notes to consolidated financial statements

Prior to November 30, 2001, the company and Henkel KGaA, Düsseldorf, Germany (“Henkel”), each owned 50 percent of Henkel-Ecolab, a joint venture of their respective European institutional and industrial cleaning and sanitizing businesses. The company accounted for this investment in Henkel-Ecolab under the equity method of accounting. On November 30, 2001, Ecolab purchased the remaining 50 percent interest of this joint venture it did not already own from Henkel. Because the company consolidates its international operations on the basis of their November 30 fiscal year ends, the balance sheet of Henkel-Ecolab as of November 30, 2001 was consolidated with the company's balance sheet beginning with year-end 2001. The income statement for the European operations was consolidated with the company's operations beginning in 2002.

For 2001, Henkel-Ecolab results of operations and the company's equity in earnings of Henkel-Ecolab included:

(thousands)	2001
Henkel-Ecolab   Net sales	$869,487
Gross profit	419,635
Income before income taxes	67,286
Net income	$  40,043
Ecolab equity in earnings   Ecolab equity in net income	$  20,022
Ecolab royalty income from Henkel-Ecolab, net of income taxes	2,123
Amortization expense for the excess of cost over the underlying     net assets of Henkel-Ecolab	(6,312)
Equity in earnings of Henkel-Ecolab	$  15,833

Prior to November 30, 2001, the company's investment in Henkel-Ecolab included the unamortized excess of the company's investment over its equity in Henkel-Ecolab net assets. This excess was $92 million at November 30, 2001 and was included in goodwill, net at year-end 2001. The excess was being amortized on a straight-line basis over estimated economic useful lives of up to 30 years.

The company acquired the remaining 50 percent of Henkel-Ecolab for approximately 483.5 million euros, equal to approximately $432.7 million at rates of exchange prevailing at November 30, 2001, plus approximately $6.5 million of direct transaction related expenses.

The acquisition of Henkel-Ecolab was accounted for under the purchase method of accounting as a step-acquisition. Accordingly, the purchase price was applied to the 50 percent interest of Henkel-Ecolab being acquired.

The following table summarizes the estimated fair value of assets acquired and liabilities initially assumed at the date of acquisition and the final allocation made during 2002.

November 30, 2001 (thousands)	Initial   Allocation	Final   Allocation
Current assets	$178,705	$178,201
Property, plant and equipment	66,538	67,966
Identifiable intangible assets	119,257	119,203
Goodwill	239,737	252,017
Other assets	9,185	29,678
Total assets acquired	613,422	647,065
Current liabilities	115,559	130,199
Postretirement health care and pension benefits	38,614	38,219
Other liabilities	19,860	39,423
Total liabilities assumed	174,033	207,841
Purchase price	$439,389	$439,224

Identifiable intangible assets have a weighted-average useful life of approximately 14 years. Identifiable intangible assets included customer relationships of $83 million and intellectual property of $31 million. Goodwill was assigned to the International Cleaning & Sanitizing reportable segment. Approximately 30 percent of the goodwill will be deductible for income tax purposes.

Subsequent to the initial allocation of the purchase price, approximately $28.0 million of restructuring charges were incurred in connection with the acquisition of Henkel-Ecolab. These costs consisted of $24.1 million for employee termination benefits, $0.4 million for asset disposals, including inventory and property, plant and equipment, and $3.5 million for lease termination and other costs. Because the company acquired only 50 percent of Henkel-Ecolab, $14.0 million of these costs were treated as a liability assumed at the date of acquisition and have been treated as additional goodwill in 2002. The remaining $14.0 million, along with $1.9 million of merger integration costs, were treated as operating expenses during 2002 and are included in the “special charges” discussed in Note 3 to the consolidated financial statements.

The following unaudited pro forma financial information reflects the consolidated results of the company and Henkel-Ecolab assuming the acquisition had occurred at the beginning of 2001.

(thousands, except per share)	2001   (unaudited)
Net sales	$3,182,271
Income from continuing operations before    cumulative effect of change in accounting	192,009
Diluted income from continuing operations    before change in accounting per common share	$          0.74

These unaudited pro forma results are presented for information purposes only. These unaudited pro forma results also do not include the benefits of improvements from synergies the company anticipates it will realize. The results are not necessarily indicative of results that would have occurred had the acquisition been completed at the beginning of 2001, nor are they necessarily indicative of future operating results.

As part of the transaction, the stockholder's agreement between the company and Henkel was amended and extended. The amended stockholder's agreement provides, among other things, that Henkel is permitted to increase its ownership in the company to 35 percent of the company's outstanding common stock. Henkel remains entitled to proportionate representation on the company's board of directors.

Henkel beneficially owned 72.7 million shares, or approximately 28.2 percent, of the company's outstanding common stock on December 31, 2003.

In 2003, 2002 and 2001, the company and its affiliates sold products and services in the amount of $3,426,000, $6,986,000 and $507,000 to Henkel or its affiliates, and purchased products and services in the amount of $71,265,000, $74,192,000 and $4,628,000 from Henkel or its affiliates. Prior to 2002, Henkel-Ecolab also acquired and sold products to Henkel. Transactions between Henkel and Ecolab's European operations acquired on November 30, 2001, are reflected in the consolidated financial statements beginning in 2002. The transactions were made at prices comparable to prices charged to unrelated third parties.