Koninklijke DSM N.V. Annual Report 2005

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FY2005 Annual Report · Koninklijke DSM N.V.

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Royal DSM N.V.

Annual Report 2005

DSM Profile

Royal DSM N.V.

P.O. Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111
F + 31 (45) 571 9753
E info@dsm.com

www.dsm.com

R
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A year of
achievements

DSM is active worldwide in nutritional and pharma
ingredients, performance materials and industrial
chemicals. The company develops, produces and sells
innovative products and services that help improve
the quality of life. DSM’s products are used in a wide
range of end-markets and applications, such as
human and animal nutrition and health, personal care,
pharmaceuticals, automotive and transport, coatings,
housing and electrics & electronics (E&E). DSM’s
strategy, named Vision 2010 – Building on Strengths,
focuses on accelerating profitable and innovative
growth of the company’s specialties portfolio. Market-
driven growth, innovation and increased presence in
emerging economies are key drivers of this strategy.
The group has annual sales of over € 8 billion and
employs some 22,000 people worldwide. DSM ranks
among the global leaders in many of its fields. The
company is headquartered in the Netherlands, with

locations in Europe, Asia, Africa and the Americas. ‰

Web link
Detailed group strategy information can also be
found at www.dsm.com : About us

Annual Report 2005

www.dsm.com

Royal DSM N.V.

Annual Report 2005

DSM Profile

Royal DSM N.V.

P.O. Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111
F + 31 (45) 571 9753
E info@dsm.com

www.dsm.com

R
o
y
a

D
S
M
N
V.

A
n
n
u
a

R
e
p
o
r
t
2
0
0
5

A year of
achievements

locations in Europe, Asia, Africa and the Americas. ‰

Web link
Detailed group strategy information can also be
found at www.dsm.com : About us

Annual Report 2005

www.dsm.com

DSM at a glance

Life Science Products

DSM Nutritional Products

Performance Materials

Industrial Chemicals

New structure – Vision 2010

DSM’s activities have been
grouped into business
groups representing
coherent product/market
combinations. The
business group directors
report directly to the
Managing Board. For
reporting purposes the
activities are grouped
into three strategic
clusters – Life Science
Products, Performance
Materials and Industrial
Chemicals − plus DSM
Nutritional Products. In
addition, DSM reports
on a number of other
activities, which have
been grouped under
Other Activities.

‰

At the end of 2005 DSM started its new five-year
strategy for 2006-2010: Vision 2010 – Building
on Strengths.

With this strategy DSM focuses on accelerating
profitable and innovative growth of its specialties
portfolio. The overall objective is strong value
creation, 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 business
groups, the organizational model of DSM will be
aligned with the new Vision 2010 strategy. As of
Q2 2006 there will be four clusters:

1,479m

1,914m

2,447m

1,687m

– Pharma restructurings yield clearly improved

– VITAL program contributes further to

– Strong performance in all business groups

– Supply/demand balance favorable for fertilizers

profitability.

improved results.

– Food ingredients portfolio profits from

– Significant steps taken to secure

innovations.

competitive position.

in 2005.

– NeoResins acquisition strengthens

coating resins business.

and fiber intermediates.
– Melamine faces oversupply.

DSM Fine Chemicals
Produces chemical intermediates for the agro-
chemical, food and pharma industries.
Products include: glyoxylic acid, fumaric acid,
aspartame, benzoic acid, sodium benzoate.

DSM Pharmaceutical Products
Provides custom manufacturing services to the
pharmaceutical and agro-chemical industries.
Products: active ingredients, advanced
intermediates, monoclonal antibodies, sterile and
solid dose manufacturing and packaging.

DSM Anti-infectives
Produces penicillin equivalents and other active
ingredients for the antibiotics industry.
Products: penicillin G, penicillin intermediates (6-
APA and 7-ADCA), side chains, semi-synthetic
penicillins, semi-synthetic cefalosporins.

DSM Food Specialties
Produces dairy, savory, beverage and functional
food ingredients and enzymes for food industries.
Products include: starter cultures, flavor enhancers,
baking and brewing processing enzymes,
arachidonic acid, probiotics and peptides.

DSM Nutritional Products
The world’s largest supplier of vitamins, carotenoids
and other biochemicals and fine chemicals.

- Human Nutrition & Health
Producer of functional food ingredients for the
food industries and personal care ingredients for
cosmetics and skin care product manufacturers.
Food products include: total vitamins range,
carotenoids (pigments and anti-oxidants), probiotic
strains, 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 & Health
World market leader in vitamins,
carotenoids and feed enzymes for the feed industry.
Products: animal performance products (e.g. for gut
flora, bone health). Includes 35 premixing facilities
for feed across the globe.

DSM Elastomers
Manufactures synthetic rubbers (EPDM) and
thermoplastic elastomers (TPVs) for the automotive,
construction, and white goods industries.

DSM Fibre Intermediates
Producer of caprolactam and acrylonitrile, which
are raw materials for synthetic fibers and plastics.
Caprolactam is the raw material for Nylon 6, which is
used in a wide range of applications.

DSM Dyneema
Produces the world’s strongest fiber (based
on ultra-high molecular weight polyethylene).
Dyneema® is used in life protection products and
by aircraft, shipping, leisure, sports and medical
industries.

DSM Engineering Plastics
Produces polyamides, polyesters, polycarbonates,
ultra-high molecular weight polyethylene and
extrudable adhesive resins for automotive,
engineering, electrics & electronics and extrusion
industries.

DSM Coating Resins
Manufactures resins for coating systems, including
powder coating, liquid coating and UV-curable
resins, and waterborne, solvent-borne and solid.
Most resins find their way in industrial applications.

DSM Composite Resins
Manufactures unsaturated polyester resins for
marine, leisure, construction and automotive
applications.

DSM Melamine
Produces melamine, a product used in
impregnating resins and adhesive resins for the
wood-processing industry. Applications include
laminate flooring, flame retardants, bank notes, car
paints and durable plastic tableware.

Nutrition

- Human Nutrition & Health
- Animal Nutrition & Health
- DSM Food Specialties
- New Business Development
- parts of DSM Fine Chemicals

DSM Agro
Producer of ammonia and high-nitrogen fertilizers
for grasslands and agricultural crops.

Pharma

DSM Energy
Participates in the exploration and production of oil
and gas on the Dutch Continental Shelf.

- DSM Anti-Infectives
- DSM Pharmaceutical Products
- parts of DSM Fine Chemicals

Performance Materials

- DSM Engineering Plastics (incl. DSM Dyneema)
- DSM Resins
- DSM Elastomers

Industrial Chemicals

- DSM Fibre Intermediates
- DSM Melamine
- DSM Agro
- DSM Energy

Supplies 2005
1. DSM Fine Chemicals
303
2. DSM Pharmaceutical Products 482
330
3. DSM Anti-Infectives
416
4. DSM Food Specialties
1,531
Total

Supplies 2005
1. Human Nutrition & Health
2. Animal Nutrition & Health
3. Personal Care
Total

973
875
98
1,946

Supplies 2005
1. DSM Elastomers (incl. DSM Dyneema) 646
705
2. DSM Engineering Plastics
698
3. DSM Coating Resins
410
4. DSM Composite Resins
2,459
Total

Supplies 2005
1. DSM Fibre Intermediates
2. DSM Melamine
3. DSM Agro
4. DSM Energy
Total

1,243
212
370
74
1,899

EBITDA/Net sales (as a %)

2004

2005

2004

2005

2004

2005

2004

2005

Annual Report 2005

www.dsm.com

Annual Report 2005

www.dsm.com

DSM at a glance

Life Science Products

DSM Nutritional Products

Performance Materials

Industrial Chemicals

New structure – Vision 2010

‰

At the end of 2005 DSM started its new five-year
strategy for 2006-2010: Vision 2010 – Building
on Strengths.

To leverage the capabilities of the various business
groups, the organizational model of DSM will be
aligned with the new Vision 2010 strategy. As of
Q2 2006 there will be four clusters:

1,479m

1,914m

2,447m

1,687m

– Pharma restructurings yield clearly improved

– VITAL program contributes further to

– Strong performance in all business groups

– Supply/demand balance favorable for fertilizers

profitability.

improved results.

– Food ingredients portfolio profits from

– Significant steps taken to secure

innovations.

competitive position.

in 2005.

– NeoResins acquisition strengthens

coating resins business.

and fiber intermediates.
– Melamine faces oversupply.

DSM Fine Chemicals
Produces chemical intermediates for the agro-
chemical, food and pharma industries.
Products include: glyoxylic acid, fumaric acid,
aspartame, benzoic acid, sodium benzoate.

DSM Nutritional Products
The world’s largest supplier of vitamins, carotenoids
and other biochemicals and fine chemicals.

DSM Elastomers
Manufactures synthetic rubbers (EPDM) and
thermoplastic elastomers (TPVs) for the automotive,
construction, and white goods industries.

DSM Composite Resins
Manufactures unsaturated polyester resins for
marine, leisure, construction and automotive
applications.

Nutrition

- Human Nutrition & Health
- Animal Nutrition & Health
- DSM Food Specialties
- New Business Development
- parts of DSM Fine Chemicals

DSM Agro
Producer of ammonia and high-nitrogen fertilizers
for grasslands and agricultural crops.

Pharma

DSM Energy
Participates in the exploration and production of oil
and gas on the Dutch Continental Shelf.

- DSM Anti-Infectives
- DSM Pharmaceutical Products
- parts of DSM Fine Chemicals

Performance Materials

- DSM Engineering Plastics (incl. DSM Dyneema)
- DSM Resins
- DSM Elastomers

Industrial Chemicals

- DSM Fibre Intermediates
- DSM Melamine
- DSM Agro
- DSM Energy

Supplies 2005
1. DSM Fine Chemicals
303
2. DSM Pharmaceutical Products 482
330
3. DSM Anti-Infectives
416
4. DSM Food Specialties
1,531
Total

Supplies 2005
1. Human Nutrition & Health
2. Animal Nutrition & Health
3. Personal Care
Total

973
875
98
1,946

Supplies 2005
1. DSM Elastomers (incl. DSM Dyneema) 646
705
2. DSM Engineering Plastics
698
3. DSM Coating Resins
410
4. DSM Composite Resins
2,459
Total

Supplies 2005
1. DSM Fibre Intermediates
2. DSM Melamine
3. DSM Agro
4. DSM Energy
Total

1,243
212
370
74
1,899

EBITDA/Net sales (as a %)

2004

2005

2004

2005

2004

2005

2004

2005

Annual Report 2005

www.dsm.com

Annual Report 2005

www.dsm.com

DSM key data for 2005

Net sales
(x million)

CFROI

Workforce
(at year-end)

€8,195

9.1%

21,820

Operating profit (EBIT)
(x million)

Net profit excluding
exceptional items
(x million)

Net profit
(x million)

€808

€563

€527

Capital expenditure and
acquisitions
(x million)

Net earnings excluding exceptional
items
(per ordinary share)

Dividend
(per ordinary share)

€974

€2.87

€1.00

Forward-looking statements
This annual report contains forward-looking statements. These statements are based on current expectations, estimates and
projections of DSM management and information currently available to the company. The statements involve certain risks and
uncertainties that are difficult to predict and therefore DSM does not guarantee that its expectations will be realized. Furthermore, DSM
has no obligation to update the statements contained in this annual report.

Annual Report 2005

www.dsm.com

Content

03 Key financial data

04 Message from the Chairman

Section 1 Report by the Managing Board

19 Developments in 2005
20 Strategy – looking back and ahead
23 Corporate governance
25 Safety, Health, Environment
25 Human Resources
27 Research and Development
30 Intellectual Property
30 ICT and e-Business
31 Purchasing
31 Macro-economic review
32 Financial results

Section 2 Review of business

36 Life Science Products
42 DSM Nutritional Products
46 Performance Materials
52 Industrial Chemicals
56 Other Activities

58 Report by the Supervisory Board of Directors to the shareholders

60 Corporate organization

62 Remuneration Policy regarding the Managing Board and the Supervisory Board

62 Remuneration Policy as from 2005
64 Remuneration 2005

Section 3 Corporate Governance, risk management and internal control

70 Organization
71 Dutch Corporate Governance Code
71 Governance framework
72 Risk management system
74 Financial Policy
75 Risks

78 Information about the DSM Share

Section 4 Royal DSM N.V. Financial statements 2005

82 Consolidated financial statements

82 Summary of significant accounting policies
86 Summary of overviews
90 Notes to the consolidated financial statements of Royal DSM N.V.

128 Financial statements of Royal DSM N.V.
133 Other information

133 Auditor’s report
134 Profit appropriation
134 Special statutory rights
136 DSM figures: five-year summary
139 Explanation of some financial concepts and ratios

140 Index - Financial statements

Annual Report 2005

www.dsm.com

Key financial data

Throughout 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)

key figures (x € million):
net sales
operating profit plus depreciation and amortization (EBITDA)
operating profit (EBIT)

2005

2004

8,195
1,311
808

7,832
1,067
562

net profit excluding exceptional items
net result from exceptional items
net profit
dividend
depreciation and amortization
capital expenditure
acquisitions
cash flow (net profit plus amortization and depreciation)
net debt
shareholders’ equity
total assets
capital employed

per ordinary share in €:
net earnings excluding exceptional items
net profit
dividend
shareholders’ equity

ratios (%):
operating profit / net sales (ROS)
EBITDA / net sales
CFROI
net debt / equity plus net debt
equity / total assets
EBITDA / net finance costs
cash flow from operational activities / net sales

workforce:
year-average workforce
workforce at 31 December

* Excluding the impact of the temporary reclassification of cumulative preference shares A in 2004.

563
-36
527
207
503
401
573
1,066
832
5,474
10,025
6,221

2.87
2.68
1.00
27.45

9.9
16.0
9.1
0.13
0.55
18.7
8.5

423
-130
293
190
505
348
-
928
339
5,068*
9,626
5,558

2.09
1.41
0.875
25.19

7.2
13.6
8.1
0.06*
0.53*
19.1
11.8

22,839
21,820

24,503
24,204

Annual Report 2005

www.dsm.com

Message from the Chairman
Peter Elverding

A very good year

2005 was an important milestone in our
company’s history. We achieved strong
progress on virtually all fronts, and thus laid
a solid foundation for further value-creating
growth. New opportunities will be captured
with great vigor in the context of our
ambitious strategy for the next five years:
Vision 2010 – Building on Strengths.

The financial results for 2005 were
significantly better than those for 2004. Net
sales growth amounted to almost 5%, and
our operating profit of € 808 million was the
highest DSM has ever achieved. In 2005 we
created substantial value, as the Cash Flow
Return on Investment (CFROI) of 9.1%
clearly exceeded the weighted average
cost of capital (WACC).

The company benefited from balanced
market conditions, an economy that
was in better shape (although there were
marked differences per region), on average
stable currency rates and a variety of
self-generated activities, ranging from
operational excellence programs to the
successful market introduction of new
products and applications. I find it particularly
gratifying to note that almost all our business
groups and units were able to improve their
sales and operating profit.

Vision 2005 completed – new strategy
already in full swing

We have successfully completed our
strategy Vision 2005: Focus and Value.
Major events in the context of the portfolio
transformation during 2005 included the
acquisition of resins specialist NeoResins
from Avecia and the divestment of our
bakery ingredients activities. The successful
completion of Vision 2005 has provided us
with a solid platform from which we can take
the next step, embodied in our new strategy
Vision 2010 – Building on Strengths. This
new strategy focuses on accelerated growth
and expansion of the specialty content of
our portfolio, accelerated innovation,
expansion in emerging economies, and
continued operational excellence. The first
steps have already been taken. An extensive
evaluation of Vision 2005 and the rationale
and objectives of Vision 2010 are provided
on pages 20-23.

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 has
embarked on a new strategic course with new
opportunities and challenges.

2005: a very good year

‰

+44%

Operating profit up € 246 million
to € 808 million

+14%

Dividend rise to € 1.00
per share

9.1%

CFROI, clearly exceeding WACC

49%

Total Shareholder Return

DSM maintains #1 position in
chemicals sector of Dow Jones
Sustainability World Index

-16%

Frequency index of all recordable
incidents improves to 0.74
(2004: 0.88)

Annual Report 2005

www.dsm.com

Message from the Chairman

In terms of Safety, Health and Environment
(SHE) important progress was achieved in
2005. At year-end 2005 we had met ten of
our fourteen environmental targets for
2006. The frequency index for all recordable
accidents decreased further. In 2005, we
maintained our number one position in the
chemicals sector of the Dow Jones
Sustainability World Index. Moreover,
sustainability targets have been included in
our new strategy. An extensive description
of our activities and ambitions in this respect
is presented in our Triple P report for 2005.

Where we go from here

All in all, I would qualify 2005 as a very
good year for DSM, despite some adverse
developments such as the high and volatile
cost of raw materials. 2005 was a year
of historically strong results, a good
performance with regard to sustainability,
and significant progress in our efforts
to further exploit value-creating
growth opportunities based on the
accomplishments of 2005 and the
preceding years. Our employees
deserve tremendous appreciation for
their commitment and perseverance in
making DSM the better and stronger
specialty chemicals company it is today.
It has never been easy, but all the hard
work has clearly paid off. I would also like
to thank our customers and shareholders
for their enduring support during the
execution of our transformation strategy.

We regret that Henk van Dalen, who has
been a Managing Board member for six
years, has decided to take up a career
opportunity outside DSM with effect from
1 April 2006. The company is grateful to
Henk van Dalen for his 29 years of
commitment and leadership. He played a
key role in the Vision 2005 transformation
process and in the establishment of the
company’s new strategic direction. We also
regret that our Managing Board member
Chris Goppelsroeder has decided for
personal reasons to relinquish his position
with effect from 1 April 2006. Chris
Goppelsroeder has, among other things,
been instrumental in the establishment of
DSM’s new Vision 2010 strategy program.
Prior to his appointment as member of the
Managing Board, he was vital to the
integration and transformation of DSM
Nutritional Products. Both colleagues
deserve great appreciation for their work.

DSM is financially sound, technology-rich
and has embarked on a new strategic course
with new opportunities and challenges.
The successful completion of Vision 2005
has paved the way for the next logical step,
Vision 2010 – Building on Strengths. In fact,
we have already started. And more will
follow as we further leverage the capabilities
and performance of our company in order
to successfully execute this strategy.

Peter Elverding
Chairman of the Managing Board of
Directors
peter.elverding@dsm.com

Annual Report 2005

www.dsm.com

DSM Dyneema produces
Dyneema®, a lightweight,
super strong high performance
polyethylene fiber. Dyneema® is
an important component in ropes,
cables and nets in the fishing,
shipping and offshore industries.

‰

for acrylic fibers.‰

DSM Fibre Intermediates produces
caprolactam as a raw material for
Nylon-6, which is used in textiles, and
acrylonitrile, which is a raw material

DSM Coating Resins
produces synthetic
coating resins for use in

the marine industry. ‰

DSM Engineering Plastics
produces insulator materials for LV
switchgear and ITE components,
lighting fittings and armatures,
motors, wire and cable, enclosure

housings and electrical equipment.‰

PeptoPro®, a sports recovery
ingredient, a product of DSM Food
Specialties, differs from other
sports and energy drinks in that it
enables faster replenishment of

muscle energy stores. ‰

DSM Melamine
produces melamine,
which is mainly applied
in adhesives and
impregnating resins for
wood-based panels
used in the construction

industry. ‰

DSM Fine Chemicals' products
are used in coatings, resins, dyes,
pigments, polymers and plastics
all around the world, both as base
products and as additives that give
the end products special qualities,
such as strength, UV resistance and
elasticity.

‰

DSM everywhere…
an innovative company

DSM Nutritional Products produces
vitamins and UV filters for use in the
personal care industry.

‰

DSM Nutritional Products
produces vitamins, carotenoids,
enzymes, amino acids and other
ingredients for use in the animal feed
and pet food industries.

‰

DSM Composite Resins produces
unsaturated polyester resins, gel
coats, sizings and binders and
polymeric plasticizers for use in glass
reinforced plastics applications in the

marine industry.‰

DSM NeoResins produces extremely
durable resins specially designed for
the marine industry.

‰

Innovation

‰

Beyond bright ideas

Innovation is not just about great ideas, state-of-the-art
technology and high-tech laboratories. It also involves
spotting market trends and opportunities and using
technological capabilities to improve the quality of people's
lives in a way that is commercially attractive for our
customers and for us.

With our accelerated transformation into a true specialty
player, the importance of innovation has become ever
greater. We will make great strides in the coming period, as
innovation is one of the building blocks of our Vision 2010 –
Building on Strengths strategy. Our focus will be
specifically on the two growth areas performance materials
and nutritional ingredients.

We are demonstrating our intensified commitment to
innovation by e.g. allocating significant additional funds
and by hiring new innovative talents. We are also exploring
important emerging domains such as personalized
nutrition, biomedical materials, specialty packaging and
industrial or ‘white’ biotechnology.

Annual Report 2005

www.dsm.com

Navigating for value

DSM has developed technology for
structuring materials and surfaces on a
nanometer scale. Control of surface and
bulk properties and surface chemistries
on this scale has led to interesting,
valuable functional properties. We first
used this technology to develop anti-
reflective coatings for the flat-panel-
display industry and more recently for
other applications such as picture display
glass. These anti-reflective coating
systems have excellent optical and
mechanical properties.

Their nanostructured nature means that
these properties can be achieved in a
single layer, whereas competitive
technologies rely on at least two, and
sometimes as many as six optical layers.

In the coming years DSM plans to target
applications such as transparent UV-
blocking coatings and anti-fogging
coatings. Also under development are
anti-fouling functionalities, i.e. coatings
capable of resisting the adhesion of
biological materials such as proteins or
microorganisms.

Brewers Clarex™ – a clear solution

brewers with an innovative method for
preventing turbidity in beer. It does not
remove the polyphenols and proteins from
the beer, and it saves costs. Brewers
Clarex™ was launched at the European
Brewing Conference in Prague, Czech
Republic, in the summer of 2005.

Any beer has a tendency to become turbid
after some time. How can beer be
stabilized without affecting its taste and
color? Brewers are dedicated to their own
traditional recipes. They do however make
use of adsorbents which remove essential
components such as protein and
polyphenol. These are crucial for flavor and
mouth feel. After a period of intense
research, we found a clear solution to this
problem: Brewers Clarex™. Brewers
Clarex™ is a totally new concept, based
on enzyme technology, that provides

Open Innovation at DSM

Increasing technological complexity and
market developments evolving at high
speed make cooperation indispensable.
For DSM, innovation is open, multi-site
and multidisciplinary.

Building knowledge and expertise in
partnership with others can create
leverage for everyone involved. Where
desirable, DSM works together with
external partners. For example, we have
scientific and technological collaborations
in place with some 2,000 university
departments. We participate in renowned
research organizations and networks,

such as Gene Alliance (Germany), the
Biocatalysis & Bioprocessing of
Macromolecules Consortium (USA), the
Wageningen Center for Food Sciences
and the Dutch Polymer Institute, both in
The Netherlands.

DSM also invests in company start-ups.
This enables us to exploit trends more
quickly and meet social needs such as
weight control, health products and
health advice.

Annual Report 2005

www.dsm.com

DSM everywhere…
an international company

Internationalization

What boundaries?

‰

Some 40 years ago, DSM took the last step in the transition
from mining to chemicals. Since then, the company has
gradually evolved from a national to a European
organization. Our strategies of the past ten years speeded
up the company’s internationalization towards a global
player. Important drivers in this development were significant
portfolio changes, technological progress, new cooperative
patterns and increasing efforts to exploit the opportunities of
the emerging economies.

DSM’s internationalization is a multi-faceted process, clearly
visible in terms of staff, distribution of sales and assets, and
our increasing presence in emerging economies.
Internationalization is also reflected in our research and
development activities. In 2005 we established the new
DSM R&D Center China in Shanghai, and opened the doors
of a new joint lab with the prestigious Shanghai Fudan
University.

Annual Report 2005

www.dsm.com

Distribution of sales

One aspect of our further internationaliza-
tion concerns the spread of sales. In 2000
around 70% of our sales were destined for
West European markets. Today, sales are
more evenly spread across the world, in an
almost 50:50 balance between Western
Europe and the rest of the world.
An important factor is that DSM has in
recent years won new customers especially
in Asia and the USA.

In 2005, sales outside North America and
Europe increased by some € 200 million,
while sales in China increased from $ 500
million to over $ 580 milion. Further interna-
tionalization of sales will continue in the
coming years, partly because our invest-
ment and acquisition decisions will, more
than in the past, take account of the need
for a presence in the emerging economies.

Staff around the globe

DSM's profile as a mainly European
company is changing in terms of the
composition of our staff. At year-end 2005
about one out of every three DSM
employees was based outside Europe. The
internationalization of our staff received an
extra boost with the acquisition of DSM
Nutritional Products, which also led to
substantial expansion in China. Of DSM’s
total staff, approximately one out of every
six employees – all joint ventures included –
is now active in China.

Since greater diversity and further
internationalization of our staff are
spearheads of our new Vision 2010 –
Building on Strengths strategy, the
internationalization trend of the past few
years is set to continue.

Stronger presence in the emerging economies

Over the past few years, economic growth
and market demand have clearly shifted
from Europe to countries in the Asian
region, notably China and India. DSM of
course took this development into account
while crafting its Vision 2010 strategy.
Increasing DSM’s presence in the
emerging economies is one of the strate-
gy’s focal points. Investment and
acquisition decisions will be geared to
reinforcing the company’s positions in
these parts of the world. DSM has been
present in the US and China for several

decades, but in 2000 the internationaliza-
tion of business began to receive
considerable impetus. Since then,
business has grown, both organically and
via acquisitions, in countries such as the
US, Japan, China and India. DSM will
further improve the specialty profile of its
portfolio and expand its presence in
today’s fastest-growing emerging
economies.

Annual Report 2005

www.dsm.com

DSM everywhere…
Operational Excellence

Operational Excellence

‰

Better sourcing, production and selling

In 1999, DSM started its Operational Excellence program
to optimize the flow of the company’s business processes
of sourcing, production and selling. Operational Excellence
spans a wide range of projects aimed at realizing cost
reductions, increasing the efficiency of plants and
organizations, improving product quality, strengthening the
purchasing organization and enhancing the value pricing
of our products and services. Operational Excellence
started with a focus on streamlining and standardizing
processes at DSM in order to arrive at a better
performance at lower costs. Purchasing and value pricing
are two important more recent areas of attention.

Operational Excellence has yielded significant results over
the past years and it is included as an essential building
block in our Vision 2010 – Building on Strengths strategy.

Annual Report 2005

www.dsm.com

Excellence in sourcing

In 2005 DSM established a new, globally
active sourcing organization with the aim
of improving the company’s purchasing
practices across the board and thus
contributing to DSM’s bottom line. Many
initiatives have been launched in this
context, ranging from the introduction of
best purchasing practices to the
implementation of new performance
management models. The purchasing
objectives outlined in 2004 were already
to a large extent achieved in 2005.

Excellence in production
Manufacturing Excellence is a program
designed to enhance the effectiveness
and professionalism of all production,
maintenance and project work in the area
of manufacturing. Plant output may be
boosted without significant investments,
efficiency improvements may be realized
and costs saved. The results of this
program so far are quite worthwhile.
Significant yield, quality and reliability
improvements and cost reductions have

been realized. Manufacturing Excellence
has been implemented mainly within DSM
Nutritional Products and the Industrial
Chemicals cluster. Implementation in the
other parts of DSM is underway.

Excellence in selling

DSM’s Excellerate program focuses on
creating an optimum balance between
the value of supplied products and
services and the required investments.
Value pricing is becoming more and more
important for DSM now that the company
is marketing ever more specialties. Selling
prices should reflect the perceived value
that DSM creates for its customers and
end-users.

That’s why DSM started this program,
covering elements such as the upgrading
of pricing skills, the introduction of new
systems, training and the hiring of new
professionals and a change in the
mindset of marketing and sales
professionals.

Annual Report 2005

www.dsm.com

Report by the Managing Board

2005 was a strong year for DSM on many counts.
Conditions for DSM products were generally good in
most markets.

‰

Financial

net sales and supplies

x € million

Life Science Products

DSM Nutritional Products

Performance Materials

Industrial Chemicals

Other activities

intra-group supplies

Total, continuing operations

Discontinued operations

Total DSM

2005

1,479

1,914

2,447

1,687

485

8,012

183

8,195

Net sales
2004

1,484

1,899

2,007

1,570

474

7,434

398

7,832

2005

1,531

1,946

2,459

1,899

498

-321

8,012

183

8,195

Supplies
2004

1,582

1,910

2,013

1,747

485

-303

7,434

398

7,832

Sales by core activity
excl. discontinued activities

19%

Life Science Products

18%

25%

DSM Nutritional Products

24%

26%

Performance Materials

31%

21%

Industrial Chemicals

Other

21%

2004

2005

operating profit plus depreciation and amortization
(EBITDA)

operating profit (EBIT)

EBITDA / supplies 2004 and 2005
excl. discontinued activities

x € million

2005

2004

x € million

2005

2004

Life Science Products

DSM Nutritional Products

Performance Materials

Industrial Chemicals

Other activities

266

376

410

246

-3

226

Life Science Products

330

DSM Nutritional Products

249

Performance Materials

207

Industrial Chemicals

Other activities

Total, continuing operations

1,295

1,036

Total, continuing operations

1,311

Discontinued operations

1,067

Total DSM

126

252

305

165

-49

799

808

202

165

120

-20

546

562

2004
2005

Life Science
Products

DSM Nutritional
Products

Performance
Materials

Industrial
Chemicals

DSM (total)

Discontinued operations

Total DSM

Markets

End-use markets

Sales by origin
excl. discontinued activities

Sales by destination
excl. discontinued activities

30%

11%

15%

17%

Human Health & Animal Health

29%

11.2%

Netherlands

Pharmaceuticals

Builing & construction

Automotive / transport

Textiles

Agriculture

Electrics / electronics

Metal & Machine building

10%

15%

Other

19%

43.0%

Netherlands

44.3%

29.1%

Rest of Europe

28.0%

16.9%

3.7%

4.1%

3.1%

North America

China

Asia-Pacific

Rest of the world

16.3%

3.7%

4.2%

3.6%

9.9%

4.6%

5.4%

19.6%

21.8%

5.7%

11.8%

9.9%

Germany

United Kingdom

France

Rest of Europe

North America

China

Asia-Pacific

Rest of the world

10.8%

10.2%

5.7%

4.2%

20.1%

21.3%

6.2%

13.3%

8.1%

2004

2005

2004

2005

2004

2005

Annual Report 2005

www.dsm.com

Section 1 Report by the Managing Board

Developments in 2005
Strategy – looking back and ahead
Corporate governance
Safety, Health, Environment
Human Resources
Research and Development
Intellectual Property
ICT and e-Business
Purchasing
Macro-economic review
Financial results

Overall EBITDA over sales from ongoing
activities of DSM Nutritional Products
amounted to 19.6% in 2005, compared to
17.4% in 2004.

The Performance Materials cluster posted
very good results in 2005. Of the total top-
line growth of 22% compared to the
previous year, 12% was attributable to the
inclusion of NeoResins, acquired at the
beginning of February 2005 and now part of
the DSM Coating Resins business group.
Moreover, Chinese resins manufacturer
Syntech was acquired at year-end 2005.

Bottom-line results of the Performance
Materials cluster further benefited from
good demand for DSM’s products, which
enabled a substantial margin improvement
despite generally high and volatile raw
material prices. The overall product mix
improved due to strong growth of
specifically in-house-developed products
such as Dyneema®, various engineering
plastics and special grades of composite
resins. In addition, the ongoing efforts to
streamline business processes in the
framework of the Operational Excellence
program and the successful restructuring at
DSM Elastomers contributed clearly to the
strong performance of this cluster. Overall,
the EBITDA over sales margin from ongoing
activities amounted to 16.8% in 2005,
compared to 12.4% in 2004.

The Industrial Chemicals cluster also
yielded strongly improved results in 2005,
benefiting from favorable market conditions
for fiber intermediates and for fertilizers. The
overall tight supply/demand balance in
these markets facilitated good margins,
despite the high and volatile raw material
prices. Results of fiber intermediates were
held back in the second half of 2005 due to
the prolonged shutdown of the
caprolactam plant in Nanjing (China) in
order to enable construction work for the
planned doubling of capacity to 140,000
metric tons/year. DSM Melamine had to
cope with some oversupply on the global
markets, which prevented it from fully
passing on the high feedstock prices, and
consequently had a clearly weaker year.
This was especially the case in the USA,
above all due to the high natural gas and
ammonia prices. DSM Agro achieved
an even better performance than in the
already strong 2004, driven mainly by
high fertilizer prices.

Developments in 2005

Group review
2005 was a strong year for DSM on many
counts. Conditions for DSM products were
generally good in most markets. Despite
high and volatile oil and energy prices,
which were further influenced in September
by the hurricanes in the USA, industrial
production in most sectors relevant to DSM
developed at favorable levels. The situation
in the American automotive industry,
however, gave some cause for concern.
Demand growth in Asia maintained its high
momentum, while in Europe economic
growth was still lagging behind the rest of
the world, although it showed signs of
strengthening. In these conditions DSM
successfully managed to consolidate the
high sales volumes achieved in 2004, while
margins were widened due to strong pricing
and the favorable effects of various cost-
control initiatives. Volatility on the currency
markets was relatively limited in 2005.

At € 8,195 million, net sales increased by
almost 5%, which was exclusively due to
higher sales prices, as overall sales volumes
were flat and the effects of currency
fluctuations on sales as well as the net
effects of acquisitions and divestments
were both close to zero.

Bottom-line results improved significantly
in 2005. EBITDA increased by 23% to
€ 1,311 million, and the operating profit
increased to € 808 million (up 44% from
2004) – which represents the highest
operating profit in DSM’s history, surpassing
the previous record level (€ 751 million)
achieved in 2000. It is important to note
that, while the 2000 results were recorded
mainly on the back of a cyclical peak in
earnings of DSM’s petrochemical activities,
results in 2005 were for the greater part
achieved with specialty businesses. The
inherent quality of DSM’s current profit
profile is undoubtedly higher than when the
previous record was set. In 2005 all clusters
contributed to these improved results.
DSM created substantial value, with its
CFROI of 9.1% clearly exceeding the
company’s WACC.

Business review per cluster
In the Pharma-related activities of the
Life Science Products cluster, the effects
of restructuring projects to address the
unfavorable market conditions in both
custom manufacturing and anti-infectives
yielded clearly improved profitability.
Conditions in both markets more or less
stabilized in 2005. Further profit
improvement actions from DSM will be
necessary in order to attain the desired
profitability levels. This will involve completion
of the ongoing restructuring projects at
DSM Anti-Infectives and at the Linz site
(Austria), and further reduction of the asset
base of DSM Pharmaceutical Products.
Also, the development of partner ships with
North China Pharmaceuticals Corporation
is in process. Significant progress was
achieved in 2005 with this project.

With regard to the food-related activities of
the Life Science Products cluster, DSM
Food Specialties once again recorded
strong results, hinging on the innovative
portfolio of ingredients developed by this
business group. The successful divestment
of the below-average-performing activities
of DSM Bakery Ingredients contributed to
the improved overall performance of this
cluster, yielding an overall EBITDA over
sales margin from ongoing activities of
18.0% in 2005, compared to 15.2%
in 2004.

DSM Nutritional Products further improved
on its already strong performance of 2004.
Top-line growth was limited as the net effect
on sales of autonomous volume growth
was more or less equal to the effects of
continuing price pressure for some more
mature products in the portfolio. Bottom-
line results improved further, however,
thanks to an improving product mix and the
lowering of cost levels resulting from the
activities undertaken in the framework of
the VITAL program. Significant steps were
taken to structurally strengthen the position
of Vitamin C, for instance, by concentrating
production on the site in Scotland (UK) and
closing the plant in New Jersey (USA). The
competitive position for this basic product
will be further strengthened when the
envisaged cooperation with North China
Pharmaceutical Group Corporation (NCPC)
in China commences. Besides improving
the efficiency of operations, much
emphasis was placed on developing
innovative tailor-made formulations and
new ingredients for the various market
segments in which DSM Nutritional
Products is active.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Strategy – looking back and ahead

Financials
DSM’s financial position remained solid in
2005. The major credit rating institutions
reconfirmed their Single A credit rating, with
Moody’s slightly upgrading their outlook to
‘Stable’ in May 2005. Net debt at year-end
2005 amounted to € 832 million (€ 339
million at year-end 2004), representing a
gearing (defined as net debt/total capital)
of 13%.

DSM generated healthy net cash provided
by operating activities in 2005, totaling
€ 693 million, or 11.8% of net sales.

Capital expenditure (excluding acquisitions)
amounted to € 401 million (2004: € 348
million), and was below depreciation level
(€ 503 million), as planned. Major investment
projects were e.g. the expansion of the
fermentation capacities for arachidonic acid
of DSM Food Specialties in Italy and in the
USA, the construction of new production
lines for Dyneema® and Dyneema®UD at
the Greenville site in the USA, expansions of
the sterile formulation facilities at the same
site, new plants for various engineering
plastics materials at sites in the Netherlands,
and the doubling of capacity of the
caprolactam plant in Nanjing (China).

Acquisitions (mainly NeoResins) and
divestments (mainly DSM Bakery Ingredients
and Styrene-Butadiene-Rubber (SBR)) on
balance resulted in a net cash outflow of
€ 372 million in 2005.

In view of the favorable development of its
share price, DSM decided in August 2005
to split its shares two-for-one. The earnings
per share excluding exceptional items in
2005, calculated for the full year on the
basis of the share split, increased to
€ 2.87, against € 2.09 in 2004. DSM paid
its shareholders a total of € 183 million in
dividends. The achievements of the past
year were recognized by the financial
markets, resulting in an increase in the
DSM share price of 45% in 2005, clearly
outperforming the market. With a Total
Shareholder Return (TSR) of 49%, DSM
also outperformed the average TSR of its
European chemical peer group, which was
33% in 2005.

Strategy – looking back and ahead

- More stable and higher earnings

Cash flow (EBITDA) was stable yet at too
low a level in the economically difficult
period 2001-20031, but it saw a steady
increase in 2004 and 2005, when the
acquisitions of DSM Nutritional Products
and NeoResins, combined with clear
improvements in other businesses, had a
positive effect.

- Operational Excellence

In addition to the merger and acquisition
activities in the context of our Vision 2005
strategy, a large number of Operational
Excellence projects and cost efficiency
measures clearly contributed to the
higher profitability levels, both in 2004
and 2005. DSM started its Operational
Excellence program in order to optimize
cost efficiencies and the flow of business
processes: sourcing – producing –
selling. For the production part, the
Manufacturing Excellence program was
developed. Manufacturing Excellence
enhanced the effectiveness and
professionalism of all operations,
maintenance and project work within
manufacturing. The program is being
implemented successfully, mainly in the
Industrial Chemicals and Nutritional
Products clusters. Other (parts of)
clusters have started the program and will
finalize it in 2006/2007.

The portfolio transformation and
numerous operational excellence
projects have significantly improved
DSM’s profit profile. Throughout the
transformation, DSM further
strengthened its financial basis. The
Single A credit rating from the major credit
rating institutions was maintained
throughout the Vision 2005 period.

Evaluation of Vision 2005
Towards the end of 2005 DSM completed
its Vision 2005: Focus & Value strategy. The
overriding goal of this strategy had been to
transform DSM from the predominantly
commodity chemicals-oriented company
that it was in 2000 into a leading multi-
specialty player. DSM wanted to accelerate
its growth in the areas of life sciences and
performance materials, while generating
more stable earnings growth. The Vision
2005 strategy objectives introduced in
September 2000 have to a large extent
been fulfilled.

- Withdrawal from petrochemicals and
accelerated growth of life science
products and performance materials to
approximately 80% of sales
M&A actions formed a crucial element in
the transformation process and were
planned and executed carefully and in
phases. In 2001 DSM sold its profit rights
in Energie Beheer Nederland
(participations in gas and oil exploration)
to the Dutch state and in 2002 it divested
its petrochemical activities to SABIC. The
total proceeds from these transactions
amounted to € 3.2 billion net, which DSM
used to finance the acquisition of the
Vitamins & Fine Chemicals division from
Roche in September 2003 (€ 1.75
billion), among other things. This division
was renamed DSM Nutritional Products.
A transformation and integration project,
named VITAL, successfully integrated the
businesses into the DSM organization,
structurally improved their performance
and prepared them for further growth. A
fourth action was the acquisition of resins
manufacturer NeoResins in February
2005, to expand the coating resins
portfolio in the Performance Materials
cluster (€ 523 million). Other adjustments
of the portfolio were the acquisition of
Catalytica in late 2000 and the
divestments of DSM Engineering Plastic
Products in 2001 and of DSM Bakery
Ingredients (excluding Baking Enzymes)
and the Styrene-Butadiene-Rubber
(SBR) activities in 2005. As a result of the
portfolio transformation, by 2005 almost
80% of DSM’s sales came from its
businesses in life science products and
performance materials.

Annual Report 2005

www.dsm.com

1 Excluding the petrochemicals businesses sold in 2002.

Section 1 Report by the Managing Board

The inside-out analyses showed that DSM
should grow and enhance the quality of its
portfolio along two paths: it should strive for
accelerated growth of the specialty
leadership components in its portfolio, and
it should strengthen the specialty profile of
its portfolio, supported by targeted
acquisitions. DSM should boost its
innovation efforts in a market-driven way.
This will be done by accelerating eleven
selected projects, via an active new
business development policy in an open
innovation model and by initiating
innovation towards carefully selected
Emerging Business Areas to capture the
future, mid to long-term opportunities
presented by the three key innovation areas
mentioned.

DSM should improve the geographical
spread of its activities in order to reduce the
present imbalance between sales by origin
and sales by destination. This imbalance is
undesirable: it makes DSM’s results more
sensitive to currency fluctuations and
creates increasing competitive pressure for
certain products from producers based in
low-cost countries. Capturing the
opportunities of demand growth in
emerging economies and expanding
production in low-cost countries, where
appropriate, will improve the geographical
spread and enhance competitiveness.

Operational Excellence will remain a key
success factor as cost efficiency continues
to play an important role across many of our
businesses. Consequently, DSM will
vigorously continue and expand its current
efforts in the various fields of effective cost
management and business process
standardization.

The overall conclusion is that DSM
possesses a strong base to build on and is
fit to capture the opportunities and to face
the challenges presented by the future. This
is why the new strategy program is called
Vision 2010 – Building on Strengths.

- Sales around € 10 billion by 2005
Looking back at Vision 2005: Focus
and Value, it is fair to say that DSM has
successfully accomplished this strategy.
The € 10 billion sales target turned
out to be beyond reach, due to weak
economic conditions in 2001-2003 and
the substantial weakening of the US
dollar – factors whose full extent was not
envisaged in the strategy scenarios made
in 2000. DSM favored quality over quantity
and refrained from buying sales growth for
the sake of reaching this target.

The analyses conducted in the framework
of the study resulted in a clear set of
conclusions. The outside-in analyses
showed that DSM had to take into account
a growing divergence in raw material costs.
While prices for oil-based raw materials will
remain high, costs of bio-based raw
materials (e.g. sugar and molasses) are
expected to decline further. This will
enhance the competitiveness of
fermentation-based production – one of the
technologies in the field of white biotech –
in the future.

Demographic trends in combination with
economic developments in emerging
economies (such as China, India, Russia
and Brazil) offer threats as well as
opportunities. For about 35% of DSM’s
current portfolio these rapidly growing
economies, with a strongly increasing
buying power of the middle class, offer
interesting opportunities for growth.
Competition from low-cost countries poses
threats to the competitiveness of about
25% of DSM’s portfolio. Markets in
developed countries remain interesting, but
opportunities here will have to be captured
mainly via innovation. For 40% of DSM’s
portfolio the impact of low-cost countries is
neutral. This mainly relates to products with
a local-for-local approach (e.g. fertilizers)
and markets with a very high entry barrier
based on specific technological positions
and IP-protected innovative products.

Furthermore, extensive analyses of global
mega-trends in society and technology
resulted in the identification of a number of
promising innovation areas, offering
attractive opportunities for the future: health
& prevention (healthy foods, pharma, and
personal care), sustainable & clean
resources (e.g. fermentation-based
production and eco-friendly coating
technologies), and materials with advanced
properties (notably in the markets for
engineering materials and coatings).

- Market capitalization to double

Shareholders benefited from DSM’s policy
of preferring quality over quantity, with a
doubling of the share price and a Total
Shareholder Return of 215% during the
Vision 2005 strategy period.

DSM share Sept. 2000 - Dec. 2005
in (cid:96)

12/00

12/01

12/02

12/03

12/04

12/05

New strategy: Vision 2010 – Building on
Strengths
In October 2005, DSM presented its new
five-year strategy Vision 2010 – Building on
Strengths. The strategy was the outcome
of the Corporate Strategy Dialog. This study
– a twelve-month process – thoroughly
analyzed global economic and social trends
and conditions, technological
developments, price scenarios for energy
and raw materials, differentiated growth in
the various geographical regions and end-
markets, factors potentially impacting on
DSM’s portfolio, and the four focal business
areas for DSM (nutrition, pharma,
performance materials and industrial
chemicals).

Annual Report 2005

www.dsm.com

Report by the Managing Board
Strategy - looking back and ahead – Corporate Governance

Four Emerging Business Areas (EBAs):

Biomedical Materials An increase in chronic
diseases, growing demand for tailored therapies
and converging technologies in pharma,
nutrition and materials form the rationale behind
the selection of this EBA. Dyneema® Purity – a
first example in this field – stands for a specially
developed, high-performance polyethylene fiber,
made available to the medical device industry
for use in surgical implants. Target areas for
future innovation are drug delivery systems
and coatings for stents using nanotechnology.
Advanced polymer technology can offer
solutions superior to metals and ceramics in
these high-performance and value-added
niche segments.

Specialty Packaging The drivers leading to
the choice of this EBA are growing awareness
of the importance of food quality, increasing
interaction between a product and its packaging
and upcoming regulatory changes. DSM aims
to develop innovative packaging, for example
solutions for food products, with innovative
barrier properties relating to freshness, release of
odors, and the ability to monitor the history
of the product.

Personalized Nutrition The Personalized
Nutrition EBA builds on DSM’s strengths in
nutrition, food and biotechnology. Based on
scientific evidence Personalized Nutrition
addresses certain health risks by offering
tailor-made and specially developed nutritional
products that fit individual consumers’ genetic
profiles and other factors, such as age and
life-style. This way health and well-being can
be promoted, whereas the risk of certain
health problems may be reduced. DSM is
already involved in this personalization trend
via a participation in a US start-up which
develops and commercializes genetic tests for
personalized health and wellness advice.

White Biotechnology With the White
Biotechnology EBA DSM will further boost
the application of nature’s toolset, for example
micro-organisms and enzymes, to the
production of (fine) chemicals, materials and
fuels from renewable resources. A growing
cost spread between hydrocarbon and
carbohydrate feedstock as well as advances
in science and technology will allow White
Biotechnology to become a competitive
alternative in an increasing range of applications,
including nutritional ingredients, fine chemicals,
performance materials and base chemicals.
DSM will focus on opportunities where White
Biotechnology enables drastic process
improvement compared to the chemical
technologies.

Objectives
DSM’s new strategy focuses on
accelerating profitable and innovative
growth of its specialties portfolio. The
overall objective of Vision 2010 is strong
value creation, which should be
accomplished via three main levers:

1. Market-driven growth and innovation
Based on existing leadership positions,
DSM intends to grow its sales in four
Emerging Business Areas: personalized
nutrition, specialty packaging, biomedical
materials and white/industrial
biotechnology. This growth will be
accelerated by innovation in the markets
targeted.

DSM also intends to further grow the
specialty content of its portfolio. In this
connection the definition of specialties has
been made more specific. Whereas under
Vision 2005 all life science products and
performance materials businesses were
classified as specialty, as of 2006,
specialties will be businesses that have
product, application or custom
manufacturing leadership. Under this
sharper definition, the current specialty
leadership portfolio represents 40% of
DSM’s total sales, versus 60% consisting of
products that compete primarily on the
basis of price or costs.

By 2010 DSM aims to have grown its
specialties portfolio to 50-60% of sales,
coming from 40% under the new specialty
leadership definition. Profitable growth via
specialty leadership business, innovation
and geographic growth should lead to an
underlying sales growth rate of 3-5% per
year (including small acquisitions) under an
assumed economic scenario and

increasing over time within this bracket. The
economic scenario assumes a constant
euro/dollar exchange rate of 1.20, a crude
oil price of $ 50 per barrel, mid-cycle GDP
growth rates for the various regions of the
globe and generally balanced supply/
demand conditions. Moreover, major scope
changes via acquisitions or divestments are
excluded from the assumed scenario.
Organic growth will be complemented with
selective acquisitions in the field of nutrition
and performance materials.

To boost innovation, significant additional
resources will be made available. Some
250 new people will be recruited to work in
dedicated, business-driven innovation
teams. On average € 50 million per year
(€ 30 million in 2006 increasing to € 70
million in 2010) will additionally be spent
on innovation. About 15% of capital
expenditure will be allocated to new
business development in this context.
And the innovation infrastructure in DSM’s
main research centers will be upgraded.
By 2010, DSM wishes to generate up to
€ 1 billion in sales based on these
intensified innovation efforts.

2. Increased presence in emerging
economies
DSM plans to continue the trend of
improving its globally balanced presence by
accelerating the internationalization of its
asset base and workforce.

The internationalization of DSM’s asset
base and workforce progressed rapidly
under the Vision 2005 program and will be
intensified in the coming years. Identified
opportunities such as demand growth in
selected emerging economies have led
DSM to decide to significantly step up its

Sales
percentages are based on estimates

EBIT
percentages are based on estimates

21%

Specialty Leadership

40%

34%

Specialty Leadership

70%

79%

Cost Leadership

60%

66%

Cost Leadership

30%

2000

2005

2000

2005

Annual Report 2005

www.dsm.com

Organizational model
In order to leverage the capabilities of
the various business groups, the current
organizational model will be aligned with
the Vision 2010 strategy. Pharma activities
will be grouped into a new Pharma cluster
and the activities of DSM Nutritional
Products and DSM Food Specialties will
be combined into a new Nutrition cluster.
Performance Materials and Industrial
Chemicals will remain as clusters.
Innovation will be anchored at cluster level,
and DSM will also establish a DSM
Innovation Center at corporate level. This
organization will support innovation in the
businesses. The Innovation Center will lead
the Emerging Business Area programs and
the corporate technology, licensing,
venturing and intellectual property activities
of DSM.

Value creation
With Vision 2010 – Building on Strengths
DSM expects to create substantial value.
The company has set itself the objective
of creating more value through higher
profitability. DSM targets a CFROI (Cash-
Flow Return on Investment) in the Vision
2010 period of more than 50 base points
(0.5%) over its annual weighted average
cost of capital (WACC).

Specific margin targets will apply for the
various clusters. The new clustering of
businesses will allow for more tailored
EBITDA/sales margin objectives per cluster:
- Nutrition: > 18%
- Pharma: > 18%
- Performance Materials: ≥ 16%
- Industrial Chemicals: ≥14% (on average
over the cycle)

By realizing these value creation targets,
DSM aims to achieve a Total Shareholder
Return that exceeds the average of DSM’s
peer group2.

growth efforts in these promising regions.
A stronger presence in selected emerging
economies will also help to create a better
balance between sales by origin and sales
by destination. When evaluating investment
proposals, DSM will take these two
elements into account. In China, where
DSM has been highly active over the past
few years, the company expects to double
its sales to more than $ 1 billion per year
by 2010.

3. Operational Excellence
DSM continues to build on its strong
Operational Excellence capabilities to sustain
and enhance the cost competitiveness
of its businesses.

Over the past five years DSM has
successfully introduced and implemented
Operational Excellence programs. So far,
the focus has been mainly on standardization
of business processes in manufacturing,
order fulfillment, finance and costing and
ICT infrastructure. These programs will be
further extended to include more parts of
DSM’s business portfolio. New initiatives
are envisaged in purchasing and prospect-
to-order / pricing excellence processes.
DSM will also continue to consistently
look at productivity improvement in
its businesses.

Sustainability
Sustainability is at the heart of doing
business in all our fields. Having been
named the number one in the chemical
industry sector of the Dow Jones
Sustainability World Index for the second
year in a row, DSM has a leading position to
defend, and the company has defined the
areas in which it intends to further improve.
DSM aims to retain its top positions with
regard to Safety, Health and the Environment,
for which it has set new ambitious targets
in the context of the new strategy. DSM
plans to put effort into eco-efficiency and a
gradual increase in the use of renewable
resources as raw materials for its products.
Also, the Emerging Business Area of White
Biotechnology will aim to exploit the potential
that the use of biotechnology offers in terms
of new products and cleaner and more
cost-efficient industrial processes. In
addition, DSM aims to further diversify
and internationalize its workforce.

Section 1 Report by the Managing Board

Corporate Governance

Governance
The general characteristics of DSM’s
governance system are described in
the section of this annual report entitled
Corporate Governance, Risk Management
and Internal Control (page 70). For 2005
a number of developments regarding
Corporate Governance at DSM can be
reported, although in this respect the year
was not as eventful as the preceding one, in
which the new Dutch Corporate Governance
Code (Tabaksblat Code) was published.

In April 2005, the Annual General Meeting
of shareholders discussed the way DSM
applies the Dutch Corporate Governance
Code. With regard to the direct appointment
of new Supervisory Board members and a
new Managing Board member, the relevant
regulations were complied with. Further-
more, a detailed remuneration policy for
Supervisory Board and Managing Board
members was submitted to the Annual
General Meeting and approved. The
proceedings of the Annual General Meeting
were also made available online via the
internet in 2005. The Vision 2005 Priority
Foundation was dissolved because its goal,
an orderly execution of the agreed Vision
2005 strategy, had been achieved.

Internal Control was strengthened in 2005
by a revision of the Corporate Requirements
and a thorough and detailed implementation
and compliance program via the so-called
True Blue project. In this project, flying
squads of process and internal control
experts supported the business groups in
introducing and implementing the revised
Corporate Requirements.

In line with independence criteria the term of
one of the DSM lead auditors within Ernst &
Young came to an end; responsibilities have
been transferred to a colleague who has not
yet worked on the DSM account.

The first operational year of DSM Alert – our
whistle-blowing procedure – yielded a
limited number of cases (twelve). Some
cases were directly solved by providing
more information, some did not qualify and
some led to corrective measures.

2 DSM’s peer group: AkzoNobel, BASF, CIBA, Clariant, Danisco/

Genencor, Degussa, EMS Chemie, ICI, Lanxess, Lonza,
Novozymes, Rhodia and Solvay.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Corporate Governance – Safety, Health, Environment – Human Resources

Risk Management
The Managing Board is responsible for the
design and effectiveness of the company’s
risk management and control systems.
The purpose of these systems is to identify
any significant risks to which the company
is exposed and to enable effective
management of these risks. However,
these systems can never provide absolute
assurance regarding the achievement of
corporate objectives and can never entirely
prevent the occurrence of material errors,
losses, cases of fraud or the violation of
laws or regulations.

Based on these activities and on what is
described in the Risk Management section
of this report (see page 72), the Managing
Board believes, to the best of its knowledge,
that it can assert with reasonable assurance
that the risk management and internal
control system of DSM was effective during
the financial year 2005.

A crucial element in the management of a
company is clarity concerning the strategic
direction and objectives as these serve as a
compass and yardstick for all parts of the
organization. The Managing Board
therefore considers the development of
Vision 2010 as an important element in its
enterprise risk management. The three
main risks identified in the 2004 Corporate
Risk Assessment were also input for the
strategy process:
- The entry of Chinese low-cost producers

into DSM markets

- The company’s innovative capabilities
- The availability of sufficient high-caliber

managers and professionals.

In Vision 2010, these three risks have been
addressed. Special actions and targets
have been formulated for the Chinese
market and the other emerging markets, an
Innovation Center is being created to secure
the company’s effectiveness in innovation,
and major programs are underway to
ensure that the company will have at its
disposal the human and organizational
capabilities that are necessary to reap the
benefits of the new strategy.

In the True Blue project, flying squads of
process and internal control experts
support the bigger entities of most of the
business groups in introducing these
Requirements. The squads help the units
achieve even stricter documentation of their
business processes, sharper clarification of
roles and responsibilities and tighter
segregation of duties. In units already using
the standard DSM ERP environment, or
about to implement it, full advantage is
taken of the standard functionality available
in the system, e.g. to describe processes,
provide training in them, and check
authorizations.

To ensure lasting compliance, a monitoring
tool is being installed in all these units. This
tool automatically triggers checks on the
effectiveness of key controls and reports
control overviews. Continuous education
programs are also being developed.
Furthermore the external financial audits by
DSM’s auditors Ernst & Young in 2005
specifically focused on internal control.

In its efforts to strengthen the risk
management and internal control system on
an ongoing basis, the company subjected
the Corporate Requirements to a first review
and update. The progress of the compliance
programs and the effectiveness of the True
Blue implementations were discussed with
the management of the operational units.
The units were also requested to conduct
self-assessments, and audits were carried
out by Corporate Operational Audit. The
efforts in the field of risk management were
discussed in the Managing Board and the
Audit Committee of the Supervisory Board.
Support for the implementation of the
revised Corporate Requirements will be
continued in 2006. The business groups
that were visited by squads in 2005 will take
charge of the implementation in the smaller
entities themselves. For business groups
and corporate activities not yet covered,
True Blue resources will be available in 2006.
The activities will be further aligned with the
business process standardization efforts
conducted by Corporate ICT. A Home Office
function will continue to support all units.

Moreover, the strategic process was
accompanied by a renewed risk
assessment at corporate level. In this
assessment, two generic risks were
identified which are inherent in Vision 2010:
- In reality, economic developments may
differ from the assumed and defined
economic scenario in the strategy. This
could influence the financial results and
may lead to a deviation from the
objectives.

- The results of DSM’s increased innovation
efforts will also be dependent on our ability
to identify developments in the relevant
markets and to effectively anticipate these
market developments. Market intelligence
therefore needs to be strengthened and
market and customer orientation
enhanced.

All parts of DSM’s Governance Framework
and Risk Management and Internal Control
System will of course be reviewed for
consistency with the new strategy and
business model.

In 2005 DSM continued implementing
the revised Corporate Requirements with
great vigor as these Requirements are the
basis for sound Risk Management and
Internal Control in its operating units. The
Requirements with regard to financial and
strategic processes were already in place at
the beginning of the year, whilst a special
program was in progress for the
implementation of the revised Requirements
concerning safety, health and environment
and legal affairs. The latter programs were
continued through 2005.

In 2005 the focus was on the Requirements
that relate to the flows of goods and money.
These include the Requirements regarding
the purchasing, manufacturing and
marketing & sales processes, as well as
demand supply chain planning and financial
control processes. Also included are the
Unit Risk Management Requirements,
which specify the Risk Management
organization of the operational units and
the need to perform risk assessments.
Finally, part of the Requirements in certain
support functions are included (human
resources, legal, ICT and security). The
selection was made in such a way as to
cover the risk management and control of
goods and money flows for the primary
process, including the integrity of related
master data, clarity of responsibilities and
authorizations, and security of information.

Annual Report 2005

www.dsm.com

Environment
The number of non-safety incidents
classified as “serious” decreased from four
in 2004 to three in 2005. The total number
of incidents, including Loss of Primary
Containment, amounted to 501 in 2005
compared to 522 in 2004 (both figures
excluding DSM Nutritional Products). For
DSM Nutritional Products, this number was
147 in 2005. Major emission reductions
were achieved at the caprolactam plant in
Nanjing, China. Furthermore, an innovative
waste water treatment plant was built at the
DSM Food Specialties site in Seclin, France.

Of the fourteen environmental targets set
for the period 2000-2006, ten had been
achieved by the end of 2005. DSM has set
new environmental targets for the period
2006-2010. Detailed information on these
new targets and on the company’s safety,
health and environmental performance can
be found in the 2005 Triple P Report.

Safety, Health, Environment

Safety
The frequency index of all recordable
incidents involving both DSM employees
and contractor employees, excluding DSM
Nutritional Products, decreased from 0.88
in 2004 to 0.74 in 2005. This is a reduction
of 16%. The frequency index of lost
workday cases involving DSM employees,
excluding DSM Nutritional Products,
improved by 23% from 0.22 in 2004 to 0.17
in 2005. At DSM Nutritional Products both
indicators increased, from 1.47 to 1.49 and
from 0.52 to 0.73, mainly because of
improved reporting.

As from 2005, DSM Nutritional Products
has been officially consolidated in the safety
performance data of DSM. The frequency
indices for recordable incidents and lost
workday cases for 2005, including DSM
Nutritional Products, are 0.95 and 0.33,
respectively. This will be the starting point
for comparison in the coming years.

Over the past four years, DSM has reduced
the frequency index of all recordable
incidents by 17% per year on average.
Further reduction will be increasingly difficult
and will require longer lasting efforts, which
will be mainly focused on behavior. In line
with Vision 2010 and the environmental
targets laid down, DSM has decided to set
as a corporate target a 50% reduction for all
recordable incidents involving DSM and
contractor employees in 2010 relative
to 2005.

DSM regrets having to report the loss of a
contractor employee who had a fatal traffic
accident in Belgium in June 2005.

Health
In 2005, fourteen cases of occupational
disease were recorded at DSM (excluding
DSM Nutritional Products), versus twenty
cases in the previous year (excluding DSM
Nutritional Products). The cases range from
ergonomic issues and hearing problems
to allergic reactions. A risk inventory and
reporting tool was developed and their
implementation was piloted in two cases.
Occupational health practice was updated
and introduced at DSM’s European SHE
Conference in early 2005.

Section 1 Report by the Managing Board

Human Resources

Internationalization
The internationalization of DSM’s workforce
that has been going on for a number of
years continued through 2005. This mainly
reflected DSM’s strong expansion in China;
the DSM workforce in China – including all
joint ventures – now numbers approximately
3,500 people. Between 1999 and 2004 the
overall percentage of non-Dutch DSM
employees increased from 50% to about
70%. At year-end 2005 almost 8,000 DSM
employees were based outside Europe. The
ongoing trend towards internationalization
is having a clear impact on DSM’s HR
processes and systems. DSM has adapted
its expatriation policy, which is now being
applied worldwide. The company’s ongoing
internationalization and the major portfolio
changes that have been effected also
highlight the importance of good internal
communication, which is why DSM
undertook various new initiatives in this
field in 2005.

Integration of new activities
The integration of DSM Nutritional Products
is proceeding swiftly. Various DSM Nutritional
Products processes and systems, including
remuneration and appraisal systems, have
been integrated into the DSM systems. In
addition, DSM Nutritional Products has
started implementing DSM’s management
development system and has set up special
programs for high potentials. Some 1,100
DSM Nutritional Products employees took
part in training courses last year. DSM
Nutritional Products also implemented the
DSM policies and work processes in the
fields of production (Manufacturing
Excellence) and safety, health and the
environment. The integration of DSM
NeoResins is likewise proceeding well.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Human Resources – Research and Development

People Matter(s)
The major changes that DSM has
implemented in the Human Resources field
over the past few years are based on the
strategy outlined in the internal strategy plan
People Matter(s). DSM is on the whole
satisfied with the progress made, and has
realized most of the ambitions outlined in
the plan. The follow-up activities in the HR
field to be undertaken in the coming period
will be outlined in a new strategy plan. This
new plan will be published in the third
quarter of 2006, and will among other
things focus on leadership styles, ways to
increase diversity, the stimulation of truly
market-driven work processes and an
innovative specialty culture within the
organization, as well as on several other
themes intended to contribute to the
success of DSM’s new corporate strategy.

DSM workforce at year-end in:

Europe

- the Netherlands

- rest of Europe

Asia

- China

- rest of Asia

North and South America

rest of the world

total DSM

2005

2004

14,206

15,679

7,258

6,948

3,666

2,581

1,085

3,667

281

7,553

8,126

3,488

2,439

1,049

4,569

468

21,820

24,204

DSM workforce at year-end in:

Life Science Products

DSM Nutritional Products

Performance Materials

Industrial Chemicals

Other activities

2005

6,239

6,119

4,441

2,234

2,787

total, continuing operations

21,820

Discontinued operations

total DSM

21,820

2004

6,836

6,607

3,735

2,566

2,953

22,697

1,507
24,204

DSM as a learning organization
Employee development obviously continues
to be important. Besides the individual
development of employees, on which an
average of 18 hours per employee were
spent in 2005, DSM is increasingly devoting
attention to structured programs to continue
developing the leadership and professional
competencies that are important to us.
For most of these fields, the DSM Business
Academy offers special programs. The
Talent Development Centers which were
set up in 2004 have functioned well and
are an effective complement to our
management development systems.

Diversity
The development of a culture based on
diversity is fundamental to DSM’s HR policy.
Targets have been set for each business
group in relation to the recruitment,
appointment and promotion of women to
senior management positions. At the end of
2005 the percentage of female executives
stood at 4% (2004: 3%); the percentage of
female senior managers was 13% (2004:
11%). In the context of the new corporate
strategy Vision 2010 – Building on
Strengths, DSM will make a strong effort in
the coming period to further increase the
diversity and the international character of
our workforce.

Operational Excellence
DSM’s HR organization is working hard
to achieve operational excellence. An
important precondition for operational
excellence in HR is the development and
implementation of standard work processes
supported by SAP HR. At the end of 2005,
a global HR model was developed. This
model has been ‘localized’ at three sites in
Switzerland, the USA and the Netherlands
and will come into operation in early 2006.
The model provides a standardized format
for obtaining information about HR
developments at a particular site, including
absenteeism, training facilities etc, in order
to enable the HR organization to respond
to these developments, or anticipate them,
in a more effective way. Furthermore,
Shared Service Centers are being set up to
support SAP HR and, from 2006 onwards,
to offer HR services at a regional level.

Here, the emphasis is mainly on combining
resources to develop new opportunities
and achieve synergies, for example by
adopting an integrated market approach
and combining technologies.

Recruitment
The changed portfolio and the company’s
international growth are triggering a clear
trend towards recruiting managers on the
external labor market. DSM is moreover
becoming increasingly conscious of the
need to inject more diversity into its
management community at all levels. This
is another reason for recruiting managers
externally, international experience being an
important selection criterion. The majority
of the new executives recruited in 2005
are non-Dutch. In 2005 new recruitment
programs were launched that are geared
to specific disciplines, in particular R&D
and finance. Also, recruitment-focused
business courses took place in China.

Working climate analysis
The working climate analysis conducted
in 2004 yielded valuable conclusions, for
example about employees’ perception of
their work and the importance of innovation
for DSM’s further growth. Innovation is of
crucial importance to DSM, and the
company will be devoting substantial
resources to this goal in the coming period.
We are well aware that people need a
working environment in which their
innovative ideas can thrive and in which
management allows scope for this. We
will therefore promote creativity and
collaboration in all echelons of our
organization and across the boundaries of
professional disciplines. The next working
climate analysis is scheduled for 2008.

Annual Report 2005

www.dsm.com

Section 1 Report by the Managing Board

Use of the above-mentioned tools led to
several new developments. One of these
is a new enzyme, Brewers Clarex®, which
was recently introduced in the brewers
market and which prevents chill-haze in
beer. Most brewers use a chemical
adsorbent to remove protein or polyphenols
which cause haze after bottling of the beer.
The application of the Brewers Clarex®
enzyme is a viable alternative to prevent this
haze formation.

Another example is the production of so-
called clear milk. Again, the use of specific
enzymes enables the production of
transparent, colorless milk products, which
still have all the nutritional properties of milk,
have a neutral taste (i.e. no taste) and allow
for the production of healthy soft drinks.

Not all developments are carried out
exclusively in-house. Fabuless®, a natural
product for weight management, was
developed by the Swedish company Lipid
Technology Provider (LTP), in which DSM
Venturing has a stake, whereas the
application development was carried out by
DSM. Fabuless® is produced exclusively for
DSM’s dairy applications. The active
ingredient is based on specific lipids and
suppresses the feeling of hunger via a
natural mechanism when it is digested.

Research and Development

Innovation is a key element of DSM’s new
strategy. An important element in the
realization of DSM’s innovation ambitions is
effective R&D. R&D programs for the
coming years will be geared to making a
strong contribution to innovation and to
supporting process and product
improvements for existing businesses.

Apart from business-focused R&D
programs, accounting for 90% of total
annual R&D expenditure, DSM has a
Corporate Research Program in place
directed at building and strengthening the
technological competences needed to
support our strategy. In 2005 we continued
to strengthen our technological
competences and to enhance our
knowledge base, both through in-house
work and through collaboration with the
external knowledge infrastructure.

R&D at Life Science Products
The Corporate Research activities of the
Life Science Products cluster continued to
build on and develop three technology
platforms: Advanced Synthetic Methods,
Biotechnology and Food & Feed
Applications. In 2005, DSM Nutritional
Products joined the Corporate Research
Program. The Advanced Synthetic Methods
activities focused on improved bond-
forming reactions with emphasis on catalysis
as well as on process intensification. In
Biotechnology, the Systems Biology
activities focused on further developing a
functional genomics platform to best address
the scientific questions in our business
projects. In Food and Feed Applications,
the program will accelerate our
development capabilities and contribute
to future innovations in both the Human
and Animal Nutrition and Health sectors.
Our strong formulation technology plays
a key role in tailoring these applications.

Expenditure
Expenditure on R&D in 2005 amounted to
€ 290 million (3.5% of net sales), a 1% rise
compared to the € 286 million (3.7% of net
sales) in 2004. R&D expenditure in life
science products amounted to 6.3% (2004:
to 6.6%). DSM Nutritional Products spent
€ 80 million, 4.2% of net sales, compared
to € 75 million (3.9% of net sales) during the
previous year. The figures for Performance
Materials are 3.8% (2004: 3.9%) and for
Industrial Chemicals 0.8% (2004: 1.0%).
At 31 December 2005, a total of 1,970 staff
were employed on R&D activities,
representing some 9% of the total workforce.

R&D presence in China
In 2005 the global spread of our R&D
activities was extended to China, where we
took the first steps to establish a multi-
business R&D presence. In September we
opened the DSM R&D Center China in
Shanghai, which combines R&D facilities
for some of our Life Science and
Performance Materials activities. In
November, also in Shanghai, we opened a
joint laboratory with Fudan University for
research on new technologies for, among
other things, food and feed ingredients.

R&D also made progress in the application
of so-called micro-reactors. These are
small continuous reactors with a high
capacity based on the principle of process
intensification. These reactors, which
combine cost-effective synthesis with
high selectivity, also support our
sustainability efforts.

DSM has now completed sequencing the
Penicillium genome; this will lead to more
rational approaches to the development
of improved strains for the production of
existing and new products. DSM further
harvested the fruits of the sequencing of
the Aspergillus genome, resulting in new
powerful tools for the optimization of its
production strains for enzymes in the
production process for 7-ADCA. The
genomic knowledge also allows R&D to far
more quickly and effectively select new
enzymes to be used in the production of,
among other things, new nutritional
ingredients.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Research and Development

introducing new process technology, thus
securing cost leadership. R&D efforts at
Nutritional Products are building on two
strengths of DSM’s R&D: modern, atom-
efficient synthesis applying catalysis and
white, or industrial, biotechnology. With
respect to atom-efficient synthesis, several
activities scouting new routes and
technologies for improving our key
production process are ongoing. R&D
capabilities in white biotechnology – one of
DSM’s selected Emerging Business Areas –
have led to the development of new
production strains.

Regarding the future growth of new
business, the activities in Human Health &
Nutrition, Animal Health & Nutrition and
Personal Care are aimed at innovative
products and product forms. In Human
Health & Nutrition, the focus is on
developing nutritional ingredients that can
help reduce the risk of chronic disease as

well as improving wellness. For example,
recent human studies have confirmed that
our new product Teavigo® increases fat
oxidation. Also in recent human studies, the
new product Bonistein®, a pure synthetic
genistein, has been demonstrated to help
reduce bone loss. Science has shown that
Bonistein® can improve the benefits of
calcium supplements, especially in
combination with ROPUFA and the vitamins
D and K. Collaborations between DSM
Nutritional Products and DSM Food
Specialties have resulted in synergies and
joint project activities. By further aligning
competences in human nutrition, DSM will
boost innovation and focus on combining
new products with established products for
the development of nutritional solutions.

In Animal Health & Nutrition, DSM
Nutritional Products develops eubiotic (pre-
and pro-biotic) solutions for future market
needs, among other things. Maintaining
health and performance in livestock without
the use of antibiotic growth promoters has

R&D at DSM Nutritional Products
R&D activities at DSM Nutritional Products
in 2005 focused on the one hand on
maintaining and improving the profitability of
the more established part of the business
by improved processes and, on the other
hand, on future growth in new business by
developing new products and solutions.

For the established vitamins and
carotenoids, the objective is to achieve
drastically lower production costs by

Annual Report 2005

Section 1 Report by the Managing Board

Biomedical materials is one of the four
Emerging Business Areas that DSM has
identified in its Vision 2010 strategy. In the
biomedical field, an intensive collaboration
with the University of Maastricht and with
the Academic Hospital of Maastricht
(Netherlands) was started. In 2005, DSM
Medical Coatings was launched. This unit
develops and markets innovative coatings
for medical devices such as catheters for
cardiovascular and urological uses.

R&D at Industrial Chemicals
The focus of Industrial Chemicals R&D is to
actively maintain the existing businesses
through process improvement and the
development of new processes for existing
products, and to increase efficiency and
sustainability through waste reduction.
As part of the Corporate Research
Program, Industrial Chemicals R&D and Life
Science Products R&D worked together on
enzymes. New enzymes were discovered
and patented for an important step in the
fermentative production of caprolactam. At
the same time, projects were carried out to
improve chemistry and technology
operations in the caprolactam plants.
Industrial Chemicals R&D continued to
work on the development of new
melamine-based coatings in collaboration
with Performance Materials R&D. Moreover,
building on the success of the newly
developed melamine-based glue systems
for OSB (Oriented Strand Board), DSM
continues to work on application
development for systems based on
straw and sugar cane.

become a core challenge for animal farmers
worldwide. In addition, efficacy under
practical farm conditions should not be
compromised by new, alternative concepts.
The Eubiotics R&D program addresses
these needs. Combining expertise in Animal
Health & Nutrition with the most advanced
in-house technologies for rapid screening of
natural compound libraries has led to the
establishment of a unique platform to
identify new products. Several development
projects target specific solutions for all
relevant species. Improvement of feed
conversion remains a key activity. In the
successful alliance with Novozymes, joint
teams are working on new feed enzymes
that target current unmet needs.
Additionally in a new focus area, pet health
and nutrition, DSM Nutritional Products is
building on its innovative research in Human
Health and Personal Care, and is
developing attractive new concepts for the
pet food industry.

In Personal Care, DSM’s focus remains on
providing lead ingredients for sun and skin
care. Although there are several pigment-
based UV filters available, none of them
combine performance with excellent
application properties. DSM has closed this
gap with a new double-coated titanium
oxide grade, called Parsol®TX. Parsol®TX is
extremely stable in applications with and
without UV light and hardly visible on the
skin, but nevertheless provides superior
protection. Furthermore, in skin care, active
ingredients which beautify the skin are in
development. For example, Allantoin, a
naturally occurring compound which
harmonizes skin functions like regeneration,
moisture retention and cell renewal, has
been added to the program.

R&D at Performance Materials
Corporate Research in the Performance
Materials field during 2005 mainly focused
on further reinforcement of the key
competences that are needed to play a
leading role in this field. Competences in
chemistry and technology for the synthesis
of polymers and resins as well as those in
material sciences were expanded, taking
into account new developments in science
and technology. Special attention was given
to the convergence of nanotechnology and
biotechnology and its possible
consequences for the development of
‘smart materials’.

Several new developments were made in
coatings. In 2005 DSM focused on the
development of functional coatings, such
as anti-reflective coatings and hydrophobic
(easy-to-clean) coatings. Work on anti-
reflective coatings led to the development
of OptoClear® and PictoClear™, anti-
reflective coating systems based on a
nano-structured surface.

The acquisition of NeoResins expanded
DSM’s knowledge base in eco-friendly
resins to include water-based systems and
reinforced our technology position in UV-
curable resins. This gives us a strong basis
for developing new innovative products.

For the automotive industry new resins
were developed that reduce the emission of
volatiles by 40%. Also, unsaturated
polyester resins with a lower styrene
content were developed, for an improved
working environment in the polyester-
producing industry.

Increased insight into, and understanding
of, various material properties and of the
behaviors of plastic materials during
processing supports the development of
new applications of our superior nylon 4.6,
Stanyl®, our thermoplastic elastomers
Arnitel® and Sarlink® and our Dyneema®
fiber. New applications and materials were
developed based on Sarlink® thermoplastic
vulcanizate grades. Various new packaging
materials were developed, which form a
solid basis for the Emerging Business Area
of Specialty Packaging. For the petroleum
additives market a new product line was
developed with excellent soot dispersion
properties.

Apart from its application in functional
coatings, nanotechnology is increasingly
being applied in other areas as well. For
example, DSM is using nanotechnology to
develop fluids with special optical properties
to be deployed in lithographic equipment
for the manufacture of advanced computer
chips.

DSM Hybrane has developed an advanced
paper coating additive, called
C*TopBraneTM, for a major European
manufacturer of starches and starch
derivatives. The additive makes it easier to
replace expensive synthetic binders by
natural materials, thus generating
substantial savings for paper makers.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Intellectual Property – ICT and e-Business –
Purchasing – Macro-economic review

Intellectual Property

Our Vision 2010 strategy further increases
the role of intellectual property. Some 375
new patent applications were filed in 2005.
Basic IP positions were obtained in new
performance materials and ingredients for
human and animal nutrition. The patents
connected to the NeoResins business, in
total over 300 patents and patent
applications in the field of coating
technology, were transferred and integrated
into our overall patent portfolio. The
strategic shift in DSM’s portfolio also drives
an increasing interest in trademarks and
branding. Trademarks such as Dyneema®,
Teavigo® and PeptoPro® are becoming
well-known names.

DSM is now actively managing about 500
trademarks. DSM continues to strengthen
its IP position in China. Most of the patents
are also filed in China.

ICT and e-Business

Technical infrastructure
In 2005 a company-wide program was
initiated for the regular upgrade of DSM’s
ICT infrastructure – built in 2000/2001 –,
including the global network, e-mail
infrastructure, office automation and
managed services. The program aims to
implement off-the-shelf, proven
technologies and reduce the total cost of
ownership. The year 2005 was mainly used
for preparation activities and the migration
of the global network. The actual
replacement of work stations and servers
will follow in 2006.

ICT security is an issue that requires
continuous attention. Efforts to protect
DSM’s infrastructure and systems from
intrusion by computer viruses and hackers
were increased in 2005.

e-Business
In the past few years DSM has invested in
an advanced e-business architecture and
infrastructure that enables the company to
conduct business with key customers and
suppliers in a smooth and “hands-free”
manner. DSM is already reaping the benefits
of this infrastructure in terms of direct
system connectivity, a 24-hour web shop
for customers, elogistics, electronic
conferencing, electronic invoicing, e-buy
and electronic payment.

In 2005, more than 30% of overall group
sales on average were generated via
various e-channels. Today, DSM is directly
connected to more than 300 business
partners. In addition, over 5,000 customers
place their orders via the DSM web shop, to
a total of more than 35,000 orders per year.
In 2005, the possibilities in the field of
elogistics in particular were further
expanded. Over 45,000 messages were
shared with logistic providers, allowing
smoother and faster handling. DSM is
looking into the possibility of using elogistics
for road and rail transport in the USA.
The company is already using elogistics
applications in sea transport between
Europe and Asia and is investigating the
possibility of using these applications in the
rest of the world. DSM also conducts
thousands of web-enabled meetings per
year via the internet, which reduces travel
costs considerably. Via the e-channels
DSM also had more than 200,000
downloads of key product- and order-
related data in 2005, reducing handling
costs.

In the years to come, DSM will further refine
its existing e-business applications. In
addition, the company will investigate the
latest techniques and developments in the
field of RFID (Radio Frequency Identification)
and CRM (Customer Relations
Management), and will use these if they
provide added value.

The process of separating the ICT
infrastructure and the business application
systems that DSM Nutritional Products
shared with its former parent company
Roche was completed in the course of
2005. In addition, a number of improvement
projects were executed as part of DSM’s
VITAL integration program. For example,
marketing & sales tools were introduced to
support DSM Nutritional Products’ sales
force. Integration between the Outlook XP
calendar and DSM’s online conferencing
system WebEx was improved.

Business process standardization
In 2005, the business process
standardization program (Apollo), which
aims at improving efficiency and thus further
increasing customer satisfaction, continued
its roll-out of standardized best-practice
processes throughout a number of DSM
units, including DSM Food Specialties,
DSM Agro, DSM Coating Resins, DSM
Composite Resins and DEX Plastomers.
Furthermore, preparations were started for
the implementation of these standardization
processes in DSM Anti-Infectives and DSM
Nutritional Products. The units that had
already implemented this standardization
program made significant progress in
improving their order-to-cash, purchasing
and financial operations and further
streamlined their organizations. The
implementation of these processes enables
business units to adopt a uniform way of
working worldwide. The aim is to increase
the internal organization’s efficiency through
integrated planning and automated order
and financial/administrative processes.
Apollo enables business unit management
to react faster to market developments and
it supports DSM’s compliance efforts.

Organization
By the end of 2005, the ICT department of
DSM Nutritional Products had been fully
integrated in the Corporate ICT
department, while all business systems
management groups were transferred from
the other business groups to Corporate ICT.
This reorganization has resulted in a main
office in the Netherlands with affiliates in
Switzerland, the USA, Brazil, Singapore and
China. The new organization is capable of
offering around-the-clock ICT services to
the business.

Annual Report 2005

www.dsm.com

Section 1 Report by the Managing Board

Macro-economic outlook for 2006
The consensus is that global GDP growth
will amount to 3.3% (2005: 3.2%), with
continued strong Asian growth, propelled
by robust exports and strong domestic
demand in China and India. The Euro-
zone economy is forecast to grow by
approximately 2% in 2006. Global industrial
production is set to grow at around 4%,
although there are marked geographical
differences in growth rates and per sector.
Growth in Western Europe is projected at
2.4%, the USA at 3.1%, the Middle East at
4.9%, Eastern Europe at 5.6% and Asia
Pacific at 6.5%, with industrial production
growth in China being projected at 12.1%.

If these circumstances materialize without
major geopolitical disturbances and
currency volatilities, the demand/supply
balance for the chemical industry is
expected to remain good in 2006.

Purchasing

Macro-economic review

In 2005 DSM further detailed and
implemented the new purchasing
organization with the aim of ensuring that it
will make a sustainable contribution to the
company’s bottom line.

A global purchasing strategy was
developed as an integral part of the group’s
business strategy. We completed the
staffing of the new organization and made a
start on the development of standard
processes and systems to support the new
organization. The new organizational model
is based on a centrally led DSM sourcing
organization (with a regional presence in
Europe, USA and Asia) to fully leverage
DSM Purchasing’s spend, resources,
capability requirements and best practices.
It is aligned with the business groups’
sourcing organizations responsible for their
specific spend. Spend Area Directors have
developed spend plans that will be
consolidated into a global DSM purchasing
plan covering our total spend. This structure
is fully aligned with DSM’s Vision 2010
strategy in order to leverage synergies
within the company. Job-specific
purchasing learning curricula were
developed to further professionalize the
DSM purchasing community. In addition, a
performance management model was
developed for the new purchasing
organization. We successfully completed
the purchasing program launched in early
2004 to achieve substantial annual savings.
Contracts were negotiated based on
sourcing strategies developed using the
Strategic Sourcing Methodology. A major
part of these savings were realized in 2005
and will – as planned – be fully realized in
2006. As of 2006, there will be one aligned
purchasing organization in place for the
whole of DSM.

Macro-economic developments in 2005
Macro-economic growth in developed
countries slowed down somewhat after
the favorable developments in 2004, but
emerging countries, especially in Asia,
continued to grow at very healthy levels.
The Asian emerging countries developed
to become the most important drivers of
global economic growth and positively
affected global trade volumes. Also, leading
Japanese economic indicators point to the
highest growth levels for many years,
resulting in increasing exports and
increasing domestic demand as well.

Since the fast-growing sectors of the
emerging economies make relatively
intensive use of commodities, including oil,
their economic growth has contributed to
upward price pressure. This development
has had an impact on several of DSM’s
markets, mainly in the Industrial Chemicals
and Performance Materials clusters.

In Europe, the economy showed only initial
signs of recovery in 2005. The value
decrease of the euro, from levels of above
$ 1.30 towards the end of 2004 and during
the first months of 2005 to around $ 1.20
in the second half of 2005, improved
European company prospects for exports.
The long-anticipated growth of domestic
demand took off gradually, and strengthened
significantly in the last quarter of 2005.

Many of DSM’s businesses benefited from
the generally positive economic
environment. Global manufacturing output
grew by 4% and global chemical output
grew by 3% in 2005. Demand growth in
engineering plastics, elastomers and other
performance materials was above trend on
the back of healthy global developments in
end-markets such as building &
construction, electronics and electrical
applications and, to a lesser extent,
automotive.

China’s importance has increased. China is
home to many fast-growing industrial
markets as well as many emerging
competitors. The country’s share of overall
global chemical output growth in 2005 was
approximately 40%.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Financial results

Statement of income

x € million

net sales
other operating income
total operating income
total operating costs
operating profit excluding exceptional items
net finance costs
income tax expense
share of the profit of associates
profit attributable to minority interests
net profit excluding exceptional items
net result from exceptional items
net profit*

* attributable to equity holders of Royal DSM N.V.

2005

8,195
223
8,418
-7,610
808
-70
-180
-2
7
563
-36
527

2004

7,832
197
8,029
-7,467
562
-56
-103
9
11
423
-130
293

Net sales
At € 8.195 million, net sales in 2005 were
almost 5% higher than in the previous year.
DSM NeoResins accounted for an increase
of 3% in net sales, and divestments
accounted for a 3% decrease. Selling
prices were on average 5% higher than in
2004. Autonomous volumes remained
unchanged. Exchange rates had no effect
on sales.

Operating profit
The operating profit excluding exceptional
items rose by € 246 million (44%), from
€ 562 million in 2004 to € 808 million in
2005, mainly as a result of higher margins,
lower fixed costs and an improved product
mix. The EBITDA margin, i.e. operating
profit before depreciation and amortization
as a percentage of net sales, rose from
13.6% in 2004 to 16.0% in 2005.

Operating costs
Operating costs rose compared with 2004,
closing the year at € 7.6 billion. The main
component of these costs, the cost of raw
materials and consumables for goods sold,
corrected for acquisitions and divestments,
rose by approximately € 300 million. Total
fixed costs remained stable.

With selling prices showing a stronger
increase than raw materials prices, the
average margin, i.e. the selling price per unit
of product less variable costs, was clearly
up from the 2004 level.

Net profit
Net profit rose from € 293 million in 2004 to
€ 527 million in 2005. Expressed as
earnings per ordinary share, the net profit
rose from € 1.41 in 2004 to € 2.68 in 2005.

Net finance costs stood at € 70 million in
2005, compared with € 56 million in 2004.
The increase was due primarily to the
acquisition of DSM NeoResins and hedging
costs for the US dollar.

At 24%, the effective tax rate in 2005 was
higher than in 2004 (20%). The 4% increase
was due to higher profits and a consequent
decrease in the relative proportion of
income elements taxed at a low rate.

The profit of associates decreased from
€ 9 million in 2004 to € 2 million negative in
2005 because of adverse developments at
Methanor.

The net profit excluding exceptional items
increased by € 140 million to € 563 million,
which was largely due to the higher level of
operating profit.

In 2005 provisions were made and
impairments were recognized for the
mothballing of the Montreal site (Canada)
and the closure of the South Haven site
(USA). Also, a provision was created for the
restructuring of the Linz site in Austria. Book
profits were recorded on the sale of DSM
Bakery Ingredients and the sale of land.
Furthermore, DSM recorded a book loss on
the sale of the SBR business and an
impairment of the company’s share in the
assets of Methanor. On balance several tax
items had a positive effect.

Minority interests accounted for € 7 million
(2004: €11 million); the figure in question
related to activities in North America and
China.

Annual Report 2005

www.dsm.com

Section 1 Report by the Managing Board

Capital expenditure and financing
Capital expenditure on intangible assets
and property, plant and equipment
amounted to € 401 million in 2005, which
was below the figure for amortization and
depreciation (for cluster details see page 35).
This was primarily due to the fact that the
selection criteria applied to new investments
had been revised. In 2004 and 2005 the
level of capital expenditure was relatively
low. The level of capital expenditure,
including small and new business
development type acquisitions, is expected
to be above the level of amortization and
depreciation in 2006. At € 693 million, net
cash provided by operating activities was
about 53% of EBITDA.

-323

-194
-339
17

-7

1,261

The balance sheet total (total assets)
increased in 2005 and amounted to € 10.0
billion at year-end (2004: € 9.6 billion).
Equity increased by € 451 million compared
with the position at the end of 2004; this
was due mainly to the net profit and
exchange differences relating to non-euro-
denominated holdings. Equity as a
percentage of total assets increased from
53% at the end of 2004 to 55% at the end
of 2005. The current ratio (current assets
divided by current liabilities) decreased from
1.79 in 2004 to 1.75 in 2005.

2004
5
40
9
13
33
100

53*
9
15
23
100

2005
1,261

2004
1,209

906
209
-217

693

898

Statement of cash flows

x € million
Cash and cash equivalents at 1 January
Operating activities:
- net profit plus amortization and depreciation
- change in working capital
- other changes
Cash flow from operational activities

Investing activities:
- capital expenditure
- acquisitions
- sale of participations
- divestments
- other changes
Net cash used in investing activities

1,094
-201
-200

-393
-564
192
30
-110

Dividend
Net cash used in financing activities
Changes due to IAS 32/39
Effects of changes in accounting principles
and exchange differences

Cash and cash equivalents at 31 December

Balance sheet profile

as %
intangible assets
property, plant and equipment
other non-current assets
cash and cash equivalents
other current assets
total assets

equity
provisions
non-current liabilities
current liabilities
total liabilities

-349
-
-
28
-2

-845

-183
-37
-

902

2005
10
37
12
9
32
100

55
10
14
21
100

* Excluding the impact of the temporary reclassification of cumulative preference shares A at year-end 2004.

Annual Report 2005

www.dsm.com

Report by the Managing Board
Financial results

Capital expenditure on intangible assets
and property, plant and equipment was
20% below the level of amortization and
depreciation. The total of intangible assets
and property, plant and equipment was
€ 489 million (11%) higher than in 2004.
The working capital was € 155 million
higher than in 2004, due in particular to
currency exchange rates, effects of
acquisitions, higher raw material prices
and a higher activity level. Cash decreased
strongly and amounted to € 902 million.

Net debt stood at 13% of equity plus net
debt at the end of 2005.

Equity
as a % of balance sheet total

2001

2002

2003

2004

2005*

* Excluding the impact of the temporary reclassification
of cumulative preference shares A.

50.1%

57.6%

52.8%

52.9%

55.3%
60

Dividend
DSM aims to provide a stable and,
preferably, rising dividend. The dividend is
based on a percentage of cash flow.
Barring unforeseen circumstances, this
percentage lies within a range of 16 to 20%
of the net profit excluding exceptional items
minus the dividend payable to holders of
cumulative preference shares plus
depreciation and amortization.

The proposed dividend on ordinary shares
for the year 2005 amounts to € 1.00 per
share, about 15% higher than the previous
year. This corresponds to 18% of the cash
flow (net profit excluding exceptional items
(€ 563 million) plus depreciation and
amortization (€ 503 million) minus the
dividend payable to holders of cumulative
preference shares (€ 16 million)). An interim
dividend of € 0.29 per ordinary share
having been paid in August 2005, the final
dividend will amount to € 0.71 per
ordinary share.

The dividend will be paid out in cash and will
be made payable on 14 April 2006.

DSM outlook for 2006
The general economic outlook for the year
2006 is positive. Consumer confidence is
expected to improve in Japan and Europe
and remain positive in other regions. In
addition, industrial production is also
predicted to remain strong in many sectors
and regions, including continued strong
growth in emerging economies. For the
chemical industry, a well-balanced supply
and demand situation is anticipated in
most markets.

However, growth in the automotive sector –
especially in the USA – will probably lag
behind.

Against this generally positive outlook,
key risks may emerge from major currency
fluctuations, more specifically the value of
the US dollar against the euro, geopolitical
tensions and high and volatile raw
material prices.

For 2006, DSM expects continued
performance strength in its Nutrition and
Performance Materials businesses. For the
Pharma businesses a further improvement
in performance is envisaged. Industrial
Chemicals is expected to see a continuation
of the relatively stable business environment.
Barring unforeseen circumstances, DSM
expects an operating profit from continuing
operations3 for the first quarter of 2006 at or
above the level of the first quarter of 2005
(€ 182 million). For the year 2006 as a
whole the trading environment is expected
to remain positive for DSM.

Annual Report 2005

www.dsm.com

The 2005 operating profit from continuing operations reported
here is exclusive of DSM Bakery Ingredients, DSM Minera and
SBR, to enable a meaningful comparison with 2006. The report
for the first quarter of 2006 will also include a breakdown of results
according to the new clustering of activities.

Section 1 Report by the Managing Board

2005

2004

97
97
667
85
26
972
2
974

124
55
64
75
26
344
4
348

2005
1,753
1,830
1,737
728
173
6,221
-
6,221

2004
1,704
1,694
988
673
331
5,390
168
5,558

Capital employed by core activity at
31 December 2005
x (cid:96) billion

Life Science Products

DSM Nutritional Products

Performance Materials

Industrial Chemicals

Other activities

0.5

1.0

1.5

2.0

2005
18.0
19.6
16.8
14.6

2004
15.2
17.4
12.4
13.2

Operating profit by core activity at
31 December 2005
x (cid:96) million

Life Science Products*

DSM Nutritional Products

Performance Materials

Industrial Chemicals

Other activities

-50 0

100

200

300

* Excl. discontinued activities

2005
93
80
94
14
8
289
1
290

x € million
2004
98
75
78
16
11
278
8
286

as a percentage*

2005
6.3
4.2
3.8
0.8
1.6
3.6

2004
6.6
3.9
3.9
1.0
2.3
3.7

R&D expenditure 2001-2005
x (cid:96) million / incl. discontinued activities

2001

2002

2003

2004

2005

100

150

200

250

300

capital expenditure and acquisitions

x € million

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other activities
total, continuing operations
Discontinued operations
total DSM

capital employed at 31 December

x € million
Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other activities
total, continuing operations
Discontinued operations
total DSM

EBITDA/net sales

as %
Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals

R&D expenditure

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other activities
total, continuing operations
Discontinued operations
total DSM

* Of net sales

Annual Report 2005

www.dsm.com

Review of business
Life Science Products

The Life Science Products cluster comprises
business groups that supply to the pharmaceutical,
food and agro-chemical industries. The cluster's
share in DSM's overall net sales is 18%.
‰

x € million
net sales*:
- DSM Fine Chemicals
- DSM Pharmaceutical Products
- DSM Anti-Infectives
- DSM Food Specialties

total

operating profit
operating profit plus amortization and depreciation
capital expenditure
capital employed at 31 December
operating profit as % of average capital employed
research and development

workforce at 31 December

* Before elimination of intra-group supplies to other clusters.

2005

2004

303
482
330
416

374
463
386
359

1,531

1,582

126
266
97
1,753
7.3
93

79
226
124
1,704
4.2
98

6,239

6,836

Supplies of Life Science Products
x (cid:96) million / incl. discontinued activities

2001

2002

2003

2004

2005

500

1000

1500

2000

2500

Operating profit of Life Science Products
x (cid:96) million / incl. discontinued activities

2004

2005

100

150

200

The Life Science Products cluster
comprises the following business groups:
DSM Fine Chemicals, DSM Pharmaceutical
Products, DSM Anti-Infectives, DSM Food
Specialties and DSM Bakery Ingredients.
DSM Bakery Ingredients was divested in
June 2005 and its bakery enzymes
activities were transferred to DSM Food
Specialties. Our main customers in life
science products are the pharmaceutical,
food and agrochemical industries. The main
drivers of growth are a growing world
population, increasing purchasing power,
the aging of the population, the increasing
importance attached to a healthy lifestyle
and the growing emphasis placed on
personal care.

The activities in this cluster are to a large
extent based on DSM’s in-depth
knowledge of biotechnology (including
fermentation, genomics and biocatalysis)
and organic chemistry. DSM is one of the
world’s leading independent suppliers to
the pharmaceutical industry, and we also
hold leading positions in the markets for
ingredients for human and animal nutrition.
The business groups in this cluster work
closely together with each other and with
DSM Nutritional Products in the field of
R&D, for example in biotechnology, and in
some cases they share distribution
channels as well as production facilities.

Annual Report 2005

www.dsm.com

DSM Fine Chemicals

Working on improved profitability
DSM Fine Chemicals produces chemical
intermediates mainly for the agrochemical
and food industries. DSM Fine Chemicals
comprised four business units. DSM
Fine Chemicals Intermediates develops,
produces and sells maleic anhydride,
glyoxylic acid and fumaric acid and fine
chemicals based on these raw materials,
applying a broad technology toolbox.
The business unit has production facilities
in Linz (Austria). DSM Special Products
develops, produces and sells benzoic acid,
sodium benzoate, benzaldehyde, benzyl
alcohol and products derived from these
for a range of end-use markets in the life
science industry. DSM Special Products
is the market leader in these products. The
business unit has production facilities in
Rotterdam, the Netherlands. DSM Minera
operates an iodine mine in Chile and sells
iodine and iodine derivatives to the life
science and performance chemicals
industries.

Business review
The trend in DSM Fine Chemicals markets
in 2005 was in line with the overall trend in
2005. Business was affected mainly by the
sharp rises in the prices of various key raw
materials, such as toluene and n-butane.
These cost increases were in general
successfully passed on to customers. The
results of the DSM Minera business further
improved as a consequence of continuous
strong demand for iodine and its derivatives.
The restructuring measures we took in
relation to our aspartame business showed
positive effects. DSM Fine Chemicals
profits for 2005 improved compared to
the 2004 figures.

Projects
The exclusive synthesis activities were
integrated within the activities of DSM
Pharmaceutical Products to capture
synergies. Restructuring studies for the
activities in Linz were started in the second
half of 2005 and were already showing
results. The full effects will materialize in
2006 and 2007.

Holland Sweetener Company is a joint
venture with Tosoh (Japan). It produces and
sells aspartame, an intense, low-calorie
sweetener. It has a production plant in
Geleen (the Netherlands).

The concentration of DSM Special Products’
production activities in Rotterdam was
completed in 2005 with the integration of
benzyl alcohol and benzaldehyde
production on this location.

DSM Minera was sold in January 2006 to
Sociedad Química y Minera de Chile.

Strategy
As a consequence of the organizational re-
adjustments in the context of DSM’s Vision
2010 strategy program, the activities of
DSM Fine Chemicals will be repositioned in
2006. Until then, the business group’s
strategy is to maintain its position as a
supplier of high-quality specialty chemicals
and to aim for improved profitability. The
main pillars of the business group’s strategy
are continuous process improvements,
lowest cost production processes and
targeted growth in attractive market
segments with existing and new
intermediates.

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

DSM Pharmaceutical Products

Improved revenues and profit
DSM Pharmaceutical Products is a
leading provider of high-quality global
custom manufacturing services to the
pharmaceutical industry. Customers –
served from five manufacturing sites in
North America and Europe – include
seventeen of the top twenty pharmaceutical
companies, mid-sized and smaller (even
virtual) pharma companies as well as a large
number of agro-chemical companies
across the globe.

The group comprises four business areas.
DSM Pharma Chemicals is a provider of
custom chemical manufacturing services
for complex intermediates and active
ingredients for pharmaceuticals. DSM
Biologics provides process development,
scale-up and cGMP manufacturing
services for clinical and commercial
biopharmaceutical products. DSM Biologics’
focus, under an exclusive license with
Dutch biotech firm Crucell, is to establish
the PER.C6® human cell line as a
production platform for biopharmaceutical
proteins and monoclonal antibodies. DSM
Pharmaceuticals, Inc. is a leading provider
of finished dose manufacturing services to
the pharmaceutical and biotech industries.
Operating from a state-of-the-art facility in
Greenville, North Carolina (US), the company
manufactures sterile injectables (liquid &
freeze-dried), solid dose (tablets, capsules),
semi-solid (creams, ointments) and liquid
products. DSM Exclusive Synthesis was
transferred from DSM Fine Chemicals to
DSM Pharmaceutical Products during the
year under review. Exclusive Synthesis
develops, produces and sells products
made by synthesis on an exclusive basis,
primarily for use in agrochemical industries.

Annual Report 2005

www.dsm.com

Review of business
Life Science Products

Strategy
DSM Pharmaceutical Products’ strategy
is to focus on exclusive high-end solutions
to the complex development and
manufacturing needs of the pharmaceutical
industry. Aiming at being closer to its main
customers, the business group headquarters
was relocated from The Netherlands to
Parsippany, New Jersey in the USA during
the first quarter of 2005. New Jersey is
an important region in the worldwide
pharma industry.

Business Review
Sales in 2005 exceeded the 2004 level
due to increased revenues of DSM
Pharmaceuticals, Inc. and the addition of
the Exclusive Synthesis business with effect
from 1 July 2005. A continued focus on cost
and the addition of new strategic customers
is ongoing in an effort to further improve
performance. DSM Pharmaceuticals, Inc.
showed a strong increase in revenue and
profit versus 2004 due to increases in
both solid-dose and sterile manufacturing
services. Demand for existing solid-dose
products increased as a number of
customer products launched in 2004
began to take hold in the marketplace.
Sterile manufacturing growth was the result
of continued demand for existing biologic
products and the addition of significant new
projects, including commitments for newly
added freeze-drying capacity. Seventeen
new products were launched from the
Greenville facility during 2005, including
major launches into Europe and Japan.
New business inquiries exceeded the
already high level attained in 2004.

The sterile manufacturing service
offerings will be further expanded with the
construction of two additional sterile
manufacturing suites – one for the
manufacture of clinical trial materials (CTM)
and another for the manufacture of cytotoxic
products. The CTM suite will be operational
in late 2006; the cytotoxic area will be ready
in 2007. These additions, combined with
the completion of additional freeze-drying
capacity, will result in further revenue growth
capitalizing on the expected demand for
sterile manufacturing services resulting from
the large number of biologic products in the
development pipeline.

DSM Biologics’ activities during 2005
were centered on delivering Phase II/III
clinical trial materials and commercial
supply for customers out of the Groningen
(Netherlands) facility and furthering the
development of the PER.C6® human cell
line. In July 2005, DSM acquired the 40%
share interest in DSM Biologics Holding
from its joint venture partner Société
générale de financement du Québec (SGF).
DSM now holds 100% of DSM Biologics. At
the end of 2005 the strategic repositioning
of DSM Biologics resulted in the decision to
mothball the DSM Biologics facilities in
Montreal at the beginning of 2006.

Furthermore, stronger emphasis was
placed on the accelerated development
of PER.C6®, through increased
development efforts in a joint effort with
Crucell. DSM Biologics and Crucell will
intensify their efforts in the development
of the promising PER.C6® platform and
create an integrated solution for the
production of biopharmaceutical proteins
and monoclonal antibodies on PER.C6®
in order to increase licensing and royalty
income and accelerate the development
and roll-out of the PER.C6® technology
platform in the market. The partnership’s
Research and Development to create this
new platform will be based around a new
joint R&D center, located in the Netherlands
and the US East Coast. DSM Biologics
in Groningen (Netherlands) will focus on
providing full support to licensees of the
PER.C6® technology, besides its services
as a contract manufacturer for the
biopharmaceutical market.

Despite a continued tough business
environment, DSM Pharma Chemicals
performed significantly better, due to faster
realization of cost reductions and an ongoing
upgrade of its product portfolio. The
necessary further reduction of the asset
base took shape in the announced closure
of the South Haven (Michigan, USA) site,
which will take effect in the second quarter
of 2007. DSM will increase the focus of its
pharmaceutical chemical operations on

higher added-value products (such as
active pharmaceutical ingredients and
advanced and registered intermediates),
capitalizing on its toolbox in chemical and
biochemical processing and its track record
in regulatory compliance.

Projects
DSM Pharma Chemicals had a good year
with respect to project intake. The business
unit’s product portfolio now contains several
high-profile compounds that are close to
launch or were launched in 2005. RESCOM,
the unit within DSM Pharma Chemicals
focusing on early clinical phases, had a
record year, and the business group will
continue to expand the facility. DSM
Exclusive Synthesis had a difficult year, but
made good progress in the development
of a major restructuring plan for the Linz
site. The implementation of this plan will
bring exclusive synthesis back on track.

In the course of 2005 the Manufacturing
Excellence project Heureka in Linz, Austria
entered its implementation phase. The
project affects the pharmachemical,
exclusive synthesis and intermediates
businesses on the Linz site and aims to
deliver an overall performance improvement
of € 35 million, to be realized by 2007.

DSM Pharmaceutical Products posted
a clearly higher operating profit compared
with 2004.

DSM Anti-Infectives

A year of restructuring
DSM Anti-Infectives holds global
leadership positions in penicillin G, penicillin
intermediates (6-APA and 7-ADCA), side
chains, semi-synthetic penicillins, semi-
synthetic cefalosporins and other active
ingredients such as potassium clavulanate
and nystatin. These products are used for
combating bacterial or fungal infections.
DSM Anti-Infectives has production sites
distributed over the Netherlands, Spain,
Sweden, Mexico, India, China and Egypt.

Annual Report 2005

www.dsm.com

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

variable-cost reductions were achieved in
the 7-ADCA plant in Delft in the
Netherlands, while its capacity was
increased according to plan. Margins of
nystatin were stable in an increasingly
competitive market.

The operating profit in 2005 was still
negative, but showed a considerable
improvement compared to the
previous year.

Projects
DSM reaffirmed its plan for a strategic co-
operation with North China Pharmaceutical
Group Corporation (NCPC) via investments
in NCPC and the establishment of a joint
venture in anti-infective products. DSM will
invest in expanding the production of
penicillin-related intermediates and active
pharmaceutical ingredients at the Toansa
facility in India. This expansion – implying a
doubling of production capacity – will take
place in 2006. The focus of R&D activities is
on variable-cost reduction of core products
and on extracting value from DSM
technology. R&D activities also contributed
to identifying and developing new growth
options.

DSM Food Specialties

Operating profit higher
DSM Food Specialties is a global supplier of
advanced ingredients for the food industry,
manufactured with the aid of fermentation
and enzyme technology, among other
technologies. The group comprises five
business units. DSM Dairy Ingredients
supplies enzymes (e.g. rennets), starter
cultures and preservation systems for
cheese and yogurt, and tests for the
detection of residues of antibiotics. DSM is
one of the biggest suppliers of dairy
ingredients in the world. DSM Savoury
Ingredients is a major supplier of ingredients
for flavorings and flavor enhancers (such
as yeast extracts) used in products such as
soups, instant meals, sauces and savory
snacks. DSM Enzymes produces a large
range of food enzymes for applications
such as baking, fruit processing, brewing
and other alcoholic beverages. DSM
Functional Food Ingredients produces

Strategy
DSM Anti-Infectives strives to actively
maintain its positions via technological
innovation, customer intimacy and
operational excellence.

Business review
Global market demand in penicillin
equivalents grew about 4% in 2005.
Although worldwide production capacity
decreased by 4% in 2005, there is still a
situation of oversupply. This oversupply
forced several producers to step out in
2005, while many others are still suffering
severe financial difficulties. During 2005, the
weak dollar kept pressure on top-line
results, while rising energy prices could not
be passed on in the value chain.

At the end of 2004, DSM Anti-Infectives
announced drastic measures to reduce its
European cost base, to maximize its
technology value extraction and to reduce
its bottom-line exposure to the euro-dollar
exchange rate. The implementation of
these measures progressed well in 2005,
leading to a substantially better result
compared to 2004. Still, with 2005 being a
transition year, major additional improvement
and restructuring steps will have to be
made in 2006.

The clavulanic acid business had a good
year. Substantial cost price improvements
were realized in the Sweden plant. The side
chains activities of DSM Deretil improved
due to the reorganizational measures
taken. DSM Deretil took an important
step by increasing its presence in China
with the initiation of the Shangyu Deretil
Yuntao Joint Venture. Considerable

Annual Report

Review of business
Life Science Products

ingredients for baby food, food supplements
and functional foods such as arachidonic
acid, probiotics and peptides. DSM
Ingredients Development develops and
pre-launches innovative ingredients for
the food industry.

The main production sites are in Seclin
(France, enzyme production), Capua (Italy,
arachidonic acid), Delft (Netherlands, yeast
extracts, natamycin and tests), Belvidere
(USA, arachidonic acid) and Moorebank
(Australia, cultures). The main R&D center is
in Delft (Netherlands).

Strategy
DSM Food Specialties targets market
segments characterized by rapid growth
and seeks to respond to the major trends
in the food industry toward health,
convenience and natural products. The
business group supplies its customer
base with innovative, high-added-value
ingredients that enable them to satisfy
consumer demands in terms of quality,
nutritional value and taste. Under the
supervision of a Monitoring Trustee

appointed by the EU Commission and
the FTC, DSM Food Specialties has
continued to produce and supply feed
enzymes to BASF as part of the dissolution
arrangement for the former alliance with
BASF. Due to the arrangements made,
production will fade out in the course
of 2006.

Business review
The global food ingredients market grew by
about 4% in 2005. DSM Food Specialties
saw its sales grow by around 13%. DSM
Dairy Ingredients’ sales were up on 2004.
Sales volumes of starter cultures showed
strong growth. Sales volumes of rennets
produced by means of fermentation were
also higher than in 2004. Sales volumes of
antibiotic tests were stable, while sales
volumes of preservation systems and
coatings increased. Prices were somewhat
under pressure in the latter segment.

DSM Savoury Ingredients recorded strong
sales volume growth, in particular in the
segment of specialty yeast extracts
including the newly launched product with

a high nucleotide content under the brand
name Maxarome® Select. Early in 2005
the hydrolyzed vegetable protein business
(HVP) and the manufacturing site in
Zaandam (Netherlands) were sold to the
Dutch company Oterap Holding B.V., in line
with the strategy to further focus on high
added-value savory ingredients. Yeast
extracts are produced in Delft (Netherlands).
Investments are being made to build a
dedicated factory for processed flavors
in Shanghai (China).

DSM Food Enzymes’ sales were up on
2005 with volume growth in fruit-processing
enzymes and a good performance in a
newly introduced pectinase enzyme under
the brand name Rapidase® Smart. Sales
volumes of brewing enzymes and baking
enzymes grew, whilst a new enzyme was
successfully introduced on the market
under the brand name Brewers Clarex®.
This enzyme provides brewers with
a method to prevent turbidity in beers.
A new enzyme for improved emulsification
properties in mayonnaise, sauces and
bakery products was launched under the

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

brand name Maxapal®. On 1 January 2005,
a new Enzyme Unit was formed, which
includes the baking enzymes activities from
the DSM Bakery Ingredients
business group.

Thanks to higher sales coupled with
lower costs as a result of streamlining the
organization, DSM Food Specialties’
operating profit was clearly higher than
in 2004.

DSM Functional Food Ingredients saw its
sales increase very sharply as more and
more baby food manufacturers in the USA
are launching new product lines for infant
formula enriched with arachidonic acid
(ARA). DSM Food Specialties is the
exclusive supplier of ARA to Martek, the
company that markets ARA/DHA oil.
Production capacity for ARA was expanded
in 2005 in Belvidere (USA). A new natural
ingredient in the weight-management
category marketed under the trade name
Fabuless® was successfully launched on
the market for fermented milk products. It
contains a special emulsion of natural palm
and oat oil, which are already part of the
normal diet, and uses the body’s natural
appetite control mechanism to reduce
calorie intake. The product has been
developed by Swedish-based Lipid
Technologies Provider AB, and DSM has
the exclusive, worldwide marketing rights
in this most promising application area of
dairy products.

Projects
Various efforts were made to facilitate
strong sales growth and to increase
operational efficiency. The restructuring
project at our enzyme production facility in
Seclin (France) was completed, and a new
chromatography unit was opened which
will secure the highest level of purity of our
dairy enzymes in particular. In the course of
the year all production facilities for yeast and
yeast extracts in Delft (Netherlands) were
audited by the American Institute of Baking
and rated as “excellent”. Various projects
were completed to further improve our
ability to serve our customers in an optimal
way, focusing on Demand and Supply
Chain Management. The USA organization
was streamlined and aligned with the needs
of the market. The organization of DSM
Food Specialties in China was strengthened
in a significant way in order to capture the
growing demand for food ingredients and
to investigate possibilities for local
production and formulation of ingredients.

DSM Ingredients Development was
successful in the development of radically
new ingredients for the (functional) food
industry. The number of new product
launches from the radical innovation
program increased from two in 2004 to four
in 2005, and the business unit expects to
launch up to eight new products in 2006.
In 2005, Maxarome® Select (Savory
Ingredients), Brewers Clarex® (Enzymes),
Maxapal®(Enzymes) and Fabuless®
(Functional Foods) were introduced on
the market by a combined effort of the
Ingredients Development unit and the
marketing and sales organizations. Sales of
the patented peptide PeptoPro® started in
Europe, Japan and the USA and are
gradually picking up. Various producers of
sport and energy drinks have now included
PeptoPro® in their new product lines
targeted at fast recovery after exercise or
endurance during exercise. A promising
development program concerns a product
concept which enables beverage
manufacturers to include the nutritional value
of milk into a beverage without the limitations
of the specific color and taste of milk.

Annual Report 2005

www.dsm.com

Review of business
DSM Nutritional Products

The activities of DSM Nutritional Products are
focused on three sectors: food and feed ingredients
and supplements and personal care. Net sales of
DSM Nutritional Products amount to 24% of DSM's
overall net sales.
‰

x € million
net sales *
operating profit
operating profit plus amortization and depreciation
capital expenditure
capital employed at 31 December
operating profit as % of average capital employed
research and development

workforce at 31 December

* Before elimination of intra-group supplies to other clusters.

2005
1,946
252
376
97
1,830
14.3
80

2004
1,910
202
330
55
1,694
11.5
75

6,119

6,607

Supplies of DSM Nutritional Products
x (cid:96) million

2003

2004

2005

500

1000

1500

2000

Operating profit of DSM Nutritional Products
x (cid:96) million

2004

2005

100

150

200

250

300

Strong performance in challenging
markets

DSM Nutritional Products is the world’s
largest supplier of vitamins, carotenoids
(pigments and anti-oxidants) and other
biochemicals and fine chemicals used in
products for human and animal nutrition
and health and in personal care products.
It has eleven large production sites in seven
countries: Switzerland (Sisseln and Lalden),
France (Village-Neuf), Belgium (Tienen),
Germany (Grenzach), the UK (Dalry), the
USA (Freeport and Belvidere) and China
(two plants in Shanghai and one in Wuxi).
At these sites DSM Nutritional Products
produces its main straight products as well
as formulations. Specific formulation plants
are located in Belvidere, Sisseln and Village-
Neuf. The unit also owns 35 premix plants
for animal nutrition and health and 10
premix plants for human nutrition and
health, where products are made in
response to specific customer needs. R&D
work is concentrated in the region of Basel,
Switzerland, strongly integrated in an
innovation network with the other DSM
R&D campuses in Delft and Geleen
(Netherlands). DSM Nutritional Products
has some 40 sales offices that are active in
over 100 countries.

Annual Report 2005
Annual Report 2005

www.dsm.com
www.dsm.com

42
42

The VITAL project
The VITAL project was continued, as
planned, by defining the strategy and new
organizational outline of DSM Nutritional
Products. In 2004, the focus had been on
improving profits by reducing costs and
on unbundling DSM Nutritional Products
from its former parent company, the Roche
Group, and integrating its systems, people
and culture into DSM. In 2005, the project
on Profitable Growth focused on improving
the quality of profits and creating new
options for growth and developing
innovation management, while the running
improvement programs and the unbundling/
integration efforts were continued. To
capture the full innovation potential, DSM’s
R&D model was introduced in research &
development. In the second half of 2005,
the Innovation Engine was started. The aim
of the Innovation Engine is to bring high
added-value, innovative products to market
faster. It speeds up the selection, funding,
development and testing process for new
products and formulations.

From 2006 onwards, the integration of
DSM Nutritional Products and DSM Food
Specialties in a new Nutrition cluster and
intensified cooperation with external
organizations will allow for new
opportunities for innovative products. In
2005 DSM Nutritional Products defined its
Dual Track strategy to improve and
strengthen existing products and at the
same time fully boost innovation and new
business development. The new strategy
offers business partners continuity as well
as new opportunities to develop and exploit
additional applications, while drawing on
DSM Nutritional Products’ strengths in
R&D, manufacturing and marketing & sales.
To further support the implementation of the
new strategy, the organizational structure
has also been aligned. It is centered around
two operational units allowing for a sharper
focus on the two key industries – Human
Nutrition & Health and Animal Nutrition &
Health – and a new unit, New Business
Development, fostering a broader and more
intense approach to innovation.

Business Review
DSM Nutritional Products strengthened its
position as the leading player in the market
for nutritional ingredients, recording sales of
€ 1.9 billion and an operating profit of more
than € 250 million. Despite the increase in
new product growth, overall sales were
generally stable due to the price pressure
on some carotenoids and mature vitamins,
such as vitamins E and C. Volume growth
compensated for the price erosion at net
sales level. DSM Nutritional Products’
approach of focusing on differentiation in
customer products started to have effects.
Recently launched products performed well
and accounted for some 10% of aggregate
sales, with recently launched forms
contributing about 20%.

Most of the outcomes of the three-stage
VITAL project have been handed over to
the line organization of DSM Nutritional
Products to ensure that the achievements
can be sustained. During the third stage of
the VITAL project the organization focused
on certain strategic issues, among other
things on the concentration of vitamin C
production in Dalry (United Kingdom), and
it was announced that as a consequence
vitamin C production in Belvidere (USA)
would be discontinued.

DSM Nutritional Products is now an integral
part of DSM’s core business and has
contributed to the company’s operating
profit from day one. The VITAL project will
contribute approximately € 200 million in
total by the end of 2006, thus exceeding the
original target of € 150 million. The
contribution mainly results from reduced
staff levels, global efficiency improvements,
lower cost of purchased goods and gains in
the aforementioned program focused on
profitable growth. The planned closure of
the Belvidere bulk vitamin C plant in 2006
and the newly formed alliance with North
China Pharmaceutical Group Corporation
represent steps in the strategic
repositioning.

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

Human Nutrition & Health
The global food market was stable and saw
a continued trend towards functional foods
and dietary supplements. Functional food
concepts are proving increasingly popular
in the nutritional products sector, a trend
that ties in well with DSM Nutritional
Products’ strategy. Due to seasonal effects
in Europe and local trends in the US, sales
in the pharma segment were not as strong
as in 2004. In Human Nutrition & Health,
DSM Nutritional Products strongly
increased sales of new products such as
Lafti®, Optisharp and Teavigo®. Lafti® is a
probiotic addressing gut health and well-
being. Lafti® strains can strengthen the
natural defense in athletes and reduce
the overall severity of gastro-intestinal
disturbances while showing excellent
survival in the human gastro-intestinal tract.
The range of Lafti® probiotic strains forms a
complete package, offering targeted health
benefits for functional foods or dietary
supplements. Globally, probiotics is a rapid
growth segment in the supplement market,
and the range of different Lafti® strains
offers excellent opportunities for growth.
Teavigo®, now globally launched, showed
significant growth. Many new beverages,
food and dietary supplement products
containing Teavigo® are being launched
world-wide. In the second half of 2005,
DSM launched Bonistein®, a high-purity
genistein produced by a patented process.
Genistein is a major health-beneficial
component of soy. Bonistein® is a nature-
identical health ingredient that helps prevent
weakening of the bones.

DSM Nutritional Products launched a new
program focusing on markets such as
Africa, India and China: the Nutrition
Improvement Program (NIP). The Program
will mainly serve the developing markets as
a sustainable business for the future of DSM
and will work in close partnership with
governmental and non-governmental
organizations.

Annual Report 2005

www.dsm.com

Review of business
DSM Nutritional Products

Animal Nutrition & Health
Significant above-average volume growth
and further price decreases affected the
Animal Nutrition & Health business. The
swine business had a good year globally in
2005, experiencing normal market growth.
By contrast, the poultry business, after
recovering in early 2005, was confronted
in the second half of 2005 with the
reappearance of avian flu, which may
have an impact on consumer confidence
in poultry meat, although this has not yet
affected our sales.

In the aquaculture market, the Norwegian
salmon industry was impacted in the first
half of the year by European import tariffs,
affecting salmon farmers’ sales. Salmon
prices remained strong in the second half of
2005, partly due to a tightening of salmon
supplies. The Chilean situation was similar,
with forecast supplies not meeting actual
supplies, mostly due to disease problems in
the freshwater phase resulting in fewer
salmon entering the sea for production.
Although salmon production was flat for
2005 compared to 2004, DSM Nutritional
Products maintained its leadership position
in supplying key products to the
aquaculture industry.

DSM Nutritional Products continued to see
substantial sales growth in new products
for Animal Nutrition and Health. Hy-D®,
used by poultry farmers to improve bone
health and animal performance, was
distributed on a global scale. Feed enzyme
products sold under the brands of
Ronozyme® and Roxazyme® continued
their excellent performance despite
increased competition in various markets.
In particular activities focusing on eubiotics,
products that improve animal performance
by gut flora modulation, enjoyed further
growth. This growth was mainly fueled
by the ban on antibiotic growth promoters,
to be implemented early 2006. DSM
Nutritional Products’ eubiotics portfolio
includes VevoVitall®, Cyclatin and
MicroSource, which all achieved substantial
growth. VevoVitall® is an organic acid that is
used as a replacement of antibiotic growth
promoters in the European, Latin American
and Asian markets. It is a very successful
product offering new ways for pig farmers
to reduce ammonia emissions and improve
performance of pigs. In Europe it is
currently registered for use in growing
and fattening pigs.

Personal Care
This segment saw strong volume growth,
with leading cosmetics manufacturers on
the lookout for active ingredients for skin,
hair and oral care. Parsol®SLX, a new
generation of UV-B filters, was well received
by leading sun care manufacturers. In 2005,
DSM Nutritional Products expanded its
portfolio by introducing three new products,
the two UV-filters Parsol® EHS and HMS
and the skin care active Allantoin. Stay-C®
50, a stable form of vitamin C, made further
progress in the skin care market, particularly
in Asia where it showed exceptional growth.

Projects
In 2005, DSM took various steps to build a
successful future for its Nutritional Products
business and to underline its position as the
world’s leading producer of vitamins for the
food, pharmaceutical and personal care
industries. New product forms were
successfully launched, such as Rovimix® A-
1000 for the animal nutrition market. For the
food and dietary supplements market lutein
CWS/S-TG was launched to expand
DSM’s animal-free ingredients portfolio.
This portfolio already includes animal-free
product forms of beta-carotene, vitamin A,
vitamin E, vitamin D3, ALL-Q® (Coenzyme
Q10) and Optisharp® (zeaxanthin). With this
launch DSM is meeting the growing market
needs and consumer requirements for
animal-free ingredients.

In Dalry (Scotland, UK), DSM Nutritional
Products will implement an extensive
package of measures to optimize its vitamin
C production, leading to considerable cost
reductions and improved supply chain
flexibility. Dalry is one of the last larger
Western plants producing high-quality
vitamin C, which fits in with the increasing
demand for high-quality, traceable product
grades. DSM also reconfirmed its ambition
to secure its leadership position in the field
of vitamin C by a strategic partnership with

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

Directors of DSM Nutritional Products
Chairman

Animal Nutrition & Health
Human Nutrition & Health
Finance & ICT
Research & Development
Human Resource Management
New Business Development
Strategy / VITAL project
Strategic projects

Feike Sijbesma (1959). He combines

this position with his membership of the
DSM Managing Board
Jos Schneiders (1951)
Mauricio Adade (1963)
Geert Mooren (1951)
Manfred Eggersdorfer (1951)
Alexander Schmid-Lossberg (1959)
Krijn Rietveld (1956)
Bruno Müller (1956)
Bob Hartmayer (1952)

the (low-cost) North China Pharmaceutical
Group Corporation Ltd. In Belvidere, USA,
DSM Nutritional Products will invest in an
arachidonic acid production-related facility
and in Grenzach, Germany in an upgrade
and the integration of the last step of vitamin
D3 production. In China, DSM Nutritional
Products opened a new joint laboratory
with the renowned Fudan University in
Shanghai in 2005 to develop new
production processes. Also in China, DSM
Nutritional Products will open
a new state-of-the-art feed premix plant
and start a new project at its citric acid
production site in Wuxi.

VITAL project in 2006
In 2006 DSM Nutritional Products will focus
on the completion of the defined
improvement programs. The main
topics for 2006 are the last steps in
the implementation of performance
improvement plans at the Sisseln, Belvidere
and Dalry sites, the further enhancement of
the plans focused on profitable growth, the
implementation of strategic measures and
the roll out of the new organization. Several
initiatives will be anchored in the already
improved marketing and sales organization,
with redefined work processes and
systems. The integration of the Activity-
Based Costing tool and the hand-over to
line management of the last remaining
measures will be done in parallel with the
implementation of the new organization.
The business aspirations and related R&D
targets for the coming years have been set.
The new organizational model for DSM
Nutritional Products has been defined and a
start has been made on its implementation.
Tracking and tracing of the detailed
programs by the VITAL project office will be
continued throughout 2006. DSM aims
to finalize the VITAL project by the end
of 2006.

Annual Report 2005

Review of business
Performance Materials

The Performance Materials business groups
specialize in technologically sophisticated, high-
quality products such as the superstrong Dyneema®
fiber and the advanced plastic Stanyl®. Net sales of
the cluster amount to 30% of DSM's overall net sales.
‰

x € million
net sales*:
- DSM Elastomers (including DSM Dyneema)
- DSM Engineering Plastics
- DSM Coating Resins
- DSM Composite Resins

total

operating profit
operating profit plus amortization and depreciation
capital expenditure
capital employed at 31 December
operating profit as % of average capital employed
research and development

workforce at 31 December

* Before elimination of intra-group supplies to other clusters.

2005

2004

646
705
698
410

583
624
440
366

2,459

2,013

305
410
667
1,737
19.1
94

165
249
64
988
16.0
78

4,441

3,735

The Performance Materials cluster
comprises the business groups DSM
Elastomers, DSM Engineering Plastics,
DSM Coating Resins and DSM Composite
Resins and the DSM Dyneema business
unit. All of these specialize in the
manufacture of technologically
sophisticated, high-quality products that
are tailored to meet customers’ performance
criteria. The products are used in a wide
variety of end-use markets, each of which
comes with its own particular dynamics.
These include the automotive industry, the
aviation industry, the electrics & electronics
industry, the sports and leisure industries,
the coatings industry and the construction
industry. We are constantly developing new
applications, such as new materials for
electronic components and glass-fiber
cables, plastic components to replace
steel, eco-friendly coatings and new
products for enhancing personal safety.

Supplies of Performance Materials
x (cid:96) million

2001

2002

2003

2004

2005

500

1000

1500

2000

2500

Operating profit of Performance Materials
x (cid:96) million

2004

2005

100

200

300

400

Annual Report 2005

www.dsm.com

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

DSM Elastomers

Profits restored
DSM Elastomers manufactures synthetic
rubbers (EPDM) and thermoplastic
elastomers (TPVs) for use in cars, white
goods, various industrial products and
construction materials, and as motor-oil
additives. The group is the global market
leader in EPDM rubber with a production
capacity of 200,000 tpa and a market share
of around 20%, and the world’s second
supplier of thermoplastic rubber. DSM
Elastomers has production plants in Geleen
(Netherlands), Genk (Belgium), Leominster
(USA) and Triunfo (Brazil).

Strategy
DSM Elastomers works to maintain its
position as the global leader in the EPDM
market by constantly renewing its product
range and cutting costs. Both the closure of
its EPDM sites in Addis (USA) and Chiba
(Japan) in 2004 and improvements in its
plants in Geleen and Triunfo made significant
contributions to the attainment of this goal.
With respect to TPVs the business group is
expanding its production in the field of
consumer products.

Business review
Global EPDM supply and demand were
well balanced in 2005. Demand was strong
in Asia and North America, but relatively
weak in Europe. In line with oil price
developments raw material prices soared
for the second consecutive year. DSM
Elastomers was able to pass on these raw
material price rises to its customers and
slightly improve its margins. Another
important driver for restoring operating
profit was the decrease in fixed costs
resulting from the restructuring programs
the business group had started in 2003
and 2004.

DSM Elastomers substantially expanded
the market targeted by Sarlink®
thermoplastic rubber and its derivatives,
which are used in sealing profiles for cars
and in a range of consumer products.

The investigation into possible restrictive
and/or concerted practices involving a
number of EPDM producers, including DSM,
launched by the European Commission
and the US Department of Justice at the
end of 2002, is still ongoing. DSM is
cooperating fully in this investigation and will
continue to do so for as long as necessary.

The operating profit of the business group
improved very strongly compared with 2004.

Projects
There is a growing interest in the
development of artificial grass pitches.
These provide all-season constant playing
characteristics and allow multiple use forms
of stadiums, for instance for professional
soccer as well as for rock concerts. DSM
has been pioneering developments in this
new application field, which has led to the
development of the materials for the first
professional artificial soccer pitches. For the
Petroleum Additives market a new product
line has been developed with excellent soot
dispersion properties.

DSM Elastomers has an interest in the
development of so-called smart materials.
With the recent commercialization of
amorphous ethylene-propylene
copolymers, grafted with reactive groups to
a high degree, a firm basis has been
created for further product differentiation.
These grafted groups offer myriad
diversification opportunities that can give
rise to significant changes in materials
behavior. DSM will continue to actively
explore such opportunities. The
development of Keltan® EPDM rubbers
based on new catalyst systems is well
under way.

DSM Dyneema

A very good year
Dyneema®, DSM’s high modulus
polyethylene fiber – the strongest fiber in the
world on a weight-for-weight basis – was
invented and developed by DSM and is
used in protective products for the military,
the police, the aircraft industry and ropes,
nets, cut-resistant gloves and garments,
sports goods and medical sutures. DSM
Dyneema has production facilities in
Heerlen (Netherlands), Greenville, North
Carolina (USA) and, in a joint venture with
Toyobo, in Katata and Tsuruga (Japan). The
Dyneema® business is growing strongly

through application development as well as
product innovation. New applications are
being developed in rapid succession, and
the production lines are constantly being
refined and expanded. Over the past few
years, sales of Dyneema® have on average
grown 10% faster than the market for high-
performance fibers. DSM, its customers
and end-users provide a constant supply of
suggestions for new applications. Demand
for light but strong, convenient to use
material continues to show steady rapid
growth, driven by a range of social and
economic factors such as the general
increase in safety awareness, the increasing
level of violence on the streets, the growing
demand for readily manageable materials in
the marine industry and the increase in
leisure time and prosperity.

Strategy
DSM Dyneema is expanding around the
world in selected, high-margin markets
offering high profitability. The unit will
continue to focus on the further
development of ultra-strong polyethylene
fiber and UD technology, in order to further
increase its lead over rival materials and
suppliers.

Business review
2005 was a very successful year. All the
markets for Dyneema® products showed
growth, and the business unit succeeded
in raising its sales in all geographic regions.
Sales growth was particularly strong in
North America, where high military demand
continues to be a main driver. DSM
Dyneema’s operating profit was strongly
up on 2004. The coming year should
see continued growth in all relevant
market segments.

Annual Report 2005

www.dsm.com

Review of business
Performance Materials

Geleen (Netherlands), Genk (Belgium),
Evansville (USA), Jiangyin (China) and Pune
(India). The small facility in Stoney Creek
(Canada) was divested at the end of 2005.

Strategy
DSM Engineering Plastics wants to further
strengthen its leadership position with a
strong focus on performance materials and
specialties. All activities are centered on
creating value for the business group’s
customers and for DSM. Thanks to its
outstanding knowledge of products and
applications, combined with excellent service
levels, the business group is increasingly
able to position itself as a valuable, solutions-
oriented business partner.

Business review
Market growth for engineering plastics
strengthened during the year. Sales
increased in all regions for all major product
lines and in all relevant markets. Asia
showed the strongest growth while the
automotive markets in Europe and USA
demonstrated slow growth. The successful
start-up of the new Akulon® polyamide 6
line in Emmen contributed immediately after
start-up and supported strong growth in the
flexible packaging market.

DSM Engineering Plastics successfully
implemented price increases to cope with
the continuing increase in raw material
prices. For the part of the business that is
based on products manufactured in Europe
for the world market, the adverse impact
from currency exchange rates eased a little
with the relative strengthening of the US
dollar against the euro. The business group
was able to maintain the favorable cost
position built up in previous years.
Successful price increases, volume growth
through innovative new applications and
continued cost control were the main
reasons for the improved operating profit.

Projects
The business group started the construction
of a new compounding site in Jiangyin
(China) that will increase capacity
significantly and will replace the existing
site; the site will start operations early 2006.
DSM Engineering Plastics also started the
engineering for a new Akulon® polyamide 6
plant in China.

The new Stanyl® Superflow polyamide 46
and Arnite® XL PBT products introduced
last year were successful in the market. The
de-bottlenecking of the existing Stanyl plant
led to a much higher than projected
throughput.

Together with leading customers DSM
Engineering Plastics developed a variety of
new applications. Some examples are
Arnitel® TPE-E based crash buffers that
make a strong contribution to the safety of
rail transport of chemical and dangerous
goods, and electronic throttle control gears
with Stanyl® polyamide 46. The market for
airbag canisters developed very favorably
thanks to the increasing numbers of airbags
in automobiles; Akulon® polyamide 6 is the
leading product for this application. Akulon®
XP, a new polyamide 6 product delivering
higher productivity for the flexible packaging
industry, is being received very well.

The American and European organizations
were certified to ISO/TS 16949 during the
year under review. DSM Engineering
Plastics further re-aligned its North
American business and sold the PP-
compound business and associated assets
in Canada.

DSM Coating Resins

Operating profit increased
The DSM Coating Resins business group
consists of three business units: Coating
Resins, Desotech and NeoResins.

DSM Coating Resins
The DSM Coating Resins business unit
specializes in the development, manufacture
and marketing of resins for coating systems.
The unit is one of the global leaders in
powder coating resins, with a market share
of about 25%. These resins are used in
industrial applications for the coating of for
example washing machines, radiators,
façades, car parts and bicycles. In Europe
DSM Coating Resins is a leading supplier
of liquid coating resins. These products
are mainly used in decorative and industrial
coatings. The unit focuses on the
development and production of
environmentally friendly coating resins
systems that show interesting growth in
Europe. DSM Coating Resins has plants in
the Netherlands, Spain, the USA, Germany,
Sweden, China and Taiwan.

Projects
Some setbacks were experienced in
the building of the new Dyneema® Purity
production line in Heerlen, but product
availability and business growth were not
negatively affected. At the beginning of
2005 DSM Dyneema announced that
production capacity in the US would be
expanded in response to continued high
demand. Construction of two new
production lines for Dyneema® fiber and
one for bullet-resistant material started in
the course of 2005. At the end of 2005,
DSM announced that it would make another
investment in a new production line for
Dyneema® fiber in Greenville, North Carolina
(USA). The investment will be substantial,
amounting to several tens of millions of US
dollars, and will bring the total number of
fiber lines for the company to nine, with four
production lines being located at the
Greenville facility. All projects are running
according to schedule. The first expansion
is expected to come on stream in the first
quarter of 2006; the other expansions will
become operational in the second half of
2006 and in 2007.

DSM Engineering Plastics

Clearly higher operating profits
DSM Engineering Plastics is a global player
in polyamides (polyamide 6, polyamide 66
and polyamide 46), polyesters (PBT, PET
and TPE-E), polycarbonate (PC and
PC blends), Ultra-High Molecular Weight
Polyethylene (UHMWPE) and extrudable
adhesive resins. These materials are used
mainly in technical components for the
electrical and electronics, automotive,
engineering and extrusion industries. The
latter industry also includes the market for
flexible packaging materials. With a market
share of about 5%, DSM is one of the world
leaders. DSM is the global market leader in
high-heat polyamide. DSM Engineering
Plastics has production sites in Emmen and

Annual Report 2005

www.dsm.com

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

Strategy
DSM Coating Resins aims to strengthen its
position as one of the market leaders with a
focus on environmentally friendly coating
resins systems and a continued Operational
Excellence drive. Its aim is to reduce costs
in the value chain by maximizing
collaboration with customers and suppliers.

Business review
The DSM Coating Resins business unit’s
powder coatings market showed highly
different growth rates between the regions.
The North American market recovered from
the decline in previous years and showed
moderate growth. The overall European
market showed growth rates at GDP levels,
with double-digit rates for Eastern Europe
and the Middle East. The Far Eastern
market featured a decline of the
Chinese market in the first half of
2005, with good recovery during the
second half of the year and a moderate
growth rate in the rest of Asia. Market
dynamics were determined by the global
overcapacity situation, reflected by severe
price pressure and soaring feedstock
prices. Price increases and, to a lesser
extent, volume growth partially
compensated for the steep increase in raw
material cost increases.

A reduction in volume in can and coil
coating resins was recorded as a correction
to the unexpectedly high growth rate in the
year before. Similar to the powder resins
business, price increases partially
compensated for the steep increase in raw
material costs.

In 2005 the results for liquid coating resins
were below expectation. Especially in
Europe the market was slow. The
increasing raw material costs throughout
the year could be partially passed on to the
market.

In October 2005 DSM Coating Resins
acquired the Chinese resins producer
Syntech. This is an important step that will
help reinforce DSM’s resins portfolio and
speed up the expansion of DSM’s activities
in China. The DSM Coating Resins
business unit’s overall operating profit
showed a strong increase compared
with 2004.

DSM NeoResins
The DSM NeoResins business unit, which
has been part of DSM since 1 February
2005, is a leading global supplier of
innovative waterborne resins, uniquely
suited to the needs of the coatings,
adhesives and graphic arts industries. By
far the greater part of sales is in the area of
coating applications, with the remaining
portion in graphic arts and, to a lesser
extent, adhesives. These waterborne and
other environmentally-friendly technologies
comprise acrylics, urethanes, urethane-
acrylics, vinyl acrylics and other copolymers.
DSM NeoResins focuses on strong
customer relations to develop new products
and technologies with specific performance
goals. The broad portfolio of waterborne,
solvent-borne and solid resins is supported
by the company's ongoing commitment to
quality, service, technical innovation and
operational excellence. DSM NeoResins
markets its products globally and
has manufacturing sites in Waalwijk
(Netherlands), Parets del Valles (Spain),
Wilmington (Massachusetts, USA) and
Frankfort (Indiana, USA).

Strategy
DSM NeoResins’ market approach is
to detect high growth and high margins
in niche applications. DSM NeoResins’
waterborne platform enables it to supply
special product characteristics in a market
that is moving towards environmentally
friendly systems. The main focus for the
business will be on innovation and capturing
growth opportunities in waterborne systems
and geographic growth in North America
and Asia. In order to provide capacity for
the growing market, capacity expansion is
planned in Europe.

Business review
Most of DSM NeoResins’ sales are
generated in Europe (70%) and the USA
(20%). The remainder is mainly realized in
Asia. While the decorative segments in the
USA and Europe were strong, given the
strength of the US housing market and the
upcoming VOC legislation in Europe, the
industrial segments and graphic arts
showed some signs of weakness

Annual Report 2005

www.dsm.com

Review of business
Performance Materials

worldwide. For the longer term, continued
growth of construction and industrial
production will be driving the growth of this
business, along with the migration to eco-
friendly technologies. The upcoming VOC
legislation in 2007 and 2010 will positively
impact on developments in the next few
years.

DSM Desotech
The DSM Desotech business unit is a
leading producer of specialty UV-curable
coatings and resins. These are materials
that cure very rapidly in an environmentally
friendly fashion when exposed to ultraviolet
light. DSM Desotech is the market leader in
the supply of coatings for optical fibers and
inks and matrix resins that are used in fiber
optic cables. The business unit is a co-
market leader in the supply of
stereolithographic resins that are cured by
laser technology for the production of rapid
prototypes for a wide variety of industries. It
is also active in the supply of antireflective
coatings used in the area of LCD and
plasma flat panel displays. DSM Desotech
markets its products globally with main
sales being in the USA, Europe, China,
Japan and Korea. Its headquarters are in
Elgin, Illinois, USA. The plants are located in
Stanley (North Carolina, USA), Hoek van
Holland (Netherlands), and in Shanghai
(China). DSM Desotech also has a 50/50
joint venture with JSR in Japan, which
supplies the Japanese market. Research
and Development is critical to Desotech’s
growth, with main centers being in Elgin
(USA), Geleen (Netherlands) and
Tsukuba (Japan).

Strategy
DSM Desotech’s strategy is to maintain its
leading market share in fiber optics, which
is expected to be a fairly stable business
from a profit point of view. Beyond that,
Desotech will grow its overall revenue and
profit by using its technology base in
stereolithography, flat panel displays and
UV chemistry.

Business Review
The DSM Desotech business unit saw the
fiber optic market grow by 10-15% in 2005
on a global basis. However, price pressures
throughout the chain led to minimal value
increases in the overall business. The bulk
of the growth was in the USA. Activities in
Japan shrank due to a reduction in NTT’s
(Nippon Telegraph and Telephone
Corporation) Fiber to the Home project.
Activities in China also slowed down due to
economic measures instituted by the

Chinese government. The business unit
expects moderate growth in fiber optics
over the next few years.

DSM Desotech’s Somos business, which
supplies stereolithographic resins used for
rapid prototyping, saw its sales grow by
more than 15% in 2005. The business
focuses on new materials that can be used
in extending the application of
stereolithography and will eventually move
towards rapid manufacturing of small
volume part runs. 3D Systems, the market
leader in equipment supply, has become a
distributor of Somos’ resins.

DSM Coating Resins’ overall operating
profit increased very strongly, partly
because of the consolidation of DSM
NeoResins.

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

Projects
The acquisitions in 2004 (HAL) and in 2005
(NeoResins and Syntech) leveraged DSM
Coating Resins’ worldwide presence as
well as its ability to pursue different pockets
of innovation. The product portfolio, route to
market and innovation capabilities have
been substantially strengthened by these
acquisitions.

To integrate the DSM NeoResins business
into the DSM Coating Resins business, an
integration project called Inspire was
started immediately after closing. Inspire
aims to ensure that the benefits of joining
forces are maximized in terms of cost/
purchase savings and to create a joint
platform for profitable growth for the future.
Purchasing savings have already been
captured and the analysis of innovation
areas that leverage the bundling of DSM
and NeoResins expertise and
competences has been finalized.

Good progress was made with the
development and market introduction of an
improved generation of waterborne alkyd
resins. To an increasing degree the
decorative and industrial markets require
waterborne paint with the same qualities
as systems based on organic solvents.

In 2005 the liquid coating resins site in
Hoek van Holland (Netherlands) went
through a major restructuring program.
The objectives of this project – improving
cost effectiveness as well as ensuring full
compliance with the DSM requirements –
were met.

For the DSM Desotech business unit
the main projects are focused on cost
reductions, strengthening the company's
positions in Asia and developing innovative
growth businesses. The Somos business
has been consolidated to the Elgin
headquarters, which brings cost and
synergy advantages.

DSM Composite Resins

Strong improvement
DSM Composite Resins is a globally leading
solutions provider for the composite resins
industry. The business group develops,
produces and markets unsaturated
polyester resins (including vinyl esters and
additives), which are used for the production
of fiber-reinforced plastics or non-reinforced
filled products in end-use applications such
as marine, leisure, building & construction,
automotive and wind turbine blades. The
business group is the European market
leader in unsaturated polyesters (UPE) and
has its own pan-European distributor
(Euroresins). DSM Composite Resins is the
global market leader in sizings and binders,
which are vital functional components that
facilitate the production of glass fiber
reinforcements and enhance their
performance. China is the fastest growing
market for sizings and binders and the
business group is investing in local
production in this country. The business
group has had a presence in China for a
long time via JDR, a 75% owned joint venture
in Nanjing that is active in unsaturated
polyesters and is growing rapidly.

With headquarters in Switzerland, DSM
Composite Resins has production sites
in France, Italy, the Netherlands, Spain,
the UK and China. In addition, Customer
Competence Centers are located in
France, Germany, Italy, the Netherlands,
Scandinavia, Spain and the UK. Besides its
Western European base, DSM Composite
Resins holds positions in Poland, China
and the USA.

Strategy
DSM Composite Resins wants to lead the
industry through dedication and innovation.
The business group aims to effectuate and
strengthen its European leadership by
playing a frontrunner role in the composite
resins industry to compete with aluminium
and steel composites. The group focuses
on cost efficiency and innovation and at the
same time is expanding globally, especially
in China, targeting high-added-value
segments. The Sizings and Binders
business unit is the global expert and
portfolio player in this segment, dedicated
to the glass fiber industry.

Business review
Market developments were mixed in 2005,
leading to different pictures due to the local-
for-local character of the UPE market.
The building and construction market in
the United Kingdom showed some signs
of recession and the automotive market
continued to have difficulties passing on
the increased raw material prices. Marine
continued its strong growth. As in the
previous year, raw material prices remained
high and volatile, but increases were
relatively moderate. Margins consequently
returned to sustainable levels, resulting in
an improvement in profitability. Sizings
and Binders continued to grow strongly,
especially in China, but the unit also faced
higher raw material costs. Growth in the
UPE market in China was somewhat
slower, but DSM strengthened its position
in the specialty segments thanks to a focus
on quality and innovation.

The business group’s operating profit for
2005 showed a strong improvement
compared with 2004.

Projects
In 2005 substantial investments were
made in the business group’s European
production sites to proactively meet the
stricter regulations in the fields of safety and
the environment. DSM Composite Resins
wants to further reinforce its leadership by
investing in sustainability. In 2006 this will be
continued, also in China. For Sizings and
Binders the new production site in China
will start towards the end of 2006, entailing
proximity to DSM Composite Resins’
biggest and fastest growing customers.
The business group will further invest in
innovation and in expanding its presence
in Eastern Europe.

Annual Report 2005

www.dsm.com

Review of business
Industrial Chemicals

Industrial Chemicals comprises the business groups
that produce industrial chemicals such as fiber
intermediates, melamine and fertilizers. The cluster's
share in DSM's net sales is 20%.
‰

x € million
net sales*:
- DSM Fibre Intermediates (including D SM Acrylonitrile)
- DSM Melamine
- DSM Agro
- DSM Energy

total

operating profit
operating profit plus amortization and depreciation
capital expenditure
capital employed at 31 December
operating profit as % of average c apital employed
research and development

workforce at 31 December

* Before elimination of intra-group supplies to other clusters.

2005

2004

1,243
212
370
74

1,127
209
351
60

1,899

1,747

165
246
85
728
23.5
14

120
207
75
673
17.5
16

2,234

2,566

The Industrial Chemicals cluster consists of
DSM Fibre Intermediates, DSM Melamine
and DSM Agro. These business groups
produce materials and chemicals in large-
scale, capital-intensive production facilities.
Essential features of these businesses,
which operate plants in the Netherlands,
Asia and the USA and are thus global in
scope, are strong customer relations (often
geared to the long term), keen cost
awareness and careful planning of any
capacity expansions. DSM Energy is also
part of this cluster.

Our caprolactam and melamine businesses
are among the global leaders in terms of
sales and technology. DSM Agro, our
fertilizer company, is active in Northwestern
Europe. DSM Energy has small but profitable
stakes in various oil and gas fields in the
Dutch part of the Continental Shelf.

Supplies of Industrial Chemicals
x (cid:96) million

2002

2003

2004

2005

500

1000

1500

2000

Operating profit of Industrial Chemicals
x (cid:96) million

2004

2005

100

150

200

Annual Report 2005

www.dsm.com

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

DSM Melamine

Difficult year for successful business
Melamine is a product used in impregnating
resins and adhesive resins for the wood-
processing industry. It boosts the scratch,
moisture and heat resistance of wood-
based products. Melamine can be
combined with softwood from rapidly
growing trees to obtain high-quality panels
that can replace hardwood. One of its main
applications is in laminated flooring, which
is a market that has been expanding rapidly
for several years, particularly in Europe and
China. Melamine is also used in many other
products, such as car paints, durable
plastic tableware, euro bank notes and
flame retardants.

With a market share of about 25%, DSM
Melamine is the global leader in melamine.
The business group is well established, with
production plants on three continents and a
sophisticated technical support system in
place for its customers. It earns more than
half its sales from long-term contracts. DSM
Melamine’s aggregate production capacity
is 240,000 tons per year. The new plant in
Geleen (Netherlands), which is based on
advanced SLP technology, is not yet
producing at capacity, but is expected to
reach its capacity level in 2006.

DSM Fibre Intermediates

Further profit improvement
DSM Fibre Intermediates produces
caprolactam and acrylonitrile, which are raw
materials for synthetic fibers and plastics.
Caprolactam is the raw material for nylon 6
(also called polyamide 6). Nylon 6 is a
versatile material, which in the form of fibers
is used in sports and leisure clothes, military
equipment, and also in tires and carpets. It
is increasingly used as a high-performance
construction material in, for example, the
electronics and automotive industries, in
packaging materials and in medical
applications. Nylon 6 has reached the
mature phase of its life cycle, where market
demand and selling prices are strongly
influenced by economic cycles.

DSM Fibre Intermediates has caprolactam
plants in the Netherlands, the USA and
China, with a total capacity of more than
500,000 tons per year. This makes it the
largest merchant producer in the world,
with a market share of 15%. In addition, the
business group produces about one million
tons of fertilizer (ammonium sulfate) per year
as a co-product.

Acrylonitrile is a raw material used in textile
fibers, ABS plastics, latex rubber and water
purification products. The business group’s
acrylonitrile production capacity is 235,000
tons per year. With a market share of 25%,
DSM is a major player in the merchant
acrylonitrile market in Europe.

DSM Fibre Intermediates also produces
about 25,000 tons per year of sodium
cyanide, which is used in detergents, in
water purification products and in the
synthesis of vitamins and antibiotics.

Strategy
DSM Fibre Intermediates’ distinguishing
characteristics are its process technology,
reliability and service. The business group
aims to exploit its global cost and
technology leadership position in
caprolactam while growing its position in
China parallel to a further strengthening in
Europe and North America. For acrylonitrile,
DSM Fibre Intermediates aims to
strengthen its manufacturing base to
maintain its solid position in Europe.

Business review
Global demand for caprolactam grew in
2005 compared with 2004. Prices were on
average higher than in 2004 as demand
was strong even in the face of high raw
material prices. Energy-related raw material
prices (e.g. ammonia prices) remained
volatile and high relative to historical norms
but declined slightly compared to 2004.
Natural gas prices in the USA skyrocketed
in the second half of 2005. Margins were on
average higher than in 2004, helped by
sustained high selling prices and the effects
of cost control measures.

Demand for acrylonitrile was comparable to
2004. The steady rise in raw material prices,
especially for propylene, could be recouped
with higher selling prices.

DSM Fibre Intermediates closed the year
2005 with a higher profit than in the
previous year thanks to higher margins.

Projects
The capacity of DSM Fibre Intermediates’
caprolactam plant in Nanjing (China) was
expanded to 140,000 tons per year on
the basis of DSM’s HPOPlus ® technology,
during a shutdown of the plant from May
until September. The plant will reach its
new capacity level in 2006. The expansion
will make the business group the leading
supplier in the rapidly growing Chinese
market. DSM Fibre Intermediates is planning
an additional expansion to support this
market growth. It is studying the feasibility
of expanding the capacity of its acrylonitrile
plant in Geleen (Netherlands) by 40,000 tons
per year.

Annual Report 2005

www.dsm.com

Review of business
Industrial Chemicals

Strategy
DSM Melamine’s objective is to further
strengthen its leading position in a market
that is growing at an average rate of 6-7%
per annum. From a demand point of view,
the long-term outlook is reasonably good
due to the growing scarcity of hardwood.
Due to the high price of natural gas, the
prices of raw materials and auxiliary
materials for the production of melamine are
at a structurally higher level than in the past.
There is an ongoing need to increase the
scale of operations still further and to gain
access to low-cost raw materials, in order
to achieve the necessary further reduction
in costs. Major customers expect their
suppliers to provide them with products
and support services all over the world. The
melamine industry is therefore likely to see a
restructuring.

Business review
Demand for melamine grew by 2% in 2005.
Following the exceptional growth in 2004, in
the first half of 2005 the business group saw
customers depleting their stocks. China
was once again the center of growth in
2005. DSM has developed formulations for
low-formaldehyde-emission resins.
Together with customers it has successfully
devised new applications, for example in
OSB (Oriented Strand Board) panels and
flame retardants. Furthermore, formulations
have been developed that give resins a
longer shelf life and thus increase the
geographical reach of a resins plant. In
2005 the prices of natural gas and
ammonia in the USA reached record highs,
due in part to the hurricanes. In line with
this, the AMEL plant, a 50/50 production
joint venture with Cytec, saw its production
costs increase significantly. Given the price
of melamine on the world market, DSM’s
production operations in the USA were
loss-making.

In Europe and Asia, too, the costs of raw
materials and auxiliaries increased very
strongly. Melamine prices did not increase
until the fourth quarter. As a result, margins
were considerably lower than in previous
years. The 2005 operating result was
slightly positive.

Projects
Mid-2005 DSM announced to Cytec that
it would pull out of the AMEL joint venture
with effect from August 2007 at the latest.
DSM will take timely measures to ensure
continuity of supply to its American
customers.

DSM intends to implement major capacity
expansions in response to market growth in
Asia and the need for a low-cost supply of
the markets in the USA. Negotiations on a
new 120,000 metric tons/year plant, based
on DSM’s proprietary gas phase know-
how, are progressing well. The plant is
expected to come on stream at the end
of 2008.

DSM Agro

Once again a better performance
DSM Agro is a producer of ammonia and
high nitrogen fertilizers for grasslands and
agricultural crops, which it supplies mainly
to agricultural wholesalers in Western
Europe. DSM Agro is the market leader in
the Netherlands and ranks among the
market leaders in Germany, France and
Belgium. It is the number 2 supplier of
calcium ammonium nitrate (CAN) and
ammonium sulfate (AS) in Western Europe.
Its fertilizer production facilities are located
in Geleen and IJmuiden (Netherlands). DSM
Agro operates world-scale ammonia plants
in Geleen.

Strategy
DSM Agro’s strategy is to maintain a
profitable position in Western Europe. On
top of this, DSM Agro makes an additional
contribution to DSM’s cash flow by
providing DSM’s production facilities at the
Geleen site with a sustainable and secure
supply of raw materials and auxiliaries at the
lowest possible cost. DSM Agro also
supplies these raw materials (such as
ammonia, nitric acid and carbon dioxide) to
third parties in Europe.

Business review
The year 2004 had been characterized by
a balanced market with good returns, but
in 2005 the fertilizer market was relatively
tight. Following a hesitant start in the first
quarter, the situation developed favorably
in the course of the year. Bad farming
conditions led to weak demand in Western
Europe, but this turned around in the second
quarter as weather conditions improved.
Backed by globally high urea and ammonia
prices – resulting from high gas prices and
a healthy ammonia balance – at the end of
the first half of 2005 healthy fertilizer prices
were recorded. This situation continued in
the second half of the year with the fertilizer
balance becoming very tight and customers
rushing for materials, leading to record
price increases towards the end of the year.
These developments helped DSM Agro
achieve an even better performance than
in the already strong 2004.

Annual Report 2005

www.dsm.com

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

The production decline is due to the fact
that most fields in the portfolio are mature
and their production capacity is decreasing
due to pressure decline and increasing
water-cut. The new Q1-b field, started up
in 2004, contributed nearly 50% to the
group’s overall production.

The remaining reserves at the end of the
year in the producing fields were about nine
million bbls of oil equivalent, the same as
the year before. The discovery of the new
G14 gas fields compensated for the
reduction in reserves resulting from the
production of two million bbls in 2005.

In spite of the production decline the
business group’s operating profit increased
very strongly compared to 2004. This was
due to the increased oil price. The average
Brent price in 2005 was $ 54 per barrel,
compared to $ 38 per barrel in 2004.

Projects
DSM Agro is well underway with on-line-
ordering via webshop and business-to-
business connectivity in 2005. These
activities were expanded further in 2005;
almost 50% of fertilizer turnover is now
e-enabled. The facilities in IJmuiden have
been upgraded to ensure a larger volume
and broader portfolio of fertilizer specialties.
The Copernicus project in Geleen and
Operational Excellence programs in
IJmuiden led to substantial cost reductions
at both sites in 2005, and will also further
improve DSM Agro’s competitive position
in 2006.

DSM Energy

Very strong profit increase
DSM Energy participates in the exploration
and production of oil and gas on the Dutch
Continental Shelf. The business group is
also involved in the transportation of oil and
gas through its ownership of pipelines on
the Shelf. DSM usually participates as non-
operator with a stake of up to 25% in the oil
and gas joint ventures. At year-end, the
business group had a share in nineteen
producing oil and gas fields and participated
in four gas field developments. All fields are
located in fifteen production licenses.

Strategy
DSM Energy’s strategic mission is to
maximize cash flow by minimizing cost and
maximizing production in the existing
licenses.

Business review
In 2005 a gas discovery was made
in offshore block G14. The fast-track
development decision for this field was taken
at the end of the year. The development of
two other new fields in the same block was
completed and production started up in
November 2005. The production license
for the A/B blocks, containing six shallow
gas accumulations, was granted. The
development of three of these reservoirs
started in 2005. Total production of the
group decreased from 2.3 million bbls of oil
equivalent in 2004 to 2.0 million bbls in 2005.

Annual Report 2005

www.dsm.com

Review of business
Other Activities

DSM reports on a number of activities that have been
grouped under Other activities. Their share in DSM's
overall net sales is 6%.

‰

x € million
net sales*

operating profit
operating profit plus amortization and depreciation
capital expenditure

workforce at 31 December

* Before elimination of intra-group supplies to other clusters.

2005
498

-49
-3
26

2004
485

-20
24
26

2,787

2,953

Other activities includes the DSM Venturing
& Business Development business group,
Noordgastransport and a number of other
activities such as DSM Industrial Services,
DSM Research, DSM Insurances and part
of the costs of corporate activities and non-
core activities that are to be disposed of or
reduced in the future. Due to their very
nature, these activities can be subject to
business fluctuations and will normally have
a negative operating result.

Interests in associates

The main activity under this heading is Methanor VoF (30% DSM). Methanor, a producer
of methanol, turned in a reasonable performance in the first half of 2005. In the second
half, oil and gas prices skyrocketed while global methanol prices remained stable. As a
consequence, the company was barely able to cover variable costs and during the last
quarter of 2005 it incurred significant losses. One of the two lines was taken out of
operation and the second one ran at bare minimum capacity to fulfill contractual
commitments. 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 2005

www.dsm.com

Section 2 Review of business

Life Science Products
DSM Nutritional Products
Performance Materials
Industrial Chemicals
Other Activities

Stamicarbon

Stamicarbon had a successful and
challenging year. It continued to be the
world’s leading urea licensor with a market
share of approximately 70%. In 2005
Stamicarbon granted a license for a grass-
roots urea plant in Egypt and for a large
revamp project in China. Furthermore, it
started broadening its scope as the DSM
Licensing Center. Stamicarbon uses its
long-standing experience to professionalize
DSM’s licensing-out and licensing-in
activities and to create more value from
intellectual property. These activities are
instrumental to boosting DSM’s innovation
process.

EdeA

EdeA VoF owns, operates and maintains
most of the production and distribution
facilities for utilities (i.e. steam, power and
water) at the Chemelot site in Geleen
(Netherlands). EdeA VoF is a joint venture
with Essent, an energy production and
distribution company in which DSM’s stake
is 50%.

Heerlen, 8 February 2006

The Managing Board
Peter Elverding, chairman
Jan Zuidam, deputy chairman
Henk van Dalen
Feike Sijbesma
Chris Goppelsroeder

Start-ups
The business group’s portfolio comprises
the following start-ups: Micabs® (laser
marking), Hybrane® (highly branched
polyester amides, used in for example
oil field chemicals and cosmetics) and
Premi®Test (for rapid detection of antibiotic
residues in meat, fish, eggs, urine and
blood). These businesses made significant
progress and established stronger
market positions.

Grown-ups
DSM Venturing & Business Development
also manages a number of grown-ups:
DSM Solutech (producer of ultra-thin but
very strong Solupor® film which is used in
for example fuel cells and drug delivery
systems) and SBR (Styrene Butadiene
Rubber). The latter was sold in 2005
because it no longer fitted in DSM’s
portfolio.

Noordgastransport

Noordgastransport (NGT) transports gas
produced offshore through a system of
pipelines from gas fields in the North Sea to
a processing plant in Uithuizen in the north
of the Netherlands. Here, the gas is treated
so that it matches customers’ specifications,
before being delivered to these customers.

DSM Industrial Services

DSM Industrial Services consists of various
units. Some services are provided for the
Geleen site (Netherlands), others are
targeted at DSM organizations all over the
world. These services include technological
consultancy, expertise in energy and
auxiliary materials, the supply of utilities,
human resources and the management of
the Chemelot site in Geleen. The Copernicus
project, aimed at re-organizing this activity,
was completed in 2005. Manufacturing-
related services have been regrouped into
the new DSM Manufacturing Center (DMC).
The savings objective of Copernicus, € 50
million on an annual basis, is expected to be
achieved in 2006.

DSM Venturing & Business
Development

DSM Venturing & Business Development
participates in external start-up companies
(Venturing) and initiates small businesses
that gradually develop into grown-up
businesses (Business Development).

Strategy
DSM Venturing & Business Development is
on a constant quest for innovative
businesses or technologies in the fields of
life science products (nutritional products,
pharmaceuticals) and performance
materials.

Venturing
DSM Venturing explores new markets and
technologies to strengthen DSM’s activities
and product portfolio. DSM Venturing plays
an important part in DSM’s open innovation
policy and invests in activities that are of
immediate or potential relevance to DSM’s
business groups and their current or future
markets. In 2005 DSM Venturing added
Oryxe Energy (fuel additives) to its portfolio,
which comprises ten direct investments.
Speedel (drug development), in which DSM
Venturing invested in 2003, listed its shares
on the Swiss Stock Exchange. DSM's
participation in Sciona (genetic tests for
personalized health and wellness advice
with applications in nutrition, sports and skin
care), which took place in 2004, signaled
DSM’s first steps in the field of personalized
nutrition. This is one of the areas DSM will
focus its innovation efforts on in the coming
years. DSM Venturing is also involved in a
number of venture capital funds.

Business development
Activities in which DSM Venturing &
Business Development was involved in
2005 included the development of a liquid
for a new generation of computer-chip-
manufacturing equipment and PictoClear™,
an anti-reflective coating system based on
a nano-structured surface. In addition,
DSM Medical Coatings was launched.
This entity develops and markets innovative
photo-curable polymer coatings for medical
devices. DSM Venturing & Business
Development also initiated a specialty
packaging project and developed a number
of bio-process business opportunities. Most
of these activities will be further developed
in the newly created Emerging Business
Areas, as part of DSM’s Vision 2010 strategy.

Annual Report 2005

www.dsm.com

Report by the Supervisory Board of Directors to the shareholders

There were several changes in the
composition of the Supervisory Board
during the year under review. Mr Sosa
resigned from the Supervisory Board on
6 April 2005 at his own initiative because
the intercontinental travels related to his
Board membership were increasingly
becoming a burden to him. The Supervisory
Board is grateful to Mr Sosa for his
commitment to the company during his
five-year membership and his constructive
and valuable contribution to the Board’s
work. According to the rotation scheme it
was Mr Müller’s turn to resign. He was
reappointed by the Annual General Meeting
on 6 April 2005 on the understanding that –
in compliance with the Dutch Corporate
Governance Code – he will step down at
the Annual General Meeting in 2007, as he
will by then have served the maximum term
of twelve years on the Supervisory Board.
Mr Sonder and Mr Hochuli were appointed
as Supervisory Board members by the
Annual General Meeting on 6 April 2005.

On 1 April 2005 Mr Dopper stepped down
as a member of the Managing Board. The
Supervisory Board would like to express its
sincere appreciation for all that Mr Dopper
did for the company during the many years
he worked for DSM, of which almost six
were served on the Managing Board. The
resulting vacancy on the Managing Board
was filled by the appointment by the
Annual General Meeting on 6 April 2005
of Mr Goppelsroeder with effect from
the same date. In his previous position
Mr Goppelsroeder had been responsible
for DSM Nutritional Products’ North
American business and, as Project Director
of the VITAL project, had supervised the
integration of the acquired Roche Vitamins
& Fine Chemicals business into DSM. For
personal reasons, Mr Goppelsroeder has
decided to relinquish his position with effect
from 1 April 2006. The Supervisory Board
wishes to express its appreciation for the
contribution he made to the successful
integration of the former Roche business
within DSM and for his commitment to
DSM during his period of Managing
Board membership.

After having worked for DSM 29 years, of
which six were served on the Managing
Board, Mr Van Dalen has decided to pursue
his career as Chief Financial Officer of the
Dutch express, logistics and postal services
group TNT with effect from 1 April 2006. The
Supervisory Board would like to express its
sincere appreciation for all that Mr Van
Dalen has done for the company, especially
for his key role in the transformation process
of DSM, both during the execution of Vision
2005 over the past five years and in the
establishment of DSM’s new strategic
direction as outlined in the Vision 2010 –
Building on Strengths program.

The Supervisory Board held six meetings
in the presence of the Managing Board
during the year under review. Each of
these meetings was preceded by a private
Supervisory Board meeting. The Supervisory
Board also devoted a separate meeting to
its profile, composition and functioning.
The composition and performance of the
Managing Board were also discussed at
the same meeting. The meeting concluded
that all members of the Supervisory Board
were independent, as defined by the Dutch
Corporate Governance Code, and that
the competences of its individual members
were in aggregate in line with the Board’s
profile. Virtually all Supervisory Board
meetings in 2005 were attended by all its
members. One of the meetings was held
in China; on this occasion the Supervisory
Board visited several DSM sites (in Beijing,
Nanjing, Wuxi and Shanghai) and had
sessions on the Chinese economic,
financial, political and business environment.

The composition of the Audit Committee
changed in 2005. Mr Van Woudenberg
stepped down as member of the Audit
Committee and was succeeded by
Mr Herkströter. The Audit Committee, thus
consisting of Messrs Bodt (chairman),
Müller and Herkströter, met three times in
2005. The external auditor was in
attendance at these meetings, and at most
meetings the internal – operational – auditor
was present as well.

The main topics of discussion during the
Audit Committee meeting held in February
were the adoption of the group’s financial
statements, the external auditors’
comments and their assessment of DSM’s
annual accounts and internal control
systems. In addition, various aspects
relating to the conversion to IFRS were
discussed. The meeting concluded that the
external auditors were independent of
DSM. The main topics discussed during the
meeting held in June were the work of the
Corporate Operational Audit department,
some IFRS technicalities, Directors’ &
Officers’ liability and the status of the True
Blue project concerning the further
upgrading of the internal control and risk
management system. The possibility of a
stock split was also discussed. The main
agenda items during the Committee’s
December meeting were the provisions and
impairments for 2005, an interim report by
the external auditor and the Corporate
Operational Audit plan for 2006.
Furthermore the committee was informed
about DSM’s risk management system.

The composition of the Nomination and
Remuneration Committee also changed.
Mr Kist was appointed as member of
this Committee. He succeeded Mr Bodt.
The Committee, thus consisting of Messrs
Herkströter (chairman), Van Woudenberg
and Kist, met five times in 2005.
The Committee’s activities regarding
remuneration are described in detail on
page 64 (in the chapter on remuneration
policy). The Committee made suggestions
for dealing with future changes in the
composition of the Supervisory Board.
The Committee made a recommendation
concerning the remuneration of members of
the Managing Board. This recommendation
was adopted by the Supervisory Board.
Information on the group’s remuneration
policy is to be found on page 62 of this
annual report.

Annual Report 2005

www.dsm.com

58
58

Report by the Supervisory Board of Directors
to the shareholders

The Supervisory Board and the Managing
Board discussed company matters on a
regular basis during the year under review.
The Supervisory Board discussed and
approved the Capital Expenditure and
Financing Plan for 2005. Approval was
given for the refinancing of the existing bond
maturing at year-end 2005. The financial
results recorded by the various company
units and developments at these units
were discussed at every meeting. Special
attention was paid to those units that were
not performing well or whose future
prospects were less bright. Various meetings
included a discussion of the progress made
in implementing the corporate strategy
adopted in 2000, as set out in Vision 2005:
Focus and Value. Furthermore the
Supervisory Board held in-depth discussions
with the Managing Board on the new
strategy program for the next five years.
The Board approved the new strategy
program, which has been named Vision
2010 – Building on Strengths, focusing on
accelerating profitable and innovative growth
of DSM’s specialties portfolio. The Board
supports the ambitious targets set and will
see to the implementation of this strategy.

The Supervisory Board monitored the
progress of the transformation and
integration process at DSM Nutritional
Products (formerly Roche’s Vitamins & Fine
Chemicals Division, which DSM acquired in
2003) and a similar program for the
integration of the NeoResins business that
was acquired in early 2005. The Supervisory
Board supported the continuation of
the collaboration with North China
Pharmaceutical Group Corporation (NCPC)
in Shijlazhuang, China, on the formation
of a strategic alliance and the possibility of
forming joint ventures for the production
of vitamins and antibiotics. The Supervisory
Board approved the sale of DSM Bakery
Ingredients (excluding Baking Enzymes)
and the share in the South African joint
venture Rymco. The Board also approved
the divestment of the styrene-butadiene-
rubber business and the divestment of the
Chilean DSM Minera iodine business.

The Supervisory Board approved the
acquisition of coating resins producer
Syntech, located in the Guangdong area
(China). The Board also approved two major
investment projects in Greenville (North
Carolina, USA) for building additional
capacity for the production of
Dyneema® fibers.

The Supervisory Board gave its approval
for the Heureka project regarding major
restructuring measures at the Linz (Austria)
site. The Board agreed with the asset
streamlining within the DSM Pharmaceutical
Products business group, leading to the
closure of the South Haven (USA) site in
2007 and the mothballing of the Montreal
(Canada) site.

The Supervisory Board approved the
replacement of two existing stand-by credit
facilities by one new facility.

The Supervisory Board agreed with a
proposal that was to be presented to an
extra General Meeting of Shareholders for
amending the articles of association in
connection with a two-for-one share split.

The Supervisory Board discussed
the dividend policy in relation to the
implementation of IFRS and approved the
continuation of the existing policy. The
Supervisory Board approved the interim
dividend to be paid for 2005 and the
proposal to be made to the Annual General
Meeting regarding the final dividend to be
paid out for 2005.

As in previous years, the Supervisory
Board invited managers from a number
of DSM business groups and corporate
staff departments to its meetings, to present
relevant developments in their units
in person.

Discussions were held with the external
auditor, Ernst & Young Accountants, about
the financial statements and the financial
reports for 2005. The Report by the
Managing Board and the financial
statements for 2005 were submitted to the
Supervisory Board by the Managing Board,
in accordance with the provisions of Article
30 of the Articles of Association, and
subsequently approved by the Supervisory
Board in its meeting on 8 February 2006.

The financial statements were audited by
Ernst & Young Accountants, who issued
an unqualified opinion (see page 133 of
this report).

We submit the financial statements to the
Annual General Meeting of Shareholders,
and propose that the shareholders adopt
them and discharge the Managing Board
from all liability in respect of its managerial
activities and the Supervisory Board from all
liability in respect of its supervision of the
Managing Board. The profit appropriation
as approved by the Supervisory Board is
presented on page 134 of this report.

In 2005 DSM achieved an operating profit
which considerably surpassed the result of
the previous years, and also succeeded in
improving its safety, environmental and
health performance. DSM has achieved
almost all of the strategic goals set out in
Vision 2005: Focus and Value and has
successfully concluded the Group’s
transformation into a specialty company,
realizing more stable and higher earnings.
This strong foundation will enable the
company to embark on the Vision 2010 –
Building on Strengths program with
confidence. The Supervisory Board wishes
to express its sincere appreciation for the
company’s performance and would like to
thank the Managing Board and all
employees for all the good work done.

Heerlen, 8 February 2006

The Supervisory Board
Cor Herkströter, chairman
Henk Bodt, deputy chairman
Pierre Hochuli
Ewald Kist
Okko Müller
Claudio Sonder
Cees van Woudenberg

Annual Report 2005

www.dsm.com

Corporate Organization

Supervisory Board

Cor A. Herkströter (1937, m), Chairman
First appointed: 2000. End of current
term: 2008.
Position: retired; last position held: President
of Koninklijke Nederlandsche Petroleum
Maatschappij N.V. and Chairman of the
Committee of Managing Directors of
Royal Dutch/Shell Group.
Nationality: Dutch.
Supervisory directorships and other
positions held: chairman of the Supervisory
Board of the ING Group, chairman of the
Advisory Committee on the Listing and
Issuing Rules of Euronext Amsterdam N.V.,
trustee of the International Accounting
Standards Committee Foundation (IASCF),
professor of International Management at
the University of Amsterdam, chairman of
the Social Advisory Council of the
Tinbergen Institute, member of the Advisory
Council of Robert Bosch.

Henk Bodt (1938, m), Deputy Chairman
First appointed: 1996. End of current
term: 2008.
Position: retired; last position held:
Executive Vice President of Philips
Electronics N.V.
Nationality: Dutch.
Supervisory directorships and other
positions held: member of the Supervisory
Boards of ASM Lithography N.V., Neopost
SA and Delft Instruments N.V.

Pierre Hochuli (1947, m)
First appointed: 2005. End of current
term: 2009
Position: Chairman of the Board of
Directors of Devgen N.V., chairman of the
Executive Committee and member of the
Board of Directors of Unibioscreen S.A. and
member of the Board of Directors of
Oncomethylome S.A.
Nationality: Swiss.
Supervisory directorships and other
positions held: Venture Partner of
Polytechnos Venture-Partners GmbH.

Managing Board

Peter A. Elverding (1948, m), Chairman
Position: chairman of DSM’s Managing
Board since July 1999; member of the
Managing Board since October 1995.
Nationality: Dutch.
Supervisory directorships and other
positions held: president of the European
Chemical Industry Council (CEFIC),
member of the Board of the American
Chemical Council (ACC), member of the
Supervisory Board of N.V. Nederlandse
Gasunie and chairman of the Committee of
Delegate Members of the Supervisory
Board of N.V. Nederlandse Gasunie till 1
January 2006, vice-chairman of the
Supervisory Board of De Nederlandsche
Bank N.V., member of the Supervisory
Board of VNU N.V., member of the General
Council of the Confederation of Netherlands
Industry and Employers (VNO-NCW),
chairman of the management committee of
Stichting Management Studies till January
2006; member of the Supervisory Board of
the University of Maastricht and the
Transnational University of Limburg.
e-mail: peter.elverding@dsm.com

Jan Zuidam (1948, m), Deputy Chairman
Position: deputy chairman of DSM’s
Managing Board since January 2001;
member of the Managing Board since
January 1998.
Nationality: Dutch.
Supervisory directorships and other
positions held: member of the Supervisory
Board and the Committee of Delegate
Members of the Supervisory Board of N.V.
Nederlandse Gasunie (till 1 January 2006),
member of the Supervisory Board of
Gamma Holding N.V., vice-chairman of the
Dutch Chemical Industry Association
(VNCI), chairman of the Supervisory Board
of the ORBIS medicare group, chairman of
the Netherlands Forum for Technology and
Science; member of the Supervisory Board
of the Bonnefanten Museum in Maastricht
(Netherlands), chairman of the Technology
Committee of the Confederation of
Netherlands Industry and Employers (VNO-
NCW).
e-mail: jan.zuidam@dsm.com

Ewald Kist (1944, m)
First appointed: 2004. End of current
term: 2008.
Position: retired; last position held:
Chairman of the Managing Board of the
ING Group.
Nationality: Dutch.
Supervisory directorships and other
positions held: member of the Supervisory
Boards of De Nederlandsche Bank N.V.,
Philips Electronics N.V. and Moody’s
Investor Services, member of the Board of
Governors of the Peace Palace in The
Hague (Netherlands).

Okko Müller (1936, m)
First appointed: 1994. End of current
term: 2007.
Position: retired; last position held: member
of the Managing Boards of Unilever N.V.
and Unilever PLC.
Nationality: German.
Supervisory directorships and other
positions held: Chairman of the Supervisory
Board of Unilever Deutschland Holding
GmbH (till 9 December 2005).

Claudio Sonder (1942, m)
First appointed: 2005. End of current
term: 2009.
Position: retired; last position held:
Chairman of the Managing Board of
Celanese
Nationality: Brazilian and German.
Supervisory directorships and other
positions held: member of the Supervisory
Boards of Companhia Suzano de Papel e
Celulose S.A. (Brazil), Suzano Petroquimica
S.A. (Brazil), RBS-Media Group (Brazil),
Cyrela Brazil Reatty S.A. (Brazil), Hospital
Albert Einstein (Brazil) and member of the
Board of the Ibero-America Association,
Hamburg (Germany).

Cees Van Woudenberg (1948, m)
First appointed: 1998. End of current
term: 2006.
Position: member of the Executive
Committee of Air France.
Nationality: Dutch.
Supervisory directorships and other
positions held: member of the Supervisory
Boards of Transavia CV, Mercurius Group
Wormerveer B.V. and Coöperatieve
Vereniging Verenigde Bloemenveiling
Aalsmeer B.A., member of the management
committee of the Confederation of
Netherlands Industry and Employers (VNO-
NCW); chairman of the Dutch employers’
association AWVN.

Annual Report 2005

www.dsm.com

Corporate organization

Other corporate officers
(as at 31 December 2005)

Directors of corporate departments
and services

Corporate Secretary
Paul Fuchs (1946)

Directors of business groups

DSM Fine Chemicals
Henk Numan (1949)
DSM Pharmaceutical Products
Leendert Staal (1953)
DSM Anti-Infectives
Nico Gerardu (1951)
DSM Food Specialties
Rob van Leen (1957)
DSM Elastomers
Ben van Kooten (1951)
DSM Engineering Plastics
Jos Goessens (1951)
DSM Coating Resins
Don Verstegen (1944)
DSM Composite Resins
Jan Paul de Vries (1958)
DSM Fibre Intermediates
Bill Price (1944)
DSM Melamine
Hans Dijkman (1948)
DSM Agro
Renso Zwiers (1955)
DSM Energy
Frank Choufoer (1951)
DSM Venturing & Business Development
Henk Numan (1949)

Finance & Economics
Arnold Gratama van Andel (1946)
Human Resources
Ben van Dijk (1951)
Planning & Development
Hein Schreuder (1951)
Chief Innovation Officer (as of 01/01/2006)
Rob van Leen (1957)
Safety, Health, Environment &
Manufacturing
John Prooi (1946)
DSM Nederland B.V. /
DSM Industrial Services
Just Fransen van de Putte (1943)
Chief Information Officer
Jo van den Hanenberg (1947)
Communications
Bernard van Schaik (1951)
President DSM China
Stefan Sommer (1959)
Chief Purchasing Officer
Ton Trommelen (1950)
Legal Affairs
Pieter de Haan (1954)
Operational Audit
Roelof Mulder (1946)
Strategic Projects
Hans van Suijdam (1950)
Strategic Projects
Frans Pistorius (1948)

Henk Van Dalen (1952, m)
Position: member of DSM’s Managing
Board since January 2000.
Nationality: Dutch.
Supervisory directorships and other
positions held: member of the Supervisory
Board of Macintosh Retail Group N.V. and
NIB Capital Group, member of the
Supervisory Board of Stichting Verpakking
en Milieu Pact (SVM) (on behalf of the Dutch
polymer sector), board member of the
Foundation for Responsible
Entrepreneurship (SVA), member of the
Board of Advisors of AIESEC Nederland,
member of ‘Ambassadeursnetwerk’, a
council set up by the Dutch government to
promote women’s participation in
governance and leadership, member of the
Advisory Council of ADL Benelux.
e-mail: henk.dalen-van@dsm.com

Feike Sijbesma (1959, m)
Position: member of DSM’s Managing
Board since July 2000.
Nationality: Dutch.
Supervisory directorships and other
positions held: board member of EuropaBio
(European Association for Biotech
Industries), board member of BIO
(Biotechnology Industry Organization,
USA), board member of the Dutch Top
Institute for Food Sciences WCFS
(Wageningen Centre for Food Sciences –
WCFS), member of the Supervisory Board
of Utrecht University and member of the
Supervisory Board of the Dutch Genomics
Initiative, board member of DuVo (Dutch
Food Chain Sustainability Foundation) and
board member of SGCI (Swiss Society of
Chemical Industry), member of the Advisory
Board of RSM Erasmus University and
member of the Advisory Board of ECP.NL.
e-mail: feike.sijbesma@dsm.com

Chris Goppelsroeder (1959, m)
Position: member of DSM’s Managing
Board since April 2005.
Nationality: Swiss.
Supervisory directorships and other
positions held: None.
e-mail: christoph.goppelsroeder@dsm.com

Annual Report 2005

www.dsm.com

Remuneration Policy
regarding the Managing Board and the Supervisory Board
Remuneration Policy as from 2005

This chapter comprises two parts. The first
part outlines the remuneration policy for
2005 and subsequent years as approved
by the Annual General Meeting on 6 April
2005. The second part contains details of
the remuneration received in 2005.

Remuneration policy as from 2005

Objectives of remuneration policy for 2005
and onwards
The objective of DSM’s remuneration policy
is to attract, motivate and retain the
qualified and expert individuals that the
company needs in order to achieve its
strategic and operational objectives.

Below, the following elements of the
remuneration policy will be addressed:
– DSM strives for high performance in

the field of sustainability/Triple P, finding
a balance between economic gain,
respect for people and concern for the
environment. The remuneration policy
should reflect a balance between the
interests of DSM’s main stakeholders as
well as a balance between the Company’s
short-term and long-term strategy. In
the light of the remuneration policy, the
structure of the remuneration package
for the Managing Board is designed to
balance short-term operational
performance with the long-term objective
of creating sustainable value within the
company, while taking account of the
interests of all stakeholders.

– To ensure that highly skilled and qualified
managers can be attracted and retained,
DSM aims for a total remuneration level
that is comparable to levels provided by
other Dutch multinational companies that
are similar to DSM in terms of size and
complexity. For that purpose, external
reference data are used. See below
for an outline of the labor market
reference group.

– The remuneration policy for the members
of the Managing Board is aligned with the
remuneration of other senior executives
of DSM.

– In designing and setting the levels of

remuneration for the Managing Board,
the Supervisory Board also takes into
account the relevant provisions of
statutory requirements, corporate
governance guidelines and other best
practices applicable to DSM.

Labor Market Peer Group
In order to be able to recruit the right caliber
of people for the Managing Board and to
secure long-term retention of the current
Board members, DSM has taken external
reference data into account in determining
adequate salary levels. For that purpose, a
specific labor market peer group has been
defined which consists of Dutch companies
that are headquartered in the Netherlands
and are more or less comparable to DSM in
terms of size, international scope and
complexity of industrial operations.

Bonus
Managing Board members can earn
a bonus amounting to 50% of their annual
base salary for on-target performance.
Under the bonus plan, the part of the bonus
that is related to financial targets accounts
for 35% of base salary, which can increase
to 52.5% in the case of an exceptionally
good financial performance.

The part of the bonus that is not related to
financial targets accounts for 15% of the base
salary and cannot increase beyond that.

The labor market peer group consists of
the following ten companies:

– Aegon
– Akzo Nobel
– Getronics
– Heineken
– KPN

– Numico
– Nutreco
– Océ
– TNT
– Wolters Kluwer

Professional independent remuneration
experts have modified the raw data of the
peer-group companies using a statistical
empirical model, so as to make them
comparable with a company the size of
DSM, with the associated scope and
responsibilities of the Managing Board.
Peer-group data will be updated on an
annual basis.

DSM operates in a competitive international
industry. Therefore, DSM will also closely
monitor industry-specific international
developments with respect to remuneration,
notably at the following companies: CIBA,
Clariant, Degussa, Lonza and Solvay.

The European industry peer group is
influenced by factors such as the type
of organization and the organizational
superstructure of these companies.
Therefore in assessing DSM pay levels,
the peer data are used with caution, as they
do not reflect the specific organizational
structure of DSM.

Below, the various remuneration
components are addressed separately.

Base Salary
On joining the Board, the Managing Board
members receive a base salary that is
comparable with the median of the labor
market peer group. Every year base salary
levels are reviewed. Adjustment of the base
salary is at the discretion of the Supervisory
Board, which takes into account external
and internal developments.

Bonus part linked to financial targets
The part of the bonus that is linked to
financial targets includes elements related
to operational performance, being
operating profit and free cash, reflecting
short-term financial results, in addition to
CFROI. The balance of the financial
elements of the bonus is CFROI 17.5%,
operating profit 10% and free cash 7.5%
of annual base salary for on-target
performance.

Financial targets:
- CFROI

- Operating Profit

- Free Cash

Non-financial targets

total

On-target
pay-out
(% of base)

Maximum
pay-out
(% of base)

17.50

10.00

7.50

15.00

50.00

26.25

15.00

11.25

15.00

67.50

CFROI
The definition of CFROI has been
established in such a way that the
realization of the CFROI target can be
derived from the financial information in the
annual report and is as follows4:

recurring EBITDA – related annual tax
– economic depreciation (1%)

gross asset base (incl. working capital)

CFROI focuses on value realization and
creation compared with the Weighted
Average Cost of Capital (WACC)
established for DSM.

4 Recurring EBITDA is defined as: EBIT excluding exceptional items
plus depreciation and amortization as reported in the profit and
loss account. Related annual tax is defined as taxes paid minus the
effect of exceptional items as reported in the statement of income.
Economic depreciation is defined as a 1% charge on the historic
value of intangible assets and property, plant and equipment as
reported in the balance sheet (see notes 9 and 10 to the consolidated
financial statements). Working capital is defined as inventories plus
receivables minus other current liabilities as reported in the balance
sheet. The 1% charge represents the fund to be formed to replace
the average asset mix after economic lifetime ends. Gross asset base
is defined as the historic value of property, plant and equipment and
intangible assets plus average annualized working capital.

Annual Report 2005

www.dsm.com

Remuneration Policy regarding the Managing Board
and the Supervisory Board

Remuneration Policy as from 2005
Remuneration 2005

Operational performance
There are two financial-target-related bonus
elements that allow for a focus on short-
term operational targets: operating profit
and cash. These can be derived from the
financial statements and are defined
as follows:

– Operating profit: EBIT excluding

exceptional items.

– Free cash, defined as cash from operating
activities minus capital expenditure (as
shown in the cash flow statement) and
minus the average dividend paid in the
previous three years.

The company is of the opinion that the
combination of CFROI (value realization and
creation), operating profit and free cash
adequately reflects the company’s financial
performance. Targets will be determined
each year by the Supervisory Board, based
on historical performance, the operational
and strategic outlook of the company in the
short term and expectations of the
company’s management and stakeholders,
among other things. The targets contribute
to the realization of the objective of long-
term value creation.

In determining the realization of the
operating-profit target, a (partial) adjustment
mechanism for sensitivity to the euro/dollar
ratio will apply. The company will not
disclose the actual targets, as they qualify
as commercially sensitive information.

Besides financial targets, 15% of the base
salary is related to non-financial targets.
These targets will be defined in areas
relating to the strategic development of the
company and Triple P, among other things.

Stock Incentives
The stock incentive plan has been adjusted
with effect from 2005. Non-performance-
related options and a part of the
performance-related options have been
replaced by performance shares, up to
an equal balance of stock options and
performance shares in terms of economic
value (calculated by independent specialists
on the basis of the Black-Scholes method
and the weighted-probability method). Both
stock options and performance shares
operate on the basis of the same
performance schedule.

The vesting of stock options and
performance shares is conditional on the
achievement after three years of previously
determined target levels of Total Shareholder
Return (TSR) compared to the peer group.

The Chairman will receive 10,000
performance shares and 37,500
performance options; the members of
the Board will receive 8,000 performance
shares and 30,000 performance options.

Exercise/Grant price
The stock options and shares are granted
on the first ‘ex dividend’ day following the
Annual General Meeting at which DSM’s
annual accounts are adopted. The exercise
price/grant price of the stock incentives will
be equal to the opening price of the share
on the date of grant.

TSR as a performance measure
DSM’s TSR performance is compared
to the average TSR performance of a set
of pre-defined peer companies. TSR
measures the returns received by
shareholders and captures both the change
in a company’s share price and the value
of dividend income. This measure is used
as it assesses long-term value creation by
the company.

The TSR peer group for 2005 consists of
the following companies:

– Akzo Nobel
– BASF
– Bayer
– CIBA

– EMS Chemie
Holding
– ICI
– Lanxess

Spezialitätenchemie – Lonza Group

– Clariant
– Degussa

– Rhodia
– Solvay

This peer group is not the same as the one
used for determining remuneration levels.
The latter is chosen to reflect the relevant
labor market. Compared with the peer
group for 2004, Lanxess has been added
to this group after its spin-off from Bayer.

The peer group used for benchmarking
TSR performance reflects the relevant
market in which the company competes for
shareholder preference. It includes sector-
specific competitors which the Supervisory
Board considers to be suitable benchmarks
for DSM. The peer group is verified by
the Supervisory Board each year based
on market circumstances (mergers,
acquisitions) which determine the
appropriateness of the composition of
the performance peer group.

In view of the evolution of DSM, its portfolio
development and industry context, the
Supervisory Board has reconsidered the
composition of the peer group for 2006.
Bayer will be excluded, whilst Danisco/
Genencor and Novozymes will be included
in the peer group.

Performance with regard to TSR will remain
the criterion for the vesting of stock options
and performance shares.

Depending on DSM’s performance
compared to the peer group a certain
number of options will become exercisable
and a certain number of shares will be
unconditionally awarded. The stock options
can be kept for a maximum of eight years
(including the three-year vesting period)
while the shares shall be retained by the
members of the Managing Board for a
period of at least five years (after the three-
year vesting period) or at least until
termination of employment if this period is
shorter. The final performance of DSM
versus its peers will be determined and
validated by a bank and audited by the
external auditor at the end of the
performance period.

Performance incentive zone
The number of options and shares that
become unconditional after three years
is determined on the basis of DSM’s
performance relative to the average
TSR performance of the peer group. The
difference between DSM’s performance
and the peer group’s performance (in
percentage points) determines the vesting.

Annual Report 2005

www.dsm.com

Remuneration Policy
regarding the Managing Board and the Supervisory Board
Remuneration 2005

Term of appointment
Members of the Managing Board appointed
before 1 January 2005 are appointed for an
indefinite period of time. New members of
the Managing Board (after 1 January 2005)
will be appointed for a period of four years
as Board Member. Newly appointed
members are subject to reappointment
by the shareholders after a period of
four years.

Notice period
Termination of employment by a member
of the Managing Board is subject to three
months’ notice. A notice period of six
months will for legal reasons be applicable
in the case of termination by the company.

Severance arrangement
There are no specific contractual exit
arrangements for the members of the
Managing Board appointed before
1 January 2005. Should a situation arise in
which a severance payment is appropriate
for these Board members, the Nomination
and Remuneration Committee will
recommend the terms and conditions.
The Supervisory Board will decide upon
this, taking into account usual practices
for these types of situations, as well as
applicable laws and corporate governance
requirements.

The employment contracts of newly
appointed members of the Managing
Board (after 1 January 2005) will include an
exit arrangement provision which is in
accordance with best practice provision
II.2.7. of the Dutch Corporate Governance
Code (i.e. a sum equivalent to the fixed
annual salary, or if this is manifestly
unreasonable in the case of dismissal
during the first term of office, two times the
fixed annual salary).

Remuneration 2005

Nomination & Remuneration Committee
The Nomination & Remuneration
Committee (hereinafter referred to as ‘the
Committee’) reviews the remuneration
policy on a regular basis and proposes
changes to this policy to the Supervisory
Board. The Committee consists entirely of
Supervisory Board members. Its members
are Mr Herkströter (Chairman), Mr Kist and
Mr Van Woudenberg. The Corporate Vice
President Human Resources acts as the
Secretary to the Committee.The
Committee met five times in 2005. During
these meetings it discussed the
remuneration for 2005 for the Managing
Board. The Committee also defined targets
for the bonus plan and assessed the degree
to which the members of the Managing
Board had achieved their targets for the
previous year. The Committee made
recommendations for stock options and
performance shares to be granted to the
Managing Board. The Committee also
discussed proposals to revise the pension
scheme for the Managing Board. Finally, the
Committee discussed the changes in the
Managing Board (Jan Dopper and Chris
Goppelsroeder).

Remuneration 2005
The remuneration package for the
Managing Board is subject to annual
review. The market competitiveness of the
remuneration package of the Managing
Board for 2005 was reviewed, based on the
Dutch labor market peer group. The data
below reflect the July 2005 remuneration
levels. All values are denominated in euros.

Target bonus and stock option grants are
expressed as a percentage of base salary.
The remuneration data are regressed to
reflect the size and scope of DSM. Stock
incentive valuations are based on the Black-
Scholes method.

The following table gives an overview of
the vesting conditions.

DSM performance minus
peer group performance
in % points

Percentage of performance-related
stock options that become
exercisable and shares awarded

≥ 20
≥ 10 and < 20
≥ -10 and < 10 (Target)
≥ -20 and < -10
< -20

100 %

75 %

50 %

25 %

0 %

Pensions
The members of the Managing Board are
participants in the Dutch pension fund
“Stichting Pensioenfonds DSM Chemie
(PDC)”. PDC operates similar pension plans
for various DSM companies. The pension
provision of the Managing Board is equal to
the pension provision for the employees of
DSM Limburg BV and executives employed
in the Limburg area.

Due to changes in legislation with respect to
pre-pensions, the pension plans of PDC
have been revised with effect from
1 January 2006. Since the Managing Board
members are participants in the PDC
pension plans, these changes apply to the
Managing Board as well.

The non-pension early-retirement scheme
and the temporary individual pension
scheme will be revised too.

For members of the Managing Board born
before 1 January 1950 (Peter Elverding and
Jan Zuidam) continuation of the present
pension plans will be possible. Continuation
of the present plans will not be possible for
other Board members. For Henk van Dalen
and Feike Sijbesma a transitional
arrangement will be applicable. As a result,
retirement before the age of 65 will remain
possible. Chris Goppelsroeder only
participates in the plan with a retirement
age of 65.

Employment Contracts

Term of employment
The employment contracts of the members
of the Managing Board appointed before
1 January 2005, have been entered into for
an indefinite period of time. Newly appointed
members of the Managing Board are also
offered an employment contract for an
indefinite period of time. The employment
contract ends on the date of retirement or
by notice of either party.

Annual Report 2005

www.dsm.com

Remuneration Policy regarding the Managing Board
and the Supervisory Board

Remuneration Policy as from 2005
Remuneration 2005

Target bonus level and pay-out
When they achieve all their targets,
Managing Board members receive a
bonus of 50% of their annual base salary.
Outstanding financial performance can
increase the bonus level to 67.5% of the
annual base salary.

Vesting of stock incentives in 2005
In 2005, besides the regular vesting of
non-performance-related options, all
performance-related options granted in
2002 vested on the basis of DSM’s
performance relative to the aforementioned
peer group (≥ 20%).

Outstanding and exercised stock incentives
in 2005
The tables below show the stock incentives
positions of the individual members of the
Managing Board and the rights exercised
during 2005.

The 2005 annual report presents the
bonuses that have been earned on the
basis of results achieved in 2005. These
bonuses will be paid out in 2006.
The Supervisory Board has established the
extent to which the targets for 2005 were
achieved. The targets relating to the group’s
financial performance were all met and
partially even exceeded. The other, non-
financial targets were also fully realized. The
average realization percentage was 62.5%.

See page 68 for tabular overviews on the
actual bonus pay-out per individual Board
member in 2005.

To move further towards the median level
of the benchmark, the at-target bonus
percentage for all members of the Managing
Board will be increased from 50% to 60%
with effect from 1 January 2006. After this
increase, there is still a gap for the chairman,
whilst the members will be at the median of
the 2005 benchmark.

Stock options and (performance) shares
in 2005

Stock incentives granted in 2005
In 2005 performance-related stock options
and performance shares were granted to
the Managing Board. The respective stock
incentives were granted on April 8, 2005
against an exercise/grant price (after stock
split) of € 29.05. The table below shows
the number of stock incentives granted to
the individual Board members:

Number of stock incentives granted*

Stock
options

37,500

30,000

Performance
shares

10,000

8,000

Peter Elverding

Jan Zuidam

Henk van Dalen

Feike Sijbesma

Chris Goppelsroeder
* After stock split.

Furthermore, data are presented as median
actual levels.

Benchmark against Dutch labor market
peer group 2005

Managing Board Chairman

Base salary

Bonus at target (%)

Total Cash at target

Peer group
median

DSM

612,000

750,000

50%

65%

918,000

1,237,500

Annualized Stock Incentive Value (%)

34%

65%

total Direct Compensation

1,126,080

1,725,000

Board member

Base salary

Bonus at target (%)

Total Cash at target

Peer group
median

DSM

470,000

50%

60%

705,000

752,000

Annualized Stock Incentive Value (%)

36%

50%

total Direct Compensation

874,200

987,000

Base salary in 2005
The Committee reviewed whether
circumstances justified an adjustment of
the base salary levels. Based on the 2005
benchmark against the peer group, it was
established that the base salary for the
chairman was at the lower quartile whilst
the members of the Managing Board were
around the median level. Although a gradual
move toward the median level of the
external benchmark is part of the policy,
no extra increase was effectuated on
1 January 2005. External and internal
circumstances however justified a modest
general increase of the base salary with
effect from 1 July 2005 to cope with inflation
and labor market developments. The base
salary was increased by 2% with effect from
1 July 2005.

In order to move closer towards the median
level of the benchmark a 5% increase of
the base salary of the chairman will be
effectuated on 1 January 2006. After this
increase, the gap with the median of the
market for the chairman remains
considerable.

Bonus for 2005
Bonus targets are revised annually so as to
ensure that they are stretching but realistic.
Considerations regarding the performance
targets are influenced by the operational
and strategic course taken by the company
and are directly linked to the company´s
ambitions. The targets are determined at
the beginning of the year for each Board
member.

Annual Report 2005

www.dsm.com

Remuneration Policy
regarding the Managing Board and the Supervisory Board
Remuneration 2005

Overview of Stock options/ Stock Appreciation Rights (SARs) *

Peter Elverding

Vested stock options(1):

Unvested stock options:

Jan Zuidam

Vested stock options(1):

Unvested stock options:

Henk van Dalen

Vested stock options(1):

Unvested stock options:

Feike Sijbesma

Vested stock options(1):

Unvested stock options:

outstanding at
December 31
2004

granted

exercised

vested

forfeited

during 2005

outstanding at
December 31
2005

average share
price at
exercise

exercise
price

1999

2000

2001

2002

2003

2004

2005(2)

36,000

45,000

75,000

Total

381,000

37,500

-36,000

75,000

-75,000

31.445

45,000

75,000

37,500

13.005

18.240

19.990

23.505

18.195

17.895

29.050

-36,000

382,500

outstanding at
December 31
2004

granted

exercised

vested

forfeited

during 2005

outstanding at
December 31
2005

average share
price at
exercise

exercise
price

1999

2000

2001

2002

2003

2004

2005(2)

36,000

60,000

Total

312,000

30,000

-36,000

60,000

-60,000

31.445

36,000

60,000

30,000

13.005

18.240

19.990

23.505

18.195

17.895

29.050

-36,000

306,000

outstanding at
December 31
2004

granted

exercised

vested

during 2005

outstanding at
December 31
2005

forfeited

average share
price at
exercise

exercise
price

1999

2000

2001

2002

2003

2004

2005(2)

22,500

36,000

60,000

Total

298,500

30,000

-22,500

-36,000

60,000

-60,000

26.595

30.672

60,000

30,000

13.005

18.240

19.990

23.505

18.195

17.895

29.050

-58,500

270,000

outstanding at
December 31
2004

granted

exercised

vested

during 2005

outstanding at
December 31
2005

forfeited

average share
price at
exercise

exercise
price

1999

2000

2001

2002

2003

2004

2005(2)

15,000

22,500

60,000

Total

277,500

-15,000

-22,500

60,000

-60,000

30,000

-37,500

31.000

60,000

30,000
270,000

13.005

18.240

19.990

23.505

18.195

17.895

29.050

Annual Report 2005

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Remuneration Policy regarding the Managing Board
and the Supervisory Board

Remuneration Policy as from 2005
Remuneration 2005

granted

exercised

vested

during 2005

outstanding at
December 31
2005

forfeited

average share
price at
exercise

exercise
price

59,000

30,000

19.770

17.895

29.050

148,000

30,000

granted

exercised

vested

during 2005

-27,000

outstanding at
December 31
2005

forfeited

average share
price at
exercise

exercise
price

40,000

-40,000

-20,000

-60,000

-27,000

26.750

36,000

60,000

40,000

216,000

13.005

18.240

19.990

23.505

18.195

17.895

23.505

18.195

17.895

Chris Goppelsroeder

Unvested SARs:

Unvested stock options:

Jan Dopper

Vested stock options:

Unvested stock options(3):

outstanding at
December 31
2004

2003

2004

2005(2)

59,000

Total

118,000

outstanding at
December 31
2004

1999

2000

2001

2002

2003

2004

2002

2003

2004

Total

27,000

36,000

60,000

303,000

*
(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.

After stock split.

(3)

At retirement date 2/3 of all unvested stock options become exercisable and 1/3 are forfeited.

Restricted Shares

Peter Elverding

Unvested(1):

Total

Jan Zuidam

Unvested(1):

Henk van Dalen

Unvested(1):

Feike Sijbesma

Unvested(1):

Chris Goppelsroeder

Unvested(1):

outstanding at
December 31
2004

2005

outstanding at
December 31
2004

2005

total

outstanding at
December 31
2004

2005

total

outstanding at
December 31
2004

2005

total

outstanding at
December 31
2004

2005

total

during 2005
vested

forfeited

during 2005
vested

forfeited

outstanding at
December 31
2005

10,000

outstanding at
December 31
2005

8,000

during 2005
vested

outstanding at
December 31
2005

forfeited

8,000

during 2005
vested

outstanding at
December 31
2005

forfeited

8,000

during 2005
vested

outstanding at
December 31
2005

forfeited

8,000

granted

10,000

granted

8,000

granted

8,000

granted

8,000

granted

8,000

share price
at date
of grant

29.050

share price
at date
of grant

29.050

share price
at date
of grant

29.050

share price
at date
of grant

29.050

share price
at date
of grant

29.050

(1)

Vesting of all stock incentives granted since 2005 is performance related.

Annual Report 2005

www.dsm.com

Remuneration Policy
regarding the Managing Board and the Supervisory Board
Remuneration 2005

Shares
At year-end 2005 the members of the
Managing Board together held 1,836 shares
in Royal DSM N.V.

Pensions in 2005
The members of the Managing Board
are participants in the Dutch pension fund
“Stichting Pensioenfonds DSM Chemie”
(PDC).

The retirement age is 65. PDC operates two
different schemes: a pre-pension scheme
providing benefits between age 62 and 65
and a basic pension scheme for old-age
pension benefits as of age 65. The latter
scheme is a defined-benefit final-pay scheme.
Old-age pension rights are accrued according
to vested years of service. Only base salary,
after deduction of an offset, is pensionable. In
2005 this offset was € 20,231.

The accrual of pension rights in the salary
range between the offset and € 50,810
amounts to 1.75% per annum, and in the
salary range above € 50,810 to 1.55% per
annum. The basic pension scheme includes
entitlement to a pension and a waiver of
pension contributions in the event of
disability, as well as a spouse’s/dependants’
pension on death. Contribution to this basic
pension scheme is a flat-rate percentage of
pensionable salary. The scheme participants
contribute a pension premium of 4% of
base salary above € 50,810.

The pre-pension scheme (PPS) is basically
a defined contribution scheme, in which
benefits are based on the contributions paid
by the participants. The scheme guarantees
a pre-pension income of 75% of base
salary from age 62, provided that the
participant has paid the full contribution.

Since July 1999 a (temporary) individual
scheme has been applied to members of the
Managing Board, aimed at accruing
additional pension rights (as of age 65). The
company pays a premium of 4.5% of the
monthly base salary. This scheme is intended
to compensate for the fact that an old-age
pension of max. 60% of the pensionable
salary will normally be attainable only after
40 years of service. Old-age pension rights
are accrued according to vested years of
service. In practice most current members of
the Managing Board will not reach 40 years
of service and therefore their maximum
attainable old-age pension will be less than
60% of their base salary and an even lower
percentage of their total compensation
(including bonuses and stock options).

Early retirement plan
In addition to the pension provisions as set
out above, DSM operates a non-pension
early-retirement scheme for the members
of the Managing Board. Early retirement is
possible from the age of 60 if the Supervisory
Board decides so. The early-retirement
income is 80% of base salary during the first
six months of payment and 75% thereafter.
The early-retirement benefit stops at age
65. The total attainable early-retirement
income is determined taking into account as
an offset the benefits from the pre-pension
scheme operated by PDC. The early-
retirement benefits do not accrue or vest.
The early-retirement scheme is non-
contributory.

Loans
The Company does not provide any loans
to members of the Managing Board. There
are therefore no loans outstanding.

Total remuneration
The total remuneration (including pension
costs and other commitments) of Managing
Board members amounted to € 3.9 million
in 2005 (2004: € 3.4 million). The increase
of € 0.5 million is mainly due to a higher
bonus pay-out in 2005 (results DSM 2004).

Overview of Remuneration 2005 – Managing Board
The tables below show the remuneration paid to the Managing Board in 2005.

Fixed Annual Salary in €
Peter Elverding
Jan Zuidam
Jan Dopper (until 01.04.05)
Henk van Dalen
Feike Sijbesma
Chris Goppelsroeder (as from 01.04.05)

Bonus in €
Peter Elverding
Jan Zuidam
Jan Dopper (until 01.04.05)
Henk van Dalen
Feike Sijbesma
Chris Goppelsroeder (as from 01.04.05)

01.07.2004 01.07.2005
599,760 612,000
461,040 470,000
461,040
n.a.
461,040 470,000
461,040 470,000
n.a. 470,000

20051

20042
378,675 215,914
290,950 165,974
31,3803 165,974
290,950 165,974
290,950 165,974
218,9134
n.a.

1
2
3
4

Pension

Based on results achieved in 2005 and therefore payable in 2006.
Bonus paid in 2005 based on results achieved in 2004.
Bonus paid in 2005 based on estimated results achieved in Q1-2005.
Pro-rated bonus based on results achieved in 2005.

Pension costs (employer)

Accrued pension
as of age 65

in €
Peter Elverding
Jan Zuidam
Jan Dopper (until 01.04.05)
Henk van Dalen
Feike Sijbesma
Chris Goppelsroeder (as from 01.04.05)

2005

2004 31-12-2005 31-12-2004
111,482 110,289 283,206 274,162
85,250 225,192 218,298
85,250
n.a. 190,149
85,250 200,490 193,596
85,250 140,745 133,851
n.a.
48,830

86,148
21,401
86,148
86,148
48,304

n.a.

Annual Report 2005

www.dsm.com

Remuneration Policy regarding the Managing Board
and the Supervisory Board

Remuneration Policy as from 2005
Remuneration 2005

If any shareholdings in DSM are held by
Supervisory Board members, they serve
as a long-term investment in the Company.
At year-end 2005 the members of the
Supervisory Board together held 8,084
shares in Royal DSM N.V.

The Company does not provide any loans
to its Supervisory Board members.

Rules have been adopted governing
ownership and reporting on transactions
in securities (other than securities issued
by DSM) by Supervisory Board members.

Overview of Remuneration in 2005
– Supervisory Board
The remuneration package of the
Supervisory Board comprises an annual
fixed fee and an annual committee
membership fee. The fixed fee for the
Chairman of the Supervisory Board is
€ 50,000. The members of the Supervisory
Board each receive a fixed fee of € 35,000.
Committee membership is awarded
€ 5,000 per member and € 7,500 per
committee for the Chairman.

In accordance with good corporate
governance, the remuneration of the
Supervisory Board is not dependent on
the results of the Company. This implies
that neither stock options nor shares are
granted to Supervisory Board members
by way of remuneration.

The table below gives an overview of the remuneration paid to the Supervisory Board
in 2005.

Supervisory Board Remuneration 2005

in €
Cor Herkströter, Chairman
Henk Bodt, Deputy Chairman
Okko Müller
Enrique Sosa **
Cees van Woudenberg
Ewald Kist
Claudio Sonder *
Pierre Hochuli *
TOTAL

*
**

Annual fixed Committee
fee
11,250
8,750
5,000
0
6,250
3,750
0
0

fee
50,000
35,000
35,000
8,750
35,000
35,000
26,250
26,250
251,250

Total
61,250
43,750
40,000
8,750
41,250
38,750
26,250
26,250
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 in
2005. Mr Herkströter chairs the Nomination and Remuneration Committee, whilst Mr Bodt
is the chairman of the Audit Committee.

Committee membership

Cor Herkströter
Henk Bodt
Okko Müller
Enrique Sosa
Cees van Woudenberg
Ewald Kist
Claudio Sonder
Pierre Hochuli

*
**

Audit
Committee
X*
X
X

X**

Nomination &
Remuneration
Committee
X
X**

X
X*

Since 06.04.05.
Until 06.04.05.

Annual Report 2005

www.dsm.com

Corporate Governance, risk management and internal control
Organization – Dutch Corporate Governance Code – Governance Framework

In the 2004 annual report, an extensive account
was given of the way in which DSM conducts its
governance, risk management and control. In this
section, the main elements are reported, the overall
governance framework is described, and the risk
management and control system is explained.

‰

Web link
Detailed Corporate governance information can
also be found at www.dsm.com : Governance

Organization

Royal DSM N.V. is a public limited company
with a Managing Board and an independent
Supervisory Board. The Managing Board
is responsible for the company’s strategy,
its portfolio policy, the deployment of
human and capital resources and the
company’s financial performance as based
on these factors.

The Supervisory Board supervises the
policy pursued by the Managing Board,
the Managing Board’s performance of its
managerial duties and the company’s
general state, taking account of the interests
of all the company’s stakeholders. The
annual financial statements are approved by
the Supervisory Board and then submitted
for adoption to the Annual General Meeting
of shareholders, accompanied by an
explanation by the Supervisory Board of
how it carried out its supervisory duties
during the year concerned.

Members of the Managing Board and
the Supervisory Board are appointed (and,
if necessary, dismissed) by the Annual
General Meeting of shareholders.

DSM fully informs its stakeholders about its
corporate objectives, the way the company
is managed and the company’s performance.
Its aim in doing so is to pursue an open
dialog with its shareholders and other
stakeholders.

DSM has a decentralized organizational
structure built around business groups
that are empowered to carry out all business
functions. This structure ensures a flexible,
efficient and fast response to market
changes. DSM Nutritional Products is a
separate entity. At the corporate level, DSM
has a number of staff departments to
support the Managing Board and the
business groups. The services of a number
of shared service departments and DSM
Research and intra-group product supplies
are contracted by the business groups
at market prices.

Annual Report 2005

www.dsm.com

Section 3 Corporate Governance, risk management
and internal control

Organization
Dutch Corporate Governance Code
Governance framework
Risk management system
Financial Policy
Risks

Compliance with the Corporate
Requirements and the effectiveness of
the risk management and internal control
system are discussed regularly between
Managing Board and operational units. On
average once every three years, the units
are also audited by Corporate Operational
Audit (COA). The director of the COA
department reports to the Chairman of the
Managing Board and has the authority to
consult with the Chairman of the Audit
Committee. Furthermore, the director of
COA acts as the compliance officer with
regard to inside information and is the
chairman of the DSM Alert Committee,
which implements the whistle-blower policy.

Dutch Corporate Governance Code

DSM supports the Dutch Corporate
Governance Code (Tabaksblat Code), and
applies all but one of the 113 Best Practices.
The only exception is Best Practice III.5.11,
which stipulates that the remuneration
committee shall not be chaired by the
chairman of the Supervisory Board. This
exception has been discussed in the
Annual General Meeting of shareholders,
where it met no objections. All documents
related to the implementation at DSM of
the Dutch Corporate Governance Code,
can be found at the corporate website
(www.dsm.com).

The most important governance elements
of this framework are:
– The DSM Values to which both the

Managing Board and the operational
units adhere.

– The governance model, including the
charters of several functional Boards,
specifying the basic organizational
structure and division of responsibilities
between Managing Board and
operational units.

– The Corporate Strategy Dialog (CSD),
specifying the strategic direction and
objectives of the corporation and
Business Strategy Dialogs (BSD).
establishing unit strategy and objectives

– Policies and Multi-Year Plans in several

functional areas.

Governance Framework

– The Corporate Requirements.

The figure below depicts DSM’s overall
governance framework. It shows how
responsibilities are divided over the various
levels of the company and lists some of the
most important governance elements and
regulations at each level.

The relationship between the Managing
Board and the operational units (business
groups, corporate staff departments and
central service units) is described by the
governance and risk management and
control framework that the Managing Board
has established and to which the
operational units adhere.

Within the responsibilities as defined by the
governance model and in the context of the
strategies and policies of the company, the
operational units have the freedom to
operate within the limits set by the Corporate
Requirements (and of course in compliance
with all applicable national or international
laws and regulations). These corporate
requirements form the basis for systematic
risk management and internal control at
the operational level. If a special situation
calls for it, the Corporate Requirements
are extended by so-called Management
Directives (e.g. a travel ban for security
reasons).

Share-
holders

Articles of Association

Supervisory
Board

– Regulations of the Supervisory Board
– Charter of the Audit Committee
– Charter of the Remuneration Committee

Managing
Board

– Works according to DSM Values and
Regulations of the Managing Board

– Creates and maintains Governance and
Risk Management Framework for BGs/CS/CSUs

Unit
Management

BGs/CS/CSU’s conduct their business within
Governance and Risk Management Framework set
by the Managing Board

Note: all internal regulations apply in addition to applicable national and international laws
and regulations. In cases where internal regulations are incompatible with national or
international laws and regulations, the latter prevail.

Annual Report 2005

www.dsm.com

Corporate Governance, risk management and internal control
Risk Management

Risk Management System

Managing Board Level
DSM’s risk management and internal
control system is based on the Enterprise
Risk Management framework of the
Committee of Sponsoring Organisations of
the Treadway Commission (COSO ERM),
and covers the eight risk management
elements identified in that framework.

The COSO ERM risk management
elements

– internal environment
– objective setting
– event identification
– risk assessment
– risk response
– control activities
– information & communication
– monitoring

By instituting the governance structures
as described above and specifying a risk
management and internal control
framework for the operational units, the
Managing Board has established the
internal environment for enterprise risk
management. The DSM Values and
Requirements as well as policies in the field
of finance and economics (page 74),
human resources, safety, health and
environment (SHE), security and legal affairs
define the 'tone at the top' with regard to
ethical behavior and doing business.

Strategies are established for every unit and
translated into clear objectives, amongst
others, with regard to business, markets,
innovation, financial results, SHE and social
matters. The objectives are reviewed in the

Annual Strategic Review for the corporation
as well as at unit level.
Performance and compliance are
monitored consistently in discussions
between accountable management and
the Managing Board.

The Corporate Strategy Dialog, executed
every three to five years, includes an
elaborate process for the identification
and assessment of risks and the definition
of responses at the corporate level. These
are updated in an annual Corporate Risk
Assessment.

Operational Unit Level
The Corporate Requirements form the
basis for systematic risk management and
internal control at the operational level. They
are structured as follows:

The application of the Corporate
Requirements leads to systematic risk
management and internal control. The Unit
Risk Management (URM) Requirements
‘govern’ the whole system and are the
backbone of the internal environment for
risk management in the operational units.

They require that:
– a risk management system be put

in place.

– risks be identified and assessed and risk

responses chosen.

– compliance with applicable law and

Corporate Requirements be monitored
and deviations corrected.
– reporting of control failures be

encouraged and identified material risks
be reported immediately.

– the effectiveness of the risk management

system be assessed and reported,
together with the compliance status, in an
annual Letter of Representation.

DSM Values

Introduction to the DSM Corporate Requirements

Unit Risk Management Requirements

Functional Requirements

Business Process Requirements

Strategy
Legal
Finance and Economics
Safety, Health and Environment
External Communications
Security
Information and Communication Technology
Research, Technology and Development
Project Management
Pensions

Order to Cash
Purchase to Pay
Demand Supply Chain Management
Manufacturing

The Corporate Requirements require that
Corporate Policies are translated into
policies for the operational units. They also
stipulate that management should take the
lead and give the example, and should
keep the employees accountable for
compliance. In this way the “tone at the top”
is cascaded downward in the organization.

Each operational unit executes a Business
Strategy Dialog (BSD) at regular intervals.
The outcome of this strategic process is
translated into clear objectives for financial
as well as other functional and business
fields. As part of the BSD, events are
identified that could influence the risk profile
of the business. It is an important aspect of
the DSM risk management and internal
control system that it provides for the
assessment, control and monitoring of risks
in two ways:

– Common Risk and Common Controls
In companies such as DSM, a large part of
the identifiable risks are directly linked to the
nature of the operations. DSM has chosen
to identify and assess these common risks
and design common controls for them.
These mandatory common controls are
part of the Corporate Requirements and
cover all functional fields. Especially in the
field of the primary flow of goods and
products and the related financial control
processes, but also in some supportive
processes, implementation is supported by
standard ICT solutions. In these cases, the
controls are built into so-called standard
business processes. A special tool (DSM
i2i) supports the monitoring of the
effectiveness of a number of key controls in
these standard business processes.

Through this concept of common risks and
common controls, control or mitigation of a
large number of risks is achieved in an
efficient and effective way.

– Business-specific risks and responses
According to the Unit Risk Management
Requirements, operational units are
nevertheless required to carry out risk
assessments following every BSD. These
assessments are aimed at identifying and
designing responses to risks that are not
covered by the common controls as
described above. In these cases specific
responses have to be identified and
controls have to be implemented and
monitored.

Annual Report 2005

www.dsm.com

Section 3 Corporate Governance, risk management
and internal control

Organization
Dutch Corporate Governance Code
Governance framework
Risk management system
Financial Policy
Risks

For units that have not yet implemented
the standard business processes, the
Corporate Requirements describe which
controls need to be implemented as a
minimum.

Reporting
To ensure reliable financial reporting there
are detailed accounting and reporting
requirements and related annexes
specifying amongst other things reporting
time schedules and formats, the DSM
Chart of Accounts, the IFRS-compliant
DSM Accounting Rules and the format for a
quarterly affidavit, to be signed by the
Financial Director of each unit.

The financial control process has also been
translated into a standard business
process, with ‘built in’ internal controls such
as authorizations and segregations of duty,
mandatory control reports and
documented procedures.

Compliance
In its Corporate Requirements, DSM puts
much emphasis on compliance with
internal rules as well as applicable external
laws and regulations. The text under the
heading 'Management Leadership' in the
Human Resources section of the
Requirements reads:

“ Management is visibly committed to and,
wherever applicable, leads by example
in, achieving full compliance with the
DSM Values and Requirements and
(local) legislation. Management ensures
that systems, specific information and
expertise are available for its employees to
ensure compliance. It keeps its employees
accountable for compliant behavior. To
support this, it has a policy in place with
regard to the consequences”.

Compliance with the internal requirements
and external laws is monitored consistently.
A special program on the assessment and
reporting of SHE compliance is in place. In
the field of compliance with Competition
Law an awareness program is run and
relevant people have to sign for compliance.

A business continuity plan needs to be
prepared for an effective response to all
risks with a potentially serious impact
which, although they have a very low
chance of occurring, cannot be excluded
altogether.

The corporate Policies and Requirements
and their implementation in the operational
units are the subject of mandatory training
and specific attention is given to
communication about risks, also, for
example, in job hand-over procedures at
senior management levels.

To help the operational units in
implementing the risk management and
internal control system, the DSM Business
System Portal has been developed (see
figure below).

The portal is made available to them on the
DSM intranet and all relevant Policies,
Requirements, practices and standard
business processes are to be found under
the respective buttons. The operational
units have to copy the portal for their own
use and can add unit-specific Policies,
Requirements and practices and make links
to documents archived, such as
documents describing standard operating
procedures.

Application of the system
Of course, having a suitable risk
management system only leads to the
desired degree of control if it is effectively
applied. Below, the implementation of the
system and the way in which the
effectiveness of implementation is
monitored is described for each COSO
ERM category: strategic, operational,
reporting and compliance.

Strategic
In the DSM risk management and internal
control system, a great deal of attention is
given to ensuring that the strategic direction
is clear at all times. At the corporate level
the strategic choices for the company are
made through an elaborate process, the
Corporate Strategy Dialog (CSD). The
strategy is translated into concrete targets,
financial and otherwise, the attainment of
which will be checked in annual strategic
reviews. A similar process (BSD) takes
place in the operational units. In this way
DSM attempts to ensure that it understands
the extent to which its strategic objectives
are being achieved.

Operational
Operational risks are identified through
Process Risk Assessments and
categorized as either business-specific or
common; in the latter case the controls are
prescribed in the Corporate Requirements
and, if applicable, implemented through a
standard business process. Policies and
plans are drawn up for each relevant
operational field, based on the chosen
strategy. Fulfillment of these plans is
monitored and reported at least on a
quarterly basis and revised forecasts are
made. In this way, surprises with regard to
the operational results should be avoided.

The business processes themselves,
however, should also be reliable. Each step
in a process and its related risks must be
defined and controls must be put in place.
DSM has developed and implemented
standard business processes; in these
processes the necessary internal control is
“designed in”

DSM Values

Corporate Requirements

Strategy

BG Requirements

BG Organization

BG Policies

Performance

CSD

BSD

VBBS

Risk & Control Assessments

HRM

RT&D
Business Dev.

QESH, Security
& Regulatory

Project
management

PtP

Manufacturing

PtO

OtC

Demand Supply Chain Management

BIM &
ICT security

Asset
management

Legal Affairs

Finance &
control

Monitoring and continuous improvement

People

Planet

Profit

Annual Report 2005

www.dsm.com

Corporate Governance, risk management and internal control
Financial Policy – Risks

Financial Policy

As a basis for and contribution to effective
risk management and to ensure that the
company will be able to pursue its strategies
even during periods of economic downturn,
DSM retains a solid financial policy.

One of the key targets of Vision 2010 is to
achieve a cash flow return on investment
(CFROI, see definition on page 62) which is
at least 50 base points higher than the
weighted average cost of capital (WACC).
DSM further aims for a net debt which is
between 30 and 40% of equity plus net
debt and an operating profit before
amortization and depreciation (EBITDA)
which is at least 8.5 times the balance of
financial income and expense. This
underlines the company’s aim of maintaining
its single A long-term credit rating.

An important element of DSM´s financial
strategy is the allocation of cash flow.
DSM primarily allocates cash flow to
investments aimed at strengthening its
business positions and to dividend
payments to its shareholders. The cash
flow is further used for strengthening the
Nutrition and Performance Materials
businesses by means of selective
acquisitions. As the occasion arises, the
company may choose to buy back shares,
if excess cash is available in the context of a
medium-term analysis of primary cash flow
allocation requirements and a sustained
solid single A rating.

DSM’s dividend policy is outlined on
page 34 of this report. In order to avoid
dilution of earnings per share as a result of
the exercise of management and employee
options, DSM buys back shares insofar
as this is desirable and feasible at a
reasonable price.

DSM’s tax policy is aimed at realizing an
optimal position in the field of taxes and
import, export and excise duties, and at
maintaining such a position for the long term.

The investor relations function's primary
task is to maintain contacts with current
and potential shareholders of DSM and
with analysts who advise shareholders.
The policy of this function is to provide
quality information to investors and analysts
about developments at DSM, ensuring
that relevant information is equally and
simultaneously provided and accessible
to all interested parties.

The insurance function has the task of
achieving a proper balance between self-
financing hazardous risks or having these
risks transferred to external insurers, based
on the relative costs involved. The underlying
premise is the company's risk management
philosophy, which is that group-wide risk
awareness must ultimately lead to gaining a
proper insight into the risks that a company
such as DSM may be confronted with, and
to controlling, preventing and limiting such
risks. An insurance policy is therefore
viewed as a last-resort element of this risk
management process.

The choice as to whether or not to obtain
external insurance coverage also depends
on the scope of the risk exposure in relation
to the financial parameters that are relevant
for a listed corporation. Such parameters
determine the amount of risk that the
corporation will afford to bear itself.

All DSM units have to report their results
periodically and comply with Corporate
Requirements in the field of finance &
economics. Compliance with the
requirements of accounting and reporting is
confirmed by means of a quarterly written
statement signed by the management.
Before the annual report is disclosed it is
first discussed by the Managing Board with
the Supervisory Board’s Audit Committee
and the external auditor, and then with the
Supervisory Board. Quarterly financial
reports are discussed by the Managing
Board, with the Chairman of the Audit
Committee and the external auditor. The
company uses a release calendar for
financial results.

An important acquisition criterion is that the
business concerned should be compatible
with DSM in terms of technological and/or
market competencies. Capitalized goodwill
paid in the case of acquisitions is subject
to an annual impairment test. Acquired
companies are in principle required to
contribute to DSM’s cash EPS from the
very beginning and to meet the company’s
profitability requirements. In some cases,
for instance in the case of small innovative
growth acquisitions, this requirement
cannot be used.

DSM’s policy in the various sub-disciplines
of the finance function is strongly oriented
towards solidity, reliability and optimum
protection of cash flows. The finance
function also plays an important role in
business steering.

The accounting and control function is
responsible for the administrative processing
of business processes, financial reporting
and making assessments and providing
advice regarding business processes
geared to the company’s financial targets.
The main policy aim in this function is to
obtain and make available reliable financial
information that meets statutory and other
governance requirements and is adequate
for business steering purposes.

The treasury function’s tasks include
financing the group and its units, managing
the cash held by the company and managing
currency risks and interest risks. To ensure
that its policy in these fields is properly
implemented and produces the best possible
results, DSM has a set of stringent internal
regulations, procedures, organizational
measures and market-related benchmarks
in place. DSM’s treasury policy is mainly
geared to optimizing the financial risks to
which the group and its units are exposed
and to optimizing the balance of financial
income and expense.

The tax function is responsible for optimizing
the company's position with regard to taxes
and import, export and excise duties. As
part of this task, it handles the various tax
returns and reviews acquisitions, disposals
and liquidations of business components
and/or joint ventures, as well as restructuring
programs and reorganizations. It also
examines the tax consequences of cross-
border activities between business
components such as transfer pricing, cross-
border activities that lead to some permanent
form of foreign establishment, and changes
in the shareholdings in legal entities.

Annual Report 2005

www.dsm.com

Section 3 Corporate Governance, risk management
and internal control

Organization
Dutch Corporate Governance Code
Governance framework
Risk management system
Financial Policy
Risks

volatility deriving from the use of derivatives,
hedge accounting is applied in certain
cases. Hedge accounting is only allowed
under strict conditions, which are different
per hedge type.

DSM applies the following hedge accounting
models: fair value hedge accounting, cash
flow hedge accounting and net investment
hedge accounting. The goal of a fair value
hedge is to fix the value of an asset/liability
(hedged item). Changes in fair value of a
designated derivative that is highly effective
as a fair value hedge, together with the
change in fair value of the corresponding
asset, liability or firm commitment
attributable to the hedged risk, are included
directly in earnings. So both fair value
changes are offset in the income statement.
The goal of a cash flow hedge is to limit the
variability of highly probable future cash
flows due to foreign currency or interest rate
movements. Changes in fair value of a
designated derivative that is highly effective
as a cash flow hedge 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 a foreign entity.
Changes in fair value of a designated
derivative that is highly effective as a net
investment hedge are included in equity.
So volatility of the hedged part of the net
investment is offset in equity.

Under IFRS hedge accounting through
combined derivatives is not allowed. For
this reason DSM has chosen to hedge the
interest and foreign currency risk with
separate derivatives and not to use
combined derivatives to hedge both risks.

Any ineffectiveness of hedges is reflected
directly in income. DSM aims to mitigate
these risks by closely monitoring the
effectiveness of the hedges through
effectiveness testing. Ineffectiveness only
occurs when fair value changes of the
hedging instrument compared to fair value
changes of the underlying risk are outside a
80 – 125 % bandwidth. All hedges in 2005
have proven to be effective.

Risks

The following section contains a selection of
important risks that have been identified
and for the management of which strategies,
controls and mitigating measures have
been put in place as part of our risk
management practices. They nevertheless
involve uncertainty that may lead to the
actual results differing from those projected.
There may also be current risks that the
company has not yet fully assessed and
that are currently qualified as “minor”
but that could have a material impact on
the company’s performance at a later
stage. The company’s risk management
and internal control system has been
designed to identify and respond to these
developments on time, but 100% assurance
can never be achieved, of course.

Generic risks
Macroeconomic trends
Being a global company, DSM is subject
to the usual business risks associated with
macroeconomic trends and events. The
projected results from the Vision 2010
strategy are sensitive to deviations from the
assumed and defined economic scenario
on which the strategy is based.

General market developments
DSM operates in many different
business segments with contingent risk
profiles reflecting the different business
environments, the diverse nature of the
businesses and the distinctive competitive
positions those businesses target for.
DSM’s Vision 2010 strategy aims at further
reducing the cyclical element, but a
substantial portion of its activities may still
experience material fluctuation in sales and
results due to changes in general market
conditions, supply-driven overcapacity,
economic conditions, currency exchange
rate fluctuations or other factors.

Low-cost competition
Counteracting the influence of low-cost
competitors and seizing opportunities in
low-cost areas (especially China) is one of
the centerpieces of DSM’s new strategy.
The risk remains, however, that such low-
cost competitors may penetrate in DSM’s
core markets.

Political risks
DSM has subsidiaries in more than 35
countries. These subsidiaries can be
exposed to changes in government
regulations and potentially unfavorable
political developments that might hamper

the exploitation of certain opportunities or
might impair the value of the local business.

Currency risks
All DSM sales that are priced in currencies
other than the euro are subject to economic
transaction and/or translation risks that may
significantly impact on the financial results,
as the company’s reporting unit is the euro.

DSM’s aim is to mitigate its currency
exposure by developing sales in certain
regions, through product mix
improvements, by focusing manufacturing
activities and through increased dollar-
based purchasing. However, these ‘natural
hedges’ are never fully balanced. The
volatility of the US dollar in relation to the
euro and the Swiss franc can have a
significant impact on the company’s results.
Although the production base still has its
center of gravity in Europe, a large portion of
DSM’s product sales is in US dollars or is
based on US-dollar-denominated world-
market prices. Consequently, from a
currency perspective there is a mismatch
between revenue and costs. In the 2005
business mix a 1% change in the euro-US
dollar rate and the US dollar-Swiss franc
rate has on aggregate a € 8 -10 million
impact on gross margin level (=sales minus
variable costs). Fluctuations in the relative
values of other currencies (such as the yen
or the pound sterling) have a limited impact
on DSM’s results.

DSM companies are obliged to hedge
their open currency positions via the
DSM Inhouse Bank in order to protect
the operating result against effects of
currency fluctuations. Only under strict
conditions are DSM companies allowed to
hedge firm commitments in order to protect
the cash flow of the contract value against
currency fluctuations. Hedging of forecast
transactions is only allowed after the
approval of the Managing Board.

Risks of derivatives used for hedging
purposes
DSM uses derivatives to hedge various
currency and interest rate risks. Under
IFRS, all derivatives are recognized as either
assets or liabilities. In line with IAS 39
derivatives are recognized at fair value.
Changes in fair value go to the income
statement either contemporaneously or, in
case hedge accounting is applied, at the
moment that the hedged item impacts on
the income statement. These changes
normally consist of a currency and an
interest rate component. To limit the

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Corporate Governance, risk management and internal control
Risks

Strategic risks
Acquisitions, divestments and joint ventures
The success of DSM’s strategy is partly
dependent on the results obtained in
spotting and implementing acquisition and
divestment opportunities and joint ventures.
Risks in this field are connected to the
company not identifying relevant acquisitions
or alliances, or not doing so in time, or not
being successful in bid processes or in the
integration of acquired businesses needed
to safeguard its path of growth. DSM uses
joint ventures and other strategic alliances
whenever it is beneficial to do so (for
example to combine strengths and to share
investments and inherent risks). Although
joint ventures and strategic alliances are
always intended to add value, situations
can arise that result in a conflict of interests
that could potentially damage the business.

New markets, products and technologies
In its Vision 2010 strategy, DSM increases
its focus on innovation in order to develop
new technologies and products and explore
new markets. Market intelligence will be
strengthened and market and customer
orientation enhanced. Nevertheless, the
actual developments in the targeted
markets, the speed with which new products
and technologies are accepted and the
emergence of new competition will always
constitute risks to the success of the
chosen strategy.

Innovation Risks
Within DSM’s new strategy there is an extra
focus on innovation. A multitude of actions
are being taken to ensure success in the
R&D and market development processes.
There is a risk that goals nevertheless will
not be achieved and that the company will
have to abandon a project on which it has
already spent substantial sums of money.
The company may reach a point where its
overall sales volume does not, on a longer-
term basis, justify the company’s related
R&D expenditure.

A certain portion of the company’s financial
results is based on legally protected
intellectual property. When these protection
mechanisms expire and the company is
unable to follow up these situations
appropriately, e.g. through new valuable
patents, there is a risk that the financial
results might deteriorate.

Human resource risks
DSM’s ability to retain highly specialized and
committed technical staff as well as talented
staff working in sales, R&D, manufacturing,
finance, general management and human
resources is critical to the future success of
the company. Within the company’s new
strategic direction, huge and ongoing
efforts are directed to managing the required
processes. The company may have to
adjust the timing of its growth path, due to
constraints or opportunities in this field.

Specific risks
Corporate reputation risks
Any failure by any of its business units to
meet production safety, social,
environmental and/or ethical standards
could harm DSM’s corporate reputation
and thereby impact on its business and
results. DSM values such as good
corporate citizenship, open communication
and transparency should reasonably assure
appropriate employee conduct. Moreover,
the company mitigates its reputation risk by
making substantial efforts to reduce the
probability that any of its units might fail to
comply with internal requirements and/or
external laws and regulations (see the
general section on risk management).

In 2005 DSM was ranked No. 1 worldwide
in the chemical industry sector of the Dow
Jones Sustainability Index for the second
year running, reflecting among other things
the enormous efforts the company
continues to make in the area of production
processes and their potential impact on the
environment and on the safety and well-
being of its employees.

Customer risks
The company makes considerable efforts
to delight its customers. Compliance with
customer agreements and commitments
is measured regularly. Appropriate process
and product quality checks and balances
are in place to mitigate the risk of non-
compliance with customers’ and DSM’s
sales conditions.

No DSM customer represents more than
3% of DSM’s total sales.

Production process risks
DSM tries to mitigate production process
risks by spreading production where
possible, but concentration is necessary
in order to achieve economies of scale.
The design of any new facilities and/or
production processes is required to include
state-of-the-art safety and security facilities.
Plants are regularly and systematically
inspected against predefined risk and
engineering standards. Nevertheless, certain
risks and the degree to which SHE elements
are managed may not be sufficiently
well known.

Legal risks
DSM’s current strategic position and
direction has considerably changed the
product portfolio. The life science business
is rather different from the other businesses
from a product-liability point of view. For
instance some pharma product liabilities
cannot be insured against, or only at
prohibitively high costs. This typically holds
true for the pharma business in the USA.
On the basis of highly demanding process
and product quality requirements, the
company tries to mitigate such product
liability risks as far as is reasonably possible.

The company is putting in a great deal of
effort on an ongoing basis into ensuring that
all its units comply with internal and external
requirements (e.g. FDA compliance). The
risk of non-compliance has been further
reduced by the recent revision and
tightening-up of the Corporate
Requirements.

ICT risks
In order to control potential ICT risks DSM
employs a policy of using the latest proven
hardware and software solutions. Group-
wide DSM works with integrated and
standardized ICT infrastructures, backup,
encoding and encryption systems,
replicated databases, virus and access
protection and a fully compatible global
network and intranet. Regular local ICT
security assessments should assure
adequate local applications. External ICT
service providers have been contracted in
and are required to report regularly on the
measures they are taking to reasonably
assure that DSM’s ICT processes are not
disrupted.

Annual Report 2005

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Section 3 Corporate Governance, risk management
and internal control

Organization
Dutch Corporate Governance Code
Governance framework
Risk management system
Financial Policy
Risks

fluctuations in the cost of finance. The
company aims to keep its single-A credit
rating. The risk of fluctuating interest rates is
addressed in the financial statements, see
page 113 of this report.

The low effective rate of corporation tax
may come under pressure under the new
harmonized European and Dutch tax
legislation. In addition, the outcomes of
ongoing disputes with tax authorities could
impact on the company’s tax position with
retroactive effect. Although tax assets have
been recognized at fair value, future profits
may not suffize to realize all tax-loss carry-
forwards.

Insurable risks
Global insurance policies are in place to
reduce the risk of damage to property,
business-interruption loss and general
liability. Uninsured losses in 2006 for any
one incident will not exceed about € 30
million per occurrence with an annual
aggregate maximum of € 45 million.

Control failures
In DSM’s Triple P Report some of the control
failures are mentioned that occurred in spite
of the risk management efforts. They can be
found in the section 'What still went wrong'.
All failures are extensively analyzed and
lessons learnt are implemented.

Although DSM has applied strict measures
with regard to the security and reliability of
its IT systems, incidents regarding for
example back-up recovery, hot failover
systems, virus attacks and international
network connections may still occur, and
this can have a material impact on business
operations.

Project risks
The company is currently undertaking some
major projects whose success is important
to the overall business results and exposure.
In general these fall into three categories:
pricing reinforcement projects, reorganization
projects and ICT projects. Apollo is a project
that assures uniform application of standard
business processes designed in SAP-R3
throughout DSM worldwide. The True Blue
project is intended to reduce the risk of
internal and external non-compliance and
to further strengthen controls.

DSM has extensive experience in project
management. It seconds its best people
to projects that are considered critical.
Moreover, direct Board involvement and
monitoring are in place to mitigate the risk
of project failure.

Financial risks
Additional financial risks include commodity
risk, credit risk, interest rate risk, tax risk,
pension risk and country risk. The major
credit rating institutions may change their
assessments of DSM’s creditworthiness,
thereby affecting the company’s borrowing
capacity and/or the conditions under which
it can borrow money and causing

Annual Report 2005

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Information about the DSM share

Distribution of shares

Under the Dutch Major Holdings Disclosure
Act, shareholdings of 5% or more in any
Dutch company must be disclosed to that
company. On 31 December 2005 the
following shareholders had disclosed that
they owned between 5 and 10% of DSM’s
total share capital:
- ABN AMRO Holding N.V.
- Delta Lloyd Levensverzekering N.V.
- ING Investment Management B.V.
- Rabobank Nederland Participatie-

maatschappij B.V.

Shares and listings

Ordinary shares in Royal DSM N.V. are listed
on the Euronext stock exchange in
Amsterdam, the Netherlands (Stock code
00981, ISIN code NL0000009819). On
31 December 2005 DSM de-listed from the
electronic exchange in Switzerland (SWX).

Options on ordinary DSM shares are
traded on the European Option Exchange
in Amsterdam, the Netherlands
(Euronext.liffe).

In the USA a sponsored unlisted American
Depositary Receipts (ADR) program is
offered by Citibank NA (Cusip 23332H202),
with four ADRs representing the value of
one ordinary DSM share.

On 5 September 2005 the ordinary DSM
shares and the ADRs were split two for one
(two new shares/ADRs for one old share/
ADR). With this stock split DSM aimed to
promote the tradeability of its shares, which
threatened to be hampered by the favorable
development of the share price. As the
share price had risen to over € 60 per share
(a doubling of the share price since the

inception of DSM’s Vision 2005 strategy in
September 2000), DSM had become one
of the highest-priced shares in the AEX
group of companies at the Amsterdam
Euronext stock exchange.

Besides the ordinary shares, 44.04 million
cumulative preference shares A are in issue,
which are not listed on the stock exchange;
these are placed with institutional investors
in the Netherlands. The cumprefs A have
the same voting rights as ordinary shares,
as their nominal value of € 1.50 per share is
equal to the nominal value of the ordinary
shares. The dividend on cumprefs A
amounted to 6.8% of the issue price of
€ 5.295 per share until the contractual
dividend reset date (1 January 2006).
As of this date the dividend has been reset
to 4.348%.

The total number of ordinary DSM shares
in issue decreased by 1,033,931 in 2005.
On 31 December it stood at 190,922,965.

Development of the number of ordinary DSM shares*

balance at 31 December 2004
changes:
- issue of shares to service option rights
- repurchased
balance at 31 December 2005

average number of shares outstanding

DSM share prices
- highest price
- lowest price
- at 31 December

* Where applicable, the effects of the share split have been recognized retroactively in the figures in this table.

placed
201,953,008

repurchased
-/- 9,996,112

in issue
191,956,896

201,953,008

5,108,069
-/- 6,142,000
190,922,965

5,108,069
-/- 6,142,000
-/- 11,030,043

190,783,006

€ 35.22
€ 23.07
€ 34.50

Annual Report 2005

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Information about the DSM share

Trading volumes 2005 (on a monthly basis)

Share Price Development 2004-2005, versus AEX and DJ Euro Stoxx Chemical Index

x million

January

February

March

April

May

June

July

August

September

October

November

December

DSM
AEX Index
DJ Euro Stoxx Chemical Index

10
1/04

2/04

3/04

4/04

5/04

6/04

7/04

8/04

9/04 10/04 11/04 12/04 1/05

2/05

3/05

4/05

5/05

6/05

7/05

8/05

9/05 10/05 11/05 12/05

Geographical spread of DSM shares

Netherlands
North America
Belgium / Luxemburg
United Kingdom
Germany
Switzerland
Other countries

2005
35%
14%
16%
24%
2%
3%
6%

2004
32%
14%
16%
19%
5%
5%
9%

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Royal DSM N.V. Financial statements 2005

Share split
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 DSM share. This split is applicable to the
ordinary 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, all
relevant per-share data in the financial statements are presented in accordance with the number of shares outstanding after the share split.

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Summary of significant accounting
policies

Basis of preparation
DSM’s consolidated financial statements
have been prepared in accordance with
International Financial Reporting Standards
(IFRS) as adopted by the European Union.
DSM applied accounting policies that
comply with IFRS effective at December
2005, the so-called IASB stable platform for
2005. Details about the first-time adoption
of IFRS by DSM can be found in note 35.

Consolidation
The consolidated financial statements
comprise the financial statements of the
parent entity, Royal DSM N.V., and its
subsidiaries as well as the proportion of
DSM’s ownership of joint ventures (together
‘DSM’ or ‘Group’). A subsidiary is an entity
over which DSM has control. Control is the
power to govern the financial and operating
policies of the entity so as to obtain benefits
from its activities. The financial data of
subsidiaries are fully consolidated. Minority
interests in the Group’s equity and income
are stated separately. A joint venture is an
entity in which DSM holds an interest and
which is jointly controlled by DSM and one
or more other venturers under a contractual
arrangement. The financial data of joint
ventures are included in the consolidated
financial statements according to the
method of proportionate consolidation.

Subsidiaries and joint ventures are
consolidated from the acquisition date and
de-consolidated from the date on which
DSM ceases to have control or joint control,
respectively. On consolidation all intra-
group balances and transactions and
unrealized gains and losses from intra-
group transactions are eliminated.
Unrealized losses are not eliminated if these
losses indicate an impairment of the asset
transferred. In such cases a value
adjustment for impairment of the asset
is made.

Segmentation
Segment information is presented in
respect of the Group’s business and
geographical segments. The primary
format, business segments, reflects the
Group’s management structure. Prices for
transactions between segments are
determined on an arm’s length basis.
Segment results, assets and liabilities
include items directly attributable to a
segment as well as those that can be
allocated on a reasonable basis.

Foreign currency translation
The presentation currency of the Group is
the euro.

Each entity of the Group records
transactions and balance sheet items in its
functional currency. Commercial
transactions denominated in another
currency than the functional currency are
recorded at the spot exchange rates
prevailing at the date of the transactions.
Monetary assets and liabilities denominated
in a currency other than the functional
currency of the entity are translated at the
closing rates at the balance sheet date.
Exchange differences resulting from the
settlement of these transactions and from
the translation of monetary items are
recognized in income.

On consolidation, the balance sheets of
subsidiaries and joint ventures whose
functional currency is not the euro are
translated into euro at the closing rate.
The income statements of these entities are
translated into euro at the average rates for
the relevant period. Goodwill paid on
acquisition is recorded in the functional
currency of the acquired entity. Exchange
differences arising from the translation of
the net investment in entities with a
functional currency other than the euro are
recorded in equity (Translation reserve). The
same applies to exchange differences
arising from borrowings and other financial
instruments in so far as they hedge the
currency exchange risk related to the net
investment. On disposal of an entity with a
functional currency other than the euro the
cumulative exchange difference relating to
the translation of net investment is
recognized in income. DSM has made use
of the exemption in IFRS 1, according to
which the cumulative translation differences
at the date of transition to IFRS (1 January
2004) are deemed to be zero.

Distinction between current and non-
current
An asset (liability) is classified as current
when it is expected to be realized (settled)
within 12 months after the balance sheet
date.

Emission rights
DSM is subject to legislation encouraging
reductions in greenhouse gas emission and
has been awarded emission rights in a
number of jurisdictions, principally to cover
emission of CO2. Emission rights are
reserved for meeting delivery obligations
and are not recognized. Revenue is
recognized when surplus emission rights
are sold to third parties. When actual
emissions exceed the emission rights
available to DSM a provision is recognized
for the expenditure required to obtain the
additional rights.

Intangible assets
Goodwill represents the excess of the cost
of an acquisition over DSM’s share in the
net fair value of the identifiable assets,
liabilities and contingent liabilities of an
acquired subsidiary, joint venture or
associate. Goodwill paid on acquisition of
subsidiaries and joint ventures is included in
intangible assets. Goodwill paid on
acquisition of associates is included in the
carrying amount of these associates.
Goodwill is tested for impairment annually
and when there are indications that the
carrying value may not be recoverable. Any
impairment is recognized in income. Gains
and losses on the disposal of an entity
include the carrying amount of goodwill
relating to the entity sold.

It was DSM’s policy up to and including
1999 to charge goodwill paid immediately
against equity. In accordance with IFRS 1
this goodwill is not recognized in the
opening balance sheet but remains a
deduction from equity. From 2000 up to and
including 2003, goodwill was capitalized
and amortized over its estimated useful life.
DSM has made use of the exemption of
IFRS 1 that permits entities to elect not to
apply IFRS 3, Business Combinations,
retrospectively. The carrying amount of the
goodwill on 31 December 2003 according
to ‘NL GAAP’ is used as the deemed cost
of the goodwill as at the date of transition to
IFRS (1 January 2004).

Annual Report 2005

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Acquired licenses, patents and application
software are carried at cost less straight-line
depreciation and less any impairment
losses. The expected useful lives vary from
4 to 10 years. Costs of software
maintenance and new releases are
expensed when incurred. Capital
expenditure that is directly related to the
development of application software is
recognized as intangible asset and
amortized over its estimated useful life
(5-8 years).

Research costs are expensed when
incurred. Where the recognition criteria are
met, development expenditure is
capitalized and amortized over its useful life
from the moment the product is launched
commercially. The carrying amount of an
intangible asset from development is
reviewed for impairment at each balance
sheet date or earlier upon indication of
impairment. Any impairment losses are
recorded in income.

Property, plant and equipment
Property, plant and equipment is carried at
cost less depreciation calculated on a
straight-line basis and less any impairment
losses. Interest during construction is
capitalized. Expenditures relating to major
scheduled turnarounds are capitalized and
depreciated over the period up to the next
turnaround.

The items of property, plant and equipment
are systematically depreciated over their
estimated useful lives. Reviews are made
annually of the estimated remaining lives of
the most important individual productive
assets, taking account of commercial and
technological obsolescence as well as
normal wear and tear. The initially assumed
expected useful lives are in principle: for
buildings 10-50 years; for plant and
machinery 5-15 years; for other equipment
4-10 years. Land is not depreciated.

An item of property, plant and equipment is
derecognized upon disposal or when no
future economic benefits are expected to
arise from continued use or the sale of the
asset. Any gain or loss arising on
derecognition of the asset is included in
income.

Associates and financial assets
An associate is an entity over which DSM
has significant influence but no control,
usually supported by a shareholding that
entitles DSM to between 20% and 50% of
the voting rights. Investments in associates
are accounted for by the equity method of
accounting, which involves recognition in
income of DSM’s share of the associate’s
profit or loss for the year. DSM’s interest in
an associate is carried in the balance sheet
at its share in the net assets of the associate
together with goodwill paid on acquisition,
less any impairment loss.

When DSM’s share in the loss of an
associate exceeds the carrying amount of
the associate, including any other
receivables, the carrying amount is reduced
to nil. No further losses are recognized,
unless DSM incurs obligations of the
associate which it has guaranteed or is
otherwise committed to.

Unrealized profits and losses from
transactions with associates are eliminated
according to DSM’s percentage ownership
of these entities.

Securities comprise interests in entities in
which DSM has no significant influence that
are accounted for as available-for-sale
securities. These securities are measured
against fair value with changes in fair value
being recognized in equity (Fair value
reserve). If a reliable fair value cannot be
established the securities are held at cost.
Available-for sale securities are tested for
impairment with other than temporary
declines in value being charged to income.
On disposal the cumulative fair value
adjustments of the related securities are
released from equity and included in
income. Proceeds from other securities
held at cost are recognized in income on
disposal (Net finance costs).

Loans and long-term receivables are
measured at amortized cost, if necessary
with deduction of a value adjustment for
bad debts. The proceeds are recognized in
income (Net finance costs).

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Impairment losses
When there are indications that the carrying
amount of a non-current asset (an item of
intangible assets, property, plant and
equipment, or financial assets) may exceed
the estimated recoverable amount (the
higher of its value in use and fair value less
costs to sell), the possible existence of an
impairment loss is investigated. If an asset
does not generate largely independent
cash inflows, the recoverable amount is
determined for the cash-generating unit to
which the asset belongs. In assessing the
value in use, the estimated future cash flows
are discounted to their present value using
a pre-tax discount rate that reflects current
market assessments of the time value of
money and the risks specific to the asset.
When the recoverable amount of an asset is
less than its carrying amount, the carrying
amount is impaired to its recoverable
amount. An impairment loss is reversed
when there has been a change in estimate
that is relevant for the determination of the
asset’s recoverable amount since the last
impairment loss was recognized.
Impairment losses for goodwill will never
be reversed.

Inventories
Inventories are stated at the lower of cost
and net realizable value. The first-in, first-out
(FIFO) method of valuation is used. The cost
of finished goods and intermediates
includes directly attributable costs and
related production overhead expenses. Net
realizable value is determined as the
estimated selling price in the ordinary
course of business, less the estimated
costs of completion and the estimated
costs necessary to make the sale. Products
whose manufacturing cost cannot be
calculated because of joint cost
components are stated at net realizable
price after deduction of a margin.

Current receivables
Current receivables are stated at face value
less an allowance for bad debts.

Current investments
Deposits held at call with banks with a
remaining maturity of more than 3 months
and less than 12 months are classified as
current investments. They are measured at
amortized cost. Proceeds from these
deposits are recognized in income (Net
finance costs).

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Cash and cash equivalents
Cash and cash equivalents comprise cash
at bank and in hand and deposits held at
call with banks with a remaining maturity of
less than 3 months. Bank overdrafts are
included in current liabilities. Cash and cash
equivalents are stated at nominal value.

Assets held for sale
Non-current assets or assets and liabilities
related to a disposal group are separately
disclosed as assets and/or liabilities held for
sale when such assets are available for
immediate sale and when the sale is highly
probable. These conditions are usually met
as from the date a first draft of an
agreement to sell is ready for discussion.
Assets and liabilities classified as held for
sale are measured at the lower of carrying
amount and fair value less costs to sell. For
non-current assets classified as held for
sale depreciation is terminated.

Shareholders’ equity
DSM’s ordinary shares and cumulative
preference shares are classified as equity.
The consideration paid for repurchased
DSM shares (treasury shares) is deducted
from Shareholders’ equity until the shares
are withdrawn or reissued. Dividend to be
distributed to holders cumulative
preference shares is recognized as a liability
in the period in which the Supervisory Board
of Directors approves the proposal for profit
distribution. Dividend to be distributed to
holders of ordinary shares is recognized as
a liability in the period in which the Annual
General Meeting of Shareholders approves
the proposal for dividend.

Borrowings
Borrowings are initially recognized at cost,
being the fair value of the proceeds
received, net of transaction costs.
Subsequently, borrowings are stated at
amortized cost using the effective interest
method. Amortized cost is calculated by
taking into account any discount or
premium. Interest expenses are accrued for
and recorded in income for each period.

Where the interest rate risk relating to a
long-term borrowing is hedged, and the
hedge is regarded as effective, the carrying
amount of the long-term loan is adjusted for
changes in fair value of the interest
component of the loan.

Provisions
Provisions are recognized when all of the
following conditions are met: 1) there is a
present legal or constructive obligation as a
result of past events; and 2) it is probable
that a transfer of economic benefits will
settle the obligation; and 3) a reliable
estimate can be made of the amount of
the obligation.

If the effect of the time value of money is
material, provisions are determined by
discounting the expected cash flows at a
pre-tax rate. Where discounting is used, the
increase in the provision due to the passage
of time is recognized as borrowing cost.
However, the interest costs relating to
pension obligations are included in pension
costs.

Any provision for costs that will arise from
future site restoration is made when the
investment project concerned is taken into
operation. These are included in Property,
plant and equipment, along with the historic
cost of the relating asset, and depreciated
over the useful life of the asset.

Income tax expense
Income tax is accounted for using the
balance sheet liability method. Income tax
expense is recognized in the income
statement except to the extent it relates to
an item recognized directly within
shareholders’ equity.

Current tax is the expected tax payable on
the taxable income for the year, using tax
rates enacted at the balance sheet date,
and any adjustment to tax payable in
respect to previous years. Deferred tax
assets and liabilities are recognized for the
expected tax consequences of temporary
differences between the bases of assets
and liabilities and their reported amounts.
Deferred tax assets and liabilities are
measured at the tax rates and under the tax
laws that have been enacted or
substantially enacted at the balance sheet
date and are expected to apply when the
related deferred tax assets are realized or
the deferred tax liabilities are settled.
Deferred tax assets are recognized to the
extent that it is probable that future taxable
profits will be available against which the
deductible temporary differences and
unused tax losses can be utilized. If
necessary a value adjustment is deducted.
Deferred tax assets and liabilities are stated
at face value.

Deferred tax liabilities relating to withholding
taxes are included only if and to the extent
that DSM intends to distribute the profits
made by subsidiaries in the form of dividend
in the near future.

Pensions and other post-employment
benefits
The Group operates a number of defined
benefit plans and defined contribution plans
throughout the world, the assets of which
are generally held in separately
administered funds. The pension plans are
generally funded by payments from
employees and by the relevant Group
companies. The Group also provides
certain additional post-employment
healthcare benefits to retired employees in
the United States. These benefits are
unfunded.

For defined benefit plans, pension costs are
determined using the projected unit credit
method. Actuarial gains and losses are
recognized in income, spread over the
average remaining service lives of
employees, using the corridor approach.
Prepaid pension costs relating to defined
benefit plans are capitalized only if they lead
to refunds to the employer or to reductions
in future contributions to the plan by the
employer. Payments to defined contribution
plans are charged as an expense as they fall
due.

Share-based compensation
The 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 fair value is determined using the Black-
Scholes option pricing model, taking into
account market conditions linked to the
price of the DSM share. The costs of these
options are recognized in income
(Employee benefits), together with a
corresponding increase in equity (Reserve
for share-based compensation) during the
vesting period in the case of share-settled
options. In the case of cash-settled options
(share appreciation rights) the contra-
account is Other liabilities. No expense is
recognized for options that do not ultimately
vest, except for options where vesting is
conditional upon a market condition, which
are treated as vesting irrespective of
whether or not the market condition is
satisfied, provided that all other
performance conditions are satisfied.

Annual Report 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Exceptional items
Exceptional items relate to material non-
recurring items of income and expense
arising from circumstances such as:
- write-downs of inventories to net realizable
value or of property, plant and equipment
to recoverable amount, as well as
reversals of such write-downs;

- restructurings of the activities of an entity

and reversals of any provisions for the cost
of restructurings;

- disposals of property, plant and

equipment;

- disposals of investments;
- discontinued operations;
- litigation settlements;
- other reversals of provisions.
Exceptional items are reported separately
to give a better understanding of the
underlying results of the period.

Effect of new accounting standards
DSM did not opt for early adoption of the
following new standards, amendments to
standards, and new IFRIC interpretations,
which are mandatory for annual periods
beginning on or after 1 January 2006 or
later years:
- IFRS 6 Exploration for and Evaluation of

Mineral Resources

- IFRS 7 Financial Instruments: Disclosures
- Amendment to IAS 1: Capital Disclosures
- Amendment to IAS 19: Actuarial Gains

and Losses, Group Plans and Disclosures
- Amendment to IAS 21: Net Investment in

a Foreign Operation

- Amendment to IAS 39: Cash Flow Hedge

Accounting of Forecast Intragroup
Transactions

- Amendment to IAS 39: The Fair Value

Option

- Amendment to IAS 39 and IFRS 4:
Financial Guarantee Contracts
- IFRIC 4 Determining whether an
Arrangement contains a Lease

- IFRIC 5 Rights to Interests arising from
Decommissioning, Restoration and
Environmental Rehabilitation Funds

- IFRIC 6 Liabilities arising from Participating
in a Specific Market – Waste Electrical and
Electronic Equipment

- IFRIC 7 Applying the Restatement
Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies

DSM expects that the adoption of these
new standards, amendments to standards
and new IFRC interpretations in future
periods will have no material impact on
DSM’s financial statements.

Leases
Finance leases, which transfer to the Group
substantially all the risks and benefits
incidental to ownership of the leased item,
are capitalized at the inception of the lease
at the fair value of the leased property or, if
lower, at the present value of the minimum
lease payments. All other leases are
operating leases. Lease payments for
finance leases are apportioned to finance
charges and reduction of the lease liability
so as to achieve a constant rate of interest
on the remaining balance of the liability.
Finance charges are charged directly
against income. Capitalized leased assets
are depreciated over the shorter of the
estimated useful life of the asset or the lease
term. Operating lease payments are
recognized as an expense on a straight-line
basis over the lease term.

Revenue
Revenue from the sale of goods is
recognized when the significant risks and
rewards of ownership are transferred to the
buyer. Net sales represent the invoice value
less estimated rebates and cash discounts,
and excluding value-added taxes.

Derivative financial instruments
The Group uses derivative financial
instruments (‘derivatives’) such as foreign
currency contracts and interest rate swaps
to hedge risks associated with foreign
currency and interest rate fluctuations.
Financial derivatives are initially recognized
in the balance sheet at cost and
subsequently measured at their fair value on
each balance sheet date. The method of
recognizing the resulting gains or losses is
dependent on the nature of the item being
hedged.

When derivative contracts are entered into,
the Group designates them as either
hedges of the fair value of recognized
assets or liabilities, hedges of firm
commitments or forecast transactions or
hedges of net investments in entities with a
functional currency other than the euro.

Changes in the fair value of derivatives
designated and qualifying as fair value
hedges are immediately recognized in
income, together with any changes in the
fair value of the hedged assets or liabilities
attributable to the hedged risk.

Royalty income is recognized (Other
operating revenue) on an accruals basis in
accordance with the substance of the
relevant agreements. Interest income is
recognized on a time-proportion basis
using the effective interest method.
Dividend income is recognized when the
right to receive payment is established.

Changes in the fair value of derivatives
designated and qualifying as cash flow
hedges are recognized in equity (Hedging
reserve). Upon recognition of the related
asset or liability the cumulative gain or loss
is transferred from the Hedging reserve and
included in the carrying amount or in
income.

Changes in the fair value of derivatives
designated and qualifying as net investment
hedges are recognized in equity (Translation
reserve). Gains and losses accumulated in
the Translation reserve are included in
income when the net investment is
disposed of.

Gains or losses relating to the ineffective
portion of fair value hedges, cash flow
hedges and net investment hedges are
immediately recognized in income.

Government grants
Government grants are recognized at their
fair value where there is reasonable
assurance that the grant will be received
and all related conditions will be complied
with. If the grant relates to an expense item,
it is recognized as income over the periods
necessary to match the grant on a
systematic basis to the costs that it is
intended to compensate. Where the grant
relates to an asset, the fair value is initially
recognized as deferred income (Other non-
current liabilities) and then released to
income over the expected useful life of the
relevant asset by equal annual amounts.

Research and development
Research expenditure is charged to income
in the period in which it is incurred. Internal
development expenditure is charged to
income in the period in which it is incurred
unless it meets the recognition criteria for
intangible assets.

Annual Report 2005

www.dsm.com

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Consolidated income statement

x € million

net sales, continuing operations
net sales, discontinued operations

total net sales
other operating income (4)

own work capitalized
change in inventories of intermediates and finished goods
raw materials and consumables used
work subcontracted and other external costs
employee benefits costs (5)
depreciation and amortization (5)
other operating costs (5)
costs, discontinued operations

operating profit (including discontinued operations)
less operating profit from discontinued operations

operating profit from continuing operations
net finance costs (6)
share of the profit of associates

profit before income tax expense
income tax expense (25)

result
before
excep-
tional
items
8,012
183

8,195
223

8,418
47
251
-4,338
-1,501
-1,352
-496
-46
-175

808
-9

799
-70
-2

727
-173

2005
excep-
tional
items
(8)

total

-
-

8,012
183

result
before
excep-
tional
items
7,434
398

-
59

59
-
-
-
-
-
-64
-31
-

-36
-

-36
-8
-15

-59
23

8,195
282

7,832
197

8,477
47
251
-4,338
-1,501
-1,352
-560
-77
-175

772
-9

763
-78
-17

668
-150

8,029
38
-126
-3,574
-1,503
-1,342
-490
-83
-387

562
-16

546
-56
9

499
-95

2004
excep-
tional
items
(8)

-
-

-
19

19
-
-
-
-
-
-108
-110
-

-199
-

-199
-
-

-199
57

total

7,434
398

7,832
216

8,048
38
-126
-3,574
-1,503
-1,342
-598
-193
-387

363
-16

347
-56
9

300
-38

net profit from continuing operations

554

-36

518

404

-142

262

net profit from discontinued operations

profit for the year

556

-36

520

412

-142

270

profit attributable to minority interests

net profit attributable to equity holders
of Royal DSM N.V.

563

-36

527

423

-130

293

earnings per share in euro (7)
- shares outstanding
- diluted

2.87
2.85

2.68
2.66

2.09
2.09

1.41
1.41

Annual Report 2005

www.dsm.com

Consolidated balance sheet

assets
x € million

non-current assets
intangible assets (9)
property, plant and equipment (10)
deferred tax assets (11)
associates (12)
prepaid pension costs (13)
other financial assets (14)

current assets
inventories (15)
receivables (16)
financial derivatives (26)
current investments
cash and cash equivalents

assets classified as held for sale (17)

total

equity and liabilities
x € million

equity (18)
shareholders’ equity
minority interests

non-current liabilities
deferred tax liabilities (11)
employee benefits liabilities (19)
provisions (20)
borrowings (21)
other non-current liabilities (22)

current liabilities
employee benefits liabilities (19)
provisions (20)
borrowings (21)
financial derivatives (26)
other current liabilities (23)

liabilities classified as held for sale (17)

total

* Pro forma: after application of IAS 32 and IAS 39.
** Before application of IAS 32 and IAS 39.

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

31 December

2005

2004*

2004**

1,003
3,750
517
43
405
189
5,907

1,535
1,597
36
5
902
4,075
43
4,118

10,025

5,474
67
5,541

198
363
145
1,381
53
2,140

25
218
329
65
1,699
2,336
8
2,344

10,025

453
3,811
432
78
355
82
5,211

1,348
1,556
244
6
1,261
4,415
-
4,415

9,626

4,835
22
4,857

147
345
266
1,497
60
2,315

40
218
527
59
1,610
2,454
-
2,454

9,626

453
3,811
427
78
355
82
5,206

1,348
1,566
-
6
1,274
4,194
-
4,194

9,400

5,053
22
5,075

142
345
266
1,118
60
1,931

40
218
524
-
1,612
2,394
-
2,394

9,400

Annual Report 2005

www.dsm.com

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Consolidated statement of changes in equity

x € million

share
capital

share
premium

treasury
shares

other
reserves
(18)

retained
earnings

balance at 1 January 2004

370

548

-179

4,380

translation differences
income tax expense
total income and expense for the
year directly recognized in equity
profit for the year
total income and expense for the period

dividends
management options
share buy-backs
proceeds from re-issued shares
capital payments

adoption of IAS 32 and IAS 39
balance at 31 December 2004,
after adoption of IAS 32 and 39

translation differences
income tax expense
capital duty
change in 'hedging' reserve
total income and expense for the
year directly recognized in equity
profit for the year
total income and expense for the period

reclassification cumulative preference shares A
dividends
management options
share buy-backs
proceeds from re-issued shares
change in share of subsidiaries

-
-

-
-
-

-
-
-
-
-
370
-66

-
-

-
-
-

-
-
-
-
-
548
-167

-
-

-
-
-

-
-
-119
10
-
-288
-

-46
-6

-52
-
-52

-
4
-
-
-
-47
-1

-10
-

-10
293
283

-194
-
-
1
-
4,470
16

total
share-
holders’
equity
5,120

-56
-6

-62
293
231

-194
4
-119
11
-
5,053
-218

minority
interests

total
equity

5,164

-4
-

-4
-23
-27

-1
-
-
-
6
22
-

-60
-6

-66
270
204

-195
4
-119
11
6
5,075
-218

304

381

-288

-48

4,486

4,835

4,857

-
-
-
-

-
-
-

66
-
-
-
-
-

-
-
-3
-

-3
-
-3

167
-
-
-
-
-

-
-
-
-

-
-
-

-
-
-
-170
82
-

121
7
-
-2

126
-
126

-
-
7
-
-
-

-
-
-
-

-
527
527

-
-183
-
-
20
-

121
7
-3
-2

123
527
650

233
-183
7
-170
102
-

7
-
-
-

7
-7
-

-
-3
-
-
-
48

128
7
-3
-2

130
520
650

233
-186
7
-170
102
48

balance at 31 December 2005

370

545

-376

4,850

5,474

5,541

Annual Report 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Consolidated cash flow statement (29)

x € million
operating activities
net profit
adjustmenst for:
- depreciation, amortization and impairments
- gain from divestments
- result of associates
- dividends received from associates
- change in provisions
- interest:

. received
. paid
. charged to income

- income taxes:

. paid
. charged to income

- post-employment benefits: . paid

. charged to income

- other changes
operating cash flow before changes in working capital
change in working capital:
- inventories
- receivables
- other current liabilities

net cash provided by operating activities
investing activities
investments in:
- intangible assets
- property, plant and equipment
proceeds from sale of property, plant and equipment
acquisition of subsidiaries
proceeds from sale of subsidiaries and businesses
financial assets:
- capital payments
- change in loans granted
- sale proceeds
net cash used in investing activities
financing activities
sale of derivatives
loans taken up
redemption of loans
change in debt to credit institutions
dividend paid
buy-back of own shares
proceeds from re-issued shares
change in minority interests
capital duty
net cash used in financing activities
net change in cash and cash equivalents
change IAS 32/39

cash and cash equivalents at beginning of year
exchange differences of cash held and changes in consolidation
cash and cash equivalents at end of year

Annual Report 2005

www.dsm.com

2005

527

567
-20
23
3
-131

-71
-28
894

-201
693

-845

-220
-372
-

1,261
13
902

2004

293

613
-18
-9
7
-57

-10

-39

-96
5
689

209
898

-323

-533
42
17

1,209
-7
1,261

30
-96
56

-77
38

-120
24

69
-53
193

-12
-337
28
-
-

-12
10
-

-
64
-197
-103
-194
-119
11
5
-

24
-95
78

-133
150

-104
33

-140
-59
-2

-23
-370
28
-564
192

-3
-107
2

133
348
-487
42
-183
-170
102
-2
-3

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(1) General information
Unless 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 after
application 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 during
the 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 the
company 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 DSM
share. 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 is
considered to be effective as of January 1, 2004. Unless otherwise noted, all relevant per-share data in the financial statements are presented in
accordance 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 and
expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. The policies that management
considers both to be most important to the presentation of financial condition and results of operations and to make the most significant demands
on management’s judgments and estimates about matters that are inherently uncertain are discussed in the notes that are impacted by such
estimates and judgements. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment.

Currency exchange rates
The currency exchange rates that were used in drawing up the consolidated statements are listed below for the most important currencies.

1 euro =

US dollar
Swiss franc
Pound sterling
100 Japanese yen

exchange rate at balance sheet date average exchange rate

2005
1.18
1.56
0.69
1.39

2004
1.36
1.54
0.71
1.41

2005
1.25
1.55
0.68
1.37

2004
1.24
1.54
0.68
1.34

Annual Report 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

(2) Scope of consolidation

Acquisitions
On February 2, 2005 DSM acquired 100% of NeoResins (now DSM NeoResins), the coating resins business of Avecia. As of the date of
acquisition net sales of NeoResins were € 238 million. The impact of this acquisition on the consolidated balance sheet of DSM, at the
date of acquisition, is summarized below:

assets
intangible assets
property, plant and equipment
deferred tax assets
inventories
receivables
cash and cash equivalents
total assets

liabilities
provisions
deferred tax liabilities
other liabilities
total liabilities
fair value of net assets
acquisition price (in cash)
acquisition costs
goodwill

151
82
16
25
49
6

36
48
80

329

164
165
516
7
358

The goodwill relates to items, other than property, plant and equipment, which do not meet the recognition criteria for intangible assets
because they do not meet the identifiability criterion (for example customer contacts) or cannot be controlled by the company (for example
workforce).

On May 30, 2005 DSM increased its share in Roche Vitamins (Shanghai) Ltd. (now renamed DSM Vitamins (Shanghai) Ltd.) from 64% to
100% and on July 13, 2005 DSM increased its share in DSM Biologics Holding, Inc. from 60% to 100%. On October 16, 2005 DSM
acquired the Chinese resins company Syntech.

Annual Report 2005

www.dsm.com

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Divestments

Discontinued operations
The activities of DSM Bakery Ingredients excluding the joint venture Rymco Pty. Ltd. in South Africa were sold to Gilde Investment
Management on June 30, 2005. Rymco was sold to the joint venture partner Daniel Mills & Sons on September 30, 2005. The impact of
the deconsolidation of these activities on the consolidated balance sheet of DSM is as follows:

assets
intangible assets
property, plant and equipment
deferred tax assets
other financial assets
inventories
receivables
cash and cash equivalents
total assets

liabilities
provisions
borrowings
other liabilities
total liabilities
net asset value
sales price, net of selling costs
gain (before income tax expense)

-4
-96
-7
-7
-27
-93
-32

-22
-2
-56

The impact of the disposal of DSM Bakery ingredients on the cash flow statement is disclosed in the table below.

net cash provided by operating activities
net cash used in investing activities
net cash used in financing activities
net change in cash and cash equivalents

-266

-80

2005
10
-1
0
9

-186
200
14

2004
36
-3
0
33

Other divestments
On 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 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

continuing operations

discontinued
operations

total

Life
Science
Products

DSM Performance
Materials

Nutritional
Products

Industrial
Chemicals

Other
activities**

eliminations

total,
continuing
operations

-
-321
-321

8,012
-
8,012

183
-
183

8,195
-
8,195

1,479
52
1,531

1,914
32
1,946

2,447
12
2,459

1,687
212
1,899

126
-91
35

-140
-42
-
-93
-329

252
9
261

-124
-20
1
-80
-379

305
4
309

-105
-1
-
-94
-258

165
-
165

-81
-2
-1
-14
-103

485
13
498

-49
42
-7

-46
-24
-2
-8
-236

-
-
-

-
-
-
-
-

799
-36
763

-496
-89
-2
-289
-1,305

2,330
2,082
1,753
97
2

3,246
1,492
1,830
97
7

2,504
1,418
1,737
667
-

1,403
889
728
85
27

10,166
3,465
173
26
7

-9,624
-4,862
-
-
-

10,025
4,484
6,221
972
43

9
-
9

-7
-
-
-1
-32

808
-36
772

-503
-89
-2
-290
-1,337

-
-
-
2
-

10,025
4,484
6,221
974
43

18.0
6.3

19.6
4.2

16.8
3.8

14.6
0.8

1.6

6,403
6,239

6,285
6,119

4,302
4,441

2,312
2,234

2,758
2,787

-
-

3.6

0.5

3.5

22,060
21,820

779
-

22,839
21,820

(3) Segment information

Business segments 2005

financial performance
net sales
deliveries to other clusters
supplies

operating profit
(excluding exceptional items)
exceptional items
operating profit

depreciation and amortization
additions to provisions
share in result of associates
R&D costs
labor costs***

financial position
total assets
total liabilities
capital employed at year-end
capital expenditure
share in equity of associates

financial ratios in %
EBITDA / net sales
R&D costs / net sales

workforce*
average
year-end

* 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 is

not available, because these costs relate to both active and inactive employees.

*** Wages, salaries and social security costs.

Annual Report 2005

www.dsm.com

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

continuing operations

discontinued
operations

total

Life
Science
Products

DSM Performance
Materials

Nutritional
Products

Industrial
Chemicals

Other
activities**

eliminations

total,
continuing
operations

1,484
98
1,582

1,899
11
1,910

2,007
6
2,013

1,570
177
1,747

79
-168
-89

-147
-62
0
-98
-365

202
-
202

-128
-56
1
-75
-403

165
19
184

-84
-11
-2
-78
-218

120
-
120

-87
-4
2
-16
-113

474
11
485

-20
-50
-70

-44
-50
8
-11
-215

2,421
1,992
1,704
124
2

2,907
1,324
1,694
55
3

1,701
1,195
988
64
1

1,224
776
673
75
34

9,199
4,155
331
26
29

-8,083
-4,826
-
-
-

-
-303
-303

7,434
-
7,434

398
-
398

7,832
-
7,832

-
-
-

-
-
-
-
-

546
-199
347

-490
-183
9
-278
-1,314

9,369
4,616
5,390
344
69

16
-
16

-15
-
0
-8
-68

257
153
168
4
7

562
-199
363

-505
-183
9
-286
-1,382

9,626
4,769
5,558
348
76

Business segments 2004

financial performance
net sales
deliveries to other clusters
supplies

operating profit
(excluding exceptional items)
exceptional items
operating profit

depreciation and amortization
additions to provisions
share in result of associates
R&D costs
labor costs***

financial position
total assets
total liabilities
capital employed at year-end
capital expenditure
share in equity of associates

financial ratios in %
EBITDA / net sales
R&D costs / net sales

workforce*
average
year-end

15.2
6.6

17.4
3.9

12.4
3.9

13.2
1.0

2.3

6,950
6,836

6,868
6,607

3,687
3,735

2,581
2,566

2,891
2,953

-
-

3.7

2.0

3.7

22,977
22,697

1,526
1,507

24,503
24,204

not available, because these costs relate to both active and inactive employees.

*** Wages, salaries and social security costs.

Annual Report 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

the
Nether-
lands

rest of
Europe

North
America

China

3,549
44

2,240
28

1,304
16

300
4

rest of
Asia-
Pacific

333
4

rest of
the
world

286
4

867
11

3,220
40

1,707
21

498
6

1,068
14

652
8

elimina-
tions

total

-
-

8,012
100

8,967

3,580

1,708

585

373

455

-5,643

10,025

119

105

1,405

1,377

523

332

the
Nether-
lands

rest of
Europe

North
America

China

3,200
43

2,162
29

1,258
17

836
11

2,941
39

1,619
22

275
4

427
6

rest of
Asia-
Pacific

305
4

rest of
the
world

234
3

876
12

735
10

8,516

3,617

1,427

430

323

444

-5,131

9,626

118

1,436

1,517

474

233

378

3,750

21,820

elimina-
tions

total

-
-

7,434
100

304

3,811

24,204

Geographical areas

2005

net sales* by origin
in € million
in %

net sales* by destination
in € million
in %

total assets
capital expenditure on
property, plant and equipment
carrying amount of
property, plant and equipment

2004

net sales* by origin
in € million
in %

net sales* by destination
in € million
in %

total assets
capital expenditure on
property, plant and equipment
carrying amount of
property, plant and equipment

workforce** at year-end

7,258

6,948

2,764

2,581

1,156

1,113

workforce** at year-end

7,553

8,126

3,291

2,439

1,121

1,674

* Continuing operations only.
** The workforce of joint ventures has been included on a proportionate basis.

Annual Report 2005

www.dsm.com

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(4) Other operating income

continuing operations
release of provisions
settlements
government grants
gain on assets and emission rights sold
insurance claims
proceeds from the sale of scrap, waste materials, etc.
sundry
total other operating income, before exceptional items
exceptional items (see note 8)
total, continuing operations
total, discontinued operations
total

The government grants include an amount of € 6 million (2004: € 5 million) for investment grants.

2005

2004

41
25
18
20
6
10
101
221
59
280
2
282

35
-
13
22
16
13
96
195
19
214
2
216

Annual Report 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

(5) Specification of Employee benefits costs, Depreciation and amortization and Other operating costs

employee benefits costs:
in continuing operations
- wages and salaries
- social security costs
- post-employment benefits (see also note 27)
total, continuing operations
total, discontinued operations
total

depreciation and amortization:
in continuing operations
- amortization of intangible assets
- depreciation of property, plant and equipment
- impairments
total depreciation and amortization, before exceptional items
- exceptional items (see note 8)
total, continuing operations
total, discontinued operations
total

other operating costs:
in continuing operations
-additions to provisions
-exchange differences
- sundry
total other operating costs, before exceptional items
- exceptional items (see note 8)
total, continuing operations
total, discontinued operations
total

(6) Net finance costs

interest income
interest expense
capitalized interest during construction
net interest costs
exchange differences
income from other securities
interest charge on discounted provisions
sundry
total, net finance costs, before exceptional items
interest expense on exceptional items (see note 8)
total, continuing operations

2005

2004

1,119
186
47

1,117
197
28

1,352
33
1,385

1,342
69
1,411

34
440
22
496
64

31
3
12
46
31

560
7
567

77
-
77

21
455
14
490
108

60
23
0
83
110

2005
19
-92
6
-67
-7
1
-2
5
-70
-8
-78

598
15
613

193
-7
186

2004
22
-88
6
-60
-
3
-
1
-56
-
-56

In 2005 the interest rate applied in the capitalization of interest during construction was 5% (2004: 5%).

Annual Report 2005

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(7) Earnings per ordinary share

2005
net profit attributable to equity holders of Royal DSM N.V.
dividend on cumulative preference shares
net profit used for calculating earnings per share

average number of ordinary shares outstanding (x 1,000)
effect of dilution:
- share options
adjusted weighted average number of ordinary shares

earnings per share in euro:
- shares outstanding
- diluted
dividend paid in 2005 per share in euro

2004
net profit attributable to equity holders of Royal DSM N.V.
dividend on cumulative preference shares
net profit used for calculating earnings per share

average number of ordinary shares outstanding (x 1,000)
effect of dilution:
- share options
- convertible debenture loan
adjusted weighted average number of ordinary shares

earnings per share in euro:
- shares outstanding
- diluted
dividend paid in 2004 per share in euro

continuing
operations
before ex-
ceptional
items

561
-16
545

discon-
tinued
opera-
tions

result
before ex-
ceptional
items

excep-
tional
items

2
-
2

563
-16
547

-36
-
-36

total

527
-16
511

190,783

- 190,783

1,066
191,849

-
1,066
- 191,849

2.86
2.84
0.875

0.01
0.01
-

2.87
2.85
0.875

-0.19
-0.19
-

2.68
2.66
0.875

415
-22
393

8
-
8

423
-22
401

-130
-
-130

293
-22
271

191,617

- 191,617

375
14
192,006

375
-
-
14
- 192,006

2.05
2.05
0.875

0.04
0.04
-

2.09
2.09
0.875

-0.68
-0.68
-

1.41
1.41
0.875

Annual Report 2005

www.dsm.com

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

23
36

-3
-28
-
-64
-

2005

2004

19
-

-
-94
-15
-108
-1

-95
-36
-8
-15
-59
23
-36
-
-36

-218
-199
-
-
-199
57
-142
12
-130

(8) Exceptional items

exceptional income:
- gain from the sale of activities
- release of provision for environmental costs
total exceptional income

exceptional expense:
- loss from the sale of activities
- additions to provisions for reorganization costs and severance payments
- additions to other provisions
- impairment of intangible assets and property, plant and equipment
- impairment of other assets
total exceptional expense

net finance costs
share of the profit of associates (net)
total, exceptional items (before income tax expense)
income tax expense
total, exceptional items after income tax expense
minority interests
net result from exceptional items

2005
The gain from the sale of activities relates to book profits on the sale of DSM Bakery Ingredients and on the sale of land (DSM Nutritional
Products). Jurisprudence showed that a provision for environmental costs could be released. The loss from the sale of activities is related
to the sale of the SBR business. The addition to provisions for reorganization and severance costs is mainly the balance of restructuring
and reorganization costs at the Linz site in Austria (€ 15 million) and expenses due to the closing of the South Haven site (USA) of DSM
Pharmaceutical Products (€ 11 million). The impairment of intangible assets and property, plant and equipment relates to impairment of
property, plant and equipment at the Linz site (€ 6 million), the South Haven site (€ 27 million) and the Montreal site in Canada (€ 31
million). The net finance costs are related to interest payments in connection with a final tax assessment in the Netherlands for the years
1997 and 1998. The share of profit of associates (net) concerns an impairment of DSM’s share in Methanor. The income tax expense on
exceptional items also includes the recognition of withholding tax credits over previous years and the settlement of tax returns in the
Netherlands over previous years.

2004
The exceptional income in 2004 related to book profits on the sale of land (Performance Materials). The addition to provisions for
reorganization and severance costs is the balance of restructuring and reorganization costs at DSM Anti-Infectives (€ 44 million) and in
the production organization at the Geleen site in the Netherlands (€ 50 million, Other activities). The addition to the other provisions
relates to an onerous purchasing contract in the field of anti-infectives. The impairment of assets relates entirely to the restructuring
measures and reorganizations in the Life Science Products cluster.

Annual Report 2005

www.dsm.com

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(9) Intangible assets

balance at 31 December 2003
cost
amortization
carrying amount

changes in carrying amount:
- capital expenditure
- acquisitions
- disposals
- amortization
- impairments
- exchange differences
- reclassifications
- other

balance at 31 December 2004
cost
amortization
carrying amount

changes in carrying amount:
- capital expenditure
- acquisitions
- disposals
- amortization
- exchange differences
- classified as held for sale
- reclassifications
- other

balance at 31 December 2005
cost
amortization
carrying amount

total

goodwill

licences
and patents

other

515
64
451

44
-
-
-22
-1
-32
14
-1
2

545
92
453

24
526
-4
-35
54
-13
-2
0
550

1,110
107
1,003

355
-
355

-
-
-
-
-
-29
-
-
-29

326
-
326

-
368
-
-
48
-
0
-
416

742
-
742

72
38
34

17
-
-
-10
-1
-2
13
-1
16

102
52
50

19
7
-
-7
5
-13
0
-6
5

93
38
55

88
26
62

27
-
-
-12
-
-1
1
0
15

117
40
77

5
151
-4
-28
1
-
-2
6
129

275
69
206

DSM acquired several entities in business combinations that have been accounted for by the purchase method, resulting in recognition
of goodwill and other intangible assets. The amounts assigned to the acquired assets and liabilities are based on assumptions and
estimates 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 could
affect 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 in
2001 and an amount of € 358 million relating to the acquisition of NeoResins in 2005. The goodwill of Catalytica is allocated to DSM
Pharmaceuticals 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 business
groups (which are in the process of being merged into the new DSM Resins). In all cases the carrying amount is tested against the fair
value of the business. Fair value is based on parameters, which are common for the industry in acquisitions of similar businesses. This
includes a 10-year cash flow and a terminal value without growth. Discount rates applied are between 6 and 8%.

Annual Report 2005

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100

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

cost

100
11
3
154
7
275

amorti-
zation

carrying
amount

44
3
2
19
1
69

56
8
1
135
6
206

of which
acquisition
related
8
7
-
126
-
141

total

land and
plant and
buildings machinery

other
equip-
ment

under
construc-
tion

not used
for
operating
activities

8,843
4,644
4,199

1,629
595
1,034

6,284
3,794
2,490

304
-
-10
-469
-147
-56
-14
4
-388

19
34
-3
-55
-14
-12
-13
8
-36

86
393
-5
-392
-93
-35
-1
-4
-51

8,838
5,027
3,811

1,635
637
998

6,566
4,127
2,439

378
-
88
-126
-446
-86
140
-6
-3
-61

16
39
48
-44
-57
-26
34
-1
8
17

94
218
30
-63
-372
-33
85
-5
-8
-54

8,804
5,054
3,750

1,664
649
1,015

6,483
4,098
2,385

306
246
60

5
14
-1
-22
-
-1
-
-
-5

299
244
55

4
7
1
-15
-17
-1
1
-
-3
-23

284
252
32

611
6
605

194
-441
-
-
-40
-8
-
-3
-298

323
16
307

264
-264
9
-4
-
-26
20
-
-
-1

343
37
306

13
3
10

-1
-
-
-
-
3
2

15
3
12

-
-
-
-
-
-
-
-
-
-

30
18
12

The other intangible assets include:

application software
marketing-related
customer-related
technology-based
other
total

(10) Property, plant and equipment

balance at 31 December 2003
cost
depreciation
carrying amount

changes in carrying amount:
- capital expenditure
- put into operation
- diposals
- depreciation
- impairments
- exchange differences
- reclassifications
- other

balance at 31 December 2004
cost
depreciation
carrying amount

changes in carrying amount:
- capital expenditure
- put into operation
- acquisitions
- diposals
- depreciation
- impairments
- exchange differences
- classified as held for sale
- other

balance at 31 December 2005
cost
depreciation
carrying amount

Annual Report 2005

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101

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Property, 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 December
2004: € 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:

2006
2007 - 2010
after 2010
total

(11) Deferred taxes

deferred tax assets
deferred tax liabilities
net deferred tax assets

On balance net deferred tax assets increased by € 34 million owing to the following changes:

balance at 31 December 2004
deferred tax expense
income tax expense recognized in equity
acquisitions and disposals
exchange rate differences
other
balance at 31 December 2005

The changes under the heading “other” consist for the greater part of reclassifications.

(12) Associates

balance at beginning of year

changes:
- share of profit
- dividends
- capital payments
- acquisitions
- disposals
- other value changes
- transfers
- other
balance at end of year
of which loans issued

Annual Report 2005

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102

lease
14
6
5
25

2005
517
198
319

2004
432
147
285

285
-14
7
-37
21
57
319

2005
78

2004
76

-2
-3
2
2
-9
-21
-2
-2
43
-

9
-7
6
–
–
–
–
-6
78
2

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

2005
355

13
35
2
405

2004
286

10
59
-
355

total

other
securities

other
recei-
vables
15

other
deferred
items
36

-3
6
1
-5
1
-6
-4
82

-3
4
-3
3
111
-5
4
-4
189

-
6
-
-
-
-
-1
46

-
4
-2
-
-
-
-
1
49

-
-
1
-5
1
-
-1
11

-
-
-1
3
111
-5
3
1
123

-3
-
-
-
-
-6
-2
25

-3
-
-
-
-
-
1
-6
17

(13) Prepaid pension costs

balance at beginning of year
changes:
- charged to income
- employer contributions
- reclassifications
balance at end of year

For more details see also note 27.

(14) Other financial assets

balance at 31 December 2003

changes:
- charged to income
- capital payments
- loans issued
- redemptions
- exchange differences
- transfers to current assets
- other
balance at 31 December 2004

changes:
- charged to income
- capital payments
- disposals
- advances
- loans issued
- redemptions
- exchange differences
- transfers to current assets
balance at 31 December 2005

Other securities relate to equity instruments in companies with activities that support DSM’s business, such as venture funds. In Other
securities an amount of € 45 million is included that relates to unquoted equity instruments for which the fair value cannot be measured
reliably 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 2005

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103

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(15) Inventories

raw materials and consumables, at cost
intermediate s and finished go ods, at cost

adjustme nts to lower net realizable value
total

2005
442
1,120
1,562
-27
1,535

2004
540
850
1,390
-42
1,348

The carrying amount of inventories adjusted to net realizable value is € 78 million, the value adjustments of inventories charged to the
income statement was € 4 million.

(16) Receivables

trade accounts receivable
receivable from associates
income taxes receivable
other taxes and social security contributions
government grants
other receivables
deferred items

adjustments for bad debts
total

2005
1,350
13
58
92
3
59
48
1,623
-26
1,597

2004
1,261
25
68
89
7
63
66
1,579
-23
1,556

In government grants an amount of € 2 million (2004: € 3 million) for investment grants and an amount of € 1 million (2004: € 4 million) for
cost grants is included.

(17) Assets and liabilities classified as held for sale

Assets and liabilities classified as held for sale are related to the expected disposal of the DSM Minera business unit and comprise the
following:

assets
intangible assets
property, plant and equipment
inventories
receivables
total assets

liabilities
other current liabilities
total liabilities

13
6
13
11

The sale of Minera was signed and closed on January 19, 2006, with an effective date of January 1, 2006.

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

2005
4,857

2004
5,164

520
233
135
-186
-170
102
50
5,541

270
-233
-66
-195
-119
11
25
4,857

(18) Equity

balance at beginning of year

net profit for 2005
reclassification cumulative preference shares A
exchange differences, net of income tax expense
dividends paid
buy-back of ordinary shares
proceeds from re-issue of ordinary shares
other changes
balance at end of year

On January 1, 2005, the date of first-time application of IAS 32/39, it was not unequivocally clear that the cumulative preference shares A
met 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, by
adaptation of the contract with the holders of these shares. For this reason the cumulative preference shares were recognized in the
opening 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:

0.36 per cumulative preference share A (2004: € 0.36)

-.- per cumulative preference share C (2004: € 0.16)

€
16
€
6
€ 1.00 per ordinary share (2004: € 0.875)
total

2005

191
207

2004
16

168
190

The proposed dividend on ordinary shares is subject to approval by shareholders at the Annual General Meeting and has not been
deducted from equity.

Share capital
On 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, and
1,200,000,000 cumulative preference shares C with a par value of € 0.03 each. The changes in the number of shares in 2005 are shown in
the table below.

ordinary
situation as at 31 December 2004* 201,953,008
re-issue of shares in connection with
-
exercise of options
buy-back of own shares
-
situation as at 31 December 2005 201,953,008
number of treasury shares as
at 31 December 2005
number of shares outstanding as
at 31 December 2005

190,922,965

11,030,043

shares in issue
cumprefs A
44,040,000

-
-
44,040,000

cumprefs C
37,500,000

ordinary
9,996,112

cumprefs C
37,500,000

treasury shares

-
-
37,500,000

-5,108,069
6,142,000
11,030,043

-
-
37,500,000

37,500,000

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.

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Share premium
Of the total Share premium of € 545 million, an amount of € 139 million can be regarded as entirely free of tax.

Ordinary shares held in treasury
On 31 December 2004 DSM possessed 9,996,112 ordinary shares (nominal value € 15 million, 4.1% of the share capital). In 2005, DSM
used 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 average
purchase price of the ordinary treasury shares was € 23.82. The ordinary treasury shares will be used for servicing management and
personnel share option rights.

Other reserves

balance at 31 December 2004

fair value changes of cash flow hedges
exchange differences, net
options granted
balance at 31 December 2005

(19) Employee benefits liabilities

balance at beginning of year
expenses
acquisitions
disposals
employer contribution
exchange differences
other changes
balance at end of year
of which current

translation
reserve

‘hedging’
reserve

-51

-
128
-
77

-1

-2
-
-
-3

fair value

reserve for
reserve share-based
compensation
4
-

0
-
-
0

-
-
7
11

2005
385
46
34
-31
-69
13
10
388
25

total

-48

-2
128
7
85

2004
425
34
-
-
-61
-8
-5
385
40

The Employee benefits liabilities of € 388 million (2004: € 385 million) include € 321 million (2004: € 314 million) related to liabilities from
defined benefit and medical care plans, other long-term employee benefits such as jubilee benefits and long-term compensated
absences for an amount of € 21 million (2004: € 17 million) and € 46 million (2004: € 54 million) for other plans. The liability for post-
employment benefits is explained in detail in note 27.

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

2005

2004

total

207
54
102
363

of which
current
156
24
38
218

total

306
91
87
484

of which
current
175
21
22
218

(20) Provisions

restructuring costs and termination benefits
environmental costs
other provisions
total

Where the effect of the time value of money is material, provisions are measured at the present value of the expenditures expected to be
required to settle the obligation. The discount rate used is based on swap rates for various terms, increased with 75 to 100 base points
depending on those terms.

The Provision for restructuring costs and termination benefits mainly includes the costs of redundancy schemes relating to the dismissal
and 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 of
more than 10 years.

Several items have been combined under Other provisions, for example obligations ensuing from drilling platform decommissioning and
site 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:

restructuring costs and termination benefits
environmental costs
other provisions
total

balance
at 1
January
2005
306
91
87
484

additions

releases

uses

exchange
differen-
ces

other
changes

45
11
33
89

-7
-36
-2
-45

-145
-12
-18
-175

5
2
1
8

3
-2
1
2

balance
at 31
December
2005
207
54
102
363

The 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 (€ 28
million) and DSM Nutritional Products (€ 15 million). The withdrawal from this provision concerns expenditure related to restructuring
operations at DSM Pharmaceutical Products, DSM Food Specialties, DSM Anti-Infectives, DSM Nutritional Products, DSM Elastomers
and DSM Industrial Services (Copernicus project).

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(21) Borrowings

debenture loans
private loans
finance lease liabilities
credit institutions

cumulative preference shares A
total

2005

2004

total

1,057
492
22
139
1,710
-
1,710

of which
current
140
37
13
139
329
-
329

total

1,131
538
40
82
1,791
233
2,024

of which
current
383
46
16
82
527
-
527

For 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 of
security. The documentation of the € 300 million bond issued in November 2005 includes a change of control clause. This clause allows
the 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 is
downgraded 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 of
borrowings excluding credit institutions is as follows:

- 2006
- 2007
- 2008
- 2009 and 2010
- 2011 through 2015
- after 2015
total

190
462
36
253
630
0
1,571

A breakdown of the borrowings, excluding debt to credit institutions and cumulative preference shares, by currency is given below:

EUR
USD
CNY
CAD
ZAR
other
total

2005
986
459
124
-
-
2
1,571

2004
1,117
407
107
56
16
6
1,709

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

On balance, total borrowings decreased by € 314 million owing to the following changes:

balance at 31 December 2004

loans taken up
redemptions
changes in fair value
changes in credit institutions
exchange differences
reclassification of cumulative preference shares A
transfer
other changes
balance at 31 December 2005

2,024

348
-487
-27
42
100
-233
-1
-56
1,710

The 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, outstanding
in 2005 amounted to 4.1% in 2005 (2004: 4.2%).

A breakdown of debenture loans is given below:

4.75%
6.25%
6.75%
6.38%
4.00%
total

DEM loan
NLG loan
USD loan
EUR loan
EUR loan

1998-2005
1996-2006
1999-2009
2000-2007
2005-2015

2005
-
140
204
413
300
1,057

2004
383
143
182
423
-
1,131

All debenture loans have a fixed interest rate. The fixed interest rate of the 6.25% NLG loan 1996-2006, the 6.75% USD loan 1999-2009
and 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 denominated
subsidiaries. This net investment hedge was unwound in 2005. In 2005 this EUR loan was swapped into Swiss francs to hedge the
currency 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 fixed
interest rate of 3.66%.

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Private loans breakdown is given below:

9.22%
9.3%
4.34%
floating (6 months)
floating
12.9%
floating (indefinite)
5.51%
5.61%
3.67%

total

NLG loan
NLG loan
NLG loan
NLG loan
CNY loan
ZAR loan
CNY loan
USD loan
USD loan
CAD loans
other loans

1990-2005
1991-2006
1998-2008
2000-2014
2002-2005
2002-2006
2002-2010
2003-2013
2003-2015

2005
-
7
11
69
-
-
123
128
127
-
27
492

2004
12
7
15
67
20
16
87
115
110
46
43
538

The 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 value
hedge). During 2005 this interest rate swap was unwound. The gain from this will be amortized until the maturity date, leading to an
effective 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 obligation
was swapped into Swiss francs to hedge the currency risk of net investments in Swiss-franc-denominated subsidiaries (net investment
hedge).

DSM’s policy regarding financial risk management is described in note 26.

(22) Other non-current liabilities

government grants
other deferred items
total

The government grants include an amount of € 37 million (2004: € 38 million) in investment grants.

(23) Other current liabilities

received in advance
trade accounts payable
notes and checks due
owing to associates
income taxes payable
other taxes and social security contributions
pensions
other liabilities
deferred items
total

In the ‘deferred items’ an amount of € 1 million (2004: € 1 million) in cost grants is included.

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110

2005
37
16
53

2004
38
22
60

2005
8
960
3
14
57
64
4
205
384
1,699

2004
3
845
6
38
29
65
0
210
414
1,610

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

(24) Contingent assets and contingent liabilities

Contingent liabilities

operating leases
guarantee obligations on behalf of associates and third parties
outstanding orders for projects under construction
other
total

Most of the outstanding orders for projects under construction will be completed in 2006.

The commitments for operating leases are spread as follows:

- 2006
- 2007
- 2008
- 2009 and 2010
- after 2010
total

2005
34
28
8
17
87

2004
23
19
11
6
59

9
6
4
5
10
34

Litigation
There is an ongoing investigation into possible restrictive and/or concerted practices involving a number of EPDM producers, including
DSM, launched by the European Commission and the US Department of Justice at the end of 2002. DSM is cooperating fully in this
investigation and will continue to do so for as long as necessary. The investigation has prompted various buyers to institute proceedings for
damage against a number of EPDM producers, including DSM. These proceedings include a class action brought before the United
States District Court in Connecticut.

There is a process in place to monitor legal claims periodically and systematically.

(25) Income tax expense

As part of the process of preparing consolidated financial statements, DSM is required to estimate income tax expense in each of the
jurisdictions in which it conducts business. This process involves estimating actual current tax expense and temporary differences
between tax and commercial reporting. Temporary differences result in deferred tax assets and liabilities, which are included in the
consolidated balance sheet. The Company has to assess the likelihood that deferred tax assets will be recovered from future taxable
income. 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 be
realized. In the event that actual results differ from estimates in future periods, and depending on tax strategies that DSM may be able to
implement, 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.

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111

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

The tax expense can be broken down as follows:

total tax on result from continuing operations, before exceptional items
tax on exceptional items
total tax expense from continuing operations

of which:
current tax expense
- current year
- prior year adjustments

deferred tax expense
- originating from and reversal of temporary differences
- prior year adjustments
- change in tax rate
- benefit of tax losses and tax credits recognized

total tax expense

The relationship between the domestic income tax rate and the effective tax rate is as follows:

as a %
domestic income tax rate

tax effects of
- deviating rates
- tax-exempt income and non-deductible expense
- other effects
effective tax rate excluding exceptional items
effective tax rate including exceptional items

2005
-173
23
-150

-82
-54
-136

-93
69
-3
13
-14

2004
-95
57
-38

14
38
52

-163
-23
30
66
-90

-150

-38

2005
31.5

2004
34.5

-9.9
-0.9
3.0
23.7
21.9

-14.5
-
-0.6
19.4
13.1

The difference in effective tax rate including and excluding exceptional items in 2005 was due to the fact that exceptional items included a
separate (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).

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112

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

The deferred tax assets and liabilities relate to the following balance sheet categories:

intangible assets
property, plant and equipment
financial assets
other non-current assets
inventories
receivables
other current assets
equity
other non-current liabilities
non-current provisions
non-current borrowings
other current liabilities
tax losses carried forward

set-off
total

(26) Financial instruments

Policies on financial risks

December 31, 2005 December 31, 2004
deferred
tax
liability
1
229
74
122
35
3
7
12
3
9
12
28
-
535
-388
147

deferred
tax
liability
47
295
15
123
35
1
0
10
7
11
6
7
-
557
-359
198

deferred
tax
asset
25
72
35
2
52
3
3
0
29
69
9
57
520
876
-359
517

deferred
tax
asset
11
55
60
2
42
34
0
1
27
133
37
27
391
820
-388
432

General
DSM is exposed to several financial risks: liquidity risk, currency risk, interest rate risk and credit risk. DSM’s financial risk policy is aimed at
minimizing the effects of fluctuations in currency exchange and interest rates on its results in the short term and following the market
exchange rates and interest rates in the long term. Within DSM financial risk management is centralized. DSM uses financial derivatives to
manage financial risks relating to business operations. DSM does not use derivative instruments for trading purposes.

Liquidity risk
At DSM cash management is carried out centrally insofar as this is possible via an “In-house Bank”. To this end, in the major countries use
is 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 two
commercial paper programs to a total of not more than € 900 million (2004: € 900 million).

Currency risk
The currency risk arises from recognized assets and liabilities, firm commitments and forecast transactions, denominated in currencies
other than the euro. The currencies giving rise to this risk are primarily the US dollar, the UK pound and the Swiss franc. DSM uses
currency forward contracts, spot contracts and – to a limited extent – currency options to hedge the exposure to fluctuations in foreign
exchange rates. In general, currency forward contracts and currency options have maturities of less than one year. It is DSM’s policy to
hedge 100% of the currency risks resulting from sales and purchases at the moment of recognition of the trade receivables and trade
payables. 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 that
effect 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 is
partially hedged. Swiss-franc-denominated net assets have to some extent been hedged by currency swaps (CHF 826 million). US-
dollar-denominated net assets have to some extent been hedged through USD loans (USD 400 million). The reason for these hedges is
the relatively high level of foreign-currency-denominated net investments.

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Interest rate risk
DSM’s interest rate risk policy is aimed at minimizing the interest rate risks associated with the financing of the company and thus at the
same time optimizing the net finance costs. Interest rate instruments will be applied only on the basis of underlying positions. This policy
translates into a certain desired profile of fixed interest and floating interest positions, with the floating interest position in principle not
exceeding 60% of net debt. DSM manages interest rate risks by means of interest rate swaps and, to a limited extent, the purchase of
interest rate options.

Market values
Financial assets and financial liabilities are initially recognized at cost, being the fair value of the proceeds received, net of transaction
costs. Subsequently, the estimated fair value of financial instruments is determined by using available market information and appropriate
valuation methods. The fair value of derivatives and borrowings has been calculated by discounting the expected cash flows at prevailing
interest rates. For the loans included in the non-current financial assets, trade accounts receivable, cash and cash equivalents, and trade
accounts 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 accounting
DSM applies the following hedge accounting models: fair value hedge accounting, cash flow hedge accounting and net investment
hedge accounting, to manage the risks as mentioned above. The goal of a fair value hedge is to fix the value of an asset/liability (hedged
item). Changes in fair value of a designated derivative that is highly effective as a fair value hedge, together with the change in fair value of
the corresponding asset, liability or firm commitment attributable to the hedged risk, are included directly in earnings. So both fair value
changes are offset in the income statement. The goal of a cash flow hedge is to limit the variability of highly probable future cash flows
due to foreign currency or interest rate movements. Changes in fair value of a designated derivative that is highly effective as a cash flow
hedge 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 a
foreign entity. Changes in fair value of a designated derivative that is highly effective as a net investment hedge are included in equity. So
volatility 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 of
the hedges through effectiveness testing. Ineffectiveness only occurs when fair value changes of the hedging instrument compared to fair
value changes of the underlying risk are outside a 80 – 125 % bandwidth. All hedges in 2005 have proven to be effective.

Credit risk
DSM manages the credit risk to which it is exposed through credit limits per financial institution and by dealing exclusively with financial
institutions having a high credit rating. At the balance sheet date there were no significant concentrations of credit risk.

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114

Financial derivatives

interest rate swaps
currency swaps
total financial derivatives related to external borrowings

currency forward contracts
currency options
balance at 31 December 2004

interest rate swaps
currency swaps
total financial derivatives related to external borrowings

currency forward contracts
currency options
balance at 31 December 2005

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

total

41
129
170

29
-14
185

14
-7
7

-36
-
-29

current
assets
43
158
201

38
5
244

22
11
33

3
-
36

current
liabilities
-2
-29
-31

-9
-19
-59

-8
-18
-26

-39
-
-65

Value changes of external borrowings and related financial derivatives 2005 vs. 2004:

hedges on external borrowings

fair value hedges (interest rate swaps)
cash flow hedge (currency swaps)
net investment hedge (currency swaps)
total

external
borrowings
27
-17
26
36

derivatives

total

equity

P&L

other

-27
11
-147
-163

-
-6
-121
-127

-
-6
-
-6

-
-
-2
-2

-
-
-119*
-119

* Positive cash flow impact of unwinding the currency swap from EUR to USD on the 6,38% EUR loan 2000-2007.

Interest rate swaps
Interest rate swaps are used to achieve an appropriate mix of fixed and floating interest rate exposure of external loans. These swaps are
accounted for as fair value hedges. The maturities of the swaps match those of the related loans. On 31 December 2005, the notional
amount 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 as
from the future issue date. In this way DSM achieves up-front certainty about the interest costs for a major part of DSM long-term euro
debt. 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). A
second interest rate swap of € 200 million was concluded in 2005 for the highly probable refinancing of the 6.38% EUR 400 million loan
2000-2007 maturing in 2007. On 31 December 2005, the notional amount of the interest rate swaps for cash flow hedging purposes
relating to future long-term loans was € 200 million (2004: zero).

Currency swaps
With currency swaps the currency risk of loans and net investments in subsidiaries denominated in foreign currencies are hedged. These
currency swaps are accounted for as net investment hedges. DSM uses currency swaps to hedge part of the net investment in Swiss-
franc-based assets (CHF 826 million). On 31 December 2005, the notional amount of the currency swaps relating to net investment
hedges was € 538 million (2004: € 538 million).

Currency swaps that hedge the currency risk resulting from recognized assets and liabilities, firm commitments and forecast transactions
are accounted for as cash flow hedges. The notional amount of currency swaps relating to long-term-loans denominated as cash flow
hedges was € 141 million (2004: € 141 million).

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Currency forward contracts
To hedge intercompany loans and receivables/payables denominated in the non-functional currency of the subsidiaries, DSM uses
currency 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 specifically
average 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 net
USD exposure at this exchange rate. The effects of these hedges will be included in the operating profit of the clusters involved.

Currency options
Currency options, more specifically average rate options, are used to hedge certain currency risks related to forecast transactions and
firm commitments of operating companies. These options provide protection against deterioration of the USD whilst allowing DSM to
retain upward USD potential. The premiums for these instruments are paid up-front and impact on the operating result of the subsidiary
involved. In 2004 DSM hedged two USD firm commitment contracts for 2005 and 2006 by buying average rate options with a total
underlying value of USD 34.6 million (2005) and USD 37.2 million (2006). Additional, average rate options were used to hedge part of the
projected 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 160
million. The costs of these options were € 2.3 million.

(27) Post-employment benefits

The charges for post-employment benefits recognized in the income statement (note 5) consist of: :

net costs related to defined benefit plans
net costs related to medical care plans
costs related to other long-term employee benefits
total, continuing operations
discontinued operations
total

2005
22
5
20
47
1
48

2004
21
-2
9
28
1
29

For 2006 net costs related to defined benefit and medical care plans will approximate the costs for 2005.

Pensions
The DSM Group companies have various pension plans, which are geared to the local regulations and practices in the countries in which
they operate. As these plans are designed to comply with the statutory framework, tax legislation, local customs and economic situation
of 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 the
United States. The rights that can be derived from these plans are based primarily on length of service and (average) final salary. The
majority 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 and
fair values of plan assets. Post-employment benefit accounting is intended to reflect the recognition of post-employment benefits over
the employee’s approximate service period, based on the terms of the plans and the investment and funding decisions made. The
accounting requires management to make assumptions regarding variables such as discount rate, future salary increases, return on
assets, and future medical costs. Management consults with outside actuaries regarding these assumptions at least annually for
significant plans. Changes in these key assumptions can have a significant impact on the projected benefit obligations, funding
requirements and periodic costs incurred.

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

The amounts recognized in the balance sheet for defined benefit plans are as follows:

present value of benefit obligation
benefit obligation at 1 January
changes:
- service costs
- interest costs
- employee contributions
- plan changes
- net actuarial gain (-) or loss (+)
- exchange differences
- acquisitions
- divestments
- curtailments
- benefits paid
- other
benefit obligation at 31 December

fair value of plan assets
plan assets at 1 January
changes:
- actual return on plan assets
- employer contributions
- employee contributions
- exchange differences
- benefits paid
- other
plan assets at 31 December

net assets
present value of benefit obligations
fair value of plan assets
funded status
unrecognized actuarial gains (-) or losses (+)
unrecognized past service costs
effect of asset ceiling
net assets in balance sheet

amounts in the balance sheet:
- liabilities (provision for post-employment benefits)
- assets (prepaid pension costs)
net assets in balance sheet

The amounts recognized in the income statement are as follows:

current service costs
interest costs
expected return on plan assets
past service costs
asset ceiling
net costs related to defined benefit plans

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117

2005
4,756

112
210
12
4
149
20
81
-62
-5
-233
-
5,044

2005
4,616

734
88
12
14
-233
0
5,231

2005
5,044
5,231
187
-49
-
-1
137

268
405
137

2005
112
210
-305
4
1
22

2004
4,247

90
215
12
0
407
-10
-
-
-
-230
25
4,756

2004
4,253

458
99
12
-7
-230
31
4,616

2004
4,756
4,616
-140
228
0
-
88

267
355
88

2004
89
215
-283
0
0
21

Royal DSM N.V. Financial statements 2005
Consolidated financial statements

The changes in the net asset recognized in the balance sheet are as follows:

net assets at 1 January
net expense recognized in the income statement
employer contributions
exchange differences
others
net assets at 31 December

The main actuarial assumptions for the year (expressed as ranges) are:

discount rate
price inflation
salary increase
pension increase
return on assets

2005
88
-22
88
-7
-10
137

2004
7
-21
99
3
-
88

2005

2.6% - 6.1%
1.5% - 3.0%
1.8% - 4.0%
0% - 2.8%
4.5% - 8.5%

2004

3.3% - 6.1%
1.5% - 3.0%
1.8% - 4.0%
0% - 2.8%
4.8% - 8.5%

Post-employment medical care and other costs
In some countries, particularly the United States, group companies provide retired employees and their surviving dependants with post-
employment benefits other than pensions, mainly allowances for medical and dental expenses and life insurance premiums. Some of
these are unfunded; in these cases, approved expense claims are reimbursed out of the financial resources of the group companies
concerned.

The amounts included in the balance sheet are as follows:

present value of obligations
fair value of plan assets
present value of obligations
unrecognized actuarial gains (-) or losses (+)
unrecognized past service costs
net liability in balance sheet (provision for post-employment benefits)

The amounts recognized in the income statement are as follows:

current service cost
interest costs
expected return on plan assets
past service costs
net costs related to medical care plans

2005
67
13
54
-3
2
53

2005
2
4
-1
-
5

2004
54
11
43
0
4
47

2004
2
3
-1
-6
-2

The (net) changes in the liability for post-employment medical care and other costs recognized in the balance sheet (Provision for post-
employment benefits) can be shown as follows:

net liability at 1 January
net expense recognized in the income statement
benefits paid
exchange differences on foreign plans
other
net liability at 31 December

2005
47
5
-3
7
-3
53

2004
61
-2
-6
-4
-2
47

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

2005
3.0%
7.0%
6.0%
4.0%

2004
3.0%
7.25%
6.12%
4.0%

2005

2004

1,381
329

1,264
527

1,710
-5
-902
29
832

1,791
-6
-1,261
-185
339

The main actuarial assumptions for post-employment medical care costs for the year are:

underlying inflation rate
medical claim inflation rate
salary increase
discount rate

(28) Net debt

borrowings:
- non-current borrowings
- current borrowings
total borrowings
current investments
cash and cash equivalents
net balance of financial derivatives (see also note 26)
net debt

In the calculation of the net debt the temporary reclassification at year-end 2004 to debt of the cumulative preference shares A with an
impact 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 in
connection with the dissolution of the joint venture with BASF in the field of feed enzymes, as a consequence of the takeover in 2003 of
Roche’s Vitamins & Fine Chemicals division.

(29) Notes to the cash flow statement

The cash flow statement provides an explanation of the changes in cash and cash equivalents. It is prepared on the basis of a
comparison of the balance sheets as at 1 January and 31 December. Changes that do not involve cash flows, such as changes in
exchange 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 items
concerned. For those balance-sheet items for which no detailed statement of changes is included, the table below shows the link
between the change according to the balance sheet and the change according to the cash flow statement:

balance at 1 January 2005
balance at 31 December 2005
balance-sheet change

adjustments:
- exchange differences
- changes in consolidation
- transfers
- reclassifications
adjusted balance-sheet change

change in cash flow

working capital
1,294
1,433
139

-103
87
62
16
201

-201

provisions
484
363
-121

-8
-2
-
-
-131

-131

borrowings
2,024
1,710
-314

-100
55
29
233
-97

-97

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(30) Management share options

Under the current plan performance and non-performance related stock options or stock appreciation rights (SARs) are granted to senior
management. Such a grant takes place on the first day on which the DSM share is quoted ex-dividend following the Annual General
Meeting. 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 the
stock options/SARs (non-performance related) vest and two third of the stock options/SARs which are performance related will become
exercisable in whole, in part, or not at all, depending on the Total Shareholder Return (TSR) achieved by DSM in comparison with a peer
group. 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 of
senior 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 obtain
the approval of an officer ranking one level higher in the organization. Senior management that is not included in the aforementioned
groups are not subject to any predefined black-out periods and may exercise their stock options at any time, provided they have no
insider knowledge. In specific circumstances the Compliance Officer may define special black-out periods for individuals or a group of
employees, during which they are not allowed to trade in any DSM securities.

Overview of management option rights
outstanding
on 31 Dec.
2004

in 2005

granted

vested (a)

exercised

forfeited /
expired

outstanding
on 31 Dec.
2005

exercise
price (€ )

exercise period

until 14 Jan. 2007

until 31 Mar. 2008

until 30 Mar. 2009

until 4 Apr. 2010

until 4 Apr. 2011

until 3 Nov. 2011

until 2 Apr. 2012

until 8 Apr. 2013

until 14 Jan. 2007

until 31 Mar. 2008

until 30 Mar. 2009

until 4 Apr. 2010

until 4 Apr. 2011

until 3 Nov. 2011

until 2 Apr. 2012

until 8 Apr. 2013

2,580,478

-65,200

stock options:

- vested

- unvested

stock appreciation rights

- vested

- unvested

1999

2000

2001

2002

2003

393,500

765,000

2,039,250

479,100

140,000

2003(b)

11,300

2004

2005

6,000

2002

2003

1,801,950

2,098,126

2003(b)

192,050

2,634,076

2004

2005

1999

2000

2001

2002

2003

2003(b)

2004

2005

72,000

31,500

18,000

8,000

1,000

8,000

2002

2003

225,750

264,750

2003(b)

342,200

2004

2005

633,900

447,750

total

12,237,452

3,028,228

-393,500

-643,500

-1,405,859

1,779,450

-1,104,300

71,000

14,150

119,150

65,200

-102,500

-11,300

-43,500

-5,000

-1,779,450

-71,000

-14,150

-119,150

121,500

633,391

1,154,250

108,500

14,150

81,650

60,200

-22,500

-98,500

1,928,626

-5,250

172,650

-101,250

2,413,676

-47,600

2,467,678

-58,000

-57,000

-31,500

213,750

-133,750

14,000

15,000

98,000

8,000

9,450

16,450

8,000

240,750

333,750

601,450

435,750

-8,000

-12,000

-16,000

-4,000

-4,005,709

-323,100

10,936,871

-356,150

-482,750

8,000

8,450

16,450

8,000

-213,750

-8,000

-8,450

-16,450

-8,000

13.005

18.240

19.990

23.505

18.195

19.770

17.895

29.050

23.505

18.195

19,770

17.895

29.050

13.005

18.240

19.990

23.505

18.195

19.770

17.895

29.050

23.505

18.195

19.770

17.895

29.050

changes in 2004

total

3,341,726

(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 rights

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

relating to 1999

relating to 2000

relating to 2001

relating to 2002

relating to 2003

relating to 2004

total

changes in 2004

outstanding
on 31 Dec.
2004

289,686

477,418

410,334

278,262

granted

in 2005
exercised

-252,348

-413,542

-239,310

-198,010

256,100

-11,650

1,455,700

256,100

-1,114,860

expired

-480

-1,320

-6,356

-2,370

-8,956

-19,482

outstanding
on 31 Dec.
2005

36,858

62,556

164,668

77,882

235,494

577,458

exercise
price (€ )
19.80

19.99

23.11

18.19

29.05

-272,552

-30,088

exercise period

until Feb. 2006

until Mar. 2006

until Apr. 2007

until Apr. 2008

until Apr. 2010

Based on the 2004 result, 256,100 personnel option rights were granted in 2005. No personnel option rights were granted in 2004.

Restricted shares

Granting of restricted shares is limited to the Managing Board; a further explanation is available on page 67.

outstanding
on 31 Dec.
2004

during 2005
vested

granted

expired /
forfeited

outstanding
on 31 Dec.
2005

share price
at date of
grant (€ )

unvested

2005

42,000

29.050

Before 2005 no restricted shares were granted.

Share-based compensation

The 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 fair
value is determined using the Black-Scholes option pricing model, taking into account market conditions linked to the price of the DSM
share. The costs of these options are recognized in the income statement (Employee benefits). Prior to 2004 share-based compensation
was accounted for using the intrinsic value method.

The following assumptions were used in the Black-Scholes option pricing model:

risk-free interest rate (6 years risk free)
expected option life management option rights
nominal option life management option rights
expected option life personnel option rights
nominal option life personnel option rights
expected stock price volatility

2005
3.15%
6 years
8 years

2004
3.24%
6 years
8 years
2.5 years 2.5 years
5 years
26%

5 years
26%

The costs of wages and salaries include an amount of € 22 million in share-based compensation (2004: € 8 million).

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

(31) Interests in joint ventures

DSM holds the following interests in the following most important joint ventures:

company
DEX-Plastomers VoF
Holland Sweetener Company VoF
Noordgastransport BV
Fersina Gb SA de CV
Zhang Jia Kou Gist-brocades Pharmaceutical Company Ltd.
EdeA VoF

location
Heerlen
Geleen
Zoetermeer
Ramos Arizpe
Zhang Jia Kou
Geleen

DSM interest
50%
50%
40%
50%
50%
50%

NL
NL
NL
MX
CN
NL

The financial data of joint ventures are included in the consolidated financial statements according to the method of proportionate
consolidation. DSM interests in the assets and liabilities, revenues and expenses of these joint ventures are:

non-current assets
current assets
non-current liabilities
current liabilities
net assets

net sales
expenses
net profit

2005
187
134
-116
-66
139

374
-339
35

2004
208
146
-127
-68
159

391
-356
35

(32) Interests in associates

DSM holds the following interests in the following most important associates:

company
American Melamine Industries, Inc.
Methanor VoF
Nippon Dyneema Co. Ltd.
Nylon Polymer Company, LLC
Triferto BV
Xinhui Meida - DSM Nylon Chips Co. Ltd.

location
Fortier
Amersfoort
Osaka
Augusta
Doetinchem
Guangzhou

DSM interest
50%
30%
50%
25%
40%
25%

US
NL
JP
US
NL
CN

Investments in associates are accounted for by the equity method of accounting. The following table provides summary financial
information on associates on a 100% basis.

non-current assets
current assets
non-current liabilities
current liabilities
net assets

net sales
net profit

2005
126
65
-17
-62
112

358
-2

2004
218
64
-48
-147
87

542
34

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

(33) Related parties

Related 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 financial
year 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 of
Managing Board members employed by Royal DSM N.V. was 5 (2004: 5). The remuneration of former members of the Managing Board
amounted 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: € 0.2
million).

Further information about the remuneration of Managing Board members and Supervisory Board members and their share option rights
is given on page 62 of the Report by the Managing Board.

(34) Service fees paid to external auditors

The service fees paid to Ernst & Young included in ‘Work subcontracted and other external costs’ in 2005 amounted to € 5.2 million for
audit services (2004: € 5.8 million), € 1.6 million for tax services (2004: € 1.6 million) and € 0.4 million for sundry services (2004: € 0.5
million).

(35) First-time adoption of IFRS by DSM

Introduction
Until 2004 DSM prepared its consolidated financial statements in accordance with accounting principles generally accepted in the
Netherlands (‘NL GAAP’). From 2005 onwards DSM is required to prepare its consolidated financial statements in accordance with
International 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. The
information in that annex was prepared on the basis of the best of our knowledge. At that moment some issues were still subject to
debate 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 DSM
publishes comparative information for one year in its Annual Report, the date for transition to IFRS is 1 January 2004, this being the start
of the earliest period for which comparative information is given. The financial information of DSM according to IFRS has been prepared
on the basis of IFRS effective at 31 December 2005.

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

Overview of the impact of the transition to IFRS
The impact of the transition on shareholders’ equity and net profit can be summarized as follows:

SHAREHOLDERS’ EQUITY

according to NL GAAP
changes due to the application of:
- IFRS 2 Share-based payment
- IFRS 3 Business combinations
- IAS 19 Employee benefits
- IAS 28 Investments in associates
- IAS 31 Interests in joint ventures
- IAS 37 Provisions
addition of dividend on cumprefs, declared after balance sheet
date, but under NL GAAP already deducted from equity
reclassifications
according to IFRS (excluding IAS 32 and IAS 39)
IAS 32 and IAS 39 Financial instruments
according to IFRS (including IAS 32 and IAS 39)

NET PROFIT

group profit according to NL GAAP
changes due to the application of:
- IFRS 2 Share-based payment
- IFRS 3 Business combinations
- reversal of amortization of goodwill
- deferred costs relating to DNP
- IAS 19 Employee benefits
- IAS 28 Investments in associates
- IAS 31 Interests in joint ventures
- IAS 37 Provisions
income tax expense
profit for the year

difference
of which:

operating profit
net finance costs
income tax expense
share in results of associates

1 January 31 December
2004
4,812

2004
4,918

1 January
2005

-1
22
83
7
-3
35

-3
20
163
8
-4
1

15
44
5,120

11
45
5,053

5,053
-218
4,835

2004
result before
exceptional
items
348

2004
exceptional
items

2004
total

-109

239

-8

21
-29
86
1
-1
-1
-5
412

64
73
-5
-5
1

-
-
-
-
-
-50
17
-142

-33
-50
-
17
-

21
-29
86
1
-1
-51
12
270

31
23
-5
12
1

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

The impact on net sales and cash flows (both effects resulted from the application of IAS 31 Interests in Joint Ventures) and on earnings
per share were:

2004
net sales (€ million)

net cash provided by operating activities
net cash used in investing activities
net cash used in financing activities

per ordinary share in euro:
- net profit excluding exceptional items
- net profit
- net profit, after dilution

NL GAAP
7,752

IFRS
7,832

Delta
+80

-13
-15
+28
0

898
-323
-533
42

2.13
1.45
1.45

+0.37
+0.20
+0.20

911
-308
-561
42

1.76
1.25
1.25

Transitional arrangements
DSM made use of the following exemptions to retrospective application of IFRSs as permitted by IFRS 1 First-time Adoption of
International Financial Reporting Standards:
- Business combinations prior to the transition date of 1 January 2004 have not been restated according to the requirements of IFRS 3

Business 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 the

transition date.

- The comparative information for 2004 about financial instruments is based on existing NL GAAP. IAS 32 Financial Instruments: Disclosure
and Presentation and IAS 39 Financial Instruments: Recognition and Measurement were not applied in 2004, but have been applied as
from 1 January 2005.

Most important changes in DSM’s accounting policies as at 1 January 2004
On page 82 you find a summary of significant accounting policies used in this annual report. The most important changes in DSM’s
accounting policies and their impact on result and equity are summarized below.

IFRS 2 Share-based Payment
In accordance with IFRS 2, an expense must be recognized representing the fair value of employee share options and stock appreciation
rights granted to employees. The fair value is calculated using the Black-Scholes option pricing model and is charged to the income
statement 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 (transitional

provisions 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 Combinations
Goodwill is no longer amortized, but tested for impairment at least annually. Goodwill was tested for impairment as at 1 January 2004 and
31 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 deemed

cost 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 the
removal of amortization relating to the acquisition of Catalytica in 2000. There were no related income tax expense effects because of the
tax-exempt nature of this goodwill. Under NL GAAP an amount of € 29 million in negative goodwill was allocated to current liabilities (for
deferred costs related to DSM Nutritional Products). Recognition of negative goodwill is not allowed under IFRS 3. The impact for the
opening balance under IFRS was an increase in equity of € 22 million and a decrease in deferred tax assets of € 7 million. The impact on
net profit 2004 under IFRS was a reduction of € 22 million.

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Royal DSM N.V. Financial statements 2005
Consolidated financial statements

IAS 19 Employee Benefits
With regard to defined benefit plans (pensions and other post-retirement benefits) IAS 19 requires for each plan the recognition of a
liability 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 additional
pension liability of € 160 million in DSM’s IFRS opening balance sheet as at 1 January 2004. On balance, the after-tax impact on equity
was 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 31
December 2004. The pension charge under IFRS for the year 2004 was € 28 million, compared with an amount recognized under NL
GAAP 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 Associates
This Standard applies to investments in which the investor has significant influence. There is a rebuttable presumption of significant
influence if the investor holds 20% or more of the voting power of the associate. Associates are accounted for in the consolidated
financial 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 fair
value, 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 the
balance sheet as at 1 January 2004 and an increase of € 8 million in the balance sheet as at 31 December 2004. The positive impact on
net profit 2004 under IFRS was € 1 million.

IAS 31 Interests in Joint Ventures
DSM has opted to consolidate joint ventures according to the proportionate consolidation method. Under NL GAAP DSM restricted this
method to joint ventures that were important to DSM in terms of sales to external parties. This restriction is not allowed under IFRS. As a
result, 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 flow
statement, 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 Provisions
According to IAS 37 a provision shall be recognized only when a past event has created a legal or constructive obligation, an outflow of
resources is probable, and the amount of the obligation can be estimated reliably. Under NL GAAP DSM recognized a provision of € 50
million 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. The
effect 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.

Reclassifications
In changing over to IFRS, DSM implemented several changes in the format of the financial statements and the terminology used. The
reclassifications 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 fixed

assets (Intangible assets).

- The introduction of a separate category Deferred tax assets (€ 234 million), which were previously presented under Financial fixed

assets.

- 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 been

transferred to Other non-current liabilities.

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Change in DSM’s accounting policies as at 1 January 2005

IAS 32 and IAS 39 Financial Instruments
IAS 32 and IAS 39 address the accounting for and financial reporting of financial instruments. IAS 32 covers disclosure and presentation
whilst 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 financial
assets and financial liabilities (including derivatives) at fair value. DSM has opted to apply these standards as from the beginning of the
financial 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 the

related 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 a
temporary classification of cumulative preference shares A to debt for an amount of € 233 million.The impact on net profit for 2005 was
negligible.

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Royal DSM N.V. Financial statements 2005
Financial statements of Royal DSM N.V.

Balance sheet

assets

x € million

non-current assets
intangible assets (2)
property, plant and equipment (3)
financial fixed assets (4)

current assets
receivables (5)
financial derivatives
cash and cash equivalents

total

shareholders’ equity and liabilities

x € million

shareholders’ equity (6)

non-current liabilities
deffered tax liabilities
provisions (7)
borrowings (8)

current liabilities
provisions (7)
borrowings (8)
financial derivatives
other current liabilities (9)

total

* Pro forma: after application of IAS 32 and IAS 39.
** Before application of IAS 32 and IAS 39.

Income statement

31 December 31 December 31 December
2004**

2004*

2005

359
21
7,989
8,369

309
33
1
343
8,712

-
20
7,459
7,479

228
200
3
431
7,910

-
20
7,455
7,475

226
-
3
229
7,704

31 December 31 December 31 December
2004**

2005
5,474

2004*
4,835

5,053

13
17
819
849

8
400
-
1,394
1,802
7,704

24
12
1,175
1,211

14
147
25
1,841
2,027
8,712

13
17
1,216
1,246

8
400
31
1,390
1,829
7,910

x € million
share in results of subsidiaries, joint ventures and associates (after income tax expense)
other income and expense
net profit attributable to equity holders of Royal DSM N.V.

2005
471
56
527

2004
359
-66
293

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Notes to the Royal DSM N.V. balance sheet
(1) General
Unless 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 are
presented after application of IAS 32 and 39. These standards were 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 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 the
provisions of article 362-8 of Book 2 of the Dutch Civil Code, except for investments in subsidiaries, which are accounted for at net asset
value in accordance with the equity method. 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 has been published at the Chamber of Commerce for Zuid-Limburg in Maastricht (The Netherlands) and is
available from the company upon request. The list is also available on the company’s website www.dsm.com.

(2) Intangible assets
The intangible assets completely comprise out of the goodwill related to the acquisition of NeoResins (now DSM NeoResins) on
February 2, 2005.

(3) Property, plant and equipment
This item mainly relates to land and buildings and corporate IT projects. Capital expenditure in 2005 was € 5 million, while the
depreciation charge in 2005 was € 3 million. The historic cost of property, plant and equipment as at 31 December 2005 was € 52
million; accumulated depreciation amounted to € 31 million.

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Royal DSM N.V. Financial statements 2005
Financial statements of Royal DSM N.V.

total

subsidiaries

share in
equity
7,022 6,954

262 262
-505 -505
899 899
318 -
-498 -498
55 55
-102 -102
8 -22
7,459 7,043

450 450
-422 -422
728 727
-358 -358
108 -
-211 -211
107 107
136 136
-8 -11
7,989 7,461

(4) Financial fixed assets

balance at 31 December 2003

changes:
-share in profit
- dividends
- capital payments
- loans granted
- intra-group transactions
- value adjustments
- exchange differences
- other
balance at 31 December 2004

changes:
-share in profit
- dividends
- capital payments
- goodwill
- loans granted
- intra-group transactions
- value adjustments
- exchange differences
- other
balance at 31 December 2005

(5) Receivables

receivables from subsidiaries
other receivables
total

(6) Shareholders' equity

balance at 31 December

net profit
reclassification of cumulative preference shares A
net translation differences
management options
dividend
share buy-backs
adoption of IAS 32 and IAS 39 -15
other
balance at 31 December, after adoption of IAS 32 and IAS 39

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130

loans

-
-
-
318
-
-
-
33
414

-
-
-

-
-
-
-
3
417

other
securities

-
-
-
-
-
-
-
-2
2

-
-
1

-
-
-
-
-
3

2005
228
81
309

other
loans

-
-
-
-
-
-
-
-1
0

-
-
-

108
-
-
-
-
108

2004
142
86
228

2005
4,835

2004
5,120

527
233
128
7
-183
-68
-
-5
5,474

293
-233
-62
4
-194
-108
15
-
4,835

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

For details see the consolidated statement of changes in equity on page 88.

Legal reserves
Since the profits retained in Royal DSM N.V.'s consolidated and non-consolidated companies can be distributed, and received in the
Netherlands, without restriction, no legal reserve for retained profits is required. In shareholders’ equity an amount of € 77 million is
included for translation reserve and -€ 3 million for hedging reserve.

(7) Provisions

environmental costs
other provisions
total

2005

2004

total
8
18
26

of which
current
3
11
14

total
12
13
25

of which
current
6
2
8

The total of non-current and current provisions increased by € 1 million. This is the net effect of the following changes:

environmental costs
other provisions
total

(8) Borrowings

debenture loans
private loans

cumulative preference shares A
total

balance
at 31
december
2004
12
13
25

additions

uses

-
12
12

-4
-7
-11

balance
at 31
december
2005
8
18
26

2005

2004

total

1,057
265
1,322
-
1,322

of which
current
139
8
147
-
147

total

1,383
-
1,383
233
1,616

of which
current
400
-
400
-
400

Of 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
- 2007
- 2008
- 2009 and 2010
- 2011 through 2015

147
413
-
204
558
1,322

The 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.

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Royal DSM N.V. Financial statements 2005
Financial statements of Royal DSM N.V. – Other information

(9) Other current liabilities

owing to subsidiaries
other liabilities
deferred items
total

2005
1,769
70
2
1,841

2004
1,343
44
3
1,390

Contingent liabilities
Guarantee 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 writing
that it accepts several liability for debts arising from acts-in-law of a number of consolidated companies. These debts are included in the
consolidated balance sheet.

Employees
The 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 Feike
Sijbesma, annual salary € 470,000 (2004: € 461,040), bonus € 290,950 (2004: € 165,974), pension € 86,148 (2004: € 85,250) and
Chris Goppelsroeder, annual salary € 470,000 (2004: n.a.), bonus € 218,913 (2004: n.a.), pension € 48,304 (2004: n.a.). Further details
are provided in the Remuneration 2005 paragraph (pages 64-69).

Heerlen, 6 February 2006

Heerlen, 8 February 2006

MANAGING BOARD,
Peter Elverding
Jan Zuidam
Henk van Dalen
Feike Sijbesma
Chris Goppelsroeder

SUPERVISORY BOARD,
Cor Herkströter
Henk Bodt
Pierre Hochuli
Ewald Kist
Okko Müller
Claudio Sonder
Cees van Woudenberg

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Auditors' report
Introduction
We have audited the financial statements of Royal DSM N.V. Heerlen for the year 2005. These financial statements consist of the
consolidated financial statements and the company financial statements. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

Scope
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Opinion with respect to the consolidated financial statements
In our opinion, the consolidated financial statements give a true and fair view of the financial position of the company as at 31 December
2005 and of the result and the cash flows for the year then ended in accordance with the International Financial Reporting Standards as
adopted by the EU and comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code as far as
applicable.

Furthermore we have established to the extent of our competence that the annual report is consistent with the consolidated financial
statements.

Opinion with respect to the company financial statements
In our opinion, the company financial statements give a true and fair view of the financial position of the company as at 31 December 2005
and of the result for the year then ended in accordance with the accounting principles generally accepted in the Netherlands and comply
with 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 financial
statements.

Maastricht, 8 February 2006
for Ernst & Young Accountants

W.J. Spijker

Chr. J. Westerman

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Royal DSM N.V. Financial statements 2005
Other information

Profit appropriation

According to Article 32 of the Royal DSM N.V. Articles of Association and with the approval of the Supervisory Board of Directors, every
year the Managing Board of Directors determines the portion of the net profit to be appropriated to the reserves. For the year 2005 the net
profit is € 527 million and the amount to be appropriated to the reserves has been established at € 320 million. From the subsequent
balance of the net profit (€ 207 million), dividend is first distributed on the cumulative preference shares B. At the end of 2005 no cumprefs
B were in issue. Subsequently, a 6.78% dividend is distributed on the cumulative preference shares A, based on a share price of € 5.30
per cumulative preference share A. For 2005 this distribution amounts to € 0.36 per share, which is € 16 million in total. An interim
dividend of € 0.12 per cumulative preference share A having been paid in August 2005, the final dividend will then amount to € 0.24 per
cumulative preference share A. The cumulative preference shares C were repurchased on 28 November 2004; consequently no final
dividend 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 in
accordance 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. This
dividend corresponds to about 18% of the net profit excluding exceptional items (€ 563 million) plus depreciation and amortization (€ 503
million) minus the dividend paid to holders of cumulative preference shares (€ 16 million). An interim dividend of € 0.29 per ordinary share
having 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 as
follows:

x € million
net profit

profit appropriation:
- to be added to / paid from the reserves
- dividend on cumprefs A and C
- interim dividend on ordinary shares
- final dividend payable on ordinary shares

Special statutory rights

DSM Preference Shares Foundation
The DSM Preference Shares Foundation was established in 1989.

2005
527

320
16
55
136

2004
300

110
22
56
112

By virtue of DSM's Articles of Association, 375,000,000 preference shares B can be issued. Shares thus issued can be placed with the
Foundation 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 option
on such shares. Under these agreements, the Foundation is obliged to take preference shares B in DSM’s capital or has the right to
acquire 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, chairman
Maarten van Veen, vice-chairman
Bas Kortmann

The Foundation Committee

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Declaration of independence
The DSM Managing Board and the Foundation Committee hereby declare that, according to their joint assessment, the DSM Preference
Shares Foundation meets the independence requirements laid down in Appendix X to the Listing and Issuing Rules of Euronext
Amsterdam N.V.

The Managing Board of Royal DSM N.V.
The Foundation Committee

DSM Vision 2005 BV and DSM Vision 2005 Priority Foundation

In 2002, DSM Vision 2005 BV and the DSM Vision 2005 Priority Foundation were established. DSM entrusted the revenues from the sale
of DSM’s petrochemical activities, as well as the financial resources that became available in 2001 following the sale of DSM’s interest in
Energie Beheer Nederland BV, to its subsidiary DSM Vision 2005 BV. This company was set up to manage these revenues and their use for
the 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 of
the Priority Foundation. The only criterion to be used by the Priority Foundation in assessing the proposed decisions was whether they
were 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) and
NeoResins (now DSM NeoResins).

Since DSM Vision 2005 BV had fulfilled its objective, e.g. support the implementation of the Vision 2005 strategy, the Priority Foundaton
was 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 shareholders
The Annual General Meeting is to be held at the DSM head office in Heerlen (the Netherlands) on Wednesday, 29 March
2006 at 14.00 hours.

Important dates
Ex-dividend quotation
Publication of first-quarter results
Publication of second-quarter results
Publication of third-quarter results
Annual figures 2006
Annual General Meeting

* These are provisional dates.

Friday, 31 March 2006
Friday, 28 April 2006
Thursday, 27 July 2006
Thursday, 26 October 2006
Thursday, 8 February 2007*
Wednesday, 28 March 2007*

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Royal DSM N.V. Financial statements 2005
DSM figures: five-year summary

Balance sheet

x € million
intangible assets
property, plant and equipment
deferred tax assets
associates
prepaid pension costs
other financial assets
non-current assets

inventories
receivables
financial derivatives
current investments
cash

assets classified as held for sale
current assets
total assets

shareholders’ equity
minority interests
equity

deferred tax liabilities
employee benefits liabilities
provisions
borrowings
other non-current liabilities
non-current liabilities

employee benefits liabilities
provisions
borrowings
financial derivatives
other current liabilities

liabilities classified as held for sale
current liabilities
total equity and liabilities

capital employed
capital expenditure:
- intangible assets and property, plant and equipment
- participating interests** and other securities
divestments
depreciation and amortization, continuing operations
net debt***

ratios***:
net sales / average capital employed
current assets / current liabilities
equity / total assets
net debt / equity plus net debt

2005*
1,003
3,750
517
43
405
189
5,907

1,535
1,597
36
5
902
4,075
43
4,118
10,025

5,474
67
5,541

198
363
145
1,381
53
2,140

25
218
329
65
1,699
2,336
8
2,344
10,025

2004*
453
3,811
432
78
355
82
5,211

1,348
1,556
244
6
1,261
4,415
-
4,415
9,626

4,835
22
4,857

147
345
266
1,497
60
2,315

40
218
527
59
1,610
2,454
-
2,454
9,626

2004
369
3,809
-
491
-
-
4,669

1,347
1,669
-
4
1,247
4,267
-
4,267
8,936

4,812
22
4,834

-
-
874
1,045
-
1,919

-
-
543
-
1,640
2,183
-
2,183
8,936

2003
405
4,188
-
371
-
-
4,964

1,474
1,746
-
4
1,212
4,436
-
4,436
9,400

4,918
43
4,961

-
-
901
1,505
-
2,406

-
-
382
-
1,651
2,033
-
2,033
9,400

2002
462
2,885
-
292
-
-
3,639

944
1,439
-
2,014
960
5,357
-
5,357
8,996

5,142
44
5,186

-
-
682
1,337
-
2,019

-
-
599
-
1,192
1,791
-
1,791
8,996

2001
594
3,607
-
241
-
-
4,442

1,171
1,814
-
-
1,148
4,133
-
4,133
8,575

4,239
59
4,298

-
-
809
1,533
-
2,342

-
-
482
-
1,453
1,935
-
1,935
8,575

6,221

5,558

5,554

6,162

4,538

5,763

401
573
222
496
832

1.34
1.76
0.55
0.13

348
0
28
490
339

1.34
1.80
0.53
0.06

334
0
28
524
337

1.32
1.95
0.54
0.07

433
1,561
17
429
671

1.21
2.18
0.53
0.12

503
33
2,037
442
-1,038

1.29
2.99
0.58
-0.25

652
-
1,465
521
867

1.41
2.14
0.50
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).

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Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

Income statement

x € million
net sales
change compared with previous year (%)

2005*
8,195
5

2004*
7,832
1

2004
7,752
28

2003
6,050
-9

2002
6,665
-16

2001
7,970
-1

operating profit plus depreciation and amortization (EBITDA)

1,311

1,067

1,013

723

892

1,042

operating profit (EBIT)
net finance costs
income tax expense
share of the profit of associates
net profit excluding exceptional items
net result from exceptional items
profit for the year
profit attributable to minority interests
net profit attributable to equity holders of Royal DSM N.V.
net profit attibutable to holders of cumulative preference shares
net profit used for calculating earnings per share

808
-70
-180
-2
556
-36
520
7
527
-16
511

562
-56
-103
9
412
-142
270
23
293
-22
271

489
-51
-98
8
348
-97
251
11
262
-22
240

294
-31
-49
5
219
-94
125
14
139
-22
117

450
-14
-84
-3
349
840
1,189
-1
1,188
-22
1,166

521
-97
-69
14
369
1,045
1,414
1
1,415
-22
1,393

workforce at 31 December (x 1,000)

employee benefits costs (x € million)

1,385

1,411

1,487

1,215

1,217

1,251

percentage ratios:
- EBIT / net sales
- CFROI
- net profit / average shareholders’ equity
available to holders of ordinary shares

9.9
9.1

10.5

7.2
8.1

6.2

6.3
7.6

5.7

4.9
5.8

6.8
7.0

6.5
7.7

2.5

26.8

42.3

EBITDA / net finance costs

18.7

19.1

19.9

23.3

63.7

10.7

dividend (x € million)
* Figures according to IFRS, including discontinued operations. The figures for previous periods were drawn up according to NL GAAP.

207

190

188

199

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137

Royal DSM N.V. Financial statements 2005
DSM figures: five-year summary – Explanation of some financial
concepts and ratios

Information 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 of
the DSM share. The data regarding the number of shares and earnings per share in the overview below have been presented as if the
ordinary DSM shares had been issued for all periods presented.

per ordinary share in € :

2005**

2004**

2004

2003

2002

2001

net profit excluding exceptional items
net profit
cash flow
shareholders’ equity

dividend:
- interim dividend
- final dividend

pay-out as % of net profit before exceptional items
pay-out including dividend on cumulative preference
shares as % of net profit before exceptional items
pay-out as % of net profit
dividend yield (based on average price of an
ordinary DSM share)

share prices on Euronext Amsterdam:
- highest price
- lowest price
- at 31 December

x 1,000

number of ordinary shares outstanding:
- at 31 December
- average

daily trading volumes on Euronext Amsterdam:
- average
- lowest
- highest

* 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.

2.87
2.68
5.65
27.45

1.00
0.29
0.71

2.09
1.41
4.52
25.19

0.875
0.290
0.585

1.76
1.25
3.99
23.86

0.875
0.290
0.585

1.11
0.62
2.88
23.86

0.875
0.290
0.585

1.69
6.04
8.34
24.82

0.875
0.290
0.585

1.81
7.25
9.96
20.24

0.875
0.290
0.585

32%

42%

50%

79%

54%

51%

34%
37%

45%
62%

53%
70%

81%
143%

57%
15%

54%
13%

3.4%

4.3%

4.5%

3.9%

4.5%

35.22
23.07
34.50

23.85
17.88
23.81

22.50
15.65
19.52

25.63
18.95
21.69

22.58
14.40
20.51

190,923 191,957 191,957 191,537 193,179 192,293
190,783 191,617 191,617 189,430 192,935 192,180

1,063
238
6,563

1,014
26
6,494

1,126
130
6,540

1,034
140
3,864

1,086
47
5,538

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138

Section 4 Royal DSM N.V. Financial statements 2005

Consolidated financial statements
Financial statements of Royal DSM N.V.
Other information
DSM figures: five-year summary
Explanation of some financial concepts and ratios

General

Definitions

In calculating financial profitability ratios use
is made of the average of the opening and
closing values of balance-sheet items in the
year under review.

The financial indicators per ordinary share
are calculated on the basis of the average
number of ordinary shares outstanding
(average daily number). In calculating
shareholders’ equity per ordinary share,
however, the number of shares outstanding
at year-end is used.

In calculating the figures per ordinary share
and the 'net profit as a percentage of
average shareholders’ equity available to
holders of ordinary shares', the amounts
available to the holders of cumulative
preference shares are deducted from the
profits and from shareholders’ equity.

Capital employed
The total of the carrying amount of
intangible assets and property, plant and
equipment, inventories and receivables,
less other current liabilities.

Capital expenditure
This includes all investments in intangible
assets and property, plant and equipment
as well as the acquisition of participating
interests and other securities.

Cash flow
Cash flow is net profit plus depreciation and
amortization.

CFROI (Cash Flow Return On Investment)
Cash Flow Return On Investment is the
sustainable cash flow (EBITDA minus
normative annual tax and minus 1%
depreciation on weighted average historic
asset base) divided by weighted average
asset base plus average working capital.

Divestments
This includes the divestment of intangible
assets and property, plant and equipment
as well as the sale of participating interests
and other securities.

Earnings Before Interest, Tax, Depreciation
and Amortization (EBITDA)
EBITDA is the sum total of operating profit
plus depreciation and amortization.

Earnings per ordinary share
- Net profit attributable to equity holders of
Royal DSM N.V. minus dividend on
cumulative preference shares, divided by
the average number of ordinary shares
outstanding.

- Net profit attributable to equity holders of
Royal DSM N.V. excluding exceptional
items minus dividend on cumulative
preference shares, divided by the average
number of ordinary shares outstanding.

Total Shareholder Return (TSR)
Total Shareholder Return is capital gain plus
dividends.

Annual Report 2005

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139

Index – Financial statements

A
accounting policies _______________________________ 82
acquisition ______________________________________ 91
assets and liabilities classified as held for sale _________ 104
associates _________________________________102, 122
auditors' report _________________________________ 133

B
borrowings _________________________________108, 131

C
cash flow statement _____________________________ 119
consolidated balance sheet ________________________ 87
consolidated cash flow statement ___________________ 89
consolidated financial statements ___________________ 82
consolidated income statement ____________________ 86
consolidated statement of changes in equity __________ 88
contingent liabilities __________________________111, 132
credit facilities __________________________________ 113
credit risk ______________________________________ 114
currency exchange rates __________________________ 90
currency forward contracts _______________________ 116
currency options ________________________________ 116
currency risk ___________________________________ 113
currency swaps _________________________________ 115

D
debenture loans ________________________________ 109
deferred taxes __________________________________ 102
definitions ______________________________________ 139
depreciation and amortization ______________________ 97
divestments _____________________________________ 92

E
earnings per ordinary share ________________________ 98
employee benefits costs ___________________________ 97
employee benefits liabilities _______________________ 106
equity _________________________________________ 105
exceptional items ________________________________ 99

F
financial derivatives ______________________________ 115
financial fixed assets _____________________________ 130
financial instruments _____________________________ 113
financial lease __________________________________ 102
financial risks ___________________________________ 113
financial statements of Royal DSM N.V. ______________ 128
first-time adoption of IFRS by DSM _________________ 123
five year summary _______________________________ 136

G
goodwill _______________________________________ 100
government grants ___________________________96, 110
guarantee obligations ____________________________ 111

H
hedge accounting _______________________________ 114
hedging reserve _________________________________ 106

I
important dates _________________________________ 135
income tax expense _____________________________ 111
information about ordinary DSM shares _____________ 138
intangible assets ________________________________ 100
interest expense _________________________________ 97
interest income __________________________________ 97
interest rate swaps ______________________________ 115
interest-rate risk ________________________________ 114
inventories _____________________________________ 104

J
joint ventures ___________________________________ 122

L
land and buildings _______________________________ 101
legal reserve for retained profits ____________________ 131
licences _______________________________________ 100
liquidity risk ____________________________________ 113
litigation _______________________________________ 111

M
management share options _______________________ 120
market values __________________________________ 114

N
net cash provided by operating activities _____________ 89
net cash used in financing activities __________________ 89
net cash used in investing activities __________________ 89
net debt _______________________________________ 119
net finance costs _________________________________ 97

O
operational lease ________________________________ 111
ordinary shares held in treasury ____________________ 106
other current liabilities ________________________110, 132
other financial assets _____________________________ 103
other non-current liabilities ________________________ 110
other operating costs _____________________________ 97
other operating income ___________________________ 96
other reserves __________________________________ 106

P
patents ________________________________________ 100
pensions ______________________________________ 116
plant and machinery _____________________________ 101
post-employment benefits ________________________ 116
post-employment medical care and other costs ______ 118
prepaid pension costs ___________________________ 103
private loans ___________________________________ 110
profit appropriation ______________________________ 134
property, plant and equipment _____________________ 101
provisions __________________________________107, 131

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140

Index

R
receivables _________________________________104, 130
related parties __________________________________ 123
remuneration ________________________________62, 123
reserve for share-based compensation _____________ 106

S
segment information ______________________________ 93
service fees paid to external auditors ________________ 123
share capital ___________________________________ 105
share premium _________________________________ 106
share split _______________________________________ 81
share-based compensation _______________________ 121
shareholders' equity _____________________________ 130
special statutory rights ___________________________ 134

T
trade accounts payable __________________________ 110
trade accounts receivable ________________________ 104
translation reserve _______________________________ 106

W
wages and salaries _______________________________ 97

Annual Report 2005

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141

Annual report
Copies of this report (which is also available
in the original Dutch version) can be ordered
by phone (+31 800 0233480) or e-mail
(DSM@servicebureau.nl).

Internet
The information contained in this annual
report is also available via DSM’s website:
www.dsm.com. You can view the annual
report online and also download and print
parts of it.

Information
Our other publications and sources of
information are:
- Internet: www.dsm.com
- Triple P Report 2005
- Brochure: The Unlimited World of DSM

Addresses
Institutional and private investors and
financial analysts should contact:

DSM, Investor Relations,
P.O. Box 6500,
6401 JH Heerlen,
the Netherlands
tel. +31 45-5782864
fax. +31 45-5782595
e-mail: investor.relations@dsm.com

Those who are interested in DSM in general
should contact:

DSM, Corporate Communications,
P.O. Box 6500,
6401 JH Heerlen,
The Netherlands
tel. +31 45-5782421
fax. +31 45-5740680
e-mail: media.relations@dsm.com

General information
Production:
DSM, Corporate Communications

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142

Royal DSM N.V.

Annual Report 2005

DSM Profile

Royal DSM N.V.

P.O. Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111
F + 31 (45) 571 9753
E info@dsm.com

www.dsm.com

R
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a

D
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V.

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0
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5

A year of
achievements

locations in Europe, Asia, Africa and the Americas. ‰

Web link
Detailed group strategy information can also be
found at www.dsm.com : About us

Annual Report 2005