Henkel Annual Report 1995Contents

● Henkel Annual Report 1995 ❍ Contents ❍ Preface ❍ Financial Highlights for Fiscal 1995 ❍ Corporate Management of Henkel KGaA

■ Supervisory Board ■ Shareholders' Committee ■ Management Board

■ Personally Liable Managing Associates ■ Members

■ Operating Management ■ Management Group Affiliated Companies

❍ Report of the Supervisory Board ❍ Management Report

■ Solid foundation, promising future ■ Sales just up on previous year's level ■ Profits again higher ■ Stronger increase in exports, sales in Europe slightly up on the previous year ■ Overseas sales hit by foreign exchange rate fluctuations ■ Capital expenditure ■ Research ■ Outlook ■ Dividend

❍ Financial Performance ■ Balance sheet structure still strong

■ Segment reporting ■ Distribution of value added ■ Cash flow statement in line with IAS ■ Total assets increased by acquisitions ■ Henkel shares

❍ Research and Technology ■ Focusing on customer benefit

■ Competition of ideas for future innovation ■ Innovation offensive bears fruit ■ Innovation awards 1995 ■ Environmental protection ■ Symposium on renewable raw materials

❍ Employees ■ Managing change

■ Cooperation and management ■ Personnel development ■ Performance targeting ■ International exchange ■ Movements in employee numbers ■ A word of thanks to our employees

❍ Chemical Products ■ Sustained success in the face of tough competition

■ Oleochemicals ■ Organic Specialty Chemicals ■ Modern management structure for global markets ■ Outlook

❍ Metal Chemicals ■ Worldwide market success

■ Europe ■ America ■ PRO Teroson - Change in corporate structure ■ Asia/Pacific ■ Production ■ Outlook

❍ Industrial Adhesives/Technical Consumer Products ■ Worldwide competitive success

■ Technical Consumer Products ■ Industrial Adhesives ■ Kaizen at Industrial Adhesives: An ongoing process to improve competitiveness ■ Outlook

❍ Cosmetics/Toiletries ■ Market position with Schwarzkopf substantially improved

■ Domestic German markets ■ Foreign markets ■ Henkel Cosmetik: Strategic Business Units ■ Outlook

❍ Detergents/Household Cleansers ■ Market position in Europe consolidated

■ Universal and speciality detergents ■ Household Cleansers ■ Household care products ■ European sales and distribution strategy revamp ■ Market access in growth regions ■ Groupwork in detergent production ■ Combating competitive pressures with qualified employees ■ Outlook

❍ Industrial and Institutional Hygiene ■ Market position expanded

■ Henkel-Ecolab - European identity ■ Outlook

❍ Major Participations ■ Europe

■ Henkel-Ecolab Joint Venture Companies ■ Germany

■ Grünau Illertissen GmbH, lllertissen ■ Henkel Adhesives Group, Düsseldorf ■ Henkel Teroson GmbH, Heidelberg

■ Austria ■ Henkel Austria Group, Vienna

■ Belgium/Netherlands ■ Henkel Benelux Group, Brussels/Nieuwegein

■ France ■ Henkel France Group, Boulogne-Billancourt

■ Sidobre-Sinnova S.A., Boussens-Saint Martory ■ Great Britain

■ Henkel Ltd., London ■ Italy

■ Henkel S.p.A., Ferentino ■ Spain

■ Henkel Ibérica SA, Barcelona ■ Sweden

■ Henkel Norden Group, Stockholm ■ Switzerland

■ Henkel & Cie AG, Pratteln* ■ Turkey

■ Henkel Turyag A.S., Izmir ■ Türk Henkel A.S., Istanbul

■ Overseas ■ Brasil

■ Henkel SA Indústrias Químicas, Sao Paulo ■ Mexico

■ Henkel Mexicana SA de C.V., Ecátepec de Morelos and Mexico, D.F. ■ South Africa

■ Henkel South Africa (Pty) Ltd., Alrode ■ USA

■ Henkel of America Inc., Gulph Mills/Pennsylvania ■ Asia/Pacific Region

■ Henkel Asia Pacific Group, Hong Kong ❍ Major Participations in Associated Companies

■ Degussa AG via GFC Gesellschaft für Chemiewerte mbH, Düsseldorf, Germany ■ Loctite Corporation, Hartford/Connecticut, USA ■ The Clorox Company, Oakland/California, USA ■ Ecolab Inc., St. Paul/Minnesota, USA

❍ Annual Financial Statements ■ Henkel Group Consolidated Balance Sheet

■ ASSETS ■ SHAREHOLDERS' EQUITY AND LIABILITIES

■ Henkel Group Consolidated Statement of Income ■ Henkel KGaA Balance Sheet

■ ASSETS ■ SHAREHOLDERS' EQUITY AND LIABILITIES

■ Henkel KGaA Statement of Income ❍ Changes in Fixed Assets

■ Henkel Group ■ Henkel KGaA

❍ Notes on Henkel Group and Henkel KGaA ■ Consolidation and Accounting Policies

■ General ■ Companies included in the consolidation ■ Consolidation principles ■ Currency translation ■ Preparation, valuation and audit of financial statements included in the consolidation

■ Notes on the Balance Sheet ■ Fixed assets

■ (1) Intangible assets ■ (2) Tangible assets

■ (3) Financial assets ■ Current assets

■ (4) Inventories ■ (5) Receivables and other assets ■ (6) Marketable securities ■ (7) Liquid funds ■ (8) Deferred charges

■ Shareholders' equity ■ (9) Subscribed capital ■ (10) Capital reserve ■ (11) Revenue reserves ■ (12) Minority interests ■ (13) Currency translation difference

■ Special items ■ (14) Participating certificates ■ (15) Capital funds of dormant partners ■ (16) Special accounts with reserve element

■ Provisions ■ (17) Provisions for pensions and similar obligations ■ (18) Other provisions

■ Liabilities ■ (19) Liabilities ■ (20) Deferred income

■ Contingent liabilities and other financial commitments ■ (21) Contingent liabilities ■ (22) Other financial commitments ■ (23) Financial derivatives

■ Notes on the Statement of Income ■ (24) Sales

■ Analysis by product groups ■ Analysis by markets

■ (25) Costs of sales ■ (26) Selling and distribution costs ■ (27) Research and development costs ■ (28) Administrative expenses ■ (29) Other operating income ■ (30) Other operating charges ■ (31) Restructing costs ■ (32) Financial items ■ (33) Changes in special accounts with reserve elements ■ (34) Extraordinary items ■ (35) Taxes on income ■ (36) Depreciation ■ (37) Cost of materials ■ (38) Payroll costs ■ (39) Number of employees by function* ■ (40) Total emoluments of members and former members of the Supervisory Board,

Shareholders' Committee and Management Board ■ (41) Recommendation for appropriation of the profit of Henkel KGaA

■ Auditors' Report ❍ Major 1996 events to date

■ December 1995 / January 1996, New York ■ January 1996, Düsseldorf

■ January 1996, Izmir ■ January 1996, Zurich ■ February 1996, Düsseldorf ■ February 1996, Düsseldorf ■ March 1996, Izmir ■ March 1996, Beijing

❍ Ten-Year Summary ■ Henkel Group ■ Henkel KGaA

❍ Table of Monetary Units ■ Europe

■ Average Exchange Rates ■ Exchange Rates

■ Overseas ■ Average Exchange Rates ■ Exchange Rates

❍ Financial Terms ❍ Chemical-technical Terms ❍ Further Information

PrefaceDear Shareholders,

For Henkel, fiscal 1995 was characterized by conditions visible during the previous year: the consumer goods markets in Europe still lacked any sustained momentum. The unfavorable foreign exchange influences continued to prevail.

Economies in the Asia/Pacific region maintained their dynamic growth. In the USA, we were unable to escape the combined effects of a weak dollar, increases in raw material prices and selective scarcity of feedstocks.

It is all the more gratifying, therefore, that we succeeded in increasing our net earnings by 5 percent to DM 488 million, yet another record high. This is attributable both to an improved operating profit - following lower restructuring costs - and better results from financial items.

The continued internationalization of our businesses is reflected in the regional distribution of our workforce. As a result of acquisitions, in particular, and joint ventures, which have been consolidated for the first time, the number of employees worldwide increased. However, restructuring in Germany has led to a fall in staffing levels.

We are stressing the central role played by our employees in enhancing the competitiveness of the Henkel Group. In the year under review, we supported our Mission Statement with the introduction of our Guidelines for Teamwork and Leadership. These describe how we intend to work together on a worldwide scale, and how to lead and motivate our employees. In acknowledgment of our employees being key to our success, we have illustrated this Annual Report with photographs of our employees from around the world.

We also reviewed and upgraded our principles and objectives of environmental protection and safety in 1995. In doing so, we have completed the development of our corporate identity statement including customer, market, and employee orientation and commitment to ecological and social responsibility.

One main thrust in the process of internationalization during the year under review was directed at the further development of our activities in China. Following the establishment of Henkel (China) Investment Co. Ltd. in Beijing, eleven companies in the Chinese market now represent us. Our Metal Chemicals business was very successful as supplier to international automotive manufacturers operating in China. Because management availability is one of the limiting factors in developing Chinese markets, Henkel is participating in programs aimed at accelerated training and development of Chinese staff.

Again in 1995, we strengthened our core business through several acquisitions. Of particular importance was the purchase of a majority interest in Hans Schwarzkopf GmbH. The regional strengthening of our cosmetics activities through the integration of the hair care and toiletries businesses of the Schwarzkopf Group, and complementary fit of the various product lines have created synergies and improved our position in the European markets. In addition, we identified promising opportunities for growth in our markets outside Europe.

We continued our innovation offensive, begun in 1994, vigorously. An innovation review, involving all business sectors together with our corporate Research and Technology sector, produced many new product ideas. These will enable us to protect and improve both our competitiveness and our market position. Innovation, coupled with a high-performance workforce and the excellent financial condition of our Company, provides confidence that we will succeed in further expanding our Company in the coming years.

Albrecht WoesteChairman of the Supervisory Board andof the Shareholders' Committee

Hans-Dietrich WinkhausPresident and Chief Executive Officer

Financial Highlights for Fiscal 1995(figures in DM millions, unless stated otherwise)

Henkel Group 1995 1994

Total sales 14,198 14,069

Operating profit 725 671 3)

Earnings before taxes on income 760 677

Net earnings 488 464

Cash flow 1,249 1,288 4)

- as % of sales 8.8 9.2

Shareholder's equity 1) 4,303 4,070

Capital expenditure 2,109 1,007

Research and development costs 369 369

Number of employees (annual average) 41,728 40,590

Henkel KGaA 1995 1994

Dividend per ordinary share (DM) 10.50 2) 9.00

Dividend per preferred share (DM) 11.50 2) 11.00

Total dividends 159.9 144.6

1) incl. participating certificates and capital funds of dormant partners2) proposed3) adjusted to show operating profit after charging restructuring costs.4) adjusted to bring cash flow statement into line with International Accounting Standards. (IAS)

Corporate Management of Henkel KGaADr. Dr. h.c. Konrad Henkel

Honorary Chairman of the Henkel Group

Supervisory Board

Albrecht WoesteChairmanOwner of R. Woeste Group

Gottfried NeuenVice ChairmanChairman of the Works Council of Henkel KGaA

Dr. Ulrich CartellieriMember of the Executive Board of Deutsche Bank AG

Ursula FairchildPhotographer

Johann-Christoph FreyInvestment Banker

Benedikt-Joachim Freiherr von HermanForester

Dr. Klaus Dieter Leisteruntil December 31, 1995Member of the Executive Board of Westdeutsche Landesbank Girozentrale

Hans MehnertMember of the Works Council of Henkel KGaA

Herbert PuderbachChairman of the Management Personnel Representatives of Henkel KGaA

Erich RuchGeneral Manager of the Düsseldorf administration of IG Chemie-Papier-Keramik

Jürgen SarrazinChairman of the Board of Managing Directors of Dresdner Bank AG

Kläre SpaasChairwoman of the Works Council of Thera Cosmetic GmbH

Hans VonderhagenMember of the Works Council of Henkel KGaA

Jürgen WalterMember of the Governing Board of IG Chemie-Papier-Keramik

Dieter WendelstadtChairman of the Supervisory Board of Colonia Konzern AG

Winfried ZanderVice Chairman of the Works Council of Henkel KGaA

Shareholders' Committee

(Preface, (40) Total emoluments of members and former members of the Supervisory Board, Shareholders' Committee and Management Board, (41) Recommendation for appropriation of the profit of Henkel KGaA)

Albrecht WoesteChairmanOwner of R. Woeste Group

Christoph HenkelVice ChairmanBusiness Executive

Dr. Jürgen ManchotVice ChairmanChemist

Walter HunekePrivate Investor

Helmut MaucherChairman and Delegate of the Board of Nestlé S.A.

Dr. Christa PlichtaPhysician

Dr. Wolfgang RöllerChairman of the Supervisory Board of Dresdner Bank AG

Prof. Dr. Dr. Helmut SihlerFormer President and Chief Executive Officer of Henkel KGaA

Management Board

Personally Liable Managing Associates

Dr. Hans-Dietrich WinkhausPresident and Chief Executive Officer

Dr. Hans-Günter Grünewald(until March 31, 1995)

Dr. Klaus Morwind(effective June 12, 1995)

Dr. Roland Schulz(effective June 12, 1995)

Dr. Uwe Specht

Members

Dr. Jens Conrad

Guido De Keersmaecker

Dr. Jochen Krautter

Dr. Ulrich Lehner(effective April 1, 1995)

Dr. Wilfried Umbach

Operating Management

Hans J.M. Boekkerink

Bruno Deschamps(until March 31, 1995)

Dr. Karl Grüter

Thorsten Hagenau(effective Nov. 1, 1995)

Dr. Jochen Heidrich

Dr. Paul Hövelmann

Arno Jacobi

Dirk-Stephan Koedijk

Jörg Koppenhöfer

Dr. Ulrich Lehner(until March 31, 1995)

Dr. Jürgen Maaß

Dr. Michael Schulenburg

Jürgen Seidler

Dr. Lothar Steinebach(effective April 1, 1995)

Prof. Dr. Hans Verbeek

Knut Weinke

Management Group Affiliated Companies

Klaus BehrensBrazil

Ron BennettGreat Britain (effective July 1, 1995)

Pierre BrusselmansBelgium/Netherlands

Eberhard Buse

Heidelberg (effective April 1, 1995)

Bruno DeschampsHenkel-Ecolab (effective April 1, 1995)

Terry EdwardsGreat Britain (until June 30, 1995)

Horst-Günther FalkenhanHamburg (effective Nov. 1, 1995)

Alfredo GangotenaHong Kong (effective February 1, 1996)

Denis Claude B. de GersignySouth Africa

Jorge GuixáMexico

Thorsten HagenauSwitzerland (until October 31, 1995)

Axel KneipJapan

André LesaicherreFrance

Alois LinderSpain (effective January 1, 1995)

Jean-Pierre de MontalivetFrance

Dr. Veit Müller-HillebrandHong Kong (until January 31, 1996)

Rolf MünchSwitzerland (effective Nov. 1, 1995)

Dr. Can PakerTurkey

Kaya SenerTurkey

Dr. Heinz-Gerd SmolkaIllertissen

Björn J:son-StampeSweden

Dr. Friedrich StaraAustria

Dr. Vincenzo Vitelli

Italy

Dr. Harald P. WulffUSA

Report of the Supervisory BoardThe Supervisory Board has fulfilled the responsibilities incumbent upon it by law and under the Company's statutes. The Management Board has informed the Supervisory Board every three months in writing about sales figures, earnings, capital expenditure, activities in the field of research and technology, and the numbers of employees. These reports have included information about the performance of the business of each business sector and by geographical region. The Supervisory Board has been kept informed about important business transactions.

At meetings of the Supervisory Board the Management Board has reported in detail on the performance and earnings of the business as a whole and of the product divisions and has answered questions raised by the Supervisory Board. Budget projections have been presented in summary form. The main items of capital expenditure in 1995 and 1996 have been explained. The strategy of the Cosmetics/Toiletries business sector was examined in connection with the Schwarzkopf acquisition. The reports by the Management Board were always discussed in depth.

The annual financial statements of Henkel KGaA, the consolidated financial statements of the Group together with the management report, the recommendation for the appropriation of profit and the report by the auditors KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Düsseldorf, have been laid before the Supervisory Board.

The annual financial statements and the consolidated financial statements together with the management report for the year ended December 31, 1995, have been given an unqualified opinion by the auditors, including a statement that the accounting records and the financial statements comply with the German legal regulations and the financial statements present a true and fair view of the net worth, financial position and results of the Company. The Supervisory Board has noted and approved the results of the auditors' examination.

The Supervisory Board has examined the annual financial statements, the management report, and the recommendation for the appropriation of profit. After concluding its own examination the Board has found no grounds for objections. The Supervisory Board accordingly approves the annual financial statements and concurs with the recommendation for the appropriation of profit.

Düsseldorf, April 15, 1996

The Supervisory BoardAlbrecht WoesteChairman

Management Report(Report of the Supervisory Board, Auditors' Report)

Solid foundation, promising future

1995 saw a slow-down in world economic growth. In the USA, the decline had already set in by the beginning of the year, with Western Europe following suit a little later and enduring a more pronounced downturn. In Latin America, the overall growth curve flattened out considerably, with the individual countries of the subcontinent finding themselves in varying degrees of economic health. The Mexican currency crisis had far-reaching effects. The Asia/Pacific region continued to enjoy strong economic expansion; the one exception was the Japanese economy which, in spite of new economic regeneration measures, still remained unable to climb out of its depression. In most Central and Eastern European countries, the period of growth continued. In the Russian economy, there were increasing signs of progress toward stabilization.

Business activity worldwide continued to be driven by growing demand for capital goods. Demand for consumer goods remained weak in Western Europe. The consumer climate was adversely affected by high levels of tax and duty in a number of countries and also by the persistence of high unemployment.

These different market forces were reflected in the business performance of our product divisions and our activities in various countries. Once again, negative exchange rate fluctuations, particularly the marked weakness of the dollar against the German mark, placed a burden on our results.

In the case of our Chemical Products and Metal Chemicals business sectors, gratifying growth rates in local currencies were nullified by the new parity rates. Our Industrial Adhesives division performed particularly well. Developments at our Detergents/Household Cleansers business sectors and also our Cosmetics/Toiletries business sectors were affected by the continuing weakness in consumer demand in Western Europe and the accompanying intensive price competition. However, the Detergents/Household Cleansers business sector was still able to maintain sales at the level of the previous year. Losses resulting from foreign exchange influences were offset by additional sales from newly consolidated joint ventures both in Eastern Europe and outside Europe. The products marketed by our Industrial and Institutional Hygiene business sector continued to perform well.

Sales just up on previous year's level

The value of sales in 1995 rose by 1 percent to DM 14.2 billion. Excluding the effect of exchange rate fluctuations, particularly in the USA, but also in Spain, Italy and Mexico, the increase would have amounted to 6 percent.

With effect from November 1, 1995, Henkel acquired from Hoechst AG, Frankfurt, a 77 percent majority interest in Hans Schwarzkopf GmbH, Hamburg, which has been included under financial assets in the annual financial statements as of December 31, 1995. The Schwarzkopf companies will, however, be consolidated as from 1996.

Sales revenue at our German companies rose by 3 percent, while sales recorded by our companies abroad remained at the same level of the previous year.

Profits again higher

Further restructuring measures were introduced last year. The resulting expenditure was, however, substantially lower than in 1994. For better comparability, the restructuring costs included in the extraordinary items of the previous year have been removed and inserted as a separate line before operating profit. After inclusion of the restructuring expenditure incurred in both years, the operating profit showed an increase of 8 percent. Aside from the reduction in restructuring costs, lower selling and distribution costs and an improvement in the balance from other operating expenses and income also contributed positively to the earnings position. On the other hand, there were increases in material costs which could only be partially passed on to the market. In spite of additional financing costs due to the Schwarzkopf acquisition, there was an overall improvement in the result from financial items.

Earnings before tax increased by 12 percent to DM 760 million. With an effective tax rate of 36 percent, net earnings were 5 percent up on last time at DM 488 million, so continuing the long-standing upward movement in our profitability - a trend which was only interrupted in 1992 and 1993 due to the recession of that period.

Stronger increase in exports, sales in Europe slightly up on the previous year

While domestic sales were up 2 percent, the increase in exports was 7 percent. Good growth rates were enjoyed by those German Group companies producing and marketing chemical products and specialty chemicals. On the other hand, sales of our brand-name products fell just short of the 1994 mark.

Elsewhere in Europe, sales were up by a total of 2 percent on the previous year. Industrial adhesives and technical consumer products performed particularly well with a growth rate of 19 percent (6 percent excluding acquisitions and joint ventures consolidated for the first time). Chemical Products, Industrial and Institutional Hygiene, and Metal Chemicals also saw their sales revenue exceed the level of the previous year. Due to exchange rate fluctuations, our Cosmetics business recorded a decline in revenue. The decrease in sales in Detergents and Household Cleansers,

likewise attributable to exchange rate fluctuations, was offset by additional sales from our new markets in Eastern Europe. Business performance in France in relation to our detergents and household cleansers, and also our cosmetic products, was positive with sales up even after conversion to German marks.

Henkel Group Sales by Region

Region Customer location Company location

DM mill.Change

%Share

% DM mill.Change

%Share

%

Germany 4,093 + 1 29 5,091 + 3 36

Rest of Europe 6,805 + 3 48 6,218 + 2 44

North America 1,633 - 6 11 1,677 - 6 12

Latin America 512 - 6 4 377 - 11 2

Africa 227 + 20 2 144 + 18 1

Asia, Australia 928 - 6 691 - 5

14,198 + 1 100 14,198 + 1 100

Among the changes undergone by our business portfolio last year, the acquisition of a majority interest in Hans Schwarzkopf GmbH was of major significance. The 23 percent participating interest held by the Hans Peter Schwarzkopf family in this company will be kept for the time being. These shares may, however, be brought into Henkel at a later date.

With this acquisition, Henkel Cosmetics has become one of the leading manufacturers in the field of hair care products, not only in Europe but also worldwide, and now ranks as the third largest supplier to the hair salon sector. The most important foreign markets for Schwarzkopf are Austria, Benelux, France, Great Britain, Switzerland, Central and Eastern Europe, Latin America and Australia.

Another major focal point of our acquisition activities has been the adhesives sector. With effect from January 1, 1995, Henkel KGaA took over the Swiss company Laesser Klebstoffe AG, Erlinsbach, a leading manufacturer of adhesives for the cigarette industry, as well as for paper processing and graphics applications.

In Germany, Henkel KGaA acquired the Industrial Adhesives division from PKL Verpackungssysteme GmbH, Linnich, with financial effect from January 1, 1995. The products thus acquired will supplement our own range of labeling glues, dispersion adhesives and hotmelts.

In Spain, we took over the brand-name adhesives manufacturer Indústrias Nural S.A., Barcelona, in March 1995.

Our cooperation agreement with Pelikan Holding AG, Zug/Switzerland, for the paper, office materials and stationery sector, which began toward the end of 1994, was further expanded. Following the takeover of the production facilities for adhesives and correction products, Henkel KGaA also acquired, as of August 1, 1995, the brand rights for the products of Pelikan's "General Office" unit, assuming responsibility for marketing, sales and distribution in the countries outside the German-speaking region.

With effect from October 1, 1995, Henkel KGaA took over Dr. Rudolf Schieber Chemische Fabrik GmbH + Co. KG, Bopfingen/Germany. This company is a leading manufacturer of adhesives for the woodworking and paper processing industries.

In Sweden, the Liljeholmens candles business, including the Oskarshamn factory taken over as part of the Barnängen acquisition, were demerged and sold retrospectively as of January 1, 1995 to Midway Holding AB, Malmö.

A.O.O.T. Henkel Era Tosno of Tosno near St. Petersburg/Russia, in which Henkel built up its participating interest to 79 percent during the year under review, was included for the first time in the consolidated financial statements. The company manufactures detergents, household cleansers and adhesives.

Overseas sales hit by foreign exchange rate fluctuations

Overall, our Group companies overseas recorded a drop in sales for 1995 of 4 percent. The main reason for this was the low valuation of the dollar compared to the German mark. Close to 60 percent of sales by our companies overseas came from North America. On a dollar basis, sales in the USA and Canada rose by a total of 6 percent; however, following conversion to German marks, they were down 6 percent on the previous year's value. Our oleochemical and industrial adhesives product groups registered disproportionately high dollar growth rates.

With effect from June 30, 1995, Henkel Canada took over the businesses of LePage's Ltd., Brampton, Ontario/Canada. LePage's Ltd. is the leading supplier of trade and do-it-yourself adhesives in Canada.

Our Latin American companies had to cope with a drop in sales of 11 percent. The peso crisis in Mexico and its economic consequences, the recession in Argentina and the effects of the stability program implemented in Brazil all adversely affected our results. At the beginning of 1995, Henkel acquired a 25 percent equity interest in Bombril S.A., São Paulo/Brazil. Bombril is a major company in the Brazilian detergents market. Toward the end of the year, the business activities (adhesives and sealants for the automotive industry) of Argenpisa, Buenos Aires, Argentina, and the company Tenaz Colas Ltda., São Paulo, Brazil, with the adhesives business marketed under the brand name "Tenaz", were taken over from Orniex S.A., São Paulo.

In Africa, sales rose by 20 percent while still remaining at a relatively low level in absolute terms.

In Egypt, we increased our participating interest in Port Said Detergents & Chemical Industries SAE, Port Said, from 50 percent to 96.7 percent, and the company was consolidated the first time in 1995. Henkel South Africa acquired the adhesives business of Trans Hex Group Ltd., Parow.

Overall, sales in Asia and Australia remained at the level of the previous year. Sales of chemical products decreased. All the product divisions were able to increase their sales revenue as measured in the local currencies. However, as the Asian currencies are often linked to the US dollar, the largely gratifying business performance at the national level was overshadowed by the weakness of the US dollar compared to the German mark.

In China, Henkel has strengthened its position in the cosmetics sector. Henkel and the Shanghai Kemeng Group, Shanghai, have together established the Henkel Kemeng Cosmetics Ltd. joint venture headquartered in Shanghai. Henkel's participating interest amounts to 60 percent, and the new company will be manufacturing and marketing a wide range of toiletry products, particularly for the skin and hair care segments. Henkel is already represented in the People's Republic of China in the cosmetics sector by Henkel Cosmetics China Ltd., Hong Kong.

In all, Henkel now has participating interests in ten companies active in China, which are coordinated by a holding company in Bejing. All product divisions are represented in China. The companies Shanghai Henkel Oleochemicals Ltd. and Shanghai Henkel Teroson Adhesives & Coatings Ltd. were consolidated for the first time in 1995.

In Australia, Betatene Ltd., Cheltenham/Victoria, a company active on the antioxidants sector, was fully taken over by the Henkel Corporation which already held a minority interest in that company.

Capital expenditure

(Financial Highlights for Fiscal 1995, Report of the Supervisory Board, Cash flow statement in line with IAS, Ten-Year Summary - Henkel Group)

Capital expenditure on tangible, intangible and financial assets amounted to DM 2,109 million in 1995. The exceptionally high level of additions to financial assets was largely attributable to the acquisition of Schwarzkopf.

At our parent plant in Düsseldorf-Holthausen, a second facility within the Group for the production of the particularly environmentally compatible surfactant alkyl polyglycoside (APG) went into operation. Also in Holthausen, another facility was completed for the hydrogenation of fatty acids on the basis of what is, to date, a unique continuous process. Further investment was made in environmental protection through the expansion of the waste air collection system with which the emissions from our production facilities are ducted for combustion in the boiler house of the power plant.

At Neynaber Chemie, Loxstedt/Germany, a further stabilizer mixing facility went into operation. In Genthin, where Henkel KGaA's only branch operation is based alongside Henkel Genthin GmbH, the new production plant for liquid detergents and household cleansers, parts of which were commissioned in the previous year, went into full production. At Grünau Illertissen, a second spray drying facility for food additives was completed. And at Henkel Teroson, Heidelberg/Germany, the production facilities for direct glazing products were expanded.

A new sulfonation plant went into operation in Cayirova/Turkey. Work was also completed on the capacity expansion projects for pouch refill packs and for dishwashing detergents involving the production facilities at Herent/Belgium and at our parent plant in Düsseldorf-Holthausen. The production facilities for cosmetic products in Liepvre/France also underwent their final stages of expansion.

In Cincinnati/USA, a new fatty acid distillation plant was taken on stream, expansion of the azelaic acid plant was completed, and a new administration building was opened.

1996 will see capital expenditure remaining at a high level. Three major projects due for completion in 1996 are:

● Expansion of the production facilities for extraction chemicals in Cork/Ireland● Capacity expansion project for the oleo-chemicals sector in Kelang/Malaysia● A second employee cafeteria at our Düsseldorf-Holthausen parent plant.

Research

Expenditure on research and development by the Henkel Group remained at the same level as in the previous year - at DM 369 million, equal to 2.6 percent of sales revenue. In addition, DM 143 million were spent on technical services.

The objectives of the measures introduced back in 1992, which were geared toward a fundamental restructuring of our research and development activities, have now been achieved, namely concentration on our core activities, greater market orientation, and the streamlining of our procedures in project handling. In the service sectors of our research operation, our capacities are being further aligned toward specific business requirements. Our research and development activities are described in detail in a separate section of this 1995 Annual Report entitled "Research and Technology".

We also publish a separate Environment Report detailing the many environmental protection activities pursued by Henkel, which for years has been issued the same date as the Annual Report. The new Environment Report will, for the first time, contain data of the Group's main emission and energy consumption values.

Outlook

We expect 1996 to see moderate economic growth in Europe and North America, coupled with a continuation of the dynamic expansion currently underway in Southeast Asia. The foreign exchange risks will, in our estimation, become substantially smaller as compared to 1995.

Developments at Henkel during 1996 will depend largely on how quickly the generally expected recovery of the consumer climate takes place. Following the cost-cutting measures and process improvements which we have introduced in the brand-name products sector, we are confident of being well placed to benefit from an increase in private consumer spending.

Against this economic background, we expect sales to grow more rapidly in 1996. Results should be further boosted by sales and profits arising from the Schwarzkopf acquisition and other company takeovers.

The expected earnings from the Schwarzkopf activities will be offset by the full financing costs and amortization of the goodwill purchased. Appropriate allocations to provisions will have to be made to cover the restructuring costs expected in the wake of the integration process.

Aside from the ongoing efforts being made to improve our cost structure and increase the speed of innovation, our main goals for 1996 will include:

● Encouraging growth in our existing business activities through more intensive marketing activities underpinned by a special initiative under the heading "Year of Sales"

● Utilization of potential synergies arising from the integration of the acquisitions made in 1995 - particularly that of the Schwarzkopf businesses

● Continuing restructuring measures for enhancing process improvements in order to consolidate and strengthen our long-term competitiveness.

Henkel is based on solid grounds. If our expectations regarding macroeconomic development prove to be true, we are confident that we can look forward to a further improvement in earnings in 1996.

Dividend

The unappropriated profit of Henkel KGaA amounts to DM 160 million. Our recommendation to the Annual General Meeting will be for a dividend of DM 10.50 to be paid on the ordinary shares, and a dividend of DM 11.50 to be paid on the preferred shares for each share of DM 50 par value held. Including the tax credit on the cash dividend paid, shareholders liable to tax at the full rate will receive a gross dividend of DM 15.00 on each ordinary share, and DM 16.42 on each preferred share.

Henkel KGaA Dividend in DM1990 1991 1992 1993 1994 1995

per ordinary share 6.50 7.00 7.00 7.00 9.00 10.50 *

with tax credit 10.16 10.94 10.94 10.00 12.86 15.00

per preferred share 9.50 10.00 10.00 10.00 11.00 11.50 *

with tax credit 14.84 15.63 15.63 14.29 15.71 16.42

* recommendation

The Henkel family has again waived part of the dividend payable on its ordinary shares in accordance with the Company's statutes.

After deducting minority interests of DM 55 million and total dividends of DM 160 million from consolidated net earnings of DM 488 million, the balance of DM 273 million is being transferred to revenue reserves.

Financial Performance

Balance sheet structure still strong

Segment reporting

We report by segment on the fields of activity which match the key strategic elements of our business: chemical products, specialty chemicals and brand-name products.

Henkel Group Sales and Operating Profit by Field of Activity

Sales Operating profit

DM mill.Change

%Share

% DM mill.Change**

%Share

%

Chemical products 4,025 - 1 28 154 - 14 21

Specialty chemicals* 4,700 + 5 33 307 + 21 42

Brand-name products 5,473 - 1 39 264 + 11 37

14,198 + 1 100 725 + 8 100

* including secondary activities

** 1994 figures adjusted to show operating profit after charging restructuring costs

Sales of chemical products fell by 1 percent to DM 4,025 million. Without the effects of currency fluctuations they would have increased by 7 percent. Sales of oleochemicals matched the previous year's level whilst organic specialty chemicals were slightly lower. Operating profits - after restructuring costs - went down by 14 percent to DM 154 million. Earnings were affected by sharp increases in raw material costs for organic specialty chemicals which could not be passed on in selling prices. Substantial overcapacity also resulted in prices for base surfactants - an important area of our activities - coming under pressure.

Specialty chemicals - metal surface treatment products, adhesives, and products for institutional and industrial cleaning and maintenance - achieved a 5 percent increase in sales to DM 4,700 million. Most of the growth came from adhesives which recorded strong sales growth, especially in other European countries, partly as a result of acquisitions. Operating profits improved by 21 percent to DM 307 million, likewise reflecting mainly the very good performance of adhesives.

Sales of brand-name products - household detergents, dishwashing products and cleansers, and toiletries - were 1 percent down on the previous year at DM 5,473 million. Sales of detergents, although lower overall, recorded growth in France and Spain but decreased in Germany and in the Benelux countries, in Austria and in Italy. Sales of dishwashing products and household cleansers showed an increase. Sales of toiletries decreased overall but recorded growth in France. Operating profits, helped by lower restructuring costs, improved by 11 percent to DM 264 million.

Distribution of value added

Value added (sales and other income less the cost of materials, depreciation charges and other expenses) was marginally higher than in 1994 at DM 4,301 million. By far the largest proportion of the value added - 75.4 percent - was paid to employees. 6.3 percent was retained in the business to safeguard growth and strengthen reserves. Taxes accounted for 8.0 percent and 5.3 percent went to providers of capital (in the form of interest); shareholders and minority interests received 5.0 percent.

Henkel Group Value Added Statement

1995 1994

DM mill. % DM mill. %

Net sales/Other income 14,639 100.0 14,466 100.0

Cost of materials 6,169 42.1 5,893 40.7

Fixed asset depreciation 804 5.5 826 5.7

Other expenses 3,365 23.0 3,455 23.9

Value added 4,301 29.4 4,292 29.7

Shared between:

Employees 3,241 75.4 3,310 77.1

Public sector 343 8.0 280 6.5

Providers of capital 229 5.3 238 5.6

Shareholders 160 3.7 145 3.4

Minority interests 55 1.3 70 1.6

Retained in the business 273 6.3 249 5.8

Cash flow statement in line with IAS

The cash flow statement has been prepared for the first time in accordance with International Accounting Standards

(IAS). This format is now generally accepted around the world and is also recommended by the Institut der Wirtschaftsprüfer (the professional accountancy body in Germany). This method of presentation has the advantage of classifying cash flows by operating, investing and financing activities. The change has a marginal effect on the cash flow figure because the proceeds of fixed asset disposals are now set off against capital expenditure. The previous year's cash flow figures have been adjusted accordingly.

Cash flow was 3 percent down on the previous year at DM 1,249 million. As a proportion of sales it was 8.8 percent. Capital expenditure on tangible fixed assets and the extra funding required for current assets were financed in full out of cash flow. The acquisition of Schwarzkopf gave rise to an extra financing requirement. The main cash flow from financing activities came from an issue of bonds (commercial paper) and the increase in liabilities to banks to finance acquisitions. Liquid funds and marketable securities went down by DM 199 million.

Henkel Group Cash Flow Statement in DM millions

1995 1994

Net earnings 488 464

Depreciation of fixed assets + 804 + 826

Change in long-term provisions + 70 + 83

Gains from disposals of fixed assets - 25 - 14

Equity income less dividends - 88 - 71

Cash flow 1,249 1,288

Change in inventories - 104 - 169

Change in receivables and other assets - 123 + 69

Changes in liabilities and short-term provisions + 260 + 30

Net cash flow from normal operating activities 1,282 1,218

Capital expenditure on intangible assets* - 292 - 146

Capital expenditure on tangible assets - 952 - 783

Capital expenditure on financial assets** - 865 - 78

Proceeds from disposals of fixed assets + 201 + 108

Net cash flow from investing activities - 1,908 - 899

Increase in capital - + 272

Issue/Redemption of bonds + 400 - 250

Change in other financial liabilities + 165 - 140

Dividends Henkel KGaA - 145 - 116

Dividends subsidiary companies (to other shareholders) - 25 - 26

Other financing transactions + 33 - 8

Net cash flow from financing activities + 428 - 268

Change in financial position involving movements of cash - 198 + 51

Effect of exchange rate changes on cash - 1 - 4

Change in liquid funds and marketable securities - 199 + 47

* additions, including goodwill from company takeovers

** excluding increase in equity valuation of shares in associated companies (equity income)

Total assets increased by acquisitions

The balance sheet ratios remain consistently good. Total assets rose by 11 percent to DM 11,620 million. This was chiefly due to the increase in financial assets, the main contributory factors being the acquisition of Schwarzkopf and the purchase of a participation in Bombril in Brazil. The proportion of fixed assets to total assets went up to 56 percent; and the proportion of current assets down to 44 percent accordingly.

Purchased goodwill amounting to DM 186 million has been capitalized in 1995 and is being amortized against earnings in subsequent years.

The shareholders' equity (including capital funds of dormant partners and participating certificates) increased by DM 233 million during the year under review. The equity ratio has gone down to 37.0 percent owing to the increase in total assets. Shareholders' equity and long-term borrowings together cover total fixed assets plus a proportion of inventories. Pension and other provisions increased by DM 108 million to DM 3,525 million; their proportion of total assets has gone down to 30.4 percent. The return on equity was 12.3 percent (1994: 12.8 percent) and the return on total assets 8.9 percent (1994: 8.8 percent).

Henkel Group Balance Sheet Structure

Dec. 31, 1995 Dec. 31, 1994

Total assets (DM mill.) 11,620 10,487

as % of total assets:

Fixed assets 56.4 52.0

Inventories 16.8 17.6

Liquid funds and receivables 26.8 30.4

Shareholders' equity 37.0 38.8

Long-term borrowings 20.6 23.0

Short-term borrowings 42.4 38.2

Henkel shares

Calculated on the DVFA/SG basis, earnings per share for 1995 were DM 33.50 (the same as in 1994). The shares were quoted at DM 538 at the end of the year after trading between a high of DM 583.50 and a low of DM 508 during the year.

Over the long term since 1985 the average yield on Henkel shares for investors who acquired the shares at their original issue price has been 9.2 percent. The average yield on the DAX index over the same period has been 6.6 percent.

Key Data on Henkel Shares in DM

1995 1994

DVFA/SG earnings per share 33.50 33.50

Quoted share price at year end 538 565

High for the year 538.50 685

Low for the year 508 529

Research and Technology(Preface, Report of the Supervisory Board, Research, Innovation offensive bears fruit)

Focusing on customer benefit

(America)

Henkel research is meeting head-on the challenges which have resulted from the increasing difficulties emanating from the national and international economic situation. The first priority still lies with ensuring ongoing improvement in our processes and maintaining a high level of flexibility in providing our customers with the solutions they require. With these objectives in mind, we have carried out a series of systematic process analyses in relation to all our main activities so as to increase further the efficiency of our R & D effort.

Competition of ideas for future innovation

Last year, even greater emphasis was placed on targeting our resources in our explorative research activities with the purpose of securing a sharper competitive edge for the Company, particularly in the long term.

Project proposals with the potential for a high level of economic return are evaluated and selected by interdisciplinary teams by applying special portfolio management techniques.

Innovation requires a stream of initial ideas, and we rely on our employees to provide this flow of inventiveness. We have established multi-disciplined idea development teams to provide an important stepping stone in the innovation path. In order to enhance this process, the already existing external cooperation arrangements have also been further intensified. Our contacts with universities and similar institutions have been strengthened in all the strategically important areas. Our customers' requests constitute a very important source of impetus, as do the suggestions of our suppliers. In selective areas, strategic cooperation arrangements with companies of a similar market alignment are being expanded for the purpose of cost and risk minimization.

Innovation offensive bears fruit

In 1994, we embarked upon a special innovation offensive which, in the meantime, has led to a number of gratifying results.

In the textile industry, so-called sizing formulations are employed in weaving to reduce the mechanical stresses which occur in the loom. A substantial reduction in wastewater contamination has been achieved through the substitution of carboxymethyl cellulose by a better biodegradable guar derivative which offers comparable application-related performance.

Fatty alcohol sulfates, anionic surfactants manufactured by Henkel using renewable raw materials, are readily biodegradable. For large-scale industrial applications, bulk granulates have now been developed which offer a high bulk density.

A project sponsored by the Federal Ministry for Education, Science, Research and Technology (BMBF) in the field of paper recycling was completed in the year under review. The recycling quota of used print was increased from approx. 60 percent at the beginning of the project in 1990, to 100 percent. This success is largely attributable to an advanced concept in joint/multi-disciplinary research.

The so-called fuzzy controls and neural networks designed by our process development unit for supporting the operating personnel in production plant have been extensively applied and further refined. These new technologies have resulted in an even greater emphasis on human resources and the effective utilization of workforce creativity.

Process-integrated environmental protection constitutes a permanent pillar of our Eco-Leadership strategy. Thanks to new developments in membrane technology, products of high purity can now be obtained through high-performance osmosis techniques. With specially developed falling-film and thin-film evaporators, temperature-sensitive products can now be manufactured with minimal energy input.

In the surface treatment of metals, considerable emphasis has been placed on the development of environmentally

compatible phosphating techniques. A new process which eliminates the need for nickel was developed to commercialization.

In our adhesives research and development effort, one of the main activities lies in the substitution of solvents. In the case of our Liofol range of laminating adhesives, a solvent-free formulation offering specific ecological advantages was indeed introduced during the year under review.

The rapid curing of adhesion-bonded joints is of major economic importance for many of our customers. With a newly developed class of 1-pack and 2-pack methacrylate-type reactive adhesives, we are now able to offer them the high-quality, fast-curing industrial adhesives they require. These are used where the performance of superglues is not sufficient for the application concerned.

With its cable sealing compounds for optical fibers, our research and development team has also been extremely successful in the high-tech fields of information technology and data transmission.

In the hair care sector, we have further developed products offering natural active ingredients. The trend toward care substances which remain on the hair has continued. Gentle color tones with a visibly better luster effect have been created through the combination of fruit acids and a cationic polymer.

We have also developed new biologically active ingredients for our skin care products which have been proven to possess better properties for preventing the aging of the skin.

Enzymes constitute an important ingredient in detergents. Thanks to protein engineering, we have succeeded in developing an even gentler protease specifically for wool and silk. The manufacturing process has also been substantially improved by our process development team.

Innovation awards 1995

This year the Fritz Henkel Award for Innovation was conferred for the fourteenth time. This serves to reward employee teams who have led the way in the development of products which are successful on the market. This time around, the following projects were selected to receive this prize: Megaperls (extrudate detergent); the continuous hydrogenation of fatty acids with the aid of an innovative process employing a precious metal catalyst; a new ethoxylation process; and fatty alcohol sulfate (FAS) powder and granulate for use in powder detergents.

Environmental protection

(Preface, Capital expenditure, Research, Innovation offensive bears fruit, (16) Special accounts with reserve element, December 1995 / January 1996, New York, Further Information)

Last year we reformulated our corporate "Principles and Objectives of Environmental Protection and Safety". These guidelines are binding on all employees of the Henkel Group. Environmental protection is a global undertaking. Within the framework of a worldwide Environment Audit, we identify those areas where action is necessary and we also detail the objectives achieved in our annual Environment Report.

Our successes in the field of environmental protection have provided further encouragement to our research and development people in their efforts to continue in the future to create environmentally compatible products and processes. The employment of ecologically acceptable substances and materials ensures that the burden on the environment can be effectively reduced. This approach is very much in line with the worldwide initiative Responsible Care® developed by the chemical industry.

Expenditure on environmental and consumer protection thus remained at a high level.

Symposium on renewable raw materials

In organizing the fourth symposium entitled "Renewable Resources - Perspectives for Chemistry" on September 27 and 28, 1995 in Düsseldorf, Henkel underlined its leading role as a processor of native fats and oils. The wide spectrum of

international participants from science, politics, commerce and agriculture provided an ideal forum for improving the opportunities for the increased employment of renewable raw materials in the chemical industry.

Employees

Managing change

For several years now, our personnel policies have concentrated on the further development of our corporate culture and improving our performance through the more effective utilization of our human resources. Our aim is to reconcile as far as possible the interests of the Company with those of our employees. Our vision in relation to our corporate culture is characterized by the following development directions: From status to performance; from control to trust; from working out of a sense of duty to working for the enjoyment of success; from individualism to community; and from caution born out of a desire for security to a more entrepreneurial approach.

The commercial goals of our personnel policy relate to our desire to secure and consolidate competitive advantage and to achieve customer-oriented quality improvement. Each individual employee contributes to our corporate success. Thus our international personnel-related activities are geared toward developing employees into motivated high-performers and creating the conditions which will promote necessary change.

Cooperation and management

In the year under review, we established new guidelines for teamwork and leadership and these were presented to and discussed with our employees. International teams were involved in formulating these guidelines. They are binding worldwide. They describe how we intend to promote profit- and performance-oriented cooperation and management, as well as creativity, responsibility and work enjoyment on a basis of trust. It is also intended that this corporate culture should permeate through to our customers, our suppliers and our commercial environment in general.

Personnel development

The qualification of our employees constitutes a central prerequisite for high performance and efficiency within the Company. In 1995, around 70 percent of our employees in Germany took part in internal or external training courses and education programs. Special attention was given to the further development of our managerial staff. Wherever possible, we endeavor to promote from within the Company in order to fill vacant managerial positions. The suitability criteria applied essentially relate to key qualifications evidencing expert and social competence. In 1995, 43 international seminars were held in 11 different countries, with around 700 managers in all taking part. Employees from 12 nations participated in our internationally aligned study course for managerial candidates in which the emphasis was on tackling strategic matters and current affairs related to the Company. At our International Management Program in Fontainbleau, 30 participants were prepared for the assignment of specific managerial tasks in Germany and abroad. A new qualification offensive has been put in place to enable employees of the Henkel Group showing exceptional potential, to gain further experience on the basis of their participation in general management seminars, project management teams and assignments abroad. Our systematic management review meetings have provided a successful instrument for identifying potential successors and candidates for promotion.

Performance targeting

Our policy is to assign to our employees challenging tasks which they can tackle independently and under their own responsibility. In target-setting meetings involving all managerial staff, individual objectives are agreed and team goals coordinated. Achievement of the targets is rewarded by a graded incentive scheme which was extended in 1995 to the entire Henkel Group.

International exchange

(Combating competitive pressures with qualified employees)

Last year saw the establishment of the Henkel "European Employees' Council". Its first meeting took place in May 1995, attended by employee representatives and managers of our subsidiaries within the European Union. The Council

has the task of providing information to the employees of the Henkel companies in the European Union relating to the economic and financial situation of the Group, the employment situation and also important production and investment programs.

The exchange of personnel between the companies of the Henkel Group is an important factor in promoting the development of our business in growth markets and improving the general transfer of know-how within the Group. During 1995, around 450 employees were included in these transfer programs.

Movements in employee numbers

Our total workforce increased in 1995 by 1,757 to 41,664. This increase in numbers was due in particular to acquisitions in Europe, Africa and North America, and - in Southeast Asia - to the incorporation of various joint ventures within the scope of consolidation. The number of employees at our German companies decreased as a result of our ongoing restructuring program.

Adjustments to staffing levels were agreed with the employees concerned and their representatives, and were largely achieved through early retirement.

Changes in Employee Numbers

Dec. 31, 1995 Dec. 31, 1994

Germany 14,954 15,418

of which Henkel KGaA 9,474 10,133

Abroad 26,710 24,489

Total 41,664 39,907

A word of thanks to our employees

Thanks to the high level of commitment, efficiency and goodwill shown by our employees, we again achieved good results last year despite difficult market conditions. We would therefore like to express our gratitude to all the employees of the Henkel Group for their dedication and hard work. Our gratitude also goes to the employee representative bodies for their constructive and loyal cooperation.

Chemical Products(Solid foundation, promising future, Stronger increase in exports, sales in Europe slightly up on the previous year, Overseas sales hit by foreign exchange rate fluctuations, Segment reporting, Sustained success in the face of tough competition, Modern management structure for global markets, Metal Chemicals, Technical Consumer Products, Henkel Benelux Group, Brussels/Nieuwegein, Henkel Ltd., London, Henkel S.p.A., Ferentino, Henkel Ibérica SA, Barcelona, Henkel South Africa (Pty) Ltd., Alrode, Degussa AG via GFC Gesellschaft für Chemiewerte mbH, Düsseldorf, Germany, Ecolab Inc., St. Paul/Minnesota, USA, Analysis by product groups)

Share of Group sales: 28%

Oleochemicals/Care Chemicals Product groups: Fatty acids; glycerine and fatty acid derivatives; fatty alcohols and their derivatives; products for the cosmetics, toiletries and pharmaceutical industries, for detergents and household cleansers; aroma chemicals/perfume compositions; food and feedstuff additives; natural-source vitamin E and beta carotene.

Organic Specialty Chemicals Product groups: Base materials and additives for plastics, paints and coatings; auxiliary products for textile, leather and paper production; specialty products for mining, oil drilling, and for lubricants, for plant care formulations and the construction industry.

Inorganic Products: Water glass

Sustained success in the face of tough competition

During the second half of the year, world market activity in relation to chemical products tailed off substantially. Although there was a considerable growth in sales in local currencies, their value in DM only met levels of the previous year. If the foreign exchange rates had remained unchanged, sales revenue from chemical products would have increased by 7 percent over last time.

The year under review was characterized by scarcity and, in some cases, drastic increases in raw material prices which could not be passed on to our customers. In the market for base surfactants, e.g. fatty alcohol sulfates - an area important for us - competition was ruinous. This was triggered by newly established capacities which far exceed current demand.

The earnings situation in 1995 worsened with the margins for our exports from Germany to the dollar area being particularly affected.

Oleochemicals

(Overseas sales hit by foreign exchange rate fluctuations, Segment reporting, Chemical Products, Overseas)

Demand varied both by region and in relation to the different product groups. Overall, the business results achieved with oleochemicals matched those of the previous year; without the changes in foreign exchange parities, a growth of 9 percent would have been achieved. While growth rates were realized in Europe in spite of heavy competition, the currency-related decrease in sales revenue in North America amounted to more than DM 100 million. Developments in the Southeast Asia region for 1995 were less than satisfactory. Recessive tendencies in Japan and a very slow take-off phase in China adversely affected business performance.

Among our oleochemical base materials, fatty acids and glycerine showed disproportionate growth worldwide, with market share being further expanded. In the case of our fatty alcohols, we forwent opportunities to increase market share in order to improve profitability.

Our Care Chemicals operation was able to extend further its leading market position. Ignoring foreign exchange fluctuations, sales grew by 9 percent. Despite the ruinous competition resulting from surplus capacity in the production of fatty alcohol ether sulfates and other base surfactants, we were able to strengthen our overall position through growth in specialty products.

In the spring of 1995, the second plant for the production of alkyl polyglycosides (APG) in Düsseldorf was put in operation. We have developed further areas of application for this new, environmentally compatible class of surfactant. A fatty alcohol sulfate compound with APG for detergents and household cleansers was incorporated into our product range. APG has also made considerable inroads in applications in the cosmetics sector as demand continues to increase for new vegetable-based raw materials in surfactant formulations and emulsions for the skin care segment. In the field of aroma chemicals/perfume compositions, the success of Ambroxan continued.

Our business in food additives continued to grow, with high increases being registered particularly in exports to Eastern Europe. Increased efforts in the countries of Southeast Europe will also provide a further boost to sales. In the anti-oxidant sector, the restriction to supplies of natural-source vitamin E resulting from a scarcity in the necessary raw materials was offset by a growth in business volume involving our carotene preparations. The Australian company Betatene, a major manufacturer of natural-source beta carotene, was wholly taken over in 1995.

Organic Specialty Chemicals

(Segment reporting, Chemical Products, Modern management structure for global markets)

A growth in volume sales figures was achieved in a considerably tougher competitive situation as compared with 1994. With a market characterized by overcapacity and negative foreign exchange influences, there was however a slight

decrease in sales revenue. If the foreign exchange rates had remained unchanged, sales would have grown by 6 percent. The steep rise in raw material costs could only be partially passed on to the market. In spite of tight cost management, the effect of this development on the earnings situation was considerable.

A small downturn in our plastics additives business in North America was offset by substantial improvements in Europe and Asia. The paints and coatings unit was able to increase sales in Asia. Sales revenue from specialty resins in North America were slightly down on the previous year.

We were able to maintain volume sales in textile auxiliary products at the level of the previous year, albeit at reduced prices. Our joint venture in Shanghai is currently at the developmental stage and is expected in the next few years to contribute to a substantial improvement in our business in textile auxiliary products in Asia.

Leather production worldwide stagnated. With the exception of Southern Europe, volume sales of our leather auxiliary products were only just maintained at the level of the previous year, with revenue decreasing appreciably in the face of heavy competition.

The high level of activity in the paper industry had a promotional effect on our business in this sector, particularly in Europe. In the USA there was a temporary decline in sales owing to certain customers restricting the number of their suppliers by consolidation programs.

We were able to expand further our leading market position in specialty chemicals for copper extraction in the mining sector. Demand for ecologically compatible oil well fluids for petroleum production continued to increase, particularly in the Gulf of Mexico. Our share in this market growth was disproportionately high.

Sales involving oleochemical based synthetic lubricants continued to show a gratifying upward trend. While in Europe our sales effort tends to concentrate on components, in the USA we supply complete longlife oil systems for gearboxes and axles.

Modern management structure for global markets

The Organic Specialty Chemicals division of the Chemical Products business sector controls its worldwide business activities through Regional Business Teams (RBT) which reside within the Strategic Business Units (SBU). RBTs define the regional marketplace. They are responsible for profits in the respective region and they are accountable to the SBU worldwide. The generation of global strategic plans is the primary responsibility of Market Segment Teams (MST) within the SBUs.

This ensures that international and globally active key customers are provided with the optimum service they require by Henkel.

Outlook

We are confident that the global structure of our business, our ongoing efforts to improve our competitiveness and our innovative product portfolio will provide an effective launch pad for positive developments in 1996. We are endeavoring to optimize further our product range and business structure in order to become more immune to cyclical trends.

Metal Chemicals(Preface, Solid foundation, promising future, Stronger increase in exports, sales in Europe slightly up on the previous year, Worldwide market success, Europe, America, Outlook, Henkel Benelux Group, Brussels/Nieuwegein, Henkel Ltd., London, Henkel Ibérica SA, Barcelona, Henkel SA Indústrias Químicas, Sao Paulo, Henkel South Africa (Pty) Ltd., Alrode, Henkel of America Inc., Gulph Mills/Pennsylvania, Henkel Asia Pacific Group, Hong Kong, Analysis by product groups)

Share of Group sales: 7%

Product groups: Chemical products and application systems for the surface treatment of metals and metal substitutes; lubricants; cleaning products; corrosion inhibitors; products for conversion processing and water treatment; engineering services; antifreeze agents and corrosion inhibitors for motor vehicle cooling systems; CFC substitutes for cleaning applications; polyurethane adhesives and sealants; epoxide structure adhesives; PVC and SMA plastisols; dispersion adhesives; acrylates.

Worldwide market success

The growth experienced by our Metal Chemicals business over the last few years continued throughout 1995. Related to national currencies, we achieved a sales increase of almost 10 percent. This improvement in output was spread amongst virtually all the regions of the world. Business performance in Germany and our other European markets was particularly gratifying. In our overseas markets, too, we continued to achieve good growth rates. The main exception was Latin America where economic activity was generally at a low level. Owing to negative foreign exchange influences, however, the growth in sales in terms of German marks converted to just 1 percent.

Europe

Sales in Europe lay well above the figure for the previous year. A major contributor to this high level of success was our automotive business. Our environmentally compatible, nitrite-free phosphating process gained further ground against competitor products. We succeeded in placing this process in a large number of important autobody production lines. Overall, we achieved a substantial increase in our market share in the automotive sector. Our Teroson operation serving the automotive industry was transferred in 1995 from Industrial Adhesives/Technical Consumer Products to the Metal Chemicals business sector, enabling us to augment our product range so as to provide a more comprehensive service to our customers. In the steel industry, the addition of rolling oils to our product range led to a further improvement in sales. There was also considerable growth in our coil coating business in Spain, Scandinavia and Germany. We were able to obtain two new major beverage can industry customers in Poland and Austria. Sales to the aluminum industry in Italy increased, and in the automotive components supply sector we enjoyed considerable success with the introduction of our Autophoretic® Coating Technology (single-coat painting system). Several customers responded to our comprehensive product service concept by making us their "Supplier of the Year".

America

There was a noticeable downturn in business activity in the metal chemicals markets of the USA. However, in spite of the difficult conditions, we were still able to record high sales and profits thanks to our commitment to focusing on customer benefit. Our "Chemical Systems Management" concept strengthened our position both in the automotive industry and in the automotive components sector. New products and processes such as our Autophoretic® coating system, specialty chemicals, lubricants and our water treatment systems resulted in market share gains throughout the entire metal processing industry.

Owing to difficult market conditions and unfavorable foreign exchange fluctuations in Latin America, our sales revenue there underwent a decrease. However, by effectively expanding our product range and introducing new technologies, we were able to retain our high overall market share.

PRO Teroson - Change in corporate structure

In the PRO Teroson program developed by Henkel Teroson GmbH of Heidelberg, concepts such as Lean Management and Group Work are provided with precise definitions and effectively implemented in practice. Teroson is unde4going a comprehensive structural and cultural change within the framework of its "Pro-customer, pro-employee offensive". At its core, PRO Teroson is a business process re-engineering program aligned toward effecting a fundamental reappraisal and a thorough reorganization of corporate procedures. It is geared toward the achievement of tangible improvements under the headings: Performance and Efficiency; Cost; Quality and Service.

Since the inception of the program toward the end of 1993, particular emphasis has been placed on the introduction of group work. Around 300 employees - predominantly in production - were organized into "semi-autonomous working groups" in 1995.

The transfer of planning, design and control tasks to these individual groups requires both a redefined corporate structure and employees able to assimilate a new, all-encompassing approach.

The next phase involves a further distribution of previously centrally performed functions, coupled with process optimization in materials management and business administration.

Asia/Pacific

(Preface, Solid foundation, promising future)

In Asia, business grew at rates which were predominantly in double figures. In China, substantial increases in sales were achieved in the household appliance and aluminum industries. We have now attained a dominant market position in the beverage can manufacturing sector. Contracts for new projects in the automotive industry will secure additional sales in 1996.

In Japan, we made the most of our opportunities to market CFC-free cleaning agents based on our environmentally compatible technology, and achieved gratifying growth rates in sales as a result. In the fast-growing Southeast Asia region, new markets were developed for pretreatment products for metal processing applications, and again disproportionately high growth was achieved.

Once more, our business performance in Australia and New Zealand, based on already high market share, was encouraging.

Production

The reduction in the number of production centers in Europe, achieved through the creation of cost-efficient interregional plants, has now been completed. The number of production centers has thus been reduced from 19 to 9. Our plant in Schönbach successfully completed a re-audit to DIN ISO 9001.

Outlook

We are confident that, in spite of continuing difficult market conditions, our Metal Chemicals business will succeed in further increasing both sales and profits in 1996.

Industrial Adhesives/Technical Consumer Products(Europe, Worldwide competitive success, Analysis by product groups)

Share of Group sales: 15%

Technical Consumer Products Product groups: Wallpaper pastes; ceiling, wall covering and tile adhesives; home decoration products; sealants; polyurethane foam fillers; contact adhesives; wood glues; PVC pipe adhesives; flooring adhesives; building chemicals; coatings; automotive after products; superglues; glue sticks, glue rollers and correction products.

Industrial Adhesives Product groups: Dispersion adhesives; starch-, dextrin- and casein-based adhesives; hotmelts; polyurethane adhesives and sealants; contact adhesives; anaerobic- and aerobic-curing acrylates; cyanoacrylates; polyamides; epoxide structure adhesives; flock adhesives; rubber-to-metal bonding agents; cable sealing compounds.

Worldwide competitive success

Our Industrial Adhesives/Technical Consumer Products business sector recorded an increase in sales in 1995 amounting to 9 percent over the previous year.

Technical Consumer Products

(Stronger increase in exports, sales in Europe slightly up on the previous year, Industrial Adhesives/Technical Consumer Products, Outlook, Henkel France Group, Boulogne-Billancourt, Sidobre-Sinnova S.A., Boussens-Saint Martory, Henkel S.p.A., Ferentino, Türk Henkel A.S., Istanbul, Overseas)

Our Technical Consumer Products division performed very well in 1995. Particularly high sales growth rates were achieved in France, Benelux, Spain and South Africa. We also made good progress with the expansion of our business in the Central and Southeast European markets. There was a substantial improvement in earnings thanks to our policy of strict concentration on our core businesses, combined with successful cost reduction measures. We were able to achieve this high level of performance in spite of a downturn in activity in the construction sector and general consumer weakness in Germany and major European markets.

Following our takeover of the production facilities for adhesives and correction products from the Pelikan company, the brand rights for Pelikan products were incorporated into our "General Office Products" business with effect from August 1, 1995, as were the sales and distribution rights relating to countries outside the German-speaking area. The integration of these operations, combined with the planned introduction of further innovative products, will facilitate further expansion of our activities in the paper, office products and stationery markets of a number of countries.

Having taken over LePage's Ltd., the leading Canadian supplier of trade and do-it-yourself adhesives, we have now assumed the position of market leader for such products in Canada. The acquisition of the Nural company enabled us to enhance our position in Spain in respect of consumer products and technical specialties for the hardware trade and automotive aftermarket. In Brazil, we have taken over from the Orniex company the range of adhesives marketed under the "Tenaz" brand name for the office supply and stationery sector. Having acquired the Tylon company from the Trans Hex Group, we are also now represented on the South African market in respect of tile adhesives and other chemical products for the building industry. In Shantou/China work commenced on the construction of an adhesives factory which is scheduled to begin production by mid-1996.

Henkel Bautechnik, the unit responsible for construction and flooring products, was the QMS certificate to DIN ISO 9001.

Industrial Adhesives

(Solid foundation, promising future, Stronger increase in exports, sales in Europe slightly up on the previous year, Overseas sales hit by foreign exchange rate fluctuations, Innovation offensive bears fruit, Industrial Adhesives/Technical Consumer Products, Kaizen at Industrial Adhesives: An ongoing process to improve competitiveness, Outlook, Henkel Benelux Group, Brussels/Nieuwegein, Henkel Ltd., London, Henkel S.p.A., Ferentino, Henkel & Cie AG, Pratteln*, Henkel of America Inc., Gulph Mills/Pennsylvania)

Our Industrial Adhesives business also performed well in 1995. In regional terms, the main contributors were South America, Asia and Western Europe. The procurement of raw materials for adhesive production was hampered by considerable price increases and, in some cases, the imposition of volume quotas. In accordance with our strategic alignment policy, we have systematically strengthened our positions in various sectors of the adhesives market.

In an ongoing process, our packaging adhesives were effectively aligned to the various customer requirements prevailing in individual market segments. In the case of our labeling adhesives and in the graphics industry, we were able to improve further our product range and market position through the takeover and integration of the industrial adhesives unit of PKL Verpackungssysteme GmbH in Germany.

Our cigarette adhesives business was permanently strengthened through the acquisition of the Swiss company Laesser. Henkel is now in possession of a range of highly specialized quality adhesives tailored to the requirements of the worldwide cigarettes industry.

Our Wood Glues business was substantially expanded through the takeover of the company Dr. Rudolf Schieber Chem. Fabrik GmbH + Co. KG in Germany. Advanced wood adhesive technologies can now be offered to our customers on a worldwide base.

The business results achieved with our Liofol laminating adhesives improved, particularly in the USA and South America. Work on the further development of solvent-free and aqueous systems is being intensified.

Our position in the rubber-to-metal bonding agents sector for the vehicle components industry was further expanded in spite of considerable cost pressure. Our newly available aqueous systems also met with a high level of demand.

Our specialty adhesives for the cable and electrotechnical industries were faced with difficult market conditions. With the establishment of OptiMel Schmelzgusstechnik GmbH & Co. KG, Henkel has committed itself to meeting the growing demand for system solutions involving water-tight connectors and cable joints.

The specialty products division of Henkel Teroson GmbH continued to perform well with adhesives and sealants for the General Industry sector enjoying particularly good results

Kaizen at Industrial Adhesives: An ongoing process to improve competitiveness

1994 saw the first stage in the implementation of the Kaizen system at the Industrial Adhesives division. This is geared toward cost reduction through business process re-engineering. Toward the end of 1994, the concept became more widely applied. Interdisciplinary teams succeeded in further improving business process efficiency during the year under review, as evidenced particularly by the faster development of innovative products and services.

A worldwide quality code number system was also introduced.

Various projects are planned for 1996 with the purpose of establishing the principles of Kaizen in customer orientation and production.

Outlook

The acquisitions of 1995 will only begin to take full effect in the Technical Consumer Products division in 1996 in terms of increased sales and earnings. Aside from expanding our position in sectors and markets in which we are already represented, we shall also be placing new emphasis on the office supply and stationery sector where we see real opportunities for utilizing existing synergies in relation to our worldwide Pritt business.

On the product development side, we are particularly interested in using renewable raw materials on the basis of natural oils and fats.

With the business cycle stabilizing in the industrial countries of the West, the market outlook for our industrial adhesives remains promising. We also expect additional impetus from the growth regions in Eastern Europe and Asia.

Our market development activities are focusing on innovative technologies, environmentally compatible product solutions and new adhesive systems.

In order better to serve our customers, we are also seeking to enhance our international presence backed up by local competence.

Cosmetics/Toiletries(Report of the Supervisory Board, Solid foundation, promising future, Analysis by product groups)

Share of Group sales: 10%

Product groups: Toilet soaps; bath and shower products; deodorants; skin creams; skin care products; dental care and oral hygiene products; hair shampoos and conditioners; hair colorants; hair styling and permanent wave products; perfumes and fragrances; hair salon products.

Market position with Schwarzkopf substantially improved

The cosmetics market in Western Europe continued in 1995 to be characterized by consumer caution and increased trade concentration.

In the countries of Eastern Europe, there was a considerable slow-down in growth following the turbulent increases of recent years. We consider that the markets of the future are the highly populated regions of Asia, particularly China and India. Our platform there is provided by three joint ventures and an expandable licensee business.

We combated the increase in competition in Western Europe through the introduction of innovative product concepts supported by targeted marketing investments in those areas in which we are able to offer a high level of competence.

We have created a basis for further increases in efficiency by streamlining our capacities as part of our concept geared toward the optimization of our European production structure.

The outstanding event for our cosmetics business in the year under review was the acquisition of a majority holding in Hans Schwarzkopf GmbH of Hamburg, which took effect as of November 1, 1995. Brands enjoying a strong market position such as Schauma, Drei Wetter Taft and Gliss on the hair cosmetics side, and also Kaloderma and Bac on the toiletries side, provide an ideal complement to our product range, not only in Germany but also elsewhere in Western Europe. They will secure for us leading or improved positions in the most important cosmetics markets of Western Europe.

We intend to utilize the performance capabilities of Schwarzkopf as a major worldwide supplier in the hair salon business, and also our joint research potential, in order to achieve a leading international position with new, trend-setting hair care products.

The measures necessary in order to realize the synergy potential in sales and distribution, production and administration have been instigated according to plan. In addition, we, together with Schwarzkopf, are now able to utilize business bases in the regions of Asia and Latin America which will substantially facilitate entry into these markets.

Domestic German markets

Sluggish demand on the part of consumers, and cautious stocking policies adopted by the trade meant that in some market segments there was considerable pressure on our selling prices. In order to secure our various market positions, we effectively revised the existing product range and introduced various new products.

For example, the hair care segment served by our Poly Kur brand was further developed through the addition of two new products ( Sofort-Pflege-Balsam and a two-phase treatment for dandruff). The new coloration line Country Colors with natural care ingredients and its innovative application system was very well received by the trade and has contributed to a further consolidation of our leading market position.

We also revised our already established lines Poly Color Softtöner and Poly Color Cremehaarfarbe, realigning them to current fashion trends.

We remain undisputed market leader in the home-perm products sector. The basic lines Poly Lock, Poly Style and Nowa likewise had their formulations improved and their packaging redesigned.

Our Aok skin care and facial products were just able to maintain their position. We intend to consolidate and further expand the market positions achieved by aligning our product range even more stringently to the fast-changing consumer requirements which currently characterize the market.

Our fragrances and scents business based on the brands Moschus and Musk was affected by the appreciable pressure on prices which is also being increasingly felt in the upper price segments of the market.

Foreign markets

Sales from our foreign business fell slightly in 1995, due largely to fluctuations in exchange rates.

We continued to perform well in France, our largest foreign market, in Greece and, as a result of the Barnängen acquisition, in the newly established markets of Scandinavia. Our business results in Spain likewise showed an improvement over the previous year.

Our operations in Southeast Europe under the control of the Henkel Austria Group were unable to escape completely the effects of market shrinkage.

In Italy, business performance was likewise unsatisfactory. Following termination of a distribution agreement and assumption of full control of the selling and distribution activities for part of the product range, we expect to see our results improve in 1996. This also applies to our business in Great Britain. Its integration in the local Schwarzkopf operation is expected to provide a major boost to earnings.

In our overseas markets, Henkel Cosmetics China Ltd. performed particularly well. Sales there increased considerably thanks to a line in toiletries and skin care products under our umbrella brand Fa, which was aligned specifically to the requirements of the market. Our business in China will be further expanded through the establishment of the Henkel Kemeng joint venture. The Schwarzkopf acquisition will also provide exciting opportunities for new overseas activities in Latin America and Australia/New Zealand.

Henkel Cosmetik: Strategic Business Units

The international cosmetics business of Henkel is divided into five Strategic Business Units, namely Toiletries, Hair care products, Skin care products, Dental care and oral hygiene products, and Hair salon products. The emphasis of our SBU activities lies in strategy development and uniform brand management on a worldwide scale.

In the last few years, there has been a clear shift toward the internationalization of these business units. The factors contributing to this trend include not only the globalization of the relevant markets and developments in world-wide brand control, but also the internationalization of our employee teams. Consequently, the five Strategic Business Units are predominantly managed by non-German staff. In addition to this managerial function, they are also, as a rule, responsible for the operational cosmetics business of a foreign Group subsidiary.

International teamwork has placed Henkel Cosmetics in a position of being able to tackle more quickly and effectively the challenges and changes taking place on the various global markets.

Outlook

In our most important market, namely Germany, we expect business activity to undergo a revival, particularly during the second half of 1996, encouraged by a slight increase in real income and an upturn in the propensity to consume.

Intensive competition both in Germany and also in other countries in Western Europe is nevertheless destined to continue unabated. However, as a result of the Schwarzkopf acquisition, there are extremely promising opportunities for growth in the hair care and toiletries segments in which we are already particularly strong. The integration of Schwarzkopf within our own operations is an urgent priority, and our aim is to realize the potential synergies from combination of the two businesses as quickly as possible.

In Turkey, Egypt, Israel and Lebanon we shall be developing new businesses both within the Group companies already active there and in collaboration with local partners.

Detergents/Household Cleansers(Solid foundation, promising future, European sales and distribution strategy revamp, Analysis by product groups)

Share of Group sales: 29%

Product groups: Universal detergents; specialty detergents; fabric softeners; dishwashing products; household cleansers; scouring agents; floor and carpet care products; bath and toilet cleansers; glass cleaners and lens wipes; furniture and kitchen care products; shoe care and laundry conditioning products; plant care products.

Market position in Europe consolidated

Universal and speciality detergents

The European market for detergents in 1995 was characterized by a further increase in competition. While volume sales increased slightly, in value terms there was a shrinkage of markets in virtually every country. Aside from structural changes, the decisive factor influencing this trend was increased price competition. In addition, low-price products, particularly from the countries of Southern Europe, gained further market significance. Against this background, and the continuing deflationary tendency of certain European currencies, sales revenue fell slightly as compared with the previous year. Nevertheless, we were able to maintain our market position.

Our main brand, Persil, performed particularly well, substantially expanding its market position throughout Europe thanks to Megaperls. Le Chat and Super Croix in France also saw their market shares increase. The main reason for the improvement in results achieved by these products was again the successful launch of Megaperls.

We responded quickly and decisively to the growing pressure on prices and costs by introducing sweeping measures geared toward increasing efficiency and reducing costs. We were thus able, in spite of the declining price level, to improve our earnings position. This applies particularly to the last third of the year under review. We also expect further improvements to accrue in 1996.

We initiated comprehensive relaunch campaigns toward the end of 1995 to promote our major universal detergent brands Persil and Dixan. With the innovations planned for 1996, we shall pursue our strategy of thoroughly covering all the market segments of significance. Having introduced structural improvements through cost reduction, harmonization and standardization, we are well placed to combat the increasingly unfavorable market conditions.

In value terms, the German detergents sector, our most important national market, also suffered a downturn. One reason for this was the penetration achieved by inexpensive refill packs. Added to this, price competition was also heavier. Volume consumption decreased owing to the continuing trend toward compacts and concentrates.

Nevertheless, we were able to maintain our leading market position. In line with market trends, sales revenue from our product range underwent a slight decrease.

Our German business involving universal detergents performed satisfactorily. The exceptional success of Persil Megaperls, which began in 1994, continued into 1995 and was a major contributory factor in the considerable increase in market share gained by Persil.

Our domestic market for specialty detergents declined further due to the increase in market share enjoyed by universal color detergents. The already high market share enjoyed by Henkel in this segment was, however, further increased. This is attributable in particular to the outstanding performance of Perwoll.

Household Cleansers

(Stronger increase in exports, sales in Europe slightly up on the previous year, Capital expenditure, Segment reporting, Chemical Products, Oleochemicals, Detergents/Household Cleansers, Market access in growth regions, Outlook, Henkel Ibérica SA, Barcelona, Henkel Norden Group, Stockholm, Henkel & Cie AG, Pratteln*, The Clorox Company, Oakland/California, USA)

The European market for dishwashing detergents and household cleansers was again characterized in 1995 by tough competition.

Nevertheless, we were able to expand our market position significantly. Particularly in the largest market segment - that of manual dishwashing liquids - we achieved substantial increases in market share thanks to the further development of the dishwashing concentrates launched in previous years, and also a successful new concept (Pril Balsam). A market share gain in the household cleansers market was achieved through the introduction of the ultra-concentrate Der General Professionell. We also expect this product concept to provide a further substantial boost to growth in 1996.

On the German market, our dishwashing products Pril and Somat had to combat ongoing heavy competitive pressure. While Pril was able to win back some of its lost market share, Somat's performance showed a decline. Nevertheless, both brands were able to maintain their strong positions as market leaders in the manual and automatic dishwashing detergent segments. Somat Tabs for automatic dishwashers were introduced in the form of a handier box pack for enhanced convenience for both the trade and consumers.

Our domestic German business with household cleansers was exceptionally successful thanks to the outstanding performance of Der General. The strong gain in market share of this brand in the last few years continued into 1995 with the growth rate again well above average. Through the launch of Der General bath cleaner in 1994 and the high concentrate Der General Professionell in the spring of 1995, Der General has established itself as an umbrella brand for the effective solution of many household cleaning problems.

Household care products

The household care markets likewise underwent a downturn; however, we nevertheless succeeded in maintaining our overall market share. Our leading market positions in toilet cleansers, glass cleaners, floor and carpet care products and plant care products (Substral) were successfully consolidated. Investments in new and promising market segments such as that of limescale removers, kitchen care products and oven cleaners all brought significant success. The development of the Eastern European markets continued to progress satisfactorily.

European sales and distribution strategy revamp

The process of concentration within the trade, which has persisted for many years - particularly in Western Europe - correlates with an increasing level of internationalization among the larger wholesalers and retailers. A growing number of trade organizations are attempting to compensate for a decrease in growth opportunity within their national markets by extending their distribution systems to other countries.

Our Detergents/Household Cleansers business sector is meeting the challenges arising from this Europeanization process through the creation of international standards to promote even more effective customer orientation. Together with major trade partners, we are working on a program of strategic integration of manufacturer and trade outlet marketing. Our intention is to realize additional sales potential and achieve increased levels of added value.

A major proportion of the initiatives adopted by Henkel for 1996 therefore involve not only the intensified application of our classic sales and distribution instruments, but also increased cooperation with our trade customers in selected projects. Our aim is to achieve jointly a reduction of those costs which add no value in the flow of goods as they pass through the chain from purchasing and production to distribution and the consumer. The overall objective of the concepts adopted is to strengthen the position of Henkel's brands and to facilitate a pricing arrangement which is perceived by the consumer as commensurate with product performance.

Market access in growth regions

Our traditional markets in Europe are only expected to show minor growth. Here, our objective is to further expand our market positions. On the other hand, it is our firm intention to participate to a greater extent in the development of growth markets in other regions. The countries on which our efforts will be concentrated will, in particular, be those in which market growth is likely to ensue from an increase in population and growing per capita consumption. The emphasis in this program is on joint ventures with local companies. We are utilizing locally established brands as the starting basis to enable our own brands also to be introduced into the market.

In 1995, our presence in these growth markets was again strengthened. In Russia, we were able to increase both sales and earnings significantly. Here, with our two joint ventures in St. Petersburg and Engels, we successfully developed to become leading suppliers on the detergents and household cleansers market. In China, we are now represented by three joint ventures, and we are striving toward the establishment of further such enterprises in order to expand our position on the Chinese market.

In Egypt, we achieved substantial sales successes. In our endeavor to further increase our presence in the Near and Middle East, we shall be concentrating in particular on Lebanon and Israel.

In India, too, we are working on extending our market base within the framework of joint ventures.

With the acquisition of a 25 percent equity interest in the Bombril company, a leading manufacturer of detergents and household cleansers in Brazil, we succeeded at the beginning of 1995 in gaining a foothold in a market to which we attach great importance in view of its considerable growth potential for the future. This also means that we have provided ourselves with a promising base for further expansion of our business in South America.

Groupwork in detergent production

With the commissioning of the Megaperls production facility in Düsseldorf, traditional working practices characterized by a hierarchical structure and the defense of departmental interests have been replaced by a group-oriented approach. Instead of the previously prevalent task-oriented attitudes, we now have across-the-board process alignment.

With group work as an essential component of our Lean Management concept, we are able to gain considerable advantages not only for the Company at large but also for the participating employees. Staff are provided with every opportunity to organize themselves and their work largely independently within their department. They then work toward operational and production goals in consultative collaboration with their superiors. This has resulted in flat hierarchies, clearly defined team structures and increased transfer of responsibility to the various groups concerned. It also brings with it greater utilization of the knowledge and experience of each individual employee. By deploying staff in rotation in different jobs and sections within the production process, the employees concerned are able to gain a greater understanding of the overall process. In regular round-table discussions, the groups, chaired by an internally elected speaker, are able to introduce on their own initiative improvements and innovations to their working environment, based on the experience they have gained.

Group work has led not only to an improvement in the working conditions, qualifications and self-determination of our employees, but also to a higher level of flexibility, productivity and quality on the production side.

Combating competitive pressures with qualified employees

We are particularly keen to ensure that our managerial staff at home and abroad are effectively equipped for their tasks and responsibilities. Consequently, we have introduced an international job rotation scheme. And the internationality of our business is also very much reflected in the multi-national complexion of our decision-making bodies and project teams.

A further priority is that of encouraging and promoting younger employees who, in the medium term, are expected to assume managerial responsibilities. Within the framework of an international exchange program, young marketing employees are seconded for up to three years to a foreign subsidiary with the aim of providing them with professional experience at an early stage on an international plane. In addition, greater understanding of the various national cultures represented within the Henkel Group is promoted through their personal experience.

Outlook

We shall continue with our products to concentrate on innovative solutions which excel through high performance, exceptional environmental compatibility and easy handling. Owing to the considerable success of the Megaperls concept in Germany and France, we shall launch further products in this form onto the market. We intend to set new standards with more high-powered formulations for the household cleansers segment, and with user-friendly packaging solutions for the automatic dishwasher products market.

We are also endeavoring to further improve our production processes, concentrating in particular on promoting teamwork in production, effective materials management, the development of lean hierarchies and greater internationalization. We shall continue stringently to apply our successful strategy of international harmonization and standardization in relation to our formulations and packaging systems. Our involvement in growth regions outside Europe is to be further intensified with particular emphasis on China, Brazil, India and the Near and Middle East.

Industrial and Institutional Hygiene

(Solid foundation, promising future, Stronger increase in exports, sales in Europe slightly up on the previous year, Cosmetics/Toiletries, Henkel Cosmetik: Strategic Business Units, Market position expanded, Henkel-Ecolab - European identity, Outlook, Henkel-Ecolab Joint Venture Companies, Henkel Ibérica SA, Barcelona, Henkel South Africa (Pty) Ltd., Alrode, Analysis by product groups)

Share of Group sales: 10%

Product groups: Products, appliances, equipment, systems and services for cleaning, washing, maintenance, sanitizing and disinfecting applications at major institutional and industrial customers, the food and beverage industry and the agricultural sector.

Market position expanded

This business is operated in Europe as a joint venture, Henkel-Ecolab, in collaboration with our American partner Ecolab Inc., St. Paul, Minnesota/USA. The joint venture is complemented by several smaller operations run in conjunction with local partners overseas.

Although market growth was moderate, we were able to achieve a disproportionate increase in sales. Decisive factors for this success were the effective development of our markets by pan-European business units, and a further increase in cooperation with our joint venture partner Ecolab Inc. in relation to international key accounts and in the field of joint product development. The growth in sales was also due to the acquisition of Sanisol in France in 1994 and CFM in Great Britain, coupled with gratifying market success in Benelux, Austria, Switzerland and Scandinavia. We were also able to substantially boost sales in our markets in Eastern Europe where market development was actively pursued. In 1995, we introduced a short-term action plan with the objective of countering negative market developments. This focused on the effective implementation of price increases in all our business units and international markets, coupled with a reduction of manufacturing costs as percentage of sales, and the elimination of unnecessary administration costs. These measures prepared the ground for a strategic realignment of the joint venture.

Our Institutional Hygiene unit introduced a new commercial dishwashing system throughout Europe named "Ecoplus 2000". Patented product formulations, innovative dosing technologies and also monitoring, alarm and documentation facilities for controlling setpoint/actual value deviations in relation to all relevant hygiene parameters contributed to our success in further consolidating our position in this market. Agreements were concluded with major international customers, thus securing our sales potential for the coming years.

Our Floordress unit was also able to win new major customers for the building cleaning business through more intensive marketing of its Full Service Concept, particularly in France and the Netherlands.

In the Hospital Hygiene sector, our product range was expanded by acquiring external brand rights involving innovative hand disinfectants. Products manufactured on the basis of the active ingredient glucoprotamin continued to perform well.

In the commercial Textile Hygiene market, greater emphasis was given to customer chains through the introduction of a national and international key account management system. System projects for major laundries, further investments in Scandinavia and the expansion of our range of patented systems based on paste detergents served to support this strategy.

The P3 Food Hygiene unit was able to consolidate its position against the aggressive price-cutting competition in spite of increasing concentration within its customer industries. While our traditional agricultural segment showed only marginal growth, the beverages and food processing segments experienced a gratifying upswing in sales thanks to new product and service concepts. With activities in the water treatment sector we achieved a further expansion of our product range.

Henkel-Ecolab - European identity

The Henkel-Ecolab joint venture was founded in 1991. Since then there has been a successful integration process between two companies who had previously competed on the European market: Henkel Hygiene and Ecolab. This

integration process extends not only to the two sales operations, but also - as a result of the development of the joint venture's own administrative structures - to the creation of new organizational entities such as Finance, Materials Management and Personnel Management.

Former employees of Ecolab, former employees of Henkel and a number of new employees have been brought together within a single company operating in 24 countries. At the same time, the joint venture was "Europeanized". This process was facilitated by a wide range of measures applied within the framework of the "Strategy 2000" program.

● The Strategic Business Units, the regional and functional managers together carry the responsibility for our performance in Europe as an executive team consisting of Dutch, French, Italians, Swedes, Austrians, Swiss and Germans.

● Numerous "Euroteams" operate together in managing projects and serve our European customer base. Kaizen projects are also carried out on an international basis.

● International training programs support the integration process and promote cross-border cooperation.● Intensive language training combined with education programs geared toward improving multi-cultural

sensibility form the basis for the development and implementation of uniform guidelines. A keen sense of fairness backed up by clear, open and accurate communication constitute the most important factors for ensuring the success of integration and internationalization processes.

Outlook

We continued to work intensively on the creation of a solid basis for sustained growth. We particularly expect our strong presence in the growth markets of Eastern Europe to provide us with good opportunities for a further expansion of our market positions. The penetration of major customers within this region has provided us with favorable conditions from which we intend to benefit on the basis of a balanced business development strategy.

In the commercial Kitchen Hygiene sector, 1996 will see our various divisional segments reorganized into an effective single unit with an integrated sales force.

In the commercial Textile Hygiene market, we will concentrate in 1996 on our systems business. The focus is on the development of highly profitable systems and markets plus closer cooperation with Ecolab Inc., USA.

Our Hospital Hygiene unit will be intensifying its cooperation with commercial cleaners. The objective is also to provide other units of the joint venture with an opportunity to enter the Hospital Hygiene market. This applies particularly to Eastern Europe where the need to raise hygiene standards to Western European levels will open up considerable market potential.

The P3 Food Hygiene unit will increase its profitability through the employment of system-oriented concepts in the food processing and related sectors. Proven strategies will be applied to newly developed markets and controlled by various "centers of competence". Particular attention is paid to the training and motivation of our field sales personnel, showing a clear trend toward specialization in serving different customer segments.

With improved problem solutions on the basis of integral concepts including systems, appliances, cleaning products and services, and with the concentration of our resources on profitable sustainable growth enhanced by major reengineering programs introduced to optimize our cost and organizational structures, we expect that 1996 will again be a success.

Major Participations

Europe

Most of the Group companies market the full range of Henkel products within the countries of Europe. Where this is not the case, the relevant product groups are listed.

Henkel-Ecolab Joint Venture Companies

Product groups: Products, appliances, equipment and systems for cleaning, washing, maintenance, sanitizing and

disinfecting applications for major institutional and industrial customers, the food and beverage industry and the agricultural sector

Sales:(fiscal year Dec. 1, 1994 - Nov. 30, 1995)

DM 1,311 million.

Change: + 2 %

Employees (Nov.30): 4.081

Group share:(majority of voting rights)

50 % + 1 share

Sales rose above the level of the previous year by 2 percent. In contrast, earnings were down on last year. Developments in the industrial and institutional hygiene sector are described in section "Industrial and Institutional Hygiene".

Germany

Grünau Illertissen GmbH, lllertissen

Product groups: Food and feedstuff additives; cosmetic base materials; industrial emulsifiers; textile auxiliaries; products for active and passive fire prevention; sealing systems

Sales: DM 261 million.

Change: + 9 %

Employees (Dec. 31): 595

Group share: 100 %

Thanks in particular to brisk demand in Germany and abroad during the first half of the year, sales rose by 9 percent. Disproportionate growth rates were registered in the food and feedstuff additives sector, and also in respect of fire prevention products. Business in relation to sealing systems stagnated with sales still remaining high. Following a reduction in costs resulting from the further streamlining of internal processes, earnings were once again up on the previous year.

Henkel Adhesives Group, Düsseldorf

Main product groups and participating interests: Floor products; construction materials for interior work and façades (Henkel Bautechnik GmbH, Düsseldorf); reaction adhesives, bonding agents, starch derivatives (Sichel-Werke GmbH, Hannover); wood glues and packaging adhesives (Dr. Rudolf Schieber Chemische Fabrik GmbH + Co. KG, Bopfingen); adhesives and sealants; corrosion inhibitors and sound-deadening products (Henkel Teroson GmbH, Heidelberg; S.A.I.M., Cosne-sur-Loire, France)

Sales: DM 788 million.

Change + 9 %

Employees (Dec. 31): 1,839

Group share (Henkel-Klebstoff GmbH) 100 %

The European adhesives activities have been integrated within the Henkel Adhesives Group where these operate and are managed in the form of legally independent companies.

Business performance of the individual product groups varied. While demand in relation to building chemicals stagnated, increases in sales - in some cases quite considerable - were registered in respect of adhesives and sealants, corrosion inhibitors and sound-deadening products, and also the reaction adhesives.

The acquisition of Schieber in the fall of 1995 has substantially strengthened activities involving wood glues and packaging adhesives.

Performance of the largest company within this Group, Henkel Teroson GmbH, Heidelberg, is detailed below.

Henkel Teroson GmbH, Heidelberg

Product groups: Adhesives and sealants, corrosion inhibitors and sound-deadening products

Sales: DM 317 million.

Change: + 5 %

Employees (Dec. 31) 784

Group share: 100 %

Business performance was again gratifying in 1995. Further market share was won from within the European automotive sector. Sales of sealants to the insulating/double glazing industry increased once again. There was, however, a downturn in demand in the automotive aftermarket sector. In spite of, in some cases, drastic price increases for certain raw materials, 1995 again saw an increase in earnings.

Austria

Henkel Austria Group, Vienna

Sales: DM 652 million.

Change: - 6 %

Employees (Dec. 31) 2,456

Group share: 100 %

The companies of Central and Southeast Europe under the management of Henkel Austria had to combat considerably adverse market conditions during the year under review. Sales of the Henkel Austria Group decreased by 6 percent.

In Austria detergents and cosmetics suffered from a downward pressure on selling prices, due in particular to the need to adjust to prevailing European price levels. A loss in consumer purchasing power in the former Communist countries resulted in shrinking demand, with crowding out competition further increasing in severity.

As a result of a number of cost-cutting measures, and particularly a reduction in personnel in Poland, the Group succeeded in holding earnings close to the level of the previous year.

Belgium/Netherlands

(Management Group Affiliated Companies)

Henkel Benelux Group, Brussels/Nieuwegein

Sales: DM 543 million.

Change: - 2 %

Employees (Dec. 31) 685

Group share: 100 %

Sales were 2 percent down on the previous year, with the individual product groups showing quite disparate performance. Price competition remained strong in the detergents and cosmetics sectors. The trademark products were again able to gain ground. With the markets shrinking in value terms, the Group nevertheless succeeded in

consolidating its own market positions. In the detergents sector, there was a drop in export sales.

Business performance with chemical products, metal chemicals and industrial adhesives was highly gratifying. There was a further improvement in earnings.

France

Henkel France Group, Boulogne-Billancourt

Sales: DM 1,133 million.

Change: + 5 %

Employees (Dec. 31) 1,729

Group share: 100 %

The Henkel France Group was able to increase its sales by 5 percent over last year. A major contributory factor in this progress was the detergents business which benefited from the successful launch of Megaperls via the brands Le Chat and Super Croix. In stagnating markets characterized by significant price pressure and a growing importance of trademarks, Henkel was able to increase its market share in detergents and also dishwashing products significantly. The cosmetics business was under considerable competitive pressure in virtually every segment of the market, but the Group was nevertheless able to maintain its market positions by introducing appropriate countermeasures. Gratifying progress was again made in the technical consumer products sector.

Thanks to an ongoing policy of strict cost management, the Group succeeded in increasing its already high operating profit. As a result of further restructuring measures, the workforce was again reduced by 180 employees. Earnings for the year were down owing to an increase in tax provisions.

Sidobre-Sinnova S.A., Boussens-Saint Martory

Main activities: Oleochemical and technical consumer products

Sales: DM 280 million.

Change: - 4 %

Employees (Dec. 31) 419

Group share: 100 %

The restructuring measures implemented in 1994 have led to a substantial improvement in competitiveness. The transfer of production from Courtenay to Meaux was extensively completed in the year under review.

Sales were down on last time owing to a policy of not accepting zero-margin orders merely for the purpose of securing workload and employment levels. In the meantime, the earnings position has improved. The main contributory factor here was the increase in both volume sales and the prices achieved in relation to fatty alcohols. Further progress was made in the specialty markets. The downturn in demand from Europe's textile industry brought with it certain adverse influences on results. The company made a profit for the year.

Great Britain

Henkel Ltd., London

Sales: DM 267 million.

Change: - 12 %

Employees (Dec. 31) 601

Group share: 100 %

Sales were 12 percent down on the previous year. This decline was largely due to exchange rate fluctuations. The only sector in which sales increased was that served by the metal chemicals business. In other product divisions - chemical products, industrial adhesives and cosmetics - sales remained below the values for last time owing to the lower level of demand resulting from the economic situation.

The restructuring program, started in 1994, was continued through the year under review and will be completed in 1996. Earnings were down on last time.

Italy

Henkel S.p.A., Ferentino

Sales: DM 829 million.

Change: - 9 %

Employees (Dec. 31) 1,535

Group share: 100 %

The drop in sales of 9 percent was due to exchange rate fluctuations. In the national currency, sales rose by 3 percent.

Performance in the detergents and cosmetics sectors continued to be characterized by stagnating and, in some cases, shrinking demand. Price cuts had to be made in virtually all segments - with the reductions occasionally quite heavy - and this resulted in considerable losses in sales revenue in both product divisions. Market share was, however, retained in all cases. On the raw materials side, the company had to cope with substantial cost increases.

Sales in chemical products and technical consumer products were close to the levels of the previous year. Industrial adhesives performed well. The company made a small profit for the year.

Spain

Henkel Ibérica SA, Barcelona

Sales: DM 932 million.

Change: + 2 %

Employees (Dec. 31) 1,953

Group share: 80 %

In spite of the substantial depreciation of the Spanish peseta, sales at Henkel Ibérica increased by 2 percent.

The low level of demand for consumer goods and stiff pressure from the competition continued unabated. In addition, there were considerable price increases for the raw materials employed in the manufacture of our brand-name products.

Sales in detergents and household cleansers were held at the level of the previous year. A small degree of sales growth was achieved in respect of universal detergents, although there was some slight shrinkage in the detergent concentrates sector. The company was able to consolidate its position in the bleaching solutions sector. Household cleansers performed well.

Sales in the cosmetics sector were down on last year. A degree of growth was, however, achieved in the oral hygiene and dental care market segment. Toiletries and skin care products were subjected to enormous downward pressure on prices; nevertheless, market share was retained.

In the case of adhesives, metal chemicals and chemical products, sales increased substantially . The company returned to profitability following the special restructuring costs charged in 1994.

Sweden

Henkel Norden Group, Stockholm

Sales: DM 166 million.

Change: - 3 %

Employees (Dec. 31) 321

Group share: 100 %

The Group's detergent and household cleanser businesses and also its cosmetics and adhesives activities in the countries of Scandinavia have been grouped together under the leadership of the managing company Henkel Norden AB, Stockholm. Sales fell against the level of the previous year by 3 percent. The adhesives business performed particularly well, but there was a drop in sales in the detergents and household cleansers market. Sales in cosmetics were maintained at roughly the level of the previous year.

In Sweden, the Liljeholmens candles business, including the Oskarshamn factory taken over as part of the Barnängen acquisition, were demerged and sold retrospectively as of January 1, 1995 to Midway Holding AB of Malmö. As a result of this divestment, the workforce was reduced by 110 employees. The Group made a profit for the year.

Switzerland

Henkel & Cie AG, Pratteln*

Sales: DM 173 million.

Change: + 6 %

Employees (Dec. 31) 218

Group share: 100 %

* including Laesser Klebstoffe AG

The sales result was heavily influenced by the takeover of the adhesives business from Laesser on the one hand, and the ending of contract production on behalf of the Henkel-Ecolab joint venture on the other.

Sales fell in respect of detergents and household cleansers. Business was adversely affected by heavy pressure on selling prices and the restricted extent to which the newly introduced value-added tax could be passed on to the market. This was further compounded by a market decline in the universal detergents segment and stagnation in the other market sectors.

The cosmetics business and the end-consumer adhesives sector suffered from a decline in sales owing to similarly difficult market conditions. However, sales were held at the previous year's level in the case of industrial adhesives.

The restructuring measures introduced in 1994 - affecting not only production but also administration, sales and distribution - have had a positive effect and contributed to the fact that the annual earnings result showed an improvement in spite of the unfavorable market influences. Profits for the year were also boosted by the acquisition of Laesser.

Turkey

Henkel Turyag A.S., Izmir

Main activities: Detergents and household cleaners, edible fats

Sales: DM 194 million.

Change: + 2 %

Employees (Dec. 31) 430

Group share: 100 %

Following the crisis year of 1994, the Turkish economy has stabilized with inflation and devaluation rates at 60 - 70 percent and a return to growth in real gross national product. The substantial weakening of consumer purchasing power was reflected by stagnating and, in some cases, slightly shrinking consumer goods markets.

In spite of a high level of overall competition and the arrival of a new competitor on the margarine sector, sales increased by 2 percent over the previous year.

A comprehensive program to improve earnings was successfully completed and the company returned to profit.

Türk Henkel A.S., Istanbul

Main activities: Chemicals and technical consumer products

Sales: DM 164 million.

Change: + 27 %

Employees (Dec. 31) 404

Group share: 100 %

With the Turkish economy bottoming out, Türk Henkel was able not only to recover from the decline in sales which occurred in 1994 but also to achieve substantial growth. Its leading position in relation to products for the textile, leather, cosmetics and detergents industries was further extended. Performance in relation to products for metal surface treatment applications was particularly gratifying.

One of the main targets for 1995 was to expand business activities in the Near and Middle East and also in the Turkish-speaking republics of the C.I.S. Business volume in these areas was doubled as compared with 1994 levels. Earnings were well above the previous year's figure.

Overseas

Outside Europe, Henkel produces and markets mainly chemical and technical consumer products, oleochemicals, metal surface treatment products and adhesives.

Brasil

Henkel SA Indústrias Químicas, Sao Paulo

Sales: DM 199 million.

Change: - 1 %

Employees (Dec. 31) 722

Group share: 100 %

Thanks to continuing progress in Brazil's economic reform program, its rate of inflation in 1995 was greatly reduced. Growth in the economy as a whole amounted to 4 percent.

Owing to exchange rate fluctuations, sales fell by 1 percent as compared with the previous year. While good growth rates were achieved in the oleo-chemicals sector, sales of products for the textile and leather industries fell considerably. Although developments on the exports side were exceptionally favorable, these only served partly to offset the low level of domestic demand, which was particularly poor during the second half of the year. Sales in the metal chemicals sector also decreased; however, the company was able to maintain its leading market position. The adhesives business performed particularly well with a gratifying degree of sales growth. Earnings fell below the level of the previous year.

Mexico

Henkel Mexicana SA de C.V., Ecátepec de Morelos and Mexico, D.F.

Sales: DM 67 million.

Change: - 32 %

Employees (Dec. 31) 347

Group share: 100 %

After the considerable devaluation of the peso in December 1994, Mexico suffered a serious economic crisis in 1995. Sales at Henkel Mexicana fell by 32 percent. All the product groups were affected by a substantial reduction in sales. However, their various market positions were successfully held. A considerable net loss was made during the year under review.

South Africa

Henkel South Africa (Pty) Ltd., Alrode

Sales: DM 94 million.

Change: + 7 %

Employees (Dec. 31) 605

Group share: 50 %

The South African economy recovered well during the year under review. Considerable growth rates were recorded in the automotive and construction industries.

Business performance at Henkel South Africa was satisfactory. Measured in local currency, a high growth rate was achieved, but owing to the considerable devaluation of the South African rand, much of this additional revenue disappeared on conversion to German marks. Sales in chemical products were substantially below the level of the previous year. In contrast, a gratifying increase in sales was recorded in the case of metal chemicals. The company also increased its sales from its adhesives business, although this was largely attributable to the takeover of the building chemicals activities of the Trans Hex company. Its industrial and institutional hygiene business was sold to Ecolab Inc.

USA

Henkel of America Inc., Gulph Mills/Pennsylvania

Sales: DM 1,685 million.

Change: - 7 %

Employees (Dec. 31) 3,331

Group share: 100 %

The main factors influencing business performance in 1995 were cost increases and - in some sectors - the scarce availability of raw materials. In most cases, the higher raw material costs could only be partially passed on to the market. The weakness of the dollar had a negative effect on the sales figures once these were converted into German

marks.

Oleochemical base materials (fatty acids, glycerine, fatty alcohols) continued to perform well in dollar terms thanks to an increase in market demand. Oleochemical derivatives for detergents and cosmetics registered a slight increase in sales, although rising raw material costs and stiffer price competition had a negative effect on earnings. Growth in synthetic lubricants and ozone acids was particularly gratifying. The latter increase the flexibility, temperature stability and colorability of adhesives, plastics and polyester fibers.

Business involving vitamin E and also products for the paint and coatings industries suffered from rapidly increasing raw material prices compounded by a scarcity of supply. The increase in costs could only be partially offset through the imposition of higher prices. Demand for natural-source vitamin E and beta-carotene remained brisk. In 1995, Henkel took full control of the Australian company Betatene Ltd. with the objective of achieving world coverage for its natural beta-carotene business.

Performance in the case of organic specialty products varied. Under difficult market conditions, sales in paper and leather auxiliaries were down. On the other hand, sales of products for the textile and plastics sectors increased slightly, and mining chemicals enjoyed considerable success in the marketplace with a high level of sales growth being achieved.

The Metal Chemicals Division (Parker + Amchem) consolidated its leading market position over a broad business base. New activities in chemical systems management and autophoretic specialty coatings were particularly successful. Parker + Amchem was among those vendors which received the "Supplier of the Year Award" from General Motors.

Overall, sales performance in respect of industrial adhesives was positive. While packaging adhesives achieved good growth rates, sales of polyamide adhesives fell below the level of the previous year.

In spite of the substantially lower value of the dollar, earnings measured in German marks for the year under review increased.

Asia/Pacific Region

Henkel Asia Pacific Group, Hong Kong

Sales: DM 738 million.

Change: + 1 %

Employees (Dec. 31) 4,015

Group share: 100 %

By the end of fiscal 1995, this management unit had become responsible for 24 companies in 12 different countries.

Sales were up 1 percent on the previous year. Although good business performance was recorded in most of the countries of the region, this was out-weighed by adverse exchange rate fluctuations, particularly in Thailand, Indonesia, Malaysia, China, Taiwan and Australia.

Oleochemical base materials and also products for the cosmetics and pharmaceutical industries suffered from high raw material costs and stiffer competition from local suppliers. The metal chemicals business, on the other hand, performed exceptionally well, with market positions being further extended.

Business development in China continued to progress. Three new joint ventures in the oleo-chemicals, detergents and cosmetics sectors began operations in that country. A holding company was also founded in the form of Henkel (China) Investment Co. Ltd. of Beijing.

Major Participations in Associated Companies

Degussa AG via GFC Gesellschaft für Chemiewerte mbH, Düsseldorf, Germany

Henkel KGaA has a participating interest of 45.8 percent in GFC Gesellschaft für Chemiewerte mbH, Düsseldorf, which in turn owns 39.1 percent of the capital stock of Degussa AG, Frankfurt. Degussa is predominantly active in the fields of precious metals, chemicals and pharmaceutical products. A close customer/supplier relationship has long existed between Henkel and Degussa in the field of detergent raw materials, with an outline agreement existing between the two companies relating to joint research. A significant result of our cooperation to date has been the development of Sasil which forms the basis for phosphate-free detergents.

In fiscal 1994/95, Degussa recorded Group sales of DM 13,862 million. It enjoyed a considerable revival of business, particularly in its Chemical Products division. Thanks to good capacity utilization and the success of the rationalization measures it has introduced, the company's net earnings for the financial year rose by 71 percent to DM 298 million.

Loctite Corporation, Hartford/Connecticut, USA

Product groups: Specialty adhesives, anaerobic adhesives and cyanoacrylate adhesives

Henkel owns 11.2 million shares in the Loctite Corporation, corresponding to a participating interest of 33.4 percent. The company is an internationally successful manufacturer of anaerobic adhesives and cyanoacrylate adhesives for industrial and domestic applications. Their main sales markets lie in North America and Europe.

Loctite was able to increase its sales during fiscal 1995 by 12 percent to US$ 785 million. Its net earnings increased by 2 percent to US$ 84 million.

The Clorox Company, Oakland/California, USA

Product groups: Bleaching agents, household products, processed foods

Henkel owns 15.4 million shares in The Clorox Company, corresponding to a participating interest of 27.8 percent. Henkel and Clorox also have a technology transfer agreement. Our collaboration with Clorox extends to the exchange of formulations, marketing concepts and test methods. As Henkel is not present on the American detergents and household cleansers markets, this cooperation is of major importance. Moreover, within certain European countries we also cooperate on the production and marketing of household bleaching agents.

In fiscal 1994/95, Clorox achieved an increase in sales of 8 percent to US$ 1,984 million. Its net earnings figure rose, after allowing for extraordinary profits arising from a number of divestments, by 12 percent to US$ 201 million.

Ecolab Inc., St. Paul/Minnesota, USA

Product groups: Chemical products, appliances and equipment for cleaning, washing, maintenance, sanitizing and disinfecting applications at major institutional and industrial customers, and for water treatment and pest control

Henkel owns 15.5 million shares in Ecolab Inc., corresponding to a participating interest of 22.1 percent. The European joint venture Henkel-Ecolab, and Ecolab Inc. with its activities in the USA and other regions outside Europe, together represent a business of global importance enjoying a leading market position.

In fiscal 1995, Ecolab Inc. achieved sales of US$ 1,341 million. The growth in sales of 11 percent resulted in part from acquisitions in the USA and South Africa. The comparable net earnings figure rose by 10 percent to US$ 99 million.

Annual Financial Statements(Report of the Supervisory Board, Sales just up on previous year's level, General, Preparation, valuation and audit of financial statements included in the consolidation, (13) Currency translation difference, Auditors' Report)

Henkel Group Consolidated Balance Sheet

December 31, 1995 December 31, 1994

Notes DM mill. % DM mill. %

ASSETS

Intangible assets (1) 595 5.1 416 4.0

Tangible assets (2) 3,592 30.9 3,567 34.0

Financial assets (3) 2,367 20.4 1,466 14.0

Fixed assets 6,554 56.4 5,449 52.0

Inventories (4) 1,951 16.8 1,847 17.6

Receivables and other assets (5) 2,732 23.5 2,619 25.0

Marketable securities (6) 48 0.4 242 2.3

Liquid funds (7) 292 2.5 297 2.8

Current assets 5,023 43.2 5,005 47.7

Deferred charges (8) 43 0.4 33 0.3

Total assets 11,620 100.0 10,487 100.0

December 31, 1995 December 31, 1994

Notes DM mill. % DM mill. %

SHAREHOLDERS' EQUITY AND LIABILITIES

Subscribed capital (9) 730 6.3 730 7.0

Capital reserve (10) 1,276 11.0 1,276 12.2

Revenue reserves (11) 2,011 17.3 1,700 16.2

Unappropriated profit 160 1.4 145 1.4

Minority interests (12) 434 3.7 409 3.9

Currency translation difference (13) - 538 - 4.7 - 422 - 4.1

Shareholders' equity 4,073 35.0 3,838 36.6

Participating certificates (14) 100 0.9 102 1.0

Capital funds of of dormant partners (15) 130 1.1 130 1.2

Special items 230 2.0 232 2.2

Provisions for pensions and similar obligations (17) 2,196 18.9 2,126 20.2

Other provisions (18) 1,329 11.5 1,291 12.3

Provisions 3,525 30.4 3,417 32.5

Liabilities with a residual term of

more than 5 years 55 0.5 208 2.0

between 1 and 5 years 146 1.2 82 0.8

up to 1 year 3,575 30.8 2,703 25.8

Liabilities (19) 3,776 32.5 2,993 28.6

Deferred income (20) 16 0.1 7 0.1

Total equity and liabilities 11,620 100.0 10,487 100.0

Henkel Group Consolidated Statement of Income

1995 1994

Notes DM mill. % DM mill. %

Sales (24) 14,198 100.0 14,069 100.0

Cost of sales (25) 8,385 59.1 8,142 57.9

Gross profit 5,813 40.9 5,927 42.1

Selling and distribution costs (26) 3,822 26.9 3,919 27.9

Research and development costs (27) 369 2.6 369 2.6

Administrative expenses (28) 862 6.1 824 5.8

Other operating income (29) 176 1.3 125 0.9

Other operating charges (30) 131 0.9 146 1.0

Restructuring costs (31) 80 0.6 123* 0.9

Operating result 725 5.1 671 4.8

Financial items (32) 35 0.2 29 0.2

Result from ordinary activities 760 5.3 700 5.0

Extraordinary items (34) - - - 23 - 0.2

Earnings before tax 760 5.3 677 4.8

Taxes on income (35) - 272 - 1.9 - 213 - 1.5

Net earnings 488 3.4 464 3.3

Allocation to revenue reserves - 273 - 1.9 - 249 - 1.8

Minority interests in profits - 63 - 0.4 - 78 - 0.5

Minority interests in losses 8 - 8 -

Unappropriated profit 160 1.1 145 1.0

* reclassified from extraordinary items for comparative purposes

Key ratios:

Return on capital % (net earnings ÷ average equity capital over the year)

12.3 12.8

Total return on investment % (earnings before taxation and interest expense ÷ average total equity and liabilities over the year)

8.9 8.8

Equity ratio % (shareholders' equity and special items ÷ total assets)

37.0 38.8

Henkel KGaA Balance Sheet

December 31, 1995 December 31, 1994

Notes DM mill. % DM mill. %

ASSETS

Intangible assets (1) 92 1.1 127 1.7

Tangible assets (2) 819 10.3 809 11.1

Financial assets (3) 4,680 58.3 4,394 60.4

Fixed assets 5,591 69.7 5,330 73.2

Inventories (4) 561 7.0 567 7.8

Receivables and other assets (5) 1,832 22.8 1,159 15.9

Marketable securities (6) - - 180 2.5

Liquid funds (7) 28 0.4 37 0.5

Current assets 2,421 30.2 1,943 26.7

Deferred charges (8) 10 0.1 4 0.1

Total assets 8,022 100.0 7,277 100.0

December 31, 1995 December 31, 1994

Notes DM mill. % DM mill. %

SHAREHOLDERS' EQUITY AND LIABILITIES

Subscribed capital (9) 730 9.1 730 10.0

Capital reserve (10) 1,276 15.9 1,276 17.5

Revenue reserves (11) 1,114 13.9 1,114 15.3

Unappropriated profit 160 2.0 145 2.1

Shareholders' equity 3,280 40.9 3,265 44.9

Participating certificates (14) 69 0.9 68 0.9

Capital funds of dormant partners (15) 130 1.6 130 1.8

Special accounts with reserve element (16) 202 2.5 221 3.0

Special items 401 5.0 419 5.7

Provisions for pensions and similar obligations (17) 1,637 20.5 1,561 21.5

Other provisions (18) 477 5.9 446 6.1

Provisions 2,114 26.4 2,007 27.6

Liabilities with a residual term of

more than 5 years 29 0.3 29 0.4

between 1 and 5 years - - - -

up to 1 year 2,195 27.4 1,553 21.3

Liabilities (19) 2,224 27.7 1,582 21.7

Deferred income (20) 3 - 4 0.1

Total equity and liabilities 8,022 100.0 7,277 100.0

Henkel KGaA Statement of Income

1995 1994

Notes DM mill. % DM mill. %

Sales (24) 5,640 100.0 5,599 100.0

Cost of sales (25) 3,519 62.4 3,437 61.4

Gross profit 2,121 37.6 2,162 38.6

Selling and distribution costs (26) 1,351 24.0 1,381 24.7

Research and development costs (27) 268 4.8 274 4.9

Administrative expenses (28) 358 6.3 349 6.2

Other operating income (29) 69 1.2 44 0.8

Other operating charges (30) 31 0.5 41 0.7

Restructuring costs (31) 50 0.9 72* 1.3

Operating result 132 2.3 89 1.6

Financial items (32) 115 2.1 74 1.3

Result from ordinary activities 247 4.4 163 2.9

Changes in special accounts with reserve element (33) 19 0.3 15 0.3

Extraordinary items (34) - - 34 0.6

Earnings before tax 266 4.7 212 3.8

Taxes on income (35) - 106 - 1.9 - 51 - 0.9

Net earnings 160 2.8 161 2.9

Allocation to revenue reserves - - - 16 - 0.3

Unappropriated profit 160 2.8 145 2.6

* reclassified from extraordinary items for comparative purposes

Key ratios:

Return on capital % (net earnings ÷ average equity capital over the year)

4.9 5.2

Total return on investment %(earnings before taxation and interest expense ÷ average total equity liabilities over the year)

4.9 4.7

Equity ratio %(shareholders' equity and special items less 50 % of special accounts with reserve element ÷ total assets)

44.6 49.1

Changes in Fixed Assets((2) Tangible assets)

(figures in DM millions)

Henkel Group

At CostAccumulateddepreciation

Net book values

Revaluations1995

Depreciationcharge 1995

Jan. 1,1995 Additions Disposals

Reclassi-fications

Translationdifferences

Dec. 31,

1995Dec. 31,

1995

Dec. 31,

1995

Dec. 31,

1994

Patents, licenses and similar rights 490 106 34 - - 6 556 280 276 266 - 84

Goodwill 158 186 1 - 1 344 25 319 150 - 17

Intangible assets 648 292 35 - - 5 900 305 595 416 - 101

Land, land rights and buildings, incl. buildings on leasehold land 2,348 175 53 + 48 - 49 2,469 1,104 1,365 1,305 - 96

Plant and machinery 5,066 393 247 + 168 - 125 5,255 3,593 1,662 1,686 - 438

Other factory and office equipment 1,240 182 138 + 4 - 19 1,269 938 331 334 2 167

Payments on account and assets in course of construction 275 202 23 - 220 2 236 2 234 242 - 2

Tangible assets 8,929 952 461 - - 191 9,229 5,637 3,592 3,567 2 703

Shares in affiliated companies 97 758 28 - 827 9 818 86 - -

Participations in associated companies 1,328 101 13 + 1 - 1 1,416 - 1,416 1,328 - -

Other participations 54 94 12 - 1 - 135 2 133 52 - -

Financial assets 1,479 953 53 - - 1 2,378 11 2,367 1,466 - -

Fixed assets 11,056 2,197 549 - - 197 12,507 5,953 6,554 5,449 2 804

Henkel KGaA

At CostAccumulateddepreciation

Net book values

Revaluations1995

Depreciationcharge 1995

Jan. 1,1995 Additions Disposals

Reclassi-fications

Dec. 31,

1995Dec. 31,

1995

Dec. 31,

1995

Dec. 31,

1994

Patents, licenses and similar rights 227 14 12 - 229 137 92 127 - 46

Intangible assets 227 14 12 - 229 137 92 127 - 46

Land, land rights and buildings, incl. buildings on leasehold land 863 42 5 + 2 902 548 354 335 - 26

Plant and machinery 1,996 112 108 + 44 2,044 1,691 353 342 - 140

Other factory and office equipment 502 54 56 - 5 495 419 76 84 - 58

Payments on accounts and assets in course of construction 48 29 - - 41 36 - 36 48 - -

Tangible assets 3,409 237 169 - 3,477 2,658 819 809 - 224

Shares in affiliated companies 4,496 216* 4 + 12 4,720 434 4,286 4,082 23 45

Participations in other companies 314 94* - - 12 396 2 394 312 - -

Financial assets 4,810 310 4 - 5,116 436 4,680 4,394 23 45

Fixed assets 8,446 561 185 - 8,822 3,231 5,591 5,330 23 315

* including DM 42 million (Shares in affiliated companies) and DM 1 million (Participations in other companies) recapitalized following external tax audit

Notes on Henkel Group and Henkel KGaA

Consolidation and Accounting Policies

General

Unless otherwise indicated, these Notes refer both to the consolidated financial statements and to the annual financial

statements of Henkel KGaA.

In order to improve the clarity and informative value of the financial statements, certain items have been combined in the balance sheet and statement of income and shown separately in the Notes. The cost of sales method is used for presentation of the statement of income. Research and development costs are shown separately because they are so important.

Restructuring costs (plant closures, relocation of premises, and early retirement schemes) are shown separately as an operating expense in 1995. The restructuring costs treated as an extraordinary expense in previous years have been adjusted accordingly.

Changes in special accounts with reserve element are shown below the result from ordinary activities in the statement of income of Henkel KGaA because they are relevant only for tax purposes. In the consolidated financial statements, in order to improve their informative value for comparative purposes in an international context, the appropriate proportions of special accounts with reserve element in the balance sheets of individual companies have been transferred to revenue reserves and provisions for deferred taxation.

Companies included in the consolidation

(Consolidation principles, Preparation, valuation and audit of financial statements included in the consolidation, (11) Revenue reserves, (12) Minority interests)

Apart from Henkel KGaA itself, the consolidated financial statements include 42 domestic and 171 foreign companies in which Henkel KGaA holds, directly or indirectly, a majority of the voting rights or which are under the unified management control of Henkel KGaA.

Hans Schwarzkopf GmbH, Hamburg, and its subsidiaries in which a majority interest was acquired with effect from November 1, 1995, are only being consolidated in the Henkel Group as from January 1, 1996. At December 31, 1995, they are shown in the consolidated balance sheet as financial assets.

63 subsidiary companies have not been included in the consolidation because they are not material for a true and fair view of the net worth, financial position and results of the Group. Apart from two housing companies, the companies in question are mainly either companies which are not actively trading or companies which trade in the name and for the account of Group companies which have been included.

Six domestic and 9 foreign companies have been included in the consolidation for the first time. These changes have not had any material effect on the overall sales or earnings of the Group in 1995.

The option of including in the consolidation a proportionate part of companies in which Henkel KGaA has an equal shareholding with others outside the Group has not been exercised.

Consolidation principles

Investments in subsidiaries are consolidated by setting off the book values of the investments in Group companies against the corresponding proportionate part of the net assets shown in their balance sheets at the date of acquisition (the "book value" method). Any differences are allocated to the relevant assets and liabilities to the extent that the values attributable to them are significantly higher or lower than the valuations taken over. Any remaining differences on the assets side of the balance sheet are capitalized as goodwill under intangible fixed assets and amortized against earnings. The same procedure is adopted for participations in associated companies valued by the equity method, goodwill being included in the equity valuations of the companies concerned. The appropriate proportion of these companies' earnings, including the amount written off goodwill, is included under financial items in the statement of income.

Differences arising on consolidation of inter-company balances as a result of write-downs made on intercompany receivables and of exchange rate differences are reflected in the provision for exchange rate risks within the Group.

Any profits or losses made on trading or financial transactions between companies included in the consolidation are

eliminated. The same applies to write-downs or write-ups on the book values of shares in Group companies included in the consolidation. Inventories originating from goods supplied between Group companies have been valued at their cost to the Group as a whole.

Deferred taxation, calculated at the average rate of tax chargeable on profits of the Group, is accrued on consolidation procedures affecting net earnings when the difference in the tax charge as a result of such procedures can be expected to be reversed in subsequent accounting periods.

The unappropriated profit of the Group agrees with that of Henkel KGaA because changes in consolidation items which affect earnings are taken to revenue reserves.

Currency translation

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, (13) Currency translation difference)

Accounts receivable and payable in foreign currency are translated in the financial statements of individual companies at the rates of exchange in force when they first originated. If, however, translation of foreign currency items at the rate in force on the balance sheet date produces a lower amount for receivables or a higher amount for liabilities, then foreign currency items are translated at the rates in force on the balance sheet date, unless amounts receivable and payable in a particular currency balance each other out or the amounts involved are covered by forward exchange transactions.

In order to eliminate inflation more effectively the financial statements of our Turkish and Russian subsidiaries are drawn up in DM and those of our Argentinian, Brazilian and Mexican companies in US dollars.

For consolidation purposes the balance sheets of foreign companies are translated at the middle rates of exchange ruling at the balance sheet date and their income statements at average rates for the year. The differences arising from translating earnings at average rates and equity capital figures at year-end rates are shown - in the same way as exchange rate differences compared with the beginning of the year - under a separate heading as part of the shareholders' equity at the cumulative amounts up to the balance sheet date.

Preparation, valuation and audit of financial statements included in the consolidation

With the exception of the companies in the Henkel-Ecolab joint venture (whose fiscal year ends on November 30) the annual financial statements of domestic and foreign companies included in the consolidated financial statements are drawn up at the same accounting date as the financial statements of Henkel KGaA. Accounting and valuation policies are laid down in a Group Accounting Manual whichcomplies with the regulations contained in the German Commercial Code. Where the accounting treatment or valuation policies adopted by foreign companies to comply with local regulations are different, appropriate adjustments are made for purposes of the consolidated financial statements.

Assets and liabilities are valued in conformity with the prudence concept; in the case of domestic companies, when calculating purchase or manufactured cost or when exercising valuation options allowed under company law, the minimum values which have to be used to comply with the regulations governing the calculation of taxes on income are not normally exceeded. As allowed by company law regulations, no assets have been written up to their original values except to bring valuations in the commercial balance sheet into line with the findings of external tax audits. No advantage has been taken of the option to show deferred tax receivable as an asset. The accounting and valuation policies applied take all identifiable contingencies into account; they are explained in detail in the notes on individual balance sheet headings.

The annual financial statements of companies included in the consolidation have been audited almost without exception by the Group auditors or by member firms of the KPMG organization, the remaining financial statements by other auditors, all in accordance with normal professional standards. The auditors have confirmed that the financial statements comply with the Group Accounting Guideline.

Notes on the Balance Sheet

(figures in DM millions, onless stated otherwise)

Fixed assets

(1) Intangible assets

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Software purchased is written off over 3 - 5 years, patents, licenses and other property rights (including know-how) over 5 - 10 years or in accordance with the terms of the contractual agreements.

Purchased goodwill and goodwill arising from the first-time consolidation of subsidiaries is amortized on a scheduled basis over a maximum of 15 years. Additions in the consolidated balance sheet amount to DM 186 million.

(2) Tangible assets

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Tangible fixed assets are valued at cost less scheduled depreciation. Manufacturing cost includes, in addition to direct costs, appropriate proportions of factory overheads.

Office buildings are depreciated over a maximum of 40 years, factory buildings over 25 years. Depreciation is calculated on a declining balance basis where allowed for tax purposes.

Movable tangible fixed assets are generally depreciated first on a declining balance basis and then on a straight-line basis. The service lives of plant and machinery are 10 - 20 years, those of other factory and office equipment 5 - 20 years. Assets of low value are written off in full in the year when they are acquired and also shown as disposals in the schedule of changes in fixed assets. Exceptional depreciation is charged where a diminution in value is expected to be permanent.

Taxable investment grants received and special tax-allowable depreciation charged are transferred to special accounts with reserve element and written back over the useful lives of the assets concerned; tax-free investment allowances are taken to income as revenue.

(3) Financial assets

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Shares in affiliated companies and other participations are shown at cost or at such lower value as is attributable to them. Participations in companies where a significant influence is exercised over their business affairs ("associated" companies) are valued in the consolidated financial statements at 'equity' under the book value method, unless they are not material in the context of the Group as a whole. In the case of participations in foreign companies carried at equity, the valuation methods applied by those companies in their own financial statements have not been adjusted to bring them into line with the valuation methods used for the consolidated financial statements. Inter-company profits on goods supplied by such companies to companies in the Group are not material and so have not been eliminated. In the case of participations in foreign associated companies carried at equity whose business strategy is directly influenced by Henkel KGaA, the valuation of the participations is not adjusted to reflect the effects of fluctuating exchange rates.

Shares in affiliated companies shown as such in the consolidated balance sheet relate to the Schwarzkopf Group and to unconsolidated majority shareholdings which are not material. Participations in associated companies relate particularly to GFC Gesellschaft für Chemiewerte mbH, Loctite Corporation, The Clorox Company, and Ecolab Inc.

The main additions to shares in affiliated companies and other participations in the balance sheet of Henkel KGaA relate to the incorporation of new companies and the acquisition of shares in companies in Egypt, Brazil and China. Extra capital was injected into some Group companies - especially in Austria and Poland - in order to improve their financial structure and help finance the growing volume of business. Write-downs of DM 45 million have been made on the valuation of a foreign affiliated company which continues to be unprofitable.

The difference of DM 13 million arising from application of the equity method of valuation to acquisitions in 1995 is to be written off on a scheduled basis over 15 years.

The list of shareholdings owned by Henkel KGaA and by the Henkel Group is filed with the Commercial Register at the Düsseldorf Municipal Court.

Current assets

(Cash flow statement in line with IAS, Total assets increased by acquisitions, Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS, Ten-Year Summary - Henkel Group)

(4) Inventories

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Inventories are valued at cost using the average method or such simplified methods of valuation as are permitted. The LIFO method is used by Henkel KGaA and some foreign Group companies to value standard inventory items of the same kind.

The cost of manufacture includes, in addition to costs which are directly attributable, any necessary indirect materials and production overheads plus depreciation. In the case of German companies, the cost of manufacture does not exceed those elements of cost which have to be included for income tax purposes. Inventories in the consolidated balance sheet originating from goods supplied between Group companies are valued at their cost to the Group as a whole. Where necessary, inventories are valued at their lower market value. Appropriate markdowns have been made on the valuation of inventories which will not realize their full value or which have been on hand for a long time.

Henkel Group Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994

Raw materials and supplies 674 650 216 220

Work in process 236 210 139 124

Finished products and merchandise 1,033 977 206 223

Payments on account of inventories 8 10 - -

1,951 1,847 561 567

(5) Receivables and other assets

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Credit risks associated with accounts receivable and other assets have been covered by specific and general provisions.

Henkel Group Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994

Trade accounts receivable 2,263 2,175 411 402

Accounts receivable from affiliated companies 24 43 1,260 575

(including those with a residual term of more than 1 year) (-) (-) (5) (1)

Account receivable from other companies in which participations are held 22 34 12 25

Other assets 423 367 149 157

(including those with a residual term of more than 1 year) (136) (126) (73) (75)

2,732 2,619 1,832 1,159

(6) Marketable securities

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Marketable securities are valued at the lower of cost or quoted market value. Any reduction in valuation is retained for tax reasons.

(7) Liquid funds

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

The liquid funds comprise mainly balances at banks.

(8) Deferred charges

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS)

Henkel Group Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994

Debt discount 2 2 1 1

Other deferred charges 41 31 9 3

43 33 10 4

Shareholders' equity

(9) Subscribed capital

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

Henkel Group/Henkel KGaA

Dec. 31, 1995=Dec. 31, 1994

Ordinary bearer stock 400

Non-voting preferred bearer stock 330

Capital stock 730

Divided into:

270,000 ordinary shares of DM 1,000 par value each

200,000 ordinary shares of DM 100 par value each

2,200,000 ordinary shares of DM 50 par value each

6,600,000 preferred shares of DM 50 par value each

The subscribed capital totals DM 729,9 million.

(10) Capital reserve

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

The capital reserve comprises amounts received in previous years in excess of the nominal value of preferred shares and convertible warrant bonds issued.

(11) Revenue reserves

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

"Other" revenue reserves in the financial statements of Henkel KGaA represent amounts allocated in previous years. In the consolidated financial statements they also comprise the results of companies included in the consolidation less the interests of minority shareholders therein. This heading also includes the changes in consolidation items which affect earnings and the effects of companies being included or excluded in the consolidation for the first time.

(12) Minority interests

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

Minority interests in the consolidated balance sheet include Ecolab Inc.'s share in the Henkel-Ecolab joint venture companies and partners' shares in a number of foreign companies included in the consolidation.

(13) Currency translation difference

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

The differences on currency translation of the annual financial statements of foreign companies are shown under a separate heading as part of the shareholders' equity. The negative difference has increased by DM 116 million as a result of exchange rate losses on some foreign currencies.

Special items

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Statement of Income, (18) Other provisions)

(14) Participating certificates

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

Henkel Group Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994

Participating certificates of Henkel KGaA issued to employees 69 68 69 68

Redeemable preferred shares issued by Henkel Corporation 31 34 - -

100 102 69 68

Resolutions passed by shareholders at General Meetings held on June 29, 1987, and June 15, 1992, created conditionally authorized participating certificates for a total nominal value of DM 60 million and DM 70 million respectively for issuing - to employees of the Company and of affiliated companies - rights to participate in profits with a distribution linked to the rate of dividend. Each issue of participating rights is divided into individual participating rights ranking equally with each other, documented in the form of participating certificates with a nominal value of DM 52 each. Authorization for the first issue expired on June 28, 1992; for the second issue it remains in force until June 14, 1997. At December 31, 1995, 1,330,021 certificates (DM 69 million) had been allotted, including 189,334 (DM 10 million) in 1995. The maximum period for which the participating certificates are valid is until December 31, 2002.

In 1984, Henkel Corporation issued 220 redeemable preferred shares with a total value of US$ 22 million which were taken up by American financial institutions. These preferred shares, which carry a variable rate of interest, have been eligible for repurchase by Henkel Corporation since 1987; no fixed redemption date is laid down under the terms of the issue.

(15) Capital funds of dormant partners

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

The capital funds of dormant partners are unchanged at DM 129.6 million. They represent capital contributions of our ordinary shareholders which carry participation rights linked to the rate of dividend.

(16) Special accounts with reserve element

(Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994

Tax-allowable valuation adjustments to fixed assets 202 213

Other tax-allowable items - 8

202 221

In the financial statements of Henkel KGaA all differences between valuations allowable under company law regulations and valuations made solely in accordance with tax regulations are shown as special accounts with reserve element. In the consolidated financial statements these special accounts are added to revenue reserves, after allowing for deferred taxation at the average rate chargeable on profits of the Group.

The special accounts with reserve element shown in the statements of Henkel KGaA include amounts set aside for reinvestment in fixed assets under § 6b of the Income Tax Law; for environmental protection under § 7d of the Income Tax Law; and for research and development under § 82d of the Income Tax Regulation.

The overall reduction in special accounts with reserve element has increased the net earnings of Henkel KGaA for the year by DM 11 million; the tax charge on special accounts with reserve element which have been released back to income amounts to about 43 percent. There have been no cases where amounts have not been written back for tax reasons.

Provisions

(17) Provisions for pensions and similar obligations

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

The pension provisions of German companies are calculated on actuarial principles at their "going concern" value recognized for tax purposes in accordance with the provisions of § 6a of the Income Tax Law, using an interest rate of 6 percent. Those of foreign companies are calculated in accordance with the relevant local regulations or, in the absence of such regulations, on actuarial principles.

In addition to the pension provisions accrued as liabilities in the balance sheets, policy reserves for employees of certain Group companies have been set up under the umbrella of pension and staff provident funds; in some cases, employees' pension rights have also been placed with insurance companies.

The pension provisions also include commitments under early retirement schemes, discounted at 6 percent.

Provisions have been set up for the statutory obligations which exist in certain countries to make severance payments to persons leaving a company's employment, calculated on the basis of the "going concern" concept in accordance with the treatment customary in the country concerned.

All direct and indirect pension obligations and commitments for severance payments are fully covered by provisions or fund assets. The same applies to the obligations of American companies to meet the health costs of employees who have retired.

(18) Other provisions

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

Henkel Group Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994

Tax provisions 246 186 134 88

Deferred taxation 134 144 10 7

Sundry provisions 949 961 333 351

comprising:

Sales 247 242 100 98

Personnel 333 338 138 145

Production and technology 117 143 23 28

Other 252 238 72 80

1,329 1,291 477 446

The tax provisions comprise mainly amounts payable in 1996 and amounts which could be payable as a result of

external tax audits and appeal proceedings.

The provisions for deferred taxation reflect timing differences compared with the calculation of profit for tax purposes. The figure in the consolidated financial statements includes deferred tax liabilities of foreign companies, profits taxes for consolidation adjustments which will be subject to tax at a later date, and the tax portion of special items permitted under company law regulations and tax-allowable valuation adjustments. In the case of foreign companies, the provisions are calculated at the anticipated rate of tax chargeable on each individual company's profit, and in all other cases at the anticipated average rate of tax chargeable on profits of the Group.

Sundry provisions include amounts for sales rebates, end-of-year and long-service bonuses, vacation pay outstanding, restructuring programs, exchange rate and litigation risks, claims for damages, anticipated losses on contracts in course of completion, pollution control, etc. They are adequate to cover all identifiable contingencies. Appropriate provisions have been made for deferred maintenance carried out in the first three months of the following fiscal year.

Liabilities

(19) Liabilities

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

Liabilities are shown at the amounts due on repayment.

The amounts shown as "Bonds" are part of the commercial paper program which has been expanding since 1993.

Henkel Group

Residual term Dec. 31, 1995 Dec. 31, 1994

more than 5 years between 1 and 5 years up to 1 year Total

Bonds - - 400 400 -

Loans from employee welfare funds of the Henkel Group - - 44 44 29

Bank loans and overdrafts 30 109 729 868 704

(including amounts secured) (47) (66)

Trade accounts payable - - 1,134 1,134 1,069

Notes payable - - 316 316 199

Accounts payable to affiliated companies - - 47 47 39

Accounts payable to other companies in which participations are held - - 31 31 31

Liabilities in respect of taxation - - 82 82 77

Liabilities in respect of social security - - 51 51 46

Other liabilities 25 37 741 803 799

(including amounts secured) (4) (5)

55 146 3,575 3,776 2,993

(including amounts secured) (51) (71)

Henkel KGaA

Residual term Dec. 31, 1995 Dec. 31, 1994

more than 5 years between 1 and 5 years up to 1 year Total

Bonds - - 383 383 -

Loans from employee welfare funds of the Henkel Group - - 24 24 13

Bank loans and overdrafts - - 177 177 58

Trade accounts payable - - 228 228 228

Notes payable - - 230 230 110

Accounts payable to affiliated companies - - 725 725 673

Accounts payable to other companies in which participations are held - - 15 15 13

Liabilities in respect of taxation - - 4 4 6

Liabilities in respect of social security - - 9 9 10

Other liabilities 29 - 400 429 471

29 - 2,195 2,224 1,582

The liabilities of Henkel KGaA are not secured. The total amount of liabilities in the Henkel Group secured as at December 31, 1995, amounted to DM 51 million.

(20) Deferred income

(Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES)

The amounts carried forward as deferred income on the liabilities side of the balance sheets represent amounts already received relating to future years.

Contingent liabilities and other financial commitments

(21) Contingent liabilities

Henkel Group Henkel KGaA

Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994

Bills and notes discounted 48 41 4 3

Guarantees 19 23 461 810

Collateral 11 13 - -

The contingent liabilities of Henkel KGaA under guarantees include DM 455 million relating to guarantees for liabilities of Group companies.

(22) Other financial commitments

Payment obligations under rent, leasehold and leasing agreements are not now discounted but shown at the total amounts payable up to the earliest date when they can be terminated. Together with order commitments for tangible fixed assets and potential liabilities in respect of payments on shares not yet called up they amounted to DM 462 million in the Group at the end of 1995 and DM 222 million for Henkel KGaA; they include DM 7 million in the Group and DM 28 million for Henkel KGaA in respect of obligations towards affiliated companies.

There are also commitments to take over minority interests in subsidiary companies which could total up to DM 300

million if they have not been exchanged for shares in Henkel KGaA by December 31, 1998.

(23) Financial derivatives

Use of financial derivatives

Henkel Group

1995 1994

Nominal value Market value Nominal value Market value

Currency derivatives 1,250 + 1 1,072 + 2

Interest rate derivatives 502 - 12 381 + 7

1,752 - 11 1,453 + 9

Financial derivatives are used for the management of currency exposure and interest rate risks in connection with trading operations and the resultant financing requirements. Contracts of this kind are entered into purely for the purpose of hedging such risks and no additional risks are involved as far as the Company is concerned. Only marketable derivatives are used which can be simulated and evaluated by our own computer systems. All the relevant activities are centrally coordinated by Henkel KGaA's Corporate Treasury. Portfolio management, settlement and accounting are kept physically and organizationally separate from the trading function. The counterparties are German and international banks of the highest standing.

The nominal amounts shown are net of balancing contracts only when such contracts match exactly in scope, nature and maturity. Fair market values are arrived at by valuing the open contracts at market prices, ignoring any opposing movements in value of the underlying transactions.

Most of the currency derivatives are hedging instruments matching the amount and maturity of financing arrangements within the Group. The remaining currency derivatives (forward exchange contracts and options) provide forward exchange cover for receipts and payments in foreign currency in respect of sales and purchases of goods.

All interest rate derivatives are valued together with underlying transactions shown in the balance sheet. Adverse movements in the market therefore do not require any additional provisions to be made.

Notes on the Statement of Income

(figures in DM million, unless stated otherwise)

(24) Sales

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

Analysis by product groups

Henkel Group Henkel KGaA

1995 1994Change

% 1995 1994Change

%

Chemical Products 4,025 4,072 - 1.2 1,619 1,532 + 5.7

Metal Chemicals 949 937* + 1.3 120 111 + 8.1

Industrial Adhesives/Technical Consumer Products 2,165 1,990* + 8.8 731 742 - 1.5

Cosmetics/Toiletries 1,377 1,404 - 1.9 615 630 - 2.4

Detergents/Household Cleansers 4,096 4,110 - 0.3 1,575 1,607 - 2.0

Institutional Hygiene 1,371 1,345 + 1.9 398 388 + 2.6

Royalty income and subsidiary activities 215 211 + 1.9 582 589 - 1.2

14,198 14,069 + 0.9 5,640 5,599 + 0.7

* adjusted for organizational reasons

Analysis by markets

Henkel Group Henkel KGaA

1995 1994Change

% 1995 1994Change

%

Germany 4,093 4,037 + 1.4 3,612 3,620 - 0.2

Rest of Europe 6,805 6,625 + 2.7 1,477 1,443 + 2.4

North America 1,633 1,745 - 6.4 122 111 + 9.9

Latin America 512 547 - 6.4 108 103 + 4.9

Africa 227 189 + 20.1 69 56 + 23.2

Asia, Australia 928 926 + 0.2 252 266 - 5.3

14,198 14,069 + 0.9 5,640 5,599 + 0.7

(25) Costs of sales

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

This heading comprises the manufacturing cost of products sold and the purchase cost of merchandise sold. Manufacturing cost includes production-related costs such as direct materials, labor and energy costs, as well as costs which can be attributed such as depreciation of production plant, repair costs and operating taxes. Interest charges are not included. The heading also includes markdowns on the valuation of inventories.

(26) Selling and distribution costs

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

This heading includes the costs of the marketing organization, of distribution, advertising and market research, and of customer-specific technical advisory services.

(27) Research and development costs

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

These comprise the costs of research and of product and process development..

(28) Administrative expenses

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

Administrative expenses include the personnel and non-personnel costs of the administration departments..

(29) Other operating income

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

Henkel Group Henkel KGaA

1995 1994 1995 1994

Gains on disposal of fixed assets 25 14 10 7

Revaluations of tangible fixed assets 2 - - -

Income from release of provisions 65 45 30 21

Income from release of bad debt reserves 7 10 1 3

Other operating revenue 77 56 28 13

176 125 69 44

Other operating revenue includes tax-free investment allowances, cost reimbursements, refunds, and amounts distributed by employee welfare funds.

(30) Other operating charges

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

Henkel Group Henkel KGaA

1995 1994 1995 1994

Amounts receivable written off 51 45 12 12

Sundry taxes 3 7 - -

Other operating expenses 77 94 19 29

131 146 31 41

Other operating expenses include amounts provided for services to be rendered to customers under guarantee and for the sake of customer goodwill, and leasehold payments.

(31) Restructing costs

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

The costs of plant closures, relocation of premises, and early retirement schemes are shown under this heading.

(32) Financial items

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

Henkel Group Henkel KGaA

1995 1994 1995 1994

Income from participations

in affiliated companies 2 2 79 99

in other companies 3 3 24 23

Share of profits less losses of associated companies 170 170 - -

Income from profit and loss transfer agreements 3 2 64 59

Interest and similar income

from affiliated companies - - 22 21

from others 79 94 14 31

Gains on disposal of financial assets and marketable securities 7 1 5 -

Revaluations of financial assets and amounts recapitalized following external tax audit 1 - 66 -

Write-downs of financial assets and marketable securities - 1 - 5 - 45 - 19

Losses taken over under profit and loss transfer agreements - - - 1 - 16

Interest charges payable

to affiliated companies - - - 34 - 41

to others - 229 - 238 - 79 - 83

+ 35 + 29 + 115 + 74

(33) Changes in special accounts with reserve elements

(Annual Financial Statements - Henkel KGaA Statement of Income)

Henkel KGaA

1995 1994

Income from release of valuation adjustment write-downs on fixed assets 14 16

Amounts released from other special accounts with reserve element 5 -

Amounts allocated to other special accounts with reserve element - - 1

+ 19 + 15

(34) Extraordinary items

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

Henkel Group Henkel KGaA

1995 1994 1995 1994

Extraordinary income - - - 53

Extraordinary expenses - - 23 - - 19

- - 23 - + 34

(35) Taxes on income

(Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)

The disproportionately large increase in the charge for taxes on income compared with the increase in earnings in the financial statements of Henkel KGaA is mainly due to the reduction in tax-free income compared with the previous year

and to lower corporation tax relief on the proposed dividend for 1995.

In the financial statements of Henkel KGaA amounts totaling DM 14 million (1994: DM 15 million) charged on to other companies in the same "tax group" in respect of municipal trade tax on income are set off against the tax charge.

Operating taxes - such as real property tax, municipal trade tax on capital, net assets tax and motor vehicle tax - are charged in the operating result. They amount to DM 67 million (1994: DM 61 million) in the Group. Operating taxes in the statements of Henkel KGaA are the same as in the previous year, namely DM 2 million after deducting DM 2 million charged on to other companies in the same "tax group".

(36) Depreciation

Henkel Group Henkel KGaA

1995 1994 1995 1994

Scheduled depreciation and write-downs on tangible and intangible fixed assets 783 780 262 263

Exceptional depreciation and write-downs on tangible and intangible fixed assets 21 43 8 14

Write-downs on financial assets - 3 45 18

804 826 315 295

(37) Cost of materials

Henkel Group Henkel KGaA

1995 1994 1995 1994

Cost of raw materials and supplies and of goods purchased for resale 5,912 5,670 2,507 2,483

Cost of outside services 257 223 233 222

6,169 5,893 2,740 2,705

(38) Payroll costs

Henkel Group Henkel KGaA

1995 1994 1995 1994

Wages and salaries 2,443 2,518 870 908

Social security contributions and social assistance 507 514 139 144

Pension costs 291 278 178 158

3,241 3,310 1,187 1,210

(39) Number of employees by function*

Henkel Group Henkel KGaA

1995 1994 1995 1994

Production 21,407 20,592 4,280 4,966

Sales 10,329 9,981 1,737 1,751

Research and development 3,001 2,989 1,425 1,452

Administration 6,991 7,028 1,773 1,863

41,728 40,590 9,215 10,032

* annual average excluding apprentices, work experience students and trainees

(40) Total emoluments of members and former members of the Supervisory Board, Shareholders' Committee and Management Board

The total emoluments paid to members of the Supervisory Board for the 1995 fiscal year amounted to TDM 700 (TDM = thousand DM), those paid to members of the Shareholders' Committee to TDM 1,800. The personally liable Managing Associates and other members of management received remuneration totaling TDM 11,688 for the year under review.

TDM 49,744 has been provided for pension commitments towards former members of the Management Board of Henkel KGaA and former managers of its legal predecessor and their surviving dependents. Amounts paid during the year under review totaled TDM 6,559.

Loans amounting to TDM 320 were advanced to members of the Management Board during the 1995 fiscal year. Amounts totaling TDM 195 were repaid. Loans to personally liable Associates outstanding at the end of 1995 included under the heading "Other assets" amounted to TDM 400. The loans are for terms of up to 4 years and are subject to interest at the Bundesbank's discount rate up to a maximum of 5.5 percent.

(41) Recommendation for appropriation of the profit of Henkel KGaA

The unappropriated profit of Henkel KGaA for the 1995 fiscal year amounts to TDM 159,884.

In accordance with Article 35 of the Company's statutes, the ordinary shareholders have again waived part of the share of profits to which they are entitled for the 1995 fiscal year, so that the personally liable Managing Associates, the Shareholders' Committee and the Supervisory Board are able to recommend that the unappropriated profit of TDM 159,884 for the year ended December 31, 1995, be applied as follows:

1. Payment of a dividend of DM 10.50 per ordinary share of DM 50 par value (on capital of TDM 400,000 ranking for the dividend) = TDM 84,000.

2. Payment of a dividend of DM 11.50 per preferred share of DM 50 par value (on capital of TDM 329,931 ranking for the dividend) = TDM 75,884.

Düsseldorf, March 8, 1996

The personally liable Managing Associates of Henkel KGaADr. Hans-Dietrich WinkhausDr. Klaus MorwindDr. Roland SchulzDr. Uwe Specht

The Shareholders' CommitteeAlbrecht WoesteChairman

Auditors' Report

The accounting records, the annual financial statements and the consolidated financial statements, which we have audited in accordance with professional standards, comply with the German legal regulations and the Company's statutes. The annual financial statements and the consolidated financial statements present a true and fair view of the net worth, financial position and results of the Company and of the Group in compliance with accounting principles generally accepted in Germany. The management report on the situation of the Company and of the Group is consistent with the annual financial statements and the consolidated financial statements.

Düsseldorf, March 12, 1996

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

HausmannWirtschaftsprüfer

Dr. KührWirtschaftsprüfer

Major 1996 events to date

December 1995 / January 1996, New York

The Henkel Corporation receives from the US Federal Environmental Protection Agency an award for "significant reductions in industrial pollutants". The Henkel Corporation together with a further 19 leading US companies voluntarily reduced their emissions as compared with the 1988 level by 33 percent in 1992 and by 50 percent in 1995. More than 1,300 companies in all had taken part in this US Government-sponsored program.

January 1996, Düsseldorf

Persil powder and Persil Megaperls are manufactured to new, improved formulations. The performance of both products, and particularly their bleaching effect and grease-dissolving power at low temperatures, is further improved.

January 1996, Izmir

Our Turkish brand-name products subsidiary Henkel Turyag of Izmir is the first company in Turkey to use SAP standard software for its main business processes. The implementation project, coordinated by an international team of experts, encompasses the functions materials management, finance and accounts, production planning, selling and distribution, personnel management and maintenance.

January 1996, Zurich

Henkel places a bond valued at 200 million Swiss francs with a syndicate of banks headed by SBC Warburg and Schweizerischer Bankverein. Within one week, the securities issue is fully subscribed.

February 1996, Düsseldorf

The detergent brands Weisser Riese and Spee, positioned within the medium price band, are relaunched as Megaperls. This means that Henkel's technology for the production of these highly concentrated detergent "beads" has now been conclusively confirmed as the new standard in the German market.

February 1996, Düsseldorf

The automatic dishwasher detergent Somat Supra is provided with an enhanced formulation. Both Somat Supra powder and the Somat Supra Tabs are now even more effective in the removal of dried food and dirt deposits.

March 1996, Izmir

Henkel Turyag enters the Turkish cosmetics market with four products from our international Fa line of toiletries. Some of the products are produced in the country itself.

March 1996, Beijing

Henkel and the Liyuan Group, one of the leading cosmetics companies in Beijing, establish a joint venture under the name Henkel Liyuan Cosmetics Ltd. Liyuan's contribution to the joint venture includes not only a complete production center but also "Guangming", the leading hair colorant on the Chinese market.

Ten-Year Summary(figures in DM millions, unless stated otherwise)

Henkel Group

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Total Sales 8,716 9,256 10,252 11,639 12,017 12,905 14,101 13,867 14,069 14,198

Operating profit 516 571 600 646 687 761 681 550 3) 671 3) 725

Earnings before taxes on income 440 493 581 655 689 742 621 584 677 760

Net earnings 226 292 352 404 429 443 402 385 464 488

DVFA/SG earnings per share (DM) 21.50 25.50 30.50 31.00 32.00 31.00 30.50 32.00 33.50 33.50

Cash flow 719 830 827 1,035 1,203 1,323 1,397 1,443 1,288 4) 1,249

- as % of sales 8.3 9.1 8.1 8.9 10.0 10.3 9.9 10.4 9.2 8.8

Total assets 6,196 6,779 7,442 8,540 9,163 9,914 10,015 2) 10,376 10,487 11,620

Fixed assets 2,772 3,085 3,313 4,210 4,503 4,789 5,278 5,485 5,449 6,554

Current assets 3,724 3,694 4,129 4,330 4,660 5,125 4,737 4,891 5,038 5,066

Borrowings 3,428 4,059 4,525 5,127 5,204 5,848 6,596 6,705 6,417 7,317

Shareholders' equity1) 2,768 2,720 2,917 3,413 3,959 4,066 3,419 2) 3,671 4,070 4,303

- as % of total assets 44.7 40.1 39.2 40.0 43.2 41.0 34.1 2) 35.4 38.8 37.0

Capital expenditure 814 1,517 864 2,012 1,003 1,353 2,197 981 1,007 2,109

Research and development costs 235 277 308 359 374 400 414 402 369 369

Number of employees (annual av.)

- Germany 16,021 16,013 16,118 16,155 16,182 18,687 17,635 16,617 15,313 14,684

- Abroad 15,044 18,147 18,900 20,809 22,028 23,353 24,561 23,853 25,277 27,044

Total 31,065 34,160 35,018 36,964 38,210 42,040 42,196 40,470 40,590 41,728

Henkel KGaA

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Total sales 4,021 4,040 4,190 4,649 4,953 5,250 5,464 5,460 5,599 5,640

Operating profit 81 116 139 125 174 214 114 33 3) 89 3) 132

Net earnings 132 152 153 161 174 141 126 116 161 160

Dividend per ordinary share (DM) 4.50 5.00 5.50 6.00 6.50 7.00 7.00 7.00 9.00 10.50 5)

Dividend per preferred share (DM) 7.50 8.00 8.50 9.00 9.50 10.00 10.00 10.00 11.00 11.50 5)

Total dividends 62.3 68.0 78.6 102.5 109.5 116.5 116.5 116.5 144.6 159.9 5)

Capital stock 575 575 632.5 702.5 702.5 702.5 702.5 702.5 730 730

- Ordinary shares 400 400 400 400 400 400 400 400 400 400

- Preferred shares 175 175 232.5 302.5 302.5 302.5 302.5 302.5 330 330

1) incl. participating certificates and capital funds of dormant partners2)at Jan. 1, 19933)adjusted to show operating profit after charging restructuring costs4)adjusted to bring cash flow statement into line with International Accounting Standards (IAS)5)proposed

Table of Monetary UnitsEurope:BEF = Belgian Franc, GBP = British Pound, FRF = French Franc, NLG = Dutch Guilder, ITL = Italian Lira, ATS = Austrian Schilling, CHF = Swiss Franc, ESP = Spanish Peseta, TRL = Turkish Lira.

Overseas:BRL = Brazilian Real, JPY = Japanese Yen, MXN = Mexican Peso, USD = US Dollar

Europe Average Exchange Rates Exchange Rates

Jan. 1 - Dec. 31, 1995 Dec. 31, 1995

Belgian Franc 100 BEF = 4.86 DM 100 BEF = 4.8686 DM

British Pound 1 GBP = 2.26 DM 1 GBP = 2.2135 DM

French Franc 100 FRF = 28.75 DM 100 FRF = 29.2530 DM

Dutch Guilder 100 NLG = 89.27 DM 100 NLG = 89.3350 DM

Italian Lira 1000 ITL = 0.88 DM 1000 ITL = 0.9045 DM

Austrian Schilling 100 ATS = 14.21 DM 100 ATS = 14.2140 DM

Swiss Franc 100 CHF = 121.28 DM 100 CHF = 124.5400 DM

Spanish Peseta 100 ESP = 1.15 DM 100 ESP = 1.1791 DM

Turkish Lira 10000 TRL = 0.32 DM 10000 TRL = 0.2330 DM

Overseas Average Exchange Rates Exchange Rates

(Sustained success in the face of tough competition, Organic Specialty Chemicals, Foreign markets, (3) Financial assets)

Jan. 1 - Dec. 31, 1995 Dec. 31, 1995

Brazilian Real 1 BRL = 1.57 DM 1 BRL = 1.4770 DM

Japanese Yen 100 JPY = 1.53 DM 100 JPY = 1.3908 DM

Mexican Peso 100 MXN = 22.78 DM 100 MXN = 18.6000 DM

US Dollar 1 USD = 1.43 DM 1 USD = 1.4335 DM

Financial TermsThe following explanations of some specialist accounting terms are intended to make the financial statements of the Henkel Group easier to understand for non-specialist readers. We do not claim, however, that they are either exhaustive or technically accurate.

Associated companyA business undertaking which is not under the unified management control or not majority-owned by the parent company, but over which a significant influence is exercised (shareholding of more than 20 percent).

Borrowings(Total assets increased by acquisitions, Ten-Year Summary - Henkel Group)Capital only temporarily available to the company, such as loans from banks and suppliers and liabilities in respect of which the amount payable and/or the due date for payment have not yet been determined ("provisions").

Capital reservesReserves accumulated out of the premium on the issue of shares. The premium is that part of the purchase price which the providers of capital have paid for the shares in excess of their nominal value.

Cash flow(Financial Highlights for Fiscal 1995, Cash flow statement in line with IAS, Ten-Year Summary - Henkel Group, Ten-Year Summary - Henkel KGaA)The "cash surplus" generated from the activities of the business, calculated by eliminating non-cash items of income and expenditure from the net earnings for the year.

Debt discount((8) Deferred charges)Amount by which the total of a loan repayable on redemption exceeds the amount received.

Deferred charges and deferred incomePayments made or received in advance during the current accounting period which relate to a period after the balance sheet date.

Deferred taxation(General, Consolidation principles, (16) Special accounts with reserve element, (18) Other provisions)Timing differences in the tax charge shown in the published financial statements of Henkel KGaA and of the Group compared with the computations for tax purposes. Showing the differences under this heading creates a sensible correlation between published net earnings and the tax charge actually attributable.

Equity method of valuation((3) Financial assets)Valuing shareholdings in associated companies at the appropriate proportion of their net assets and profit or loss for the year.

Extraordinary items(Profits again higher, Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Statement of Income)Material items of income or expenditure outside the ordinary activities of the business.

Fixed assets(Cash flow statement in line with IAS, Total assets increased by acquisitions, Annual Financial Statements - Henkel Group Consolidated Balance Sheet - ASSETS, Annual Financial Statements - Henkel KGaA Balance Sheet - ASSETS, Changes in Fixed Assets - Henkel Group, Changes in Fixed Assets - Henkel KGaA, Consolidation principles, (2) Tangible assets, (16) Special accounts with reserve element, (22) Other financial commitments, (29) Other operating income, (33) Changes in special accounts with reserve elements, (36) Depreciation, Ten-Year Summary - Henkel Group)Assets intended to be used long term.

Going concern conceptAssets and liabilities are valued on the assumption that the business will continue in operational existence.

Goodwill(Outlook, Cash flow statement in line with IAS, Total assets increased by acquisitions, A word of thanks to our employees, Changes in Fixed Assets - Henkel Group, Consolidation principles, (1) Intangible assets, (30) Other operating charges)The difference between the purchase price for a business and the value of its net assets (assets less liabilities).

Group companies(Stronger increase in exports, sales in Europe slightly up on the previous year, Overseas sales hit by foreign exchange rate fluctuations, Outlook, Europe, Companies included in the consolidation, Consolidation principles, (3) Financial assets, (4) Inventories, (17) Provisions for pensions and similar obligations, (21) Contingent liabilities)Henkel KGaA and all subsidiary companies, regardless of whether they have been included in the consolidated financial statements or not.

LIFO method((4) Inventories)

The LIFO method (last in, first out) is a simplified method of valuating inventory items of the same kind, based on the assumption that the latest items acquired are used first.

Minority interests(Dividend, Distribution of value added, Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel Group Consolidated Statement of Income, (12) Minority interests, (22) Other financial commitments)Minority shareholdings in companies in the Henkel Group, not held by Henkel KGaA or by other companies in the Group.

Revenue reserves(Dividend, Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Statement of Income, General, Consolidation principles, (11) Revenue reserves, (16) Special accounts with reserve element)Reserves accumulated out of undistributed profits.

Shareholders' equity(Total assets increased by acquisitions, Annual Financial Statements - Henkel Group Consolidated Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel Group Consolidated Statement of Income, Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Statement of Income, Currency translation, (13) Currency translation difference, Ten-Year Summary - Henkel Group)Capital permanently available to the company in the form of amounts paid in or profits retained.

Special accounts with reserve element(Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Statement of Income, General, (2) Tangible assets, (16) Special accounts with reserve element, (33) Changes in special accounts with reserve elements)In the published financial statements (drawn up in accordance with company law) this heading comprises amounts which have been charged against profits purely on the grounds of tax regulations. Such amounts can include:(Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Statement of Income, General, (2) Tangible assets, (16) Special accounts with reserve element, (33) Changes in special accounts with reserve elements)untaxed reserves which are taxed only when they are released to income; or(Annual Financial Statements - Henkel KGaA Balance Sheet - SHAREHOLDERS' EQUITY AND LIABILITIES, Annual Financial Statements - Henkel KGaA Statement of Income, General, (2) Tangible assets, (16) Special accounts with reserve element, (33) Changes in special accounts with reserve elements)depreciation and write-downs in excess of those charged under company law regulations.

Subsidiary companies(Cash flow statement in line with IAS, Companies included in the consolidation, (22) Other financial commitments, Group companies)All business undertakings which are controlled directly or indirectly by Henkel KGaA as a result of a majority shareholding and/or unified management control.

Chemical-technical TermsAcrylates

(Metal Chemicals, Industrial Adhesives/Technical Consumer Products)Salts of acrylic acid. Used especially as raw materials for special polymers.

Additives(Capital expenditure, Chemical Products, Oleochemicals, Organic Specialty Chemicals, Grünau Illertissen GmbH, lllertissen)Substances which, added in small quantities, significantly improve certain properties of a substance or mixture of substances, or facilitate their processing.

Alkyl polyglycosides (APG®)(Capital expenditure, Oleochemicals)

New type of surfactants which are manufactured exclusively from the natural raw materials starch or glucose on the one hand and fatty alcohols on the other.

Anaerobic(Industrial Adhesives/Technical Consumer Products, Loctite Corporation, Hartford/Connecticut, USA)Conditions characterized by the absence of free oxygen.

Anionic surfactants(Innovation offensive bears fruit, Fatty alcohol ether sulfates)Surfactants that break down into electrically charged ions in aqueous solutions, and whose special surfactant properties are attributable to the negatively charged anions.

Antioxidants(Overseas sales hit by foreign exchange rate fluctuations)Organic compounds that prevent the undesirable effects of oxygen and other oxidants on oxidation-sensitive substances, such as various plastics, natural rubber, fats, gasoline, aromatic substances, coating materials, etc.

Derivatives(Chemical Products, Henkel Adhesives Group, Düsseldorf, Henkel of America Inc., Gulph Mills/Pennsylvania, (23) Financial derivatives)In chemistry a common name for substances derived from a chemical compound -; often in only one reaction step -; having a close chemical degree of relationship with this compound.

DIN ISO 9001(Production, Technical Consumer Products)International standard that describes a universal and comprehensive quality assurance system covering all product stages from development through materials procurement and production to customer delivery.

Enzymes(Innovation offensive bears fruit, Protein hydrolyzates)Biocatalysts which make possible chemical changes in living organisms and are also used in industrial processes.

Ethoxylation(Innovation awards 1995)Reaction between fatty alcohols and ethylene oxide to form fatty acid polyglycol ethers (nonionic surfactants).

Extrusion processName of a process for manufacturing pipes, wires, etc. from thermoplastic or other materials.

Fatty acids(Capital expenditure, Innovation awards 1995, Chemical Products, Oleochemicals, Henkel of America Inc., Gulph Mills/Pennsylvania)Substances occuring in all vegetable and animal fats and oils bound to glycerine. Fatty acids are important base materials for numerous oleochemical products.

Fatty alcohols(Chemical Products, Oleochemicals, Sidobre-Sinnova S.A., Boussens-Saint Martory, Henkel of America Inc., Gulph Mills/Pennsylvania, Alkyl polyglycosides (APG®), Ethoxylation, Fatty alcohol sulfates (FAS))Long-chain alcohols which are obtained at Henkel from fatty acid methyl esters or directly from fats by reaction with hydrogen (hydrogenation). Fatty alcohols are an important raw material for surfactants.

Fatty alcohol ether sulfates(Oleochemicals)Anionic surfactants manufactured by reacting fatty alcohol ethers with sulfuric acid.

Fatty alcohol sulfates (FAS)(Innovation offensive bears fruit, Innovation awards 1995, Sustained success in the face of tough competition)Major group of surfactants based on fatty alcohols.

Glycerine(Chemical Products, Oleochemicals, Henkel of America Inc., Gulph Mills/Pennsylvania, Fatty acids)Component in fats and oils; is used, for example, in the manufacture of alkyd resins, polyurethane foams, in humidifying tobacco and in the food and cosmetics industries.

OleochemistryTerm for industrial chemistry involving natural fats and oils, used in analogy to the term petrochemistry.

Petrochemical productsCollective name for substances that are obtained from mineral oil or natural gas by chemical synthesis.

PhosphatizationTreatment of metal surfaces (steel, galvanized steel) to give them a thin coating of phosphate as protection

against corrosion.Polymers

(Acrylates)Substances that are composed of a large number of repeated basic units, for example plastics.

Polyurethane(Metal Chemicals, Industrial Adhesives/Technical Consumer Products, Glycerine)Plastic with an extremely wide range of specifically adjustable applicational properties; for adhesives, sealants, foams, molded articles and many other applications.

Protease(Innovation offensive bears fruit)Enzyme that is capable of breaking down specific proteins.

Protein hydrolyzatesDegradation products of natural proteins. One of the ways in which they can be formed is by the action of specific enzymes. They have many applications (e.g. as precursors of so-called protein surfactants in the cosmetics sector).

Responsible Care®(Environmental protection)A worldwide initiative developed by the chemical industry. It stands for commitment to continuous improvement in safety and the protection of health and the environment, going beyond the relevant legal requirements.

Surfactants(Segment reporting, Sustained success in the face of tough competition, Oleochemicals, Alkyl polyglycosides (APG®), Anionic surfactants, Ethoxylation, Fatty alcohols, Fatty alcohol sulfates (FAS), Protein hydrolyzates)Substances which, in their molecules, contain both a water-soluble and a fat-soluble part. They can accumulate at interfaces and reduce, for example, the surface tension. Surfactants are not only important ingredients of detergents and cleaning agents, but are moreover indispensable components of numerous consumer products, as well as industrial and technical products.

Further Information

Postanschrift Mailing address

Henkel KGaA

D-40191 Düsseldorf

Forschung Biologie undProduktsicherheit

Biological Research andProduct Safety

Telefon: 0211/797-9062 Phone: 49-211-797-9062

Telefax: 0211/798-2363 Fax: 49-211-798-2363

E-Mail: rolf.schnakig@henkel.de

Umweltschutz und SicherheitEnvironmental Protection

and Safety

Telefon: 0211/797-3837 Phone: 49-211-797-3837

Telefax: 0211/798-2551 Fax: 49-211-798-2551

E-Mail: ruediger.wagner@henkel.de

Corporate Communications Corporate Communications

Telefon: 0211/797-3533 Phone: 49-211-797-3533

Telefax: 0211/798-4040 Fax: 49-211-798-4040

E-Mail: corporate.communications@henkel.de

Investor Relations

Telefon: 0211/797-3937 Phone: 49-211-797-3937

Telefax: 0211/798-2863 Fax: 49-211-798-2863

E-Mail: magdalena.moll@henkel.de

waltraud.mueller@henkel.de

Henkel im Internet Internet site

www.henkel.de www.henkel.com