Annual Report 2005 - DSM

Royal DSM N.V.Annual Report 2005A year ofachievements

DSM ProfileDSM is active worldwide in nutritional and pharmaingredients, performance materials and industrialchemicals. The company develops, produces and sellsinnovative products and services that help improvethe quality of life. DSM’s products are used in a widerange of end-markets and applications, such ashuman and animal nutrition and health, personal care,pharmaceuticals, automotive and transport, coatings,housing and electrics & electronics (E&E). DSM’sstrategy, named Vision 2010 – Building on Strengths,focuses on accelerating profitable and innovativegrowth of the company’s specialties portfolio. Marketdrivengrowth, innovation and increased presence inemerging economies are key drivers of this strategy.The group has annual sales of over € 8 billion andemploys some 22,000 people worldwide. DSM ranksamong the global leaders in many of its fields. Thecompany is headquartered in the Netherlands, withlocations in Europe, Asia, Africa and the Americas.‰8Web linkDetailed group strategy information can also befound at www.dsm.com : About usAnnual Report 2005www.dsm.com

0 5 10 15 20DSM at a glance Life Science Products DSM Nutritional ProductsDSM’s activities have beengrouped into businessgroups representingcoherent product/marketcombinations. Thebusiness group directorsreport directly to theManaging Board. Forreporting purposes theactivities are groupedinto three strategicclusters – Life ScienceProducts, PerformanceMaterials and IndustrialChemicals − plus DSMNutritional Products. Inaddition, DSM reportson a number of otheractivities, which havebeen grouped underOther Activities.1,479m– Pharma restructurings yield clearly improvedprofitability.– Food ingredients portfolio profits frominnovations.DSM Fine ChemicalsProduces chemical intermediates for the agrochemical,food and pharma industries.Products include: glyoxylic acid, fumaric acid,aspartame, benzoic acid, sodium benzoate.DSM Pharmaceutical ProductsProvides custom manufacturing services to thepharmaceutical and agro-chemical industries.Products: active ingredients, advancedintermediates, monoclonal antibodies, sterile andsolid dose manufacturing and packaging.DSM Anti-infectivesProduces penicillin equivalents and other activeingredients for the antibiotics industry.Products: penicillin G, penicillin intermediates (6-APA and 7-ADCA), side chains, semi-syntheticpenicillins, semi-synthetic cefalosporins.DSM Food SpecialtiesProduces dairy, savory, beverage and functionalfood ingredients and enzymes for food industries.Products include: starter cultures, flavor enhancers,baking and brewing processing enzymes,arachidonic acid, probiotics and peptides.1,914m– VITAL program contributes further toimproved results.– Significant steps taken to securecompetitive position.DSM Nutritional ProductsThe world’s largest supplier of vitamins, carotenoidsand other biochemicals and fine chemicals.- Human Nutrition & HealthProducer of functional food ingredients for thefood industries and personal care ingredients forcosmetics and skin care product manufacturers.Food products include: total vitamins range,carotenoids (pigments and anti-oxidants), probioticstrains, green tea extract.Personal care products: active ingredients (e.g.vitamin C and E forms) for skin, hair and oral care;UV filters.- Animal Nutrition & HealthWorld market leader in vitamins,carotenoids and feed enzymes for the feed industry.Products: animal performance products (e.g. for gutflora, bone health). Includes 35 premixing facilitiesfor feed across the globe.Supplies 20051. DSM Fine Chemicals 3032. DSM Pharmaceutical Products 4823 23. DSM Anti-Infectives 3304. DSM Food Specialties 416Total 1,531 41Supplies 20051. Human Nutrition & Health 9732. Animal Nutrition & Health 8753. Personal Care 98Total 1,946231EBITDA/Net sales (as a %)200420050 5 10 15 20EBITDA/Net sales (as a %)200420050 5 10 15 20Annual Report 2005www.dsm.com

Performance MaterialsIndustrial ChemicalsNew structure – Vision 20102,447m1,687m‰At the end of 2005 DSM started its new five-yearstrategy for 2006-2010: Vision 2010 – Buildingon Strengths.– Strong performance in all business groupsin 2005.– NeoResins acquisition strengthenscoating resins business.DSM ElastomersManufactures synthetic rubbers (EPDM) andthermoplastic elastomers (TPVs) for the automotive,construction, and white goods industries.DSM DyneemaProduces the world’s strongest fiber (basedon ultra-high molecular weight polyethylene).Dyneema ® is used in life protection products andby aircraft, shipping, leisure, sports and medicalindustries.DSM Engineering PlasticsProduces polyamides, polyesters, polycarbonates,ultra-high molecular weight polyethylene andextrudable adhesive resins for automotive,engineering, electrics & electronics and extrusionindustries.DSM Coating ResinsManufactures resins for coating systems, includingpowder coating, liquid coating and UV-curableresins, and waterborne, solvent-borne and solid.Most resins find their way in industrial applications.DSM Composite ResinsManufactures unsaturated polyester resins formarine, leisure, construction and automotiveapplications.– Supply/demand balance favorable for fertilizersand fiber intermediates.– Melamine faces oversupply.DSM Fibre IntermediatesProducer of caprolactam and acrylonitrile, whichare raw materials for synthetic fibers and plastics.Caprolactam is the raw material for Nylon 6, which isused in a wide range of applications.DSM MelamineProduces melamine, a product used inimpregnating resins and adhesive resins for thewood-processing industry. Applications includelaminate flooring, flame retardants, bank notes, carpaints and durable plastic tableware.DSM AgroProducer of ammonia and high-nitrogen fertilizersfor grasslands and agricultural crops.DSM EnergyParticipates in the exploration and production of oiland gas on the Dutch Continental Shelf.With this strategy DSM focuses on acceleratingprofitable and innovative growth of its specialtiesportfolio. The overall objective is strong valuecreation, to be accomplished via three main levers:1. market-driven growth and innovation;2. increased presence in emerging economies;3. operational excellence.To leverage the capabilities of the various businessgroups, the organizational model of DSM will bealigned with the new Vision 2010 strategy. As ofQ2 2006 there will be four clusters:Nutrition- Human Nutrition & Health- Animal Nutrition & Health- DSM Food Specialties- New Business Development- parts of DSM Fine ChemicalsPharma- DSM Anti-Infectives- DSM Pharmaceutical Products- parts of DSM Fine ChemicalsPerformance Materials- DSM Engineering Plastics (incl. DSM Dyneema)- DSM Resins- DSM ElastomersIndustrial Chemicals- DSM Fibre Intermediates- DSM Melamine- DSM Agro- DSM EnergySupplies 20051. DSM Elastomers (incl. DSM Dyneema) 6462. DSM Engineering Plastics 7053. DSM Coating Resins 6984. DSM Composite Resins 410Total 2,459214 3Supplies 20051. DSM Fibre Intermediates 1,2432. DSM Melamine 2123. DSM Agro 3704. DSM Energy 74Total 1,8993124EBITDA/Net sales (as a %)EBITDA/Net sales (as a %)2004200420050 5 10 15 2020050 3 6 9 12 15Annual Report 2005www.dsm.com

DSM key data for 2005Net sales(x million)CFROIWorkforce(at year-end)€8,1959.1%21,820Operating profit (EBIT)(x million)Net profit excludingexceptional items(x million)Net profit(x million)€808€563€527Capital expenditure andacquisitions(x million)Net earnings excluding exceptionalitems(per ordinary share)Dividend(per ordinary share)€974€2.87€1.00Forward-looking statementsThis annual report contains forward-looking statements. These statements are based on current expectations, estimates andprojections of DSM management and information currently available to the company. The statements involve certain risks anduncertainties that are difficult to predict and therefore DSM does not guarantee that its expectations will be realized. Furthermore, DSMhas no obligation to update the statements contained in this annual report.Annual Report 2005 www.dsm.com 1

Content03 Key financial data04 Message from the ChairmanSection 1 Report by the Managing Board19 Developments in 200520 Strategy – looking back and ahead23 Corporate governance25 Safety, Health, Environment25 Human Resources27 Research and Development30 Intellectual Property30 ICT and e-Business31 Purchasing31 Macro-economic review32 Financial resultsSection 2 Review of business36 Life Science Products42 DSM Nutritional Products46 Performance Materials52 Industrial Chemicals56 Other Activities58 Report by the Supervisory Board of Directors to the shareholders60 Corporate organization62 Remuneration Policy regarding the Managing Board and the Supervisory Board62 Remuneration Policy as from 200564 Remuneration 2005Section 3 Corporate Governance, risk management and internal control70 Organization71 Dutch Corporate Governance Code71 Governance framework72 Risk management system74 Financial Policy75 Risks78 Information about the DSM ShareSection 4 Royal DSM N.V. Financial statements 200582 Consolidated financial statements82 Summary of significant accounting policies86 Summary of overviews90 Notes to the consolidated financial statements of Royal DSM N.V.128 Financial statements of Royal DSM N.V.133 Other information133 Auditor’s report134 Profit appropriation134 Special statutory rights136 DSM figures: five-year summary139 Explanation of some financial concepts and ratios140 Index - Financial statementsAnnual Report 2005www.dsm.com2

Key financial dataThroughout this annual report:1. Operating profit, EBITDA and EBIT do not include exceptional items.2. Net profit is defined as Net profit attributable to equity h olders of Royal DSM N.V.(consolidated) 2005 2004key figures (x € million):net sales 8,195 7,832operating profit plus depreciation and amortization (EBITDA) 1,311 1,067operating profit (EBIT) 808 562net profit excluding exceptional items 563 423net result from exceptional items -36 -130net profit 527 293dividend 207 190depreciation and amortization 503 505capital expenditure 401 348acquisitions 573 -cash flow (net profit plus amortization and depreciation) 1,066 928net debt 832 339shareholders’ equity 5,474 5,068*total assets 10,025 9,626capital employed 6,221 5,558per ordinary share in €:net earnings excluding exceptional items 2.87 2.09net profit 2.68 1.41dividend 1.00 0.875shareholders’ equity 27.45 25.19ratios (%):operating profit / net sales (ROS) 9.9 7.2EBITDA / net sales 16.0 13.6CFROI 9.1 8.1net debt / equity plus net debt 0.13 0.06*equity / total assets 0.55 0.53*EBITDA / net finance costs 18.7 19.1cash flow from operational activities / net sales 8.5 11.8workforce:year-average workforce 22,839 24,503workforce at 31 December 21,820 24,204* Excluding the impact of the temporary reclassification of cumulative preference shares A in 2004.Annual Report 2005www.dsm.com3

Message from the ChairmanPeter ElverdingA very good year2005 was an important milestone in ourcompany’s history. We achieved strongprogress on virtually all fronts, and thus laida solid foundation for further value-creatinggrowth. New opportunities will be capturedwith great vigor in the context of ourambitious strategy for the next five years:Vision 2010 – Building on Strengths.Managing Board of Directors (from left to right): Henk van Dalen, Feike Sijbesma, Jan Zuidam (deputy chairman),Peter Elverding (chairman) and Chris Goppelsroeder.DSM is financially sound, technology-rich and hasembarked on a new strategic course with newopportunities and challenges.The financial results for 2005 weresignificantly better than those for 2004. Netsales growth amounted to almost 5%, andour operating profit of € 808 million was thehighest DSM has ever achieved. In 2005 wecreated substantial value, as the Cash FlowReturn on Investment (CFROI) of 9.1%clearly exceeded the weighted averagecost of capital (WACC).The company benefited from balancedmarket conditions, an economy thatwas in better shape (although there weremarked differences per region), on averagestable currency rates and a variety ofself-generated activities, ranging fromoperational excellence programs to thesuccessful market introduction of newproducts and applications. I find it particularlygratifying to note that almost all our businessgroups and units were able to improve theirsales and operating profit.2005: a very good year+44%Operating profit up € 246 millionto € 808 million9.1%CFROI, clearly exceeding WACC49%Total Shareholder Return+14%Dividend rise to € 1.00per share‰#1DSM maintains #1 position inchemicals sector of Dow JonesSustainability World Index-16%Frequency index of all recordableincidents improves to 0.74(2004: 0.88)Vision 2005 completed – new strategyalready in full swingWe have successfully completed ourstrategy Vision 2005: Focus and Value.Major events in the context of the portfoliotransformation during 2005 included theacquisition of resins specialist NeoResinsfrom Avecia and the divestment of ourbakery ingredients activities. The successfulcompletion of Vision 2005 has provided uswith a solid platform from which we can takethe next step, embodied in our new strategyVision 2010 – Building on Strengths. Thisnew strategy focuses on accelerated growthand expansion of the specialty content ofour portfolio, accelerated innovation,expansion in emerging economies, andcontinued operational excellence. The firststeps have already been taken. An extensiveevaluation of Vision 2005 and the rationaleand objectives of Vision 2010 are providedon pages 20-23.Annual Report 2005www.dsm.com4

Message from the ChairmanIn terms of Safety, Health and Environment(SHE) important progress was achieved in2005. At year-end 2005 we had met ten ofour fourteen environmental targets for2006. The frequency index for all recordableaccidents decreased further. In 2005, wemaintained our number one position in thechemicals sector of the Dow JonesSustainability World Index. Moreover,sustainability targets have been included inour new strategy. An extensive descriptionof our activities and ambitions in this respectis presented in our Triple P report for 2005.Where we go from hereAll in all, I would qualify 2005 as a verygood year for DSM, despite some adversedevelopments such as the high and volatilecost of raw materials. 2005 was a yearof historically strong results, a goodperformance with regard to sustainability,and significant progress in our effortsto further exploit value-creatinggrowth opportunities based on theaccomplishments of 2005 and thepreceding years. Our employeesdeserve tremendous appreciation fortheir commitment and perseverance inmaking DSM the better and strongerspecialty chemicals company it is today.It has never been easy, but all the hardwork has clearly paid off. I would also liketo thank our customers and shareholdersfor their enduring support during theexecution of our transformation strategy.We regret that Henk van Dalen, who hasbeen a Managing Board member for sixyears, has decided to take up a careeropportunity outside DSM with effect from1 April 2006. The company is grateful toHenk van Dalen for his 29 years ofcommitment and leadership. He played akey role in the Vision 2005 transformationprocess and in the establishment of thecompany’s new strategic direction. We alsoregret that our Managing Board memberChris Goppelsroeder has decided forpersonal reasons to relinquish his positionwith effect from 1 April 2006. ChrisGoppelsroeder has, among other things,been instrumental in the establishment ofDSM’s new Vision 2010 strategy program.Prior to his appointment as member of theManaging Board, he was vital to theintegration and transformation of DSMNutritional Products. Both colleaguesdeserve great appreciation for their work.DSM is financially sound, technology-richand has embarked on a new strategic coursewith new opportunities and challenges.The successful completion of Vision 2005has paved the way for the next logical step,Vision 2010 – Building on Strengths. In fact,we have already started. And more willfollow as we further leverage the capabilitiesand performance of our company in orderto successfully execute this strategy.Peter ElverdingChairman of the Managing Board ofDirectorspeter.elverding@dsm.comAnnual Report 2005www.dsm.com5

‰‰‰DSM Dyneema producesDyneema ® , a lightweight,super strong high performancepolyethylene fiber. Dyneema ® isan important component in ropes,cables and nets in the fishing,shipping and offshore industries.DSM Coating Resinsproduces syntheticcoating resins for use inthe marine industry.‰DSM Fibre Intermediates producescaprolactam as a raw material forNylon-6, which is used in textiles, andacrylonitrile, which is a raw materialfor acrylic fibers.DSM Engineering Plasticsproduces insulator materials for LVswitchgear and ITE components,lighting fittings and armatures,motors, wire and cable, enclosurehousings and equipment.‰electricalPeptoPro ® , a sports recoveryingredient, a product of DSM FoodSpecialties, differs from othersports and energy drinks in that itenables faster replenishment ofmuscle energy stores.‰DSM Melamineproduces melamine,which is mainly appliedin adhesives andimpregnating resins forwood-based panelsused in the constructionindustry.‰DSM Fine Chemicals' productsare used in coatings, resins, dyes,pigments, polymers and plasticsall around the world, both as baseproducts and as additives that givethe end products special qualities,such as strength, UV resistance andelasticity.

DSM everywhere…an innovative companyDSM Nutritional Products producesvitamins and UV filters for use in thepersonal care industry.‰‰DSM Nutritional Productsproduces vitamins, carotenoids,enzymes, amino acids and otheringredients for use in the animal feedand pet food industries.DSM NeoResins produces extremelydurable resins specially designed forthe marine industry.‰‰DSM Composite Resins producesunsaturated polyester resins, gelcoats, sizings and binders andpolymeric plasticizers for use in glassreinforced plastics applications in themarine industry.

Innovation‰Beyond bright ideasInnovation is not just about great ideas, state-of-the-arttechnology and high-tech laboratories. It also involvesspotting market trends and opportunities and usingtechnological capabilities to improve the quality of people'slives in a way that is commercially attractive for ourcustomers and for us.With our accelerated transformation into a true specialtyplayer, the importance of innovation has become evergreater. We will make great strides in the coming period, asinnovation is one of the building blocks of our Vision 2010 –Building on Strengths strategy. Our focus will bespecifically on the two growth areas performance materialsand nutritional ingredients.We are demonstrating our intensified commitment toinnovation by e.g. allocating significant additional fundsand by hiring new innovative talents. We are also exploringimportant emerging domains such as personalizednutrition, biomedical materials, specialty packaging andindustrial or ‘white’ biotechnology.Annual Report 2005www.dsm.com8

Navigating for valueDSM has developed technology forstructuring materials and surfaces on ananometer scale. Control of surface andbulk properties and surface chemistrieson this scale has led to interesting,valuable functional properties. We firstused this technology to develop antireflectivecoatings for the flat-paneldisplayindustry and more recently forother applications such as picture displayglass. These anti-reflective coatingsystems have excellent optical andmechanical properties.Their nanostructured nature means thatthese properties can be achieved in asingle layer, whereas competitivetechnologies rely on at least two, andsometimes as many as six optical layers.In the coming years DSM plans to targetapplications such as transparent UVblockingcoatings and anti-foggingcoatings. Also under development areanti-fouling functionalities, i.e. coatingscapable of resisting the adhesion ofbiological materials such as proteins ormicroorganisms.Brewers Clarex – a clear solutionAny beer has a tendency to become turbidafter some time. How can beer bestabilized without affecting its taste andcolor? Brewers are dedicated to their owntraditional recipes. They do however makeuse of adsorbents which remove essentialcomponents such as protein andpolyphenol. These are crucial for flavor andmouth feel. After a period of intenseresearch, we found a clear solution to thisproblem: Brewers Clarex. BrewersClarex is a totally new concept, basedon enzyme technology, that providesbrewers with an innovative method forpreventing turbidity in beer. It does notremove the polyphenols and proteins fromthe beer, and it saves costs. BrewersClarex was launched at the EuropeanBrewing Conference in Prague, CzechRepublic, in the summer of 2005.Open Innovation at DSMIncreasing technological complexity andmarket developments evolving at highspeed make cooperation indispensable.For DSM, innovation is open, multi-siteand multidisciplinary.Building knowledge and expertise inpartnership with others can createleverage for everyone involved. Wheredesirable, DSM works together withexternal partners. For example, we havescientific and technological collaborationsin place with some 2,000 universitydepartments. We participate in renownedresearch organizations and networks,such as Gene Alliance (Germany), theBiocatalysis & Bioprocessing ofMacromolecules Consortium (USA), theWageningen Center for Food Sciencesand the Dutch Polymer Institute, both inThe Netherlands.DSM also invests in company start-ups.This enables us to exploit trends morequickly and meet social needs such asweight control, health products andhealth advice.Annual Report 2005www.dsm.com9

DSM everywhere…an international company

‰InternationalizationWhat boundaries?Some 40 years ago, DSM took the last step in the transitionfrom mining to chemicals. Since then, the company hasgradually evolved from a national to a Europeanorganization. Our strategies of the past ten years speededup the company’s internationalization towards a globalplayer. Important drivers in this development were significantportfolio changes, technological progress, new cooperativepatterns and increasing efforts to exploit the opportunities ofthe emerging economies.DSM’s internationalization is a multi-faceted process, clearlyvisible in terms of staff, distribution of sales and assets, andour increasing presence in emerging economies.Internationalization is also reflected in our research anddevelopment activities. In 2005 we established the newDSM R&D Center China in Shanghai, and opened the doorsof a new joint lab with the prestigious Shanghai FudanUniversity.Annual Report 2005www.dsm.com12

Distribution of salesOne aspect of our further internationalizationconcerns the spread of sales. In 2000around 70% of our sales were destined forWest European markets. Today, sales aremore evenly spread across the world, in analmost 50:50 balance between WesternEurope and the rest of the world.An important factor is that DSM has inrecent years won new customers especiallyin Asia and the USA.In 2005, sales outside North America andEurope increased by some € 200 million,while sales in China increased from $ 500million to over $ 580 milion. Further internationalizationof sales will continue in thecoming years, partly because our investmentand acquisition decisions will, morethan in the past, take account of the needfor a presence in the emerging economies.Staff around the globeDSM's profile as a mainly Europeancompany is changing in terms of thecomposition of our staff. At year-end 2005about one out of every three DSMemployees was based outside Europe. Theinternationalization of our staff received anextra boost with the acquisition of DSMNutritional Products, which also led tosubstantial expansion in China. Of DSM’stotal staff, approximately one out of everysix employees – all joint ventures included –is now active in China.Since greater diversity and furtherinternationalization of our staff arespearheads of our new Vision 2010 –Building on Strengths strategy, theinternationalization trend of the past fewyears is set to continue.Stronger presence in the emerging economiesOver the past few years, economic growthand market demand have clearly shiftedfrom Europe to countries in the Asianregion, notably China and India. DSM ofcourse took this development into accountwhile crafting its Vision 2010 strategy.Increasing DSM’s presence in theemerging economies is one of the strategy’sfocal points. Investment andacquisition decisions will be geared toreinforcing the company’s positions inthese parts of the world. DSM has beenpresent in the US and China for severaldecades, but in 2000 the internationalizationof business began to receiveconsiderable impetus. Since then,business has grown, both organically andvia acquisitions, in countries such as theUS, Japan, China and India. DSM willfurther improve the specialty profile of itsportfolio and expand its presence intoday’s fastest-growing emergingeconomies.Annual Report 2005www.dsm.com13

DSM everywhere…Operational Excellence

‰Operational ExcellenceBetter sourcing, production and sellingIn 1999, DSM started its Operational Excellence programto optimize the flow of the company’s business processesof sourcing, production and selling. Operational Excellencespans a wide range of projects aimed at realizing costreductions, increasing the efficiency of plants andorganizations, improving product quality, strengthening thepurchasing organization and enhancing the value pricingof our products and services. Operational Excellencestarted with a focus on streamlining and standardizingprocesses at DSM in order to arrive at a betterperformance at lower costs. Purchasing and value pricingare two important more recent areas of attention.Operational Excellence has yielded significant results overthe past years and it is included as an essential buildingblock in our Vision 2010 – Building on Strengths strategy.Annual Report 2005www.dsm.com16

Excellence in sourcingIn 2005 DSM established a new, globallyactive sourcing organization with the aimof improving the company’s purchasingpractices across the board and thuscontributing to DSM’s bottom line. Manyinitiatives have been launched in thiscontext, ranging from the introduction ofbest purchasing practices to theimplementation of new performancemanagement models. The purchasingobjectives outlined in 2004 were alreadyto a large extent achieved in 2005.Excellence in productionManufacturing Excellence is a programdesigned to enhance the effectivenessand professionalism of all production,maintenance and project work in the areaof manufacturing. Plant output may beboosted without significant investments,efficiency improvements may be realizedand costs saved. The results of thisprogram so far are quite worthwhile.Significant yield, quality and reliabilityimprovements and cost reductions havebeen realized. Manufacturing Excellencehas been implemented mainly within DSMNutritional Products and the IndustrialChemicals cluster. Implementation in theother parts of DSM is underway.Excellence in sellingDSM’s Excellerate program focuses oncreating an optimum balance betweenthe value of supplied products andservices and the required investments.Value pricing is becoming more and moreimportant for DSM now that the companyis marketing ever more specialties. Sellingprices should reflect the perceived valuethat DSM creates for its customers andend-users.That’s why DSM started this program,covering elements such as the upgradingof pricing skills, the introduction of newsystems, training and the hiring of newprofessionals and a change in themindset of marketing and salesprofessionals.Annual Report 2005www.dsm.com17

Report by the Managing Board2005 was a strong year for DSM on many counts.Conditions for DSM products were generally good inmost markets.‰Financialnet sales and suppliesNet salesSuppliesx € million 2005 2004 2005 2004Life Science Products 1,479 1,484 1,531 1,582DSM Nutritional Products 1,914 1,899 1,946 1,910Performance Materials 2,447 2,007 2,459 2,013Industrial Chemicals 1,687 1,570 1,899 1,747Other activities 485 474 498 485intra-group supplies - - -321 -303Total, continuing operations 8,012 7,434 8,012 7,434Discontinued operations 183 398 183 398Total DSM 8,195 7,832 8,195 7,832Sales by core activityexcl. discontinued activities200419% Life Science Products25% DSM Nutritional Products26% Performance Materials21% Industrial Chemicals9% Other18%24%31%21%6%2005operating profit plus depreciation and amortization(EBITDA)x € million 2005 2004Life Science Products 266 226DSM Nutritional Products 376 330Performance Materials 410 249Industrial Chemicals 246 207Other activities -3 24Total, continuing operations 1,295 1,036Discontinued operations 16 31Total DSM 1,311 1,067operating profit (EBIT)x € million 2005 2004Life Science Products 126 79DSM Nutritional Products 252 202Performance Materials 305 165Industrial Chemicals 165 120Other activities -49 -20Total, continuing operations 799 546Discontinued operations 9 16Total DSM 808 562EBITDA / supplies 2004 and 2005excl. discontinued activities20042005Life ScienceProductsDSM NutritionalProductsPerformanceMaterialsIndustrialChemicalsDSM (total)0 5 10 15 20MarketsEnd-use marketsSales by originexcl. discontinued activitiesSales by destinationexcl. discontinued activities30%Human Health & Animal Health29%11.2%Netherlands10.8%11%15%PharmaceuticalsBuiling & construction10%15%43.0% Netherlands44.3%9.9%4.6%GermanyUnited Kingdom10.2%5.7%6%Automotive / transport6%5.4%France4.2%8%7%TextilesAgriculture9%6%29.1% Rest of Europe28.0%19.6%21.8%Rest of EuropeNorth America20.1%21.3%4%2%17%Electrics / electronicsMetal & Machine buildingOther4%2%19%16.9% North America3.7% China4.1% Asia-Pacific3.1% Rest of the world16.3%3.7%4.2%3.6%5.7%11.8%9.9%ChinaAsia-PacificRest of the world6.2%13.3%8.1%200420052004200520042005Annual Report 2005www.dsm.com18

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsDevelopments in 2005Group review2005 was a strong year for DSM on manycounts. Conditions for DSM products weregenerally good in most markets. Despitehigh and volatile oil and energy prices,which were further influenced in Septemberby the hurricanes in the USA, industrialproduction in most sectors relevant to DSMdeveloped at favorable levels. The situationin the American automotive industry,however, gave some cause for concern.Demand growth in Asia maintained its highmomentum, while in Europe economicgrowth was still lagging behind the rest ofthe world, although it showed signs ofstrengthening. In these conditions DSMsuccessfully managed to consolidate thehigh sales volumes achieved in 2004, whilemargins were widened due to strong pricingand the favorable effects of various costcontrolinitiatives. Volatility on the currencymarkets was relatively limited in 2005.At € 8,195 million, net sales increased byalmost 5%, which was exclusively due tohigher sales prices, as overall sales volumeswere flat and the effects of currencyfluctuations on sales as well as the neteffects of acquisitions and divestmentswere both close to zero.Bottom-line results improved significantlyin 2005. EBITDA increased by 23% to€ 1,311 million, and the operating profitincreased to € 808 million (up 44% from2004) – which represents the highestoperating profit in DSM’s history, surpassingthe previous record level (€ 751 million)achieved in 2000. It is important to notethat, while the 2000 results were recordedmainly on the back of a cyclical peak inearnings of DSM’s petrochemical activities,results in 2005 were for the greater partachieved with specialty businesses. Theinherent quality of DSM’s current profitprofile is undoubtedly higher than when theprevious record was set. In 2005 all clusterscontributed to these improved results.DSM created substantial value, with itsCFROI of 9.1% clearly exceeding thecompany’s WACC.Annual Report 2005Business review per clusterIn the Pharma-related activities of theLife Science Products cluster, the effectsof restructuring projects to address theunfavorable market conditions in bothcustom manufacturing and anti-infectivesyielded clearly improved profitability.Conditions in both markets more or lessstabilized in 2005. Further profitimprovement actions from DSM will benecessary in order to attain the desiredprofitability levels. This will involve completionof the ongoing restructuring projects atDSM Anti-Infectives and at the Linz site(Austria), and further reduction of the assetbase of DSM Pharmaceutical Products.Also, the development of partner ships withNorth China Pharmaceuticals Corporationis in process. Significant progress wasachieved in 2005 with this project.With regard to the food-related activities ofthe Life Science Products cluster, DSMFood Specialties once again recordedstrong results, hinging on the innovativeportfolio of ingredients developed by thisbusiness group. The successful divestmentof the below-average-performing activitiesof DSM Bakery Ingredients contributed tothe improved overall performance of thiscluster, yielding an overall EBITDA oversales margin from ongoing activities of18.0% in 2005, compared to 15.2%in 2004.DSM Nutritional Products further improvedon its already strong performance of 2004.Top-line growth was limited as the net effecton sales of autonomous volume growthwas more or less equal to the effects ofcontinuing price pressure for some moremature products in the portfolio. Bottomlineresults improved further, however,thanks to an improving product mix and thelowering of cost levels resulting from theactivities undertaken in the framework ofthe VITAL program. Significant steps weretaken to structurally strengthen the positionof Vitamin C, for instance, by concentratingproduction on the site in Scotland (UK) andclosing the plant in New Jersey (USA). Thecompetitive position for this basic productwill be further strengthened when theenvisaged cooperation with North ChinaPharmaceutical Group Corporation (NCPC)in China commences. Besides improvingthe efficiency of operations, muchemphasis was placed on developinginnovative tailor-made formulations andnew ingredients for the various marketsegments in which DSM NutritionalProducts is active.www.dsm.comOverall EBITDA over sales from ongoingactivities of DSM Nutritional Productsamounted to 19.6% in 2005, compared to17.4% in 2004.The Performance Materials cluster postedvery good results in 2005. Of the total toplinegrowth of 22% compared to theprevious year, 12% was attributable to theinclusion of NeoResins, acquired at thebeginning of February 2005 and now part ofthe DSM Coating Resins business group.Moreover, Chinese resins manufacturerSyntech was acquired at year-end 2005.Bottom-line results of the PerformanceMaterials cluster further benefited fromgood demand for DSM’s products, whichenabled a substantial margin improvementdespite generally high and volatile rawmaterial prices. The overall product miximproved due to strong growth ofspecifically in-house-developed productssuch as Dyneema ® , various engineeringplastics and special grades of compositeresins. In addition, the ongoing efforts tostreamline business processes in theframework of the Operational Excellenceprogram and the successful restructuring atDSM Elastomers contributed clearly to thestrong performance of this cluster. Overall,the EBITDA over sales margin from ongoingactivities amounted to 16.8% in 2005,compared to 12.4% in 2004.The Industrial Chemicals cluster alsoyielded strongly improved results in 2005,benefiting from favorable market conditionsfor fiber intermediates and for fertilizers. Theoverall tight supply/demand balance inthese markets facilitated good margins,despite the high and volatile raw materialprices. Results of fiber intermediates wereheld back in the second half of 2005 due tothe prolonged shutdown of thecaprolactam plant in Nanjing (China) inorder to enable construction work for theplanned doubling of capacity to 140,000metric tons/year. DSM Melamine had tocope with some oversupply on the globalmarkets, which prevented it from fullypassing on the high feedstock prices, andconsequently had a clearly weaker year.This was especially the case in the USA,above all due to the high natural gas andammonia prices. DSM Agro achievedan even better performance than in thealready strong 2004, driven mainly byhigh fertilizer prices.19

Report by the Managing BoardStrategy – looking back and aheadFinancialsDSM’s financial position remained solid in2005. The major credit rating institutionsreconfirmed their Single A credit rating, withMoody’s slightly upgrading their outlook to‘Stable’ in May 2005. Net debt at year-end2005 amounted to € 832 million (€ 339million at year-end 2004), representing agearing (defined as net debt/total capital)of 13%.DSM generated healthy net cash providedby operating activities in 2005, totaling€ 693 million, or 11.8% of net sales.Capital expenditure (excluding acquisitions)amounted to € 401 million (2004: € 348million), and was below depreciation level(€ 503 million), as planned. Major investmentprojects were e.g. the expansion of thefermentation capacities for arachidonic acidof DSM Food Specialties in Italy and in theUSA, the construction of new productionlines for Dyneema ® and Dyneema ® UD atthe Greenville site in the USA, expansions ofthe sterile formulation facilities at the samesite, new plants for various engineeringplastics materials at sites in the Netherlands,and the doubling of capacity of thecaprolactam plant in Nanjing (China).Acquisitions (mainly NeoResins) anddivestments (mainly DSM Bakery Ingredientsand Styrene-Butadiene-Rubber (SBR)) onbalance resulted in a net cash outflow of€ 372 million in 2005.In view of the favorable development of itsshare price, DSM decided in August 2005to split its shares two-for-one. The earningsper share excluding exceptional items in2005, calculated for the full year on thebasis of the share split, increased to€ 2.87, against € 2.09 in 2004. DSM paidits shareholders a total of € 183 million individends. The achievements of the pastyear were recognized by the financialmarkets, resulting in an increase in theDSM share price of 45% in 2005, clearlyoutperforming the market. With a TotalShareholder Return (TSR) of 49%, DSMalso outperformed the average TSR of itsEuropean chemical peer group, which was33% in 2005.Strategy – looking back and aheadEvaluation of Vision 2005Towards the end of 2005 DSM completedits Vision 2005: Focus & Value strategy. Theoverriding goal of this strategy had been totransform DSM from the predominantlycommodity chemicals-oriented companythat it was in 2000 into a leading multispecialtyplayer. DSM wanted to accelerateits growth in the areas of life sciences andperformance materials, while generatingmore stable earnings growth. The Vision2005 strategy objectives introduced inSeptember 2000 have to a large extentbeen fulfilled.- Withdrawal from petrochemicals andaccelerated growth of life scienceproducts and performance materials toapproximately 80% of salesM&A actions formed a crucial element inthe transformation process and wereplanned and executed carefully and inphases. In 2001 DSM sold its profit rightsin Energie Beheer Nederland(participations in gas and oil exploration)to the Dutch state and in 2002 it divestedits petrochemical activities to SABIC. Thetotal proceeds from these transactionsamounted to € 3.2 billion net, which DSMused to finance the acquisition of theVitamins & Fine Chemicals division fromRoche in September 2003 (€ 1.75billion), among other things. This divisionwas renamed DSM Nutritional Products.A transformation and integration project,named VITAL, successfully integrated thebusinesses into the DSM organization,structurally improved their performanceand prepared them for further growth. Afourth action was the acquisition of resinsmanufacturer NeoResins in February2005, to expand the coating resinsportfolio in the Performance Materialscluster (€ 523 million). Other adjustmentsof the portfolio were the acquisition ofCatalytica in late 2000 and thedivestments of DSM Engineering PlasticProducts in 2001 and of DSM BakeryIngredients (excluding Baking Enzymes)and the Styrene-Butadiene-Rubber(SBR) activities in 2005. As a result of theportfolio transformation, by 2005 almost80% of DSM’s sales came from itsbusinesses in life science products andperformance materials.- More stable and higher earningsCash flow (EBITDA) was stable yet at toolow a level in the economically difficultperiod 2001-2003 1 , but it saw a steadyincrease in 2004 and 2005, when theacquisitions of DSM Nutritional Productsand NeoResins, combined with clearimprovements in other businesses, had apositive effect.- Operational ExcellenceIn addition to the merger and acquisitionactivities in the context of our Vision 2005strategy, a large number of OperationalExcellence projects and cost efficiencymeasures clearly contributed to thehigher profitability levels, both in 2004and 2005. DSM started its OperationalExcellence program in order to optimizecost efficiencies and the flow of businessprocesses: sourcing – producing –selling. For the production part, theManufacturing Excellence program wasdeveloped. Manufacturing Excellenceenhanced the effectiveness andprofessionalism of all operations,maintenance and project work withinmanufacturing. The program is beingimplemented successfully, mainly in theIndustrial Chemicals and NutritionalProducts clusters. Other (parts of)clusters have started the program and willfinalize it in 2006/2007.The portfolio transformation andnumerous operational excellenceprojects have significantly improvedDSM’s profit profile. Throughout thetransformation, DSM furtherstrengthened its financial basis. TheSingle A credit rating from the major creditrating institutions was maintainedthroughout the Vision 2005 period.1Excluding the petrochemicals businesses sold in 2002.Annual Report 2005www.dsm.com20

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial results- Sales around € 10 billion by 2005Looking back at Vision 2005: Focusand Value, it is fair to say that DSM hassuccessfully accomplished this strategy.The € 10 billion sales target turnedout to be beyond reach, due to weakeconomic conditions in 2001-2003 andthe substantial weakening of the USdollar – factors whose full extent was notenvisaged in the strategy scenarios madein 2000. DSM favored quality over quantityand refrained from buying sales growth forthe sake of reaching this target.- Market capitalization to doubleShareholders benefited from DSM’s policyof preferring quality over quantity, with adoubling of the share price and a TotalShareholder Return of 215% during theVision 2005 strategy period.DSM share Sept. 2000 - Dec. 2005in 35302520151012/00 12/01 12/02 12/03 12/04 12/05New strategy: Vision 2010 – Building onStrengthsIn October 2005, DSM presented its newfive-year strategy Vision 2010 – Building onStrengths. The strategy was the outcomeof the Corporate Strategy Dialog. This study– a twelve-month process – thoroughlyanalyzed global economic and social trendsand conditions, technologicaldevelopments, price scenarios for energyand raw materials, differentiated growth inthe various geographical regions and endmarkets,factors potentially impacting onDSM’s portfolio, and the four focal businessareas for DSM (nutrition, pharma,performance materials and industrialchemicals).The analyses conducted in the frameworkof the study resulted in a clear set ofconclusions. The outside-in analysesshowed that DSM had to take into accounta growing divergence in raw material costs.While prices for oil-based raw materials willremain high, costs of bio-based rawmaterials (e.g. sugar and molasses) areexpected to decline further. This willenhance the competitiveness offermentation-based production – one of thetechnologies in the field of white biotech –in the future.Demographic trends in combination witheconomic developments in emergingeconomies (such as China, India, Russiaand Brazil) offer threats as well asopportunities. For about 35% of DSM’scurrent portfolio these rapidly growingeconomies, with a strongly increasingbuying power of the middle class, offerinteresting opportunities for growth.Competition from low-cost countries posesthreats to the competitiveness of about25% of DSM’s portfolio. Markets indeveloped countries remain interesting, butopportunities here will have to be capturedmainly via innovation. For 40% of DSM’sportfolio the impact of low-cost countries isneutral. This mainly relates to products witha local-for-local approach (e.g. fertilizers)and markets with a very high entry barrierbased on specific technological positionsand IP-protected innovative products.Furthermore, extensive analyses of globalmega-trends in society and technologyresulted in the identification of a number ofpromising innovation areas, offeringattractive opportunities for the future: health& prevention (healthy foods, pharma, andpersonal care), sustainable & cleanresources (e.g. fermentation-basedproduction and eco-friendly coatingtechnologies), and materials with advancedproperties (notably in the markets forengineering materials and coatings).The inside-out analyses showed that DSMshould grow and enhance the quality of itsportfolio along two paths: it should strive foraccelerated growth of the specialtyleadership components in its portfolio, andit should strengthen the specialty profile ofits portfolio, supported by targetedacquisitions. DSM should boost itsinnovation efforts in a market-driven way.This will be done by accelerating elevenselected projects, via an active newbusiness development policy in an openinnovation model and by initiatinginnovation towards carefully selectedEmerging Business Areas to capture thefuture, mid to long-term opportunitiespresented by the three key innovation areasmentioned.DSM should improve the geographicalspread of its activities in order to reduce thepresent imbalance between sales by originand sales by destination. This imbalance isundesirable: it makes DSM’s results moresensitive to currency fluctuations andcreates increasing competitive pressure forcertain products from producers based inlow-cost countries. Capturing theopportunities of demand growth inemerging economies and expandingproduction in low-cost countries, whereappropriate, will improve the geographicalspread and enhance competitiveness.Operational Excellence will remain a keysuccess factor as cost efficiency continuesto play an important role across many of ourbusinesses. Consequently, DSM willvigorously continue and expand its currentefforts in the various fields of effective costmanagement and business processstandardization.The overall conclusion is that DSMpossesses a strong base to build on and isfit to capture the opportunities and to facethe challenges presented by the future. Thisis why the new strategy program is calledVision 2010 – Building on Strengths.Annual Report 2005www.dsm.com21

Report by the Managing BoardStrategy - looking back and ahead – Corporate GovernanceFour Emerging Business Areas (EBAs):Biomedical Materials An increase in chronicdiseases, growing demand for tailored therapiesand converging technologies in pharma,nutrition and materials form the rationale behindthe selection of this EBA. Dyneema ® Purity – afirst example in this field – stands for a speciallydeveloped, high-performance polyethylene fiber,made available to the medical device industryfor use in surgical implants. Target areas forfuture innovation are drug delivery systemsand coatings for stents using nanotechnology.Advanced polymer technology can offersolutions superior to metals and ceramics inthese high-performance and value-addedniche segments.Specialty Packaging The drivers leading tothe choice of this EBA are growing awarenessof the importance of food quality, increasinginteraction between a product and its packagingand upcoming regulatory changes. DSM aimsto develop innovative packaging, for examplesolutions for food products, with innovativebarrier properties relating to freshness, release ofodors, and the ability to monitor the historyof the product.Personalized Nutrition The PersonalizedNutrition EBA builds on DSM’s strengths innutrition, food and biotechnology. Based onscientific evidence Personalized Nutritionaddresses certain health risks by offeringtailor-made and specially developed nutritionalproducts that fit individual consumers’ geneticprofiles and other factors, such as age andlife-style. This way health and well-being canbe promoted, whereas the risk of certainhealth problems may be reduced. DSM isalready involved in this personalization trendvia a participation in a US start-up whichdevelops and commercializes genetic tests forpersonalized health and wellness advice.White Biotechnology With the WhiteBiotechnology EBA DSM will further boostthe application of nature’s toolset, for examplemicro-organisms and enzymes, to theproduction of (fine) chemicals, materials andfuels from renewable resources. A growingcost spread between hydrocarbon andcarbohydrate feedstock as well as advancesin science and technology will allow WhiteBiotechnology to become a competitivealternative in an increasing range of applications,including nutritional ingredients, fine chemicals,performance materials and base chemicals.DSM will focus on opportunities where WhiteBiotechnology enables drastic processimprovement compared to the chemicaltechnologies.ObjectivesDSM’s new strategy focuses onaccelerating profitable and innovativegrowth of its specialties portfolio. Theoverall objective of Vision 2010 is strongvalue creation, which should beaccomplished via three main levers:1. Market-driven growth and innovationBased on existing leadership positions,DSM intends to grow its sales in fourEmerging Business Areas: personalizednutrition, specialty packaging, biomedicalmaterials and white/industrialbiotechnology. This growth will beaccelerated by innovation in the marketstargeted.DSM also intends to further grow thespecialty content of its portfolio. In thisconnection the definition of specialties hasbeen made more specific. Whereas underVision 2005 all life science products andperformance materials businesses wereclassified as specialty, as of 2006,specialties will be businesses that haveproduct, application or custommanufacturing leadership. Under thissharper definition, the current specialtyleadership portfolio represents 40% ofDSM’s total sales, versus 60% consisting ofproducts that compete primarily on thebasis of price or costs.By 2010 DSM aims to have grown itsspecialties portfolio to 50-60% of sales,coming from 40% under the new specialtyleadership definition. Profitable growth viaspecialty leadership business, innovationand geographic growth should lead to anunderlying sales growth rate of 3-5% peryear (including small acquisitions) under anassumed economic scenario andSalespercentages are based on estimates21%Specialty Leadership40%increasing over time within this bracket. Theeconomic scenario assumes a constanteuro/dollar exchange rate of 1.20, a crudeoil price of $ 50 per barrel, mid-cycle GDPgrowth rates for the various regions of theglobe and generally balanced supply/demand conditions. Moreover, major scopechanges via acquisitions or divestments areexcluded from the assumed scenario.Organic growth will be complemented withselective acquisitions in the field of nutritionand performance materials.To boost innovation, significant additionalresources will be made available. Some250 new people will be recruited to work indedicated, business-driven innovationteams. On average € 50 million per year(€ 30 million in 2006 increasing to € 70million in 2010) will additionally be spenton innovation. About 15% of capitalexpenditure will be allocated to newbusiness development in this context.And the innovation infrastructure in DSM’smain research centers will be upgraded.By 2010, DSM wishes to generate up to€ 1 billion in sales based on theseintensified innovation efforts.2. Increased presence in emergingeconomiesDSM plans to continue the trend ofimproving its globally balanced presence byaccelerating the internationalization of itsasset base and workforce.The internationalization of DSM’s assetbase and workforce progressed rapidlyunder the Vision 2005 program and will beintensified in the coming years. Identifiedopportunities such as demand growth inselected emerging economies have ledDSM to decide to significantly step up itsEBITpercentages are based on estimates34%Specialty Leadership70%79%Cost Leadership60%66%Cost Leadership30%2000200520002005Annual Report 2005www.dsm.com22

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsgrowth efforts in these promising regions.A stronger presence in selected emergingeconomies will also help to create a betterbalance between sales by origin and salesby destination. When evaluating investmentproposals, DSM will take these twoelements into account. In China, whereDSM has been highly active over the pastfew years, the company expects to doubleits sales to more than $ 1 billion per yearby 2010.3. Operational ExcellenceDSM continues to build on its strongOperational Excellence capabilities to sustainand enhance the cost competitivenessof its businesses.Over the past five years DSM hassuccessfully introduced and implementedOperational Excellence programs. So far,the focus has been mainly on standardizationof business processes in manufacturing,order fulfillment, finance and costing andICT infrastructure. These programs will befurther extended to include more parts ofDSM’s business portfolio. New initiativesare envisaged in purchasing and prospectto-order/ pricing excellence processes.DSM will also continue to consistentlylook at productivity improvement inits businesses.SustainabilitySustainability is at the heart of doingbusiness in all our fields. Having beennamed the number one in the chemicalindustry sector of the Dow JonesSustainability World Index for the secondyear in a row, DSM has a leading position todefend, and the company has defined theareas in which it intends to further improve.DSM aims to retain its top positions withregard to Safety, Health and the Environment,for which it has set new ambitious targetsin the context of the new strategy. DSMplans to put effort into eco-efficiency and agradual increase in the use of renewableresources as raw materials for its products.Also, the Emerging Business Area of WhiteBiotechnology will aim to exploit the potentialthat the use of biotechnology offers in termsof new products and cleaner and morecost-efficient industrial processes. Inaddition, DSM aims to further diversifyand internationalize its workforce.Organizational modelIn order to leverage the capabilities ofthe various business groups, the currentorganizational model will be aligned withthe Vision 2010 strategy. Pharma activitieswill be grouped into a new Pharma clusterand the activities of DSM NutritionalProducts and DSM Food Specialties willbe combined into a new Nutrition cluster.Performance Materials and IndustrialChemicals will remain as clusters.Innovation will be anchored at cluster level,and DSM will also establish a DSMInnovation Center at corporate level. Thisorganization will support innovation in thebusinesses. The Innovation Center will leadthe Emerging Business Area programs andthe corporate technology, licensing,venturing and intellectual property activitiesof DSM.Value creationWith Vision 2010 – Building on StrengthsDSM expects to create substantial value.The company has set itself the objectiveof creating more value through higherprofitability. DSM targets a CFROI (Cash-Flow Return on Investment) in the Vision2010 period of more than 50 base points(0.5%) over its annual weighted averagecost of capital (WACC).Specific margin targets will apply for thevarious clusters. The new clustering ofbusinesses will allow for more tailoredEBITDA/sales margin objectives per cluster:- Nutrition: > 18%- Pharma: > 18%- Performance Materials: ≥ 16%- Industrial Chemicals: ≥14% (on averageover the cycle)By realizing these value creation targets,DSM aims to achieve a Total ShareholderReturn that exceeds the average of DSM’speer group 2 .Corporate GovernanceGovernanceThe general characteristics of DSM’sgovernance system are described inthe section of this annual report entitledCorporate Governance, Risk Managementand Internal Control (page 70). For 2005a number of developments regardingCorporate Governance at DSM can bereported, although in this respect the yearwas not as eventful as the preceding one, inwhich the new Dutch Corporate GovernanceCode (Tabaksblat Code) was published.In April 2005, the Annual General Meetingof shareholders discussed the way DSMapplies the Dutch Corporate GovernanceCode. With regard to the direct appointmentof new Supervisory Board members and anew Managing Board member, the relevantregulations were complied with. Furthermore,a detailed remuneration policy forSupervisory Board and Managing Boardmembers was submitted to the AnnualGeneral Meeting and approved. Theproceedings of the Annual General Meetingwere also made available online via theinternet in 2005. The Vision 2005 PriorityFoundation was dissolved because its goal,an orderly execution of the agreed Vision2005 strategy, had been achieved.Internal Control was strengthened in 2005by a revision of the Corporate Requirementsand a thorough and detailed implementationand compliance program via the so-calledTrue Blue project. In this project, flyingsquads of process and internal controlexperts supported the business groups inintroducing and implementing the revisedCorporate Requirements.In line with independence criteria the term ofone of the DSM lead auditors within Ernst &Young came to an end; responsibilities havebeen transferred to a colleague who has notyet worked on the DSM account.The first operational year of DSM Alert – ourwhistle-blowing procedure – yielded alimited number of cases (twelve). Somecases were directly solved by providingmore information, some did not qualify andsome led to corrective measures.2DSM’s peer group: AkzoNobel, BASF, CIBA, Clariant, Danisco/Genencor, Degussa, EMS Chemie, ICI, Lanxess, Lonza,Novozymes, Rhodia and Solvay.Annual Report 2005www.dsm.com23

Report by the Managing BoardCorporate Governance – Safety, Health, Environment – Human ResourcesRisk ManagementThe Managing Board is responsible for thedesign and effectiveness of the company’srisk management and control systems.The purpose of these systems is to identifyany significant risks to which the companyis exposed and to enable effectivemanagement of these risks. However,these systems can never provide absoluteassurance regarding the achievement ofcorporate objectives and can never entirelyprevent the occurrence of material errors,losses, cases of fraud or the violation oflaws or regulations.Based on these activities and on what isdescribed in the Risk Management sectionof this report (see page 72), the ManagingBoard believes, to the best of its knowledge,that it can assert with reasonable assurancethat the risk management and internalcontrol system of DSM was effective duringthe financial year 2005.A crucial element in the management of acompany is clarity concerning the strategicdirection and objectives as these serve as acompass and yardstick for all parts of theorganization. The Managing Boardtherefore considers the development ofVision 2010 as an important element in itsenterprise risk management. The threemain risks identified in the 2004 CorporateRisk Assessment were also input for thestrategy process:- The entry of Chinese low-cost producersinto DSM markets- The company’s innovative capabilities- The availability of sufficient high-calibermanagers and professionals.In Vision 2010, these three risks have beenaddressed. Special actions and targetshave been formulated for the Chinesemarket and the other emerging markets, anInnovation Center is being created to securethe company’s effectiveness in innovation,and major programs are underway toensure that the company will have at itsdisposal the human and organizationalcapabilities that are necessary to reap thebenefits of the new strategy.Moreover, the strategic process wasaccompanied by a renewed riskassessment at corporate level. In thisassessment, two generic risks wereidentified which are inherent in Vision 2010:- In reality, economic developments maydiffer from the assumed and definedeconomic scenario in the strategy. Thiscould influence the financial results andmay lead to a deviation from theobjectives.- The results of DSM’s increased innovationefforts will also be dependent on our abilityto identify developments in the relevantmarkets and to effectively anticipate thesemarket developments. Market intelligencetherefore needs to be strengthened andmarket and customer orientationenhanced.All parts of DSM’s Governance Frameworkand Risk Management and Internal ControlSystem will of course be reviewed forconsistency with the new strategy andbusiness model.In 2005 DSM continued implementingthe revised Corporate Requirements withgreat vigor as these Requirements are thebasis for sound Risk Management andInternal Control in its operating units. TheRequirements with regard to financial andstrategic processes were already in place atthe beginning of the year, whilst a specialprogram was in progress for theimplementation of the revised Requirementsconcerning safety, health and environmentand legal affairs. The latter programs werecontinued through 2005.In 2005 the focus was on the Requirementsthat relate to the flows of goods and money.These include the Requirements regardingthe purchasing, manufacturing andmarketing & sales processes, as well asdemand supply chain planning and financialcontrol processes. Also included are theUnit Risk Management Requirements,which specify the Risk Managementorganization of the operational units andthe need to perform risk assessments.Finally, part of the Requirements in certainsupport functions are included (humanresources, legal, ICT and security). Theselection was made in such a way as tocover the risk management and control ofgoods and money flows for the primaryprocess, including the integrity of relatedmaster data, clarity of responsibilities andauthorizations, and security of information.In the True Blue project, flying squads ofprocess and internal control expertssupport the bigger entities of most of thebusiness groups in introducing theseRequirements. The squads help the unitsachieve even stricter documentation of theirbusiness processes, sharper clarification ofroles and responsibilities and tightersegregation of duties. In units already usingthe standard DSM ERP environment, orabout to implement it, full advantage istaken of the standard functionality availablein the system, e.g. to describe processes,provide training in them, and checkauthorizations.To ensure lasting compliance, a monitoringtool is being installed in all these units. Thistool automatically triggers checks on theeffectiveness of key controls and reportscontrol overviews. Continuous educationprograms are also being developed.Furthermore the external financial audits byDSM’s auditors Ernst & Young in 2005specifically focused on internal control.In its efforts to strengthen the riskmanagement and internal control system onan ongoing basis, the company subjectedthe Corporate Requirements to a first reviewand update. The progress of the complianceprograms and the effectiveness of the TrueBlue implementations were discussed withthe management of the operational units.The units were also requested to conductself-assessments, and audits were carriedout by Corporate Operational Audit. Theefforts in the field of risk management werediscussed in the Managing Board and theAudit Committee of the Supervisory Board.Support for the implementation of therevised Corporate Requirements will becontinued in 2006. The business groupsthat were visited by squads in 2005 will takecharge of the implementation in the smallerentities themselves. For business groupsand corporate activities not yet covered,True Blue resources will be available in 2006.The activities will be further aligned with thebusiness process standardization effortsconducted by Corporate ICT. A Home Officefunction will continue to support all units.Annual Report 2005www.dsm.com24

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsSafety, Health, EnvironmentSafetyThe frequency index of all recordableincidents involving both DSM employeesand contractor employees, excluding DSMNutritional Products, decreased from 0.88in 2004 to 0.74 in 2005. This is a reductionof 16%. The frequency index of lostworkday cases involving DSM employees,excluding DSM Nutritional Products,improved by 23% from 0.22 in 2004 to 0.17in 2005. At DSM Nutritional Products bothindicators increased, from 1.47 to 1.49 andfrom 0.52 to 0.73, mainly because ofimproved reporting.As from 2005, DSM Nutritional Productshas been officially consolidated in the safetyperformance data of DSM. The frequencyindices for recordable incidents and lostworkday cases for 2005, including DSMNutritional Products, are 0.95 and 0.33,respectively. This will be the starting pointfor comparison in the coming years.Over the past four years, DSM has reducedthe frequency index of all recordableincidents by 17% per year on average.Further reduction will be increasingly difficultand will require longer lasting efforts, whichwill be mainly focused on behavior. In linewith Vision 2010 and the environmentaltargets laid down, DSM has decided to setas a corporate target a 50% reduction for allrecordable incidents involving DSM andcontractor employees in 2010 relativeto 2005.DSM regrets having to report the loss of acontractor employee who had a fatal trafficaccident in Belgium in June 2005.HealthIn 2005, fourteen cases of occupationaldisease were recorded at DSM (excludingDSM Nutritional Products), versus twentycases in the previous year (excluding DSMNutritional Products). The cases range fromergonomic issues and hearing problemsto allergic reactions. A risk inventory andreporting tool was developed and theirimplementation was piloted in two cases.Occupational health practice was updatedand introduced at DSM’s European SHEConference in early 2005.EnvironmentThe number of non-safety incidentsclassified as “serious” decreased from fourin 2004 to three in 2005. The total numberof incidents, including Loss of PrimaryContainment, amounted to 501 in 2005compared to 522 in 2004 (both figuresexcluding DSM Nutritional Products). ForDSM Nutritional Products, this number was147 in 2005. Major emission reductionswere achieved at the caprolactam plant inNanjing, China. Furthermore, an innovativewaste water treatment plant was built at theDSM Food Specialties site in Seclin, France.Of the fourteen environmental targets setfor the period 2000-2006, ten had beenachieved by the end of 2005. DSM has setnew environmental targets for the period2006-2010. Detailed information on thesenew targets and on the company’s safety,health and environmental performance canbe found in the 2005 Triple P Report.Human ResourcesInternationalizationThe internationalization of DSM’s workforcethat has been going on for a number ofyears continued through 2005. This mainlyreflected DSM’s strong expansion in China;the DSM workforce in China – including alljoint ventures – now numbers approximately3,500 people. Between 1999 and 2004 theoverall percentage of non-Dutch DSMemployees increased from 50% to about70%. At year-end 2005 almost 8,000 DSMemployees were based outside Europe. Theongoing trend towards internationalizationis having a clear impact on DSM’s HRprocesses and systems. DSM has adaptedits expatriation policy, which is now beingapplied worldwide. The company’s ongoinginternationalization and the major portfoliochanges that have been effected alsohighlight the importance of good internalcommunication, which is why DSMundertook various new initiatives in thisfield in 2005.Integration of new activitiesThe integration of DSM Nutritional Productsis proceeding swiftly. Various DSM NutritionalProducts processes and systems, includingremuneration and appraisal systems, havebeen integrated into the DSM systems. Inaddition, DSM Nutritional Products hasstarted implementing DSM’s managementdevelopment system and has set up specialprograms for high potentials. Some 1,100DSM Nutritional Products employees tookpart in training courses last year. DSMNutritional Products also implemented theDSM policies and work processes in thefields of production (ManufacturingExcellence) and safety, health and theenvironment. The integration of DSMNeoResins is likewise proceeding well.Annual Report 2005www.dsm.com25

Report by the Managing BoardHuman Resources – Research and DevelopmentHere, the emphasis is mainly on combiningresources to develop new opportunitiesand achieve synergies, for example byadopting an integrated market approachand combining technologies.RecruitmentThe changed portfolio and the company’sinternational growth are triggering a cleartrend towards recruiting managers on theexternal labor market. DSM is moreoverbecoming increasingly conscious of theneed to inject more diversity into itsmanagement community at all levels. Thisis another reason for recruiting managersexternally, international experience being animportant selection criterion. The majorityof the new executives recruited in 2005are non-Dutch. In 2005 new recruitmentprograms were launched that are gearedto specific disciplines, in particular R&Dand finance. Also, recruitment-focusedbusiness courses took place in China.Working climate analysisThe working climate analysis conductedin 2004 yielded valuable conclusions, forexample about employees’ perception oftheir work and the importance of innovationfor DSM’s further growth. Innovation is ofcrucial importance to DSM, and thecompany will be devoting substantialresources to this goal in the coming period.We are well aware that people need aworking environment in which theirinnovative ideas can thrive and in whichmanagement allows scope for this. Wewill therefore promote creativity andcollaboration in all echelons of ourorganization and across the boundaries ofprofessional disciplines. The next workingclimate analysis is scheduled for 2008.DSM as a learning organizationEmployee development obviously continuesto be important. Besides the individualdevelopment of employees, on which anaverage of 18 hours per employee werespent in 2005, DSM is increasingly devotingattention to structured programs to continuedeveloping the leadership and professionalcompetencies that are important to us.For most of these fields, the DSM BusinessAcademy offers special programs. TheTalent Development Centers which wereset up in 2004 have functioned well andare an effective complement to ourmanagement development systems.DiversityThe development of a culture based ondiversity is fundamental to DSM’s HR policy.Targets have been set for each businessgroup in relation to the recruitment,appointment and promotion of women tosenior management positions. At the end of2005 the percentage of female executivesstood at 4% (2004: 3%); the percentage offemale senior managers was 13% (2004:11%). In the context of the new corporatestrategy Vision 2010 – Building onStrengths, DSM will make a strong effort inthe coming period to further increase thediversity and the international character ofour workforce.Operational ExcellenceDSM’s HR organization is working hardto achieve operational excellence. Animportant precondition for operationalexcellence in HR is the development andimplementation of standard work processessupported by SAP HR. At the end of 2005,a global HR model was developed. Thismodel has been ‘localized’ at three sites inSwitzerland, the USA and the Netherlandsand will come into operation in early 2006.The model provides a standardized formatfor obtaining information about HRdevelopments at a particular site, includingabsenteeism, training facilities etc, in orderto enable the HR organization to respondto these developments, or anticipate them,in a more effective way. Furthermore,Shared Service Centers are being set up tosupport SAP HR and, from 2006 onwards,to offer HR services at a regional level.People Matter(s)The major changes that DSM hasimplemented in the Human Resources fieldover the past few years are based on thestrategy outlined in the internal strategy planPeople Matter(s). DSM is on the wholesatisfied with the progress made, and hasrealized most of the ambitions outlined inthe plan. The follow-up activities in the HRfield to be undertaken in the coming periodwill be outlined in a new strategy plan. Thisnew plan will be published in the thirdquarter of 2006, and will among otherthings focus on leadership styles, ways toincrease diversity, the stimulation of trulymarket-driven work processes and aninnovative specialty culture within theorganization, as well as on several otherthemes intended to contribute to thesuccess of DSM’s new corporate strategy.DSM workforce at year-end in:2005 2004Europe 14,206 15,679- the Netherlands 7,258 7,553- rest of Europe 6,948 8,126Asia 3,666 3,488- China 2,581 2,439- rest of Asia 1,085 1,049North and South America 3,667 4,569rest of the world 281 468total DSM 21,820 24,204DSM workforce at year-end in:2005 2004Life Science Products 6,239 6,836DSM Nutritional Products 6,119 6,607Performance Materials 4,441 3,735Industrial Chemicals 2,234 2,566Other activities 2,787 2,953total, continuing operations 21,820 22,697Discontinued operations - 1,507total DSM 21,820 24,204Annual Report 2005www.dsm.com26

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsResearch and DevelopmentInnovation is a key element of DSM’s newstrategy. An important element in therealization of DSM’s innovation ambitions iseffective R&D. R&D programs for thecoming years will be geared to making astrong contribution to innovation and tosupporting process and productimprovements for existing businesses.Apart from business-focused R&Dprograms, accounting for 90% of totalannual R&D expenditure, DSM has aCorporate Research Program in placedirected at building and strengthening thetechnological competences needed tosupport our strategy. In 2005 we continuedto strengthen our technologicalcompetences and to enhance ourknowledge base, both through in-housework and through collaboration with theexternal knowledge infrastructure.ExpenditureExpenditure on R&D in 2005 amounted to€ 290 million (3.5% of net sales), a 1% risecompared to the € 286 million (3.7% of netsales) in 2004. R&D expenditure in lifescience products amounted to 6.3% (2004:to 6.6%). DSM Nutritional Products spent€ 80 million, 4.2% of net sales, comparedto € 75 million (3.9% of net sales) during theprevious year. The figures for PerformanceMaterials are 3.8% (2004: 3.9%) and forIndustrial Chemicals 0.8% (2004: 1.0%).At 31 December 2005, a total of 1,970 staffwere employed on R&D activities,representing some 9% of the total workforce.R&D presence in ChinaIn 2005 the global spread of our R&Dactivities was extended to China, where wetook the first steps to establish a multibusinessR&D presence. In September weopened the DSM R&D Center China inShanghai, which combines R&D facilitiesfor some of our Life Science andPerformance Materials activities. InNovember, also in Shanghai, we opened ajoint laboratory with Fudan University forresearch on new technologies for, amongother things, food and feed ingredients.R&D at Life Science ProductsThe Corporate Research activities of theLife Science Products cluster continued tobuild on and develop three technologyplatforms: Advanced Synthetic Methods,Biotechnology and Food & FeedApplications. In 2005, DSM NutritionalProducts joined the Corporate ResearchProgram. The Advanced Synthetic Methodsactivities focused on improved bondformingreactions with emphasis on catalysisas well as on process intensification. InBiotechnology, the Systems Biologyactivities focused on further developing afunctional genomics platform to best addressthe scientific questions in our businessprojects. In Food and Feed Applications,the program will accelerate ourdevelopment capabilities and contributeto future innovations in both the Humanand Animal Nutrition and Health sectors.Our strong formulation technology playsa key role in tailoring these applications.R&D also made progress in the applicationof so-called micro-reactors. These aresmall continuous reactors with a highcapacity based on the principle of processintensification. These reactors, whichcombine cost-effective synthesis withhigh selectivity, also support oursustainability efforts.DSM has now completed sequencing thePenicillium genome; this will lead to morerational approaches to the developmentof improved strains for the production ofexisting and new products. DSM furtherharvested the fruits of the sequencing ofthe Aspergillus genome, resulting in newpowerful tools for the optimization of itsproduction strains for enzymes in theproduction process for 7-ADCA. Thegenomic knowledge also allows R&D to farmore quickly and effectively select newenzymes to be used in the production of,among other things, new nutritionalingredients.Use of the above-mentioned tools led toseveral new developments. One of theseis a new enzyme, Brewers Clarex ® , whichwas recently introduced in the brewersmarket and which prevents chill-haze inbeer. Most brewers use a chemicaladsorbent to remove protein or polyphenolswhich cause haze after bottling of the beer.The application of the Brewers Clarex ®enzyme is a viable alternative to prevent thishaze formation.Another example is the production of socalledclear milk. Again, the use of specificenzymes enables the production oftransparent, colorless milk products, whichstill have all the nutritional properties of milk,have a neutral taste (i.e. no taste) and allowfor the production of healthy soft drinks.Not all developments are carried outexclusively in-house. Fabuless ® , a naturalproduct for weight management, wasdeveloped by the Swedish company LipidTechnology Provider (LTP), in which DSMVenturing has a stake, whereas theapplication development was carried out byDSM. Fabuless ® is produced exclusively forDSM’s dairy applications. The activeingredient is based on specific lipids andsuppresses the feeling of hunger via anatural mechanism when it is digested.Annual Report 2005www.dsm.com27

Report by the Managing BoardResearch and DevelopmentR&D at DSM Nutritional ProductsR&D activities at DSM Nutritional Productsin 2005 focused on the one hand onmaintaining and improving the profitability ofthe more established part of the businessby improved processes and, on the otherhand, on future growth in new business bydeveloping new products and solutions.For the established vitamins andcarotenoids, the objective is to achievedrastically lower production costs byintroducing new process technology, thussecuring cost leadership. R&D efforts atNutritional Products are building on twostrengths of DSM’s R&D: modern, atomefficientsynthesis applying catalysis andwhite, or industrial, biotechnology. Withrespect to atom-efficient synthesis, severalactivities scouting new routes andtechnologies for improving our keyproduction process are ongoing. R&Dcapabilities in white biotechnology – one ofDSM’s selected Emerging Business Areas –have led to the development of newproduction strains.Regarding the future growth of newbusiness, the activities in Human Health &Nutrition, Animal Health & Nutrition andPersonal Care are aimed at innovativeproducts and product forms. In HumanHealth & Nutrition, the focus is ondeveloping nutritional ingredients that canhelp reduce the risk of chronic disease aswell as improving wellness. For example,recent human studies have confirmed thatour new product Teavigo ® increases fatoxidation. Also in recent human studies, thenew product Bonistein ® , a pure syntheticgenistein, has been demonstrated to helpreduce bone loss. Science has shown thatBonistein ® can improve the benefits ofcalcium supplements, especially incombination with ROPUFA and the vitaminsD and K. Collaborations between DSMNutritional Products and DSM FoodSpecialties have resulted in synergies andjoint project activities. By further aligningcompetences in human nutrition, DSM willboost innovation and focus on combiningnew products with established products forthe development of nutritional solutions.In Animal Health & Nutrition, DSMNutritional Products develops eubiotic (preandpro-biotic) solutions for future marketneeds, among other things. Maintaininghealth and performance in livestock withoutthe use of antibiotic growth promoters hasAnnual Report 2005

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsbecome a core challenge for animal farmersworldwide. In addition, efficacy underpractical farm conditions should not becompromised by new, alternative concepts.The Eubiotics R&D program addressesthese needs. Combining expertise in AnimalHealth & Nutrition with the most advancedin-house technologies for rapid screening ofnatural compound libraries has led to theestablishment of a unique platform toidentify new products. Several developmentprojects target specific solutions for allrelevant species. Improvement of feedconversion remains a key activity. In thesuccessful alliance with Novozymes, jointteams are working on new feed enzymesthat target current unmet needs.Additionally in a new focus area, pet healthand nutrition, DSM Nutritional Products isbuilding on its innovative research in HumanHealth and Personal Care, and isdeveloping attractive new concepts for thepet food industry.In Personal Care, DSM’s focus remains onproviding lead ingredients for sun and skincare. Although there are several pigmentbasedUV filters available, none of themcombine performance with excellentapplication properties. DSM has closed thisgap with a new double-coated titaniumoxide grade, called Parsol ® TX. Parsol ® TX isextremely stable in applications with andwithout UV light and hardly visible on theskin, but nevertheless provides superiorprotection. Furthermore, in skin care, activeingredients which beautify the skin are indevelopment. For example, Allantoin, anaturally occurring compound whichharmonizes skin functions like regeneration,moisture retention and cell renewal, hasbeen added to the program.R&D at Performance MaterialsCorporate Research in the PerformanceMaterials field during 2005 mainly focusedon further reinforcement of the keycompetences that are needed to play aleading role in this field. Competences inchemistry and technology for the synthesisof polymers and resins as well as those inmaterial sciences were expanded, takinginto account new developments in scienceand technology. Special attention was givento the convergence of nanotechnology andbiotechnology and its possibleconsequences for the development of‘smart materials’.Several new developments were made incoatings. In 2005 DSM focused on thedevelopment of functional coatings, suchas anti-reflective coatings and hydrophobic(easy-to-clean) coatings. Work on antireflectivecoatings led to the developmentof OptoClear ® and PictoClear, antireflectivecoating systems based on anano-structured surface.The acquisition of NeoResins expandedDSM’s knowledge base in eco-friendlyresins to include water-based systems andreinforced our technology position in UVcurableresins. This gives us a strong basisfor developing new innovative products.For the automotive industry new resinswere developed that reduce the emission ofvolatiles by 40%. Also, unsaturatedpolyester resins with a lower styrenecontent were developed, for an improvedworking environment in the polyesterproducingindustry.Increased insight into, and understandingof, various material properties and of thebehaviors of plastic materials duringprocessing supports the development ofnew applications of our superior nylon 4.6,Stanyl ® , our thermoplastic elastomersArnitel ® and Sarlink ® and our Dyneema ®fiber. New applications and materials weredeveloped based on Sarlink ® thermoplasticvulcanizate grades. Various new packagingmaterials were developed, which form asolid basis for the Emerging Business Areaof Specialty Packaging. For the petroleumadditives market a new product line wasdeveloped with excellent soot dispersionproperties.Apart from its application in functionalcoatings, nanotechnology is increasinglybeing applied in other areas as well. Forexample, DSM is using nanotechnology todevelop fluids with special optical propertiesto be deployed in lithographic equipmentfor the manufacture of advanced computerchips.DSM Hybrane has developed an advancedpaper coating additive, calledC*TopBrane TM , for a major Europeanmanufacturer of starches and starchderivatives. The additive makes it easier toreplace expensive synthetic binders bynatural materials, thus generatingsubstantial savings for paper makers.Biomedical materials is one of the fourEmerging Business Areas that DSM hasidentified in its Vision 2010 strategy. In thebiomedical field, an intensive collaborationwith the University of Maastricht and withthe Academic Hospital of Maastricht(Netherlands) was started. In 2005, DSMMedical Coatings was launched. This unitdevelops and markets innovative coatingsfor medical devices such as catheters forcardiovascular and urological uses.R&D at Industrial ChemicalsThe focus of Industrial Chemicals R&D is toactively maintain the existing businessesthrough process improvement and thedevelopment of new processes for existingproducts, and to increase efficiency andsustainability through waste reduction.As part of the Corporate ResearchProgram, Industrial Chemicals R&D and LifeScience Products R&D worked together onenzymes. New enzymes were discoveredand patented for an important step in thefermentative production of caprolactam. Atthe same time, projects were carried out toimprove chemistry and technologyoperations in the caprolactam plants.Industrial Chemicals R&D continued towork on the development of newmelamine-based coatings in collaborationwith Performance Materials R&D. Moreover,building on the success of the newlydeveloped melamine-based glue systemsfor OSB (Oriented Strand Board), DSMcontinues to work on applicationdevelopment for systems based onstraw and sugar cane.Annual Report 2005www.dsm.com29

Report by the Managing BoardIntellectual Property – ICT and e-Business –Purchasing – Macro-economic reviewIntellectual PropertyOur Vision 2010 strategy further increasesthe role of intellectual property. Some 375new patent applications were filed in 2005.Basic IP positions were obtained in newperformance materials and ingredients forhuman and animal nutrition. The patentsconnected to the NeoResins business, intotal over 300 patents and patentapplications in the field of coatingtechnology, were transferred and integratedinto our overall patent portfolio. Thestrategic shift in DSM’s portfolio also drivesan increasing interest in trademarks andbranding. Trademarks such as Dyneema ® ,Teavigo ® and PeptoPro ® are becomingwell-known names.DSM is now actively managing about 500trademarks. DSM continues to strengthenits IP position in China. Most of the patentsare also filed in China.ICT and e-BusinessTechnical infrastructureIn 2005 a company-wide program wasinitiated for the regular upgrade of DSM’sICT infrastructure – built in 2000/2001 –,including the global network, e-mailinfrastructure, office automation andmanaged services. The program aims toimplement off-the-shelf, proventechnologies and reduce the total cost ofownership. The year 2005 was mainly usedfor preparation activities and the migrationof the global network. The actualreplacement of work stations and serverswill follow in 2006.ICT security is an issue that requirescontinuous attention. Efforts to protectDSM’s infrastructure and systems fromintrusion by computer viruses and hackerswere increased in 2005.The process of separating the ICTinfrastructure and the business applicationsystems that DSM Nutritional Productsshared with its former parent companyRoche was completed in the course of2005. In addition, a number of improvementprojects were executed as part of DSM’sVITAL integration program. For example,marketing & sales tools were introduced tosupport DSM Nutritional Products’ salesforce. Integration between the Outlook XPcalendar and DSM’s online conferencingsystem WebEx was improved.Business process standardizationIn 2005, the business processstandardization program (Apollo), whichaims at improving efficiency and thus furtherincreasing customer satisfaction, continuedits roll-out of standardized best-practiceprocesses throughout a number of DSMunits, including DSM Food Specialties,DSM Agro, DSM Coating Resins, DSMComposite Resins and DEX Plastomers.Furthermore, preparations were started forthe implementation of these standardizationprocesses in DSM Anti-Infectives and DSMNutritional Products. The units that hadalready implemented this standardizationprogram made significant progress inimproving their order-to-cash, purchasingand financial operations and furtherstreamlined their organizations. Theimplementation of these processes enablesbusiness units to adopt a uniform way ofworking worldwide. The aim is to increasethe internal organization’s efficiency throughintegrated planning and automated orderand financial/administrative processes.Apollo enables business unit managementto react faster to market developments andit supports DSM’s compliance efforts.OrganizationBy the end of 2005, the ICT department ofDSM Nutritional Products had been fullyintegrated in the Corporate ICTdepartment, while all business systemsmanagement groups were transferred fromthe other business groups to Corporate ICT.This reorganization has resulted in a mainoffice in the Netherlands with affiliates inSwitzerland, the USA, Brazil, Singapore andChina. The new organization is capable ofoffering around-the-clock ICT services tothe business.e-BusinessIn the past few years DSM has invested inan advanced e-business architecture andinfrastructure that enables the company toconduct business with key customers andsuppliers in a smooth and “hands-free”manner. DSM is already reaping the benefitsof this infrastructure in terms of directsystem connectivity, a 24-hour web shopfor customers, elogistics, electronicconferencing, electronic invoicing, e-buyand electronic payment.In 2005, more than 30% of overall groupsales on average were generated viavarious e-channels. Today, DSM is directlyconnected to more than 300 businesspartners. In addition, over 5,000 customersplace their orders via the DSM web shop, toa total of more than 35,000 orders per year.In 2005, the possibilities in the field ofelogistics in particular were furtherexpanded. Over 45,000 messages wereshared with logistic providers, allowingsmoother and faster handling. DSM islooking into the possibility of using elogisticsfor road and rail transport in the USA.The company is already using elogisticsapplications in sea transport betweenEurope and Asia and is investigating thepossibility of using these applications in therest of the world. DSM also conductsthousands of web-enabled meetings peryear via the internet, which reduces travelcosts considerably. Via the e-channelsDSM also had more than 200,000downloads of key product- and orderrelateddata in 2005, reducing handlingcosts.In the years to come, DSM will further refineits existing e-business applications. Inaddition, the company will investigate thelatest techniques and developments in thefield of RFID (Radio Frequency Identification)and CRM (Customer RelationsManagement), and will use these if theyprovide added value.Annual Report 2005www.dsm.com30

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsPurchasingIn 2005 DSM further detailed andimplemented the new purchasingorganization with the aim of ensuring that itwill make a sustainable contribution to thecompany’s bottom line.A global purchasing strategy wasdeveloped as an integral part of the group’sbusiness strategy. We completed thestaffing of the new organization and made astart on the development of standardprocesses and systems to support the neworganization. The new organizational modelis based on a centrally led DSM sourcingorganization (with a regional presence inEurope, USA and Asia) to fully leverageDSM Purchasing’s spend, resources,capability requirements and best practices.It is aligned with the business groups’sourcing organizations responsible for theirspecific spend. Spend Area Directors havedeveloped spend plans that will beconsolidated into a global DSM purchasingplan covering our total spend. This structureis fully aligned with DSM’s Vision 2010strategy in order to leverage synergieswithin the company. Job-specificpurchasing learning curricula weredeveloped to further professionalize theDSM purchasing community. In addition, aperformance management model wasdeveloped for the new purchasingorganization. We successfully completedthe purchasing program launched in early2004 to achieve substantial annual savings.Contracts were negotiated based onsourcing strategies developed using theStrategic Sourcing Methodology. A majorpart of these savings were realized in 2005and will – as planned – be fully realized in2006. As of 2006, there will be one alignedpurchasing organization in place for thewhole of DSM.Macro-economic reviewMacro-economic developments in 2005Macro-economic growth in developedcountries slowed down somewhat afterthe favorable developments in 2004, butemerging countries, especially in Asia,continued to grow at very healthy levels.The Asian emerging countries developedto become the most important drivers ofglobal economic growth and positivelyaffected global trade volumes. Also, leadingJapanese economic indicators point to thehighest growth levels for many years,resulting in increasing exports andincreasing domestic demand as well.Since the fast-growing sectors of theemerging economies make relativelyintensive use of commodities, including oil,their economic growth has contributed toupward price pressure. This developmenthas had an impact on several of DSM’smarkets, mainly in the Industrial Chemicalsand Performance Materials clusters.In Europe, the economy showed only initialsigns of recovery in 2005. The valuedecrease of the euro, from levels of above$ 1.30 towards the end of 2004 and duringthe first months of 2005 to around $ 1.20in the second half of 2005, improvedEuropean company prospects for exports.The long-anticipated growth of domesticdemand took off gradually, and strengthenedsignificantly in the last quarter of 2005.Many of DSM’s businesses benefited fromthe generally positive economicenvironment. Global manufacturing outputgrew by 4% and global chemical outputgrew by 3% in 2005. Demand growth inengineering plastics, elastomers and otherperformance materials was above trend onthe back of healthy global developments inend-markets such as building &construction, electronics and electricalapplications and, to a lesser extent,automotive.China’s importance has increased. China ishome to many fast-growing industrialmarkets as well as many emergingcompetitors. The country’s share of overallglobal chemical output growth in 2005 wasapproximately 40%.Macro-economic outlook for 2006The consensus is that global GDP growthwill amount to 3.3% (2005: 3.2%), withcontinued strong Asian growth, propelledby robust exports and strong domesticdemand in China and India. The Eurozoneeconomy is forecast to grow byapproximately 2% in 2006. Global industrialproduction is set to grow at around 4%,although there are marked geographicaldifferences in growth rates and per sector.Growth in Western Europe is projected at2.4%, the USA at 3.1%, the Middle East at4.9%, Eastern Europe at 5.6% and AsiaPacific at 6.5%, with industrial productiongrowth in China being projected at 12.1%.If these circumstances materialize withoutmajor geopolitical disturbances andcurrency volatilities, the demand/supplybalance for the chemical industry isexpected to remain good in 2006.Annual Report 2005www.dsm.com31

Report by the Managing BoardFinancial resultsStatement of incomex € million 2005 2004net sales 8,195 7,832other operating income 223 197total operating income 8,418 8,029total operating costs -7,610 -7,467operating profit excluding exceptional items 808 562net finance costs -70 -56income tax expense -180 -103share of the profit of associates -2 9profit attributable to minority interests 7 11net profit excluding exceptional items 563 423net result from exceptional items -36 -130net profit* 527 293* attributable to equity holders of Royal DSM N.V.Net salesAt € 8.195 million, net sales in 2005 werealmost 5% higher than in the previous year.DSM NeoResins accounted for an increaseof 3% in net sales, and divestmentsaccounted for a 3% decrease. Sellingprices were on average 5% higher than in2004. Autonomous volumes remainedunchanged. Exchange rates had no effecton sales.Operating costsOperating costs rose compared with 2004,closing the year at € 7.6 billion. The maincomponent of these costs, the cost of rawmaterials and consumables for goods sold,corrected for acquisitions and divestments,rose by approximately € 300 million. Totalfixed costs remained stable.Operating profitThe operating profit excluding exceptionalitems rose by € 246 million (44%), from€ 562 million in 2004 to € 808 million in2005, mainly as a result of higher margins,lower fixed costs and an improved productmix. The EBITDA margin, i.e. operatingprofit before depreciation and amortizationas a percentage of net sales, rose from13.6% in 2004 to 16.0% in 2005.With selling prices showing a strongerincrease than raw materials prices, theaverage margin, i.e. the selling price per unitof product less variable costs, was clearlyup from the 2004 level.Net profitNet profit rose from € 293 million in 2004 to€ 527 million in 2005. Expressed asearnings per ordinary share, the net profitrose from € 1.41 in 2004 to € 2.68 in 2005.Net finance costs stood at € 70 million in2005, compared with € 56 million in 2004.The increase was due primarily to theacquisition of DSM NeoResins and hedgingcosts for the US dollar.At 24%, the effective tax rate in 2005 washigher than in 2004 (20%). The 4% increasewas due to higher profits and a consequentdecrease in the relative proportion ofincome elements taxed at a low rate.The profit of associates decreased from€ 9 million in 2004 to € 2 million negative in2005 because of adverse developments atMethanor.The net profit excluding exceptional itemsincreased by € 140 million to € 563 million,which was largely due to the higher level ofoperating profit.In 2005 provisions were made andimpairments were recognized for themothballing of the Montreal site (Canada)and the closure of the South Haven site(USA). Also, a provision was created for therestructuring of the Linz site in Austria. Bookprofits were recorded on the sale of DSMBakery Ingredients and the sale of land.Furthermore, DSM recorded a book loss onthe sale of the SBR business and animpairment of the company’s share in theassets of Methanor. On balance several taxitems had a positive effect.Minority interests accounted for € 7 million(2004: €11 million); the figure in questionrelated to activities in North America andChina.Annual Report 2005www.dsm.com32

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultsStatement of cash flowsx € million 2005 2004Cash and cash equivalents at 1 January 1,261 1,209Operating activities:- net profit plus amortization and depreciation 1,094 906- change in working capital -201 209- other changes -200 -217Cash flow from operational activities 693 898Investing activities:- capital expenditure -393 -349- acquisitions -564 -- sale of participations 192 -- divestments 30 28- other changes -110 -2Net cash used in investing activities -845 -323Dividend -183 -194Net cash used in financing activities -37 -339Changes due to IAS 32/39 - 17Effects of changes in accounting principlesand exchange differences 13 -7Cash and cash equivalents at 31 December 902 1,261Capital expenditure and financingCapital expenditure on intangible assetsand property, plant and equipmentamounted to € 401 million in 2005, whichwas below the figure for amortization anddepreciation (for cluster details see page 35).This was primarily due to the fact that theselection criteria applied to new investmentshad been revised. In 2004 and 2005 thelevel of capital expenditure was relativelylow. The level of capital expenditure,including small and new businessdevelopment type acquisitions, is expectedto be above the level of amortization anddepreciation in 2006. At € 693 million, netcash provided by operating activities wasabout 53% of EBITDA.The balance sheet total (total assets)increased in 2005 and amounted to € 10.0billion at year-end (2004: € 9.6 billion).Equity increased by € 451 million comparedwith the position at the end of 2004; thiswas due mainly to the net profit andexchange differences relating to non-eurodenominatedholdings. Equity as apercentage of total assets increased from53% at the end of 2004 to 55% at the endof 2005. The current ratio (current assetsdivided by current liabilities) decreased from1.79 in 2004 to 1.75 in 2005.Balance sheet profileas % 2005 2004intangible assets 10 5property, plant and equipment 37 40other non-current assets 12 9cash and cash equivalents 9 13other current assets 32 33total assets 100 100equity 55 53*provisions 10 9non-current liabilities 14 15current liabilities 21 23total liabilities 100 100* Excluding the impact of the temporary reclassification of cumulative preference shares A at year-end 2004.Annual Report 2005www.dsm.com33

Report by the Managing BoardFinancial resultsCapital expenditure on intangible assetsand property, plant and equipment was20% below the level of amortization anddepreciation. The total of intangible assetsand property, plant and equipment was€ 489 million (11%) higher than in 2004.The working capital was € 155 millionhigher than in 2004, due in particular tocurrency exchange rates, effects ofacquisitions, higher raw material pricesand a higher activity level. Cash decreasedstrongly and amounted to € 902 million.Net debt stood at 13% of equity plus netdebt at the end of 2005.Equityas a % of balance sheet total20012002200320042005*55.3%0 10 20 30 40 50 60* Excluding the impact of the temporary reclassificationof cumulative preference shares A.50.1%52.8%52.9%57.6%DividendDSM aims to provide a stable and,preferably, rising dividend. The dividend isbased on a percentage of cash flow.Barring unforeseen circumstances, thispercentage lies within a range of 16 to 20%of the net profit excluding exceptional itemsminus the dividend payable to holders ofcumulative preference shares plusdepreciation and amortization.The proposed dividend on ordinary sharesfor the year 2005 amounts to € 1.00 pershare, about 15% higher than the previousyear. This corresponds to 18% of the cashflow (net profit excluding exceptional items(€ 563 million) plus depreciation andamortization (€ 503 million) minus thedividend payable to holders of cumulativepreference shares (€ 16 million)). An interimdividend of € 0.29 per ordinary sharehaving been paid in August 2005, the finaldividend will amount to € 0.71 perordinary share.The dividend will be paid out in cash and willbe made payable on 14 April 2006.DSM outlook for 2006The general economic outlook for the year2006 is positive. Consumer confidence isexpected to improve in Japan and Europeand remain positive in other regions. Inaddition, industrial production is alsopredicted to remain strong in many sectorsand regions, including continued stronggrowth in emerging economies. For thechemical industry, a well-balanced supplyand demand situation is anticipated inmost markets.However, growth in the automotive sector –especially in the USA – will probably lagbehind.Against this generally positive outlook,key risks may emerge from major currencyfluctuations, more specifically the value ofthe US dollar against the euro, geopoliticaltensions and high and volatile rawmaterial prices.For 2006, DSM expects continuedperformance strength in its Nutrition andPerformance Materials businesses. For thePharma businesses a further improvementin performance is envisaged. IndustrialChemicals is expected to see a continuationof the relatively stable business environment.Barring unforeseen circumstances, DSMexpects an operating profit from continuingoperations 3 for the first quarter of 2006 at orabove the level of the first quarter of 2005(€ 182 million). For the year 2006 as awhole the trading environment is expectedto remain positive for DSM.3The 2005 operating profit from continuing operations reportedhere is exclusive of DSM Bakery Ingredients, DSM Minera andSBR, to enable a meaningful comparison with 2006. The reportfor the first quarter of 2006 will also include a breakdown of resultsaccording to the new clustering of activities.Annual Report 2005www.dsm.com34

Section 1 Report by the Managing BoardDevelopments in 2005Strategy – looking back and aheadCorporate governanceSafety, Health, EnvironmentHuman ResourcesResearch and DevelopmentIntellectual PropertyICT and e-BusinessPurchasingMacro-economic reviewFinancial resultscapital expenditure and acquisitionsx € million 2005 2004Life Science Products 97 124DSM Nutritional Products 97 55Performance Materials 667 64Industrial Chemicals 85 75Other activities 26 26total, continuing operations 972 344Discontinued operations 2 4total DSM 974 348capital employed at 31 Decemberx € million 2005 2004Life Science Products 1,753 1,704DSM Nutritional Products 1,830 1,694Performance Materials 1,737 988Industrial Chemicals 728 673Other activities 173 331total, continuing operations 6,221 5,390Discontinued operations - 168total DSM 6,221 5,558Capital employed by core activity at31 December 2005x billionLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther activities0 0.5 1.0 1.5 2.0EBITDA/net salesas % 2005 2004Life Science Products 18.0 15.2DSM Nutritional Products 19.6 17.4Performance Materials 16.8 12.4Industrial Chemicals 14.6 13.2Operating profit by core activity at31 December 2005x millionLife Science Products*DSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther activities-50 0 100 200 300* Excl. discontinued activitiesR&D expenditurex € millionas a percentage*2005 2004 2005 2004Life Science Products 93 98 6.3 6.6DSM Nutritional Products 80 75 4.2 3.9Performance Materials 94 78 3.8 3.9Industrial Chemicals 14 16 0.8 1.0Other activities 8 11 1.6 2.3total, continuing operations 289 278 3.6 3.7Discontinued operations 1 8total DSM 290 286* Of net salesR&D expenditure 2001-2005x million / incl. discontinued activities200120022003200420050 50 100 150 200 250 300Annual Report 2005www.dsm.com35

Review of businessLife Science ProductsThe Life Science Products cluster comprisesbusiness groups that supply to the pharmaceutical,food and agro-chemical industries. The cluster'sshare in DSM's overall net sales is 18%.‰x € million 2005 2004net sales*:- DSM Fine Chemicals 303 374- DSM Pharmaceutical Products 482 463- DSM Anti-Infectives 330 386- DSM Food Specialties 416 359total 1,531 1,582operating profit 126 79operating profit plus amortization and depreciation 266 226capital expenditure 97 124capital employed at 31 December 1,753 1,704operating profit as % of average capital employed 7.3 4.2research and development 93 98workforce at 31 December 6,239 6,836* Before elimination of intra-group supplies to other clusters.Supplies of Life Science Productsx million / incl. discontinued activities200120022003200420050 500 1000 1500 2000 2500The Life Science Products clustercomprises the following business groups:DSM Fine Chemicals, DSM PharmaceuticalProducts, DSM Anti-Infectives, DSM FoodSpecialties and DSM Bakery Ingredients.DSM Bakery Ingredients was divested inJune 2005 and its bakery enzymesactivities were transferred to DSM FoodSpecialties. Our main customers in lifescience products are the pharmaceutical,food and agrochemical industries. The maindrivers of growth are a growing worldpopulation, increasing purchasing power,the aging of the population, the increasingimportance attached to a healthy lifestyleand the growing emphasis placed onpersonal care.The activities in this cluster are to a largeextent based on DSM’s in-depthknowledge of biotechnology (includingfermentation, genomics and biocatalysis)and organic chemistry. DSM is one of theworld’s leading independent suppliers tothe pharmaceutical industry, and we alsohold leading positions in the markets foringredients for human and animal nutrition.The business groups in this cluster workclosely together with each other and withDSM Nutritional Products in the field ofR&D, for example in biotechnology, and insome cases they share distributionchannels as well as production facilities.Operating profit of Life Science Productsx million / incl. discontinued activities200420050 50 100 150 200Annual Report 2005www.dsm.com36

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesDSM Fine ChemicalsWorking on improved profitabilityDSM Fine Chemicals produces chemicalintermediates mainly for the agrochemicaland food industries. DSM Fine Chemicalscomprised four business units. DSMFine Chemicals Intermediates develops,produces and sells maleic anhydride,glyoxylic acid and fumaric acid and finechemicals based on these raw materials,applying a broad technology toolbox.The business unit has production facilitiesin Linz (Austria). DSM Special Productsdevelops, produces and sells benzoic acid,sodium benzoate, benzaldehyde, benzylalcohol and products derived from thesefor a range of end-use markets in the lifescience industry. DSM Special Productsis the market leader in these products. Thebusiness unit has production facilities inRotterdam, the Netherlands. DSM Mineraoperates an iodine mine in Chile and sellsiodine and iodine derivatives to the lifescience and performance chemicalsindustries.Holland Sweetener Company is a jointventure with Tosoh (Japan). It produces andsells aspartame, an intense, low-caloriesweetener. It has a production plant inGeleen (the Netherlands).StrategyAs a consequence of the organizational readjustmentsin the context of DSM’s Vision2010 strategy program, the activities ofDSM Fine Chemicals will be repositioned in2006. Until then, the business group’sstrategy is to maintain its position as asupplier of high-quality specialty chemicalsand to aim for improved profitability. Themain pillars of the business group’s strategyare continuous process improvements,lowest cost production processes andtargeted growth in attractive marketsegments with existing and newintermediates.Business reviewThe trend in DSM Fine Chemicals marketsin 2005 was in line with the overall trend in2005. Business was affected mainly by thesharp rises in the prices of various key rawmaterials, such as toluene and n-butane.These cost increases were in generalsuccessfully passed on to customers. Theresults of the DSM Minera business furtherimproved as a consequence of continuousstrong demand for iodine and its derivatives.The restructuring measures we took inrelation to our aspartame business showedpositive effects. DSM Fine Chemicalsprofits for 2005 improved compared tothe 2004 figures.ProjectsThe exclusive synthesis activities wereintegrated within the activities of DSMPharmaceutical Products to capturesynergies. Restructuring studies for theactivities in Linz were started in the secondhalf of 2005 and were already showingresults. The full effects will materialize in2006 and 2007.The concentration of DSM Special Products’production activities in Rotterdam wascompleted in 2005 with the integration ofbenzyl alcohol and benzaldehydeproduction on this location.DSM Minera was sold in January 2006 toSociedad Química y Minera de Chile.DSM Pharmaceutical ProductsImproved revenues and profitDSM Pharmaceutical Products is aleading provider of high-quality globalcustom manufacturing services to thepharmaceutical industry. Customers –served from five manufacturing sites inNorth America and Europe – includeseventeen of the top twenty pharmaceuticalcompanies, mid-sized and smaller (evenvirtual) pharma companies as well as a largenumber of agro-chemical companiesacross the globe.The group comprises four business areas.DSM Pharma Chemicals is a provider ofcustom chemical manufacturing servicesfor complex intermediates and activeingredients for pharmaceuticals. DSMBiologics provides process development,scale-up and cGMP manufacturingservices for clinical and commercialbiopharmaceutical products. DSM Biologics’focus, under an exclusive license withDutch biotech firm Crucell, is to establishthe PER.C6 ® human cell line as aproduction platform for biopharmaceuticalproteins and monoclonal antibodies. DSMPharmaceuticals, Inc. is a leading providerof finished dose manufacturing services tothe pharmaceutical and biotech industries.Operating from a state-of-the-art facility inGreenville, North Carolina (US), the companymanufactures sterile injectables (liquid &freeze-dried), solid dose (tablets, capsules),semi-solid (creams, ointments) and liquidproducts. DSM Exclusive Synthesis wastransferred from DSM Fine Chemicals toDSM Pharmaceutical Products during theyear under review. Exclusive Synthesisdevelops, produces and sells productsmade by synthesis on an exclusive basis,primarily for use in agrochemical industries.Annual Report 2005www.dsm.com37

Review of businessLife Science ProductsStrategyDSM Pharmaceutical Products’ strategyis to focus on exclusive high-end solutionsto the complex development andmanufacturing needs of the pharmaceuticalindustry. Aiming at being closer to its maincustomers, the business group headquarterswas relocated from The Netherlands toParsippany, New Jersey in the USA duringthe first quarter of 2005. New Jersey isan important region in the worldwidepharma industry.Business ReviewSales in 2005 exceeded the 2004 leveldue to increased revenues of DSMPharmaceuticals, Inc. and the addition ofthe Exclusive Synthesis business with effectfrom 1 July 2005. A continued focus on costand the addition of new strategic customersis ongoing in an effort to further improveperformance. DSM Pharmaceuticals, Inc.showed a strong increase in revenue andprofit versus 2004 due to increases inboth solid-dose and sterile manufacturingservices. Demand for existing solid-doseproducts increased as a number ofcustomer products launched in 2004began to take hold in the marketplace.Sterile manufacturing growth was the resultof continued demand for existing biologicproducts and the addition of significant newprojects, including commitments for newlyadded freeze-drying capacity. Seventeennew products were launched from theGreenville facility during 2005, includingmajor launches into Europe and Japan.New business inquiries exceeded thealready high level attained in 2004.The sterile manufacturing serviceofferings will be further expanded with theconstruction of two additional sterilemanufacturing suites – one for themanufacture of clinical trial materials (CTM)and another for the manufacture of cytotoxicproducts. The CTM suite will be operationalin late 2006; the cytotoxic area will be readyin 2007. These additions, combined withthe completion of additional freeze-dryingcapacity, will result in further revenue growthcapitalizing on the expected demand forsterile manufacturing services resulting fromthe large number of biologic products in thedevelopment pipeline.DSM Biologics’ activities during 2005were centered on delivering Phase II/IIIclinical trial materials and commercialsupply for customers out of the Groningen(Netherlands) facility and furthering thedevelopment of the PER.C6 ® human cellline. In July 2005, DSM acquired the 40%share interest in DSM Biologics Holdingfrom its joint venture partner Sociétégénérale de financement du Québec (SGF).DSM now holds 100% of DSM Biologics. Atthe end of 2005 the strategic repositioningof DSM Biologics resulted in the decision tomothball the DSM Biologics facilities inMontreal at the beginning of 2006.Furthermore, stronger emphasis wasplaced on the accelerated developmentof PER.C6 ® , through increaseddevelopment efforts in a joint effort withCrucell. DSM Biologics and Crucell willintensify their efforts in the developmentof the promising PER.C6 ® platform andcreate an integrated solution for theproduction of biopharmaceutical proteinsand monoclonal antibodies on PER.C6 ®in order to increase licensing and royaltyincome and accelerate the developmentand roll-out of the PER.C6 ® technologyplatform in the market. The partnership’sResearch and Development to create thisnew platform will be based around a newjoint R&D center, located in the Netherlandsand the US East Coast. DSM Biologicsin Groningen (Netherlands) will focus onproviding full support to licensees of thePER.C6 ® technology, besides its servicesas a contract manufacturer for thebiopharmaceutical market.Despite a continued tough businessenvironment, DSM Pharma Chemicalsperformed significantly better, due to fasterrealization of cost reductions and an ongoingupgrade of its product portfolio. Thenecessary further reduction of the assetbase took shape in the announced closureof the South Haven (Michigan, USA) site,which will take effect in the second quarterof 2007. DSM will increase the focus of itspharmaceutical chemical operations onhigher added-value products (such asactive pharmaceutical ingredients andadvanced and registered intermediates),capitalizing on its toolbox in chemical andbiochemical processing and its track recordin regulatory compliance.ProjectsDSM Pharma Chemicals had a good yearwith respect to project intake. The businessunit’s product portfolio now contains severalhigh-profile compounds that are close tolaunch or were launched in 2005. RESCOM,the unit within DSM Pharma Chemicalsfocusing on early clinical phases, had arecord year, and the business group willcontinue to expand the facility. DSMExclusive Synthesis had a difficult year, butmade good progress in the developmentof a major restructuring plan for the Linzsite. The implementation of this plan willbring exclusive synthesis back on track.In the course of 2005 the ManufacturingExcellence project Heureka in Linz, Austriaentered its implementation phase. Theproject affects the pharmachemical,exclusive synthesis and intermediatesbusinesses on the Linz site and aims todeliver an overall performance improvementof € 35 million, to be realized by 2007.DSM Pharmaceutical Products posteda clearly higher operating profit comparedwith 2004.DSM Anti-InfectivesA year of restructuringDSM Anti-Infectives holds globalleadership positions in penicillin G, penicillinintermediates (6-APA and 7-ADCA), sidechains, semi-synthetic penicillins, semisyntheticcefalosporins and other activeingredients such as potassium clavulanateand nystatin. These products are used forcombating bacterial or fungal infections.DSM Anti-Infectives has production sitesdistributed over the Netherlands, Spain,Sweden, Mexico, India, China and Egypt.Annual Report 2005www.dsm.com38

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesStrategyDSM Anti-Infectives strives to activelymaintain its positions via technologicalinnovation, customer intimacy andoperational excellence.Business reviewGlobal market demand in penicillinequivalents grew about 4% in 2005.Although worldwide production capacitydecreased by 4% in 2005, there is still asituation of oversupply. This oversupplyforced several producers to step out in2005, while many others are still sufferingsevere financial difficulties. During 2005, theweak dollar kept pressure on top-lineresults, while rising energy prices could notbe passed on in the value chain.At the end of 2004, DSM Anti-Infectivesannounced drastic measures to reduce itsEuropean cost base, to maximize itstechnology value extraction and to reduceits bottom-line exposure to the euro-dollarexchange rate. The implementation ofthese measures progressed well in 2005,leading to a substantially better resultcompared to 2004. Still, with 2005 being atransition year, major additional improvementand restructuring steps will have to bemade in 2006.The clavulanic acid business had a goodyear. Substantial cost price improvementswere realized in the Sweden plant. The sidechains activities of DSM Deretil improveddue to the reorganizational measurestaken. DSM Deretil took an importantstep by increasing its presence in Chinawith the initiation of the Shangyu DeretilYuntao Joint Venture. Considerablevariable-cost reductions were achieved inthe 7-ADCA plant in Delft in theNetherlands, while its capacity wasincreased according to plan. Margins ofnystatin were stable in an increasinglycompetitive market.The operating profit in 2005 was stillnegative, but showed a considerableimprovement compared to theprevious year.ProjectsDSM reaffirmed its plan for a strategic cooperationwith North China PharmaceuticalGroup Corporation (NCPC) via investmentsin NCPC and the establishment of a jointventure in anti-infective products. DSM willinvest in expanding the production ofpenicillin-related intermediates and activepharmaceutical ingredients at the Toansafacility in India. This expansion – implying adoubling of production capacity – will takeplace in 2006. The focus of R&D activities ison variable-cost reduction of core productsand on extracting value from DSMtechnology. R&D activities also contributedto identifying and developing new growthoptions.DSM Food SpecialtiesOperating profit higherDSM Food Specialties is a global supplier ofadvanced ingredients for the food industry,manufactured with the aid of fermentationand enzyme technology, among othertechnologies. The group comprises fivebusiness units. DSM Dairy Ingredientssupplies enzymes (e.g. rennets), startercultures and preservation systems forcheese and yogurt, and tests for thedetection of residues of antibiotics. DSM isone of the biggest suppliers of dairyingredients in the world. DSM SavouryIngredients is a major supplier of ingredientsfor flavorings and flavor enhancers (suchas yeast extracts) used in products such assoups, instant meals, sauces and savorysnacks. DSM Enzymes produces a largerange of food enzymes for applicationssuch as baking, fruit processing, brewingand other alcoholic beverages. DSMFunctional Food Ingredients producesAnnual Report

Review of businessLife Science Productsingredients for baby food, food supplementsand functional foods such as arachidonicacid, probiotics and peptides. DSMIngredients Development develops andpre-launches innovative ingredients forthe food industry.The main production sites are in Seclin(France, enzyme production), Capua (Italy,arachidonic acid), Delft (Netherlands, yeastextracts, natamycin and tests), Belvidere(USA, arachidonic acid) and Moorebank(Australia, cultures). The main R&D center isin Delft (Netherlands).StrategyDSM Food Specialties targets marketsegments characterized by rapid growthand seeks to respond to the major trendsin the food industry toward health,convenience and natural products. Thebusiness group supplies its customerbase with innovative, high-added-valueingredients that enable them to satisfyconsumer demands in terms of quality,nutritional value and taste. Under thesupervision of a Monitoring Trusteeappointed by the EU Commission andthe FTC, DSM Food Specialties hascontinued to produce and supply feedenzymes to BASF as part of the dissolutionarrangement for the former alliance withBASF. Due to the arrangements made,production will fade out in the courseof 2006.Business reviewThe global food ingredients market grew byabout 4% in 2005. DSM Food Specialtiessaw its sales grow by around 13%. DSMDairy Ingredients’ sales were up on 2004.Sales volumes of starter cultures showedstrong growth. Sales volumes of rennetsproduced by means of fermentation werealso higher than in 2004. Sales volumes ofantibiotic tests were stable, while salesvolumes of preservation systems andcoatings increased. Prices were somewhatunder pressure in the latter segment.DSM Savoury Ingredients recorded strongsales volume growth, in particular in thesegment of specialty yeast extractsincluding the newly launched product witha high nucleotide content under the brandname Maxarome ® Select. Early in 2005the hydrolyzed vegetable protein business(HVP) and the manufacturing site inZaandam (Netherlands) were sold to theDutch company Oterap Holding B.V., in linewith the strategy to further focus on highadded-value savory ingredients. Yeastextracts are produced in Delft (Netherlands).Investments are being made to build adedicated factory for processed flavorsin Shanghai (China).DSM Food Enzymes’ sales were up on2005 with volume growth in fruit-processingenzymes and a good performance in anewly introduced pectinase enzyme underthe brand name Rapidase ® Smart. Salesvolumes of brewing enzymes and bakingenzymes grew, whilst a new enzyme wassuccessfully introduced on the marketunder the brand name Brewers Clarex ® .This enzyme provides brewers witha method to prevent turbidity in beers.A new enzyme for improved emulsificationproperties in mayonnaise, sauces andbakery products was launched under the

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther Activitiesbrand name Maxapal ® . On 1 January 2005,a new Enzyme Unit was formed, whichincludes the baking enzymes activities fromthe DSM Bakery Ingredientsbusiness group.DSM Functional Food Ingredients saw itssales increase very sharply as more andmore baby food manufacturers in the USAare launching new product lines for infantformula enriched with arachidonic acid(ARA). DSM Food Specialties is theexclusive supplier of ARA to Martek, thecompany that markets ARA/DHA oil.Production capacity for ARA was expandedin 2005 in Belvidere (USA). A new naturalingredient in the weight-managementcategory marketed under the trade nameFabuless ® was successfully launched onthe market for fermented milk products. Itcontains a special emulsion of natural palmand oat oil, which are already part of thenormal diet, and uses the body’s naturalappetite control mechanism to reducecalorie intake. The product has beendeveloped by Swedish-based LipidTechnologies Provider AB, and DSM hasthe exclusive, worldwide marketing rightsin this most promising application area ofdairy products.Thanks to higher sales coupled withlower costs as a result of streamlining theorganization, DSM Food Specialties’operating profit was clearly higher thanin 2004.ProjectsVarious efforts were made to facilitatestrong sales growth and to increaseoperational efficiency. The restructuringproject at our enzyme production facility inSeclin (France) was completed, and a newchromatography unit was opened whichwill secure the highest level of purity of ourdairy enzymes in particular. In the course ofthe year all production facilities for yeast andyeast extracts in Delft (Netherlands) wereaudited by the American Institute of Bakingand rated as “excellent”. Various projectswere completed to further improve ourability to serve our customers in an optimalway, focusing on Demand and SupplyChain Management. The USA organizationwas streamlined and aligned with the needsof the market. The organization of DSMFood Specialties in China was strengthenedin a significant way in order to capture thegrowing demand for food ingredients andto investigate possibilities for localproduction and formulation of ingredients.DSM Ingredients Development wassuccessful in the development of radicallynew ingredients for the (functional) foodindustry. The number of new productlaunches from the radical innovationprogram increased from two in 2004 to fourin 2005, and the business unit expects tolaunch up to eight new products in 2006.In 2005, Maxarome ® Select (SavoryIngredients), Brewers Clarex ® (Enzymes),Maxapal ® (Enzymes) and Fabuless ®(Functional Foods) were introduced onthe market by a combined effort of theIngredients Development unit and themarketing and sales organizations. Sales ofthe patented peptide PeptoPro ® started inEurope, Japan and the USA and aregradually picking up. Various producers ofsport and energy drinks have now includedPeptoPro ® in their new product linestargeted at fast recovery after exercise orendurance during exercise. A promisingdevelopment program concerns a productconcept which enables beveragemanufacturers to include the nutritional valueof milk into a beverage without the limitationsof the specific color and taste of milk.Annual Report 2005www.dsm.com41

Review of businessDSM Nutritional ProductsThe activities of DSM Nutritional Products arefocused on three sectors: food and feed ingredientsand supplements and personal care. Net sales ofDSM Nutritional Products amount to 24% of DSM'soverall net sales.‰x € million 2005 2004net sales * 1,946 1,910operating profit 252 202operating profit plus amortization and depreciation 376 330capital expenditure 97 55capital employed at 31 December 1,830 1,694operating profit as % of average capital employed 14.3 11.5research and development 80 75workforce at 31 December 6,119 6,607* Before elimination of intra-group supplies to other clusters.Supplies of DSM Nutritional Productsx million2003200420050 500 1000 1500 2000Strong performance in challengingmarketsDSM Nutritional Products is the world’slargest supplier of vitamins, carotenoids(pigments and anti-oxidants) and otherbiochemicals and fine chemicals used inproducts for human and animal nutritionand health and in personal care products.It has eleven large production sites in sevencountries: Switzerland (Sisseln and Lalden),France (Village-Neuf), Belgium (Tienen),Germany (Grenzach), the UK (Dalry), theUSA (Freeport and Belvidere) and China(two plants in Shanghai and one in Wuxi).At these sites DSM Nutritional Productsproduces its main straight products as wellas formulations. Specific formulation plantsare located in Belvidere, Sisseln and Village-Neuf. The unit also owns 35 premix plantsfor animal nutrition and health and 10premix plants for human nutrition andhealth, where products are made inresponse to specific customer needs. R&Dwork is concentrated in the region of Basel,Switzerland, strongly integrated in aninnovation network with the other DSMR&D campuses in Delft and Geleen(Netherlands). DSM Nutritional Productshas some 40 sales offices that are active inover 100 countries.Operating profit of DSM Nutritional Productsx million200420050 50 100 150 200 250 300Annual Report 2005www.dsm.com42

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesThe VITAL projectThe VITAL project was continued, asplanned, by defining the strategy and neworganizational outline of DSM NutritionalProducts. In 2004, the focus had been onimproving profits by reducing costs andon unbundling DSM Nutritional Productsfrom its former parent company, the RocheGroup, and integrating its systems, peopleand culture into DSM. In 2005, the projecton Profitable Growth focused on improvingthe quality of profits and creating newoptions for growth and developinginnovation management, while the runningimprovement programs and the unbundling/integration efforts were continued. Tocapture the full innovation potential, DSM’sR&D model was introduced in research &development. In the second half of 2005,the Innovation Engine was started. The aimof the Innovation Engine is to bring highadded-value, innovative products to marketfaster. It speeds up the selection, funding,development and testing process for newproducts and formulations.Most of the outcomes of the three-stageVITAL project have been handed over tothe line organization of DSM NutritionalProducts to ensure that the achievementscan be sustained. During the third stage ofthe VITAL project the organization focusedon certain strategic issues, among otherthings on the concentration of vitamin Cproduction in Dalry (United Kingdom), andit was announced that as a consequencevitamin C production in Belvidere (USA)would be discontinued.DSM Nutritional Products is now an integralpart of DSM’s core business and hascontributed to the company’s operatingprofit from day one. The VITAL project willcontribute approximately € 200 million intotal by the end of 2006, thus exceeding theoriginal target of € 150 million. Thecontribution mainly results from reducedstaff levels, global efficiency improvements,lower cost of purchased goods and gains inthe aforementioned program focused onprofitable growth. The planned closure ofthe Belvidere bulk vitamin C plant in 2006and the newly formed alliance with NorthChina Pharmaceutical Group Corporationrepresent steps in the strategicrepositioning.From 2006 onwards, the integration ofDSM Nutritional Products and DSM FoodSpecialties in a new Nutrition cluster andintensified cooperation with externalorganizations will allow for newopportunities for innovative products. In2005 DSM Nutritional Products defined itsDual Track strategy to improve andstrengthen existing products and at thesame time fully boost innovation and newbusiness development. The new strategyoffers business partners continuity as wellas new opportunities to develop and exploitadditional applications, while drawing onDSM Nutritional Products’ strengths inR&D, manufacturing and marketing & sales.To further support the implementation of thenew strategy, the organizational structurehas also been aligned. It is centered aroundtwo operational units allowing for a sharperfocus on the two key industries – HumanNutrition & Health and Animal Nutrition &Health – and a new unit, New BusinessDevelopment, fostering a broader and moreintense approach to innovation.Business ReviewDSM Nutritional Products strengthened itsposition as the leading player in the marketfor nutritional ingredients, recording sales of€ 1.9 billion and an operating profit of morethan € 250 million. Despite the increase innew product growth, overall sales weregenerally stable due to the price pressureon some carotenoids and mature vitamins,such as vitamins E and C. Volume growthcompensated for the price erosion at netsales level. DSM Nutritional Products’approach of focusing on differentiation incustomer products started to have effects.Recently launched products performed welland accounted for some 10% of aggregatesales, with recently launched formscontributing about 20%.Human Nutrition & HealthThe global food market was stable and sawa continued trend towards functional foodsand dietary supplements. Functional foodconcepts are proving increasingly popularin the nutritional products sector, a trendthat ties in well with DSM NutritionalProducts’ strategy. Due to seasonal effectsin Europe and local trends in the US, salesin the pharma segment were not as strongas in 2004. In Human Nutrition & Health,DSM Nutritional Products stronglyincreased sales of new products such asLafti ® , Optisharp and Teavigo ® . Lafti ® is aprobiotic addressing gut health and wellbeing.Lafti ® strains can strengthen thenatural defense in athletes and reducethe overall severity of gastro-intestinaldisturbances while showing excellentsurvival in the human gastro-intestinal tract.The range of Lafti ® probiotic strains forms acomplete package, offering targeted healthbenefits for functional foods or dietarysupplements. Globally, probiotics is a rapidgrowth segment in the supplement market,and the range of different Lafti ® strainsoffers excellent opportunities for growth.Teavigo ® , now globally launched, showedsignificant growth. Many new beverages,food and dietary supplement productscontaining Teavigo ® are being launchedworld-wide. In the second half of 2005,DSM launched Bonistein ® , a high-puritygenistein produced by a patented process.Genistein is a major health-beneficialcomponent of soy. Bonistein ® is a natureidenticalhealth ingredient that helps preventweakening of the bones.DSM Nutritional Products launched a newprogram focusing on markets such asAfrica, India and China: the NutritionImprovement Program (NIP). The Programwill mainly serve the developing markets asa sustainable business for the future of DSMand will work in close partnership withgovernmental and non-governmentalorganizations.Annual Report 2005www.dsm.com43

Review of businessDSM Nutritional ProductsAnimal Nutrition & HealthSignificant above-average volume growthand further price decreases affected theAnimal Nutrition & Health business. Theswine business had a good year globally in2005, experiencing normal market growth.By contrast, the poultry business, afterrecovering in early 2005, was confrontedin the second half of 2005 with thereappearance of avian flu, which mayhave an impact on consumer confidencein poultry meat, although this has not yetaffected our sales.In the aquaculture market, the Norwegiansalmon industry was impacted in the firsthalf of the year by European import tariffs,affecting salmon farmers’ sales. Salmonprices remained strong in the second half of2005, partly due to a tightening of salmonsupplies. The Chilean situation was similar,with forecast supplies not meeting actualsupplies, mostly due to disease problems inthe freshwater phase resulting in fewersalmon entering the sea for production.Although salmon production was flat for2005 compared to 2004, DSM NutritionalProducts maintained its leadership positionin supplying key products to theaquaculture industry.DSM Nutritional Products continued to seesubstantial sales growth in new productsfor Animal Nutrition and Health. Hy-D ® ,used by poultry farmers to improve bonehealth and animal performance, wasdistributed on a global scale. Feed enzymeproducts sold under the brands ofRonozyme ® and Roxazyme ® continuedtheir excellent performance despiteincreased competition in various markets.In particular activities focusing on eubiotics,products that improve animal performanceby gut flora modulation, enjoyed furthergrowth. This growth was mainly fueledby the ban on antibiotic growth promoters,to be implemented early 2006. DSMNutritional Products’ eubiotics portfolioincludes VevoVitall ® , Cyclatin andMicroSource, which all achieved substantialgrowth. VevoVitall ® is an organic acid that isused as a replacement of antibiotic growthpromoters in the European, Latin Americanand Asian markets. It is a very successfulproduct offering new ways for pig farmersto reduce ammonia emissions and improveperformance of pigs. In Europe it iscurrently registered for use in growingand fattening pigs.Personal CareThis segment saw strong volume growth,with leading cosmetics manufacturers onthe lookout for active ingredients for skin,hair and oral care. Parsol ® SLX, a newgeneration of UV-B filters, was well receivedby leading sun care manufacturers. In 2005,DSM Nutritional Products expanded itsportfolio by introducing three new products,the two UV-filters Parsol ® EHS and HMSand the skin care active Allantoin. Stay-C ®50, a stable form of vitamin C, made furtherprogress in the skin care market, particularlyin Asia where it showed exceptional growth.ProjectsIn 2005, DSM took various steps to build asuccessful future for its Nutritional Productsbusiness and to underline its position as theworld’s leading producer of vitamins for thefood, pharmaceutical and personal careindustries. New product forms weresuccessfully launched, such as Rovimix ® A-1000 for the animal nutrition market. For thefood and dietary supplements market luteinCWS/S-TG was launched to expandDSM’s animal-free ingredients portfolio.This portfolio already includes animal-freeproduct forms of beta-carotene, vitamin A,vitamin E, vitamin D3, ALL-Q ® (CoenzymeQ10) and Optisharp ® (zeaxanthin). With thislaunch DSM is meeting the growing marketneeds and consumer requirements foranimal-free ingredients.In Dalry (Scotland, UK), DSM NutritionalProducts will implement an extensivepackage of measures to optimize its vitaminC production, leading to considerable costreductions and improved supply chainflexibility. Dalry is one of the last largerWestern plants producing high-qualityvitamin C, which fits in with the increasingdemand for high-quality, traceable productgrades. DSM also reconfirmed its ambitionto secure its leadership position in the fieldof vitamin C by a strategic partnership with44

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther Activitiesthe (low-cost) North China PharmaceuticalGroup Corporation Ltd. In Belvidere, USA,DSM Nutritional Products will invest in anarachidonic acid production-related facilityand in Grenzach, Germany in an upgradeand the integration of the last step of vitaminD3 production. In China, DSM NutritionalProducts opened a new joint laboratorywith the renowned Fudan University inShanghai in 2005 to develop newproduction processes. Also in China, DSMNutritional Products will opena new state-of-the-art feed premix plantand start a new project at its citric acidproduction site in Wuxi.Directors of DSM Nutritional ProductsChairmanFeike Sijbesma (1959). He combinesthis position with his membership of theDSM Managing BoardAnimal Nutrition & Health Jos Schneiders (1951)Human Nutrition & Health Mauricio Adade (1963)Finance & ICT Geert Mooren (1951)Research & Development Manfred Eggersdorfer (1951)Human Resource Management Alexander Schmid-Lossberg (1959)New Business Development Krijn Rietveld (1956)Strategy / VITAL project Bruno Müller (1956)Strategic projects Bob Hartmayer (1952)VITAL project in 2006In 2006 DSM Nutritional Products will focuson the completion of the definedimprovement programs. The maintopics for 2006 are the last steps inthe implementation of performanceimprovement plans at the Sisseln, Belvidereand Dalry sites, the further enhancement ofthe plans focused on profitable growth, theimplementation of strategic measures andthe roll out of the new organization. Severalinitiatives will be anchored in the alreadyimproved marketing and sales organization,with redefined work processes andsystems. The integration of the Activity-Based Costing tool and the hand-over toline management of the last remainingmeasures will be done in parallel with theimplementation of the new organization.The business aspirations and related R&Dtargets for the coming years have been set.The new organizational model for DSMNutritional Products has been defined and astart has been made on its implementation.Tracking and tracing of the detailedprograms by the VITAL project office will becontinued throughout 2006. DSM aimsto finalize the VITAL project by the endof 2006.Annual Report 2005

Review of businessPerformance MaterialsThe Performance Materials business groupsspecialize in technologically sophisticated, highqualityproducts such as the superstrong Dyneema ®fiber and the advanced plastic Stanyl ® . Net sales ofthe cluster amount to 30% of DSM's overall net sales.‰x € million 2005 2004net sales*:- DSM Elastomers (including DSM Dyneema) 646 583- DSM Engineering Plastics 705 624- DSM Coating Resins 698 440- DSM Composite Resins 410 366total 2,459 2,013operating profit 305 165operating profit plus amortization and depreciation 410 249capital expenditure 667 64capital employed at 31 December 1,737 988operating profit as % of average capital employed 19.1 16.0research and development 94 78workforce at 31 December 4,441 3,735* Before elimination of intra-group supplies to other clusters.The Performance Materials clustercomprises the business groups DSMElastomers, DSM Engineering Plastics,DSM Coating Resins and DSM CompositeResins and the DSM Dyneema businessunit. All of these specialize in themanufacture of technologicallysophisticated, high-quality products thatare tailored to meet customers’ performancecriteria. The products are used in a widevariety of end-use markets, each of whichcomes with its own particular dynamics.These include the automotive industry, theaviation industry, the electrics & electronicsindustry, the sports and leisure industries,the coatings industry and the constructionindustry. We are constantly developing newapplications, such as new materials forelectronic components and glass-fibercables, plastic components to replacesteel, eco-friendly coatings and newproducts for enhancing personal safety.Supplies of Performance Materialsx million200120022003200420050 500 1000 1500 2000 2500Operating profit of Performance Materialsx million200420050 100 200 300 400Annual Report 2005www.dsm.com46

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesDSM ElastomersProfits restoredDSM Elastomers manufactures syntheticrubbers (EPDM) and thermoplasticelastomers (TPVs) for use in cars, whitegoods, various industrial products andconstruction materials, and as motor-oiladditives. The group is the global marketleader in EPDM rubber with a productioncapacity of 200,000 tpa and a market shareof around 20%, and the world’s secondsupplier of thermoplastic rubber. DSMElastomers has production plants in Geleen(Netherlands), Genk (Belgium), Leominster(USA) and Triunfo (Brazil).StrategyDSM Elastomers works to maintain itsposition as the global leader in the EPDMmarket by constantly renewing its productrange and cutting costs. Both the closure ofits EPDM sites in Addis (USA) and Chiba(Japan) in 2004 and improvements in itsplants in Geleen and Triunfo made significantcontributions to the attainment of this goal.With respect to TPVs the business group isexpanding its production in the field ofconsumer products.Business reviewGlobal EPDM supply and demand werewell balanced in 2005. Demand was strongin Asia and North America, but relativelyweak in Europe. In line with oil pricedevelopments raw material prices soaredfor the second consecutive year. DSMElastomers was able to pass on these rawmaterial price rises to its customers andslightly improve its margins. Anotherimportant driver for restoring operatingprofit was the decrease in fixed costsresulting from the restructuring programsthe business group had started in 2003and 2004.DSM Elastomers substantially expandedthe market targeted by Sarlink ®thermoplastic rubber and its derivatives,which are used in sealing profiles for carsand in a range of consumer products.The investigation into possible restrictiveand/or concerted practices involving anumber of EPDM producers, including DSM,launched by the European Commissionand the US Department of Justice at theend of 2002, is still ongoing. DSM iscooperating fully in this investigation and willcontinue to do so for as long as necessary.The operating profit of the business groupimproved very strongly compared with 2004.ProjectsThere is a growing interest in thedevelopment of artificial grass pitches.These provide all-season constant playingcharacteristics and allow multiple use formsof stadiums, for instance for professionalsoccer as well as for rock concerts. DSMhas been pioneering developments in thisnew application field, which has led to thedevelopment of the materials for the firstprofessional artificial soccer pitches. For thePetroleum Additives market a new productline has been developed with excellent sootdispersion properties.DSM Elastomers has an interest in thedevelopment of so-called smart materials.With the recent commercialization ofamorphous ethylene-propylenecopolymers, grafted with reactive groups toa high degree, a firm basis has beencreated for further product differentiation.These grafted groups offer myriaddiversification opportunities that can giverise to significant changes in materialsbehavior. DSM will continue to activelyexplore such opportunities. Thedevelopment of Keltan ® EPDM rubbersbased on new catalyst systems is wellunder way.DSM DyneemaA very good yearDyneema ® , DSM’s high moduluspolyethylene fiber – the strongest fiber in theworld on a weight-for-weight basis – wasinvented and developed by DSM and isused in protective products for the military,the police, the aircraft industry and ropes,nets, cut-resistant gloves and garments,sports goods and medical sutures. DSMDyneema has production facilities inHeerlen (Netherlands), Greenville, NorthCarolina (USA) and, in a joint venture withToyobo, in Katata and Tsuruga (Japan). TheDyneema ® business is growing stronglythrough application development as well asproduct innovation. New applications arebeing developed in rapid succession, andthe production lines are constantly beingrefined and expanded. Over the past fewyears, sales of Dyneema ® have on averagegrown 10% faster than the market for highperformancefibers. DSM, its customersand end-users provide a constant supply ofsuggestions for new applications. Demandfor light but strong, convenient to usematerial continues to show steady rapidgrowth, driven by a range of social andeconomic factors such as the generalincrease in safety awareness, the increasinglevel of violence on the streets, the growingdemand for readily manageable materials inthe marine industry and the increase inleisure time and prosperity.StrategyDSM Dyneema is expanding around theworld in selected, high-margin marketsoffering high profitability. The unit willcontinue to focus on the furtherdevelopment of ultra-strong polyethylenefiber and UD technology, in order to furtherincrease its lead over rival materials andsuppliers.Business review2005 was a very successful year. All themarkets for Dyneema ® products showedgrowth, and the business unit succeededin raising its sales in all geographic regions.Sales growth was particularly strong inNorth America, where high military demandcontinues to be a main driver. DSMDyneema’s operating profit was stronglyup on 2004. The coming year shouldsee continued growth in all relevantmarket segments.Annual Report 2005www.dsm.com47

Review of businessPerformance MaterialsProjectsSome setbacks were experienced inthe building of the new Dyneema ® Purityproduction line in Heerlen, but productavailability and business growth were notnegatively affected. At the beginning of2005 DSM Dyneema announced thatproduction capacity in the US would beexpanded in response to continued highdemand. Construction of two newproduction lines for Dyneema ® fiber andone for bullet-resistant material started inthe course of 2005. At the end of 2005,DSM announced that it would make anotherinvestment in a new production line forDyneema ® fiber in Greenville, North Carolina(USA). The investment will be substantial,amounting to several tens of millions of USdollars, and will bring the total number offiber lines for the company to nine, with fourproduction lines being located at theGreenville facility. All projects are runningaccording to schedule. The first expansionis expected to come on stream in the firstquarter of 2006; the other expansions willbecome operational in the second half of2006 and in 2007.DSM Engineering PlasticsClearly higher operating profitsDSM Engineering Plastics is a global playerin polyamides (polyamide 6, polyamide 66and polyamide 46), polyesters (PBT, PETand TPE-E), polycarbonate (PC andPC blends), Ultra-High Molecular WeightPolyethylene (UHMWPE) and extrudableadhesive resins. These materials are usedmainly in technical components for theelectrical and electronics, automotive,engineering and extrusion industries. Thelatter industry also includes the market forflexible packaging materials. With a marketshare of about 5%, DSM is one of the worldleaders. DSM is the global market leader inhigh-heat polyamide. DSM EngineeringPlastics has production sites in Emmen andGeleen (Netherlands), Genk (Belgium),Evansville (USA), Jiangyin (China) and Pune(India). The small facility in Stoney Creek(Canada) was divested at the end of 2005.StrategyDSM Engineering Plastics wants to furtherstrengthen its leadership position with astrong focus on performance materials andspecialties. All activities are centered oncreating value for the business group’scustomers and for DSM. Thanks to itsoutstanding knowledge of products andapplications, combined with excellent servicelevels, the business group is increasinglyable to position itself as a valuable, solutionsorientedbusiness partner.Business reviewMarket growth for engineering plasticsstrengthened during the year. Salesincreased in all regions for all major productlines and in all relevant markets. Asiashowed the strongest growth while theautomotive markets in Europe and USAdemonstrated slow growth. The successfulstart-up of the new Akulon ® polyamide 6line in Emmen contributed immediately afterstart-up and supported strong growth in theflexible packaging market.DSM Engineering Plastics successfullyimplemented price increases to cope withthe continuing increase in raw materialprices. For the part of the business that isbased on products manufactured in Europefor the world market, the adverse impactfrom currency exchange rates eased a littlewith the relative strengthening of the USdollar against the euro. The business groupwas able to maintain the favorable costposition built up in previous years.Successful price increases, volume growththrough innovative new applications andcontinued cost control were the mainreasons for the improved operating profit.ProjectsThe business group started the constructionof a new compounding site in Jiangyin(China) that will increase capacitysignificantly and will replace the existingsite; the site will start operations early 2006.DSM Engineering Plastics also started theengineering for a new Akulon ® polyamide 6plant in China.The new Stanyl ® Superflow polyamide 46and Arnite ® XL PBT products introducedlast year were successful in the market. Thede-bottlenecking of the existing Stanyl plantled to a much higher than projectedthroughput.Together with leading customers DSMEngineering Plastics developed a variety ofnew applications. Some examples areArnitel ® TPE-E based crash buffers thatmake a strong contribution to the safety ofrail transport of chemical and dangerousgoods, and electronic throttle control gearswith Stanyl ® polyamide 46. The market forairbag canisters developed very favorablythanks to the increasing numbers of airbagsin automobiles; Akulon ® polyamide 6 is theleading product for this application. Akulon ®XP, a new polyamide 6 product deliveringhigher productivity for the flexible packagingindustry, is being received very well.The American and European organizationswere certified to ISO/TS 16949 during theyear under review. DSM EngineeringPlastics further re-aligned its NorthAmerican business and sold the PPcompoundbusiness and associated assetsin Canada.DSM Coating ResinsOperating profit increasedThe DSM Coating Resins business groupconsists of three business units: CoatingResins, Desotech and NeoResins.DSM Coating ResinsThe DSM Coating Resins business unitspecializes in the development, manufactureand marketing of resins for coating systems.The unit is one of the global leaders inpowder coating resins, with a market shareof about 25%. These resins are used inindustrial applications for the coating of forexample washing machines, radiators,façades, car parts and bicycles. In EuropeDSM Coating Resins is a leading supplierof liquid coating resins. These productsare mainly used in decorative and industrialcoatings. The unit focuses on thedevelopment and production ofenvironmentally friendly coating resinssystems that show interesting growth inEurope. DSM Coating Resins has plants inthe Netherlands, Spain, the USA, Germany,Sweden, China and Taiwan.Annual Report 2005www.dsm.com48

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesStrategyDSM Coating Resins aims to strengthen itsposition as one of the market leaders with afocus on environmentally friendly coatingresins systems and a continued OperationalExcellence drive. Its aim is to reduce costsin the value chain by maximizingcollaboration with customers and suppliers.Business reviewThe DSM Coating Resins business unit’spowder coatings market showed highlydifferent growth rates between the regions.The North American market recovered fromthe decline in previous years and showedmoderate growth. The overall Europeanmarket showed growth rates at GDP levels,with double-digit rates for Eastern Europeand the Middle East. The Far Easternmarket featured a decline of theChinese market in the first half of2005, with good recovery during thesecond half of the year and a moderategrowth rate in the rest of Asia. Marketdynamics were determined by the globalovercapacity situation, reflected by severeprice pressure and soaring feedstockprices. Price increases and, to a lesserextent, volume growth partiallycompensated for the steep increase in rawmaterial cost increases.A reduction in volume in can and coilcoating resins was recorded as a correctionto the unexpectedly high growth rate in theyear before. Similar to the powder resinsbusiness, price increases partiallycompensated for the steep increase in rawmaterial costs.In 2005 the results for liquid coating resinswere below expectation. Especially inEurope the market was slow. Theincreasing raw material costs throughoutthe year could be partially passed on to themarket.In October 2005 DSM Coating Resinsacquired the Chinese resins producerSyntech. This is an important step that willhelp reinforce DSM’s resins portfolio andspeed up the expansion of DSM’s activitiesin China. The DSM Coating Resinsbusiness unit’s overall operating profitshowed a strong increase comparedwith 2004.DSM NeoResinsThe DSM NeoResins business unit, whichhas been part of DSM since 1 February2005, is a leading global supplier ofinnovative waterborne resins, uniquelysuited to the needs of the coatings,adhesives and graphic arts industries. Byfar the greater part of sales is in the area ofcoating applications, with the remainingportion in graphic arts and, to a lesserextent, adhesives. These waterborne andother environmentally-friendly technologiescomprise acrylics, urethanes, urethaneacrylics,vinyl acrylics and other copolymers.DSM NeoResins focuses on strongcustomer relations to develop new productsand technologies with specific performancegoals. The broad portfolio of waterborne,solvent-borne and solid resins is supportedby the company's ongoing commitment toquality, service, technical innovation andoperational excellence. DSM NeoResinsmarkets its products globally andhas manufacturing sites in Waalwijk(Netherlands), Parets del Valles (Spain),Wilmington (Massachusetts, USA) andFrankfort (Indiana, USA).StrategyDSM NeoResins’ market approach isto detect high growth and high marginsin niche applications. DSM NeoResins’waterborne platform enables it to supplyspecial product characteristics in a marketthat is moving towards environmentallyfriendly systems. The main focus for thebusiness will be on innovation and capturinggrowth opportunities in waterborne systemsand geographic growth in North Americaand Asia. In order to provide capacity forthe growing market, capacity expansion isplanned in Europe.Business reviewMost of DSM NeoResins’ sales aregenerated in Europe (70%) and the USA(20%). The remainder is mainly realized inAsia. While the decorative segments in theUSA and Europe were strong, given thestrength of the US housing market and theupcoming VOC legislation in Europe, theindustrial segments and graphic artsshowed some signs of weaknessAnnual Report 2005www.dsm.com49

Review of businessPerformance Materialsworldwide. For the longer term, continuedgrowth of construction and industrialproduction will be driving the growth of thisbusiness, along with the migration to ecofriendlytechnologies. The upcoming VOClegislation in 2007 and 2010 will positivelyimpact on developments in the next fewyears.DSM DesotechThe DSM Desotech business unit is aleading producer of specialty UV-curablecoatings and resins. These are materialsthat cure very rapidly in an environmentallyfriendly fashion when exposed to ultravioletlight. DSM Desotech is the market leader inthe supply of coatings for optical fibers andinks and matrix resins that are used in fiberoptic cables. The business unit is a comarketleader in the supply ofstereolithographic resins that are cured bylaser technology for the production of rapidprototypes for a wide variety of industries. Itis also active in the supply of antireflectivecoatings used in the area of LCD andplasma flat panel displays. DSM Desotechmarkets its products globally with mainsales being in the USA, Europe, China,Japan and Korea. Its headquarters are inElgin, Illinois, USA. The plants are located inStanley (North Carolina, USA), Hoek vanHolland (Netherlands), and in Shanghai(China). DSM Desotech also has a 50/50joint venture with JSR in Japan, whichsupplies the Japanese market. Researchand Development is critical to Desotech’sgrowth, with main centers being in Elgin(USA), Geleen (Netherlands) andTsukuba (Japan).StrategyDSM Desotech’s strategy is to maintain itsleading market share in fiber optics, whichis expected to be a fairly stable businessfrom a profit point of view. Beyond that,Desotech will grow its overall revenue andprofit by using its technology base instereolithography, flat panel displays andUV chemistry.Business ReviewThe DSM Desotech business unit saw thefiber optic market grow by 10-15% in 2005on a global basis. However, price pressuresthroughout the chain led to minimal valueincreases in the overall business. The bulkof the growth was in the USA. Activities inJapan shrank due to a reduction in NTT’s(Nippon Telegraph and TelephoneCorporation) Fiber to the Home project.Activities in China also slowed down due toeconomic measures instituted by theChinese government. The business unitexpects moderate growth in fiber opticsover the next few years.DSM Desotech’s Somos business, whichsupplies stereolithographic resins used forrapid prototyping, saw its sales grow bymore than 15% in 2005. The businessfocuses on new materials that can be usedin extending the application ofstereolithography and will eventually movetowards rapid manufacturing of smallvolume part runs. 3D Systems, the marketleader in equipment supply, has become adistributor of Somos’ resins.DSM Coating Resins’ overall operatingprofit increased very strongly, partlybecause of the consolidation of DSMNeoResins.

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesProjectsThe acquisitions in 2004 (HAL) and in 2005(NeoResins and Syntech) leveraged DSMCoating Resins’ worldwide presence aswell as its ability to pursue different pocketsof innovation. The product portfolio, route tomarket and innovation capabilities havebeen substantially strengthened by theseacquisitions.To integrate the DSM NeoResins businessinto the DSM Coating Resins business, anintegration project called Inspire wasstarted immediately after closing. Inspireaims to ensure that the benefits of joiningforces are maximized in terms of cost/purchase savings and to create a jointplatform for profitable growth for the future.Purchasing savings have already beencaptured and the analysis of innovationareas that leverage the bundling of DSMand NeoResins expertise andcompetences has been finalized.Good progress was made with thedevelopment and market introduction of animproved generation of waterborne alkydresins. To an increasing degree thedecorative and industrial markets requirewaterborne paint with the same qualitiesas systems based on organic solvents.In 2005 the liquid coating resins site inHoek van Holland (Netherlands) wentthrough a major restructuring program.The objectives of this project – improvingcost effectiveness as well as ensuring fullcompliance with the DSM requirements –were met.For the DSM Desotech business unitthe main projects are focused on costreductions, strengthening the company'spositions in Asia and developing innovativegrowth businesses. The Somos businesshas been consolidated to the Elginheadquarters, which brings cost andsynergy advantages.DSM Composite ResinsStrong improvementDSM Composite Resins is a globally leadingsolutions provider for the composite resinsindustry. The business group develops,produces and markets unsaturatedpolyester resins (including vinyl esters andadditives), which are used for the productionof fiber-reinforced plastics or non-reinforcedfilled products in end-use applications suchas marine, leisure, building & construction,automotive and wind turbine blades. Thebusiness group is the European marketleader in unsaturated polyesters (UPE) andhas its own pan-European distributor(Euroresins). DSM Composite Resins is theglobal market leader in sizings and binders,which are vital functional components thatfacilitate the production of glass fiberreinforcements and enhance theirperformance. China is the fastest growingmarket for sizings and binders and thebusiness group is investing in localproduction in this country. The businessgroup has had a presence in China for along time via JDR, a 75% owned joint venturein Nanjing that is active in unsaturatedpolyesters and is growing rapidly.With headquarters in Switzerland, DSMComposite Resins has production sitesin France, Italy, the Netherlands, Spain,the UK and China. In addition, CustomerCompetence Centers are located inFrance, Germany, Italy, the Netherlands,Scandinavia, Spain and the UK. Besides itsWestern European base, DSM CompositeResins holds positions in Poland, Chinaand the USA.StrategyDSM Composite Resins wants to lead theindustry through dedication and innovation.The business group aims to effectuate andstrengthen its European leadership byplaying a frontrunner role in the compositeresins industry to compete with aluminiumand steel composites. The group focuseson cost efficiency and innovation and at thesame time is expanding globally, especiallyin China, targeting high-added-valuesegments. The Sizings and Bindersbusiness unit is the global expert andportfolio player in this segment, dedicatedto the glass fiber industry.Business reviewMarket developments were mixed in 2005,leading to different pictures due to the localfor-localcharacter of the UPE market.The building and construction market inthe United Kingdom showed some signsof recession and the automotive marketcontinued to have difficulties passing onthe increased raw material prices. Marinecontinued its strong growth. As in theprevious year, raw material prices remainedhigh and volatile, but increases wererelatively moderate. Margins consequentlyreturned to sustainable levels, resulting inan improvement in profitability. Sizingsand Binders continued to grow strongly,especially in China, but the unit also facedhigher raw material costs. Growth in theUPE market in China was somewhatslower, but DSM strengthened its positionin the specialty segments thanks to a focuson quality and innovation.The business group’s operating profit for2005 showed a strong improvementcompared with 2004.ProjectsIn 2005 substantial investments weremade in the business group’s Europeanproduction sites to proactively meet thestricter regulations in the fields of safety andthe environment. DSM Composite Resinswants to further reinforce its leadership byinvesting in sustainability. In 2006 this will becontinued, also in China. For Sizings andBinders the new production site in Chinawill start towards the end of 2006, entailingproximity to DSM Composite Resins’biggest and fastest growing customers.The business group will further invest ininnovation and in expanding its presencein Eastern Europe.Annual Report 2005www.dsm.com51

Review of businessIndustrial ChemicalsIndustrial Chemicals comprises the business groupsthat produce industrial chemicals such as fiberintermediates, melamine and fertilizers. The cluster'sshare in DSM's net sales is 20%.‰x € million 2005 2004net sales*:- DSM Fibre Intermediates (including D SM Acrylonitrile) 1,243 1,127- DSM Melamine 212 209- DSM Agro 370 351- DSM Energy 74 60total 1,899 1,747operating profit 165 120operating profit plus amortization and depreciation 246 207capital expenditure 85 75capital employed at 31 December 728 673operating profit as % of average c apital employed 23.5 17.5research and development 14 16workforce at 31 December 2,234 2,566* Before elimination of intra-group supplies to other clusters.The Industrial Chemicals cluster consists ofDSM Fibre Intermediates, DSM Melamineand DSM Agro. These business groupsproduce materials and chemicals in largescale,capital-intensive production facilities.Essential features of these businesses,which operate plants in the Netherlands,Asia and the USA and are thus global inscope, are strong customer relations (oftengeared to the long term), keen costawareness and careful planning of anycapacity expansions. DSM Energy is alsopart of this cluster.Our caprolactam and melamine businessesare among the global leaders in terms ofsales and technology. DSM Agro, ourfertilizer company, is active in NorthwesternEurope. DSM Energy has small but profitablestakes in various oil and gas fields in theDutch part of the Continental Shelf.Supplies of Industrial Chemicalsx million20022003200420050 500 1000 1500 2000Operating profit of Industrial Chemicalsx million200420050 50 100 150 200Annual Report 2005www.dsm.com52

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesDSM Fibre IntermediatesFurther profit improvementDSM Fibre Intermediates producescaprolactam and acrylonitrile, which are rawmaterials for synthetic fibers and plastics.Caprolactam is the raw material for nylon 6(also called polyamide 6). Nylon 6 is aversatile material, which in the form of fibersis used in sports and leisure clothes, militaryequipment, and also in tires and carpets. Itis increasingly used as a high-performanceconstruction material in, for example, theelectronics and automotive industries, inpackaging materials and in medicalapplications. Nylon 6 has reached themature phase of its life cycle, where marketdemand and selling prices are stronglyinfluenced by economic cycles.DSM Fibre Intermediates has caprolactamplants in the Netherlands, the USA andChina, with a total capacity of more than500,000 tons per year. This makes it thelargest merchant producer in the world,with a market share of 15%. In addition, thebusiness group produces about one milliontons of fertilizer (ammonium sulfate) per yearas a co-product.Acrylonitrile is a raw material used in textilefibers, ABS plastics, latex rubber and waterpurification products. The business group’sacrylonitrile production capacity is 235,000tons per year. With a market share of 25%,DSM is a major player in the merchantacrylonitrile market in Europe.DSM Fibre Intermediates also producesabout 25,000 tons per year of sodiumcyanide, which is used in detergents, inwater purification products and in thesynthesis of vitamins and antibiotics.StrategyDSM Fibre Intermediates’ distinguishingcharacteristics are its process technology,reliability and service. The business groupaims to exploit its global cost andtechnology leadership position incaprolactam while growing its position inChina parallel to a further strengthening inEurope and North America. For acrylonitrile,DSM Fibre Intermediates aims tostrengthen its manufacturing base tomaintain its solid position in Europe.Business reviewGlobal demand for caprolactam grew in2005 compared with 2004. Prices were onaverage higher than in 2004 as demandwas strong even in the face of high rawmaterial prices. Energy-related raw materialprices (e.g. ammonia prices) remainedvolatile and high relative to historical normsbut declined slightly compared to 2004.Natural gas prices in the USA skyrocketedin the second half of 2005. Margins were onaverage higher than in 2004, helped bysustained high selling prices and the effectsof cost control measures.Demand for acrylonitrile was comparable to2004. The steady rise in raw material prices,especially for propylene, could be recoupedwith higher selling prices.DSM Fibre Intermediates closed the year2005 with a higher profit than in theprevious year thanks to higher margins.ProjectsThe capacity of DSM Fibre Intermediates’caprolactam plant in Nanjing (China) wasexpanded to 140,000 tons per year onthe basis of DSM’s HPO Plus ® technology,during a shutdown of the plant from Mayuntil September. The plant will reach itsnew capacity level in 2006. The expansionwill make the business group the leadingsupplier in the rapidly growing Chinesemarket. DSM Fibre Intermediates is planningan additional expansion to support thismarket growth. It is studying the feasibilityof expanding the capacity of its acrylonitrileplant in Geleen (Netherlands) by 40,000 tonsper year.DSM MelamineDifficult year for successful businessMelamine is a product used in impregnatingresins and adhesive resins for the woodprocessingindustry. It boosts the scratch,moisture and heat resistance of woodbasedproducts. Melamine can becombined with softwood from rapidlygrowing trees to obtain high-quality panelsthat can replace hardwood. One of its mainapplications is in laminated flooring, whichis a market that has been expanding rapidlyfor several years, particularly in Europe andChina. Melamine is also used in many otherproducts, such as car paints, durableplastic tableware, euro bank notes andflame retardants.With a market share of about 25%, DSMMelamine is the global leader in melamine.The business group is well established, withproduction plants on three continents and asophisticated technical support system inplace for its customers. It earns more thanhalf its sales from long-term contracts. DSMMelamine’s aggregate production capacityis 240,000 tons per year. The new plant inGeleen (Netherlands), which is based onadvanced SLP technology, is not yetproducing at capacity, but is expected toreach its capacity level in 2006.Annual Report 2005www.dsm.com53

Review of businessIndustrial ChemicalsStrategyDSM Melamine’s objective is to furtherstrengthen its leading position in a marketthat is growing at an average rate of 6-7%per annum. From a demand point of view,the long-term outlook is reasonably gooddue to the growing scarcity of hardwood.Due to the high price of natural gas, theprices of raw materials and auxiliarymaterials for the production of melamine areat a structurally higher level than in the past.There is an ongoing need to increase thescale of operations still further and to gainaccess to low-cost raw materials, in orderto achieve the necessary further reductionin costs. Major customers expect theirsuppliers to provide them with productsand support services all over the world. Themelamine industry is therefore likely to see arestructuring.Business reviewDemand for melamine grew by 2% in 2005.Following the exceptional growth in 2004, inthe first half of 2005 the business group sawcustomers depleting their stocks. Chinawas once again the center of growth in2005. DSM has developed formulations forlow-formaldehyde-emission resins.Together with customers it has successfullydevised new applications, for example inOSB (Oriented Strand Board) panels andflame retardants. Furthermore, formulationshave been developed that give resins alonger shelf life and thus increase thegeographical reach of a resins plant. In2005 the prices of natural gas andammonia in the USA reached record highs,due in part to the hurricanes. In line withthis, the AMEL plant, a 50/50 productionjoint venture with Cytec, saw its productioncosts increase significantly. Given the priceof melamine on the world market, DSM’sproduction operations in the USA wereloss-making.In Europe and Asia, too, the costs of rawmaterials and auxiliaries increased verystrongly. Melamine prices did not increaseuntil the fourth quarter. As a result, marginswere considerably lower than in previousyears. The 2005 operating result wasslightly positive.ProjectsMid-2005 DSM announced to Cytec thatit would pull out of the AMEL joint venturewith effect from August 2007 at the latest.DSM will take timely measures to ensurecontinuity of supply to its Americancustomers.DSM intends to implement major capacityexpansions in response to market growth inAsia and the need for a low-cost supply ofthe markets in the USA. Negotiations on anew 120,000 metric tons/year plant, basedon DSM’s proprietary gas phase knowhow,are progressing well. The plant isexpected to come on stream at the endof 2008.DSM AgroOnce again a better performanceDSM Agro is a producer of ammonia andhigh nitrogen fertilizers for grasslands andagricultural crops, which it supplies mainlyto agricultural wholesalers in WesternEurope. DSM Agro is the market leader inthe Netherlands and ranks among themarket leaders in Germany, France andBelgium. It is the number 2 supplier ofcalcium ammonium nitrate (CAN) andammonium sulfate (AS) in Western Europe.Its fertilizer production facilities are locatedin Geleen and IJmuiden (Netherlands). DSMAgro operates world-scale ammonia plantsin Geleen.StrategyDSM Agro’s strategy is to maintain aprofitable position in Western Europe. Ontop of this, DSM Agro makes an additionalcontribution to DSM’s cash flow byproviding DSM’s production facilities at theGeleen site with a sustainable and securesupply of raw materials and auxiliaries at thelowest possible cost. DSM Agro alsosupplies these raw materials (such asammonia, nitric acid and carbon dioxide) tothird parties in Europe.Business reviewThe year 2004 had been characterized bya balanced market with good returns, butin 2005 the fertilizer market was relativelytight. Following a hesitant start in the firstquarter, the situation developed favorablyin the course of the year. Bad farmingconditions led to weak demand in WesternEurope, but this turned around in the secondquarter as weather conditions improved.Backed by globally high urea and ammoniaprices – resulting from high gas prices anda healthy ammonia balance – at the end ofthe first half of 2005 healthy fertilizer priceswere recorded. This situation continued inthe second half of the year with the fertilizerbalance becoming very tight and customersrushing for materials, leading to recordprice increases towards the end of the year.These developments helped DSM Agroachieve an even better performance thanin the already strong 2004.Annual Report 2005www.dsm.com54

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesProjectsDSM Agro is well underway with on-lineorderingvia webshop and business-tobusinessconnectivity in 2005. Theseactivities were expanded further in 2005;almost 50% of fertilizer turnover is nowe-enabled. The facilities in IJmuiden havebeen upgraded to ensure a larger volumeand broader portfolio of fertilizer specialties.The Copernicus project in Geleen andOperational Excellence programs inIJmuiden led to substantial cost reductionsat both sites in 2005, and will also furtherimprove DSM Agro’s competitive positionin 2006.DSM EnergyVery strong profit increaseDSM Energy participates in the explorationand production of oil and gas on the DutchContinental Shelf. The business group isalso involved in the transportation of oil andgas through its ownership of pipelines onthe Shelf. DSM usually participates as nonoperatorwith a stake of up to 25% in the oiland gas joint ventures. At year-end, thebusiness group had a share in nineteenproducing oil and gas fields and participatedin four gas field developments. All fields arelocated in fifteen production licenses.The production decline is due to the factthat most fields in the portfolio are matureand their production capacity is decreasingdue to pressure decline and increasingwater-cut. The new Q1-b field, started upin 2004, contributed nearly 50% to thegroup’s overall production.The remaining reserves at the end of theyear in the producing fields were about ninemillion bbls of oil equivalent, the same asthe year before. The discovery of the newG14 gas fields compensated for thereduction in reserves resulting from theproduction of two million bbls in 2005.In spite of the production decline thebusiness group’s operating profit increasedvery strongly compared to 2004. This wasdue to the increased oil price. The averageBrent price in 2005 was $ 54 per barrel,compared to $ 38 per barrel in 2004.StrategyDSM Energy’s strategic mission is tomaximize cash flow by minimizing cost andmaximizing production in the existinglicenses.Business reviewIn 2005 a gas discovery was madein offshore block G14. The fast-trackdevelopment decision for this field was takenat the end of the year. The development oftwo other new fields in the same block wascompleted and production started up inNovember 2005. The production licensefor the A/B blocks, containing six shallowgas accumulations, was granted. Thedevelopment of three of these reservoirsstarted in 2005. Total production of thegroup decreased from 2.3 million bbls of oilequivalent in 2004 to 2.0 million bbls in 2005.Annual Report 2005www.dsm.com55

Review of businessOther ActivitiesDSM reports on a number of activities that have beengrouped under Other activities. Their share in DSM'soverall net sales is 6%.‰x € million 2005 2004net sales* 498 485operating profit -49 -20operating profit plus amortization and depreciation -3 24capital expenditure 26 26workforce at 31 December 2,787 2,953* Before elimination of intra-group supplies to other clusters.Other activities includes the DSM Venturing& Business Development business group,Noordgastransport and a number of otheractivities such as DSM Industrial Services,DSM Research, DSM Insurances and partof the costs of corporate activities and noncoreactivities that are to be disposed of orreduced in the future. Due to their verynature, these activities can be subject tobusiness fluctuations and will normally havea negative operating result.Interests in associatesThe main activity under this heading is Methanor VoF (30% DSM). Methanor, a producerof methanol, turned in a reasonable performance in the first half of 2005. In the secondhalf, oil and gas prices skyrocketed while global methanol prices remained stable. As aconsequence, the company was barely able to cover variable costs and during the lastquarter of 2005 it incurred significant losses. One of the two lines was taken out ofoperation and the second one ran at bare minimum capacity to fulfill contractualcommitments. As soon as alternatives for these commitments have been developed,probably by mid-2006, the second unit will also be closed and the VoF will be liquidated.Because of these developments the value of this associate has been impaired.Annual Report 2005www.dsm.com56

Section 2 Review of businessLife Science ProductsDSM Nutritional ProductsPerformance MaterialsIndustrial ChemicalsOther ActivitiesDSM Venturing & BusinessDevelopmentDSM Venturing & Business Developmentparticipates in external start-up companies(Venturing) and initiates small businessesthat gradually develop into grown-upbusinesses (Business Development).StrategyDSM Venturing & Business Development ison a constant quest for innovativebusinesses or technologies in the fields oflife science products (nutritional products,pharmaceuticals) and performancematerials.VenturingDSM Venturing explores new markets andtechnologies to strengthen DSM’s activitiesand product portfolio. DSM Venturing playsan important part in DSM’s open innovationpolicy and invests in activities that are ofimmediate or potential relevance to DSM’sbusiness groups and their current or futuremarkets. In 2005 DSM Venturing addedOryxe Energy (fuel additives) to its portfolio,which comprises ten direct investments.Speedel (drug development), in which DSMVenturing invested in 2003, listed its shareson the Swiss Stock Exchange. DSM'sparticipation in Sciona (genetic tests forpersonalized health and wellness advicewith applications in nutrition, sports and skincare), which took place in 2004, signaledDSM’s first steps in the field of personalizednutrition. This is one of the areas DSM willfocus its innovation efforts on in the comingyears. DSM Venturing is also involved in anumber of venture capital funds.Business developmentActivities in which DSM Venturing &Business Development was involved in2005 included the development of a liquidfor a new generation of computer-chipmanufacturingequipment and PictoClear,an anti-reflective coating system based ona nano-structured surface. In addition,DSM Medical Coatings was launched.This entity develops and markets innovativephoto-curable polymer coatings for medicaldevices. DSM Venturing & BusinessDevelopment also initiated a specialtypackaging project and developed a numberof bio-process business opportunities. Mostof these activities will be further developedin the newly created Emerging BusinessAreas, as part of DSM’s Vision 2010 strategy.Start-upsThe business group’s portfolio comprisesthe following start-ups: Micabs ® (lasermarking), Hybrane ® (highly branchedpolyester amides, used in for exampleoil field chemicals and cosmetics) andPremi ® Test (for rapid detection of antibioticresidues in meat, fish, eggs, urine andblood). These businesses made significantprogress and established strongermarket positions.Grown-upsDSM Venturing & Business Developmentalso manages a number of grown-ups:DSM Solutech (producer of ultra-thin butvery strong Solupor ® film which is used infor example fuel cells and drug deliverysystems) and SBR (Styrene ButadieneRubber). The latter was sold in 2005because it no longer fitted in DSM’sportfolio.NoordgastransportNoordgastransport (NGT) transports gasproduced offshore through a system ofpipelines from gas fields in the North Sea toa processing plant in Uithuizen in the northof the Netherlands. Here, the gas is treatedso that it matches customers’ specifications,before being delivered to these customers.DSM Industrial ServicesDSM Industrial Services consists of variousunits. Some services are provided for theGeleen site (Netherlands), others aretargeted at DSM organizations all over theworld. These services include technologicalconsultancy, expertise in energy andauxiliary materials, the supply of utilities,human resources and the management ofthe Chemelot site in Geleen. The Copernicusproject, aimed at re-organizing this activity,was completed in 2005. Manufacturingrelatedservices have been regrouped intothe new DSM Manufacturing Center (DMC).The savings objective of Copernicus, € 50million on an annual basis, is expected to beachieved in 2006.StamicarbonStamicarbon had a successful andchallenging year. It continued to be theworld’s leading urea licensor with a marketshare of approximately 70%. In 2005Stamicarbon granted a license for a grassrootsurea plant in Egypt and for a largerevamp project in China. Furthermore, itstarted broadening its scope as the DSMLicensing Center. Stamicarbon uses itslong-standing experience to professionalizeDSM’s licensing-out and licensing-inactivities and to create more value fromintellectual property. These activities areinstrumental to boosting DSM’s innovationprocess.EdeAEdeA VoF owns, operates and maintainsmost of the production and distributionfacilities for utilities (i.e. steam, power andwater) at the Chemelot site in Geleen(Netherlands). EdeA VoF is a joint venturewith Essent, an energy production anddistribution company in which DSM’s stakeis 50%.Heerlen, 8 February 2006The Managing BoardPeter Elverding, chairmanJan Zuidam, deputy chairmanHenk van DalenFeike SijbesmaChris GoppelsroederAnnual Report 2005www.dsm.com57

Report by the Supervisory Board of Directors to the shareholdersThere were several changes in thecomposition of the Supervisory Boardduring the year under review. Mr Sosaresigned from the Supervisory Board on6 April 2005 at his own initiative becausethe intercontinental travels related to hisBoard membership were increasinglybecoming a burden to him. The SupervisoryBoard is grateful to Mr Sosa for hiscommitment to the company during hisfive-year membership and his constructiveand valuable contribution to the Board’swork. According to the rotation scheme itwas Mr Müller’s turn to resign. He wasreappointed by the Annual General Meetingon 6 April 2005 on the understanding that –in compliance with the Dutch CorporateGovernance Code – he will step down atthe Annual General Meeting in 2007, as hewill by then have served the maximum termof twelve years on the Supervisory Board.Mr Sonder and Mr Hochuli were appointedas Supervisory Board members by theAnnual General Meeting on 6 April 2005.On 1 April 2005 Mr Dopper stepped downas a member of the Managing Board. TheSupervisory Board would like to express itssincere appreciation for all that Mr Dopperdid for the company during the many yearshe worked for DSM, of which almost sixwere served on the Managing Board. Theresulting vacancy on the Managing Boardwas filled by the appointment by theAnnual General Meeting on 6 April 2005of Mr Goppelsroeder with effect fromthe same date. In his previous positionMr Goppelsroeder had been responsiblefor DSM Nutritional Products’ NorthAmerican business and, as Project Directorof the VITAL project, had supervised theintegration of the acquired Roche Vitamins& Fine Chemicals business into DSM. Forpersonal reasons, Mr Goppelsroeder hasdecided to relinquish his position with effectfrom 1 April 2006. The Supervisory Boardwishes to express its appreciation for thecontribution he made to the successfulintegration of the former Roche businesswithin DSM and for his commitment toDSM during his period of ManagingBoard membership.After having worked for DSM 29 years, ofwhich six were served on the ManagingBoard, Mr Van Dalen has decided to pursuehis career as Chief Financial Officer of theDutch express, logistics and postal servicesgroup TNT with effect from 1 April 2006. TheSupervisory Board would like to express itssincere appreciation for all that Mr VanDalen has done for the company, especiallyfor his key role in the transformation processof DSM, both during the execution of Vision2005 over the past five years and in theestablishment of DSM’s new strategicdirection as outlined in the Vision 2010 –Building on Strengths program.The Supervisory Board held six meetingsin the presence of the Managing Boardduring the year under review. Each ofthese meetings was preceded by a privateSupervisory Board meeting. The SupervisoryBoard also devoted a separate meeting toits profile, composition and functioning.The composition and performance of theManaging Board were also discussed atthe same meeting. The meeting concludedthat all members of the Supervisory Boardwere independent, as defined by the DutchCorporate Governance Code, and thatthe competences of its individual memberswere in aggregate in line with the Board’sprofile. Virtually all Supervisory Boardmeetings in 2005 were attended by all itsmembers. One of the meetings was heldin China; on this occasion the SupervisoryBoard visited several DSM sites (in Beijing,Nanjing, Wuxi and Shanghai) and hadsessions on the Chinese economic,financial, political and business environment.The composition of the Audit Committeechanged in 2005. Mr Van Woudenbergstepped down as member of the AuditCommittee and was succeeded byMr Herkströter. The Audit Committee, thusconsisting of Messrs Bodt (chairman),Müller and Herkströter, met three times in2005. The external auditor was inattendance at these meetings, and at mostmeetings the internal – operational – auditorwas present as well.The main topics of discussion during theAudit Committee meeting held in Februarywere the adoption of the group’s financialstatements, the external auditors’comments and their assessment of DSM’sannual accounts and internal controlsystems. In addition, various aspectsrelating to the conversion to IFRS werediscussed. The meeting concluded that theexternal auditors were independent ofDSM. The main topics discussed during themeeting held in June were the work of theCorporate Operational Audit department,some IFRS technicalities, Directors’ &Officers’ liability and the status of the TrueBlue project concerning the furtherupgrading of the internal control and riskmanagement system. The possibility of astock split was also discussed. The mainagenda items during the Committee’sDecember meeting were the provisions andimpairments for 2005, an interim report bythe external auditor and the CorporateOperational Audit plan for 2006.Furthermore the committee was informedabout DSM’s risk management system.The composition of the Nomination andRemuneration Committee also changed.Mr Kist was appointed as member ofthis Committee. He succeeded Mr Bodt.The Committee, thus consisting of MessrsHerkströter (chairman), Van Woudenbergand Kist, met five times in 2005.The Committee’s activities regardingremuneration are described in detail onpage 64 (in the chapter on remunerationpolicy). The Committee made suggestionsfor dealing with future changes in thecomposition of the Supervisory Board.The Committee made a recommendationconcerning the remuneration of members ofthe Managing Board. This recommendationwas adopted by the Supervisory Board.Information on the group’s remunerationpolicy is to be found on page 62 of thisannual report.Annual Report 2005 www.dsm.com58

Report by the Supervisory Board of Directorsto the shareholdersThe Supervisory Board and the ManagingBoard discussed company matters on aregular basis during the year under review.The Supervisory Board discussed andapproved the Capital Expenditure andFinancing Plan for 2005. Approval wasgiven for the refinancing of the existing bondmaturing at year-end 2005. The financialresults recorded by the various companyunits and developments at these unitswere discussed at every meeting. Specialattention was paid to those units that werenot performing well or whose futureprospects were less bright. Various meetingsincluded a discussion of the progress madein implementing the corporate strategyadopted in 2000, as set out in Vision 2005:Focus and Value. Furthermore theSupervisory Board held in-depth discussionswith the Managing Board on the newstrategy program for the next five years.The Board approved the new strategyprogram, which has been named Vision2010 – Building on Strengths, focusing onaccelerating profitable and innovative growthof DSM’s specialties portfolio. The Boardsupports the ambitious targets set and willsee to the implementation of this strategy.The Supervisory Board monitored theprogress of the transformation andintegration process at DSM NutritionalProducts (formerly Roche’s Vitamins & FineChemicals Division, which DSM acquired in2003) and a similar program for theintegration of the NeoResins business thatwas acquired in early 2005. The SupervisoryBoard supported the continuation ofthe collaboration with North ChinaPharmaceutical Group Corporation (NCPC)in Shijlazhuang, China, on the formationof a strategic alliance and the possibility offorming joint ventures for the productionof vitamins and antibiotics. The SupervisoryBoard approved the sale of DSM BakeryIngredients (excluding Baking Enzymes)and the share in the South African jointventure Rymco. The Board also approvedthe divestment of the styrene-butadienerubberbusiness and the divestment of theChilean DSM Minera iodine business.The Supervisory Board approved theacquisition of coating resins producerSyntech, located in the Guangdong area(China). The Board also approved two majorinvestment projects in Greenville (NorthCarolina, USA) for building additionalcapacity for the production ofDyneema ® fibers.The Supervisory Board gave its approvalfor the Heureka project regarding majorrestructuring measures at the Linz (Austria)site. The Board agreed with the assetstreamlining within the DSM PharmaceuticalProducts business group, leading to theclosure of the South Haven (USA) site in2007 and the mothballing of the Montreal(Canada) site.The Supervisory Board approved thereplacement of two existing stand-by creditfacilities by one new facility.The Supervisory Board agreed with aproposal that was to be presented to anextra General Meeting of Shareholders foramending the articles of association inconnection with a two-for-one share split.The Supervisory Board discussedthe dividend policy in relation to theimplementation of IFRS and approved thecontinuation of the existing policy. TheSupervisory Board approved the interimdividend to be paid for 2005 and theproposal to be made to the Annual GeneralMeeting regarding the final dividend to bepaid out for 2005.As in previous years, the SupervisoryBoard invited managers from a numberof DSM business groups and corporatestaff departments to its meetings, to presentrelevant developments in their unitsin person.Discussions were held with the externalauditor, Ernst & Young Accountants, aboutthe financial statements and the financialreports for 2005. The Report by theManaging Board and the financialstatements for 2005 were submitted to theSupervisory Board by the Managing Board,in accordance with the provisions of Article30 of the Articles of Association, andsubsequently approved by the SupervisoryBoard in its meeting on 8 February 2006.The financial statements were audited byErnst & Young Accountants, who issuedan unqualified opinion (see page 133 ofthis report).We submit the financial statements to theAnnual General Meeting of Shareholders,and propose that the shareholders adoptthem and discharge the Managing Boardfrom all liability in respect of its managerialactivities and the Supervisory Board from allliability in respect of its supervision of theManaging Board. The profit appropriationas approved by the Supervisory Board ispresented on page 134 of this report.In 2005 DSM achieved an operating profitwhich considerably surpassed the result ofthe previous years, and also succeeded inimproving its safety, environmental andhealth performance. DSM has achievedalmost all of the strategic goals set out inVision 2005: Focus and Value and hassuccessfully concluded the Group’stransformation into a specialty company,realizing more stable and higher earnings.This strong foundation will enable thecompany to embark on the Vision 2010 –Building on Strengths program withconfidence. The Supervisory Board wishesto express its sincere appreciation for thecompany’s performance and would like tothank the Managing Board and allemployees for all the good work done.Heerlen, 8 February 2006The Supervisory BoardCor Herkströter, chairmanHenk Bodt, deputy chairmanPierre HochuliEwald KistOkko MüllerClaudio SonderCees van WoudenbergAnnual Report 2005www.dsm.com59

Corporate OrganizationSupervisory BoardCor A. Herkströter (1937, m), ChairmanFirst appointed: 2000. End of currentterm: 2008.Position: retired; last position held: Presidentof Koninklijke Nederlandsche PetroleumMaatschappij N.V. and Chairman of theCommittee of Managing Directors ofRoyal Dutch/Shell Group.Nationality: Dutch.Supervisory directorships and otherpositions held: chairman of the SupervisoryBoard of the ING Group, chairman of theAdvisory Committee on the Listing andIssuing Rules of Euronext Amsterdam N.V.,trustee of the International AccountingStandards Committee Foundation (IASCF),professor of International Management atthe University of Amsterdam, chairman ofthe Social Advisory Council of theTinbergen Institute, member of the AdvisoryCouncil of Robert Bosch.Henk Bodt (1938, m), Deputy ChairmanFirst appointed: 1996. End of currentterm: 2008.Position: retired; last position held:Executive Vice President of PhilipsElectronics N.V.Nationality: Dutch.Supervisory directorships and otherpositions held: member of the SupervisoryBoards of ASM Lithography N.V., NeopostSA and Delft Instruments N.V.Pierre Hochuli (1947, m)First appointed: 2005. End of currentterm: 2009Position: Chairman of the Board ofDirectors of Devgen N.V., chairman of theExecutive Committee and member of theBoard of Directors of Unibioscreen S.A. andmember of the Board of Directors ofOncomethylome S.A.Nationality: Swiss.Supervisory directorships and otherpositions held: Venture Partner ofPolytechnos Venture-Partners GmbH.Ewald Kist (1944, m)First appointed: 2004. End of currentterm: 2008.Position: retired; last position held:Chairman of the Managing Board of theING Group.Nationality: Dutch.Supervisory directorships and otherpositions held: member of the SupervisoryBoards of De Nederlandsche Bank N.V.,Philips Electronics N.V. and Moody’sInvestor Services, member of the Board ofGovernors of the Peace Palace in TheHague (Netherlands).Okko Müller (1936, m)First appointed: 1994. End of currentterm: 2007.Position: retired; last position held: memberof the Managing Boards of Unilever N.V.and Unilever PLC.Nationality: German.Supervisory directorships and otherpositions held: Chairman of the SupervisoryBoard of Unilever Deutschland HoldingGmbH (till 9 December 2005).Claudio Sonder (1942, m)First appointed: 2005. End of currentterm: 2009.Position: retired; last position held:Chairman of the Managing Board ofCelaneseNationality: Brazilian and German.Supervisory directorships and otherpositions held: member of the SupervisoryBoards of Companhia Suzano de Papel eCelulose S.A. (Brazil), Suzano PetroquimicaS.A. (Brazil), RBS-Media Group (Brazil),Cyrela Brazil Reatty S.A. (Brazil), HospitalAlbert Einstein (Brazil) and member of theBoard of the Ibero-America Association,Hamburg (Germany).Cees Van Woudenberg (1948, m)First appointed: 1998. End of currentterm: 2006.Position: member of the ExecutiveCommittee of Air France.Nationality: Dutch.Supervisory directorships and otherpositions held: member of the SupervisoryBoards of Transavia CV, Mercurius GroupWormerveer B.V. and CoöperatieveVereniging Verenigde BloemenveilingAalsmeer B.A., member of the managementcommittee of the Confederation ofNetherlands Industry and Employers (VNO-NCW); chairman of the Dutch employers’association AWVN.Managing BoardPeter A. Elverding (1948, m), ChairmanPosition: chairman of DSM’s ManagingBoard since July 1999; member of theManaging Board since October 1995.Nationality: Dutch.Supervisory directorships and otherpositions held: president of the EuropeanChemical Industry Council (CEFIC),member of the Board of the AmericanChemical Council (ACC), member of theSupervisory Board of N.V. NederlandseGasunie and chairman of the Committee ofDelegate Members of the SupervisoryBoard of N.V. Nederlandse Gasunie till 1January 2006, vice-chairman of theSupervisory Board of De NederlandscheBank N.V., member of the SupervisoryBoard of VNU N.V., member of the GeneralCouncil of the Confederation of NetherlandsIndustry and Employers (VNO-NCW),chairman of the management committee ofStichting Management Studies till January2006; member of the Supervisory Board ofthe University of Maastricht and theTransnational University of Limburg.e-mail: peter.elverding@dsm.comJan Zuidam (1948, m), Deputy ChairmanPosition: deputy chairman of DSM’sManaging Board since January 2001;member of the Managing Board sinceJanuary 1998.Nationality: Dutch.Supervisory directorships and otherpositions held: member of the SupervisoryBoard and the Committee of DelegateMembers of the Supervisory Board of N.V.Nederlandse Gasunie (till 1 January 2006),member of the Supervisory Board ofGamma Holding N.V., vice-chairman of theDutch Chemical Industry Association(VNCI), chairman of the Supervisory Boardof the ORBIS medicare group, chairman ofthe Netherlands Forum for Technology andScience; member of the Supervisory Boardof the Bonnefanten Museum in Maastricht(Netherlands), chairman of the TechnologyCommittee of the Confederation ofNetherlands Industry and Employers (VNO-NCW).e-mail: jan.zuidam@dsm.comAnnual Report 2005www.dsm.com60

Corporate organizationHenk Van Dalen (1952, m)Position: member of DSM’s ManagingBoard since January 2000.Nationality: Dutch.Supervisory directorships and otherpositions held: member of the SupervisoryBoard of Macintosh Retail Group N.V. andNIB Capital Group, member of theSupervisory Board of Stichting Verpakkingen Milieu Pact (SVM) (on behalf of the Dutchpolymer sector), board member of theFoundation for ResponsibleEntrepreneurship (SVA), member of theBoard of Advisors of AIESEC Nederland,member of ‘Ambassadeursnetwerk’, acouncil set up by the Dutch government topromote women’s participation ingovernance and leadership, member of theAdvisory Council of ADL Benelux.e-mail: henk.dalen-van@dsm.comFeike Sijbesma (1959, m)Position: member of DSM’s ManagingBoard since July 2000.Nationality: Dutch.Supervisory directorships and otherpositions held: board member of EuropaBio(European Association for BiotechIndustries), board member of BIO(Biotechnology Industry Organization,USA), board member of the Dutch TopInstitute for Food Sciences WCFS(Wageningen Centre for Food Sciences –WCFS), member of the Supervisory Boardof Utrecht University and member of theSupervisory Board of the Dutch GenomicsInitiative, board member of DuVo (DutchFood Chain Sustainability Foundation) andboard member of SGCI (Swiss Society ofChemical Industry), member of the AdvisoryBoard of RSM Erasmus University andmember of the Advisory Board of ECP.NL.e-mail: feike.sijbesma@dsm.comChris Goppelsroeder (1959, m)Position: member of DSM’s ManagingBoard since April 2005.Nationality: Swiss.Supervisory directorships and otherpositions held: None.e-mail: christoph.goppelsroeder@dsm.comOther corporate officers(as at 31 December 2005)Corporate SecretaryPaul Fuchs (1946)Directors of business groupsDSM Fine ChemicalsHenk Numan (1949)DSM Pharmaceutical ProductsLeendert Staal (1953)DSM Anti-InfectivesNico Gerardu (1951)DSM Food SpecialtiesRob van Leen (1957)DSM ElastomersBen van Kooten (1951)DSM Engineering PlasticsJos Goessens (1951)DSM Coating ResinsDon Verstegen (1944)DSM Composite ResinsJan Paul de Vries (1958)DSM Fibre IntermediatesBill Price (1944)DSM MelamineHans Dijkman (1948)DSM AgroRenso Zwiers (1955)DSM EnergyFrank Choufoer (1951)DSM Venturing & Business DevelopmentHenk Numan (1949)Directors of corporate departmentsand servicesFinance & EconomicsArnold Gratama van Andel (1946)Human ResourcesBen van Dijk (1951)Planning & DevelopmentHein Schreuder (1951)Chief Innovation Officer (as of 01/01/2006)Rob van Leen (1957)Safety, Health, Environment &ManufacturingJohn Prooi (1946)DSM Nederland B.V. /DSM Industrial ServicesJust Fransen van de Putte (1943)Chief Information OfficerJo van den Hanenberg (1947)CommunicationsBernard van Schaik (1951)President DSM ChinaStefan Sommer (1959)Chief Purchasing OfficerTon Trommelen (1950)Legal AffairsPieter de Haan (1954)Operational AuditRoelof Mulder (1946)Strategic ProjectsHans van Suijdam (1950)Strategic ProjectsFrans Pistorius (1948)Annual Report 2005www.dsm.com61

Remuneration Policyregarding the Managing Board and the Supervisory BoardRemuneration Policy as from 2005This chapter comprises two parts. The firstpart outlines the remuneration policy for2005 and subsequent years as approvedby the Annual General Meeting on 6 April2005. The second part contains details ofthe remuneration received in 2005.Remuneration policy as from 2005Objectives of remuneration policy for 2005and onwardsThe objective of DSM’s remuneration policyis to attract, motivate and retain thequalified and expert individuals that thecompany needs in order to achieve itsstrategic and operational objectives.Below, the following elements of theremuneration policy will be addressed:– DSM strives for high performance inthe field of sustainability/Triple P, findinga balance between economic gain,respect for people and concern for theenvironment. The remuneration policyshould reflect a balance between theinterests of DSM’s main stakeholders aswell as a balance between the Company’sshort-term and long-term strategy. Inthe light of the remuneration policy, thestructure of the remuneration packagefor the Managing Board is designed tobalance short-term operationalperformance with the long-term objectiveof creating sustainable value within thecompany, while taking account of theinterests of all stakeholders.– To ensure that highly skilled and qualifiedmanagers can be attracted and retained,DSM aims for a total remuneration levelthat is comparable to levels provided byother Dutch multinational companies thatare similar to DSM in terms of size andcomplexity. For that purpose, externalreference data are used. See belowfor an outline of the labor marketreference group.– The remuneration policy for the membersof the Managing Board is aligned with theremuneration of other senior executivesof DSM.– In designing and setting the levels ofremuneration for the Managing Board,the Supervisory Board also takes intoaccount the relevant provisions ofstatutory requirements, corporategovernance guidelines and other bestpractices applicable to DSM.Annual Report 2005Labor Market Peer GroupIn order to be able to recruit the right caliberof people for the Managing Board and tosecure long-term retention of the currentBoard members, DSM has taken externalreference data into account in determiningadequate salary levels. For that purpose, aspecific labor market peer group has beendefined which consists of Dutch companiesthat are headquartered in the Netherlandsand are more or less comparable to DSM interms of size, international scope andcomplexity of industrial operations.The labor market peer group consists ofthe following ten companies:– Aegon – Numico– Akzo Nobel – Nutreco– Getronics – Océ– Heineken – TNT– KPN – Wolters KluwerProfessional independent remunerationexperts have modified the raw data of thepeer-group companies using a statisticalempirical model, so as to make themcomparable with a company the size ofDSM, with the associated scope andresponsibilities of the Managing Board.Peer-group data will be updated on anannual basis.DSM operates in a competitive internationalindustry. Therefore, DSM will also closelymonitor industry-specific internationaldevelopments with respect to remuneration,notably at the following companies: CIBA,Clariant, Degussa, Lonza and Solvay.The European industry peer group isinfluenced by factors such as the typeof organization and the organizationalsuperstructure of these companies.Therefore in assessing DSM pay levels,the peer data are used with caution, as theydo not reflect the specific organizationalstructure of DSM.Below, the various remunerationcomponents are addressed separately.Base SalaryOn joining the Board, the Managing Boardmembers receive a base salary that iscomparable with the median of the labormarket peer group. Every year base salarylevels are reviewed. Adjustment of the basesalary is at the discretion of the SupervisoryBoard, which takes into account externaland internal developments.www.dsm.comBonusManaging Board members can earna bonus amounting to 50% of their annualbase salary for on-target performance.Under the bonus plan, the part of the bonusthat is related to financial targets accountsfor 35% of base salary, which can increaseto 52.5% in the case of an exceptionallygood financial performance.The part of the bonus that is not related tofinancial targets accounts for 15% of the basesalary and cannot increase beyond that.Bonus part linked to financial targetsThe part of the bonus that is linked tofinancial targets includes elements relatedto operational performance, beingoperating profit and free cash, reflectingshort-term financial results, in addition toCFROI. The balance of the financialelements of the bonus is CFROI 17.5%,operating profit 10% and free cash 7.5%of annual base salary for on-targetperformance.On-target Maximumpay-out pay-out(% of base) (% of base)Financial targets:- CFROI 17.50 26.25- Operating Profit 10.00 15.00- Free Cash 7.50 11.25Non-financial targets 15.00 15.00total 50.00 67.50CFROIThe definition of CFROI has beenestablished in such a way that therealization of the CFROI target can bederived from the financial information in theannual report and is as follows 4 :62recurring EBITDA – related annual tax– economic depreciation (1%)gross asset base (incl. working capital)CFROI focuses on value realization andcreation compared with the WeightedAverage Cost of Capital (WACC)established for DSM.4 Recurring EBITDA is defined as: EBIT excluding exceptional itemsplus depreciation and amortization as reported in the profit andloss account. Related annual tax is defined as taxes paid minus theeffect of exceptional items as reported in the statement of income.Economic depreciation is defined as a 1% charge on the historicvalue of intangible assets and property, plant and equipment asreported in the balance sheet (see notes 9 and 10 to the consolidatedfinancial statements). Working capital is defined as inventories plusreceivables minus other current liabilities as reported in the balancesheet. The 1% charge represents the fund to be formed to replacethe average asset mix after economic lifetime ends. Gross asset baseis defined as the historic value of property, plant and equipment andintangible assets plus average annualized working capital.

Remuneration Policy regarding the Managing Boardand the Supervisory BoardRemuneration Policy as from 2005Remuneration 2005Operational performanceThere are two financial-target-related bonuselements that allow for a focus on shorttermoperational targets: operating profitand cash. These can be derived from thefinancial statements and are definedas follows:– Operating profit: EBIT excludingexceptional items.– Free cash, defined as cash from operatingactivities minus capital expenditure (asshown in the cash flow statement) andminus the average dividend paid in theprevious three years.The company is of the opinion that thecombination of CFROI (value realization andcreation), operating profit and free cashadequately reflects the company’s financialperformance. Targets will be determinedeach year by the Supervisory Board, basedon historical performance, the operationaland strategic outlook of the company in theshort term and expectations of thecompany’s management and stakeholders,among other things. The targets contributeto the realization of the objective of longtermvalue creation.In determining the realization of theoperating-profit target, a (partial) adjustmentmechanism for sensitivity to the euro/dollarratio will apply. The company will notdisclose the actual targets, as they qualifyas commercially sensitive information.Besides financial targets, 15% of the basesalary is related to non-financial targets.These targets will be defined in areasrelating to the strategic development of thecompany and Triple P, among other things.Stock IncentivesThe stock incentive plan has been adjustedwith effect from 2005. Non-performancerelatedoptions and a part of theperformance-related options have beenreplaced by performance shares, up toan equal balance of stock options andperformance shares in terms of economicvalue (calculated by independent specialistson the basis of the Black-Scholes methodand the weighted-probability method). Bothstock options and performance sharesoperate on the basis of the sameperformance schedule.The vesting of stock options andperformance shares is conditional on theachievement after three years of previouslydetermined target levels of Total ShareholderReturn (TSR) compared to the peer group.The Chairman will receive 10,000performance shares and 37,500performance options; the members ofthe Board will receive 8,000 performanceshares and 30,000 performance options.Exercise/Grant priceThe stock options and shares are grantedon the first ‘ex dividend’ day following theAnnual General Meeting at which DSM’sannual accounts are adopted. The exerciseprice/grant price of the stock incentives willbe equal to the opening price of the shareon the date of grant.TSR as a performance measureDSM’s TSR performance is comparedto the average TSR performance of a setof pre-defined peer companies. TSRmeasures the returns received byshareholders and captures both the changein a company’s share price and the valueof dividend income. This measure is usedas it assesses long-term value creation bythe company.The TSR peer group for 2005 consists ofthe following companies:– Akzo Nobel – EMS Chemie– BASF Holding– Bayer – ICI– CIBA – LanxessSpezialitätenchemie – Lonza Group– Clariant – Rhodia– Degussa – SolvayThis peer group is not the same as the oneused for determining remuneration levels.The latter is chosen to reflect the relevantlabor market. Compared with the peergroup for 2004, Lanxess has been addedto this group after its spin-off from Bayer.The peer group used for benchmarkingTSR performance reflects the relevantmarket in which the company competes forshareholder preference. It includes sectorspecificcompetitors which the SupervisoryBoard considers to be suitable benchmarksfor DSM. The peer group is verified bythe Supervisory Board each year basedon market circumstances (mergers,acquisitions) which determine theappropriateness of the composition ofthe performance peer group.In view of the evolution of DSM, its portfoliodevelopment and industry context, theSupervisory Board has reconsidered thecomposition of the peer group for 2006.Bayer will be excluded, whilst Danisco/Genencor and Novozymes will be includedin the peer group.Performance with regard to TSR will remainthe criterion for the vesting of stock optionsand performance shares.Depending on DSM’s performancecompared to the peer group a certainnumber of options will become exercisableand a certain number of shares will beunconditionally awarded. The stock optionscan be kept for a maximum of eight years(including the three-year vesting period)while the shares shall be retained by themembers of the Managing Board for aperiod of at least five years (after the threeyearvesting period) or at least untiltermination of employment if this period isshorter. The final performance of DSMversus its peers will be determined andvalidated by a bank and audited by theexternal auditor at the end of theperformance period.Performance incentive zoneThe number of options and shares thatbecome unconditional after three yearsis determined on the basis of DSM’sperformance relative to the averageTSR performance of the peer group. Thedifference between DSM’s performanceand the peer group’s performance (inpercentage points) determines the vesting.Annual Report 2005www.dsm.com63

Remuneration Policyregarding the Managing Board and the Supervisory BoardRemuneration 2005The following table gives an overview ofthe vesting conditions.DSM performance minus Percentage of performance-relatedpeer group performancestock options that becomein % pointsexercisable and shares awarded≥ 20 100 %≥ 10 and < 20 75 %≥ -10 and < 10 (Target) 50 %≥ -20 and < -10 25 %< -20 0 %PensionsThe members of the Managing Board areparticipants in the Dutch pension fund“Stichting Pensioenfonds DSM Chemie(PDC)”. PDC operates similar pension plansfor various DSM companies. The pensionprovision of the Managing Board is equal tothe pension provision for the employees ofDSM Limburg BV and executives employedin the Limburg area.Due to changes in legislation with respect topre-pensions, the pension plans of PDChave been revised with effect from1 January 2006. Since the Managing Boardmembers are participants in the PDCpension plans, these changes apply to theManaging Board as well.The non-pension early-retirement schemeand the temporary individual pensionscheme will be revised too.For members of the Managing Board bornbefore 1 January 1950 (Peter Elverding andJan Zuidam) continuation of the presentpension plans will be possible. Continuationof the present plans will not be possible forother Board members. For Henk van Dalenand Feike Sijbesma a transitionalarrangement will be applicable. As a result,retirement before the age of 65 will remainpossible. Chris Goppelsroeder onlyparticipates in the plan with a retirementage of 65.Employment ContractsTerm of employmentThe employment contracts of the membersof the Managing Board appointed before1 January 2005, have been entered into foran indefinite period of time. Newly appointedmembers of the Managing Board are alsooffered an employment contract for anindefinite period of time. The employmentcontract ends on the date of retirement orby notice of either party.Term of appointmentMembers of the Managing Board appointedbefore 1 January 2005 are appointed for anindefinite period of time. New members ofthe Managing Board (after 1 January 2005)will be appointed for a period of four yearsas Board Member. Newly appointedmembers are subject to reappointmentby the shareholders after a period offour years.Notice periodTermination of employment by a memberof the Managing Board is subject to threemonths’ notice. A notice period of sixmonths will for legal reasons be applicablein the case of termination by the company.Severance arrangementThere are no specific contractual exitarrangements for the members of theManaging Board appointed before1 January 2005. Should a situation arise inwhich a severance payment is appropriatefor these Board members, the Nominationand Remuneration Committee willrecommend the terms and conditions.The Supervisory Board will decide uponthis, taking into account usual practicesfor these types of situations, as well asapplicable laws and corporate governancerequirements.The employment contracts of newlyappointed members of the ManagingBoard (after 1 January 2005) will include anexit arrangement provision which is inaccordance with best practice provisionII.2.7. of the Dutch Corporate GovernanceCode (i.e. a sum equivalent to the fixedannual salary, or if this is manifestlyunreasonable in the case of dismissalduring the first term of office, two times thefixed annual salary).Remuneration 2005Nomination & Remuneration CommitteeThe Nomination & RemunerationCommittee (hereinafter referred to as ‘theCommittee’) reviews the remunerationpolicy on a regular basis and proposeschanges to this policy to the SupervisoryBoard. The Committee consists entirely ofSupervisory Board members. Its membersare Mr Herkströter (Chairman), Mr Kist andMr Van Woudenberg. The Corporate VicePresident Human Resources acts as theSecretary to the Committee.TheCommittee met five times in 2005. Duringthese meetings it discussed theremuneration for 2005 for the ManagingBoard. The Committee also defined targetsfor the bonus plan and assessed the degreeto which the members of the ManagingBoard had achieved their targets for theprevious year. The Committee maderecommendations for stock options andperformance shares to be granted to theManaging Board. The Committee alsodiscussed proposals to revise the pensionscheme for the Managing Board. Finally, theCommittee discussed the changes in theManaging Board (Jan Dopper and ChrisGoppelsroeder).Remuneration 2005The remuneration package for theManaging Board is subject to annualreview. The market competitiveness of theremuneration package of the ManagingBoard for 2005 was reviewed, based on theDutch labor market peer group. The databelow reflect the July 2005 remunerationlevels. All values are denominated in euros.Target bonus and stock option grants areexpressed as a percentage of base salary.The remuneration data are regressed toreflect the size and scope of DSM. Stockincentive valuations are based on the Black-Scholes method.Annual Report 2005www.dsm.com64

Remuneration Policy regarding the Managing Boardand the Supervisory BoardRemuneration Policy as from 2005Remuneration 2005Furthermore, data are presented as medianactual levels.Benchmark against Dutch labor marketpeer group 2005Peer groupManaging Board Chairman DSM medianBase salary 612,000 750,000Bonus at target (%) 50% 65%Total Cash at target 918,000 1,237,500Annualized Stock Incentive Value (%) 34% 65%total Direct Compensation 1,126,080 1,725,000Peer groupBoard member DSM medianBase salary 470,000 470,000Bonus at target (%) 50% 60%Total Cash at target 705,000 752,000Annualized Stock Incentive Value (%) 36% 50%total Direct Compensation 874,200 987,000Base salary in 2005The Committee reviewed whethercircumstances justified an adjustment ofthe base salary levels. Based on the 2005benchmark against the peer group, it wasestablished that the base salary for thechairman was at the lower quartile whilstthe members of the Managing Board werearound the median level. Although a gradualmove toward the median level of theexternal benchmark is part of the policy,no extra increase was effectuated on1 January 2005. External and internalcircumstances however justified a modestgeneral increase of the base salary witheffect from 1 July 2005 to cope with inflationand labor market developments. The basesalary was increased by 2% with effect from1 July 2005.In order to move closer towards the medianlevel of the benchmark a 5% increase ofthe base salary of the chairman will beeffectuated on 1 January 2006. After thisincrease, the gap with the median of themarket for the chairman remainsconsiderable.Bonus for 2005Bonus targets are revised annually so as toensure that they are stretching but realistic.Considerations regarding the performancetargets are influenced by the operationaland strategic course taken by the companyand are directly linked to the company´sambitions. The targets are determined atthe beginning of the year for each Boardmember.Target bonus level and pay-outWhen they achieve all their targets,Managing Board members receive abonus of 50% of their annual base salary.Outstanding financial performance canincrease the bonus level to 67.5% of theannual base salary.The 2005 annual report presents thebonuses that have been earned on thebasis of results achieved in 2005. Thesebonuses will be paid out in 2006.The Supervisory Board has established theextent to which the targets for 2005 wereachieved. The targets relating to the group’sfinancial performance were all met andpartially even exceeded. The other, nonfinancialtargets were also fully realized. Theaverage realization percentage was 62.5%.See page 68 for tabular overviews on theactual bonus pay-out per individual Boardmember in 2005.To move further towards the median levelof the benchmark, the at-target bonuspercentage for all members of the ManagingBoard will be increased from 50% to 60%with effect from 1 January 2006. After thisincrease, there is still a gap for the chairman,whilst the members will be at the median ofthe 2005 benchmark.Stock options and (performance) sharesin 2005Stock incentives granted in 2005In 2005 performance-related stock optionsand performance shares were granted tothe Managing Board. The respective stockincentives were granted on April 8, 2005against an exercise/grant price (after stocksplit) of € 29.05. The table below showsthe number of stock incentives granted tothe individual Board members:Number of stock incentives granted*Stock PerformanceoptionssharesPeter Elverding 37,500 10,000Jan Zuidam 30,000 8,000Henk van Dalen 30,000 8,000Feike Sijbesma 30,000 8,000Chris Goppelsroeder 30,000 8,000* After stock split.Vesting of stock incentives in 2005In 2005, besides the regular vesting ofnon-performance-related options, allperformance-related options granted in2002 vested on the basis of DSM’sperformance relative to the aforementionedpeer group (≥ 20%).Outstanding and exercised stock incentivesin 2005The tables below show the stock incentivespositions of the individual members of theManaging Board and the rights exercisedduring 2005.Annual Report 2005www.dsm.com65

Remuneration Policyregarding the Managing Board and the Supervisory BoardRemuneration 2005Overview of Stock options/ Stock Appreciation Rights (SARs) *Peter Elverding outstanding at outstanding at average shareDecember 31 during 2005 December 31 exercise price at2004 granted exercised vested forfeited 2005 price exerciseVested stock options (1) : 1999 36,000 -36,000 0 13.005 31.4452000 45,000 45,000 18.2402001 75,000 75,000 19.9902002 0 75,000 75,000 23.505Unvested stock options: 2002 75,000 -75,000 0 23.5052003 75,000 75,000 18.1952004 75,000 75,000 17.8952005 (2) 37,500 37,500 29.050Total 381,000 37,500 -36,000 0 0 382,500Jan Zuidam outstanding at outstanding at average shareDecember 31 during 2005 December 31 exercise price at2004 granted exercised vested forfeited 2005 price exerciseVested stock options (1) : 1999 36,000 -36,000 0 13.005 31.4452000 36,000 36,000 18.2402001 60,000 60,000 19.9902002 0 60,000 60,000 23.505Unvested stock options: 2002 60,000 -60,000 0 23.5052003 60,000 60,000 18.1952004 60,000 60,000 17.8952005 (2) 30,000 30,000 29.050Total 312,000 30,000 -36,000 0 0 306,000Henk van Dalen outstanding at outstanding at average shareDecember 31 during 2005 December 31 exercise price at2004 granted exercised vested forfeited 2005 price exerciseVested stock options (1) : 1999 22,500 -22,500 0 13.005 26.5952000 36,000 -36,000 0 18.240 30.6722001 60,000 60,000 19.9902002 0 60,000 60,000 23.505Unvested stock options: 2002 60,000 -60,000 0 23.5052003 60,000 60,000 18.1952004 60,000 60,000 17.8952005 (2) 30,000 30,000 29.050Total 298,500 30,000 -58,500 0 0 270,000Feike Sijbesma outstanding at outstanding at average shareDecember 31 during 2005 December 31 exercise price at2004 granted exercised vested forfeited 2005 price exerciseVested stock options (1) : 1999 15,000 -15,000 0 13.005 31.0002000 22,500 -22,500 0 18.240 31.0002001 60,000 60,000 19.9902002 0 60,000 60,000 23.505Unvested stock options: 2002 60,000 -60,000 0 23.5052003 60,000 60,000 18.1952004 60,000 60,000 17.8952005 (2) 30,000 30,000 29.050Total 277,500 30,000 -37,500 0 0 270,000Annual Report 2005www.dsm.com66

Remuneration Policy regarding the Managing Boardand the Supervisory BoardRemuneration Policy as from 2005Remuneration 2005Chris Goppelsroeder outstanding at outstanding at average shareDecember 31 during 2005 December 31 exercise price at2004 granted exercised vested forfeited 2005 price exerciseUnvested SARs: 2003 59,000 59,000 19.7702004 59,000 59,000 17.895Unvested stock options: 2005 (2) 30,000 30,000 29.050Total 118,000 30,000 0 0 0 148,000Jan Dopper outstanding at outstanding at average shareDecember 31 during 2005 December 31 exercise price at2004 granted exercised vested forfeited 2005 price exerciseVested stock options: 1999 27,000 -27,000 0 13.005 26.7502000 36,000 36,000 18.2402001 60,000 60,000 19.9902002 0 40,000 40,000 23.5052003 0 40,000 40,000 18.1952004 0 40,000 40,000 17.895Unvested stock options (3) : 2002 60,000 -40,000 -20,000 0 23.5052003 60,000 -40,000 -20,000 0 18.1952004 60,000 -40,000 -20,000 0 17.895Total 303,000 0 -27,000 0 -60,000 216,000* After stock split.(1) All stock incentives (performance related as well as non-performance related) may only vest three years after the granting date.(2) Vesting of all stock incentives granted since 2005 is performance related.(3) At retirement date 2/3 of all unvested stock options become exercisable and 1/3 are forfeited.Restricted SharesPeter Elverding outstanding at outstanding at share priceDecember 31 during 2005 December 31 at date2004 granted vested forfeited 2005 of grantUnvested (1) : 2005 0 10,000 10,000 29.050Total 0 10,000 10,000Jan Zuidam outstanding at outstanding at share priceDecember 31 during 2005 December 31 at date2004 granted vested forfeited 2005 of grantUnvested (1) : 2005 0 8,000 8,000 29.050total 0 8,000 8,000Henk van Dalen outstanding at outstanding at share priceDecember 31 during 2005 December 31 at date2004 granted vested forfeited 2005 of grantUnvested (1) : 2005 0 8,000 8,000 29.050total 0 8,000 8,000Feike Sijbesma outstanding at outstanding at share priceDecember 31 during 2005 December 31 at date2004 granted vested forfeited 2005 of grantUnvested(1): 2005 0 8,000 8,000 29.050total 0 8,000 8,000Chris Goppelsroeder outstanding at outstanding at share priceDecember 31 during 2005 December 31 at date2004 granted vested forfeited 2005 of grantUnvested (1) : 2005 0 8,000 8,000 29.050total 0 8,000 8,000(1) Vesting of all stock incentives granted since 2005 is performance related.Annual Report 2005www.dsm.com67

Remuneration Policyregarding the Managing Board and the Supervisory BoardRemuneration 2005SharesAt year-end 2005 the members of theManaging Board together held 1,836 sharesin Royal DSM N.V.Pensions in 2005The members of the Managing Boardare participants in the Dutch pension fund“Stichting Pensioenfonds DSM Chemie”(PDC).The retirement age is 65. PDC operates twodifferent schemes: a pre-pension schemeproviding benefits between age 62 and 65and a basic pension scheme for old-agepension benefits as of age 65. The latterscheme is a defined-benefit final-pay scheme.Old-age pension rights are accrued accordingto vested years of service. Only base salary,after deduction of an offset, is pensionable. In2005 this offset was € 20,231.Early retirement planIn addition to the pension provisions as setout above, DSM operates a non-pensionearly-retirement scheme for the membersof the Managing Board. Early retirement ispossible from the age of 60 if the SupervisoryBoard decides so. The early-retirementincome is 80% of base salary during the firstsix months of payment and 75% thereafter.The early-retirement benefit stops at age65. The total attainable early-retirementincome is determined taking into account asan offset the benefits from the pre-pensionscheme operated by PDC. The earlyretirementbenefits do not accrue or vest.The early-retirement scheme is noncontributory.LoansThe Company does not provide any loansto members of the Managing Board. Thereare therefore no loans outstanding.Total remunerationThe total remuneration (including pensioncosts and other commitments) of ManagingBoard members amounted to € 3.9 millionin 2005 (2004: € 3.4 million). The increaseof € 0.5 million is mainly due to a higherbonus pay-out in 2005 (results DSM 2004).The accrual of pension rights in the salaryrange between the offset and € 50,810amounts to 1.75% per annum, and in thesalary range above € 50,810 to 1.55% perannum. The basic pension scheme includesentitlement to a pension and a waiver ofpension contributions in the event ofdisability, as well as a spouse’s/dependants’pension on death. Contribution to this basicpension scheme is a flat-rate percentage ofpensionable salary. The scheme participantscontribute a pension premium of 4% ofbase salary above € 50,810.The pre-pension scheme (PPS) is basicallya defined contribution scheme, in whichbenefits are based on the contributions paidby the participants. The scheme guaranteesa pre-pension income of 75% of basesalary from age 62, provided that theparticipant has paid the full contribution.Since July 1999 a (temporary) individualscheme has been applied to members of theManaging Board, aimed at accruingadditional pension rights (as of age 65). Thecompany pays a premium of 4.5% of themonthly base salary. This scheme is intendedto compensate for the fact that an old-agepension of max. 60% of the pensionablesalary will normally be attainable only after40 years of service. Old-age pension rightsare accrued according to vested years ofservice. In practice most current members ofthe Managing Board will not reach 40 yearsof service and therefore their maximumattainable old-age pension will be less than60% of their base salary and an even lowerpercentage of their total compensation(including bonuses and stock options).Overview of Remuneration 2005 – Managing BoardThe tables below show the remuneration paid to the Managing Board in 2005.Fixed Annual Salary in € 01.07.2004 01.07.2005Peter Elverding 599,760 612,000Jan Zuidam 461,040 470,000Jan Dopper (until 01.04.05) 461,040 n.a.Henk van Dalen 461,040 470,000Feike Sijbesma 461,040 470,000Chris Goppelsroeder (as from 01.04.05) n.a. 470,000Bonus in € 2005 1 2004 2Peter Elverding 378,675 215,914Jan Zuidam 290,950 165,974Jan Dopper (until 01.04.05) 31,380 3 165,974Henk van Dalen 290,950 165,974Feike Sijbesma 290,950 165,974Chris Goppelsroeder (as from 01.04.05) 218,913 4 n.a.1 Based on results achieved in 2005 and therefore payable in 2006.2 Bonus paid in 2005 based on results achieved in 2004.3 Bonus paid in 2005 based on estimated results achieved in Q1-2005.4 Pro-rated bonus based on results achieved in 2005.PensionPension costs (employer)Accrued pensionas of age 65in € 2005 2004 31-12-2005 31-12-2004Peter Elverding 111,482 110,289 283,206 274,162Jan Zuidam 86,148 85,250 225,192 218,298Jan Dopper (until 01.04.05) 21,401 85,250 n.a. 190,149Henk van Dalen 86,148 85,250 200,490 193,596Feike Sijbesma 86,148 85,250 140,745 133,851Chris Goppelsroeder (as from 01.04.05) 48,304 n.a. 48,830 n.a.Annual Report 2005www.dsm.com68

Remuneration Policy regarding the Managing Boardand the Supervisory BoardRemuneration Policy as from 2005Remuneration 2005Overview of Remuneration in 2005– Supervisory BoardThe remuneration package of theSupervisory Board comprises an annualfixed fee and an annual committeemembership fee. The fixed fee for theChairman of the Supervisory Board is€ 50,000. The members of the SupervisoryBoard each receive a fixed fee of € 35,000.Committee membership is awarded€ 5,000 per member and € 7,500 percommittee for the Chairman.In accordance with good corporategovernance, the remuneration of theSupervisory Board is not dependent onthe results of the Company. This impliesthat neither stock options nor shares aregranted to Supervisory Board membersby way of remuneration.If any shareholdings in DSM are held bySupervisory Board members, they serveas a long-term investment in the Company.At year-end 2005 the members of theSupervisory Board together held 8,084shares in Royal DSM N.V.The Company does not provide any loansto its Supervisory Board members.Rules have been adopted governingownership and reporting on transactionsin securities (other than securities issuedby DSM) by Supervisory Board members.The table below gives an overview of the remuneration paid to the Supervisory Boardin 2005.Supervisory Board Remuneration 2005Annual fixed Committeein € fee fee TotalCor Herkströter, Chairman 50,000 11,250 61,250Henk Bodt, Deputy Chairman 35,000 8,750 43,750Okko Müller 35,000 5,000 40,000Enrique Sosa ** 8,750 0 8,750Cees van Woudenberg 35,000 6,250 41,250Ewald Kist 35,000 3,750 38,750Claudio Sonder * 26,250 0 26,250Pierre Hochuli * 26,250 0 26,250TOTAL 251,250 35,000 286,250* Supervisory Board member since 06.04.05.** Supervisory Board member until 06.04.05.The table below shows the Committee membership of the Supervisory Board members in2005. Mr Herkströter chairs the Nomination and Remuneration Committee, whilst Mr Bodtis the chairman of the Audit Committee.Committee membershipAuditCommitteeNomination &RemunerationCommitteeCor Herkströter X* XHenk Bodt X X**Okko MüllerXEnrique SosaCees van Woudenberg X** XEwald Kist X*Claudio SonderPierre Hochuli* Since 06.04.05.** Until 06.04.05.Annual Report 2005www.dsm.com69

Corporate Governance, risk management and internal controlOrganization – Dutch Corporate Governance Code – Governance FrameworkIn the 2004 annual report, an extensive accountwas given of the way in which DSM conducts itsgovernance, risk management and control. In thissection, the main elements are reported, the overallgovernance framework is described, and the riskmanagement and control system is explained.‰8Web linkDetailed Corporate governance information canalso be found at www.dsm.com : GovernanceOrganizationRoyal DSM N.V. is a public limited companywith a Managing Board and an independentSupervisory Board. The Managing Boardis responsible for the company’s strategy,its portfolio policy, the deployment ofhuman and capital resources and thecompany’s financial performance as basedon these factors.The Supervisory Board supervises thepolicy pursued by the Managing Board,the Managing Board’s performance of itsmanagerial duties and the company’sgeneral state, taking account of the interestsof all the company’s stakeholders. Theannual financial statements are approved bythe Supervisory Board and then submittedfor adoption to the Annual General Meetingof shareholders, accompanied by anexplanation by the Supervisory Board ofhow it carried out its supervisory dutiesduring the year concerned.Members of the Managing Board andthe Supervisory Board are appointed (and,if necessary, dismissed) by the AnnualGeneral Meeting of shareholders.DSM fully informs its stakeholders about itscorporate objectives, the way the companyis managed and the company’s performance.Its aim in doing so is to pursue an opendialog with its shareholders and otherstakeholders.DSM has a decentralized organizationalstructure built around business groupsthat are empowered to carry out all businessfunctions. This structure ensures a flexible,efficient and fast response to marketchanges. DSM Nutritional Products is aseparate entity. At the corporate level, DSMhas a number of staff departments tosupport the Managing Board and thebusiness groups. The services of a numberof shared service departments and DSMResearch and intra-group product suppliesare contracted by the business groupsat market prices.Annual Report 2005www.dsm.com70

Section 3 Corporate Governance, risk managementand internal controlOrganizationDutch Corporate Governance CodeGovernance frameworkRisk management systemFinancial PolicyRisksDutch Corporate Governance CodeDSM supports the Dutch CorporateGovernance Code (Tabaksblat Code), andapplies all but one of the 113 Best Practices.The only exception is Best Practice III.5.11,which stipulates that the remunerationcommittee shall not be chaired by thechairman of the Supervisory Board. Thisexception has been discussed in theAnnual General Meeting of shareholders,where it met no objections. All documentsrelated to the implementation at DSM ofthe Dutch Corporate Governance Code,can be found at the corporate website(www.dsm.com).Governance FrameworkThe figure below depicts DSM’s overallgovernance framework. It shows howresponsibilities are divided over the variouslevels of the company and lists some of themost important governance elements andregulations at each level.The relationship between the ManagingBoard and the operational units (businessgroups, corporate staff departments andcentral service units) is described by thegovernance and risk management andcontrol framework that the Managing Boardhas established and to which theoperational units adhere.The most important governance elementsof this framework are:– The DSM Values to which both theManaging Board and the operationalunits adhere.– The governance model, including thecharters of several functional Boards,specifying the basic organizationalstructure and division of responsibilitiesbetween Managing Board andoperational units.– The Corporate Strategy Dialog (CSD),specifying the strategic direction andobjectives of the corporation andBusiness Strategy Dialogs (BSD).establishing unit strategy and objectives– Policies and Multi-Year Plans in severalfunctional areas.– The Corporate Requirements.Within the responsibilities as defined by thegovernance model and in the context of thestrategies and policies of the company, theoperational units have the freedom tooperate within the limits set by the CorporateRequirements (and of course in compliancewith all applicable national or internationallaws and regulations). These corporaterequirements form the basis for systematicrisk management and internal control atthe operational level. If a special situationcalls for it, the Corporate Requirementsare extended by so-called ManagementDirectives (e.g. a travel ban for securityreasons).Compliance with the CorporateRequirements and the effectiveness ofthe risk management and internal controlsystem are discussed regularly betweenManaging Board and operational units. Onaverage once every three years, the unitsare also audited by Corporate OperationalAudit (COA). The director of the COAdepartment reports to the Chairman of theManaging Board and has the authority toconsult with the Chairman of the AuditCommittee. Furthermore, the director ofCOA acts as the compliance officer withregard to inside information and is thechairman of the DSM Alert Committee,which implements the whistle-blower policy.ShareholdersArticles of AssociationSupervisoryBoard– Regulations of the Supervisory Board– Charter of the Audit Committee– Charter of the Remuneration CommitteeManagingBoard– Works according to DSM Values andRegulations of the Managing Board– Creates and maintains Governance andRisk Management Framework for BGs/CS/CSUsUnitManagementBGs/CS/CSU’s conduct their business withinGovernance and Risk Management Framework setby the Managing BoardNote: all internal regulations apply in addition to applicable national and international lawsand regulations. In cases where internal regulations are incompatible with national orinternational laws and regulations, the latter prevail.Annual Report 2005www.dsm.com71

Corporate Governance, risk management and internal controlRisk ManagementRisk Management SystemManaging Board LevelDSM’s risk management and internalcontrol system is based on the EnterpriseRisk Management framework of theCommittee of Sponsoring Organisations ofthe Treadway Commission (COSO ERM),and covers the eight risk managementelements identified in that framework.The COSO ERM risk managementelements– internal environment– objective setting– event identification– risk assessment– risk response– control activities– information & communication– monitoringBy instituting the governance structuresas described above and specifying a riskmanagement and internal controlframework for the operational units, theManaging Board has established theinternal environment for enterprise riskmanagement. The DSM Values andRequirements as well as policies in the fieldof finance and economics (page 74),human resources, safety, health andenvironment (SHE), security and legal affairsdefine the 'tone at the top' with regard toethical behavior and doing business.Strategies are established for every unit andtranslated into clear objectives, amongstothers, with regard to business, markets,innovation, financial results, SHE and socialmatters. The objectives are reviewed in theDSM ValuesIntroduction to the DSM Corporate RequirementsFunctional RequirementsStrategyLegalFinance and EconomicsSafety, Health and EnvironmentExternal CommunicationsSecurityInformation and Communication TechnologyResearch, Technology and DevelopmentProject ManagementPensionsUnit Risk Management RequirementsAnnual Strategic Review for the corporationas well as at unit level.Performance and compliance aremonitored consistently in discussionsbetween accountable management andthe Managing Board.The Corporate Strategy Dialog, executedevery three to five years, includes anelaborate process for the identificationand assessment of risks and the definitionof responses at the corporate level. Theseare updated in an annual Corporate RiskAssessment.Operational Unit LevelThe Corporate Requirements form thebasis for systematic risk management andinternal control at the operational level. Theyare structured as follows:The application of the CorporateRequirements leads to systematic riskmanagement and internal control. The UnitRisk Management (URM) Requirements‘govern’ the whole system and are thebackbone of the internal environment forrisk management in the operational units.They require that:– a risk management system be putin place.– risks be identified and assessed and riskresponses chosen.– compliance with applicable law andCorporate Requirements be monitoredand deviations corrected.– reporting of control failures beencouraged and identified material risksbe reported immediately.– the effectiveness of the risk managementsystem be assessed and reported,together with the compliance status, in anannual Letter of Representation.Business Process RequirementsOrder to CashPurchase to PayDemand Supply Chain ManagementManufacturingThe Corporate Requirements require thatCorporate Policies are translated intopolicies for the operational units. They alsostipulate that management should take thelead and give the example, and shouldkeep the employees accountable forcompliance. In this way the “tone at the top”is cascaded downward in the organization.Each operational unit executes a BusinessStrategy Dialog (BSD) at regular intervals.The outcome of this strategic process istranslated into clear objectives for financialas well as other functional and businessfields. As part of the BSD, events areidentified that could influence the risk profileof the business. It is an important aspect ofthe DSM risk management and internalcontrol system that it provides for theassessment, control and monitoring of risksin two ways:– Common Risk and Common ControlsIn companies such as DSM, a large part ofthe identifiable risks are directly linked to thenature of the operations. DSM has chosento identify and assess these common risksand design common controls for them.These mandatory common controls arepart of the Corporate Requirements andcover all functional fields. Especially in thefield of the primary flow of goods andproducts and the related financial controlprocesses, but also in some supportiveprocesses, implementation is supported bystandard ICT solutions. In these cases, thecontrols are built into so-called standardbusiness processes. A special tool (DSMi2i) supports the monitoring of theeffectiveness of a number of key controls inthese standard business processes.Through this concept of common risks andcommon controls, control or mitigation of alarge number of risks is achieved in anefficient and effective way.– Business-specific risks and responsesAccording to the Unit Risk ManagementRequirements, operational units arenevertheless required to carry out riskassessments following every BSD. Theseassessments are aimed at identifying anddesigning responses to risks that are notcovered by the common controls asdescribed above. In these cases specificresponses have to be identified andcontrols have to be implemented andmonitored.Annual Report 2005www.dsm.com72

Section 3 Corporate Governance, risk managementand internal controlOrganizationDutch Corporate Governance CodeGovernance frameworkRisk management systemFinancial PolicyRisksA business continuity plan needs to beprepared for an effective response to allrisks with a potentially serious impactwhich, although they have a very lowchance of occurring, cannot be excludedaltogether.The corporate Policies and Requirementsand their implementation in the operationalunits are the subject of mandatory trainingand specific attention is given tocommunication about risks, also, forexample, in job hand-over procedures atsenior management levels.To help the operational units inimplementing the risk management andinternal control system, the DSM BusinessSystem Portal has been developed (seefigure below).The portal is made available to them on theDSM intranet and all relevant Policies,Requirements, practices and standardbusiness processes are to be found underthe respective buttons. The operationalunits have to copy the portal for their ownuse and can add unit-specific Policies,Requirements and practices and make linksto documents archived, such asdocuments describing standard operatingprocedures.Application of the systemOf course, having a suitable riskmanagement system only leads to thedesired degree of control if it is effectivelyapplied. Below, the implementation of thesystem and the way in which theeffectiveness of implementation ismonitored is described for each COSOERM category: strategic, operational,reporting and compliance.StrategicIn the DSM risk management and internalcontrol system, a great deal of attention isgiven to ensuring that the strategic directionis clear at all times. At the corporate levelthe strategic choices for the company aremade through an elaborate process, theCorporate Strategy Dialog (CSD). Thestrategy is translated into concrete targets,financial and otherwise, the attainment ofwhich will be checked in annual strategicreviews. A similar process (BSD) takesplace in the operational units. In this wayDSM attempts to ensure that it understandsthe extent to which its strategic objectivesare being achieved.OperationalOperational risks are identified throughProcess Risk Assessments andcategorized as either business-specific orcommon; in the latter case the controls areprescribed in the Corporate Requirementsand, if applicable, implemented through astandard business process. Policies andplans are drawn up for each relevantoperational field, based on the chosenstrategy. Fulfillment of these plans ismonitored and reported at least on aquarterly basis and revised forecasts aremade. In this way, surprises with regard tothe operational results should be avoided.The business processes themselves,however, should also be reliable. Each stepin a process and its related risks must bedefined and controls must be put in place.DSM has developed and implementedstandard business processes; in theseprocesses the necessary internal control is“designed in”For units that have not yet implementedthe standard business processes, theCorporate Requirements describe whichcontrols need to be implemented as aminimum.ReportingTo ensure reliable financial reporting thereare detailed accounting and reportingrequirements and related annexesspecifying amongst other things reportingtime schedules and formats, the DSMChart of Accounts, the IFRS-compliantDSM Accounting Rules and the format for aquarterly affidavit, to be signed by theFinancial Director of each unit.The financial control process has also beentranslated into a standard businessprocess, with ‘built in’ internal controls suchas authorizations and segregations of duty,mandatory control reports anddocumented procedures.ComplianceIn its Corporate Requirements, DSM putsmuch emphasis on compliance withinternal rules as well as applicable externallaws and regulations. The text under theheading 'Management Leadership' in theHuman Resources section of theRequirements reads:“ Management is visibly committed to and,wherever applicable, leads by examplein, achieving full compliance with theDSM Values and Requirements and(local) legislation. Management ensuresthat systems, specific information andexpertise are available for its employees toensure compliance. It keeps its employeesaccountable for compliant behavior. Tosupport this, it has a policy in place withregard to the consequences”.StrategyCSDBG RequirementsHRMDSM ValuesCorporate RequirementsBG OrganizationRisk & Control AssessmentsRT&DBusiness Dev.QESH, Security& RegulatoryBG PoliciesProjectmanagementPerformancePeopleCompliance with the internal requirementsand external laws is monitored consistently.A special program on the assessment andreporting of SHE compliance is in place. Inthe field of compliance with CompetitionLaw an awareness program is run andrelevant people have to sign for compliance.BSDPtP Manufacturing PtO OtCPlanetDemand Supply Chain ManagementVBBSBIM &ICT securityAssetmanagementLegal AffairsFinance &controlMonitoring and continuous improvementProfitAnnual Report 2005www.dsm.com73

Corporate Governance, risk management and internal controlFinancial Policy – RisksFinancial PolicyAs a basis for and contribution to effectiverisk management and to ensure that thecompany will be able to pursue its strategieseven during periods of economic downturn,DSM retains a solid financial policy.One of the key targets of Vision 2010 is toachieve a cash flow return on investment(CFROI, see definition on page 62) which isat least 50 base points higher than theweighted average cost of capital (WACC).DSM further aims for a net debt which isbetween 30 and 40% of equity plus netdebt and an operating profit beforeamortization and depreciation (EBITDA)which is at least 8.5 times the balance offinancial income and expense. Thisunderlines the company’s aim of maintainingits single A long-term credit rating.An important element of DSM´s financialstrategy is the allocation of cash flow.DSM primarily allocates cash flow toinvestments aimed at strengthening itsbusiness positions and to dividendpayments to its shareholders. The cashflow is further used for strengthening theNutrition and Performance Materialsbusinesses by means of selectiveacquisitions. As the occasion arises, thecompany may choose to buy back shares,if excess cash is available in the context of amedium-term analysis of primary cash flowallocation requirements and a sustainedsolid single A rating.DSM’s dividend policy is outlined onpage 34 of this report. In order to avoiddilution of earnings per share as a result ofthe exercise of management and employeeoptions, DSM buys back shares insofaras this is desirable and feasible at areasonable price.Annual Report 2005An important acquisition criterion is that thebusiness concerned should be compatiblewith DSM in terms of technological and/ormarket competencies. Capitalized goodwillpaid in the case of acquisitions is subjectto an annual impairment test. Acquiredcompanies are in principle required tocontribute to DSM’s cash EPS from thevery beginning and to meet the company’sprofitability requirements. In some cases,for instance in the case of small innovativegrowth acquisitions, this requirementcannot be used.DSM’s policy in the various sub-disciplinesof the finance function is strongly orientedtowards solidity, reliability and optimumprotection of cash flows. The financefunction also plays an important role inbusiness steering.The accounting and control function isresponsible for the administrative processingof business processes, financial reportingand making assessments and providingadvice regarding business processesgeared to the company’s financial targets.The main policy aim in this function is toobtain and make available reliable financialinformation that meets statutory and othergovernance requirements and is adequatefor business steering purposes.The treasury function’s tasks includefinancing the group and its units, managingthe cash held by the company and managingcurrency risks and interest risks. To ensurethat its policy in these fields is properlyimplemented and produces the best possibleresults, DSM has a set of stringent internalregulations, procedures, organizationalmeasures and market-related benchmarksin place. DSM’s treasury policy is mainlygeared to optimizing the financial risks towhich the group and its units are exposedand to optimizing the balance of financialincome and expense.The tax function is responsible for optimizingthe company's position with regard to taxesand import, export and excise duties. Aspart of this task, it handles the various taxreturns and reviews acquisitions, disposalsand liquidations of business componentsand/or joint ventures, as well as restructuringprograms and reorganizations. It alsoexamines the tax consequences of crossborderactivities between businesscomponents such as transfer pricing, crossborderactivities that lead to some permanentform of foreign establishment, and changesin the shareholdings in legal entities.www.dsm.comDSM’s tax policy is aimed at realizing anoptimal position in the field of taxes andimport, export and excise duties, and atmaintaining such a position for the long term.The investor relations function's primarytask is to maintain contacts with currentand potential shareholders of DSM andwith analysts who advise shareholders.The policy of this function is to providequality information to investors and analystsabout developments at DSM, ensuringthat relevant information is equally andsimultaneously provided and accessibleto all interested parties.The insurance function has the task ofachieving a proper balance between selffinancinghazardous risks or having theserisks transferred to external insurers, basedon the relative costs involved. The underlyingpremise is the company's risk managementphilosophy, which is that group-wide riskawareness must ultimately lead to gaining aproper insight into the risks that a companysuch as DSM may be confronted with, andto controlling, preventing and limiting suchrisks. An insurance policy is thereforeviewed as a last-resort element of this riskmanagement process.The choice as to whether or not to obtainexternal insurance coverage also dependson the scope of the risk exposure in relationto the financial parameters that are relevantfor a listed corporation. Such parametersdetermine the amount of risk that thecorporation will afford to bear itself.All DSM units have to report their resultsperiodically and comply with CorporateRequirements in the field of finance &economics. Compliance with therequirements of accounting and reporting isconfirmed by means of a quarterly writtenstatement signed by the management.Before the annual report is disclosed it isfirst discussed by the Managing Board withthe Supervisory Board’s Audit Committeeand the external auditor, and then with theSupervisory Board. Quarterly financialreports are discussed by the ManagingBoard, with the Chairman of the AuditCommittee and the external auditor. Thecompany uses a release calendar forfinancial results.74

Section 3 Corporate Governance, risk managementand internal controlOrganizationDutch Corporate Governance CodeGovernance frameworkRisk management systemFinancial PolicyRisksRisksThe following section contains a selection ofimportant risks that have been identifiedand for the management of which strategies,controls and mitigating measures havebeen put in place as part of our riskmanagement practices. They neverthelessinvolve uncertainty that may lead to theactual results differing from those projected.There may also be current risks that thecompany has not yet fully assessed andthat are currently qualified as “minor”but that could have a material impact onthe company’s performance at a laterstage. The company’s risk managementand internal control system has beendesigned to identify and respond to thesedevelopments on time, but 100% assurancecan never be achieved, of course.Generic risksMacroeconomic trendsBeing a global company, DSM is subjectto the usual business risks associated withmacroeconomic trends and events. Theprojected results from the Vision 2010strategy are sensitive to deviations from theassumed and defined economic scenarioon which the strategy is based.General market developmentsDSM operates in many differentbusiness segments with contingent riskprofiles reflecting the different businessenvironments, the diverse nature of thebusinesses and the distinctive competitivepositions those businesses target for.DSM’s Vision 2010 strategy aims at furtherreducing the cyclical element, but asubstantial portion of its activities may stillexperience material fluctuation in sales andresults due to changes in general marketconditions, supply-driven overcapacity,economic conditions, currency exchangerate fluctuations or other factors.Low-cost competitionCounteracting the influence of low-costcompetitors and seizing opportunities inlow-cost areas (especially China) is one ofthe centerpieces of DSM’s new strategy.The risk remains, however, that such lowcostcompetitors may penetrate in DSM’score markets.Political risksDSM has subsidiaries in more than 35countries. These subsidiaries can beexposed to changes in governmentregulations and potentially unfavorablepolitical developments that might hamperAnnual Report 2005the exploitation of certain opportunities ormight impair the value of the local business.Currency risksAll DSM sales that are priced in currenciesother than the euro are subject to economictransaction and/or translation risks that maysignificantly impact on the financial results,as the company’s reporting unit is the euro.DSM’s aim is to mitigate its currencyexposure by developing sales in certainregions, through product miximprovements, by focusing manufacturingactivities and through increased dollarbasedpurchasing. However, these ‘naturalhedges’ are never fully balanced. Thevolatility of the US dollar in relation to theeuro and the Swiss franc can have asignificant impact on the company’s results.Although the production base still has itscenter of gravity in Europe, a large portion ofDSM’s product sales is in US dollars or isbased on US-dollar-denominated worldmarketprices. Consequently, from acurrency perspective there is a mismatchbetween revenue and costs. In the 2005business mix a 1% change in the euro-USdollar rate and the US dollar-Swiss francrate has on aggregate a € 8 -10 millionimpact on gross margin level (=sales minusvariable costs). Fluctuations in the relativevalues of other currencies (such as the yenor the pound sterling) have a limited impacton DSM’s results.DSM companies are obliged to hedgetheir open currency positions via theDSM Inhouse Bank in order to protectthe operating result against effects ofcurrency fluctuations. Only under strictconditions are DSM companies allowed tohedge firm commitments in order to protectthe cash flow of the contract value againstcurrency fluctuations. Hedging of forecasttransactions is only allowed after theapproval of the Managing Board.Risks of derivatives used for hedgingpurposesDSM uses derivatives to hedge variouscurrency and interest rate risks. UnderIFRS, all derivatives are recognized as eitherassets or liabilities. In line with IAS 39derivatives are recognized at fair value.Changes in fair value go to the incomestatement either contemporaneously or, incase hedge accounting is applied, at themoment that the hedged item impacts onthe income statement. These changesnormally consist of a currency and aninterest rate component. To limit thewww.dsm.comvolatility deriving from the use of derivatives,hedge accounting is applied in certaincases. Hedge accounting is only allowedunder strict conditions, which are differentper hedge type.DSM applies the following hedge accountingmodels: fair value hedge accounting, cashflow hedge accounting and net investmenthedge accounting. The goal of a fair valuehedge is to fix the value of an asset/liability(hedged item). Changes in fair value of adesignated derivative that is highly effectiveas a fair value hedge, together with thechange in fair value of the correspondingasset, liability or firm commitmentattributable to the hedged risk, are includeddirectly in earnings. So both fair valuechanges are offset in the income statement.The goal of a cash flow hedge is to limit thevariability of highly probable future cashflows due to foreign currency or interest ratemovements. Changes in fair value of adesignated derivative that is highly effectiveas a cash flow hedge are included in equityand reclassified into income in the sameperiod during which the hedged forecastcash flow affects income. This means thereis no volatility in the income statement. Thegoal of a net investment hedge is to fix thevalue of an investment in a foreign entity.Changes in fair value of a designatedderivative that is highly effective as a netinvestment hedge are included in equity.So volatility of the hedged part of the netinvestment is offset in equity.Under IFRS hedge accounting throughcombined derivatives is not allowed. Forthis reason DSM has chosen to hedge theinterest and foreign currency risk withseparate derivatives and not to usecombined derivatives to hedge both risks.Any ineffectiveness of hedges is reflecteddirectly in income. DSM aims to mitigatethese risks by closely monitoring theeffectiveness of the hedges througheffectiveness testing. Ineffectiveness onlyoccurs when fair value changes of thehedging instrument compared to fair valuechanges of the underlying risk are outside a80 – 125 % bandwidth. All hedges in 2005have proven to be effective.75

Corporate Governance, risk management and internal controlRisksStrategic risksAcquisitions, divestments and joint venturesThe success of DSM’s strategy is partlydependent on the results obtained inspotting and implementing acquisition anddivestment opportunities and joint ventures.Risks in this field are connected to thecompany not identifying relevant acquisitionsor alliances, or not doing so in time, or notbeing successful in bid processes or in theintegration of acquired businesses neededto safeguard its path of growth. DSM usesjoint ventures and other strategic allianceswhenever it is beneficial to do so (forexample to combine strengths and to shareinvestments and inherent risks). Althoughjoint ventures and strategic alliances arealways intended to add value, situationscan arise that result in a conflict of intereststhat could potentially damage the business.New markets, products and technologiesIn its Vision 2010 strategy, DSM increasesits focus on innovation in order to developnew technologies and products and explorenew markets. Market intelligence will bestrengthened and market and customerorientation enhanced. Nevertheless, theactual developments in the targetedmarkets, the speed with which new productsand technologies are accepted and theemergence of new competition will alwaysconstitute risks to the success of thechosen strategy.Innovation RisksWithin DSM’s new strategy there is an extrafocus on innovation. A multitude of actionsare being taken to ensure success in theR&D and market development processes.There is a risk that goals nevertheless willnot be achieved and that the company willhave to abandon a project on which it hasalready spent substantial sums of money.The company may reach a point where itsoverall sales volume does not, on a longertermbasis, justify the company’s relatedR&D expenditure.A certain portion of the company’s financialresults is based on legally protectedintellectual property. When these protectionmechanisms expire and the company isunable to follow up these situationsappropriately, e.g. through new valuablepatents, there is a risk that the financialresults might deteriorate.Human resource risksDSM’s ability to retain highly specialized andcommitted technical staff as well as talentedstaff working in sales, R&D, manufacturing,finance, general management and humanresources is critical to the future success ofthe company. Within the company’s newstrategic direction, huge and ongoingefforts are directed to managing the requiredprocesses. The company may have toadjust the timing of its growth path, due toconstraints or opportunities in this field.Specific risksCorporate reputation risksAny failure by any of its business units tomeet production safety, social,environmental and/or ethical standardscould harm DSM’s corporate reputationand thereby impact on its business andresults. DSM values such as goodcorporate citizenship, open communicationand transparency should reasonably assureappropriate employee conduct. Moreover,the company mitigates its reputation risk bymaking substantial efforts to reduce theprobability that any of its units might fail tocomply with internal requirements and/orexternal laws and regulations (see thegeneral section on risk management).In 2005 DSM was ranked No. 1 worldwidein the chemical industry sector of the DowJones Sustainability Index for the secondyear running, reflecting among other thingsthe enormous efforts the companycontinues to make in the area of productionprocesses and their potential impact on theenvironment and on the safety and wellbeingof its employees.Customer risksThe company makes considerable effortsto delight its customers. Compliance withcustomer agreements and commitmentsis measured regularly. Appropriate processand product quality checks and balancesare in place to mitigate the risk of noncompliancewith customers’ and DSM’ssales conditions.No DSM customer represents more than3% of DSM’s total sales.Production process risksDSM tries to mitigate production processrisks by spreading production wherepossible, but concentration is necessaryin order to achieve economies of scale.The design of any new facilities and/orproduction processes is required to includestate-of-the-art safety and security facilities.Plants are regularly and systematicallyinspected against predefined risk andengineering standards. Nevertheless, certainrisks and the degree to which SHE elementsare managed may not be sufficientlywell known.Legal risksDSM’s current strategic position anddirection has considerably changed theproduct portfolio. The life science businessis rather different from the other businessesfrom a product-liability point of view. Forinstance some pharma product liabilitiescannot be insured against, or only atprohibitively high costs. This typically holdstrue for the pharma business in the USA.On the basis of highly demanding processand product quality requirements, thecompany tries to mitigate such productliability risks as far as is reasonably possible.The company is putting in a great deal ofeffort on an ongoing basis into ensuring thatall its units comply with internal and externalrequirements (e.g. FDA compliance). Therisk of non-compliance has been furtherreduced by the recent revision andtightening-up of the CorporateRequirements.ICT risksIn order to control potential ICT risks DSMemploys a policy of using the latest provenhardware and software solutions. GroupwideDSM works with integrated andstandardized ICT infrastructures, backup,encoding and encryption systems,replicated databases, virus and accessprotection and a fully compatible globalnetwork and intranet. Regular local ICTsecurity assessments should assureadequate local applications. External ICTservice providers have been contracted inand are required to report regularly on themeasures they are taking to reasonablyassure that DSM’s ICT processes are notdisrupted.Annual Report 2005www.dsm.com76

Section 3 Corporate Governance, risk managementand internal controlOrganizationDutch Corporate Governance CodeGovernance frameworkRisk management systemFinancial PolicyRisksAlthough DSM has applied strict measureswith regard to the security and reliability ofits IT systems, incidents regarding forexample back-up recovery, hot failoversystems, virus attacks and internationalnetwork connections may still occur, andthis can have a material impact on businessoperations.Project risksThe company is currently undertaking somemajor projects whose success is importantto the overall business results and exposure.In general these fall into three categories:pricing reinforcement projects, reorganizationprojects and ICT projects. Apollo is a projectthat assures uniform application of standardbusiness processes designed in SAP-R3throughout DSM worldwide. The True Blueproject is intended to reduce the risk ofinternal and external non-compliance andto further strengthen controls.DSM has extensive experience in projectmanagement. It seconds its best peopleto projects that are considered critical.Moreover, direct Board involvement andmonitoring are in place to mitigate the riskof project failure.Financial risksAdditional financial risks include commodityrisk, credit risk, interest rate risk, tax risk,pension risk and country risk. The majorcredit rating institutions may change theirassessments of DSM’s creditworthiness,thereby affecting the company’s borrowingcapacity and/or the conditions under whichit can borrow money and causingfluctuations in the cost of finance. Thecompany aims to keep its single-A creditrating. The risk of fluctuating interest rates isaddressed in the financial statements, seepage 113 of this report.The low effective rate of corporation taxmay come under pressure under the newharmonized European and Dutch taxlegislation. In addition, the outcomes ofongoing disputes with tax authorities couldimpact on the company’s tax position withretroactive effect. Although tax assets havebeen recognized at fair value, future profitsmay not suffize to realize all tax-loss carryforwards.Insurable risksGlobal insurance policies are in place toreduce the risk of damage to property,business-interruption loss and generalliability. Uninsured losses in 2006 for anyone incident will not exceed about € 30million per occurrence with an annualaggregate maximum of € 45 million.Control failuresIn DSM’s Triple P Report some of the controlfailures are mentioned that occurred in spiteof the risk management efforts. They can befound in the section 'What still went wrong'.All failures are extensively analyzed andlessons learnt are implemented.Annual Report 2005www.dsm.com77

Information about the DSM shareShares and listingsOrdinary shares in Royal DSM N.V. are listedon the Euronext stock exchange inAmsterdam, the Netherlands (Stock code00981, ISIN code NL0000009819). On31 December 2005 DSM de-listed from theelectronic exchange in Switzerland (SWX).Options on ordinary DSM shares aretraded on the European Option Exchangein Amsterdam, the Netherlands(Euronext.liffe).In the USA a sponsored unlisted AmericanDepositary Receipts (ADR) program isoffered by Citibank NA (Cusip 23332H202),with four ADRs representing the value ofone ordinary DSM share.On 5 September 2005 the ordinary DSMshares and the ADRs were split two for one(two new shares/ADRs for one old share/ADR). With this stock split DSM aimed topromote the tradeability of its shares, whichthreatened to be hampered by the favorabledevelopment of the share price. As theshare price had risen to over € 60 per share(a doubling of the share price since theinception of DSM’s Vision 2005 strategy inSeptember 2000), DSM had become oneof the highest-priced shares in the AEXgroup of companies at the AmsterdamEuronext stock exchange.Besides the ordinary shares, 44.04 millioncumulative preference shares A are in issue,which are not listed on the stock exchange;these are placed with institutional investorsin the Netherlands. The cumprefs A havethe same voting rights as ordinary shares,as their nominal value of € 1.50 per share isequal to the nominal value of the ordinaryshares. The dividend on cumprefs Aamounted to 6.8% of the issue price of€ 5.295 per share until the contractualdividend reset date (1 January 2006).As of this date the dividend has been resetto 4.348%.The total number of ordinary DSM sharesin issue decreased by 1,033,931 in 2005.On 31 December it stood at 190,922,965.Distribution of sharesUnder the Dutch Major Holdings DisclosureAct, shareholdings of 5% or more in anyDutch company must be disclosed to thatcompany. On 31 December 2005 thefollowing shareholders had disclosed thatthey owned between 5 and 10% of DSM’stotal share capital:- ABN AMRO Holding N.V.- Delta Lloyd Levensverzekering N.V.- ING Investment Management B.V.- Rabobank Nederland ParticipatiemaatschappijB.V.Development of the number of ordinary DSM shares*placed repurchased in issuebalance at 31 December 2004 201,953,008 -/- 9,996,112 191,956,896changes:- issue of shares to service option rights 5,108,069 5,108,069- repurchased -/- 6,142,000 -/- 6,142,000balance at 31 December 2005 201,953,008 -/- 11,030,043 190,922,965average number of shares outstanding 190,783,006DSM share prices- highest price € 35.22- lowest price € 23.07- at 31 December € 34.50* Where applicable, the effects of the share split have been recognized retroactively in the figures in this table.Annual Report 2005www.dsm.com78

Annual Report 2005www.dsm.com80

Royal DSM N.V. Financial statements 2005Share splitOn 5 September 2005 DSM effected a share split on a two-for-one basis (two shares for one old share) in order to increase the liquidity of the DSM share. This split is applicable to theordinary shares as well as to the class A and class B preference shares. In the financial statements the split is considered to be effective as of January 1, 2004. Unless otherwise noted, allrelevant per-share data in the financial statements are presented in accordance with the number of shares outstanding after the share split.Annual Report 2005www.dsm.com81

Royal DSM N.V. Financial statements 2005Consolidated financial statementsSummary of significant accountingpoliciesBasis of preparationDSM’s consolidated financial statementshave been prepared in accordance withInternational Financial Reporting Standards(IFRS) as adopted by the European Union.DSM applied accounting policies thatcomply with IFRS effective at December2005, the so-called IASB stable platform for2005. Details about the first-time adoptionof IFRS by DSM can be found in note 35.ConsolidationThe consolidated financial statementscomprise the financial statements of theparent entity, Royal DSM N.V., and itssubsidiaries as well as the proportion ofDSM’s ownership of joint ventures (together‘DSM’ or ‘Group’). A subsidiary is an entityover which DSM has control. Control is thepower to govern the financial and operatingpolicies of the entity so as to obtain benefitsfrom its activities. The financial data ofsubsidiaries are fully consolidated. Minorityinterests in the Group’s equity and incomeare stated separately. A joint venture is anentity in which DSM holds an interest andwhich is jointly controlled by DSM and oneor more other venturers under a contractualarrangement. The financial data of jointventures are included in the consolidatedfinancial statements according to themethod of proportionate consolidation.Subsidiaries and joint ventures areconsolidated from the acquisition date andde-consolidated from the date on whichDSM ceases to have control or joint control,respectively. On consolidation all intragroupbalances and transactions andunrealized gains and losses from intragrouptransactions are eliminated.Unrealized losses are not eliminated if theselosses indicate an impairment of the assettransferred. In such cases a valueadjustment for impairment of the assetis made.SegmentationSegment information is presented inrespect of the Group’s business andgeographical segments. The primaryformat, business segments, reflects theGroup’s management structure. Prices fortransactions between segments aredetermined on an arm’s length basis.Segment results, assets and liabilitiesinclude items directly attributable to asegment as well as those that can beallocated on a reasonable basis.Foreign currency translationThe presentation currency of the Group isthe euro.Each entity of the Group recordstransactions and balance sheet items in itsfunctional currency. Commercialtransactions denominated in anothercurrency than the functional currency arerecorded at the spot exchange ratesprevailing at the date of the transactions.Monetary assets and liabilities denominatedin a currency other than the functionalcurrency of the entity are translated at theclosing rates at the balance sheet date.Exchange differences resulting from thesettlement of these transactions and fromthe translation of monetary items arerecognized in income.On consolidation, the balance sheets ofsubsidiaries and joint ventures whosefunctional currency is not the euro aretranslated into euro at the closing rate.The income statements of these entities aretranslated into euro at the average rates forthe relevant period. Goodwill paid onacquisition is recorded in the functionalcurrency of the acquired entity. Exchangedifferences arising from the translation ofthe net investment in entities with afunctional currency other than the euro arerecorded in equity (Translation reserve). Thesame applies to exchange differencesarising from borrowings and other financialinstruments in so far as they hedge thecurrency exchange risk related to the netinvestment. On disposal of an entity with afunctional currency other than the euro thecumulative exchange difference relating tothe translation of net investment isrecognized in income. DSM has made useof the exemption in IFRS 1, according towhich the cumulative translation differencesat the date of transition to IFRS (1 January2004) are deemed to be zero.Distinction between current and noncurrentAn asset (liability) is classified as currentwhen it is expected to be realized (settled)within 12 months after the balance sheetdate.Emission rightsDSM is subject to legislation encouragingreductions in greenhouse gas emission andhas been awarded emission rights in anumber of jurisdictions, principally to coveremission of CO 2. Emission rights arereserved for meeting delivery obligationsand are not recognized. Revenue isrecognized when surplus emission rightsare sold to third parties. When actualemissions exceed the emission rightsavailable to DSM a provision is recognizedfor the expenditure required to obtain theadditional rights.Intangible assetsGoodwill represents the excess of the costof an acquisition over DSM’s share in thenet fair value of the identifiable assets,liabilities and contingent liabilities of anacquired subsidiary, joint venture orassociate. Goodwill paid on acquisition ofsubsidiaries and joint ventures is included inintangible assets. Goodwill paid onacquisition of associates is included in thecarrying amount of these associates.Goodwill is tested for impairment annuallyand when there are indications that thecarrying value may not be recoverable. Anyimpairment is recognized in income. Gainsand losses on the disposal of an entityinclude the carrying amount of goodwillrelating to the entity sold.It was DSM’s policy up to and including1999 to charge goodwill paid immediatelyagainst equity. In accordance with IFRS 1this goodwill is not recognized in theopening balance sheet but remains adeduction from equity. From 2000 up to andincluding 2003, goodwill was capitalizedand amortized over its estimated useful life.DSM has made use of the exemption ofIFRS 1 that permits entities to elect not toapply IFRS 3, Business Combinations,retrospectively. The carrying amount of thegoodwill on 31 December 2003 accordingto ‘NL GAAP’ is used as the deemed costof the goodwill as at the date of transition toIFRS (1 January 2004).Annual Report 2005www.dsm.com82

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosAcquired licenses, patents and applicationsoftware are carried at cost less straight-linedepreciation and less any impairmentlosses. The expected useful lives vary from4 to 10 years. Costs of softwaremaintenance and new releases areexpensed when incurred. Capitalexpenditure that is directly related to thedevelopment of application software isrecognized as intangible asset andamortized over its estimated useful life(5-8 years).Research costs are expensed whenincurred. Where the recognition criteria aremet, development expenditure iscapitalized and amortized over its useful lifefrom the moment the product is launchedcommercially. The carrying amount of anintangible asset from development isreviewed for impairment at each balancesheet date or earlier upon indication ofimpairment. Any impairment losses arerecorded in income.Property, plant and equipmentProperty, plant and equipment is carried atcost less depreciation calculated on astraight-line basis and less any impairmentlosses. Interest during construction iscapitalized. Expenditures relating to majorscheduled turnarounds are capitalized anddepreciated over the period up to the nextturnaround.The items of property, plant and equipmentare systematically depreciated over theirestimated useful lives. Reviews are madeannually of the estimated remaining lives ofthe most important individual productiveassets, taking account of commercial andtechnological obsolescence as well asnormal wear and tear. The initially assumedexpected useful lives are in principle: forbuildings 10-50 years; for plant andmachinery 5-15 years; for other equipment4-10 years. Land is not depreciated.An item of property, plant and equipment isderecognized upon disposal or when nofuture economic benefits are expected toarise from continued use or the sale of theasset. Any gain or loss arising onderecognition of the asset is included inincome.Associates and financial assetsAn associate is an entity over which DSMhas significant influence but no control,usually supported by a shareholding thatentitles DSM to between 20% and 50% ofthe voting rights. Investments in associatesare accounted for by the equity method ofaccounting, which involves recognition inincome of DSM’s share of the associate’sprofit or loss for the year. DSM’s interest inan associate is carried in the balance sheetat its share in the net assets of the associatetogether with goodwill paid on acquisition,less any impairment loss.When DSM’s share in the loss of anassociate exceeds the carrying amount ofthe associate, including any otherreceivables, the carrying amount is reducedto nil. No further losses are recognized,unless DSM incurs obligations of theassociate which it has guaranteed or isotherwise committed to.Unrealized profits and losses fromtransactions with associates are eliminatedaccording to DSM’s percentage ownershipof these entities.Securities comprise interests in entities inwhich DSM has no significant influence thatare accounted for as available-for-salesecurities. These securities are measuredagainst fair value with changes in fair valuebeing recognized in equity (Fair valuereserve). If a reliable fair value cannot beestablished the securities are held at cost.Available-for sale securities are tested forimpairment with other than temporarydeclines in value being charged to income.On disposal the cumulative fair valueadjustments of the related securities arereleased from equity and included inincome. Proceeds from other securitiesheld at cost are recognized in income ondisposal (Net finance costs).Loans and long-term receivables aremeasured at amortized cost, if necessarywith deduction of a value adjustment forbad debts. The proceeds are recognized inincome (Net finance costs).Impairment lossesWhen there are indications that the carryingamount of a non-current asset (an item ofintangible assets, property, plant andequipment, or financial assets) may exceedthe estimated recoverable amount (thehigher of its value in use and fair value lesscosts to sell), the possible existence of animpairment loss is investigated. If an assetdoes not generate largely independentcash inflows, the recoverable amount isdetermined for the cash-generating unit towhich the asset belongs. In assessing thevalue in use, the estimated future cash flowsare discounted to their present value usinga pre-tax discount rate that reflects currentmarket assessments of the time value ofmoney and the risks specific to the asset.When the recoverable amount of an asset isless than its carrying amount, the carryingamount is impaired to its recoverableamount. An impairment loss is reversedwhen there has been a change in estimatethat is relevant for the determination of theasset’s recoverable amount since the lastimpairment loss was recognized.Impairment losses for goodwill will neverbe reversed.InventoriesInventories are stated at the lower of costand net realizable value. The first-in, first-out(FIFO) method of valuation is used. The costof finished goods and intermediatesincludes directly attributable costs andrelated production overhead expenses. Netrealizable value is determined as theestimated selling price in the ordinarycourse of business, less the estimatedcosts of completion and the estimatedcosts necessary to make the sale. Productswhose manufacturing cost cannot becalculated because of joint costcomponents are stated at net realizableprice after deduction of a margin.Current receivablesCurrent receivables are stated at face valueless an allowance for bad debts.Current investmentsDeposits held at call with banks with aremaining maturity of more than 3 monthsand less than 12 months are classified ascurrent investments. They are measured atamortized cost. Proceeds from thesedeposits are recognized in income (Netfinance costs).Annual Report 2005www.dsm.com83

Royal DSM N.V. Financial statements 2005Consolidated financial statementsCash and cash equivalentsCash and cash equivalents comprise cashat bank and in hand and deposits held atcall with banks with a remaining maturity ofless than 3 months. Bank overdrafts areincluded in current liabilities. Cash and cashequivalents are stated at nominal value.Assets held for saleNon-current assets or assets and liabilitiesrelated to a disposal group are separatelydisclosed as assets and/or liabilities held forsale when such assets are available forimmediate sale and when the sale is highlyprobable. These conditions are usually metas from the date a first draft of anagreement to sell is ready for discussion.Assets and liabilities classified as held forsale are measured at the lower of carryingamount and fair value less costs to sell. Fornon-current assets classified as held forsale depreciation is terminated.Shareholders’ equityDSM’s ordinary shares and cumulativepreference shares are classified as equity.The consideration paid for repurchasedDSM shares (treasury shares) is deductedfrom Shareholders’ equity until the sharesare withdrawn or reissued. Dividend to bedistributed to holders cumulativepreference shares is recognized as a liabilityin the period in which the Supervisory Boardof Directors approves the proposal for profitdistribution. Dividend to be distributed toholders of ordinary shares is recognized asa liability in the period in which the AnnualGeneral Meeting of Shareholders approvesthe proposal for dividend.BorrowingsBorrowings are initially recognized at cost,being the fair value of the proceedsreceived, net of transaction costs.Subsequently, borrowings are stated atamortized cost using the effective interestmethod. Amortized cost is calculated bytaking into account any discount orpremium. Interest expenses are accrued forand recorded in income for each period.Where the interest rate risk relating to along-term borrowing is hedged, and thehedge is regarded as effective, the carryingamount of the long-term loan is adjusted forchanges in fair value of the interestcomponent of the loan.ProvisionsProvisions are recognized when all of thefollowing conditions are met: 1) there is apresent legal or constructive obligation as aresult of past events; and 2) it is probablethat a transfer of economic benefits willsettle the obligation; and 3) a reliableestimate can be made of the amount ofthe obligation.If the effect of the time value of money ismaterial, provisions are determined bydiscounting the expected cash flows at apre-tax rate. Where discounting is used, theincrease in the provision due to the passageof time is recognized as borrowing cost.However, the interest costs relating topension obligations are included in pensioncosts.Any provision for costs that will arise fromfuture site restoration is made when theinvestment project concerned is taken intooperation. These are included in Property,plant and equipment, along with the historiccost of the relating asset, and depreciatedover the useful life of the asset.Income tax expenseIncome tax is accounted for using thebalance sheet liability method. Income taxexpense is recognized in the incomestatement except to the extent it relates toan item recognized directly withinshareholders’ equity.Current tax is the expected tax payable onthe taxable income for the year, using taxrates enacted at the balance sheet date,and any adjustment to tax payable inrespect to previous years. Deferred taxassets and liabilities are recognized for theexpected tax consequences of temporarydifferences between the bases of assetsand liabilities and their reported amounts.Deferred tax assets and liabilities aremeasured at the tax rates and under the taxlaws that have been enacted orsubstantially enacted at the balance sheetdate and are expected to apply when therelated deferred tax assets are realized orthe deferred tax liabilities are settled.Deferred tax assets are recognized to theextent that it is probable that future taxableprofits will be available against which thedeductible temporary differences andunused tax losses can be utilized. Ifnecessary a value adjustment is deducted.Deferred tax assets and liabilities are statedat face value.Deferred tax liabilities relating to withholdingtaxes are included only if and to the extentthat DSM intends to distribute the profitsmade by subsidiaries in the form of dividendin the near future.Pensions and other post-employmentbenefitsThe Group operates a number of definedbenefit plans and defined contribution plansthroughout the world, the assets of whichare generally held in separatelyadministered funds. The pension plans aregenerally funded by payments fromemployees and by the relevant Groupcompanies. The Group also providescertain additional post-employmenthealthcare benefits to retired employees inthe United States. These benefits areunfunded.For defined benefit plans, pension costs aredetermined using the projected unit creditmethod. Actuarial gains and losses arerecognized in income, spread over theaverage remaining service lives ofemployees, using the corridor approach.Prepaid pension costs relating to definedbenefit plans are capitalized only if they leadto refunds to the employer or to reductionsin future contributions to the plan by theemployer. Payments to defined contributionplans are charged as an expense as they falldue.Share-based compensationThe costs of option plans are measured byreference to the fair value of the options atthe date at which the options are granted.The fair value is determined using the Black-Scholes option pricing model, taking intoaccount market conditions linked to theprice of the DSM share. The costs of theseoptions are recognized in income(Employee benefits), together with acorresponding increase in equity (Reservefor share-based compensation) during thevesting period in the case of share-settledoptions. In the case of cash-settled options(share appreciation rights) the contraaccountis Other liabilities. No expense isrecognized for options that do not ultimatelyvest, except for options where vesting isconditional upon a market condition, whichare treated as vesting irrespective ofwhether or not the market condition issatisfied, provided that all otherperformance conditions are satisfied.Annual Report 2005www.dsm.com84

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosLeasesFinance leases, which transfer to the Groupsubstantially all the risks and benefitsincidental to ownership of the leased item,are capitalized at the inception of the leaseat the fair value of the leased property or, iflower, at the present value of the minimumlease payments. All other leases areoperating leases. Lease payments forfinance leases are apportioned to financecharges and reduction of the lease liabilityso as to achieve a constant rate of intereston the remaining balance of the liability.Finance charges are charged directlyagainst income. Capitalized leased assetsare depreciated over the shorter of theestimated useful life of the asset or the leaseterm. Operating lease payments arerecognized as an expense on a straight-linebasis over the lease term.RevenueRevenue from the sale of goods isrecognized when the significant risks andrewards of ownership are transferred to thebuyer. Net sales represent the invoice valueless estimated rebates and cash discounts,and excluding value-added taxes.Royalty income is recognized (Otheroperating revenue) on an accruals basis inaccordance with the substance of therelevant agreements. Interest income isrecognized on a time-proportion basisusing the effective interest method.Dividend income is recognized when theright to receive payment is established.Government grantsGovernment grants are recognized at theirfair value where there is reasonableassurance that the grant will be receivedand all related conditions will be compliedwith. If the grant relates to an expense item,it is recognized as income over the periodsnecessary to match the grant on asystematic basis to the costs that it isintended to compensate. Where the grantrelates to an asset, the fair value is initiallyrecognized as deferred income (Other noncurrentliabilities) and then released toincome over the expected useful life of therelevant asset by equal annual amounts.Research and developmentResearch expenditure is charged to incomein the period in which it is incurred. Internaldevelopment expenditure is charged toincome in the period in which it is incurredunless it meets the recognition criteria forintangible assets.Derivative financial instrumentsThe Group uses derivative financialinstruments (‘derivatives’) such as foreigncurrency contracts and interest rate swapsto hedge risks associated with foreigncurrency and interest rate fluctuations.Financial derivatives are initially recognizedin the balance sheet at cost andsubsequently measured at their fair value oneach balance sheet date. The method ofrecognizing the resulting gains or losses isdependent on the nature of the item beinghedged.When derivative contracts are entered into,the Group designates them as eitherhedges of the fair value of recognizedassets or liabilities, hedges of firmcommitments or forecast transactions orhedges of net investments in entities with afunctional currency other than the euro.Changes in the fair value of derivativesdesignated and qualifying as fair valuehedges are immediately recognized inincome, together with any changes in thefair value of the hedged assets or liabilitiesattributable to the hedged risk.Changes in the fair value of derivativesdesignated and qualifying as cash flowhedges are recognized in equity (Hedgingreserve). Upon recognition of the relatedasset or liability the cumulative gain or lossis transferred from the Hedging reserve andincluded in the carrying amount or inincome.Changes in the fair value of derivativesdesignated and qualifying as net investmenthedges are recognized in equity (Translationreserve). Gains and losses accumulated inthe Translation reserve are included inincome when the net investment isdisposed of.Gains or losses relating to the ineffectiveportion of fair value hedges, cash flowhedges and net investment hedges areimmediately recognized in income.Exceptional itemsExceptional items relate to material nonrecurringitems of income and expensearising from circumstances such as:- write-downs of inventories to net realizablevalue or of property, plant and equipmentto recoverable amount, as well asreversals of such write-downs;- restructurings of the activities of an entityand reversals of any provisions for the costof restructurings;- disposals of property, plant andequipment;- disposals of investments;- discontinued operations;- litigation settlements;- other reversals of provisions.Exceptional items are reported separatelyto give a better understanding of theunderlying results of the period.Effect of new accounting standardsDSM did not opt for early adoption of thefollowing new standards, amendments tostandards, and new IFRIC interpretations,which are mandatory for annual periodsbeginning on or after 1 January 2006 orlater years:- IFRS 6 Exploration for and Evaluation ofMineral Resources- IFRS 7 Financial Instruments: Disclosures- Amendment to IAS 1: Capital Disclosures- Amendment to IAS 19: Actuarial Gainsand Losses, Group Plans and Disclosures- Amendment to IAS 21: Net Investment ina Foreign Operation- Amendment to IAS 39: Cash Flow HedgeAccounting of Forecast IntragroupTransactions- Amendment to IAS 39: The Fair ValueOption- Amendment to IAS 39 and IFRS 4:Financial Guarantee Contracts- IFRIC 4 Determining whether anArrangement contains a Lease- IFRIC 5 Rights to Interests arising fromDecommissioning, Restoration andEnvironmental Rehabilitation Funds- IFRIC 6 Liabilities arising from Participatingin a Specific Market – Waste Electrical andElectronic Equipment- IFRIC 7 Applying the RestatementApproach under IAS 29 FinancialReporting in Hyperinflationary EconomiesDSM expects that the adoption of thesenew standards, amendments to standardsand new IFRC interpretations in futureperiods will have no material impact onDSM’s financial statements.Annual Report 2005www.dsm.com85

Royal DSM N.V. Financial statements 2005Consolidated financial statementsConsolidated income statementx € million 2005 2004result excep- total result excep- totalbefore tional before tionalexcep- items excep- itemstional (8) tional (8)itemsitemsnet sales, continuing operations 8,012 - 8,012 7,434 - 7,434net sales, discontinued operations 183 - 183 398 - 398total net sales 8,195 - 8,195 7,832 - 7,832other operating income (4) 223 59 282 197 19 2168,418 59 8,477 8,029 19 8,048own work capitalized 47 - 47 38 - 38change in inventories of intermediates and finished goods 251 - 251 -126 - -126raw materials and consumables used -4,338 - -4,338 -3,574 - -3,574work subcontracted and other external costs -1,501 - -1,501 -1,503 - -1,503employee benefits costs (5) -1,352 - -1,352 -1,342 - -1,342depreciation and amortization (5) -496 -64 -560 -490 -108 -598other operating costs (5) -46 -31 -77 -83 -110 -193costs, discontinued operations -175 - -175 -387 - -387operating profit (including discontinued operations) 808 -36 772 562 -199 363less operating profit from discontinued operations -9 - -9 -16 - -16operating profit from continuing operations 799 -36 763 546 -199 347net finance costs (6) -70 -8 -78 -56 - -56share of the profit of associates -2 -15 -17 9 - 9profit before income tax expense 727 -59 668 499 -199 300income tax expense (25) -173 23 -150 -95 57 -38net profit from continuing operations 554 -36 518 404 -142 262net profit from discontinued operations 2 - 2 8 - 8profit for the year 556 -36 520 412 -142 270profit attributable to minority interests 7 - 7 11 12 23net profit attributable to equity holdersof Royal DSM N.V. 563 -36 527 423 -130 293earnings per share in euro (7)- shares outstanding 2.87 2.68 2.09 1.41- diluted 2.85 2.66 2.09 1.41Annual Report 2005www.dsm.com86

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosConsolidated balance sheetassets 31 December 31 December 31 Decemberx € million 2005 2004* 2004**non-current assetsintangible assets (9) 1,003 453 453property, plant and equipment (10) 3,750 3,811 3,811deferred tax assets (11) 517 432 427associates (12) 43 78 78prepaid pension costs (13) 405 355 355other financial assets (14) 189 82 825,907 5,211 5,206current assetsinventories (15) 1,535 1,348 1,348receivables (16) 1,597 1,556 1,566financial derivatives (26) 36 244 -current investments 5 6 6cash and cash equivalents 902 1,261 1,2744,075 4,415 4,194assets classified as held for sale (17) 43 - -4,118 4,415 4,194total 10,025 9,626 9,400equity and liabilitiesx € millionequity (18)shareholders’ equity 5,474 4,835 5,053minority interests 67 22 225,541 4,857 5,075non-current liabilitiesdeferred tax liabilities (11) 198 147 142employee benefits liabilities (19) 363 345 345provisions (20) 145 266 266borrowings (21) 1,381 1,497 1,118other non-current liabilities (22) 53 60 602,140 2,315 1,931current liabilitiesemployee benefits liabilities (19) 25 40 40provisions (20) 218 218 218borrowings (21) 329 527 524financial derivatives (26) 65 59 -other current liabilities (23) 1,699 1,610 1,6122,336 2,454 2,394liabilities classified as held for sale (17) 8 - -2,344 2,454 2,394total 10,025 9,626 9,400* Pro forma: after application of IAS 32 and IAS 39.** Before application of IAS 32 and IAS 39.Annual Report 2005www.dsm.com87

Royal DSM N.V. Financial statements 2005Consolidated financial statementsConsolidated statement of changes in equityx € million share share treasury other retained total minority totalcapital premium shares reserves earnings share- interests equity(18) holders’equitybalance at 1 January 2004 370 548 -179 1 4,380 5,120 44 5,164translation differences - - - -46 -10 -56 -4 -60income tax expense - - - -6 - -6 - -6total income and expense for theyear directly recognized in equity - - - -52 -10 -62 -4 -66profit for the year - - - - 293 293 -23 270total income and expense for the period - - - -52 283 231 -27 204dividends - - - - -194 -194 -1 -195management options - - - 4 - 4 - 4share buy-backs - - -119 - - -119 - -119proceeds from re-issued shares - - 10 - 1 11 - 11capital payments - - - - - - 6 6370 548 -288 -47 4,470 5,053 22 5,075adoption of IAS 32 and IAS 39 -66 -167 - -1 16 -218 - -218balance at 31 December 2004,after adoption of IAS 32 and 39 304 381 -288 -48 4,486 4,835 22 4,857translation differences - - - 121 - 121 7 128income tax expense - - - 7 - 7 - 7capital duty - -3 - - - -3 - -3change in 'hedging' reserve - - - -2 - -2 - -2total income and expense for theyear directly recognized in equity - -3 - 126 - 123 7 130profit for the year - - - - 527 527 -7 520total income and expense for the period - -3 - 126 527 650 - 650reclassification cumulative preference shares A 66 167 - - - 233 - 233dividends - - - - -183 -183 -3 -186management options - - - 7 - 7 - 7share buy-backs - - -170 - - -170 - -170proceeds from re-issued shares - - 82 - 20 102 - 102change in share of subsidiaries - - - - - - 48 48balance at 31 December 2005 370 545 -376 85 4,850 5,474 67 5,541Annual Report 2005www.dsm.com88

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosConsolidated cash flow statement (29)x € million 2005 2004operating activitiesnet profit 527 293adjustmenst for:- depreciation, amortization and impairments 567 613- gain from divestments -20 -18- result of associates 23 -9- dividends received from associates 3 7- change in provisions -131 -57- interest: . received 24 30. paid -95 -96. charged to income 78 567 -10- income taxes: . paid -133 -77. charged to income 150 3817 -39- post-employment benefits: . paid -104 -120. charged to income 33 24-71 -96- other changes -28 5operating cash flow before changes in working capital 894 689change in working capital:- inventories -140 69- receivables -59 -53- other current liabilities -2 193-201 209net cash provided by operating activities 693 898investing activitiesinvestments in:- intangible assets -23 -12- property, plant and equipment -370 -337proceeds from sale of property, plant and equipment 28 28acquisition of subsidiaries -564 -proceeds from sale of subsidiaries and businesses 192 -financial assets:- capital payments -3 -12- change in loans granted -107 10- sale proceeds 2 -net cash used in investing activities -845 -323financing activitiessale of derivatives 133 -loans taken up 348 64redemption of loans -487 -197change in debt to credit institutions 42 -103dividend paid -183 -194buy-back of own shares -170 -119proceeds from re-issued shares 102 11change in minority interests -2 5capital duty -3 -net cash used in financing activities -220 -533net change in cash and cash equivalents -372 42change IAS 32/39 - 17cash and cash equivalents at beginning of year 1,261 1,209exchange differences of cash held and changes in consolidation 13 -7cash and cash equivalents at end of year 902 1,261Annual Report 2005www.dsm.com89

Royal DSM N.V. Financial statements 2005Consolidated financial statements(1) General informationUnless stated otherwise, all amounts are in € million.To enhance transparency and readability of the notes to the financial statements, balance sheet items at December 31, 2004 are presented afterapplication of IAS 32 and 39. These standards have been implemented with effect from January 1, 2005 and were applicable during the full year.Therefore, this presentation enhances the comparability of individual balance sheet items and provide a better understanding of changes duringthe year.In conformity with article 402, Book 2 of the Dutch Civil Code, a condensed statement of income is included in the Royal DSM N.V. accounts.A list of DSM participations is published at the Chamber of Commerce for Zuid-Limburg in Maastricht (The Netherlands) and available from thecompany upon request. The list is also available on the company’s website www.dsm.com.On 5 September 2005 DSM effected a share split on a two-for-one basis (two shares for one old share) in order to increase the liquidity of the DSMshare. This split is applicable to the ordinary shares as well as the class A and class B preference shares. In the financial statements the split isconsidered to be effective as of January 1, 2004. Unless otherwise noted, all relevant per-share data in the financial statements are presented inaccordance with the number of shares outstanding after the share split.The preparation of financial statements requires estimates and judgments that affect the reported amounts of assets and liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. The policies that managementconsiders both to be most important to the presentation of financial condition and results of operations and to make the most significant demandson management’s judgments and estimates about matters that are inherently uncertain are discussed in the notes that are impacted by suchestimates and judgements. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment.Currency exchange ratesThe currency exchange rates that were used in drawing up the consolidated statements are listed below for the most important currencies.1 euro = exchange rate at balance sheet date average exchange rate2005 2004 2005 2004US dollar 1.18 1.36 1.25 1.24Swiss franc 1.56 1.54 1.55 1.54Pound sterling 0.69 0.71 0.68 0.68100 Japanese yen 1.39 1.41 1.37 1.34Annual Report 2005www.dsm.com90

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(2) Scope of consolidationAcquisitionsOn February 2, 2005 DSM acquired 100% of NeoResins (now DSM NeoResins), the coating resins business of Avecia. As of the date ofacquisition net sales of NeoResins were € 238 million. The impact of this acquisition on the consolidated balance sheet of DSM, at thedate of acquisition, is summarized below:assetsintangible assets 151property, plant and equipment 82deferred tax assets 16inventories 25receivables 49cash and cash equivalents 6total assets 329liabilitiesprovisions 36deferred tax liabilities 48other liabilities 80total liabilities 164fair value of net assets 165acquisition price (in cash) 516acquisition costs 7goodwill 358The goodwill relates to items, other than property, plant and equipment, which do not meet the recognition criteria for intangible assetsbecause they do not meet the identifiability criterion (for example customer contacts) or cannot be controlled by the company (for exampleworkforce).On May 30, 2005 DSM increased its share in Roche Vitamins (Shanghai) Ltd. (now renamed DSM Vitamins (Shanghai) Ltd.) from 64% to100% and on July 13, 2005 DSM increased its share in DSM Biologics Holding, Inc. from 60% to 100%. On October 16, 2005 DSMacquired the Chinese resins company Syntech.Annual Report 2005www.dsm.com91

Royal DSM N.V. Financial statements 2005Consolidated financial statementsDivestmentsDiscontinued operationsThe activities of DSM Bakery Ingredients excluding the joint venture Rymco Pty. Ltd. in South Africa were sold to Gilde InvestmentManagement on June 30, 2005. Rymco was sold to the joint venture partner Daniel Mills & Sons on September 30, 2005. The impact ofthe deconsolidation of these activities on the consolidated balance sheet of DSM is as follows:assetsintangible assets -4property, plant and equipment -96deferred tax assets -7other financial assets -7inventories -27receivables -93cash and cash equivalents -32total assets -266liabilitiesprovisions -22borrowings -2other liabilities -56total liabilities -80net asset value -186sales price, net of selling costs 200gain (before income tax expense) 14The impact of the disposal of DSM Bakery ingredients on the cash flow statement is disclosed in the table below.2005 2004net cash provided by operating activities 10 36net cash used in investing activities -1 -3net cash used in financing activities 0 0net change in cash and cash equivalents 9 33Other divestmentsOn October 31, 2005 DSM sold the Styrene-Butadiene-Rubber (SBR) business to Lion Chemical Capital LLC in the form of an asset deal.Annual Report 2005www.dsm.com92

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(3) Segment informationBusiness segments 2005continuing operations discontinued totaloperationsLife DSM Performance Industrial Other eliminations total,Science Nutritional Materials Chemicals activities** continuingProducts Products operationsfinancial performancenet sales 1,479 1,914 2,447 1,687 485 - 8,012 183 8,195deliveries to other clusters 52 32 12 212 13 -321 - - -supplies 1,531 1,946 2,459 1,899 498 -321 8,012 183 8,195operating profit(excluding exceptional items) 126 252 305 165 -49 - 799 9 808exceptional items -91 9 4 - 42 - -36 - -36operating profit 35 261 309 165 -7 - 763 9 772depreciation and amortization -140 -124 -105 -81 -46 - -496 -7 -503additions to provisions -42 -20 -1 -2 -24 - -89 - -89share in result of associates - 1 - -1 -2 - -2 - -2R&D costs -93 -80 -94 -14 -8 - -289 -1 -290labor costs*** -329 -379 -258 -103 -236 - -1,305 -32 -1,337financial positiontotal assets 2,330 3,246 2,504 1,403 10,166 -9,624 10,025 - 10,025total liabilities 2,082 1,492 1,418 889 3,465 -4,862 4,484 - 4,484capital employed at year-end 1,753 1,830 1,737 728 173 - 6,221 - 6,221capital expenditure 97 97 667 85 26 - 972 2 974share in equity of associates 2 7 - 27 7 - 43 - 43financial ratios in %EBITDA / net sales 18.0 19.6 16.8 14.6R&D costs / net sales 6.3 4.2 3.8 0.8 1.6 - 3.6 0.5 3.5workforce*average 6,403 6,285 4,302 2,312 2,758 - 22,060 779 22,839year-end 6,239 6,119 4,441 2,234 2,787 - 21,820 - 21,820* The workforce of joint ventures has been included on a proportionate basis.** Other activities also include costs for defined benefit pension plans, corporate overhead and share-based compensation. A reliable allocation of the costs for defined benefit pension plans to the individual clusters isnot available, because these costs relate to both active and inactive employees.*** Wages, salaries and social security costs.Annual Report 2005www.dsm.com93

Royal DSM N.V. Financial statements 2005Consolidated financial statementsBusiness segments 2004continuing operations discontinued totaloperationsLife DSM Performance Industrial Other eliminations total,Science Nutritional Materials Chemicals activities** continuingProducts Products operationsfinancial performancenet sales 1,484 1,899 2,007 1,570 474 - 7,434 398 7,832deliveries to other clusters 98 11 6 177 11 -303 - - -supplies 1,582 1,910 2,013 1,747 485 -303 7,434 398 7,832operating profit(excluding exceptional items) 79 202 165 120 -20 - 546 16 562exceptional items -168 - 19 - -50 - -199 - -199operating profit -89 202 184 120 -70 - 347 16 363depreciation and amortization -147 -128 -84 -87 -44 - -490 -15 -505additions to provisions -62 -56 -11 -4 -50 - -183 - -183share in result of associates 0 1 -2 2 8 - 9 0 9R&D costs -98 -75 -78 -16 -11 - -278 -8 -286labor costs*** -365 -403 -218 -113 -215 - -1,314 -68 -1,382financial positiontotal assets 2,421 2,907 1,701 1,224 9,199 -8,083 9,369 257 9,626total liabilities 1,992 1,324 1,195 776 4,155 -4,826 4,616 153 4,769capital employed at year-end 1,704 1,694 988 673 331 - 5,390 168 5,558capital expenditure 124 55 64 75 26 - 344 4 348share in equity of associates 2 3 1 34 29 - 69 7 76financial ratios in %EBITDA / net sales 15.2 17.4 12.4 13.2R&D costs / net sales 6.6 3.9 3.9 1.0 2.3 - 3.7 2.0 3.7workforce*average 6,950 6,868 3,687 2,581 2,891 - 22,977 1,526 24,503year-end 6,836 6,607 3,735 2,566 2,953 - 22,697 1,507 24,204* The workforce of joint ventures has been included on a proportionate basis.** Other activities also include costs for defined benefit pension plans, corporate overhead and share-based compensation. A reliable allocation of the costs for defined benefit pension plans to the individual clusters isnot available, because these costs relate to both active and inactive employees.*** Wages, salaries and social security costs.Annual Report 2005www.dsm.com94

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosGeographical areas2005 the rest of North China rest of rest of elimina- totalNether- Europe America Asia- the tionslands Pacific worldnet sales* by originin € million 3,549 2,240 1,304 300 333 286 - 8,012in % 44 28 16 4 4 4 - 100net sales* by destinationin € million 867 3,220 1,707 498 1,068 652 - 8,012in % 11 40 21 6 14 8 - 100total assets 8,967 3,580 1,708 585 373 455 -5,643 10,025capital expenditure onproperty, plant and equipment 119 82 105 62 4 6 - 378carrying amount ofproperty, plant and equipment 1,405 1,377 523 332 59 54 - 3,750workforce** at year-end 7,258 6,948 2,764 2,581 1,156 1,113 - 21,8202004 the rest of North China rest of rest of elimina- totalNether- Europe America Asia- the tionslands Pacific worldnet sales* by originin € million 3,200 2,162 1,258 275 305 234 - 7,434in % 43 29 17 4 4 3 - 100net sales* by destinationin € million 836 2,941 1,619 427 876 735 - 7,434in % 11 39 22 6 12 10 - 100total assets 8,516 3,617 1,427 430 323 444 -5,131 9,626capital expenditure onproperty, plant and equipment 118 74 72 34 2 4 - 304carrying amount ofproperty, plant and equipment 1,436 1,517 474 233 68 83 - 3,811workforce** at year-end 7,553 8,126 3,291 2,439 1,121 1,674 - 24,204* Continuing operations only.** The workforce of joint ventures has been included on a proportionate basis.Annual Report 2005www.dsm.com95

Royal DSM N.V. Financial statements 2005Consolidated financial statements(4) Other operating income2005 2004continuing operationsrelease of provisions 41 35settlements 25 -government grants 18 13gain on assets and emission rights sold 20 22insurance claims 6 16proceeds from the sale of scrap, waste materials, etc. 10 13sundry 101 96total other operating income, before exceptional items 221 195exceptional items (see note 8) 59 19total, continuing operations 280 214total, discontinued operations 2 2total 282 216The government grants include an amount of € 6 million (2004: € 5 million) for investment grants.Annual Report 2005www.dsm.com96

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(5) Specification of Employee benefits costs, Depreciation and amortization and Other operating costs2005 2004employee benefits costs:in continuing operations- wages and salaries 1,119 1,117- social security costs 186 197- post-employment benefits (see also note 27) 47 28total, continuing operations 1,352 1,342total, discontinued operations 33 69total 1,385 1,411depreciation and amortization:in continuing operations- amortization of intangible assets 34 21- depreciation of property, plant and equipment 440 455- impairments 22 14total depreciation and amortization, before exceptional items 496 490- exceptional items (see note 8) 64 108total, continuing operations 560 598total, discontinued operations 7 15total 567 613other operating costs:in continuing operations-additions to provisions 31 60-exchange differences 3 23- sundry 12 0total other operating costs, before exceptional items 46 83- exceptional items (see note 8) 31 110total, continuing operations 77 193total, discontinued operations - -7total 77 186(6) Net finance costs2005 2004interest income 19 22interest expense -92 -88capitalized interest during construction 6 6net interest costs -67 -60exchange differences -7 -income from other securities 1 3interest charge on discounted provisions -2 -sundry 5 1total, net finance costs, before exceptional items -70 -56interest expense on exceptional items (see note 8) -8 -total, continuing operations -78 -56In 2005 the interest rate applied in the capitalization of interest during construction was 5% (2004: 5%).Annual Report 2005www.dsm.com97

Royal DSM N.V. Financial statements 2005Consolidated financial statements(7) Earnings per ordinary share2005continuing discon- result excep- totaloperations tinued before ex- tionalbefore ex- opera- ceptional itemsceptional tions itemsitemsnet profit attributable to equity holders of Royal DSM N.V. 561 2 563 -36 527dividend on cumulative preference shares -16 - -16 - -16net profit used for calculating earnings per share 545 2 547 -36 511average number of ordinary shares outstanding (x 1,000) 190,783 - 190,783 - 190,783effect of dilution:- share options 1,066 - 1,066 - 1,066adjusted weighted average number of ordinary shares 191,849 - 191,849 - 191,849earnings per share in euro:- shares outstanding 2.86 0.01 2.87 -0.19 2.68- diluted 2.84 0.01 2.85 -0.19 2.66dividend paid in 2005 per share in euro 0.875 - 0.875 - 0.8752004net profit attributable to equity holders of Royal DSM N.V. 415 8 423 -130 293dividend on cumulative preference shares -22 - -22 - -22net profit used for calculating earnings per share 393 8 401 -130 271average number of ordinary shares outstanding (x 1,000) 191,617 - 191,617 - 191,617effect of dilution:- share options 375 - 375 - 375- convertible debenture loan 14 - 14 - 14adjusted weighted average number of ordinary shares 192,006 - 192,006 - 192,006earnings per share in euro:- shares outstanding 2.05 0.04 2.09 -0.68 1.41- diluted 2.05 0.04 2.09 -0.68 1.41dividend paid in 2004 per share in euro 0.875 - 0.875 - 0.875Annual Report 2005www.dsm.com98

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(8) Exceptional items2005 2004exceptional income:- gain from the sale of activities 23 19- release of provision for environmental costs 36 -total exceptional income 59 19exceptional expense:- loss from the sale of activities -3 -- additions to provisions for reorganization costs and severance payments -28 -94- additions to other provisions - -15- impairment of intangible assets and property, plant and equipment -64 -108- impairment of other assets - -1total exceptional expense -95 -218-36 -199net finance costs -8 -share of the profit of associates (net) -15 -total, exceptional items (before income tax expense) -59 -199income tax expense 23 57total, exceptional items after income tax expense -36 -142minority interests - 12net result from exceptional items -36 -1302005The gain from the sale of activities relates to book profits on the sale of DSM Bakery Ingredients and on the sale of land (DSM NutritionalProducts). Jurisprudence showed that a provision for environmental costs could be released. The loss from the sale of activities is relatedto the sale of the SBR business. The addition to provisions for reorganization and severance costs is mainly the balance of restructuringand reorganization costs at the Linz site in Austria (€ 15 million) and expenses due to the closing of the South Haven site (USA) of DSMPharmaceutical Products (€ 11 million). The impairment of intangible assets and property, plant and equipment relates to impairment ofproperty, plant and equipment at the Linz site (€ 6 million), the South Haven site (€ 27 million) and the Montreal site in Canada (€ 31million). The net finance costs are related to interest payments in connection with a final tax assessment in the Netherlands for the years1997 and 1998. The share of profit of associates (net) concerns an impairment of DSM’s share in Methanor. The income tax expense onexceptional items also includes the recognition of withholding tax credits over previous years and the settlement of tax returns in theNetherlands over previous years.2004The exceptional income in 2004 related to book profits on the sale of land (Performance Materials). The addition to provisions forreorganization and severance costs is the balance of restructuring and reorganization costs at DSM Anti-Infectives (€ 44 million) and inthe production organization at the Geleen site in the Netherlands (€ 50 million, Other activities). The addition to the other provisionsrelates to an onerous purchasing contract in the field of anti-infectives. The impairment of assets relates entirely to the restructuringmeasures and reorganizations in the Life Science Products cluster.Annual Report 2005www.dsm.com99

Royal DSM N.V. Financial statements 2005Consolidated financial statements(9) Intangible assetstotal goodwill licences otherand patentsbalance at 31 December 2003cost 515 355 72 88amortization 64 - 38 26carrying amount 451 355 34 62changes in carrying amount:- capital expenditure 44 - 17 27- acquisitions - - - -- disposals - - - -- amortization -22 - -10 -12- impairments -1 - -1 -- exchange differences -32 -29 -2 -1- reclassifications 14 - 13 1- other -1 - -1 02 -29 16 15balance at 31 December 2004cost 545 326 102 117amortization 92 - 52 40carrying amount 453 326 50 77changes in carrying amount:- capital expenditure 24 - 19 5- acquisitions 526 368 7 151- disposals -4 - - -4- amortization -35 - -7 -28- exchange differences 54 48 5 1- classified as held for sale -13 - -13 -- reclassifications -2 0 0 -2- other 0 - -6 6550 416 5 129balance at 31 December 2005cost 1,110 742 93 275amortization 107 - 38 69carrying amount 1,003 742 55 206DSM acquired several entities in business combinations that have been accounted for by the purchase method, resulting in recognitionof goodwill and other intangible assets. The amounts assigned to the acquired assets and liabilities are based on assumptions andestimates about their fair values. In making these estimates, management consults independent, qualified appraisers if appropriate.A change in assumptions and estimates could change the values allocated to certain assets and estimated economic lives, which couldaffect the amount or timing of charges to the income statement, such as amortization of intangible assets.The carrying amount of goodwill as at 31 December 2005 includes an amount of € 366 million relating to the acquisition of Catalytica in2001 and an amount of € 358 million relating to the acquisition of NeoResins in 2005. The goodwill of Catalytica is allocated to DSMPharmaceuticals Inc. (DPI) as cash generating unit and tested annually for impairment on the basis of the Annual Strategic Review (ASR)for the business. The goodwill of NeoResins is tested at the level of the DSM Coating Resins and DSM Composite Resins businessgroups (which are in the process of being merged into the new DSM Resins). In all cases the carrying amount is tested against the fairvalue of the business. Fair value is based on parameters, which are common for the industry in acquisitions of similar businesses. Thisincludes a 10-year cash flow and a terminal value without growth. Discount rates applied are between 6 and 8%.Annual Report 2005www.dsm.com100

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosThe other intangible assets include:cost amorti- carrying of whichzation amount acquisitionrelatedapplication software 100 44 56 8marketing-related 11 3 8 7customer-related 3 2 1 -technology-based 154 19 135 126other 7 1 6 -total 275 69 206 141(10) Property, plant and equipmenttotal land and plant and other under not usedbuildings machinery equip- construc- forment tion operatingactivitiesbalance at 31 December 2003cost 8,843 1,629 6,284 306 611 13depreciation 4,644 595 3,794 246 6 3carrying amount 4,199 1,034 2,490 60 605 10changes in carrying amount:- capital expenditure 304 19 86 5 194 -- put into operation - 34 393 14 -441- diposals -10 -3 -5 -1 - -1- depreciation -469 -55 -392 -22 - -- impairments -147 -14 -93 - -40 -- exchange differences -56 -12 -35 -1 -8 -- reclassifications -14 -13 -1 - - -- other 4 8 -4 - -3 3-388 -36 -51 -5 -298 2balance at 31 December 2004cost 8,838 1,635 6,566 299 323 15depreciation 5,027 637 4,127 244 16 3carrying amount 3,811 998 2,439 55 307 12changes in carrying amount:- capital expenditure 378 16 94 4 264 -- put into operation - 39 218 7 -264 -- acquisitions 88 48 30 1 9 -- diposals -126 -44 -63 -15 -4 -- depreciation -446 -57 -372 -17 - -- impairments -86 -26 -33 -1 -26 -- exchange differences 140 34 85 1 20 -- classified as held for sale -6 -1 -5 - - -- other -3 8 -8 -3 - --61 17 -54 -23 -1 -balance at 31 December 2005cost 8,804 1,664 6,483 284 343 30depreciation 5,054 649 4,098 252 37 18carrying amount 3,750 1,015 2,385 32 306 12Annual Report 2005www.dsm.com101

Royal DSM N.V. Financial statements 2005Consolidated financial statementsProperty, plant and equipment includes assets acquired under finance lease agreements with a carrying amount of € 34 million(31 December 2004: € 49 million). The related commitments are included under Borrowings and amount to € 22 million (31 December2004: € 40 million). The total of the minimum lease payments at the balance sheet date amount to € 25 million and their present values to€ 24 million.Overview of minimum lease payments in time:lease2006 142007 - 2010 6after 2010 5total 25(11) Deferred taxes2005 2004deferred tax assets 517 432deferred tax liabilities 198 147net deferred tax assets 319 285On balance net deferred tax assets increased by € 34 million owing to the following changes:balance at 31 December 2004 285deferred tax expense -14income tax expense recognized in equity 7acquisitions and disposals -37exchange rate differences 21other 57balance at 31 December 2005 319The changes under the heading “other” consist for the greater part of reclassifications.(12) Associates2005 2004balance at beginning of year 78 76changes:- share of profit -2 9- dividends -3 -7- capital payments 2 6- acquisitions 2 –- disposals -9 –- other value changes -21 –- transfers -2 –- other -2 -6balance at end of year 43 78of which loans issued - 2Annual Report 2005www.dsm.com102

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(13) Prepaid pension costs2005 2004balance at beginning of year 355 286changes:- charged to income 13 10- employer contributions 35 59- reclassifications 2 -balance at end of year 405 355For more details see also note 27.(14) Other financial assetstotal other other othersecurities recei- deferredvables itemsbalance at 31 December 2003 92 41 15 36changes:- charged to income -3 - - -3- capital payments 6 6 - -- loans issued 1 - 1 -- redemptions -5 - -5 -- exchange differences 1 - 1 -- transfers to current assets -6 - - -6- other -4 -1 -1 -2balance at 31 December 2004 82 46 11 25changes:- charged to income -3 - - -3- capital payments 4 4 - -- disposals -3 -2 -1 -- advances 3 - 3 -- loans issued 111 - 111 -- redemptions -5 - -5 -- exchange differences 4 - 3 1- transfers to current assets -4 1 1 -6balance at 31 December 2005 189 49 123 17Other securities relate to equity instruments in companies with activities that support DSM’s business, such as venture funds. In Othersecurities an amount of € 45 million is included that relates to unquoted equity instruments for which the fair value cannot be measuredreliably because there is no quoted price in the active market for these equity instruments. These securities are therefore held at cost.The increase in loans issued relates for the major part to a loan to the Gist-brocades pension fund.Annual Report 2005www.dsm.com103

Royal DSM N.V. Financial statements 2005Consolidated financial statements(15) Inventories2005 2004raw materials and consumables, at cost 442 540intermediate s and finished go ods, at cost 1,120 8501,562 1,390adjustme nts to lower net realizable value -27 -42total 1,535 1,348The carrying amount of inventories adjusted to net realizable value is € 78 million, the value adjustments of inventories charged to theincome statement was € 4 million.(16) Receivables2005 2004trade accounts receivable 1,350 1,261receivable from associates 13 25income taxes receivable 58 68other taxes and social security contributions 92 89government grants 3 7other receivables 59 63deferred items 48 661,623 1,579adjustments for bad debts -26 -23total 1,597 1,556In government grants an amount of € 2 million (2004: € 3 million) for investment grants and an amount of € 1 million (2004: € 4 million) forcost grants is included.(17) Assets and liabilities classified as held for saleAssets and liabilities classified as held for sale are related to the expected disposal of the DSM Minera business unit and comprise thefollowing:assetsintangible assets 13property, plant and equipment 6inventories 13receivables 11total assets 43liabilitiesother current liabilities 8total liabilities 8The sale of Minera was signed and closed on January 19, 2006, with an effective date of January 1, 2006.Annual Report 2005www.dsm.com104

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(18) Equity2005 2004balance at beginning of year 4,857 5,164net profit for 2005 520 270reclassification cumulative preference shares A 233 -233exchange differences, net of income tax expense 135 -66dividends paid -186 -195buy-back of ordinary shares -170 -119proceeds from re-issue of ordinary shares 102 11other changes 50 25balance at end of year 5,541 4,857On January 1, 2005, the date of first-time application of IAS 32/39, it was not unequivocally clear that the cumulative preference shares Amet all the requirements for an equity instrument as set out in IAS 32 paragraph 16. This was clarified in the course of the first quarter, byadaptation of the contract with the holders of these shares. For this reason the cumulative preference shares were recognized in theopening balance sheet of 2005 (which includes application of IAS 32/39) as debt, which was reversed in the course of the first quarter.Details of the impact of IFRS on shareholders’ equity is explained in note 35: first-time adoption of IFRS by DSM.After the balance sheet date the following dividends were established by the Managing Board:2005 2004€ 0.36 per cumulative preference share A (2004: € 0.36) 1616€ -.- per cumulative preference share C (2004: € 0.16) -6€ 1.00 per ordinary share (2004: € 0.875) 191 168total 207 190The proposed dividend on ordinary shares is subject to approval by shareholders at the Annual General Meeting and has not beendeducted from equity.Share capitalOn 31 December 2005 the authorized share capital amounted to € 1,125 million, distributed over 306,960,000 ordinary shares,44,040,000 cumulative preference shares A and 375,000,000 cumulative preference shares B with a par value of € 1.50 each, and1,200,000,000 cumulative preference shares C with a par value of € 0.03 each. The changes in the number of shares in 2005 are shown inthe table below.shares in issuetreasury sharesordinary cumprefs A cumprefs C ordinary cumprefs Csituation as at 31 December 2004* 201,953,008 44,040,000 37,500,000 9,996,112 37,500,000re-issue of shares in connection withexercise of options - - - -5,108,069 -buy-back of own shares - - - 6,142,000 -situation as at 31 December 2005 201,953,008 44,040,000 37,500,000 11,030,043 37,500,000number of treasury shares asat 31 December 2005 11,030,043 - 37,500,000number of shares outstanding asat 31 December 2005 190,922,965 44,040,000 -* In this overview the split of the DSM shares is considered to be effective as of December 31, 2004.The average number of ordinary shares outstanding in 2005 was 190,783,006. All shares in issue are fully paid.Annual Report 2005www.dsm.com105

Royal DSM N.V. Financial statements 2005Consolidated financial statementsShare premiumOf the total Share premium of € 545 million, an amount of € 139 million can be regarded as entirely free of tax.Ordinary shares held in treasuryOn 31 December 2004 DSM possessed 9,996,112 ordinary shares (nominal value € 15 million, 4.1% of the share capital). In 2005, DSMused 5,108,069 ordinary shares for servicing option rights. The company bought back 6,142,000 ordinary shares.On 31 December 2005 DSM possessed 11,030,043 ordinary shares (nominal value € 17 million, 4.5% of the share capital). The averagepurchase price of the ordinary treasury shares was € 23.82. The ordinary treasury shares will be used for servicing management andpersonnel share option rights.Other reservestranslation ‘hedging’ fair value reserve for totalreserve reserve reserve share-basedcompensationbalance at 31 December 2004 -51 -1 - 4 -48fair value changes of cash flow hedges - -2 0 - -2exchange differences, net 128 - - - 128options granted - - - 7 7balance at 31 December 2005 77 -3 0 11 85(19) Employee benefits liabilities2005 2004balance at beginning of year 385 425expenses 46 34acquisitions 34 -disposals -31 -employer contribution -69 -61exchange differences 13 -8other changes 10 -5balance at end of year 388 385of which current 25 40The Employee benefits liabilities of € 388 million (2004: € 385 million) include € 321 million (2004: € 314 million) related to liabilities fromdefined benefit and medical care plans, other long-term employee benefits such as jubilee benefits and long-term compensatedabsences for an amount of € 21 million (2004: € 17 million) and € 46 million (2004: € 54 million) for other plans. The liability for postemploymentbenefits is explained in detail in note 27.Annual Report 2005www.dsm.com106

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(20) Provisions2005 2004total of which total of whichcurrentcurrentrestructuring costs and termination benefits 207 156 306 175environmental costs 54 24 91 21other provisions 102 38 87 22total 363 218 484 218Where the effect of the time value of money is material, provisions are measured at the present value of the expenditures expected to berequired to settle the obligation. The discount rate used is based on swap rates for various terms, increased with 75 to 100 base pointsdepending on those terms.The Provision for restructuring costs and termination benefits mainly includes the costs of redundancy schemes relating to the dismissaland transfer of employees, costs of termination of contracts and consulting fees. These provisions have an average life of 1 to 3 years.The Provision for environmental costs relates to soil clean-up obligations, among other things. These provisions have an average life ofmore than 10 years.Several items have been combined under Other provisions, for example obligations ensuing from drilling platform decommissioning andsite restoration, expenses relating to claims and onerous contracts. These provisions have an average life of 5 tot 10 years.The total of non-current and current provisions decreased by € 121 million. This is the balance of the following changes:balance additions releases uses exchange other balanceat 1 differen- changes at 31January ces December2005 2005restructuring costs and termination benefits 306 45 -7 -145 5 3 207environmental costs 91 11 -36 -12 2 -2 54other provisions 87 33 -2 -18 1 1 102total 484 89 -45 -175 8 2 363The other changes include amounts relating to transfers to and from other balance-sheet items.The addition to the Provision for restructuring costs and termination benefits mainly relates to the Life Science Products cluster (€ 28million) and DSM Nutritional Products (€ 15 million). The withdrawal from this provision concerns expenditure related to restructuringoperations at DSM Pharmaceutical Products, DSM Food Specialties, DSM Anti-Infectives, DSM Nutritional Products, DSM Elastomersand DSM Industrial Services (Copernicus project).Annual Report 2005www.dsm.com107

Royal DSM N.V. Financial statements 2005Consolidated financial statements(21) Borrowings2005 2004total of which total of whichcurrentcurrentdebenture loans 1,057 140 1,131 383private loans 492 37 538 46finance lease liabilities 22 13 40 16credit institutions 139 139 82 821,710 329 1,791 527cumulative preference shares A - - 233 -total 1,710 329 2,024 527For more information relating to the reclassification of cumulative preference shares A see note 18.In agreements governing loans with a residual amount at year-end 2005 of € 1,322 million, of which € 147 million of a short-term nature(31 December 2004: € 1,392 million, of which € 400 million short term), clauses have been included which restrict the provision ofsecurity. The documentation of the € 300 million bond issued in November 2005 includes a change of control clause. This clause allowsthe bond investors to request repayment at par if 50% or more of the DSM shares are controlled by a third party and if the company isdowngraded below investment grade (< BBB-). For private loans no collateral was furnished (31 December 2004: also zero).At 31 December 2005, borrowings to a total of € 630 million had a remaining term of more than 5 years. The schedule of repayment ofborrowings excluding credit institutions is as follows:- 2006 190- 2007 462- 2008 36- 2009 and 2010 253- 2011 through 2015 630- after 2015 0total 1,571A breakdown of the borrowings, excluding debt to credit institutions and cumulative preference shares, by currency is given below:2005 2004EUR 986 1,117USD 459 407CNY 124 107CAD - 56ZAR - 16other 2 6total 1,571 1,709Annual Report 2005www.dsm.com108

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosOn balance, total borrowings decreased by € 314 million owing to the following changes:balance at 31 December 2004 2,024loans taken up 348redemptions -487changes in fair value -27changes in credit institutions 42exchange differences 100reclassification of cumulative preference shares A -233transfer -1other changes -56balance at 31 December 2005 1,710The changes in fair value of external borrowings are offset by the changes in fair value of related financial derivatives (see also note 26).The other changes related to the increase of DSM’s share in DSM Biologics Holdings, Inc.The average effective interest rate on the portfolio of borrowings, including financial instruments related to these borrowings, outstandingin 2005 amounted to 4.1% in 2005 (2004: 4.2%).A breakdown of debenture loans is given below:2005 20044.75% DEM loan 1998-2005 - 3836.25% NLG loan 1996-2006 140 1436.75% USD loan 1999-2009 204 1826.38% EUR loan 2000-2007 413 4234.00% EUR loan 2005-2015 300 -total 1,057 1,131All debenture loans have a fixed interest rate. The fixed interest rate of the 6.25% NLG loan 1996-2006, the 6.75% USD loan 1999-2009and the 6.38% EUR loan 2000-2007 have been swapped to floating rates by means of interest rate swaps (fair value hedges). The 6.38%EUR loan 2000-2007 was swapped into US dollars in 2000 to hedge the currency risk of net investments in US dollar denominatedsubsidiaries. This net investment hedge was unwound in 2005. In 2005 this EUR loan was swapped into Swiss francs to hedge thecurrency risk of net investments in Swiss franc denominated subsidiaries.The 4.00% EUR loan 2005-2015 was pre-hedged (cash flow hedge) in 2005 as a forecast transaction, which led to an effective lower fixedinterest rate of 3.66%.Annual Report 2005www.dsm.com109

Royal DSM N.V. Financial statements 2005Consolidated financial statementsPrivate loans breakdown is given below:2005 20049.22% NLG loan 1990-2005 - 129.3% NLG loan 1991-2006 7 74.34% NLG loan 1998-2008 11 15floating (6 months) NLG loan 2000-2014 69 67floating CNY loan 2002-2005 - 2012.9% ZAR loan 2002-2006 - 16floating (indefinite) CNY loan 2002-2010 123 875.51% USD loan 2003-2013 128 1155.61% USD loan 2003-2015 127 1103.67% CAD loans - 46other loans 27 43total 492 538The fixed interest rate of the 5.51% USD loan 2003-2013 was swapped into a floating rate by means of an interest rate swap (fair valuehedge). During 2005 this interest rate swap was unwound. The gain from this will be amortized until the maturity date, leading to aneffective fixed US dollar interest rate of 4.29% for the loan.The currency component of the 5.61% USD loan 2003-2015 was swapped into euros (cash flow hedge). The resulting EUR obligationwas swapped into Swiss francs to hedge the currency risk of net investments in Swiss-franc-denominated subsidiaries (net investmenthedge).DSM’s policy regarding financial risk management is described in note 26.(22) Other non-current liabilities2005 2004government grants 37 38other deferred items 16 22total 53 60The government grants include an amount of € 37 million (2004: € 38 million) in investment grants.(23) Other current liabilities2005 2004received in advance 8 3trade accounts payable 960 845notes and checks due 3 6owing to associates 14 38income taxes payable 57 29other taxes and social security contributions 64 65pensions 4 0other liabilities 205 210deferred items 384 414total 1,699 1,610In the ‘deferred items’ an amount of € 1 million (2004: € 1 million) in cost grants is included.Annual Report 2005www.dsm.com110

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(24) Contingent assets and contingent liabilitiesContingent liabilities2005 2004operating leases 34 23guarantee obligations on behalf of associates and third parties 28 19outstanding orders for projects under construction 8 11other 17 6total 87 59Most of the outstanding orders for projects under construction will be completed in 2006.The commitments for operating leases are spread as follows:- 2006 9- 2007 6- 2008 4- 2009 and 2010 5- after 2010 10total 34LitigationThere is an ongoing investigation into possible restrictive and/or concerted practices involving a number of EPDM producers, includingDSM, launched by the European Commission and the US Department of Justice at the end of 2002. DSM is cooperating fully in thisinvestigation and will continue to do so for as long as necessary. The investigation has prompted various buyers to institute proceedings fordamage against a number of EPDM producers, including DSM. These proceedings include a class action brought before the UnitedStates District Court in Connecticut.There is a process in place to monitor legal claims periodically and systematically.(25) Income tax expenseAs part of the process of preparing consolidated financial statements, DSM is required to estimate income tax expense in each of thejurisdictions in which it conducts business. This process involves estimating actual current tax expense and temporary differencesbetween tax and commercial reporting. Temporary differences result in deferred tax assets and liabilities, which are included in theconsolidated balance sheet. The Company has to assess the likelihood that deferred tax assets will be recovered from future taxableincome. Deferred tax assets are reduced if, and to the extent that, it is not probable that all or some portion of the deferred tax assets will berealized. In the event that actual results differ from estimates in future periods, and depending on tax strategies that DSM may be able toimplement, changes to the valuation of deferred taxes could be required, which could impact on the financial position and net income.The tax expense on the total result was € 150 million (2004: € 38 million). In 2005 the exceptional items included a tax gain of € 23 million,compared with a gain of € 57 million in 2004.Annual Report 2005www.dsm.com111

Royal DSM N.V. Financial statements 2005Consolidated financial statementsThe tax expense can be broken down as follows:2005 2004total tax on result from continuing operations, before exceptional items -173 -95tax on exceptional items 23 57total tax expense from continuing operations -150 -38of which:current tax expense- current year -82 14- prior year adjustments -54 38-136 52deferred tax expense- originating from and reversal of temporary differences -93 -163- prior year adjustments 69 -23- change in tax rate -3 30- benefit of tax losses and tax credits recognized 13 66-14 -90total tax expense -150 -38The relationship between the domestic income tax rate and the effective tax rate is as follows:as a % 2005 2004domestic income tax rate 31.5 34.5tax effects of- deviating rates -9.9 -14.5- tax-exempt income and non-deductible expense -0.9 -- other effects 3.0 -0.6effective tax rate excluding exceptional items 23.7 19.4effective tax rate including exceptional items 21.9 13.1The difference in effective tax rate including and excluding exceptional items in 2005 was due to the fact that exceptional items included aseparate (positive) tax item. The difference in 2004 was caused by the relatively high tax rate on the exceptional loss.No deferred tax assets were recognized for losses carried forward amounting to € 115 million (2004: € 121 million).Annual Report 2005www.dsm.com112

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosThe deferred tax assets and liabilities relate to the following balance sheet categories:December 31, 2005 December 31, 2004deferred deferred deferred deferredtax tax tax taxasset liability asset liabilityintangible assets 25 47 11 1property, plant and equipment 72 295 55 229financial assets 35 15 60 74other non-current assets 2 123 2 122inventories 52 35 42 35receivables 3 1 34 3other current assets 3 0 0 7equity 0 10 1 12other non-current liabilities 29 7 27 3non-current provisions 69 11 133 9non-current borrowings 9 6 37 12other current liabilities 57 7 27 28tax losses carried forward 520 - 391 -876 557 820 535set-off -359 -359 -388 -388total 517 198 432 147(26) Financial instrumentsPolicies on financial risksGeneralDSM is exposed to several financial risks: liquidity risk, currency risk, interest rate risk and credit risk. DSM’s financial risk policy is aimed atminimizing the effects of fluctuations in currency exchange and interest rates on its results in the short term and following the marketexchange rates and interest rates in the long term. Within DSM financial risk management is centralized. DSM uses financial derivatives tomanage financial risks relating to business operations. DSM does not use derivative instruments for trading purposes.Liquidity riskAt DSM cash management is carried out centrally insofar as this is possible via an “In-house Bank”. To this end, in the major countries useis made of cash pools operating mainly via zero-balancing agreements. DSM has two confirmed credit facilities of € 400 million and€ 500 million amounting to a total of € 900 million (2004: three credit facilities) and two commercial paper programs, one amounting to€ 900 million (2004: € 900 million) and the other amounting to $ 400 million (2004: $ 400 million). The company will use the twocommercial paper programs to a total of not more than € 900 million (2004: € 900 million).Currency riskThe currency risk arises from recognized assets and liabilities, firm commitments and forecast transactions, denominated in currenciesother than the euro. The currencies giving rise to this risk are primarily the US dollar, the UK pound and the Swiss franc. DSM usescurrency forward contracts, spot contracts and – to a limited extent – currency options to hedge the exposure to fluctuations in foreignexchange rates. In general, currency forward contracts and currency options have maturities of less than one year. It is DSM’s policy tohedge 100% of the currency risks resulting from sales and purchases at the moment of recognition of the trade receivables and tradepayables. In addition, operating companies may opt – under strict conditions – for hedging currency risks from firm commitments.Currency risks arising from forecast transactions denominated in US dollar are in some instances hedged, following a decision to thateffect by the Managing Board. This kind of hedge is treated as cash flow hedges.The currency risk associated with the translation of DSM’s net investment in entities denominated in currencies other than the euro ispartially hedged. Swiss-franc-denominated net assets have to some extent been hedged by currency swaps (CHF 826 million). USdollar-denominatednet assets have to some extent been hedged through USD loans (USD 400 million). The reason for these hedges isthe relatively high level of foreign-currency-denominated net investments.Annual Report 2005www.dsm.com113

Royal DSM N.V. Financial statements 2005Consolidated financial statementsInterest rate riskDSM’s interest rate risk policy is aimed at minimizing the interest rate risks associated with the financing of the company and thus at thesame time optimizing the net finance costs. Interest rate instruments will be applied only on the basis of underlying positions. This policytranslates into a certain desired profile of fixed interest and floating interest positions, with the floating interest position in principle notexceeding 60% of net debt. DSM manages interest rate risks by means of interest rate swaps and, to a limited extent, the purchase ofinterest rate options.Market valuesFinancial assets and financial liabilities are initially recognized at cost, being the fair value of the proceeds received, net of transactioncosts. Subsequently, the estimated fair value of financial instruments is determined by using available market information and appropriatevaluation methods. The fair value of derivatives and borrowings has been calculated by discounting the expected cash flows at prevailinginterest rates. For the loans included in the non-current financial assets, trade accounts receivable, cash and cash equivalents, and tradeaccounts payable, the carrying amount approximates the fair value.Borrowings are valued at amortized cost, with the exception of the loans related to fair value hedges.Hedge accountingDSM applies the following hedge accounting models: fair value hedge accounting, cash flow hedge accounting and net investmenthedge accounting, to manage the risks as mentioned above. The goal of a fair value hedge is to fix the value of an asset/liability (hedgeditem). Changes in fair value of a designated derivative that is highly effective as a fair value hedge, together with the change in fair value ofthe corresponding asset, liability or firm commitment attributable to the hedged risk, are included directly in earnings. So both fair valuechanges are offset in the income statement. The goal of a cash flow hedge is to limit the variability of highly probable future cash flowsdue to foreign currency or interest rate movements. Changes in fair value of a designated derivative that is highly effective as a cash flowhedge are included in equity and reclassified into income in the same period during which the hedged forecast cash flow affects income.This means there is no volatility in the income statement. The goal of a net investment hedge is to fix the value of an investment in aforeign entity. Changes in fair value of a designated derivative that is highly effective as a net investment hedge are included in equity. Sovolatility of the hedged part of the net investment is offset in equity.Any ineffectiveness of hedges is reflected directly in income. DSM aims to mitigate these risks by closely monitoring the effectiveness ofthe hedges through effectiveness testing. Ineffectiveness only occurs when fair value changes of the hedging instrument compared to fairvalue changes of the underlying risk are outside a 80 – 125 % bandwidth. All hedges in 2005 have proven to be effective.Credit riskDSM manages the credit risk to which it is exposed through credit limits per financial institution and by dealing exclusively with financialinstitutions having a high credit rating. At the balance sheet date there were no significant concentrations of credit risk.Annual Report 2005www.dsm.com114

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosFinancial derivativestotal current currentassets liabilitiesinterest rate swaps 41 43 -2currency swaps 129 158 -29total financial derivatives related to external borrowings 170 201 -31currency forward contracts 29 38 -9currency options -14 5 -19balance at 31 December 2004 185 244 -59interest rate swaps 14 22 -8currency swaps -7 11 -18total financial derivatives related to external borrowings 7 33 -26currency forward contracts -36 3 -39currency options - - -balance at 31 December 2005 -29 36 -65Value changes of external borrowings and related financial derivatives 2005 vs. 2004:hedges on external borrowings external derivatives total equity P&L otherborrowingsfair value hedges (interest rate swaps) 27 -27 - - - -cash flow hedge (currency swaps) -17 11 -6 -6 - -net investment hedge (currency swaps) 26 -147 -121 - -2 -119*total 36 -163 -127 -6 -2 -119* Positive cash flow impact of unwinding the currency swap from EUR to USD on the 6,38% EUR loan 2000-2007.Interest rate swapsInterest rate swaps are used to achieve an appropriate mix of fixed and floating interest rate exposure of external loans. These swaps areaccounted for as fair value hedges. The maturities of the swaps match those of the related loans. On 31 December 2005, the notionalamount of the interest rate swaps for fair value hedging purposes relating to long-term loans was € 748 million (2004: € 830 million).Interest rate swaps are from time to time used to hedge the fixed interest rate (excluding the DSM credit spread) of a new external loan asfrom the future issue date. In this way DSM achieves up-front certainty about the interest costs for a major part of DSM long-term eurodebt. Under IFRS such swaps are accounted for as cash flow hedges. DSM pre-hedged the 4.00% EUR loan 2005-2015 (€ 300 million)during 2005 as a highly probable transaction, which led to an effective lower fixed interest rate of 3.66% (including DSM credit spread). Asecond interest rate swap of € 200 million was concluded in 2005 for the highly probable refinancing of the 6.38% EUR 400 million loan2000-2007 maturing in 2007. On 31 December 2005, the notional amount of the interest rate swaps for cash flow hedging purposesrelating to future long-term loans was € 200 million (2004: zero).Currency swapsWith currency swaps the currency risk of loans and net investments in subsidiaries denominated in foreign currencies are hedged. Thesecurrency swaps are accounted for as net investment hedges. DSM uses currency swaps to hedge part of the net investment in Swissfranc-basedassets (CHF 826 million). On 31 December 2005, the notional amount of the currency swaps relating to net investmenthedges was € 538 million (2004: € 538 million).Currency swaps that hedge the currency risk resulting from recognized assets and liabilities, firm commitments and forecast transactionsare accounted for as cash flow hedges. The notional amount of currency swaps relating to long-term-loans denominated as cash flowhedges was € 141 million (2004: € 141 million).Annual Report 2005www.dsm.com115

Royal DSM N.V. Financial statements 2005Consolidated financial statementsCurrency forward contractsTo hedge intercompany loans and receivables/payables denominated in the non-functional currency of the subsidiaries, DSM usescurrency forward contracts. These hedges are based on underlying positions. Hedge accounting is not applied. On 31 December 2005,the notional amount of the currency forward contracts was € 1,567 million (2004: € 1,891 million).DSM hedged part of its projected net cash flow in USD in 2006 (USD 306 million) by means of currency forwards, more specificallyaverage rate forwards, at an average exchange rate of USD 1.22 per euro for the four quarters. This hedge has fixed part of the DSM netUSD exposure at this exchange rate. The effects of these hedges will be included in the operating profit of the clusters involved.Currency optionsCurrency options, more specifically average rate options, are used to hedge certain currency risks related to forecast transactions andfirm commitments of operating companies. These options provide protection against deterioration of the USD whilst allowing DSM toretain upward USD potential. The premiums for these instruments are paid up-front and impact on the operating result of the subsidiaryinvolved. In 2004 DSM hedged two USD firm commitment contracts for 2005 and 2006 by buying average rate options with a totalunderlying value of USD 34.6 million (2005) and USD 37.2 million (2006). Additional, average rate options were used to hedge part of theprojected net cash flow in USD in the second half of 2005 at an exchange rate of USD 1.20 per euro with an underlying value of USD 160million. The costs of these options were € 2.3 million.(27) Post-employment benefitsThe charges for post-employment benefits recognized in the income statement (note 5) consist of: :2005 2004net costs related to defined benefit plans 22 21net costs related to medical care plans 5 -2costs related to other long-term employee benefits 20 9total, continuing operations 47 28discontinued operations 1 1total 48 29For 2006 net costs related to defined benefit and medical care plans will approximate the costs for 2005.PensionsThe DSM Group companies have various pension plans, which are geared to the local regulations and practices in the countries in whichthey operate. As these plans are designed to comply with the statutory framework, tax legislation, local customs and economic situationof the countries concerned, it follows that the nature of the plans varies from country to country.Defined benefit plans are applicable to the majority of employees in the Netherlands, Germany, the United Kingdom, Switzerland and theUnited States. The rights that can be derived from these plans are based primarily on length of service and (average) final salary. Themajority of these obligations are funded and have been transferred to independent pension funds and life assurance companies.Post-employment benefits relate to obligations that will be settled in the future and require assumptions to project benefit obligations andfair values of plan assets. Post-employment benefit accounting is intended to reflect the recognition of post-employment benefits overthe employee’s approximate service period, based on the terms of the plans and the investment and funding decisions made. Theaccounting requires management to make assumptions regarding variables such as discount rate, future salary increases, return onassets, and future medical costs. Management consults with outside actuaries regarding these assumptions at least annually forsignificant plans. Changes in these key assumptions can have a significant impact on the projected benefit obligations, fundingrequirements and periodic costs incurred.Annual Report 2005www.dsm.com116

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosThe amounts recognized in the balance sheet for defined benefit plans are as follows:present value of benefit obligation 2005 2004benefit obligation at 1 January 4,756 4,247changes:- service costs 112 90- interest costs 210 215- employee contributions 12 12- plan changes 4 0- net actuarial gain (-) or loss (+) 149 407- exchange differences 20 -10- acquisitions 81 -- divestments -62 -- curtailments -5 -- benefits paid -233 -230- other - 25benefit obligation at 31 December 5,044 4,756fair value of plan assets 2005 2004plan assets at 1 January 4,616 4,253changes:- actual return on plan assets 734 458- employer contributions 88 99- employee contributions 12 12- exchange differences 14 -7- benefits paid -233 -230- other 0 31plan assets at 31 December 5,231 4,616net assets 2005 2004present value of benefit obligations 5,044 4,756fair value of plan assets 5,231 4,616funded status 187 -140unrecognized actuarial gains (-) or losses (+) -49 228unrecognized past service costs - 0effect of asset ceiling -1 -net assets in balance sheet 137 88amounts in the balance sheet:- liabilities (provision for post-employment benefits) 268 267- assets (prepaid pension costs) 405 355net assets in balance sheet 137 88The amounts recognized in the income statement are as follows:2005 2004current service costs 112 89interest costs 210 215expected return on plan assets -305 -283past service costs 4 0asset ceiling 1 0net costs related to defined benefit plans 22 21Annual Report 2005www.dsm.com117

Royal DSM N.V. Financial statements 2005Consolidated financial statementsThe changes in the net asset recognized in the balance sheet are as follows:2005 2004net assets at 1 January 88 7net expense recognized in the income statement -22 -21employer contributions 88 99exchange differences -7 3others -10 -net assets at 31 December 137 88The main actuarial assumptions for the year (expressed as ranges) are:2005 2004discount rate 2.6% - 6.1% 3.3% - 6.1%price inflation 1.5% - 3.0% 1.5% - 3.0%salary increase 1.8% - 4.0% 1.8% - 4.0%pension increase 0% - 2.8% 0% - 2.8%return on assets 4.5% - 8.5% 4.8% - 8.5%Post-employment medical care and other costsIn some countries, particularly the United States, group companies provide retired employees and their surviving dependants with postemploymentbenefits other than pensions, mainly allowances for medical and dental expenses and life insurance premiums. Some ofthese are unfunded; in these cases, approved expense claims are reimbursed out of the financial resources of the group companiesconcerned.The amounts included in the balance sheet are as follows:2005 2004present value of obligations 67 54fair value of plan assets 13 11present value of obligations 54 43unrecognized actuarial gains (-) or losses (+) -3 0unrecognized past service costs 2 4net liability in balance sheet (provision for post-employment benefits) 53 47The amounts recognized in the income statement are as follows:2005 2004current service cost 2 2interest costs 4 3expected return on plan assets -1 -1past service costs - -6net costs related to medical care plans 5 -2The (net) changes in the liability for post-employment medical care and other costs recognized in the balance sheet (Provision for postemploymentbenefits) can be shown as follows:2005 2004net liability at 1 January 47 61net expense recognized in the income statement 5 -2benefits paid -3 -6exchange differences on foreign plans 7 -4other -3 -2net liability at 31 December 53 47Annual Report 2005www.dsm.com118

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosThe main actuarial assumptions for post-employment medical care costs for the year are:2005 2004underlying inflation rate 3.0% 3.0%medical claim inflation rate 7.0% 7.25%salary increase 6.0% 6.12%discount rate 4.0% 4.0%(28) Net debt2005 2004borrowings:- non-current borrowings 1,381 1,264- current borrowings 329 527total borrowings 1,710 1,791current investments -5 -6cash and cash equivalents -902 -1,261net balance of financial derivatives (see also note 26) 29 -185net debt 832 339In the calculation of the net debt the temporary reclassification at year-end 2004 to debt of the cumulative preference shares A with animpact of € 233 million has not been taken into consideration.An amount of € 13 million (2004: € 20 million) in cash and cash equivalents was restricted and mainly relates to cash pledged inconnection with the dissolution of the joint venture with BASF in the field of feed enzymes, as a consequence of the takeover in 2003 ofRoche’s Vitamins & Fine Chemicals division.(29) Notes to the cash flow statementThe cash flow statement provides an explanation of the changes in cash and cash equivalents. It is prepared on the basis of acomparison of the balance sheets as at 1 January and 31 December. Changes that do not involve cash flows, such as changes inexchange rates, impairments and transfers to other balance-sheet items, are eliminated.Changes in working capital due to the acquisition or sale of consolidated companies are included under Investing activities.Most of the changes in the cash flow statement can be traced back to the detailed statements of changes for the balance-sheet itemsconcerned. For those balance-sheet items for which no detailed statement of changes is included, the table below shows the linkbetween the change according to the balance sheet and the change according to the cash flow statement:working capital provisions borrowingsbalance at 1 January 2005 1,294 484 2,024balance at 31 December 2005 1,433 363 1,710balance-sheet change 139 -121 -314adjustments:- exchange differences -103 -8 -100- changes in consolidation 87 -2 55- transfers 62 - 29- reclassifications 16 - 233adjusted balance-sheet change 201 -131 -97change in cash flow -201 -131 -97Annual Report 2005www.dsm.com119

Royal DSM N.V. Financial statements 2005Consolidated financial statements(30) Management share optionsUnder the current plan performance and non-performance related stock options or stock appreciation rights (SARs) are granted to seniormanagement. Such a grant takes place on the first day on which the DSM share is quoted ex-dividend following the Annual GeneralMeeting. The opening price of the DSM share on that day is the exercise price of the stock options/SARs.Stock options/SARs have a term of eight years and are subject to a vesting period of three years. After this 3-year period one third of thestock options/SARs (non-performance related) vest and two third of the stock options/SARs which are performance related will becomeexercisable in whole, in part, or not at all, depending on the Total Shareholder Return (TSR) achieved by DSM in comparison with a peergroup. Non-vested stock options/SARs will be forfeited.The exercise of stock options/SARs is regulated and in any case prohibited if the Plan participant has insider knowledge. A number ofsenior officers as well as a number of officers involved in processing financial statements are not allowed to exercise their stock options/SARs during predefined black-out periods prior to the publication of quarterly or annual reports. In addition, senior officers must obtainthe approval of an officer ranking one level higher in the organization. Senior management that is not included in the aforementionedgroups are not subject to any predefined black-out periods and may exercise their stock options at any time, provided they have noinsider knowledge. In specific circumstances the Compliance Officer may define special black-out periods for individuals or a group ofemployees, during which they are not allowed to trade in any DSM securities.Overview of management option rightsoutstanding in 2005 outstandingon 31 Dec. forfeited / on 31 Dec. exercise2004 granted vested (a) exercised expired 2005 price (€ ) exercise periodstock options:- vested 1999 393,500 -393,500 - 13.005 until 14 Jan. 20072000 765,000 -643,500 121,500 18.240 until 31 Mar. 20082001 2,039,250 -1,405,859 633,391 19.990 until 30 Mar. 20092002 479,100 1,779,450 -1,104,300 1,154,250 23.505 until 4 Apr. 20102003 140,000 71,000 -102,500 108,500 18.195 until 4 Apr. 20112003(b) 11,300 14,150 -11,300 14,150 19.770 until 3 Nov. 20112004 6,000 119,150 -43,500 81,650 17.895 until 2 Apr. 20122005 0 65,200 -5,000 60,200 29.050 until 8 Apr. 2013- unvested 2002 1,801,950 -1,779,450 -22,500 - 23.5052003 2,098,126 -71,000 -98,500 1,928,626 18.1952003(b) 192,050 -14,150 -5,250 172,650 19,7702004 2,634,076 -119,150 -101,250 2,413,676 17.8952005 0 2,580,478 -65,200 -47,600 2,467,678 29.050stock appreciation rights- vested 1999 72,000 -58,000 14,000 13.005 until 14 Jan. 20072000 72,000 -57,000 15,000 18.240 until 31 Mar. 20082001 31,500 -31,500 - 19.990 until 30 Mar. 20092002 18,000 213,750 -133,750 98,000 23.505 until 4 Apr. 20102003 8,000 8,000 -8,000 8,000 18.195 until 4 Apr. 20112003(b) 1,000 8,450 9,450 19.770 until 3 Nov. 20112004 8,000 16,450 -8,000 16,450 17.895 until 2 Apr. 20122005 0 8,000 8,000 29.050 until 8 Apr. 2013- unvested 2002 225,750 -213,750 -12,000 - 23.5052003 264,750 -8,000 -16,000 240,750 18.1952003(b) 342,200 -8,450 333,750 19.7702004 633,900 -16,450 -16,000 601,450 17.8952005 0 447,750 -8,000 -4,000 435,750 29.050total 12,237,452 3,028,228 - -4,005,709 -323,100 10,936,871changes in 2004 total 3,341,726 - -356,150 -482,750(a) Stock options / SARs will partly vest and may therefore be exercised immediately upon termination of employment in connection with (early) retirement.(b) On 3 November 2003 a select group of DSM Nutritional Products employees received stock options / SARs on a one-off basis.Overview of personnel option rightsAnnual Report 2005www.dsm.com120

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosoutstanding in 2005 outstandingon 31 Dec. granted exercised expired on 31 Dec. exercise2004 2005 price (€ ) exercise periodrelating to 1999 289,686 - -252,348 -480 36,858 19.80 until Feb. 2006relating to 2000 477,418 - -413,542 -1,320 62,556 19.99 until Mar. 2006relating to 2001 410,334 - -239,310 -6,356 164,668 23.11 until Apr. 2007relating to 2002 278,262 - -198,010 -2,370 77,882 18.19 until Apr. 2008relating to 2003 0 - - - 0relating to 2004 0 256,100 -11,650 -8,956 235,494 29.05 until Apr. 2010total 1,455,700 256,100 -1,114,860 -19,482 577,458changes in 2004 - -272,552 -30,088Based on the 2004 result, 256,100 personnel option rights were granted in 2005. No personnel option rights were granted in 2004.Restricted sharesGranting of restricted shares is limited to the Managing Board; a further explanation is available on page 67.outstanding during 2005 outstanding share priceon 31 Dec. granted vested expired / on 31 Dec. at date of2004 forfeited 2005 grant (€ )unvested 2005 - 42,000 - - 42,000 29.050Before 2005 no restricted shares were granted.Share-based compensationThe costs of option plans are measured by reference to the fair value of the options at the date at which the options are granted. The fairvalue is determined using the Black-Scholes option pricing model, taking into account market conditions linked to the price of the DSMshare. The costs of these options are recognized in the income statement (Employee benefits). Prior to 2004 share-based compensationwas accounted for using the intrinsic value method.The following assumptions were used in the Black-Scholes option pricing model:2005 2004risk-free interest rate (6 years risk free) 3.15% 3.24%expected option life management option rights 6 years 6 yearsnominal option life management option rights 8 years 8 yearsexpected option life personnel option rights2.5 years 2.5 yearsnominal option life personnel option rights 5 years 5 yearsexpected stock price volatility 26% 26%The costs of wages and salaries include an amount of € 22 million in share-based compensation (2004: € 8 million).Annual Report 2005www.dsm.com121

Royal DSM N.V. Financial statements 2005Consolidated financial statements(31) Interests in joint venturesDSM holds the following interests in the following most important joint ventures:company location DSM interestDEX-Plastomers VoF Heerlen NL 50%Holland Sweetener Company VoF Geleen NL 50%Noordgastransport BV Zoetermeer NL 40%Fersina Gb SA de CV Ramos Arizpe MX 50%Zhang Jia Kou Gist-brocades Pharmaceutical Company Ltd. Zhang Jia Kou CN 50%EdeA VoF Geleen NL 50%The financial data of joint ventures are included in the consolidated financial statements according to the method of proportionateconsolidation. DSM interests in the assets and liabilities, revenues and expenses of these joint ventures are:2005 2004non-current assets 187 208current assets 134 146non-current liabilities -116 -127current liabilities -66 -68net assets 139 159net sales 374 391expenses -339 -356net profit 35 35(32) Interests in associatesDSM holds the following interests in the following most important associates:company location DSM interestAmerican Melamine Industries, Inc. Fortier US 50%Methanor VoF Amersfoort NL 30%Nippon Dyneema Co. Ltd. Osaka JP 50%Nylon Polymer Company, LLC Augusta US 25%Triferto BV Doetinchem NL 40%Xinhui Meida - DSM Nylon Chips Co. Ltd. Guangzhou CN 25%Investments in associates are accounted for by the equity method of accounting. The following table provides summary financialinformation on associates on a 100% basis.2005 2004non-current assets 126 218current assets 65 64non-current liabilities -17 -48current liabilities -62 -147net assets 112 87net sales 358 542net profit -2 34Annual Report 2005www.dsm.com122

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratios(33) Related partiesRelated parties disclosure relates entirely to the key management of DSM.Remuneration of Members of the Managing Board and the Supervisory Board of Royal DSM N.V.The renumeration of the members of the Managing Board and the Supervisory Board is included in the employee benefits. In the financialyear under review, the remuneration of persons who were on the Managing Board of Royal DSM N.V. in 2005 amounted to € 3.9 million(2004: € 3.4 million). This includes fixed annual salaries € 2.5 million (2004: € 2.4 million), bonuses € 0.9 million (2004: 0.5 million),pension costs € 0.3 million (2004: € 0.3 million) and other costs € 0.2 million (2004: € 0.2 million). In 2005 the average number ofManaging Board members employed by Royal DSM N.V. was 5 (2004: 5). The remuneration of former members of the Managing Boardamounted to zero (the same as in 2004).Members of the Supervisory Board received a fixed remuneration (included in ‘Other operating costs’) totaling € 0.3 million (2004: € 0.2million).Further information about the remuneration of Managing Board members and Supervisory Board members and their share option rightsis given on page 62 of the Report by the Managing Board.(34) Service fees paid to external auditorsThe service fees paid to Ernst & Young included in ‘Work subcontracted and other external costs’ in 2005 amounted to € 5.2 million foraudit services (2004: € 5.8 million), € 1.6 million for tax services (2004: € 1.6 million) and € 0.4 million for sundry services (2004: € 0.5million).(35) First-time adoption of IFRS by DSMIntroductionUntil 2004 DSM prepared its consolidated financial statements in accordance with accounting principles generally accepted in theNetherlands (‘NL GAAP’). From 2005 onwards DSM is required to prepare its consolidated financial statements in accordance withInternational Financial Reporting Standards (IFRS) as adopted by the European Union.In the Annual Report 2004 DSM provided an annex that explained the main consequences of the transition from NL GAAP to IFRS. Theinformation in that annex was prepared on the basis of the best of our knowledge. At that moment some issues were still subject todebate with respect to the general interpretation of certain standards (notably with respect to IAS 19, IAS 32 and IAS 39). For this reason,the reconciliations in the Annual Report 2005 deviate from the figures presented in the annex of the Annual Report 2004. As DSMpublishes comparative information for one year in its Annual Report, the date for transition to IFRS is 1 January 2004, this being the startof the earliest period for which comparative information is given. The financial information of DSM according to IFRS has been preparedon the basis of IFRS effective at 31 December 2005.Annual Report 2005www.dsm.com123

Royal DSM N.V. Financial statements 2005Consolidated financial statementsOverview of the impact of the transition to IFRSThe impact of the transition on shareholders’ equity and net profit can be summarized as follows:SHAREHOLDERS’ EQUITY1 January 31 December 1 January2004 2004 2005according to NL GAAP 4,918 4,812changes due to the application of:- IFRS 2 Share-based payment -1 -3- IFRS 3 Business combinations 22 20- IAS 19 Employee benefits 83 163- IAS 28 Investments in associates 7 8- IAS 31 Interests in joint ventures -3 -4- IAS 37 Provisions 35 1addition of dividend on cumprefs, declared after balance sheetdate, but under NL GAAP already deducted from equity 15 11reclassifications 44 45according to IFRS (excluding IAS 32 and IAS 39) 5,120 5,053 5,053IAS 32 and IAS 39 Financial instruments -218according to IFRS (including IAS 32 and IAS 39) 4,835NET PROFIT2004 2004 2004result before exceptional totalexceptional itemsitemsgroup profit according to NL GAAP 348 -109 239changes due to the application of:- IFRS 2 Share-based payment -8 - -8- IFRS 3 Business combinations- reversal of amortization of goodwill 21 - 21- deferred costs relating to DNP -29 - -29- IAS 19 Employee benefits 86 - 86- IAS 28 Investments in associates 1 - 1- IAS 31 Interests in joint ventures -1 - -1- IAS 37 Provisions -1 -50 -51income tax expense -5 17 12profit for the year 412 -142 270difference 64 -33 31of which: operating profit 73 -50 23net finance costs -5 - -5income tax expense -5 17 12share in results of associates 1 - 1Annual Report 2005www.dsm.com124

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosThe impact on net sales and cash flows (both effects resulted from the application of IAS 31 Interests in Joint Ventures) and on earningsper share were:2004 NL GAAP IFRS Deltanet sales (€ million) 7,752 7,832 +80net cash provided by operating activities 911 898 -13net cash used in investing activities -308 -323 -15net cash used in financing activities -561 -533 +2842 42 0per ordinary share in euro:- net profit excluding exceptional items 1.76 2.13 +0.37- net profit 1.25 1.45 +0.20- net profit, after dilution 1.25 1.45 +0.20Transitional arrangementsDSM made use of the following exemptions to retrospective application of IFRSs as permitted by IFRS 1 First-time Adoption ofInternational Financial Reporting Standards:- Business combinations prior to the transition date of 1 January 2004 have not been restated according to the requirements of IFRS 3Business Combinations.- Cumulative actuarial gains and losses for post-employment benefits have been recognized in equity at the transition date.- The cumulative translation differences for all foreign operations are deemed to be zero at transition date.- The provision for site restoration has been recalculated without taking into account changes in such liabilities that occurred before thetransition date.- The comparative information for 2004 about financial instruments is based on existing NL GAAP. IAS 32 Financial Instruments: Disclosureand Presentation and IAS 39 Financial Instruments: Recognition and Measurement were not applied in 2004, but have been applied asfrom 1 January 2005.Most important changes in DSM’s accounting policies as at 1 January 2004On page 82 you find a summary of significant accounting policies used in this annual report. The most important changes in DSM’saccounting policies and their impact on result and equity are summarized below.IFRS 2 Share-based PaymentIn accordance with IFRS 2, an expense must be recognized representing the fair value of employee share options and stock appreciationrights granted to employees. The fair value is calculated using the Black-Scholes option pricing model and is charged to the incomestatement over the relevant vesting periods. The share-based payment charge of € 8 million for 2004 related to:- employee share options granted since 7 November 2002 (the effective date of IFRS 2), and not yet vested at 1 January 2005 (transitionalprovisions of IFRS), and- stock appreciation rights existing at 1 January 2004.The impact on equity at 1 January 2004 and at 31 December 2004 was not material.Management options and stock appreciation rights in DSM typically have a vesting period of three years.Consequently, it will take until 2006 before the full impact of IFRS 2 will be visible.IFRS 3 Business CombinationsGoodwill is no longer amortized, but tested for impairment at least annually. Goodwill was tested for impairment as at 1 January 2004 and31 December 2004.The impact for DSM is as follows:- amortization of goodwill has been discontinued as of the transition date of 1 January 2004; and- the carrying amount of the goodwill on 31 December 2003 according to NL GAAP amounting to € 355 million is used as the deemedcost of the goodwill as at the date of transition to IFRS (1 January 2004).The operating profit impact in 2004 was a reduction of the amortization charge of € 21 million, the most significant element being theremoval of amortization relating to the acquisition of Catalytica in 2000. There were no related income tax expense effects because of thetax-exempt nature of this goodwill. Under NL GAAP an amount of € 29 million in negative goodwill was allocated to current liabilities (fordeferred costs related to DSM Nutritional Products). Recognition of negative goodwill is not allowed under IFRS 3. The impact for theopening balance under IFRS was an increase in equity of € 22 million and a decrease in deferred tax assets of € 7 million. The impact onnet profit 2004 under IFRS was a reduction of € 22 million.Annual Report 2005www.dsm.com125

Royal DSM N.V. Financial statements 2005Consolidated financial statementsIAS 19 Employee BenefitsWith regard to defined benefit plans (pensions and other post-retirement benefits) IAS 19 requires for each plan the recognition of aliability that equals the net amount of:- the present value of the defined benefit obligation;- deferred actuarial gains and losses and deferred past service costs; and- the fair value of any plan assets at balance sheet date.This calculation may result in an asset. It is DSM’s policy to use the corridor approach for the recognition of actuarial gains and losses.The balance sheet impact of the implementation of IAS 19 was the recognition of a pension asset of € 282 million and an additionalpension liability of € 160 million in DSM’s IFRS opening balance sheet as at 1 January 2004. On balance, the after-tax impact on equitywas an increase of € 83 million in the balance sheet as at 1 January 2004 and an increase of € 163 million in the balance sheet as at 31December 2004. The pension charge under IFRS for the year 2004 was € 28 million, compared with an amount recognized under NLGAAP of € 114 million. Consequently, the operating profit impact of the transition to IFRS in 2004 was an additional gain of € 86 million,with a related tax charge of € 15 million.IAS 28 Investments in AssociatesThis Standard applies to investments in which the investor has significant influence. There is a rebuttable presumption of significantinfluence if the investor holds 20% or more of the voting power of the associate. Associates are accounted for in the consolidatedfinancial statements using the equity method. DSM has reclassified non-consolidated companies as associates or as other securities.Other securities are interests in companies over which DSM has no significant influence. These other securities are measured at fairvalue, or at cost if a fair value cannot be reliably measured. The application of IFRS resulted in an increase in equity of € 7 million in thebalance sheet as at 1 January 2004 and an increase of € 8 million in the balance sheet as at 31 December 2004. The positive impact onnet profit 2004 under IFRS was € 1 million.IAS 31 Interests in Joint VenturesDSM has opted to consolidate joint ventures according to the proportionate consolidation method. Under NL GAAP DSM restricted thismethod to joint ventures that were important to DSM in terms of sales to external parties. This restriction is not allowed under IFRS. As aresult, one additional joint venture will be proportionally consolidated (EdeA VoF). This had a limited impact on equity (a decrease of€ 3 million) and net profit, but had a larger impact on the separate items within the balance sheet and income statement. In the cash flowstatement, the cash flow from operating activities increased by € 13 million, the cash flow used in investing activities increased by€ 15 million and the cash flow used in financing activities decreased by € 5 million.IAS 37 ProvisionsAccording to IAS 37 a provision shall be recognized only when a past event has created a legal or constructive obligation, an outflow ofresources is probable, and the amount of the obligation can be estimated reliably. Under NL GAAP DSM recognized a provision of € 50million in 2003 for restructuring and reorganization costs in the manufacturing operations at the Geleen site in the Netherlands(Copernicus project), which under IFRS should have been recognized in 2004. The impact of this change was an increase in equity of €33 million at 1 January 2004, a decrease in deferred tax assets of € 17 million, and a decrease in net profit in 2004 of € 33 million.Furthermore, DSM has adjusted the existing provisions for site restoration in the area of DSM Energy to the level required by IAS 37. Theeffect in the opening balance sheet of 1 January 2004 (31 December 2004) was an increase in provisions of € 11 million (increase of€ 8 million), an increase in property, plant and equipment of € 14 million (increase of € 11 million), and an increase in equity of € 2 million(increase of € 1 million). The impact on net profit in 2004 was negligible.ReclassificationsIn changing over to IFRS, DSM implemented several changes in the format of the financial statements and the terminology used. Thereclassifications in the opening balance sheet at 1 January 2004 relate to the following:- The reclassification of application software (€ 45 million) from Tangible fixed assets (Property, plant and equipment) to Intangible fixedassets (Intangible assets).- The introduction of a separate category Deferred tax assets (€ 234 million), which were previously presented under Financial fixedassets.- The transfer of prepayments (€ 37 million) from Tangible fixed assets (Property, plant and equipment) to Other non-current assets(€ 30 million) and to Receivables (€ 7 million) for the current portion of prepayments made to suppliers.- Prepaid expenses (€ 10 million) have been transferred from Receivables to Other non-current assets.- Amounts from Provisions that will be used within 12 months (€ 282 million) months are presented in Provisions under Current liabilities.- An amount of € 66 million related to deferred items (such as Government grants) and reported under Current liabilities has beentransferred to Other non-current liabilities.Annual Report 2005www.dsm.com126

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosChange in DSM’s accounting policies as at 1 January 2005IAS 32 and IAS 39 Financial InstrumentsIAS 32 and IAS 39 address the accounting for and financial reporting of financial instruments. IAS 32 covers disclosure and presentationwhilst IAS 39 covers recognition and measurement. The general principle of IAS 39 is that all financial assets and financial liabilities,including all derivatives, shall be recognized on the balance sheet. Borrowings shall be measured at amortized cost, most other financialassets and financial liabilities (including derivatives) at fair value. DSM has opted to apply these standards as from the beginning of thefinancial year 2005. Changes in this regard relate to:- The inclusion in the balance sheet of derivative financial instruments that where held off-balance in previous years;- Measurement of all financial derivatives at their fair value;- Separate recognition of derivative financial instruments as non-current or current assets and liabilities, instead of netting them with therelated hedged items.Adoption of IAS 32 and IAS 39 resulted on balance in a decrease of € 218 million in equity at 1 January 2005, the main reason being atemporary classification of cumulative preference shares A to debt for an amount of € 233 million.The impact on net profit for 2005 wasnegligible.Annual Report 2005www.dsm.com127

Royal DSM N.V. Financial statements 2005Financial statements of Royal DSM N.V.Balance sheetassetsx € million31 December 31 December 31 December2005 2004* 2004**non-current assetsintangible assets (2) 359 - -property, plant and equipment (3) 21 20 20financial fixed assets (4) 7,989 7,459 7,4558,369 7,479 7,475current assetsreceivables (5) 309 228 226financial derivatives 33 200 -cash and cash equivalents 1 3 3343 431 229total 8,712 7,910 7,704shareholders’ equity and liabilitiesx € million31 December 31 December 31 December2005 2004* 2004**shareholders’ equity (6) 5,474 4,835 5,053non-current liabilitiesdeffered tax liabilities 24 13 13provisions (7) 12 17 17borrowings (8) 1,175 1,216 8191,211 1,246 849current liabilitiesprovisions (7) 14 8 8borrowings (8) 147 400 400financial derivatives 25 31 -other current liabilities (9) 1,841 1,390 1,3942,027 1,829 1,802total 8,712 7,910 7,704* Pro forma: after application of IAS 32 and IAS 39.** Before application of IAS 32 and IAS 39.Income statementx € million 2005 2004share in results of subsidiaries, joint ventures and associates (after income tax expense) 471 359other income and expense 56 -66net profit attributable to equity holders of Royal DSM N.V. 527 293Annual Report 2005www.dsm.com128

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosNotes to the Royal DSM N.V. balance sheet(1) GeneralUnless stated otherwise, all amounts are in € million.To enhance the transparency and readability of the notes to the financial statements, balance sheet items at December 31, 2004 arepresented after application of IAS 32 and 39. These standards were implemented with effect from January 1, 2005 and were applicableduring the full year. Therefore, this presentation enhances the comparability of individual balance sheet items and provide a betterunderstanding of changes during the year.The company financial statements have been prepared in accordance with accounting principles generally accepted in the Netherlands(NL GAAP).The accounting policies used are substantially the same as those used in the consolidated financial statements in accordance with theprovisions of article 362-8 of Book 2 of the Dutch Civil Code, except for investments in subsidiaries, which are accounted for at net assetvalue in accordance with the equity method. In conformity with article 402, Book 2 of the Dutch Civil Code, a condensed statement ofincome is included in the Royal DSM N.V. accounts.A list of DSM participations has been published at the Chamber of Commerce for Zuid-Limburg in Maastricht (The Netherlands) and isavailable from the company upon request. The list is also available on the company’s website www.dsm.com.(2) Intangible assetsThe intangible assets completely comprise out of the goodwill related to the acquisition of NeoResins (now DSM NeoResins) onFebruary 2, 2005.(3) Property, plant and equipmentThis item mainly relates to land and buildings and corporate IT projects. Capital expenditure in 2005 was € 5 million, while thedepreciation charge in 2005 was € 3 million. The historic cost of property, plant and equipment as at 31 December 2005 was € 52million; accumulated depreciation amounted to € 31 million.Annual Report 2005www.dsm.com129

Royal DSM N.V. Financial statements 2005Financial statements of Royal DSM N.V.(4) Financial fixed assetstotal subsidiaries other othershare in loans securities loansequitybalance at 31 December 2003 7,022 6,954 63 4 1changes:-share in profit 262 262 - - -- dividends -505 -505 - - -- capital payments 899 899 - - -- loans granted 318 - 318 - -- intra-group transactions -498 -498 - - -- value adjustments 55 55 - - -- exchange differences -102 -102 - - -- other 8 -22 33 -2 -1balance at 31 December 2004 7,459 7,043 414 2 0changes:-share in profit 450 450 - - -- dividends -422 -422 - - -- capital payments 728 727 - 1 -- goodwill -358 -358- loans granted 108 - - - 108- intra-group transactions -211 -211 - - -- value adjustments 107 107 - - -- exchange differences 136 136 - - -- other -8 -11 3 - -balance at 31 December 2005 7,989 7,461 417 3 108(5) Receivables2005 2004receivables from subsidiaries 228 142other receivables 81 86total 309 228(6) Shareholders' equity2005 2004balance at 31 December 4,835 5,120net profit 527 293reclassification of cumulative preference shares A 233 -233net translation differences 128 -62management options 7 4dividend -183 -194share buy-backs -68 -108adoption of IAS 32 and IAS 39 -15 - 15other -5 -balance at 31 December, after adoption of IAS 32 and IAS 39 5,474 4,835Annual Report 2005www.dsm.com130

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosFor details see the consolidated statement of changes in equity on page 88.Legal reservesSince the profits retained in Royal DSM N.V.'s consolidated and non-consolidated companies can be distributed, and received in theNetherlands, without restriction, no legal reserve for retained profits is required. In shareholders’ equity an amount of € 77 million isincluded for translation reserve and -€ 3 million for hedging reserve.(7) Provisions2005 2004of whichof whichtotal current total currentenvironmental costs 8 3 12 6other provisions 18 11 13 2total 26 14 25 8The total of non-current and current provisions increased by € 1 million. This is the net effect of the following changes:balance additions uses balanceat 31 at 31decemberdecember2004 2005environmental costs 12 - -4 8other provisions 13 12 -7 18total 25 12 -11 26(8) Borrowings2005 2004total of which total of whichcurrentcurrentdebenture loans 1,057 139 1,383 400private loans 265 8 - -1,322 147 1,383 400cumulative preference shares A - - 233 -total 1,322 147 1,616 400Of the total amount of borrowings outstanding at 31 December 2005, € 558 million had a remaining term of more than five years.The repayment schedule for non-current borrowings is as follows:- 2006 147- 2007 413- 2008 -- 2009 and 2010 204- 2011 through 2015 5581,322The repayments scheduled for 2006 relate to redemption of debenture loans and private loans.In agreements governing loans with a residual amount at year-end 2005 of € 1,175 million, of which € 147 million of a current nature(31 December 2004: € 1,392 million, of which € 400 million current), clauses have been included which restrict the provision of security.Annual Report 2005www.dsm.com131

Royal DSM N.V. Financial statements 2005Financial statements of Royal DSM N.V. – Other information(9) Other current liabilities2005 2004owing to subsidiaries 1,769 1,343other liabilities 70 44deferred items 2 3total 1,841 1,390Contingent liabilitiesGuarantee obligations on behalf of affiliated companies and third parties amounted to € 300 million (31 December 2004: € 300 million).Other commitments not appearing on the balance sheet amounted to zero (the same as in 2004). Royal DSM N.V. has declared in writingthat it accepts several liability for debts arising from acts-in-law of a number of consolidated companies. These debts are included in theconsolidated balance sheet.EmployeesThe remuneration of the individual members of the Managing Board was as follows: Peter Elverding, annual salary € 612,000 (2004: €599,760), bonus € 378,675 (2004: € 215,914 ), pension € 111,482 (2004: € 110,289); Jan Zuidam, Henk van Dalen and FeikeSijbesma, annual salary € 470,000 (2004: € 461,040), bonus € 290,950 (2004: € 165,974), pension € 86,148 (2004: € 85,250) andChris Goppelsroeder, annual salary € 470,000 (2004: n.a.), bonus € 218,913 (2004: n.a.), pension € 48,304 (2004: n.a.). Further detailsare provided in the Remuneration 2005 paragraph (pages 64-69).Heerlen, 6 February 2006 Heerlen, 8 February 2006MANAGING BOARD,Peter ElverdingJan ZuidamHenk van DalenFeike SijbesmaChris GoppelsroederSUPERVISORY BOARD,Cor HerkströterHenk BodtPierre HochuliEwald KistOkko MüllerClaudio SonderCees van WoudenbergAnnual Report 2005www.dsm.com132

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosAuditors' reportIntroductionWe have audited the financial statements of Royal DSM N.V. Heerlen for the year 2005. These financial statements consist of theconsolidated financial statements and the company financial statements. These financial statements are the responsibility of thecompany’s management. Our responsibility is to express an opinion on these financial statements based on our audit.ScopeWe conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallpresentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.Opinion with respect to the consolidated financial statementsIn our opinion, the consolidated financial statements give a true and fair view of the financial position of the company as at 31 December2005 and of the result and the cash flows for the year then ended in accordance with the International Financial Reporting Standards asadopted by the EU and comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code as far asapplicable.Furthermore we have established to the extent of our competence that the annual report is consistent with the consolidated financialstatements.Opinion with respect to the company financial statementsIn our opinion, the company financial statements give a true and fair view of the financial position of the company as at 31 December 2005and of the result for the year then ended in accordance with the accounting principles generally accepted in the Netherlands and complywith the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code.Furthermore we have established to the extent of our competence that the annual report is consistent with the company financialstatements.Maastricht, 8 February 2006for Ernst & Young AccountantsW.J. SpijkerChr. J. WestermanAnnual Report 2005www.dsm.com133

Royal DSM N.V. Financial statements 2005Other informationProfit appropriationAccording to Article 32 of the Royal DSM N.V. Articles of Association and with the approval of the Supervisory Board of Directors, everyyear the Managing Board of Directors determines the portion of the net profit to be appropriated to the reserves. For the year 2005 the netprofit is € 527 million and the amount to be appropriated to the reserves has been established at € 320 million. From the subsequentbalance of the net profit (€ 207 million), dividend is first distributed on the cumulative preference shares B. At the end of 2005 no cumprefsB were in issue. Subsequently, a 6.78% dividend is distributed on the cumulative preference shares A, based on a share price of € 5.30per cumulative preference share A. For 2005 this distribution amounts to € 0.36 per share, which is € 16 million in total. An interimdividend of € 0.12 per cumulative preference share A having been paid in August 2005, the final dividend will then amount to € 0.24 percumulative preference share A. The cumulative preference shares C were repurchased on 28 November 2004; consequently no finaldividend was distributed on these shares in 2005.The profits remaining after distribution of these dividends (€ 191 million) will be put at the disposal of the Annual General Meeting inaccordance with the provisions of Article 32, section 6 of the Articles of Association.In view of the above, the proposed dividend on ordinary shares outstanding for the year 2005 would amount to € 1.00 per share. Thisdividend corresponds to about 18% of the net profit excluding exceptional items (€ 563 million) plus depreciation and amortization (€ 503million) minus the dividend paid to holders of cumulative preference shares (€ 16 million). An interim dividend of € 0.29 per ordinary sharehaving been paid in August 2005, the final dividend would then amount to € 0.71 per ordinary share.If the Annual General Meeting of Shareholders makes a decision in accordance with the proposal, the net profit will be appropriated asfollows:x € million 2005 2004net profit 527 300profit appropriation:- to be added to / paid from the reserves 320 110- dividend on cumprefs A and C 16 22- interim dividend on ordinary shares 55 56- final dividend payable on ordinary shares 136 112Special statutory rightsDSM Preference Shares FoundationThe DSM Preference Shares Foundation was established in 1989.By virtue of DSM's Articles of Association, 375,000,000 preference shares B can be issued. Shares thus issued can be placed with theFoundation in order to provide protection against a hostile takeover bid.The DSM Preference Shares Foundation and DSM have concluded agreements on the placement of preference shares B and an optionon such shares. Under these agreements, the Foundation is obliged to take preference shares B in DSM’s capital or has the right toacquire such shares to a maximum corresponding to 100% of the capital issued in any form other than preference shares B, less one.The Foundation acquired no preference shares B in 2005.On 31 December 2005 the Committee was composed as follows:Floris Maljers, chairmanMaarten van Veen, vice-chairmanBas KortmannThe Foundation CommitteeAnnual Report 2005www.dsm.com134

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosDeclaration of independenceThe DSM Managing Board and the Foundation Committee hereby declare that, according to their joint assessment, the DSM PreferenceShares Foundation meets the independence requirements laid down in Appendix X to the Listing and Issuing Rules of EuronextAmsterdam N.V.The Managing Board of Royal DSM N.V.The Foundation CommitteeDSM Vision 2005 BV and DSM Vision 2005 Priority FoundationIn 2002, DSM Vision 2005 BV and the DSM Vision 2005 Priority Foundation were established. DSM entrusted the revenues from the saleof DSM’s petrochemical activities, as well as the financial resources that became available in 2001 following the sale of DSM’s interest inEnergie Beheer Nederland BV, to its subsidiary DSM Vision 2005 BV. This company was set up to manage these revenues and their use forthe implementation of the Vision 2005 strategy.A number of decisions by the company, including decisions on the use of the financial resources that it manages, required the approval ofthe Priority Foundation. The only criterion to be used by the Priority Foundation in assessing the proposed decisions was whether theywere compatible with the Vision 2005: Focus and Value strategy.The financial resources were mainly used for the acquisition of Roche Vitamins and Fine Chemicals (now DSM Nutritional Products) andNeoResins (now DSM NeoResins).Since DSM Vision 2005 BV had fulfilled its objective, e.g. support the implementation of the Vision 2005 strategy, the Priority Foundatonwas liquidated and dissolved in the course of the year and DSM Vision 2005 BV will in due course transfer its remaining funds(approximately € 30 million) to Royal DSM N.V.Annual General Meeting of shareholdersThe Annual General Meeting is to be held at the DSM head office in Heerlen (the Netherlands) on Wednesday, 29 March2006 at 14.00 hours.Important datesEx-dividend quotation Friday, 31 March 2006Publication of first-quarter results Friday, 28 April 2006Publication of second-quarter results Thursday, 27 July 2006Publication of third-quarter results Thursday, 26 October 2006Annual figures 2006 Thursday, 8 February 2007*Annual General Meeting Wednesday, 28 March 2007** These are provisional dates.Annual Report 2005www.dsm.com135

Royal DSM N.V. Financial statements 2005DSM figures: five-year summaryBalance sheetx € million 2005* 2004* 2004 2003 2002 2001intangible assets 1,003 453 369 405 462 594property, plant and equipment 3,750 3,811 3,809 4,188 2,885 3,607deferred tax assets 517 432 - - - -associates 43 78 491 371 292 241prepaid pension costs 405 355 - - - -other financial assets 189 82 - - - -non-current assets 5,907 5,211 4,669 4,964 3,639 4,442inventories 1,535 1,348 1,347 1,474 944 1,171receivables 1,597 1,556 1,669 1,746 1,439 1,814financial derivatives 36 244 - - - -current investments 5 6 4 4 2,014 -cash 902 1,261 1,247 1,212 960 1,1484,075 4,415 4,267 4,436 5,357 4,133assets classified as held for sale 43 - - - - -current assets 4,118 4,415 4,267 4,436 5,357 4,133total assets 10,025 9,626 8,936 9,400 8,996 8,575shareholders’ equity 5,474 4,835 4,812 4,918 5,142 4,239minority interests 67 22 22 43 44 59equity 5,541 4,857 4,834 4,961 5,186 4,298deferred tax liabilities 198 147 - - - -employee benefits liabilities 363 345 - - - -provisions 145 266 874 901 682 809borrowings 1,381 1,497 1,045 1,505 1,337 1,533other non-current liabilities 53 60 - - - -non-current liabilities 2,140 2,315 1,919 2,406 2,019 2,342employee benefits liabilities 25 40 - - - -provisions 218 218 - - - -borrowings 329 527 543 382 599 482financial derivatives 65 59 - - - -other current liabilities 1,699 1,610 1,640 1,651 1,192 1,4532,336 2,454 2,183 2,033 1,791 1,935liabilities classified as held for sale 8 - - - - -current liabilities 2,344 2,454 2,183 2,033 1,791 1,935total equity and liabilities 10,025 9,626 8,936 9,400 8,996 8,575capital employed 6,221 5,558 5,554 6,162 4,538 5,763capital expenditure:- intangible assets and property, plant and equipment 401 348 334 433 503 652- participating interests** and other securities 573 0 0 1,561 33 -divestments 222 28 28 17 2,037 1,465depreciation and amortization, continuing operations 496 490 524 429 442 521net debt*** 832 339 337 671 -1,038 867ratios***:net sales / average capital employed 1.34 1.34 1.32 1.21 1.29 1.41current assets / current liabilities 1.76 1.80 1.95 2.18 2.99 2.14equity / total assets 0.55 0.53 0.54 0.53 0.58 0.50net debt / equity plus net debt 0.13 0.06 0.07 0.12 -0.25 0.17* Figures according to IFRS, including IAS 32 and IAS 39. The figures for previous periods were drawn up according to NLNL GAAP.** Including goodwill.*** To enhance comparibility the net debt and ratios 2004 do not include the impact of the temporary reclassification of cumulative preference shares A (see also note 8).Annual Report 2005www.dsm.com136

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosIncome statementx € million 2005* 2004* 2004 2003 2002 2001net sales 8,195 7,832 7,752 6,050 6,665 7,970change compared with previous year (%) 5 1 28 -9 -16 -1operating profit plus depreciation and amortization (EBITDA) 1,311 1,067 1,013 723 892 1,042operating profit (EBIT) 808 562 489 294 450 521net finance costs -70 -56 -51 -31 -14 -97income tax expense -180 -103 -98 -49 -84 -69share of the profit of associates -2 9 8 5 -3 14net profit excluding exceptional items 556 412 348 219 349 369net result from exceptional items -36 -142 -97 -94 840 1,045profit for the year 520 270 251 125 1,189 1,414profit attributable to minority interests 7 23 11 14 -1 1net profit attributable to equity holders of Royal DSM N.V. 527 293 262 139 1,188 1,415net profit attibutable to holders of cumulative preference shares -16 -22 -22 -22 -22 -22net profit used for calculating earnings per share 511 271 240 117 1,166 1,393workforce at 31 December (x 1,000) 22 24 24 26 18 22employee benefits costs (x € million) 1,385 1,411 1,487 1,215 1,217 1,251percentage ratios:- EBIT / net sales 9.9 7.2 6.3 4.9 6.8 6.5- CFROI 9.1 8.1 7.6 5.8 7.0 7.7- net profit / average shareholders’ equityavailable to holders of ordinary shares 10.5 6.2 5.7 2.5 26.8 42.3EBITDA / net finance costs 18.7 19.1 19.9 23.3 63.7 10.7dividend (x € million) 207 190 190 188 199 199* Figures according to IFRS, including discontinued operations. The figures for previous periods were drawn up according to NL GAAP.Annual Report 2005www.dsm.com137

Royal DSM N.V. Financial statements 2005DSM figures: five-year summary – Explanation of some financialconcepts and ratiosInformation about ordinary DSM shares*On 5 September 2005 DSM effected a share split on a two-for-one basis (two shares for one old share) in order to increase the liquidity ofthe DSM share. The data regarding the number of shares and earnings per share in the overview below have been presented as if theordinary DSM shares had been issued for all periods presented.per ordinary share in € : 2005** 2004** 2004 2003 2002 2001net profit excluding exceptional items 2.87 2.09 1.76 1.11 1.69 1.81net profit 2.68 1.41 1.25 0.62 6.04 7.25cash flow 5.65 4.52 3.99 2.88 8.34 9.96shareholders’ equity 27.45 25.19 23.86 23.86 24.82 20.24dividend: 1.00 0.875 0.875 0.875 0.875 0.875- interim dividend 0.29 0.290 0.290 0.290 0.290 0.290- final dividend 0.71 0.585 0.585 0.585 0.585 0.585pay-out as % of net profit before exceptional items 32% 42% 50% 79% 54% 51%pay-out including dividend on cumulative preferenceshares as % of net profit before exceptional items 34% 45% 53% 81% 57% 54%pay-out as % of net profit 37% 62% 70% 143% 15% 13%dividend yield (based on average price of anordinary DSM share) 3.4% 4.3% 4.3% 4.5% 3.9% 4.5%share prices on Euronext Amsterdam:- highest price 35.22 23.85 23.85 22.50 25.63 22.58- lowest price 23.07 17.88 17.88 15.65 18.95 14.40- at 31 December 34.50 23.81 23.81 19.52 21.69 20.51x 1,000number of ordinary shares outstanding:- at 31 December 190,923 191,957 191,957 191,537 193,179 192,293- average 190,783 191,617 191,617 189,430 192,935 192,180daily trading volumes on Euronext Amsterdam:- average 1,063 1,014 1,014 1,126 1,034 1,086- lowest 238 26 26 130 140 47- highest 6,563 6,494 6,494 6,540 3,864 5,538* The table is based on the annual figures published for the years concerned.** Figures according to IFRS. The figures for previous periods were drawn up according to NL GAAP.Annual Report 2005www.dsm.com138

Section 4 Royal DSM N.V. Financial statements 2005Consolidated financial statementsFinancial statements of Royal DSM N.V.Other informationDSM figures: five-year summaryExplanation of some financial concepts and ratiosGeneralIn calculating financial profitability ratios useis made of the average of the opening andclosing values of balance-sheet items in theyear under review.The financial indicators per ordinary shareare calculated on the basis of the averagenumber of ordinary shares outstanding(average daily number). In calculatingshareholders’ equity per ordinary share,however, the number of shares outstandingat year-end is used.In calculating the figures per ordinary shareand the 'net profit as a percentage ofaverage shareholders’ equity available toholders of ordinary shares', the amountsavailable to the holders of cumulativepreference shares are deducted from theprofits and from shareholders’ equity.DefinitionsCapital employedThe total of the carrying amount ofintangible assets and property, plant andequipment, inventories and receivables,less other current liabilities.Capital expenditureThis includes all investments in intangibleassets and property, plant and equipmentas well as the acquisition of participatinginterests and other securities.Cash flowCash flow is net profit plus depreciation andamortization.CFROI (Cash Flow Return On Investment)Cash Flow Return On Investment is thesustainable cash flow (EBITDA minusnormative annual tax and minus 1%depreciation on weighted average historicasset base) divided by weighted averageasset base plus average working capital.DivestmentsThis includes the divestment of intangibleassets and property, plant and equipmentas well as the sale of participating interestsand other securities.Earnings Before Interest, Tax, Depreciationand Amortization (EBITDA)EBITDA is the sum total of operating profitplus depreciation and amortization.Earnings per ordinary share- Net profit attributable to equity holders ofRoyal DSM N.V. minus dividend oncumulative preference shares, divided bythe average number of ordinary sharesoutstanding.- Net profit attributable to equity holders ofRoyal DSM N.V. excluding exceptionalitems minus dividend on cumulativepreference shares, divided by the averagenumber of ordinary shares outstanding.Total Shareholder Return (TSR)Total Shareholder Return is capital gain plusdividends.Annual Report 2005www.dsm.com139

Index – Financial statementsAaccounting policies _______________________________ 82acquisition ______________________________________ 91assets and liabilities classified as held for sale _________ 104associates _________________________________102, 122auditors' report _________________________________ 133Bborrowings _________________________________108, 131Ccash flow statement _____________________________ 119consolidated balance sheet ________________________ 87consolidated cash flow statement ___________________ 89consolidated financial statements ___________________ 82consolidated income statement ____________________ 86consolidated statement of changes in equity __________ 88contingent liabilities __________________________111, 132credit facilities __________________________________ 113credit risk ______________________________________ 114currency exchange rates __________________________ 90currency forward contracts _______________________ 116currency options ________________________________ 116currency risk ___________________________________ 113currency swaps _________________________________ 115Ddebenture loans ________________________________ 109deferred taxes __________________________________ 102definitions ______________________________________ 139depreciation and amortization ______________________ 97divestments _____________________________________ 92Eearnings per ordinary share ________________________ 98employee benefits costs ___________________________ 97employee benefits liabilities _______________________ 106equity _________________________________________ 105exceptional items ________________________________ 99Ffinancial derivatives ______________________________ 115financial fixed assets _____________________________ 130financial instruments _____________________________ 113financial lease __________________________________ 102financial risks ___________________________________ 113financial statements of Royal DSM N.V. ______________ 128first-time adoption of IFRS by DSM _________________ 123five year summary _______________________________ 136Ggoodwill _______________________________________ 100government grants ___________________________96, 110guarantee obligations ____________________________ 111Hhedge accounting _______________________________ 114hedging reserve _________________________________ 106Iimportant dates _________________________________ 135income tax expense _____________________________ 111information about ordinary DSM shares _____________ 138intangible assets ________________________________ 100interest expense _________________________________ 97interest income __________________________________ 97interest rate swaps ______________________________ 115interest-rate risk ________________________________ 114inventories _____________________________________ 104Jjoint ventures ___________________________________ 122Lland and buildings _______________________________ 101legal reserve for retained profits ____________________ 131licences _______________________________________ 100liquidity risk ____________________________________ 113litigation _______________________________________ 111Mmanagement share options _______________________ 120market values __________________________________ 114Nnet cash provided by operating activities _____________ 89net cash used in financing activities __________________ 89net cash used in investing activities __________________ 89net debt _______________________________________ 119net finance costs _________________________________ 97Ooperational lease ________________________________ 111ordinary shares held in treasury ____________________ 106other current liabilities ________________________110, 132other financial assets _____________________________ 103other non-current liabilities ________________________ 110other operating costs _____________________________ 97other operating income ___________________________ 96other reserves __________________________________ 106Ppatents ________________________________________ 100pensions ______________________________________ 116plant and machinery _____________________________ 101post-employment benefits ________________________ 116post-employment medical care and other costs ______ 118prepaid pension costs ___________________________ 103private loans ___________________________________ 110profit appropriation ______________________________ 134property, plant and equipment _____________________ 101provisions __________________________________107, 131Annual Report 2005www.dsm.com140

IndexRreceivables _________________________________104, 130related parties __________________________________ 123remuneration ________________________________62, 123reserve for share-based compensation _____________ 106Ssegment information ______________________________ 93service fees paid to external auditors ________________ 123share capital ___________________________________ 105share premium _________________________________ 106share split _______________________________________ 81share-based compensation _______________________ 121shareholders' equity _____________________________ 130special statutory rights ___________________________ 134Ttrade accounts payable __________________________ 110trade accounts receivable ________________________ 104translation reserve _______________________________ 106Wwages and salaries _______________________________ 97Annual Report 2005www.dsm.com141

Annual reportCopies of this report (which is also availablein the original Dutch version) can be orderedby phone (+31 800 0233480) or e-mail(DSM@servicebureau.nl).InternetThe information contained in this annualreport is also available via DSM’s website:www.dsm.com. You can view the annualreport online and also download and printparts of it.InformationOur other publications and sources ofinformation are:- Internet: www.dsm.com- Triple P Report 2005- Brochure: The Unlimited World of DSMAddressesInstitutional and private investors andfinancial analysts should contact:DSM, Investor Relations,P.O. Box 6500,6401 JH Heerlen,the Netherlandstel. +31 45-5782864fax. +31 45-5782595e-mail: investor.relations@dsm.comThose who are interested in DSM in generalshould contact:DSM, Corporate Communications,P.O. Box 6500,6401 JH Heerlen,The Netherlandstel. +31 45-5782421fax. +31 45-5740680e-mail: media.relations@dsm.comGeneral informationProduction:DSM, Corporate CommunicationsAnnual Report 2005www.dsm.com142

Royal DSM N.V.P.O. Box 65006401 JH HeerlenThe NetherlandsT + 31 (45) 578 8111F + 31 (45) 571 9753E info@dsm.comwww.dsm.com