-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FE6OtiLGaWJgcYvd1vASzIujLC4/3nXNCsr6oqIBusf9RdfwWk6kpkkeAFSyS654 IvFpcFdhWreE1ykaaQY4iw== 0000029915-99-000043.txt : 19991115 0000029915-99-000043.hdr.sgml : 19991115 ACCESSION NUMBER: 0000029915-99-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOW CHEMICAL CO /DE/ CENTRAL INDEX KEY: 0000029915 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 381285128 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03433 FILM NUMBER: 99747228 BUSINESS ADDRESS: STREET 1: 2030 DOW CENTER CITY: MIDLAND STATE: MI ZIP: 48674-2030 BUSINESS PHONE: 5176361000 MAIL ADDRESS: STREET 1: 2030 DOW CENTER CITY: MIDLAND STATE: MI ZIP: 48674-2030 10-Q 1 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, 1999 Commission file number 1-3433 THE DOW CHEMICAL COMPANY (Exact name of registrant as specified in its charter) Delaware 38-1285128 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 2030 DOW CENTER, MIDLAND, MICHIGAN 48674 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 517-636-1000 Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Outstanding at Class September 30, 1999 ----- ------------------ Common Stock, $2.50 219,297,129 shares par value --- Page 1 --- THE DOW CHEMICAL COMPANY TABLE OF CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 6 Consolidated Statements of Comprehensive Income 6 Operating Segments and Geographic Areas 7 Commitments and Contingent Liabilities 8 Item 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Information 10 Third Quarter Earnings Announcement 10 Acquisitions and Divestitures 12 Changes in Financial Condition 13 Results of Operations 14 Accounting Policies 19 Year 2000 Readiness Disclosure 19 Euro Conversion 20 Item 3. Quantitative and Qualitative Disclosures About 21 Market Risk PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURE 26 Exhibit 27 27 --- Page 2 --- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Note A)
The Dow Chemical Company and Subsidiaries - ------------------------------------------------------------------------------------------------------------- Consolidated Statements of Income Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, In millions, except for share amounts (Unaudited) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------- Net Sales $4,693 $4,314 $13,729 $14,000 - ------------------------------------------------------------------------------------------------------------- Cost of Sales 3,587 3,258 10,258 10,451 Research and development expenses 203 198 618 580 Selling, general and administrative expenses 381 401 1,145 1,244 Amortization of intangibles 27 23 81 62 Purchased in-process research and development charges (Note B) - - - 350 Special charges (Note C) - (24) - 306 Insurance and finance company operations, pretax income 21 25 82 83 Equity in earnings of nonconsolidated affiliates 15 28 62 78 Sundry income - net (Note D) 53 53 210 907 - ------------------------------------------------------------------------------------------------------------- Earnings before Interest, Income Taxes and Minority Interest 584 564 1,981 2,075 - ------------------------------------------------------------------------------------------------------------- Interest income 29 34 81 100 Interest expense and amortization of debt discount 93 121 334 370 - ------------------------------------------------------------------------------------------------------------- Income before Income Taxes and Minority Interests 520 477 1,728 1,805 - ------------------------------------------------------------------------------------------------------------- Provision for taxes on income 182 158 613 632 Minority interests' share in income 17 4 52 9 Preferred stock dividends 1 1 4 4 - ------------------------------------------------------------------------------------------------------------- Net Income Available for Common Stockholders $320 $314 $1,059 $1,160 - ------------------------------------------------------------------------------------------------------------- Share Data Earnings per common share - basic $1.46 $1.41 $4.81 $5.17 Earnings per common share - diluted $1.44 $1.40 $4.74 $5.10 Common stock dividends declared per share $0.87 $0.87 $2.61 $2.61 Weighted-average common shares outstanding - basic 219.4 222.7 220.1 224.3 Weighted-average common shares outstanding - diluted 224.0 226.2 224.2 228.2 - ------------------------------------------------------------------------------------------------------------- Depreciation $273 $272 $830 $814 - ------------------------------------------------------------------------------------------------------------- Capital Expenditures $353 $365 $950 $994 - ------------------------------------------------------------------------------------------------------------- Notes to Financial Statements. Note A: The unaudited interim financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. Certain reclassifications of prior year amounts have been made to conform to current year presentation. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1998. (Except as otherwise indicated by the context, the terms "Company" or "Dow" as used herein mean The Dow Chemical Company and its consolidated subsidiaries.) Note B: During the first half of 1998, pretax charges totaling $350 million were recorded for purchased in-process research and development (IPR&D) costs associated with the acquisitions of Dow AgroSciences, Mycogen and Sentrachem Limited. This amount was reduced in the fourth quarter of 1998 by $55 million, in accordance with the SEC's clarified guidance on IPR&D. Note C: During the first quarter of 1998, a pretax special charge of $330 million was recorded, principally for severance costs and asset write-downs. In the third quarter of 1998, this charge was reduced by $24 million. Note D: In January 1998, the Company completed the sale of the DowBrands business to S.C. Johnson & Son, Inc. The sale resulted in a pretax gain of $816 million. Note E: During the third quarter of 1999, a third party contributed $500 million for a preferred interest in a newly formed consolidated subsidiary of the Company.
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The Dow Chemical Company and Subsidiaries - ------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets Sept. 30, Dec. 31, In millions (Unaudited) 1999 1998 - ------------------------------------------------------------------------------------------------------------- Assets - ------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $369 $123 Marketable securities and interest-bearing deposits 672 267 Accounts and notes receivable: Trade (less allowance for doubtful receivables - 1999, $132; 1998, $93) 2,223 2,787 Other 1,889 1,750 Inventories: Finished and work in process 2,168 2,245 Material and supplies 591 565 Deferred income tax assets - current 255 303 ----------------------------------------------------------------------------------------------------------- Total current assets 8,167 8,040 - ------------------------------------------------------------------------------------------------------------- Investments Investment in nonconsolidated affiliates 1,371 1,311 Other investments 2,239 2,191 Noncurrent receivables 400 424 ----------------------------------------------------------------------------------------------------------- Total investments 4,010 3,926 - ------------------------------------------------------------------------------------------------------------- Property Property 24,097 24,435 Less accumulated depreciation 15,730 15,988 ----------------------------------------------------------------------------------------------------------- Net property 8,367 8,447 - ------------------------------------------------------------------------------------------------------------- Other Assets Goodwill (net of accumulated amortization - 1999, $292; 1998, $246) 1,629 1,641 Deferred income tax assets - noncurrent 583 684 Deferred charges and other assets 1,116 1,092 ----------------------------------------------------------------------------------------------------------- Total other assets 3,328 3,417 - ------------------------------------------------------------------------------------------------------------- Total Assets $23,872 $23,830 - -------------------------------------------------------------------------------------------------------------
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The Dow Chemical Company and Subsidiaries - ------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets Sept. 30, Dec. 31, In millions (Unaudited) 1999 1998 - ------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------------------------- Current Liabilities Notes payable $921 $1,526 Long-term debt due within one year 213 300 Accounts payable: Trade 1,695 1,682 Other 882 981 Income taxes payable 210 290 Deferred income tax liabilities - current 40 71 Dividends payable 193 192 Accrued and other current liabilities 1,970 1,800 ----------------------------------------------------------------------------------------------------------- Total current liabilities 6,124 6,842 - ------------------------------------------------------------------------------------------------------------- Long-Term Debt 4,130 4,051 - ------------------------------------------------------------------------------------------------------------- Other Noncurrent Liabilities Deferred income tax liabilities - noncurrent 809 747 Pension and other postretirement benefits - noncurrent 1,882 1,903 Other noncurrent obligations 2,286 2,283 ----------------------------------------------------------------------------------------------------------- Total other noncurrent liabilities 4,977 4,933 - ------------------------------------------------------------------------------------------------------------- Minority Interest in Subsidiaries 413 532 - ------------------------------------------------------------------------------------------------------------- Preferred Securities of Subsidiary (Note E) 509 - - ------------------------------------------------------------------------------------------------------------- Temporary Equity Preferred stock at redemption value 114 117 Guaranteed ESOP obligation (74) (74) ----------------------------------------------------------------------------------------------------------- Total temporary equity 40 43 - ------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock 818 818 Additional paid-in capital 898 718 Retained earnings 13,372 12,887 Accumulated other comprehensive income (353) (347) Treasury stock, at cost (7,056) (6,647) ----------------------------------------------------------------------------------------------------------- Net stockholders' equity 7,679 7,429 - ------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $23,872 $23,830 - ------------------------------------------------------------------------------------------------------------- See Notes to Financial Statements.
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The Dow Chemical Company and Subsidiaries - ----------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows Nine Months Ended Sept. 30, Sept. 30, In millions (Unaudited) 1999 1998 - ----------------------------------------------------------------------------------------------------- Operating Activities Net income available for common stockholders $1,059 $1,160 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 934 877 Purchased in-process research & development - 350 Special charge - 306 Provision for deferred income tax 164 21 Undistributed earnings of nonconsolidated affiliates (33) (64) Minority interests' share in income 52 9 Net gain on sale of consolidated companies (22) (816) Net gain on sales of property (49) (38) Other net (gain) loss (78) 9 Changes in assets and liabilities that provided (used) cash: Accounts receivable 455 370 Inventories 52 105 Accounts payable (86) (292) Other assets and liabilities 260 (100) ------------------------------------------------------------------------------------------------ Cash provided by operating activities 2,708 1,897 - ----------------------------------------------------------------------------------------------------- Investing Activities Capital expenditures (950) (994) Proceeds from sales of property 102 82 Purchases of consolidated companies (101) (357) Proceeds from sale of consolidated companies 35 1,300 Purchases from outside investors in limited partnership - (210) Proceeds from outside investors in limited partnership - 200 Investments in nonconsolidated affiliates (91) (41) Purchases of investments (2,744) (3,084) Proceeds from sales of investments 2,340 3,031 ------------------------------------------------------------------------------------------------ Cash used in investing activities (1,409) (73) - ----------------------------------------------------------------------------------------------------- Financing Activities Changes in short-term notes payable (578) (545) Payments on long-term debt (280) (431) Proceeds from issuance of long-term debt 300 256 Purchases of treasury stock (428) (604) Proceeds from sales of common stock 149 112 Purchase of subsidiary preferred stock (102) - Proceeds from issuance of preferred securities of subsidiary 500 - Distributions to minority interests (32) (23) Dividends paid to stockholders (577) (590) ------------------------------------------------------------------------------------------------ Cash used in financing activities (1,048) (1,825) - ----------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (5) (8) - ----------------------------------------------------------------------------------------------------- Summary Increase (decrease) in cash and cash equivalents 246 (9) Cash and cash equivalents at beginning of year 123 235 ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $369 $226 - -----------------------------------------------------------------------------------------------------
The Dow Chemical Company and Subsidiaries - ----------------------------------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, In millions (Unaudited) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------- Net Income Available for Common Stockholders $320 $314 $1,059 $1,160 - ----------------------------------------------------------------------------------------------------- Other Comprehensive Income, Net of Tax Unrealized gains (losses) on investments (41) (153) 59 (212) Income, Net of Tax Cumulative translation adjustment (12) 14 (65) 9 Minimum pension liability - - - - ----------------------------------------------------------------------------------------------- Total other comprehensive income (53) (139) (6) (203) - ----------------------------------------------------------------------------------------------------- Comprehensive Income $267 $175 $1,053 $957 - ----------------------------------------------------------------------------------------------------- See Notes to Financial Statements.
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The Dow Chemical Company and Subsidiaries - -------------------------------------------------------------------------------------------------------------------- Operating Segments and Geographic Areas Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, In millons (Unaudited) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Operating segment sales Performance Plastics $1,302 $1,254 $3,862 $3,800 Performance Chemicals 674 663 1,971 1,965 Agricultural Products 399 424 1,732 1,831 Plastics 1,170 915 3,110 2,905 Chemicals 607 555 1,660 1,817 Hydrocarbons and Energy 469 367 1,141 1,153 Unallocated and Other 72 136 253 529 - -------------------------------------------------------------------------------------------------------------------- Total $4,693 $4,314 $13,729 $14,000 - -------------------------------------------------------------------------------------------------------------------- Operating segment EBIT Performance Plastics $248 $300 $815 $841 Performance Chemicals 108 136 381 334 Agricultural Products (35) (45) 205 (183) Plastics 207 132 437 549 Chemicals 101 69 290 215 Hydrocarbons and Energy (17) 19 (7) (13) Unallocated and Other (28) (47) (140) 332 - -------------------------------------------------------------------------------------------------------------------- Total $584 $564 $1,981 $2,075 - -------------------------------------------------------------------------------------------------------------------- Operating segment intersegment revenues Performance Plastics $3 $4 $9 $12 Performance Chemicals 3 2 10 7 Plastics (1) - 1 2 Chemicals 5 10 19 33 Unallocated and Other (10) (16) (39) (54) - -------------------------------------------------------------------------------------------------------------------- Total - - - - - -------------------------------------------------------------------------------------------------------------------- Geographic area sales United States $1,821 $1,743 $5,577 $5,710 Europe 1,572 1,427 4,663 4,830 Rest of World 1,300 1,144 3,489 3,460 - -------------------------------------------------------------------------------------------------------------------- Total $4,693 $4,314 $13,729 $14,000 - -------------------------------------------------------------------------------------------------------------------- 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.
- --------------------------------------------------------------------------------------------------------------------- Sales Volume and Price by Operating Segment and Geographic Area Three Months Ended Nine Months Ended Sept. 30, 1999 Sept. 30, 1999 Percentage change from prior year Volume Price Total Volume Price Total - --------------------------------------------------------------------------------------------------------------------- Operating segments Performance Plastics 9% (5)% 4% 7% (5)% 2% Performance Chemicals 6% (4)% 2% 3% (3)% 0% Agricultural Products (2)% (4)% (6)% (2)% (3)% (5)% Plastics 18% 10% 28% 14% (7)% 7% Chemicals 7% 2% 9% 0% (9)% (9)% Hydrocarbons and Energy 5% 23% 28% (1)% 0% (1)% - --------------------------------------------------------------------------------------------------------------------- Total 7% 2% 9% 3% (5)% (2)% - --------------------------------------------------------------------------------------------------------------------- Geographic areas United States 1% 3% 4% 0% (2)% (2)% Europe 10% 0% 10% 4% (7)% (3)% Rest of World 13% 1% 14% 7% (6)% 1% - --------------------------------------------------------------------------------------------------------------------- Total 7% 2% 9% 3% (5)% (2)% - ---------------------------------------------------------------------------------------------------------------------
--- Page 7 --- COMMITMENTS AND CONTINGENT LIABILITIES In January 1994, Dow Corning Corporation (Dow Corning), in which the Company is a 50 percent shareholder, announced a pretax charge of $640 million ($415 million after tax) for the fourth quarter of 1993. In January 1995, Dow Corning announced a pretax charge of $241 million ($152 million after tax) for the fourth quarter of 1994. These charges included Dow Corning's best estimate of its potential liability for breast implant litigation based on a global Breast Implant Litigation Settlement Agreement (the Settlement Agreement); litigation and claims outside of the Settlement Agreement; and provisions for legal, administrative and research costs related to breast implants. The charges for 1993 and 1994 included pretax amounts of $1,240 million and $441 million less expected insurance recoveries of $600 million and $200 million, respectively. The 1993 amounts reported by Dow Corning were determined on a present value basis. On an undiscounted basis, the estimated liability noted above for 1993 was $2,300 million less expected insurance recoveries of $1,200 million. As a result of the Dow Corning actions, the Company recorded its 50 percent share of the charges, net of tax benefits available to Dow. The impact on net income was a charge of $192 million for 1993 and $70 million for 1994. Dow Corning reported an after tax net loss of $167 million for the second quarter of 1995 as a result of a $221 million after tax charge taken to reflect a change in accounting method from the present value basis noted above to an undiscounted basis resulting from the uncertainties associated with its voluntary filing for protection under Chapter 11 of the U.S. Bankruptcy Code on May 15, 1995. As a result of such loss and Chapter 11 filing, the Company recognized a pretax charge against income of $330 million for the second quarter of 1995, fully reserved its investment in Dow Corning and is not recognizing its 50 percent share of equity earnings while Dow Corning remains in Chapter 11. On September 1, 1994, Judge Sam C. Pointer, Jr. of the U.S. District Court for the Northern District of Alabama approved the Settlement Agreement, pursuant to which plaintiffs choosing to participate in the Settlement Agreement released the Company from liability. The Company was not a participant in the Settlement Agreement nor was it required to contribute to the settlement. On October 7, 1995, Judge Pointer issued an order which concluded that the Settlement Agreement was not workable in its then- current form because the funds committed to it by industry participants were inadequate. The order provided that plaintiffs who had previously agreed to participate in the Settlement Agreement could opt out after November 30, 1995. The Company's maximum exposure for breast implant product liability claims against Dow Corning is limited to its investment in Dow Corning which, after the second quarter of 1995 charge noted above, is zero. As a result, any future charges by Dow Corning related to such claims or as a result of the Chapter 11 proceeding would not have an adverse impact on the Company's consolidated financial statements. The Company is separately named as a defendant in more than 14,000 breast implant product liability cases, of which approximately 4,000 state cases are the subject of summary judgments in favor of the Company. In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation" by the Company or its agents in Dow Corning's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence. Judge Pointer was appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of the product liability cases involving silicone breast implants filed in the U.S. federal courts. Initially, in a ruling issued on December 1, 1993, Judge Pointer granted the Company's motion for summary judgment, finding that there was no basis on which a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Corning. In an interlocutory opinion issued on April 25, 1995, Judge Pointer affirmed his earlier ruling as to plaintiffs' corporate control claims but vacated that ruling as to plaintiffs' direct participation claims. It is the opinion of the Company's management that the possibility is remote that plaintiffs will prevail on the theory that the Company should be liable in the breast implant litigation because of its shareholder relationship with Dow Corning. The Company's management believes that there is no merit to plaintiffs' claims that the Company is liable for alleged defects in Dow Corning's silicone products because of the Company's alleged direct participation in the development of those products, and the Company intends to contest those claims vigorously. Management believes that the possibility is remote that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, would have a material adverse impact on the Company's financial position or cash flows. Nevertheless, in light of Judge Pointer's April 25, 1995, ruling, it is possible that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, could have a material adverse impact on the Company's net income for a particular period, although it is impossible at this time to estimate the range or amount of any such impact. --- Page 8 --- Commitments and Contingent Liabilities (Continued) Numerous lawsuits have been brought against the Company and other chemical companies alleging that the manufacture, distribution or use of pesticides containing dibromochloropropane (DBCP) has caused, among other things, property damage, including contamination of groundwater. To date, there have been no verdicts or judgments against the Company in connection with these allegations. It is the opinion of the Company's management that the possibility is remote that the resolution of such lawsuits will have a material adverse impact on the Company's consolidated financial statements. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. The Company had accrued $335 million at September 30, 1999, for environmental matters, including $7 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. It is the opinion of the Company's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Company's consolidated financial statements. In addition to the breast implant, DBCP and environmental remediation matters, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage which will be utilized to minimize the impact, if any, of the contingencies described above. Except for the possible effect on the Company's net income for breast implant litigation described above, it is the opinion of the Company's management that the possibility is remote that the aggregate of all claims and lawsuits will have a material adverse impact on the Company's consolidated financial statements. A Canadian subsidiary entered into two 20-year agreements, one which expired in 1998 and one which expires in 2004, to purchase ethylene. The purchase price is determined on a cost-of-service basis which, in addition to covering all operating expenses and debt service costs, provides the owner of the manufacturing plants with a specified return on capital. Total purchases under the agreements were $221 million, $199 million and $221 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had various outstanding commitments for take or pay and throughput agreements, including the Canadian subsidiary's ethylene 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, 1998 (in millions) - --------------------------------------------------------- 1999 $ 272 2000 253 2001 255 2002 248 2003 240 2004 through expiration of contracts 1,669 - --------------------------------------------------------- Total $2,937 - --------------------------------------------------------- In addition to the take or pay obligations at December 31, 1998, the Company had outstanding purchase commitments which range from one to 18 years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $106 million. In general, such commitments were at prices not in excess of current market prices. The Company also had outstanding direct and indirect commitments for construction performance and lease payment guarantees and other obligations of $307 million. --- Page 9 --- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of the Company. This section covers the current performance and outlook of the Company and each of its operating segments. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Company's operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental, and technological factors, as well as issues related to Year 2000 and the Euro conversion. Accordingly, there is no assurance that the Company's expectations will be realized. THIRD QUARTER EARNINGS ANNOUNCEMENT (OCTOBER 21, 1999) DOW REPORTS HIGHER EARNINGS AND SALES FOR THIRD QUARTER - ------------------------------------------------------------------------ Third Quarter of 1999 Highlights - - Earnings were $1.44 per share, an 8 percent increase from third quarter 1998 earnings per share of $1.33 excluding unusual items. - - Sales for the quarter were $4.7 billion, up 9 percent from a year ago. Both volume and price improved - by 7 percent and 2 percent respectively. - - EBIT was $584 million for the quarter versus $540 million, excluding unusual items, for third quarter 1998 - a gain of 8 percent. - ------------------------------------------------------------------------ (In millions, except for per share amounts 3 Months Ended 9 Months Ended September 30 September 30 - ------------------------------------------------------------------------ 1999 1998 1999 1998 -------------------------------- Net Sales $4,693 $4,314 $13,729 $14,000 Earnings Before Interest, Income Taxes and Minority Interests (EBIT) $584 $564 $1,981 $2,075 Earnings Per Common Share $1.44 $1.40 $4.74 $5.10 Excluding unusual items: EBIT $584 $540 $1,981 $2,023 Earnings Per Common Share $1.44 $1.33 $4.74 $4.96 - ------------------------------------------------------------------------ Review of Third Quarter Results The Dow Chemical Company today announced higher sales and earnings compared with the same quarter a year ago. The company reported sales of $4.7 billion, earnings before interest, income taxes and minority interests (EBIT) of $584 million and net income of $320 million. Earnings per share of $1.44 were up 8 percent, excluding unusual items from third quarter 1998. The company's higher earnings were achieved despite a 30 percent spike in feedstock and energy costs from the same period a year ago, according to J. Pedro Reinhard, executive vice president and chief financial officer. "These strong results truly differentiate Dow and reflect our ability to withstand significant increases in feedstock costs through our diversified business portfolio and geographic mix, operational excellence and cost reductions." He added, "The fact that we have achieved favorable year-to-year comparisons in sales and earnings underscores that Dow will earn a positive economic profit this year." --- Page 10 --- Third Quarter Earnings Announcement (October 21, 1999) (Continued) Sales increased by 9 percent, while EBIT grew 8 percent excluding 1998 unusual items. Dow's volume climbed 7 percent - the highest year-over-year growth since second quarter 1997. Double-digit volume growth was achieved in Asia and Europe as well as in the Plastics segment. Price rose by 2 percent compared with the same quarter a year ago and by 5 percent versus last quarter. Price increases in the basics segments more than offset declines in the performance businesses. On a year-to-date basis excluding 1998 unusual items, EBIT for Dow's combined performance segments was up 2 percent, contributing more than 60 percent of the company's total earnings. For the quarter, EBIT declined from the same period a year ago reflecting higher feedstock costs and price deterioration, which were only partially offset by increased volume. Performance Plastics sales increased to $1.3 billion, reflecting a 9 percent growth in volume with strongest gains in Engineering Plastics and Adhesives, Sealants and Coatings. Sales in Performance Chemicals rose to $674 million, bolstered by a 6 percent increase in volume. Exhibiting normal third quarter seasonality, EBIT for the Agricultural Products segment was negative, though up from the third quarter of 1998 due to a strong focus on productivity improvements. In the Chemicals and Plastics segments, improved productivity, strong demand and some price recovery more than offset higher feedstock and energy costs. The Chemicals segment turned in EBIT of $101 million, an increase of 46 percent from the same period a year ago. In the Plastics segment, EBIT improved by 57 percent from third quarter 1998 to $207 million, on volume gains of 18 percent coupled with a 10 percent increase in price. This latter segment drew particular strength from its differentiated product mix focused on higher value markets and high growth customers. "We are very pleased with the quarter's results, which again demonstrate Dow's resilience based on our global business leadership positions and low-cost structure," said Reinhard. "We look forward to continuing this strong performance supported by improving global economic conditions. Dow is delivering on its commitments and remains focused on implementing its strategy to achieve aggressive value growth." The Dow Chemical Company is a global science and technology based company that develops and manufactures a portfolio of chemical, plastic and agricultural products and services for customers in 168 countries around the world. With annual sales of more than $18 billion, Dow conducts its operations through 14 global businesses employing 39,000 people and supplies more than 3,500 products. --- Page 11 --- ACQUISITIONS AND DIVESTITURES In April 1995, the Company signed an agreement with Bundesanstalt fuer vereinigungsbedingte Sonderaufgaben (BvS) for the privatization of three state-owned chemical companies in eastern Germany (Buna Sow Leuna Olefinverbund, referred to herein as BSL). Economic transfer of business operations to the Company, through the privatization agreement and various service agreements, occurred in June 1995. In September 1997, the Company acquired 80 percent ownership in BSL for an investment of $174 million. BvS will maintain a 20 percent ownership until the end of the restructuring period, which is expected to be June 2000. After the restructuring period, the Company will have a call option and BvS a put option for the remaining 20 percent of BSL for an additional investment of approximately $137 million. BvS is providing certain incentives during the restructuring period to cover portions of the reconstruction program and has retained environmental cleanup obligations for existing facilities. Incentives relating to property construction reduce the basis of such property. Incentives relating to expenses during the reconstruction period are recognized as such expenses are incurred. The Company expects to include the financial results of BSL as a nonconsolidated affiliate until the end of the restructuring period. In January 1998, the Company completed the sale of the DowBrands consumer products business to S.C. Johnson & Son, Inc. for $1.2 billion. This transaction resulted in a pretax gain of $816 million. In February 1998, the Company entered into an agreement with Pronor Petroquimica S.A. (Pronor) to purchase a portion of its business. The new company, named Isopol, was acquired for the production and commercialization of toluene diisocyanate (TDI), used to manufacture durable goods such as cushioned furniture and mattresses, and will primarily supply the markets of the Mercosur countries of Latin America. The Company's total investment was $137 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 January 1996, the Company and The Hartford Steam Boiler Inspection and Insurance Company (HSB) formed, through the transfer of net assets and existing businesses, a 60:40 joint venture named Radian International LLC (Radian) to provide environmental services. In January 1998, HSB exercised a put option requiring the Company to purchase HSB's interest for $136 million. In July 1998, as part of the Company's ongoing efforts to restructure its business portfolio, Radian was sold to Dames & Moore Group for $117 million. In December 1998, the Company and United Technologies Corporation sold the business and certain assets of their 50:50 joint venture, Dow-United Technologies Composite Products, Inc., to GKN Westland Aerospace, Inc., a unit of GKN plc, of the United Kingdom. The Company expects to dissolve the joint venture in 2000, with no material effect on its consolidated financial statements. On August 2, 1999, the Company announced it had reached an agreement with TransCanada Pipelines Limited to acquire CanStates Holdings, Inc., and its subsidiary, ANGUS Chemical Company. On October 1, 1999, the Company executed the purchase agreement to acquire ANGUS Chemical. ANGUS Chemical is a global leader in the manufacture and marketing of unique specialty chemicals - nitroparaffins and their derivatives - sold into over 40 industries. ANGUS Chemical reports annual sales of more than $150 million. 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 shareholders 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 $124 11/16 on August 3, 1999, the transaction is valued at $66.96 per Union Carbide share, or $11.6 billion in aggregate including the assumption of $2.3 billion of net debt. The merger is subject to certain conditions including approval by Union Carbide shareholders and review by antitrust regulatory authorities in the United States, Europe and Canada. The transaction is expected to be accounted for as a pooling-of- interests. See the sections entitled "Purchased In-process Research and Development" and "Special Charge" on page 17 regarding certain charges recorded during 1998 related to acquisitions and divestitures. --- Page 12 --- CHANGES IN FINANCIAL CONDITION The following tables represent total debt, working capital and certain balance sheet ratios at September 30, 1999 versus December 31, 1998: Sept. 30, Dec. 31, Increase In millions 1999 1998 (Decrease) - ------------------------------------------------------------------- Notes payable $ 921 $1,526 $(605) Long-term debt due within one year 213 300 (87) Long-term debt 4,130 4,051 79 - ------------------------------------------------------------------- Total debt $5,264 $5,877 $(613) - ------------------------------------------------------------------- At September 30, 1999, 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 $1.0 billion are available for use by foreign subsidiaries. On November 9, 1999, the Company issued $1.0 billion in 30- year senior unsecured debentures for general corporate purposes, drawing that amount from a $2.5 billion shelf registration statement filed with the U.S. Securities and Exchange Commission on October 8, 1999. Sept. 30, Dec. 31, Increase In millions 1999 1998 (Decrease) - ------------------------------------------------------------------- Cash and cash equivalents $ 369 $ 123 $ 246 Marketable securities and 672 267 405 interest-bearing deposits Accounts and notes receivable - net 4,112 4,537 (425) Inventories: Finished and work in process 2,168 2,245 (77) Materials and supplies 591 565 26 Deferred income tax assets - current 255 303 (48) - ------------------------------------------------------------------- Total current assets 8,167 8,040 127 - ------------------------------------------------------------------- Total current liabilities 6,124 6,842 (718) - ------------------------------------------------------------------- Working capital $2,043 $1,198 $ 845 - ------------------------------------------------------------------- Operating activities provided cash of $2.7 billion for the nine months ended September 30, 1999. Included in this amount was the sale of U.S. trade receivables totaling $450 million late in the third quarter. The issuance of preferred securities by a newly formed subsidiary of the Company provided an additional $500 million this quarter. Cash was used to reduce total debt $613 million, to purchase Hoechst South Africa's shares in the Safripol and Plastomark polyolefins joint venture with Sentrachem for $47 million, to repurchase shares of the Company's common stock for $428 million, and for capital expenditures and other normal activities. Activities for the quarter resulted in a temporary increase in cash, cash equivalents, marketable securities and interest-bearing deposits of $651 million. On October 1, 1999, cash was used to acquire ANGUS Chemical. (See the Consolidated Statements of Cash Flows and Acquisitions and Divestitures for more detail.) Sept.30, Dec. 31, Balance Sheet Ratios 1999 1998 - ------------------------------------------------------------------- Current assets over current liabilities 1.3:1 1.2:1 Days-sales-outstanding-in-receivables 46 49 Days-sales-in-inventory 71 72 Debt as a percentage of total capitalization 37.9% 42.3% - ------------------------------------------------------------------- Prior to the announcement of the merger agreement with Union Carbide this quarter, the Company purchased 0.9 million shares of common stock as part of its overall stock repurchase program, bringing the year to date total to 3.7 million shares. Due to the pending merger, on August 3, 1999, the Board of Directors of the Company terminated its 1997 authorization to repurchase Dow stock. The Company's average shares outstanding for the first nine months of 1999 were 220 million, a decrease of 2 percent from the average shares outstanding for the first nine months of 1998. On October 29, 1999, the Company paid a quarterly dividend of 87 cents per share to shareholders of record on September 30, 1999. This was the 351st consecutive quarterly dividend since 1912 and in each instance Dow has maintained or increased the dividend. --- Page 13 --- RESULTS OF OPERATIONS Following are selected data for the three months and nine months ended September 30, 1999 and 1998: Three Months Ended Nine Months Ended -------------------- -------------------- Dollars in millions, except Sept. 30, Sept. 30, Sept. 30, Sept. 30, for share amount 1999 1998 1999 1998 - ---------------------------------------------------------------------------- Sales $4,693 $4,314 $13,729 $14,000 Cost of sales 3,587 3,258 10,258 10,451 % of sales 76% 76% 75% 75% Research and development, selling general and adminstrative expense 584 599 1,763 1,824 Earnings before interest, income taxes and minority interests (EBIT) 584 564 1,981 2,075 % of sales 12% 13% 14% 15% Earnings before interest, income taxes and minority interests excluding unusual items 584 540 1,981 2,023 % of sales 12% 13% 14% 14% Effective tax rate 35.0% 33.1% 35.5% 35.0% Net income available for common stockholders $320 $314 $1,059 $1,160 Earnings per common share - basic $1.46 $1.41 $4.81 $5.17 Earnings per common share - diluted $1.44 $1.40 $4.74 $5.10 Operating rate percentage 91% 83% 88% 86% Net sales for the third quarter of 1999 were $4.7 billion, up 9 percent from $4.3 billion in the third quarter of last year, with increases in both volume and price. Volume growth contributed 7 percent, representing the highest year-over-year volume increase since the second quarter of 1997. Price increases contributed another 2 percent compared with last year, with increases in the basic segments more than offsetting declines in the performance businesses. Considering the effect of acquisitions and divestitures, volume improved 8 percent from last year. Volume was up in all operating segments except Agricultural Products, and was particularly strong in Plastics, up 18 percent due primarily to double-digit growth in polyethylene. Agricultural Products volume was down 2 percent due to adverse worldwide industry conditions. Overall, volume was up in all geographic areas, although only slightly in the United States due to the 1998 divestitures of the magnesium business and Radian International. Volume was strong in Europe, up 10 percent, and in Rest of World, up 13 percent, driven by a 35 percent volume increase in Asia Pacific over last year's depressed levels. Net sales of $13.7 billion for the first three quarters of 1999 were down 2 percent from $14.0 billion last year, as a 3 percent gain in volume was more than offset by a 5 percent decline in prices. Expenses, which include research and development (R&D), selling, general and administrative expenses, were $584 million, down $15 million from the third quarter of 1998. R&D was up 3 percent versus last year, supporting our growth initiatives in biotechnology. Selling, general and administrative were down 5 percent, due to the Company's on-going efforts to reduce structural costs, more than offsetting the increase in R&D. Net income for the third quarter was $320 million, $1.44 per share (diluted), up from last year's net income of $314 million, $1.40 per share (diluted). Net income was up despite a 30 percent increase in hydrocarbon and energy costs versus last year, due to improved product mix, increased prices and continued productivity gains. Year to date, net income was $1,059 million, $4.74 per share (diluted), compared with $1,160 million, $5.10 per share (diluted), last year. Net income last year included a net positive impact of $0.14 per share for unusual items, including the gain on the sale of the DowBrands business, offset by several unusual charges recorded in the first quarter, and an adjustment to the first quarter special charge recorded in the third quarter. The unusual charges included charges for purchased in- process research and development, severance costs, asset write- downs and environmental remediation costs. -- Page 14 --- Results of Operations (Continued) PERFORMANCE PLASTICS Performance Plastics sales of $1,302 million were up 4 percent compared with sales for the third quarter of 1998, due to volume growth of 9 percent partially offset by price declines of 5 percent. Third quarter EBIT for the segment declined 17 percent to $248 million from $300 million a year ago, as volume increases and productivity improvements were more than offset by declining prices and higher feedstock costs. Polyurethanes sales for the third quarter were down slightly versus the same period last year, due to a 4 percent decline in prices against a 3 percent increase in volume. Volume was particularly strong for toluene diisocyanate (TDI) due to the start up of a new plant in Freeport, Texas, but weak for polyols due to competitive pressure. Prices were down in all geographic areas except Asia Pacific, which showed some improvement over last year. EBIT was flat versus the third quarter of last year as volume increases and cost reductions helped offset lower prices and higher raw material costs. Sales of Epoxies and Intermediates were down 3 percent from a year ago, with price declines of 8 percent partially offset by a 5 percent gain in volume. Significant volume growth in Asia Pacific, along with modest volume growth in Europe, more than offset volume declines in the other geographic areas. EBIT for the business was down compared with last year, negatively impacted by product mix, price declines, increased raw material costs, and shutdown costs. Engineering Plastics sales for the quarter were up 27 percent from the same quarter last year, with volume up 36 percent and prices down 9 percent. Volume, up significantly in all geographic areas, was boosted by new sales of nylon from a marketing agreement with Solutia. Demand was also very strong for polycarbonate. Price pressure continued in all geographic areas, except Latin America. EBIT for the quarter was down versus the third quarter of 1998 due to lower prices and higher raw material costs. Fabricated Products sales for the third quarter of 1999 were down slightly from last year, due to a 3 percent decline in prices, only partially offset by increased volume. Excluding the effect of the 1998 divestiture of the plastic-lined pipe business, volume was up 3 percent. Volume for Styrofoam brand insulation was up in North America due to the strength of the construction industry. Price declines were experienced in all geographic areas, except Asia Pacific, but seem to have slowed during the quarter. EBIT for the quarter was down from last year due to lower prices and the inclusion of the gain on the sale of the plastic-lined pipe business last year. Adhesives, Sealants and Coatings sales for the third quarter were up 15 percent versus the third quarter of 1998, due to a 19 percent increase in sales volume partially offset by a 4 percent decline in prices. Volume in the business' Systems Houses was up significantly with strong growth in Europe, Latin America and Asia Pacific. Volume was also significantly up for glass bonding and automotive acoustical systems in North America. Third quarter EBIT for this business was up slightly compared with last year, as volume growth and continued cost control more than offset declining prices and increased raw material costs. For the first nine months of the year, Performance Plastics sales were $3,862 million, up 2 percent from $3,800 million last year. Volume growth of 7 percent during this period was partially offset by a 5 percent decline in prices. Year to date, EBIT of $815 million was down 4 percent from $847 million last year, excluding unusual charges of $6 million recorded in the first quarter of 1998. PERFORMANCE CHEMICALS Third quarter sales for Performance Chemicals were $674 million, up 2 percent from $663 for the same quarter last year, as a 6 percent improvement in volume more than offset a 4 percent decline in prices. EBIT for the segment was $108 million this quarter, down from $136 million due to lower prices and a significant rise in feedstock costs. Specialty Chemicals sales for the quarter were up, with a 6 percent increase in volume more than offsetting a 3 percent decline in prices versus the same quarter last year. Volume was particularly strong in Asia Pacific, up over 25 percent, and in Europe. In North America, demand for Methocel cellulose ethers continued to be strong. Demand for alkanolamines, oxygenated solvents and the Company's contract manufacturing operations was also up. Price declines were experienced in all geographic areas and most product lines. EBIT for the third quarter was down versus last year due to lower pricing and higher raw material costs. Emulsion Polymers sales were down versus the third quarter of 1998 as price declines of 7 percent more than offset a 5 percent increase in volume. Driven by lower selling prices and higher raw material costs, EBIT for the quarter was down versus last year. Sales for the nine months of 1999 for this segment were $1,971 million, flat with last year as a 3 percent increase in volume was offset by a 3 percent decline in prices. Year to date, EBIT for this segment was $381 million, up 10 percent versus $346 million last year, excluding unusual charges of $12 million recorded in the first quarter of 1998. --- Page 15 --- Results of Operations (Continued) AGRICULTURAL PRODUCTS Sales of Agricultural Products for third quarter 1999 were $399 million, down 6 percent compared with $424 million for the same quarter last year. Prices declined 4 percent and volume was down 2 percent, due to adverse worldwide industry conditions. The most significant price declines were seen in Latin America for weed control products and in North America for chlorpyrifos. Volume declines were most notable for seeds and insecticides in North America. Volume improvements were reported for Sentricon Termite Colony Elimination System. EBIT for the third quarter was a loss of $35 million, up from a loss of $45 million last year. Sales for the segment were $1,732 million for the first nine months of this year, down 5 percent from $1,831 million in 1998, due to a volume decline of 2 percent and price declines of 3 percent. EBIT of $205 million for the same period was up 13 percent from $181 million last year excluding unusual items recorded in the first half of 1998. Unusual items totaling $364 million, recorded in the first half of 1998, included charges for purchased in-process research and development related to the additional investments in Dow AgroSciences and Mycogen, severance costs, and environmental remediation costs. (See sections entitled "Purchased In-process Research and Development" and "Special Charges" in the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations.) PLASTICS Plastics sales for the third quarter of 1999 were $1,170 million, up 28 percent from $915 million a year ago, with improvements in both volume and price. Volume was up 18 percent; prices were up 10 percent. Despite higher feedstock and energy costs, EBIT of $207 million for the quarter was up 57 percent from $132 million last year, due to strong demand and price recovery. Polyethylene sales were up 31 percent in the third quarter versus the same period last year. Volume increased 17 percent; prices increased 14 percent. The increase in prices was the first year-over-year increase since the second quarter of 1997. Demand continued to be strong, with volume growth in all geographic areas. Third quarter sales were also boosted by the addition of sales from Safripol, following the purchase of Hoechst South Africa's shares of the joint venture, bringing Dow's ownership to 100 percent. Prior to the second quarter of this year, results for Safripol were reported in Unallocated and Other. Third quarter EBIT for polyethylene was up more than 50 percent from the same quarter of 1998, due to greater volumes and higher margins. Polystyrene sales increased 6 percent in the third quarter versus the same quarter of 1998. Compared with last year, volume growth of 9 percent was partially offset by price declines of 3 percent. Demand was up in all geographic areas, except North America, and was particularly strong in Asia Pacific, up over 30 percent. Prices, while down in Europe and Latin America, showed some improvement in North America. EBIT for the business was down compared with third quarter 1998, negatively impacted by lower selling prices and higher feedstock costs. Polypropylene sales continued a strong growth trend, with volume up significantly in Europe and North America. Prices also improved versus the third quarter last year. EBIT for the quarter improved versus last year. Insite EBIT for the third quarter improved compared with the same period last year, primarily due to an improvement in equity earnings from DuPont Dow Elastomers L.L.C. on higher sales and lower structural costs. Plastics sales for the first three quarters of 1999 were $3,110 million, compared with $2,905 for the same period last year, a 7 percent improvement. During the first nine months of the year, volume growth of 14 percent was partially offset by a 7 percent decline in prices. Year to date, EBIT was $437 million, down from $549 million for the first nine months of 1998. CHEMICALS Third quarter sales for the Chemicals segment were $607 million, up from $555 million for the same quarter last year. Volume, up 7 percent, was strong in Asia Pacific and Latin America, but lower in North America and Europe. Net of sales volume lost by exiting magnesium-related businesses late last year, volume was up 13 percent. Ethylene glycol (EG) volume was up more than 90 percent on high seasonal demand, with prices also up versus the same period last year. Vinyl chloride monomer (VCM) sales were up significantly with strong volume and increased prices. Caustic volume for the quarter was up, but prices were down almost 50 percent compared with last year. Overall, prices for the segment were up 2 percent. EBIT for the quarter was $101 million, up from $69 million for the same period last year due to improved plant operations, portfolio changes and higher VCM and EG prices that more than offset lower caustic prices and higher feedstock and energy costs. --- Page 16 --- Results of Operations (Continued) For the nine months of 1999, sales for the Chemicals segment were $1,660 million, down from $1,817 million last year due almost entirely to a 9 percent decline in prices. EBIT for the period was $290 million compared with $270 for 1998, excluding $55 million of unusual items (primarily environmental remediation charges) recorded in the first quarter of 1998. (See section entitled "Special Charges" in the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations.) Cost reductions, better plant operations and changes in the segment's portfolio have helped to offset declining prices and maintain EBIT. HYDROCARBONS AND ENERGY Sales for Hydrocarbons and Energy for the third quarter of 1999 were $469 million, up from $367 last year mainly due to a 23 percent increase in price. Sales volume was up 5 percent. EBIT for the quarter was a loss of $17 million, down from EBIT of $19 million last year. Sales for the first three quarters of 1999 were $1,141 million, down slightly from sales of $1,153 million last year due to a 1 percent volume decline. EBIT for the first nine months was a loss of $7 million, compared with a loss of $2 million last year, excluding $11 million of charges for unusual items (environmental remediation costs) recorded in the first quarter of 1998. (See section entitled "Special Charges" in the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations.) UNALLOCATED AND OTHER EBIT for Unallocated and Other was a loss of $28 million for the third quarter of 1999, compared with a loss of $47 million last year. Year to date, EBIT was a loss of $140 million compared with a loss of $168 million, excluding a net gain of $500 million recorded in the first three quarters of 1998. Unusual items recorded last year included a gain on the sale of the DowBrands business, partially offset by severance costs, asset write-downs and environmental remediation costs. (See section entitled "Special Charges" in the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations.) COMPANY SUMMARY Operating Rate - -------------- The Company's global plant operating rate for its chemicals and plastics businesses was 91 percent for the third quarter of 1999, up significantly from 83 percent for the same period last year. Purchased In-process Research and Development - --------------------------------------------- Purchased in-process research and development (IPR&D) represents the value assigned in a purchase business combination to research and development projects of the acquired business that had commenced but had not yet been completed at the date of acquisition and which have no alternative future use. In accordance with SFAS No. 2, "Accounting for Research and Development Costs," as clarified by FASB Interpretation No. 4, amounts assigned to IPR&D must be charged to expense as part of the allocation of the purchase price of the business combination. Accordingly, a charge of $338 million was recorded during the first quarter of 1998 as part of the allocations of the purchase price related to the acquisitions of Sentrachem, additional common stock of Mycogen, and the remaining 40 percent of DowElanco (since renamed Dow AgroSciences). An additional $12 million was recorded during the second quarter of 1998 related to Mycogen's acquisition of Dinamilho Carol Produtos Agricolas, a Brazilian seed company. During the third and fourth quarters of 1998, the U.S. Securities and Exchange Commission (SEC) issued clarifying guidance on how these amounts should be determined. In light of this clarification, the Company reviewed all IPR&D charges, and in the fourth quarter recorded a $55 million reduction of the IPR&D charges recorded in the first half of 1998 to comply with the SEC guidance. Special Charges - --------------- In the first quarter of 1998, a special charge of $330 million was recorded, including $218 million for the write-down of several assets and $112 million for severance. The asset write- downs included Radian International LLC, Dow-United Technologies Composite Products, Inc., both of which were subsequently sold (see Acquisitions and Divestitures), and an agricultural plant in Brazil. In the third quarter, based on changes in the estimated fair values, a $24 million adjustment to the reduced values of the assets to be disposed was recorded. --- Page 17 --- Results of Operations (Continued) Severance plans were adopted by the Company in the first quarter of 1998 for North America, Europe and Sentrachem, resulting in the special charge of $112 million. The plans for North America and Europe were complete at the end of 1998. The plan for Sentrachem is expected to be completed in 2000. During 1998, severance costs of $138 million were incurred relative to these plans, exceeding the initial severance accrual by $39 million. Total headcount reduction related to the severance plans was 1,881 through December 31, 1998. At year-end, the balance of the accrual for the Sentrachem plan was $13 million, representing an anticipated additional headcount reduction of 180. During the first nine months of 1999, $9 million related to the Sentrachem plan was paid to 129 individuals, leaving an accrued balance of $4 million for an anticipated additional headcount reduction of 80. Equity in Earnings of Nonconsolidated Affiliates - ------------------------------------------------ Equity in earnings of nonconsolidated affiliates was $15 million in the third quarter of 1999, down from $28 million in the third quarter of last year. Sundry Income - Net - ------------------- Sundry income includes a variety of income and expense items including royalty income, the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income for the third quarter was $53 million, flat versus the third quarter of 1998. Year to date, sundry income was $210 million compared with $907 million last year. The first quarter of 1998 included a pretax gain of $816 million on the sale of DowBrands. Interest Income and Expense - --------------------------- Interest expense (net of capitalized interest) and interest income totaled $64 million for the third quarter, down from $87 million last year. Interest expense was down this quarter due principally to lower average levels of short-term borrowings resulting from the use of proceeds from a new low-cost financing vehicle to reduce commercial paper. (See Changes in Financial Condition and the section entitled "Minority Interests' Share in Income" below.) Provision for Taxes on Income - ----------------------------- The effective tax rate for the third quarter was 35.0 percent versus 33.1 percent for the third quarter of 1998. Year to date, the effective tax rate was 35.5 percent. Minority Interests' Share in Income - ----------------------------------- During the quarter, the Company formed a low-cost financing vehicle that involved the issuance of preferred securities by a newly formed subsidiary of the Company. The preferred dividends from this vehicle are reported as minority interest, which was up $13 million (after tax) from the third quarter of 1998. Outlook - ------- The improvement of the global economy is expected to favorably affect most of the chemical industry. Strong derivative demand with little new capacity should keep global ethylene balances tight through year-end and well into the first half of 2000. The chlor-alkali chain should benefit from improved economic conditions, keeping markets tight, with upward price bias on chlorine/VCM. Oil and gas prices likely peaked late in the third quarter, though the prices for these products are usually volatile prior to winter. We expect average feedstock costs to be up slightly in the fourth quarter versus third quarter, with a downward trend likely in first quarter 2000. The outlook for most of the performance businesses calls for generally stable pricing and strong demand continuing from the third quarter, with raw material costs trending upward. In Agricultural Products, structural cost reductions should allow the segment to improve earnings from last year's fourth quarter, but EBIT will likely remain negative in this seasonally low quarter. For polyethylene, strong volume growth should continue, along with increasing global prices. Polystyrene pricing should improve following price increase announcements made late in the third quarter in a tight styrene and polystyrene environment. VCM pricing should continue to rise on the strength of PVC and ethylene pricing. Fourth quarter caustic pricing, while expected to be up in the U.S., should be tempered by weaker supply/demand balances in Europe and Asia. Overall, we believe we are on track to achieve our strategic and financial goals, including earning positive economic profit at the trough of the chemical cycle. --- Page 18 --- ACCOUNTING POLICIES Effective January 1, 1999, the Company adopted American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires capitalization of certain internal-use computer software costs. The Company previously expensed such costs as incurred; therefore, the adoption of this statement resulted in a favorable, though immaterial, impact on earnings in the first half of 1999. The effect on the full year is also expected to be immaterial. The Company also adopted AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities," which provides guidance on the financial reporting of start-up costs and organization costs, requiring those costs to be expensed as incurred. The Company's existing policy regarding the treatment of these costs was substantially consistent with SOP 98-5; therefore, the adoption of this standard on January 1, 1999 did not have a material impact on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board (FASB) issued 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." SFAS No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company expects to adopt this standard on January 1, 2001. Determination of the impact of adoption has not been made. YEAR 2000 READINESS DISCLOSURE State of Readiness - ------------------ The Company's Year 2000 (Y2K) project, which began in early 1997, is a global effort covering information systems, process control and embedded systems for all of the Company's businesses. The project is designed to address, through use of reasonable commercial efforts, the risk that certain internal or external systems may inaccurately interpret dates after December 31, 1999. The project is led by a senior director of Information Systems who reports to the Chief Information Officer and an executive steering team, and is managed by a global team consisting of technical, functional and business leaders. Since early 1997, the Audit Committee of the Company's Board of Directors has received quarterly reports on the team's plan and progress. Most of the Company's systems have already been upgraded and tested and the project is substantially complete. The first two phases of the Y2K project have been completed. Phase I, the Business Study, established an awareness of the problem and developed the overall strategy. During Phase II, the Project Study, the Company inventoried and assessed applications, infrastructure and embedded systems for Y2K problems; selected the remediation tools; and prioritized the remediation projects. Phase III, Remediation, includes the efforts to upgrade, test for Y2K readiness and implement needed changes and new systems. This phase is in progress and almost all elements, as noted below, are complete. Phase IV, Business Contingency Planning, is complete and, as discussed below, any necessary plans are being implemented as needed. The Information Systems Y2K remediation of hardware, systems software, telecommunications network infrastructure and business applications is more than 99 percent complete. The remaining Information Systems remediation tasks are anticipated to be completed in November1999, and are not considered mission critical. The Company's implementation of enterprise-wide financial and operational systems and standardized desktop computing during the last several years has facilitated this effort. At the end of the third quarter, more than 99 percent of the manufacturing process control systems were Y2K ready. None of the remaining systems are considered mission or business critical. Remediation and testing of the remaining systems are anticipated to be complete in November 1999. Timing for the remaining work is consistent with plant shutdown schedules. Remediation of the Company's embedded systems, such as laboratory equipment, air conditioners and elevators is complete, as planned. The Company's assessment of critical suppliers is complete, and risk management actions and contingency plans are being implemented, as necessary. Contingency plans, such as building inventories and switching suppliers, have been developed for a number of these critical suppliers, and are being executed in 1999, as necessary. The Company's assessment of critical customer readiness is complete. --- Page 19 --- Year 2000 Readiness Disclosure (Continued) Costs - ----- Project costs are expected to be approximately $78 million, over three years, and are not considered material to the Company's consolidated financial statements. This estimate is up from previous estimates due mostly to contingency planning efforts and implementation costs. Total project costs incurred to date were approximately $73 million at the end of the third quarter of 1999. The remaining costs will be spent primarily for implementation of specific business and site contingency plans. The Y2K effort is being supported by a reallocation of existing resources. In addition to the project costs previously identified, approximately $6 million has been spent on capital equipment replacement costs. Risks - ----- Failure to adequately address critical Y2K issues by the Company, its suppliers and/or its customers could result in interruptions of normal business work operations. Such interruptions could materially and adversely affect the Company's results of operations, liquidity and financial condition; however, the Company's program to address these is on schedule to meet a completion date ahead of the year 2000. The Company has assessed external sources of risk and developed contingency plans to address both internal and external identifiable risks through commercially reasonable efforts. The Company's risk assessment data plus external studies continue to indicate that electric power and utilities in some countries may be an external source of risk. Manufacturing sites have assessed the local impact and developed contingency plans to manage this risk. Telecommunications providers in certain Asian, Latin American and Eastern European countries continue to be identified as sources of risk. To manage this risk, technical alternatives have been assessed and implemented where economically justified. Manual workarounds are also being implemented, as necessary. As an example, we have implemented full telephone and data backup facilities in one Latin American country where we have significant manufacturing operations and where there is a concern about the readiness of the telecommunications infrastructure. We have also deployed backup satellite telephone systems in some locations, which can be used for emergency communications. While the risks discussed herein have a possible material impact, the risk management actions and contingency plans that have been developed and are being implemented will significantly reduce the probability and potential impact of the identified risks. Contingency Plans - ----------------- In addition to the specific risk management actions and contingency plans outlined in the previous sections, a business contingency planning process has identified additional prudent steps that may be necessary to prepare for unexpected, but credible, scenarios. For instance, a number of plants will be shut down, or brought to an idle state for a short period of time, during the year-end rollover due to normal seasonal operations, inventory management reasons or Y2K-related decisions, which were made on a business-by-business basis. It is anticipated that less than 10 percent of the manufacturing capacity may be temporarily shut down or idled. Also, a corporate command center is being established to monitor and report internal and external operational status across the Company during the critical date period. EURO CONVERSION On January 1, 1999, the Euro was adopted as the national currency of 11 European Union member nations. During a three-year transition period, the Euro will be used as a non-cash transactional currency. The Company began conducting business in the Euro on January 1, 1999, and will change its functional currencies during the three-year transition period. The conversion to the Euro is not expected to have a significant operational impact or a material impact on the results of operations, financial position, or liquidity of its European businesses. --- Page 20 --- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Dow's business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, that enable it to mitigate the adverse effects of financial market risk. A secondary objective is to add value by creating additional exposure within established limits and policies. The potential impact of creating such additional exposures is not material to the Company's results. The global nature of Dow's business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global scale, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company's foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts and over-the-counter option contracts. Main exposures are related to assets and liabilities denominated in the currencies of Europe, Asia Pacific and Canada; bonds denominated in foreign currencies - mainly the Euro, Deutsche mark, Swiss franc and Japanese yen; and economic exposure derived from the risk that currency fluctuations could affect the dollar value of future cash flows. The majority of the foreign exchange exposure is related to the Japanese yen, Deutsche mark, Dutch guilder and other European currencies. The main objectives of interest rate risk management are to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, "swaptions" and exchange traded instruments to accomplish these objectives. The Company's primary exposure is to the U.S. dollar yield curve. Inherent in Dow's business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Cracker feedstocks and natural gas constitute the main commodity exposures. Over-the- counter and exchange traded instruments are used to hedge these risks when feasible. The risk of these hedging instruments is not material. Dow has a portfolio of equity securities derived from its acquisition and divestiture activity. This exposure is managed in a manner consistent with the Company's market risk policies and procedures. Dow uses value at risk (VAR), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. On an ongoing basis, the Company estimates the maximum gain or loss that could arise in one day, given a two standard deviation move in the respective price levels. These amounts are immaterial in comparison to the equity and earnings of the Company. The VAR methodology used by Dow is based primarily on the variance/covariance statistical model. As an example, the average daily VAR, using a 95 percent confidence level at December 31, 1998 and 1997, for foreign exchange, interest rate and equity exposures, net of hedges, was: foreign exchange - $4 million and $12 million; interest rate - $23 million and $23 million; and equity - $6 million and $3 million, respectively. Management believes there have been no material changes in market risk or in risk management policies subsequent to December 31, 1998. ---Page 21 --- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Breast Implant Matters - ---------------------- The Company and Corning Incorporated ("Corning") are each 50 percent stockholders in Dow Corning Corporation ("Dow Corning"). Dow Corning, the Company and/or Corning have been sued in a number of individual and class actions by plaintiffs seeking damages, punitive damages and injunctive relief in connection with injuries purportedly resulting from alleged defects in silicone breast implants. In addition, certain stockholders of the Company have filed separate consolidated class action complaints in the federal district court for the Southern District of New York alleging that the Company, Dow Corning or some of their respective Directors violated duties imposed by the federal securities laws regarding disclosure of alleged defects in silicone breast implants. All individual defendants in this case have been dismissed without prejudice. The Company and one of its former officers were also sued in two separate class action complaints (subsequently consolidated in the federal district court for the Eastern District of Michigan under the caption ZSA v. Dow Chemical) alleging that the defendants violated duties imposed by the federal securities laws regarding disclosure of information material to a reasonable investor's assessment of the magnitude of the Company's exposure to direct liability in silicone breast implant litigation. On February 1, 1999, the Court entered a Stipulated Order in ZSA v. Dow Chemical dismissing the claims of the named plaintiffs with prejudice and dismissing the claims of the class, which had never been certified, without prejudice. On May 15, 1995, Dow Corning announced that it had voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code. Under Chapter 11, all claims against Dow Corning (although not against its co-defendants) are automatically stayed. It is impossible to predict the outcome of each of the above described legal actions. However, it is the opinion of the Company's management that the possibility that these actions will have a material adverse impact on the Company's consolidated financial statements is remote, except as described below. In January 1994, Dow Corning announced a pretax charge of $640 million ($415 million after tax) for the fourth quarter of 1993. In January 1995, Dow Corning announced a pretax charge of $241 million ($152 million after tax) for the fourth quarter of 1994. These charges included Dow Corning's best estimate of its potential liability for breast implant litigation based on a global Breast Implant Litigation Settlement Agreement (the "Settlement Agreement"); litigation and claims outside the Settlement Agreement; and provisions for legal, administrative and research costs related to breast implants. The charges for 1993 and 1994 included pretax amounts of $1,240 million and $441 million, respectively, less expected insurance recoveries of $600 million and $200 million, respectively. The 1993 amounts reported by Dow Corning were determined on a present value basis. On an undiscounted basis, the estimated liability noted above for 1993 was $2,300 million less expected insurance recoveries of $1,200 million. As a result of the Dow Corning actions, the Company recorded its 50 percent share of the charges, net of tax benefits available to the Company. The impact on the Company's net income was a charge of $192 million for 1993 and a charge of $70 million for 1994. Dow Corning reported an after-tax net loss of $167 million for the second quarter of 1995, of which the Company's share amounted to $83 million. Dow Corning's second quarter loss was a result of a $221 million after-tax charge taken to reflect a change in accounting method from the present value basis noted above to an undiscounted basis resulting from the uncertainties associated with its Chapter 11 filing. As a result of Dow Corning's 1995 second quarter loss and Chapter 11 filing, the Company recognized a pretax charge against income of $330 million for the second quarter of 1995, fully reserved its investment in Dow Corning and is not recognizing its 50 percent share of equity earnings while Dow Corning remains in Chapter 11. On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States District Court for the Northern District of Alabama approved the Settlement Agreement pursuant to which plaintiffs choosing to participate in the Settlement Agreement released the Company from liability. The Company was not a participant in the Settlement Agreement nor was it required to contribute to the settlement. On October 7, 1995, Judge Pointer issued an order which concluded that the Settlement Agreement was not workable in its then-current form because the funds committed to it by industry participants were inadequate. The order provided that plaintiffs who had previously agreed to participate in the Settlement Agreement could opt out after November 30, 1995. The Company's maximum exposure for breast implant product liability claims asserted against Dow Corning is limited to its investment in Dow Corning which, after the 1995 second quarter charge noted above, is zero. As a result, any future charges by Dow Corning related to such claims or as a result of the Chapter 11 proceeding would not have an adverse impact on the Company's consolidated financial statements. --- Page 22 --- Legal Proceedings (Continued) The Company is separately named as a defendant in over 14,000 breast implant product liability cases. In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation" by the Company or its agents in Dow Corning's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence. Judge Pointer has been appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of the product liability cases involving silicone breast implants filed in the U.S. federal courts. Initially, in a ruling issued on December 1, 1993, Judge Pointer granted the Company's motion for summary judgment, finding that there was no basis on which a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Corning. In an interlocutory opinion issued on April 25, 1995, Judge Pointer affirmed his December 1993 ruling as to plaintiffs' corporate control claims but vacated that ruling as to plaintiffs' direct participation claims. In his opinion, Judge Pointer reaffirmed the view he had expressed in his December 1993 ruling that the Company is a separate, independent entity from Dow Corning and therefore has no legal responsibility as a result of its ownership of Dow Corning stock for Dow Corning's breast implant business. However, Judge Pointer stated that, under the law of at least some states (although not necessarily all states), actions allegedly taken by the Company independent of its role as a stockholder in Dow Corning could give rise to liability under a negligence theory. Judge Pointer declined to address plaintiffs' other legal theories, including strict liability, fraud, aiding and abetting, conspiracy and concert of action. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the federal product liability cases. The Company has filed claims with insurance carriers to recover in the event it is held liable in the federal (or any other) breast implant litigation. After Judge Pointer's initial ruling in December 1993, summary judgment was granted to the Company in approximately 4,000 breast implant cases pending in state courts in California, Indiana, Michigan, New Jersey and New York, and over 100 actions in Pennsylvania were dismissed. Of these rulings, the California ruling was final and was appealed. On September 25, 1996, the California Court of Appeal for the 4th District affirmed the trial court's order granting summary judgment to the Company. On July 9, 1998, the California Supreme Court affirmed the decision of the Court of Appeal, and the California summary judgment order in favor of the Company is now final. The Michigan ruling was made final on March 20, 1997. 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, --- Page 23 --- Legal Proceedings (Continued) 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. --- Page 24 --- Legal Proceedings (Continued) On July 7, 1998, Dow Corning, the Company and Corning, on the one hand, and the Tort Claimants' Committee in Dow Corning's bankruptcy on the other, agreed on a binding Term Sheet to resolve all tort claims involving Dow Corning's silicone medical products, including the claims against Corning and the Company. The agreement set forth in the Term Sheet was memorialized in a Joint Plan of Reorganization (the "Joint Plan") filed by Dow Corning and the Tort Claimants' Committee on November 9, 1998. On February 4, 1999, the court approved the disclosure statement describing the Joint Plan. Before the Joint Plan can become effective, however, it will be subject to a vote by the claimants, a confirmation hearing and all relevant provisions of the Bankruptcy Code. Voting was completed on May 14, 1999, and the confirmation hearing concluded on July 30, 1999. The effectiveness of the Joint Plan remains subject to the issuance of an opinion by the bankruptcy judge confirming the Joint Plan. Accordingly, there can be no assurances at this time that the Joint Plan will become effective. It is the opinion of the Company's management that the possibility is remote that plaintiffs will prevail on the theory that the Company should be liable in the breast implant litigation because of its stockholder relationship with Dow Corning. The Company's management believes that there is no merit to plaintiffs' claims that the Company is liable for alleged defects in Dow Corning's silicone products because of the Company's alleged direct participation in the development of those products, and the Company intends to contest those claims vigorously. Management believes that the possibility is remote that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, will have a material adverse impact on the Company's financial position or cash flows. Nevertheless, in light of Judge Pointer's April 25, 1995 ruling, it is possible that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, could have a material adverse impact on the Company's net income for a particular period, although it is impossible at this time to estimate the range or amount of any such impact. 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. On August 4, 1999, the Company filed a Current Report on Form 8-K that included the press release describing the proposed merger of the Company and Union Carbide Corporation. On October 22, 1999, the Company filed a Current Report on Form 8-K that included the press release announcing the third quarter results for the Company. The following trademarks of The Dow Chemical Company appear in this report: Insite, Methocel, Styrofoam The following trademark of Dow AgroSciences LLC appears in this report: Sentricon --- Page 25 --- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE DOW CHEMICAL COMPANY ------------------------ Registrant Date: November 11, 1999 - ---- G. Michael Lynch ---------------- G. Michael Lynch Vice President & Controller --- Page 26 --- EX-27 2
5 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 369 672 2,355 132 2,759 8,167 24,097 15,730 23,872 6,124 4,130 114 0 818 6,861 23,872 13,729 13,729 10,258 12,020 0 0 (334) 1,728 613 1,059 0 0 0 1,059 4.81 4.74
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