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

FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION

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

FOR THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to QUARTER ENDED MARCH 31, 2002

Commission File Numberfile number 1-1463

UNION CARBIDE CORPORATION
A SUBSIDIARY OF THE DOW CHEMICAL COMPANY (ExactSubsidiary of The Dow Chemical Company
(Exact name of registrant as specified in its charter) New York 13-1421730 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

New York13-1421730
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization)

39 Old Ridgebury Road, Danbury, CTConnecticut 06817-0001 (Address
(Address of principal executive offices)        (Zip Code) 203-794-2000

Registrant's telephone number, including area code (Formercode:203-794-2000

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

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

        At OctoberMarch 31, 2001,2002, 1,000 shares of common stock were outstanding, all of which were held by the registrant's parent, The Dow Chemical Company. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS

        The registrant meets the conditions set forth in General Instructions H(1)(A) AND (B) FOR FORM(a) and (b) for Form 10-Q AND IS THEREFORE FILING THIS FORM WITH A REDUCED DISCLOSURE FORMAT. Total number of sequentially numbered pages inand is therefore filing this filing, including exhibits thereto: 21 form with a reduced disclosure format.




UNION CARBIDE CORPORATION (A SUBSIDIARY
A Subsidiary of The Dow Chemical Company

TABLE OF THE DOW CHEMICAL COMPANY) Table of Contents CONTENTS

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PAGE

PART I. I—FINANCIAL INFORMATION



Item 1.    Financial Statements


3

Consolidated Statements of Income


3

Consolidated Balance Sheets


4

Consolidated Statements of Cash Flows


6

Consolidated Statements of Comprehensive Income


7

Notes to the Consolidated Financial Statements


8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


14

Disclosure Regarding Forward-Looking Information


14

Results of Operations


14

Other Matters


16

Item 3.    Quantitative and Qualitative Disclosures About Market Risk 19


18

PART II. II—OTHER INFORMATION



Item 1.    Legal Proceedings 20


19

Item 6.    Exhibits and Reports on Form 8-K


19

SIGNATURE


20 SIGNATURE 21
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2



PART I. FINANCIAL INFORMATION --------------------------------------------------------------------------------

ITEM 1:1. FINANCIAL STATEMENTS: -------------------------------------------------------------------------------- UNION CARBIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended -------------------- ------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, In Millions (Unaudited) 2001 2000 2001 2000 ----------------------------------------------------- -------- -------- -------- -------- Net trade sales $ 827 $ 1,637 $ 3,529 $ 4,928 Net sales to related companies 350 - 880 - ------- ------- ------- ------- Total Net Sales $ 1,177 $ 1,637 $ 4,409 $ 4,928 Cost of sales 1,114 1,494 4,139 4,332 Research and development expenses 32 51 112 167 Selling, general and administrative expenses 31 57 138 180 Amortization of intangibles 1 4 8 11 Merger-related expenses and restructuring - - 1,262 - Insurance and finance company operations, pretax income (loss) (2) 10 (3) 15 Equity in earnings of nonconsolidated affiliates 19 27 42 121 Sundry income (expense) - net 7 (4) 31 32 ------- ------- ------- ------- Earnings (Loss) Before Interest, Income Taxes, and Minority Interests 23 64 (1,180) 406 ------- ------- ------- -------- Interest income 3 3 7 22 Interest expense and amortization of debt discount 45 35 143 117 ------- ------- ------- -------- Income (Loss) Before Income Taxes and Minority Interests (19) 32 (1,316) 311 Provision (benefit) for income taxes (8) - (476) 49 Minority interests' share in income 1 3 4 6 ------- ------- ------- -------- Net Income (Loss) $ (12) $ 29 $ (844) $ 256 ======= ======= ======= ======== Depreciation $ 91 $ 96 $ 302 $ 293 ======= ======= ======= ======== Capital Expenditures $ 16 $ 75 $ 75 $ 397 ======= ======= ======= ========
-------------------------------------------------------------------------------- (Note A)

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income

 
 Three Months Ended
 
In millions (Unaudited)

 March 31,
2002

 March 31,
2001

 
 Net trade sales $141 $1,536 
 Net sales to related companies  977   
  
 
 
Total Net Sales  1,118  1,536 
  
 
 
 Cost of sales  1,006  1,476 
 Research and development expenses  32  46 
 Selling, general and administrative expenses  14  55 
 Amortization of intangibles  2  3 
 Merger-related expenses and restructuring    1,275 
 Insurance and finance company operations, pretax income    1 
 Equity in earnings of nonconsolidated affiliates  3  12 
 Sundry expense—net  (3) (1)
  
 
 
Earnings (Loss) before Interest, Income Taxes and Minority Interests  64  (1,307)
  
 
 
 Interest income  15  2 
 Interest expense and amortization of debt discount  33  51 
  
 
 
Income (Loss) before Income Taxes and Minority Interests  46  (1,356)
  
 
 
 Provision (Credit) for income taxes  9  (486)
 Minority interests' share in income    1 
  
 
 
Net Income (Loss) Available for Common Stockholder $37 $(871)
  
 
 
Depreciation $76 $100 
  
 
 
Capital Expenditures $9 $34 
  
 
 

See Notes to the Consolidated Financial Statements.

3 UNION CARBIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, In Millions (Unaudited) 2001 2000 -------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 30 $ 63 Marketable securities -- 74 Accounts and notes receivable: Trade (net of allowance for doubtful receivables - 2001: $13; 2000: $11) 317 897 Related companies 824 -- Other 614 137 Inventories: Finished and work in process 284 557 Materials and supplies 152 193 Deferred income tax assets - current 348 142 Other current assets -- 113 ------ ------ Total current assets 2,569 2,176 ------ ------ Investments Investment in nonconsolidated affiliates 595 1,008 Other investments 298 97 Noncurrent receivables 527 154 ------ ------ Total investments 1,420 1,259 ------ ------ Property Property 8,736 9,361 Less accumulated depreciation 5,110 4,840 ------ ------ Net property 3,626 4,521 Other Assets Goodwill (net of accumulated amortization - 2001: $49; 2000: $54) 28 41 Deferred charges and other assets 371 349 ------ ------ Total other assets 399 390 ------ ------ Total assets $8,014 $8,346 ====== ======
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Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets

In millions    (Unaudited)

 March 31,
2002

 Dec. 31,
2001

Assets      
Current Assets      
 Cash and cash equivalents $32 $35
 Accounts and notes receivable:      
  Trade (net of allowance for doubtful receivables—2002: $9; 2001: $8)  103  266
  Related companies  1,233  1,324
  Other  115  197
 
Inventories:

 

 

 

 

 

 
  Finished and work in process  263  263
  Materials and supplies  79  100
 Deferred income tax assets—current  281  299
  
 
 Total current assets  2,106  2,484
  
 
Investments      
 Investments in related companies, at cost  480  480
 Investments in nonconsolidated affiliates  483  565
 Other investments  57  24
 Noncurrent receivables  351  253
 Noncurrent receivables from related companies  583  587
  
 
 Total investments  1,954  1,909
  
 
Property      
 Property  7,705  7,711
 Less accumulated depreciation  4,934  4,873
  
 
 Net property  2,771  2,838
  
 
Other Assets      
 Goodwill (Note E)  26  26
 Other intangible assets (Note E)  26  28
 Deferred income tax assets—noncurrent  354  324
 Deferred charges and other assets  286  299
  
 
 Total other assets  692  677
  
 
Total Assets $7,523 $7,908
  
 

See Notes to the Consolidated Financial Statements.

4 UNION CARBIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, In Millions (Unaudited) 2001 2000 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable: Related companies $ 1,214 $ -- Other 21 1,171 Long-term debt due within one year 2 7 Accounts payable: Trade 327 703 Related companies 537 -- Other 46 67 Income taxes payable 63 -- Deferred income tax liabilities - current 5 -- Accrued and other current liabilities 249 352 ------- -------- Total current liabilities 2,464 2,300 ------- -------- Long-Term Debt 1,744 1,748 ------- -------- Other Noncurrent Liabilities Deferred income tax liabilities - noncurrent 261 278 Pension and other postretirement benefits - noncurrent 693 492 Other noncurrent obligations 1,063 834 ------- -------- Total other noncurrent liabilities 2,017 1,604 ------- -------- Minority Interest in Subsidiaries 9 40 ------- -------- Stockholders' Equity Common stock - issued - 1,000 shares (158,994,683 shares in 2000) -- 159 Additional paid-in capital -- 217 Unearned ESOP shares (50) (50) Retained earnings 2,067 3,572 Accumulated other comprehensive loss (237) (224) Treasury stock, at cost - no shares (23,431,939 shares in 2000) -- (1,020) ------- -------- Total stockholders' equity 1,780 2,654 ------- -------- Total Liabilities and Stockholders' Equity $ 8,014 $ 8,346 ======= ========
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Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets

In millions    (Unaudited)

 March 31,
2002

 Dec. 31,
2001

 
Liabilities and Stockholder's Equity       
Current Liabilities       
 Notes payable:       
  Related companies $585 $396 
  Other  7  14 
 Long-term debt due within one year  13  15 
 Accounts payable:       
  Trade  225  360 
  Related companies  777  1,197 
  Other  55  83 
 Income taxes payable  58  44 
 Accrued and other current liabilities  232  201 
  
 
 
 Total current liabilities  1,952  2,310 
  
 
 
Long-Term Debt  1,718  1,730 
  
 
 
Other Noncurrent Liabilities       
 Pension and other postretirement benefits—noncurrent  717  709 
 Other noncurrent obligations  979  1,035 
  
 
 
 Total other noncurrent liabilities  1,696  1,744 
  
 
 
Minority Interest in Subsidiaries  7  7 
  
 
 
Stockholder's Equity       
 Common stock (1,000 shares authorized and issued)     
 Additional paid-in capital     
 Retained earnings  2,237  2,200 
 Accumulated other comprehensive loss  (87) (83)
  
 
 
 Net stockholder's equity  2,150  2,117 
  
 
 
Total Liabilities and Stockholder's Equity $7,523 $7,908 
  
 
 

See Notes to the Consolidated Financial Statements.

5 UNION CARBIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept. 30, In Millions (Unaudited) 2001 2000 ------------------------- ------ ------ OPERATING ACTIVITIES Net income (loss) $ (844) $ 256 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 299 304 Provision (credit) for deferred income taxes (225) 41 Undistributed earnings of nonconsolidated affiliates (33) (84) Minority interests' share in income 4 6 Other net gain (26) (84) Merger-related expenses and restructuring 951 -- Tax benefit-nonqualified stock options exercises 4 6 Changes in assets and liabilities that provided (used) cash: Accounts and notes receivable 277 24 Related company receivables (965) -- Inventories 220 (21) Accounts payable (443) 51 Related company payables 722 -- Other assets and liabilities (268) (114) ------- ------- Cash provided by (used in) operating activities (327) 385 ------- ------- INVESTING ACTIVITIES Capital expenditures (75) (397) Proceeds from sales of property 4 8 Investments in nonconsolidated affiliates (92) (184) Proceeds from sale of nonconsolidated affiliate 180 -- Proceeds from the sale of investments 165 143 Purchase of investments (122) (84) ------- ------- Cash provided by (used in) investing activities 60 (514) ------- ------- FINANCING ACTIVITIES Change in short-term notes payable (952) 331 Change in notes payable to related companies 1,214 -- Repayments of long-term debt (5) (114) Purchases of treasury stock (1) -- Proceeds from sales of common stock 6 25 Dividends paid to stockholders (28) (91) ------- ------- Cash provided by financing activities 234 151 ------- ------- Effect of Exchange Rate Changes on Cash and Cash Equivalents -- -- ------- ------- Summary Increase (decrease) in cash and cash equivalents (33) 22 Cash and cash equivalents, beginning-of-period 63 41 ------- ------- CASH AND CASH EQUIVALENTS, END-OF-PERIOD $ 30 $ 63 ======= =======
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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows

 
 Three Months Ended
 
In millions    (Unaudited)

 March 31,
2002

 March 31,
2001

 
Operating Activities       
 Net Income (Loss) $37 $(871)
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:       
  Depreciation and amortization  81  103 
  Credit for deferred income tax  (12) (422)
  Earnings/losses of nonconsolidated affiliates less than (in excess of) dividends received  42  (9)
  Minority interests' share in income    1 
  Net gain on sales of property  (2)  
  Other net (gain) loss  2  (24)
  Merger-related expenses and restructuring    1,176 
  Tax benefit—nonqualified stock option exercises    4 
 Changes in assets and liabilities that provided (used) cash:       
  Accounts and notes receivable  243  (56)
  Related company receivables  91   
  Inventories  21  34 
  Accounts payable  (152) (64)
  Related company payables  (420)  
  Other assets and liabilities  (92) (153)
  
 
 
 Cash used in operating activities  (161) (281)
  
 
 
Investing Activities       
 Capital expenditures  (9) (34)
 Proceeds from sales of property  2   
 Investments in nonconsolidated affiliates  (7) (2)
 Advances to nonconsolidated affiliates    (29)
 Purchases of investments  (15) (22)
 Proceeds from sales of investments  15  22 
  
 
 
 Cash used in investing activities  (14) (65)
  
 
 
Financing Activities       
 Changes in short-term notes payable  (2) (952)
 Changes in notes payable to related companies  189  1,308 
 Payments on long-term debt  (14) (5)
 Purchases of treasury stock    (1)
 Proceeds from sales of common stock    6 
 Distributions to minority interests  (1)  
 Dividends paid to stockholders    (28)
  
 
 
 Cash provided by financing activities  172  328 
  
 
 
Effect of Exchange Rate Changes on Cash    1 
  
 
 
Summary       
 Decrease in cash and cash equivalents  (3) (17)
 Cash and cash equivalents at beginning of year  35  63 
  
 
 
 Cash and cash equivalents at end of period $32 $46 
  
 
 

See Notes to the Consolidated Financial Statements.

6 UNION CARBIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended -------------------- -------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, In Millions (Unaudited) 2001 2000 2001 2000 ----------------------- ------- -------- -------- --------- Net income (loss) $ (12) $ 29 $ (844) $ 256 Other comprehensive income (loss), net of tax: Unrealized gains and losses on investments (4) (3) (7) 1 Cumulative translation adjustments 32 (23) (6) (58) ------- -------- --------- -------- Comprehensive income (loss) $ 16 $ 3 $ (857) $ 199 ======= ======= ========= =======
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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income

 
 Three Months Ended
 
In millions    (Unaudited)

 March 31,
2002

 March 31,
2001

 
Net Income (Loss) Available for Common Stockholder $37 $(871)
  
 
 
Other Comprehensive Income (Loss), Net of Tax       
 Unrealized losses on investments    (1)
 Translation adjustments  (4) (79)
  
 
 
 Total other comprehensive loss  (4) (80)
  
 
 
Comprehensive Income (Loss) $33 $(951)
  
 
 

See Notes to the Consolidated Financial Statements.

7 UNION CARBIDE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - CONSOLIDATED FINANCIAL STATEMENTS


Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

(Unaudited)

Note A—Consolidated Financial Statements

        Except as otherwise indicated by the context, the terms "Corporation" and "UCC" as used herein mean Union Carbide Corporation and its consolidated subsidiaries. The unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. Certain reclassifications of prior period amounts have

        Since February 6, 2001, the Corporation has been made to conform to the current period's presentation. These statements should be read in conjunction with the audited Notes to Financial Statements of Union Carbide Corporation and Subsidiaries (the "corporation" or "UCC") in the 2000 Annual Report on Form 10-K. CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ---------------------------------------------------- BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION - Effective with the merger of the corporation into a wholly owned subsidiary of The Dow Chemical Company ("Dow", and) as a consequence of the Corporation merging with regard to the merger, the "Dow Merger"), the corporation's business activities were fully integrated with thosea wholly owned subsidiary of Dow and are no longer operated as separate business units. Dow conducts its worldwide operations through global businesses which extend beyond the boundaries of both geography and legal entities. This results in the corporation's business activities comprising fully integrated components of Dow's global businesses rather than stand-alone operations. Because there are no separable reportable business segments for the corporation under Statement of Financial Accounting Standards ("Statement") No. 131, "Disclosures about Segments of an Enterprise and Related Information," and the information used by the chief operating decision maker regarding the corporation's operations relates to the corporation in its entirety, the corporation's results are reported as a single operating segment. Prior to the Dow Merger, the corporation was managed as two separate business segments, Specialties and Intermediates and Basic Chemicals and Polymers, as well as a nonoperating segment ("Other"effective that date (the "merger" or "Dow merger"). Prior periods have been restated to conform to the current period's presentation. RESEARCH AND DEVELOPMENT - Research and development costs are charged to expense as incurred. Depreciation expense applicable to research and development facilities and equipment is included in "Research and development expenses" in the Consolidated Statements of Income. RELATED COMPANIES - Significant transactionsTransactions with the corporation'sCorporation's parent company, Dow, or other Dow subsidiaries have been characterizedreflected as related company transactions in the consolidated financial statements. EARNINGS PER SHARE -See Note D for further discussion. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries. 8 NOTE B - ACCOUNTING CHANGES In 1998,

        The Corporation's business activities comprise components of Dow's global operations rather than stand-alone operations. Dow conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for the Corporation under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and no business information is provided to a chief operating decision maker regarding the Corporation's stand-alone operations, the Corporation's results are reported as a single operating segment.

        Certain reclassifications of prior years' amounts have been made to conform to the presentation adopted for 2002. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in a Form 10-K filed by the Corporation on March 20, 2002 for the year ended December 31, 2001.

Note B—Accounting Changes

        The Financial Accounting Standards Board ("FASB") issued StatementSFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities.Activities," Itin June 1998. SFAS No. 133 requires that an entity to recognize all derivative instrumentsderivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes inIn June 1999, the fair value of those derivatives will be reported in earnings or accumulated other comprehensive loss, depending on the uses of the derivatives and whether they qualify for hedge accounting. This Statement, as amended by StatementFASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Activities—Deferral of the Effective Date of FASB Statement No. 133,133." and StatementIn June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, -" an amendment of FASB StatementSFAS No. 133," is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The corporation133. Effective January 1, 2001, the Corporation adopted the provisions of StatementSFAS No. 133, as amended on January 1, 2001.by SFAS No. 137 and SFAS No. 138, and as interpreted by the FASB and the Derivatives Implementation Group through "Statement 133 Implementation Issues." Due to the corporation'sCorporation's limited use of financial instruments to manage its exposure to market risks, primarily related only to changes in foreign currency exchange rates, the adoption of StatementSFAS No. 133 on January 1, 2001 did not have a material effectimpact on the corporation'sCorporation's consolidated financial position or resultsstatements.

        In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of operations. In 1999,Financial Assets and Extinguishments of Liabilities." This statement, which replaces SFAS No. 125, revises the Securitiesstandards for accounting for securitizations and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which summarizes the staff's views regarding the applicationother transfers of generally accepted accounting principles to selected revenue recognition issues. The corporation adoptedfinancial assets and collateral, and requires certain disclosures, but it carries over most of the provisions of SAB 101SFAS No. 125 without reconsideration. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It was effective for recognition and

8



reclassifications of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material impact on October 1, 2000, the effect of which was not material to the corporation'sCorporation's consolidated financial position or results of operations.statements.

        In July 2001, the FASB issued StatementSFAS No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." These Statements replacewhich replaces Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations,Combinations." and APB Opinion No. 17, "Intangible Assets," respectively. Under StatementSFAS No. 141, all business combinations initiated after June 30, 2001 are accounted for using only the purchase method. StatementThe application of SFAS No. 141 did not result in the reclassification of any amounts previously recorded as goodwill or other intangible assets.

        In July 2001, the FASB issued SFAS No. 142, is"Goodwill and Other Intangible Assets," which replaces APB Opinion No. 17, "Intangible Assets," and establishes new accounting and reporting requirements for goodwill and other intangible assets, effective for fiscal years beginning after December 15, 2001. Under this Statement,statement, goodwill willand intangible assets that are deemed to have indefinite useful lives are not be amortized, but will beare subject to impairment testing. Impairment testing is required to be performed at adoption and at least annually thereafter. On an ongoing basis (absent any impairment indicators), Dow's global businesses plan to perform impairment tests during the fourth quarter of each year, in conjunction with the annual budgeting process. Effective January 1, 2002, UCC ceased all amortization of goodwill, which is its only intangible asset with an indefinite useful life, and tested recorded goodwill for impairment by comparing fair value, determined using a discounted cash flow method, with carrying value. The corporation is currently assessingresults of the impactCorporation's goodwill impairment test indicated no impairment.

        As required by SFAS No. 142, the Corporation also reassessed the useful lives and the classification of adopting these Statements.its identifiable intangible assets and determined them to be appropriate. See Note E for additional disclosures regarding the adoption of SFAS No. 142.

        In August 2001, the FASB issued StatementSFAS No. 143, "Accounting for Asset Retirement Obligations," which requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the related long-lived asset. The liability is adjusted to its present value each period and the asset is depreciated over its useful life. A gain or loss may be incurred upon settlement of the liability. StatementSFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The corporationCorporation is currently assessing the impact of adopting this Statement. 9 statement.

        In October 2001, the FASB issued StatementSFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces StatementSFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and provisions of APB Opinion No.30No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of segments of a business. The statement creates one accounting model, based on the framework established in StatementSFAS No. 121, to be applied to all long-lived assets including discontinued operations. StatementSFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The corporationCorporation determined that its current accounting policy for the impairment of long-lived assets is currently assessing the impact of adopting this Statement. NOTE C - THE DOW MERGER AND MERGER-RELATED EXPENSES AND RESTRUCTURING On February 6, 2001, the corporation mergedconsistent with a wholly owned subsidiary of Dow. As a result of the merger, each share of Union Carbide common stock outstanding immediately prior to the merger was exchanged for 1.611 shares of Dow common stock,SFAS No. 144.

Note C—Merger-related Expenses and Union Carbide became a wholly owned subsidiary of Dow. Contemporaneous with the merger, certain rights vested and stock units equivalent of Union Carbide common stock were converted into stock units equivalent of Dow common stock under various employee benefit and incentive plans, such as the ESOP Plan, the 1997 Union Carbide Long-Term Incentive Plan and the deferred compensation plan. On February 23, 2001, the corporation cancelled its unused $1 billion major bank credit agreement. In order to satisfy the European Commission's condition for approval of the merger, the corporation divested its 50-percent interest in Polimeri Europa S.r.l. ("Polimeri Europa") to EniChem S.p.A. in April 2001.Restructuring

        On March 29, 2001, Dow's management made certain decisions relative to employment levels, duplicate assets and facilities and excess capacity resulting from the Dow Merger.merger. These decisions were based on Dow management's assessment of the actions necessary to achieve synergies as thea result of the merger. The economic effects of these decisions, combined with merger-related transaction costs and certain asset impairments, resulted in a pretax special charge in the first quarter of 2001 of $1,275 million which was reduced by $13$52 million in the second quarter.subsequent quarters.

9



        The following table shows the major components of the special charge:
In millions ----------- Transaction costs $ 41 Labor-related costs 616 Write-down of assets and facilities 605 ------- Total $1,262 -------
Transactioncharge included $629 million for employee-related costs, of $41 million consisted primarily of investment banking, legal and accounting fees, all of which had been paid at March 31, 2001. 10 Employee-related costs consisted predominantly of provisions for employee severance, change of control obligations, medical and retirement benefits, and outplacement services. Dow'sThe charge was increased by $3 million during 2001 as the original estimates of amounts expected to be paid were further refined. The integration plans include a workforce reduction of approximately 4,500 people, primarily from the corporation's administrative, marketing, purchasing, research and development, and manufacturing workforce.4,200 people. The charge for severance was based upon the severance plan provisions communicated to employees. Headcount reductions began inAccording to the second quarter of 2001. As planned, more than one-half ofinitial integration plans, the reductions were completed by the end of September; approximately 80 percent will be completed by the end of the first 12 months following the merger. The corporation expects thatCorporation expected to expend approximately 66 percent of the employee-related costs will be expended in cash within the nextfirst two years following the merger, though the timing of severance payments is dependent upon employee elections. Expenditures with respect to employee-related costs associated with pension and postretirement benefit plans will occur over a much more extended period. The Corporation is in the process of determining these costs and the period that is not currently determinable.of time over which they will be expended. In the first quarter of 2002, severance of $57 million was paid to approximately 450 former employees, bringing the program-to-date amount to $384 million paid to approximately 3,350 former employees.

        The special charge included $41 million for transaction costs, which consisted primarily of investment banking, legal and accounting fees. All of these costs had been paid at March 31, 2001.

        The special charge included $605 million for the write-down of duplicate assets and facilities directly related to the Dow merger, the loss on divestitures required to obtain regulatory approval for the Dow merger, asset impairments and lease abandonment reserves. Duplicate assets consist principally of capitalized software costs, information technology equipment and research and development facilities and equipment, all of which were written off during the first quarter. The fair values of the impaired assets, which include production facilities and transportation equipment, were determined based on discounted cash flows and an appraisal, respectively. At September 30, 2001, $101 million of the reserve remained for the abandonment of leased facilities. These components of the special charge will require limited future cash outlays, and will result in a decrease in annual depreciation of approximately $65$62 million. AsIn November 2001, the decision to close a research and development facility in Bound Brook, New Jersey was reversed, in light of September 30,difficult economic conditions; the facility will now remain open until at least 2005. Consequently, $55 million of the special charge was reversed during the fourth quarter. At December 31, 2001, severance$77 million of approximately $282the reserve remained for the abandonment of leased facilities and demolition costs; at March 31, 2002, $73 million had been paid to approximately 2,400 former employees.of the reserve remained.

        The following table summarizes the activity in the special charge reservereserve:

In millions

 Labor-related
Costs

 Transaction
Costs

 Write-down of
Duplicate Assets
and Facilities

 Total
 
2001:             
Special charge $629 $41 $605 $1,275 
Adjustments to reserve  3    (55) (52)
Charges against reserve $(327) (41) (473) (841)
  
 
 
 
 
Balance at Dec. 31, 2001 $305   $77 $382 
  
 
 
 
 
2002:             
Charges against reserve $(57)  $(4) (61)
  
 
 
 
 
Balance at March 31, 2002 $248   $73 $321 
  
 
 
 
 

Note D—Related Party Transactions

        In the second quarter of 2001, the Corporation commenced selling products to Dow to simplify the customer interface process. Products are sold to Dow in accordance with the terms of Dow's longstanding intercompany pricing policies. The application of these policies results in products being sold to Dow at market-based prices. The Corporation procures certain commodities and raw materials

10



through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in "Sundry expense—net" in the consolidated statement of income. Purchases from that Dow subsidiary during the first quarter of 2002 were approximately $236 million.

        Subsequent to the merger, the Corporation entered into a master services agreement with Dow whereby Dow provides services, including accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, and business management for UCC. This arrangement results in a quarterly charge of approximately $4 million (included in "Sundry expense—net") for management of the functions in addition to direct charges from the various service providers based upon the terms of the agreement.

        As part of Dow's cash management process, UCC is a party to revolving loans with Dow that have LIBOR-based interest rates with varying maturities. The noncurrent receivable from related companies of $583 million is primarily related to the funding of ethylene and polyethylene plants in Canada which are now owned by Dow Chemical Canada Inc. This note receivable has a LIBOR-based interest rate and matures in 2008.

Note E—Goodwill and Other Intangible Assets

        Accumulated amortization for goodwill upon adoption of SFAS No. 142 was $50 million. The following table provides pro forma results for the year by quarter:
In millions ------------- Opening Additions Charges Against Balance at Quarter Balance To Reserve Reserve Period End -------- --------- ------------ ---------------- ----------- 1Q01 $ - $1,275 $ 646 $ 629 2Q01 629 (13) 158 458 3Q01 458 - 23 435
11 NOTE D - COMMITMENTS AND CONTINGENCIES The corporation has two major agreementsthree months ended March 31, 2001, compared with actual results for the purchasethree months ended March 31, 2002, as if the non-amortization provisions of ethylene-related products and twoSFAS No. 142 had been applied:

 
 Three months ended
 
In millions

 March 31,
2002

 March 31,
2001

 
Reported net income (loss) $37.0 $(871.0)
Add back:       
 Goodwill amortization, net of tax    1.0 
 Equity method goodwill amortization, net of tax    0.5 
  
 
 
Adjusted net income (loss) $37.0 $(869.5)
  
 
 

        The following table provides information regarding the Corporation's other purchase agreements in the U.S. and Canada. The net present value of the fixed and determinable portion of obligations under these purchase commitments at September 30, 2001 totaled $162intangible assets:

 
 At March 31, 2002
 At December 31, 2001
In millions

 Gross
Carrying
Amount

 Accumulated
Amortization

 Net
 Gross
Carrying
Amount

 Accumulated
Amortization

 Net
Intangible assets with finite lives:                  
 Licenses and intellectual property $35 $(25)$10 $35 $(24)$11
 Patents  5  (3) 2  5  (2) 3
 Software  178  (164) 14  178  (164) 14
 Other  1  (1)   1  (1) 
  
 
 
 
 
 
 Total $219 $(193)$26 $219 $(191)$28
  
 
 
 
 
 

11


        Amortization expense for other intangible assets was $2 million including one contract for the purchase of ethylene from Dow representing $127three months ended March 31, 2002, and $2 million of this obligation. The corporationfor the three months ended March 31, 2001. Estimated amortization expense for 2002 and the five succeeding fiscal years is subject to loss contingencies resulting fromas follows:

In millions

 Estimated
Amortization
Expense

2002 $8.3
2003  5.3
2004  4.8
2005  0.9
2006  0.3
2007  0.2
  

Note F—Commitments and Contingent Liabilities

Environmental

        Accruals for environmental laws and regulations, which include obligations to remove or remediate the effects on the environment of the disposal or release of certain wastes and substances at various sites. The corporation has established accruals in current dollars for those hazardous waste sites wherematters are recorded when it is probable that a lossliability has been incurred and the amount of the lossliability can be reasonably estimated.estimated, based on current law and existing technologies. The reliability and precisionCorporation had accrued obligations of the loss estimates are affected by numerous factors, such as different stages of site evaluation, the allocation of responsibility among potentially responsible parties and the assertion of additional claims. The corporation adjusts its accruals as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made, and to reflect new and changing facts. At September 30, 2001, the corporation had established$145 million at March 31, 2002 for environmental remediation accruals in the amount of $157 million. These accruals have two components, estimated future expenditures for site investigation and cleanup and estimated future expenditures for closure and postclosure activities. In addition, the corporation had environmental loss contingencies of $59 million. The corporation has sole responsibilitymatters, including $37 million for the remediation of approximately 40 percentSuperfund sites. This is management's best estimate of itsthe costs for remediation and restoration with respect to environmental sitesmatters for which accruals have been established. These sites are well advancedthe Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. It is the investigation and cleanup stage. The corporation's environmental accruals at September 30, 2001 included $132 million for these sites, of which $30 million was for estimated future expenditures for site investigation and cleanup and $102 million was for estimated future expenditures for closure and postclosure activities. In addition, $44 millionopinion of the corporation's environmental loss contingencies related to these sites.Corporation's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Corporation's consolidated financial statements.

Litigation

        The three sites with the largest total potential cost to the corporation are nonoperating sites. Of the above accruals, these sites accounted for $39 million, of which $8 million was for estimated future expenditures for site investigationCorporation and cleanup and $31 million was for estimated future expenditures for closure and postclosure activities. In addition, $30 million of the above environmental loss contingencies related to these sites. The corporation does not have sole responsibility at the remainder of its environmental sites for which accruals have been established. All of these sites are in the investigation and cleanup stage. The corporation's environmental accruals at September 30, 2001 included $25 million for estimated future expenditures for site investigation and cleanup at these sites. In addition, $15 million of the corporation's environmental loss contingencies related to these sites. The largest two of these sites are also nonoperating sites. Of the above accruals, these sites accounted for $10 million for estimated future expenditures for site investigation and cleanup. In addition, $2 million of the above environmental loss contingencies related to these sites. 12 In 2000, worldwide expenses related to environmental protection for compliance with federal, state and local laws regulating solid and hazardous wastes and discharge of materials to air and water, as well as for waste site remedial activities, totaled $104 million. Expenses in 1999 and 1998 were $118 million and $91 million, respectively. The corporation severally guaranteed up to approximately $54 million at September 30, 2001 of EQUATE Petrochemical Company K.S.C.'s ("EQUATE") debt and working capital financing needs. The corporation has also severally guaranteed certain sales volume targets until EQUATE's sales capabilities are proved. In addition, the corporation has pledged its shares in EQUATE as security for EQUATE's debt. The corporation has political risk insurance coverage for its equity investment and a majority of its guarantee of EQUATE's debt. The corporation had additional contingent obligations at September 30, 2001 totaling $68 million, of which $25 million related to guarantees of debt. The corporation and its consolidated subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes. In some of these legal proceedings and claims, the cost of remedies that may be sought or damages claimed is substantial.

        Separately, the Corporation is involved in a large number of asbestos-related suits filed, for the most part, in various state courts at various times over the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both general and punitive damages, often in very large amounts. The corporationalleged claims primarily relate to products that UCC sold in the past; alleged exposure to asbestos-containing products located on UCC's premises; and UCC's responsibility for asbestos suits filed against a divested subsidiary—Amchem Products, Inc. ("Amchem").

        Typically, the Corporation is only one of many named defendants, many of which, including UCC and Amchem, were members of the Center for Claims Resolution ("CCR") which sought to resolve asbestos cases on behalf of its members. The CCR has recorded nonenvironmentalceased operating in this manner although it still administers certain settlements. The Corporation now utilizes Peterson Asbestos Claims Enterprise for claims processing and insurance invoicing.

12



        The rate at which plaintiffs file asbestos-related suits against the Corporation and Amchem has been influenced by the bankruptcy filings of several former CCR members. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future. The Corporation cannot estimate the range of liability that will result from these future cases. The Corporation will aggressively defend or reasonably resolve, as appropriate, both pending and future cases. To date, substantially all of the amounts paid by the Corporation to resolve asbestos-related suits have been covered by third-party insurance.

        For pending cases, the Corporation had asbestos-related litigation accruals of $175$233 million and related insurance recovery receivables of $146$223 million at December 31, 2001. At March 31, 2002, the Corporation had asbestos-related litigation accruals of $270 million and related insurance recovery receivables of $258 million. At September 30, 2001,In addition, at March 31, 2002, the corporationCorporation had nonenvironmentalother litigation loss contingenciesaccruals, unrelated to environmental or asbestos litigation, of $58$15 million and related insurance recovery receivables of $15 million.

        While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this note,filing, management believes that adequate provisions have been made for probable losses with respect theretoto pending claims and proceedings, and that suchthe ultimate outcome of all known and future claims, after provisions therefor,for insurance, will not have a material adverse effect on the consolidated financial position of the corporation,Corporation, but could have a material effect on consolidated results of operations in a given quarter or year. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions therefor,provided and available insurance, they will be charged to income when determinable. 13 NOTE E - EXCHANGE OF ASSETS WITH RELATED COMPANIES Effective June 30,

Purchase Commitments

        The Corporation has purchase agreements including one major agreement in 2001 the corporation contributed all of its ownership interests(two in several wholly owned entities in Europe and Latin America to wholly owned subsidiaries of Dow. In return2000) for the contributionpurchase of interests, the corporation received stockethylene-related products in the acquiring company equal to the book valueUnited States. Total purchases under these agreements were $63 million in 2001 and $171 million in 2000. The fixed and determinable portion of the net assets that the corporation contributed. The corporation's percentage ownership inobligations under these entities ranges from 10 to 15 percent. These investments have been accounted for using the cost method of accounting and have been included in "Other investments" on the balance sheet. The following chart reflects the combined book value of these entities on the effective date of transfer and the amounts includedpurchase commitments at December 31, 2001 are presented in the corporation's consolidated results for the six months ended June 30, 2001:
In millions -------------------------------------------------------------------------- BALANCE SHEET DATA Current assets $496 Non-current assets 123 ---- Total assets $619 Current liabilities $454 Non-current liabilities 5 ---- Total liabilities $459 Net assets $160 ==== INCOME STATEMENT DATA Sales $455 ==== EBIT $147 ==== Net Income $138 ====
Effective on September 30,following table:

Fixed and Determinable Portion of Take or Pay and
Throughput Obligations at December 31, 2001    (in millions)

  
2002 $17
2003  17
2004  6
2005 through expiration of contracts  
  
Total $40
  

Other

        The Corporation had additional contingent obligations relating primarily to performance agreements at December 31, 2001 the corporation contributed all of its ownership interests in several wholly owned entities in Latin America to a Brazilian subsidiary of Modeland International Holdings Inc. ("Modeland"), a wholly owned subsidiary of Dow. In return for the contribution of interests, the corporation received stock in Modeland equal to the book value of the net assets that the corporation contributed, which represents 41 percent of Modeland's stock outstanding. This investment has been accounted for using the cost method of accounting and has been included in "Other investments" on the balance sheet. The following chart reflects the combined book value of these entities on September 30, 2001 and the amounts included in the corporation's consolidated results for the nine months ended September 30, 2001: 14
In millions -------------------------------------------------------------------------------- BALANCE SHEET DATA Current assets $ 71 Non-current assets 56 ----- Total assets $127 Current liabilities $ 36 Non-current liabilities (33) ----- Total liabilities $ 3 Net assets $124 ===== INCOME STATEMENT DATA Sales $139 ===== EBIT $ 3 ===== Net Income $ 6 =====
The corporation will continue to integrate into the Dow organization over the next several months in order to realize synergies of the merger. NOTE F - LOAN RECEIVABLE During the third quarter of 2001, the corporation, Petroliam Nasional Berhad (Petronas) and Polifin International Investments (PTY) Ltd. entered into agreements with the OPTIMAL Group (consisting of OPTIMAL Chemicals (Malaysia) Sdn Bhd, OPTIMAL Olefins (Malaysia) Sdn Bhd and OPTIMAL Glycols (Malaysia) Sdn Bhn), to provide loans and drawing facilities to the OPTIMAL Group with the terms expiring between September 2007 and September 2009. The loans and drawing facilities bear floating rates based on the six month LIBOR, and are payable by the respective OPTIMAL Group members. At September 30, 2001, $313totaling $173 million, of previously funded amounts by the corporationwhich $19 million related to the OPTIMAL Group were converted into loans. Previously funded amounts were recorded as partguarantees of the corporation's investment in the OPTIMAL Group and presented in "Investments in nonconsolidated affiliates" on the balance sheet. Subsequent to this conversion, this amount has been recorded and presented in "Noncurrent receivables". NOTE G - SALE OF RECEIVABLES During the second quarter of 2001, the corporation entered into an agreement under which certain qualifying trade accounts receivables are sold to a third party. For those sales, Dow will provide servicing responsibilities. The third party has no recourse against the corporation for receivables that are in default. The average quarterly amount sold and the average quarterly discount on sales during the quarter ended September 30, 2001 were approximately $400 million and $1.2 million, respectively. NOTE H - LIQUIDATION OF LIFO INVENTORY During the quarter ended June 30, 2001, certain inventory quantities were reduced which resulted in a liquidation of certain LIFO inventory layers carried at lower costs that prevailed in prior years. The effect of the liquidation was to decrease cost of goods sold by $51 million and increase after-tax earnings by $33 million. 15 debt.



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

        Pursuant to General Instruction H of Form 10-Q, this section includes only management's narrative analysis of the results of operations for the three and nine month periodsmonths ended September 30, 2001,March 31, 2002, the most recent periods, andfiscal year-to-date period, compared with the three and nine month periodsmonths ended September 30, 2000,March 31, 2001, the same periodscorresponding year-to-date period in the year immediately preceding it. FORWARD-LOOKING INFORMATIONfiscal year.

        References below to "Dow" refer to The Dow Chemical Company and its subsidiaries.

Disclosure Regarding Forward-Looking Information

        The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of Union Carbide Corporation (Union Carbide(the "Corporation" or the corporation)"UCC"). This section covers the current performance and outlook of the corporation.Corporation. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the corporation'sCorporation's operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (SEC)("SEC"). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the corporation'sCorporation's expectations will be realized. The corporation hasCorporation assumes no obligation to provide revisions to any forward-looking statements should circumstances change. INTRODUCTORY NOTES TO READERS On February 6, 2001, the corporation merged with a wholly owned subsidiarychange, except as otherwise required by securities and other applicable laws.

Results of Dow. As a resultOperations

        The Corporation reported net income of the merger, each share of Union Carbide common stock outstanding immediately prior to the merger was exchanged for 1.611 shares of Dow common stock and Union Carbide became a wholly owned subsidiary of Dow. The merger received clearance from the U.S. Federal Trade Commission, the European Commission and the Canadian Competition Bureau, subject to the divestiture of certain assets and the contribution of UNIPOL (trademark symbol) polyethylene technology licensing and polyethylene conventional catalyst businesses of the corporation to its joint venture Univation Technologies, LLC. The transaction is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes and has been accounted for under the pooling-of-interests method of accounting. In order to realize synergies of the merger, the corporation entered into several agreements with Dow to combine legal entities. On June 30, 2001, the corporation contributed all of its ownership interests in several wholly owned entities in Europe and Latin America to wholly owned subsidiaries of Dow. In return$37 million for the contributionfirst quarter of interests, the corporation received stock in each acquiring company equal to the book value of the net assets that the corporation contributed. The corporation's percentage ownership in these entities ranges from 10 to 15 percent. Additionally, on September 30, 2001, the corporation contributed all of its ownership interests in several other wholly owned entities in Latin America to2002, compared with a Brazilian subsidiary of Modeland International Holdings Inc. ("Modeland"), a wholly owned subsidiary of Dow. In return for the contribution of interests, the corporation received stock in Modeland equal to the book value of the net assets that the corporation contributed, which represents 41 percent of Modeland's stock outstanding. For further details, see Note E to the corporation's consolidated financial statements included in this Quarterly Report on Form 10-Q. Further integration of the corporation with and into the Dow organization is expected to occur over the next several months. 16 RESULTS OF OPERATIONS The corporation reported net loss of $12$871 million for the third quarter of 2001, compared with net income of $29 million for the same quarter of 2000. Net losslast year. The results for the first nine monthsquarter of 2001 was $844 million, compared with net income of $256 million for the same nine months of 2000. In the first half of 2001, results of operations were impacted by a special charge of $1,262$1,275 million ($829770 million after tax) related to the Dow merger of the corporation into a subsidiary of Dow (see Note C to the corporation's consolidated financial statements included in this Quarterly Report on Form 10-Q)Consolidated Financial Statements). Like other companies in the chemical industry, throughout 2001 the corporation has experienced the most difficult industry conditions in years. While hydrocarbon and energy costs declined during the quarter from unusually high levels, selling prices fell more sharply, compressing margins. The tragic events that began on September 11 have further eroded consumer confidence and dampened the outlook for the global economy. This year's macroeconomic and industry conditions have resulted in a significant negative impact on the corporation. Total net sales for the third quarter of 2001 decreased 28 percent to $1,177 million from $1,637 million in the same quarter of 2000. Net trade sales for the third quarter of 2001 declined 49 percent to $827 million from $1,637 million in the third quarter of 2000.

        Total net sales for the first nine monthsquarter of 2001, compared with2002 decreased 27 percent to $1,118 million from $1,536 million in the same periodfirst quarter last year. Significant price declines occurred in polyethylene, polypropylene and ethylene oxide/ethylene glycol which more than offset increased volumes for these products. The decline in net sales this year is also partially attributable to the absence of 2000, declined 11 percentsales from $4,928 million to $4,409 million.former subsidiaries in Europe, Latin America and Canada in the first quarter of 2002. Net trade sales for the first nine months of 2001quarter declined 2891 percent compared with last year as trade sales have been replaced by sales to $3,529 million from $4,928 millionDow in order to simplify the customer interface process. Sales to Dow in the same nine months of 2000. In the secondfirst quarter of 2001,2002 were $971 million.

        Cost of sales declined $470 million (32 percent) in the corporation commenced selling product to its parent company, Dow. The effectfirst quarter of the related company sales accounted for a portion of the decline in trade sales for both the quarterly and year-to-date periods. Further declines in net trade sales represented a significant decline in average selling prices coupled with smaller decline in volume. Declines in average selling prices occurred in almost all products for both the three and nine month periods ended September 30, 2001, as2002 compared with the same periods in 2000, although greater declines occurred in the third quarter of 2001. Eroding average selling prices reflect the market's responselast year, primarily due to declines in raw materialslower feedstock and energy costs and, coupledas a result, gross margin improved to 9.5 percent from 3.9 percent last year.

        Earnings before interest, taxes, and minority interests ("EBIT") was $64 million in the first quarter of 2002, compared with declines due to competitive market pressures. Volume declines were most significant in oxide derivatives, core chemicals, polyethylene and ethylene oxide/glycol. While mosta loss of these declines related to market demand, especially in ethylene oxide/glycol, polyethylene, and organic intermediates, solvents and monomers ("OISM"), other declines reflected the corporation's decision to forego lower margin sales. This was apparent by the shutdown of the corporation's Prentiss, Alberta, Canada plant$1,307 million last year. The results for the first halfquarter of 2001. Although the plant restarted in mid-July, operating rates for ethylene glycol on the U.S. Gulf Coast were reduced. 17 Cost of sales declined $380 million (25 percent) and $193 million (4 percent) for the three and nine month periods ended September 30, 2001, respectively, as compared with the same periods in 2000. The cost of oil and natural gas-related raw materials and energy continued to drop from the high levels experienced in 2000 and the beginning of 2001. However, these declines did not occur as quickly as declines in average selling prices thereby causing a decrease in the corporation's gross margins in 2001. Additional declines in gross margins occurred as sales to Dow in 2001 were made at cost-to-produce thereby realizing no profit. Forimpacted by merger-related expenses and restructuring charges of $1,275 million (see Note C to the nine month period, competitive pressures inConsolidated Financial Statements).

        In the beginningfirst quarter of 2001, for most products, prevented the corporation from raising average selling prices enough to totally offset the increase in raw material costs that the corporation experienced throughout 20002002, research and the beginning of 2001. These declines were offset by some margin improvement, in 2001, which was obtained by producing a greater volume of polyethylene at the corporation's new Canadian plant, where raw material cost is advantaged. Research and development expenses declined $14 million, and selling, general and administrative expenses declined $19$41 million and $26 million, respectively, for the third quarter of 2001 compared with the same quarter of 2000. For the nine month period ended September 30, 2001, compared with the same period of 2000, research and development, and selling, general and administrative expenses declined $55 million and $42 million, respectively.last year. These declines are primarilywere attributable to the resultrealization of cost synergies associated with the integration of the corporation into Dow. In the first half of 2001, pretax costs of $1,262 million were recorded for merger-related expenses and restructuring. These costs, the majority of which were recorded in the first quarter, included transaction costs, employee severance, and the write-down of duplicate assets and facilities. For further details, see Note C to the corporation's consolidated financial statements included in this Quarterly Report on Form 10-Q. Insurance and finance company operations, pretax income (loss) declined from pretax income of $10 million in the third quarter of 2000 to a pretax loss of $2 million for the same quarter of 2001. Operations for the nine months ended September 30, declined from pretax income of $15 million in 2000 to a pretax loss of $3 million in 2001. Decline for the three and nine month periods represent a reduction in investment income related to poor economic conditions coupled with a decline in policy income as the corporation's insurance company novates its policies to an insurance company of Dow.merger.

14



        Equity in earnings of nonconsolidated affiliates decreased from $27$12 million in the third quarter of 2000 to $19 million in the same quarter of 2001 while earnings for the first nine months of 2001 declined from $121 million in 2000 to $42 million in 2001. These declines principally reflect the absence of earnings from Polimeri Europa, which was required to be divested as part of the merger clearance from the European Union. Additional declines in the nine month period reflected a decrease in earnings at UOP LLC ("UOP") and EQUATE which were partly offset by lower losses related to Aspell Polymeres SNC. UOP's earnings continue to be negatively impacted by the slowdown of projects in the oil and gas industry which the venture services. EQUATE's earnings reflect weaker market conditions, primarily declines in selling prices, for ethylene derivatives as compared with the same periods last year. 18 Sundry income (expense) for the quarter and nine-month period ended September 30, 2001 included a gain of $8 million from the sale of certain available-for-sale securities. The nine month period ended September 30, 2000 included an $18 million ($11 million after tax) gain on shares received and sold in connection with the demutualization of Metropolitan Life Insurance Company a provider of certain employee benefit programs for the corporation. Interest income for the third quarter of 2001 remained flat with third quarter of 2000. However, interest income for the nine months ended September 30, 2001 declined to $7 million from the $22 million reported for the same nine months of 2000. The decline in the nine-month amount is primarily the result of $15 million in interest income associated with a tax refund that was received in the first quarter of 2000.2001 to $3 million in the first quarter of 2002. The decline is primarily due to lower earnings from EQUATE Petrochemical Company and UOP LLC.

        Sundry expense-net for the first quarter of 2002 was $3 million, compared with $1 million last year. The increased expense in 2002 relates primarily to related company commissions and management services fees (see Note D to the Consolidated Financial Statements).

        Interest income for the first quarter of 2002 increased to $15 million from $2 million last year. This increase is primarily due to interest on the noncurrent receivable from related companies. Interest expense and amortization of debt discount for the three month and nine month periods ended September 30, 2001 increased $10first quarter decreased to $33 million and $26from $51 million respectively, compared with the same periods of 2000. The majority of these increases are related to a decline in capitalized interest from the prior year's comparable periods. Capitalized interest for the first nine monthsquarter of 2000 related2001. This is due to a reduction in short-term borrowings of $935 million at March 31, 2002 compared with March 31, 2001.

Asbestos-Related Matters

        The Corporation and its subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes. In some of these legal proceedings and claims, the cost of remedies that may be sought or damages claimed is substantial.

        Separately, the Corporation is involved in a large number of asbestos-related suits filed, for the most part, in various state courts at various times over the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both general and punitive damages, often in very large amounts. The alleged claims primarily relate to products that UCC sold in the corporation's olefinspast; alleged exposure to asbestos-containing products located on UCC's premises; and polyethylene projects in Canada, bothUCC's responsibility for asbestos suits filed against a divested subsidiary—Amchem Products, Inc. ("Amchem").

        Typically, the Corporation is only one of many named defendants, many of which, including UCC and Amchem, were completedmembers of the Center for Claims Resolution ("CCR") which sought to resolve asbestos cases on behalf of its members. As members of the CCR, the Corporation's and Amchem's strategy was to settle claims as two relatively small (percentage wise) members of the CCR group. The CCR has ceased operating in this manner although it still administers certain settlements. The Corporation now utilizes Peterson Asbestos Claims Enterprise for claims processing and insurance invoicing.

        The rate at which plaintiffs file asbestos-related suits against the Corporation and Amchem has been influenced by the bankruptcy filings of several former CCR members. Cases filed against the Corporation and Amchem contain a large percentage of claims that do not allege a particular injury ("Non-Specific Claims").

        Dow now owns 100 percent of the Corporation and has been retained to provide its experience in mass tort litigation to manage the Corporation's response to asbestos-related liability. The Corporation has hired new outside counsel to serve as national trial counsel to aggressively defend or reasonably resolve, as appropriate, both pending and future cases. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the second halffuture. The Corporation cannot estimate the range of 2000. ENVIRONMENTAL Estimatesliability that will result from these future cases. As a consequence of all of the above-stated facts, the Corporation lacks any remotely comparable loss history from which to assess either the number of or the value of future expensesclaims. To date, substantially all of the amounts paid by the Corporation to resolve asbestos-related suits have been covered by third-party insurance.

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        For pending cases, the Corporation had asbestos-related litigation accruals of $233 million at December 31, 2001 and related insurance recovery receivables of $223 million. At March 31, 2002, the Corporation had asbestos-related litigation accruals of $270 million and related insurance recovery receivables of $258 million. The litigation accruals were determined by considering the number of pending claims filed against the Corporation and Amchem, taking into account claims administration records indicating the severity of the alleged injury. Because many of the pending claims are Non-Specific Claims, the Corporation has calculated several probable liability outcomes based on estimates and historic distributions of personal injury claim types and settlement and resolution amounts. The liability estimates at March 31, 2002 ranged from a low of $236 million to environmental protection for compliance with federal, state and local laws regulating solid and hazardous wastes and dischargea high of materials to air and water,$325 million. Upon review by management, it was determined that the most reasonable estimate was $270 million, which is well within the estimable range. The Corporation's asbestos litigation accrual at March 31, 2002, reflected the receipt of notification in the first quarter of additional claims filed in 2001, as well as for waste site remedial activities, have not changed materially since December 31, 2000. The reliabilitynew claims filed in the first quarter of 2002 and precisionthe use of the loss estimates are affected by numerous factors, such as different stageslatest average resolution values to calculate probable outcomes. The number of site evaluation,claims filed in the allocationfirst quarter of responsibility among potentially responsible parties2002 was substantially below the high level of claims filed in the middle of last year.

        The insurance receivables for asbestos-related liability were determined after a thorough review of applicable insurance policies and the assertion1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions, and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The insurance receivable associated with the most reasonable probable liability outcome for pending claims is $258 million and has been recorded at March 31, 2002. This resulted in a net income statement impact to the Corporation of $2 million for asbestos-related expense in the first quarter of 2002. In all of the probable outcomes for pending claims, sufficient insurance coverage exists to provide a similar percentage of coverage for the accrued liability. If the maximum probable outcome were in fact to materialize, the impact would be an additional claims. The corporation's environmental exposures are discussed in more detail in Note Dcharge of $3 million to income, which is not material to the consolidated financial statements includedstatements. In addition, insurance is available for future claims.

        The amounts recorded for the litigation accrual and related insurance receivable are based upon currently known facts. If the number of claims and the cost to resolve such claims differ from the current assumptions used by management in arriving at its estimates for the recorded amounts, this may impact management's future assessments of the ultimate outcome of asbestos-related legal proceedings.

        While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this Quarterly Reportfiling, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that the ultimate outcome of all known and future claims, after provisions for insurance, will not have a material adverse effect on Form 10-Q. ACCOUNTING CHANGESthe consolidated financial position of the Corporation, but could have a material effect on consolidated results of operations in a given quarter or year. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.

OTHER MATTERS

Accounting Changes

        See Note B to the Consolidated Financial Statements for a discussion of accounting changes.

Critical Accounting Policies

        The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments,

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assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Following are some of the Corporation's critical accounting policies impacted by judgments, assumptions and estimates.

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ITEM 3:3.    QUANTITATIVE AND QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK --------------------------------------------------------------------------------

        Omitted pursuant to General Instruction H of Form 10-Q. 19



PART II. II—OTHER INFORMATION --------------------------------------------------------------------------------

ITEM 1.    LEGAL PROCEEDINGS See

        No material developments in any legal proceedings, including asbestos-related matters, occurred during the first quarter of 2002. For a summary of the history and current status of legal proceedings, including asbestos-related matters, see Management's Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters; and Note DF to the corporation's consolidated financial statements included in this Quarterly Report on Form 10-Q. Consolidated Financial Statements.


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

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SIGNATURE --------------------------------------------------------------------------------

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Union Carbide Corporation (Registrant) Date: November 6, 2001 By: /s/ Frank H. Brod Frank H. Brod Vice President & Controller The Dow Chemical Company Authorized Representative of Union Carbide Corporation 21


Date: May 3, 2002




UNION CARBIDE CORPORATION

Registrant



By:


/s/  
FRANK H. BROD      
Frank H. Brod
Vice President and Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation


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