-----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, Up2lU1V2+mAo0d+Jj2jROmQXzJV80mJ/uXCBjf/YlwBl1+04TATK9efX2Or+2vMG hAfaXTbaXQqSjvBGhZdmIg== 0000029915-98-000065.txt : 19981105 0000029915-98-000065.hdr.sgml : 19981105 ACCESSION NUMBER: 0000029915-98-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981104 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: 98737594 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 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, 1998 Commission file number 1-3433 THE DOW CHEMICAL COMPANY (Exact name of registrant as specified in its charter) Delaware 38-1285128 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2030 DOW CENTER, MIDLAND, MICHIGAN 48674 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 517-636-1000 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, 1998 ----- ------------------ Common Stock, $2.50 par value 221,340,159 shares --- Page 1 --- THE DOW CHEMICAL COMPANY TABLE OF CONTENTS PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Comprehensive Income 5 Commitments and Contingent Liabilities 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Disclosure Regarding Forward-Looking Information 8 Third Quarter Earnings Announcement 8 Acquisitions and Divestitures 9 Changes in Financial Condition 10 Results of Operations 11 Subsequent Events 17 Accounting Policies 17 Year 2000 17 Euro Conversion 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings 20 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 Exhibit 3(ii) 25 Exhibit 27 36 --- 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) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------- Net Sales $4,314 $4,857 $14,000 $15,215 - -------------------------------------------------------------------------------------------------------- Operating Costs and Expenses Cost of sales 3,258 3,530 10,451 10,981 Insurance and finance company operations, pretax income (25) (35) (83) (71) Research and development expenses 198 197 580 583 Selling, general and administrative expenses 401 478 1,244 1,434 Amortization of intangibles 23 17 62 41 Purchased in-process research and development (Note B) - - 350 - Special charge (Note C) (24) - 306 - --------------------------------------------------------------------------------------------------- Total operating costs and expenses 3,831 4,187 12,910 12,968 - -------------------------------------------------------------------------------------------------------- Operating Income 483 670 1,090 2,247 - -------------------------------------------------------------------------------------------------------- Other Income (Expense) Equity in earnings of nonconsolidated affiliates 28 (18) 78 21 Interest expense and amortization of debt discount (121) (113) (370) (359) Interest income and foreign exchange - net 37 23 99 167 Sundry income - net (Note D) 50 98 908 378 --------------------------------------------------------------------------------------------------- Total other income (expense) (6) (10) 715 207 - -------------------------------------------------------------------------------------------------------- Income before Provision for Taxes on Income and Minority Interests 477 660 1,805 2,454 - -------------------------------------------------------------------------------------------------------- Provision for Taxes on Income 158 236 632 895 - -------------------------------------------------------------------------------------------------------- Minority Interests' Share in Income 4 - 9 109 - -------------------------------------------------------------------------------------------------------- Preferred Stock Dividends 1 2 4 5 - -------------------------------------------------------------------------------------------------------- Net Income Available for Common Stockholders $314 $422 $1,160 $1,445 - -------------------------------------------------------------------------------------------------------- Weighted-average Common Shares Outstanding 222.7 227.9 224.3 231.9 - -------------------------------------------------------------------------------------------------------- Per Share Data Earnings per common share $1.41 $1.85 $5.17 $6.23 Earnings per common share - assuming dilution $1.40 $1.82 $5.10 $6.15 Common stock dividends declared per share $0.87 $0.87 $2.61 $2.49 - -------------------------------------------------------------------------------------------------------- Depreciation $272 $287 $814 $890 - -------------------------------------------------------------------------------------------------------- Capital Expenditures $365 $310 $994 $802 - -------------------------------------------------------------------------------------------------------- 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, 1997. (Except as otherwise indicated by the context, the terms "Company" or "Dow" as used herein mean The Dow Chemical Company and its consolidated subsidiaries.) Note B: During the first quarter of 1998, a pretax charge of $338 million was recorded for purchased in-process research and development costs associated with the recent acquisitions of Dow AgroSciences, Mycogen and Sentrachem Limited. 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. In June 1997, the Company completed the sale of Destec Energy, Inc. to NGC Acquisition Corporation, resulting in a pretax gain of $189 million.
--- Page 3 --- The Dow Chemical Company and Subsidiaries Consolidated Balance Sheets
Sept. 30, Dec. 31, In millions (Unaudited) 1998 1997 - -------------------------------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $226 $235 Marketable securities and interest-bearing deposits 558 302 Accounts and notes receivable: Trade (less allowance for doubtful receivables - 1998, $91; 1997, $73) 2,864 3,257 Other 1,738 1,701 Inventories: Finished and work in process 2,183 2,309 Material and supplies 568 612 Deferred income tax assets - current 358 224 ---------------------------------------------------------------------------------------------------- Total current assets 8,495 8,640 - -------------------------------------------------------------------------------------------------------- Investments Investment in nonconsolidated affiliates 1,262 1,206 Other investments 2,127 2,529 Noncurrent receivables 346 400 ---------------------------------------------------------------------------------------------------- Total investments 3,735 4,135 - -------------------------------------------------------------------------------------------------------- Property Property 24,267 23,345 Less accumulated depreciation 16,027 15,293 ---------------------------------------------------------------------------------------------------- Net property 8,240 8,052 - -------------------------------------------------------------------------------------------------------- Other Assets Goodwill (net of accumulated amortization - 1998, $227; 1997, $211) 1,408 1,762 Deferred income tax assets - noncurrent 513 452 Deferred charges and other assets 978 999 ---------------------------------------------------------------------------------------------------- Total other assets 2,899 3,213 - -------------------------------------------------------------------------------------------------------- Total Assets $23,369 $24,040 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------------------------------- Current Liabilities Notes payable $1,263 $1,656 Long-term debt due within one year 249 406 Accounts payable: Trade 1,422 1,731 Other 958 960 Income taxes payable 676 521 Deferred income tax liabilities - current 45 100 Dividends payable 199 200 Accrued and other current liabilities 1,736 1,766 --------------------------------------------------------------------------------------------------- Total current liabilities 6,548 7,340 - -------------------------------------------------------------------------------------------------------- Long-Term Debt 4,259 4,196 - -------------------------------------------------------------------------------------------------------- Other Noncurrent Liabilities Deferred income tax liabilities - noncurrent 795 649 Pension and other postretirement benefits - noncurrent 1,850 1,840 Other noncurrent obligations 1,725 1,664 --------------------------------------------------------------------------------------------------- Total other noncurrent liabilities 4,370 4,153 - ------------------------------------------------------------------------------------------------------- Minority Interest in Subsidiary Companies 586 676 - -------------------------------------------------------------------------------------------------------- Temporary Equity Temporary equity - other 23 9 Preferred stock at redemption value 118 124 Guaranteed ESOP obligation (84) (84) --------------------------------------------------------------------------------------------------- Total temporary equity 57 49 - -------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock 818 818 Additional paid-in capital 685 532 Retained earnings 12,932 12,357 Accumulated other comprehensive income (349) (146) Treasury stock, at cost (6,537) (5,935) --------------------------------------------------------------------------------------------------- Net stockholders' equity 7,549 7,626 - -------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $23,369 $24,040 - --------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. --- Page 4 --- The Dow Chemical Company and Subsidiaries Consolidated Statements of Cash Flows
Nine Months Ended Sept. 30, Sept. 30, In millions (Unaudited) 1998 1997 - ------------------------------------------------------------------------------------------- Operating Activities Net income available for common stockholders $1,160 $1,445 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 877 948 Provision for deferred income tax 21 130 Undistributed earnings of nonconsolidated affiliates (64) 4 Minority interests' share in income 9 109 Net gain on sale of consolidated companies (816) (186) Net gain on sales of property (38) (33) Other net gain (loss) 9 (39) Purchased in-process research & development 350 - Special charge 306 - Changes in assets and liabilities that provided (used) cash: Accounts receivable 370 (213) Inventories 105 111 Accounts payable (292) (88) Other assets and liabilities (100) 598 -------------------------------------------------------------------------------------- Cash provided by operating activities 1,897 2,786 - ------------------------------------------------------------------------------------------- Investing Activities Purchases of property (994) (802) Proceeds from sales of property 82 51 Purchases of consolidated companies (357) (1,270) Proceeds from sale of consolidated companies 1,300 907 Proceeds from outside investors in limited partnership 200 - Purchases from outside investors in limited partnership (210) (909) Investments in nonconsolidated affiliates (41) (201) Purchases of investments (3,084) (1,977) Proceeds from sales of investments 3,031 1,805 -------------------------------------------------------------------------------------- Cash used in investing activities (73) (2,396) - ------------------------------------------------------------------------------------------- Financing Activities Changes in short-term notes payable (545) 283 Proceeds from issuance of long-term debt 256 244 Payments on long-term debt (431) (621) Purchases of treasury stock (604) (1,444) Proceeds from sales of common stock 112 146 Distributions to minority interests (23) (64) Dividends paid to stockholders (590) (553) -------------------------------------------------------------------------------------- Cash used in financing activities (1,825) (2,009) - ------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (8) (7) - ------------------------------------------------------------------------------------------- Summary Decrease in cash and cash equivalents (9) (1,626) Cash and cash equivalents at beginning of year 235 1,903 -------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $226 $277 - -------------------------------------------------------------------------------------------
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) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------- Net Income Available for Common Stockholders $314 $422 $1,160 $1,445 - ------------------------------------------------------------------------------------------- Other Comprehensive Income, Net of Tax Unrealized gains (losses) on investments (153) 91 (212) 163 Cumulative translation adjustments 14 10 9 (33) Minimum Pension Liability - - - - -------------------------------------------------------------------------------------- Total other comprehensive income (139) 101 (203) 130 - ------------------------------------------------------------------------------------------- Comprehensive Income $175 $523 $957 $1,575 - -------------------------------------------------------------------------------------------
See Notes to Financial Statements. --- Page 5 --- 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. In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation" by the Company or its agents in Dow Corning's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence. Judge Pointer was appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of the product liability cases involving silicone breast implants filed in the U.S. federal courts. Initially, in a ruling issued on December 1, 1993, Judge Pointer granted the Company's motion for summary judgment, finding that there was no basis on which a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Corning. In an interlocutory opinion issued on April 25, 1995, Judge Pointer affirmed his earlier ruling as to plaintiffs' corporate control claims but vacated that ruling as to plaintiffs' direct participation claims. On July 7, 1998, Dow Corning, the Company and Corning, 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 contained in the Term Sheet will be effectuated by the filing of a plan of reorganization in Dow Corning's bankruptcy embodying its terms. Before such a plan can become effective, it will be subject to a disclosure statement hearing, a vote by the claimants, a confirmation hearing and all relevant provisions of the Bankruptcy Code. Accordingly, there can be no assurances at this time that such a plan will become effective. It is the opinion of the Company's management that the possibility is remote that plaintiffs will prevail on the theory that the Company should be liable in the breast implant litigation because of its shareholder relationship with Dow Corning. The Company's management believes that there is no merit to plaintiffs' claims that the Company is liable for alleged defects in Dow Corning's silicone products because of the Company's alleged direct participation in the development of those products, and the Company intends to contest those claims vigorously. Management believes that the possibility is remote that a resolution of plaintiffs' direct participation claims, including the vigorous defense against --- Page 6 --- Commitments and Contingent Liabilities (Continued) those claims, would have a material adverse impact on the Company's financial position or cash flows. Nevertheless, in light of Judge Pointer's April 25, 1995, ruling, it is possible that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, could have a material adverse impact on the Company's net income for a particular period, although it is impossible at this time to estimate the range or amount of any such impact. Numerous lawsuits have been brought against the Company and other chemical companies alleging that the manufacture, distribution or use of pesticides containing dibromochloropropane (DBCP) has caused, among other things, property damage, including contamination of groundwater. To date, there have been no verdicts or judgments against the Company in connection with these allegations. It is the opinion of the Company's management that the possibility is remote that the resolution of such lawsuits will have a material adverse impact on the Company's consolidated financial statements. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. The Company had accrued $380 million at September 30, 1998, for environmental matters, including $10 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 business 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 has entered into two 20-year agreements, which expire in 1998 and 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 $199 million, $221 million and $204 million in 1997, 1996 and 1995, respectively. At December 31, 1997, the Company had various outstanding commitments for take or pay and throughput agreements, including the Canadian subsidiary's ethylene contracts, for terms extending from one to 20 years. In general, such commitments were at prices not in excess of current market prices. Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 1997 (in millions) - --------------------------------------------------------- 1998 $ 215 1999 179 2000 168 2001 157 2002 148 2003 through expiration of contracts 1,270 - --------------------------------------------------------- Total $2,137 - --------------------------------------------------------- In addition to the take or pay obligations at December 31, 1997, 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 $178 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 $226 million. --- Page 7 --- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION The Private Secruities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of the Company. The discussions in this quarterly report contain both historical information and forward-looking statements. The forward-looking statements involve risks and uncertainties that affect the Company's operations, markets, products, services, prices and factors as discussed in the Company's filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, 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 22, 1998) DOW REPORTS THIRD QUARTER EARNINGS OF $1.40 PER SHARE - -------------------------------------------------------------------- Third Quarter of 1998 Highlights - - Earnings per share were $1.40 compared with $1.82 for the same period in 1997. - - Third quarter sales were $4.3 billion versus $4.9 billion a year ago due to lower prices. - - Sales and operating income improved for the Performance segments, which partially offset significant declines in Plastics and Chemicals & Metals. - -------------------------------------------------------------------- (In millions, except for per share amounts) 3 Months Ended 9 Months Ended September 30 September 30 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales $4,314 $4,857 $14,000 $15,215 Net Income Available for $ 314 $ 422 $ 1,160 $ 1,445 Common Stockholders Earnings Per Common Share $ 1.41 $ 1.85 $ 5.17 $ 6.23 Earnings Per Common Share - Diluted $ 1.40 $ 1.82 $ 5.10 $ 6.15 - -------------------------------------------------------------------- Review of Third Quarter Results The Dow Chemical Company today announced sales of $4.3 billion, operating income of $483 million, and diluted earnings per share of $1.40 for the third quarter of 1998. Sales declined 11 percent as prices fell $555 million due to weak business conditions in Asia Pacific and industry overcapacity in the basic segments. Sales volume increased 1 percent in the third quarter versus the same period a year ago, net of acquisitions and divestitures. Operating income decreased $187 million as price declines were not offset by lower feedstock costs and reductions in selling, general and administrative expenses. Vinyl chloride monomer and other chlorine derivatives suffered price declines as significantly reduced demand in Asia Pacific led to surplus supply in that geographic region and globally. As a result, Chemicals and Metals had $139 million in price erosion, contributing to decreases of 21 percent for sales and 77 percent for operating income. Lower prices for polyethylene contributed to Plastics having a 13 percent decline in sales and a 55 percent decrease in operating income. Dow's polyethylene volume growth reflected strong global demand for its differentiated products. Performance Plastics and Performance Chemicals had a combined gain of 9 percent in operating income, demonstrating the less cyclical nature of these segments and the impact of recent portfolio changes. These businesses contributed $363 million or 75 percent of the company's operating income in the third quarter. "We are pleased to see that our investments in performance products are helping us weather challenging business conditions," said J. Pedro Reinhard, Dow executive vice president and chief financial officer. --- Page 8 --- Third Quarter Earnings Announcement (October 22, 1998) (Continued) Dow continued to restructure its portfolio by acquiring the outstanding shares of Mycogen Corporation, entering into several biotechnology alliances including one with Biosource Technologies, Inc., forming two Performance Plastics joint ventures, and creating an alliance for nylon with Solutia Inc., as well as selling some nonstrategic assets. "Our diverse business and geographic mix combined with productivity improvements, portfolio restructuring and growth initiatives give us the ability to succeed as we face a challenging economic environment," Reinhard said. "Dow is on track to meet its financial objectives." ACQUISITIONS AND DIVESTITURES In June 1997, the Company purchased the outstanding 40 percent share in DowElanco, an agricultural chemicals joint venture, from Eli Lilly and Company for $900 million plus Lilly's share of undistributed earnings. This transaction resulted in the Company owning 100 percent of DowElanco (since renamed Dow AgroSciences LLC). During the first quarter of 1998, the Company recorded a $220 million charge for purchased in-process research and development as part of the final allocation of the purchase price related to this acquisition. In June 1997, the Company completed the sale of its 45 million shares of Destec Energy, Inc. to NGC Acquisition Corporation for $974 million or $21.65 per share. This transaction resulted in a pretax gain of $189 million. 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 $149 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 December 1997, Dow acquired Sentrachem Limited, a global chemical company based in South Africa, for $487 million. Sentrachem's major businesses are specialty and agricultural chemicals. During the first quarter of 1998, the Company recorded a $50 million charge for purchased in-process research and development as part of the allocation of the purchase price related to this acquisition. In January 1998, the Company completed the sale of the DowBrands 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 formed 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 will be $162 million, $81 million of which will be paid over the next three years. In January 1998, Hartford Steam Boiler Inspection and Insurance Company (HSB) exercised a put option requiring the Company to purchase HSB's 40 percent interest in Radian International LLC (Radian) for $136 million, thus increasing the Company's ownership to 100 percent. On July 31, 1998, as part of the Company's ongoing efforts to restructure its business portfolio, Radian was sold to Dames & Moore Group for $117 million. During the first quarter of 1998, Dow AgroSciences invested an additional $121 million in Mycogen, increasing its ownership to 69 percent, and the Company recorded a $56 million charge for purchased in-process research and development as part of the allocation of this purchase price. On September 4, 1998, the Company made a tender offer to acquire the remaining shares of Mycogen for $28.00 per share. In October 1998, following the expiration of the tender offer, the Company had purchased approximately 14.7 million shares of Mycogen common stock. On November 2, 1998, the Company announced that it had completed the acquisition of all remaining shares. 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. --- Page 9 --- CHANGES IN FINANCIAL CONDITION The following tables represent total debt and working capital at September 30, 1998 versus December 31, 1997. Sept. 30, Dec. 31, Increase In millions 1998 1997 (Decrease) - ------------------------------------------------------------------ Notes payable $1,263 $1,656 $(393) Long-term debt due within one year 249 406 (157) Long-term debt 4,259 4,196 63 - ------------------------------------------------------------------ Total debt $5,771 $6,258 $(487) - ------------------------------------------------------------------ At September 30 1998, the Company had unused and available credit facilities with various U.S. and foreign banks totaling $1.8 billion in support of its working capital requirements and commercial paper borrowings. Additional unused credit facilities totaling $1.1 billion are available for use by foreign subsidiaries. Sept. 30, Dec. 31, Increase In millions 1998 1997 (Decrease) - ------------------------------------------------------------------ Cash and cash equivalents $ 226 $ 235 $ (9) Marketable securities and interest-bearing deposits 558 302 256 Accounts and notes receivable-net 4,602 4,958 (356) Inventories: Finished and work in process 2,183 2,309 (126) Materials and supplies 568 612 (44) Deferred income tax assets-current 358 224 134 - ------------------------------------------------------------------ Total current assets 8,495 8,640 (145) - ------------------------------------------------------------------ Total current liabilities 6,548 7,340 (792) - ------------------------------------------------------------------ Working capital $1,947 $1,300 $ 647 - ------------------------------------------------------------------ Operating activities provided cash of $1.9 billion for the nine months ended September 30, 1998. The divestitures of the DowBrands business in the first quarter and Radian in the third quarter provided a further $1.3 billion. Cash was used to repurchase shares of the Company's common stock, to reduce total debt, to pay Hartford Steam Boiler Inspection and Insurance Company (HSB) for the exercise of Radian put options, to purchase additional ownership interest in Mycogen, to purchase an ownership interest in Isopol from Pronor, and for other normal activities. This resulted in an increase in marketable securities and interest-bearing deposits of $256 million. (See the Consolidated Statements of Cash Flows and the Acquisitions and Divestitures section for more detail). Goodwill decreased $354 million to $1,408 million in the first nine months of 1998, primarily the result of finalizing the allocation of the purchase price associated with the acquisition of Eli Lilly and Company's 40 percent ownership interest in DowElanco. Sept. 30, Dec. 31, Balance Sheet Ratios 1998 1997 - ------------------------------------------------------------------ Current assets over current liabilities 1.3:1 1.2:1 Days-sales-outstanding-in-receivables 47 47 Days-sales-in-inventory 89 84 Debt as a percentage of total capitalization 41.3 42.8 - ------------------------------------------------------------------ The Company purchased 3 million shares of common stock during the third quarter of 1998 as part of its overall stock repurchase program, bringing the year-to-date total to 6.6 million shares. The Company's average shares outstanding for the first nine months of 1998 were 224 million, a decrease of 3 percent from the average shares outstanding for the first nine months of 1997. On October 30, 1998, the Company paid a quarterly dividend of 87 cents per share to shareholders of record on September 30, 1998. This was the 347th consecutive quarterly dividend since 1912 and in each instance Dow has maintained or increased the dividend. --- Page 10 --- RESULTS OF OPERATIONS The Dow Chemical Company and Subsidiaries Industry Segments and Geographic Areas
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, In millons (Unaudited) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------- Industry segment sales Performance Plastics $1,260 $1,345 $3,828 $3,950 Performance Chemicals 1,087 986 3,796 3,514 Plastics 909 1,040 2,877 3,106 Chemicals and Metals 555 706 1,817 2,201 Hydrocarbons and Energy 367 503 1,153 1,696 Diversified Businesses and Unallocated 136 277 529 748 - ------------------------------------------------------------------------------------------- Total $4,314 $4,857 $14,000 $15,215 - ------------------------------------------------------------------------------------------- Industry segment operating income (loss) Performance Plastics $267 $241 $807 $709 Performance Chemicals 96 92 166 537 Plastics 97 217 488 660 Chemicals and Metals 32 141 125 509 Hydrocarbons and Energy 19 (3) (6) (9) Diversified Businesses and Unallocated (28) (18) (490) (159) - ------------------------------------------------------------------------------------------- Total $483 $670 $1,090 $2,247 - ------------------------------------------------------------------------------------------- Geographic sales United States $1,743 $2,094 $5,710 $6,718 Europe 1,427 1,466 4,830 4,682 Rest of World 1,144 1,297 3,460 3,815 - ------------------------------------------------------------------------------------------- Total $4,314 $4,857 $14,000 $15,215 - ------------------------------------------------------------------------------------------- Geographic operating income United States $271 $235 $170 $871 Europe 171 250 593 706 Rest of World 41 185 327 670 - ------------------------------------------------------------------------------------------- Total $483 $670 $1,090 $2,247 - -------------------------------------------------------------------------------------------
Sales Volume and Price by Industry Segment and Geographic Area - ------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended Sept. 30, 1998 Sept. 30, 1998 Percentage change from prior year Volume Price Total Volume Price Total - ------------------------------------------------------------------------------------------- Industry segments Performance Plastics (1)% (5)% (6)% 4% (7)% (3)% Performance Chemicals 14% (4)% 10% 12% (4)% 8% Plastics 7% (20)% (13)% 8% (15)% (7)% Chemicals and Metals (2)% (19)% (21)% (2)% (15)% (17)% Hydrocarbons and Energy (8)% (19)% (27)% (15)% (17)% (32)% Diversified Businesses and Unallocated (51)% 0% (51)% (30)% 1% (29)% - ------------------------------------------------------------------------------------------- Total 0% (11)% (11)% 2% (10)% (8)% - ------------------------------------------------------------------------------------------- Geographic areas United States (7)% (10)% (17)% (8)% (7)% (15)% Europe 10% (13)% (3)% 15% (12)% 3% Rest of World 2% (14)% (12)% 3% (12)% (9)% - ------------------------------------------------------------------------------------------- Total 0% (11)% (11)% 2% (10)% (8)% - -------------------------------------------------------------------------------------------
--- Page 11 --- Results of Operations (Continued) Following are selected data for the three months and nine months ended September 30, 1998 and 1997: Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30,Sept. 30, Dollars in millions, except for share amounts 1998 1997 1998 1997 - ------------------------- ---- ---- ---- ---- Cost of sales $3,258 $3,530 $10,451 $10,981 % of sales 76% 73% 75% 72% Research and development, selling, general and administrative expenses 599 675 1,824 2,017 Operating income 483 670 1,090 2,247 % of sales 11% 14% 8% 15% Operating income excluding unusual items 459 670 1,866 2,335 % of sales 11% 14% 13% 15% Minority Interests' Share in Income 4 - 9 109 Effective tax rate 33.1% 35.8% 35.0% 36.5% Net income available for common stockholders $314 $422 $1,160 $1,445 Earnings per common share $1.41 $1.85 $5.17 $6.23 Earnings per common share - assuming dilution $1.40 $1.82 $5.10 $6.15 Operating rate percentage 83% 90% 86% 90% Net sales for third quarter 1998 were $4.3 billion, down 11 percent from $4.9 billion in the third quarter of 1997. Sales volume was flat versus the same quarter last year; prices were down 11 percent, with 1 percentage point of the price decline due to the negative impact of currency. The acquisition of Sentrachem late last year generated new sales for 1998, while the divestitures of DowBrands (first quarter 1998) and Destec (second quarter 1997) reduced sales versus a year ago. Excluding major acquisitions and divestitures, volume for the third quarter was up 1 percent from the same period last year. Volume was particularly strong in Performance Chemicals (due to the additions of Hampshire Chemical and Sanachem from the Sentrachem acquisition), up 14 percent, and in Plastics, up 7 percent. Volume was down for Diversified Businesses and Unallocated due to the sale of the DowBrands business, partly offset by new volume from the Sentrachem acquisition. Volume was up in Europe largely due to the addition of Sentrachem in Africa, down in the United States due to the absence of DowBrands, and up slightly in the rest of world. Prices were down in all segments and all geographic regions. Net sales for the first three quarters of the year were $14.0 billion, down 8 percent from $15.2 billion for the same period last year. While volume grew 2 percent, prices declined 10 percent or $1.5 billion. Expenses, which include research and development, selling (including promotion and advertising), general and administrative expenses, were $599 million, down $76 million from the third quarter of 1997. Expenses for the first nine months of the year were $1,824, down $193 million, or 10 percent, from the same period last year. The decrease reflects the reduction of expenses, including the elimination of promotion and advertising associated with the DowBrands business, partially offset by the addition of Sentrachem's expenses. Year-to-date minority interests' share in income of $9 million decreased significantly from $109 million for the same period last year due to the acquisition of Eli Lilly's 40 percent stake in DowElanco, the divestiture of Destec and the redemption of outside partners' capital accounts in DowBrands L.P. Net income for the third quarter was $314 million or $1.40 per share (diluted), down from $422 million or $1.82 per share (diluted) for the third quarter of 1997. Net income was negatively impacted by lower local prices and unfavorable currency, partially offset by lower hydrocarbon and energy costs. For the nine months ended September 30, 1998, net income of $1,160 million or $5.10 per share (diluted) included the net positive impact of $0.11 per share for unusual items. These items included a gain of the sale of the DowBrands business offset by charges for purchased in-process research and development related to recent acquisitions; severance costs; asset write-downs; and environmental remediation costs. Net income for the first nine months of 1997 of $1,445 million or $6.15 per share (diluted) included a net positive impact of $0.23 per share from one-time events: a gain of the sale of Destec, charges related to insurance restructuring and the shutdown of an ethylene cracker in Texas, and property write-downs taken by DowElanco at the time of the purchase of Eli Lilly's share. --- Page 12 --- Results of Operations (Continued) PERFORMANCE PLASTICS Performance Plastics sales of $1,260 million were down 6 percent versus third quarter 1997, mostly due to lower sales prices. Volume was down slightly, while prices declined 5 percent, with 1 percentage point of the price decline due to the negative impact of currency. Despite lower prices, operating income for the segment increased 11 percent to $267 million, from $241 million a year ago. Polyurethanes sales for third quarter were down 9 percent versus the third quarter of 1997. Volume was down 3 percent, mostly due to a falloff in Asia Pacific sales. Prices were down 6 percent, with declines in all geographic regions. Operating income was down versus the third quarter of last year due to the price declines and start-up expenses for two new plants. Sales of epoxies and intermediates were down 12 percent from a year ago. Volume and prices declined 5 percent and 7 percent, respectively, with 1 percent of the sales decline due to the impact of currency. Weak demand led to volume declines in all geographic regions except Europe, where volume was up 11 percent. The Asian crisis significantly impacted sales in the region causing volume to be down. Despite volume and price declines, operating income for the business was up slightly versus last year primarily due to lower hydrocarbon costs for propylene and cumene. Engineering plastics sales for the quarter were up 1 percent from the same quarter last year, with volume up 3 percent and prices down 2 percent. Demand remained strong in all geographic regions, except Europe where volume was down 4 percent. Volume was particularly strong for polycarbonate, up 18 percent in the United States following a plant expansion. Engineering plastics sales were hurt by weak automotive sales resulting from the strike at General Motors. Operating income for the quarter was up substantially versus the third quarter of 1997 due to improved product mix and reductions in selling, administrative, and research and development expenses. Adhesives, sealants and coatings sales for the third quarter were up 15 percent versus the third quarter of 1997, with a 16 percent increase in volume slightly offset by a 1 percent price decline due to currency. Volume increases were the result of plant/market expansions in Europe and Latin America. Third quarter operating income for this growth business was up significantly when compared with last year, due to higher volumes and continued cost control. Fabricated products sales for the third quarter of 1998 were down 6 percent versus a year ago. While volume was up slightly, prices were down 6 percent, with 4 percent due to a decline in local prices and 2 percent due to currency. Volume was strong in Europe and North America, but weak in Asia Pacific. Operating income was up considerably versus third quarter 1997 due to lower raw material costs and reduced spending for selling, administrative, and research and development activities. For the first nine months of 1998, sales in Performance Plastics were $3,828 million, down 3 percent from $3,950 million in the same period last year. Volume growth of 4 percent for this period was more than offset by lower local prices, down 5 percent, and a 2 percent unfavorable currency impact. Operating income was $807 million for the first nine months of 1998, up 14 percent from $709 million last year, due primarily to strong volume and lower hydrocarbon and energy costs. PERFORMANCE CHEMICALS Third quarter sales for Performance Chemicals were $1,087 million, an increase of 10 percent from $986 million in the third quarter of 1997. Volume increased 14 percent, helped by the acquisition of Sentrachem, while prices declined 4 percent. Third quarter operating income for the segment was up 4 percent to $96 million from $92 million a year ago. Specialty chemicals sales for the quarter were up 9 percent, with 11 percent volume growth offset by a 2 percent price decline versus the same quarter last year. Volume increased due to the addition of Hampshire Chemical, from the Sentrachem acquisition, and strong demand for Methocel and superabsorbents. Volume was strong in the United States and Europe, but fell in Asia Pacific due to the severe economic conditions there. Operating income for the third quarter was up due to lower raw material costs and the addition of Hampshire Chemical. Emulsion polymers sales decreased 1 percent for the quarter versus the third quarter of 1997 as volume growth of 3 percent was more than offset by a 4 percent decline in prices. Volume, up in all geographic regions except the United States, was particularly strong in Europe. Prices were down in all geographies, but not as much as feedstock costs; therefore, margins improved. Operating income for the third quarter improved 23 percent versus last year. --- Page 13 --- Results of Operations (Continued) Sales of agricultural products for third quarter 1998 were 18 percent above the same quarter of 1997, with strong volume growth, up 24 percent, offset by a 4 percent decline in local prices and a 2 percent reduction in sales due to currency. Third quarter sales included the sales of Sanachem (from the Sentrachem acquisition), accounting for 6 percent of the increase in volume. New product sales, including Tracer, First Rate and Sentricon, were up significantly. Operating results for the third quarter were down substantially from last year due to increased research and field selling expenses in biotechnology, additional costs from Sanachem and higher amortization costs associated with acquisitions. These expenses are up year-to-year, in line with the Company's strategy to invest in this high growth arena. Sales for the first nine months of 1998 for this segment were $3,796 million, up 8 percent from $3,514 million for the same period of 1997. Sales volume grew 12 percent, largely due to the addition of Hampshire Chemical and Sanachem, while prices declined 4 percent. Operating income of $166 million year-to-date included the $364 million impact of several unusual items recorded during the first quarter: a charge for purchased in- process research and development related to the additional investments in Dow AgroSciences and Mycogen, severance costs and environmental remediation costs. Operating income of $537 million for the first nine months of 1997 included $20 million in one- time charges for insurance restructuring and property write- downs. Excluding these items, year-to-date operating income for 1998 was $530 million compared with $557 million for 1997. PLASTICS Plastics sales in the third quarter of 1998 were $909 million, down 13 percent from $1,040 million a year ago. While volume increased 7 percent, prices fell 20 percent. Plastics operating income for the quarter was $97 million, down 55 percent from $217 million in third quarter 1997. Polyethylene sales were down 15 percent in the third quarter versus the same quarter last year, as prices fell 23 percent. Price declines were experienced around the globe. Volume, up 8 percent, was strong in all geographic regions except Asia Pacific where volume was down 2 percent. Volume growth for Affinity was particularly strong. Third quarter operating income for polyethylene was down from the third quarter of 1997 as significant price declines were only partly offset by volume growth and lower ethylene costs. Polystyrene sales decreased 12 percent in the third quarter versus the same quarter of 1997 with a 1 percent volume decline and a 11 percent decline in prices. While volume improved in North America and Europe, the gains were more than offset by lower demand in Asia Pacific and volume declines in Latin America brought on by financial instability in the region. Prices were dramatically lower in all regions of the globe. Despite the decline in prices, operating income for the business was up 75 percent compared with third quarter 1997, primarily due to lower styrene monomer costs. Polypropylene sales continued a strong growth trend, with volume up significantly in the third quarter. This volume growth was the result of new capacity that came on stream in Europe during the second quarter. Pricing was weak in the third quarter versus the same period last year. As this business continues to build, third quarter operating income was down slightly versus last year primarily due to price declines. Sales for the nine months of 1998 for Plastics were $2,877 million, down 7 percent from $3,106 million for the same period of 1997. Volume grew 8 percent, but was more than offset by a 15 percent decline in prices. Operating income for the period was $488 million, down from $660 million for the first nine months of 1997. CHEMICALS AND METALS Chemical and Metals sales in the third quarter of 1998 were $555 million, down from $706 million in the third quarter of 1997. Sales were severely impacted by steep price declines (20 percent) and lower volume stemming from reduced export demand from North America, as well as lower domestic sales. Vinyl chloride monomer pricing was down 48 percent from third quarter 1997. Ethylene glycol volume was up 9 percent, but prices were down 34 percent from the same period last year. Caustic volume remained stable with prices up 39 percent from the third quarter of 1997; however, this price benefit was overshadowed by price declines for other products. Accordingly, operating income was down significantly from $141 million last year to $32 million for the quarter. In late September 1998, the Company declared force majeure to its magnesium customers following serious storm damage to its magnesium plant in Freeport, Texas. It is uncertain as to when force majeure will be lifted. Sales for this segment year-to-date were $1,817 million, down 17 percent from $2,201 million in the first nine months of 1997. Volume was down 2 percent while prices declined 15 percent. Operating income for the first nine months of the year of $125 million included $55 million of unusual items, primarily environmental remediation charges. Excluding the unusual items, operating income was $180 million versus $509 million for the same period of 1997. This decline in operating income was the result of overall lower prices and higher costs associated with plant outages. --- Page 14 --- Results of Operations (Continued) HYDROCARBONS AND ENERGY Sales for Hydrocarbons and Energy in the third quarter of 1998 were $367 million, a decrease of 27 percent from $503 million for the same period a year ago. Sales volume was down 8 percent mainly due to a plant closure in the fourth quarter of last year. Prices declined 19 percent as lower crude oil costs resulted in lower refinery prices. Operating income for the quarter was $19 million compared with an operating loss for the third quarter of 1997 of $3 million. Sales for the first nine months of 1998 were $1,153 million versus $1,696 million for the same period of 1997. Volume was down 15 percent, largely due to the absence of Destec which was sold in the second quarter of 1997. Prices were down 17 percent. Operating loss for the first nine months of the year was $6 million, including $11 million of unusual items (environmental remediation costs) recorded in the first quarter. Operating loss for the same period last year was $9 million, including a property write-down of $15 million recorded in the second quarter of 1997. DIVERSIFIED BUSINESSES AND UNALLOCATED Diversified Businesses and Unallocated sales for the third quarter of 1998 were $136 million, down 51 percent from $277 million in the third quarter of 1997, as the reduction of sales due to the first quarter divestiture of the DowBrands business and the current quarter divestiture of Radian was not offset by the addition of Sentrachem sales (those not assigned to other segments). Operating income for this segment was a loss of $28 million, compared with an operating loss of $18 million for the third quarter of 1997. This decrease was primarily due to lower results from the insurance companies and the absence of the operating income from DowBrands, partially offset by lower severance costs and a favorable special charge adjustment. Sales for the first nine months of 1998 were $529 million, a decrease from $748 million. Operating income for this period declined from a loss of $159 million last year to a loss of $490 million, including $327 million of unusual charges for purchased in-process research and development related to the acquisition of Sentrachem; severance costs; asset write-downs; and environmental remediation costs. Last year's operating loss included charges for one-time events totaling $52 million. Excluding the unusual items, operating income for the first nine months was a loss of $163 million compared with a loss of $107 million for the first nine months of last year. COMPANY SUMMARY Operating Rate The Company's global plant operating rate for its chemicals and plastics businesses was 83 percent, down from 90 percent in the third quarter of 1997. Purchased In-process Research and Development Purchased in-process research and development 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 Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," as interpreted by FASB Interpretation No. 4, amounts assigned to purchased in-process research and development meeting the above stated criteria must be charged to expense as part of the allocation of the purchase price of the business combination. Accordingly, a charge of $338 million was recorded during the first quarter of 1998 as part of the allocations of the purchase prices related to the acquisitions of Sentrachem, additional common stock of Mycogen, and the remaining 40 percent of DowElanco (since renamed Dow AgroSciences). An additional $12 million was recorded during the second quarter of 1998 related to Mycogen's acquisition of Dinamilho Carol Productos Agricolas, a Brazilian seed company. --- Page 15 --- Results of Operations (Continued) Special Charge In the first quarter of 1998, a special charge of $330 million was recorded, including $110 million for severance and $220 million for the write-down of several assets. In the first quarter, the Company adopted employee severance plans for North America, Europe and Sentrachem, most of which will be completed by the end of the year. The headcount reduction related to these plans is expected to be about 1,800 employees. The asset write- downs recorded during the first quarter included Radian International LLC, Dow-United Technologies Composite Products, Inc. and an agricultural plant in Brazil. In the third quarter, a $24 million adjustment to the reduced values of the assets to be disposed was recorded, bringing the year-to-date special charge to $306 million. During the third quarter of 1998, $15 million in severance payments were charged against the severance liability. Program-to- date, $41 million in severance payments have been charged against the severance liability, and the reduction in headcount has been 831. Other Income (Expense) Equity in earnings of nonconsolidated affiliates was up $46 million in the third quarter of 1998 versus the same quarter last year, primarily due to the improvement in Asia Pacific joint ventures that were negatively impacted by currency last year. Net financial expense, which is the total of interest expense, interest income and foreign exchange, was down $6 million this quarter from $90 million in the third quarter of 1997. The decrease in net financial expense was mainly attributable to an improvement in foreign exchange. Sundry income includes a variety of both income and expense items including royalty income, dividends from investments, and gains or losses on sales of investments and assets. Sundry income for the quarter was $50 million versus $98 million for the same period last year. Year-to-date, sundry income was $908 million, reflecting the $816 million gain recorded in the first quarter for the sale of the DowBrands business, versus $378 million for the same period last year, which included the $189 million gain on the sale of Destec. Provision for Taxes on Income The effective tax rate for the third quarter was 33.1 percent versus 35.8 percent for the third quarter of 1997. The lower tax rate this quarter was the result of changes in foreign tax laws. Year-to-date, the effective tax rate was 35.0 percent. Outlook Global economic growth slowed in the third quarter as the impact of the crisis in Asia Pacific affected other geographic regions. The U.S. economy, while still stable, is expected to slow in 1999. Economic activity in Europe has continued at a high level, but is expected to moderate. Supply/demand imbalances in Asia Pacific are producing historically low industry pricing. The situation has particularly influenced global basic chemical prices, especially chlor-alkali and its derivatives. Latin America is also being affected by the international financial crisis with prices under pressure, even though Dow's volumes continue to grow. Overall, slightly lower global economic growth is anticipated in 1999 versus 1998. The decline in hydrocarbons and energy feedstock costs is expected to moderate. While the Company's end-product prices have fallen by more than $1.5 billion during this period, most of the Performance businesses have been able to increase margins, staying ahead of the feedstock decline. Looking forward, hydrocarbon and energy costs are expected to stabilize. The rest of the year and into 1999 is expected to be a challenging period. Virtually all basic products are approaching trough-level pricing. Weakening economic conditions are anticipated to restrict volume growth. However, the Company will continue to follow its strategy to gain productivity improvements, develop value growth opportunities and further refine its portfolio toward performance businesses. --- Page 16 --- SUBSEQUENT EVENTS The Company announced on October 5, 1998 it had purchased 14.7 million shares of common stock of Mycogen Corporation that were validly tendered in response to a $28.00 per share tender offer. On November 2, 1998, the Company announced that it has completed the acquisition of all remaining shares. Allocation of the purchase price to the assets acquired and liabilities assumed may result in a material charge for purchased in-process research and development. On October 28, 1998, the Company and United Technologies Corporation announced an agreement to sell the business and 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 transaction, subject to regulatory and government approval, is expected to close near year-end. This transaction is not expected to have a material effect on the Company's consolidated financial statements. ACCOUNTING POLICIES In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which was effective January 1, 1998. Consolidated Statements of Comprehensive Income have been included in Part I - Financial Information, under Item 1. Financial Statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which was effective January 1, 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has not yet determined what changes, if any, will be made to its segment structure as a result of this standard. The Company will comply with the new disclosure requirements of this standard in its 1998 Annual Report on Form 10-K. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which was effective January 1, 1998. SFAS No. 132 modifies the required disclosures related to pensions and other postretirement benefits. The Company will comply with the new disclosure requirements of this standard, as required, in its 1998 Annual Report on Form 10-K. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires capitalization of certain internal-use computer software costs. SOP 98-1, effective for fiscal years beginning after December 15, 1998, will be adopted by the Company January 1, 1999. The Company currently expenses such costs as incurred; therefore, adoption of this statement will result in a favorable initial impact on earnings, though the effect is expected to be immaterial. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs, requiring those costs to be expensed as incurred. The Company's current policy regarding the treatment of these costs is substantially consistent with SOP 98-5; therefore, adoption of this standard is not expected to have a material impact on the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company will adopt this standard by January 1, 2000 and has not yet determined the impact of adoption on its consolidated financial statements. YEAR 2000 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 led by a senior director of Information Systems who reports to the CIO 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. Several strategic systems have already been upgraded and tested, and project completion is anticipated in the first half of 1999. --- Page 17 --- Year 2000 (Continued) The Information Systems infrastructure team is responsible for the hardware, systems software and telecommunications network assessments and remediation activities. This work is more than 65 percent complete and is on schedule to be completed by approximately March 31, 1999. The Information Systems applications software organization is responsible for the remediation and upgrade of applications and Y2K testing, and as of October 31, 1998, these tasks were more than 50 percent complete. Upgrade of all business-critical applications is expected to be completed by mid-1999. The Company's implementation of enterprise-wide financial and operational systems and standardized desktop computing during the last several years has facilitated this effort. Two critical replacement projects are in progress and are on target to be completed by mid-1999. Contingency plans have been established should either of these projects miss the scheduled completion dates. The Company has common process control systems in more than 80 percent of its plants globally and is upgrading these systems with Y2K-ready software. The remaining 20 percent of the process control systems are commercial systems; these have been assessed and are being remediated and tested during scheduled plant shutdowns. It is anticipated that work on all critical process control systems will be completed by mid-year 1999. The Company's embedded systems, such as laboratory equipment, air conditioners, elevators, etc., have been assessed and are being upgraded, as necessary. Costs Project costs are expected to range from $50 million to $70 million, over three years, and are not considered material to the Company's consolidated financial statements. Total project costs incurred to date are approximately $30 million. The Y2K effort is being supported by a reallocation of existing resources. Risks Failure to adequately address critical Y2K issues by the Company, its suppliers and/or 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 is on schedule to meet a completion date ahead of the year 2000. The Company is assessing external sources of risk and developing appropriate contingency plans to address both internal and external identifiable risks through commercially reasonable efforts. The Company's assessment of customer readiness is in progress, with completion anticipated early in the first quarter of 1999. The Company's assessment of critical suppliers is complete and risk management actions and contingency plans have been developed, where necessary. Work is ongoing with a number of critical suppliers, primarily in Asia Pacific, Latin America and Eastern Europe, who have indicated that they may not be Y2K compliant before the year 2000. Contingency plans, including such actions as building inventories and switching suppliers, will be completed by the end of 1998 and will be executed in 1999, if necessary. The Company's risk assessment data plus recent conclusions of the U.S. Senate Year 2000 sub-committee indicate that electric power may be a significant external source of risk. Efforts are underway to validate the impact on the Company's operations and to develop specific contingency plans for those sites found to be at higher risk. Telecommunications providers in certain Asian, Latin American and Eastern European countries have also been identified as a source of risk. To manage this risk, technical alternatives are being assessed where economically justified and manual workarounds will be implemented, if necessary. The Company's internal Y2K project is anticipated to be completed by mid-1999, with the exception of two recent acquisitions where Y2K programs had not been initiated prior to being acquired by the Company. The nature of the Y2K issues for these companies will be better understood once the initial assessments are completed. These acquisitions represent an immaterial portion of the Company's total revenues and profits. 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 these identified risks. Contingency Plans In addition to the specific risk management actions and contingency plans outlined in the previous sections, a generic contingency planning process is currently in progress to update the Company's existing site and computer disaster recovery plans and to identify additional prudent steps that may be necessary to prepare for unexpected, but credible, scenarios. A draft of these additional plans will be completed by the end of 1998. --- Page 18 --- EURO CONVERSION On January 1, 1999, the Euro will be adopted as the national currency of 11 European Union member nations. The Euro will be used as a non-cash transactional currency for a three-year transition period. The Company established a steering team in November 1996 to study and address the implications of this change. Issues addressed included such matters as pricing, continuity of contracts, accounting and financial reporting, competitive implications, tax, treasury activities and computer systems. The Company anticipates it will be prepared to conduct business in the Euro as of the effective date, and does not expect the conversion to the Euro to have a significant operational impact. Additionally, the Company does not expect the conversion to the Euro to have a material impact on results of operations, financial position, or liquidity of its European businesses. ITEM 3. QUANTITIVE 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 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 objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. The Company uses interest rate swaps, "swaptions" and exchange traded instruments to accomplish this objective. Primary exposure is to the U.S. dollar yield curve. Inherent in the Company's business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Chemical 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. As a result of acquisition and divestiture activity, the Company has a portfolio of equity securities. The major part of this exposure is related to restricted stock warrants. This exposure is managed in a manner consistent with the Company's market risk policies and procedures. The Company uses value at risk (VAR) stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. On an ongoing basis, the Company estimates the maximum gain or loss that could arise in one day, given a two standard deviation move in the respective price levels. These amounts are relatively insignificant in comparison to the size of the equity and earnings of the Company. The VAR methodology used by the Company is based primarily on the variance/covariance statistical model. As an example, the VAR for one day, using a 95 percent confidence level at December 31, 1997, for foreign exchange, interest rate and equity exposures, net of hedges was: foreign exchange - $12 million; interest rate - - $23 million; and equity - $3 million. Management believes there have been no material changes in market risk or in risk management policies subsequent to December 31, 1997. --- Page 19 --- 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 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 have also been sued in two separate class action complaints (now consolidated) 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 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 second quarter charge noted above, is zero. As a result, any future charges by Dow Corning related to such claims or as a result of the Chapter 11 proceeding would not have an adverse impact on the Company's consolidated financial statements. The Company is separately named as a defendant in over 14,000 breast implant product liability cases. In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation" by the Company or its agents in Dow Corning's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence. --- Page 20 --- Legal Proceedings (Continued) Judge Pointer has been appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of the product liability cases involving silicone breast implants filed in the U.S. federal courts. Initially, in a ruling issued on December 1, 1993, Judge Pointer granted the Company's motion for summary judgment, finding that there was no basis on which a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Corning. In an interlocutory opinion issued on April 25, 1995, Judge Pointer affirmed his December 1993 ruling as to plaintiffs' corporate control claims but vacated that ruling as to plaintiffs' direct participation claims. In his opinion, Judge Pointer reaffirmed the view he had expressed in his December 1993 ruling that the Company is a separate, independent entity from Dow Corning and therefore has no legal responsibility as a result of its ownership of Dow Corning stock for Dow Corning's breast implant business. However, Judge Pointer stated that, under the law of at least some states (although not necessarily all states), actions allegedly taken by the Company independent of its role as a stockholder in Dow Corning could give rise to liability under a negligence theory. Judge Pointer declined to address plaintiffs' other legal theories, including strict liability, fraud, aiding and abetting, conspiracy and concert of action. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the federal product liability cases. The Company has filed claims with insurance carriers to recover in the event it is held liable in the federal (or any other) breast implant litigation. After Judge Pointer's initial ruling in December 1993, summary judgment was granted to the Company in approximately 4,000 breast implant cases pending in state courts in California, Indiana, Michigan, New Jersey and New York, and over 100 actions in Pennsylvania were dismissed. Of these rulings, the California ruling was final and was appealed. On September 25, 1996, the California Court of Appeal for the 4th District affirmed the trial court's order granting summary judgment to the Company. On July 9, 1998, the California Supreme Court affirmed the decision of the Court of Appeal, and the California summary judgment order in favor of the Company is now final. The Michigan ruling was made final on March 20, 1997. This decision has been appealed by plaintiffs. The New Jersey ruling has been reconsidered and all claims were again dismissed, except the negligence claim. Plaintiffs in New York filed a motion to reconsider based on Judge Pointer's April 25, 1995 ruling. On September 22, 1995, Judge Lobis, presiding over the consolidated New York breast implant litigation, dismissed all counts of all cases filed against the Company in New York on the ground that no reasonable jury could find against the Company. On May 28, 1996, the New York Supreme Court Appellate Division affirmed the lower court's dismissal of all claims against the Company. New York's highest court subsequently denied plaintiffs' petition for review, and the order dismissing all claims against the Company is now final. Other rulings that are not final decisions are also subject to reconsideration. On October 20, 1996, in a Louisiana state court breast implant case styled Spitzfaden v. Dow Corning, et al., the court entered an order maintaining certification of a class of Louisiana plaintiffs consisting of recipients of Dow Corning breast implants who, as of January 15, 1997, (i) are residents of Louisiana, (ii) are former residents of Louisiana who are represented by Louisiana counsel, or (iii) received their implants in Louisiana and are represented by Louisiana counsel, together with the spouses and children of such plaintiffs, and representatives of the estates of class members who are deceased. On August 18, 1997, at the conclusion of the first of four phases of this case, the jury found in part that the Company had been negligent in the testing and/or research of silicone, had misrepresented and concealed unspecified hazards associated with using silicone in the human body and had conspired with Dow Corning to misrepresent or conceal such hazards. The Company has appealed the jury's verdict. On December 1, 1997, the trial court decertified the class. Further action in the Spitzfaden case will commence, if at all, only after the resolution of pending appeals. The Company remains a defendant in other breast implant product liability cases originally brought in state courts and continues to be named as a defendant as cases are filed in various courts which are then transferred to the United States District Court, Eastern District of Michigan. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the product liability cases described above. 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. --- Page 21 --- Legal Proceedings (Continued) 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. The Company has appealed the verdict. The Company has filed a claim in Dow Corning's bankruptcy proceedings to recover from Dow Corning its share of any monies the Company might pay as a result of the Nevada verdict or any other adverse decision related to Dow Corning's products. On May 13, 1997, United States District Court Judge Denise Page Hood ordered that all breast implant claims currently pending against the Company as to which judgment had not been entered, whether pending in state or federal courts, be transferred to the United States District Court, Eastern District of Michigan pursuant to a decision issued by the United States Court of Appeals for the Sixth Circuit on May 8, 1997. On August 1, 1997, Judge Hood issued her case management order with respect to the transferred claims, and ordered that all implant claims later filed in federal or state courts against the Company should likewise be transferred. On August 5, 1997, the Tort Committee in Dow Corning's bankruptcy case filed a petition for a writ of certiorari with the United States Supreme Court seeking review of the May 8, 1997 decision of the Sixth Circuit. On November 10, 1997, the Supreme Court denied the Tort Committee's petition. Judge Hood's May 13 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 has sought review of Judge Hood's May 21 decision by the United States Court of Appeals for the Sixth Circuit. On June 25, 1998, the Sixth Circuit rejected the Company's argument that Judge Hood's May 21, 1997 order returning Phases I and II of the Spitzfaden proceeding to Louisiana was an abuse of her discretion. On July 7, 1998, Dow Corning, the Company and Corning, on the one hand, and the Tort Claimants' Committee in Dow Corning's bankruptcy on the other, agreed on a binding Term Sheet to resolve all tort claims involving Dow Corning's silicone medical products, including the claims against Corning and the Company. The agreement contained in the Term Sheet will be effectuated by the filing of a plan of reorganization in Dow Corning's bankruptcy embodying its terms. Before such a plan can become effective, it will be subject to a disclosure statement hearing, a vote by the claimants, a confirmation hearing and all relevant provisions of the Bankruptcy Code. Accordingly, there can be no assurances at this time that such a plan will become effective. --- Page 22 --- Legal Proceedings (Continued) 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 5. OTHER INFORMATION Amendment to the Bylaws Regarding Notice Requirements On October 8, 1998, the Board of Directors amended the Company's Bylaws in response to recent changes in Rule 14a-4 of the Securities Exchange Act of 1934. The amended Bylaws provide that the Secretary of the Company must receive written notification describing any business proposed to be presented by a stockholder at an annual meeting at least 60 days before the date on which the Company first mailed its proxy materials for the prior year's annual meeting, unless the annual meeting is called for a date that is not within 30 days before or after the anniversary of the prior year's annual meeting. In case of such a change in the meeting date, notice must be received by the tenth day after notice of the meeting was mailed or the meeting date was publicly disclosed, whichever occurs first. The amendments adopted by the Board of Directors include corresponding changes in the notice procedures for the nomination of Directors. The amendments to the Bylaws became effective upon adoption by the Board of Directors and will apply to the 1999 Annual Meeting of Stockholders. Under the new provisions, notification must be received by the Secretary not later than January 24, 1999, unless the meeting date changes by more than 30 days from the 1998 meeting date of May 14. The amended Bylaws contain additional requirements that apply to stockholders who wish to bring business or Director nominations before an annual meeting or call a special meeting of stockholders. These requirements are included in the complete copy of the amended Bylaws filed as Exhibit No. 3(ii) to this Report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description of Exhibit ----------- ---------------------- 3(ii) A copy of the Bylaws of The Dow Chemical Company, as amended on October 8, 1998. 27 Financial Data Schedule (b) Reports on Form 8-K. There were no Current Reports on Form 8-K filed by the Company during the third quarter of 1998. The following trademarks of The Dow Chemical Company appear in this report: Affinity, Methocel. The following trademarks of Dow AgroSciences or its affiliates appear in this report: First Rate, Sentricon, Tracer. --- Page 23 --- 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 4, 1998 G. Michael Lynch ---------------- G. Michael Lynch Vice President & Controller --- Page 24 --- EXHIBIT 3(ii) THE DOW CHEMICAL COMPANY BYLAWS* (As re-adopted in full on November 21, 1985, effective December 1, 1985; and as amended February 13, 1986; October 9, 1986; May 14, 1987; November 12, 1987; July 11, 1991; November 12, 1992; April 8, 1993; February 10, 1994; April 14, 1994; July 14, 1994; February 8, 1996; February 13, 1997; March 9, 1998, effective March 1, 1998; and October 8, 1998) Section I CAPITAL STOCK Section 1.1. Certificates. Every holder of stock in the Company shall be entitled to have a certificate signed in the name of the Company by the Chairman of the Board of Directors or the President or an Executive Vice President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, representing the number of shares registered in certificate form. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. (As amended February 8, 1996.) Section 1.2. Record Ownership. The certificates of each class or series of a class of stock shall be numbered consecutively. A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Company's books. The Company shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by the laws of the State of Delaware. Section 1.3. Transfer of Record Ownership. Transfers of stock shall be made on the books of the Company only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby, which certificate shall be canceled before the new certificate is issued. Section 1.4. Lost Certificates. Any person claiming a stock certificate in lieu of one lost, stolen or destroyed shall give the Company an affidavit as to such person's ownership of the certificate and of the facts which go to prove its loss, theft or destruction. Such person shall also, if required by policies adopted by the Board of Directors, give the Company a bond, in such form as may be approved by the General Counsel or his or her staff, sufficient to indemnify the Company against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate. Section 1.5. Transfer Agents; Registrars; Rules Respecting Certificates. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. The Board of Directors may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Company. Section 1.6. Record Date. The Board of Directors may fix in advance a date, not exceeding sixty days preceding the date of any meeting of stockholders, payment of dividend or other distribution, allotment of rights or change, conversion or exchange of capital stock or for the purpose of any other lawful action, as the record date for determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or other distribution or allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to participate in any such other lawful action, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or other distribution or allotment of rights, or to exercise such rights, or to participate in any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Company after any such record date fixed as aforesaid. --- Page 25 --- Bylaws (Continued) Section II MEETINGS OF STOCKHOLDERS Section 2.1. Annual. The annual meeting of stockholders for the election of Directors and the transaction of such other proper business shall be held during the month of May each year at a time and place, within or without Delaware, as determined by the Board of Directors. Section 2.2. Special. Special meetings of stockholders for any purpose or purposes may be called only by the Board of Directors, pursuant to a resolution adopted by a majority of the entire Board of Directors, either upon motion of a Director or upon written request by the holders of at least fifty percent of the voting power of all the shares of capital stock of the Company then outstanding and entitled to vote generally in the election of Directors. Any such request by stockholders shall be delivered to, or mailed and received by, the Secretary of the Company at the Company's principal executive offices, shall set forth the purpose or purposes of the meeting, and shall be in proper form. To be proper form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder(s) propose(s) to bring before the meeting: (a) The name and record address of each such stockholder; (b) The class or series and number of shares of capital stock of the Company that are owned beneficially or of record by each such stockholder; (c) A brief description of each proposed item of business desired to be brought before the meeting, including the text of any proposed amendment to the Certificate of Incorporation or these Bylaws; (d) A description of all arrangements or understandings between each such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interests of such stockholder in such business; and (e) A representation that such stockholder intends to appear in person or by proxy at the meeting to bring such business before the meeting. At any such special meeting, only such business may be transacted as is related to the purpose or purposes set forth in the notice of meeting. Special meetings may be held at any place, within or without Delaware. (As amended February 13, 1997, and October 8, 1998.) Section 2.3. Notice. Written notice of each meeting of stockholders, stating the time, place and purpose thereof, shall be mailed by the Secretary or an Assistant Secretary not less than ten days nor more than sixty days before such meeting to every stockholder entitled to vote thereat. Section 2.4. List of Stockholders. A complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary and shall be open to the examination of any stockholder, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, for at least ten days before the meeting and at the place of the meeting during the whole time of the meeting. Section 2.5. Quorum. The holders of at least fifty percent of the issued and outstanding stock of the Company entitled to vote with respect to any one of the purposes for which the meeting is called, present in person or represented by proxy, shall constitute a quorum, except as otherwise required by the General Corporation Law of Delaware. In the event of a lack of quorum, the chairman of the meeting or a majority in interest of the stockholders present in person or represented by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be obtained. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called. (As amended February 10, 1994.) --- Page 26 --- Bylaws (Continued) Section 2.6. Organization. The Chairman of the Board, or, in the absence of the Chairman of the Board, the President, or, in the absence of both, any Executive Vice President or Vice President, shall preside at meetings of stockholders as chairman of the meeting. The Secretary of the Company shall act as secretary, but in the absence of the Secretary, the chairman of the meeting may appoint a secretary. Rules governing the procedures and conduct of meetings of stockholders shall be determined by the chairman of the meeting. (As amended March 9, 1998, effective March 1, 1998.) Section 2.7. Voting. Subject to all of the rights of the Preferred Stock provided for by resolution or resolutions of the Board of Directors pursuant to Article IV of the Certificate of Incorporation or by the General Corporation Law of Delaware, each stockholder shall be entitled to one vote, in person or by written proxy, for each voting share held of record by such stockholder. The votes for the election of Directors and, upon the demand of any stockholder, the vote upon any matter before the meeting shall be by written ballot. Except as otherwise required by the General Corporation Law of Delaware or as specifically provided for in the Certificate of Incorporation or these Bylaws, in any question or matter brought before any meeting of stockholders (other than the election of Directors), the affirmative vote of the holders of voting shares present in person or by proxy representing a majority of the votes actually cast on any such question or matter shall be the act of the stockholders. Directors shall be elected by a plurality of the votes of the voting shares present in person or represented by proxy at the meeting and entitled to vote and actually cast on the election of Directors. (As amended February 13, 1986, effective May 8, 1986; and February 10, 1994.) Section 2.8. Inspectors of Election. In advance of any meeting of stockholders, the Board of Directors or the chairman of the meeting shall appoint one or more inspectors to act at the meeting and make a written report thereof. The chairman of the meeting may designate one or more persons as alternate inspectors to replace any inspector who fails or is unable to act. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspector(s), and certify the inspectors' determination of the number of shares represented at the meeting and the count of all votes and ballots. The inspector(s) may appoint or retain other persons or entities to assist the inspector(s) in the performance of the duties of the inspector(s). (As amended February 8, 1996.) Section 2.9. Notification of Annual Meeting Business. Any stockholder may bring business before an annual meeting only if: (a) Such stockholder is a stockholder of record on the date of giving notice as provided for in this Section 2.9 and on the record date for the determination of stockholders entitled to vote at such annual meeting; (b) Such business is properly before the meeting pursuant to the laws of the State of Delaware; and (c) Such stockholder complies with the notice procedures set forth in this Section 2.9. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely written notice thereof in proper form to the Secretary of the Company. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 120 days prior to the date on which the Company first mailed its proxy materials for the prior year's annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after the anniversary of the prior year's annual meeting, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. In no event shall the public disclosure of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. For purposes of Sections 2.9 and 3.10 of these Bylaws, "public disclosure" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or any document publicly filed by the Company with the Securities and Exchange --- Page 27 --- Bylaws (Continued) Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934. To be in proper form, a stockholder's notice to the Secretary must comply with all the same requirements that apply to special meetings of stockholders as set forth in Section 2.2 of these Bylaws. No business shall be conducted at an annual meeting of stockholders except business brought before the meeting in accordance with the procedures set forth in this Section 2.9. If the person presiding at an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, he or she shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. (As adopted February 13, 1997, and amended October 8, 1998.) Section III BOARD OF DIRECTORS Section 3.1. Number and Qualifications. The business and affairs of the Company shall be managed by or under the direction of its Board of Directors. The number of Directors constituting the entire Board of Directors shall be not less than six nor more than twenty-one, as authorized from time to time exclusively by a vote of a majority of the entire Board of Directors. As used in these Bylaws,* the term "entire Board of Directors" means the total authorized number of Directors that the Company would have if there were no vacancies. Each Director shall at all times be a holder of Common Stock of the Company. (As amended February 13, 1997.) Section 3.2. Resignation. A Director may resign at any time by giving written notice to the Chairman of the Board, to the President or the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. Section 3.3. Regular Meetings. Regular meetings of the Board of Directors may be held without further notice at such time and place as shall from time to time be determined by the Board of Directors. A meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before it may be held without notice immediately following the annual meeting of stockholders. Section 3.4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President or at the request in writing of one-third of the Directors then in office. Section 3.5. Notice of Special Meetings. Notice of the time and place of each special meeting shall be mailed to each Director at least two days before the meeting or telegraphed or telecopied to such Director at least one day before the meeting. The notice need not state the purposes of the special meeting. Section 3.6. Place of Meetings. The Directors may hold their meetings and have an office or offices outside of Delaware. Section 3.7 Quorum. A majority of the total number of Directors then holding office shall constitute a quorum. In the event of lack of a quorum, a majority of the Directors present may adjourn the meeting from time to time without notice, other than announcement at the meeting, until a quorum shall be obtained. Section 3.8. Organization. The Chairman of the Board, or, in the absence of the Chairman of the Board, the President, or, in the absence of both, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary or an Assistant Secretary of the Company shall act as secretary, but in the absence of the Secretary or an Assistant Secretary, the presiding officer may appoint a secretary. (As amended February 13, 1997.) Section 3.9. Compensation of Directors. Directors shall receive such compensation for their services as the Compensation Committee may determine pursuant to Section 4.4(a) of these Bylaws,* or as the Board of Directors may determine. Any Director may serve the Company in any other capacity and receive compensation therefor. (As amended July 14, 1994.) --- Page 28 --- Bylaws (Continued) Section 3.10. Notification of Nominations. Nominations for the election of Directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of Directors. Any stockholder entitled to vote for the election of Directors at a meeting may nominate persons for election as Directors only if such stockholder complies with all the same requirements that apply to business to be brought before an annual meeting of stockholders as set forth in Section 2.9, and with respect to an election to be held at an annual meeting of stockholders within the time limits specified in such Section, but with respect to an election to be held at a special meeting of stockholders for election of Directors, by the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. In addition to the information required by Section 2.9, the required notice shall include: (a) A description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder; (b) Such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (c) The consent of each nominee to serve as a Director of the Company if elected. The person presiding at any meeting of stockholders may refuse to acknowledge the nomination of any person not made in full compliance with the foregoing procedure. (As adopted February 10, 1994, and amended February 13, 1997, and October 8, 1998.) Section IV COMMITTEES OF THE BOARD Section 4.1. Creation and Organization. The standing committees of the Board of Directors shall be an Executive Committee; an Audit Committee; a Compensation Committee; a Committee on Directors; an Environment, Health, Safety and Public Policy Committee; a Finance Committee; and an Investment Policy Committee, having the respective duties assigned to each in this Section IV and any other duties assigned to such committee by resolution passed by a majority of the entire Board of Directors from time to time. Each such standing committee shall consist of one or more Directors and such other ex officio members as the Board of Directors shall from time to time determine. The chairman of each standing committee shall be one of such committee's members who shall be designated as that committee's chairman by a majority of the entire Board of Directors. Members of each standing committee shall be elected by a majority of the entire Board of Directors. Vacancies in any standing committee shall be filled by a majority vote of the entire Board of Directors. The Board of Directors may appoint management employees of the Company or its subsidiaries to be ex officio members of any standing committee except the Executive Committee. Ex officio members of standing committees shall be entitled to be present at all meetings of their respective committees and to participate in committee discussions, but shall not be entitled to vote or be counted for quorum purposes. Each standing committee shall fix its own rules of procedure and shall meet where and as provided by such rules, but the presence of a majority of its members shall be necessary to constitute a quorum. The Board of Directors may from time to time appoint such special committees with such powers and such members as it may designate in a resolution or resolutions adopted by a majority of the entire Board of Directors. (As amended February 8, 1996, and March 9, 1998, effective March 1, 1998.) Section 4.2. Executive Committee. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise all the powers of the Board of Directors in the management and direction of the business and affairs of the Company to the fullest extent allowed by the General Corporation Law of Delaware, including the power and authority: (a) To authorize the issuance of stock; --- Page 29 --- Bylaws (Continued) (b) To the extent authorized in a resolution or resolutions providing for the issuance of shares of Preferred Stock adopted by the Board of Directors, to fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Company or the conversion into, or the exchange of such shares for, shares of any other class or any other series of any class of stock of the Company, to fix the number of shares of any series of Preferred Stock or to authorize the increase or decrease of the shares of any series of Preferred Stock; (c) To declare dividends on stock; and (d) To adopt a certificate of ownership and merger in accordance with the General Corporation Law of Delaware. The Executive Committee shall consist of the officer who serves as the chief executive officer pursuant to Section 5.17 and not fewer than three other Directors. The Executive Committee shall keep minutes of its meetings. (As amended April 14, 1994, and February 13, 1997.) Section 4.3. Audit Committee. The Audit Committee shall: (a) Prior to each annual meeting of stockholders, submit a recommendation in writing to the Board of Directors for the selection of independent auditors to be appointed by the Board of Directors in advance of the annual meeting of stockholders and to be submitted for ratification or rejection at such meeting; (b) Annually consult with the independent auditors with regard to the proposed plan of audit and from time to time consult privately with them and also with the Corporate Auditor and the Controller with regard to the adequacy of internal controls; and (c) Upon completion of the report of audit by the independent auditors and before the date of the annual meeting of stockholders, (i) review the financial statements of the Company, and (ii) meet with the independent auditors and review with them the results of their audit and any recommendations made to the management. (As amended April 8, 1993.) Section 4.4. Compensation Committee. The Compensation Committee shall consist of two or more members, all of whom shall be "non-employee Directors" as defined in Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, or any future rule of the Securities and Exchange Commission with respect to the same subject matter, and who also comply with the rules for eligibility to serve as members of the award and option committees hereinafter described. The Compensation Committee may, with the consent of the Board of Directors, delegate any portion of its authority to a subcommittee consisting of two or more of its members. (a) The Compensation Committee may establish rates of salary, bonuses, retirement and other compensation for all Directors and executive officers of the Company for purposes of the Securities Exchange Act of 1934, as amended, or the regulations of the Securities and Exchange Commission, and for such other personnel as the Board of Directors may from time to time delegate to it; provided, however, that no member of the Committee may vote upon his or her own rate of salary or his or her own bonus, retirement or other compensation except for such items as are applicable to a group that also includes personnel who are not Directors or officers, or where his or her participation in such items is determined by formula; and (b) The Compensation Committee shall exercise all functions of the award and option committees under the Company's incentive and option plans. (As amended July 14, 1994, and February 13, 1997.) Section 4.5. Committee on Directors. The Committee on Directors shall: (a) Recommend to the Board the individuals to constitute the nominees of the Board of Directors for election at the next annual meeting of stockholders and who will be named as such nominees in the proxy statement used for solicitation of proxies by the Board; --- Page 30 --- Bylaws (Continued) (b) Recommend and nominate an individual for Director to fill the unexpired term of any vacancy existing in the Board of Directors or created by an increase in the size of the Board; (c) Conduct continuing studies of the size and composition of the Board of Directors and from time to time make recommendations to the Board for enlargement or reduction in size of the Board; and (d) Recommend and nominate individuals for election as officers and members of Board committees. (As amended February 13, 1997.) Section 4.6. Environment, Health, Safety and Public Policy Committee. The Environment, Health, Safety and Public Policy Committee shall have the authority and responsibility to assess all aspects of the Company's environment, health and safety policies and performance, and to make recommendations to the Board of Directors and the management of the Company with regard to promoting and maintaining superior standards of performance. It shall have the authority to assess any and all aspects of the Company's decisions to determine their social impact. Recognizing that positive perceptions of the Company's policies and actions among its several constituencies are extremely valuable assets, the Committee will keep itself informed of these perceptions and will recommend to the Board and management actions directed at continually enhancing the Company's public image. (As amended April 8, 1993, and March 9, 1998, effective March 1, 1998.) Section 4.7. Finance Committee. The Finance Committee shall have the responsibility of periodically reviewing the financial affairs of the Company and making recommendations to the Board of Directors concerning the financial needs of the Company and the methods of providing funds for such needs. Section 4.8. Investment Policy Committee. The Investment Policy Committee shall have the authority and responsibility to: (a) Establish investment policy for The Dow Employees' Pension Plan or any other retirement plan or fund maintained by the Company for its employees or employees of its subsidiaries ("Plans"); (b) Employ, replace, discharge and supervise, and review the performance of trustees and investment advisers acting pursuant to the Plans; (c) Enter into, modify, alter, amend or revoke any existing or future trust agreement or trust relating to the Plans; (d) Review and advise upon the investment policy of, and performance of trustees and investment advisers acting pursuant to or on behalf of, any retirement plan or fund maintained by any directly or indirectly wholly owned subsidiary or subsidiaries of the Company for the benefit of its or their employees or the employees of its or their subsidiaries; and (e) Perform similar duties with respect to such other retirement or investment plan or fund, or on behalf of such other entities affiliated with the Company, as the Board of Directors from time to time shall designate. (As amended November 12, 1992, and February 13, 1997.) Section 4.9. Powers Reserved to the Board. No committee of the Board of Directors shall have the power or authority to: (a) Approve or adopt, or recommend to stockholders, any action or matter expressly required by the General Corporation Law of Delaware to be submitted to stockholders for approval; or (b) Adopt, amend, or repeal these Bylaws. No committee of the Board of Directors shall take any action that is required by these Bylaws,* the Certificate of Incorporation or the General Corporation Law of Delaware to be taken by a vote of a specified proportion of the entire Board of Directors. (As amended February 13, 1997, and renumbered March 9, 1998, effective March 1, 1998.) --- Page 31 --- Bylaws (Continued) Section V OFFICERS Section 5.1. Designation. The officers of the Company shall be a Chairman of the Board, a President, one or more Executive Vice Presidents, one or more Vice Presidents, a Treasurer, one or more Assistant Treasurers, a Secretary, one or more Assistant Secretaries, a Controller, one or more Assistant Controllers and a General Counsel. The Board of Directors also may elect or appoint, or provide for the appointment of, such other officers or agents as may from time to time appear necessary or advisable in the conduct of the business and affairs of the Company. (As amended February 13, 1986.) Section 5.2. Election and Term. At its first meeting after each annual meeting of stockholders, the Board of Directors shall elect the officers. The term of each officer shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until such officer's successor is chosen and qualified. Section 5.3. Resignation. Any officer may resign at any time by giving written notice to the President or the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. Section 5.4. Removal. Except where otherwise expressly provided in a contract authorized by the Board of Directors, any officer elected or appointed by the Board of Directors may be removed at any time with or without cause by the affirmative vote of a majority of the entire Board of Directors. (As amended February 13, 1997.) Section 5.5. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. Section 5.6. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall have such other powers and perform such other duties as may be assigned by the Board of Directors. (As amended May 14, 1987; November 12, 1987; November 12, 1992, effective December 1, 1992; and April 14, 1994.) Section 5.7. President. The President shall have such other powers and perform such other duties as may be assigned by the Board of Directors. (As amended May 14, 1987; November 12, 1987; November 12, 1992, effective April 1, 1993; and April 14, 1994.) Section 5.8. Executive Vice Presidents. The Executive Vice Presidents shall assist the President in the management of the business and affairs of the Company and shall perform such other duties as may be assigned by the President or the Board of Directors. Section 5.9. Vice Presidents. Each Vice President shall have such powers and perform such duties as may be assigned by the President or the Board of Directors. The Board of Directors may designate a Financial Vice President and one or more Vice Presidents as Senior Vice Presidents or Group Vice Presidents. Section 5.10. Treasurer. The Treasurer shall have charge of all funds of the Company and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors. Section 5.11. Assistant Treasurers. Each Assistant Treasurer shall have such powers and perform such duties as may be assigned by the Treasurer or the Board of Directors. Section 5.12. Secretary. The Secretary or an Assistant Secretary shall keep the minutes and give notices of all meetings of stockholders and Directors and of such committees as directed by the Board of Directors. The Secretary shall have charge of such books and papers as the Board of Directors may require. The Secretary or any Assistant Secretary is authorized to certify copies of extracts from minutes and of documents in the Secretary's charge, and anyone may rely on such certified copies to the same effect as if such copies were originals and may rely upon any statement of fact concerning the Company certified by the Secretary or any Assistant Secretary. The Secretary shall perform all acts incident to the office of Secretary, subject to the control of the Board of Directors. (As amended February 13, 1997.) --- Page 32 --- Bylaws (Continued) Section 5.13. Assistant Secretaries. Each Assistant Secretary shall have such powers and perform such duties as may be assigned by the Secretary or the Board of Directors. Section 5.14. Controller. The Controller shall be in charge of the accounts of the Company. The Controller shall have such other powers and perform such other duties as may be assigned by the Board of Directors and shall submit such reports and records to the Board of Directors as it may request. Section 5.15. Assistant Controllers. Each Assistant Controller shall have such powers and perform such duties as may be assigned by the Controller or the Board of Directors. (As adopted on February 13, 1986.) Section 5.16. General Counsel. The General Counsel shall be in charge of all matters concerning the Company involving litigation or legal counseling. The General Counsel shall have such other powers and perform such other duties as may be assigned by the Board of Directors and shall submit such reports to the Board of Directors as it may request. (As renumbered on February 13, 1986.) Section 5.17. Designation of an Officer as the Chief Executive Officer. The Board of Directors shall designate one of the elected officers as the chief executive officer of the Company. The chief executive officer shall be in general and active charge of the business and affairs of the Company. (As adopted April 14, 1994, and amended February 8, 1996.) Section 5.18. Designation of an Officer as the Chief Operating Officer. The Board of Directors may designate one of the elected officers the chief operating officer of the Company with such powers and duties as may be assigned by the Board of Directors. (As adopted on April 14, 1994.) Section 5.19. Compensation of Officers. The officers of the Company shall receive such compensation for their services as the Compensation Committee may determine pursuant to Section 4.4(a) of these Bylaws.* (As renumbered on February 13, 1986, and April 14, 1994.) Section VI INDEMNIFICATION Section 6.1. Mandatory Indemnification of Directors, Officers and Employees. The Company shall indemnify, to the full extent permitted by the laws of the State of Delaware, any person who was or is a defendant or is threatened to be made a defendant to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person: (a) Is or was a Director, officer or employee of the Company; or (b) Is or was a Director, officer or employee of the Company and is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Any repeal, amendment or modification of this Section 6.1 shall not affect any rights or obligations then existing between the Company and any then incumbent or former Director, officer or employee with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon such state of facts. (As amended February 13, 1986, effective May 8, 1986; and July 11, 1991.) Section 6.2. Permitted Indemnification of Directors, Officers, Employees and Agents. The Company may indemnify, to the full extent permitted by the laws of the State of Delaware, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person: --- Page 33 --- Bylaws (Continued) (a) Is or was a Director, officer, employee or agent of the Company; or (b) Is or was a Director, officer, employee or agent of the Company and is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. (As amended February 13, 1986, effective May 8, 1986.) Section 6.3. Judicial Determination of Indemnification. Any incumbent or former Director, officer or employee may apply to any court of competent jurisdiction in the State of Delaware to order indemnification to the extent mandated under Section 6.1 above. The basis of such order of indemnification by a court shall be a determination by such court that indemnification of the incumbent or former Director, officer or employee is proper in the circumstances. Notice of any application for indemnification pursuant to this Section 6.3 shall be given to the Company promptly upon the filing of such application. (As amended February 13, 1986, effective May 8, 1986; and July 11, 1991.) Section 6.4. Expenses Payable in Advance. Expenses incurred by any Director or officer in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it ultimately shall be determined that the Director or officer is not entitled to be indemnified by the Company as authorized in this Section VI. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (As amended February 13, 1986, effective May 8, 1986; and October 9, 1986.) Section 6.5. Nonexclusivity. The indemnification and advancement of expenses mandated or permitted by, or granted pursuant to, this Section VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw,* agreement, contract, vote of stockholders or disinterested Directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise both as to action by the person in an official capacity and as to action in another capacity while holding such office, it being the policy of the Company that indemnification of the persons specified in Sections 6.1 or 6.2 above as defendants shall be made to the fullest extent permitted by the laws of the State of Delaware. The provisions of this Section VI shall not be deemed to preclude the indemnification of any person who is not specified in Sections 6.1 or 6.2 above, but whom the Company has the power or obligation to indemnify under the laws of the State of Delaware or otherwise. (As amended February 13, 1986, effective May 8, 1986; and October 9, 1986.) Section 6.6. Insurance. The Company may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against and incurred by such person in any such capacity, or arising out of the person's status as such, whether or not the Company would have the power or the obligation to indemnify the Director, officer, employee or agent of the Company against such liability under the provisions of this Section VI. (As amended February 13, 1986, effective May 8, 1986.) Section 6.7. Definitions. For the purposes of this Section VI references to "the Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section VI with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. The term "other enterprise" as used in this Section VI shall include employee benefit plans. References to "fines" in this Section VI shall include excise taxes assessed on a person with respect to an employee benefit plan. The phrase "serving at the request of the Company" shall include any service as a Director, --- Page 34 --- Bylaws (Continued) officer, employee or agent of the Company that imposes duties on, or involves services by, such Director, officer, employee or agent with respect to any employee benefit plan, its participants or beneficiaries. (As amended February 13, 1986, effective May 8, 1986.) Section 6.8. Survival. The indemnification and advancement of expenses provided by, or granted pursuant to, this Section VI shall continue as to a person who has ceased to be a Director, officer, employee or agent of the Company and shall inure to the benefit of the heirs, executors and administrators of such person. (As amended October 9, 1986.) Section VII MISCELLANEOUS Section 7.1. Seal. The corporate seal shall have inscribed upon it the name of the Company, the year "1947" and the words "Corporate Seal" and "Delaware." The Secretary shall be in charge of the seal and may authorize a duplicate seal to be kept and used by any other officer or person. Section 7.2. Waiver of Notice. Whenever any notice is required to be given, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Section 7.3. Voting of Stock Owned by the Company. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Company may be executed in the name of and on behalf of the Company by the President, any Executive Vice President, any Vice President or the General Counsel. Any such officer may, in the name of and on behalf of the Company, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Company may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Company might have exercised and possessed if present. The Board of Directors may from time to time confer like powers upon any other person or persons. Section 7.4. Executive Office. The principal executive office of the Company shall be located in the City of Midland, County of Midland, State of Michigan, where the books of account and records shall be kept. The Company also may have offices at such other places, both within and without Delaware, as the Board of Directors from time to time shall determine or the business and affairs of the Company may require. Section VIII AMENDMENT OF BYLAWS* Section 8.1. The Board of Directors shall have power to amend, alter, change, adopt and repeal the Bylaws* of the Company at any regular or special meeting. The stockholders also shall have power to amend, alter, change, adopt and repeal the Bylaws* of the Company at any annual or special meeting subject to the requirements of the Certificate of Incorporation. * Spelling as amended April 8, 1993. --- Page 35 --- EX-27 2
5 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 226 558 2,955 91 2,751 8,495 24,267 16,027 23,369 6,548 4,259 818 118 0 6,731 23,369 14,000 14,000 10,451 12,910 0 0 (370) 1,805 632 1,160 0 0 0 1,160 5.17 5.10
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