Note 4. Henkel-Ecolab

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 its investment in Henkel-Ecolab under the equity method of accounting prior to November 30, 2001. On November 30, 2001, Ecolab purchased the remaining 50 percent interest of this joint venture it did not previously 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 has been consolidated with the company’s balance sheet as of year-end 2001. The income statement for the European operations will be consolidated with the company’s operations beginning in 2002.

Henkel-Ecolab results of operations and the company’s equity in earnings of Henkel-Ecolab included:

Prior year gross profit amounts have been adjusted to reflect the reclassification of shipping and handling charges as cost of sales. Shipping and handling charges totaled $60.0 million, $58.3 million and $60.5 million for 2001, 2000 and 1999, respectively.

In 2001, 2000, and 1999, the company and its affiliates sold products and services in the amounts of approximately $507,000, $625,000 and $568,000 to Henkel or its affiliates, and purchased products and services in the amount of approximately $4,628,000, $5,183,000 and $3,530,000 from Henkel or its affiliates. The company also acquired access to certain technology of Henkel during 2000 and 1999 in return for annual payments of approximately $1,700,000 and $1,300,000, respectively. The transactions were made at prices comparable to prices charged to unrelated third parties.

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 is being amortized on a straight-line basis over estimated economic useful lives of up to 30 years. This historical goodwill plus the new goodwill generated by the acquisition of the remaining 50 percent of Henkel-Ecolab will be subject to provisions of SFAS No. 142.

Condensed balance sheet information for Henkel-Ecolab was:

Henkel owned 36.3 million shares, or approximately 28.4 percent, of the company’s outstanding common stock on December 31, 2001.

The company acquired the remaining 50 percent of Henkel-Ecolab for approximately 484 million euros, equal to approximately $433 million at rates of exchange prevailing at the time of the transaction plus $6.5 million of direct transaction related expenses. The purchase price is subject to certain post-closing adjustments.

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

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition.

Identifiable intangible assets have a weighted-average useful life of approximately 14 years. Included as a component of identifiable intangible assets are customer relationships of $83 million and intellectual property of $31 million. Goodwill was assigned to the International Cleaning & Sanitizing reportable segment.

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

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 2000.

The unaudited pro forma results are presented for information purposes only and include the preliminary purchase accounting as described above. 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 2000, nor are they necessarily indicative of future operating results.