with a year ago, on record first quarter sales of $5.4 billion. Earnings before interest, income taxes and minority interests (EBIT) rose to $763 million, net income reached $415 million and earnings per share increased to $1.83.

Compared with the first quarter of 1999, EBIT rose 16 percent—despite $700 million in higher energy and feedstock costs that were only partially offset by a $540 million rise in prices—due to double-digit volume gains, a diverse portfolio and improved contributions from joint ventures in Europe and Asia.

"These excellent results continue Dow's positive trend of increasing quarterly earnings year over year and demonstrate once again our ability to overcome major hurdles such as the substantial rise in raw material and energy costs," said J. Pedro Reinhard, executive vice president and chief financial officer. "Dow's diverse business mix and broad geographic presence enabled us to fully capitalize on growth in a variety of businesses and regions around the globe."

The nearly $1 billion rise in sales, compared with first quarter 1999, resulted from a 10 percent growth in volume and a 12 percent increase in prices. Volume was up in most segments, led by double-digit growth in Performance Chemicals, Performance Plastics and Plastics. Highest volume gains occurred outside North America, with increases of 26 percent in Asia Pacific, 12 percent in Europe and 10 percent in Latin America. Prices rose more than 30 percent in each of the basics segments—reflecting the steep rise in raw material and energy costs as well as balanced supply/demand conditions—while prices in the performance segments declined slightly.

Performance Plastics and Performance Chemicals recorded strong volume gains of 14 and 21 percent, respectively, versus a year ago. EBIT in these segments declined, however, as margins were squeezed due to the spike in raw material and energy costs, which most heavily impacted Emulsion Polymers, Polyurethanes, and Epoxy Products and Intermediates. Although prices in these segments were down compared with first quarter 1999, local prices were up slightly from fourth quarter 1999 levels. Agricultural Products continued its good performance with an increase in EBIT of 11 percent versus a year ago, due to productivity gains and growth in new products.

In the Plastics and Chemicals segments, EBIT climbed 74 percent from first quarter 1999 levels, with Plastics reporting a 50 percent increase in sales on gains in both volume and prices. The Chemicals segment benefited from higher prices, which outpaced higher feedstock and energy costs.

Commenting on the outlook for the second quarter and beyond, Reinhard said, "We look forward to healthy volume growth in all businesses and improving margins as feedstock and energy prices stabilize." He added, "We are confident that Dow will achieve its long-term goal of increasing earnings per share 10 percent per year. For the next few years, we expect higher than trend-line growth, as we accelerate our strategy and focus on delivering long-term value to our shareholders."

Dow is a leading science and technology company that provides innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $19 billion, Dow serves customers in 162 countries and a wide range of markets that are vital to human progress, including food, transportation, health and medicine, personal and home care, and building and construction, among others. Committed to the principles of sustainable development, Dow and its 39,000 employees seek to balance economic, environmental and social responsibilities.

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. In September 1997, the Company acquired 80 percent ownership in BSL for an investment of $174 million. BvS will maintain a 20 percent ownership until the end of the reconstruction period, which is expected to be June 2000. After the reconstruction period, the Company will have a call option and BvS a put option for the remaining 20 percent of BSL for an additional investment of approximately $122 million. BvS is providing certain incentives during the reconstruction period to cover portions of the reconstruction program and has retained environmental cleanup obligations for existing facilities. Incentives relating to property construction reduce the basis of such property. Incentives relating to expenses during the reconstruction period are recognized as such expenses are incurred. The Company expects to include the financial results of BSL as a nonconsolidated affiliate until the end of the reconstruction period.

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

In February 1998, the Company entered into an agreement with Pronor Petroquimica S.A. (Pronor) to purchase a portion of its business. The new company, named Isopol, was acquired for the production and commercialization of toluene diisocyanate (TDI), used to manufacture durable goods such as cushioned furniture and mattresses, 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 and provides crop protection products and services.

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 0.537 of a share of Dow stock for each share of Union Carbide stock they own. Based upon Dow's closing price of $124¹¹/16 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, with a second quarter 2000 closing anticipated. 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.

CHANGES IN FINANCIAL CONDITION

The following tables represent total debt and working capital at March 31, 2000 versus December 31, 1999.

	Mar. 31, 2000		Dec. 31, 1999		Increase (Decrease)
	In millions
Notes payable	$	921	$	692	$	229
Long-term debt due within one year		180		343		(163	)
Long-term debt		4,800		5,022		(222	)

Total debt	$	5,901	$	6,057	$	(156	)

At March 31, 2000, the Company had unused and available credit facilities with various U.S. and foreign banks totaling $2.6 billion in support of its working capital requirements and commercial paper borrowings. Additional unused credit facilities totaling approximately $900 million are available for use by foreign subsidiaries.

	Mar. 31, 2000		Dec. 31, 1999		Increase (Decrease)
	In millions
Cash and cash equivalents	$	228	$	506	$	(278	)
Marketable securities and interest-bearing deposits		462		706		(244	)
Accounts and notes receivable—net		4,911		4,614		297
Inventories:
Finished and work in process		2,236		2,264		(28	)
Materials and supplies		568		522		46
Deferred income tax assets—current		270		235		35

Total current assets		8,675		8,847		(172	)

Total current liabilities		6,508		6,295		213

Working capital	$	2,167	$	2,552	$	(385	)

Operating activities provided cash of $237 million for the three months ended March 31, 2000. Additional cash was generated by sales of available-for-sale securities. Cash was used to reduce total debt, to acquire Flexible Products Company, and for capital expenditures and other normal activities. See the Consolidated Statements of Cash Flows and the Acquisitions and Divestitures section (above) for more detail.

Balance Sheet Ratios	Mar. 31, 2000		Dec. 31, 1999
Current assets over current liabilities	1.3:1		1.4:1
Days-sales-outstanding-in-receivables	44		45
Days-sales-in-inventory	65		66
Debt as a percentage of total capitalization	38.0	%	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. Average shares outstanding for the first three months of 2000 were 224 million, an increase of 2 percent from the average shares outstanding for the first three months of 1999.

On April 28, 2000, the Company paid a quarterly dividend of 87 cents per share to shareholders of record on March 31, 2000. This was the 353rd 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 ended March 31, 2000 and 1999:

	Three Months Ended
	Mar. 31, 2000			Mar. 31, 1999
	Dollars in millions, except for share amounts
Sales	$	5,381		$	4,417
Cost of sales		4,169			3,276
% of sales		77	%		74	%
Research and development, selling, general and administrative expenses		622			582
Earnings before interest, income taxes and minority interests (EBIT)		763			655
% of sales		14	%		15	%
Effective tax rate		35.9	%		36.3	%
Net income available for common stockholders	$	415		$	329
Earnings per common share—basic	$	1.85		$	1.49
Earnings per common share—diluted	$	1.83		$	1.47
Operating rate percentage		86	%		85	%

Net sales for the first quarter of 2000 were $5.4 billion, setting a new record for first quarter sales. Compared with $4.4 billion in the first quarter of 1999, net sales were up $964 million, or 22 percent, due to volume growth of 10 percent and increased prices of 12 percent. Volume was particularly strong in the Performance Plastics, Performance Chemicals and Plastics segments, with double-digit volume growth reported by all of the businesses within these segments. While increases in volume were reported in all geographic areas, the most notable increases occurred outside North America, with growth of 26 percent in Asia Pacific, 12 percent in Europe and 10 percent in Latin America. Selling prices, up in all geographic areas, rose $540 million in total for the Company, despite a 4 percent negative currency impact. Prices improved more than 30 percent in each of the basics segments, reflecting a steep rise in feedstock and energy costs as well as balanced supply/demand conditions. Prices in the performance segments, however, declined slightly.

Operating expenses, which include research and development, selling, general and administrative expenses, were $622 million for the first quarter, up from $582 million for the same quarter last year. The increase reflects the Company's planned support of new business growth initiatives and the recent acquisition of ANGUS Chemical.

Net income for the first quarter was $415 million or $1.83 per share (diluted), up 26 percent from $329 million or $1.47 per share (diluted) for the first quarter of 1999. Despite approximately $700 million in higher energy and feedstock costs that were only partially offset by the increase in

selling prices, net income improved due to the strong volume gains, the Company's diverse business portfolio and improved contributions from joint ventures around the world.

PERFORMANCE PLASTICS

Performance Plastics sales of $1,379 million were up 9 percent from $1,263 million in the first quarter of 1999. While volume improved 14 percent, prices declined 5 percent, including a 3 percent negative currency impact. EBIT for the segment was $208 million, down from $273 million last year, due to lower selling prices and increased raw material costs.

Dow Automotive, Dow's first industry-focused global business unit, reported good results for the first quarter of 2000, with sales up 18 percent from a year ago. The increase in sales was due entirely to volume growth. Volume was up 19 percent on the strength of the global automotive industry. Prices overall were down slightly from last year. First quarter EBIT for the business was flat compared with last year due to increases in raw material costs that offset the increases in volume.

Engineering Plastics sales for the quarter were up 19 percent from the same quarter last year, with volume up 22 percent and prices down 3 percent. All geographic areas reported double-digit volume growth, led by Asia Pacific which reported a greater than 60 percent increase in volume. Demand was particularly strong for polycarbonate and ABS. EBIT for the quarter was down slightly versus the first quarter of 1999 as higher raw material costs and the negative impact of currency on sales offset increased volume.

Sales of Epoxy Products and Intermediates were up 8 percent from a year ago. Volume was up 12 percent, more than offsetting a 4 percent decline in prices (primarily due to negative currency impact). Volume growth was strongest in phenolics and liquid epoxy resins. Prices were down year over year, but showed some improvement from the fourth quarter in terms of local currency. EBIT for the business was down compared with the first quarter of 1999 due to lower prices, increased raw material costs and plant outages.

Fabricated Products sales for the first quarter of 2000 were up 5 percent versus a year ago due to strong volume gains. Volume was up 10 percent, led by strong demand within the construction industry for Styrofoam brand insulation in Canada, Europe and Asia Pacific. Prices were down 5 percent, despite an environment of strong demand and higher feedstock costs. EBIT for the first quarter was relatively flat versus the same quarter last year as higher raw material costs offset volume growth.

Polyurethanes sales for the first quarter were up 5 percent compared with the first quarter of 1999, driven by volume growth of 11 percent. Volume, up in all geographic areas, was particularly strong in North America and Asia Pacific. 2 percentage points of the volume increase resulted from the addition of Flexible Products Company, acquired in mid-February. Prices were down versus last year, with the largest declines reported in Europe. Lower prices, coupled with increased raw material costs, resulted in a decrease in EBIT for the business versus last year.

PERFORMANCE CHEMICALS

Performance Chemicals sales of $740 million for the first quarter were up significantly from $641 million for the first quarter of 1999, as price declines of 6 percent were more than offset by volume gains of 21 percent. Approximately one third of the volume increase came from net acquisitions. First quarter EBIT for the segment was down from $124 million last year to $103 million this year, as the combination of lower selling prices, higher raw material costs and increased operating expenses (due to recent acquisitions) more than offset volume growth.

Specialty Chemicals sales for the quarter were up 20 percent, with a 24 percent increase in volume and a 4 percent decline in prices (3 percent due to negative currency impact) versus the same quarter last year. Net of the acquisitions of ANGUS Chemical and Shell's synthetic rubber business, volume

was up 12 percent from last year. Methocel cellulose ethers were sold out during the quarter, setting a new all-time record for quarterly sales. Demand was also up for alkanolamines, antimicrobials, liquid separations, oxygenated solvents, and Dow's contract manufacturing operations. EBIT for the first quarter improved versus last year as volume growth more than offset higher raw material costs, increased operating expenses due to acquisitions and lower selling prices.

Emulsion Polymers sales increased 5 percent versus the first quarter of 1999 as volume growth of 13 percent exceeded an 8 percent decline in prices. Volume was particularly strong in the paper industry due to stronger economies around the world, dot.com advertising and an anticipated postage rate hike in the United States, which typically drives mail volumes up pre-increase. Sales were reduced 7 percent by the negative impact of currency, primarily in Europe. EBIT for the quarter was down from the same quarter last year due to significantly higher styrene monomer costs.

AGRICULTURAL PRODUCTS

Sales of Agricultural Products for first quarter 2000 were down 8 percent compared with the same quarter of 1999, with a decrease in volume of 5 percent and lower prices of 3 percent. Volume was down in France due to pre-buying in the fourth quarter prior to the implementation of the Eco-Tax. Volume was also down versus the first quarter of 1999, due to last year's early spring in the United States and a pre-buying program for FirstRate herbicides, which accelerated sales of this new product in the first quarter of 1999. Prices were down due to competitive pressure and the negative impact of currency on sales in Europe. EBIT of $90 million for the quarter was up compared with $81 million for the first quarter of 1999, an 11 percent improvement resulting from Dow AgroSciences' cost reduction and business restructuring program announced last November and margin on new product growth. See the section entitled "1999 Special Charge" in Management's Discussion and Analysis of Financial Condition and Results of Operations for further details.

PLASTICS

Plastics sales in the first quarter of 2000 were $1,379 million, up 50 percent from $918 million a year ago. While volume increased 18 percent, prices rose 32 percent, net of a 6 percent negative currency impact. EBIT for the quarter was $256 million, up 82 percent from $141 million in first quarter 1999 due to strong volume growth and price increases that outpaced a sharp rise in raw material costs. Improved earnings from joint ventures around the world also contributed to the increase in EBIT.

The Polyethylene business reported record sales and volume in the first quarter of 2000. Sales were up 54 percent versus the same quarter last year, with volume up 20 percent and prices up 34 percent. Volume and price improvements were reported in all geographic areas, with the highest volume increases reported in Europe and Asia Pacific. Prices increased following the surge in crude oil prices. Sales were particularly strong for Dowlex linear low density polyethylene resins and Elite enhanced polyethylene resins due to greater availability of octene versus the first quarter of 1999. Sales were also up due to the inclusion of sales from Safripol (previously reported in Unallocated and Other) and sales of polyethylene made available to Dow through the marketing and sales agreement with BSL as that joint venture nears the end of the reconstruction period. EBIT for the business was up significantly as increased volume and prices more than offset the hike in ethylene costs.

Polystyrene sales increased 47 percent in the first quarter versus the same quarter of 1999 on increased volume, up 14 percent, and higher prices, up 33 percent. Demand was strong around the globe with product on order control in all four regions. Prices were also up around the globe due primarily to tight styrene monomer supply. Margins were relatively flat though, as price increases only kept pace with increases in styrene monomer costs. Sales were also up due to sales of polystyrene made available to Dow through the marketing and sales agreement with BSL as that joint venture nears the

end of the reconstruction period. EBIT for the business was up significantly compared with first quarter 1999 due to increased volume.

Polypropylene sales continued a strong growth trend, with volume up 50 percent in the first quarter. First quarter pricing was also up versus the same period last year. EBIT improved versus last year due to an overall improvement in business quality, with improved customer mix.

First quarter EBIT for Insite Technology improved significantly compared with the same quarter last year, primarily due to an improvement in equity earnings from DuPont Dow Elastomers L.L.C. on higher sales and lower structural costs, following the restructuring of that joint venture in 1999.

CHEMICALS

First quarter sales for the Chemicals segment were $675 million, up 32 percent compared with $512 million in the first quarter of 1999. Prices rose 31 percent during the quarter, with increases reported in all geographic areas. Volume, up 1 percent overall, was strong in Asia Pacific and Europe, but off in North America (due to lower calcium chloride sales and volume lost from exiting magnesium-related businesses) and Latin America. Caustic sales were down versus last year primarily due to price declines, as heavy chlorine demand increased caustic availability in the industry. Vinyl chloride monomer (VCM) sales were up significantly on strong volume and price increases to levels that were almost double first quarter 1999 prices. Ethylene glycol (EG) sales were up for the quarter, with increases in both price and volume seen globally. Demand for propylene glycol was strong during the quarter, but prices remained under pressure, especially in North America. EBIT for the segment was $164 million, up from $100 million in first quarter 1999. EBIT improved due to higher prices and increased volume for VCM and EG that offset lower caustic prices and higher feedstock and energy costs.

HYDROCARBONS AND ENERGY

Hydrocarbons and Energy sales were up $213 million from the first quarter last year to $522 million this year, an increase of 69 percent, driven by higher prices. Refinery sales prices were up in the quarter due to significantly higher crude oil costs. EBIT for the quarter was $10 million compared with a loss of $13 million for the first quarter of 1999.

UNALLOCATED AND OTHER

Sales for Unallocated and Other were down in the first quarter of 2000 due to the integration of Safripol into the Plastics segment. Sales and results for Safripol were previously reported in Unallocated and Other. EBIT for Unallocated and Other was a loss of $68 million for the first quarter, compared with a loss of $51 million for the first quarter of 1999, due in part to the Company's investment in new business growth.

COMPANY SUMMARY

Operating Rate

The Company's global plant operating rate for its chemicals and plastics businesses was 86 percent compared with 85 percent in the first quarter of 1999.

Equity in Earnings of Nonconsolidated Affiliates

Equity in earnings of nonconsolidated affiliates was $88 million in the first quarter of 2000, up from $25 million in the first quarter of 1999 due to improved performance by several of the Company's joint ventures around the world. These improvements were due in part to economic recovery in Asia Pacific and Latin America. Dupont Dow Elastomers L.L.C., Gurit-Essex AG, several joint ventures in

Thailand, and Triunfo were among the joint ventures that reported improved earnings. Equity in earnings was also improved by a greater contribution from BSL as that joint venture nears the end of the reconstruction period.

Sundry Income—Net

Sundry income includes a variety of income and expense items such as royalty income, the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income for the first quarter of 2000 was $94 million compared with $68 million in the first quarter of 1999. Sundry income for the quarter included positive economic hedging results, which helped offset some of the negative impact of currency on sales, and gains on sales of available-for-sale securities.

Interest Income and Expense

The net total of interest expense (net of capitalized interest) and interest income was $89 million for the first quarter, down $6 million from the first quarter of 1999. Net expense decreased primarily due to higher interest income.

Provision for Taxes on Income

The effective tax rate for the first quarter was 35.9 percent compared with 36.3 percent for the same quarter of 1999.

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, 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, asset write-offs of $26 million, and inventory write-offs of $17 million. During the first quarter of 2000, $24 million of the severance reserve was used to reduce headcount by 205 individuals, leaving a balance of $27 million for an estimated additional headcount reduction of approximately 500. 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 $21 million.

Outlook

The strength of the global economy should continue to help the chemical industry. Many industries are reporting tight supply, mostly driven by demand growth rather than capacity issues. Strong derivative demand should mitigate the effect of the new ethylene capacity coming on in the second half of 2000. Styrene monomer may remain tight into the fourth quarter. The chlor-alkali chain is expected to benefit from improved economic conditions, keeping chlorine supply/demand closely balanced in the second quarter, though caustic balances are weaker. Oil and gas prices spiked in mid-first quarter, before falling back at quarter-end. Oil and gas pricing is expected to remain flat to slightly down from quarter-end levels, with oil in approximately the $22-25 per barrel range.

Dow's outlook for the second quarter is positive, based on generally rising sequential pricing in both basics and performance businesses, with an expectation of lower feedstock costs for the quarter. Most businesses should see expanded margins. One exception may be the performance businesses with propylene-based products, as the cost of propylene is expected to continue to rise into the second quarter. Seasonally, the second quarter is usually the strongest volume quarter, due to construction pickup and the agricultural growing season in the Northern Hemisphere. Dow AgroSciences expects good sales growth in the quarter, particularly from several new products.

Good volume growth for polyethylene is expected to continue, along with improved margins from upward price momentum going into the quarter and an expectation of lower feedstock costs. Polystyrene pricing is expected to rise for the third straight quarter due to tight styrene monomer supply worldwide.

VCM pricing will likely continue to trend upward into the second quarter due to higher ethylene and PVC values and strong demand. Caustic pricing is uncertain; the current weakness in spot prices raises questions about the direction of contractual pricing over the next two quarters.

Trends into the second quarter appear favorable for Dow, with strong volumes and increasing margins anticipated. Into the future, Dow looks forward to solid business results following the pending merger and integration of Union Carbide.

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 addition, the Company is assessing the impact of the following standard:

•: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 March 2000, the FASB issued a proposed amendment to SFAS No. 133. The comment period ended in April and the FASB continues to deliberate potential changes. Based on the new effective date and potential changes, the Company will adopt SFAS No. 133 on January 1, 2001, and has not yet determined the impact of adoption 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, Deutsche mark, Swiss franc 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*
	1999		1998
	In millions
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 reserving its 50 percent share of equity earnings while Dow Corning remains in Chapter 11.

On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States District Court for the Northern District of Alabama approved the Settlement Agreement pursuant to which plaintiffs choosing to participate in the Settlement Agreement released the Company from liability. The Company was not a participant in the Settlement Agreement nor was it required to contribute to the settlement. On October 7, 1995, Judge Pointer issued an order which concluded that the Settlement Agreement was not workable in its then-current form because the funds committed to it by industry participants were inadequate. The order provided that plaintiffs who had previously agreed to participate in the Settlement Agreement could opt out after November 30, 1995.

The Company's maximum exposure for breast implant product liability claims asserted against Dow Corning is limited to its investment in Dow Corning which, after the 1995 second quarter charge noted above, is zero. As a result, any future charges by Dow Corning related to such claims or as a result of the Chapter 11 proceeding would not have an adverse impact on the Company's consolidated financial statements.

The Company is separately named as a defendant in over 14,000 breast implant product liability cases. In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation" by the Company or its agents in Dow Corning's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence.

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.

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 first quarter of 2000:

On January 24, 2000, the Company filed a Current Report on Form 8-K that included a press release issued on January 21, 2000, announcing that the Company and Union Carbide Corporation expect to conclude the regulatory review of the proposed merger of the two companies in the second quarter of 2000.

On February 11, 2000, the Company filed a Current Report on Form 8-K that included a press release issued on the same date announcing executive management changes for the Company effective November 1, 2000.

On March 6, 2000, the Company filed a Current Report on Form 8-K that included a press release issued on the same date announcing plans to seek stockholder approval to authorize additional shares to allow for a future three-for-one split of the Company's common stock.

The following trademarks of The Dow Chemical Company appear in this report: Dowlex, Elite, Insite, Methocel, Styrofoam

The following trademark of Dow AgroSciences LLC appears in this report: FirstRate

SIGNATURE

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

	THE DOW CHEMICAL COMPANY
	Registrant

Date: May 9, 2000

/s/ G. MICHAEL LYNCH

G. Michael Lynch
Vice President & Controller

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