Diversey 10Q 2003 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10–Q

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

FOR THE QUARTERLY PERIOD ENDED JULY 4, 2003

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 August 1, 2003, there were 24,422 outstanding shares of the registrant’s common stock, $1.00 par value.

Index

Section	Topic	Page
	Forward-Looking Statements	ii

PART I

Item 1	Financial Statements

	Consolidated Balance Sheets as of July 4, 2003 and January 3, 2003	1

	Consolidated Statements of Income for the three and six months ended July 4, 2003 and June 28, 2002	2

	Consolidated Statements of Cash Flows for the six months ended July 4,2003 and June 28, 2002	3

	Notes to Consolidated Financial Statements for the six months ended July 4, 2003 and June 28, 2002	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3	Quantitative and Qualitative Disclosure about Market Risk	25

Item 4	Controls and Procedures	26

PART II

Item 6	Exhibits and Reports on Form 8–K	28

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 integrate and operate our new organizational structure, including 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 our 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

•

severe weather conditions affecting the food and lodging industry.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JOHNSONDIVERSEY, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)	July 4, 2003			January 3, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	48,496		$	59,272
Accounts receivable less allowance of $22,547 and $21,099, respectively		548,675			463,743
Accounts receivable – related parties		49,095			80,922
Inventories		288,852			260,983
Deferred income taxes – current		47,509			43,682
Other current assets		90,425			83,742

Total current assets		1,073,052			992,344
Property, plant and equipment, net		576,639			561,835
Capitalized software, net		76,804			79,343
Goodwill, net		1,213,076			1,132,329
Other intangibles, net		399,675			387,953
Deferred income taxes – non-current		44,986			37,653
Long-term receivables – related parties		85,397			72,475
Other assets		123,574			119,453

Total assets	$	3,593,203		$	3,383,385

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	143,929		$	68,119
Current portion of long-term debt		29,187			57,906
Accounts payable		231,912			218,147
Accounts payable – related parties		107,850			110,414
Accrued expenses		411,552			375,170
Accrued profit-sharing		8,862			7,563

Total current liabilities		933,292			837,319
Pension and other post-retirement benefits		273,120		��	268,962
Long-term borrowings		1,361,918			1,348,270
Long-term payables – related parties		23,110			11,750
Other liabilities		102,143			84,051

Total liabilities		2,693,583			2,550,352

Stockholders’ equity:
Common stock – $1.00 par value; 200,000 shares authorized; 24,422 shares issued and outstanding		24			24
Capital in excess of par value		734,568			734,568
Retained earnings		107,006			100,672
Accumulated other comprehensive income		61,160			1,262
Notes receivable from officers		(3,138	)		(3,493	)

Total stockholders’ equity		899,620			833,033

Total liabilities and stockholders’ equity	$	3,593,203		$	3,383,385

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

JOHNSONDIVERSEY, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended						Six Months Ended
(dollars in thousands)	July 4, 2003			June 28, 2002			July 4, 2003			June 28, 2002
	(unaudited)						(unaudited)
Net sales:
Net product and service sales	$	739,038		$	553,649		$	1,415,294		$	821,028
Sales agency fee income		22,913			12,352			44,161			12,352

		761,951			566,001			1,459,455			833,380
Cost of sales		413,454			305,541			795,701			459,365

Gross profit		348,497			260,460			663,754			374,015
Marketing, administrative and general expenses		277,727			188,172			535,145			277,375
Research and development expenses		17,722			18,093			35,458			27,978
Restructuring expense		6,792			—			13,301			—

Operating profit		46,256			54,195			79,850			68,662
Other expense (income):
Interest expense		32,320			21,066			65,047			23,979
Interest income		(754	)		(593	)		(1,948	)		(684	)
Other (income), net		(136	)		(17,431	)		(3,047	)		(13,353	)

Income before taxes		14,826			51,153			19,798			58,720
Provision for income taxes		6,322			19,013			8,113			21,441

Income before minority interests		8,504			32,140			11,685			37,279
Minority interests in net income (loss) of subsidiaries		52			(134	)		51			(161	)

Net income	$	8,452		$	32,274		$	11,634		$	37,440

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

JOHNSONDIVERSEY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
(dollars in thousands)	July 4, 2003			June 28, 2002
	(unaudited)
Cash flows from operating activities:
Net income	$	11,634		$	37,440
Adjustments to reconcile net income to net cash provided by operating activities–
Depreciation		59,431			28,556
Amortization of intangibles		17,544			4,258
Amortization of debt issuance costs		5,118			—
Deferred income taxes		(8,169	)		4,292
Gain from divestitures		(1,295	)		—
Loss on property disposals		4,653			—
Other		(532	)		592
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses–
Accounts receivable		(61,640	)		(100,386	)
Inventories		(17,431	)		398
Other current assets		17,213			5,291
Other assets		(984	)		18,764
Accounts payable and accrued expenses		(1,833	)		101,688
Other liabilities		3,869			(5,864	)

Net cash provided by operating activities		27,578			95,029
Cash flows from investing activities:
Capital expenditures		(48,466	)		(22,264	)
Expenditures for capitalized computer software		(13,061	)		(15,297	)
Cash from property disposals		3,777			6,356
Proceeds from divestitures		835			—
Acquisitions of businesses		(5,315	)		(1,409,200	)

Net cash used in investing activities		(62,230	)		(1,440,405	)
Cash flows from financing activities:
Proceeds from short-term borrowings		73,765			20,534
(Repayments of) proceeds from long-term borrowings		(65,473	)		1,126,512
Capital contributions		—			385,782
Retirement of preferred stock		—			(50	)
Payment of debt issuance costs		—			(61,709	)
Dividends paid		(5,300	)		(11,788	)

Net cash provided by financing activities		2,992			1,459,281

Effect of exchange rate changes on cash and cash equivalents		20,884			3,095

Change in cash and cash equivalents		(10,776	)		117,000
Beginning balance		59,272			8,093

Ending balance	$	48,496		$	125,093

Supplemental cash flows information
Cash paid during the period:
Interest	$	56,503		$	9,610
Income taxes		14,838			16,490
Noncash investing and financing activities:
Capital contribution-Investments in subsidiaries		—			201,900

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

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.Description of the Company

The accompanying consolidated financial statements include all of the operations, assets and liabilities of JohnsonDiversey, Inc. (formerly S. C. Johnson Commercial Markets, Inc.) (the “Company”). 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, and plastics industries.

Prior to November 5, 1999, the Company was a wholly owned subsidiary of S.C. Johnson & Son, Inc. (“SCJ”). On November 5, 1999, ownership of the Company, including all of its assets and liabilities, was spun-off in a tax-free reorganization. In connection with the spin-off, Commercial Markets Holdco, Inc. (“Holdco”) obtained substantially all of the shares of the Company from SCJ.

Prior to May 3, 2002, Holdco contributed its shares in the Company to Johnson Professional Holdings, Inc., a wholly owned subsidiary of Holdco.

On May 3, 2002, the Company acquired the DiverseyLever business from Conopco, Inc., a subsidiary of Unilever N.V. and Unilever PLC (together, “Unilever”) (see Note 8). At the closing of the acquisition, the Company changed its name to JohnsonDiversey, Inc., and Johnson Professional Holdings, Inc. changed its name to JohnsonDiversey Holdings, Inc. (“Holdings”). In connection with the acquisition, Unilever acquired a 33 1/3% interest in Holdings, with the remaining 66 2/3% continuing to be held by Holdco.

2.Basis of Presentation

In the opinion of management, the unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of the Company as of July 4, 2003, and its results of operations for the three and six months ended July 4, 2003 and cash flows for the six months ended July 4, 2003. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2003. The results of operations for the three and six months ended July 4, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.

In order to achieve alignment with its actual business management practices, beginning with fiscal year 2003, the Company reclassified distribution costs from marketing, distribution, administrative and general expenses to cost of sales. Prior year amounts have been reclassified for consistency. Distribution costs were $69,281 and $50,026 for the three months ended July 4, 2003 and June 28, 2002, respectively; and $136,838 and $71,106 for the six months ended July 4, 2003 and June 28, 2002, respectively.

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

All monetary amounts, excluding share data, are stated in thousands.

3.New Accounting Standards

In July 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated with Disposal Activities(“SFAS 146”). Under SFAS 146, liabilities for costs associated with a plan to dispose of an asset or to exit a business activity must generally be recognized in the period in which the costs are incurred. The pronouncement supercedes Emerging Issues Task Force No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity(“EITF 94-3”). Under EITF 94-3, a liability is recognized solely upon an entity’s commitment to a plan. SFAS 146 is effective for disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 effective January 4, 2003 (see Note 11).

In November 2002, the FASB issued Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation 45”), which expands on the guidance for the accounting and disclosure of guarantees. Each guarantee meeting the characteristics described in Interpretation 45 is to be recognized and initially measured at fair value. In addition, guarantors will be required

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

to make significant new disclosures, even if the likelihood of the guarantor making payments under the guarantee is remote. Interpretation 45’s disclosure requirements are effective for financial statements for annual periods ending after December 15, 2002, while the initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted Interpretation 45 effective January 4, 2003.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure(“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(“SFAS 123”), and provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for annual periods ending after December 15, 2002, and interim periods beginning after December 31, 2002. The Company adopted the amendments to the SFAS 123 disclosure provisions required under SFAS 148 effective January 4, 2003, but will continue to use the intrinsic value method under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, to account for stock-based compensation (see Note 6).

In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities(“Interpretation 46”). Interpretation 46 defines a “variable interest entity” and requires a company to consolidate such an entity if the company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. The interpretation also requires disclosure of variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Interpretation 46 is immediately effective for variable interest entities created after January 31, 2003 and effective June 15, 2003 for variable interest entities created on or prior to January 31, 2003. The Company’s adoption of Interpretation 46 has not had a significant impact on its consolidated financial position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities(“SFAS 149”). SFAS 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003. The Company’s adoption of SFAS 149 is not expected to have a significant impact on its consolidated financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(“SFAS 150”). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Instruments that are indexed to and potentially settled in an issuer’s own shares that are not within the scope of SFAS 150 remain subject to existing guidance. SFAS 150 must be applied to instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The Company’s adoption of SFAS 150 is not expected to have a significant impact on its consolidated financial position or results of operations.

4.Income Taxes

The provision for income taxes includes deferred taxes and is based upon estimates of annual effective tax rates in the tax jurisdictions in which the Company operates.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

5.Inventories

Inventories are summarized as follows:

	July 4, 2003			January 3, 2003
Raw materials and containers	$	77,518		$	72,551
Finished goods		218,079			195,177
Last-in, first-out inventory reserves		(6,745	)		(6,745	)

Total inventories	$	288,852		$	260,983

Inventories are net of allowance for excess and obsolete inventory of $25,797 and $22,671 at July 4, 2003 and January 3, 2003, respectively.

6.Stock-based Compensation

The Company has a Long-Term Incentive Plan (the “Plan”) that provides for the right to purchase stock of Holdco 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. All restricted shares vest over a three-to-four year period from the grant date and have an exercise period of ten years from the date of grant. 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 spin-off 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’s compensation expense related to restricted stock and debt forgiveness is recorded as $426 and $359 for the three months ended July 4, 2003 and June 28, 2002, respectively; and $627 and $1,671 for the six months ended July 4, 2003 and June 28, 2002, 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 $2,074 and $791 for the three months ended July 4, 2003 and June 28, 2002, respectively; and $4,085 and $1,583 for the six months ended July 4, 2003 and June 28, 2002, respectively.

7.Comprehensive Income

Comprehensive income for the respective periods consists of the following:

	Three Months Ended					Six Months Ended
	July 4, 2003			June 28, 2002		July 4, 2003			June 28, 2002
Net income	$	8,452		$	32,274	$	11,634		$	37,440
Translation adjustment		36,549			39,688		64,181			36,977
Unrealized losses on derivatives, net of tax		(2,538	)		1,031		(4,283	)		983

Total comprehensive income	$	42,463		$	72,993	$	71,532		$	75,400

8.Acquisition of the DiverseyLever Business

On May 3, 2002, the Company acquired the DiverseyLever business – the institutional and industrial cleaning and sanitation business of Unilever. In addition, with specified exceptions, the Company and its parent, 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.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company continues the process of settlement and conclusion on purchase price allocation and adjustments associated with the acquisition of the DiverseyLever business. The following represents a reconciliation of the preliminary allocation of purchase price from January 3, 2003 through July 4, 2003:

	As of January 3, 2003			Six Months Ended July 4, 2003 Adjustments			As of July 4, 2003
Cash purchase price	$	1,029,836		$	—		$	1,029,836
Senior discount notes of Holdings		201,900			—			201,900
Equity in Holdings issued to Unilever		352,059			—			352,059
Transaction-related costs		39,564			2,163	(a)		41,727
Net debt adjustment payable in cash		15,320			—			15,320
Net debt adjustment to subscription price		11,750			—			11,750
Working capital adjustment payable in cash		33,568			—			33,568
Working capital adjustment to subscription price		(36,540	)		—			(36,540	)
Pension adjustment – EBITDA		2,580			—			2,580
Pension adjustment–fully funded		(108,017	)		6,033	(b)		(101,984	)

Total purchase price		1,542,020			8,196			1,550,216
Fair value of net tangible assets acquired		(389,603	)		3,256	(c)		(386,347	)

Excess purchase price		1,152,417			11,452			1,163,869
Allocation to intellectual property		(122,941	)		—			(122,941	)
Allocation to other identified intangible assets		(235,394	)		—			(235,394	)

Goodwill	$	794,082		$	11,452		$	805,534

(a)

The Company recorded additional transaction-related costs of $1,830 and $2,163 during the three and six months ended July 4, 2003, which were accounted for as an increase to acquisition goodwill. The Company does not expect further adjustment to goodwill as it relates to transaction-related costs.

(b)

During the three months ended July 4, 2003, the pension adjustment – fully funded was decreased by $6,033 relative to revisions to preliminary estimates. Further adjustments are expected to be finalized and agreed with Unilever by December 2003 and are, accordingly, subject to change.

The Company received approximately $10,600 and $12,600 during the three and six months ended July 4, 2003, in partial and preliminary settlement of pension full-funding adjustments agreed with

Unilever. During the three and six months ended July 4, 2003, approximately $10,500 and $12,100, respectively, represented collections on previously estimated receivables from Unilever. The remaining $100 and $500 represented cash received on certain pension plans for which receivables from Unilever were not previously recorded.

(c)

The Company recorded additional restructuring liabilities of $21,758 (see Note 11) and associated deferred taxes of $4,956 during the six months ended July 4, 2003. The Company also recorded $1,700 of additional environmental reserves in the three months ended July 4, 2003 in adjustment of previous estimates. In addition, the Company increased net tangible assets acquired by $11,827 in the three months ended July 4, 2003 to properly reflect fair value and adjustment of previous estimates.

The purchase agreement provides for the indemnification of certain tax liabilities included in net tangible assets acquired. During the three months ended July 4, 2003, the Company recorded an estimated receivable from Unilever of $3,419 and increased the net fair value of assets acquired. Further adjustments are expected to be finalized and agreed with Unilever by December 2003 and are, accordingly, subject to change.

Based on the preliminary determination of the working capital adjustment to subscription price, the Company recorded a receivable and corresponding reduction in purchase price of $36,540 as of January 3, 2003. The Company and Unilever have continued the settlement process and anticipate finalization by September 2003.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Pro Forma Results

The following reflects the unaudited pro forma results for the Company giving effect to the acquisition of the DiverseyLever business and the related financings as if they had occurred at the beginning of the three and six months ended June 28, 2002.

	Three Months Ended June 28, 2002		Six Months Ended June 28, 2002
Net sales	$	702,101	$	1,295,880
Net income		20,092		16,224

9.Acquisitions and Divestitures

Acquisitions

In April 2003, the Company acquired the shares of National Brands, Inc. for $2,665. The primary assets acquired were intellectual property rights to certain industrial tradenames. In addition, the Company entered into non-compete arrangements with the sellers. The Company did not record goodwill as a result of this transaction. The acquisition was accounted for under the purchase method of accounting. Operations are included in the Company’s financial statements from the date of acquisition.

Divestitures

In March 2003, the Company disposed of a non-strategic logistical service business in Japan for approximately $835 and the assumption of net liabilities by the purchaser of approximately $460. The net gain of $1,295 was included as a component of other (income) expense in the consolidated statement of income for the three months ended April 4, 2003. The disposed business was part of a larger cash-flow-generating group and was therefore not reported as a discontinued operation.

In May 2003, the Company and a joint venture partner determined that they would dissolve a non-strategic business involved in the development and distribution of cleaning machines. The Company recorded a net loss of $1,119 as a component of other (income) expense in the consolidated statement of income for the three months ended July 4, 2003. The Company expects to record additional disposal costs during the quarter ending October 3, 2003, but does not expect those costs to be significant to the consolidated results. The disposed business was part of a larger cash-flow generating group and was therefore not reported as a discontinued operation.

10.Accounts Receivable Securitization

The Company and certain of its U.S. subsidiaries entered into an agreement (the “Receivables Facility”) in March 2001 whereby they sell on a continuous basis certain domestic trade receivables to a wholly owned, consolidated special purpose, bankruptcy-remote subsidiary (“JWPRC”) of the Company. JWPRC was formed for the sole purpose of buying and selling receivables generated by the Company and the U.S. subsidiaries party to the agreement. JWPRC in turn sells an undivided interest in the total domestic accounts receivable to a nonconsolidated financial institution (the “Conduit”) for an amount equal to the percentage of total domestic receivables deemed eligible. The amounts of the beneficial interest of accounts receivable sold under these arrangements are excluded from accounts receivable in the Company’s consolidated balance sheets. As of July 4, 2003, and January 3, 2003, the Conduit held $39,600 and $35,900, respectively, of accounts receivable that are not included in the accounts receivable balance reflected in the Company’s consolidated balance sheets.

The Company had a retained interest of $29,301 and $20,701 in receivables of JWPRC as of July 4, 2003, and January 3, 2003, respectively. The retained interest is included in the accounts receivable balance reflected in the consolidated balance sheet at estimated fair value.

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

11.Restructuring Liabilities

During fiscal year 2002, 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”). During the three and six months ended July 4, 2003, the Company recognized liabilities of $12,729 and $18,224 for the involuntary termination of 214 and 299 additional former DiverseyLever employees and $2,541 and $3,534 for additional other exit costs, respectively, which were recorded as an adjustment to purchase accounting. The Company does not expect to record further adjustments.

The Company’s exit plans provide for the planned termination of 1,299 employees, of which 839 and 471 were actually terminated as of July 4, 2003 and January 3, 2003, 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 year 2002, 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 and six months ended July 4, 2003, the Company recognized liabilities of $5,350 and $10,111 for the involuntary termination of 62 and 99 additional pre-acquisition employees and $1,442 and $3,190 for additional other restructuring costs, respectively, which were recorded as restructuring expenses in accordance with SFAS 146 (see Note 3).

The Company’s restructuring plans provide for the planned termination of 339 pre-acquisition employees, of which 274 and 151 were actually terminated as of July 4, 2003 and January 3, 2003, respectively.

	Exit Plans									Restructuring Plans
	Employee- Related			Other			Total			Employee- Related			Other			Total
Liability balances as of January 3, 2003	$	51,963		$	6,079		$	58,042		$	5,724		$	5,092		$	10,816
Liability established in purchase accounting		5,495			993			6,488			—			—			—
Liability recorded as restructuring expense		—			—			—			4,761			1,748			6,509
Cash paid¹		(8,231	)		(595	)		(8,826	)		(5,550	)		(1,573	)		(7,123	)

Liability balances as of April 4, 2003	$	49,227		$	6,477		$	55,704		$	4,935		$	5,267		$	10,202
																	—
Liability established in purchase accounting		12,729			2,541			15,270			—			—			—
Liability recorded as restructuring expense .		—			—			—			5,350			1,442			6,792
Cash paid¹		(9,883	)		(2,846	)		(12,729	)		(2,750	)		(3,089	)		(5,839	)

Liability balances as of July 4, 2003	$	52,073		$	6,172		$	58,245		$	7,535		$	3,620		$	11,155

Cash paid includes the effects of foreign exchange

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

12.Segment Information

The sales and results of operations of the Company’s segments are summarized as follows:

	Three Months Ended or As Of July 4, 2003
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	694,846	$	72,703	$	(5,598	)	$	761,951
Operating profit		38,350		7,906		—			46,256
Depreciation and amortization		38,629		2,328		—			40,957
Interest expense		32,257		123		(60	)		32,320
Interest income		652		162		(60	)		754
Total assets		3,472,731		195,736		(75,264	)		3,593,203
Goodwill, net		1,212,500		576		—			1,213,076
Capital expenditures		21,962		1,087		—			23,049

	Three Months Ended or As Of June 28, 2002
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	504,197	$	67,193	$	(5,389	)	$	566,001
Operating profit		45,727		8,468		—			54,195
Depreciation and amortization		20,955		1,945		—			22,900
Interest expense		20,814		253		(1	)		21,066
Interest income		73		521		(1	)		593
Total assets		3,210,718		164,231		(32,038	)		3,342,911
Goodwill, net		1,091,993		193		—			1,092,186
Capital expenditures		11,899		2,397		—			14,296

	Six Months Ended or As Of July 4, 2003
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	1,325,380	$	144,787	$	(10,712	)	$	1,459,455
Operating profit		60,649		19,201		—			79,850
Depreciation and amortization		72,435		4,540		—			76,975
Interest expense		65,059		251		(263	)		65,047
Interest income		1,875		336		(263	)		1,948
Total assets		3,472,731		195,736		(75,264	)		3,593,203
Goodwill, net		1,212,500		576		—			1,213,076
Capital expenditures		46,131		2,335		—			48,466

	Six Months Ended or As Of June 28, 2002
	Professional		Polymer		Eliminations/ Other			Total Company
Net sales	$	714,358	$	129,053	$	(10,031	)	$	833,380
Operating profit		50,577		18,085		—			68,662
Depreciation and amortization		28,970		3,844		—			32,814
Interest expense		23,620		451		(92	)		23,979
Interest income		443		333		(92	)		684
Total assets		3,210,718		164,231		(32,038	)		3,342,911
Goodwill, net		1,091,993		193		—			1,092,186
Capital expenditures		18,730		3,534		—			22,264

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

13.Subsidiary Guarantors of Senior Subordinated Notes

The Company’s $557,175 senior subordinated notes (based on exchange rates applied at July 4, 2003),which bear interest at 9.625% and are due in 2012, 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.

Consolidating condensed statements of operations for the three months ended July 4, 2003:

	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	164,357		$	97,141		$	515,137		$	(37,597	)	$	739,038
Sales agency fee income		1,368			27			21,518			—			22,913
Cost of sales		91,114			65,549			294,388			(37,597	)		413,454

Gross profit		74,611			31,619			242,267			—			348,497
Marketing, administrative and general expenses		75,969			16,959			184,799			—			277,727
Research and development expenses		5,979			3,165			8,578			—			17,722
Restructuring expense		1,951			—			4,841			—			6,792

Operating profit (loss)		(9,288	)		11,495			44,049			—			46,256

Other expense (income):
Interest expense		26,747			96			26,680			(21,203	)		32,320
Interest income		(6,720	)		(14,962	)		(275	)		21,203			(754	)
Other (income) expense, net		(28,811	)		(329	)		(2,822	)		31,826			(136	)

Income before taxes		(504	)		26,690			20,466			(31,826	)		14,826

Provision (benefit) for income taxes		(9,006	)		5,593			9,735			—			6,322

Net income (loss) before minority interests		8,502			21,097			10,731			(31,826	)		8,504
Minority interests		—			—			52			—			52

Net income (loss)	$	8,502		$	21,097		$	10,679		$	(31,826	)	$	8,452

Consolidating condensed statements of operations for the three months ended June 28, 2002:

	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	135,658		$	103,628		$	332,001		$	(17,638	)	$	553,649
Sales agency fee income		1,053			—			11,299			—			12,352
Cost of sales		73,920			64,804			184,455			(17,638	)		305,541

Gross profit		62,791			38,824			158,845			—			260,460
Marketing, administrative and general expenses		58,392			18,038			111,742			—			188,172
Research and development expenses		6,159			1,283			10,651			—			18,093

Operating profit (loss)		(1,760	)		19,503			36,452			—			54,195

Other expense (income):
Interest expense		17,737			1,159			15,897			(13,727	)		21,066
Interest income		(4,495	)		(9,317	)		(508	)		13,727			(593	)
Other (income) expense, net		(53,755	)		(947	)		(166	)		37,437			(17,431	)

Income before taxes		38,753			28,608			21,229			(37,437	)		51,153

Provision (benefit) for income taxes		6,613			8,513			9,082			(5,195	)		19,013

Net income (loss) before minority interests		32,140			20,095			12,147			(32,242	)		32,140
Minority interests		—			—			(134	)		—			(134	)

Net income (loss)	$	32,140		$	20,095		$	12,281		$	(32,242	)	$	32,274

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating condensed statements of operations for the six months ended July 4, 2003:

	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	320,016		$	184,945		$	985,785		$	(75,452	)	$	1,415,294
Sales agency fee income		2,810			56			41,295			—			44,161
Cost of sales		181,459			123,798			565,896			(75,452	)		795,701

Gross profit		141,367			61,203			461,184			—			663,754
Marketing, administrative and general expenses		146,512			33,453			355,180			—			535,145
Research and development expenses		12,104			6,128			17,226			—			35,458
Restructuring expense		1,951			—			11,350			—			13,301

Operating profit (loss)		(19,200	)		21,622			77,428			—			79,850

Other expense (income):
Interest expense		54,324			196			50,625			(40,098	)		65,047
Interest income		(11,513	)		(29,711	)		(822	)		40,098			(1,948	)
Other (income) expense, net		(52,187	)		(555	)		(5,465	)		55,160			(3,047	)

Income before taxes		(9,824	)		51,692			33,090			(55,160	)		19,798

Provision (benefit) for income taxes		(21,509	)		11,189			18,433			—			8,113

Net income (loss) before minority interests		11,685			40,503			14,657			(55,160	)		11,685
Minority interests		—			—			51			—			51

Net income (loss)	$	11,685		$	40,503		$	14,606		$	(55,160	)	$	11,634

Consolidating condensed statements of operations for the six months ended June 28, 2002:

	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	195,082		$	190,739		$	459,873		$	(24,666	)	$	821,028
Sales agency fee income		1,053			—			11,299			—			12,352
Cost of sales		106,095			118,526			259,410			(24,666	)		459,365

Gross profit		90,040			72,213			211,762			—			374,015
Marketing, administrative and general expenses		84,706			37,918			154,751			—			277,375
Research and development expenses		9,730			5,598			12,650			—			27,978

Operating profit (loss)		(4,396	)		28,697			44,361			—			68,662

Other expense (income):
Interest expense		20,621			2,676			17,235			(16,553	)		23,979
Interest income		(4,491	)		(12,102	)		(644	)		16,553			(684	)
Other (income) expense, net		(61,737	)		(3,232	)		3,270			48,346			(13,353	)

Income before taxes		41,211			41,355			24,500			(48,346	)		58,720

Provision (benefit) for income taxes		3,932			12,579			10,125			(5,195	)		21,441

Net income (loss) before minority interests		37,279			28,776			14,375			(43,151	)		37,279
Minority interests		—			—			(161	)		—			(161	)

Net income (loss)	$	37,279		$	28,776		$	14,536		$	(43,151	)	$	37,440

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating condensed balance sheets at July 4, 2003:

	Parent Company		Guarantor Subsidiaries			Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	6,706	$	3,002		$	38,788	$	—		$	48,496
Accounts receivable, net		49,374		25,373			523,023		—			597,770
Intercompany receivables		110,516		231,450			109,846		(451,812	)		—
Inventories		39,503		37,076			213,725		(1,452	)		288,852
Other current assets		68,990		(5,766	)		75,859		(1,149	)		137,934

Total current assets		275,089		291,135			961,241		(454,413	)		1,073,052
Property, plant and equipment, net		165,374		58,948			352,317		—			576,639
Capitalized software, net		62,804		4,260			9,740		—			76,804
Goodwill and other intangible assets, net		172,415		198,415			1,221,730		20,191			1,612,751
Deferred income taxes		37,175		1,158			6,653		—			44,986
Intercompany advances		332,248		611,420			—		(943,668	)		—
Other assets		153,751		7,220			49,840		(1,840	)		208,971
Investments in subsidiaries		1,536,972		92,577			8,969		(1,638,518	)		—

Total assets	$	2,735,828	$	1,265,133		$	2,610,490	$	(3,018,248	)	$	3,593,203

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings	$	25,000	$	—		$	118,929	$	—		$	143,929
Current portion of long-term debt		23,383		—			5,804		—			29,187
Accounts payable		61,159		17,982			260,621		—			339,762
Intercompany payables		351,311		(1,101	)		105,438		(455,648	)		—
Accrued expenses		131,410		50,195			231,326		(1,379	)		411,552
Accrued profit sharing		3,676		2,023			3,163		—			8,862

Total current liabilities		595,939		69,099			725,281		(457,027	)		933,292
Intercompany note payable		—		52,170			893,777		(945,947	)		—
Long-term borrowings		1,098,875		—			263,043		—			1,361,918
Other liabilities		141,394		29,211			227,771		(3	)		398,373

Total liabilities		1,836,208		150,480			2,109,872		(1,402,977	)		2,693,583
Stockholders’ equity		899,620		1,114,653			500,618		(1,615,271	)		899,620

Total liabilities and stockholders’ equity	$	2,735,828	$	1,265,133		$	2,610,490	$	(3,018,248	)	$	3,593,203

Consolidating condensed balance sheets at January 3, 2003:

	Parent Company			Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	4,301		$	6,282	$	48,689	$	—		$	59,272
Accounts receivable, net		43,705			17,856		483,104		—			544,665
Intercompany receivables		175,866			164,877		12,713		(353,456	)		—
Inventories		38,350			36,848		187,279		(1,494	)		260,983
Other current assets		28,925			10,838		87,661		—			127,424

Total current assets		291,147			236,701		819,446		(354,950	)		992,344
Property, plant and equipment, net		170,044			61,687		330,104		—			561,835
Capitalized software, net		56,290			4,831		18,222		—			79,343
Goodwill and other intangible assets, net		152,247			207,973		1,149,306		10,756			1,520,282
Deferred income taxes		23,261			1,125		13,267		—			37,653
Intercompany advances		243,817			562,487		—		(806,304	)		—
Other assets		120,441			6,123		66,462		(1,098	)		191,928
Investments in subsidiaries		1,442,427			88,496		9,672		(1,540,595	)		—

Total assets	$	2,499,674		$	1,169,423	$	2,406,479	$	(2,692,191	)	$	3,383,385

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings	$	32,700		$	—	$	35,419	$	—		$	68,119
Current portion of long-term debt		48,005			—		9,901		—			57,906
Accounts payable		62,158			18,110		248,293		—			328,561
Intercompany payables		182,767			10,162		163,605		(356,534	)		—
Accrued expenses		122,636			38,223		210,189		933			371,981
Accrued profit sharing		2,941			1,581		3,041		—			7,563
Accrued income taxes		(18,309	)		12,960		9,537		(999	)		3,189

Total current liabilities		432,898			81,036		679,985		(356,600	)		837,319
Intercompany note payable		—			2,868		806,687		(809,555	)		—
Long-term borrowings		1,100,193			—		248,077		—			1,348,270
Other liabilities		133,550			26,969		204,207		37			364,763

Total liabilities		1,666,641			110,873		1,938,956		(1,166,118	)		2,550,352
Stockholders’ equity		833,033			1,058,550		467,523		(1,526,073	)		833,033

Total liabilities and stockholders’ equity	$	2,499,674		$	1,169,423	$	2,406,479	$	(2,692,191	)	$	3,383,385

JOHNSONDIVERSEY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating condensed statements of cash flows for the six months ended July 4, 2003:

	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by (used in) operating activities	$	135,649		$	(49,814	)	$	(41,514	)	$	(16,743	)	$	27,578
Cash flows from investing activities:
Capital expenditures, net		(13,585	)		(5,583	)		(29,298	)		—			(48,466	)
Expenditures for capitalized software		(12,552	)		—			(509	)		—			(13,061	)
Cash from property disposals		339			279			3,994			—			4,612
Acquisitions of businesses		(11,769	)		(4,071	)		(7,251	)		17,776			(5,315	)

Net cash (used in) investing activities		(37,567	)		(9,375	)		(33,064	)		17,776			(62,230	)
Cash flows from financing activities:
Increase (decrease) in short-term debt		9,346			(8,931	)		37,500			35,850			73,765
Increase (decrease) in long-term debt		(102,034	)		49,302			71,611			(84,352	)		(65,473	)
Increase (decrease) in additional paid in capital		(21,803	)		2,137			8,291			11,375			—
Dividends paid		(5,239	)		(31,979	)		(4,176	)		36,094			(5,300	)

Net cash provided by (used in) financing activities		(119,730	)		10,529			113,226			(1,033	)		2,992

Effect of exchange rate changes on cash and cash equivalents		24,053			45,380			(48,549	)		—			20,884

Change in cash and cash equivalents		2,405			(3,280	)		(9,901	)		—			(10,776	)
Beginning balance		4,301			6,282			48,689			—			59,272

Ending balance	$	6,706		$	3,002		$	38,788		$	—		$	48,496


Consolidating condensed statements of cash flows for the six months ended June 28, 2002:
	Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by (used in) operating activities	$	(7,574	)	$	6,304		$	101,443		$	(5,144	)	$	95,029
Cash flows from investing activities:
Capital expenditures, net		(2,868	)		(3,192	)		(25,145	)		—			(31,205	)
Acquisitions of businesses		(1,110,592	)		(113,180	)		(1,797,536	)		1,612,108			(1,409,200	)

Net cash provided by (used in) investing activities		(1,113,460	)		(116,372	)		(1,822,681	)		1,612,108			(1,440,405	)
Cash flows from financing activities:
Increase in short-term debt		—			—			20,534			—			20,534
Increase in long-term debt		1,010,980			—			115,532			—			1,126,512
Increase (decrease) in intercompany receivables/payables		(438,189	)		(521,856	)		960,045						—
Retirement of preferred stock		(50	)		—			—						(50	)
Payment of debt issuance costs		(61,709	)		—			—						(61,709	)
Increase (decrease) in additional paid in capital		640,811			637,446			719,633			(1,612,108	)		385,782
Dividends paid		(11,788	)		(2,451	)		(2,693	)		5,144			(11,788	)

Net cash provided by (used in) financing activities		1,140,055			113,139			1,813,051			(1,606,964	)		1,459,281

Effect of exchange rate changes on cash and cash equivalents		—			—			3,095			—			3,095

Change in cash and cash equivalents		19,021			3,071			94,908			—			117,000
Beginning balance		735			953			6,405			—			8,093

Ending balance	$	19,756		$	4,024		$	101,313		$	—		$	125,093

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis includes a review of our results for the three and six months ended July 4, 2003. On May 3, 2002, we acquired DiverseyLever, an institutional and industrial cleaning and sanitation business, from Conopco, Inc., a subsidiary of Unilever PLC and Unilever N.V. As a result of the acquisition, our results for the three and six months ended July 4, 2003 include the results of the DiverseyLever business, which due to the date of the acquisition, are not included fully in the results of the three and six months ended June 28, 2002. Due to the timing of the acquisition, the transition of the institutional and industrial Unilever consumer brands business to a sales agency relationship with JohnsonDiversey after closing and the manner in which the DiverseyLever business was operated as a division of Unilever and not as a stand-alone business, comparative information for the acquired DiverseyLever business does not exist. Because of these factors and the extent to which integration of the businesses has occurred, historical comparisons are of limited relevance.

The acquisition significantly increased the size and scope of our operations and is the primary driver of the changes in each financial category discussed below for the three and six months ended July 4, 2003 as compared to the three and six months ended June 28, 2002. Except as noted, changes detailed below describe significant events that are unrelated to the acquisition.

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 and 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, that 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.

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. Effective July 1, 2001, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (“SFAS No. 142”). SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Upon adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. Other intangible assets are required to be separately recognized if the benefit of the intangible asset can be sold, transferred, licensed, rented or exchanged. Amortization of these intangibles over their useful lives is required. Effective July 1, 2001, we also adopted SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

In accordance with SFAS Nos. 142 and 144, management periodically reviews its long-lived assets, including 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 long-lived assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in our financial statements. As of December 28, 2002, we completed a fair value impairment analysis as required by SFAS No. 142 and anticipated future undiscounted cash flows analysis as required by SFAS No. 144. Based on these assessments no impairments were identified during the three months ended July 4, 2003.

For an additional discussion of new accounting standards see note 3 to our unaudited consolidated financial statements included elsewhere in this report.

Three Months Ended July 4, 2003 Compared to Three Months Ended June 28, 2002

Net sales increased by $196.0 million, or 34.6%, to $762.0 million for the three months ended July 4, 2003 from $566.0 million for the three months ended June 28, 2002. The primary reason for the increase was net sales attributable to the DiverseyLever business, which we acquired on May 3, 2002. Included in the net sales attributable to the acquisition is $22.9 million of sales agency fee income for the three months ended July 4, 2003, as compared to $12.4 million for the three months ended June 28, 2002, which was earned under a sales agency agreement entered into with Unilever on May 3, 2002 in connection with the acquisition.

Net sales for the professional segment increased by $190.6 million, or 37.8%, to $694.8 million for the three months ended July 4, 2003 from $504.2 million for the three months ended June 28, 2002 due primarily to net sales attributable to the DiverseyLever acquisition. The strengthening of the euro, yen and other foreign currencies against the dollar positively impacted net sales by $42.6 million. Excluding this positive currency impact, net sales of the professional segment for the three months ended July 4, 2003 grew by $148.0 million, or 29.4%, from net sales for the three months ended June 28, 2002.

Low single-digit sales growth over the comparable period of the prior year was experienced in Europe, however both internal and external forces have impacted net sales in the quarter in North America and Asia-Pacific. In North America, the business experienced softness as a result of integration challenges coupled with a reduction in consumption of the company’s products at existing customers primarily in food service and lodging. Additionally, Asia-Pacific’s performance was flat versus the prior year as the region was adversely affected by the continued impact of the SARS outbreak on lodging and foodservice in China.

Net sales for the polymer segment of $72.7 million for the three months ended July 4, 2003, including intercompany sales to the professional segment of $5.6 million, increased by $5.5 million, or 8.2%, from $67.2

million for the three months ended June 28, 2002. The strengthening of the euro and yen against the dollar positively impacted net sales by $4.6 million. The increase in the segment’s net sales excluding the positive impact from currency translation was attributable primarily to volume growth of 5.3% and was partially offset by a decline in average selling prices. Sales volume remained steady in Europe, but increased in Asia Pacific by 19.1% and North America by 5.9%, due primarily to new business in the printing and packaging industry and the global coatings market. Average selling prices declined primarily due to an unfavorable product and geographical mix reflecting reduced demand for higher priced specialty polymers and faster growth in the Asia Pacific region, which has lower average selling prices than in other markets.

Gross Profit. Gross profit increased by $88.0 million, or 33.8%, to $348.5 million for the three months ended July 4, 2003 from $260.5 million for the three months ended June 28, 2002, while gross profit margin decreased slightly to 45.7% for the three months ended July 4, 2003 from 46.0% for the three months ended June 28, 2002. The primary reason for the increase in gross profit was the acquisition of the DiverseyLever business. One-time integration-related costs of $2.4 million were incurred in cost of sales during the three months ended July 4, 2003, consisting of inventory reserve provisions and relocation costs.

The polymer segment’s gross profit decreased by $2.7 million, or 11.5%, to $20.7 million for the three months ended July 4, 2003 from $23.4 million for the three months ended June 28, 2002. The decrease in the segment’s gross profit resulted primarily from higher raw material costs and the decline in global average selling prices, offset partially by the sales volume increase discussed above. Gross profit margin was impacted by higher raw material costs and the negative effect of the decline in the global average selling prices, resulting in a decrease to 30.8% for the three months ended July 4, 2003 from 37.8% for the three months ended June 28, 2002.

Marketing, Administrative and General Expenses. Marketing, administrative and general expenses increased by $89.5 million, or 47.6%, to $277.7 million for the three months ended July 4, 2003 from $188.2 million for the three months ended June 28, 2002. The primary reason for this increase was incremental expenses attributable to the acquired DiverseyLever business. One-time integration-related costs of $14.5 million were incurred during the three months ended July 4, 2003, consisting primarily of non-severance employee and facility-related costs.

Research and Development Expenses. Research and development expenses decreased by $0.4 million, or 2.2%, to $17.7 million for the three months ended July 4, 2003 from $18.1 million for the three months ended June 28, 2002.

Restructuring and Integration.We have initiated an extensive restructuring and integration program in connection with the 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 statement 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 marketing, administrative and general expenses in the consolidated statement of income (“period costs”).

During the three months ended July 4, 2003, we recorded $15.3 million of exit costs as purchase accounting adjustments, $6.8 million of restructuring costs and $16.9 million of period costs in our consolidated statement of income. These costs consisted of involuntary termination and other costs incurred in the United Kingdom (“UK”), Greece and certain global functions associated with the consolidation of operations, the consolidation of North American supply chain operations, the restructuring of the UK sales force and IT projects in Western Europe, Japan and our corporate headquarters.

A summary of all costs associated with the restructuring and integration program is outlined below. The reserve balance shown below reflects the aggregate reserves for restructuring costs.

(dollars in thousands)	Three Months Ended July 4, 2003			Total Project to Date - May 4, 2002 - July 4, 2003
Reserve balance at beginning of period	$	65,906		$	—
Exit costs recorded as purchase accounting adjustments		15,270			91,852
Restructuring costs charged to income		6,792			32,948
Payments of accrued costs		(18,568	)		(55,400	)
Reserve balance at end of period		69,400			69,400
Period costs classified as cost of sales or marketing, administrative and general expenses		16,894			59,333
Capital Expenditures		8,857			36,784

Interest Expense, Net. Net interest expense increased by $11.1 million to $31.6 million for the three months ended July 4, 2003 from $20.5 million for the three months ended June 28, 2002. To fund the acquisition of the DiverseyLever business in May 2002, we incurred approximately $1.1 billion of debt under the senior secured credit facilities and the senior subordinated notes. Due to the timing of the borrowings, the increased debt level was in place for only two of the three months ended June 28, 2002 as opposed to the entire three month period ended July 4, 2003.

Other Income/Expense. Other income/expense decreased by $17.3 million to $0.1 million of income for the three months ended July 4, 2003 from $17.4 million of income for the three months ended June 28, 2002. The other income for the three months ended June 28, 2002 consisted primarily of a $15.7 million hedging transaction gain on a forward-purchase contract of euros related to the May 3, 2002 acquisition of DiverseyLever.

Provision for Income Taxes. While the actual provision declined by $12.7 million, the effective tax rate was 42.6% for the three months ended July 4, 2003 compared to 37.2% for the three months ended June 28, 2002. The higher effective tax rate was primarily due to not providing a current tax benefit for certain foreign tax losses.

Net Income. Net income decreased by $23.8 million, or 73.7%, to $8.5 million for the three months ended July 4, 2003 from $32.3 million for the three months ended June 28, 2002. This decrease in net income was due primarily to a $89.5 million increase in marketing, administrative and general expenses, a $6.8 million restructuring expense charge, a $17.3 million decrease in other income, and a $11.1 million increase in net interest expense, offset partially by a $88.0 million increase in gross profit driven by the incremental DiverseyLever net sales, and a $12.7 million reduction in the provision for income taxes, all as previously discussed. In addition to the $6.8 million restructuring expense, expenses of $16.9 million of integration-related costs are included in the cost of sales or marketing, administrative and general expenses discussed above, an increase of $12.4 million compared to the three months ended June 28, 2002.

We define EBITDA as net income before minority interests, plus the provision for income taxes, net interest expense and depreciation and amortization expense. EBITDA is a non-GAAP financial measure, and you should not consider EBITDA as an alternative to (a) operating profit (loss) or net income (loss) 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.

EBITDA decreased by $7.2 million, or 7.6%, to $87.3 million for the three months ended July 4, 2003 from $94.5 million for the three months ended June 28, 2002. The decrease in EBITDA resulted primarily from an $89.5 million increase in marketing, administrative and general expenses, a $17.3 million decrease in other income, and the $6.8 million restructuring expense, offset partially by a $88.0 million increase in gross profit resulting from the increased net sales, all as previously discussed. Of these cost increases, $18.1 million are related to depreciation and

amortization expense which do not impact EBITDA. In addition, as noted above, there was an increase in integration-related costs included in cost of sales, marketing, administrative and general expenses of $11.2 million.

Our management considers EBITDA to be a useful tool for managing the operations of our business. In addition, various financial covenants contained in our senior secured credit facilities are based on EBITDA, as adjusted pursuant to the provisions of the facilities, and various financial covenants contained in the indentures for our senior subordinated notes are based on consolidated cash flows, which is a non-GAAP financial measure calculated similarly to EBITDA. Our management also considers EBITDA to be useful in assessing our debt servicing ability. A further discussion and a table reconciling Net Income to EBITDA is included at the end of the six month period comparisons of this discussion.

Six Months Ended July 4, 2003 Compared to Six Months Ended June 28, 2002

Net sales increased by $626.1 million, or 75.1%, to $1,459.5 million for the six months ended July 4, 2003 from $833.4 million for the six months ended June 28, 2002. The primary reason for the increase was net sales attributable to the DiverseyLever business, which we acquired on May 3, 2002. Included in the net sales attributable to the acquisition is $44.2 million of sales agency fee income for the six months ended July 4, 2003, as compared to $12.4 million for the six months ended June 28, 2002, which was earned under a sales agency agreement entered into with Unilever on May 3, 2002 in connection with the acquisition.

Net sales for the professional segment increased by $611.0 million, or 85.5%, to $1,325.4 million for the six months ended July 4, 2003 from $714.4 million for the six months ended June 28, 2002 due primarily to net sales attributable to the DiverseyLever acquisition. The strengthening of the euro, yen and other foreign currencies against the dollar positively impacted net sales by $51.0 million. Excluding this positive currency impact, net sales of the professional segment for the six months ended July 4, 2003 grew by $560.0 million, or 78.4%, from net sales for the six months ended June 28, 2002.

Mid single-digit sales growth was experienced during the six months ended July 4, 2003 in Europe, as previously discussed, and in Latin America due largely to new customer wins. Additionally, positive growth has been generated from cross-selling efforts globally, leveraging the individual product strengths of the combined businesses. However, sales growth was adversely affected by the challenges in North America as discussed earlier, and the impact of the SARS outbreak in Asia-Pacific resulting in flat to low single-digit sales growth in those regions.

Net sales for the polymer segment of $144.8 million for the six months ended July 4, 2003, including intercompany sales to the professional segment of $10.7 million, increased by $15.7 million, or 12.2%, from $129.1 million for the six months ended June 28, 2002. The strengthening of the euro and yen against the dollar positively impacted net sales by $8.7 million. The increase in the segment’s net sales excluding the positive impact from currency translation was attributable primarily to volume growth of 9.0% partially offset by a decline in average selling prices. Sales volume increased in Europe by 6.2%, Asia Pacific by 21.4% and North America by 8.7%, due primarily to new business in the printing and packaging industry and the global coatings market. Average selling prices declined primarily due to an unfavorable product and geographical mix reflecting reduced demand for higher priced specialty polymers and faster growth in the Asia Pacific region, which has lower average selling prices than in other markets.

Gross Profit. Gross profit increased by $289.8 million, or 77.5%, to $663.8 million for the six months ended July 4, 2003 from $374.0 million for the six months ended June 28, 2002, while gross profit margin increased to 45.5% for the six months ended July 4, 2003 from 44.9% for the six months ended June 28, 2002. The primary reason for the increase in gross profit and gross profit margin was the acquisition of the DiverseyLever business. The gross profit margin on the acquired DiverseyLever business was higher due to a greater mix of higher-margin direct sales than the pre-acquisition business, which was focused more on lower-margin distributor sales. One-time integration-related costs of $2.4 million were incurred in cost of sales during the six months ended July 4, 2003, consisting of inventory reserve provisions and relocation costs.

The polymer segment’s gross profit decreased by $0.3 million, or 0.7%, to $45.1 million for the six months ended July 4, 2003 from $45.4 million for the six months ended June 28, 2002. The decrease in the segment’s gross

profit resulted primarily from higher raw material costs and the decline in global average selling prices, partially offset by the sales volume increase discussed above. Gross profit margin was impacted by higher raw material costs and the negative effect of the decline in the global average selling prices, resulting in a decrease to 33.6% for the six months ended July 4, 2003 from 38.1% for the six months ended June 28, 2002.

Marketing, Administrative and General Expenses. Marketing, administrative and general expenses increased by $257.7 million, or 92.9%, to $535.1 million for the six months ended July 4, 2003 from $277.4 million for the six months ended June 28, 2002. The primary reason for this increase was incremental expenses attributable to the acquired DiverseyLever business. One-time integration-related costs of $22.9 million were incurred during the six months ended July 4, 2003, consisting primarily of non-severance employee and facility-related costs.

Research and Development Expenses. Research and development expenses increased by $7.5 million, or 26.8%, to $35.5 million for the six months ended July 4, 2003 from $28.0 million for the six months ended June 28, 2002. The primary reason for the increase was the incremental expenses attributable to the acquired DiverseyLever business.

Restructuring and Integration.We have initiated an extensive restructuring and integration program in connection with the 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 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 are recorded as restructuring expenses in the consolidated statement 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 marketing, administrative and general expenses in the consolidated statement of income.

During the six months ended July 4, 2003, we recorded $21.8 million of exit costs as purchase accounting adjustments, $13.3 million of restructuring costs and $25.3 million of period costs in our consolidated statement of income. These costs consisted of involuntary termination and other costs incurred in the United Kingdom (“UK”), Greece and certain global functions associated with the consolidation of operations, the consolidation of North American supply chain operations, the restructuring of the UK sales force, the consolidation of back-office operations in Japan, the implementation of an early retirement program in Japan and IT projects in Western Europe, Japan and our corporate headquarters.

A summary of all costs associated with the restructuring and integration program is outlined below. The reserve balance shown below reflects the aggregate reserves for restructuring costs.

(dollars in thousands)	Six Months Ended July 4, 2003			Total Project to Date - May 4, 2002 - July 4, 2003
Reserve balance at beginning of period	$	68,858		$	—
Exit costs recorded as purchase accounting adjustments		21,758			91,852
Restructuring costs charged to income		13,301			32,948
Payments of accrued costs		(34,517	)		(55,400	)
Reserve balance at end of period		69,400			69,400
Period costs classified as cost of sales or marketing, administrative and general expenses		25,344			59,333
Capital Expenditures		21,106			36,784

Interest Expense, Net. Net interest expense increased by $39.8 million to $63.1 million for the six months ended July 4, 2003 from $23.3 million for the six months ended June 28, 2002. To fund the acquisition of the DiverseyLever business in May 2002, we incurred approximately $1.1 billion of debt under the senior secured credit facilities and the senior subordinated notes. Due to the timing of the borrowings, the increased debt level was in

place for only two of the six months ended June 28, 2002 versus the entire six month period ended July 4, 2003. Additionally, the increase in interest expense was impacted by an increase in the weighted average interest rate to 7.6% during the six months ended July 4, 2003 from the rate of 5.1% in effect during the six months ended June 28, 2002.

Other Income/Expense. Other income/expense decreased by $10.4 million to $3.0 million of income for the six months ended July 4, 2003 from $13.4 million of income for the six months ended June 28, 2002. The other income for the six months ended July 4, 2003 consisted primarily of a $1.3 million gain on the sale of a non-strategic logistics subsidiary in Japan in March 2003, and a $1.6 million gain on other foreign currency exchange related items. Other income for the six months ended June 28, 2002 consisted primarily of a $15.7 million hedging transaction gain on a forward-purchase contract of euros related to the May 3, 2002 acquisition of DiverseyLever, offset partially by a $3.0 million loss related to foreign currency devaluation in Argentina.

Provision for Income Taxes. While the actual provision declined by $13.3 million, the effective tax rate was 41.0% for the six months ended July 4, 2003 compared to 36.5% for the six months ended June 28, 2002. The higher effective tax rate was primarily due to not providing a current tax benefit for certain foreign tax losses.

Net Income. Net income decreased by $25.8 million, or 69.0%, to $11.6 million for the six months ended July 4, 2003 from $37.4 million for the six months ended June 28, 2002. This decrease in net income was due primarily to a $257.7 million increase in marketing, administrative and general expenses, a $7.5 million increase in research and development costs, a $13.3 million restructuring expense charge, a $39.8 million increase in net interest expense, and a $10.4 million decrease in other income, offset partially by a $289.8 million increase in gross profit driven by the incremental DiverseyLever net sales, and a $13.3 million reduction in the provision for income taxes, all as previously discussed. In addition to the $13.3 million restructuring expense, expenses of $25.3 million of integration-related costs are included in the cost of sales or marketing, administrative and general expenses discussed above, an increase of $20.8 million compared to the six months ended June 28, 2002.

EBITDA increased by $45.1 million to $159.9 million for the six months ended July 4, 2003 from $114.8 million for the six months ended June 28, 2002. The increase in EBITDA resulted primarily from a $289.8 million increase in gross profit resulting from the increased net sales, offset partially by a $257.7 million increase in marketing, administrative and general expenses, a $7.5 million increase in research and development expense, a $10.4 million decrease in other income, and the $13.3 million restructuring expense charge, all as previously discussed. Of these cost increases, $44.2 million are related to depreciation and amortization expense which do not impact EBITDA. In addition, as stated above, there was an increase in integration-related costs included in cost of sales, marketing, administrative and general expenses of $19.6 million.

We also believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company’s operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon accounting methods or non-operating factors (such as historical cost). Accordingly, we believe that the inclusion of EBITDA in our quarterly report permits a more comprehensive analysis of our operating performance relative to other companies and of our debt servicing ability. 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.

We believe that net income is the financial measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA. The following table reconciles net income to EBITDA for each of the periods for which EBITDA is presented in this quarter report.

EBITDA	Three Months Ended					Six Months Ended
(dollars in thousands)	July 4, 2003		June 28, 2002			July 4, 2003		June 28, 2002
	(unaudited)					(unaudited)
Net Income	$	8,452	$	32,274		$	11,634	$	37,440
Minority interests		52		(134	)		51		(161	)
Provision for income taxes		6,322		19,013			8,113		21,441
Interest expenses, net		31,566		20,473			63,099		23,295
Depreciation and amortization expense		40,957		22,900			76,975		32,814

EBITDA	$	87,349	$	94,526		$	159,872	$	114,829

Liquidity and Capital Resources

Comparison of Six Months Ended July 4, 2003 and Six Months Ended June 28, 2002. Cash flows provided by operating activities were $27.6 million for the six months ended July 4, 2003, compared to $95.0 million for the six months ended June 28, 2002. The decrease in cash from operations of $67.4 million during the six months ended July 4, 2003 was due primarily to the $25.8 million reduction in net income and changes in our operating assets and liabilities.

Cash flows used in investing activities decreased to $62.2 million for the six months ended July 4, 2003, compared to $1,440.4 million for the six months ended June 28, 2002. This decrease is attributable to the impact of the acquisition of the DiverseyLever business during the six months ended June 28, 2002.

Cash flows provided by financing activities were $3.0 million for the six months ended July 4, 2003, compared to cash flows provided by financing activities of $1,459.3 million for the six months ended June 28, 2002. This reduction in cash flows from financing activities was due to the impact of the acquisition of the DiverseyLever business during the six months ended June 28, 2002.

Overview. As a result of the acquisition, we have a significant amount of indebtedness. On May 3, 2002, in connection with the acquisition of the DiverseyLever business, 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 existing indebtedness. As of July 4, 2003, we had total indebtedness of about $1.650 billion, consisting of $557 million of notes, $939 million of borrowings under the senior secured credit facilities, $115 million in operating lease commitments and $39 million in short-term credit lines.

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 July 4, 2003, we had $105 million of indebtedness outstanding under the revolving portion of the senior secured credit facilities and the ability to incur an additional $201 million of indebtedness under those revolving facilities, of which we believe we would have been able to borrow $129 million and still be in compliance with the financial covenants set forth in the senior secured credit facilities, the indentures for the senior subordinated notes and the indenture for the senior discount notes of JohnsonDiversey Holdings, Inc.

Since March 2001, we have funded a portion of our short-term liquidity needs through the securitization of some of our trade accounts receivable. We and some of our U.S. subsidiaries 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 for an amount equal to the value of all eligible receivables (as defined under the receivables sale agreement) less the applicable reserve. As of July 4, 2003, about $40 million of eligible receivables (net of reserves) have been sold under our securitization facility. JWPRC’s funding costs under the receivables facility have accrued interest at a weighted average rate of about 1.28% per annum.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” effective June 15, 2003, which requires a company to consolidate a variable interest entity if the company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. We do not believe that the adoption of this interpretation will have a significant impact on our consolidated financial position or results of operations.

Under the terms of the senior secured credit facilities, we must use any future net proceeds from the securitization 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 $150 million in the aggregate.

During the six months ended July 4, 2003, we repaid $63 million of the principal amount outstanding under the term loan portion of the senior secured credit facilities. In addition, we are considering the divestiture of certain non-strategic businesses, including the previously disclosed sale of the Whitmire Micro-Gen pest control business, which could generate an additional $140 to $175 million available for debt reduction over the next four quarters. As of July 4, 2003, we had the following long-term debt agreements and operating leases with non-cancelable terms in excess of one year, excluding the indebtedness associated with the receivables securitization.

	Payment due within: (dollars in thousands)
	Total		1 Year		2 Years		3 Years		Due after 3 Years
Senior secured credit facilities	$	833,930	$	29,187	$	36,608	$	36,608	$	731,527
Senior subordinated notes		557,175		—		—		—		557,175
Operating leases		114,803		33,300		25,134		16,768		39,601

Total long-term indebtedness	$	1,505,908	$	62,487	$	61,742	$	53,376	$	1,328,303

The characteristics of our business do not generally require us to make significant ongoing capital expenditures. We made capital expenditures of about $61.1 million in the six months ended July 4, 2003. We may make significant cash expenditures in the next few years in an effort to capitalize on anticipated revenue growth and cost savings opportunities associated with the acquisition of the DiverseyLever business, and to continue and, in some cases, expand on certain DiverseyLever pre-acquisition restructuring initiatives.

We believe that the cash flows from operations that we anticipate as a result of cost savings and operating improvements associated with the acquisition of the DiverseyLever business and restructuring initiatives, together with available cash, our available borrowings under the senior secured credit facilities and the proceeds from our securitization facility will be sufficient 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.

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 securitization facility and indebtedness relating to specified interest rate hedge agreements) as of the last day of a financial covenant period to (2) our consolidated EBITDA, as defined in the senior secured credit facilities, for that same financial covenant period.

Commencing with the financial covenant period ending July 4, 2003, 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
June 30, 2003		5.00 to 1
September 30, 2003		4.75 to 1
December 31, 2003		4.25 to 1
March 31, 2004		4.00 to 1
June 30, 2004		3.75 to 1
September 30, 2004		3.50 to 1
December 31, 2004		3.25 to 1
March 31, 2005 to December 31, 2005		2.75 to 1
March 31, 2006 and thereafter		2.50 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
June 30, 2003		2.25 to 1
September 30, 2003		2.25 to 1
December 31, 2003		2.75 to 1
March 31, 2004		2.75 to 1
June 30, 2004		3.00 to 1
September 30,2004		3.50 to 1
December 31, 2004		3.75 to 1
March 31, 2005 and thereafter		4.50 to 1

Compliance with Maximum Leverage Ratio and Minimum Interest Coverage Ratio. For our financial covenant period ended on July 4, 2003, 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:

Year	Maximum Capital Expenditures (dollars in thousands)
December 31, 2003	$	161,200
December 31, 2004	$	122,600
December 31, 2005	$	107,000
December 31, 2006	$	110,000
December 31, 2007	$	113,200

Beginning in calendar year 2003, however, 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. As of July 4, 2003, we were in compliance with the limitation on capital expenditures for calendar year 2003.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a result of our acquisition of the DiverseyLever business, we have a significant amount of indebtedness. On May 3, 2002, in connection with the acquisition, we issued senior subordinated notes and entered into $1.2 billion senior secured credit facilities. Market risk exposure as it relates to interest and currency rates, as discussed below, has changed materially when compared to the first quarter of the fiscal year 2002.

Interest Rate Risk

As of July 4, 2003, we had about $1,535 million of debt outstanding under our 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, $538 million of the debt outstanding remained 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 Chief Financial Officer (“CFO”).

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 Section 302 of the Sarbanes-Oxley Act of 2002 (“Section 302 Certifications”). This portion of our quarterly report is our disclosure of the results of our controls evaluation referred to in paragraphs (4) and (5) of the Section 302 Certifications and should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Disclosure Controls and Internal Control over Financial Reporting.Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (“Exchange Act”), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“Commission’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 components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and 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 controls evaluation.

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 all error 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 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; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. 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 the controls’ 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 problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were undertaken. This evaluation is done 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. Many 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 in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including with 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 the controls evaluation generally and because items 4 and 5 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our board of directors’ audit committee and to our independent auditors and report on related matters in this section of the quarterly report. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; these are control issues that could have a significant adverse effect on the 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 where 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 a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our on-going procedures.

During the controls evaluation performed prior to the filing of the Form 10-K for our fiscal year ended January 3, 2003, a material weakness in our internal control over financial reporting in the former DiverseyLever North America operations was discovered to the effect that cash reconciliations were not being performed in a timely manner and the processing of vendor invoices had been delayed, resulting in a requirement for increased accruals for third party services. These weaknesses resulted from the transfer, in December of 2002, of accounting operations from the former DiverseyLever operation based in Southfield, Michigan to our headquarters in Sturtevant, Wisconsin. In addition, we discovered that certain intercompany accounts were not being reconciled in a timely manner.

In the three months ended April 4, 2003 we acted to correct and resolve the identified weakness relating to the processing of vender invoices in our North American operations by utilizing additional resources to clear the processing backlog. In the three months ended July 4, 2003, we have acted to correct the other identified weaknesses by utilizing additional resources to complete cash and intercompany reconciliations. We have implemented process improvements to facilitate timely intercompany reconciliations. Management will further strengthen internal control over financial reporting in these areas in the remainder of fiscal year 2003, will continue to evaluate and implement corrective actions to improve the effectiveness of our Disclosure Controls and will take further action as dictated by such continuing reviews. The actions being taken, and to be taken, by us to correct the weaknesses identified constitute, and will 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.

Conclusions. Based upon the controls evaluation, our CEO and 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 at a reasonable assurance level 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 Commission’s rules and forms.

PART II. OTHER INFORMATION

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits


10.1		Employment Agreement between the Company and Morio Nishikawa, executed April 11, 2003.

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.

(b)

Reports on Form 8-K during the quarter ended July 4, 2003.

On May 23, 2003, we filed a current report on Form 8-K relating to a slide presentation to investors on May 21, 2003.

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: August 14, 2003						/s/ MICHAEL J. BAILEY
						Michael J. Bailey Executive Vice President and Chief Financial Officer Duly Authorized Officer and Principal Financial Officer

JOHNSONDIVERSEY, INC.

EXHIBIT INDEX

Exhibit Number		Description of Exhibit

10.1		Employment Agreement between the Company and Morio Nishikawa, executed April 11, 2003.

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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Diversey Inactive 10-Q2003 Q2 Quarterly report

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