Document 4JbpbpkR8m7KXxbX80RN6o7XR

ST0929377 PLAINTIFF'S EXHIBIT DOW-1521 Dow manufactures and supplies more than 2,500 product families, including chemicals and performance products, plastics, hydrocarbons and energy, and consumer specialties-which include agricultural products, pharmaceuticals and consumer products. The company operates 130 manufacturing sites in 30 countries, and employs about 53,700people around the world. A canoeist enjoys the spectacular scenery of Yosemite National Park in California. For the past five years, Dow, in partnership with the U.S. National Park Service, has sponsored recycling programs at Yosemite and six other parks. A five-year progress report on Dow and the environment begins on page four. Financial Highlights of 1994....................................................................................... 1 Letter to Stockholders....................................................................................................................... 2 Continuing the Progress ........................... 4 Corporate Profile ............................................................................................................................. 10 Managements Discussion and Analysis........................................................................................... 12 Financial Statements ....................................................................................................................... 25 Notes to Financial Statements......................................................................................................... 30 Selected Financial Data.................................................................................................................... 44 Board ofDirectors / Corporate Organization ............................................................................... 48 Stockholder Reference Information................................................................................................ 49 Dow Utec ww wed in the production ofthit rrcycUbicpoper. Financial Highlights of 1994 ST0929378 Net Sale* Operating Income Net Income Available for Common Stockholders Research and Development Expenses Capital Expenditures Depreciation Wages, Salaries and Benefits Employees (in thousands) Net Stockholders' Equity (atyear-end) Return on Average Stockholders' Equity Average Common Shares Outstanding Earnings per Share (in dollars) Dividends Paid per Share (in dollars) lIneliaiet tpeciol charge ofSi80 in 1993 See Note B to the Financial Statement*. $20,015 2,345 931 1,261 1,183 1,321 4,071 53.7 8,212 11.4% 276.1 3.37 2.60 Percent $18,060 1,440' 637 1,256 1,397 1,343 4,219 55.4 8,034 7.9% 273.6 2.33 2.60 + 11 +63 +46 -15 -2 -4 -3 +2 +3.5 points +1 +45 Sales Operating Income De/Un m ktlhew Earnings per Share (Before cvmulstn* tffttt tfscconnnnf etiengt) DelUn Dividends Paid per Share DeiUn TMC DOW CmIMICAL COMMNY AND WlilDlAIKt Continuing the Progress To Our Stockholders: ST0929379 Bill SUvropouloi, President and Chief Operating Officer (left) and Frank Popoff. Chairman and Chief Executive Officer hen the economy softened in the early part of this decade, we pledged to emerge from those challenging times a stronger company-even more capable of combining profitability and growth. In 1994, wt kept that commitment. Our success demonstrates that our reengineering of the company and investments for growth are paying off. And thanks to the outstanding performance of Dow's people, our strong international presence and strengthening prices, we expea our earnings growth to continue. We're pleased to report a record $20.0 billion in sales for 1994, an 11 percent increase over the $18.1 billion achieved in 1993. This pin reflected an 8 percent improvement in volume and a 2 percent gain in prices. Operating income exceeded $2.3 billion in 1994, up 63 percent from $1.4 billion in 1993, which included the impact of a SI80 million charge caken by Marion Merrell Dow related to productivity improvements. Our 1994 earnings increased by 45 percent to $3-37 per share and would have been higher if they had not been affected by a number of charges. These included Dow Corning Corporation taking a charge related to breast implant litigation and Dow recording a write-down resulting from the pending sale of the DowBrands Personal Care business. Earnings of $2.33 per share in 1993 reflected Marion Merrell Dow's charge, another Dow Corning charge and gains from the sale of assets. Excluding charges and net gains and losses on investments over the past two years, earnings were $3.91 per share in 1994 versus $2.02 per share in 1993, an increase of 94 percent. Higher Sales For All Business Segments All of our business segments achieved higher sales in 1994 compared to the previous year. In Consumer Specialties, Agricultural Products set sales and profitability records while the performance of Pharmaceuticals and Consumer Products reflected the intense competitive pressures in those industries. The most significant improvement over the previous year came from Plastics, which increased sales by 16 percent and achieved an almost 200 percent gain in operating income. Higher volume and price recovery in Thermoplastics led to the improved performance. Demand for caustic soda and chlorine derivatives improved in 1994, contributing to increases of 6 percent in sales and 69 percent in operating income for Chemicals and Performance Products. Strong demand for emulsion polymers led to record sales for Performance Produas. In Hydrocarbons and Energy, sales increased by 14 percent and operating income grew 72 percent over 1993 due to signifi cant expansion of capacity coupled with improving demand. ST0929380 Investing For Growth with opinion leaders, bringing an improved understanding of pri To serve customers well-and to help them succeed-we must orities and how to work together to achieve them. build today to meet their future needs. The investments we We're also putting our environmental expertise to work in made during the recession, including new production facilities solving problems for customers, while creating a major new busi for ethylene, polyethylene and vinyl chloride monomer, are ness for Dow. In 1994, Dow Environmental was formed ro give now coming on line in time to meet rising demands. The addi us a stronger presence in the $250 billion per year environmental tional capacity will serve us well as demand continues to grow. services industry. Forming Dow Environmental is part of an Remaining a leading global supplier to our customers overall strategy to evolve from a traditional focus on internal required ocher tough steps in 1993 and 1994, which included compliance to a market-based and customer-focused approach reengineering the company to become competitively stronger. to environmental management. We also continued to build on our core competencies of tech nology and global reach and developed new strategics to keep Looking Ahead us ahead in today's changing competitive environment. In 1995, we will say focused on our strategy of creating value For our chemicals and plastics businesses, we created a growth and improving productivity, which is essential to fulfilling strategic blueprint that recognizes change as a necessity and our vision to be the best at applying chemistry to benefit our focuses on "clearing our future* instead of becoming a casualty customers, employees, stockholders and society. As a result, of change. The blueprint has challenged our core businesses we expect to surpass the $20 billion sales mark atuined in 1994 to excel in their management so that we can enjoy positive and to achieve higher profit margins. cash flow and economic profit through all phases of the busi The technology we generate and the new products it yields ness cycle. A key step for chemicals and plastics was to achieve are key strengths. For example. Insite technology, introduced in a cost reduction goal of $600 million within three years 1993, is one of the most significant breakthroughs we have ever through work process improvements and elimination of experienced in plastics. The resulting new products already have unneeded activities. Achieving our original goal in two years 25 commercial applications, and we anticipate our customer base prompted us to extend this target, calling for a reduction of will continue to grow dramatically in 1995. We're confident that more than $700 million in structural costs by the end of 1995 Insite will make a contribution to our operating income similar to versus a 1992 base. what we enjoy from Styron polystyrene and Dowlex polyethylene. In Consumer Specialties, each business has adopted its own Recognizing that our success depends on our people, we strategy to improve productivity and ro provide greater value continue to place a premium on employee development. It is a to consumers. For example, DowBrands is starting up a new primary responsibility for supervisors at every level. We're taking production facility in Urbana, Ohio, that will result in cost steps that include changes in compensation management to efficiencies through the use of advanced manufacturing and recognize individuals who consistently excel at developing people. packaging technologies. In 1994, we reaped the benefits of the hard work, creativity and determination that the people of this organization have Upholding Our Values exhibited over the past few challenging years. We're very pleased We will continue to grow and evolve, but we will not change with the company's many accomplishments in 1994 and opti our basic beliefs. Our commitment to protecting the environ mistic about continuing to achieve earnings growth in 1995. ment illustrates this pledge. We have improved our environmental, health and safety performance, benefiting our employees, customers and stock holders, and the communities we serve globally. This annual report is dedicated to reviewing the progress we've made in this area (see pages 4-9). We still have more to accomplish, but our resources are Chairman and ChiefExecutive Officer greater than ever. One example is the Corporate Environmental Advisory Council, which we established in 1991. Members indude experienced professionals in education, environmental protection and sdentific research from around the world who Bill Stavropoulos ' advise us on strategic environmental issues. The council and President and ChiefOperating Officer our Community Advisory Panels have broadened our dialogue February 8, 1995 ThC OOW CHEMICAL COMPANY ANO lUBSlDIAIItf ST0929381 ST0929382 "(hit- />.-ne, more limn any other, toil! affect Don's prospects in the '*)()< ,nnl beyond. Thnl issue is the eurtrnnmenl. Id f V ) ( / / / > 11 / iei' that stttu i'a Citl j1 is t tiVt /v t diyi y/ / y' I ! V I'`d V / . / y< '/'/ '//. Oil'd ' V. [ t t .S' hi pi Oh i hi up iind im pdoi 'imp tiw r ur/ yoi 7.7 COV' / / )] It ( s t < i>e cut ml for J tines p/ohal p: 'U IV i h. And ,\{VO u u </ h, '!C U'Ot Id. we i>mre eon linin'/! to impi'0i '(' (lift' CUV"t you mental. hcitltl> and >< ! fcV /"' rforan nit t As the exampfi s on the jodou nap pages siWli\ we hare nmtit > \ 't t! propress. Ur Imre set concrete pools fur our operations uni! Imre developed the systems to measure our gains. 7 hrough good economic tunes and had. we have invested hundreds oj millions of dollars to reduce our impact on the environment. Budding on a strong record we hare integrated environmental considerations with business decisions itt every level. We hare Icttmcd the bencjits oj open communication-- and active, equal partnerships -- with others. HU have found new markets for our environmental resources and expertise. UV hare created value for our customers, our stockholders and the communities we serve. Much more remains to he accomplished. But at the midtile of the decaile, our commitment remains as strong as ever. And just as it teas fire years ape the most important message is that our progress coat rains. ST0929383 A RECORD OF IMPROVEMENT Concrete Goal* In 1991, the U.S. Environment*! Protection Agency announced the 33/SO program, which challenged companies to reduce emissions of 17 priority compounds by 33 percent by 1992 and by 50 percent by 1995. Nearly 1,200 U.S. companies made this voluntary agreement. We adopted that goal as a global objective because we employ the same environmental standards at all our manufacturing facilities throughout the world. By the end of 1993, Dow had achieved a 47 percent global reduction. Reductions continue and 1994 data will be available by mid-year. Smart Investments Since the start of 1990, Dow has invested close to 51 billion in capital improvements aimed at protecting the environment Major investments, including new waste treatment facilities in Temeuzen, the Netherlands and Freeport Texas (above), have dramatically reduced emissions. With such advanced facilities in place, we can meet tomorrow* standards today, which frees capital for other purposes even as we continue to improve our environmental performance. THI DOW CHtMlCAL COMPANY AND SUIllOtAftltS A Global Commitment Responsible Care* is the chemical industry's worldwide initiative to improve its environmental, health and safety performance and broaden its dialogue with the public Responsible Care* principles emphasize continuous improvement in pollution prevention, employee health and safety, distribution, process safety, product stewardship, and community awareness and emergency response. Dow practices these principles m all 30 of the countries where we manufacture our products. In November 1994, Dow Canada successfully completed a review of its Responsible Care* commitment, verifying that it fully meets Responsible Care* requirements. WORKING \ ii' . ,- ^l I '/Sr_____" ST0929384 FOR THE ENVIRONMENT Driving to Moot Now Moods We ore working with many of our customer* to Include recycled materiel in their products. In 1991, our researchers developed a process for the recycling of reaction in/ected molded (RIM) scrap, incorporating it into the some application with virtually no loss of performance or appearance. Today. Dodge Ctrtvtn and Plymouth Voyager minivans are the first to use bumpers containing 10 percent in-plant RIM recycled material. We aho help customers from other industries tackle the same challenge. For example, our chelating agents help the pulp and paper industry meet the growing demand for recycled paper m X tettar Aiwwort This year, DowElanco Is launching the Sentricon termite colony elimination system, featuring Recruit bait. In contrast with conventional treatments that use several hundred gallons of product to keep termites away from structures, the Sentrkon system eliminates entire termite colonies with only 100 grams placed m small stations around the home. The bail has extremely low toxicity to mammals and is used only where termites are actively feeding. Sentricon protects structures with minimal disruption during installation and greater convenience to the homeowner. i* :1 r~$. >* l, l-- d 7 v3. ' / Good Products-Good Packages To help reduce solid waste, most of the packaging for DowSrands products now contains a minimum of 25 percent post-consumer recycled paperboard or plastic. Environmental impact is always a key consideration in the packaging development process, along with ease of use for the consumer. In fact, new packaging for Home Care products contains up to 12 percent less plastic per bottle. In addition, each product shipping case contains 25 percent less corrugated material per box compared to the pr^viom containers. Creating Value The creation of the Dow Environmental business in 1994 grves Dow a stronger position in the $250 billion per year global environmental services market. Dow Environmental, which includes Advanced Cleaning Systems and AWD Technologies. Inc., markets environmental resources and expertise to a broad range of industrial sectors Customers have turned to Dow Environmental for assistance in removing and treating contaminated groundwater. One innovative facility that Dow Environmental designed and built (left) removes pollutants from groundwater at flow rates up to 9.000 gallons per minute (gpm). with future expansion to 12,000 gpm HELPING OTHERS ST0929385 Building a Better World One home at a time. Habitat for Humanity has built 30,000 homes with the help of the hard-working, low-income families who buy the homes. Across North America, Dow and Its employees have supported Habitat activities at local levels for more than five years. In 1994, we became the exclusive supplier of rigid foam insulation for the organization, which now ranks as the 17th largest home builder in the United States. We are contributing Styrofoam brand insulation to meat Habitat's North American building needs in 1994 and 1995, and employees are volunteering their time and hard work to help make the dream of owning a home a reality A Parbwnhip for National Park, Working In partnanhip with Huntsman Chamkal and tha Ui. National Park Sarvtca. Dow hat brought racycling to sevan national parks sin 1990. Almost 2 million pounds of aluminum, glass and plastics were collected during the past year, reducing the solid waste sent to landfills and promoting recycling among park visitors Dow and Huntsman have invested more than $5 million in the program, which rs expected to become self-suitaming m 199$ Protecting htcleui Itemir* Wetlands provide a habitat for waterfowl, improve water quality, recharge farm wells and reduce flooding. Since 1990, as a member of the Partnership for Wetlands Preservation, Dow has financed the preservation and enhancement of more than 700.000 acres of wetlands in the United States and Canada. We also have worked to save and restore more than 60,000 acres of endangered wetlands on or near our own property. Educating the Next Generation Dow is committed to supporting innovative science and environmental education programs m schools across North America. Building on the success of our award-winning production Recycle Thist, our new ChemTV program uses live performers, video, music and comedy to motivate high school students to learn more about chemistry and its impact on everyday life. At the elementary school level. Dow is partnering with 40 school districts at 18 plant sites to improve the way science education is being taught to almost 400.000 children. These programs and others underscore Dows commitment to improving primary and secondary education TOMORROW'S GOALS ST0929386 Setting the Standard The U-S. Occupational Safety and Health Administration (OSHA) and teams of Dow people are working together to improve safety and health management programs and to introduce them to other companies. Five Dow sites have been recognized with OSHA's Voluntary Protection Program's highest rating of STAR worksite, based on a comprehensive audit of ail safety, industrial hygiene and medical programs, plansand procedures. As measured by the frequency of accidents or injuries that cause days away from work, Dow is one of the safest companies in any industry. Our low days-away-from-wo/k accident rate translates into an annual estimated $10 million cost advantage over the chemical Industry average. Part of the Solution Prom steel production to printing and electronics, solvents play a critical role In many industries. Yet many widely used solvents face regulations aimed at reducing the release of volatile organic compounds (VOCs) and limiting the depletion of the Earth's ozone layer. Our new Bne of solvents, which contain no ozone-depleting chemicals and up to SO percent water in place of emissive solvents, uses mivoemulsion technology to provide excellent cleaning power with half the VOC levels of conventional solvents. Measurable Progress While committing to reduce the EPA's 17 priority compounds by SO percent by the end of 1995. Dow's geographic areas are reducing additional compounds specific to their needs, priorities and regulations. Each area has set a goal to reduce emissions of these additional compounds by SO percent by the end of 199S. Progress through 1993 has resulted in the elimination of 44,200 tons of global emissions annually. Data for 1994 will be available by mid-year. Balancing Complex Concerns As one of the most versatile of all Progress Toward Gtographk An* 50% Emissions deduction Goals chemicals, chlorine is vital to the production of 85 percent of all pharmaceuticals and a vast array of other products. But today, chlorine's impact on health and the environment is at the center of a spirited public debate. We fully support the phase out of any substance that has risks outweighing the benefits it often society. Yet an increasing number of scientific studies verify that the vast majority of chlorinated compounds have not been found to have adverse -T- 0% 10 20 30 40 50 Percent Reduction from Baseline effects on human health or the 60 environment and they provide important benefits. Working in cooperation with government other industries and the environmental community, we are committed to finding sustainable solutions to the questions under study. THC DOW CHfMlCAl COMPANY AND SUISIDIAftKS Corporate Profile Dow is a diversified, worldwide manufacturer andsupplier ofmore than 2,500 productfamilies, which include chemicals andperformanceproducts, plastics, hydrocarbons and energy, and consumer specialties. Chemicals and Performance Products Dow's wide range of products art used primarily as raw materials in the manufacture of customer products, or they aid in the processing of customer products and services. Industries served include adhesives, aerosols, aerospace, automotive, chemical processing, metalworking, oil and gas, pulp and paper, personal care, pharmaceuticals, processed foods, utilities and water treatment Chemicals and Metals: Acetone, alkanolamines, caustic soda, chlorinated solvents, chlorine, ethyleneamines, ethylene dichloride, ethylene glycols, glycerine, hydrochloric acid, hydrogen chloride, magnesium metal, methyl chloride, phenol, propylene glycols, propylene oxide and vinyl chloride monomer. Performance Products: Acetylsalicylic acid (aspirin), acrylamide monomer, air separation and gas treating products and services, antimicrobials, aqueous and semi-aqueous cleaners, brake fluids, compressor lubricants, Dowanol glycol ethers. Dowex ion exchange resins, Dowfax surfactants: Dowfrost. Dowtherm and Syltherm heat transfer fluids; Drytech superabsorbents. FilmTec membranes. Invert solvents, latex coatings and binders, magnesium hydroxide, Methocel and Ethocel cellulosic products. Peladow, liquidow and Dowflake calcium chloride; plastic lined piping products, polyglycols, specialty monomers (DVB, VBC) and Versene chelating agents Plastic Products Dow ranks among the world leaders in the production of plastics, offering the broadest range of thermoplastic and thermoset materials of any manufacturer. Dow plastics and plastic fabricated products are used in a wide variety of industries, such as appliances, automotive, building and construction, electronics, flooring, furniture, health care, housewares, packaging and recreation. Thermoplastics: Affinity polyolefin plastomers, Aim advanced styremc resins, Aspun fiber-grade resins, Attane ultra tow density polyethylene copolymers. Calibre polycarbonate resins, Dowlex linear low density polyethylene. Engage polyolefin elastomers. Insite technology polymers. Isoplast polyurethane engineering thermoplastic resins, low and high density polyethylene. Magnum ABS resins, Pellethane TPU elastoplastic polymers. Prevail thermoplastic resins. Primacor adhesive copolymers. Pulse engineering resins. Sabre engineering resins, Saran PVDC, Styron polystyrene. Tyril SAN resins and Tyrin CPE elastomers and resins Thermosets: Cyctotene advanced electronics resins. D.E.H. curing agents, D.E.N. epoxy novolacs. D.E R. liquid and solid epoxy resins, Derakane epoxy vinyl ester resins. Isonate pure and modified MDI (methylene diphenyl diisocyanate), Papi polymeric MDI, Specffex systems, Spectnm reaction moldable products, Tactix performance polymers. The Enhancer carpet backing, Voranate T-80 TDI (toluene diisocyanate) and Voranol polyether polyols and copolymer polyols. Fabricated Products: DAF adhesive films. DWF.window films. Ethafoam plastic foams, Opticite label films, Saranex plastic films, Styrofoam brand plastic foams, Trycite plastic films, Trymer rigid foam billets and Zetabon plastic clad metals. ST0929387 IMI DOW CHEMICAL COMEANV AND SUlLlOIAKifS ST0929388 Hydrocarbons and Energy Dow is the world leader In the production of olefins, styrene and aromatics. This segment encompasses procurement of fuels and petroleum-based raw materials as well as the production of olefins, aromatics, styrene and cogenerated power and steam for use in the company's operations. Hydrocarbons: Benzene, ethylene, propylene and styrene. Energy: Power and steam production plus fuels procurement and natural gas pipelines. Includes independent power producer Destec Energy Inc , a Dow subsidiary, which develops independent power projects and sells electrical and thermal energy Consumer Specialties This segment is comprised of three businesses primarily operated by Dow affiliates: Agricultural Products, Pharmaceuticals and Consumer Products. Agricultural Products (DowElanco) are used in crop protection and production, and for industrial pest control. The Pharmaceuticals business (Marion Merrell Dow) includes prescription drugs and over-the-counter health care products. The Consumer Products business (DowBrands) includes household and personal care products. Agricultural Products: Broadstrike, Garlon, Lontrel. Sonalan, Starane, Toroon. Tfeflan and phenoxy herbicides, Dursban and Lorsban insecticides, Beam, Rubigan and Tnrmdal fungicides; N-Serve nitrogen stabilizer, Telone soil fumigant. Vikane gas fumigant, Sentncon termite colony elimination system, and hybrid seeds Pharmaceuticals: Prescription Products: Carafate antiulcer. Cardizem antiangmal. Cardizem SR antihypertensive, Cardizem CD antiangmaVantihypertensive. Cardizem Injectable for atrial fibrillation or atrial flutter. Nicorette (outside the U.S.) and Nicoderm smoking cessation aids. Sabril anticonvulsant, Seldane antihistamine, Seldane-D antihistamine-decongestant combination and Targocia antibiotic Over-the-Counter Products: (now marketed in the U S by SmithKIme Beecham Consumer Healthcare, a partnership between Marion Merrell Dow and SmithKIme Beecham) Cepastat sore throat lozenges, Citrucel bulk-fiber laxative. Debrox ear care product, Gaviscon antacid, Gly-Oxide oral antiseptic. Nicorette (in the US), Novahistine cough/cold/allergy products and OsCal calcium supplements Consumer Products: Household Products: Dow bathroom cleaner with Scrubbing Bubbles, Fantastik all purpose cleaner, Glass Pius multi-surface cleaner, HandnWrap plastic film. Saran Wrap plastic film. Smart Scrub soft scouring cleanser. Spray N Wash tough laundry stain remover, ultra Vivid color safe bleach, ultra Yes laundry detergent and Ziploc plastic bags Personal Care: Apple Pectin, Nucleic A, PermaSoft. Salon Style, and Style hair care products Unallocated This segment encompasses Dow's businesses that are not reported elsewhere, including the consolidated insurance and finance companies, and Ventures businesses such as Dow Environmental and advanced electronics materials. This segment includes activities and overhead cost variances not allocated to other segments. ?M1 OOW (H| UlCM COMMhT AND iU#SiOlA*HS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ST0929389 Results of Operations Sales were $20.0, $18.1 and $ 19.0 billion for 1994,1993 and 1992, respectively. Operating income for the same periods was $2.3, $1.4 and $ 1.3 billion, which included pretax special charges of$180 million in 1993 and $433 million in 1992 as discussed in Note B to the Financial Statements. The 1993 charge was taken by Marion Metre)] Dow Inc, Dows pharmaceutical subsidiary (71 percent owned), to cover expenses related to realignment of the company and other cost-management efforts to position the busi ness for long-term success. Dow took a special charge in 1992 that reflected write-offs and write-downs, plant shutdowns, divestitures and the consolidation ofa variety ofbusiness activities globally. Volume gains, price recovery and improved productivity contributed to higher operating income in 1994 compared to 1993 and 1992. Volume improved 8 percent in 1994 versus the previous year, and prices increased 2 percent after having declined since 1990. Through work process improvements, cost ofsales adjusted for volume was down more than 2 percent despite an increase ofalmost 1 percent in the hydrocarbons and energy purchase price index. CHEMICALS AND PERFORMANCE PRODUCTS Chemicals and Performance Products had a 6 percent gain in sales in 1994 compared to the previous year, reporting $4.5 billion in sales versus $4.3 billion. In 1992, sales were S4.5 billion. Operating income continued to increase, rising to $592 mil lion in 1994 from $350 million in 1993 and $269 million in 1992. The segment s operating income was affected by a special charge of$ 115 million in 1992. Chemicals and Metals Sales for Chemicals and Metals were up 5 percent in 1994 compared to the previous year and down 2 percent versus 1992. Sales were $2.8, $2.6 and $2.8 billion for 1994,1993 and 1992, respectively. The sales gain in 1994 resulted from 4 percent increases in both prices and volume compared ro the previous year. Besides price recovery, lower costs and expenses resulted in improved margins. Price increases and higher volume for vinyl chloride monomer made the greatest contribution to the sales gain in this business and helped offset lower prices for caustic soda. An upturn in construction activity led to the stronger demand. Ethylene glycol was also a significant contributor to the improved results, with higher prices and volume. Propylene oxide demand improved in 1994, resulting in very tight supply. Because demand is expected to continue growing, Dow is authorizing incremental expansions ofpropylene oxide capacity in the U.S., Germany and Brazil. Dow has identified more than 500 million pounds of incremental capacity that can be added beginning in late 1995 or early 1996 with little added capital. Capacity was also increased for Dow with the start-up of its Zhejiang Pacific Chemical Company joint venture propylene oxide plant in Ningbo, People's Republic of China. Following a dramatic volume decline for magnesium, Dow adjusted its capacity in 1994 by permanently closing a production facility in Freeport, Texas. The facility had previously been idled when product exported from Russia and China saturated world markets. As supply and demand balances have become more favorable, price recovery is underway. Prices for chlorinated organics remained steady while volume continued to decline. The phaseout is underway for methyl chloro form and other applications ofchlorinated organics which are of environmental concern. This phaseout will not have a material impact on Chemicals and Performance Products. Chemicals and Performance Products Sales Dm&oi in millitmi Chemicals and Performance Products Operating Income Dtlltrt in m\U*m Tm| OOW CHEMICAL COMPANY and SUISIOIAAIIS ST0929390 Performance Products In 1994, Pfcrformance Products had record sales of$1.8 billion, up 8 percent from the previous year. Sales were $1.6 and $ 1.7 billion in 1993 and 1992, respectively. Volume grew 8 percent in 1994 compared to 1993 while prices remained flat. In 1993, prices declined 6 percent compared to 1992. resulting in the sales decline that year. Improving economic conditions created greater demand for latex coated paper around the world, resulting in higher sales and profits for emulsion polymers. Demand and prices also improved for carpet and specialty applications. Dow responded to the increased demand for styrene butadiene latex by achieving an incremental increase in capacity from its existing facilities globally. Dow achieved higher sales for Methocel methyl cellulose as demand and prices strengthened. In anticipation ofgreater demand, Dow plans to add capacity in 1995 through debottlenecking. Sales declined for separation systems in 1994 due to the loss ofpatent protection for FilmTec membranes. The resulting increase in competition had little impact on volume, but prices were down significantly versus 1993. The loss ofpatent protection did not materially impact the results of Chemicals and Performance Products. Competitive pressures also resulted in a sales decline for ion exchange resins, but prices appear to have stabilized and volume is improving. Drytech superabsorbents experienced price attrition in 1994 in the face ofnew competition. However, volume remained strong. Sales of oxygenated solvents, chelants, antimicrobials, polyglycols, heat transfer fluids and other specialty chemicals continued to grow with gains in prices and volume. Outlook for Chemicals and Performance Products Prices ofcaustic soda began to recover in the second half of 1994. This recovery is expected to accelerate in 1995 as contract renewals bring higher prices. The improvement for caustic, coupled with strong demand and higher prices for most products in Chemicals and Metals, should result in further growth in sales and operating income in 1995. Performance Products is likely to better the record sales it attained in 1994, as volume and prices are expected to rise. Leading the return to more attractive margins will be the emulsion polymers business, where price recovery is expected to continue as global economic conditions improve. PLASTIC PRODUCTS Plastics reported record sales in 1994 of $7.5 billion, an increase of 16 percent versus the previous year. Sales were $6.5 billion in 1993 and $6.7 billion in 1992. The higher sales resulted from volume and price gains of 11 percent and 3 percent, respectively. Operating income continued to improve in 1994 on the strength ofprice recovery and cost and expense reductions. Operating income in 1994 was $1.1 billion, up from $380 million in 1993 and $94 million in 1992. Operating income in 1992 included a special charge of $ 184 million. Thermoplastics Sales increased 21 percent to $3 9 billion in 1994 compared to S3.2 billion in 1993. Sales were $3.3 billion in 1992. Polyolefins and elastomers had significantly improved sales and margins due to the strong global pricing environment, higher volume in all geographic areas and continued cost reductions. As overall economic conditions improved, Dow's volume increased 11 percent, in line with industry growth rates. In meeting this strong demand, the business set production records for polyethylene and chlorinated polyethylene. Start-up ofa new plant for Dowlex poly ethylene at Fort Saskatchewan, Alberta, was completed in a safe manner, within budget and ahead of schedule in September 1994. Plastic Products Sales Plastic Products Operating Income ST0929391 The global commercialization of Insite technology has accelerated as more than 25 commercial applications ofAffinity plastomers and Engage elastomers have been developed. A second production unit was convened in late 1994 to satisfy growing demand for Insite technology polymers. In January 1995, Dow and DuPont signed a letter ofintent to form an enterprise that would include a broad portfolio of general purpose and specialty elastomer products. Combined global elastomer sales for the two companies currently are about $1 billion. The new enterprise has the potential to grow at more than twice the industry rate, leading to total revenues of $2 billion within five years. Specialty polyolefins posted record profitability in 1994, resulting primarily from strong volume growth and lower costs. Price was the single largest contributor to sales and profit improvement for Styron polystyrene, with significant increases in all geographic areas. Coupled with double-digit reductions in cost, the sales gain brought a dramatic improvement in margins. Dow responded to high levels ofdemand by increasing the capacity of existing plants in the U.S. and Canada. In November 1994, Styron Asia Ltd., a Dow joint venture with Asahi Chemical Industry Co., was formed. Based in Hong Kong, Styron Asia Ltd. will engage in the marketing, sales and service for polystyrene to the consumer and business electronics industries outside ofJapan. Engineering thermoplastics had significantly improved perfor mance in 1994 due to cost reductions and volume gains. While prices were down 3 percent, volume increased, resulting in higher sales. Volume improved in the Pacific area as the result ofgeneral industrial growth and in North America due to increased demand from the automotive and construction industries. Magnum ABS, Calibre polycarbonate and Pulse polycarbonate blends had the strongest improvement. Start-up ofthe Sumitomo-Dow Ltd. joint venture polycar bonate compounding operation was completed in September 1994, with the polymerization step scheduled to start up in February 1995. Demand for polycarbonate accelerated worldwide in 1994 and was exceptionally strong in the Pacific. Dow, in cooperation wirh Idemitsu Petrochemical Ltd., has moved into the development phase of new, semi-crystalline engineering resins. Thermosets Thermosets had record sales of$2.7 billion in 1994, up from $2.4 billion the previous year and $2.5 billion in 1992. The sales increase in 1994 versus 1993 resulted from a 9 percent gain in volume, which offset a 1 percent decline in prices. Polyurethanes enjoyed record sales in 1994 based on strong demand. The global polyurethanes industry had exceptional growth rates in 2994, indudinga 12 percent increase in the U.S. Much of Dow's growth came from the Pacific, where the company has expanded its polyurethanes manufacturing presence in recent years. In 1994, Dow started up its joint venture polyol facility in Ningbo, People's Republic ofChina, and completed a 300 million pound capacity expansion for polyols at its facility in Freeport, Texas. In February 1995, Dow announced plans to construct a new world-scale toluene diisocyanate (TDI) plant in Freeport. Dow's capacity expansions for TDI, polyols and propylene oxide (discussed under Chemicals and Metals) will provide the feedstocks needed to continue meeting the growing demand for polyurethanes globally. Productivity improvements are hdping the polyurethanes business retain its low-cost-to-serve position, which is of primary importance for this industry. In 1994, costs were reduced and production records set. For epoxy products, supply tightened globally, supporting an upward trend in prices. Volume improved in 1994 and cost reduc tions contributed to better margins than in 1993. Operating rates also improved and were at high levels. In 1994, Dow started up a 120 million pound per year incremental expansion of epichlorohydrin, one ofthe basic products in the epoxy products chain. The expansion came in response to growing global demand that has outpaced supply. Bisphenol, anocher raw material for epoxy products, moved from a balanced to a tight supply situation in 1994. Fabricated Products Fabricated Products had record sales of $910 million in 1994, up from $842 million in 1993 and $898 million in 1992. The business also achieved record profits in 1994 as a result of strong volume growth, price increases and cost reductions. Volume for Styrofoam brand products improved as economic conditions provided an increase in construction activity. In line with the company's plans to expand geographically, Dow will start up a new plant in Turkey for Styrofoam brand products in late 1995. Films and engineered laminates had higher sales due to the improvement in overall economic conditions and penetration of new applications. Price increases initiated across all of films during the last four months of 1994 will have their full effect in 1995 and demand is expected to remain strong. Outlook for Plastic Products Thermoplastics will benefit from strong demand and tight supply for ethylene- and styrene-based products. Dow's capacity expansions are well timed to capture this growth. The epoxy and polyurethanes businesses should continue to grow, although at a lesser rate than during the past few years. Dow believes that its Thermosets business will grow faster than the overall economy. The Fabricated Products business is expected to benefit from growing demand in the construction, electronics and telecommu nications sectors, which are driven by expansion outside the U.S. TMt DOW CHEMICAL COMMNT AND S U * 11 0 I * 11 $ ST0929392 HYDROCARBONS AND ENERGY Hydrocarbons and Energy had sales of$2.0 billion, up 14 percent from Sl.fi billion in 1993 and 18 percenccompared to SI.7 billion in 1992. Operating income increased 72 percent to S74 million in 1994 from $43 million in 1993. Hydrocarbons and Energy had an oper ating loss of$ 183 million in 1992, which included the unfavorable impact of a special charge of S113 million. Although operating income was noc affected, Dow's 1994 earnings included a gain on its investment in Magma Power Company, primarily as a result of the merger agreement between Magma and California Energy Company, Inc. In 1993. earnings included gains from the sale of portions ofthe company's equity interests in Magma and Crestar Energy Inc. (see Note C to the Financial Statements). Ethylene production for Dow continued at high operating rates that were above the industry average. Ethylene market values rose substantially worldwide, driven by strong demand. This growth is expected to continue and capacity was expanded through the start-up ofcrackers in Fort Saskatchewan, Alberta, in the second half of 1994 and Freeport, Texas, in early 1995. Demand strengthened for styrene in the second half of 1994, leading to tight supply conditions and significant price increases. Feedstock costs for Hydrocarbons and Energy were up 1 percent in 1994 compared to the previous year. Destec Energy, Inc. Independent power producer Destec Energy, Inc., a publicly traded Dow subsidiary (76 percent owned), reported revenues for 1994 of $727 million, up from $674 million in 1993 and $508 million in 1992. The percentage of Destec's revenues sourced from Dow was 19 percent in 1994 and 1993, and 23 percent in 15)92. Destec's results were favorably affected by an increase in equity earnings from the company's power facility partnerships, financing of the 123 megawatt Michigan Power CoGen project in Ludington, Michigan, and setdements concerning the develop ment oftwo other projects. In 1994, Destec added 936 megawatts ofnew capacity and improved the operations and ownership struc tures at several existing facilities. The company presently has seven projects in construction or advanced development, representing additional equivalent capacity of more than 1,200 megawatts. Outlook (or Hydrocarbons and Energy Ethylene and styrene will begin the year in a favorable supply and demand situation for Dow, but new ethylene capacity being added around the world could lead to a weaker market in the second half of 1995. Styrene demand is expected to remain strong throughout the year. Destec implemented a major corporate restructuring in 1994 aimed at realigning its development strategy, streamlining its orga nizational profile and reducing costs. In 1995, Destec plans to focus on its restructured business strategies. Two of Destec's Texas power marketing contracts expired during 1994 and the remaining contract expires in April 1995. As these contracts expire, Destec is selling its excess capacity at prevailing tariffprices and attempting to negotiate new contracts, but these expirations could substantially reduce Destec's revenues and gross margin in 1995 and beyond. In 1994, these contracts and operations from the related facilities accounted for 30 percent of Destec's total revenues and 78 percent of its gross margin. Hydrocarbons and Energy Sales Dtlim j Hydrocarbons and Energy Operating Income DtUdn ii milhm THt DOW CHIMICAL COMrANV AND SUISIDIAMIS ST0929393 CONSUMER SPECIALTIES Consumer Specialties had sales of$5-9 billion in 1994, up 7 percent compared to 1993, but down 2 percent versus 1992. Operating income in 1994 was $762 million, a I percent decrease from $772 million in 1993 when excluding a Marion Merrell Dow Inc. special charge of$180 million that year. Including the impact ofthe charge, operating income in 1993 was $592 million. Operating income was $1.1 billion in 1992, which included the impact ofan $ 11 million special chatge. The declines in operat ing income, when excluding the charges, primarily reflect the shift to lower margin generic products for Pharmaceuticals. Agricultural Products Dow had a record $ 1.7 billion in sales ofAgricultural Products through DowEIanco, which is a global joint venture between Dow and Eli Lilly and Company, with Dow holding a 60 percent share. Sales for Agricultural Products were $ 1.6 billion in both 1993 and 1992. U.S. sales remained strong in specialty products, with notable increases in termite control, vegetation management and technical products. Lorsban 15G, the leading U.S. corn soil insecticide, yielded steady performance. Sales ofocher previously registered crop protection products were augmented by Broadstrike weed control systems in their first year ofintroduction. On a global basis, European sales stabilized despite government-sponsored farm acreage reduction programs and lack offinancing for sales to the former Soviet Union. In Latin America and the Pacific, sales increased significantly, due to strong perfor mance across product lines and added revenue from the introduc tion of fiumecsulam. the active ingredient of Broadstrike. DowEIanco also formed joint ventures with IPiCi to serve the global dinitroanaline market and with Nocil for the manufacture and sale ofehiorpyrifos in India. Additionally, European operations were streamlined with new formulation and packaging operations. In 1995, DowEIanco is commercializing the newly registered Senrricon system featuring Recruir termite bait. In 1997, pending EPA approvals, DowEIanco plans to launch a new line ofNaturalyte insecticides based on fermentation technology, initially targeted at the cocton and vegetable markets. Pharmaceuticals Sales for Pharmaceuticals were $3.3 billion in 1994, up from $3.0 billion in 1993 but down from $3.5 billion in 1992. This business includes Marion Merrell Dow Inc, a Dow subsidiary (71 percent owned), and Dow's wholly owned pharmaceutical subsidiaries in Latin America. Marion Merrell Dow Inc. reported higher sales in 1994. Sales were 53.1 billion in 1994, an increase of9 percent from 1993 sales of $2.8 billion. The growth in sales resulted primarily from acquisitions in the U.S. and Japan, along with strong North American sales ofCardizem CD once-a-day treatment for hypertension and angina. Sales of the Cardizem (diltiazem HCI) family of cardiovascular medications were $933 million in 1994, an increase of 2 percent over 1993. Sales were aided by rhe strength ofCardizem CD, which posted record sales of$708 million in 1994, up 30 percent. The Seldane (terfenadine) family ofanti-allergy produers recorded 1994 sales of $698 million, down 7 percent. Sales in North America and Europe were lower due to competitive pressures, while the Pacific region continued to show solid growth. Included in global sales for rhe brand in 1994 were $563 million for Seldane tablets, down 7 percent, and $135 million forSeldane-D (terfenadine and pseudoephedrine HCI), down 5 percent. Carafate (sucralfate), a unique anti-ulcer medication, faced continued pressure in 1994, with sales of$ 147 million, down 17 percent. Consumer Specialties Salts DtiUn nt milium Consumer Specialties Operating Income Delidn in mtliiom I SOO' ws s* [SB |t j |J |x THI DOW CHEMICAL COMMNY ANO SUtftOfARlf f j*> j91 [ 92 |M \94 ST0929394 Consumer Products allow the company to focus resources on the global expansion of Dow's Consumer Products affiliate, DowBrands, had sales of$845. its Home Food Management products, introduce new products $846 and $919 million in 1994,1993 and 1992, respectively. and restore growth in cleaning and laundry products. In North America Household Products, a gain in sales for food protection products was offset by declines in the hard surface cleaner and laundry product businesses caused by aggressive com UNALLOCATED petitive activity. Zipioc brand bags had a significant market share gain in 1994. Contributing to this gain were the recent new prod uct introductions ofZipioc vegetable bags and Zipioc snack bags. The new manufacturing and distribution center in llrbana, Ohio, began shipping product in the fourth quarter. Brands such as Dow barhroom cleaner, Fancastik all purpose cleaner, Glass Plus multi-surface cleaner and Spray'N Wash tough laundry stain remover were reintroduced to the marketplace with new ergonomi cally designed botdes, more effective formulations and improved trigger sprayers that are intended to build consumer preference for the products. DowBrands also introduced Smart Scrub soft scouring cleaner with 100 percent water-soluble baking soda, which eliminates lengthy rinsing and gritty residue. Smart Scrub achieved a strong market share during its introduction, and will be followed by Smart Scrub with bleach in the first half of 1995. The operating results ofthe consolidated insurance and finance subsidiaries, and Ventures businesses such as Dow Environmental and advanced electronics marerials, are grouped in this segment together with activities and overhead cost variances not allocated to other business segments. This segment had an operating loss of $214 million in 1994 versus income of $75 million in 1993 and a loss of$6 million in 1992. The primary components of the 1994 operating loss were severance costs of$ 124 million, research and other expenses related to new developmental activities in the Ventures businesses of$91 million, and asset write-offs and provi sions for environmental remediation not assigned to Dow's other industry segments of$38 million. These costs were partially offset by pretax income from the insurance and finance company opera tions of $40 million. This segment's 1993 operating income was comprised primarily ofpretax income from the insurance and finance company operations of $98 million and favorable variances Outlook for Consumer Specialties DowElanco expects accelerating momentum from new product sales combined with steady earnings from older products to continue in the coming year. While two ofMarion Merrell Dow's key products, Seldane and Seldane-D, face vigorous competition from other brands, the products have yet to experience generic competition in the resulting from resource use reduction of $60 million which were partially offset by expenses related to new developmental activities in the Ventures businesses of$70 million. In 1992, casualty losses from Hurricane Andrew, a fire in Terneuzen, the Netherlands, and a decrease in investment income, ail contributed to the lower operating results ofthe insurance and finance companies. U.S. Following the April 1994 expiration of one U.S. patent relat ing to Seldane, Marion Merrell Dow is defending the company's intellectual property rights related to certain other patents but COMPANY SUMMARY cannot predict when, or if, U.S. generic competition might begin. Net sales for 1994 of $20.0 billion were up 11 percent from In addition, the Cardizem brand faces increasing competition $18.1 billion in 1993 and 6 percent from $19.0 billion in 1992. from generic and brand name products. This result reflected improved economic conditions globally which DowBrands is likely to have improved profitability in 1995 as led to higher selling prices and stronger volumes as illustrated in a result of the pending sale of its Personal Care business. This will the Sales Price and Volume table below. All geographic areas and all Sales Price and Volume Percentage changesfrom prioryear' Geographic Areas: United States Europe Rot of World Total Industry Segments: Chemicals and Performance Products Plastic Products Hydrocarbons and Energy Consumer Specialties Total 'Not intended m sdd. 1994 Price Volume Total i% 6% 7% 3 7 10 3 18 21 2% 8% 11% 1% 4 6 (1) 2% 5% 12 8 8 8% 6% 16 14 7 11% Price 1993 Volume Total 03)% 0) (4)% (3)% 0) 4 (!)% (3)% (H) 3 (5)% (4)% (6) (5) - (4)% (1)% 2 9 (9) (1)% (5)% (4) 4 (9) (5)% Pnce 1992 Volume Total 0)% 6% 5% (6) 1 (5) (3) 3 - (3)% 4% 1% (3)% (6) (7) 3 (3)% 2% (0% 4 (2) (3) (10) 69 4% 1% TKf OOW CHtMlCAk COMPANY AND SUlSlOIAftlfl ST0929395 industry segments had higher saies versus 1993 with Rest ofWorld sales up 21 percent. Plastic Products led Dow's industry segments with sales increasing 16 percent compared to a year ago. Volume was up 8 percent versus 1993 and up across all geographic areas. Volume was up 6 percent in the United States, 7 percent in Europe and 18 percent in Rest ofWorld. Selling prices were up 2 percent globally with Europe and Rest ofWorld recording increases of 3 percent and the United States an increase of 1 percent versus 1993. Sales in the United States accounted for 50 percent of the total sales in 1994, 51 percent in 1993 and 50 percent in 1992. Sales details by industry segment and geographic area are provided in Note S to the Financial Statements and in the Product Segment Sales Analysis on page 45. Operating Income Operating income was $2.3 billion in 1994, up 63 percent from $ 1.4 billion in 1993 and 82 percent from $1.3 billion in 1992. As discussed in Note B to the Financial Statements, 1993 and 1992 included special charges against income of $180 million and $433 million, respectively. Gross margin improved $931 million versus 1993, primarily as a result of higher selling prices and increased sales volumes. Research and development, promotion and advertis ing, and selling and administrative expenses increased by a total of $ 158 million or 4 percent compared to 1993, primarily as a result of Increased selling expenses and new product launch costs in the Consumer Specialties segment, and variable compensation expenses linked to improved company earnings. Management's continued focus on resource use reduction resulted in structural costs being reduced $174 million or 4 percent versus 1993 levels. The ratio ofoperating income to sales was 12 percent in 1994, versus 8 percent in 1993 and 7 percent in 1992. Price and volume increases in che Chemicals and Performance Products, Plasric Products, and Hydrocarbons and Energy segments coupled with the favorable impact of reduced structural costs led to the improved 1994 results. Operating income for Plastic Products nearly tripled to $1.1 billion compared to 1993, on the strength ofboth price and volume increases. Prices for the company began to show noticeable improvement in the latter halfof 1994, contributing to the improved operating results. Higher prices are expected in 1995 versus 1994 with caustic prices improving significandy as contracts are renewed. Sales volumes are expected to be higher in 1995 as well. The United States contributed 55 percent of the total operating income in 1994 compared to 72 percent in 1993 and 90 percent in 1992. The United States portion ofthe total declined as a result ofoperating income improvements in Europe and Rest ofWorld. Operating income in Europe was $273 million in 1994 versus a $1 million loss in 1993 and a $90 million loss in 1992. Operating income from Dow's other geographic areas continued to show improvement, increasing to $779 million in 1994 from $405 mil lion in 1993 and $221 million in 1992. Operating Costs and Expenses Cost Components as a Percent of Total Hydrocarbons and energy Wages, salaries and employee benefits Maintenance Depreciation Supplies, sen ices and ocher raw materials Total 1994 22% 23 6 7 42 100% 1993 21% 25 6 S 40 100% 1992 21% 24 7 7 41 100% Dow's global plant operating rate for its chemicals and plastics businesses was 92 percent of capacity in 1994 compared to 85 per cent in 1993 and 84 percent in 1992. The higher operating rate is attributed to sales volume growth which increased 8 percent over 1993. Overall manufacturing costs for chemicals and plastics, Hydrocarbons and Energy Purchase Price Index 1993.100 i Selling Price and Volume/Mix Indices 1993-100 J 91 192 * \9i DOW CHIMICAl COMPANY AND SUISIDIAAICS ST0929396 after adjusting for volume and special charges, were down 4 percent from 1993- This reduction was primarily the result ofa continued focus on cost and resource use reduction in manufacturing, including lower maintenance spending. Depreciation expense was $1.3 billion in 1994,1993 and 1992. Research and Development expenses were S1.3 billion, flat with 1993 and down 2 percent from 1992. Promotion and Advertising expenses are ofa discretionary nature and are most directly related to sales in Consumer Specialties. In 1994, Promotion and Advertising expenses were <658 million, down 3 percent from <678 million in 1993 and 17 percent from $795 million in 1992. These 1994 expenses were reduced primarily in Pharmaceuticals as a result ofa product mix more heavily weighted by generics. Selling and Administrative expenses for 1994 were $2.4 bil lion, up 8 percent from $2.2 billion in 1993 and 3 percent from $2.3 billion in 1992. The increasein 1994 was primarily the result ofvariable compensation accruals based on improved company earnings and increased spending in Pharmaceuticals due to the inclusion of the full-year results ofThe Rugby Group, Inc. and Kodama Ltd. Rugby and Kodama, two Marion Merrell Dow Inc. pharmaceutical acquisitions, were consolidated for the first time in the fourth quarter of 1993 and first quarter of 1994. respectively. Selling and Administrative expenses represented 12 percent of sales in each of 1994, 1993 and 1992. The personnel count at December 31,1994 was 53,730 versus 55.436 at the end of 1993 and 61,353 at the end of 1992. The 12 percent reduction in personnel from the end of 1992 to the end of 1994 refleerrd rationalnation and work process improvements throughout the company. Excluding the acquisitions of Kodama in 1994 and Rugby in 1993, the personnel counts would have been 52,314 and 54,626 at the end of 1994 and 1993, respectively, a 15 percent reduction from year-end 1992 to year-end 1994. Net Income Net income available for common stockholders in 1994 of$931 million or $3.37 per share increased 46 percent compared to net income of$637 million or $2.33 per share in 1993. The increase is primarily attributable to stronger operating results in the com pany's chemicals and plastics businesses. A net loss of$496 million or $1.83 per share was recorded in 1992. Effective January 1,1992, Dow adopted Statement ofFinancial Accounting Standards (SFAS) No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions) and SFAS No. 109 (Accounting for Income Taxes). The rransirion impact of rhe adoption of these two required accounting standards was a net cumulative charge against 1992 income of<765 million. Income before cumulative effect of accounting change was $276 million in 1992 or 99 cents per share. Dow's share ofthe earnings of 20%-50% owned companies amounted to $63 million in 1994 compared to a net loss of $111 million in 1993 and net earnings of$71 million in 1992. Dow Corning Corporation, in which the company is a 50 percent shareholder, reported nec losses of $7 million in 1994, $287 million in 1993 and $72 million in 1992. Dow Coming's 1994 and 1993 losses reflected after tax charges against income related to breast implant litigation of $152 million and $415 million, respectively. The negative impact of the charges on Dow's net income was $70 million or 25 cents per share in 1994 and $ 192 million or 70 cents per share in 1993. See NoreQ to the Financial Statements for further discussion of breast implant litigation. Dow Coming's 1992 net loss was largely due to the net cumulative effect charge of $100 million for implementation of SFAS Nos. 106 and 109 and to pretax special charges of S109 million related to restructuring costs, litigation and other costs for its discontinued breast implant business. Research and Development Expenses D^JUrt tm irflrr-ir ill Promotion and Advertising Expenses DoUdn in mtlbtnj _! __ ST0929397 In 1993, Dow's share of the earnings of 20%-50% owned companies was further reduced as a result ofthe sale of the company's 50 percent ownership in the Dowell Schlumbcrger group ofcompanies in January 1993 (see Note C to the Financial Statements). In 1992, Dows share ofDowell Schlumberger's net income was $36 million. Net interest expense, which is comprised of interest income, capitalized interest, interest expense and amortization ofdebt discount, was $406 million in 1994, down 6 percent from $433 million in 1993 and down 31 percent from $586 million in 1992. The decrease in 1994 was primarily due to lower average borrowings and lower interest rates versus 1993 and 1992. Foreign currency transaction gains for Dow and its consolidated subsidiaries amounted to $7 million in 1994 versus losses of $ 10 million in 1993 and gains of$11 million in 1992. For a discussion of the company's risk management program for both foreign currency and interest rate risk, see Note J to the Financial Statements. Dow recorded a net loss on investments of $60 million in 1994. The net loss was primarily due to a $132 million pretax charge in the fourth quarter of 1994 related to the pending sale of the PersonalCare business of DowBrands. Partially offsetting this charge was a pretax gain of$90 million recorded by the company on its common shares of Magma Power Company, primarily as a result ofthe merger agreement between Magma and California Energy Company, Inc. In 1993, Dow recorded a net gain on invest ments of $592 million, primarily due to the sale of its interest in Dowell Schlumbcrger and portions of its interests in Magma and Crestar Energy fnc. (see Note C to the Financial Statements). The provision for taxes on income was $779 million in 1994 versus $606 million in 1993 and $274 million in 1992. Dow's overall effective tax rate for 1994 was 38.0 percent versus 39.7 per cent for 1993 and 31.4 percent for 1992. The underlying factors affecting Dow's overall effective tax rates are discussed in Note D to the Financial Statements. U.S. and other tax law and rate changes during the year did not have a material impact on Dow. Minority interests' share ofnet income in 1994 was $335 mil lion compared to $275 million in 1993 and $322 million in 1992. The current year increase reflected the improved profitability of Agricultural Products and Pharmaceuticals as well as the full-year impact of certain limited partnerships (see Note K to the Financial Statements). Profitability for Pharmaceuticals declined in 1993 as a result of the special charge recorded by Marion Merrell Dow Inc. (see Note B to the Financial Statements). The following table summarizes the impact of special items on earnings per common share. 1994 Special charges against operating income - Impact of Dow Corning Corporation breast implant charges $ (.25) Net gain (loss) on investments (.29) Accounting change: Transition to SFAS No. 106 - Transition to SFAS No. 109 - Other earnings 3.91 Ner earnings (loss) per common share 13.37 1993 J (.30) 1992 $(1.02) (.70) 1.31 * 2.02 (3.66) .84 2.01 $2.33 $(1 83) Dividends The Board of Directors has announced a quarterly dividend of 65 cents per share, payable April 28, 1995, to stockholders of record March 31, 1995. This will be the 333rd consecutive quarterly dividend since 1912. Dow has maintained or increased the dividend throughout that time. Selling and Administrative Expenses DnlUn in nuUimu Income (Btfwn ntmuUnvt tffttt ehtmgt) tcmntwf DniUrj in militcm 90 91 92 99 9 TMt DOW CMCMICAl COMPANY AND MftflDIAIUtS ST0929398 Environment Dow'j operations around the world are subject to increasingly stringent laws and government regulations related to environmen tal protection and remediation. Dows environmental responsibili ties and potential liabilities receive direct and ongoing scrutiny by management to ensure compliance with these laws and regulations. It has been Dow's policy to adhere to a waste management hierarchy that minimizes the impact ofwastes on the environment. First, Dow works to eliminate or minimize the generation ofwaste at the source through research, process design, plant operations and maintenance. Second, Dow finds ways to reuse and recycle materials. Finally, unusable or nonrecydable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume ofthe waste. Treatment may include destruction by chemical, physical, biological or thermal (incineration) means. Disposal ofwaste materials in landfills is considered only after all other options have been thoroughly evaluated and determined infeasible. Dow has specific requirements for wastes that are transferred to non-Dow facilities. Wastes that are recycled, treated or recovered for energy off-site represent less than 1 percent of the total amount ofwastes reported as part ofthe Pollution Prevention Act. Dow's policy of treating its wastes on-site has resulted in only 12 percent of its rotal environmental liability being directed at remediation under federal or irate "Superfund" statutes. As Dow develops advanced technology to improve its environmental performance, it disseminates that technology to operations around the world to be incorporated into new and existing plants. Environmental audits are used by management to continually measure and report Dows progress against environmental expectations. The costs ofsite remediation are accrued as a part of the shut down of a facility or, in the case of a landfill, over its useful life. The nature of such remediation includes the cleanup ofsoil contamina tion and the closure of landfills and waste treatment ponds. These practices have minimized the company's exposure to environmental liabilities. The policies adopted to properly reflect the monetary impacts ofenvironmental matters are discussed in Note A to the Financial Statements. To assess the impact on the financial state ments, environmental experts review currently available facts to evaluate the probability and scope ofpotential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. Dow has been identified as a potentially responsible party (PRP) under federal or state "Superfund" statutes at approximately 90 sites. Dow readily cooperates in remediation at sites where its liability is clear, thereby minimizing legal and administrative costs. However, at several ofthese Superfund sites, Dow has had no known involvement and is contesting all liability; at many others, Dow disputes major liability, believing its responsibility to be dt minimis. Because current law imposes joint and several liability upon each party at a Superfund site, Dow has evaluated its poten tial liability in light of the number of other companies which have also been named PRPs at each site, the estimated apportionment ofcosts among all PRPs and the financial ability and commitment of each to pay its expected share. Management has estimated that the company's probable liabil ity for the remediation of Superfund sites at December 31, 1994 was S29 million, which has been accrued. In addition, receivables of $ 15 million for probable third-party recoveries have been recorded related to these sites. Other recoveries are possible since Dow has numerous insurance policies secured from many carriers at various times that may provide coverage at different levels for environmental liabilities. The company is currently involved in Operating Rat* PlnvtlU Capital Expenditures Dollnn %n millions T THE DOW CHEMICAL COMPANY AND SUISIOIAAKS ST0929399 litigation to determine the scope and extent ofsuch coverage. Dow has not recorded any receivables for these possible recoveries. In addition to the Superfund related liability referenced above, Dow had an accrued liability of $205 million at December 31 1994 representing the total probable costs that the company could incur related to the remediation ofcurrent or former Dow-owned sites. The company had not recorded as a receivable any third-party recovery related to these sites. In total, Dow's accrued liability for probable environmental remediation and restoration costs was $234 million at December 31, 1994,-as compared to $226 million at the end of 1993. This is management's best estimate ofthese liabilities, although possible costs for environmental remediation and restoration could range up to 50 percent higher. Tire amounts charged to income on a pretax basis related to environmental remediation totaled $64 million in 1994, $69 mil lion in 1993 and $47 million in 1992. Capital expenditures for environmental protection were $106 million in 1994, $157 million in 1993 and $200 million in 1992. Capital expenditures for envi ronmental protection in future years are currently projected at $100 million in 1995 and $100 million in 1996. It is the opinion ofthe company's management that the possi bility is remote that costs in excess ofthose accrued or disclosed will have a material adverse impact on rhe company's consolidated financial srarements. Capital Expenditures Capital spending for the year was $1.2 billion, down 15 percent from $1.4 billion in 1993 and 26 percent from $ 1.6 billion in 1992. The decrease primarily reflected the completion of a number of major projects during 1994 and management's continued effort to reduce capital resource requirements. Approximately 43 percent of the company's capital expenditures was directed toward additional capacity for new and existing products, while about 12 percent was committed to projects related to environmental protection, safety and loss prevention, and industrial hygiene. The remaining capital was utilized to maintain the company's existing asset base including projects related to con reducrion, energy conservation and facilities support. Major projects underway during 1994 included a light hydrocarbons plant at Freeport, Texas, a linear low density polyethylene plant at Fort Saskatchewan, Alberta and a DowBrands household cleaners plant in Urbana, Ohio. Start-up on each ofthese plants has been completed and they are now operational. Because the company designs and builds most ofits capital projects in-house, it does not have major capital commitments, other than for the purchase ofmaterials from fabricators. Liquidity and Capital Resources Operating activities provided $2.6 billion in cash in 1994, as compared to $2.1 billion in 1993 and $2.0 billion in 1992 (see the Consolidated Statements of Cash Flows). The items affecting oper ating activities are discussed in the sales, operating income and net income analysis. Cash used in investing activities was $1.2 billion in 1994 versus $622 million in 1993 and $1.3 billion in 1992. The 1993 reduction was largely the result of the sale of the company's interest in Dowell Schlumberger which generated cash proceeds of $675 million (see Note C to the Financial Statements) and outside investors' participation in limited partnerships which generated cash proceeds of$380 million (see Note K to the Financial Statements). These proceeds were used for general corporate purposes and redemption ofdebt. During 1994, Marion Merrell Dow Inc. (MMD1) increased its ownership in Kodama Ltd. to 99.8 percent, requiring net cash outlays of$101 million (see Note C to the Financial Statements). Net cash of $271 million in 1993 and $14 million in 1994 was used by MMDI to acquire Working Capital Debt as a Percentage of Total Capitalization Ibtmt (oaiUrni temperuj fruity) TNI DOW CMIWICAI COMPANY AND SUtSIOIAKKS ST0929400 The Rugby Group. Inc., the generic drug business of Rugby-Darby Group Companies, Inc (see Note C to the Financial Statements). In 1992, the company received cash proceeds of$855 million from outside investors' participation in DowBtands LP. (see Note K to che Financial Statements). Total working capital at year-end was $2.1 billion versus $2.0 billion at the end of 1993. Cash, cash equivalents, marketable securities and inrerest-bearing deposits increased by $297 million. Inventories and trade receivables together increased $958 million in 1994 as a result ofincreased sales activity after consecutive declines in 1993 and 1992 of $238 million and $316 million, respectively. Days-sales-in-inventory was 80 days, 82 days and 91 days at the end of 1994,1993 and 1992, respectively. Dayssales-ourstanding-in-receivables was 52 days at the end of 1994, 1993 and 1992. Shorr-term borrowings at December 31, 1994 were $741 mil lion, a decrease of$ 136 million from year-end 1993. Long-term debt due within one year increased $369 million to $534 million at the end of 1994 compared to $ 165 million at the end of 1993. Long-term debt due in 1995 will be funded by operating cash hows. Accounts payable increased by S318 million to $2.6 billion and income taxes payable increased $419 million during the year. Long-term debt was $5.3 billion, a decrease of $599 million from year-end 1993. During the year, $108 million ofnew long term debt was incurred while $526 million of long-term debt was retired and $534 million was transferred to long-term debt due within one year. Total debt was $6.6, $6.9 and $7.5 billion at December 31. 1994,1993 and 1992, respectively. Net debt, which equals total debt less cash, cash equivalents, marketable securities and interestbearing deposits, was $5.4, $6.1 and $6.9 billion at December 31, 1994,1993 and 1992, respectively. The debt to total capitalization ratio decreased to 38.0 percent at year-end 1994 from 39.9 percent at the end of 1993. The company has unused and available credit facilities with various U.S. and foreign banks totaling $2.0 billion in support of its working capital requirements and commercial paper borrowings. Additional unused credit facilities totaling $2.3 billion are available for use by foreign subsidiaries. Refer to Note I to the Financial Statements for further discussion on credit facilities. In February 1993, Dow effected a shelf registration for debt securities of 50.0 billion Japanese yen with Japan's Ministry of Finance. A total of 20.0 billion yen ofthis has been used. At December 31,1994, there was a total of $ 1.4 billion in available SEC registered debt securities between Dow and Dow Capital B.V., a wholly owned subsidiary. Minority interest in subsidiary companies increased during the year from $2.4 to $2.5 billion at the end of 1994, largely as a result ofoutside investors' increased ownership in MMDI. Eli Lilly and Company (Lilly) is a 40 percent partner with the company in DowElanco, a global agricultural products joint ven ture. Lilly holds a put option requiring the company to purchase Lilly's interest in DowElanco at fair market value. Lilly notified the company in September 1994 that it did not plan to exercise the put option at that time. No subsequent notification has been received. During the third quarter of 1994, Dow Deutschland Inc., a subsidiary of the company, signed a letter of intent with the Treuhandanstalt in which Dow Deutschland Inc. agreed to study and evaluate the restructuring potential ofseveral srate-owned chemical assets in eastern Germany with the intention ofacquiring - a majority position. Facilities involved in the evaluation include a steam cracker at Saechsische Olefinwerke GmbH in Boehlen, electrochemical units and derivative operations at Buna GmbH in Schkopau, and polyolefin and intermediate chemical operations ar Leuna-Werke GmbH in Merseburg and at Buna GmbH. The Treuhandanstalt is the German government agency charged with privatizing state-owned assets in the former East Germany. In August 1994, Dow announced that it had retained an investment banking firm for advice regarding possible strategic transactions involving Marion Merrell Dow Inc. At the same time, Marion Merrell Dow announced that ic had also retained an investment banking firm for advice regarding its own strategic alternatives. Subsequent Event On February 28,1995, The Hoechst Group, Marion Merrell Dow and The Dow Chemical Company announced that they are engaged in discussions concerning the possible negotiated acquisi tion of all of the outstanding shares ofMarion Merrell Dow by the Hoechst Group at a price of $25.75 per share in cash. Dow presently owns approximately 197 million shares, or approximately 71 percent, of Marion Merrell Dow's outstanding common stock. Dow and the Hoechst Group are also discussing the possible acquisition of Dows Latin American pharmaceuricals business for approximately $200 million. The companies stated that while discussions arc ongoing, the boards ofdirectors and supervisory boards of the respective companies have not yet met to consider the possible transactions, no agreements have been reached and there can be no assurance that any agreements will be reached or that any transactions will be consummated. I H ( DO* CHIMICAL COMPANY AND S U 11D I A X < I l RESPONSIBILITY FOR FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT ST0929401 Mtnagtmcnt Statement of Responsibility The management ofThe Dow Chemical Company and its sub sidiaries prepared the accompanying consolidated financial state ments, and has responsibility for their integrity, objectivity and freedom from material misstatement or error. These statements were prepared in accordance with generally accepted accounting principles. The financial statements include amounts chat are based on management's best estimates and judgments. Management also prepared the other information in this annual report and is respon sible for its accuracy and consistency with the financial statements. The Board of Directors, through its Audit Committee, assumes an oversight role with respect to che preparation ofthe financial statements. Management recognizes its responsibility for fostering a strong ethical dimate so that the Company's affairs are conducted accord ing to the highest standards ofpersonal and corporate conduct. Management has established and maintains a system ofinternal control that provides reasonable assurance as to the integrity and reliability ofthe financial statements, the protection ofassets from unauthorized use or disposition, and che prevention and detection offraudulent financial reporting. The system of internal control provides for appropriate divi sion ofresponsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system ofinternal control for compliance. The Company maintains a strong internal auditing program that independently assesses the effectiveness of the inter nal controls and recommends possible improvements. Deloitte & Touche llp, independent auditors, with direct access to the Board of Directors through its Audit Committee, has audited the consolidated financial statements prepared by the Company, and their report follows. Management has considered recommendations from the inter nal auditors and Deloitte & Touche nr concerning the system of internal control and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management further believes the controls are adequate to accom plish the objectives discussed herein. Independent Auditors' Report To the Stockholders and Board ofDirectors of The Dow Chemical Company: We have audited the accompanying consolidated balance sheets of The Dow Chemical Company and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each ofthe three years in the period ended December 31,1994. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatemenc. An audit includes examining, on a rest basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in ail material respects, the financial position ofThe Dow Chemical Company and its subsidiaries at December 31, 1994 and 1993, and che results of their operations and their cash Dows for each of the three years in the period ended December 31. 1994 in conformity with generally accepted accounting principles. As discussed in Note B to the financial statements, effective January I, 1992, the Company changed its methods ofaccounting for other postretirement benefits and income taxes. DELOITTE & TOUCHE LLP Midland, Michigan February 8,1995 US TM| DOW CHEMICAL COMPANY AND SUIllOIAftltl CONSOLIDATED STATEMENTS OF INCOME ST0929402 In miiliotu, exceptfor ihsrr omonnij Net Seles 1994 $20,015 1993 $18,060 1992 $18,971 Operating Costs and Expenses - Cost of sales Insurance and finance company operations, pretax income Research and development expenses Promotion and advertising expenses Selling and administrative expenses Amortization of intangibles Special charge (Note B) Total operating costs and expenses 13,219 (40) 1,261 658 2,403 169 - 17,670 12.195 (98) 1.256 678 2,230 179 180 16,620 12.704 (15) 1,289 795 2.328 147 433 17.681 Operating Income Other Income (Expense) Equity in earnings (losses) of 20%-50% owned companies (Note Q) Interest income Capitalized interest Interest expense and amortization of debt discount Net gain (loss) on foreign currency transactions Net gain (loss) on investments (Note C) Sundry income-net Total ocher income (expense) Income before Provision for Taxes on Income and Minority Interests 2,345 63 131 66 (603) 7 (60) 103 (293) 2,052 1,440 (111) 167 66 (666) (10) 592 47 85 1,525 1,290 71 109 78 (773) 11 86 (418) 872 Provision for Taxes on Income 779 606 274 Minority Interests' Share in Income (Note K) Income before Cumulative Effect of Accounting Change 335 938 275 644 322 276 Cumulative Effect of Accounting Change. Net of Taxes on Income (Note B) - - (765) Net Income (loss) Preferred Stock Dividends Net Income (loss) Available for Common Stockholders Average Common Shares Outstanding Earnings (loss) per Common Share: Before cumulative effect of accounting change Cumulative effect of accounting change (Note B) Net earnings (loss) per common share Common Stock Dividends Declared per Share 938 7 $ 931 276.1 $ 3.37 - $ 3.37 $ 2.60 644 7 $ 637 273.6 $ 2.33 - $ 2.33 $ 2.60 (489) 7 S (496) 271.6 S 0.99 (2.82) $ (1.83) s 2.60 Srr Notes to Ftnonciol Statrmenti. THE DOW CHEMICAL COMPANY AND J U 110 > A * I f J CONSOLIDATED BALANCE SHEETS In miUiom Current Assets - Investments Plant Properties Other Assets Total Assets See Notes to Financial Statements. Assets Cash and cash equivalents Marketable securities and interest-bearing deposics Accounts and notes receivable: Trade (less allowance for doubtful receivables1994. $104; 1993, $93) Other Inventories: Finished and work in process Materials and supplies Deferred income taxes receivable-current Total current assets Capita! stock at cost plus equity in accumulated earnings of 20%-50% owned companies Other investments Noncurrent receivables Total investments Plant properties Less accumulated depreciation Net plant properties Goodwill (net of accumulated amortization1994. $676; 1993. $563) Deferred income taxes receivable-noncurrent Deferred charges and other assets Total other assets December 3 / 1994 1993 $ 569 565 $ 407 430 3359 1,099 2,079 633 389 8,693 931 1,529 330 2,790 23,210 14,484 8,726 4365 1,132 839 6,336 $26,545 2,587 1,245 1,984 542 457 7.652 1,019 1,726 369 3,114 21,608 13,028 8.580 4,434 933 792 6,159 $25,505 ST0929403 THE DOW CHEMICAL COMAAWr AH0 JUiJlPIAAIIJ In militant, exceptfar than amounts Liabilities and Stockholders' Equity Current Liabilities " Notes payable Long-term debt due within one year Accounts payable: Trade Other Income taxes payable Deferred income taxes payable-current Dividends payable Accrued and other current liabilities Total current liabilities Long-Term Debt Deferred Texes and Other Liabilities Deferred income taxes payable-noncurrent Pension and other postretirement benefits-noncurrent Other noncurrent obligations Total deferred raxes and other liabilities Minority Interest in Subsidiary Companies Temporary Equity Preferred stock (authorized 250,000,000 shares of $1.00 par value each; issued Series A-1994: 1,549,014; 1993: 1,566,677) at redemption value Less guaranteed ESOP obligation Total temporary equity Stockholders' Equity Common stock (authorized 500,000,000 shares of $2.50 par value each; issued 1994: 327,125,854; 1993: 327,125.854) Additional paid-in capital Retained earnings Unrealized gains (losses) on investments Cumulative translation adjustments Treasury stock, at cost (shares 1994: 50,002,967; 1993: 52,640,015) Net stockholders' equity Total Liabilities and Stockholders' Equity Str Noiti to FinancialStatemcntt. Otftmktr 31 1994 1993 $ 741 534 1,928 634 664 56 202 1,859 6,618 5,303 644 1,987 1,253 3,884 2,506 $ 877 165 1,479 765 245 199 200 1,721 5,651 5,902 372 1,918 1,173 3.463 2,439 133 111 22 818 326 8,857 (21) (330) (1,438) 8,212 $26,545 135 119 16 818 366 8,645 105 (304) (1.596) 8,034 $25,505 ST0929404 TN OOW CH(MlCAL COMPANY AMO SUlSIDIAKIfl CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY In millions Common Stock Additional Paid-in Capital Retained Earnings ' Unrealized Gains (Losses) on Investments Cumulative Translation Adjustments Treasury Stock Net Stockholders' Equity See Notes to Finonctst Statements. Balance at beginning and end of year Balance at beginning of year Tax benefit of contingent value rights Issuance of treasury stock at less than cost Balance at end ofyear Balance at beginning ofyear Nec income (loss) Unfunded pension obligations Preferred stock dividends declared Common stock dividends declared Balance at end of year Balance at beginning of year Unrealized gains (losses) Balance at end of year Balance at beginning of year Translation adjustments Balance at end of year Balance at beginning of year Purchases Issuance to employees and employee plans Balance at end of year ST0929405 1994 $ 818 1993 $ 818 1992 $ 818 366 - (40) 350 34 (18) 346 45 (41) 326 366 350 8,645 938 (7) (719) 8.720 644 (7) (712) 9.920 (489) 3 (7) (707) 8,857 8,645 8,720 105 (126) (2) 107 (2) - (21) 105 (2) (304) (26) (107) (197) 194 (301) (330) (304) (107) (1,596) (38) 196 (1,715) (17) 136 (1,835) (10) 130 (1,438) (1,596) 0,715) $ 8,212 $ 8,034 $ 8,064 TMl DOW CHEMICAL COMPANY AND S V ft S IDIA N IC S CONSOLIDATED STATEMENTS OF CASH FLOWS ST0929406 lft millions Operating Activltias - Income before cumulative effect of accounting change Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision (credit) for deferred income tax Undistributed (earnings) losses of 20%-50% owned companies Minority interests' share in income Net (gain) loss on investments (Note C) Net gain on sales of plant properties Net (gain) loss on foreign currency transactions Special charge (Note B) Other Changes in assets and liabilities that provided (used) cash: Accounts receivable Inventories Accounts payable Other assets and liabilities' 1994 $ 938 1993 S 644 1992 $ 276 1,525 34 (48) 335 60 (73) (7) 6 (513) (171) 238 311 1.552 24 147 275 (592) (58) 10 180 13 (8) 207 139 (440) 1,487 (295) (27) 322 (22) (ID 433 10 (17) 195 (275) (45) Cash provided by operating activities 2,635 2,093 2,031 Investing Activities Financing Activities Purchases of plant properties Investments in unconsolidated affiliates Purchases ofconsolidated companies (net ofcash acquired) (Note C) Proceeds from sales of plant properties Proceeds from outside investors in limited partnerships (Note K) Purchases of investments Proceeds from sales of investments (Note C) Cash used in investing activities Changes in short-term notes payable Proceeds from issuance of long-term debt Payments on long-term debt Purchases of treasury stock Proceeds from sales of common stock Distributions to minority interests Dividends paid to stockholders (1,183) (43) (88) 111 (1.171) 1,179 (U95) (62) 108 (391) (38) 110 (281) (723) (1,414) (103) (307) 100 380 (237) 959 (622) 121 969 (1,675) (17) 82 (198) (719) O.608) (90) (397) 62 855 (127) - (1.305) (248) 1,231 (791) (10) 82 (143) (710) Cash used in financing activities (1,277) (1,437) (589) Effect of Exchange Rate Changes on Cash (1) (2) 2 Summary Increase in cash and cash equivalents Cash and cash equivalents at beginning ofyear 162 407 32 375 139 236 Cash and cash equivalents at end of year $ 569 $ 407 S 375 See Notes to Finmncul Statements. 1Excludes tumuUtit* effect ofaccounting change. THE DOW CHEMICAL COMPANY ANO $ 0 0 5 I 0 l A A 11 t NOTES TO FINANCIAL STATEMENTS ST0929407 h nUluru. extrftfar thtrt munnu Tabic of Contents A Summary ofSignificant Accounting Policies....................... 30 B Special Charge and Accounting Change............................... 31 C Acquisitions and Divestitures................................................. 32 D Taxes on Income...................................................................... 33 E Inventories................................................................................. 34 F Related CompanyTransactions.............................................. 34 G Plant Properties......................................................................... 34 H Leased Properties..................................................................... 34 I Notes Payable, Long-Term Debt and Available Credit Facilities................................................... 35 J Financial Instruments............................................................ 36 K Limited Partnerships............................................................... 37 L Stockholders' Equity.............................................................. 37 M Stock Option Plans................................................................. 38 N Redeemable Preferred Stock.................................................. 38 O Pension Plans........................................................................... 38 P Other Postretirement Benefits............................................... 39 Q Commitments and Contingent Liabilities.......................... 40 R Supplementary Information...............................................42 S Industry Segments and Geographic Areas.......................... 42 A Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements of The Dow Chemical Company and its sub sidiaries (the Company) include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries. Intercompany trans actions and balances are eliminated in consolidation. Investments in companies 20%-50% owned (related companies) are accounted for on the equiry basis. The excess of the cost of investments in subsidiaries over the carrying value ofassets acquired is shown as goodwill, which is amortized on a straight-line basis over its estimated useful life with a maximum of 40 years. The Company evaluates long-lived assets for impairment based on the recoverability of the asset's carrying amount. When it is probable that undiscounted future cash flows will not be sufficient to recover the asset's carrying amount, the asset is written down to its fair value. Reclassifications Certain reclassifications of prior years' amounts have been made to conform to the presentation adopted for 1994. Foreign Currency Translation The local currency has primarily been used as the functional currency throughout the world. Translation gains and losses of those operations that use local cur rency as the functional currency, and the effects of exchange rate changes on transactions designated as hedges of net foreign invest ments, are included as a separate component of stockholders' equity. Where the U.S. dollar is used as the functional currency, foreign currency gains and losses ate reflected in income currently. Cash and Cash Equivalents Cash and cash equivalents include time deposits and readily marketable securities with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market. The method ofdetermining cost is used consistently from year to year at each subsidiary and varies among the last-in, first-out (LIFO) method; the first-in, first-out (FIFO) method; and the average cost mechod. Plant Properties, Investments and Other Assets Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of der'eciable assets and is generally provided using the declining balance method. Fully depreciated assets are retained in property and depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income. Gain Recognition on Sale of Subsidiaries' Stock Company policy is to record gains from the sale or other issuance of previously unissued stock by its subsidiaries. Financial Instruments Interest differentials on swaps and forward rate agreements designated as hedges of exposures to interest rate risk are recorded as adjustments to interest expense over the contract period. Premiums for early termination of derivatives designated as hedges are amortized as adjustments to interest expense over the original contract period. Interest derivatives not designated as hedges are marked-to-market at the end of each accounting period. The Company calculates the lair value offinancial instruments using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments (such as forwards, options, swaps, etc.) which take into account the present value of estimated future cash flows. Investments in debt and equity securities are classified as either Trading, Available-for-Sale or Held-to-Maturity. Investments classified as Trading are reported at fair value with unrealized gains and losses included in income. Investments classified as Availablefor-Sale are reported at fair value with unrealized gains and losses recorded in a separate component ofstockholders' equity. Investments classified as Held-to-Maturity are recorded at amortized cost. The cost of investments sold is determined by specific identification. t HI DOW CHIMICAl COURANY AND SUBSIDIARIES in millieni. acceptfee thin nmeunts A Summary of Significant Accounting Policies (continued) ST0929408 Environment Accruals for environmental matters ate recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on ament law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are generally included in the balance sheet as `Other noncurrent obligations" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Accruals for insurance or other third party recoveries for environmental liabilities are recorded when it is probable that a claim will be realized. Accruals for recoveries are included in the balance sheet as "Noncurrent receivables." Environmental costs are capitalized if the costs extend the lift ofthe property, increase its capacity, and/or mitigate or prevent contamination from future operations. Costs relared to environ mental contamination treatment and cleanup are charged to expense. Taxes on Income The Company accounts for taxes on income using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases ofassets and liabilities using enacted rates. Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested. Certain countries provide tax incentives which are granted to encourage new investment. Generally, such grants are credited to income as earned. Earnings per Common Share The calculation of earnings per share is based on the weighted average number of common shares outstanding during the applicable period. B Special Charge and Accounting Change The second quarter of 1993 included a special pretax charge of $180 by Marion Merrelt Dow Inc. (MMD1). The special charge reflected the impact of a number ofsteps intended ro reduce costs and position MMDI for the future, including work force reduction and U.S. business reorganization. The special charge has had total cash expenditures of $107 ($65 in 1994, $42 in 1993), all ofwhich have been funded from operations. Asset write-downs have been $4. At December 31,1994, the special charge liability was $69. Work force reduction efforts are expected to result in estimated payroll and benefir cost savings in 1995 of $ 127. The actions intended by the restructuring are expected to be substantially complete by December 1995. The Company owns 71 percent of MMDI. During the fourth quarterof 1992, opportunities were identi fied to streamline the Company and a special pretax charge of $433 was taken. This charge reflected asset write-offs and write-downs, plant shutdowns, divestitures and the consolidation of a variety of business activities globally. Included were costs related to work force reductions associated with these activities. The actions contemplated by the special charge were substantially complete at December 31, 1993, with no significant adjustments required co the estimates. Effective January 1, 1994. the Company adopted Statement of Financial Accounting Standards (SFAS) No. 112 (Employers' Accounting for Postemployment Benefits). The impact on net income for the year was not material. Effective January 1, 1992, the Company adopted SFAS No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions) and SFAS No. 109 (Accounting for Income Taxes). SFAS No. 106 requires employers to recognize the cost of certain health care and life insurance benefits provided to retirees and their depen dents as a liability during the employees' active years of service. In making the transition to adopt this required accounting standard, a charge of $994 or $3-66 pet share was made against 1992 net income. SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes. The favorable cumulative effect of its implementation was $229 or 84 cents per share in 1992. The net impact ofadopting SFAS Nos. 106 and 109 was a cumulative charge of $765 against 1992 net income. The DOW CHEMICAL COMPANY AND SVISIOIANIES NOTES TO FINANCIAL STATEMENTS ST0929409 In miUinnx. mrptfnr shnrr nmnunts C Acquisitions and Divestitures In 1994, the Company recognized a pretax gain of $90 on i ts common shares in Magma Power Company (Magma), primarily as a result ofthe merger agreement between Magma and California Energy Company, Inc. In the fourth quarter of 1994, the Company recorded a pretax charge of1132 related to the pending sale of the Personal Care business of DowBrands. Outing the third quarter of 1994, Dow Deutschland Inc, a subsidiary ofthe Company, signed a letter of intent to study and evaluate the restructuring potential ofseveral state-owned chemical assets in eastern Germany with the intention of acquiring a majority position. During January and February of 1994, Marion Merrell Dow Inc. (MMDI) increased its ownership ofKodtmt Ltd. (Kodama), a Japanese pharmaceutical corporation, to 91 percent. By December 31, 1994, MMDI had further increased its ownership of Kodama to 99.8 percent. The net cash cost for 1994 was $101. In November 1993, Dow Chemical Canada Inc. (DCCI) sold shares of Crestar Energy Inc. (Crestar). The net proceeds to the Company were $172 and generated a pretax gain of $101. As a result of the sale, DCCI's common share holding in Crestar was reduced from 50 percent to 17.5 percent. In October 1993. MMDI acquired The Rugby Group, Inc., the U.S.'s largest generic drug company, from the privately held Rugby-Darby Group Companies, Inc for $285. In June 1993, the Company sold 3.6 million shares ofcom mon stock in Magma for which it received gross proceeds of$ 116. The sale generated a pretax gain of$62 in 1993. in October 1993. the Company sold its option to purchase 2 million shares of Magma common stock to Magma and received consideration of857,143 shares of Magma's common stock. In January 1993, the Company sold its 50 percent ownership in the Dowell Schlumberger group ofcompanies to Schlumberger Limited. The selling price was $675 in cash and a warrant to purchase 7.5 million shares ofSchlumberger stock with an exercise price of$59.95 per share. The warrant is fully vested and nontransferable, and expires in the year 2000. The sale generated a pretax gain of $450. The Company acquired an additional 2.1 million shares of MMDI common stock during 1993 and 1.4 million shares during 1992 at costs of $36 and $43. respectively. The increased interests were accounted for as purchases with increases to goodwill of $21 and $29. respectively. In mtUtans, exceptfo* timet amounts D Taxes on Incoma Operating loss carryforwards at December 31. 1994 amounted to $870 ofwhich S108 is subject ro expiration in 1995, J176 in ]996, $87 in 1997, $39 in 1998 and $5 in 1999. The remaining balances expire in years beyond 1999 or have an indefinite carryforward period. Tax credit carryforwards at December 31,1994 amounted to SlOOofwhich $3 is subject to expiration in 1995,$3 in 1996,$4 in 1997, $ 1 in 1998 and $2 in 1999. The remaining balances expire in years beyond 1999 or have an indefinite carryforward period. ST0929410 Undistributed earnings ofsubsidiaries and related companies which are deemed to be permanently invested amounted to $2,053, $1,782 and $1,989 at December 31,1994.1993 and 1992, respectively. It is not practicable to calculate the unrecog nized deferred tax liability on those earnings. The movement in the valuation allowance during 1994 was a net reduction of$37 due primarily to business improvement and an extension in the loss carryforward period in Spain. Domestic and Foreign Components ofIncome before Taxes on Income and Minority Interests 1994 1993 Domestic Foreign SI,161 891 S 2,052 S 1,099 426 $1,525 1992 S632 240 $872 Reconciliation to US. Statutory Rate Turn ar U.S. statutory rate Amortization of nondeductible intangibles Taxes on foreign operations at rates different from U.5. statutory rare (including f-SCJ Other-net Total tax provision Effective tax rate 1994 $718 83 (4) (18) $779 38.0% 1993 $534 45 1992 5296 43 29 (2) $606 39 7% 37 (102) $274 31 4% Provision (Credit)for Taxes on Income 1994 Current Deferred Federal Stare and local Foreign Total S457 ZJ 265 $745 J13 2 19 S34 Total $470 25 284 $779 Current S404 G3 115 S582 1993 Deferred S(8) - 32 S 24 Total S396 63 147 S606 Current S 381 39 149 S569 1992 Deferred $(158) - (137) S1295) Total $223 39 12 $274 Deferred Tax Balances at December 31 Proper ry Inventory Accounts receivable Pension and other compensation accruals Tax loss and credit carryforwards Long-term debt Alternative minimum tax Accrual for postreriremenc benefit obligations Investments Amortization of intangibles Other accruals and reserves Other-net Subtotal Less: Valuation allowance Total 1994 Deferred Tax Assets Deferred Tax Liabilities $ 83 104 58 107 330 131 80 624 30 28 379 201 $ (799) (102) (55) (49) (19) (9) (93) (1) (9) (175) $2,155 23 $2,132 $(1,311) - $(1,311) Deferred Tax Aistn $ 94 103 47 127 355 66 102 625 76 15 305 14] $2,056 60 $ 1.996 1993 Defertrd Tax Liabilities $ (732) (95) (29) (47) (16) (96) (37) (10) (115) $(1,177) - $(1,177) NOTES TO FINANCIAL STATEMENTS Ik millions, rutptfor short omounu K Inventories A reduction ofcertain inventories resulted in the liquidation of some quantities ofLIFO inventory, which increased pretax income byS16in 1994 and decreased pretax income by $18 in 1993 and $6 in 1992. ST0929411 The amount of reserve required to reduce inventories from the first-in, first-out basis to the last-in, first-out basis at December 31. 1994 and 1993, was $119 and $106, respectively. The inventories that were valued on a UFO basis represented 35 and 41 percent of the total inventories at December 31,1994 and 1993, respectively. P Related Company Transactions The Company's investments in related companies accounted for by the equity method at December 31, 1994 and 1993 were $931 and $1,019, respectively, which approximated the Company's equity in the net assets ofthese companies. Dividends received from related companies were $15 in 1994, $36 in 1993 and $45 in 1992. All other transactions with related companies, and balances due to or from related companies, were nor material in amount. C Plant Properties Plane Properties at December 31 Land Land and waterway improvement* Buildings Transportation and construction equipment Machinery and equipment Utility and supply lino Office furniture and equipment Veits and mineral reserve* Ocher Construction m progress Total 1994 S 414 660 2,337 211 15,332 1,315 836 355 184 1,566 $23,210. 1993 i 359 607 2.177 m (4,191 1.244 757 240 229 1.605 S 21,608 Depreciation expense was $1,321 in 1994, $1,343 in 1993 and $1,342 in 1992. Maintenanceandrepaircostswere$974 in 1994, $1,004 in 1993 and Si,152 in 1992. H Leased Properties The Company routinely leases premises for use as sales and admin istrative offices, warehouses and tanks for product storage, motor vehicles, railcars, computers, office machines and equipment under operating leases, (n addition, the Company leases a vinyl chloride plant and a Canadian subsidiary leases an ethylene plant. The Company has the option to purchase these plants and certain other leased equipment and buildings at the termination of the leases. Rental expenses under operating leases were $459, $482 and $554 for 1994, 1993 and 1992, respectively. The minimum future lease commitments for all operating leases are included at right. Minimum Operating Least Commitments 1995 1996 1997 1998 1999 2000 and thereafter Total minimum lease commitments S 29' 272 250 402 360 1.35B 52.939 the oow Chemical comfant and suisidiarics ST0929412 In millions. exceptfar thorr amounrt I Note! Payable, Long-Term Debt and Available Credit Facilities Notes payable at December 31, 1994 and 1993 consisted of obli gations due banks with a variety of interest rates and maturities. The notes payable outstanding at December 31, 1994 and 1993 were 5741 and 5877, respectively, on which the year-end weighted average interest rates were 4.80 percent and 4.20 per cent, respectively, excluding the effects of short-term borrowings in highly inflationary countries. Included in notes payable at December 3J, 1994 and 1993 was commercial paper of $191 and $225, respectively. The average interest rate on long-term debt was 6.64 percent in 1994 compared to 7.43 percent in 1993. Annual installments on long-term debt for the next five years are as follows: 1995, $534; 1996, 5387; 1997, $649; 1998, S330; 1999, $230. During 1994, $526 of long-term debt was retired. Included in this amount was $135 of 5.75% subordinated exchangeable notes due in 2001 that were exchanged for shares ofMagma Power Company. The Company had unused and available credit facilities at December 31, 1994, with various U.S. and foreign banks totaling $2,043, which required the payment ofcommitment fees. Additional unused credit facilities totaling 52,276 at December 31, 1994 were available for use by foreign subsidiaries. These facilities are available in support ofcommercial paper borrowings and work ing capital requirements. Promissory Notes and Debentures at December 31 1994 4.63%, fin*! maturity 1995 8.25%, final maturity 1996 5.75%, finaj maturity 1997 5.75%, final maturiry 2001 7.38%, final maturity 2002 9.35%, final maturity 2002 7 13%. final maturity 2003 8.63%, final maturity 2006 8.55%. final maturity 2009 9.00%, final maturiry 2010 9.20%, final mammy 2010 6.85%. final maturity 2013 7.13%, final maturity 2015 9.00%, final maturity 2021 8.85%, final macurtry 2021 8.70%, final maturity 2022 7.38%, final maturity 2023 i ISO 150 200 15 150 200 150 200 150 150 200 150 24 300 200 138 150 Subtotal 52,677 Guaranteed ESOP Obligations at December 31 9.42%. final maturity 2004, Dow ESOP 9.11%. final maturity 2005. MMDI ESOP Subtotal 1994 S 111 90 S 201 1995 S 150 150 200 150 150 200 150 200 150 150 200 150 150 300 200 150 150 32.950 1993 S 119 95 S 214 Foreign Bonds at December 31 6.75%, final maturin' 1995. German mark 5-63%. final maturin' 1996, German mark 10 87%. final maturity 1997, Brinjh pound srerling 4 00%, final maturiry 1998. Japanese vrn 4.75%, final maturin' 1999, Swiss franc 4 63%, final matunrv 2000. Swi franc 6.38%, final maturity 2001, Japanese yen Subrotal 1994 i 194 194 374 201 152 114 251 $1,480 )99i 3 1-3 >3 354 ;*`9 13 5 101 224 S 1.339 Other Facilities - Various Rates and Masuritses at December 31 1994 1993 Foreign currency loam U.S. dollar loans Medium-term notes, final maturity 2022 Pollution controUindusctial revenue bonds, final maturin' 2024 Unexpended construction funds Capital lease obligations S 255 4 585 707 (20) 32 5 339 50 60" 634 (50) 40 Subtotal J 1,563 S l,6'0 Long- Term Debt at December 31 Promissory notes and debentures Guaranteed ESOP obligations Foreign bonds Other facilities Less unamor(i2ed debt discount Less long-term debt due within one year Long-term debr 1994 J 2,677 201 1,480 1,563 (84) (534) 55,303 1993 32.950 214 1.339 .670 :. 06) ; i g 51 $5,902 rC COW CK(MlCAl A At 0 1 V 5 I D A A I ( $ NOTES TO FINANCIAL STATEMENTS In milium, exceptfor share amounts 4 Financial Instruments Fair Value ofFinancial Instruments at December 31 Cost Nendenvatwes: Interest-bearing deposits Marketable equity and debt securities: Trading AvuUbie-for-Sile Debt securities Equity securities Heid-to-Maruriry Other t 92 414 824 454 408 337 ToraJ investments S 2,529 Long-term debt 3(5.303) Derivatives relating to: Foreign currency Interest Cross-currency swaps - - - The tost approximates thefair valuefor all otherfinancial instruments Gain 1994 Lost Foir Value - 320 3 64 1 388 333 352 37 15 - - 3(22) (45) (1) (7) 3(75) - 3 92 434 805 473 408 330 3 2,542 3(5,270) 3(70) (45) (93) 3 (18) (8) (78) Cost S 105 433 732 489 177 357 J 2.293 5(5.902) - ST0929413 Gam 1993 Lou Fair Value - 57 38 205 3 ' 3253 - 39 176 - - - 3 (3) (22) (3) (41 3 (32) 1(391) - 3030) - 3 105 440 767 672 177 353 $ 2.514 3(6.293) I9 46 - Investments Total investments at December 31, 1994 and 1993 included cash equivalents of $455 and $362, marketable securities and interest-bearing deposits of $565 and $430, and other invest ments of $1,529 and $1,726, respectively. The proceeds from sales ofAvailable-for-Sale securities were $981 for 1994. These sales resulted in gross realized gainsof$55 and losses of$26. Maturities for most debt securities ranged from one to ten years for the Available-for-Sale classification and one to five years for the Held-to-Maturity classification at December 31, 1994. Foreign Currency Risk Management The Company's global operations require active participation in the foreign exchange markets. The Company enters into foreign exchange forward contracts and options to hedge various currency exposures or create desired exposures. Exposures primarily relate to (a) assets and liabilities denominated in foreign currency in Europe, Asia and Canada; (b) bonds denominated in foreign currency; and (c) economic exposure derived from the risk that currency fluctuations could affect the dollar value of future cash flows at the operating margin level. The primary business objective of the activity is to optimize the U.S. dollar value of the Company's assets, liabilities and future cash flows with respect to exchange rate fluctuations. Hedging is done on a net exposure basis. Namely, assets and liabilities denominated in the same currency are netted and only the balance is hedged. At December 31, 1994 and 1993, the Company had forward contracts outstanding with various expiration dates (primarily in January of the next year) to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of$6,573 and $3,664, respectively. The unrealized gains or losses on these contracts, based on the foreign exchange rates at December 31, 1994 and 1993, were a loss of$18 and a gain of $9, respectively, and were included in income in "Net gain (loss) on foreign currency transactions." Interest Rate Risk Management The Company enters into various interest rate contracts with the objective of lowering funding costs, diversifying sources of funding or altering interest tate exposure. In these contracts, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed upon notional principal amount. The notional principal on all types of interest derivative con tracts at December 31, 1994 and 1993 totaled $4,264 and S9.302, with a weighted average remaining life of 3-3 and 3.8 years, respec tively. The $37 in gains and $45 in losses in 1994 related to interest derivatives were not recognized in income as they represented hedges of debt-related exposures. The $15 in gains and $93 in losses in 1994 relared to cross-currency swaps were primarily recog nized in income in "Net gain (loss) on foreign currency transac tions'' and offset the gains and losses from the assets and liabilities being hedged. In 1993, there were $176 in gains and $130 in losses related to cross-currency swaps and interest derivatives. Of these amounts. $ 142 in gains and $ 103 in losses had not been recognized in income as they represented hedges ofdebt-related exposures. Interest Derivatives at December 31.1994 Cross-currency swaps Receive Fixed Hedge Receive Floating Hedge Other Notional Amount 31.427 1.630 1.024 183 Maturities 1995-1999 1995-2005 1996-2005 1995-1998 VfeiphtetlAverage Hate Receive Pay m. 6.1% 5.5% - - 5.5% 6.8% - The Company's risk management program for both foreign currency and interest rate risk is based on fundamental, mathemati cal and technical models that take into account rhe implicit cost of hedging. Risks created by derivative instruments and the mark-tomarket valuations of positions are strictly monitored at all times. /* mtUwns, acceptfer than tmmna i Financial Instruments (continued) The Company uses portfolio sensitivities and stress tests to monitor risk. Because the counterparties to these contracts are major inter national financial institutions, credit risk arising from these con tracts is not significant and the Company does not anticipate any such losses. The net cash requirements arising from risk manage ment activities are not expected to be material. The Company's overall financial strategies and impacts from using derivatives in ST0929414 its risk management program arc reviewed periodically with the Finance Committee of the Company's Board of Directors and revised as marker conditions dictate. The Company's global orientation in diverse businesses with a large number ofdiverse customers and suppliers minimizes concen trations ofcredit risk. No concentration ofcredit risk existed at December 31, 1994. K Limited Partnerships In April 1993, three wholly owned subsidiaries of the Company contributed assets with an aggregate fair value of$977 to Chemtech Royalty Associates LP. (Chemtech), a newly formed Delaware limited partnership. In August and October 1993, outside investors acquired limited partner interests in Chemtech totaling 20 percent in exchange for $200. In April 1993, two wholly owned subsidiaries of Marion Merrell Dow Inc. (MMD1) contributed assets with an aggregate fair value of approximately $1 billion to Carderm Capital L.P. (Carderm), a newly formed Delaware limited partnership. Outside investors made contributions of $180 in October 1993 in exchange for limited partner interests in Carderm totaling 15 percent. In December 1991, three wholly owned subsidiaries of the Company contributed assets with an aggregate market value of $2 billion to DowBrands LP, a newly formed Delaware limited partnership. Oucside investors made cash contributions of $45 in December 1991 and $855 in June 1992 in exchange for an aggregate 31 percent limited partner interest in DowBrands L.P. The three partnerships (Chemtech, Carderm and DowBrands LP) are separate and distinct legal entities from the Company and its affiliates and have separate assets, liabilities, businesses and operations. Each partnership has as a general partner a wholly owned subsidiary ofeither the Company or MMDI which directs the business activities of the partnership and has fiduciary responsibilities to the partnership and its other partners. The outside investors in each partnership will receive a cumu lative annual priority return on their investments in the partnership and participate in residual earnings. The annual priority return is JI4, $11 and $67 for Chemtech, Carderm and DowBrands L.P, respectively. The partnerships will not terminate unless a termination or liquidation event occurs. One such event, which is within the con trol of outside investors, occurs in the year 2000 for Chemtech and Carderm and 1996 for DowBrands L.P In addition, the partner ship agreements provide for various windup provisions wherein subsidiaries of the Company or MMDI may purchase at any time the limited partnership interests of the outside investors. Upon windup, liquidation or termination, the partners' capital accounts will be redeemed at current fair values. For financial reporting purposes, the assets (other than intercompany loans, which are eliminated), liabilities, results of operations and cash flows ofthe partnerships and subsidiaries are included in the Company's consolidated financial statements and outside investors' limited partnership interests arc reflected as minority interests. Supplemental contractual disclosures required by the partner ship agreements are contained within Note R ofthe December 31, 1993 Form 10-KofThe Dow Chemical Company. L Stockholders' Equity The authorized capital stock consists of 250 million preferred shares with a par value of$ 1.00 per share, and 500 million shares ofcommon stock with a par value of $2.50 per share. The only preferred shares issued are the convertible preferred shares discussed in Note N. The number ofcommon shares issued has remained at 327,125,854 for the last three years. There are no significant restrictions limiting the Company's ability to pay dividends. Undistributed earnings of 20%-50% owned companies included in rerained earnings were $269 and $290 at December 31, 1994 and 1993, respectively. In computing earnings per common share, no adjustment was made for common shares issuable under award, option and stock purchase plans, or conversion of preferred shares issued, because there would be no material dilutive effect. The Board of Directors has authorized, subject to certain busi ness and market conditions, the purchase ofup to 18,000,000 shares of the Company's common stock. At December 31, 1994, the number of shares purchased under this authorization was approximately 3,700,000. The number of treasury shares purchased was 591,000 in 1994.300.000 in 1993 and 169,000 in 1992. The number of trea sury shares issued to employees was 2,836,000 in 1994, 1,946,000 in 1993 and 2,051,000 in 1992. The number of treasury shares contributed to the pension plan for funding future retiree health care benefits through a 401(h) account was 391,000 in 1994 and 251.000 in 1993. Reserved Treasury Stock at December 31 In ihoutands ofjharet 1994 Stock option plans Employees'stock purchase plan Total shares reserved 16,517 894 17,411 1993 15.807 1.040 16,847 1992 14,171 1,120 15.291 NOTES TO FINANCIAL STATEMENTS rnt'm/JtAflt..vXAy.jv. 'hArr.vnAMnn M Stock Option Plans The Company has various stock option plans. Options under all plans are granted at the market price of the shares on the date of the grants. Option Plans In theutandi ofthorn 1994 1993 1992 Outstanding at January \ Granted Exercised Expired 14,059 2,634 (1,862) (96) 11.657 3.431 (567) (462) 9.986 2.68B (801) (216) Outstanding at December 31 14,735 14.059 11.65" Price Range 523.54-474.63 $18.46-460.88 $18.46-560 88 Exercisable at December 31 Available Tor future grant 12,189 559 10,776 407 8,869 I.I77 ST0929415 Stock options were exercised at prices ranging from $18.46 to $65.06 in 1994. $18.46 to $59.75 in 1993 and $18.46 to $60.88 in 1992. The Company made offerings ofcommon stock to its employ ees, excluding directors, in 1994, 1993 and 1992 at $54.50, $45 00 and $48.00 pet share, respectively, payable generally through pay roll deductions. Unfilled subscriptions, cancelable at the option of the employee, were 894,000, 1,040,000 and 1,120,000 shares at December 31, 1994, 1993 and 1992, respectively. Partial payments received on these subscriptions aggregating $32, $28 and $33 at December 31, 1994,1993 and 1992, respectively, were included in current liabilities. N Redeemable Preferred Stock The Company has an employee stock ownership plan (the ESOP). which is an integral part of the Salaried Employees Savings Plan. The ESOP borrowed funds at a 9.42 percent interest rate with a final maturity in 2004, and used the proceeds to purchase con vertible preferred stock from the Company. The preferred stock is convertible into approximately 1.5 million shares of the Company s common stock at $86,125 per common share. The dividend yield on the preferred stock is 7.75 percent of the $86.125 redemption value. In the event the Company consummates certain merger or consolidation transactions involving the Company's common scock, the preferred stock must be redeemed by the Company for cash at a redemption price equal to 105 percent of the $86,125 per share redemption value, plus accrued and unpaid dividends. The convertible preferred stock issued to the ESOP is reported as temporary equity in the Company's balance sheet. Since the Company has guaranteed the ESOP's borrowings, the principal amount of the ESOP loan has been reported as long-term debt and a reduction of temporary equity in the Company's balance sheet. O Pension Plans The Company has defined benefit pension plans which cover employees in the U.S. and a number of foreign countries. The Company's funding policy is to contribute annually, at a rate that is intended to approximate a level percentage of compensation for the covered employees, to those plans where pension laws and economics either require or encourage funding. The U.S. funded plan is the largest plan. Its benefits are based on length of service and the employee's three-highest consecutive years of compensation. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 7.75 and 5-5 percent, respectively, for 1994 and 7.25 and 5.5 per cent, respectively, for 1993. The assumed long-term rate ofreturn on assets was 9 percent for 1994 and 1993. All other pension plans used assumptions in determining the actuarial present value of the projected benefit obligations that are consistent with (but not identical to) those of the U.S. plan. Defined contribution plans cover err ployees in some sub sidiaries in the U.S. and in other countries, including Australia, France, Spain, and the United Kingdom. In addition, employees in the U.S. are eligible to participate in defined contribution plans (Employee Savings Plans) by contributing a portion of their com pensation. The Company matches compensation deferrals, depending on Company profit levels. Contributions charged to income for defined contribution plans were $71 in 1994, $76 in 1993 and S83 in 1992. The net periodic pension cost for all significant defined benefit plans was as follows: Net Periodic Pension Cost 1994 Service cost -benefits earned during the period Interest co$: on projected benefit obligation Actual (return) or. assets Amortization and deferred amounts Employee contributions to the plans * Net periodic pension cost $ 170 347 (93) (266) (8) $ 150 /99J $ 152 333 (494) 153 (8) $ 136 1992 S 122 306 (34!) 47 (9) J 125 In miiljoni, exceptfor share amounts O Pension Plans Continued) The funded sraros of significant defined benefit plans for the Company was as follows: Defined Benefit Plans at December 31 Actuarial present value of benefit obligation: Voted Nonvested Accumulated benefit obligation Effect of projected compensation increases Projected benefit obligation for services rendered to date Plan assets at market value, primarily publicly traded stocks and bonds Plan assets in eacess of (less than) projected benefit obligation Unrecognized transition obligation Unrecognized net (gains) losses Unrecognized prior service cost Additional minimum liability Accrued pension asset (liability) Fully Funded 1994 1993 5(3.287) (292) (3,579) (826) (4.405) 4.439 34 28 57 9 1(3.173) (324) (3,497) (838) (4,335) 4.534 199 29 (84) (4) S 128 $ 140 ST0929416 Partially Funded 1994 1993 5(467) (40) (507) (125) (632) 221 (411) 45 (1) 39 (49) 5(377) 1(361) (50) (411) (164) (575) 208 (367) 35 51 48 (8) 5(241) P Other Postretirement Benefits The Company provides certain health care and life insurance benefits to retired employees. The Company funds most of the cost of these health care and life insurance benefits as incurred. The U.S. plan covering the parent company is the largest plan. The plan provides health care benefits, including hospital, physi cians' services, drug and major medical expense coverage, and life insurance benefits. The plan provides benefits supplemental to Medicare after retirees are eligible for these benefits, except for employees hired after December 31, 1992. The cost of these benefits is shared by the Company and the retiree, with the Company portion increasing as the retiree has increased years ofcredited service. The Company has the ability to change these benefits at any time. Effective October 1993, the Company amended its health care benefits plan in the U.S. to cap the cost absorbed by the Company at approximately twice the 1993 cost per person for employees who retire after December 31, 1993. Effective April 1994, the Company extended this amendment to cover all other retired employees. The effect of the October 1993 amendment was to reduce the net periodic postretirement cost by $21 for 1993 and the accumulated postretirement benefit obligation by $327 at December 31,1993. The effect of the April 1994 amendment was ro reduce the net periodic postretirement cost by $71 for 1994 and the accumulated postretirement benefit obligation by $101 at December31, 1994. For 1994, a discount rate of 7.75 percent and weighted average medical cost trend rates starting at 9.47 percent and declining to 5.53 percent in 2004 were assumed. For 1993, the discount rate assumption was 7.25 percent and the medical cost trend rate assumption was 10.65 percent declining to 5.03 percent in 2004. The assumed long-term rate of return on assets was 9 percent for 1994 and 1993. Increasing the assumed medical cost trend rate by 1 percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 1994 by $33 and the net periodic postretirement benefit cost for the year by $3. All other postretirement health care and other benefit plans used assumptions in determining the actuarial present value of accumulated postretirement benefit obligations that are consistent with (bur not identical to) those of the U.S. parent company plan. The net periodic benefit cost of all significant plans was as follows: Net Periodic Postretirement Cost Servtcc costs-benefits earned during the period Interest cost on accumulated postretirement benefit obligation Amortization and deferred amounts Net periodic postretirement cost 1994 S 26 89 (43) 5 72 1993 I 35 122 (9) 5148 m2 5 38 127 - 5165 The postretirement benefit obligations of all significant plans were as follows: Partially Funded Postretirement Plans at December 31 1994 Accumulated postretirement benefit obligation: Retirees Fully eligible active plan participants Other active plan participants Total accumulated postretiremen! benefit obligation Flan assets at market value, primarily publicly traded stocks and bonds Unfunded accumulated postretiremen! benefit obligation Unrecognized gain from experience favorable to assumptions Negative prior service costs S (676) (290) (210) (1,176) 52 (1,124) (166) (373) Accrued postretirement benefit liability 5(1,663) 199) S (79:) (279) (234) (1.303) 20 (1.285) (81) (319) 5(1.685) T H( DOW CHfMlCAl COMPANY AND J U $ I D A HI f $ NOTES TO FINANCIAL STATEMENTS ST0929417 In millions, cutptft tb*rr smovnn Q Commitments and Contingent Liabilities In January 1994, Dow Corning Corporation (Dow Corning), in which Dow is a 50 percent shareholder, announced a pretax charge of $640 ($415 after tax) for the fourth quarter of 1993. In January 1995, Dow Corning announced a pretax charge of $241 ($152 after tax) for the fourth quarter of 1994. These charges included Dow Comings best estimate ofits potential liability for breast implant litigation based on the settlement approved by Judge Sam C. Pointer, Jr. of the U.S. District Court for the Northern District ofAlabama (theCourt); litigation and claims outside ofthis breast implant settlement; and provisions for legal, administrative and research costs related to breast implants. The charges for 1993 and 1994 included pretax amounts of $ 1,240 and $441, respectively, less expected insurance recoveries of $600 and $200, respectively. The 1993 amounts reported by Dow Corning were determined on a present value basis. On an undiscounted basis, the estimated liability above for 1993 was $2,300 less expected insurance recoveries of $ 1,200. As a result of the Dow Corning actions, the Company recorded its 50 percent share of the charges, net of tax benefits available to Dow. The impact on the Company's net income was a charge of $192 for 1993 and a charge of $70 for 1994. In March 1994, Dow Corning signed a Breast Implant Litigation Settlement Agreement (the Settlement Agreement) which was preliminarily approved by the Court in April 1994. The Settlement Agreement received final approval by the Court on September I, 1994. The Company is not a signatory to the Settlement Agreement and is not required to contribute to the settlement. In certain circumstances, if any defendant who is a signatory to the Settlement Agreemenr considers the number of plaintiffs who have opted out and maintained lawsuits against such defendant to be excessive, such defendant may withdraw from participation in the Settlement Agreement. Various preliminary estimates of the aggregate number of plainri ffs who have indicated an intent to opt out of the settlement (the Opt Out Plaintiffs) have been made public. Dow Corning has reported that, since July 1, 1994, many former Opt Out Plaintiffs have rejoined the settlement. The Court is continuing to collect information relating to the number of Opt Out Plaintiffs. Dow Corning has stated that, as information is received from the Court, Dow Corning will continue to evaluate the nature and scope of the current or potential future claims ofthese Opt Out Plaintiffs. Opt Out Plaintiffs may continue to rejoin the settlement until the March 1,1995 date established by the Court. The date by which Dow Corning was required to decide whether to remain as a participant in or to exercise the first of its options to withdraw from the Settlement Agreement was extended to September 9, 1994. On September 8, 1994, Dow Coming's Board of Directors approved Dow Coming's continued participa tion in the Settlement Agreement. Initial claims were required to be filed with the Court by September 16, 1994. After these claims and the supporting medical records have been evaluated by the Court for validity, eligibility, accuracy, and consistency, the Court will determine whether contributions to the setdement are sufficient to pay validated claims. The date by which this process will be completed is uncertain. Ifcontributions are nor sufficient, claimants with validated claims may have the ability to become Opt Out Plaintiffs during another specified period. In that event, ifany defendant who is a signatory to the Settlement Agreement considers the number of new Opt Out Plaintiffs to be excessive, such defendant may decide to exercise a second option to withdraw from participation in the Settlement Agreement. There can be no assurance that Dow Corning will not withdraw from participation in the Settlement Agreement. Dow Coming has reported that, as additional facts and cir cumstances develop, the estimate of its potential liability may be revised, or provisions may be necessary to reflect any additional costs of resolving breast implant litigation and claims nor covered by the settlement. Any future charge by Dow Corning resulting from a revision or provision, if required, could have a material adverse impact on the Company's net income for the period in which it is recorded by Dow Corning, but would not have a material adverse impact on the Company's consolidated cash flows or financial position. The Company's maximum exposure for breast implant product liability claims against Dow Corning is limited to its investment in Dow Corning which, at December 31, 1994, was S337. The Company is separately named as a defendant in many of the breast implant claims and lawsuits. It is the opinion of the Company's management that the possibility is remote that the litigation of these claims will have a material adverse impact on the Company's consolidated financial statements. 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, includ ing contamination ofgroundwater. To date, there have been no verdiccs 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 ofsuch lawsuits will have a material adverse impact on the Company's consolidated financial statements. TH| DOW CHEMICAL COMPANY AND S U S I 0 I A It I E 5 ST0929418 in mtUtont, exceptfer there emeuntt Q Commitments and Contingent Liabilities (continued) The Company fu* accrued 1234 at December 31,1994, for probable environmental remediation and restoration liabilities, including $29 for the remediation ofSuperfund sites. This is man agements best estimate of these liabilities, although possible costs for environmental remediation and restoration could range up to 50 percent higher. It is the opinion ofche 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 and its subsidiaries are parties to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liabilities, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims art being contested. Except for the possible effect on the Company's net income for charges which may be taken by Dow Corning for breast implant litigation, 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. On behalfof Destec Energy, Inc. (Destec), a 76 percent owned subsidiary, the Company has guaranteed the lease payments ofa Destec subsidiary which leases the Lyondell cogeneration facility near Houston, Texas. Minimum lease payments total $145 for the noncancclable portion ofthe lease which runs through March 31, 1995. The guarantee is cancelable upon proper notice on any anniversary dace of the guarantee. Destec entered into an agreement with the U.S. Department of Energy, PSI Energy Inc. (PSI), and a third parcy owner to design, construct, and operate a 262 megawatt syngas facility which will repower an existing PSI turbine. Destec will provide coal gasification services under a 25-year contract. Associated with the above agreement, Destec assumed a construction performance obligation of $ 161 with project completion scheduled for third quarter 1995, at which time Destec will lease the plant. The lease commitments are included in Note H. Destec contracted to design, engineer, build and operate a cogeneration facility in central Florida for a partnership in which Destec owns approximately 50 percent. Commercial operations commenced in January 1995 as planned. Destec has guaranteed $33 to fond its equity contribution. Destec contracted to design, engineer and build a 424 megawatt cogeneration facility in Freeport, Texas and is a 50 percent partner in Oyster Creek Limited which owns the facility. The Company has agreed to purchase steam and power from the facility and estimates that its minimum annual obligation to outside parties is $20, increasing 3 percent annually through 2014. Eli Lilly and Company (Lilly) is a 40 percent partner with the Company in DowElanco, a global agricultural products joint venture. Lilly holds a put option requiring the Company to purchase Lilly's interest in DowElanco at fair market value. Lilly notified the Company in September 1994 that it did not plan to exercise the put option at that time. No subsequent notification has been received. A Canadian subsidiary has entered into two 20-year agreements to purchase 89 percent of the output of an ethylene plant (Plant No. 1) and 40 percent of the output ofa second ethylene plant (Plant No. 2). The purchase price of the output is determined on a cost-of-service basis which, in addition to covering ail operating expenses and debt service costs, provides the owner ofthe plants with a specified return on capital. Total purchases under the agreements were $252, $237 and $236 in 1994, 1993 and 1992, respectively. The contracts related to Plants No. 1 and No. 2 expire in 1998 and 2004, respectively. DCS Capital Corporation (the Corporation) is 100 percent owned by DCS Capital Partnership. The Corporation was orga nized to assist DCS Capital Partnership in raising funds to finance construction ofan ethylene plant. DCS Capital Partnership is owned by Shell Canada, Union Carbide and Dow through its 100 percent owned subsidiary, Dofinco, Inc. As parr of the owner ship agreement, Dofinco indirectly guarantees approximately 52 percent of the debt of the Corporation. Dofinco's indirect guarantee amounted to $68 at December 31, 1994. At December 31, 1994, the Company had various outstanding commitments for take or pay and throughput agreements, includ ing the Canadian subsidiary's take or pay ethylene contract, for terms extending from one to 20 years. In general, such commit ments were at prices not in excess of current market prices. The table below shows the fixed and determinable portion of the take or pay and throughput obligations: Fixtd and Determinable Portion ofObligations 1995 1996 1997 1998 1999 2000 ihrojgh expiration of contracts Total J200 168 155 142 73 197 S935 In addition to the take or pay and throughput obligations, the Company had other outstanding commitments at December 31, 1994, including ship charters, purchase commitments for materials and property, and other purchases used in the normal course of business. Total purchase obligations under the agreements were $244. In general, such commitments were at prices not in excess of current market ptices. NOTES TO FINANCIAL STATEMENTS In millions, except for ihtrt omountt It Supplementary Information Accrued and Other Current Liabilities at December 31 1994 Accrued vacation* Employees' retirement plans Interest payable Accrued payroll Accrued miscellaneous taxes Insurance companies' reserves Sundry Total % 200 163 124 316 146 168 742 i 1,859 ST0929419 1993 i 1% 135 126 154 142 155 813 51.721 Sundry Income - Net Royalty income Cain (Ion) on securities Gain on sale of assets Dividend income Other-net Total Other Supplementary Information Cash payments tor interest Cash payments for taxes on income Provision fot doubtful receivables 1994 * 25 (34) 73 36 3 5103 1993 S 26 (55) 57 93 (74) 3 47 1994 S576 257 II 1993 5611 454 18 1992 S 21 24 22 14 5 J 86 1992 5690 439 9 S Industry Segments and Geographic Areas The Company conducts ics worldwide operations through separate geographic area organizations which represent major markets or combinations of related markets. Aggregation of products is generally made on the basis of process technology, end-use markets and channels of distribution. Chemicals and Performance Products contains a wide range of products that arc used primarily as raw materials in the manufac ture ofcustomer products, or which aid in the processing of customer products and services. Plastic Products consists of a broad range of thermoplastics, thermosets and plastic fabricated products used in a wide variery of applications in markets which include packaging, automotive, electronics, and construction among many others. Hydrocarbons and Energy encompasses procurement of fuels and petroleum-based raw materials as well as the production of olefins, aromatics, sryrene and cogenerated power and steam for use in the Company's manufacturing operations. Income from the construction of power plants by Destec Energy, Inc. is also recorded in this segment. Consumer Specialties includes agricultural chemicals, phar maceuticals, and food care, home care, and personal care products. The Unallocated segment encompasses the Company's busi nesses that are not reported elsewhere, including the consolidated insurance and finance companies, and Ventures businesses such as Dow Environmental and advanced electronics materials. This segment also includes activities and overhead cost variances not allocated to other segments. Transfers between areas and industry segments are generally valued at cost except for movements between Consumer Specialties and che other industry segments. These movements are generally valued at market-based prices. 1M1 DOW CHEMICAL COMPANY ANO SUtSIDiAWiES In millions, exceptfor there amounts % Industry Segments and Geographic Areas (continued) Industry Segment Results Chemicals & Performance Products 1994 Sales to uruffiliated customers Intersegment transfer* Operating income (lots)1 Identifiable assets Depredation Capital expenditures $4,596 797 592 4,051 402 281 Plastic Products Hydrocarbons & Energy *7,476 88 1,131 5,7*2 456 219 *2.043 2345 74 3.455 259 408 1993 Sales to unaffiJiated customers Intersegment transfers Special charge Operating income1 Identifiable assets Depreciation Capital expenditures $4,268 746 - 350 4,267 400 342 $6,459 108 380 5,053 447 297 S 1,797 2,237 43 3.210 298 436 1992 Sales to unaffiliated customers Intersegment transfers Special charge Operating income (loss)1 JdenrifiibJe assets Depreciation Capital expenditures $4,471 683 115 269 4,280 439 479 $6,715 108 184 94 5.380 424 409 S 1.734 2,316 113 (183) 3.040 279 415 ST0929420 Consumer Specialties Unallocated Corporate and Eliminations Consolidated *5454 1 762 7,582 204 275 S 106 8 (214) 1.015 - *(3,239) 4,660 $20,015 - 2345 26,545 1321 1,183 $5,457 - 180 592 7.282 178 322 $ 79 6 - 75 1,127 20 ' *(3.097) 4.566 $18,060 180 1,440 25,505 1.343 1.397 55.977 - 11 1.116 7.258 183 292 S 74 4 10 !6) 947 17 - $(3,111) 4.455 $18,971 433 1.290 25.360 1.342 1.595 Geographic Area Results 1994 Sales to uruffiliated customers Transfers between areas Operating income1 Identifiable asscu Gross plant properties Capital expenditures 1993 Sales to unaffiiiated customers Transfers between areas Special charge Operaring income (lots)1 Identifiable assets Gross plant properties Capital expenditures 1992 Sales to uruffiliated customers Transfers between areas Special charge Operating income (loss)1 Identifiable assets Cross plant properties Capital expenditures 1 The reconciliation between 'Operating Income*and 'Income before Provisionfor Taxes on Income and Minority Interetnmconsists of'Other Income (Expense)* items and can be found in the Consolidated Statements ofIncome on Page 25. United States $ 9,942 1.575 1,293 14,800 12,554 758 $ 9.285 1.047 no 1.036 14,903 12.004 893 $ 9.538 1,219 167 1,159 14.551 11.581 912 Europe Rett of World Eliminations Consolidated $5,320 466 273 6,402 7,103 266 *4,753 341 779 5343 3,553 159 *(2382) $20,015 2345 26,545 23.210 1,183 $4,836 325 44 <i) 5.818 6.235 301 $3,939 311 26 405 4.784 3.369 203 1(1.683) $18,060 - 180 1.440 25.505 21,608 1.397 $5,595 432 152 (90) 6.464 6.568 464 *3.838 396 114 221 4.345 3.295 219 5(2.047) $18,971 - 433 1.290 25,360 21.444 1,695 THf OQW CKCMKAt COMPANY AMO $ U I $ I )' A < t $ QUARTERLY STATISTICS tn millions, exceptfor shore amount: 1994 Net sales Operating income Income before taxes on income and minority interests (Notes C and Q) Net income available for common stockholders Earnings per common share Cash dividends paid per common share Market price range ofcommon stock: High Low (Unaudited) 1st 54,541 527 414 171 0.62 0.65 66.50 56.50 2nd 54,934 602 570 250 0.91 0.65 70.13 58.75 1993 Net sales Special charge (Note B) Operating income Income before taxes on income and minority interests (Notes C and Q) Net income (loss) available for common stockholders Earnings (loss) per common share Cash dividends paid per common share Market price range ofcommon stock: High Low See Notts to Financial Statements. 1st S4.363 - 388 751 400 1.47 0.65 59.38 49.63 2nd $4,822 180 388 364 148 0.54 0.65 58.63 49.00 ST0929421 3rd 55,046 579 575 288 1.04 0.65 79.25 64.88 4th 55,494 637 493 222 0.80 0.65 78.13 60.75 Year 520,015 2345 2,052 931 3.37 2.60 79.25 56.50 3rd $4,370 - 346 300 137 0.50 0.65 62.00 55.25 4th $4,505 - 318 110 (48) (0.18) 0.65 60.63 53.50 Year $18,060 180 1,440 1,525 637 2.33 2.60 62.00 49.00 PRODUCT SEGMENT SALES ANALYSIS In millions Chemical* and Performance Product* Pla*t!c Product* Hydrocarbon* and Energy Contumer Specialties Unallocated Nat Sale* (VfuUmd) Sale* of Principal Product* and Services Chemicals and Metals Performance Products Total Chemicals and Performance Products Thermoplastics Thermoscts Fabricated Products Total Plastic Products Hydrocarbons and Energy Agricultural Products Pharmaceuticals Consumer Products Total Consumer Specialties Miscellaneous ST0929422 1994 1993 1992 $ 2,762 1,774 4,536 3,887 2,679 910 7,476 2,043 1,735 3,274 845 5,854 106 $20,015 $ 2,625 1.643 4,268 3,203 2,414 842 6,459 1,797 1,604 3,007 846 5,457 79 $18,060 1 2,807 1,664 4,471 3,332 2,485 898 6,715 1,734 1,580 3,478 919 5,977 74 $18,971 ELEVEN-YEAR REVIEW OF MARKET PRICE PER SHARE OF COMMON STOCK1 1 Adjustedfar stock split in 1969. In dollars High dose on December 31 Low SI00 90 80 70 60 50 40 30 20 10 0 1984 1983 1986 1987 1988 1989 1990 1991 1992 1993 1994 $ P<5 gl r BW I j ):7 ri 'i1 u I r ,;v- " 823.00 18.33 17.17 5 27.92 27.33 18.00 141.17 39.00 26.59 573 08 60.00 39.17 $62.67 58.50 51.17 $72.25 71.38 55.50 $75.75 47 50 37.00 158.00 53.75 44.13 $62.88 57.25 51.25 $62.00 56.75 49.00 579 25 67 25 56.50 THE DOW CHEMICAL COMPANY AND S U S I DIAIII f S ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA ST0929423 In militant, except at noted Summary of Operation! Year-end financial Position Financial Ratios Ganeral (Unaudited) ____________________________________________________________________________1994 Net sales Cost of sales Insurance and finance company operations, pretax (income) expense Research and development expenses Promotion and advertising expenses Selling and administrative expenses Amortization of intangibles Special charge $ 20,015 1 3,219 (40) 1,261 658 2,403 169 - Operating income Investment and sundry income Interest expense - net 2,345 113 (406) Income before provision for taxes on income and minority interests Provision (credit) for taxes on income Minority interests' share in income 2,052 779 335 Income before cumulative effect of accounting change Cumulative effect of accounting change Preferred stock dividends 938 7 Net income (loss) available for common stockholders 931 Per share of common stock (dollars)1: Income before cumulative effect of accounting change Cash dividends declared Cash dividends paid Average common shares outstanding (thousands)1 Convertible preferred shares outstanding(thousands) 3.37 2.60 2.60 276,094 1,549 Total assets Working capital Plant properties-gross Plant properties-net Long-term obligations and redeemable preferredstock Total debt Net stockholders' equity $ 26,545 2,075 23,210 8,726 5,325 6,578 8,212 Research and development expenses as percent of net sales Income before provision for taxes and minority interests as percent of net sales Return on average stockholders' equity Book value per share of common stock (dollars)1 Debt as percent of total capitalization excluding temporary equity 6.3% 10.3% 11.4% $ 29.63 38.0% Capital expenditures Depreciation Wages and salaries paid Cost if employee benefits Number of employees at year-end (thousands) Number of stockholders of record at year-end (thousands) 5 1,183 1,321 3,239 832 53.7 98.05 * 1Adjustedfor 3 for 2 teock tplit in 19891Before cumulative effect ofaccounting change *Stockholdert ofrecord at reported by the transfer agent. The Company eitirnatn that there are an additional 151,200 stockholders whore tharet are held in nominee namet. or in dividend reinvettment accountt without underlying registered tharet. ST0929424 1,440 518 (433) 1.525 606 275 644 - 7 637 1.290 168 (586) 872 274 322 276 (765) 7 (496) 1,681 488 (481) 1,688 510 236 942 7 935 2,818 278 (533) 2,563 978 201 1,384 6 1,378 4.010 259 (334) 3,935 1,436 12 2,487 ~ 1 2,486 2,398 2,398 2,265 141 (279) 2,127 882 5 1,240 1.312 179 (269) 1,222 489 1 732 81 263 (306) 38 (23) 3 58 701 310 (343) 668 107 1 560 - 1,240 ------ -- -- - ______L_ _ -----7-3-2- 58 -- 560 2.33 2.60 2.60 273,620 1,567 0.99 2.60 2.60 271,647 1,586 3.46 2.60 2.60 270,477 1.592 5.10 2.60 2.60 269,899 1,602 $ 25,505 2,001 21,608 8,580 5,918 6,944 8,034 $ 25.360 1,802 21,444 8,801 6,201 7.469 8,064 $ 24,727 1,584 20,663 8,775 6,083 7,652 9,441 $ 23,953 2,265 19,149 8,249 5.209 6,642 8,728 7.0% 6.8% 6.2% 5.7% 8.4% 4.6% 9.0% 13.0% 7.9% 3.1%]1 10.3% 16.5% $ 29.36 $ 29.69 $ 34.90 $ 32.33 39.9% 42.5% 42.3% 41.3% J 1.397 1,343 3,332 887 55.4 102.5 $ 1.595 1.342 3,263 938 61.4 105.9 $ 1,908 1,306 3,101 711 62.2 108.4 $ 2,119 1,170 3.104 690 62.1 109.4 9.20 2.37 2.18 270,243 1,602 8.51 1.73 1.63 281,891 4.31 1.43 1.40 287,504 $ 22,008 909 16,700 7,080 3,855 6,141 7,957 i 16,073 2,218 14,698 5,938 3,338 3,770 7,255 S 14,230 2,307 13,502 5,551 3,779 3,958 5,769 5.0% 4.6%, 5.0% 22.4% 23.1%, 15.9% 32.7% 36.8%, 22.7% S 29.55 $ 26.35 S 20.31 41.8% 34.0/ > 40.5% $ 1,756 $ 1,264 990 933 2,482 2,314 554 518 62.1 55.5 105.4 105.8 S 995 814 2,045 474 53.1 99.0 2.55 1.27 1.23 287,088 0.20 1.20 1.20 285,579 1.93 1.20 1.20 290,693 S 12,553 1,749 12,715 5,347 3,404 3,683 5,178 S 14,405 1,281 11,875 5,127 3,198 3.661 4,806 S 13,194 1,193 11,256 5,173 2,670 3.154 5.040 5.4% 5.2% 4.7% 11.0% 0.4% 6.3% 14.7% 1.2% 11.1% S 18.05 S 16.85 S 17.67 41.4% 43.1% 38.4% $ 890 744 1,800 464 51.3 106.3 $ 806 977 1,663 387 53.2 122.6 $ 781 908 1,548 382 49.8 133.7 TH! DOW IHIMIOl COMI1NT * 0 -O' BOARD OF DIRECTORS ST0929425 (As ofMarch }. 1995) Jacqueline K. Barton, 42 Professor of Chemistry. California Institute of Technology Director since 1995 Andrew J. Butler, 60 Senior Consultant Director since 1984 David T. BuxaelH. S3 Vice President and Corporate Director of Environment, Health 8c Safety, Public Affairs and Information Systems ~ Director since 1993 Fred P. Corson, S3 Vice President and Corporate Director of Research 6c Development Director finer 1994 Willie D. Davis, 60 President and Chief Executive Officer, All Pro Broadcasting, Inc Director since 1983 Michael L Dow, 60 Chairman, Michael L Dow, Associates Director since 1988 Joseph L Downey. 58 Senior Consultant; Chairman. DowBrands Inc. and DowEianco Director since 1989 Enrique C. Falla. 5$ Executive Vice President and Chief Financial Officer Director since 1985 farbara H. Franklin, $4 Former U.S. Secretary of Commerce Direcsor since 1993 Previously Directorfrom 1980 to 1992 Frtd W. Lyons, Jr. 59 Chairman and Chief Executive Officer. Marion Mcrreil Dow Inc. Director since 1991 William J. Nealy, 63 Senior Consultant Director since 1988 Frank P. Popoff, 59 Chairman of rhe Board and Chief Executive Officer Director since 1982 Harold T. Shapiro, 59 President, Princeton University Director since 1985 Enriqua J. Sosa, 54 Senior Vice President; President. Dow North America Director since 1990 William S. Stavropoulos. 55 President and ChiefOperating Officer Director since 1990 Paul G. Stern, 56 Special Partner. Fommann Uttle 8c Co. Director since 1992 Committees ofthe Board ofDirectors Audit Committee B. H. Franklin. Chairman H. T. Shapiro P. G. Stem Committee on Directors W. D. Davis, Chairman F. ?. Popoff H. T. Shapiro W. S. Stavropoulos R G. Stern Compensation Committee H. T. Shapiro. Chairman W. D. Divii B. H. Franklin P G. Stern Environment. Health and Safety Committee W. J. S'eely, Chairman J. K. Barton A J. Butler D. T. Buzzelli F. P Corson M. L Dow E. J. Sosa P. D. Brink, ex-officio G. S. Dickson, ex-officio J B. Martin, ex-officio J. Scriven. ex-officio Executive Committee F. P Popoff, Chairman E. C. Falla E. J. Sosa W S. Stavropoulos CORPORATE ORGANIZATION (As ofMarch 1.1995) Officers and Assistant Officers Chairman of the Board end Chief Executive Officer Frank R Popoff President and Chief Operating Officer William S. Stavropoulos Executive Vice President and Chief Financial Officer Enrique C Falla Senior Vke President Enrique J. Sosa Vice President and Corporate Director of Environment. Health 6 Safety, Public Affairs and Information Systems David T. Buztelli Group Vice President Anthony J. Carbone Vice President end Corporate Director of Research t Development Fred P. Corson Vke President end Controller Roger L. Keweler Group Vice President Michael D. Parker Financial Vice President end Treasurer J. Pedro Reinhard TKf DOW CHCMtCAl C OMMNY AMD S U SID * A * 11 5 Finance Committee E. C. Falla. Chairman A. J. Butler J. L Downey E W. Lyons. Jr . J Sosa W. S. Stavropoulos C J. Hahn, ex-officio R. L. Kesseler. ex-officio ] C Lillich. ex-officio J. P Reinhard, ex-officio J. Scriven, ex-officio Investment Policy Committee M. L. Dow, Chairman A. J. Butler F. P. Corson J. L. Downey E. C. Falla P. G. Stern W. J. Burroughs, ex-officio N.L. Camp, ex-officio J. P Reinhard, ex-officio Public Interest Committee D. T. Buizelli. Chairman J. 1C Barton E P Corson W. D. Davis M. L Dow J. L. Downey B. H. Franldin EW. Lyons, Jr. W.J. Netly H. T. Shapiro W. S. Stavropoulos J. W. Tysse, ex-officio B. Woodhouse, ex-officio Vice President and General Counsel John Scriven Vice President and Oirector of Manufacturing and Engineering Larry F. Wright Secretary Donna ]. Roberts Assistant Controller Carol J. Ashley Assistant Controller William C. Schmidt Assistant Secretary Charles J. Hahn Assistant Secretary Tina S. Van Dam Assistant Treasurer Henry Kahn Auditor James F. Hicks STOCKHOLDER REFERENCE INFORMATION ST0929426 Stockholder Inquiries Inquiries about stock, changes in name or address and other stockrelated questions may be directed to: KeyCorp Shareholder Services, Inc.' P.O. Box 6477 Cleveland, OH, U.SA 44101-1477 Telephone: 800-542-7792 (in the U.S.) or 216-813-5745 'Formerly Society National Bank Inquiries about Dow's business performance may be directed to: Investor Relations The Dow Chemical Company 2u30 Dow Center Midland, MI. U.S.A. 48674 Telephone: 800-258-9002 (in the U.S.) or 517-636-1463 Transfer Agents KeyCorp Shareholder Services, Inc. P.O. Box 6477 Cleveland, OH, U.SA 44101-1477 Telephone: 800-542-7792 (in the U.S.) or 216-813-5745 The R-M Trust Company P.O. Box 7010 Adelaide Street Postal Station Toronto, Ontario, Canada M5C 2W9 Telephone: 800-387-0825 (in North America) or 416-813-4600 Registrars KeyCorp Shareholder Services, Inc. P.O. Box 6477 Cleveland, OH, U.S.A. 44101-1477 Annual Meeting The 1995 Annual Meeting ofStockholders will be conducted at 2 p.m. (EDT) Thursday, May 11, at the Midland Center for the Arts, Midland. MI. Stockholder Financial Reports Dow's annual report, quarterly earnings newsletter to stockholders and annual report on Form 10-K filed with the Securities and Exchange Commission will be provided without charge to those requesting them in writing or by telephone. Please contact: The Dow Chemical Company Customer Information Group P.O Box 1206 Midland, MI, U.SA 48641-1206 Telephone: 800-258-2436 (in the U.S.) or 517-832-1556 Cassatt* Tapes Available Audio cassette tapes of the 1994 Annual Report can be obtained >r the blind by writingor calling: Investor Relations The Dow Chemical Company 2030 Dow Center Midland, MI, U.SA 48674 Telephone: 800-258-9002 (in the U.S.) or 517-636-1463 Environment, Health 6 Safety Report Hu- Environment, Health & Safety Report ofThe Dow Chemical - * unpany will be mailed without charge to those requesting it in writing or by telephone. Please contact: The Dow Chemical Company Customer Information Group P.O. Box 1206 Midland, MI, U.SA 48641-1206 Telephone: 800-258-2436 (in the U.S.) or 517-832-1556 Montreal Trust Company 151 Front Street West, 8th floor Toronto, Ontario, Canada M5j 2NI Stock Exchange Listings and Trading Privileges NYSE Symbol: DOW New York, Chicago, Pacific, Amsterdam, Antwerp, Basel, Bern, Brussels, Dusseldorf, Frankfurt, Geneva, Hamburg, Lausanne, London, Paris, Tokyo, Toronto and Zurich. Dividend Reinvestment Plan and Direct Deposit of Dividends Automatic reinvestment and direct deposit of dividends are available to all Dow stockholders. Information can be obtained by writing to: Society Narional Bank do KeyCorp Shareholder Services, Inc P.O. Box 6477 Cleveland, OH, U.SA 44101-1477 The following trademarks of Tire Dow Chemical Company appear tn this report: Affinirv, Aim, Aspun Attane, Calibre, Cydotenc, D.E.H.. D E.N.. D E.R , Derakane. Dowanol. Dowex, Dowfax. Dowflakc, Dowfrost, Dowles, Dowtherm, Drytech, Engage, Ethaloam, Echoed, Insite, Invert, Isonaie, Isoplasr. Liquidow. Magnum, Methocel. Opticite, Papi, Pdadow, Peilethane. Prevail, Pnmacor, Pulse. Sabre. Saran. Saran NX'rap, Saranex. Specflex. Spectrim, Styrofoam, Scyron, Tacux. The Enhancer, Trycite. Trymer. Tyril, Tyrin, Versene, Voranate, Voranol and Zetabon Thefollowing trademarks ofDowBrandt or an international affiliate appear tn this report: Apple Pectin, Fantastik. Glass Plus, Handi-Wrap, Nudeic A, PermaSoft, Scrubbing Bubbles. Smart Scrub, Spray N Wash. Style, Vivid. Yes and Ziploc. Thefollowing trademark ofDow Coming Corporation appears tn this report Sdcherm The following trademarks ofDowElanco or its affltates appear in this report. Beam, Broadsrrike. Dursban. Gatlon, Lontrd, Lorsban, Naruralyte, N*Serve, Recruit, Rubigan, Sentricon. Sonalan. Starane, Telone, Tordon. Treflan, Trimidal and Vikane. Thefollowing trademark ofFilmTec Corporation appears in this report: FilmTec The following trademarks ofMarion Merrell Dow Inc. or to affiliates appear tn this report Carafate, Carditem, Cardiaem CD. Cardiiem Injectable. Cardiiem SR. Cepastac, Citrucel, Debroa, Gavucon. Gly-Oxide, Nicoderm, Nicorette, Novahistine. OsCal. Sabril, Seldane, Seldane-D and Targocid. Responsible Care is a registered service mark. The Dow Chemical Company Midland. Michigan 48674 ST0929427 Trademark of The Dow Chemical Company 16100458