doc link: www.sec.gov/Archives/edgar/data/74303/000119312505044360/d10ka.htm

item 5. market for the registrant’s common equity and related stockholder matters

as of january 31, 2004, we had approximately 6,780 record holders of our common stock.

our common stock is traded on the new york stock exchange, chicago stock exchange and pacific exchange, inc.

the high and low sales prices of our common stock during each quarterly period in 2003 and 2002 are listed below. a dividend of $0.20 per common share was paid during each of the four quarters in 2003 and 2002.


*2003*	first quarter		second quarter	third quarter	fourth quarter
market price of common stock per new york stock exchange composite transactions
high	$	20.00	19.70	19.00	20.53
low		14.97	16.40	15.82	15.79

*2002*
market price of common stock per new york stock exchange composite transactions
high	$	18.80	22.25	22.60	17.06
low		13.85	16.98	15.59	13.90

this table summarizes share and exercise price information about our equity compensation plans as of december 31, 2003. the table does not include:

•

500,000 shares available under a deferral plan assumed in connection with the acquisition of monarch brass & copper corp. (monarch), under which certain former employees of that company with deferred compensation may periodically transfer the deferred amount into shares of olin common stock on the basis of the then-current fair market value, although no such transfers had been made as of december 31, 2003, or

•

46,950 shares remaining available as of december 31, 2003 under olin’s employee deferral plan, which permits employees to defer certain elements of compensation in shares of olin common stock, on the basis of the fair market value of the shares at the time of the deferral.

equity compensation plan information


	*(a)*	*(b)*	*(c)*
*plan category*	*number of securities to* *be issued upon* *exercise of outstanding* *options, warrants* *and rights (1)*	*weighted-average* *exercise price of* *outstanding options,* *warrants and rights*	*number of securities* *remaining available for* *future issuance under* *equity compensation* *plans (excluding securities* *reflected in column (a) (1)*
equity compensation plans approved by security holders (2)	4,861,564(3)	$19.30(3)	2,231,077
equity compensation plans not approved by security holders (4)	n/a(4)	n/a(4)	n/a(4)

total	4,861,564	$19.30(3,4)	2,231,077

(1)

number of shares is subject to adjustment for changes in capitalization for stock splits and stock dividends and similar events.

(2)

does not include information about equity compensation plans that have expired. no additional awards may be granted under those expired plans. as of december 31, 2003:


*plan name*	*expiration date*	number of securities issuable under outstanding awards	*exercise price*	weighted average remaining term
1988 stock option plan for key employees of olin corporation and subsidiaries	4/30/98	408,883	$20.81	1.64 years

olin 1991 long term incentive plan	4/30/01	753,060 (options)	$18.97	6.08 years
		13,700 (restricted stock)	n/a	n/a – weighted average remaining vesting period of 0.17 years
		5,850 (performance shares)	n/a	0 years remaining in performance measurement period

(3)

consists of the 1996 stock option plan for key employees of olin corporation and subsidiaries, the 2000 long term incentive plan, the 2003 long term incentive plan and the 1997 stock plan for non-employee directors. includes:

•

4,725,847 shares issuable upon exercise of options with a weighted average exercise price of $19.30, and a weighted average remaining term of 6.04 years,

•

38,208 shares issuable under restricted stock unit grants, with a weighted average remaining term of 1.59 years, and

•

402,265 shares issuable in connection with outstanding performance share awards, with a weighted average term of 1.52 years remaining in the performance measurement period.

•

the shares issuable upon exercise of options include 920,000 shares subject to performance accelerated vesting options, that vest on the earlier of december 27, 2009, or the tenth day in any 30 calendar day period upon which the average of the high and low per share sales prices of olin’s common stock as reported on the consolidated transaction system for new york stock exchanges issues is at or above $28.00.

•

includes 135,717 shares under the 1997 stock plan for non-employee directors which represent stock grants for retainers, other board and committee fees, and dividends on deferred stock under the plan.

(4)

does not include information about equity compensation plans assumed in connection with the acquisition of chase industries inc. in september 2002 by merger. no additional awards may be granted under those assumed plans. as of december 31, 2003, options for a total of 570,242 shares, with a weighted average exercise price of $16.98 per share, and a weighted average remaining term of 3.02 years, were outstanding under the various plans assumed in connection with that acquisition.

does not include a total of 627,296 shares issuable upon the exercise of outstanding options under the arch chemicals, inc. 1999 long term incentive plan, with a weighted average exercise price of $25.00, and a weighted average remaining term of 2.96 years. no additional options or other awards may be issued under that plan.

item 6. selected financial data

eleven-year summary


($ and shares in millions, except per share data)	*2003*			*2002*			*2001*			*2000*			*1999*			*1998*			*1997*			*1996*			*1995*			*1994*			*1993*
operations
sales	$	1,586		$	1,301		$	1,271		$	1,549		$	1,395		$	1,504		$	1,572		$	1,817		$	1,886		$	1,686		$	1,507
cost of goods sold		1,406			1,181			1,122			1,277			1,215			1,239			1,276			1,455			1,541			1,425			1,447
selling and administration		130			115			116			127			122			123			132			155			153			139			135
research and development		5			5			5			5			7			10			8			20			17			18			21
gain (loss) on sales and restructuring of businesses and spin-off costs		(31	)		—			(39	)		—			—			(63	)		—			179			—			—			(26	)
earnings (loss) of non-consolidated affiliates		8			(7	)		(8	)		2			(11	)		—			1			2			2			(1	)		(1	)
interest expense		20			26			17			16			16			17			24			27			33			27			29
interest and other income (expense)		3			6			23			5			3			7			14			11			(7	)		1			1

income (loss) from continuing operations before taxes, discontinued operations and cumulative effect of accounting change		5			(27	)		(13	)		131			27			59			147			352			137			77			(151	)
income tax provision (benefit)		4			4			(4	)		50			10			21			50			125			47			26			(60	)

income (loss) from continuing operations before discontinued operations and cumulative effect of accounting change		1			(31	)		(9	)		81			17			38			97			227			90			51			(91	)
discontinued operations		—			—			—			—			4			40			56			53			50			40			(1	)
cumulative effect of accounting change, net		(25	)		—			—			—			—			—			—			—			—			—			—

net income (loss)		(24	)		(31	)		(9	)		81			21			78			153			280			140			91			(92	)

financial position
cash, cash equivalents and short-term investments		190			136			202			82			46			75			185			605			2			2			1
working capital⁽¹⁾		180			245			79			171			206			150			88			(220	)		22			86			(16	)
property, plant and equipment, net		501			552			477			483			468			475			517			400			580			540			534
total assets		1,445			1,424			1,219			1,123			1,063			1,589			1,707			2,118			1,963			1,749			1,685
capitalization:
short-term debt		27			2			102			1			1			1			8			137			122			29			113
long-term debt		301			328			329			228			229			230			262			271			406			418			449
shareholders’ equity		176			231			271			329			309			790			879			946			841			749			596

total capitalization		504			561			702			558			539			1,021			1,149			1,354			1,369			1,196			1,158

per share data
net income (loss)
basic:
continuing operations⁽²⁾		0.02			(0.63	)		(0.22	)		1.80			0.36			0.79			1.91			4.30			1.71			0.87			(2.82	)
discontinued operations		—			—			—			—			0.09			0.85			1.11			1.04			1.04			0.96			(0.03	)
accounting change, net		(0.44	)		—			—			—			—			—			—			—			—			—			—

net income (loss)		(0.42	)		(0.63	)		(0.22	)		1.80			0.45			1.64			3.02			5.34			2.75			1.83			(2.85	)

diluted:
continuing operations⁽²⁾		0.02			(0.63	)		(0.22	)		1.80			0.36			0.79			1.90			4.26			1.70			0.87			(2.82	)
discontinued operations		—			—			—			—			0.09			0.84			1.10			1.01			0.97			0.96			(0.03	)
accounting change, net		(0.44	)		—			—			—			—			—			—			—			—			—			—

net income (loss)		(0.42	)		(0.63	)		(0.22	)		1.80			0.45			1.63			3.00			5.27			2.67			1.83			(2.85	)

cash dividends
common (historical)		0.80			0.80			0.80			0.80			0.90			1.20			1.20			1.20			1.20			1.10			1.10
common (continuing operations)		0.80			0.80			0.80			0.80			0.80			0.80			0.80			0.80			0.80			0.73			0.73
esop preferred (annual rate)		—			—			—			—			—			—			—			5.97			5.97			5.97			5.97
series a preferred (annual rate)		—			—			—			—			—			—			—			—			3.64			3.64			3.64
shareholders’ equity⁽³⁾		2.99			4.01			6.24			7.48			6.87			17.25			17.98			18.13			17.03			15.43			13.62
market price of common stock:
high		20.53			22.60			22.75			23.19			19.88			49.31			51.38			48.00			38.63			30.13			25.25
low		14.97			13.85			12.05			14.19			9.50			23.88			35.38			34.88			24.25			23.00			20.00
year end		20.06			15.55			16.14			22.13			19.81			28.31			46.88			37.63			37.13			25.75			24.75
other
capital expenditures		55			41			65			95			73			78			76			74			116			80			80
depreciation		81			87			85			79			78			76			76			84			77			78			74
common dividends paid		47			39			35			36			41			58			61			60			57			44			42
purchases of common stock		—			3			14			20			11			112			163			—			—			—			—
current ratio		2.2			2.5			1.8			1.9			2.0			1.8			1.8			1.6			1.0			1.2			1.0
total debt to total capitalization⁽⁴⁾		65.0	%		58.8	%		61.4	%		41.0	%		42.7	%		22.6	%		23.5	%		30.1	%		37.9	%		36.5	%		46.8	%
effective tax rate		76.5	%		n/a			30.8	%		38.2	%		37.0	%		35.6	%		34.0	%		35.5	%		34.3	%		33.2	%		40.0	%
average common shares outstanding		58.3			49.4			43.6			44.9			45.4			47.9			50.5			50.0			47.6			41.0			38.2
shareholders		6,800			7,200			7,500			8,000			8,600			9,200			10,600			11,300			12,000			12,100			13,000
employees⁽⁵⁾		5,700			6,200			5,900			6,700			6,700			6,400			6,600			6,200			7,200			7,500			7,100

in december 1996, we sold our isocyanates business for $565 in cash. 1996 and prior include the operating results of the isocyanates business.

(1)

working capital excludes cash and cash equivalents and short-term investments.

(2)

includes gain of $2.20 on sale of the isocyanates business in 1996.

(3)

in 1994 and 1993, calculation is based on common shares and series a conversion preferred stock outstanding.

(4)

excluding reduction to equity for the employee stock ownership plan from 1993 through 1996.

(5)

employee data exclude employees who work at government-owned/contractor-operated facilities.

item 7.

management’s discussion and analysis of financial condition and results of operations

business background

our manufacturing operations are concentrated in three segments: chlor alkali products, metals and winchester. all three are capital intensive manufacturing businesses with growth rates closely tied to the general economy. each segment has a commodity element to it, and therefore, our ability to influence pricing is quite limited on the portion of the segment’s business that is strictly commodity. our chlor alkali products business is a commodity business where all supplier products are similar and price is the major supplier selection criterion. we have little or no ability to influence prices in this large, global commodity market. cyclical price swings, driven by changes in supply/demand, can be abrupt and significant and, given capacity in our chlor alkali products business, can lead to very significant changes in our overall profitability. while a majority of metals sales are of a commodity nature, this business has a significant volume of specialty engineered products targeted for specific end-uses. in these applications, technical capability and performance differentiate the product and play a significant role in product selection and thus price is not the only selection criterion. winchester also has a commodity element to its business, but a majority of winchester ammunition is sold as a branded consumer product where there are opportunities to differentiate certain offerings through innovative new product development and enhanced product performance. while competitive pricing versus other branded ammunition products is important, it is not the only factor in product selection.

recent developments and highlights

2003 and 2004 years

in the first quarter of 2003, we made a decision to close our manufacturing plant in indianapolis, indiana. the indianapolis facility ceased operations on february 14, 2003. the plant manufactured copper and copper alloy sheet and strip products and employed approximately 200 people. production at the indianapolis strip mill has been consolidated within our east alton, illinois facility. while the indianapolis strip mill had been an important part of the metals segment since its acquisition in 1988, reduced domestic consumption of strip products combined with capacity additions at east alton have lessened the need to maintain the indianapolis production base. as a result of this closure and certain other actions, we recorded in the first quarter of 2003 a pretax restructuring charge of $29 million. in addition, we recorded in the fourth quarter of 2003, a pretax restructuring charge of $2 million primarily for the write down of certain non-u.s. assets, netted with a reduction of a previously established reserve related to our indianapolis restructuring.

the major portion of the first and fourth quarter charges was a non-cash charge ($25 million) related to the loss on disposal or write-off of equipment and facilities and goodwill. the balance of the restructuring charges related to severance and job-related benefit costs. at the indianapolis facility, approximately 190 employees were terminated, while nine employees were transferred to the east alton facility. in addition to the closing of the indianapolis facility, the metals segment had determined that further cost reductions were necessary due to continuing depressed economic conditions. approximately 55 employees were terminated to reduce headcount through a combination of a reduction-in-force program in metals and the relocation of the segment’s new haven, connecticut metals research laboratory activities to two existing manufacturing locations. we continue to estimate that the annual pretax savings from the indianapolis shutdown will more than offset the one-time cash costs and that the savings will be higher in 2004 when the full-year effect of this shutdown will be realized.

in the first quarter of 2003, we recorded an after-tax charge of $25 million in connection with the adoption of statement of financial accounting standards (sfas) no. 143, “accounting for asset retirement obligations.” we adopted this standard on january 1, 2003 and the charge is for estimated closure costs related to our former operating facilities, certain hazardous waste units at our operating plant sites, and our indianapolis facility which was shut down in the first quarter of 2003, as described above. the after-tax charge was recorded as the cumulative effect of an accounting change.

in the first quarter of 2003, we were accepted to participate in the internal revenue service’s (irs) settlement initiative pertaining to tax issues relating to our benefits liability management company. assuming a settlement is

reached pursuant to the initiative, we expect to eventually pay approximately $13 million (which had been recorded as a liability prior to 2002), representing the final settlement, net of tax benefits on the operating results of our benefits liability management company.

in addition, we reached a settlement with the irs relative to our company-owned life insurance (coli) program. the settlement with the irs contemplates a tax payment of approximately $20 million in the first half of 2004 with the remainder of approximately $23 million to be paid in future years. these payments had been recorded as a liability prior to 2002.

under sfas no. 87, we recorded a $220 million after-tax charge ($360 million pretax) to shareholders’ equity as of december 31, 2002, reflecting an accumulated benefit obligation in excess of the year-end market value of assets of our pension plan. in 2003, the decline in interest rates more than offset a significant rebound in the value of the plan’s assets, which necessitated the recording of an additional after-tax charge of $20 million ($32 million pretax). this is a non-cash charge and does not affect our ability to borrow under our revolving credit agreement. on february 6, 2004, we made a voluntary contribution of $125 million to the pension plan with the proceeds from the issuance of common stock (described below). we expect that the 2004 voluntary contribution will have a beneficial effect on the 2004 pension expense of approximately $10 million pretax ($6 million after tax). therefore, it is expected that the non-cash pension pretax expense in 2004 will be approximately $10 million higher than 2003 ($2.5 million per quarter) versus $20 million higher had we not made the $125 million voluntary contribution and that pension expense will continue to increase by about $10 million per year over the next few years. the voluntary contribution will improve the funded status of the pension plan. based on revised assumptions and estimates taking into account the 2004 voluntary contribution, we now believe that only minimal contributions will be required until 2008.

in january 2004, we announced that our board of directors approved plans to move our corporate headquarters to the east alton, illinois area. the decision to relocate was driven by the organizational, strategic and economic advantages to locating our corporate headquarters in the east alton area. the relocation of corporate headquarters will be accompanied by a downsized corporate structure more appropriate for us in today’s competitive business environment. we expect the headquarters relocation to be completed by the end of 2004. currently, 82 people are employed on the corporate staff, including 66 in norwalk. when completed, the efficiencies of being substantially co-located with the brass and winchester businesses will result in corporate personnel being reduced by more than forty percent, with total projected savings of approximately $6 million per year. as a result of the relocation, we expect to incur one-time costs of approximately $12 million which will be disclosed as expensed primarily throughout 2004. we expect to provide job transition benefits and outplacement services to all affected employees. the transition is expected to begin in the second quarter of 2004.

2002 year

on september 27, 2002, we completed our acquisition of chase with the issuance of approximately 9.8 million shares of our common stock for 100% of the outstanding stock of chase. our 2002 metals segment’s operating results include the sales and profits from chase for the fourth quarter of 2002.

in march 2002, we issued and sold 3,302,914 shares of common stock at a public offering price of $17.50. the net proceeds from the sale were approximately $56 million.

in june 2002, we repaid the $100 million 8% notes from the proceeds from the sale of $200 million 9.125% notes in december 2001. in march 2002, we refinanced our variable rate tax-exempt debt issues, totaling $35 million.

in november 2002, we announced that our metals segment had entered into an agreement with luoyang copper to jointly construct and operate a metals service center in guangzhou, guangdong province, china. the joint venture

named olin luotang metals (gz) ltd., co., will process and distribute both our and luoyang’s copper alloy products to the growing chinese marketplace. the joint venture will allow us to supply specialty alloys targeted at the electronics, automotive and telecommunications industries, at competitive prices. this joint venture is expected to be operational in the first quarter of 2004.

2001 year

in june 2001, we acquired the stock of monarch for approximately $48 million. monarch was a privately held, specialty copper alloy manufacturer headquartered in waterbury, ct. it produces and distributes an array of high performance copper alloys and other materials used for applications in electronics, telecommunications, automotive products and building products.

in the third quarter of 2001, we recorded a pretax charge for restructuring and unusual items of $29 million primarily for costs associated with a salaried workforce reduction through an early retirement incentive program. cost of goods sold and other income included $2 million and $1 million, respectively, of unusual items. cost of goods sold included the write-off of inventory associated with cancelled customer orders. other income included the write-off of an investment in an e-commerce company because the company declared bankruptcy and was dissolved and therefore had no future value. the third-quarter restructuring charge of $26 million related to the 190 employees retiring in connection with the retirement program and represented primarily pension and postretirement benefit curtailment losses and severance. as of december 31, 2002, all employees had retired.

in the fourth quarter of 2001, we recorded a restructuring charge of $13 million pretax primarily for costs associated with idling our indianapolis brass mill, consolidating distribution operations of monarch with the a.j. oster metals service center business, and reducing staffing levels in chlor alkali products. a significant portion of the charge relating to the idling of the indianapolis facility represented pension and postretirement curtailment losses and severance for 200 employees. another portion of the charge related to 38 chlor alkali employees who accepted our offer of a voluntary special separation program whereby employees accept a voluntary lay off and receive full separation benefits and also receive their accrued pension benefits at the same time. the balance of the restructuring charge relates to costs associated with the consolidation of certain monarch facilities in order to optimize distribution operations.

in 2001, we were notified that we would receive shares of prudential insurance company as a result of its decision to demutualize from a mutual company to a stock company. we recorded a gain of $11 million in other income in 2001. we received the shares and immediately sold them in january 2002.

consolidated results of operations


	*2003*			*2002*			*2001*
	*($ in millions, except per share data)*
sales	$	1,586		$	1,301		$	1,271
gross margin		180			120			149
selling and administration		130			115			116
restructuring charge		31			—			39
interest expense, net		19			23			16
other income		2			3			22
income (loss) before taxes and cumulative effect of accounting change		5			(27	)		(13	)
income (loss) before cumulative effect of accounting change…		1			(31	)		(9	)
cumulative effect of accounting change, net		(25	)		—			—
net loss		(24	)		(31	)		(9	)
diluted net loss per common share:
income (loss) before cumulative effect of accounting change	$	0.02		$	(0.63	)	$	(0.22	)
accounting change, net	$	(0.44	)	$	—		$	—
net loss	$	(0.42	)	$	(0.63	)	$	(0.22	)

2003 compared to 2002

sales increased 22% primarily due to the inclusion of the sales of chase (13%), an increase in selling prices (6%), higher metal sales (2%) and higher volumes (1%). the price increases were primarily related to higher ecu prices in the chlor alkali products segment because of the turnaround in the chlor alkali market.

gross margin percentage increased from 9% in 2002 to 11% in 2003 primarily due to higher ecu selling prices for chlor alkali products.

selling and administration expenses as a percentage of sales were 8% in 2003 and 9% in 2002. selling and administration expenses in 2003 were $15 million higher than in 2002 primarily due to higher pension costs ($5 million), the inclusion of chase’s selling and administration expenses ($4 million), and other administration expenses such as consulting expenses ($2 million) and various legal expenses ($2 million).

the earnings of non-consolidated affiliates were $8 million for 2003, up $15 million from 2002, primarily due to higher ecu pricing at the sunbelt joint venture (2003—$7 million income; 2002—$8 million loss).

interest expense, net of interest income decreased from 2002 due to lower average debt levels in 2003 ($3 million) and lower interest rates on our debt portfolio ($2 million), offset in part by lower 2003 interest income resulting from lower interest income rates ($1 million). in june 2002, we repaid the $100 million 8% notes.

in 2003, we recorded a tax provision of $4 million on a pretax income of $5 million. the effective tax rate is higher than the 35 percent u.s. federal statutory tax rate primarily due to our inability to utilize state and foreign net operating losses in certain jurisdictions and income in other foreign jurisdictions being taxed at higher rates. in addition, the 2003 restructuring charge included the write-off of goodwill, which is not deductible for tax purposes. the tax benefits recorded on the losses in 2002 were less than the statutory rate because we recorded a tax provision of $10 million in connection with the surrender of life insurance policies purchased by us under the coli program and were accruing interest on taxes which may become payable in the future.

2002 compared to 2001

sales increased 2% primarily due to sales associated with our acquisition of both chase and monarch (6%) and increased volumes (2%), offset in part by lower selling prices (5%) and metal sales (1%). chase was acquired in late september 2002, while monarch was acquired in early june 2001. the increase in sales volumes was across all segments, in particular strip shipments to the ammunition, automotive and electronics segments. the price decreases were primarily related to lower ecu netbacks in the chlor alkali products segment.

gross margin percentage decreased from 11% in 2001 to 9% in 2002 primarily due to lower ecu prices.

selling and administration as a percentage of sales were 9% in 2002 and 2001. selling and administration expenses were comparable to 2001. reduced salaries resulting from the early retirement incentive program and the voluntary separation program implemented in late 2001 and lower consumer promotional expenses offset lower pension income and higher legal expenses.

interest expense, net of interest income, increased from 2001 due to higher average outstanding debt ($5 million) relating primarily to the $200 million that we borrowed in december 2001 and higher interest rates on our debt ($4 million), partially offset by higher interest income ($2 million) in 2002.

other income decreased from 2001 primarily due to the gains on the demutualization of prudential insurance ($11 million) and the sale of excess real estate ($6 million) and a non-recurring fee payment ($2 million), all of which were received in 2001.

the effective tax rate decreased in 2002 to a negative 15.6% from 30.8% in 2001. the tax benefit recorded on the loss in 2002 was less than the statutory rate because we recorded a tax provision of $10 million in connection with the surrender of life insurance policies purchased by us under the coli program and were accruing interest on taxes which may be payable in the future.

segment operating results

historically, our external reporting of segment operating results included an allocation of all corporate costs to three operating segments. in the past, senior management and the board of directors have reviewed the results of the businesses both on an externally reported basis (including the allocation of all corporate costs) and on a divisional basis (excluding the allocation of corporate costs). during 2003 it became apparent that the most effective way to review the results of our businesses was without the corporate allocation. therefore, all of the monthly operations reviews focused on the division pretax results (earnings before interest and tax and excluding corporate) and the corporate/other costs.

consistent with the guidance in sfas no. 131, “disclosures and segments of an enterprise and related information,” we have determined it would be more appropriate to create a separate corporate/other segment for external reporting purposes to capture those corporate costs, which are not readily allocable back to the segments such as environmental remediation costs, pension income and expense, and other purely corporate items. this is consistent with the manner in which the results are accumulated in the consolidation process and the manner in which they are viewed by senior management and the board of directors. we believe that by isolating these corporate costs in a separate segment we will provide more transparent and understandable disclosure about the operating results of our segments and that is consistent with how we assess the performance of our businesses.

we define segment operating income as earnings (loss) before interest expense, interest income, other income, restructuring charge and unusual items and income taxes and include the operating results of non-consolidated affiliates. segment operating results exclude in 2003 the restructuring charge ($31 million, pretax) and in 2001 the restructuring charge and unusual items ($42 million, pretax).

management monitors segment operating results and earnings per share excluding unusual items such as restructuring charges, unusual charges/credits and accounting changes. management believes that these items are unique and are not part of the ongoing business results. management believes that providing this information to investors will better enable them to understand our historical and future earnings trends by excluding these items.


*($ in millions)*	*2003*			*2002*			*2001*
sales:
chlor alkali products	$	400		$	321		$	384
metals		883			697			618
winchester		303			283			269

total sales	$	1,586		$	1,301		$	1,271

operating income (loss) before restructuring charges and unusual items:
chlor alkali products	$	63		$	(24	)	$	21
metals		11			19			8
winchester		22			16			7
corporate/other:
pension⁽¹⁾		18			26			34
environmental		(20	)		(15	)		(14	)
other corporate and unallocated costs		(41	)		(29	)		(34	)

total operating income (loss) before restructuring charges and unusual items		53			(7	)		22
interest expense		20			26			17
interest income		1			3			1
other income		2			3			22
restructuring charges		(31	)		—			(39	)
unusual items (recorded in cost of goods sold)		—			—			(2	)

income (loss) before taxes and cumulative effect of accounting change	$	5		$	(27	)	$	(13	)

(1)

an analysis of pension income (expense) is summarized in the table below. the service cost and the amortization of prior service costs are allocated to the operating segments based on their respective estimated census data. other components of pension costs include items such as the expected return on plan assets, interest cost and recognized actuarial gains and losses.


	*2003*			*2002*			*2001*
service cost and prior service cost	$	(23	)	$	(23	)	$	(20	)
other components of pension costs		18			26			34

subtotal pension income (expense)		(5	)		3			14
curtailment charge—erip		—			—			(17	)

total pension income (expense)	$	(5	)	$	3		$	(3	)

chlor alkali products

2003 compared to 2002

sales increased 25% from 2002 due primarily to higher ecu prices. the change in net sales reflects the pricing improvements since the netback low point in the second quarter of 2002. these sales results reflect a tremendous turnaround year over year as the chlor alkali industry pricing rebounded from the depressed levels of a year ago. the year started out with aggressive price increases as the economy started to gain momentum. the pricing improvement continued until late in the third quarter when industry-wide caustic inventory and production exceeded demand. excess caustic inventory and imports of off shore material forced u. s. producers to reduce pricing. chlorine pricing remained steady during the year due to strong demand, primarily in the vinyls segment. our ecu netbacks, excluding our sunbelt joint venture, were approximately $325 in 2003, compared with approximately $235 in 2002, reflecting the impact of improved pricing. this pricing improvement was due to improving economic conditions and industry capacity rationalization. our operating rates for the full year 2003 were approximately 86% compared to 87% in 2002.

our operating results were higher in 2003 compared to 2002 primarily due to higher selling prices ($78 million) and improved operating results from the sunbelt joint venture ($15 million) because of higher selling prices. these two factors, along with the segment’s cost reduction programs, more than offset higher manufacturing costs which resulted from increases in steam cost (natural gas price), increases in electricity cost and normal escalation. the operating results from the sunbelt joint venture included interest expense of $7 million in 2003 and 2002, on the sunbelt notes. also, in the second quarter of 2003, the sunbelt joint venture completed a debottlenecking project. the impact of this project, in terms of capacity, was 40,000 ecu’s on an annualized basis or 20,000 ecu increase for each partner.

2002 compared to 2001

sales decreased 16% from 2001 primarily due to lower selling prices (18%), but offset in part by higher volumes (2%). average ecu netbacks in 2002 were approximately $235, compared to $315 in 2001. the chlor alkali industry suffered through a difficult first half of 2002 and some high cost manufacturers decided to shut down capacity. during the third quarter of 2002, demand started to pick up and the industry was able to pass through several price increases. improved demand and less overall capacity continued to support price increases through the rest of the year. our operating rates improved until late in the year when seasonal slow downs and a sluggish economy forced us and other manufacturers to reduce production. our operating rates for the full year 2002 were approximately 87% compared with 84% in 2001. chlorine and caustic volumes were both higher in 2002 compared to 2001.

operating results were significantly lower in 2002 primarily due to lower prices ($69 million), offset in part by higher volumes ($8 million) and improved results from our sunbelt joint venture ($1 million) and lower costs ($15 million). losses from the sunbelt joint venture were $8 million in 2002 and $9 million in 2001. the losses from the sunbelt joint venture include interest expense of $7 million in 2002 and 2001 on the sunbelt notes. profit improvement activities, lower steam cost, overall cost management and the voluntary separation program implemented at the end of 2001 contributed to these cost reductions.

metals

2003 compared to 2002

sales for 2003 were $883 million and include sales of $222 million from chase. excluding chase, sales were $661 million. sales for 2002 (excluding fourth quarter chase sales of $52 million) were $645 million. shipment volumes (excluding chase) were down 4% from 2002, mainly due to softer demand in the automotive and coinage segments with other segments being flat to slightly weaker, except for ammunition, which was stronger. however, reported sales (excluding chase) increased 3% because of higher copper prices and a product mix containing a higher metal component.

shipments to the automotive segment decreased in 2003 by 7% as automotive production declined versus 2002 levels. coinage shipments were down 25% from last year due to reduced demand from the u.s. mint primarily related to decreased demand for the state quarter program and the continued general softness in the overall economy. shipments to the ammunition segment in 2003 increased from 2002 by 29% due to strong demand from the military.

metals had an operating profit of $11 million (which included $8 million of chase profits) in 2003 and an operating profit of $19 million (which included $2 million of fourth quarter profits at chase) in 2002. the metals segment operating results in 2003 (excluding chase) decreased $14 million and were adversely impacted by a 4% decline in shipments, reduced product margins, higher natural gas costs of $4 million, and cost escalations in wages and fringe benefit costs approximating $4 million. the shutdown of the indianapolis facility in the first quarter of 2003 increased profits over the 2002 period. although the decline did not affect our 2003 results compared to 2002 results, as we acquired chase in september 2002, chase sales and profits for 2003 were lower than 2002 as a result of softer demand and lower margins.

2002 compared to 2001

sales increased 13% mainly as a result of the two acquisitions over the past two years. sales from monarch increased sales by 4% while chase increased sales by 8% in 2002. overall strip shipment volume increased by 5% from 2001 due to increased demand in the automotive, ammunition and electronic segments, offset in part by reduced demand from coinage. however, overall sales increased only 1%. the difference was the result of a shift in the mix of sales to lower metal value alloys, lower average metal selling prices and reduced conversion prices charged to customers. the decrease in the average metal selling price was mainly due to a 1.5% decrease in the average comex price for copper in 2002 from 2001.

shipments to the automotive and ammunition segments each increased by 21% compared to last year. shipments to the automotive segment increased in 2002 as we increased our penetration into this end-use category and an increase in automotive production in 2002. shipments to the ammunition segment increased as a result of increased domestic military demand. shipments to the electronics segment increased by 18% in 2002 compared with 2001 but were still down about 50% from the 1997 to 2000 average demand. coinage shipments were down 39% from last year due to reduced demand from the u.s. mint primarily related to decreased demand for the state quarter program, the lack of public acceptance of the $1 sacagawea coin and the continued general softness in the overall economy. in summary, although strip shipments were up in the automotive and electronics segments, this was offset by lower coinage shipments and by sales to the electronics segment that continued to be well below their historical norms.

metals operating income was $11 million higher in 2002 compared with 2001. operating income benefited by the 5% increase over the previous year in strip volumes, as mentioned above; however, this benefit was partially offset by lower unit margins. operating income was also favorably impacted by the inclusion of $2 million of chase profits and various cost reduction initiatives including the early retirement program and the consolidation of monarch’s distribution operations with a.j. oster which, on a combined basis, amounted to about $12 million in cost savings year over year. partially offsetting the cost reduction initiatives and higher volumes in 2002 were increased employee-related benefit costs of about $7 million. also, the 2001 results included a $4 million last-in, first-out (lifo) inventory liquidation benefit offset by the negative impact of the east alton work stoppage in 2001.

winchester

2003 compared to 2002

sales for 2003 were up 7% compared to 2002, primarily due to higher volumes. the increase in sales was primarily driven by higher domestic military demand. operating income in 2003 increased to $22 million, from $16 million in 2002. this increase was primarily due to the higher sales resulting from increased domestic military demand, which more than offset higher wages and fringe benefit costs.

2002 compared to 2001

sales in 2002 were 5% higher than 2001 primarily due to higher volumes (4%) and prices (1%) in the military and domestic commercial ammunition businesses. winchester posted operating income of $16 million in 2002 compared with $7 million in 2001. the increase in sales accounted for most of the increase in operating income. the cost benefit realized in 2002 associated with the 2001 early retirement incentive program and the absence of the effect of the 2001 strike were offset in part by the absence of the 2001 non-recurring income from the settlement of a claim.

corporate/other

2003 compared to 2002

in 2003 we recorded total pension expense of $5 million and in 2002 pension income of $3 million thereby resulting in an $8 million increase in total pension costs. the service cost and prior service cost components of pension expense, which are included in the operating segments and in other corporate and unallocated costs, were essentially equal in both years. the resulting decrease in the pension credit ($18 million in 2003, $26 million in 2002) recorded in corporate/other was due to the poor market returns on the pension assets in previous years and, to a lesser extent, the decline in interest rates. after making the voluntary contribution of $125 million in february 2004, it is now expected that the total pension pretax expense in 2004 will be approximately $10 million higher than 2003 ($2.5 million per quarter) versus $20 million higher had we not made the $125 million voluntary contribution and that pension expense will continue to increase by about $10 million per year over the next few years. the voluntary contribution will improve the funded status of the pension plan. based on updated assumptions and estimates, taking into account the 2004 voluntary contribution, we now believe that only minimal contributions to the pension plan will be required until 2008. we discuss our assumptions with respect to pension estimates under “critical accounting policies and estimates.”

in 2003, charges to income for environmental investigatory and remedial activities were $20 million compared to $15 million in 2002. these charges relate primarily to remedial and investigatory activities associated with past manufacturing operations and former waste disposal sites.

other corporate and unallocated costs increased from $29 million in 2002 to $41 million in 2003. the increase relates primarily to an insurance gain of $4 million recorded in 2002, and higher expenses in 2003 related to consulting fees ($2 million), various legal expenses ($2 million), higher incentive and deferred compensation costs ($2 million), and accretion expense ($1 million) associated with our asset retirement obligations recorded in accordance with financial accounting standards no. 143, “accounting for asset retirement obligations,” which we adopted on january 1, 2003.

2002 compared to 2001

in 2002, we recorded total pension income of $3 million compared to pension expense of $3 million in 2001. the service cost and prior year service cost components of pension expense, which are included in the operating segments and in other corporate and unallocated costs increased by $3 million from 2001. the 2001 pension expenses included a $17 million curtailment loss associated with the salaried workforce reduction through an early retirement incentive program at the metals and winchester operations in east alton, il and the 2001 idling of the indianapolis brass mill. excluding the curtailment charge, pension income decreased $11 million in 2002 over 2001. the decrease in pension income was due to the decline in interest rates and the poor market returns on the pension assets over the past several years.

other corporate and unallocated expenses decreased from $34 million in 2001 to $29 million in 2002. the primary contributor to this decrease was the insurance gain of $4 million in 2002.

2004 outlook

for the first quarter of 2004, the metals segment is expecting improved results over the first quarter of 2003 because of higher volumes as a result of the improving economy. winchester’s profits are expected to be about equal to the first quarter last year. chlor alkali profits are expected to be somewhat below the first quarter of 2003 with projected increased volumes partially offsetting lower pricing.

compared to the fourth quarter of 2003, the metals segment is expecting improved results in the first quarter of 2004 because of higher volumes as a result of the improving economy and normal seasonal factors. winchester’s profits are expected to be improved over the fourth quarter of 2003 primarily because of seasonal factors. chlor alkali profits are expected to approximate those of the fourth quarter as increased volumes are expected to offset lower pricing.

in the early part of the first quarter of 2004 in the metals segment, business continues to improve in our strip operations. the level of booking activity in our strip operations and comments we hear from metals customers are more encouraging than three months ago. in our rod business, we anticipate an increase in the level of booking activity as the year unfolds. however, visibility is still limited. clad coinage demand from the u.s. mint is up 40% from first quarter 2003 to 2004, indicative of a stronger economy. the new lewis & clark commemorative nickel program for 2004-2006 is also increasing demand. brass strip used to manufacture ammunition continues at 2003’s second half levels and is up 30% over 2003’s first quarter. with defense budgets still strong, we expect these levels to continue for all of 2004. sales to the automotive electrical segment, which were strong in the fourth quarter of 2003, continue to be strong in the first quarter of 2004, which supports our high performance alloy sales.

although winchester’s profits are expected to be about equal to the first quarter last year, its profits are expected to improve over the fourth quarter of 2003 primarily due to seasonal factors. winchester was the winner of a five-year contract to provide ammunition for the department of homeland security that will commence shipments in the second quarter of 2004. also, the army has awarded winchester a one-year contract to produce 70 million rounds of 5.56 mm rifle ammunition beginning in june 2004 to supplement production at the army’s arsenal. in addition, there are several military emergency procurements that are pending that could favorably affect winchester later this year.

in chlor alkali, we are expecting our ecu prices to decrease from the fourth quarter of 2003 to the first quarter of 2004 as our contracts reflect the impact of fourth quarter market price declines. according to reports in the trade press, caustic prices declined about $20 per ton from the end of the third to the end of the fourth quarter in 2003 and there has been some additional downward pressure in january. the caustic soda market has not recovered at the same rate as the chlorine market, resulting in some excess industry caustic supply. contract chlorine prices have held relatively steady since the end of the third quarter. however, in the latter part of january 2004 a chlorine price increase of $75 per ton has been announced by several major producers effective immediately or as contracts allow. operating rates have increased in the early part of the first quarter with a corresponding reduction in chlorine inventories. the chlorine supply/demand situation is very tight due to increased demand from vinyls and other sectors.

in 2004, we expect that charges to income for environmental investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites could be in the $25 million range compared to $20 million in 2003. the 2004 estimate is based on expectations regarding the potential resolution of investigations or remedial actions at known sites. the 2004 actual amounts could differ from our estimate for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application.

for 2004 we expect that capital spending will be in the $60 million range and depreciation and amortization will be in the $75 million range.

environmental matters


	*2003*			*2002*			*2001*
	($ in millions)
cash outlays:
remedial and investigatory spending (charged to reserve)	$	25		$	25		$	26
capital spending		2			3			3
plant operations (charged to cost of goods sold)		16			16			17

total cash outlays	$	43		$	44		$	46

reserve for environmental liabilities:
beginning balance	$	98		$	100		$	110
charges to income		20			15			14
businesses acquired		—			8			2
remedial and investigatory spending		(25	)		(25	)		(26	)

ending balance	$	93		$	98		$	100

the establishment and implementation of federal, state and local standards to regulate air, water and land quality has affected and will continue to affect substantially all of our manufacturing locations. federal legislation providing for regulation of the manufacture, transportation, use and disposal of hazardous and toxic substances, and remediation of contaminated sites, has imposed additional regulatory requirements on industry, particularly the chemicals industry. in addition, implementation of environmental laws, such as the resource conservation and recovery act and the clean air act, has required and will continue to require new capital expenditures and will increase plant operating costs. we employ waste minimization and pollution prevention programs at our manufacturing sites.

we are party to various governmental and private environmental actions associated with past manufacturing facilities and former waste disposal sites. associated costs of investigatory and remedial activities are provided for in accordance with generally accepted accounting principles governing probability and the ability to reasonably estimate future costs. charges to income for investigatory and remedial efforts were material to operating results in 2003, 2002, and 2001 and may be material to net income in future years. such pretax charges to income were $20 million, $15 million and $14 million in 2003, 2002, and 2001 respectively. these charges relate primarily to remedial and investigatory activities associated with past manufacturing operations and former waste disposal sites. the 2003 increase in environmental charges to income was primarily attributable to additional liabilities relating to alleged groundwater contamination at a former plant site and the cleanup of potential contaminants in the soil at an offsite disposal area.

cash outlays for remedial and investigatory activities associated with former waste sites and past operations were not charged to income but instead were charged to reserves established for such costs identified and expensed to income in prior years. cash outlays for normal plant operations for the disposal of waste and the operation and maintenance of pollution control equipment and facilities to ensure compliance with mandated and voluntarily imposed environmental quality standards were charged to income. total environmental-related cash outlays for 2004 are estimated to be $50 million, of which $26 million is expected to be spent on investigatory and remedial efforts, $6 million on capital projects and $18 million on normal plant operations. historically, we have funded our environmental capital expenditures through cash flow from operations and expect to do so in the future.

our estimated environmental liability at the end of 2003 was attributable to 64 sites, 17 of which were usepa national priority list (npl) sites. ten sites accounted for approximately 75% of such liability and, of the remaining sites, no one site accounted for more than 2% of our environmental liability. one of these ten sites is in the investigatory stage of the remediation process. in this stage, remedial investigation and feasibility studies are being conducted by us and a record of decision (rod) or its equivalent has not been issued. at one of the ten sites, a rod or its equivalent has been issued by a responsible state agency and we are engaged in performing the remedial measures required by that rod and part of that site is subject to a remedial investigation. at four of the ten sites, part of the site is subject to a remedial investigation and another part is in the long-term operation, maintenance and

monitoring (om&m) stage. the four remaining sites are in long-term om&m. all ten sites are either associated with past manufacturing operations or former waste disposal sites.

our consolidated balance sheets included liabilities for future environmental expenditures to investigate and remediate known sites amounting to $93 million at december 31, 2003, and $98 million at december 31, 2002, of which $67 million and $70 million were classified as other noncurrent liabilities, respectively. the 2002 environmental liabilities included $8 million from the chase acquisition. those amounts did not take into account any discounting of future expenditures or any consideration of insurance recoveries or advances in technology. those liabilities are reassessed periodically to determine if environmental circumstances have changed and/or remediation efforts and our estimate of related costs have changed. as a result of these reassessments, future charges to income may be made for additional liabilities.

annual environmental-related cash outlays for site investigation and remediation, capital projects, and normal plant operations are expected to range between approximately $40 million to $50 million over the next several years, $25 million to $30 million of which is for investigatory and remedial efforts, which are expected to be charged against reserves recorded on our balance sheet. while we do not anticipate a material increase in the projected annual level of our environmental-related costs, there is always the possibility that such increases may occur in the future in view of the uncertainties associated with environmental exposures. environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties (prps) and our ability to obtain contributions from other parties and the lengthy time periods over which site remediation occurs. it is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations. at december 31, 2003, we estimate we may have additional contingent environmental liabilities of $50 million in addition to the amounts for which we have already taken a reserve.

legal matters

we and our subsidiaries are defendants in various legal actions (including proceedings based on alleged exposures to asbestos, perchlorate and vinyl chloride) incidental to our past and current business activities. we describe some of these matters in “item 3—legal proceedings.” while we believe that none of these legal actions will materially adversely impact our financial position, in light of the inherent uncertainties of the litigation concerning alleged exposures, we cannot at this time determine whether the financial impact, if any, of these matters will be material to our results of operations.

liquidity, investment activity and other financial data

cash flow data


*provided by (used for)*	*2003*			*2002*			*2001*
	($ in millions)
net operating activities	$	119		$	31		$	76
capital expenditures		(55	)		(41	)		(65	)
net investing activities		(12	)		(13	)		(111	)
net financing activities		(28	)		(72	)		143

in 2003, income exclusive of non-cash charges, proceeds from the sale of short term investments and cash equivalents on hand were used to finance our working capital requirements, capital and investment projects and dividends.

operating activities

in 2003, the increase in cash provided by operating activities was primarily attributable to higher profits from operations and a lower investment in working capital, particularly in inventories, offset in part by higher accounts receivables. our investment in inventories in 2003 was lower than 2002 primarily due to our efforts to reduce inventories in our metal businesses consistent with market demand. the investment in accounts receivable was higher

in 2003 due to higher sales in chlor alkali (higher ecu prices) and metals (higher metal prices). in 2002, the decrease in cash provided by operating activities as compared to 2001 was primarily attributable to lower operating results and a higher investment in working capital. the higher investment in working capital was attributable to the metals segment where we are now selling more on a metal-price pass through basis rather than on a toll basis and therefore have to inventory more metal.

capital expenditures

capital spending of $55 million in 2003 was $14 million higher than in 2002, as we returned to a more normalized level of spending in 2003. in 2002, we curtailed all non-essential capital spending in response to the weak operating results. capital spending in 2002 of $41 million was 37% lower than 2001. the 2002 capital spending decrease also related to completion of projects that were begun in 2000, primarily to expand production capacity in metals higher value-added product categories, in particular high performance alloys. this expansion was completed in the second half of 2001 with the majority of the spending occurring in 2000. capital spending in 2003 was approximately 68% of depreciation compared to 47% in 2002.

in 2004, we plan to manage our capital spending at a level approximating 80% of depreciation, or about $60 million, an increase of approximately 9% over the 2003 amount.

investing activities

proceeds from the sale of short-term investments of $25 million represented the equity value of the coli program which we discontinued in the first quarter of 2003. we surrendered the life insurance policies that we purchased under this program, and received these proceeds in march 2003.

on september 27, 2002, we acquired 100% of the stock of chase with the issuance of approximately 9.8 million shares of our common stock. the total consideration was approximately $178 million, which represented the fair value of olin common stock issued. chase, with 2002 full-year sales of $232 million, is a leading manufacturer and supplier of brass rod in the u.s. and canada. the purchase price exceeded the fair value of the identifiable net assets acquired by $40 million. the acquisition has been accounted for using the purchase method of accounting. our 2002 operating results include the sales and profits for the fourth quarter of 2002 from chase.

in january 2002, we received $12 million for the sale of the stock of prudential insurance company. we were awarded these shares of stock in 2001 as a result of prudential’s conversion from a mutual company to a stock company.

in our efforts to dispose of non-strategic, unproductive assets during a period of a soft economy and weak operating results, we sold the company-owned airplane. the disposition of property, plant and equipment in 2002 represents primarily the sale of the airplane at approximately book value.

the 2003 decrease in investments and advances in affiliated companies, at equity, represents increased cash distributions in excess of sunbelt’s improved operating results which more than offset our share of sunbelt’s repayment of its series o notes and related interest expense. the increase in 2002 for investments and advances in affiliated companies, at equity, represents primarily our share of sunbelt’s repayment of debt and related interest obligations. in addition, we funded a portion of sunbelt’s operating losses in 2002.

in june 2001, we acquired the stock of monarch for approximately $48 million. monarch was a privately held, specialty copper alloy manufacturer headquartered in waterbury, ct, with revenues of approximately $95 million in 2000. it produces and distributes an array of high performance copper alloys and other materials used for applications in electronics, telecommunications, automotive products and building products. as part of this acquisition, we acquired 7 u.s. patents. we financed the purchase price through our credit facilities. the purchase price exceeded the fair value of the identifiable net assets acquired by $19 million. the acquisition has been accounted for using the purchase method of accounting. the operating results of monarch, which have been included in the accompanying financial statements since the date of acquisition, were not material.

financing activities

on january 3, 2002, we entered into a three-year senior revolving credit facility of $140 million, including a sublimit for letters of credit, which will expire on january 3, 2005. at december 31, 2003, we had $107 million available under this senior revolving credit facility. we issued $33 million of letters of credit under a subfacility for the purpose of supporting certain long-term debt, self-insurance, and plant closure and post-closure obligations. under the facility, we may select various floating rate borrowing options. it includes various customary restrictive covenants, including restrictions related to the ratio of debt to earnings before interest expense, taxes, depreciation and amortization (leverage ratio) and the ratio of earnings before interest expense, taxes, depreciation and amortization to interest expense (coverage ratio).

in december 2001, we sold $200 million of 9.125% senior notes with a maturity date of december 15, 2011. we used $100 million from the proceeds of the offering to repay the $100 million 8% notes in june 2002.

in march 2002, we also refinanced $35 million of tax-exempt debt to create additional capacity under our revolving credit facility by eliminating the need for an equivalent amount of letters of credit.

in january 2003, we renegotiated our $11 million note due 2005. the maturity date was extended to 2013 and the interest rate was reduced from 7.75% to 6.5%, effective january 1, 2003.

during 2002 and 2001, we used $3 million and $14 million to repurchase 0.1 million and 0.7 million shares of our stock, respectively. under programs previously approved by our board of directors, approximately 154,000 shares remained to be repurchased as of december 31, 2003.

in march 2002, we issued and sold 3,302,914 shares of common stock at a public offering price of $17.50. net proceeds from this sale were approximately $56 million.

during 2003 and 2002, we issued 915,159 and 1,039,259 shares of common stock with a total value of $16 million and $18 million, respectively, to the contributing employee ownership plan. these shares were issued to satisfy the investment in our common stock resulting from employee contributions, our matching contributions and re-invested dividends.

the percent of total debt to total capitalization increased to 65% at december 31, 2003, from 59% at year-end 2002 and was 61% at year-end 2001. the increase from year-end 2002 was due primarily to the lower shareholders’ equity resulting from the restructuring charge and the accounting change under sfas no. 143. the decrease in 2002 from 2001 was due to the repayment of the $100 million 8% notes offset in part by the effect of the lower shareholders’ equity at december 31, 2002.

dividends per common share were $0.80 in 2003, 2002 and 2001. total dividends paid on common stock amounted to $47 million in 2003, $39 million in 2002 and $35 million in 2001.

the payment of cash dividends is subject to the discretion of our board of directors and will be determined in light of then-current conditions, including our earnings, our operations, our financial conditions, our capital requirements and other factors deemed relevant by our board of directors. in the future, our board of directors may change our dividend policy, including the frequency or amount of any dividend, in light of then-existing conditions.

liquidity and other financing arrangements

our principal sources of liquidity are from cash and cash equivalents, short-term investments, cash flow from operations and short-term borrowings under our senior revolving credit facility. we also have access to the debt and equity markets.

cash flow from operations is subject to change as a result of the cyclical nature of our operating results, which have been affected recently by economic cycles and resulting downturn in many of the industries we serve, such as automotive, electronics and the telecommunications sectors. in addition, cash flow from operations is affected by changes in ecu selling prices caused by the changes in the supply/demand balance of chlorine and caustic, resulting

in the chlor alkali business having significant leverage on our earnings. a $10 per ecu selling price change equates to a $12 million pretax profit change when we are operating at full capacity.

our current debt structure is used to fund our business operations and commitments from banks under our revolving credit facility are a source of liquidity. as of december 31, 2003, we had long-term borrowings, including the current installment, of $328 million of which $1 million was at variable rates. we have entered into interest rate swaps on approximately $140 million of our underlying debt obligations whereby we agree to pay variable rates to a counterparty who, in turn, pays us fixed rates. annual maturities of long-term debt are $27 million in 2004; $52 million in 2005; $1 million in 2006, $2 million in 2007; $8 million in 2008 and a total of $238 million thereafter.

we use operating leases for certain properties, such as railroad cars, distribution, warehousing and office space, data processing and office equipment. leases covering these properties generally contain escalation clauses (except for railroad cars) based on increased costs of the lessor, for primarily property taxes, maintenance and insurance and have renewal or purchase options. future minimum rent payments under operating leases having initial or remaining non-cancelable lease terms in excess of one year at december 31, 2003 are as follows: $22 million in 2004; $21 million in 2005; $18 million in 2006; $17 million in 2007; $13 million in 2008 and a total of $64 million thereafter. assets under capital leases are not significant.

on december 31, 1997, we entered into a long-term, sulfur dioxide supply agreement with alliance specialty chemicals, inc. (alliance), formerly known as rfc so₂, inc. alliance has the obligation to deliver annually 36,000 tons of sulfur dioxide. alliance owns the sulfur dioxide plant, which is located at our charleston, tn facility and is operated by us. the price for the sulfur dioxide is fixed over the life of the contract and, under the terms of the contract, we are obligated to make a monthly payment of approximately $0.2 million regardless of the amount of sulfur dioxide purchased. commitments related to this agreement are approximately $2 million per year for each year of 2004 through 2006 and a total of $10 million thereafter.

we utilize a credit facility and standby letters of credit. in january 2002, we entered into a senior revolving credit facility with a group of banks. this credit facility is described above under the caption, “financing activities.” as of december 31, 2003, we did not have any outstanding borrowings under this credit facility. at december 31, 2003, we had outstanding standby letters of credit of $33 million. these letters of credit were used to support certain long-term debt, self-insurance, and plant closure and post-closure obligations.

in december 2002, we registered $400 million of securities with the securities and exchange commission whereby from time to time, we may issue debt securities, preferred stock and/or common stock and associated warrants. at december 31, 2003, the entire $400 million was available for issuance.

on february 3, 2004, we issued and sold 10 million shares of our common stock at a public offering price of $18.00. net proceeds from the sale were approximately $178 million and were used to make a $125 million voluntary contribution to our pension plan. the balance of the proceeds of $53 million is available to retire maturing debt or for other corporate purposes. the amount available under the $400 million registration statement filed with the securities and exchange commission was reduced by the proceeds from this issuance of securities.

we and our partner, polyone corporation (polyone) own equally the sunbelt chlor alkali partnership (sunbelt joint venture). we market all of the caustic soda production for the venture, while 250 thousand tons of the chlorine production is required to be purchased by oxy vinyls (a joint venture between oxychem and polyone) based on a formula related to the market price of chlorine. the construction of this plant and equipment was financed by the issuance of $195 million of guaranteed senior secured notes due 2017. the sunbelt joint venture sold $97.5 million of guaranteed senior secured notes due 2017, series o, and $97.5 million of guaranteed senior secured notes due 2017, series g. we refer to these notes as the sunbelt notes. the sunbelt notes bear interest at a rate of 7.23% per annum payable semiannually in arrears on each june 22 and december 22.

we have guaranteed the series o notes, and polyone has guaranteed the series g notes, in both cases pursuant to customary guaranty agreements. our guarantee and polyone’s guarantee are several, rather than joint. therefore, we are not required to make any payments to satisfy the series g notes guaranteed by polyone. an insolvency or bankruptcy of polyone will not automatically trigger acceleration of the sunbelt notes or cause us to be required to

make payments under our guarantee, even if polyone is required to make payments under its guarantee. however, if the sunbelt joint venture does not make timely payments on the sunbelt notes, whether as a result of a failure to pay on a guarantee or otherwise, the holders of the sunbelt notes may proceed against the assets of the sunbelt joint venture for repayment. if we were to make debt service payments under our guarantee, we would have a right to recover such payments from polyone.

beginning on december 22, 2002 and each year thereafter until maturity of the sunbelt notes in 2017, our sunbelt joint venture is required to repay approximately $12 million of the notes, of which approximately $6 million is attributable to the series o notes. after the payment of $6 million on the series o notes in december 2003, our guarantee of these notes was $85 million at december 31, 2003. in the event our sunbelt joint venture cannot make any of these payments, we would be required to fund our half of such payment. in certain other circumstances, we may also be required to repay the sunbelt notes prior to their maturity. we and polyone have agreed that, if we or polyone intend to transfer our respective interests in the sunbelt joint venture and the transferring party is unable to obtain consent from holders of 80% of the aggregate principal amount of the indebtedness related to the guarantee being transferred after good faith negotiations, then we and polyone will be required to repay our respective portions of the sunbelt notes. in such event, any make whole or similar penalties or costs will be paid by the transferring party.

excluding our guarantee of the sunbelt notes described above, our long-term contractual commitments, including the on and off-balance sheet arrangements, consisted of the following:


	*payments due by year*
*long-term contractual commitments*	*total*		less than 1 year		1-3 years		3-5 years		more than 5 years
	($ in millions)
long-term debt obligations^(a)	$	301	$	—	$	53	$	10	$	238
off-balance sheet commitments:
noncancelable operating leases		162		23		42		33		64
support agreement		2		—		1		1		—
purchasing commitments:
raw materials		45		6		11		12		16
utilities		22		11		11		—		—
operating supplies		1		1		—		—		—

total	$	533	$	41	$	118	$	56	$	318

^(a) excludes current maturities of long-term debt of $27 million which are classified within current liabilities.

the long-term contractual commitments, shown above, except for our long-term debt obligations, are not recorded on our consolidated balance sheet. non-cancelable operating leases and purchasing commitments are utilized in our normal course of business for our projected needs. for losses that we believe are probable and which are estimable we have accrued for such amounts in our consolidated balance sheets. in addition to the table above, we have various commitments and contingencies including: defined benefit and postretirement health care plans (as described below), environmental matters (see “environmental matters” included in item 7—“management’s discussion and analysis of financial condition and results of operations”), tax exposures (see item 1—“additional factors that may affect future results”—tax audits), and litigation claims (see item 3—“legal proceedings”).

we have several defined benefit and defined contribution pension plans, as described in the pension and other postretirement benefit plans note in the notes to consolidated financial statements. we fund these plans based on the minimum amounts required by law plus such amounts we deem appropriate. on february 6, 2004, we made a voluntary contribution of $125 million to the pension plan. we now believe that only minimal contributions will be required until 2008.

we have postretirement health care plans that provide health and life insurance benefits to certain retired and active employees and their beneficiaries, as described in the pension and other postretirement benefit plans note in

the notes to consolidated financial statements. these plans are generally not pre-funded and expenses are paid by us as incurred. approximately $14 million was paid in 2003. estimated payments are $15 million for 2004 and $16 million for 2005. these estimates are based on a growth rate of approximately 9.5% due to the estimated impact of health care cost inflation and demographic changes.

we also have standby letters of credit with various financial institutions. at december 31, 2003, we had $107 million available under our senior revolving credit facility.

critical accounting policies and estimates

our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the united states. the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. significant estimates in our consolidated financial statements include goodwill recoverability, environmental, restructuring and other unusual items, litigation, income tax reserves including deferred tax asset valuation allowance, pension, postretirement and other benefits and allowance for doubtful accounts. we base our estimates on prior experience, facts and circumstances and other assumptions. actual results may differ from these estimates.

we believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the financial statements.

goodwill

effective january 1, 2002, we adopted the provisions of sfas no. 142, “goodwill and other intangible assets,” which requires that goodwill and intangible assets with indefinite useful lives be tested for impairment at least annually. goodwill and other intangibles are reviewed annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. the annual impairment test involves the comparison of the estimated fair value of a reporting unit to its carrying amount. the fair value is determined based on a variety of assumptions including estimated future cash flows of the reporting unit, discount rates, and comparable company trading multiples. based on our evaluation prepared in the fourth quarter of 2003, no impairment charge was recorded.

environmental

accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. these amounts, which are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessments and remediation efforts progress or additional technical or legal information becomes available.

environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties and our ability to obtain contributions from other parties and the lengthy time periods over which site remediation occurs. it is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations.

pension and postretirement plans

we account for our defined benefit pension plans and non-pension postretirement benefit plans using actuarial models required by sfas no. 87, “employers’ accounting for pensions,” and sfas no. 106, “employers’ accounting for postretirement benefits other than pensions,” respectively. these models use an attribution approach that generally spreads the financial impact of changes to the plan and actuarial assumptions over the service lives of the employees in the plan. changes in liability due to changes in actuarial assumptions such as discount rate, rate of compensation increases and mortality, as well as annual deviations between what was assumed and what was

experienced by the plan are treated as gains or losses. gains and losses are amortized over the group’s service lifetime, to the extent they fall outside of a corridor designed to dampen annual volatility. the principle underlying the required attribution approach is that employees render service over their service lives on a relatively smooth basis and, therefore, the operations statement effects of pension or non-pension postretirement benefit plans are earned in, and should follow, the same pattern.

one of the key assumptions for the net periodic pension calculation is the expected long-term rate of return on plan assets, used to determine the “market-related value of assets.” (the “market-related value of assets” recognizes differences between the plan’s actual return and expected return over a five year period). the required use of an expected long-term rate of return on the market-related value of plan assets may result in a recognized pension income that is greater or less than the actual returns of those plan assets in any given year. over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. as differences between actual and expected returns are recognized over five years, they generate gains and losses that are subject to amortization over the service life of the group, as described in the preceding paragraph.

we use long-term historical actual return information, the mix of investments that comprise plan assets, and future estimates of long-term investment returns by reference to external sources to develop the expected return on plan assets.

the discount rate assumptions used for pension and non-pension postretirement benefit plan accounting reflect the rates available on high-quality fixed-income debt instruments on december 31 of each year. the rate of compensation increase is another significant assumption used in the actuarial model for pension accounting which we determine based upon our long-term plans for such increases. for retiree medical plan accounting, we review external data and our own historical trends for health care costs to determine the health care cost trend rates.

changes in pension costs may occur in the future due to changes in these assumptions resulting from economic events. for example, holding all other assumptions constant, a one hundred basis point decrease or increase in the assumed rate of return on plan assets would have increased or decreased, respectively, the 2003 pension cost by approximately $12 million. holding all other assumptions constant, a 50 basis point decrease in the discount rate used to calculate pension costs for 2003 and the accumulated benefit obligation as of december 31, 2003 would have increased pension costs by $6 million and the accumulated benefit obligation by $81 million. a 50 basis point increase in the discount rate would have decreased pension costs by $1 million and the accumulated benefit obligation by $81 million.

new accounting standards

in june 2001, the financial accounting standards board (fasb) issued sfas no. 142, “goodwill and other intangible assets,” which became effective and was adopted by us on january 1, 2002. sfas no. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of this statement. sfas no. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with sfas no. 144, “accounting for impairment or disposal of long-lived assets.” accordingly, we ceased amortizing goodwill totaling $42 million as of january 1, 2002. we completed an initial impairment review of our goodwill balance during the second quarter of 2002 and determined an impairment charge was not required. a subsequent impairment review was completed in the fourth quarter of 2003. this review determined that an impairment charge was not required.

if sfas no. 142 had been in effect for the year ended december 31, 2001, a net loss of $9 million would have been $8 million, representing the elimination of goodwill amortization. for the year ended december 31, 2001 reported basic and diluted net loss per share of $(0.22) would have been $(0.19).

in june 2001, the fasb issued sfas no. 143, “accounting for asset retirement obligations.” sfas no. 143 requires that the fair value of a liability for an asset retirement be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. this statement is effective for fiscal years beginning after june 30, 2002.

effective january 1, 2003, we adopted sfas no. 143, “accounting for asset retirement obligations,” which addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. on january 1, 2003, we recorded an after-tax charge of $25 million ($0.44 cents per share) for estimated closure costs related to our former operating facilities ($22 million, pretax), certain hazardous waste units at operating plant sites ($15 million, pretax), and our indianapolis facility ($5 million, pretax) which was shutdown in the first quarter of 2003. the after-tax charge was recorded as the cumulative effect of an accounting change. certain other asset retirement obligations associated with production technology and building materials have not been recorded because these retirement obligations have an indeterminate life, and accordingly, the retirement obligation cannot be reasonably estimated. the ongoing annual incremental expense resulting from the adoption of sfas no. 143 amounted to $1 million for 2003. at december 31, 2003, the change in fair value of the liability for asset retirements compared to the original value of the liability recorded at the date of adoption of sfas no. 143 was immaterial.

in august 2001, the fasb issued sfas no. 144, “accounting for impairment or disposal of long-lived assets.” sfas no. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. this statement requires that one accounting model be used for long-lived assets to be disposed of by sale whether previously held and used or newly acquired. in addition, it broadened the presentation of discontinued operations to include more disposal transactions. this statement is effective for fiscal years beginning after december 15, 2001, and interim periods within those fiscal years. at the time of adoption on january 1, 2002, this statement did not have a material impact on our financial statements.

in june 2002, the fasb issued sfas no. 146, “accounting for costs associated with exit or disposal activities.” sfas no. 146 addresses the accounting and reporting for costs associated with restructuring activities. this new standard changes the timing of the recognition of restructuring charges. liabilities for restructuring costs will be required to be recognized when the liability is incurred rather than when we commit to the plan. sfas no. 146 is effective for restructuring activity initiated after december 31, 2002. we adopted the provisions of sfas no. 146 on january 1, 2003. see the description of our 2003 restructuring charge under the caption “recent developments.”

in december 2002, the fasb issued sfas no. 148, “accounting for stock-based compensation.” this statement provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. it also amends the disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. we continue to account for the cost of stock compensation in accordance with accounting principles board opinion (apbo) no. 25, “accounting for stock issued to employees.” we adopted the disclosure provisions of sfas no. 148 on january 1, 2003.

in april 2003, the fasb issued sfas no. 149, “amendment of statement 133 on derivative instruments and hedging activities.” sfas no. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under sfas no. 133, “accounting for derivative instruments and hedging activities.” this statement is effective for contracts entered into or modified after june 30, 2003 and for hedging relationships designated after june 30, 2003. this statement did not have a material impact on our financial statements.

in may 2003, the fasb issued sfas no. 150, “accounting for certain financial instruments with characteristics of both liabilities and equity.” sfas no. 150 establishes standards for how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity. it requires that an issuer classify a financial instrument that is within its scope as a liability. many of those instruments were previously classified as equity. the statement revises the definition of a liability to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. this statement is effective for financial instruments entered into or modified after may 31, 2003 and was effective for financial reporting in the third quarter of 2003. this statement did not have a material impact on our financial statements.

in december 2003, the fasb revised sfas no. 132, “employers’ disclosures about pensions and other postretirement benefits-an amendment of fasb statements no. 87, 88, and 106.” it revises employers’ disclosures

about pension plans and other postretirement benefit plans required by sfas no. 87, “employers’ accounting for pensions,” no. 88, “employers’ accounting for settlements and curtailments of defined benefit pension plans and for termination benefits,” and no. 106, “employers’ accounting for postretirement benefits other than pensions.” it retains the disclosure requirements contained in sfas no. 132, “employers’ disclosures about pensions and other postretirement benefits,” which it replaces. it requires additional disclosures to those in the original statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. the required information should be provided separately for pension plans and for other postretirement benefit plans. this statement is effective for financial statements with fiscal years ending after december 15, 2003. the interim-period disclosures required by this statement are effective for interim periods beginning after december 15, 2003. the disclosures required by this statement are included in the pension plans and retirement benefits note in the notes to consolidated financial statements.

derivative financial instruments

in 1998, the fasb issued statement no. 133 “accounting for derivative instruments and hedging activities.” it requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. the implementation date of this statement is effective for all fiscal quarters of fiscal years beginning after june 15, 2000. we adopted fasb no. 133 on january 1, 2001, and use hedge accounting treatment for substantially all of our business transactions whose risks are covered using derivative instruments. sfas no. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. the accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. for derivatives designated as a fair value hedge, the changes in the fair value of both the derivative and the hedged item are recognized in earnings. for derivatives designated as a cash flow hedge, the change in fair value of the derivative is recognized in other comprehensive income until the hedged item is recognized in earnings. ineffective portions are recognized currently in earnings. unrealized gains and losses on derivatives not qualifying for hedge accounting are recognized currently in earnings.

we account for forward contracts to buy and sell foreign currencies under sfas no. 52, “foreign currency translation” and futures contracts to reduce the impact of metal price fluctuations under sfas no. 80, “accounting for futures contracts.” we enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies (principally australian dollar and canadian dollar). all of the currency derivatives expire within one year and are for united states dollar equivalents. at december 31, 2003 and 2002 we had forward contracts to buy foreign currencies with face value of $2 million and $4 million, respectively, and no forward contracts to sell foreign currencies. the fair market value of the forward contracts to buy at december 31, 2003 and 2002 approximated the carrying value. the counterparty to the forward contracts is a major financial institution. the risk of loss to us in the event of nonperformance by a counterparty would not be significant to our financial position or results of operations. foreign currency exchange gains (losses), net of taxes, were less than $1 million in 2003 and less than $(1) million in 2002 and 2001. at december 31, 2003, we had open positions in futures contracts totaling $23 million (2002—$33 million). if the futures contracts had been settled on december 31, 2003, we would have recognized a gain of $6 million. gains (losses) on futures contracts, net of taxes, were $(1) million in 2003, $1 million in 2002, and $(6) million in 2001.

we use cash flow hedges of certain raw materials and energy costs such as copper, zinc, lead and natural gas to provide a measure of stability in managing our exposure to price fluctuations. we use interest rate swaps as a means of managing interest rates on our outstanding debt obligations. these interest rate swaps are treated as fair value hedges.

at december 31, 2003 and 2002, accumulated other comprehensive loss included a pretax gain (decline) in fair value of $8 million and $(2) million, respectively. in addition, the unfavorable ineffective portion of changes in fair value resulted in a $2 million, $1 million and $1 million charge to earnings for the years ended december 31, 2003, 2002 and 2001, respectively. offsetting the above, there were assets totaling $19 million (2002—$18 million) and liabilities of $13 million (2002—$21 million).

our foreign currency forward contracts and certain commodity derivatives did not meet the criteria of sfas no. 133 to qualify for hedge accounting. the cumulative effect of items not qualifying for hedge accounting for 2003 was not material to earnings.

item 7a.

quantitative and qualitative disclosures about market risk

we are exposed to market risk in the normal course of our business operations due to our operations in different foreign currencies, our purchases of certain commodities, and our ongoing investing and financing activities. the risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. we have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks.

certain raw materials and energy costs, namely copper, lead, zinc and natural gas used primarily in our metals and winchester segments’ products are subject to price volatility. depending on market conditions, we may enter into futures contracts and put and call option contracts in order to reduce the impact of metal price fluctuations. as of december 31, 2003, we maintained open positions on futures contracts totaling $23 million ($33 million at december 31, 2002). assuming a hypothetical 10% increase in commodity prices, which are currently hedged, we would experience a $2 million ($3 million at december 31, 2002) increase in our cost of inventory purchased, which would be offset by a corresponding increase in the value of related hedging instruments.

we are exposed to changes in interest rates primarily as a result of our investing and financing activities. investing activity is not material to our consolidated financial position, results of operations, or cash flow. our current debt structure is used to fund business operations and commitments from banks under our revolving credit facility are a source of liquidity. as of december 31, 2003, we had long-term borrowings of $328 million ($330 million at december 31, 2002) of which $1 million ($1 million at december 31, 2002) was issued at variable rates. as a result of our fixed rate financings, we entered into floating interest rate swaps in order to manage interest expense and floating interest rate exposure to optimal levels. we have entered into approximately $140 million of such swaps, whereby we agree to pay variable rates to a counterparty who, in turn, pays us fixed rates. in all cases the underlying index for the variable rates is six-month london interbank offered rate (libor). accordingly, payments are settled every six months and the term of the swap is the same as the underlying debt instrument.

in december 2001, we swapped interest payments on $50 million principal amount of our 9.125% senior notes to a floating rate (4.70% at december 31, 2003). in february and march 2002, we swapped interest payments on $30 million and $25 million principal amount, respectively, of our 9.125% senior notes to floating rates. terms of these swaps set the floating rate at the end of each six-month reset period. therefore, the interest rates for the current period will be set on june 16, 2004. we estimate that the rates will be between 4% and 5%.

in march 2002, we refinanced four variable-rate tax-exempt debt issues totalling $35 million. the purpose of the refinancings was to eliminate the need for letter of credit support that used our liquidity. in order to manage interest expense and floating interest rate exposure to optimal levels, we swapped the fixed rate debt of the newly refinanced bonds back to variable rate debt through interest rate swaps. the interest rate on the swap of $8 million will be set on april 1, 2004 and is expected to be between 0.5% and 1.0%, while at december 31, 2003 interest rates on the swaps of $21 million and $6 million were 1.44% and 1.58%, respectively.

these interest rate swaps reduced interest expense, resulting in an increase in pretax profit of $6 million in 2003 and a decrease in pretax loss of $5 million and $1 million in 2002 and 2001, respectively.

if the actual change in interest or commodities pricing is substantially different than expected, the net impact of interest rate risk or commodity risk on our cash flow may be materially different than that disclosed above.

we do not enter into any derivative financial instruments for speculative purposes.

cautionary statement about forward-looking statements:

this report includes forward-looking statements within the meaning of the private securities litigation reform act of 1995. these statements relate to analyses and other information that are based on management’s beliefs, certain assumptions made by management, forecasts of future results, and current expectations, estimates and projections about the markets and economy in which we and our various segments operate. the statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties.

we have used the words “anticipate,” “intend,” “may,” “expect,” “believe,” “should,” “plan,” “will,” “estimate,” and variations of such words and similar expressions in this report to identify such forward-looking statements. these statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. we undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

the risks, uncertainties and assumptions involved in our forward-looking statements include those discussed under the caption “additional factors that may affect future results.” you should consider all of our forward-looking statements in light of these factors. in addition, other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of our forward-looking statements.

item 8.

consolidated financial statements and supplementary data

management report on financial statements

management is responsible for the preparation and integrity of the accompanying consolidated financial statements. these financial statements have been prepared in conformity with generally accepted accounting principles and, where necessary, involve amounts based on management’s best judgments and estimates. management also prepared the other information in this annual report and is responsible for its accuracy and consistency with the financial statements.

the company’s system of internal controls is designed to provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. this system, which is reviewed regularly, consists of written policies and procedures, an organizational structure providing delegation of authority and segregation of responsibility and is monitored by an internal audit department. the company’s independent auditors also review and test the internal control system along with tests of accounting procedures and records to the extent that they consider necessary in order to issue their opinion on the financial statements. management believes that the system of internal accounting controls meets the objectives noted above.

management also recognizes its responsibility for fostering a strong ethical climate so that the company’s affairs are conducted according to the highest standards of personal and corporate conduct. these expectations are summarized in a document entitled “our code of business conduct” (the code). the code addresses, among other things, honest and ethical conduct in all business transactions; compliance with company policies and procedures and with all government laws and regulations; the avoidance of conflicts of interest; full, fair, accurate, timely and understandable disclosure in all reports and communications; and the prompt reporting of violations of the code. every employee is expected to comply with the code and annually all salaried employees, including olin senior management, certify their adherence to the code. the code is periodically reinforced through training sessions. also, the company maintains a systematic program to assess compliance with the code and has established various outlets, including a confidential telephone help-line (1-800-362-8348), for employees and other interested parties to ask questions and share concerns, anonymously, if desired.

the audit committee of the board of directors, composed solely of independent directors, meets periodically with the independent auditors, management, the company’s general counsel and the internal auditors to review the work of each and to evaluate accounting, auditing, internal controls and financial reporting matters. the audit committee has sole authority to retain, compensate, evaluate and terminate the company’s independent auditors. in addition, the independent auditors and the company’s internal audit department have independent and free access to the audit committee.

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joseph d. rupp

president and chief executive officer

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anthony w. ruggiero

executive vice president and

chief financial officer

independent auditors’ report

to the board of directors and shareholders of olin corporation:

we have audited the accompanying consolidated balance sheets of olin corporation and subsidiaries as of december 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended december 31, 2003. these consolidated financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on these consolidated financial statements based on our audits.

we conducted our audits in accordance with auditing standards generally accepted in the united states of america. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. an audit also includes assessing the accounting principles used and significant 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, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of olin corporation and subsidiaries as of december 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended december 31, 2003 in conformity with accounting principles generally accepted in the united states of america.

as discussed in note “accounting policies” to the consolidated financial statements, olin corporation in 2003 adopted the provisions of the financial accounting standards board’s statement of financial accounting standard no. 143, “accounting for asset retirement obligations.”

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stamford, connecticut

january 29, 2004, except as to note “subsequent events,” which is as of february 3, 2004

consolidated balance sheets

december 31

($ in millions, except per share data)


	2003			2002
assets
current assets:
cash and cash equivalents	$	190		$	111
short-term investments		—			25
receivables, net:
trade		174			153
other		11			15
inventories, net		242			255
income taxes receivable		2			9
other current assets		62			70

total current assets		681			638
property, plant and equipment, net		501			552
prepaid pension costs		101			106
other assets		82			46
goodwill		80			82

total assets	$	1,445		$	1,424


liabilities and shareholders’ equity

current liabilities:
current installments of long-term debt	$	27		$	2
accounts payable		129			110
income taxes payable		13			—
accrued liabilities		142			145

total current liabilities		311			257
long-term debt		301			328
accrued pension liability		469			445
other liabilities		188			163

total liabilities		1,269			1,193

commitments and contingencies
shareholders’ equity:
common stock, par value $1 per share:
authorized, 120,000,000 shares issued and outstanding 59,015,087 shares (57,622,675 in 2002)		59			57
additional paid-in capital		464			442
accumulated other comprehensive loss		(247	)		(239	)
accumulated deficit		(100	)

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