JOHNSONDIVERSEY INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10–Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-97427

JOHNSONDIVERSEY, INC.

(Exact name of registrant as specified in its charter)

Delaware

39-1877511

(State or other jurisdiction

of incorporation or organization)

(IRS Employer Identification No.)

8310 16^th Street

Sturtevant, Wisconsin 53177-0902

(Address of Principal Executive Offices, Including Zip Code)

(262) 631-4001

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

There is no public trading market for the registrant’s common stock. As of November 5, 2004, there were 24,422 outstanding shares of the registrant’s common stock, $1.00 par value.

INDEX


Section	Topic	Page

	Forward-Looking Statements	i

PART I – FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)

	Consolidated Balance Sheets as of October 1, 2004 and January 2, 2004	1

	Consolidated Statements of Income for the three and nine months ended October 1, 2004 and October 3, 2003	2

	Consolidated Statements of Cash Flows for the three and nine months ended October 1, 2004 and October 3, 2003	3

	Notes to Consolidated Financial Statements – October 1, 2004	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosure about Market Risk	35

Item 4	Controls and Procedures	35

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	39

Item 6	Exhibits and Reports on Form 8–K	39

Signatures		40

Unless otherwise indicated, references to “JohnsonDiversey,” “the Company,” “we,” “our” and “us” in this quarterly report refer to JohnsonDiversey, Inc. and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

We make statements in this Form 10–Q that are not historical facts. These “forward-looking statements” can be identified by the use of terms such as “may,” “intend,” “might,” will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “project,” “potential,” or the negative of these terms, and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following:

•

our ability to successfully complete the integration of the DiverseyLever business, including the achievement of cost and tax savings;

•

our ability to execute any of our business strategies;

•

changes in general economic and political conditions, interest rates and currency movements, including, in particular, exposure to foreign currency risks;

•

the vitality of the institutional and industrial cleaning and sanitation market, particularly those sectors adversely affected by the current economic downturn, and the printing and packaging, coatings and plastics markets;

•

restraints on pricing flexibility due to competitive conditions in the professional and polymer markets;

•

the loss or insolvency of a significant supplier or customer;

•

effectiveness in managing our manufacturing processes, including our inventory, fixed assets, and system of internal control;

•

changes in energy costs, the costs of raw materials and other operating expenses;

•

our ability and the ability of our competitors to introduce new products and technical innovations;

•

the costs and effects of complying with laws and regulations relating to the environment and to the manufacture, storage, distribution and labeling of our products;

•

the occurrence of litigation or claims;

•

changes in tax, fiscal, governmental and other regulatory policies;

•

the effect of future acquisitions or divestitures or other corporate transactions;

•

adverse or unfavorable publicity regarding us or our services;

•

the loss of, or changes in, executive management or other key personnel;

•

natural and manmade disasters, including acts of terrorism, hostilities or war that impact our markets; and

•

conditions affecting the food and lodging industry, including health-related, political and weather-related.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

JOHNSONDIVERSEY, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)


	October 1, 2004			January 2, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	39,947		$	24,543
Accounts receivable, less allowance of $29,458 and $28,089, respectively		477,783			618,991
Accounts receivable – related parties		28,514			28,965
Inventories		277,425			263,397
Deferred income taxes		22,059			20,165
Other current assets		108,649			97,928

Total current assets		954,377			1,053,989
Property, plant and equipment, net		553,967			595,483
Capitalized software, net		103,624			107,947
Goodwill, net		1,166,048			1,224,059
Other intangibles, net		391,250			418,622
Deferred income taxes		96,897			93,258
Long-term receivables – related parties		89,508			87,663
Other assets		71,078			84,306

Total assets	$	3,426,749		$	3,665,327

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	73,727		$	124,228
Current portion of long-term debt		7,663			27,812
Accounts payable		308,037			298,202
Accounts payable – related parties		70,589			62,346
Accrued expenses		413,839			435,774

Total current liabilities		873,855			948,362
Pension and other post-retirement benefits		235,185			253,787
Long-term borrowings		1,223,968			1,338,622
Long-term payables – related parties		28,101			28,309
Other liabilities		79,919			101,352

Total liabilities		2,441,028			2,670,432
Commitments and contingencies (Note 16)		—			—
Stockholders’ equity:
Common stock – $1.00 par value; 200,000 shares authorized; 24,422 shares issued and outstanding		24			24
Class A 8% cumulative preferred stock – $100.00 par value; 1,000 shares authorized; no shares issued and outstanding		—			—
Class B 8% cumulative preferred stock – $100.00 par value; 1,000 shares authorized; no shares issued and outstanding		—			—
Capital in excess of par value		737,489			736,959
Retained earnings		131,948			114,198
Accumulated other comprehensive income		117,529			145,401
Notes receivable from officers		(1,269	)		(1,687	)

Total stockholders’ equity		985,721			994,895

Total liabilities and stockholders’ equity	$	3,426,749		$	3,665,327

The accompanying notes are an integral part of the consolidated financial statements.

JOHNSONDIVERSEY, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended						Nine Months Ended
(dollars in thousands)	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
	(unaudited)						(unaudited)
Net sales:
Net product and service sales	$	761,430		$	696,976		$	2,295,892		$	2,088,951
Sales agency fee income		22,508			21,835			68,079			65,996

		783,938			718,811			2,363,971			2,154,947
Cost of sales		449,645			395,932			1,331,569			1,183,838

Gross profit		334,293			322,879			1,032,402			971,109
Selling, general and administrative expenses		271,115			259,479			825,733			785,613
Research and development expenses		18,387			16,922			55,406			51,216
Restructuring expense		5,604			561			13,154			13,862

Operating profit		39,187			45,917			138,109			120,418
Other expense (income):
Interest expense		30,538			30,969			94,086			96,016
Interest income		(2,250	)		(262	)		(4,204	)		(2,189	)
Other expense (income), net		1,623			666			3,885			(2,484	)

Income before income taxes, minority interests and discontinued operations		9,276			14,544			44,342			29,075
Provision for income taxes		4,704			5,985			18,925			11,963

Income before minority interests and discontinued operations		4,572			8,559			25,417			17,112
Minority interests in net income (loss) of subsidiaries		(7	)		61			154			112

Income from continuing operations		4,579			8,498			25,263			17,000
Income (loss) from discontinued operations, net of income taxes of $11, $1,277, $958 and $3,412 (Note 6)		(139	)		1,869			2,119			5,001

Net income	$	4,440		$	10,367		$	27,382		$	22,001

The accompanying notes are an integral part of the consolidated financial statements.

JOHNSONDIVERSEY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
(dollars in thousands)	October 1, 2004			October 3, 2003
	(unaudited)
Cash flows from operating activities:
Net income	$	27,382		$	22,001
Adjustments to reconcile net income to net cash provided by operating activities–
Depreciation and amortization		112,350			90,660
Amortization of intangibles		27,241			25,708
Amortization of debt issuance costs		9,667			7,742
Interest accrued on long-term receivables - related party		(2,556	)		—
Deferred income taxes		(8,456	)		(12,125	)
Gain from divestitures		(2,757	)		(799	)
Loss on property disposals		212			9,231
Other		848			1,127
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses–
Accounts receivable		(9,740	)		(5,842	)
Accounts receivable securitization		40,600			26,900
Inventories		(26,968	)		(1,752	)
Other current assets		(12,912	)		2,245
Other assets		4,910			(5,971	)
Accounts payable and accrued expenses		24,968			(7,824	)
Other liabilities		(29,611	)		10,352

Net cash provided by operating activities		155,178			161,653
Cash flows from investing activities:
Capital expenditures		(63,335	)		(70,799	)
Expenditures for capitalized computer software		(21,757	)		(27,036	)
Cash from property disposals		5,825			16,907
Acquisitions of businesses		(4,646	)		(1,599	)
Proceeds from divestitures		48,254			988

Net cash used in investing activities		(35,659	)		(81,539	)
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings		48,872			(15,700	)
Repayments of long-term borrowings		(120,559	)		(90,011	)
Payment of debt issuance costs		(1,337	)		—
Dividends paid		(12,289	)		(5,300	)

Net cash used in financing activities		(85,313	)		(111,011	)

Effect of exchange rate changes on cash and cash equivalents		(18,802	)		(4,014	)

Change in cash and cash equivalents		15,404			(34,911	)
Beginning balance		24,543			59,272

Ending balance	$	39,947		$	24,361

Supplemental cash flows information
Cash paid during the period:
Interest	$	67,518		$	68,042
Income taxes		14,056			19,528

The accompanying notes are an integral part of the consolidated financial statements.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

1.	Description of the Company

JohnsonDiversey, Inc. (the “Company”) is comprised of a Professional Business and a Polymer Business. The Professional Business is a global manufacturer of commercial, industrial and institutional building maintenance and sanitation products. The Polymer Business is a global manufacturer of polymer intermediates marketed to the printing and packaging, coatings, adhesives and related industries.

2.	Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary to present fairly the financial position of the Company as of October 1, 2004 and its results of operations and cash flows for the three and nine month periods ended October 1, 2004 have been included. The results of operations for the three and nine month periods ended October 1, 2004 are not necessarily indicative of the results to be expected for the full fiscal year. It is suggested that the accompanying consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended January 2, 2004.

In order to achieve alignment with its functional cost structure, beginning with fiscal year 2004, the Company reclassified certain technical customer support costs from selling, general and administrative expenses to cost of sales. Prior year amounts have been reclassified for consistency. Related technical customer support costs were $6,029 and $2,366 for the three months ended October 1, 2004 and October 3, 2003, respectively; and $15,384 and $6,440 for the nine months ended October 1, 2004 and October 3, 2003, respectively.

Certain other prior period amounts have been reclassified to conform with current period presentation.

Unless otherwise indicated, all monetary amounts, excluding share data, are stated in thousands.

3.	New Accounting Standards

In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Post-retirement Benefits, an amendment of FASB Statements No. 87, 88 and 106.” In fiscal year 2003, the Company adopted SFAS No. 132, as revised, for all U.S.-based plans. SFAS No. 132, as revised, requires additional disclosures in year-end reports about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. As permitted by this standard, the Company will adopt the annual disclosure provisions for all foreign plans for the year ending December 31, 2004. SFAS No. 132, as revised, also amends Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to require interim-period disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. The Company has adopted the interim-period disclosure requirements of SFAS No. 132, as revised, for its U.S.-based defined benefit and non-pension postretirement plans effective January 3, 2004. Because SFAS No. 132, as revised, pertains only to disclosure provisions, the Company’s adoption of SFAS No. 132, as revised, did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

In January 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” with an effective date for interim or annual financial statements with fiscal years ending after December 7, 2003. FSP 106-1 relates to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act") signed into law on December 8, 2003. FSP 106-1 introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. As permitted by FSP 106-1, the Company made a one-time election to defer adoption of the Act until more specific authoritative guidance was issued. In May 2004, the FASB issued FSP No. 106-2, which supercedes FSP 106-1, and is effective for the first interim or annual period beginning after June 15, 2004. FSP 106-2 requires companies to account for the effect of the subsidy on benefits attributable to past service as an actuarial experience gain and as a reduction of the service cost component of net postretirement health care costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to Medicare Part D. The Company adopted FSP 106-2 in the quarter ending October 1, 2004. See Note 13 for further disclosure.

4.	Acquisitions

In November 2003, the Company acquired 50.1% of the outstanding shares of Daisan Kogyo Co., Ltd. (“Daisan”), Japan's leading provider of commercial cleaning products and services to the food and beverage industry, for $12,076. The Company previously held 49.9% of the outstanding shares and accounted for its holding in Daisan on an equity basis. The Company completed a valuation exercise during the quarter ending July 2, 2004 and assigned $841 and $1,462 of the purchase price to customer lists and intellectual property, respectively. As of October 1, 2004 and January 2, 2004, goodwill recorded with respect to the acquisition was $5,722 and $7,762, respectively.

In October 2003, the Company acquired certain net assets of Southwest Auto-Chlor System L.P., an Austin, Texas-based business that markets and sells low-energy dishwashing systems, kitchen chemicals, laundry and housekeeping products and services to foodservice, lodging, healthcare, and institutional customers, for $13,577. In addition, the Company entered into non-compete arrangements with the sellers. The Company has preliminarily assigned $11,295 of the purchase price to customer lists and related contracts, pending completion of a valuation exercise. The Company did not record goodwill as a result of the transaction.

During the nine months ending October 1, 2004, the Company acquired or purchased interest in three businesses associated with its professional segment from S.C. Johnson & Son, a related party, for $2,999 and one business as part of its polymer segment for $1,414. None of the transactions were considered material to the Company’s consolidated financial position or results of operations.

The results of operations for the acquired companies have been included in the consolidated financial statements from the date of acquisition.

5.	Acquisition of the DiverseyLever Business

On May 3, 2002, the Company acquired the assets and equity interests of the DiverseyLever business – the institutional and industrial cleaning and sanitation business of Unilever. In addition, with specified exceptions, the Company and its parent, JohnsonDiversey Holdings, Inc. (“Holdings”), assumed liabilities to the extent relating to, or arising out of, the DiverseyLever business. The acquisition was accounted for under the purchase method of accounting.

During the nine months ending October 1, 2004, the Company settled the pension adjustment – fully funded and pension adjustment – EBITDA with Unilever as provided for in the purchase agreement, and adjusted certain net tangible assets and tax indemnities, resulting in an increase in acquisition goodwill of $1,894, substantially all of which was recorded in the second quarter. The Company and Unilever are continuing the settlement process relative to certain remaining purchase price adjustments as provided for in the purchase agreement. Further

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

adjustments are not expected to be significant and are anticipated to be finalized with Unilever in the fourth quarter of 2004, and settled during the first quarter of 2005.

During the nine months ending October 1, 2004, the Company reversed $4,180 of restructuring reserves previously established in purchase accounting, net of $1,203 of deferred taxes, resulting in a decrease in acquisition goodwill of $2,977 (see Note 11). These adjustments were substantially recorded in the second quarter.

6.	Divestiture of the Whitmire Micro-Gen Business

As previously reported, the Company had determined that Whitmire Micro-Gen Research Laboratories, Inc. (“Whitmire”), a wholly-owned subsidiary that manufactures and supplies insecticides and equipment to the professional pest management industry in the U.S., was no longer part of the overall corporate strategic focus and therefore had been seeking a buyer.

On June 10, 2004, the Company completed the sale of Whitmire to Sorex Holdings, Ltd. (“Sorex”), a leading European pest-control manufacturer headquartered in the United Kingdom, for $46,000 cash and the assumption of certain liabilities. The purchase price was subject to a working capital adjustment, which was agreed and settled in September 2004, resulting in Sorex paying $751 to the Company. The purchase agreement also provides for additional earnout provisions based on future Whitmire net sales. As of the divestiture date, Whitmire net assets totaled $45,000.

Effective with the second quarter of 2004, Whitmire, which was included in the Company’s professional segment, has been classified as a discontinued operation in the consolidated statement of income with the prior periods restated. No adjustments or restatements for discontinued operations have been made to the consolidated balance sheets and consolidated statements of cash flows due to the immaterial impact of the divestiture for the periods presented.

Income from discontinued operations for the three and nine month periods ended October 1, 2004 and October 3, 2003 is comprised of the following:


	Three Months Ended						Nine Months Ended
	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Income (loss) from operations before taxes	$	(105	)	$	3,146		$	2,111		$	8,413
(Loss) Gain on sale		(23	)		—			966			—
Income tax provision		(11	)		(1,277	)		(958	)		(3,412	)

Income (loss) from discontinued operations	$	(139	)	$	1,869		$	2,119		$	5,001

Net sales from discontinued operations for the three and nine month periods ended October 1, 2004 and October 3, 2003 are as follows:
	Three Months Ended						Nine Months Ended
	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Net sales	$	—		$	12,559		$	18,688		$	35,878

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

7.	Accounts Receivable Securitization

The Company and certain of its subsidiaries entered into an agreement (the “Receivables Facility”) in March 2001 whereby they sell on a continuous basis certain trade receivables to JWPR Corporation (“JWPRC”), a wholly owned, consolidated, special purpose, bankruptcy-remote subsidiary of the Company. JWPRC was formed for the sole purpose of buying and selling receivables generated by the Company and its subsidiaries party to the agreement. JWPRC in turn sells an undivided interest in the accounts receivable to a nonconsolidated financial institution (the “Conduit”) for an amount equal to the percentage of total receivables deemed eligible. The accounts receivable securitization arrangement is accounted for under the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities–A replacement of FASB Statement No. 125.”

On August 29, 2003, the Receivables Facility was amended to include certain additional U.S. subsidiaries, expand the total potential for securitization of trade receivables to $75,000 from the previous limit of $55,000, and change the facility term to 354 days from the date of closing, renewable without fee.

On October 24, 2003, the Receivables Facility was again amended to include certain United Kingdom subsidiaries and further expand the total potential for securitization of trade receivables to $100,000 (the “October 2003 amendment”). Prior to the October 2003 amendment, the beneficial interest of accounts receivable sold under the Receivables Facility was excluded from accounts receivable in the Company’s consolidated balance sheets in accordance with SFAS No. 140. As a result of the terms of the October 2003 amendment, limitations in the articles of incorporation of JWPRC and the requirements for sale defined in SFAS No. 140, the Company was no longer able to exclude the accounts receivable sold under the Receivables Facility from its consolidated balance sheets.

On January 5, 2004, the Receivables Facility was amended and restated to include the Company’s Italian subsidiary and further expand the total potential for securitization of trade receivables to $150,000.

During the three months ended April 2, 2004, the Company modified the articles of incorporation of JWPRC and obtained necessary legal opinions, in order for the amended Receivables Facility to be in compliance with the provisions of SFAS No. 140. As such, the Company has excluded accounts receivable sold under the Receivables Facility from the consolidated balance sheet.

As of October 1, 2004, the Conduit held $135,800 of accounts receivable that are not included in the accounts receivable balance reflected in the Company’s consolidated balance sheet. As of January 2, 2004, the Company included $95,200 of accounts receivable held by the Conduit in its consolidated balance sheet for the reasons noted above.

As of October 1, 2004, the Company had a retained interest of $129,321 in the receivables of JWPRC. The retained interest is included in the accounts receivable balance and is reflected in the consolidated balance sheet at estimated fair value.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

8.	Inventories

The components of inventories are summarized as follows:


	October 1, 2004		January 2, 2004
Raw materials and containers	$	69,143	$	64,322
Finished goods		208,282		199,075

Total inventories	$	277,425	$	263,397

Inventories are stated in the consolidated balance sheets net of allowance for excess and obsolete inventory of $25,032 and $25,446 on October 1, 2004 and January 2, 2004, respectively.

9.	Property, Plant and Equipment

Effective January 3, 2004, the Company changed its accounting estimates relating to depreciation. The estimated useful lives for dishwashing machines were changed to seven years from a range of five to 14 years to provide consistency in accounting treatment following the integration of acquisitions into a combined business unit. As a result of this change in accounting estimate, cost of sales was increased by $3,200 and $9,500, for the three and nine month periods ended October 1, 2004, respectively.

10.

Indebtedness and Credit Arrangements

The Company’s $1.2 billion senior secured credit facilities were amended on February 24, 2004. This amendment reduced the interest rate payable for the U.S. dollar portion of the tranche B term loan under the senior secured credit facilities, thereby reducing the borrowing cost over the remaining life of the tranche. In addition, the amendment changed various financial covenants and administrative requirements to provide the Company with greater flexibility to operate and complete the integration of the DiverseyLever business.

11.

Restructuring Liabilities

During fiscal years 2002 and 2003, in connection with the acquisition of the DiverseyLever business, the Company recorded liabilities for the involuntary termination of former DiverseyLever employees and other exit costs associated with former DiverseyLever facilities (“exit plans”). The Company’s exit plans provide for the planned termination of 1,299 employees, of which 1,205 and 998 were actually terminated as of October 1, 2004 and January 2, 2004, respectively.

Additionally, the Company developed plans to restructure certain facilities that it owned prior to the acquisition of the DiverseyLever business (“restructuring plans”), primarily for the purpose of eliminating redundancies resulting from the acquisition of the DiverseyLever business. During fiscal years 2002 and 2003, in connection with these restructuring plans, the Company recorded liabilities for the involuntary termination of pre-acquisition employees and other restructuring costs associated with pre-acquisition facilities. During the three months ended October 1, 2004 and October 3, 2003, the Company recognized net liabilities of $5,343 and $342 for the involuntary termination of 99 and 15 additional pre-acquisition employees and $261 and $219 for additional other restructuring costs, respectively, which were recorded as restructuring expenses in accordance with SFAS No. 146. During the nine months ended October 1, 2004 and October 3, 2003, the Company recognized net liabilities of $12,748 and $10,453 for the involuntary termination of 252 and 114 additional pre-acquisition employees and $406 and $3,409 for additional other restructuring costs, respectively, which were recorded as restructuring expenses in accordance with SFAS No. 146.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

The Company’s restructuring plans provide for the planned termination of 613 pre-acquisition employees, of which 433 and 340 were actually terminated as of October 1, 2004 and January 2, 2004, respectively.


	Exit Plans									Restructuring Plans
	Employee- Related			Other			Total			Employee- Related			Other			Total
Liability balances as of January 2, 2004	$	24,821		$	3,411		$	28,232		$	5,173		$	1,393		$	6,566
Liability recorded as restructuring expense		—			—			—			4,719			333			5,052
Liability adjustments²		(149	)		—			(149	)		—			—			—
Cash paid¹		(8,908	)		(246	)		(9,154	)		(4,528	)		(562	)		(5,090	)

Liability balances as of April 2, 2004	$	15,764		$	3,165		$	18,929		$	5,364		$	1,164		$	6,528
Liability recorded as restructuring expense		—			—			—			2,686			97			2,783
Liability adjustments²		(2,486	)		(1,405	)		(3,891	)		—			(285	)		(285	)
Cash paid¹		(9,079	)		(718	)		(9,797	)		(4,655	)		(592	)		(5,247	)

Liability balances as of July 2, 2004	$	4,199		$	1,042		$	5,241		$	3,395		$	384		$	3,779
Liability recorded as restructuring expense		—			—			—			5,516			261			5,777
Liability adjustments²		(140	)		—			(140	)		(173	)		—			(173	)
Cash paid¹		(1,939	)		(325	)		(2,264	)		(4,147	)		(149	)		(4,296	)

Liability balances as of October 1, 2004	$	2,120		$	717		$	2,837		$	4,591		$	496		$	5,087

¹	Cash paid includes the effects of foreign exchange rates.

²	Liability adjustments include reductions to previously established plan obligations based on revisions to initial assumptions.

12.

Other (Income) Expense, Net

The components of other (income) expense, net, in the consolidated statements of income are as follows:


	Three Months Ended						Nine Months Ended
	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Revaluation losses (gains) on foreign currency denominated instruments and transactions		714			1,060			4,149			(3,612	)
Foreign currency transaction and hyper-inflationary currency translation losses (gains)		896			(99	)		3,117			1,769
Net losses (gains) on sale of product lines		207			496			(1,791	)		320
Non-recoverable sales tax assessment related to prior years		137			—			1,109			—
Compensation for partial termination of sales agency agreement¹		—			—			(2,485	)		—
Other		(331	)		(791	)		(214	)		(961	)

	$	1,623		$	666		$	3,885		$	(2,484	)

In the second quarter of 2004, the Company and Unilever, under volume terms provided for by the sales agency agreement, terminated sales agency relationships in certain countries, resulting in a gain of $2,485. The partial termination is an isolated situation and is not expected to have a significant impact on future sales agency fee income or our consolidated results of operations.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

13.

Defined Benefit Plans and Other Post-Employment Benefit Plans

The components of net periodic benefit costs for the Company’s defined benefit pension plans and other post-employment benefit plans for the three and nine month periods ended October 1, 2004 and October 3, 2003 are as follows:


	Defined Pension Benefits
	Three Months Ended						Nine Months Ended
	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Service cost	$	8,077		$	6,661		$	23,246		$	19,984
Interest cost		7,595			6,347			20,896			19,040
Expected return on plan assets		(6,616	)		(4,415	)		(16,580	)		(13,245	)
Amortization of net loss		1,237			1,597			4,565			4,789
Amortization of prior service benefit		(132	)		(5	)		(173	)		(14	)
Amortization of transition obligation		65			60			190			180
Effect of curtailments and settlements		(1,130	)		—			(1,130	)		—

Net periodic pension cost	$	9,096		$	10,245		$	31,014		$	30,734


	Other Post-Employment Benefits
	Three Months Ended				Nine Months Ended
	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Service cost	$	576	$	741	$	2,340	$	2,224
Interest cost		947		1,228		3,388		3,683
Amortization of net loss		91		83		369		249
Amortization of prior service cost		18		—		36		—
Amortization of transition obligation		71		181		215		542

Net periodic benefit cost	$	1,703	$	2,233	$	6,348	$	6,698

The Company adopted FSP 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” during the quarter ending October 1, 2004. In accordance with the proposed guidance, the Company and its actuarial advisors determined that benefits provided to certain plan participants are expected to be at least actuarially equivalent to Medicare Part D, and, accordingly, the Company will be entitled to a subsidy. The expected subsidy reduces the accumulated postretirement benefit obligation at January 1, 2004 by $6,100, and net periodic benefit cost by $561 during the quarter ending October 1, 2004. The Company will not need to amend its postretirement health care plans to qualify for the federal subsidy.

The Company recognized income of $5,800 during the quarter ending October 1, 2004 in association with pension plan adjustments which resulted from changes in census data and plan curtailments in Brazil and the United Kingdom.

The Company made contributions to its material defined pension benefit plans of approximately $27,600 and $62,600, of which $28,600 relates to the acquisition of the DiverseyLever business, during the three and nine months ending October 1, 2004 respectively.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

14.

Stock-Based Compensation

The Company has a long-term incentive plan (the “Plan”) that provides for the right to purchase stock of Commercial Markets Holdco, Inc. (“Holdco”), the parent of Holdings, for certain senior management of the Company. Prior to July 1, 2001, the Plan provided for the award of one share of restricted stock and one stock option for every four shares purchased. Shares are acquired at a formula value, which is an estimation of fair value by the Company based on overall Holdco performance. Most restricted shares vest over a two-to-four year period from the grant date. Stock options have an exercise term of ten years from the date of grant. Also, employees that remain with the Company for four years after November 1, 2000 are granted debt forgiveness of at least 50% of the purchase price of the stock.

Subsequent to June 29, 2001, the Plan was modified so that all awards granted under the Plan were stock option grants. Newly issued stock options vest over four years and have an exercise period of seven years from the date of grant.

The Company recorded compensation expense of $398 and $379 related to restricted stock and debt forgiveness during the three months ended October 1, 2004 and October 3, 2003; and $1,545 and $1,006 related to restricted stock and debt forgiveness during the nine months ended October 1, 2004 and October 3, 2003, respectively.

The pro forma impact of compensation expense if the Company had used the fair-value method of accounting to measure compensation expense would have reduced net income by approximately $4,407 and $2,039 for the three months ended October 1, 2004 and October 3, 2003; and approximately $11,933 and $6,124 for the nine months ended October 1, 2004 and October 3, 2003, respectively.

15.

Comprehensive Income (Loss)

Comprehensive income (loss) for the three and nine month periods ended October 1, 2004 and October 3, 2003 is as follows:


	Three Months Ended					Nine Months Ended
	October 1, 2004		October 3, 2003			October 1, 2004			October 3, 2003
Net income	$	4,440	$	10,367		$	27,382		$	22,001
Foreign currency translation adjustments		180		(4,773	)		(30,994	)		59,408
Unrealized gains (losses) on derivatives, net of tax		396		3,995			3,122			(288	)

Total comprehensive income (loss)	$	5,016	$	9,589		$	(490	)	$	81,121

16.

Commitments and Contingencies

The Company is subject to various legal actions and proceedings in the normal course of business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, the Company does not believe the final outcome of any current litigation will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company has purchase commitments for materials, supplies, and property, plant and equipment entered into in the ordinary conduct of business. In the aggregate, such commitments are not in excess of current market prices. Additionally, the Company normally commits to some level of marketing related expenditures that extend beyond the fiscal period. These marketing expenses are necessary in order to maintain a normal course of business and the risk associated with them is limited. It is not expected that these commitments will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company maintains environmental reserves for remediation, monitoring and related expenses at one of its domestic facilities. While the ultimate exposure to further remediation expense at this site continues to be evaluated, the Company does not anticipate a material effect on its consolidated financial position or results of operations.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

In connection with the acquisition of the DiverseyLever business, the Company conducted environmental assessments and investigations at DiverseyLever facilities in various countries. These investigations disclosed the likelihood of soil and/or groundwater contamination, or potential environmental regulatory matters. The Company continues to evaluate the nature and extent of the identified contamination and is preparing plans to address the contamination. An estimate of costs has been made based on the expected extent of contamination and the expected likelihood of recovery for some of these costs from Unilever under the purchase agreement. To the extent that contamination is determined to be in violation of local environmental laws, the Company intends to seek recovery under indemnification clauses contained in the purchase agreement.

In connection with the acquisition of the DiverseyLever business, Holdings entered into a stockholders’ agreement with its stockholders, Holdco and Marga B.V., a subsidiary of Unilever. Under the stockholders’ agreement, at any time after May 3, 2007, Holdings has the option to purchase, and Unilever has the right to require Holdings to purchase, the shares of Holdings and Senior Discount Notes of Holdings then beneficially owned by Unilever. If, after May 3, 2010, Holdings is unable to fulfill its obligations in connection with the put option, Unilever may require Holdings to take certain actions, including selling certain assets of the Company.

Under the stockholders’ agreement, Holdings may be required to make payments to Unilever in each year from 2007 through 2010 so long as Unilever continues to beneficially own 5% or more of Holdings’ outstanding shares. The amount of each payment will be equal to 25% of the amount by which the cumulative cash flows of Holdings and its subsidiaries, on a consolidated basis, for the period from the closing of the acquisition through the end of the fiscal year preceding the payment (not including any cash flow with respect to which Unilever received payment in a prior year), exceeds $727,500 in 2006, $975,000 in 2007, $1,200,000 in 2008 or $1,425,000 in 2009. The aggregate amount of these payments cannot exceed $100,000. Payment of these amounts, which may be funded with cash flows generated by the Company, is subject to compliance with the agreements relating to Holdings and the Company’s senior indebtedness including, without limitation, the senior secured credit facilities, the senior subordinated notes and the Senior Discount Notes of Holdings.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

17.

Segment Information

Business segment information is summarized as follows. Income statement measures include results from continuing operations only.


	Three Months Ended or As Of October 1, 2004
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	706,893	$	82,187	$	(5,142	)	$	783,938
Operating profit		31,895		7,292		—			39,187
Depreciation and amortization		44,533		2,421		—			46,954
Interest expense		30,732		145		(339	)		30,538
Interest income		2,251		338		(339	)		2,250
Total assets		3,290,544		225,394		(89,189	)		3,426,749
Goodwill, net		1,163,948		2,100		—			1,166,048
Capital expenditures, including capitalized computer software		32,535		717		—			33,252

	Three Months Ended or As Of October 3, 2003
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	651,711	$	71,362	$	(4,262	)	$	718,811
Operating profit		37,308		8,609		—			45,917
Depreciation and amortization		36,982		2,411		—			39,393
Interest expense		30,935		270		(236	)		30,969
Interest income		78		420		(236	)		262
Total assets		3,373,492		203,178		(88,630	)		3,488,040
Goodwill, net		1,186,274		579		—			1,186,853
Capital expenditures, including capitalized computer software		35,860		448		—			36,308

	Nine Months Ended or As Of October 1, 2004
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	2,133,332	$	246,730	$	(16,091	)	$	2,363,971
Operating profit		107,262		30,847		—			138,109
Depreciation and amortization		132,435		7,156		—			139,591
Interest expense		94,435		395		(744	)		94,086
Interest income		4,170		778		(744	)		4,204
Total assets		3,290,544		225,394		(89,189	)		3,426,749
Goodwill, net		1,163,948		2,100		—			1,166,048
Capital expenditures, including capitalized computer software		81,894		3,198		—			85,092

	Nine Months Ended or As Of October 3, 2003
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	1,953,772	$	216,149	$	(14,974	)	$	2,154,947
Operating profit		92,608		27,810		—			120,418
Depreciation and amortization		109,417		6,951		—			116,368
Interest expense		95,994		521		(499	)		96,016
Interest income		1,932		756		(499	)		2,189
Total assets		3,373,492		203,178		(88,630	)		3,488,040
Goodwill, net		1,186,274		579		—			1,186,853
Capital expenditures, including capitalized computer software		95,052		2,783		—			97,835

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

18.

Subsidiary Guarantors of Senior Subordinated Notes

The Company’s Senior Subordinated Notes are guaranteed by certain of its wholly owned subsidiaries. Such guarantees are full and unconditional, to the extent allowed by law, and joint and several. The following supplemental information sets forth, on an unconsolidated basis, statement of income, balance sheet and statement of cash flows information for the Company, for the guarantor subsidiaries and for the Company’s non-guarantor subsidiaries, each of which were determined on a combined basis with the exception of eliminating investments in combined subsidiaries and certain reclassifications, which are eliminated at the consolidated level.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

Consolidating condensed statements of operations for the three months ended October 1, 2004:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	154,926		$	84,027		$	557,105		$	(34,628	)	$	761,430
Sales agency fee income		1,294			24			21,190			—			22,508

		156,220			84,051			578,295			(34,628	)		783,938
Cost of sales		88,650			59,321			336,278			(34,604	)		449,645

Gross profit		67,570			24,730			242,017			(24	)		334,293
Selling, administrative and general expenses		82,698			11,714			176,703			—			271,115
Research and development expenses		8,240			2,137			8,010			—			18,387
Restructuring expense		4,080			—			1,524			—			5,604

Operating (loss) profit		(27,448	)		10,879			55,780			(24	)		39,187

Other expense (income):
Interest expense		24,271			165			28,603			(22,501	)		30,538
Interest income		(8,411	)		(14,025	)		(2,315	)		22,501			(2,250	)
Other (income) expense, net		(39,343	)		387			1,677			38,902			1,623

Income (loss) before income taxes, minority interests and discontinued operations		(3,965	)		24,352			27,815			(38,926	)		9,276
(Benefit from) provision for income taxes		(8,537	)		5,283			7,958			—			4,704

Income (loss) before minority interests and discontinued operations		4,572			19,069			19,857			(38,926	)		4,572
Minority interests in net income (loss) of subsidiaries		—			—			(7	)		—			(7	)

Income (loss) from continuing operations		4,572			19,069			19,864			(38,926	)		4,579
Loss from discontinued operations, net of income taxes		—			(139	)		—			—			(139	)

Net income (loss)	$	4,572		$	18,930		$	19,864		$	(38,926	)	$	4,440

Consolidating condensed statements of operations for the three months ended October 3, 2003:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Net product and service sales	$	157,613		$	80,190		$	494,036	$	(34,863	)	$	696,976
Sales agency fee income		1,330			30			20,475		—			21,835

		158,943			80,220			514,511		(34,863	)		718,811
Cost of sales		86,537			51,733			291,722		(34,060	)		395,932

Gross profit		72,406			28,487			222,789		(803	)		322,879
Selling, administrative and general expenses		81,350			19,593			158,536		—			259,479
Research and development expenses		6,094			2,298			8,530		—			16,922
Restructuring expense		(594	)		—			1,155		—			561

Operating (loss) profit		(14,444	)		6,596			54,568		(803	)		45,917

Other expense (income):
Interest expense		26,529			441			25,203		(21,204	)		30,969
Interest income		(6,950	)		(14,772	)		256		21,204			(262	)
Other (income) expense, net		(34,154	)		(2,852	)		1,022		36,650			666

Income (loss) before income taxes, minority interests and discontinued operations		131			23,779			28,087		(37,453	)		14,544
(Benefit from) provision for income taxes		(8,428	)		4,534			9,879		—			5,985

Income (loss) before minority interests and discontinued operations		8,559			19,245			18,208		(37,453	)		8,559
Minority interests in net income of subsidiaries		—			—			61		—			61

Income (loss) from continuing operations		8,559			19,245			18,147		(37,453	)		8,498
Income from discontinued operations, net of income taxes		—			1,869			—		—			1,869

Net income (loss)	$	8,559		$	21,114		$	18,147	$	(37,453	)	$	10,367

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

Consolidating condensed statements of operations for the nine months ended October 1, 2004:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	472,706		$	250,189		$	1,683,654		$	(110,657	)	$	2,295,892
Sales agency fee income		3,829			81			64,169			—			68,079

		476,535			250,270			1,747,823			(110,657	)		2,363,971
Cost of sales		266,004			169,418			1,006,780			(110,633	)		1,331,569

Gross profit		210,531			80,852			741,043			(24	)		1,032,402
Selling, administrative and general expenses		248,663			42,577			534,493			—			825,733
Research and development expenses		24,514			6,315			24,577			—			55,406
Restructuring expense		7,349			—			5,805			—			13,154

Operating (loss) profit		(69,995	)		31,960			176,168			(24	)		138,109

Other expense (income):
Interest expense		82,216			2,038			79,059			(69,227	)		94,086
Interest income		(26,608	)		(40,437	)		(6,386	)		69,227			(4,204	)
Other (income) expense, net		(123,969	)		(2,531	)		2,498			127,887			3,885

Income (loss) before income taxes, minority interests and discontinued operations		(1,634	)		72,890			100,997			(127,911	)		44,342
(Benefit from) provision for income taxes		(27,051	)		16,152			29,824			—			18,925

Income (loss) before minority interests and discontinued operations		25,417			56,738			71,173			(127,911	)		25,417
Minority interests in net income of subsidiaries		—			—			154			—			154

Income (loss) from continuing operations		25,417			56,738			71,019			(127,911	)		25,263
Income from discontinued operations, net of income taxes		—			2,119			—			—			2,119

Net income (loss)	$	25,417		$	58,857		$	71,019		$	(127,911	)	$	27,382

Consolidating condensed statements of operations for the nine months ended October 3, 2003:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net product and service sales	$	477,629		$	241,816		$	1,479,821		$	(110,315	)	$	2,088,951
Sales agency fee income		4,140			86			61,770			—			65,996

		481,769			241,902			1,541,591			(110,315	)		2,154,947
Cost of sales		263,748			155,228			874,374			(109,512	)		1,183,838

Gross profit		218,021			86,674			667,217			(803	)		971,109
Selling, administrative and general expenses		232,110			56,543			496,960			—			785,613
Research and development expenses		18,198			7,262			25,756			—			51,216
Restructuring expense		1,357			—			12,505			—			13,862

Operating (loss) profit		(33,644	)		22,869			131,996			(803	)		120,418

Other expense (income):
Interest expense		80,853			637			75,828			(61,302	)		96,016
Interest income		(18,463	)		(44,462	)		(566	)		61,302			(2,189	)
Other (income) expense, net		(83,209	)		(3,510	)		(4,443	)		88,678			(2,484	)

Income (loss) before income taxes, minority interests and discontinued operations		(12,825	)		70,204			61,177			(89,481	)		29,075
(Benefit from) provision for income taxes		(29,937	)		13,588			28,312			—			11,963

Income (loss) before minority interests and discontinued operations		17,112			56,616			32,865			(89,481	)		17,112
Minority interests in net income of subsidiaries		—			—			112			—			112

Income (loss) from continuing operations		17,112			56,616			32,753			(89,481	)		17,000
Income from discontinued operations, net of income taxes		—			5,001			—			—			5,001

Net income (loss)	$	17,112		$	61,617		$	32,753		$	(89,481	)	$	22,001

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

Consolidating condensed balance sheets at October 1, 2004:


	Parent Company		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	2,084	$	1,972	$	35,891	$	—		$	39,947
Accounts receivable, net		12,071		4,959		489,267		—			506,297
Intercompany receivables		239,725		409,679		15,174		(664,578	)		—
Inventories		41,039		30,163		206,303		(80	)		277,425
Other current assets		27,037		7,480		96,191		—			130,708

Total current assets		321,956		454,253		842,826		(664,658	)		954,377
Property, plant and equipment, net		143,753		30,989		379,225		—			553,967
Capitalized software, net		91,389		3,082		9,153		—			103,624
Goodwill and other intangible assets, net		126,734		171,052		1,234,195		25,317			1,557,298
Deferred income taxes		92,934		—		3,963		—			96,897
Intercompany advances		424,898		486,928		25,124		(936,950	)		—
Other assets		128,323		1,457		30,806		—			160,586
Investments in subsidiaries		1,596,173		41,602		—		(1,637,775	)		—

Total assets	$	2,926,160	$	1,189,363	$	2,525,292	$	(3,214,066	)	$	3,426,749

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings	$	15,900	$	—	$	57,827	$	—		$	73,727
Current portion of long-term debt		4,144		—		3,519		—			7,663
Accounts payable		61,031		15,185		302,410		—			378,626
Intercompany payables		623,910		6,662		34,285		(664,857	)		—
Accrued expenses		165,349		21,189		244,460		(17,159	)		413,839

Total current liabilities		870,334		43,036		642,501		(682,016	)		873,855
Intercompany notes payable		—		171,381		765,568		(936,949	)		—
Long-term borrowings		978,259		—		245,709		—			1,223,968
Other liabilities		91,846		45,956		198,606		6,797			343,205

Total liabilities		1,940,439		260,373		1,852,384		(1,612,168	)		2,441,028
Stockholders’ equity		985,721		928,990		672,908		(1,601,898	)		985,721

Total liabilities and stockholders’ equity	$	2,926,160	$	1,189,363	$	2,525,292	$	(3,214,066	)	$	3,426,749

Consolidating condensed balance sheets at January 2, 2004:


	Parent Company		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	1,187	$	23,356	$	—		$	24,543
Accounts receivable		14,670		10,947		622,339		—			647,956
Intercompany receivables		192,040		355,876		31,216		(579,132	)		—
Inventories		34,232		29,526		199,695		(56	)		263,397
Other current assets		31,909		7,555		81,004		(2,375	)		118,093

Total current assets		272,851		405,091		957,610		(581,563	)		1,053,989
Property, plant and equipment, net		153,734		47,016		394,733		—			595,483
Capitalized software, net		93,857		3,856		10,234		—			107,947
Goodwill and other intangible assets, net		131,010		199,848		1,291,808		20,015			1,642,681
Deferred income taxes		80,503		—		12,755		—			93,258
Intercompany advances		439,591		586,976		33,033		(1,059,600	)		—
Other assets		141,468		1,794		28,709		(2	)		171,969
Investments in subsidiaries		1,591,819		35,978		—		(1,627,797	)		—

Total assets	$	2,904,833	$	1,280,559	$	2,728,882	$	(3,248,947	)	$	3,665,327

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings	$	—	$	—	$	124,228	$	—		$	124,228
Current portion of long-term debt		21,810		—		6,002		—			27,812
Accounts payable		60,043		19,556		280,949		—			360,548
Intercompany payables		473,782		10,587		95,404		(579,773	)		—
Accrued expenses		163,050		24,287		256,944		(8,507	)		435,774

Total current liabilities		718,685		54,430		763,527		(588,280	)		948,362
Intercompany notes payable		—		167,757		891,845		(1,059,602	)		—
Long-term borrowings		1,070,262		—		268,360		—			1,338,622
Other liabilities		120,991		34,642		226,909		906			383,448

Total liabilities		1,909,938		256,829		2,150,641		(1,646,976	)		2,670,432
Stockholders’ equity		994,895		1,023,730		578,241		(1,601,971	)		994,895

Total liabilities and stockholders’ equity	$	2,904,833	$	1,280,559	$	2,728,882	$	(3,248,947	)	$	3,665,327

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 1, 2004

(unaudited)

Consolidating condensed statements of cash flows for the nine months ended October 1, 2004:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by (used in) operating activities	$	(18,783	)	$	102,405		$	183,270		$	(111,714	)	$	155,178
Cash flows from investing activities:
Capital expenditures, net		(16,972	)		(2,665	)		(43,698	)		—			(63,335	)
Expenditures for capitalized software		(19,556	)		—			(2,201	)		—			(21,757	)
Cash from property disposals		(10,456	)		8,170			8,111			—			5,825
Acquisitions of businesses		51,351			(2,516	)		3,059			(56,540	)		(4,646	)
Proceeds from divestitures		—			48,254			—			—			48,254

Net cash provided by (used in) investing activities		4,367			51,243			(34,729	)		(56,540	)		(35,659	)
Cash flows from financing activities:
Increase (decrease) in short-term debt		207,133			(90	)		(22,266	)		(135,905	)		48,872
Increase (decrease) in long-term debt		(94,693	)		3,625			(144,448	)		114,957			(120,559	)
Increase (decrease) in additional paid in capital		(75,728	)		(99,732	)		35,450			140,010			—
Payment of debt issuance costs		9,644			—			(10,981	)		—			(1,337	)
Dividends paid		(12,267	)		(44,475	)		(4,739	)		49,192			(12,289	)

Net cash provided by (used in) financing activities		34,089			(140,672	)		(146,984	)		168,254			(85,313	)

Effect of exchange rate changes on cash and cash equivalents		(17,589	)		(12,191	)		10,978			—			(18,802	)

Change in cash and cash equivalents		2,084			785			12,535			—			15,404
Beginning balance		—			1,187			23,356			—			24,543

Ending balance	$	2,084		$	1,972		$	35,891		$	—		$	39,947

Consolidating condensed statements of cash flows for the nine months ended October 3, 2003:


	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by (used in) operating activities	$	184,626		$	(91,618	)	$	135,906		$	(67,261	)	$	161,653
Cash flows from investing activities:
Capital expenditures, net		(21,191	)		(6,622	)		(42,986	)		—			(70,799	)
Expenditures for capitalized software		(26,276	)		(24	)		(736	)		—			(27,036	)
Cash from property disposals		6,211			5,743			4,953			—			16,907
Acquisitions of businesses		54,228			11,441			(35,879	)		(31,389	)		(1,599	)
Proceeds from divestitures		—			—			988			—			988

Net cash provided by (used in) investing activities		12,972			10,538			(73,660	)		(31,389	)		(81,539	)
Cash flows from financing activities:
Increase (decrease) in short-term debt		24,073			(124	)		(1,404	)		(38,245	)		(15,700	)
Increase (decrease) in long-term debt		(204,709	)		131,242			27,052			(43,596	)		(90,011	)
Increase (decrease) in additional paid in capital		(39,568	)		(41,965	)		(33,541	)		115,074			—
Dividends paid		(5,239	)		(62,385	)		(3,093	)		65,417			(5,300	)

Net cash provided by (used in) financing activities		(225,443	)		26,768			(10,986	)		98,650			(111,011	)

Effect of exchange rate changes on cash and cash equivalents		25,132			50,831			(79,977	)		—			(4,014	)

Change in cash and cash equivalents		(2,713	)		(3,481	)		(28,717	)		—			(34,911	)
Beginning balance		4,301			6,282			48,689			—			59,272

Ending balance	$	1,588		$	2,801		$	19,972		$	—		$	24,361

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary:

We are a leading global marketer and manufacturer of cleaning, hygiene and appearance products and related services for the institutional and industrial cleaning and sanitation market. We are also a leading global supplier of environmentally compliant, water-based acrylic polymer resins for the industrial printing and packaging, coatings and plastics markets. We sell our products in more than 140 countries through our direct sales force, wholesalers and third-party distributors. Our sales are balanced geographically, with our principal markets being Europe, North America and the Asia Pacific region.

For both the third quarter and the year-to-date, we have continued to increase net sales, overcoming a challenging competitive and economic landscape and our significant on-going restructuring and integration programs. For the three months ended October 1, 2004, net sales increased $65.1 million, or 9.1%, as compared to the prior year and for the nine months ended October 1, 2004, our net sales increased $209 million, or 9.7%, as compared to the prior year. Key contributors to our growth in net sales include the strengthening of the euro and certain other foreign currencies against the U.S. dollar ($32.9 million and $131 million, respectively), the impact of our November 2003 acquisition of Daisan Kogyo Co., Ltd. ($13.0 million and $38.1 million, respectively), volume growth in Europe, Japan and Asia Pacific driven by new customer wins, and volume growth in the polymer segment due to increased global demand. We also saw a return to growth in North America. As indicated in the following table, excluding the impact of foreign currency exchange rates and acquisitions and divestitures, our net sales growth for the three and nine months ended October 1, 2004 increased 3.0% and 2.2%, respectively, as compared to the prior year.


	Three Months Ended								Nine Months Ended
(dollars in thousands)	October 1, 2004			October 3, 2003			Change		October 1, 2004			October 3, 2003			Change
Net Sales	$	783,938		$	718,811		9.1	%	$	2,363,971		$	2,154,947		9.7	%
Variance due to:
Foreign currency exchange		—			32,922					—			130,933
Acquisitions and divestitures		(14,560	)		(5,091	)				(42,706	)		(14,495	)

		(14,560	)		27,831					(42,706	)		116,438

	$	769,378		$	746,642		3.0	%	$	2,321,265		$	2,271,385		2.2	%

For the three and nine months ended October 1, 2004, our gross margins have declined in both business segments as compared to the prior year as follows:


	Three Months Ended				Nine Months Ended
	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Consolidated	42.6	%	44.9	%	43.7	%	45.1	%

Professional Segment	44.5	%	46.2	%	45.1	%	46.3	%
Polymer Segment	25.3	%	32.5	%	30.5	%	33.2	%

The reductions in gross margin were most evident in our polymer segment where raw material prices have continued to escalate, driven by higher crude oil and natural gas costs, as well as industry cyclical factors that are causing demand to outstrip supply.

In our professional segment, an unfavorable product mix, particularly in Europe, Japan and Latin America, is adversely impacting gross margins. In addition, the increase in crude oil and natural gas costs have negatively affected our floorcare business where acrylic based polymers are more common in product formulations. We have also been faced with escalating freight and transportation costs in North America, which can be attributed to the rise in crude oil prices.

We are implementing focused price increases in the fourth quarter and into fiscal 2005 to recover, to the fullest extent possible, raw material cost increases, including the impact of further cost increases we anticipate in the fourth quarter. In addition, the implementation of incentives and training programs designed to improve our product mix and the continuation of our aggressive global cost reduction programs will also be required to lift gross margins.

The successful integration of the DiverseyLever acquisition continued in the first nine months of 2004 as efficiencies and cost reductions gained through the synergies from restructuring and integration programs have contributed to the growth in income from continuing operations and have partially offset the gross profit margin impact from competitive and economic factors and a less profitable product mix. We continue to track ahead of schedule in achieving our target cost savings from the multi-year restructuring and integration program, which are projected to be at least $215 million by the end of fiscal year 2005.

In June 2004, we sold Whitmire Micro-Gen Research Laboratories, Inc. (“Whitmire”), our wholly-owned subsidiary that manufactures and supplies insecticides and equipment to the professional pest management industry in the U.S., to Sorex Holdings, Ltd., a leading European pest-control manufacturer headquartered in the United Kingdom. As previously disclosed, we had determined that the Whitmire business was not part of the overall corporate strategic focus and therefore had been actively seeking a buyer. The transaction resulted in a net gain of $1.0 million, net of tax, with the proceeds of $46.0 million used to reduce debt. We have classified the Whitmire business as a discontinued operation and have restated the consolidated statements of income for both the current and prior year.

During the first nine months of 2004, our management team focused on maximizing the cash flows of the business and further improving the management of working capital and global cash balances. During the nine months ended October 1, 2004, we repaid $122 million in term debt while at the same time complying with our debt covenants and increasing short-term borrowings by only $42.0 million. Despite higher pension plan contributions and other cash outlays at the end of the third quarter, we have generated $155 million in additional cash from operations and improved working capital by $146 million through an increase of our receivables securitization program to $136 million from $95.2 million at January 2, 2004, primarily from the addition of our Italian subsidiary to the program in January 2004, and from the proceeds of the Whitmire divestiture.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from these estimates under different assumptions or conditions. We believe the accounting policies that are most critical to our financial condition and results of operations and involve management’s judgment and/or evaluation of inherent uncertain factors are as follows:

Revenue Recognition. We recognize revenue on product sales at the time title transfers to the customer. We record an estimated reduction to revenue for customer discount programs and incentive offerings, including allowances and other volume-based incentives. If market conditions were to decline, we may take actions to increase customer incentive offerings, possibly resulting in a reduction of gross profit margins in the period during which the incentive is offered.

In arriving at net sales, we estimate the amounts of sales deductions likely to be earned by customers in conjunction with incentive programs such as volume rebates and other discounts. Such estimates are based on written agreements and historical trends and are reviewed periodically for possible revision based on changes in facts and estimates.

Estimating Reserves and Allowances. Management estimates inventory reserves based on periodic reviews of our inventory balances to identify slow-moving or obsolete items. This determination is based on a number of factors, including new product introductions, changes in customer demand patterns, and historic usage trends. Further, management estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical trend rates, analyzing market conditions and specifically reserving for identified customer balances, based on known facts, which are deemed probable as uncollectible.

Management’s current estimated ranges of liabilities relating to litigation and environmental claims are based on management’s best estimate of future costs. We record those costs based on what management believes is the most probable amount of the liability within the ranges or, where no amount within the range is a better estimate of the potential liability, at the minimum amount within the range.

Pension and Post-Retirement Benefits. We sponsor pension and post-retirement plans in various countries, including the United States, which are separately funded. Several statistical and judgmental factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets, rate of future compensation increases and healthcare cost trends, as determined by us and our actuaries. In addition, our actuarial consultants also use subjective factors, such as withdrawal and mortality rates, to estimate these factors. The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, longer or shorter life spans of participants and changes in actual costs of healthcare. Actual results may significantly affect the amount of pension and other post-retirement benefit expenses recorded by us.

Goodwill and Long-Lived Assets. Management periodically reviews its long-lived assets, including non-amortizing intangible assets and goodwill, for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its estimated fair value. Management also periodically reassesses the estimated remaining useful lives of its amortizing intangible assets and its other long-lived assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in our consolidated financial statements. We annually complete a fair value impairment analysis of goodwill and non-amortizing intangible assets. Moreover, where indicators of impairment are identified for long-lived assets, we would prepare a future undiscounted cash flows analysis. There were no known impairments or indicators of impairment identified during the three and nine month periods ended October 1, 2004 or October 3, 2003.

Three Months Ended October 1, 2004 Compared to Three Months Ended October 3, 2003

Net Sales:


	Three Months Ended				Change
(dollars in thousands)	October 1, 2004		October 3, 2003		Amount		Percentage
Net product and service sales:
Professional	$	684,385	$	629,876	$	54,509	8.7	%
Polymer ⁽¹⁾		77,045		67,100		9,945	14.8	%

		761,430		696,976		64,454	9.2	%
Sales agency fee income		22,508		21,835		673	3.1	%

	$	783,938	$	718,811	$	65,127	9.1	%

⁽¹⁾	Excludes inter-segment sales to the professional segment

•

The strengthening of the euro and certain other foreign currencies against the U.S. dollar contributed $31.2 million to the increase in net product and service sales for the three months ended October 1, 2004 as compared to the same period in the prior year, which was comprised of $29.3 million and $1.9 million, respectively, for the professional segment and the polymer segment.

•

Excluding the foreign currency impact, professional segment net sales increased by $25.2 million, or 3.8%, for the three months ended October 1, 2004 as compared to the same period in the prior year primarily due to the impact of recent acquisitions, most notably Daisan Kogyo Co., Ltd. ($13.0 million), and volume growth in Latin America (5.4%) from economic recovery in Brazil and customer wins in Mexico, in the Asia Pacific region (8.3%) from expansion in the developing markets of India and China, and in Japan (3.7%) from the success of the total solutions business. As expected, the North America region returned to growth in the third quarter of 2004, establishing a platform for future expansion. In the European region, net sales grew moderately as compared to the prior period. These improvements were partially offset by competitive global pricing pressures, industry consolidation in the food and beverage business and a change in product mix in key markets as cost reduction efforts cause customers to purchase increased volumes of lower priced, lower margin products at the expense of higher priced, higher margin products.

•

Excluding the foreign currency impact, polymer segment net sales increased by $8.0 million, or 11.6%, for the three months ended October 1, 2004 as compared to the same period in the prior year primarily as a result of volume growth of 13%, mainly in the Asia Pacific and North America regions and in Japan.

•

Excluding a $1.7 million increase from the strengthening of the euro and certain other foreign currencies against the U.S. dollar, net sales under our sales agency agreement with Unilever decreased $1.0 million, or 4.4%, for the three months ended October 1, 2004 as compared to the same period in the prior year primarily due to certain brand disposals by Unilever in the European and Asia Pacific markets.

Gross Profit:


	Three Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount			Percentage
Professional	$	314,769		$	301,070		$	13,699		4.6	%
Polymer		19,524			21,809			(2,285	)	-10.5	%

		334,293			322,879			11,414		3.5	%

Gross profit as a % of net sales:
Professional		44.5	%		46.2	%
Polymer		25.3	%		32.5	%

		42.6	%		44.9	%

•

The strengthening of the euro and certain other foreign currencies against the U.S. dollar increased gross profit by $18.8 million for the three months ended October 1, 2004 as compared to the same period in the prior year, which was comprised of $14.7 million and $4.1 million, respectively, for the professional segment and the polymer segment.

•

The reductions in gross margin were most evident in our polymer segment, where our products are formulated from solvents, acrylates and resins that include propylene, ethylene and benzene, all of which are dependent of the price of crude oil and natural gas. Styrene costs, a key raw material in our polymer business, are currently at a level more than 50% above their peak in 2003. Another contributor to the rise in raw material costs and the availability of product is a cyclical mismatch in demand and supply for these materials in the marketplace. As costs have increased, the polymer segment has trended toward an unfavorable product mix from customers substituting lower margin products for specialty polymers.

•

also negatively affected our floorcare business, where acrylic based polymers are more common in product formulations. The segment has also been adversely impacted by a steady rise in freight and transportation costs, primarily in North America, which can be attributed to the rise in crude oil prices, and additional depreciation expense ($3.2 million) resulting from a change in accounting estimate for dishwashing equipment useful lives.

•

Operating Expenses:


	Three Months Ended				Change
(dollars in thousands)	October 1, 2004		October 3, 2003		Amount		Percentage
Selling, general and administrative expenses	$	271,115	$	259,479	$	11,636	4.5	%
Research and development expenses		18,387		16,922		1,465	8.7	%
Restructuring expense		5,604		561		5,043	898.9	%

	$	295,106	$	276,962	$	18,144	6.6	%

•

The strengthening of the euro and certain other foreign currencies against the U.S. dollar increased operating expenses by $11.9 million for the three months ended October 1, 2004 as compared to the same period in the prior year, which was comprised of selling, general and administrative expenses ($11.3 million), research and development expenses ($0.5 million) and restructuring expense ($0.1 million).

•

Excluding the impact of foreign currency, selling, general and administrative expenses increased $0.3 million for the three months ended October 1, 2004 as compared to the same period in the prior year due to incremental operating expenses from the Daisan Kogyo Co., Ltd. acquisition ($3.4 million), an increase in capital software amortization costs related to projects placed into service in 2003, increased legal and other professional fees, higher employee benefit costs, particularly in North America, and other inflationary wage and cost increases. These increased costs were effectively offset by decreases in pension plan costs ($5.8 million), which resulted from adjustments to census data and plan curtailments in Brazil and the United Kingdom, and synergies from restructuring and integration programs, primarily in the sales and administrative functions.

•

Excluding the impact of foreign currency, restructuring expense increased $5.0 million for the three months ended October 1, 2004 as compared to the same period in the prior year, primarily due to severance costs recorded for employees terminated as part of approved integration projects, which projects include the closure of facilities, organizational restructuring in the United States ($3.9 million) and restructuring initiatives in Italy and Spain ($1.1 million).

Restructuring and Integration:

We initiated an extensive restructuring and integration program in connection with the May 2002 acquisition of the DiverseyLever business. Under this program, specified costs associated with the closure of former DiverseyLever operations and the involuntary termination of former DiverseyLever employees (“exit costs”) are recorded as purchase accounting adjustments. Costs under the program associated with the closure of specified pre-acquisition operations and the involuntary terminations of pre-acquisition employees (“restructuring costs”) are recorded as restructuring expenses in the consolidated statements of income. Also incurred under the program are costs related to the acquisition which do not meet the definition of exit costs or restructuring costs. Those costs are included in selling, general and administrative expenses in the consolidated statements of income (“period costs”).

During the three months ended October 1, 2004, we recorded $5.6 million of restructuring costs and $7.0 million of selling, general and administrative expenses related to our restructuring and integration programs in our consolidated statement of income. These costs consisted primarily of involuntary termination and other costs incurred throughout North America and Europe as we continued to consolidate our operations.

A summary of all costs associated with the restructuring and integration program for the three months ended October 1, 2004 and the three months ended October 3, 2003 is outlined below. The reserve balance shown below reflects the aggregate reserves for restructuring costs.


	Three Months Ended
(dollars in thousands)	October 1, 2004			October 3, 2003
Reserve balance at beginning of period	$	9,020		$	69,400
Restructuring costs charged to income		5,604			561
Liability adjustments		(140	)		—
Payments of accrued costs		(6,560	)		(12,728	)

Reserve balance at end of period	$	7,924		$	57,233

Period costs classified as selling, general and administrative expenses	$	6,985		$	5,312
Capital expenditures		10,043			10,942

Non-Operating Results:


	Three Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount			Percentage
Interest expense	$	30,538		$	30,969		$	(431	)	-1.4	%
Interest income		(2,250	)		(262	)		(1,988	)	758.8	%

Net interest expense		28,288			30,707			(2,419	)	-7.9	%
Other expense, net		1,623			666			957		—

•

Net interest expense decreased for the three months ended October 1, 2004 as compared to the same period in the prior year primarily due to the reduction in total debt outstanding and reduction in interest rates resulting from the August 2003 and February 2004 amendments to our senior secured credit facilities and higher interest income from short-term investments, partially offset by increased debt issuance cost amortization expense resulting from the pre-payment of debt as required under senior secured credit facility agreement.

•

Other expense, net for the three months ended October 1, 2004 consisted primarily of net losses from foreign currency transactions of $1.6 million.

•

Other expense, net for the three months ended October 3, 2003 consisted primarily of net losses from foreign currency transactions of $1.0 million.

Income Taxes:


	Three Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount			Percentage
Income before taxes and discontinued operations including minority interests	$	9,283		$	14,483		$	(5,200	)	-35.9	%
Provision for income taxes		4,704			5,985			(1,281	)	-21.4	%
Effective income tax rate		50.7	%		41.3	%

•

The provision for income taxes increased as compared to the prior year primarily due to an increase in the effective tax rate as a result of higher taxes on foreign income and an increase in the valuation allowance for foreign tax loss carryforwards, partially offset by lower income before taxes.

EBITDA:

EBITDA decreased by $3.4 million, or 3.9%, to $84.4 million for the three months ended October 1, 2004, as compared to $87.8 million for the three months ended October 3, 2003, primarily due to the $6.7 million increase in restructuring expenses charged to operations and selling, general and administrative expenses previously discussed. Benefits from synergy and integration programs and growth in sales volume were offset by a reduction in gross margin resulting from product and geographic mix and the unrecovered raw material price increases. While third quarter EBITDA was lower than the same period in the prior year, we are ahead of last year for the nine month period and should continue to show improvement on 2003 for the full year.

EBITDA is a non-GAAP financial measure, and you should not consider EBITDA as an alternative to GAAP financial measures such as (a) operating profit or net profit as a measure of our operating performance or (b) cash flows provided by operating, investing and financing activities (as determined in accordance with GAAP) as a measure of our ability to meet cash needs.

We believe that, in addition to cash flows from operating activities, EBITDA is a useful financial measurement for assessing liquidity as it provides management, investors, lenders and financial analysts with an additional basis to evaluate our ability to incur and service debt and to fund capital expenditures. In addition, various covenants under our senior secured credit facilities are based on EBITDA, as adjusted pursuant to the provisions of those facilities.

In evaluating EBITDA, management considers, among other things, the amount by which EBITDA exceeds interest costs for the period, how EBITDA compares to principal repayments on outstanding debt for the period and how EBITDA compares to capital expenditures for the period. Management believes many investors, lenders and financial analysts evaluate EBITDA for similar purposes. To evaluate EBITDA, the components of EBITDA, such as net sales and operating expenses and the variability of such components over time, should also be considered.

Accordingly, we believe that the inclusion of EBITDA in this quarterly report permits a more comprehensive analysis of our liquidity relative to other companies and our ability to service debt requirements. Because all companies do not calculate EBITDA identically, the presentation of EBITDA in this quarterly report may not be comparable to similarly titled measures of other companies.

EBITDA should not be construed as a substitute for, and should be read together with, net cash flows provided by operating activities as determined in accordance with GAAP. The following table reconciles EBITDA to net cash flows provided by operating activities, which is the GAAP measure most comparable to EBITDA, for each of the periods for which EBITDA is presented.


	Three Months Ended
(dollars in thousands)	October 1, 2004			October 3, 2003
Net cash flows provided by operating activities	$	67,773		$	134,075
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses		(24,676	)		(78,914	)
Changes in deferred income taxes		11,120			3,956
Loss from divestitures		(276	)		(496	)
Gain (loss) on property disposals		550			(4,578	)
Depreciation and amortization expense		(46,954	)		(39,393	)
Amortization of debt issuance costs		(3,147	)		(2,624	)
Interest accrued on long-term receivables-related parties		733			—
Other		(683	)		(1,659	)

Net income		4,440			10,367
Minority interests in net income (loss) of subsidiaries		(7	)		61
Provision for income taxes		4,715			7,262
Interest expense, net		28,288			30,702
Depreciation and amortization expense		46,954			39,393

EBITDA	$	84,390		$	87,785

Nine Months Ended October 1, 2004 Compared to Nine Months Ended October 3, 2003

Net Sales:


	Nine Months Ended				Change
(dollars in thousands)	October 1, 2004		October 3, 2003		Amount		Percentage
Net product and service sales:
Professional	$	2,065,253	$	1,887,776	$	177,477	9.4	%
Polymer⁽¹⁾		230,639		201,175		29,464	14.6	%

		2,295,892		2,088,951		206,941	9.9	%
Sales agency fee income		68,079		65,996		2,083	3.2	%

	$	2,363,971	$	2,154,947	$	209,024	9.7	%

⁽¹⁾	Excludes inter-segment sales to the professional segment

•

The strengthening of the euro and certain other foreign currencies against the U.S. dollar contributed $124 million to the increase in net product and service sales for the nine months ended October 1, 2004 as compared to the same period in the prior year, which was comprised of $116 million and $7.9 million, respectively, for the professional segment and the polymer segment.

•

Excluding the foreign currency impact, professional segment net sales increased by $61.2 million, or 3.1%, for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily due to the impact of recent acquisitions, most notably Daisan Kogyo Co., Ltd. ($38.1 million), and volume growth in the Asia Pacific region (8.5%) from expansion into the developing markets in India and China and in Japan (3.2%) from the success of the total solutions business. All other regions showed slight improvement or were flat as compared to the prior period. These improvements were partially offset by competitive global pricing pressures, industry consolidation in the food and beverage business and a change in product mix in key markets as cost reduction efforts cause customers to purchase increased volumes of lower priced, lower margin products at the expense of higher priced, higher margin products.

•

Excluding the foreign currency impact, polymer segment net sales increased by $21.6 million, or 10.3%, for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily as a result of volume growth of 11%, mainly in the Asia Pacific and North America regions and in Japan.

•

Excluding a $6.8 million increase from the strengthening of the euro and certain other foreign currencies against the U.S. dollar, net sales under our sales agency agreement with Unilever decreased $4.7 million, or 6.4%, for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily due to certain brand disposals by Unilever in the European and Asia Pacific markets.

Gross Profit:


	Nine Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount		Percentage
Professional	$	962,168		$	904,240		$	57,928	6.4	%
Polymer		70,234			66,869			3,365	5.0	%

		1,032,402			971,109			61,293	6.3	%

Gross profit as a % of net sales:
Professional		45.1	%		46.3	%
Polymer		30.5	%		33.2	%

		43.7	%		45.1	%

•

The strengthening of the euro and certain other foreign currencies against the U.S. dollar increased gross profits by $64.1 million for the nine months ended October 1, 2004 as compared to the same period in the prior year, which is comprised of $58.2 million and $5.9 million, respectively, for the professional segment and the polymer segment.

•

In our professional segment, the primary driver of the gross margin decline has been an unfavorable product and services mix, primarily in Europe, Japan and Latin America, where lower margin products or services are being substituted for higher margin products. The increase crude oil and natural gas costs have also negatively affected our floorcare business, where acrylic based polymers are more common in product formulations. The segment has also been adversely impacted by a steady rise in freight and transportation costs, primarily in North America, which can be attributed to the rise in crude oil prices, and additional depreciation expense ($9.5 million) resulting from a change in accounting estimate for dishwashing equipment useful lives.

•

Operating Expenses:


	Nine Months Ended				Change
(dollars in thousands)	October 1, 2004		October 3, 2003		Amount			Percentage
Selling, general and administrative expenses	$	825,733	$	785,613	$	40,120		5.1	%
Research and development expenses		55,406		51,216		4,190		8.2	%
Restructuring expense		13,154		13,862		(708	)	-5.1	%

	$	894,293	$	850,691	$	43,602		5.1	%

•

The strengthening of the euro and certain other foreign currencies against the U.S. dollar increased operating expenses by $47.5 million for the nine months ended October 1, 2004 as compared to the same period in the prior year, which was comprised of selling, general and administrative expenses ($44.4 million), research and development expenses ($2.0 million) and restructuring expense ($1.1 million).

•

Excluding the impact of foreign currency, selling, general and administrative expenses decreased $4.3 million for the nine months ended October 1, 2004 as compared to the same period in the prior year. Decreases in pension plan costs ($5.8 million), which resulted from adjustments to census data and plan curtailments in Brazil and the United Kingdom, and synergies from restructuring and integration programs, primarily in the sales and administrative functions, have exceeded the incremental operating expenses from the Daisan Kogyo Co., Ltd. acquisition ($9.2 million), an increase in capital software amortization costs related to projects placed into service in 2003, increased legal and other professional fees, higher employee benefit costs, particularly in North America, and other wage and cost increases.

Restructuring and Integration:

During the nine months ended October 1, 2004, we recorded $13.2 million of restructuring costs and $16.7 million of selling, general and administrative expenses related to our restructuring and integration programs in our consolidated statement of income. These costs consisted primarily of severance costs recorded for employees terminated as part of approved integration projects, including the closure of facilities and organizational restructuring in the United States ($7.1 million) and initiatives in the Netherlands, Italy and Spain ($4.4 million) as we continue to consolidate our operations.

A summary of all costs associated with the restructuring and integration program for the nine months ended October 1, 2004, the nine months ended October 3, 2003 and from inception is outlined below. The reserve balance shown below reflects the aggregate reserves for restructuring costs.


	Nine Months Ended						Total Project to Date May 4, 2002 - October 1, 2004
(dollars in thousands)	October 1, 2004			October 3, 2003
Reserve balance at beginning of period	$	34,798		$	68,858		$	—
Exit costs recorded as purchase accounting adjustments		—			21,758			80,574
Restructuring costs charged to income		13,154			13,862			45,722
Liability adjustments		(4,180	)		—			(4,180	)
Payments of accrued costs		(35,848	)		(47,245	)		(114,192	)

Reserve balance at end of period	$	7,924		$	57,233		$	7,924

Period costs classified as cost of sales	$	—		$	2,420		$	4,878
Period costs classified as selling, general and administrative expenses		16,661			28,236			91,329
Capital expenditures		22,767			32,048			93,980

Non-Operating Results:


	Nine Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount			Percentage
Interest expense	$	94,086		$	96,016		$	(1,930	)	-2.0	%
Interest income		(4,204	)		(2,189	)		(2,015	)	92.1	%

Net interest expense		89,882			93,827			(3,945	)	-4.2	%
Other (income) expense, net		3,885			(2,484	)		6,369		—

•

Net interest expense decreased for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily due to the reduction in total debt outstanding and reduction in interest rates resulting from the August 2003 and February 2004 amendments to our senior secured credit facilities and higher interest income from short-term investments, partially offset by increased debt issuance cost amortization expense resulting from the pre-payment of debt as required under senior secured credit facility agreement.

•

Other expense, net for the nine months ended October 1, 2004 included net losses from foreign currency transactions ($7.3 million) and non-recoverable sales tax assessments related to prior years ($1.1 million), offset by compensation received from Unilever on the partial termination of our sales agency agreement with Unilever under terms provided for by such agreement and as a result of the disposal by Unilever of certain of its brands ($2.5 million) and net gains on the sale of certain product lines ($1.8 million).

•

Other income, net for the nine months ended October 3, 2003 primarily included a net gain from foreign currency translation and transactions of $1.8 million.

Income Taxes:


	Nine Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount		Percentage
Income before taxes and discontinued operations including minority interests	$	44,188		$	28,963		$	15,225	52.6	%
Provision for income taxes		18,925			11,963			6,962	58.2	%
Effective income tax rate		42.8	%		41.3	%

•

The provision for income taxes increased as compared to the prior year primarily due to higher income before taxes and an increase in the effective tax rate for the nine months ended October 1, 2004 primarily attributable to higher taxes on foreign income and an increase in the valuation allowance for foreign tax loss carryforwards.

EBITDA:

EBITDA increased by $29.2 million, or 11.8%, to $277 million for the nine months ended October 1, 2004, as compared to $248 million for the nine months ended October 3, 2003, primarily due to the increase in gross profit, offset partially by a $6.4 million increase in other expense, net, all as previously discussed. Benefits from synergy and integration programs and growth in sales volume were offset by a reduction in gross margin resulting from product and geographic mix and the unrecovered raw material price increases.

financial analysts evaluate EBITDA for similar purposes. To evaluate EBITDA, the components of EBITDA, such as net sales and operating expenses and the variability of such components over time, should also be considered.


	Nine Months Ended
(dollars in thousands)	October 1, 2004			October 3, 2003
Net cash flows provided by operating activities	$	155,178		$	161,653
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses		8,753			(18,108	)
Changes in deferred income taxes		8,456			12,125
Gain from divestitures		2,757			799
Loss on property disposals		(212	)		(9,231	)
Depreciation and amortization expense		(139,591	)		(116,368	)
Amortization of debt issuance costs		(9,667	)		(7,742	)
Interest accrued on long-term receivables-related parties		2,556			—
Other		(848	)		(1,127	)

Net income		27,382			22,001
Minority interests in net income (loss) of subsidiaries		154			112
Provision for income taxes		19,883			15,375
Interest expense, net		89,882			93,801
Depreciation and amortization expense		139,591			116,368

EBITDA	$	276,892		$	247,657

Liquidity and Capital Resources


	Nine Months Ended						Change
(dollars in thousands)	October 1, 2004			October 3, 2003			Amount			Percentage
Net cash provided by operating activities	$	155,178		$	161,653		$	(6,475	)	-4.0	%
Net cash used in investing activities		(35,659	)		(81,539	)		45,880		-56.3	%
Net cash used in financing activities		(85,313	)		(111,011	)		25,698		-23.1	%
Capital expenditures		85,092			97,835			(12,743	)	-13.0	%

							Change
	October 1, 2004			January 2, 2004			Amount			Percentage
Cash and cash equivalents	$	39,947		$	24,543		$	15,404		62.8	%
Working capital ⁽¹⁾		405,096			550,805			(145,709	)	-26.5	%
Total debt		1,305,358			1,490,662			(185,304	)	-12.4	%

⁽¹⁾	Working capital is defined as net accounts recievable, plus investories less accounts payable.

•

Net cash flows provided by operating activities decreased $6.5 million for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily due to higher pension plan contributions and a reduction of non-current pension related liabilities resulting from adjustments to census data and plan curtailments in Brazil and the United Kingdom ($5.8 million), partially offset by the increase in net income

and additional participation in the receivable securitization program ($13.7 million). For further detail on the receivables securitization program, see “Off-Balance Sheet Arrangements” below.

•

Net cash used in investing activities improved by $45.9 million for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily due to proceeds from the Whitmire divestiture ($46.0 million). A decrease in capital expenditures for property, plant and equipment and computer software ($12.7 million) was largely offset by a reduction in proceeds from the sale of property, plant and equipment ($11.1 million). The characteristics of our business do not generally require us to make significant ongoing capital expenditures. We may make significant cash expenditures in the next few years in an effort to further capitalize on anticipated revenue growth and cost savings opportunities associated with the acquisition of the DiverseyLever business.

•

Net cash flows used in financing activities decreased by $25.7 million for the nine months ended October 1, 2004 as compared to the same period in the prior year primarily due to lower net repayments of debt ($34.0 million) and the timing of dividend payments ($7.0 million). Our senior secured credit facility agreement requires that proceeds received through the sale of assets or expansion of the receivables securitization program be used to pay down outstanding term debt. In the nine months ended October 3, 2003, net repayments of debt were $106 million, resulting from the expansion of the receivables securitization program and increased cash flow from operations. In the nine months ended October 1, 2004, net repayments of debt were $71.7 million, resulting from the proceeds for the Whitmire divestiture and the further expansion of the receivables securitization program.

•

Net working capital decreased $146 million for the nine months ended October 1, 2004 as compared to January 2, 2004 primarily as a result of changes to the receivable securitization program that moved $95.2 million in trade receivables to our off-balance sheet special purpose entity, additional participation in the receivable securitization program of $13.7 million, primarily in Italy, and a benefit from foreign currency exchange rates. For further detail on the receivables securitization program, see “Off-Balance Sheet Arrangements” below.

•

Due to the seasonality of our business, net working capital tends to be at its lowest levels at year-end with a build during the first half of the year to meet second half demand and a reduction over the second half of the year. At October 1, 2004, net working capital of $405 million was $5.7 million lower than at the end of the second quarter. Given this trend, we anticipate that net working capital will decrease further by the end of the fiscal year.

•

Total debt decreased $185 million for the nine months ended October 1, 2004 as compared to January 2, 2004 primarily as a result of the removal of $95.2 million of obligations under the receivables securitization facility to an off-balance sheet special purpose entity, pre-payment of debt under the senior secured credit facilities ($122 million) and the strengthening of the U.S. dollar against the Euro and other foreign currencies, partially offset by additional short-term borrowings ($42 million) to fund cash outflows from operations and the aforementioned term debt principal payments. For further detail on the receivables securitization program, see “Off-Balance Sheet Arrangements” below.

Debt and Contractual Obligations. As a result of the DiverseyLever acquisition, we have a significant amount of indebtedness. On May 3, 2002, in connection with the acquisition, we issued senior subordinated notes and entered into a $1.2 billion senior secured credit facility. We used the proceeds of the sale of the senior subordinated notes and initial borrowings under the senior secured credit facilities, together with other available funds, to finance the cash portion of the purchase price for the DiverseyLever business and the related fees and expenses and to refinance then-existing indebtedness.

The senior secured credit facilities were amended in August 2003. This amendment reduced the interest rate payable with respect to specified tranches of debt under the credit facilities, thereby reducing borrowing costs over the remaining life of the credit facilities. In addition, the amendment increased specified credit limits and changed various administrative requirements to provide us greater operating flexibility.

The senior secured credit facilities were amended for a second time on February 24, 2004. This amendment reduced the interest rate payable for the U.S. dollar portion of the term B tranche of debt under the senior secured credit facilities, thereby reducing the borrowing cost over the remaining life of the tranche. In addition, the amendment changed various financial covenants and administrative requirements to provide us with greater flexibility to operate our business and to complete the integration of the DiverseyLever acquisition.

As of October 1, 2004, we had total indebtedness of about $1.3 billion, consisting of $576 million of senior subordinated notes, $670 million of borrowings under the senior secured credit facilities, $1.7 million of other long-term borrowings and $57.8 million in short-term credit lines. In addition, we had $199 million in operating lease commitments, $12.1 million in capital lease commitments and $7.3 million committed under letters of credit that expire in 2004 and 2005.

We have the capacity to borrow additional funds under the senior secured credit facilities, subject to compliance with the financial covenants set forth in the facilities. As of October 1, 2004, we had $15.9 million in borrowings under the revolving portion of the senior secured credit facilities and had the ability to borrow $302 million under those revolving facilities. Of this amount, we believe we would have been able to borrow $282 million and still be in compliance with the financial covenants set forth in the senior secured credit facilities and the indentures for the senior subordinated notes.

We believe that the cash flows from operations, the anticipated further cost savings and operating improvements associated with the acquisition of the DiverseyLever business and our restructuring initiatives, together with available cash, available borrowings under the senior secured credit facilities and the proceeds from our receivables securitization facility will generate sufficient cash flow to meet our liquidity needs for the foreseeable future. There can be no assurance, however, that we will be able to achieve the anticipated cost savings or that our substantial indebtedness will not adversely affect our financial condition.

Off-Balance Sheet Arrangements. Since March 2001, we have funded a portion of our short-term liquidity needs through the securitization of some of our trade accounts receivable (the “Receivables Facility”). We and certain of our subsidiaries in the U.S., U.K. and Italy are parties to an agreement whereby we and each participating subsidiary sell, on a continuous basis, all trade receivables to JWPR Corporation (“JWPRC”), a wholly owned, special purpose, bankruptcy-remote subsidiary formed for the sole purpose of buying and selling receivables. Under the Receivables Facility, we and some of our subsidiaries, irrevocably and without recourse, transfer all trade receivables to JWPRC. JWPRC, in turn, sells an undivided interest in these receivables to Falcon Asset Management Corporation (the “Conduit”) for an amount equal to the value of all eligible receivables (as defined under the receivables sale agreement) less the applicable reserve.

On August 29, 2003, the Receivables Facility was amended to include certain additional U.S. subsidiaries, expand the total potential for securitization of trade receivables to $75 million from the previous limit of $55 million, and change the facility term to 354 days from the date of closing, renewable without fee.

On October 24, 2003, the Receivables Facility was again amended to include certain United Kingdom subsidiaries and further expand the total potential for securitization of trade receivables to $100 million (the “October 2003 amendment”). Prior to the October 2003 amendment, the beneficial interest of accounts receivable sold under the Receivables Facility was excluded from accounts receivable in our consolidated balance sheets in accordance with SFAS No. 140. As a result of the terms of the October 2003 amendment, limitations in the articles of incorporation of JWPRC and the requirements for sale defined in SFAS No. 140, we were no longer able to exclude the accounts receivable sold under the Receivables Facility from its consolidated balance sheets.

On January 5, 2004, the Receivables Facility was amended and restated to include our Italian subsidiary and to further expand the potential for securitization of trade receivables to $150 million.

In March 2004, we modified the articles of incorporation of JWPRC and obtained necessary legal opinions in order for the Receivables Facility to be in compliance with the provisions of SFAS No. 140. As such, we have excluded accounts receivable sold under the Receivables Facility from the consolidated balance sheet at October 1, 2004.

As of October 1, 2004, the Conduit held $136 million of accounts receivable that are not included in the accounts receivable balance reflected in our consolidated balance sheet. As of January 2, 2004, we included $95.2 million of accounts receivable held by the Conduit in our consolidated balance sheet for the reasons noted above.

As of October 1, 2004, we had a retained interest of $129 million in the receivables of JWPRC. The retained interest is included in the accounts receivable balance and is reflected in the consolidated balance sheet at estimated fair value.

For the nine months ended October 1, 2004, JWPRC’s cost of borrowing under the Receivables Facility is at a weighted average rate of 2.56% per annum, which is significantly lower than our incremental borrowing rate.

Under the terms of the senior secured credit facilities, we must use any net proceeds from the Receivables Facility first to prepay loans outstanding under the senior secured credit facilities. In addition, the net amount of trade receivables at any time outstanding under this and any other securitization facility that we may enter into may not exceed $200 million in the aggregate.

Financial Covenants under Our Senior Secured Credit Facilities

Under the terms of the senior secured credit facilities, we are subject to certain financial covenants. The most restrictive covenants under the senior secured credit facilities require us to meet the following targets and ratios:

Maximum Leverage Ratio. We are required to maintain a leverage ratio for each financial covenant period of no more than the maximum ratio specified in the senior secured credit facilities for that financial covenant period. The maximum leverage ratio is the ratio of (1) our consolidated indebtedness (excluding up to $55 million of indebtedness incurred under our Receivables Facility and indebtedness relating to specified interest rate hedge agreements) as of the last day of a financial covenant period using a weighted-average exchange rate for the relevant fiscal six-month period to (2) our consolidated EBITDA, as defined in the senior secured credit facilities, for that same financial covenant period.

The senior secured credit facilities require that we maintain a leverage ratio of no more than the ratio set forth below for each of the financial covenant periods ending nearest the corresponding date set forth below:


		Maximum Leverage Ratio
September 30, 2004		4.25 to 1
December 31, 2004, to June 30, 2005		3.75 to 1
September 30, 2005		3.50 to 1
December 31, 2005		3.25 to 1
March 31, 2006 and thereafter		3.00 to 1

Minimum Interest Coverage Ratio. We are required to maintain an interest coverage ratio for each financial covenant period of no less than the minimum ratio specified in the senior secured credit facilities for that financial covenant period. The minimum interest coverage ratio is the ratio of (1) our consolidated EBITDA, as defined in the senior secured credit facilities, for a financial covenant period to (2) our cash interest expense for the same financial covenant period.

The senior secured credit facilities require that we maintain an interest coverage ratio of no less than the ratio set forth below for each of the financial covenant periods ending nearest the corresponding date set forth below:


		Minimum Interest Coverage Ratio
September 30, 2004		3.00 to 1
December 31, 2004, to March 31, 2005		3.25 to 1
June 30, 2005, to September 30, 2005		3.50 to 1
December 31, 2005 and thereafter		4.00 to 1

Compliance with Maximum Leverage Ratio and Minimum Interest Coverage Ratio. For our financial covenant period ended on October 1, 2004, we were in compliance with the maximum leverage ratio and minimum interest coverage ratio covenants contained in the senior secured credit facilities.

Capital Expenditures. The senior secured credit facilities prohibit us from making capital expenditures during any calendar year nearest the corresponding date set forth below in an amount exceeding the following:


(dollars in thousands)	Maximum Capital Expenditures
December 31, 2004	$	122,600
December 31, 2005	$	107,000
December 31, 2006	$	110,000
December 31, 2007	$	113,200

We can exceed in a year the maximum capital expenditures limitation set forth above for that year by the amount, if any, by which the limitation set forth above for the previous year exceeded actual capital expenditures made in that previous year. Based on fiscal year 2003 capital expenditures of $135 million as compared to the $161 million maximum, we may exceed the fiscal year 2004 capital expenditure limit by an additional $26 million. As of October 1, 2004, we were in compliance with the limitation on capital expenditures for fiscal year 2004.

Restructuring Charges. The senior secured credit facilities limit the amount of spending on restructuring and integration-related activities in 2004 and 2005 to $145 million in the aggregate. As of October 1, 2004, we were in compliance with the limitation on spending on restructuring and integration-related activities for fiscal year 2004.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

As of October 1, 2004, we had $670 million of debt outstanding under our senior secured credit facilities. After giving effect to the interest rate swap transactions that we have entered into with respect to some of the borrowings under our credit facilities, $216 million of the debt outstanding remained subject to variable rates. In addition, as of October 1, 2004, we had $57.8 million of debt outstanding under foreign lines of credit, all of which were subject to variable rates. Accordingly, our earnings and cash flows are affected by changes in interest rates. At the above level of variable rate borrowings, we do not anticipate a significant impact on earnings in the event of a reasonable change in interest rates. In the event of an adverse change in interest rates, management would likely take actions that would mitigate our exposure to interest rate risk; however, due to the uncertainty of the actions and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effects of the change in the level of the overall economic activity that could exist in such an environment.

Foreign Currency Risk

We conduct our business in various regions of the world and export and import products to and from many countries. Our operations may, therefore, be subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in these countries. Sales and expenses are frequently denominated in local currencies, and results of operations may be affected adversely as currency fluctuations affect product prices and operating costs. We engage in hedging operations, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. All hedging instruments are designated and effective as hedges, in accordance with GAAP. Other instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. We do not engage in hedging for speculative investment reasons. There can be no assurance that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.

Based on our overall foreign exchange exposure, we estimate that a 10% change in the exchange rates would not materially affect our financial position and liquidity. The effect on our results of operations would be substantially offset by the impact of the hedged items.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of JohnsonDiversey’s Disclosure Controls and Internal Controls. As of the end of the period covered by this quarterly report, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure Controls”). The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and interim Chief Financial Officer (“CFO”). The result of the controls evaluation was reported to the Audit Committee of the Company’s Board of Directors (the “Audit Committee”).

CEO & CFO Certifications. Attached as exhibits 31.1 and 31.2 to this quarterly report are certifications of the CEO and the CFO required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). This portion of our quarterly report is our disclosure of the results of our controls evaluation referred to in Rule 13a-14 of the Exchange Act and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Disclosure Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include those components of our internal control over financial reporting that are designed to provide reasonable assurance that transactions are recorded as necessary to permit the

preparation of financial statements in accordance with GAAP. To the extent that components of our internal control over financial reporting are included in our Disclosure Controls, they are included in the scope of our quarterly evaluation of Disclosure Controls.

Limitations on the Effectiveness of Controls. Our Disclosure Controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation. The evaluation of our Disclosure Controls included a review of control objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this quarterly report. In the course of the controls evaluation, we sought to identify data errors, control issues or acts of fraud and to confirm that appropriate corrective actions, including process improvements, were taken. This evaluation is performed, and reported to our Audit Committee, on a quarterly basis so that the conclusions of management, including the CEO and the CFO, concerning the effectiveness of the controls can be reported in our quarterly reports on Form 10-Q and to supplement the disclosures made in our annual reports on Form 10-K. Certain of the components of our Disclosure Controls are also evaluated on an ongoing basis by our internal audit department and by other personnel in our finance organization, as well as our independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to make modifications as necessary. Our intent is that the Disclosure Controls will be maintained as dynamic systems that change (including through improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our internal control over financial reporting, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal control over financial reporting. This information was important both for our controls evaluation and for Rule 13a-14 of the Exchange Act, which requires that the CEO and CFO disclose that information to our Audit Committee and to our independent auditors and report on that information and related matters in this section of the quarterly report. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions” which are control issues that could have a significant adverse effect on the Company’s ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition whereby the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the controls evaluation, and in each case if an issue was identified, we considered what revision, improvement and/or correction to make in accordance with our on-going procedures.

Commencing in the first quarter of fiscal year 2003, we formulated our Finance Infrastructure Internal Control Improvement Plan to take additional actions to strengthen our internal control environment, including the hiring of additional finance personnel, strengthening of the internal audit function, development of expanded Sarbanes-Oxley Act Section 302 certification and monthly financial statement closing processes, expansion of Sarbanes-Oxley Act Section 404 internal control review activities, commencement of a skill set assessment survey of key members of the finance staff, and improved monitoring and oversight of the finance function. In addition, to assist management in assessing our control environment and related issues associated with the material weaknesses previously identified, we retained, commencing in the first quarter of fiscal year 2003, independent consulting firms with experience in internal controls.

In connection with the completion of the audit of our consolidated financial statements for our fiscal year ended January 2, 2004, our independent auditors, Ernst & Young LLP, identified certain deficiencies in the design and operation of our internal controls related to the financial reporting process, which represent reportable conditions that collectively represent a material weakness in internal control over financial reporting. Deficiencies were identified with respect to the complex process to finalize the accounting for the purchase of the DiverseyLever business, our process for accounting, analysis, and documentation of income taxes, documentation of our receivables securitization program, accounting for fixed asset transfers arising from the integration of the business, and oversight and monitoring of the finance function.

Management continues to refine and implement the Financial Infrastructure Internal Control Improvement Plan to address these matters with input from the Company’s independent auditors and our Audit Committee. The following is a summary of actions completed as of the end of the third quarter of 2004:

•

In the first quarter of 2004, we amended the articles of incorporation related to our asset securitization facility and obtained the necessary updated legal opinions to permit us to resume off-balance sheet treatment of our sold accounts receivable in compliance with SFAS No. 140;

•

In the second quarter of 2004, we completed the integration of our North America fixed asset systems;

•

In the third quarter of 2004, we issued updated global fixed asset accounting policies and procedure statements designed to strengthen accounting and internal control in this area;

•

In the third quarter of 2004, we finalized a significant portion of the remaining open purchase price allocation matters; and

•

In the third quarter of 2004, with the assistance of a third party consulting firm, we completed our review of the Company’s financial statement closing process, which included a comprehensive analysis of the tax closing process.

Remediation of the remaining reportable conditions continues to be addressed by management. The following is an update of management’s ongoing actions as of the end of the third quarter of 2004:

•

We are making substantial progress with our comprehensive review of purchase accounting for local statutory reporting purposes and have held a number of regional training sessions for finance personnel responsible for the preparation of local statutory reports and income tax returns. We will continue to use this work to assist in identifying any remaining purchase accounting related issues and focus further tailored training sessions for local finance personnel as required.

•

We have formed task forces to develop action plans to implement prioritized recommendations resulting from our analysis of the tax closing and financial statement closing process.

•

We are continuing our work to develop and deploy against training requirements identified by the world-wide skill set assessment of key members of the finance staff that was completed during the second quarter of 2004, with initial emphasis given to tax accounting.

The actions being taken by us to correct the weaknesses previously identified constitute significant changes in internal control over financial reporting in the period covered by this quarterly report. These actions constitute the only changes to our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting in this quarterly period.

As previously disclosed, effective August 16, 2004, Michael Bailey, our Executive Vice President and Chief Financial Officer, assumed the newly created strategic role of Executive Vice President of Corporate Development for the Company. In his new role, Mr. Bailey is responsible for merger, acquisition and business alliance activity, strategy development and execution, information technology management and business development. Mr. Bailey remains on the Company’s Senior Management Committee.

Also as previously disclosed, effective August 16, 2004, Clive Newman, our Vice President and Corporate Controller, assumed the role of interim Chief Financial Officer. In addition, in his capacity as interim Chief Financial Officer, Mr. Newman is also serving as a member of the Company’s Senior Management Committee. Mr. Newman has been our Vice President and Corporate Controller since completion of the Company’s acquisition of DiverseyLever in May 2002.

On November 1, 2004, the Company’s Board of Directors named Joseph Smorada as Executive Vice President and Chief Financial Officer, effective November 15, 2004. Mr. Smorada will serve as a member of the Company’s Senior Management Committee, replacing Mr. Newman in this role. Mr. Newman will continue to serve as interim Chief Financial Officer until the effectiveness of Mr. Smorada’s appointment, at which time he will resume his prior role as Vice President and Corporate Controller.

We believe that the above actions taken by the Company will enhance the skills of senior finance leadership, improve financial oversight and help the Company meet applicable reporting and controls requirements.

Conclusions. Based upon the controls evaluation, our CEO and interim CFO have concluded that our Disclosure Controls, as of the end of the period covered by this quarterly report, including the additional procedures performed and controls instituted by us to supplement our internal control over financial reporting in order to mitigate the effect of the weaknesses identified in this report, were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Auto-C, LLC, our wholly owned subsidiary, supplies commercial warewashing, laundry and other products in the United States that bear the Auto-Chlor^® System trademark and distributes these products through us or through dealers with rights in defined territories. Pursuant to a complaint filed on March 2, 2002, as amended, a group of Auto-Chlor System dealers sued DLever, Inc., a subsidiary of Unilever, Auto-C, LLC and JDI in the United States District Court for the District of Minnesota (the “Court”). Following the Court’s July 19, 2004 dismissal of most of the claims made by the Auto-Chlor System dealers, the case was settled in August 2004 without material adverse effect on our business, financial condition, results of operations or cash flows.

We are also party to various legal proceedings in the ordinary course of our business which may, from time to time, include product liability, intellectual property, contract, environmental and tax claims as well as government or regulatory agency inquiries or investigations. We believe that, taking into account our insurance and reserves and the valid defenses with respect to legal matters currently pending against us, the ultimate resolution of these proceedings will not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits


10.1		Employment Agreement between JohnsonDiversey, Inc. and Diarmuid P. Ryan, dated as of May 3, 2004.

31.1		Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				JOHNSONDIVERSEY, INC.

Date: November 12, 2004				/s/ CLIVE A. NEWMAN
				Clive A. Newman
				Interim Chief Financial Officer,
				Vice President and Corporate Controller
				Chief Accounting Officer

JOHNSONDIVERSEY, INC.

EXHIBIT INDEX


Exhibit Number		Description of Exhibit
10.1		Employment Agreement between JohnsonDiversey, Inc. and Diarmuid P. Ryan, dated May 3, 2004.

31.1		Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.