BASF Aktiengesellschaft

Transcription

1 BASF Aktiengesellschaft (Ludwigshafen, Federal Republic of Germany) 7 1,000,000, % Bonds of 2006/2011 Issue Price: % BASF Aktiengesellschaft, Ludwigshafen (the Issuer ) will issue on April 21, 2006 (the Issue Date ) fixed rate bearer bonds (the Bonds ) in an aggregate principal amount of 5 1,000,000,000. The Bonds will be issued at an issue price of 99.88% of their principal amount. The Bonds will bear interest from and including April 21, 2006 to but excluding April 21, 2011 at a rate of 4.00% per annum, payable annually in arrear on April 21 in each year, commencing on April 21, The Bonds will be redeemed at their principal amount on April 21, The Bonds will initially be represented by a temporary global bond in bearer form without coupons which will be deposited on or about the Issue Date with Clearstream Banking AG, Frankfurt am Main ( CBF ), where the Bonds have been accepted for clearance, exchangeable for a permanent global bond. Transfers of Bonds shall be effected in the form of transfers of co-ownership participations in the global bond in accordance with the procedures established for this purpose by CBF. The global bond will not be exchangeable for bonds in definitive form. Investing in the Bonds involves certain risks. Please review carefully the section entitled RISK FACTORS beginning on page 13 of this Prospectus. Application has been made to the Irish Financial Services Regulatory Authority ( IFSRA ), as competent authority under Directive 2003/71/EC of the European Parliament and the Council of November 4, 2003 (the Prospectus Directive ), for this Prospectus to be approved. Application has been made to the Irish Stock Exchange for the Bonds to be admitted to the Official List and trading on its regulated market. There can be no assurance that listing on the Irish Stock Exchange with respect to the Bonds will be granted. The Issuer will request IFSRA to provide the competent authorities in Austria, Germany, Luxembourg, The Netherlands and the United Kingdom with a certificate of approval attesting that the Prospectus has been drawn up in accordance with the Prospectus (Directive 2003/71/EC) Regulations 2005 which implements the Prospectus Directive into Irish law. Prior to the issuance of the certificate of approval to the said competent authorities and publication of the Prospectus, where such publication is required, no public offer of the Bonds will be permissible in Austria, Germany, of Luxembourg, the Netherlands and the United Kingdom (see SUBSCRIPTION AND SALE Selling Restrictions ). Joint Lead Managers/Joint Bookrunners BNP Paribas Deutsche Bank Dresdner Kleinwort Wasserstein Co-Lead Managers ABN Amro Citigroup Helaba HSBC HVB Corporates & Markets SociØtØ GØnØrale Corporate & Investment Banking The date of this Prospectus April 13, This document constitutes a prospectus for the purposes of the Prospectus Directive on the prospectus to be published when securities are offered to the public or admitted to trading.

2 BASF Aktiengesellschaft is incorporated as a stock corporation organized under the laws of the Federal Republic of Germany with its registered office in Ludwigshafen. As used in this Prospectus (the Prospectus ), BASF Aktiengesellschaft and the Issuer refer solely to the ultimate parent company of the BASF Group. BASF or BASF Group refer to BASF Aktiengesellschaft and its consolidated subsidiaries. In this Prospectus, references to euro or EUR or 7 are to the single unified currency of the members of the European Union, including Germany, which adopted the euro in accordance with the Treaty on European Union, as amended. USD or US$ refer to the lawful currency of the United States of America. RESPONSIBILITY STATEMENT The Issuer accepts responsibility for the information contained in this Prospectus and hereby declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of its knowledge and belief, in accordance with the facts and contains no omission likely to affect its importance. The Issuer further confirms that (i) this Prospectus contains all information with respect to the Issuer, BASF Group and the Bonds which is material in the context of the issue and sale of the Bonds, including all information which, according to the particular nature of the Issuer, BASF Group and the Bonds, is necessary to enable investors and their investment advisers to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the Issuer and BASF Group and of the rights attached to the Bonds; (ii) the statements contained in this Prospectus relating to the Issuer, BASF Group and the Bonds are in all material respects true and accurate and not misleading; (iii) there are no other facts in relation to the Issuer, BASF Group or the Bonds the omission of which would, in the context of the issue and sale of the Bonds, make any statement in this Prospectus misleading in any material respect; and (iv) all reasonable enquiries have been made by the Issuer to ascertain such facts and to verify the accuracy of all such information and statements. NOTICE No person has been authorised to give any information or to make any representation other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorised by or on behalf of the Issuer or the managers set forth on the cover page (each, a Manager and together, the Managers ). Neither the delivery of this Prospectus nor any offering, sale or delivery of any Bonds made hereunder shall, under any circumstances, create any implication (i) that the information in this Prospectus is correct as of any time subsequent to the date hereof or, as the case may be, subsequent to the date on which this Prospectus has been most recently amended or supplemented, or (ii) that there has been no adverse change in the financial situation of the Issuer or BASF Group which is material in the context of the issue and sale of the Bonds since the date of this Prospectus or, as the case may be, the date on which this Prospectus has been most recently supplemented, or the balance sheet date of the most recent financial statements, or (iii) that any other information supplied in connection with the issue of the Bonds is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. An investment in the Bonds is suitable only for financially sophisticated investors who are capable of fully evaluating the risks involved in making such investments. Prospective investors should satisfy themselves that they understand all of the risks associated with making investment in the Bonds. If a prospective investor is in any doubt whatsoever as to the risks involved in investing the Bonds, he should consult professional advisers. i

3 Each investor contemplating purchasing any Bonds should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Issuer. This Prospectus does not constitute an offer of Bonds or an invitation by or on behalf of the Issuer or the Managers to purchase any Bonds. Neither this Prospectus nor any other information supplied in connection with the Bonds should be considered as a recommendation by the Issuer or the Managers to a recipient hereof and thereof that such recipient should purchase any Bonds. This Prospectus may not be used for or in connection with any offer or invitation in any jurisdiction or in any circumstances in which such offer or invitation is unlawful or unauthorised. No action has been taken by the Issuer or the Managers other than as set out in this Prospectus that would permit a public offering of the Bonds, or possession or distribution of this Prospectus or any other offering material in any country or jurisdiction where action for that purpose is required. Accordingly, no Bonds may be offered or sold, directly or indirectly, and neither this Prospectus (nor any part hereof) nor any offering circular, prospectus, form of application, advertisement or other offering materials may be issued, distributed or published in any country or jurisdiction except in compliance with applicable laws, orders, rules and regulations, and each of the Managers has represented that all offers and sales by it have been made on such terms. No public offer of the Bonds may be made in Austria, Germany, Luxembourg, The Netherlands or the United Kingdom prior to the issuance of a certificate of approval by IFSRA to the competent authorities of such countries and publication of the Prospectus in such jurisdictions where such publication is required. The offer, sale and delivery of the Bonds and the distribution of this Prospectus in certain jurisdictions is restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer and the Managers to inform themselves about, and to observe, any such restrictions. In particular, the Bonds have not been and will not be registered under the United States Securities Act of 1933, as amended (the Securities Act ). Subject to certain limited exceptions, the Bonds may not be offered, sold or delivered within the United States or to U. S. persons. This Prospectus does not constitute, and may not be used for the purposes of, an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. For a further description of certain restrictions on offerings and sales of the Bonds and distribution of this Prospectus (or of any part thereof) see SUBSCRIPTION AND SALE Selling Restrictions. The legally binding language of this Prospectus is English. Any part of the Prospectus in German language constitutes a translation, except for the conditions of issue of the Bonds in respect of which German is the legally binding language. IN CONNECTION WITH THE ISSUE OF THE BONDS, DEUTSCHE BANK AG, LONDON BRANCH AS STABILISING MANAGER OR PERSONS ACTING ON ITS BEHALF MAY OVER-ALLOT BONDS (PRO- VIDED THAT THE AGGREGATE NOMINAL AMOUNT OF THE BONDS ALLOTTED DOES NOT EXCEED 105% OF THE AGGREGATE NOMINAL AMOUNT OF THE BONDS) OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE BONDS AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT DEUTSCHE BANK AG, LONDON BRANCH AS STABILISING MANAGER (OR ANY PERSON ACTING ON ITS BEHALF) WILL UNDERTAKE ANY STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE BONDS IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 CALENDAR DAYS AFTER THE DATE OF THE RECEIPT OF THE PROCEEDS OF THE ISSUE BY THE ISSUER AND 60 CALENDAR DAYS AFTER THE DATE OF THE ALLOTMENT OF THE BONDS. FORWARD-LOOKING STATEMENTS In addition to historical information, this Prospectus includes forward-looking statements and information relating to BASF that are based on the current expectations, estimates and projections of its ii

4 management and information currently available to BASF. These statements include, but are not limited to, statements about BASF s strategies, plans, objectives, expectations, intentions, expenditures, and assumptions and other statements contained in this Prospectus that are not historical facts. When used in this Prospectus, the words anticipate, believe, estimate, expect, intend, plan, and project and other similar expressions are generally intended to identify forward-looking statements. These statements are contained in particular in the sections entitled SUMMARY, RISK FACTORS, SELECTED HISTORICAL FINANCIAL INFORMATION, BUSINESS and FINAN- CIAL INFORMATION. These statements reflect the current views of BASF with respect to future events. They are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. In addition, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Many factors could cause the actual results, performance or achievements of BASF to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors include, among others: changes in general political, economic and business conditions in the countries or regions in which BASF operates; changes in the laws or policies of governments or other governmental or quasi-governmental activities in the countries in which BASF operates; changes in the composition of BASF Group companies, joint venture activities, divestitures, and the successful integration of acquisitions; increased price competition and the introduction of competing products by other companies; the ability to develop, introduce and market innovative products and applications; the length and depth of product and industry business cycles, particularly in the automotive, construction, electrical and textile industries; changes in the demand for, supply of, and market prices of crude oil, refined products, natural gas and petrochemicals, including changes in production quotas in OPEC countries and the deregulation of the natural gas transmission industry in Europe; the cost and availability of feedstock and other raw materials, including naphtha, and the price of steam cracker products; the ability to pass increases in raw material costs on to customers; changes in the degree of patent and other legal protection afforded to BASF s products; regulatory approval, particularly in the areas of fine chemicals, agricultural products and plant biotechnology, and market acceptance of new products including genetically modified competitive products; unexpected negative results from research and development and testing of current product candidates; the ability to maintain plant utilization rates and to implement planned capacity additions and expansions; the ability to reduce production costs by implementing technological improvements to existing plants; the existence of temporary industry surplus production capacity resulting from the integration and start-up of new world-scale plants; potential liability resulting from pending or future litigation, including litigation and investigations relating to antitrust violations in the vitamins business until early 1999; potential liability for remedial actions under existing or future environmental regulations; changes in currency exchange rates, interest rates and inflation rates; and changes in business strategy and various other factors referenced in this Prospectus. iii

5 Many of these factors are macroeconomic in nature and are, therefore, beyond the control of BASF s management. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. BASF does not intend, and does not assume any obligation, to update the forward-looking statements contained in this Prospectus. The risks described above and in the section entitled RISK FACTORS are not comprehensive. New risks, uncertainties and other factors may emerge from time to time and it is not possible for the Issuer to predict all such risk factors, to assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, an investor should not place undue reliance on forward-looking statements as a prediction or guarantee of actual results or events. INDUSTRYAND MARKET DATA In this Prospectus, the Issuer refers to information from public sources, market data, analyst reports and other publicly available information regarding the chemical industry and the oil and gas industries or from BASF s estimates largely based upon public market data or data derived from public sources. Such sources include reports of Chemical Markets Associates Inc. (CMAI), Wood Mackenzie, the Association of German Engineers (Verband deutscher Ingenieure), information from the Petrochemical Yearbook and research reports by Credit Suisse First Boston, HVB Equity Research and The Goldman Sachs Group Inc. To the extent that the information contained in this Prospectus was derived from publicly accessible sources or was otherwise provided by third parties, it is accurately reproduced. Furthermore, to the Issuer s knowledge, and to the extent the Issuer could ascertain this from the information derived from public sources or from third parties, no facts have been omitted which would render the reproduced information inaccurate or misleading. Although the Issuer believes that this information is reliable, it cannot guarantee the accuracy and completeness of the information, and the Issuer has not independently verified it. PRESENTATION OF FINANCIAL INFORMATION Unless otherwise indicated, the financial information in this Prospectus has been prepared in accordance with the accounting rules of the International Accounting Standards Board the International Financial Reporting Standards ( IFRS ) and the interpretations of the International Interpretations Committee ( IFRIC ). Starting from January 1, 2005 the accounting and reporting of the BASF Group is performed according to IFRS; figures for 2004 have been restated accordingly. For further information, please see Note 3 of the consolidated financial statements of BASF for the financial year 2005 (the Consolidated Financial Statements ) included in this Prospectus. For information on BASF s critical accounting policies, see SELECTED HISTORICAL FINANCIAL INFORMATION Critical Accounting Policies. iv

6 TABLE OF CONTENTS RESPONSIBILITY STATEMENT... NOTICE... FORWARD-LOOKING STATEMENTS... INDUSTRY AND MARKET DATA... PRESENTATION OF FINANCIAL INFORMATION... TABLE OF CONTENTS... i i ii iv iv v SUMMARY... 1 GERMAN TRANSLATION OF THE SUMMARY/ZUSAMMENFASSUNG... 7 RISK FACTORS THE BONDS USE OF PROCEEDS SELECTED HISTORICAL FINANCIAL INFORMATION GENERAL INFORMATION ABOUT THE ISSUER BUSINESS TAXATION SUBSCRIPTION AND SALE GENERAL INFORMATION FINANCIAL INFORMATION... F-1 v

7 SUMMARY The following constitutes the summary (the Summary ) of the essential characteristics of and risks associated with the Issuer and the Bonds. This Summary should be read as an introduction to this Prospectus. It does not purport to be complete and is taken from, and is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Any decision by an investor to invest in the Bonds should be based on consideration of this Prospectus as a whole. Where a claim relating to the information contained in this Prospectus is brought before a court, the plaintiff investor might, under the national legislation of such court, have to bear the costs of translating the Prospectus before the legal proceedings are initiated. Civil liability attaches to those persons who have tabled this Summary including any translation thereof, and applied for its notification, but only if the Summary is misleading, inaccurate or inconsistent when read together with the other parts of this Prospectus. As used in the Summary, BASF Aktiengesellschaft and Issuer refer solely to the ultimate parent company of the BASF Group. BASF and BASF Group refer to BASF Aktiengesellschaft and its consolidated subsidiaries. Expressions defined in The Bonds Conditions of Issue below shall have the same meaning in the Summary. Summary regarding the Bonds Issuer BASF Aktiengesellschaft Principal Amount 5 1,000,000,000 Joint Lead Managers BNP PARIBAS Deutsche Bank AG, London Branch Dresdner Bank AG London Branch Co-Lead Managers Principal Paying Agent Irish Listing Agent and Paying Agent ABN Amro Bank N.V. Bayerische Hypo- und Vereinsbank AG Citigroup Global Markets Limited HSBC Bank plc Landesbank Hessen-Thüringen Girozentrale SociØtØ GØnØrale Deutsche Bank Aktiengesellschaft, Frankfurt am Main, Germany NCB Stockbrokers Ltd., Dublin, Ireland Issue Price 99.88% Issue Date April 21, 2006 Denomination Form of the Bonds The Bonds are issued in a denomination of 5 1,000 each. The Bonds are initially represented by a Temporary Global Bond without coupons which will not earlier than 40 days after its date of issue be exchanged for a Permanent Global Bond upon certification of non-us-beneficial ownership. Individual Bonds in definitive form and interest coupons will not be issued. The respective Global Bond will be deposited with Clearstream Banking AG, Frankfurt am Main ( CBF ). Transfers of Bonds shall be effected in the form of transfers of co-ownership participations in the Global Bond in accordance with the procedures established for this purpose by CBF. 1

8 Interest Taxation The Bonds bear interest on their principal amount at the rate of 4.00% per annum from (and including) April 21, 2006 to (but excluding) April 21, Interest shall be payable in arrear on April 21 in each year. The first payment of interest shall be made on April 21, All payments in respect of the Bonds will be made without withholding or deduction for or on account of any present or future taxes or duties of whatever nature imposed or levied by way of withholding or deduction at source by or on behalf of the Federal Republic of Germany or any political subdivision or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law. In such event, the Issuer will pay such additional amounts as shall be necessary in order that the net amounts received by the holders of the Bonds after such withholding or deduction shall equal the respective amounts of principal and compensation which would otherwise have been receivable in respect of the Bonds in the absence of such withholding or deduction, subject to customary exceptions as set out in the Conditions of Issue. Early Redemption for Taxation Reasons Early redemption of the Bonds, in whole but not in part, for reasons of taxation will be permitted, if, as a result of any change in, or amendment to, the laws or regulations prevailing in the Federal Republic of Germany, which change or amendment becomes effective on or after April 21, 2006, or as a result of any application or official interpretation of such laws or regulations not generally known before that date, the Issuer will become obligated to bear withholding taxes which are or will be leviable on payments of principal or interest in respect of the Bonds. Status of the Bonds Negative Pledge Event of Default Cross Default Use of Proceeds Selling Restrictions Listing Settlement The Bonds constitute unsecured and unsubordinated obligations of the Issuer and rank pari passu with all other unsecured and unsubordinated obligations of the Issuer, present and future. As long as any Bonds are outstanding, but only up to the time all amounts of principal and interest have been placed at the disposal of the Principal Paying Agent, the Issuer will not provide security upon any of its assets for any present or future Capital Market Indebtedness or any guarantees or other indemnities resulting therefrom, without at the same time having the holders of the Bonds share equally and rateably in such security or such other security as shall be approved by an independent accounting firm of internationally recognised standing as being equivalent security. The Bonds provide for events of default entitling holders of the Bonds to demand immediate redemption of the Bonds, as more fully set out in the Conditions of Issue. The Bonds provide for a cross default with other Capital Markets Indebtedness. The net proceeds from the issuance of the Bonds will amount to approximately 5 998,005,000 and are intended to be used for general corporate purposes. Subject to certain exceptions, the Bonds are not being offered, sold or delivered within the United States or to U. S. persons. In addition, there are certain restrictions on the offer and sale of Bonds and the distribution of offering materials in the European Economic Area. For a description of these and other restrictions on sale and transfer see SUBSCRIPTION AND SALE Selling Restrictions. Application has been made to list the Bonds on the Dublin Stock Exchange. The Bonds will be accepted for clearing through CBF. 2

9 Governing Law Jurisdiction The Bonds will be governed by German law. Non-exclusive place of jurisdiction for any legal proceedings arising under the Bonds is Frankfurt am Main, Germany. Summary regarding the Issuer BASF Aktiengesellschaft was incorporated as a stock corporation under the laws of the Federal Republic of Germany on January 30, 1952 under the name Badische Anilin- und Soda-Fabrik AG. In 1973, the company changed its name to BASF Aktiengesellschaft. BASF Aktiengesellschaft s headquarters are located in Ludwigshafen, Germany; its registered office is located at Carl-Bosch-Strasse 38, Ludwigshafen, Federal Republic of Germany, telephone BASF Aktiengesellschaft is registered in the commercial register (Handelsregister) of the local court (Amtsgericht) Ludwigshafen under HRB Business Overview BASF is a transnational chemical company that comprises the parent company, BASF Aktiengesellschaft, and 179 consolidated subsidiaries. BASF has customers in more than 170 countries and operates more than 100 production sites. For the year ended December 31, 2005, BASF reported sales of 5 42,745 million, income from operations of 5 5,830 million, and net income after taxes and minority interests of 5 3,007 million. Based on customer location, BASF s activities in Europe accounted for 55.6 % of BASF s total sales in 2005; North America (which includes the United States, Mexico and Canada) accounted for 22.2% of sales; the Asia Pacific region accounted for 15.2% of sales; and the South America, Africa, Middle East region accounted for 7.0 % of sales. BASF has five separate business segments: Chemicals, Plastics, Performance Products, Agricultural Products & Nutrition and Oil & Gas. These business segments encompass BASF s 12 operating divisions. For financial reporting purposes, the two operating divisions of BASF s Agricultural Products & Nutrition business segment are separate reportable operating segments: Agricultural Products and Fine Chemicals. Effective January 1, 2005, companies in Asia are reported in the region Asia Pacific. The African and Middle Eastern companies, formerly reported in the region Asia Pacific, are now reported together with the South American companies in the region South America, Africa, Middle East. Chemicals BASF s portfolio ranges from basic inorganics and petrochemicals to intermediates. Plasticizers, solvents, glues and resins, as well as electronic grade chemicals are just a few examples of BASF Chemicals products. Key customer segments for its products include the chemical, pharmaceutical, electronics, textile and automotive industries. Furthermore, BASF Chemicals achieves around 30% of its sales with other BASF segments, which use its products to manufacture higher value goods. Plastics BASF is one of the world s leading producers of plastics. Its product portfolio consists of styrenics, performance polymers and polyurethanes. In standard plastics, BASF concentrates on selected product lines and highly efficient marketing processes. In its business with specialties, BASF offers a wide range of high-value products, system solutions and services. Its main customers are companies in the automotive, packaging, construction, and electrical and electronics industries. 3

10 Performance Products In the Performance Chemicals and Functional Polymers divisions, BASF produces a wide range of products and system solutions used to make products for the textile, automotive and paper industries, as well as detergents, hygiene articles, adhesives and construction materials. In the Coatings division, BASF focuses on developing and producing coatings for the automotive industry and for industrial applications. Agricultural Products & Nutrition The Agricultural Products & Nutrition segment consists of the Agricultural Products and Fine Chemicals divisions. Products from the Agricultural Products division protect crops from harmful fungi, insects and weeds, while increasing crop quality and yields. BASF also conducts research in the field of plant biotechnology, focusing on more efficient agriculture, healthier nutrition and plants as green factories to produce chemical substances. Products in the Fine Chemicals division include vitamins, aroma chemicals, UV filters, as well as various polymers. BASF offers these products to its customers in the nutrition, pharmaceutical and cosmetic industries. Oil & Gas BASF s subsidiary Wintershall AG explores for and produces oil and natural gas in Europe, North Africa, South America, Russia and the Caspian Sea area. Together with its Russian partner Gazprom, Wintershall is also active in European gas trading the transport, storage and distribution of natural gas. Recent Developments On January 9, 2006, Iron Acquisition Corporation, Florham Park, New Jersey, USA, a 100% subsidiary of BASF Aktiengesellschaft, announced a cash offer for all the shares of Engelhard Corporation, Iselin, New Jersey, USA, in the amount of US$37 per share. The total cost of the transaction based on the price per share would be approximately US$4.9 billion. On February 28, 2006, BASF Aktiengesellschaft reached an agreement with Degussa AG, Düsseldorf, Germany, to acquire Degussa s construction chemicals business. The purchase price for equity is approximately billion plus assumption of liabilities. As a result, the transaction value for BASF is currently estimated at approximately billion. The transaction, which still requires approval from the relevant authorities, is expected to close by the middle of Board of Executive Directors, Supervisory Board and Employees BASF Aktiengesellschaft s Board of Executive Directors (Vorstand) consists of nine members who are Dr. Jürgen Hambrecht (Chairman), Eggert Voscherau, Dr. Kurt Bock, Dr. Martin Brudermüller, Dr. John Feldmann, Dr. Andreas Kreimeyer, Klaus Peter Löbbe, Dr. Stefan Marcinowski and Peter Oakley. The Supervisory Board (Aufsichtsrat) of BASF Aktiengesellschaft consists of twenty members who are Prof. Dr. Jürgen Strube (Chairman), Robert Oswald (Deputy Chairman), Ralf-Gerd Bastian, Wolfgang Daniel, Prof. Dr. Francois Diederich, Michael Diekmann, Dr. Tessen von Heydebreck, Arthur L. Kelly, Rolf Kleffmann, Max Dietrich Kley, Prof. Dr. Renate Köcher, Eva Kraut, Ulrich Küppers, Konrad Manteuffel, Dr. Karlheinz Messmer, Hans Dieter Pötsch, Dr. Hermann Scholl, Ralf Sikorski, Robert Studer and Michael Vassiliadis. As of December 31, 2005, BASF employed a workforce of 80,945 worldwide. About 56.4% of the workforce is based in Germany. 4

11 Selected Financial Information BASF GROUP (Million 5, except share data and certain other data) Income Statement Data Sales ,745 37,537 Gross profit on sales ,178 11,815 Income from operations ,830 5,193 thereof, special items (365) (37) Financial result (846) Income before taxes and minority interests ,926 4,347 Income before minority interests ,168 2,133 Net income ,007 2,004 Earnings per share Balance Sheet Data Long-term assets ,543 20,518 Short-term assets ,127 14,930 Total assets ,670 35,448 Stockholder Equity ,523 16,602 thereof, subscribed capital ,317 1,383 Long-term liabilities ,762 10,372 Short-term liabilities ,385 8,474 Total stockholders equity and liabilities ,670 35,448 Summary regarding the Risk Factors Summary of Risk Factors regarding the Bonds An investment in the Bonds involves certain risks associated with the characteristics of the Bonds which could lead to substantial losses the Bondholders would have to bear in the case of selling their Bonds or with regard to receiving interest payments and repayment of principal. Those risks include that the Bonds may be subject to early redemption at the principal amount, if the Issuer becomes obligated to bear withholding taxes which are or will be leviable on payments of principal or interest in respect of the Bonds; if the Issuer calls and redeems the Bonds in such case, the Bondholders may only be able to reinvest the redemption proceeds in securities with a lower yield; there is no restriction on the amount of debt which the Issuer may incur in the future; the price of the Bonds falls as a result of changes in market interest rates; and prior to the issue, there has been no public market for the Bonds and there can be no assurance that a liquid secondary market for the Bonds will develop or, if it does develop, that it will continue; in an illiquid market, an investor might not be able to sell his Bonds at any time at fair market prices. Summary of Risk Factors regarding BASF BASF s business, and as a result, the value of the Bonds, are exposed to a number of risks. The following contains a description of certain risks, which may materially adversely affect BASF s financial position and results of operations: 5

12 Certain developments in the global economy generally may adversely affect BASF s sales and earnings. Changes in regulatory controls could reduce the profitability of BASF s current products and could delay BASF s introduction of new products. BASF is exposed to foreign currency and interest rate risks. Significant variations in the cost and availability of raw materials, energy, precursors and intermediates may adversely affect BASF s operating results. Cyclicality may effect BASF s operating margins. The results of BASF s crop protection business are dependent on weather conditions and can be affected by local and regional economic circumstances. Exploration risk may adversely affect the business of BASF s Oil & Gas segment. Failure to develop new products and production technologies may harm BASF s competitive position and operating results. Negative developments in equity and bond markets may make extraordinary contributions to pension funds necessary. BASF is dependent upon hiring and retaining highly qualified management and technical personnel. BASF is subject to the risks associated with the use of information technology. BASF is subject to security risks. BASF is subject to risks arising from acquisition and investment decisions. Litigation could harm BASF s operating results and cash flows. The realisation of any of the risks described above may affect the Issuer s ability to fulfil its payment obligations under the Bonds and/or lead to a decline in the market price of the Bonds. 6

13 GERMAN TRANSLATION OF THE SUMMARY/ZUSAMMENFASSUNG Nachfolgend wird eine Zusammenfassung (die Zusammenfassung ) der wesentlichen Merkmale und Risiken in Bezug auf die Emittentin und die Schuldverschreibungen gegeben. Diese Zusammenfassung sollte als Einführung zu diesem Prospekt angesehen werden. Sie ist nicht als umfassend und vollständig anzusehen, sondern enthält Verweise auf die übrigen Angaben in diesem Prospekt und ist in Verbindung mit diesen zu lesen. Anleger sollten eine etwaige Anlageentscheidung in Bezug auf die Schuldverschreibungen auf Grundlage des gesamten Prospekts treffen. Bei etwaigen vor Gericht geltend gemachten Klagen in Bezug auf die in diesem Prospekt enthaltenen Informationen ist der jeweilige Anleger als Kläger unter Umständen nach dem nationalen Recht des jeweiligen Gerichts verpflichtet, diesen Prospekt auf seine Kosten übersetzen zu lassen, bevor das gerichtliche Verfahren eingeleitet wird. Die Personen, die diese Zusammenfassung, einschließlich einer etwaigen Übersetzung, erstellt und die Notifizierung beantragt haben, können zivilrechtlich haftbar gemacht werden, jedoch nur wenn diese Zusammenfassung in Verbindung mit den anderen Prospektteilen gelesen, irreführend oder unrichtig ist oder Angaben in anderen Teilen des Prospekts widerspricht. In dieser Zusammenfassung beziehen sich BASF Aktiengesellschaft und Emittentin ausschließlich auf die Muttergesellschaft der BASF-Gruppe. BASF und BASF-Gruppe beziehen sich auf die BASF Aktiengesellschaft einschließlich ihrer konsolidierten Tochtergesellschaften. In den Anleihebedingungen definierte Begriffe haben in dieser Zusammenfassung die selbe Bedeutung. Zusammenfassung in Bezug auf die Schuldverschreibungen Emittentin BASF Aktiengesellschaft Gesamtnennbetrag Joint Lead Managers BNP Paribas Deutsche Bank AG, London Branch Dresdner Bank AG London Branch Co-Lead Managers Hauptzahlstelle Listing Agent in Irland und Zahlstelle in Dublin ABN Amro Bank N.V. Bayerische Hypo- und Vereinsbank AG Citigroup Global Markets Limited HSBC Bank plc Landesbank Hessen-Thüringen Girozentrale SociØtØ GØnØrale Deutsche Bank Aktiengesellschaft, Frankfurt am Main, Deutschland NCB Stockbrokers Ltd., Dublin, Irland Ausgabepreis 99,88% Ausgabetag 21. April 2006 Stückelung Form der Schuldverschreibungen Die Schuldverschreibungen werden im Nennbetrag von je begeben. Die Schuldverschreibungen sind anfänglich durch eine vorläufige Globalurkunde ohne Zinsscheine verbrieft, die nicht früher als 40 Tage nach dem Tag ihrer Ausgabe gegen Vorlage einer Bestätigung, dass kein Anteil an der vorläufigen Globalurkunde von einem oder für einen US-Steuerinländer gehalten wird, gegen eine Dauerglobalurkunde ausgetauscht wird. Einzelurkunden und Zinsscheine werden nicht ausgegeben. Die Globalurkunden werden bei der Clearstream Banking AG, Frankfurt am Main ( CBF ) hinterlegt. Übertragungen von Schuldverschreibungen erfolgen durch Übertragung von Miteigen- 7

14 tumsanteilen an der Globalurkunde gemäß dem für diese Zwecke von CBF bestimmten Verfahren. Zinsen Besteuerung Vorzeitige Rückzahlung aus Steuergründen Status der Schuldverschreibungen Die Schuldverschreibungen werden bezogen auf ihren Nennbetrag verzinst, und zwar vom 21. April 2006 (einschließlich) 21. April 2011 (ausschließlich) mit jährlich 4,00 %. Die Zinsen sind nachträglich am 21. April eines jeden Jahres zahlbar. Die erste Zinszahlung erfolgt am 21. April Sämtliche auf die Schuldverschreibungen zu zahlenden Beträge sind an der Quelle ohne Einbehalt oder Abzug von oder aufgrund von gegenwärtigen oder zukünftigen Steuern oder sonstigen Abgaben gleich welcher Art zu leisten, die von oder in der Bundesrepublik Deutschland oder für deren Rechnung oder von oder für Rechnung einer politischen Untergliederung oder Steuerbehörde der oder in der Bundesrepublik Deutschland auferlegt oder erhoben werden, es sei denn ein solcher Einbehalt oder Abzug ist gesetzlich vorgeschrieben. In diesem Fall wird die Emittentin diejenigen zusätzlichen Beträge an Kapital und Zinsen zahlen, die erforderlich sind, damit die den Anleihegläubigern zufließenden Nettobeträge nach einem solchen Einbehalt oder Abzug jeweils den Beträgen entsprechen, die die Anleihegläubiger ohne einen solchen Einbehalt oder Abzug von den Anleihegläubigern erhalten hätten; dies gilt vorbehaltlich der üblichen in den Anleihebedingungen aufgeführten Ausnahmen Eine vorzeitige Rückzahlung aller ausstehenden Schuldverschreibungen, nicht jedoch eines Teils von ihnen, aus Steuergründen ist zulässig, falls infolge einer am oder nach dem 21. April 2006 wirksam werdenden ¾nderung oder Ergänzung der in der Bundesrepublik Deutschland geltenden Rechtsvorschriften oder einer vor diesem Zeitpunkt nicht allgemein bekannten Anwendung oder amtlichen Auslegung solcher Rechtsvorschriften Quellensteuern auf die Zahlung von Kapital oder Zinsen der Schuldverschreibungen anfallen oder anfallen werden und die Quellensteuern der Emittentin zur Last fallen. Die Schuldverschreibungen stellen nicht besicherte und nicht nachrangige Verbindlichkeiten der Emittentin dar und stehen im gleichen Rang mit allen anderen nicht besicherten und nicht nachrangigen derzeitigen und zukünftigen Verbindlichkeiten der Emittentin. Negativverpflichtung Die Emittentin verpflichtet sich, solange Schuldverschreibungen ausstehen, jedoch nur bis zu dem Zeitpunkt, an dem alle Beträge an Kapital und Zinsen der Hauptzahlstelle zur Verfügung gestellt worden sind, keine gegenwärtigen oder zukünftigen Kapitalmarktverbindlichkeiten und keine Garantien oder andere Gewährleistungen dafür durch Grund- oder Mobiliarpfandrechte an ihrem Vermögen zu besichern, ohne jeweils die Anleihegläubiger zur gleichen Zeit und im gleichen Rang an solchen Sicherheiten oder an solchen anderen Sicherheiten, die von einem internationalen angesehenen unabhängigen Wirtschaftsprüfer als gleichwertige Sicherheit anerkannt werden, teilnehmen zu lassen. Kündigungsgründe Cross Default Erlösverwendung Die Schuldverschreibungen sehen Kündigungsgründe vor, die die Gläubiger berechtigen, die unverzügliche Rückzahlung der Schuldverschreibungen zu verlangen, wie in den Emissionsbedingungen ausführlicher dargelegt. Die Emissionsbedingungen enthalten eine Regelung zum Cross Default in Verbindung mit anderen Kapitalmarktverbindlichkeiten. Der Nettoerlös aus der Anleiheemission beläuft sich auf ca und soll für allgemeine Unternehmenszwecke verwendet werden. 8

15 Verkaufsbeschränkungen Börsennotierung Settlement Geltendes Recht Gerichtsstand Vorbehaltlich bestimmter Ausnahmeregelungen dürfen die Schuldverschreibungen nicht in den Vereinigten Staaten oder US-Personen angeboten, verkauft oder ausgegeben werden. Darüber hinaus gibt es bestimmte Beschränkungen für das Angebot und den Verkauf der Schuldverschreibungen und die Verteilung der Angebotsunterlagen im Europäischen Wirtschaftsraum. Eine nähere Beschreibung dieser und weiterer Beschränkungen für den Verkauf und die Übertragung ist im Abschnitt SUBSCRIPTION AND SALE Selling Restrictions enthalten. Für die Schuldverschreibungen ist ein Antrag auf Notierung an der Dubliner Börse gestellt worden. Die Schuldverschreibungen werden zum Clearing durch CBF zugelassen. Die Schuldverschreibungen unterliegen deutschem Recht. Nicht ausschließlicher Gerichtsstand für alle rechtlichen Verfahren im Zusammenhang mit den Schuldverschreibungen ist Frankfurt am Main, Bundesrepublik Deutschland. Zusammenfassung in Bezug auf die Emittentin BASF Aktiengesellschaft wurde als Aktiengesellschaft deutschen Rechts am 30. Januar 1952 unter der Firma Badische Anilin- und Soda-Fabrik AG gegründet wurde die Gesellschaft in BASF Aktiengesellschaft umbenannt. Ihr Hauptsitz befindet sich in Ludwigshafen, Deutschland; Geschäftsadresse ist Carl-Bosch-Straße 38, Ludwigshafen, Bundesrepublik Deutschland, Telefon: Die BASF Aktiengesellschaft ist im Handelsregister des Amtsgerichts Ludwigshafen unter HRB 3000 eingetragen. Überblick über die Geschäftstätigkeit BASF ist ein transnationales Unternehmen der chemischen Industrie bestehend aus der Muttergesellschaft BASF Aktiengesellschaft und 179 konsolidierten Tochtergesellschaften. Die Gesellschaft hat Kunden in mehr als 170 Ländern und unterhält mehr als 100 Produktionsstätten. Im Geschäftsjahr 2005 betrug der Umsatz der BASF Millionen, das Ergebnis der Betriebstätigkeit betrug Millionen und das Ergebnis nach Ertragsteuern und Anteilen anderer Gesellschafter Millionen. Nach Herkunft der Kunden trugen die Aktivitäten der BASF in Europa zu 55,6% zum Umsatz 2005 von BASF bei, auf Nordamerika (das die Vereinigten Staaten, Kanada und Mexiko umfasst) entfielen 22,2%, die Region Asia Pacific trug 15,2% zum Umsatz bei und auf Südamerika, Afrika und den Mittleren Osten entfielen 7,0% des Umsatzes. BASF hat fünf separate Segmente: Chemikalien, Kunststoffe, Veredelungsprodukte, Pflanzenschutz und Ernährung und Öl und Gas. Diese fünf Segmente umfassen die zwölf Unternehmensbereiche der BASF. Für den Zweck der Finanzberichterstattung werden die zwei Unternehmensbereiche des Segments Pflanzenschutz und Ernährung in zwei separate Unternehmensbereiche aufgeteilt: Pflanzenschutz und Feinchemie. Mit Wirkung vom 1. Januar 2005 sind die Gesellschaften in Asien in der Region Asia Pacific zusammengefasst. Die Gesellschaften in Afrika und im Mittleren Osten, die früher der Region Asia Pacific zugerechnet wurden, werden nun mit den Gesellschaften in Südamerika in der Region Südamerika, Afrika, Mittlerer Osten zusammengefasst. Chemikalien Das Portfolio der BASF reicht von Anorganika, über Petrochemikalien bis zu Zwischenprodukten. Weichmacher, Lösemittel, Leime und Harze sowie Elektronikchemikalien sind nur einige Beispiele 9

16 aus dem Produktangebot von BASF Chemikalien. Zu den wichtigsten Abnehmern von Erzeugnissen der BASF gehören die Chemie-, Pharma-, Elektronik-, Textil- und die Automobilindustrie. Daneben erzielt das Segment Chemikalien rund 30% seines Umsatzes mit den übrigen Segmenten der BASF, die diese Erzeugnisse zur Herstellung höherwertiger Produkte einsetzen. Kunststoffe BASF ist einer der weltweit führenden Hersteller von Kunststoffen. Das Produktportfolio besteht aus Styrol-Kunststoffen, Performance Polymers sowie Polyurethanen. Bei Standardkunststoffen konzentriert sich BASF auf ausgewählte Produktlinien und leistungsfähige Vermarktungsprozesse. Bei Spezialitäten kann BASF ein umfangreiches Sortiment an hochwertigen Produkten, Systemlösungen und Dienstleistungen anbieten. Die Kunden der BASF sind vor allem Unternehmen aus den Bereichen Fahrzeugbau, Verpackung, Bau und Elektro/Elektronik. Veredlungsprodukte In den Unternehmensbereichen Veredlungschemikalien und Veredlungspolymere produziert BASF eine Vielzahl innovativer Produkte und Systemlösungen, die ihre Kunden zur Herstellung von Erzeugnissen für die Textil-, Automobil- und Papierindustrie sowie von Waschmitteln, Hygieneartikeln, Kleb- und Baustoffen einsetzen. Im Bereich Coatings konzentriert sich BASF auf die Entwicklung und Produktion von Lacken für die Automobilindustrie sowie für industrielle Anwendungen. Pflanzenschutz und Ernährung Das Segment Pflanzenschutz und Ernährung setzt sich aus den Unternehmensbereichen Pflanzenschutz und Feinchemie zusammen. Die Produkte des Bereichs Pflanzenschutz schützen Nutzpflanzen vor Pilzkrankheiten, Insekten oder Unkräutern und erhöhen deren Qualität sowie den Ertrag. Daneben forscht BASF auf dem Gebiet der Pflanzenbiotechnologie. Das Augenmerk liegt dabei auf effizienterer Landwirtschaft, gesünderer Ernährung und Pflanzen als grüne Fabriken zur Herstellung chemischer Substanzen. Im Bereich Feinchemie stellt BASF unter anderem Vitamine, Aromachemikalien, Lichtschutzmittel und verschiedene Polymere her. Dieses Angebot richtet sich an Kunden in der Ernährungs-, Pharma- und Kosmetikindustrie. Öl und Gas Die BASF Tochtergesellschaft Wintershall AG exploriert und fördert Erdöl und Erdgas in Europa, Nordafrika, Südamerika, Russland und im Raum am Kaspischen Meer. Gemeinsam mit ihrem russischen Partner Gazprom ist die Wintershall auch im europäischen Erdgashandel (Transport, Speicherung und Distribution) tätig. Aktuelle Entwicklungen Die Iron Acquisition Corporation mit Sitz in Florham Park/New Jersey, USA, eine 100%ige mittelbare Tochtergesellschaft der BASF Aktiengesellschaft, hat am 9. Januar 2006 ein Barangebot zum Erwerb sämtlicher Aktien der Engelhard Corporation mit Sitz in Iselin/New Jersey, USA, in Höhe von US$37 je Aktie abgegeben. Ausgehend von dem Angebotspreis je Aktie würde der Gesamtkaufpreis bei Erwerb sämtlicher Aktien etwa US$4,9 Milliarden betragen. BASF Aktiengesellschaft hat am 28. Februar 2006 mit der Degussa AG, Düsseldorf einen Vertrag zum Erwerb des Bauchemie-Geschäfts von Degussa geschlossen. Der Kaufpreis für das Eigenkapital beträgt ungefähr 5 2,2 Milliarden zuzüglich Übernahme bestehender Verbindlichkeiten. Daraus errechnet sich für BASF ein Transaktionswert von 5 2,7 Milliarden. Die Transaktion unterliegt noch der Zustimmung der Behörden. Mit dem Abschluss der Transaktion wird zur Jahresmitte 2006 gerechnet. 10

17 Vorstand, Aufsichtsrat und Mitarbeiter Dem Vorstand der BASF Aktiengesellschaft gehören neun Mitglieder an: Dr. Jürgen Hambrecht (Vorsitzender), Eggert Voscherau, Dr. Kurt Bock, Dr. Martin Brudermüller, Dr. John Feldmann, Dr. Andreas Kreimeyer, Klaus Peter Löbbe, Dr. Stefan Marcinowski und Peter Oakley. Der Aufsichtsrat der BASF Aktiengesellschaft besteht aus zwanzig Mitgliedern: Prof. Dr. Jürgen Strube (Vorsitzender), Robert Oswald (Stellvertretender Vorsitzender), Ralf-Gerd Bastian, Wolfgang Daniel, Prof. Dr. Francois Diederich, Michael Diekmann, Dr. Tessen von Heydebreck, Arthur L. Kelly, Rolf Kleffmann, Max Dietrich Kley, Prof. Dr. Renate Köcher, Eva Kraut, Ulrich Küppers, Konrad Manteuffel, Dr. Karlheinz Messmer, Hans Dieter Pötsch, Dr. Hermann Scholl, Ralf Sikorski, Robert Studer und Michael Vassiliadis. Am 31. Dezember 2005 beschäftigte BASF weltweit Mitarbeiter, von denen ungefähr 56,4% in Deutschland beschäftigt sind. Ausgewählte Finanzinformationen BASF GRUPPE (Millionen 5, außer Ergebnis je Aktie und bestimmten andere Daten) Daten aus der Gewinn- und Verlustrechnung Umsatz Bruttoergebnis vom Umsatz Ergebnis der Betriebstätigkeit davon, Sondereinflüsse Finanzergebnis Ergebnis vor Ertragssteuern Jahresüberschuss Jahresüberschuss nach Anteilen anderer Gesellschafter Ergebnis je Aktie ,73 3,65 Daten aus der Bilanz Langfristiges Vermögen Kurzfristiges Vermögen Gesamtvermögen Eigenkapital davon, gezeichnetes Kapital Kurzfristige Verbindlichkeiten Langfristige Verbindlichkeiten Gesamtkapital Zusammenfassung in Bezug auf die Risikofaktoren Zusammenfassung der Risikofaktoren in Bezug auf die Schuldverschreibungen Eine Anlage in die Schuldverschreibungen ist mit bestimmten Risiken im Zusammenhang mit den Merkmalen der Schuldverschreibungen verbunden. Diese Risiken könnten zu erheblichen Verlusten führen, die die Anleihegläubiger zu tragen hätten, wenn sie ihre Schuldverschreibungen verkaufen oder wenn Verluste im Zusammenhang mit der Zahlung von Zinsen oder der Rückzahlung entstehen. Zu diesen Risiken gehört, dass: 11

18 die Schuldverschreibungen vorzeitig zum Nennbetrag zurückgezahlt werden können, falls die Emittentin zur Zahlung von Quellensteuern auf die Zahlung von Kapital oder Zinsen der Schuldverschreibungen verpflichtet ist; wenn die Emittentin die Schuldverschreibungen kündigt und zurückzahlt, kann es sein, dass die Anleihegläubiger den aus der Rückzahlung vereinnahmten Betrag lediglich in Wertpapiere mit niedrigerer Rendite reinvestieren können; die Höhe der Schulden, die die Emittentin in Zukunft eingehen kann, nicht begrenzt ist; der Wert der Schuldverschreibungen auf Grund von Veränderungen des Zinsniveaus fällt; und vor der Begebung der Schuldverschreibungen für diese kein Markt existiert und keine Gewissheit besteht, dass ein liquider Sekundärmarkt für die Schuldverschreibungen entstehen wird, oder, sofern er entsteht, fortbestehen wird; in einem illiquiden Markt könnte es sein, dass ein Anleger seine Schuldverschreibungen nicht jederzeit zu angemessenen Marktpreisen veräußern kann. Zusammenfassung der Risikofaktoren in Bezug auf BASF Das Geschäft der BASF und damit auch der Wert der Schuldverschreibungen ist einer Reihe von Risiken ausgesetzt. Der folgende Abschnitt enthält eine Beschreibung bestimmter Risiken, die die Finanzund Ertragslage der BASF wesentlich nachteilig beeinflussen können: Bestimmte Entwicklungen in der Weltwirtschaft allgemein können den Umsatz und Ertrag von BASF negativ beeinflussen. ¾nderungen von behördlichen Kontrollen können die Profitabilität von gegenwärtigen Produkten der BASF verschlechtern und die Einführung neuer Produkte der BASF verzögern. BASF ist Währungs- und Zinsrisiken ausgesetzt. Schwankungen von Beschaffungskosten und in der Verfügbarkeit von Rohstoffen, Energie, und Vor- und Zwischenprodukten können das Ergebnis der BASF negativ beeinflussen. Zyklische Schwankungen können das Geschäft der BASF beeinflussen. Das Ergebnis des Pflanzenschutzgeschäfts ist wetterabhängig und kann von lokalen und regionalen Wirtschaftsbedingungen beeinflusst werden. Das Öl und Gas Segment der BASF kann durch Explorationsrisiken negativ beeinflusst werden. Misserfolge bei der Entwicklung von neuen Produkten und Produktionstechnologien können die Wettbewerbsposition und den Ertrag der BASF verschlechtern. Negative Entwicklungen von Aktien- und Anleihemärkten können zu außerordentlichen Zahlungsverpflichtungen gegenüber Pensionsfonds führen. BASF ist auf die Anwerbung und Bindung von hoch qualifizierten Führungs- und Fachkräften angewiesen. BASF ist Risiken ausgesetzt, die mit der Anwendung von Informationstechnologie einhergehen. BASF ist Sicherheitsrisiken ausgesetzt. BASF ist durch Akquisitionen und Investitionsentscheidungen Risiken ausgesetzt. Rechtsstreitigkeiten können das operative Ergebnis und den Cashflow negativ beeinflussen. Das Eintreten irgendeines der vorgenannten Risiken kann die Fähigkeit der Emittentin beeinträchtigen, ihren aus den Schuldverschreibungen resultierenden Zahlungsverpflichtungen nachzukommen und/oder zu einem Wertverlust der Schuldverschreibungen führen. 12

19 RISK FACTORS The following is a summary of certain risk factors which prospective investors should consider before deciding to purchase the Bonds. The sequence in which the following risk factors are listed is not an indication of their likelihood to occur or of the extent of their commercial consequences. The following statements are not exhaustive. Prospective investors should consider all of the information provided in this Prospectus or incorporated by reference into this Prospectus and consult with their own professional advisers if they consider it necessary. Risk Factors regarding the Bonds The Bonds may be subject to early redemption at the principal amount if the Issuer becomes obligated to bear withholding taxes which are or will be leviable on payments of principal or interest in respect of the Bonds The Bonds may be redeemed at the option of the Issuer (in whole, but not in part) at the principal amount of the Bonds plus accrued interest to the date fixed for of redemption, if the Issuer becomes obligated to bear withholding taxes which are or will be leviable by or on behalf of the Federal Republic of Germany or any political subdivision or any authority thereof or therein having power to tax, on payments of principal or interest in respect of the Bonds, all as more fully described in the Conditions of Issue. In the event that the Issuer exercises the option to redeem the Bonds, the Bondholders might suffer a lower than expected yield. Their is no restriction on the amount of debt which the Issuer may incur in the future There is no restriction on the amount of debt which the Issuer may issue which ranks equal to the Bonds. Such issuance of further debt may reduce the amount recoverable by the Bondholders upon winding-up or insolvency of the Issuer or may increase the likelihood that the Issuer may elect to defer payments of interest under the Bonds. The price of the Bonds may fall as a result of changes in market interest rates Until their redemption, the Bonds will carry fixed interest. A holder of fixed rate securities is particularly exposed to the risk that the price of such securities falls as a result of changes in current interest rates in the capital markets ( market interest rates ). While the nominal interest rate of a security with a fixed interest rate is fixed during the life of such security, market interest rates typically change on a daily basis. As market interest rates change, the price of such security changes in the opposite direction. If market interest rates increase, the price of such security typically falls. If market interest rates fall, the price of a security with a fixed interest rate typically increases. Investors should be aware that movements in market interest rates can adversely affect the market price of the Bonds and can lead to losses for the Bondholders if they sell Bonds before they fall due for redemption. If the holder of the Bonds holds such Bonds until maturity, changes in the market interest rates are without relevance to such holder as the Bonds will be redeemed at the principal amount of such Bonds. Prior to the issue, there has been no public market for the Bonds and there can be no assurance that a liquid secondary market for the Bonds will develop or, if it does develop, that it will continue There is currently no secondary market for the Bonds. Application has been made to list the Bonds on the Official List of the Irish Stock Exchange. However, there can be no assurance that a liquid secondary market for the Bonds will develop or, if it develops, that it will continue. The fact that the Bonds may be listed does not necessarily lead to greater liquidity as compared to unlisted Bonds. If Bonds are not listed on any exchange, pricing information for such Bonds may, however, be more difficult to obtain which may affect the liquidity of the Notes adversely. In an illiquid market, a Bondholder might not be able to sell his Bonds at any time at fair market prices. The possibility to sell the Bonds might additionally be restricted by country specific reasons. 13

20 Risk Factors regarding BASF BASF s business, financial condition or results of operations could suffer adverse material effects due to any of the following risks. While all the risks considered material are described below, these are not the only risks BASF faces. Additional risks not known by BASF or not presently considered material might also impair BASF s business operations. Certain developments in the global economy generally may adversely affect BASF s sales and earnings Four major economic factors may pose risks affecting BASF s sales and earnings: 1. Oil price developments could be different from estimated tendency to decline, 2. The U. S. dollar may further devaluate against the euro and Asian currencies, 3. China s economy might experience a significantly reduced growth rate compared with expectations, 4. The U. S. interest rate level could increase faster and higher than anticipated. Decreasing demand for chemical products in the United States and Asia, as well as ongoing economic weakness in Europe, could consequently have an adverse effect on both sales and earnings. Those areas that are subject to commoditization, such as BASF s basic inorganic chemicals, petrochemicals, intermediates and plastics operations are particularly vulnerable, whereas BASF s agricultural, nutrition and cosmetics operations and natural gas trading are less likely to suffer. BASF is also regionally diversified, and therefore less likely to suffer from weakness in a specific region. Changes in regulatory controls could reduce the profitability of BASF s current products and could delay BASF s introduction of new products BASF must comply with a broad range of regulatory controls on the testing, manufacturing and marketing of many of its products. BASF expects that regulatory controls worldwide, and especially in the European Union (E. U.), will become increasingly more demanding. The proposed new E. U. chemicals policy (REACH) could require a significant increase in testing for chemical products. These tests could be very cost intensive and time consuming, and could lead to increased costs and reduced operating margins for BASF s chemical products. The new legislation is not expected to be in force before 2007 in the respective countries in Europe. Under the E.U. Directive on Emission Trading, governments have to impose total CO 2 (carbon dioxide) caps on specific energy intensive installations. These caps aim to enable E. U. member states to meet their Kyoto targets. The National Allocation Plans (NAPs) have been assigned in 2004 for the first period from 2005 until BASF expects to comply with these targets during the next years. BASF does not anticipate specific capital expenditure exceeding the general administration and adjustment costs that the European industry is facing. Significant capital expenditure and possible limitations of BASF s growth strategy could occur, if the allocation situation changes dramatically after BASF is exposed to foreign currency and interest rate risks BASF conducts a significant portion of its operations outside of Europe and is therefore exposed to risks associated with the fluctuations of foreign currencies. BASF is subject to interest rate risks in the ordinary course of its business. Risk management is centralized at BASF Aktiengesellschaft and BASF Group companies designated for that purpose. BASF hedges against financial risks through derivative instruments such as forward exchange contracts, currency options, interest rate and currency swaps and combined instruments. There can be no assurance, however, that BASF s hedging strategy will be effective and that foreign currency and interest rate fluctuations will not adversely affect BASF s results of operations. BASF is also subject to credit risks to the extent that counterparties to transactions may not be able to perform their contractual obligations. Although BASF aims to limit the risk of default by entering into 14

21 transactions only with top-rated financial institutions and by adhering to fixed limits, defaults with respect to significant contracts may adversely affect BASF s operating results. Significant variations in the cost and availability of raw materials, energy, precursors and intermediates may adversely affect BASF s operating results BASF uses significant amounts of raw materials and energy in manufacturing a wide variety of products. Significant variations in the cost and availability of raw materials, energy, precursors and intermediates may adversely affect BASF s operating results. To control these price and supply risks, BASF purchases raw materials through negotiated long-term contracts, with prices that periodically float. Additionally required purchases on spot markets are made using optimized procedures. Supply contracts for the most strategically important raw materials are negotiated and concluded centrally for the BASF Group. BASF s individual business units constantly monitor changes in their relevant supply markets and take action to minimize their risks accordingly. Cyclicality may adversely affect BASF s operating margins The results of BASF s Chemicals, Plastics and Performance Products segments are affected by cyclicality and migration of various industries in which they operate, including the automotive, construction, electrical and electronics as well as the textile industries. BASF s strategy to deal with these risks is to constantly expand its cyclically resilient businesses, such as agrochemicals, active ingredients for pharmaceuticals and nutrition, and trading and transmission of natural gas. In cyclical businesses, BASF seeks to maintain cost leadership. BASF strives to anticipate customer migration tendencies and adjusts to customer industries by continued investment activities in emerging growth markets. The results of BASF s crop protection business are dependent on weather conditions and can be affected by local and regional economic circumstances Sales volumes of BASF s crop protection products are subject to the agricultural sector s dependency on weather conditions. Adverse weather conditions in a particular growing region could materially negatively affect the results of operations of BASF s crop protection business. Demand for crop protection products is further influenced by the agricultural policies of governments and multinational organizations. In addition, BASF s crop protection products are typically sold pursuant to contracts with long payment terms. These extended payment periods make BASF s crop protection business susceptible to losses from receivables during local or regional economic crises and may adversely affect BASF s operating results. Exploration risk may adversely affect the business of BASF s Oil & Gas segment The future growth of the exploration and production unit of BASF s Oil & Gas segment is dependent on successful findings. The search for new oil and natural gas reserves involves certain geological risks that relate to the availability of hydrocarbon products and the quality thereof. The exploration and production industries are experienced in dealing with these risks diligently. BASF diversifies its risks through a balanced exploration portfolio. Failure to develop new products and production technologies may harm BASF s competitive position and operating results BASF s operating results depend on the development of commercially viable new products and production technologies. BASF devotes substantial resources to research and development. Because of the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products BASF is currently developing, or may begin to develop in the future, will become market-ready and achieve substantial commercial success. 15

22 Negative developments in equity and bond markets may make extraordinary contributions to pension funds necessary The fund assets required to cover future pension obligations are actuarially determined using assumptions concerning the expected return on plan assets. The plan assets are partially comprised of equity investments. Declining returns on equity and bond markets could trigger additional contributions to the pension plans to cover future pension obligations. BASF is dependent upon hiring and retaining highly qualified management and technical personnel Competition for highly qualified management and technical personnel is intense in the industries in which BASF operates. BASF s future success depends in part on its continued ability to hire, integrate and retain highly skilled employees. BASF is subject to the risks associated with the use of information technology BASF is dependent upon technology for the distribution of information within the BASF Group and to customers and suppliers. This information technology is subject to risks associated with defects, errors, failures and computer viruses. To control potential risks relating to information technology, BASF uses the latest hardware and software and has integrated uniform information technology infrastructures, backup systems, replicated databases, virus and access protection, encoding systems and a high degree of internal networking. There can be no assurance, however, that BASF s information technology systems will not fail and cause material disruptions to BASF s business. BASF is subject to security risks Assessing security risks on a worldwide basis and determining their potential impact on BASF has become an extremely difficult undertaking since the terrorist attacks in the United States. BASF s corporate security is in close contact with local security offices through its group-wide network, and takes controlled precautionary steps with the help of constantly updated security measures and recommendations (e.g., travel restrictions, tighter access controls for production plants, up-dating of rescue and evacuation plans, emergency services, etc.) to protect the company and its employees. BASF is subject to risks arising from acquisitions and investment decisions The implementation of decisions related to acquisitions and investments is associated with complex risks due to the high level of capital involved and the long-term capital commitment. Litigation could harm BASF s operating results and cash flows BASF is involved in a number of legal proceedings and may become involved in additional legal proceedings. Each of these proceedings or potential proceedings could involve substantial claims for damages or other payments. For further information see BUSINESS Legal Proceedings. 16

23 THE BONDS The following is the text of the conditions of issue (the Conditions of Issue ) applicable to the Bonds which will be attached to each Global Bond. In case of any overlap or inconsistency in the definition of a term or expression in the Conditions of Issue and elsewhere in this Prospectus, the definition in the Conditions of Issue will prevail. Conditions of Issue Der deutsche Text dieser Anleihebedingungen ist allein bindend und maßgeblich. Die englische Übersetzung ist unverbindlich. The German text of the Conditions of Issue is the legally binding one. The English translation is for convenience only. ANLEIHEBEDINGUNGEN 1 (Form und Nennbetrag) (1) Die von der BASF Aktiengesellschaft, Ludwigshafen, Bundesrepublik Deutschland, (die Emittentin ) begebene Anleihe im Gesamtnennbetrag von , ist eingeteilt in unter sich gleichberechtigte, auf den Inhaber lautende Schuldverschreibungen im Nennbetrag von je , (die Schuldverschreibungen ). (2) Die Schuldverschreibungen sind anfänglich durch eine vorläufige Globalurkunde ohne Zinsscheine verbrieft, die nicht früher als 40 Tage nach dem Tag ihrer Ausgabe gegen Vorlage einer Bestätigung, dass kein Anteil an der vorläufigen Globalurkunde von einem oder für einen US- Steuerinländer ( certification of non-us-beneficial ownership ) gehalten wird, gegen eine Dauerglobalurkunde ausgetauscht wird (die Dauerglobalurkunde ). Die vorläufige Globalurkunde und die Dauerglobalurkunde tragen jeweils eigenhändige Unterschriften von zwei ordnungsgemäß bevollmächtigten Vertretern der Emittentin. Die Urkunden tragen jeweils außerdem die eigenhändige Unterschrift eines Kontrollbeauftragten. Einzelurkunden und Zinsscheine werden nicht ausgegeben. Die Globalurkunden sind bei der Clearstream Banking AG, Frankfurt am Main, ( CBF ) hinterlegt worden und wird von der CBF verwahrt, bis sämtliche Verbindlichkeiten der Emittentin aus den Schuldverschreibungen erfüllt sind. Übertragungen von Schuldverschreibungen erfolgen durch Übertragung von Miteigentumsanteilen an der Globalurkunde gemäß dem für diese Zwecke von CBF bestimmten Verfahren. 2 (Verzinsung) (1) Die Schuldverschreibungen werden bezogen auf ihren Nennbetrag verzinst, und zwar vom 21. April 2006 (einschließlich) bis zum Fälligkeitstag (wie in 3 (1) definiert) (ausschließlich) mit jährlich 4,00%. Die Zinsen sind nachträglich am 21. April eines jeden Jahres zahlbar. Die erste Zinszahlung erfolgt am 21. April (2) Der Zinslauf der Schuldverschreibungen endet mit Ablauf des Tages, der dem Tag vorangeht, an dem sie zur Rückzahlung fällig werden. Falls die Emittentin die Schuldverschreibungen bei Fälligkeit nicht einlöst, endet die Verzinsung der Schuldverschreibungen erst mit Ablauf des Tages, der dem Tag der tatsächlichen Rückzahlung der Schuldverschreibungen vorangeht. (3) Sind Zinsen für einen Zeitraum von weniger als einem Jahr zu berechnen, erfolgt die Berechnung auf der Grundlage der tatsächlich verstrichenen Tage, geteilt durch die Anzahl der Tage (365 bzw. 366) im jeweiligen Zinsjahr. CONDITIONS OF ISSUE 1 (Form and Denomination) (1) The issue by BASF Aktiengesellschaft, Ludwigshafen, Federal Republic of Germany, (the Issuer ) in the aggregate principal amount of 5 1,000,000,000. is divided into 1,000,000 Bonds payable to bearer in the denomination 5 1,000 each ranking pari passu with each other (the Bonds ). (2) The Bonds are initially represented by a temporary global bond (the Temporary Global Bond ) without coupons which will not earlier than 40 days after its date of issue be exchanged for a permanent global Bond (the Permanent Global Bond) upon certification of non-us-beneficial ownership. The Temporary and the Permanent Global Bond each bears the manual signature of or on behalf of the Issuer. The Temporary and the Permanent Global Bond each also bears the handwritten signature of a control officer. Individual Bonds in definitive form and interest coupons will not be issued. The Global Bonds have been deposited with Clearstream Banking AG, Frankfurt am Main ( CBF ) and will be kept in custody by CBF until all obligations of the Issuer under the Bonds have been satisfied. Transfers of Bonds shall be effected in the form of transfers of co-ownership participations in the Global Bond in accordance with the procedures established for this purpose by CBF. 2 (Interest) (1) The Bonds bear interest on their principal amount at the rate of 4.00% per annum from (and including) April 21, 2006 to (but excluding) the Maturity Date (as defined in 3(1)). Interest shall be payable in arrear on April 21 in each year. The first payment of interest shall be made on April 21, (2) The Bonds shall cease to bear interest from the expiry of the day preceding the day on which they are due for redemption. If the Issuer shall fail to redeem the Bonds when due, interest shall continue to accrue until the expiry of the day preceding the day of actual redemption of the Bonds. (3) If interest is to be calculated for a period of less than one year, it shall be calculated on the basis of the actual number of days elapsed, divided by the actual number of days (365 or 366) in the respective annual interest period. 17

24 3 (Fälligkeit) (1) Die Schuldverschreibungen werden am 21. April 2011 zum Nennbetrag zurückgezahlt. (2) Die Emittentin ist berechtigt, Schuldverschreibungen am Markt oder anderweitig zu erwerben und wieder zu verkaufen. 4 (Zahlungen) (1) Die Zahlung von Kapital und Zinsen erfolgt an die Deutsche Bank Aktiengesellschaft, Frankfurt am Main (die Hauptzahlstelle ) zur Weiterleitung an die CBF oder deren Order zur Gutschrift für die jeweiligen Kontoinhaber der CBF gegen Vorlage und (sofern es sich um die Kapitalrückzahlung handelt) Einreichung der Globalurkunde. (2) Die Zahlung an die CBF oder deren Order befreit die Emittentin in Höhe der geleisteten Zahlung von ihren entsprechenden Verbindlichkeiten aus den Schuldverschreibungen. (3) Fällt der Fälligkeitstag einer Zahlung in Bezug auf die Schuldverschreibungen auf einen Tag, der kein Zahltag ist, dann hat der Anleihegläubiger keinen Anspruch auf Zahlung vor dem nächsten Zahltag am jeweiligen Geschäftsort. Der Anleihegläubiger ist nicht berechtigt, weitere Zinsen oder sonstige Zahlungen aufgrund dieser Verspätung zu verlangen. Für diese Zwecke bezeichnet Zahltag einen Tag (außer einem Samstag oder Sonntag), an dem alle betroffenen Bereiche des Trans-European Automated Real-time Gross settlement Express Transfer system ( TARGET ) betriebsbereit sind, um die betreffende Zahlung auszuführen. (4) Bezugnahmen in diesen Anleihebedingungen auf Kapital der Schuldverschreibungen schließen, soweit anwendbar, jeden Aufschlag sowie sonstige auf oder in Bezug auf die Schuldverschreibungen zahlbare Beträge ein. Bezugnahmen in diesen Anleihebedingungen auf Zinszahlungen auf Schuldverschreibungen schließen, soweit anwendbar, sämtliche gemäß 5 zahlbaren zusätzlichen Beträge ein. (5) Die Hauptzahlstelle in ihrer Eigenschaft als solche handelt ausschließlich als Beauftragte der Emittentin und steht nicht in einem Auftrags- oder Treuhandverhältnis zu den Anleihegläubigern der Schuldverschreibungen (die Anleihegläubiger ). Die Emittentin kann zusätzliche Zahlstellen ernennen und die Ernennung von Zahlstellen widerrufen, vorausgesetzt dass, solange die Schuldverschreibungen an einer Börse oder mehreren Börsen zugelassen sind und diese es erfordern, jederzeit eine Zahlstelle an dem betreffenden Börsenplatz besteht. Ernennung und Widerruf sind gemäß 8 bekannt zu machen. (6) Die Emittentin kann die von den Anleihegläubigern innerhalb von zwölf Monaten nach Fälligkeit nicht erhobenen Beträge an Kapital und Zinsen bei dem Amtsgericht Frankfurt am Main hinterlegen. Soweit auf das Recht zur Rücknahme der hinterlegten Beträge verzichtet wird, erlöschen die betreffenden Ansprüche der Anleihegläubiger gegen die Emittentin. 5 (Steuern) (1) Sämtliche auf die Schuldverschreibungen zu zahlenden Beträge sind an der Quelle ohne Einbehalt oder Abzug von oder aufgrund von gegenwärtigen oder zukünftigen Steuern oder sonstigen Abgaben gleich welcher Art zu leisten, die von oder in der Bundesrepublik Deutschland oder für deren Rechnung oder von oder für Rechnung einer politischen Untergliederung oder Steuerbehörde 3 (Maturity) (1) The Bonds will be redeemed at their principal amount on April 21, (2) The Issuer is entitled to purchase and resell Bonds in the market or otherwise. 4 (Payments) (1) Payment of principal and interest on the Bonds shall be made to Deutsche Bank Aktiengesellschaft, Frankfurt am Main (the Principal Paying Agent ) for on-payment to CBF or to its order for credit to the respective account holders of CBF upon presentation and (in the case of the payment of principal) surrender of the Global Bond. (2) Payments to CBF or to its order shall to the extent of amounts so paid constitute the discharge of the Issuer from its corresponding liabilities under the Bonds. (3) If the date for payment of any amount in respect of any Bonds is not a Payment Business Day then the Bondholder shall not be entitled to payment until the next such day in the relevant place and shall not be entitled to further interest or other payment in respect of such delay. For these purposes, Payment Business Day means any day (other than a Saturday or a Sunday) on which all relevant parts of the Trans-European Automated Real-time Gross settlement Express Transfer system ( TARGET ) are operational to effect the relevant payment. (4) Reference in these Conditions of Issue to principal in respect of the Bonds shall be deemed to include also any premium and any other amounts which may be payable under or in respect of the Bonds. Reference in these Conditions of Issue to interest in respect of the Bonds shall be deemed to include, as applicable, any Additional Amounts which may be payable under 5. (5) The Principal Paying Agent in its capacity as such is acting exclusively as agent for the Issuer and does not have any relationship of agency or trust with the holders of the Bonds (the Bondholders ). The Issuer may appoint additional paying agents and revoke the appointment of paying agents, provided that as long as the Bonds are listed on one stock exchange or several stock exchanges and the rules thereof so require, there shall at all times be a paying agent in the city in which the respective stock exchange is or stock exchanges are located. Such appointment or revocation shall be published in accordance with 8. (6) The Issuer may deposit with the Amtsgericht (local court) in Frankfurt am Main principal and interest not claimed by Bondholders within twelve months after maturity. To the extent the right to withdraw such deposit is waived, the relevant claims of the Bondholders against the Issuer shall cease. 5 (Taxes) (1) All amounts payable in respect of the Bonds shall be made without withholding or deduction for or on account of any present or future taxes or duties of whatever nature imposed or levied by way of withholding or deduction at source by or on behalf of the Federal Republic of Germany or any political subdivision or any authority thereof or therein having power to tax (hereinafter together With- 18

25 der oder in der Bundesrepublik Deutschland auferlegt oder erhoben werden (nachstehend zusammen Quellensteuern genannt), es sei denn ein solcher Einbehalt oder Abzug ist gesetzlich vorgeschrieben. In diesem Fall wird die Emittentin diejenigen zusätzlichen Beträge (die zusätzlichen Beträge ) an Kapital und Zinsen zahlen, die erforderlich sind, damit die den Anleihegläubigern zufließenden Nettobeträge nach einem solchen Einbehalt oder Abzug jeweils den Beträgen entsprechen, die ohne einen solchen Einbehalt oder Abzug von den Anleihegläubigern empfangen worden wären; die Verpflichtung zur Zahlung solcher zusätzlichen Beträge besteht jedoch nicht für solche Steuern und Abgaben, die a) zu zahlen oder abzuführen sind von einer als Depotbank oder Inkassobeauftragter des Anleihegläubigers handelnden Person oder sonst auf andere Weise die keinen Abzug oder Einbehalt seitens der Emittentin von Kapital oder Zinsen darstellt, oder b) wegen gegenwärtiger oder früherer persönlicher oder geschäftlicher Beziehungen des Anleihegläubigers zur Bundesrepublik Deutschland oder einem anderen Mitgliedstaat der Europäischen Union zu zahlen sind, und nicht allein deshalb, weil Zahlungen auf die Schuldverschreibungen aus Quellen in der Bundesrepublik Deutschland stammen (oder für Zwecke der Besteuerung so behandelt werden) oder dort besichert sind. Die deutsche Zinsabschlagsteuer und der darauf erhobene Solidaritätszuschlag, in der jeweils geltenden Fassung, oder zukünftige, diese ablösende Steuern bzw. Zuschläge, einschließlich einer Europäischen Zinsabschlagsteuer oder einer Europäischen Abgeltungsteuer auf Zinseinkünfte, ist als eine unter diesen Unterpunkt b) fallende Steuer anzusehen, und hinsichtlich welcher demgemäß dem in Satz 1 dieses Unterpunkts b) in Bezug genommenen Personenkreises keine zusätzlichen Beträge zu zahlen sind, oder c) aufgrund (i) einer Richtlinie oder Verordnung der Europäischen Union betreffend die Besteuerung von Zinserträgen oder (ii) einer zwischenstaatlichen Vereinbarung über deren Besteuerung, an der die Bundesrepublik Deutschland oder die Europäische Union beteiligt ist, oder (iii) einer gesetzlichen Vorschrift, die diese Richtlinie, Verordnung oder Vereinbarung umsetzt oder befolgt, abzuziehen oder einzubehalten sind, oder d) aufgrund einer Rechtsänderung (oder infolge einer nicht allgemein bekannten Anwendung oder amtlicher Auslegung von Gesetzen oder Rechtsvorschriften) zahlbar sind, die später als 30 Tage nach Fälligkeit der betreffenden Zahlung von Kapital oder Zinsen oder, wenn dies später erfolgt, ordnungsgemäßer Bereitstellung aller fälligen Beträge und einer diesbezüglichen Bekanntmachung gemäß 8 wirksam wird, oder e) von einer Zahlstelle einbehalten oder abgezogen werden, wenn die Zahlung von einer anderen Zahlstelle ohne den Einbehalt oder Abzug hätte vorgenommen werden können. Bezugnahmen in diesen Anleihebedingungen auf Kapital oder Zinsen schließen gemäß diesem 5 zahlbare zusätzliche Beträge ein. (2) Falls infolge einer am oder nach dem 21. April 2006 wirksam werdenden ¾nderung oder Ergänzung der in der Bundesrepublik Deutschland geltenden Rechtsvorschriften oder einer vor diesem Zeitpunkt nicht allgemein bekannten Anwendung oder amtlichen Auslegung solcher Rechtsvorschriften Quellensteuern auf die Zahlung von Kapital oder Zinsen der Schuldverschreibungen anfallen oder anfallen werden und die Quellensteuern, wegen der holding Taxes ), unless such withholding or deduction is required by law. In such event, the Issuer shall pay such additional amounts (the Additional Amounts ) of principal and interest as shall be necessary in order that the net amounts received by the Bondholders, after such withholding or deduction, shall equal the respective amounts which would otherwise have been received by the Bondholders in the absence of such withholding or deduction; except that no such Additional Amounts shall be payable on account of any taxes or duties which: a) are payable by any person acting as custodian bank or collecting agent on behalf of a Bondholder, or otherwise in any manner which does not constitute a deduction or withholding by the Issuer from payment of principal or interest made by it; or b) are payable by reason of the Bondholder having, or having had, some personal or business connection with the Federal Republic of Germany or another member state of the European Union and not merely by reason of the fact that payments in respect of the Bonds are, or for purposes of taxation are deemed to be, derived from sources in, or are secured in the Federal Republic of Germany. It is being understood that the German Zinsabschlagsteuer (advance interest income tax) and the solidarity surcharge ( Solidaritätszuschlag ) imposed thereon as in effect from time to time, or any taxes or surcharges, substituting the foregoing, including a European advance interest income tax or a European Abgeltungsteuer auf Zinseinkünfte (definitive tax on interest income), is a tax falling under this clause b) and with respect to which, accordingly, no additional amount will be payable to the persons referred to in sentence 1 of this clause b), or c) are deducted or withheld pursuant to (i) any European Union Directive or Regulation concerning the taxation of interest income, or (ii) any international treaty or understanding relating to such taxation and to which the Federal Republic of Germany or the European Union is a party, or (iii) any provision of law implementing, or complying with, or introduced to conform with, such Directive, Regulation, treaty or understanding; or d) are payable by reason of change in law (or by reason of any application or official interpretation, not generally known, of any law or regulation) that becomes effective more than 30 days after the relevant payment of principal or interest becomes due, or, if this occurs later is duly provided for and notice thereof is given in accordance with 8; or e) are withheld or deducted by a Paying Agent from a payment if the payment could have been made by another Paying Agent without such withholding or deduction. Any reference in these Conditions of Issue to principal and interests shall be deemed to include any Additional Amounts payable pursuant to this 5. (2) If, as a result of any change in, or amendment to, the laws or regulations prevailing in the Federal Republic of Germany, which change or amendment becomes effective on or after April 21, 2006, or as a result of any application or official interpretation of such laws or regulations not generally known before that date, Withholding Taxes are or will be leviable on payments of principal or interest in respect of the Bonds, by reason of the obligation to pay 19

26 Verpflichtung zur Zahlung zusätzlicher Beträge gemäß Absatz (1), der Emittentin zur Last fallen, ist die Emittentin berechtigt, alle ausstehenden Schuldverschreibungen, jedoch nicht nur einen Teil von ihnen, unter Einhaltung einer Kündigungsfrist von mindestens 30 Tagen jederzeit zum Nennbetrag zuzüglich bis zum Tilgungstag aufgelaufener Zinsen zu tilgen. Eine solche Kündigung darf jedoch nicht früher als 90 Tage vor dem Zeitpunkt erfolgen, an dem die Emittentin erstmals Quellensteuern einbehalten oder zahlen müsste, falls eine Zahlung in Bezug auf die Schuldverschreibungen dann geleistet würde. (3) Die Kündigung erfolgt durch Bekanntmachung gemäß 8. Sie ist unwiderruflich und muss den Tilgungstermin sowie in zusammenfassender Form die Tatsachen angeben, die das Kündigungsrecht begründen (nachstehend Kündigungsgrund genannt); ferner muss sie eine Erklärung des Inhalts enthalten, dass die Emittentin den Eintritt oder Fortbestand des Kündigungsgrundes nach ihrer geschäftlichen Beurteilung nicht durch ihr mögliche zumutbare Maßnahmen (und zwar andere als eine Ersetzung der Emittentin gemäß 9) vermeiden kann. additional amounts as provided in subparagraph (1), such Withholding Taxes are to be borne by the Issuer, the Issuer may redeem the Bonds in whole, but not in part, at any time, on giving not less than 30 days notice, at the principal amount thereof, together with interest accrued to the date fixed for redemption. No such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be obliged to withhold or pay Withholding Taxes if a payment in respect of the Bonds shall then be made. (3) Any such notice shall be given by publication in accordance with 8. It shall be irrevocable, must specify the date fixed for redemption and must set forth a statement in summary form of the facts constituting the basis for the right of the Issuer so to redeem (hereinafter an Event of Default ), and shall include a statement to the effect that the Issuer, in its business judgement, cannot avoid the occurrence or persistence of such Event of Default by the use of reasonable measures available to it (other than the substitution of the Issuer according to 9). 6 (Status, Negativverpflichtung) (1) Die Schuldverschreibungen stellen nicht besicherte und nicht nachrangige Verbindlichkeiten der Emittentin dar und stehen im gleichen Rang mit allen anderen nicht besicherten und nicht nachrangigen derzeitigen und zukünftigen Verbindlichkeiten der Emittentin. (2) Die Emittentin verpflichtet sich, solange Schuldverschreibungen ausstehen, jedoch nur bis zu dem Zeitpunkt, an dem alle Beträge an Kapital und Zinsen der Hauptzahlstelle zur Verfügung gestellt worden sind, keine gegenwärtigen oder zukünftigen Kapitalmarktverbindlichkeiten und keine Garantien oder andere Gewährleistungen dafür durch Grund- oder Mobiliarpfandrechte an ihrem Vermögen zu besichern, ohne jeweils die Anleihegläubiger zur gleichen Zeit und im gleichen Rang an solchen Sicherheiten oder an solchen anderen Sicherheiten, die von einem internationalen angesehenen unabhängigen Wirtschaftsprüfer als gleichwertige Sicherheit anerkannt werden, teilnehmen zu lassen. (3) Im Sinne dieser Anleihebedingungen bezeichnet Kapitalmarktverbindlichkeit jede Verbindlichkeit hinsichtlich der Rückzahlung aufgenommener Geldbeträge, die durch Schuldverschreibungen oder sonstige Wertpapiere mit einer ursprünglichen Laufzeit von mehr als einem Jahr, die an einer Börse oder an einem anderen anerkannten Wertpapiermarkt notiert oder gehandelt werden oder werden können, verbrieft oder verkörpert ist. 6 (Status, Negative Pledge) (1) The Bonds constitute unsecured and unsubordinated obligations of the Issuer and rank pari passu with all other unsecured and unsubordinated obligations of the Issuer, present and future. (2) The Issuer undertakes, as long as any Bonds are outstanding, but only up to the time all amounts of principal and interest have been placed at the disposal of the Principal Paying Agent, not to provide security upon any of its assets for any present or future Capital Market Indebtedness or any guarantees or other indemnities resulting therefrom, without at the same time having the Bondholders share equally and rateably in such security or such other security as shall be approved by an independent accounting firm of internationally recognised standing as being equivalent security. (3) For purposes of these Conditions of Issue Capital Market Indebtedness means any obligation for the repayment of borrowed money which is in the form of, or represented or evidenced by, bonds, notes or other securities, with an original maturity of more than one year, which are, or are capable of being, quoted, listed, dealt in or traded on a stock exchange or other recognised securities market. 7 (Kündigungsrecht der Anleihegläubiger) (1) Jeder Anleihegläubiger ist berechtigt, seine Schuldverschreibungen zu kündigen und deren sofortige Tilgung zum Nennbetrag zuzüglich aufgelaufener Zinsen zu verlangen, falls a) die Emittentin Kapital oder Zinsen aus dieser Anleihe nicht innerhalb von 30 Tagen nach dem betreffenden Fälligkeitstag zahlt, oder b) die Emittentin die ordnungsgemäße Erfüllung irgendeiner anderen Verpflichtung aus den Schuldverschreibungen unterlässt und die Unterlassung länger als 30 Tage fortdauert, nachdem die Hauptzahlstelle hierüber eine Benachrichtigung von einem Anleihegläubiger erhalten hat, oder 7 (Events of Default) (1) Each Bondholder shall be entitled to declare his Bonds due and demand immediate redemption thereof at par plus accrued interest in the event that a) the Issuer fails to pay principal or interest within 30 days from the relevant due date, or b) the Issuer fails to duly perform any other obligation arising from the Bonds and such failure continues unremedied for more than 30 days after the Principal Paying Agent has received notice thereof from a Bondholder, or 20

27 c) eine Kapitalmarktverbindlichkeit (wie in 6 Abs. 3 definiert) oder ein Schuldscheindarlehen (mit einer ursprünglichen Laufzeit von mehr als einem Jahr) der Emittentin vorzeitig zahlbar wird aufgrund einer Nichtoder Schlechtleistung des dieser Kapitalmarktverbindlichkeit oder des Schuldscheindarlehens zugrunde liegenden Vertrages, oder die Emittentin einer Zahlungsverpflichtung in Höhe oder im Gegenwert von mehr als , aus einer Kapitalmarktverbindlichkeit oder einem Schuldscheindarlehen oder aufgrund einer Bürgschaft oder Garantie, die für die Kapitalmarktverbindlichkeit oder ein Schuldscheindarlehen Dritter gegeben wurde, nicht innerhalb von 30 Tagen nach ihrer Fälligkeit bzw. im Falle einer Bürgschaft oder Garantie nicht innerhalb von 30 Tagen nach Inanspruchnahme aus dieser Bürgschaft oder Garantie nachkommt, es sei denn, die Emittentin bestreitet in gutem Glauben, dass diese Zahlungsverpflichtung besteht oder fällig ist bzw. diese Bürgschaft oder Garantie berechtigterweise geltend gemacht wird, oder falls eine für solche Verbindlichkeiten bestellte Sicherheit für die oder von den daraus berechtigten Gläubiger(n) in Anspruch genommen wird, oder d) die Emittentin ihre Zahlungen einstellt oder ihre Zahlungsunfähigkeit allgemein bekannt gibt, oder e) ein Gericht ein Insolvenzverfahren gegen die Emittentin eröffnet, ein solches Verfahren eingeleitet und nicht innerhalb von 60 Tagen aufgehoben oder ausgesetzt worden ist, oder die Emittentin ein solches Verfahren beantragt oder einleitet oder eine allgemeine Schuldenregelung zu Gunsten ihrer Gläubiger anbietet oder trifft, oder f) die Emittentin ihre Geschäftstätigkeit ganz oder überwiegend einstellt, alle oder den wesentlichen Teil ihres Vermögens veräußert oder anderweitig abgibt und (i) dadurch den Wert ihres Vermögens wesentlich vermindert und (ii) es dadurch wahrscheinlich wird, dass die Emittentin ihre Zahlungsverpflichtungen gegenüber den Anleihegläubigern nicht mehr erfüllen kann, oder g) die Emittentin in Liquidation tritt, es sei denn, dies geschieht im Zusammenhang mit einer Verschmelzung oder einer anderen Form des Zusammenschlusses mit einer anderen Gesellschaft oder im Zusammenhang mit einer Umwandlung und die andere oder neue Gesellschaft übernimmt alle Verpflichtungen, die die Emittentin im Zusammenhang mit dieser Anleihe eingegangen ist. Das Kündigungsrecht erlischt, falls der Kündigungsgrund vor Ausübung des Rechts geheilt wurde. (2) Eine Benachrichtigung oder Kündigung gemäß Absatz (1) hat in der Weise zu erfolgen, dass der Hauptzahlstelle eine entsprechende schriftliche Erklärung übergeben oder durch eingeschriebenen Brief übermittelt wird. (3) In den Fällen gemäß Absatz (1) b) und/oder c) wird eine Kündigung, sofern nicht bei deren Eingang zugleich einer der in Absatz (1) a) und d) bis g) bezeichneten Kündigungsgründe vorliegt, erst wirksam, wenn bei der Hauptzahlstelle Kündigungserklärungen von Inhabern von Schuldverschreibungen im Nennbetrag von mindestens 1 10 der dann ausstehenden Schuldverschreibungen eingegangen sind. 8 (Bekanntmachungen) (1) Alle die Schuldverschreibungen betreffenden Bekanntmachungen werden, solange die Wertpapiere an der Iric) any Capital Market Indebtedness (as defined in 6 (3)) or a certificate of indebtedness (with an initial maturity of more than one year) of the Issuer becomes prematurely repayable as a result of a default in respect of the terms thereof, or the Issuer fails to fulfil any payment obligation in excess of 5 75,000,000 or the equivalent thereof under any Capital Market Indebtedness or under any certificate of indebtedness or under any guarantees or suretyship given for any Capital Market Indebtedness or a certificate of indebtedness of others within 30 days from its due date or, in the case of a guarantee or suretyship, within 30 days of such guarantee or security being unvoked, unless the Issuer shall contest in good faith that such payment obligation exists or is due or that such guarantee or suretyship has been validly invoked, or if a security granted in respect thereof is enforced on behalf of or by the creditor(s) entitled thereto, or d) the Issuer ceases its payments or announces its inability to meet its financial obligations generally, or e) a court opens insolvency proceedings against the Issuer, such proceedings are instituted and have not been discharged or stayed within 60 days, or the Issuer applies for or institutes such proceedings or offers or makes an arrangement for the benefit of its creditors generally, or f) the Issuer ceases all or substantially all of its business operations or sells or disposes of its assets or the substantial part thereof and thus (i) diminishes considerably the value of its assets and (ii) for this reason it becomes likely that the Issuer may not fulfil its payment obligations against the Bondholders, or g) the Issuer goes into liquidation unless this is done in connection with a merger or other form of combination with another company or in connection with a reorganisation and such other or new company assumes all obligations contracted by the Issuer, in connection with this Issue. The right to declare Bonds due shall terminate if the situation giving rise to it has been cured before the right is exercised. (2) Any notice, including any notice declaring Bonds due, in accordance with subparagraph (1) shall be made by means of a written declaration delivered by hand or registered mail to the head office of the Principal Paying Agent. (3) In the events specified in subparagraph (1) b) and/or c) any notice declaring Bonds due shall, unless at the time such notice is received, any of the events specified in subparagraph (1) a) and d) through g) entitling Bondholders to declare their Bonds due has occurred, become effective only when the Principal Paying Agent has received such notices from Bondholders of at least one-tenth in principal amount of Bonds then outstanding. 8 (Notices) (1) All notices concerning the Bonds will be given, as long as any of the Bonds are listed on the Irish Stock Exchange 21

28 schen Börse notiert werden und die Irische Börse dies verlangt, durch Mitteilung an das Company Announcements Office der Irischen Börse bekannt gemacht. (2) Sofern die Regeln der Börse, an der die Wertpapiere notiert sind, dies zulassen, gelten Bekanntmachungen auch als wirksam erfolgt durch eine Mitteilung an CBF zur Weiterleitung an die Anleihegläubiger oder direkt an die Anleihegläubiger. Bekanntmachungen über CBF gelten am siebten Tage nach der Mitteilung an CBF, direkte Mitteilungen an die Anleihegläubiger mit ihrem Zugang als bewirkt. (3) Die Texte sämtlicher Veröffentlichungen gemäß dieses 8 sind außerdem in den Geschäftsräumen einer jeden Zahlstelle zugänglich zu machen. and the Irish Stock Exchange so requires, by notification to the Company Announcements Office of the Irish Stock Exchange. (2) Notices shall also be validly given to CBF for communication by CBF to the Bondholders or directly to the Bondholders provided that this complies with the rules of the stock exchange on which the Bonds are listed. Notifications vis-à-vis CBF shall be deemed to be effected on the seventh day after the notification to CBF ; direct notifications to the Bondholders shall be deemed to be effected upon their receipt. (3) The text of any publication to be made in accordance with this 8 shall also be available at the specified office of each Paying Agent. 9 (Ersetzung der Emittentin) (1) Die Emittentin ist jederzeit berechtigt, sofern sie sich nicht mit einer Zahlung von Kapital oder Zinsen auf die Schuldverschreibungen in Verzug befindet, ohne Zustimmung der Anleihegläubiger eine andere Gesellschaft, die ihren Sitz innerhalb der Europäischen Union hat, und deren stimmberechtigte Anteile direkt oder indirekt zu mehr als 90% von der Emittentin gehalten werden, als Hauptschuldnerin für alle Verpflichtungen aus und im Zusammenhang mit dieser Anleihe einzusetzen, sofern a) die neue Emittentin alle Verpflichtungen der Emittentin aus oder im Zusammenhang mit diesen Schuldverschreibungen übernimmt und sie sämtliche sich aus oder im Zusammenhang mit dieser Anleihe ergebenden Zahlungsverpflichtungen in Euro ohne die Notwendigkeit einer Einbehaltung irgendwelcher Steuern oder Abgaben an der Quelle erfüllen sowie die hierzu erforderlichen Beträge ohne Beschränkungen an die Hauptzahlstelle transferieren kann und sie insbesondere jede hierfür notwendige Genehmigung der Behörden ihres Landes erhalten hat, b) die Emittentin unbedingt und unwiderruflich die Verpflichtungen der neuen Emittentin garantiert, und c) die neue Emittentin sich verpflichtet, jedem Anleihegläubiger alle Steuern, Gebühren oder Abgaben zu erstatten, die ihm infolge der Schuldübernahme durch die neue Emittentin auferlegt werden und die der Anleihegläubiger ohne die Ersetzung der Emittentin nicht hätte tragen müssen. (2) Eine solche Ersetzung ist gemäß 8 zu veröffentlichen. (3) Im Falle einer solchen Ersetzung gilt jede Bezugnahme auf die Emittentin in diesen Anleihebedingungen ab dem Zeitpunkt der Ersetzung als Bezugnahme auf die neue Emittentin und jede Bezugnahme auf das Land, in dem die Emittentin ihren Sitz oder Steuersitz hat, gilt ab dem Zeitpunkt als Bezugnahme auf das Land, in dem die neue Emittentin ihren Sitz oder Steuersitz hat. Des Weiteren gilt im Fall einer Ersetzung Folgendes: a) in 5 gilt eine alternative Bezugnahme auf die Bundesrepublik Deutschland als aufgenommen (zusätzlich zu der Bezugnahme nach Maßgabe des vorstehenden Satzes auf das Land, in dem die neue Emittentin ihren Sitz oder Steuersitz hat); b) in 7 (1)(c) bis (g) gilt eine alternative Bezugnahme auf die Emittentin in ihrer Eigenschaft als Garantin als aufgenommen (zusätzlich zu der Bezugnahme auf die neue Emittentin). 9 (Substitution of Issuer) (1) The Issuer shall without the consent of the Bondholders, if no payment of principal of or interest on any of the Bonds is in default, be entitled at any time to substitute for the Issuer any other company, which has its seat in the European Union, and of which more than 90 % of the shares carrying the right to vote are directly or indirectly owned by it, as principal debtor in respect of all obligations arising from or in connection with this Issue, provided that a) the substitute issuer assumes all obligations of the Issuer arising from or in connection with the Bonds and is in a position to fulfil all payment obligations arising from or in connection with this Issue in euro without the necessity of any taxes or duties to be withheld at source and to transfer all amounts which are required therefor to the Principal Paying Agent without any restrictions, and that in particular all necessary authorisations to this effect by any competent authority have been obtained, b) the Issuer irrevocably and unconditionally guarantees the obligations assumed by the substitute issuer; and c) the substitute issuer undertakes to reimburse any Bondholder for such taxes, fees or duties which may be imposed upon him as a consequence of the assumption of the Issuer s obligation by the substitute issuer and which the Bondholder would not have to bear without the substitution of the Issuer. (2) Any such substitution shall be published in accordance with 8. (3) In the event of any such substitution, any reference in these Conditions of Issue to the Issuer shall from then on be deemed to refer to the substitute issuer and any reference to the country in which the Issuer is domiciled or resident for taxation purposes shall from then on be deemed to refer to the country of domicile or residence for taxation purposes of the substitute issuer. Furthermore, in the event of such substitution the following shall apply: a) in 5 an alternative reference to the Federal Republic of Germany shall be deemed to have been included in addition to the reference according to the proceeding sentence to the country of domicile or residence for taxation purposes of the substitute issuer, and b) in 7 (1)(c) to (g) an alternative reference to the Issuer in its capacity as guarantor shall be deemed to have been included in addition to the reference to the substitute issuer. 22

29 10 (Vorlegungsfrist) Die in 801 Absatz 1 Satz 1 BGB bestimmte Vorlegungsfrist wird für die Schuldverschreibungen auf zehn Jahre verkürzt. 11 (Begebung weiterer Schuldverschreibungen) Die Emittentin behält sich vor, von Zeit zu Zeit ohne Zustimmung der Anleihegläubiger weitere Schuldverschreibungen mit gleicher Ausstattung in der Weise zu begeben, dass sie mit diesen Schuldverschreibungen zusammengefasst werden, eine einheitliche Anleihe mit ihnen bilden und ihren Gesamtnennbetrag erhöhen. Der Begriff Schuldverschreibungen umfasst im Falle einer solchen Erhöhung auch solche zusätzlich begebenen Schuldverschreibungen. 12 (Anwendbares Recht, Gerichtsstand) (1) Form und Inhalt der Schuldverschreibungen sowie die Rechte und Pflichten der Anleihegläubiger, der Emittentin und der Zahlstelle(n) bestimmen sich in jeder Hinsicht nach deutschem Recht. (2) Nicht-ausschließlicher Gerichtsstand für alle Rechtsstreitigkeiten in den in diesen Anleihebedingungen geregelten Angelegenheiten ist Frankfurt am Main. 10 (Presentation Period) The presentation period provided in 801 subparagraph 1 sentence 1 German Civil Code is reduced to ten years for the Bonds. 11 (Issue of Additional Bonds) The Issuer reserves the right from time to time without the consent of the Bondholders to issue additional Bonds with identical terms, so that the same shall be consolidated, form a single issue with and increase the aggregate principal amount of these Bonds. The term Bonds shall, in the event of such increase, also comprise such additionally issued Bonds. 12 (Applicable Law, Place of Jurisdiction) (1) The Bonds, both as to form and content, as well as the rights and duties of the Bondholders, the Issuer, and the Paying Agent(s) shall in all respects be determined in accordance with German law. (2) Non-exclusive place of jurisdiction for all proceedings arising from matters provided for in these Conditions of Issue shall be Frankfurt am Main. 23

30 USE OF PROCEEDS The net proceeds from the issuance of the Bonds will amount to approximately 5 998,005,000 and are intended to be used for general corporate purposes of the Issuer and its subsidiaries. 24

31 SELECTED HISTORICAL FINANCIAL INFORMATION The following selected financial data for the years 2005 and 2004 are excerpted from the consolidated financial statements of BASF, which have been audited by Deloitte & Touche GmbH, independent accountants during this period. Starting from January 1, 2005 the accounting and reporting of the BASF Group is performed according to IFRS. Figures for 2004 have been restated accordingly. For further information, please see Note 3 of the Consolidated Financial Statements included in this Prospectus. Investors should read the information below together with the consolidated financial statements of BASF, including the notes thereto, and the other financial information that is included elsewhere in this Prospectus. The financial year of BASF Aktiengesellschaft is the calendar year. Consolidated Statements of Income Year ended December 31, (Million 5, except per share amounts) Sales , ,536.6 Cost of Sales (29,566.8) (25,721.2) Gross profit on sales , ,815.4 Selling expenses (4,329.9) (4,309.2) General and administrative expenses (780.1) (707.4) Research and development expenses (1,063.7) (986.5) Other operating income ,046.1 Other operating expenses (1,775.1) (1,665.9) Income from operations , ,192.5 Income from companies accounted for using the equity method (7.2) Other income from participations (588.5) Interest result (170.0) (206.1) Other financial result (81.9) (43.9) Financial result (845.7) Income before taxes and minority interests , ,346.8 Income taxes (2,758.1) (2,213.5) Income before minority interests , ,133.3 Minority interests Net income , ,004.3 Earnings per share (7) Dilution effect Dilution earnings per share (7)

32 Consolidated Balance Sheets At December 31, Assets (Million 5) Long-term assets Intangible assets , ,606.6 Property, plant and equipment , ,062.7 Investments accounted for using the equity method ,100.5 Other financial assets Deferred taxes , ,336.6 Other long-term assets , ,518.0 Short-term assets Inventories , ,645.4 Accounts receivable, trade , ,860.8 Other receivables and other short-term assets , ,132.8 Liquid funds (thereof cash and cash equivalents million, 2004: 5 2,085.9 million) , , , ,929.5 Total assets , ,447.5 Stockholders equity and liabilities Stockholders equity Subscribed capital , ,383.5 Capital surplus , ,027.6 Retained earnings , ,923.1 Other comprehensive income (60.5) Minority interest , ,602.2 Long-term liabilities Provisions for pensions and similar obligations , ,124.1 Other provisions , ,375.7 Deferred taxes Financial indebtedness , ,844.6 Other liabilities , , , ,371.2 Short-term liabilities Accounts payable, trade , ,371.5 Provisions , ,364.1 Tax liabilities Financial indebtedness ,452.8 Other liabilities , , , ,474.1 Total stockholders equity and liabilities , ,

33 Consolidated Statements of Cash Flows At December 31, (Million 5) Net income , ,004.3 Depreciation and amortization of intangible assets, property, plant and equipment and financial assets , ,118.5 Changes in pension provisions, defined benefit assets and other non-cash items (11.8) 87.9 Net gains from disposal of long-term assets and securities (422.1) (383.8) Changes in inventories (412.3) (503.5) Changes in receivables (1,150.4) Changes in operating liabilities and other provisions ,461.0 Cash provided by operating activities before external financing of pension obligations , ,634.0 External financing of pension obligations (CTA) (3,660.0) Cash provided by operating activities , ,634.0 Payments related to intangible assets and property, plant and equipment (1,947.7) (2,057.0) Payments related to financial assets and securities (211.4) (203.8) Payments related to acquisitions (535.7) (103.6) Proceeds from divestitures , Proceeds from the disposal of long-term assets and marketable securities Cash used in investing activities (705.7) (1,233.) Capital increases/repayments (55.5) Share repurchases (1,434.8) (725.7) Proceeds from the addition of financial liabilities , Repayment of financial liabilities (1,942.4) (909.7) Dividends paid to shareholders of BASF Aktiengesellschaft (903.9) (774.1) to minority shareholders (78.2) (77.7) Cash used in financing activities (2,108.3) (1,836.0) Net changes in cash and cash equivalents (1,223.7) 1,565.0 Effects on cash and cash equivalents from foreign exchange rates (17.3) from changes in scope of consolidation Cash and cash equivalents as of January , Cash and cash equivalents as of December ,085.9 Marketable securities Liquid funds as shown on the balance sheet , ,290.5 Critical Accounting Policies Critical accounting policies are those that are most important to the presentation of BASF s financial condition and results of operations. These policies require management s difficult, subjective and complex judgment in the preparation of the financial statements and accompanying notes. Management makes estimates and assumptions about the effect of matters that are inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. BASF s most critical accounting policies are discussed below. 27

34 Pension Provisions and similar Obligations Obligations arising from company pension plans are based on actuarial computations made by external actuaries according to the projected unit credit method. Accordingly, assumptions must be made with regard to discount factors, salary and pension trends, and, in the case of externally financed obligations, with regard to the growth and return on the fund assets used to finance future obligations. These assumptions are redefined as of each balance sheet date, taking into account the current circumstances. Discount factors are based on returns for securities or bonds with high credit ratings. The expected return on fund assets is based on long-term developments as observed in the capital markets as well as the respective portfolio structures. If the actual developments deviate from the assumptions made, the resulting actuarial profits or losses are offset against the equity. See Note 23 to the Consolidated Financial Statements included in this Prospectus for further details with regard to the change in pension obligations and financing status. Provisions for Litigation and Claims The evaluation of risks associated with claims for damages and litigation and the determination of the amounts of related provisions are subject to considerable judgment. It is currently not possible to estimate the full consequences of litigation. Corresponding provisions are established to the extent that they are considered probable and the amount can be reasonably estimated. The level of provisions also considers the outcomes of similar cases and legal opinions, taking into account the current circumstances. The actual outcome of legal proceedings may differ considerably from these estimates. See also Note 27 to the Consolidated Financial Statements included in this Prospectus for further information with regard to litigation and claims. Deferred Taxes on Loss Carryforwards Tax loss carryforwards are primarily related to restructuring measures at subsidiaries in the North American (NAFTA) region. In countries in the NAFTA region, these carryforwards may be set against future taxable income for up to 20 years. The realization of deferred tax assets on these carryforwards is dependent upon the economic development of BASF s subsidiaries in the NAFTA region. An evaluation is affected by difficulties in predicting long-term economic developments. Significant valuation adjustments were not made to deferred tax assets on tax loss carryforwards in 2005 in view of the long carryforward period and the stable economic development in the NAFTA region. See also Note 10 to the Consolidated Financial Statements included in this Prospectus for further information on deferred taxes. Goodwill Goodwill is no longer to be amortized. Instead, goodwill is written off only if the carrying value of goodwill is impaired. The value of goodwill has to be reviewed at least once per year at the cash generating unit level. An impairment exists if the book value of the goodwill at the cash generating unit exceeds the recoverable amount, generally determined based upon the discounted value of expected future cash flows. A significant portion of goodwill is associated with the acquisition of the crop protection business of American Home Products Corporation in The value of this goodwill is not impaired given the present and future profitability of the business. Write-offs due to impairment were not necessary in

35 Provisions for Environmental Protection Measures and Site Remediation BASF records liabilities for environmental issues in the accounting period in which its responsibility is established and the cost can be reasonably estimated. Provisions are discounted if the effect of discounting is material. Accordingly, assumptions must be made with regard to discount factors. At environmental sites in which more than one potentially responsible party has been identified, BASF records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which BASF is the only potentially responsible party, a liability is recorded for the total estimated costs of remediation before consideration of recovery from insurers or other third parties. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. See also Note 24 to the Consolidated Financial Statements included in this Prospectus for further explanations with regard to the accrual of provisions for environmental protection measures and site remediation. Impairment of long-lived Assets Impairment tests of long-lived assets are made when conditions indicate a possible loss. Impairment tests are based on a comparison of the carrying amount of the asset and its recoverable amount. The asset is written down to the recoverable amount if this value exceeds the carrying amount. The recoverable amount is the higher value of the fair value less cost to sale and the discounted value of future cash flows. The impairment is reversed if the basis for its recognition subsides. The estimation of the cash flows is based on information available at that time including factors such as: expected sales, customer trends, operating efficiency, material and energy prices, etc. The assumptions used in the cash flow projections reflect the market conditions at the time an impairment becomes known. Assumptions are also made with regard to the discount factors. IFRS Accounting Standards not yet adopted The effects of IFRSs and IFRICs not applied or not yet adopted by the E.U. in the reporting year 2005 were considered: IFRS 7 (Financial Instruments: Disclosures) requires more extensive disclosure regarding financial instruments. The disclosure requirements in IAS 32 were incorporated in IFRS 7 and extended. In addition to the existing disclosure requirements regarding the approach, presentation and measurement of financial instruments, additional information is required regarding the type and extent of risks stemming from financial instruments in financial statements prepared under IFRS. It is not expected that this will have any material effect on the consolidated financial statements. IFRS 7 is to be applied for reporting years beginning on or after January 1, IFRIC 6 (Liabilities arising form Participating in a Specific Market Waste Electrical and Electronic Equipment) was issued to give guidance on the issue of establishing provisions as a result of the E. U. Directive on Waste Electrical and Electronic Equipment (WE&EE). The IFRIC interpretation clearly states when a provision is to be established according to IAS 37 for the decommissioning of equipment that has been sold to private households before August 13, 2005 ( historical household equipment ). IFRIC 6 are not expected to have an effect on the consolidated financial statements. In IFRIC 7 (Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time) two specific issues related to IAS 29 were treated. On the one hand, it explains how an entity is to restate their financial statements in accordance with IAS 29 in the first year the existence of hyperinflation is identified in the economy of its functional currency. On the other hand, IFRIC 7 gives guidance on how an entity has to treat deferred taxes in the opening balance sheet. IFRIC 7 is to be applied for reporting years beginning on or after March 1, This interpretation is not expected to have an effect on the consolidated financial statements. 29

36 IFRIC 8 (Scope of IFRS 2) clarifies that IFRS 2 (Share-based Payment) also applies to include agreements whereby the entity makes payments for which the entity does not receive any goods or services or inadequate consideration. If the identifiable consideration is less than or appears to be less than the fair value of the equity instruments granted or liability incurred, IFRIC 8 interprets this circumstance to indicate that other consideration (i. e. goods or services) has been (or will be) received. Therefore, IFRS 2 is to be applied in such cases. IFRIC 8 is to be applied for reporting years beginning on or after May 1, The application of IFRIC 8 has no effects on the consolidated financial statements. In accordance with IFRS 1 First-time adoption of International Financial Reporting Standards the retrospective application of standards concerning the derecognition of financial assets and financial liabilities, edge accounting and estimates is prohibited. Furthermore IFRS 1 permits elective exceptions from full retrospective application of IFRS accounting policies. BASF used the exception concerning employee benefits, cumulative translation differences and business combinations. Employee benefits Cumulative actuarial gains and losses resulting from the measurement of defined benefit plans at the date of transition are recognized directly in equity. BASF decided to use the option of IAS 19.93A-D; actuarial gains and losses following the conversion to IFRS are directly offset against retained earnings. Cumulative translation adjustments Cumulative adjustments from the translation of financial statements prepared in a currency other than the presentation currency are deemed to be zero at the date of transition by an offset against retained earnings as of January 1, The cumulative translation adjustments following the conversion to IFRS are recognized in other comprehensive income as a separate component of stockholders equity. Business Combinations In its Consolidated Financial Statements, BASF used the exception not to apply IFRS 3. On the basis of IFRS, business combinations prior to the date of transition have not been restated. BASF did not apply any other elective exception of IFRS 1 in its Consolidated Financial Statements. 30

37 GENERAL INFORMATION ABOUT THE ISSUER History and Development BASF Aktiengesellschaft was incorporated as a stock corporation under the laws of the Federal Republic of Germany on January 30, 1952 under the name Badische Anilin- und Soda-Fabrik AG for an indefinite period of time. In 1973, the company changed its name to BASF Aktiengesellschaft. BASF Aktiengesellschaft s headquarters are located in Ludwigshafen, Germany; its registered Office is located at Carl-Bosch-Strasse 38, Ludwigshafen, Federal Republic of Germany, telephone BASF Aktiengesellschaft is registered with the commercial register (Handelsregister) of the local court (Amtsgericht) Ludwigshafen under HRB Major recent acquisitions and divestitures include the following: On July 20, 2004, BASF divested its 30% share in DyStar to Platinum Equity. BASF also divested its printing systems business to CVC Capital Partners on November 30, On August 1, 2005, BASF, along with Shell Chemicals, BASF s 50% joint venture partner, sold Basell, a polyolefin joint venture, to Nell Acquisition S. a. r.l, a subsidiary of Access Industries. BASF acquired the global electronic chemicals business from Merck KGaA on April 15, On October 1, 2005, BASF purchased the Swiss fine chemicals firm Orgamol S.A. On January 9, 2006, Iron Acquisition Corporation, Florham Park, New Jersey, USA, a 100 % subsidiary of BASF Aktiengesellschaft, announced a cash offer for all the shares of Engelhard Corporation, Iselin, New Jersey, USA, in the amount of US$37 per share. The total cost of the transaction based on the price per share would be approximately US$4.9 billion. On February 28, 2006, BASF Aktiengesellschaft reached an agreement with Degussa AG, Düsseldorf, Germany, to acquire Degussa s construction chemicals business. The purchase price for equity is approximately billion plus assumption of liabilities. As a result, the transaction value for BASF is currently estimated at approximately billion. The transaction, which still requires approval from the relevant authorities, is expected to close by the middle of See BUSINESS Recent Developments for further details. Corporate Purpose Pursuant to Article 2 of its Articles of Association, the corporate purposes for which BASF Aktiengesellschaft is established are : activity in the field of chemistry and related branches of science and technology, the production, processing, sale of and dealing in chemical products of all kinds, in particular petrochemicals and inorganics, fertilizers, industrial and special chemicals, intermediates, plastics, synthetic fibers and fiber intermediates, colorants and finishing products, the provision of services in the field of health and nutrition, in particular the production, sale of and dealing in pharmaceuticals, crop protection agents, seeds, vitamins, biotechnological products, pharmachemicals and products for animal nutrition and health, the extraction, production, sale of and dealing in oil, natural gas, mineral oil products and energies, the development, production and sale of products and the provision of services in the area of environmental technology, in particular in the field of waste and sewage treatment and disposal, the design, production and sale of technological equipment and plant and the provision of other engineering and design services, and the carrying out of any other tasks incidental to the activity in said fields or conducive to promoting the same. The Issuer is authorized to establish branches both in Germany and abroad, and to establish and acquire business undertakings the objectives of which are consistent with, related to or conducive to promoting those mentioned above, both in Germany and abroad, or to acquire interests therein. 31

38 Term and Dissolution BASF Aktiengesellschaft has been established for an indefinite period of time. BASF Aktiengesellschaft may be dissolved upon a resolution of the general meeting requiring a majority of at least three quarters of the share capital represented during the resolution. The assets of BASF Aktiengesellschaft remaining after servicing all liabilities are distributed among the shareholders pro rata to their shareholding in BASF Aktiengesellschaft pursuant to the provisions of the German Stock Corporation Act. Share Capital As of the date of this Prospectus, the share capital of the Issuer amounts to 5 1,318,551, divided into 515,059,000 shares with no par value (Stückaktien) that are issued only in bearer form ( BASF Shares ). The BASF Shares form a single class of shares. The Issuer currently has authorized capital in an aggregate amount of 5 500,000, The Board of Executive Directors, with the approval of the Supervisory Board, is authorized to increase the share capital by issuing new shares against cash or contribution in kind through May 1, The Board of Executive Directors is empowered to decide on the exclusion of shareholders pre-emptive subscription rights for these new shares. Further, the Issuer has a total of 5 76,806, of conditional capital which, except for a minor amount, is reserved to fulfil options from the BASF s Stock Option Program for Senior Executives. Under the German Stock Corporation Act, a stock corporation may acquire its own shares in a limited number of exceptional cases, including if so authorized by a shareholder resolution adopted at a General Shareholders Meeting. At the Annual Meetings of BASF Aktiengesellschaft held on April 29, 2004 and April 28, 2005, the shareholders authorized the Board of Executive Directors to buy back BASF Shares representing up to 10 % of BASF Aktiengesellschaft s outstanding share capital. The Board of Executive Directors may either cancel the repurchased shares, reducing the BASF Aktiengesellschaft s outstanding share capital, reissue the shares subject to a further resolution adopted at an Annual Meeting, use the shares to service option rights granted to participants of the BASF Stock Option Program, or with the approval of the Supervisory Board, use the shares for the acquisition of companies, parts of companies or holdings in companies in return for the transfer of BASF shares. In 2005, BASF Aktiengesellschaft had bought 26,062,229 BASF Shares, or approximately 4.82% of the then outstanding BASF Shares. The Board of Executive Directors has cancelled 26,182,229 repurchased BASF Shares (thereof 800,000 shares repurchased in 2004), thus reducing the BASF Aktiengesellschaft s outstanding share capital. The remainder of 680,000 repurchased BASF Shares are intended to be cancelled. Between January 1, 2006 and March 31, 2006, BASF Aktiengesellschaft repurchased another 6,259,000 BASF Shares which are also intended to be cancelled. 32

39 Capitalization and financial Indebtedness The following table sets forth the consolidated capitalization of BASF Group as of December 31, 2005: December 31, 2005 (Million 5) Stockholders equity Subscribed capital ,316.8 Capital surplus ,100.2 Retained earnings ,928.0 Other Comprehensive income thereof foreign currency translation adjustments thereof fair-value changes thereof cash-flow hedges Minority interests ,523.5 Long-term liabilities Provisions for pensions and similar obligations ,546.6 Other provisions ,791.2 Deferred taxes Financial indebtedness ,681.7 Other liabilities , ,761.6 Short-term liabilities Accounts payable, trade ,777.0 Provisions ,762.5 Tax liabilities Financial indebtedness Other liabilities , ,385.0 Capitalization, total ,670.1 Contingent liabilities Bills of exchange thereof to affiliated companies Guarantees thereof to affiliated companies Warranties Granting collateral on behalf of third-party liabilities Since December 31, 2005 there has been no material change in the consolidated capitalization of BASF Group. Since December 31, 2005 there has been no material change in the contingent liabilities of BASF. Major Shareholders Because the holders of BASF Shares are not registered with BASF Aktiengesellschaft or any other organization, BASF Aktiengesellschaft generally cannot determine who its shareholders are or how many shares a particular shareholder owns. To the knowledge of BASF Aktiengesellschaft, no shareholder beneficially owns 5 % or more of the BASF Shares. To its knowledge, BASF Aktiengesellschaft is not owned or controlled directly or indirectly by any corporation, foreign government or any person, jointly or severally. 33

40 Dividend Policy The Board of Executive Directors and the Supervisory Board of BASF Aktiengesellschaft propose dividends based on BASF Aktiengesellschaft s year-end unconsolidated financial statements. The proposal is then voted on at BASF s annual meeting. The annual meeting is usually convened during the second quarter of each year. Organizational Structure BASF Aktiengesellschaft is the ultimate parent company of the BASF Group. The Group operates in five separate business segments which encompass BASF s 12 operating divisions. The business segments are reportable segments except for the business segment Agricultural Products & Nutrition, which is treated as two reportable segments, disclosing separately the Agricultural Products and Fine Chemicals divisions. Business operations are run by 57 regional and global business units, organized along business or product lines. As profit centers, they are responsible for all business operations from production to marketing and sales and their processes are customer-oriented. In addition to its operating divisions and business units, BASF has three corporate divisions that support the Board of Executive Directors in directing the company s activities, and eleven competence centers that oversee strategic activities and set global standards. The corporate divisions are Legal, Taxes & Insurance; Planning & Controlling; and Finance. The competence centers are Global Procurement and Logistics; Information Services; Human Resources; Environment, Safety & Energy; Corporate Engineering; Chemicals Research & Engineering; Specialty Chemicals Research; Polymer Research; Plant Biotechnology Research; Occupational Medicine & Health Protection; and University Relations & Research Planning. The following table sets forth significant subsidiaries owned, directly or indirectly, by BASF Aktiengesellschaft: Percentage Name of Company owned (%) BASF Coatings AG, Münster-Hiltrup, Germany BASF Schwarzheide GmbH, Schwarzheide, Germany Elastogran GmbH, Lemförde, Germany Wintershall AG, Kassel, Germany BASF Antwerpen N.V., Antwerp, Belgium BASF Espaæola S. A., Tarragona, Spain BASF Corporation, Florham Park, New Jersey, U.S.A BASF S. A., S¼o Bernardo do Campo, Brazil BASF Company Ltd., Seoul, South Korea BASF Petronas Chemicals SDN. BHD., Petaling Jaya, Malaysia Management and Supervisory Bodies General In accordance with the German Stock Corporation Act (Aktiengesetz), BASF Aktiengesellschaft has a Board of Executive Directors (Vorstand) and a Supervisory Board (Aufsichtsrat). The two Boards are separate, and no individual is simultaneously a member of both Boards. The Board of Executive Directors is responsible for managing the business of BASF Aktiengesellschaft in accordance with the German Stock Corporation Act and BASF Aktiengesellschaft s Articles of Association. The Board of Executive Directors also represents the company in its dealings with third parties and in court. 34

41 The principal function of the Supervisory Board is to appoint and supervise the Board of Executive Directors. The Supervisory Board may not make management decisions, but BASF s Articles of Association or the Supervisory Board itself may require the prior consent of the Supervisory Board for certain types of transactions. Board of Executive Directors The number of members of the Board of Executive Directors is determined by the Supervisory Board, subject to a minimum of two members. As of December 31, 2005, BASF Aktiengesellschaft s Board of Executive Directors had eight members. On December 16, 2005 the supervisory board appointed Dr. Martin Brudermüller as an additional member of the Board of Executive Directors, effective January 1, Pursuant to the Memorandum and Articles of Association of BASF Aktiengesellschaft, any two members of the Board of Executive Directors or one member and the holder of a special power of attorney (Prokura) may bind BASF Aktiengesellschaft. The Board of Executive Directors must report regularly to the Supervisory Board on the current business of BASF Aktiengesellschaft, on the company s business policies and other fundamental matters regarding the future conduct of the company s business, on the company s profitability, particularly on its return on equity, on the risk exposure of the company and the risk management, as well as on any exceptional matters that may arise from time to time. The Supervisory Board is also entitled to request special reports at any time. The Supervisory Board appoints members to the Board of Executive Directors for a maximum term of five years. Members of the Board of Executive Directors may be re-appointed or have their terms extended for one or more terms of no more than five years. BASF Aktiengesellschaft has not been notified and has not otherwise been informed by any of the members of the Board of Executive Directors about any potential conflicts of interest between the obligations of the persons towards BASF Aktiengesellschaft and their own interests or other obligations. The members of the Board of Executive Directors may be contacted at BASF Aktiengesellschaft s business address at Carl-Bosch-Strasse 38, Ludwigshafen, Germany. The following table lists the current members of the Board of Executive Directors, their ages as of December 31, 2005, and their outside directorships: Name Age Main Area of Responsibility Dr. Jürgen Hambrecht 59 Chairman of the Board of Executive Directors Legal, Taxes & Insurance, Planning & Controlling, Corporate Communications, Investor Relations, Executive Management and Development Eggert Voscherau 62 Vice Chairman of the Board of Executive Directors and Industrial Relations Director Human Resources, Environment, Safety & Energy, Occupational Medicine & Health Protection, Ludwigshafen Verbund Site, Antwerp Verbund Site, Europe Dr. Kurt Bock 47 Executive Director and Chief Financial Officer Finance, Global Procurement & Logistics, Information Services, Corporate Controlling, Internal Audit, South America Dr. Martin Brudermüller 44 Executive Director Asia (as of April 1, 2006) None Dr. John Feldmann 56 Executive Director Styrenics, Performance Polymers, None Polyurethanes, Oil & Gas, Polymer Research Membership on Supervisory Boards Bilfinger Berger AG, Mannheim, Germany Haftpflichtverband der Deutschen Industrie WaG, Hannover, Germany (German Industry Liability Association); Talanx AG, Hannover, Germany None 35

42 Name Age Main Area of Responsibility Dr. Andreas Kreimeyer 50 Executive Director Performance Chemicals, Functional Polymers, Asia (until March 31, 2006), Coatings (as of April 1, 2006) Klaus Peter Löbbe 59 Executive Director Coatings (until March 31, 2006), North America (NAFTA) Dr. Stefan Marcinowski 52 Executive Director and Research Executive Director Inorganics, Petrochemicals, Intermediates, Chemical Research & Engineering, Corporate Engineering, University Relations & Research Planning, BASF Future Business GmbH Peter Oakley 52 Executive Director Agricultural Products, Fine Chemicals, Specialty Chemicals Research, BASF Plant Science GmbH Membership on Supervisory Boards None None None None Supervisory Board The Supervisory Board consists of 20 members, 10 of whom are elected by shareholders at BASF Aktiengesellschaft s Annual Meeting and 10 of whom are elected by employees as required by the German Codetermination Act (Mitbestimmungsgesetz). Except for Hans Dieter Pötsch, all current shareholder representatives on the Supervisory Board were elected at the Annual Shareholders Meeting on May 6, Hans Dieter Pötsch was appointed by the district court of Ludwigshafen with effect as of March 2, 2004, as successor of Helmut Werner who passed away on February 6, The members of the Supervisory Board representing BASF s employees were elected on February 25, 2003, except for Ralf Sikorski who was appointed by the district court of Ludwigshafen on August 7, 2003, as a replacement for Gerhard Zibell. Michael Vassiliadis became member of the Supervisory Board on August 1, 2004, after Jürgen Walter had resigned from his membership on the Supervisory Board with effect as of July 31, Michael Vassiliadis had already been elected by BASF s employees on February 25, 2003, as substitute for Jürgen Walter. Supervisory Board members are elected for terms of approximately five years. The terms expire at the end of the Annual Meeting after the fourth fiscal year following the year in which the members were elected. The current terms of all Supervisory Board members expire at the end of the Annual Meeting in Compensation for Supervisory Board members is determined by BASF Aktiengesellschaft s Articles of Association. BASF Aktiengesellschaft has not been notified and has not otherwise been informed by any of the members of the Supervisory Board about any potential conflicts of interest between their duties as a member of the Supervisory Board and their private interests and/or duties. The members of the Supervisory Board may be contacted at BASF Aktiengesellschaft s address at Carl-Bosch-Strasse 38, Ludwigshafen, Germany. The following table lists the current members of BASF Aktiengesellschaft s Supervisory Board, their respective ages as of December 31, 2005 and their principal occupation: Prof. Dr. Jürgen Strube, Chairman Robert Oswald, ( 1 ) Deputy Chairman Name Age Principal Occupation 66 Chairman of the Supervisory Board of BASF Aktiengesellschaft Retired Chairman of the Board of Executive Directors of BASF Aktiengesellschaft 50 Chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft Chairman of the works council of BASF Ralf-Gerd Bastian ( 1 ) 48 Member of the works council of the Ludwigshafen site of BASF Aktiengesellschaft Wolfgang Daniel ( 1 ) 48 Deputy Chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft Prof. Dr. Francois Diederich 53 Professor at Zürich Technical University Michael Diekmann 51 Chairman of the Board of Executive Directors of Allianz AG 36

43 Name Age Principal Occupation Dr. Tessen von Heydebreck 60 Member of the Board of Executive Directors of Deutsche Bank AG Arthur L. Kelly 68 Chief Executive Officer of KEL Enter-prises L. P., Chicago, Illinois Rolf Kleffmann ( 1 ) 56 Chairman of the works council of Wintershall AG s Barnstorf oil plant Max Dietrich Kley 65 Attorney at law; Retired Deputy Chairman of the Board of Executive Directors of BASF Aktiengesellschaft Prof. Dr. Renate Köcher 53 Managing Director of the Institut für Demoskopie Allensbach, Gesellschaft zum Studium der öffentlichen Meinung mbh Eva Kraut ( 1 ) 49 Chairwoman of the works council of BASF IT Services GmbH Ulrich Küppers 50 Regional Manager of the Mining, Chemical and Energy Industries Union (Industriegewerkschaft Bergbau, Chemie, Energie) Rhineland Palatinate/ Saar Region Konrad Manteuffel ( 1 ) 53 Member of the works council of the Ludwigshafen site of BASF Aktiengesellschaft Dr. Karlheinz Messmer ( 1 ) 61 Plant Manager at the Ludwigshafen site of BASF Aktiengesellschaft Hans Dieter Pötsch 54 Member of the Board of Executive Directors of Volkswagen AG Dr. Hermann Scholl 70 Chairman of Supervisory Board of Robert Bosch GmbH Managing Partner of Robert Bosch Industrietreuhand AG Ralf Sikorski ( 1 ) 44 Manager of the Ludwigshafen branch of the Mining, Chemical and Energy Industries Union (Industriegewerkschaft Bergbau, Chemie, Energie) Robert Studer 67 Retired Chairman of Union Bank of Switzerland Michael Vassiliadis ( 1 ) 41 Member of the Central Board of Executive Directors of the Mining, Chemical and Energy Industries Union (Industriegewerkschaft Bergbau, Chemie, Energie) ( 1 ) Employee representative. The Supervisory Board has established three committees: the committee for the personal affairs of the members of the Board of Executive Directors (Personalausschuss), the Audit Committee (Prüfungsausschuss) and the Mediation Committee. The Personalausschuss performs the tasks of a nominating and compensation committee. The committee determines the terms and conditions of employment of the members of the Board of Executive Directors including the level and structure of their remuneration. In addition, the committee makes proposals regarding the appointment of members of the Board of Executive Directors. As of December 31, 2005, the members of this committee are Prof. Dr. Jürgen Strube, Robert Oswald, Dr. Tessen von Heydebreck and Michael Vassiliadis. The Audit Committee oversees BASF s accounting processes. Based on the independent auditor s report, it reviews BASF s annual financial statements and reports to the Supervisory Board who then makes an informed decision whether or not to approve the annual financial statements. The Audit Committee is responsible for dealing with the independent auditors of BASF. In particular, it awards the audit contract to the independent auditor elected at the Annual Shareholders Meeting, determines the focal points of the audit, as well as the auditor s compensation, and approves non-audit services rendered by the independent auditor. As of December 31, 2005, the members of the Audit Committee are Max Dietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch and Michael Vassiliadis. The Supervisory Board has determined that the Audit Committee currently includes two Audit Committee financial experts: Max Dietrich Kley and Hans Dieter Pötsch. The Mediation Committee comprises two members of the Supervisory Board elected at the Shareholders Meeting and two members of the Supervisory Board elected by the employees. As of December 31, 2005, the members of this committee are Prof. Dr. Jürgen Strube, Robert Oswald, Dr. Tessen von Heydebreck and Wolfgang Daniel. In the event the Supervisory Board cannot reach the twothirds majority required to appoint a member of the Board of Executive Directors, the Mediation Committee submits a proposal for the appointment to the Supervisory Board. 37

44 German Corporate Governance Rules Principal sources of enacted corporate governance standards for German stock corporations are the German Stock Corporation Act and the German Co-determination Act (Mitbestimmungsgesetz). In addition, the German Corporate Governance Code (the Code ), published by the German Ministry of Justice (Bundesministerium der Justiz) in 2002, as amended, presents essential widely accepted standards for the corporate governance of German listed companies. The aim of the Code is to make the German corporate governance rules applicable to listed German stock corporations transparent for national and international investors. According to Section 161 of the German Stock Corporation Act, which entered into force in 2002, the Board of Executive Directors and the Supervisory Board of a listed German stock corporation is required to declare annually (declaration of compliance) either: (i) that the company has complied, and does comply, with the recommendations set forth in the German Corporate Governance Code, or, alternatively, (ii) that the company has not or does not comply with certain recommendations (so-called comply or explain system). On December 16, 2005, the Board of Executive Directors and the Supervisory Board of BASF Aktiengesellschaft issued the current compliance statement stating the following (English language convenience translation): 1. Statement of Principles pursuant to 161 AktG [Stock Corporation Act] We declare that the recommendations by the Government Commission on the German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette have been complied with in the year 2005 and will be complied with in the year 2006 subject to the measures outlined below. 2. Deviations a) Compensation of Chair and Membership in Supervisory Board Committees As set forth in Section of the Code, compensation shall take into account the chair position and the membership in Supervisory Board committees. In respect to the Audit Committee we comply with this recommendation in addition to granting an attendance fee for the committee meetings. The membership in the other committees is solely reimbursed by granting an attendance fee for the committee meetings. A supplementary compensation for the chair is not provided for, since this function has to-date been exercised by the Chairman of the Supervisory Board. It will be proposed to the 2006 Annual General Meeting to newly regulate Supervisory Board compensation, taking, in principle, the recommendations of Section of the Code into account. Except is the Mediation Committee pursuant to 27 section 3 of the MitbestG [Co-Determination Act], which, at our company, did not have to convene to-date. Its members are not entitled to a specific compensation in addition to any possible attendance fee for the meetings. b) Dealing with the structure of the Executive Board compensation system by the full Supervisory Board; assessment of the appropriateness of the compensation of the members of the Executive Board by also applying performance-related criteria; individualized publication of the compensation of the members of the Executive Board and the Supervisory Board. The respective chairman of the Supervisory Board Committees reports regularly to the Supervisory Board on the work of the Committees. This includes the work of the Nomination and Compensation Committee (Personalausschuss). Beyond that we do not comply with the abovementioned recommendations, especially not with the recommendation to report on the individualized compensation of the Executive Board and the Supervisory Board in 2005 and c) Publication to the shareholders of candidates proposed for the Supervisory Board Chair. 38

45 In accordance with this recommendation newly included in 2005, candidates for the Supervisory Board Chair shall be published to the shareholders, although those candidates, as a rule, are members of a Supervisory Board still to be elected and the Chairman of the Supervisory Board has to be elected from among them. An early nomination may, therefore, lead, in fact, to a prior determination of the Supervisory Board s future members. In the event of a by-election, separate in time from a Supervisory Board election, there is a priori, no opportunity to publish the candidates to the shareholders. We, therefore, consider the recommendation to be lass practical. Since for the time being an election of the Chairman of the Supervisory Board is not pending, we intend to observe the further development, before we decide on a comply or an explain. d) Compliance Statement Pursuant to Section 3.10 of the Code, the Board of Executive Directors and the Supervisory Board shall report each year in the Company s corporate governance. This includes the explanation of possible deviations from the recommendations of the Code. By 161 AktG this reporting obligation is regulated with, in part, different content. The Board of Executive Directors and the Supervisory Board resolved to exclusively report as required by law. Employees As of December 31, 2005, BASF employed a workforce of 80,945 worldwide, which represents a reduction of approximately 1.2 % from the end of About 56.4% of the workforce is based in Germany. Expenditures for salaries and wages totaled 5 4,553 million in 2005, down from 5 4,579 million in For further information, see Note 12 to the Consolidated Financial Statements included in this Prospectus. The following table details BASF s workforce on a regional basis as of December 31, 2005 and 2004: Europe ,614 57,540 thereof Germany ,620 46,666 North America (NAFTA) ,826 10,578 Asia Pacific ,669 8,916 South America, Africa, Middle East ,836 4,921 Total ,945 81,955 As of December 31, 2005, BASF Aktiengesellschaft employed 34,143 people mainly at its headquarters in Ludwigshafen, Germany, compared with 35,303 people as of December 31, A number of BASF s non-management employees are members of labor unions. The majority of these union members belong to the Mining, Chemical and Energy Industries Union (Industriegewerkschaft Bergbau, Chemie, Energie). None of BASF s sites in Germany is operated on a closed shop basis, meaning that employees are not required to join a union. In Germany, collective bargaining agreements for employees below management level are generally negotiated between the association of employers within a particular industry and the respective unions. In addition, under German law, employees elect a works council (Betriebsrat) that participates in determining company site policy, especially with regard to certain voluntary compensation matters and benefits. The most recent collective bargaining agreement for employees in Germany represented by labor unions, which covers most of BASF s employees in Germany, was signed in June 2005 with a term of 19 months. BASF considers its labor relations to be positive and anticipates reaching future agreements with its labor unions on terms satisfactory to all parties. There can be no assurances, however, that new agreements will be reached without a work stoppage or strike or on terms satisfactory to BASF. 39

46 A prolonged work stoppage or strike at any of BASF s major manufacturing sites could have a material adverse effect on the company s results of operations. BASF has not experienced any material strike for more than 10 years. BASF transferred approximately billion into a newly established CTA (Contractual Trust Arrangement) by the end of 2005 solely to finance the pension obligations of BASF Aktiengesellschaft towards its employees and pensioners. In the future, existing company pension obligations will be externally funded. Employee and pensioner benefit levels remain unchanged and ongoing benefits will continue to be paid by BASF Aktiengesellschaft. The CTA enables a long-term portfolio strategy to cover the underlying pension obligation despite the rising number of retirees and further increase in life expectancy. Credit Ratings BASF has been assigned the long-term credit rating AA- with a negative outlook, by Standard & Poor s. Moody s Investors Service placed its Aa3 rating for the senior unsecured debt of BASF Aktiengesellschaft and its guaranteed subsidiaries on review for possible downgrade. Statutory Auditors The auditors of the unconsolidated financial statements of BASF Aktiengesellschaft and of BASF s consolidated financial statements or the financial years 2004 and 2005 were Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft, Franklinstrasse 50, Frankfurt am Main ( Deloitte ). The auditors audited the unconsolidated financial statements of BASF Aktiengesellschaft prepared in accordance with German GAAP and the consolidated financial statements of BASF for the financial year 2004 prepared in accordance with German GAAP and for the financial year 2005 prepared in accordance with IFRS. The figures for 2004 have been restated in accordance with IFRS. For further information see Note 3 to the Consolidated Financial Statements included in this Prospectus. The auditors issued unqualified audit reports on these financial statements. Deloitte is a member of the German Chamber of Public Accountants (deutsche Wirtschaftsprüferkammer). 40

47 BUSINESS Introduction BASF is a transnational chemical company that comprises the parent company, BASF Aktiengesellschaft of Ludwigshafen, Germany, and 179 consolidated subsidiaries. BASF has customers in more than 170 countries and operates more than 100 production sites. For the year ended December 31, 2005, BASF reported sales of 5 42,745 million, income from operations of 5 5,830 million, and net income after taxes and minority interests of 5 3,007 million. Based on customer location, BASF s activities in Europe accounted for 55.6 % of BASF s total sales in 2005; North America (which includes the United States, Mexico and Canada) accounted for 22.2% of sales; the Asia Pacific region accounted for 15.2% of sales; and the South America, Africa, Middle East region accounted for 7.0 % of sales. Structure BASF has five separate business segments: Chemicals, Plastics, Performance Products, Agricultural Products & Nutrition and Oil & Gas. These business segments encompass BASF s 12 operating divisions. For financial reporting purposes, the two operating divisions of BASF s Agricultural Products & Nutrition business segment are separate reportable operating segments: Agricultural Products and Fine Chemicals. Effective January 1, 2005, companies in Asia are reported in the region Asia Pacific. The African and Middle Eastern companies, formerly reported in the region Asia Pacific, are now reported together with the South American companies in the region South America, Africa, Middle East. BASF s operations are linked with what is referred to as the Verbund structure. Verbund loosely translates as integration, but the meaning encompasses far more than what is traditionally associated with backward or forward integration. In production processes, BASF does not simply look forward and backward to find potential efficiencies, but rather examines every input and every output of these processes. At Verbund sites, BASF uses byproducts of chemical reactions, which might otherwise have to be disposed of, as raw materials for other processes. In addition, many chemical processes release heat energy, which BASF converts into steam and then uses to drive other processes within a Verbund site. This allows BASF s Verbund sites to consume less fossil fuel than would otherwise be required. The close proximity of plants to each other at a Verbund site also allows the use of pipelines to transport intermediate products, instead of railcars, barges or trucks, thus resulting in further savings. By reusing byproducts and residual materials, using energy and other raw materials efficiently, and keeping the distances that substances need to be transported to a minimum, BASF reduces the impact on the environment and saves money. This concept of benefiting from interconnectivity is applied to other areas as well, such as research and development, purchasing, and managing customer relationships, where globally interactive teams maximize BASF s productivity. Group Strategy Chemistry offers enormous opportunities. BASF is expanding its strengths and making its portfolio more resilient toward cyclicality and oil price fluctuations. BASF is concentrating on its core activities: in its chemical businesses, in agricultural products and nutrition, and in oil and gas. Innovations are crucial for profitable growth. BASF is therefore strengthening its global research and development activities. BASF has combined the important technology-driven issues of the future in five growth clusters : energy management, raw material change, nanotechnology, plant biotechnology and white (industrial) biotechnology. Interdisciplinary cooperation is the key to success. BASF wants to use the potential offered by these broad-spectrum technologies to open up new and attractive business opportunities for its customers and itself. For example, BASF is already one of the world s leading companies in the field of nanotechnology, which BASF uses in many applications such as polymer dispersions, pigments and catalysts. 41

48 BASF is one of the world s leading companies with regard to research and development in the field of plant biotechnology. BASF aims to shape this attractive market of the future using its powerful technology platform. Its research activities in this area focus on more efficient agriculture, improved nutrition, and plants as green factories to produce specific chemical substances. By expanding white biotechnology, BASF aims to use its expertise in the areas of enzyme catalysis and fermentative manufacturing processes to develop new products and processes outside the current key areas of fine chemicals and intermediates. Chemicals Segment Overview The Chemicals segment produces a wide range of products, from basic petrochemicals and inorganic chemicals to higher-value intermediates, allowing BASF to fully exploit the benefits of its Verbund. The segment is organized into the Inorganics, Petrochemicals, and Intermediates divisions. Key information is provided in the following table: (Million 5) Sales to third parties ,103 7,020 Percentage of total BASF sales % 19% Intersegmental transfers ,826 3,395 Income from operations ,326 1,284 Capital expenditures The products are sold to a multitude of industries including the chemical, construction, automotive, electrical, electronics, detergents, colorants, coatings, health and nutrition industries. Although most of the segment s sales are to external customers, 32.1% of the segment s total sales are intersegmental transfers to other BASF operations for the manufacture of higher-value products. The products manufactured for captive use include many basic and intermediate chemicals. The Chemicals segment forms the basis of BASF s Verbund because its divisions both intensively consume and manufacture products along the company s core value-adding chains. Most of the commodity products are produced at BASF s major Verbund sites in Ludwigshafen, Germany; Antwerp, Belgium; Geismar, Louisiana; Freeport, Texas; Kuantan, Malaysia; and its newly constructed site at Nanjing, China (a 50% joint venture with BASF s partner SINOPEC), which became operational in In addition, BASF has dedicated chemical operations near its customers to foster closer relationships with them: for example, BASF s production of tetrahydrofuran and polytetrahydrofuran in Caojing (China, Asia) or its plasticizer production in Pasadena (Texas, NAFTA). The principal raw materials used in the Chemicals segment are naphtha, natural gas, butane, propane, sulfur and salt. The segment purchases approximately 5% of its raw materials from other BASF operations. Natural gas, a key raw material for the Chemicals segment, is acquired both through BASF s joint venture WINGAS GmbH and from external sources. All other principal raw materials are purchased from external sources. BASF does not rely on any dominant supplier for the raw materials of its Chemicals segment. Research and Development In 2005, the Chemicals segment invested approximately million in research and development. Research activities are focused on the development of improved or new production processes as well as on the development of innovative products. BASF concentrates on extending its product range with new customer-oriented products and applications. With Hexamoll DINCH, BASF has developed an innovative type of plasticizer which is especially suited for sensitive products such as toys, medical devices or food contact applications. After com- 42

49 pleting the various regulatory procedures, BASF introduced Hexamoll into numerous sensitive applications during In close collaboration with JGC Corporation, Japan, BASF is currently developing a new technology for removing and storing carbon dioxide (CO 2 ) contained in natural gas with the goal of reducing processing costs by 20%. The joint effort, sponsored by the Japanese Ministry of Economy, Trade and Industry, was started in 2005 and will run for eight years. BASF also provides the gas treatment technology in an research and development project of the E.U. for the capture of CO 2 from combustion gases in power stations. Another advance in the Chemicals segment s product innovations is BASF s portfolio of ionic liquids with the brand name BasionicsTM, for which BASF received the 2005 IChemE Award from the Institution of Chemical Engineers (IChemE), the British association of chemical and process engineers. To further advance these products, BASF has set up a research partnership with the University of Alabama to study the dissolution and processing of cellulose by means of ionic liquids, such as for use in fiber manufacturing. Products The Chemicals segment has the following major product lines: Inorganics Division Inorganic Specialties BASF offers a wide range of inorganic specialties which includes carbonyl iron powder, hydroxylamine free base, hydroxylammonium sulfate, boron specialties and BASF s innovative Catamold line of products for powder injection molding of metal and ceramic components. The Catamold line is especially suited for manufacturing tiny, intricate devices such as watch casings and orthodontic appliances. BASF sells these products globally to manufacturers in the automotive, construction and medical sectors, among other industries. Electronic Materials BASF produces inorganic specialties in electronic grade, such as hydroxylamine free base for use in manufacturing semiconductors, light-emitting diodes, and flat and plasma screen displays. Inorganic Chemicals BASF produces inorganic chemicals, which are the starting materials for superabsorbers, fertilizers, and other high-value chemicals. The products range from basic chemicals such as chlorine, sodium hydroxide, nitric acid and sulfuric acid to inorganic salts such as sodium and potassium alcoholates to ammonium salts. More than half of these products are for captive use within BASF s Verbund. The remaining products are sold primarily to other chemical companies. Glues and Impregnating Resins BASF offers a wide variety of tailor-made adhesives for the wood products industry. These adhesives are used to bind together the particles, fibers and strands found in all types of particle boards. In addition, BASF produces impregnating resins, which are used to manufacture decorative paper and laminated flooring. BASF is also a producer of glues and impregnating resin raw materials such as ammonia, formaldehyde, methanol, urea and melamine. Europe is the primary market for this group of products. 43

50 Petrochemicals Division Cracker Products BASF produces the entire range of cracker products from ethylene and propylene to benzene and C4 cuts. Of these, propylene is the most important starting product for BASF s value-adding chains. Benzene is used captively, while the residues from benzene extraction are sold as gasoline components. Butadiene is used captively to produce dispersions and ABS (acrylonitrile-butadiene-styrene) and is also sold in the merchant market. Isobutene (a C4 hydrocarbon) serves as the starting material for the polyisobutene value-adding chain of gasoline additives and as the basic building block in vitamin synthesis. In Europe, all n-butenes are used in the synthesis of plasticizers and detergent alcohols. Higher olefins are marketed to the adhesives industry. Alkylene Oxides and Glycols Ethylene oxide derived from ethylene is used mainly to produce surfactants, ethanolamines, glycols and glycol ethers. Ethylene glycol is a product used in antifreeze by the automotive industry and for the production of fibers, films and PET (polyethylene terephthalate) plastic bottles by polyester manufacturers. Propylene oxide is synthesized from propylene and serves as a base for a wide variety of products, including hydraulic fluids, solvents and propylene glycol. Solvents BASF offers a wide range of oxygenated, halogen-free solvents that are used to dissolve other chemicals and facilitate chemical reactions. BASF is the world s largest producer of oxo alcohols and is also a major producer of acetates, glycol ethers, glycol ether acetates and specialty solvents such as cyclohexanone. BASF sells most of these products globally, primarily to the coatings, pharmaceuticals and cosmetics industries. Plasticizers and Plasticizer Raw Materials BASF manufactures standard and specialty plasticizers, which are used in chemical processes to make rigid plastics flexible. BASF also sells the plasticizer precursor phthalic anhydride for use in dyestuffs and unsaturated polyester resins, and markets plasticizers based on higher alcohols. BASF s newest specialty product is the plasticizer Hexamoll DINCH, used for sensitive applications. Intermediates Division Amines BASF is among the world s top three producers of amines, which are principally used to make detergents and cleaning products, process chemicals, agricultural products, and pharmaceuticals. BASF offers approximately 140 different amines worldwide. Key products include ethanolamines, ethyleneamines, alkylamines, alkylalkanolamines and various specialty and aromatic amines. Several chiral intermediates are of increasing importance for pharmaceuticals and agricultural products. As gas treatment technology BASF offers amdea, short for activated methyldiethanolamine, for the removal of acid gases like hydrogen sulphide and carbon dioxide. Butanediol and its Derivatives BASF is the world s largest manufacturer of 1,4-butanediol, which is a chemical building block for products such as polyesters and polyurethanes. Its derivatives are used to manufacture products ranging from fibers to paints and include tetrahydrofuran, PolyTHF, gamma-butyrolactone and N-methylpyrrolidone. 44

51 Polyalcohols and Specialties Polyalcohols such as 1,6-hexanediol (HDO) and neopentylglycol (Neol) are mainly used as raw materials for a wide range of coatings. In addition, BASF offers specialties like carbonates and various special acetylenics, such as vinylmonomers and alkylpyrrolidones. Acids and Specialty Intermediates This product group comprises both commodity acid products and specialty intermediate products. Carbon acids such as formic acid, propionic acid an-ethylhexanoic acid can be used to manufacture preservatives for the feed and food industries as well as auxiliaries for textile and leather applications. Specialty intermediates, such as derivatives of phosgene including acid chlorides and 2nd chloroformates, glyoxal and its derivatives, glutaraldehyde, and various other chemicals such as formamide and triphenylphosphine are often used in the manufacture of paper, polymers, textiles and leather products. Division Information Inorganics BASF s Inorganics division manufactures about 750 products of which approximately 55% are used captively. The remaining amount is sold to external customers worldwide in a broad range of industries. In 2005, the Inorganics division s sales to third parties were 5 1,017 million. Thereof, Europe accounted for 67%; Asia Pacific for 21%; North America (NAFTA) for 9%; and South America, Africa, Middle East for 3 %. The Inorganics division expanded its business with electronic materials by setting-up a new global business unit (based in Hong Kong), which encompasses the acquired electronic chemicals business of Merck KGaA, Darmstadt, Germany. The acquisition was closed in April 2005 and includes Merck s production sites and distribution centers for high-purity chemicals in Taiwan, Malaysia, China, Singapore, France, the Netherlands and Germany. Through the acquisition of these new activities, BASF has become a leading supplier of electronic chemicals for the rapidly growing semiconductor and flat screen industries. The business acquired from Merck helps to develop BASF s electronic chemicals business and significantly strengthens BASF s market position in Europe and Asia. The Inorganics division competes on the basis of strong customer relationships, comprehensive product service and price. In the market for specialty products, the division also competes based on its ability to offer innovative products, such as electronic grade chemicals, catalysts and powder injection molding products. The Inorganics division sells its products primarily through BASF s own sales force. The Inorganics division s main competitors include Arkema, Norsk Hydro and Gentek. In the market for catalysts, the division s main competitors include Süd-Chemie, Criterion Catalyst & Technology Company, and Procatalyse, while in the market for glues and impregnating resins, Nordkemi and Arkema are among BASF s competitors. Petrochemicals The Petrochemicals division sells more than 200 products and represents the first step in BASF s Verbund approach to integration for the company s petrochemical-based, high-value products. In 2005, the Petrochemicals division s sales to third parties were 5 5,084 million. Thereof, North America (NAFTA) accounted for 52 %; Europe for 37%; Asia Pacific for 9%; and South America, Africa, Middle East for 2 %. 45

52 The Petrochemicals division sells products through BASF s own sales force as well as through wholesalers. Specialty chemical and other chemical companies are the primary external customers of this division, some of which are also competitors of BASF. Steam crackers, the core of the petrochemicals division, mainly supply products for captive use within the company, although BASF does maintain positions in the merchant markets for olefins to ensure high capacity utilization. Approximately 40% of the division s sales are to other BASF divisions. The Petrochemicals division produces commodities that are subject to strong cyclicality in pricing. Changes in raw materials prices have an almost immediate effect on the division s financial performance. Competition in the market is based on strong customer relationships, comprehensive product services and price. BASF considers Celanese, Degussa, Dow Chemical, Eastman Chemicals, ExxonMobil Chemical, Formosa Plastics Corporation, INEOS, SABIC, Sasol, Shell Chemicals and SINOPEC to be the main competitors of its Petrochemicals division. Intermediates The Intermediates division manufactures approximately 600 products that are sold worldwide. The customers typically purchase the division s chemical products as precursors for their higher-value chemicals such as plastics, polyurethanes, textile fibers, resins, paints, surfactants, colorants, coatings, pharmaceuticals and agricultural products. In 2005, the Intermediates division s sales to third parties were 5 2,002 million. Thereof, Europe accounted for 51 %; Asia Pacific for 26%; North America (NAFTA) for 18%; and South America, Africa, Middle East for 5 %. Many of the Intermediates division s products are more resilient to economic cycles than products in the Chemicals segment s other divisions, and many are the result of multi-step production processes within BASF before they are sold to external customers. The division additionally sells many of its products within BASF, with internal transfers accounting for approximately 25% of the division s total sales. The keys to the Intermediates division s success are achieving technological and cost leadership, offering customized products and, increasingly, developing a global production presence. In 2005, BASF started up wholly owned plants for tetrahydrofuran and polytetrahydrofuran (PolyTHF) in Caojing, China. BASF sells this division s products through its own sales force as well as through distributors. BASF is among the top three producers worldwide of the main products of its four strategic intermediates business units. In the amines markets, BASF considers its main competitors to be Air Products, Dow and Huntsman. In the butanediol and derivatives market, the company s major competitors are ISP, Invista, Lyondell, Dairen, Mitsubishi Chemicals and new entrants, especially from China. Eastman Chemical and Ube Industries are considered to be the main competitors in the areas of polyalcohols and specialties. Finally, the main competitors for BASF s acids and specialty intermediates business are Kemira and Perstorp. 46

53 Plastics Segment Overview BASF is one of the world s leading plastics manufacturers and offers one of the industry s most comprehensive product ranges. The segment is organized into three divisions: Styrenics, Performance Polymers, and Polyurethanes. Key information is provided in the following table: (Million 5) Sales to third parties ,718 10,532 Percentage of total BASF sales % 28% Intersegmental transfers Income from operations , Capital expenditures The Plastics segment purchases over two-thirds of its raw materials from external suppliers. The principal raw materials are benzene, toluene, ethylene, propylene, butadiene, acrylonitrile, cyclohexane, and ammonia. BASF has a policy of maintaining multiple suppliers for raw materials of its Plastics segment in order to remain independent from any dominant supplier. However, it cannot be guaranteed that a short-term bottleneck in the supply for a particular raw material will not occur. For products such as styrene and isocyanates where economies of scale are most important, plants tend to be located at BASF s Verbund sites. However, for higher margin products such as polyurethane systems, plants tend to be regionally located to foster closer relations with BASF s customers. Research and Development In 2005, the Plastics segment spent approximately million on research and development activities. BASF considers research and development to be a key element in ensuring the long-term success of its Plastics segment. Its research and development activities are focused on manufacturing processes and product development, including systems solutions for customers. BASF seeks to improve existing manufacturing processes and also to develop new cost-effective manufacturing alternatives. A good example of this is the new hydrogen peroxide to propylene oxide (HPPO) technology. Together with Dow, BASF develops this innovative process, which generates only the end product propylene oxide (PO) and avoids co-products. This process is a highly costeffective method to produce PO, and plants using this technology require a significantly lower investment compared to those based on conventional PO production processes. The construction of a world scale plant using this process is scheduled to begin in 2006 at BASF s Antwerp Verbund site. In product development, BASF works together with customers in order to develop innovative new products and improvements to its existing products. By working with customers from the start, BASF can ensure that the results of its efforts are marketable. For example, its Ultradur High Speed has been well received by the market as it allows BASF s customers in the automotive and electronics industry to reduce their manufacturing costs by reducing production times. Products The Plastics segment contains the following significant product lines: Styrenics Division PS (Polystyrene) 47

54 BASF s polystyrene products range from rigid and transparent general-purpose plastics to high impact-resistant grades that customers shape using injection molding, extrusion and blow molding. Primary applications include packaging and household appliances. EPS (Expandable Polystyrene) BASF sells expandable polystyrene under the brand names Styropor and Neopor. The advantages of expandable polystyrene include heat insulation, high compressive strength, shock absorption, low weight, and moisture resistance. Primary applications include building insulation and packaging. XPS (Extruded Polystyrene) BASF sells extruded polystyrene under the brand name Styrodur. It is a green, extruded, rigid polystyrene foam that is made using environmentally friendly carbon dioxide as a blowing agent. Styrodur offers heat insulation, low water absorption, and compressive strength. The primary application is building insulation. SAN (Styrene-Acrylonitrile Copolymers) Luran is BASF s trade name for SAN plastic. It is transparent, chemical and dishwasher resistant, and offers a high degree of stiffness and resistance to temperature change. Primary applications include household and toiletry items and packaging. ABS (Acrylonitrile-Butadiene-Styrene Copolymers) Terluran is the trade name for BASF s top styrene copolymer plastic. It offers superior surface quality, mechanical properties and chemical resistance. Primary applications include electrical and electronic equipment and automotive components. ASA (Acrylonitrile-Styrene-Acrylate Copolymers) Luran S is the trade name for BASF s styrene copolymer plastic modified with rubber to make it resistant to weathering, aging and chemicals. Primary applications include exterior automotive components, electrical and electronic equipment. MABS (Methacrylate-Acrylonitrile-Butadiene-Styrene Copolymer) Terlux is the trade name for BASF s MABS plastic. It offers transparency, luster, toughness and resistance to chemicals. Primary applications include hygiene and cosmetic product containers as well as medical equipment housings. MF (Melamine Resin Foam) BASF sells melamine resin foam under the brand name Basotect. It is a flexible foam material that absorbs sound and offers high heat resistance and good flame retardant attributes. Primary applications include automotive components and soundproofing materials. Performance Polymers Division PA (Polyamide) and Intermediates Ultramid and Capron are the trade names for BASF s engineering plastics based on nylon 6, nylon 6,6 and other copolymers. They offer toughness and strength as well as both heat and chemical resistance. Primary applications include automotive engine intake manifolds and flame retardant plastics for electrical components such as switches. Ultramid is also the trade name for BASF s base resin of nylon 6 and 6,6 sold in the fibers and extrusion market. Primary applications include carpets and textiles as well as films for food packaging. 48

55 Intermediates include caprolactam for nylon 6 and adipic acid and hexamethylenediamin for nylon 6,6. PBT (Polybutylene Terephthalate) Ultradur is the trade name for BASF s engineering plastic based on PBT. It features high stiffness, strength, dimensional stability, and heat and aging resistance. Primary applications include electrical connectors and automotive components. PES (Polyethersulfone) and PSU (Polysulfone) POM (Polyoxymethylene) Ultraform is the trade name for BASF s POM plastic. It offers high stiffness and strength, resilience and low wear. Primary applications include clips and fasteners as well as mechanical and precision engineering devices such as shafts and gears. PES (Polyethersulfone) and PSU (Polysulfone) Ultrason S and E are the trade names for BASF s PES and PSU plastics. The most important features of Ultrason are stiffness and resistance to water and oily substances even at high temperatures. Other important features include electrical insulation properties and dimensional stability. Primary applications include automobile oil circulation systems, headlight reflectors, microwave dishes, and medical equipment. Polyurethanes Division MDI (Diphenylmethane Diisocyanate) MDI is a versatile isocyanate that can be used to make flexible foams as well as semi-rigid and rigid polyurethane plastics. Primary applications include furniture interiors, automotive components, and shoe soles. TDI (Toluene Diisocyanate) TDI is an isocyanate used primarily in the manufacture of flexible foams. Primary applications include foam cushions for furniture and automotive components. Polyether Polyols Polyether Polyols are combined with isocyanates to make virtually all polyurethane products, other than those made with polyester polyols. Primary applications include rigid and flexible foams. Polyester Polyols Polyester Polyols are combined with isocyanates to make primarily semi-rigid polyurethane plastics. Primary applications include cable sheathing and shoe soles. Polyurethane Systems BASF s worldwide polyurethane systems group offers tailor-made polyurethane products for a wide variety of applications. BASF develops ready-to-use, tailor-made polyurethane systems for customers. Automotive OEM (original equipment manufacturer) suppliers comprise a significant customer group for polyurethane systems. OEM suppliers make seats, steering wheels, fenders and dashboards using BASF s polyurethane systems. 49

56 TPU (Thermoplastic Polyurethane Elastomers) TPU is sold under the trade name Elastollan and is based on both polyether polyols and polyester polyols. It is supplied in granulär form to customers who use it primarily to make flexible plastic cable coverings. Customers for these products are primarily in the automotive and cable and wire industries. Cellular Elastomers Cellular Elastomers are sold under the names Cellasto, Elastocell and Emdicell and are shockabsorbing, rigid plastics. Microcellular polyurethane parts for antivibration applications are sold, for example, as molded end products for use as shock absorbers and buffers in the automotive industry. Division Information Styrenics BASF is one of a small number of global producers of styrenics, supplying customers in all major geographic markets worldwide. BASF continues to fine-tune Verbund structures at its production sites and to carry out backward integration where appropriate. In 2005, the Styrenics division s sales to third parties were 5 4,518 million. Thereof, Europe accounted for 44%; Asia Pacific for 27%; North America (NAFTA) for 22%; and South America, Africa, Middle East for 7 %. Demand for styrenics continues to rise due to overall economic growth in both industrial and emerging markets. BASF believes that cost-efficient business processes with an appropriate number of products manufactured in highly competitive world-scale plants are crucial to ensuring the continued competitiveness of its styrenics products. As a consequence of BASF s continuous process of restructuring, the EPS (expandable polystyrene) production in South Brunswick, New Jersey, ceased in the second quarter of The extended plant in Altamira, Mexico now supplies the NAFTA region. With the sale of the polystyrene business to INEOS Americas, LLC in the USA and Canada, the division s strategy was further realigned. Rising volatility of raw material prices, overcapacities in the market, and pricing pressure from low cost producers, especially in Asia, are leading to reduced margins. Thus, cost leadership in production and efficient business processes are crucial for BASF to continue to meet the demands of BASF s customers for consistent quality, reliable supply and competitive prices. BASF is therefore optimizing its business models for the standard products PS, ABS and EPS by streamlining the product portfolio and business processes. In specialties, BASF seeks profitable growth by focusing on specific market needs as well as by increasing application development and global sales. Starting in 2005, BASF is concentrating specialties in a newly established global business organization. The Styrenics division sells products primarily through its own regional sales force, supported by BASF technical and marketing experts. The Styrenics division is increasingly relying on e-commerce (BASF s PlasticsPortal, EDI and VMI) for distributing its products. The principal global competitors of the Styrenics division are Dow and Total. The division also competes in North America with Nova and in Europe with Enichem. In Asia, BASF competes with other regional competitors, such as Chi Mei, Loyal and LG Chem. Performance Polymers BASF is one of the world s leading producers of engineering plastics, extrusion products and fiber intermediates. In 2005, BASF acquired the German compounding company Leuna-Miramid GmbH, 50

57 which will be integrated into BASF s engineering plastics division. BASF Corporation acquired the North American business for major engineering plastics from LATI USA, Inc., in 2005 as well. In 2005, the Performance Polymers division s sales to third parties were 5 2,909 million. Thereof, Europe accounted for 45%; North America (NAFTA) for 28%; Asia Pacific for 24%; and South America, Africa, Middle East for 3 %. Performance Polymers products are sold worldwide, and more than 85% of the customers are engineering plastics customers. This customer base consists largely of high-performance plastic molder and plastics component manufacturers in the automotive, consumer electronics, electrical equipment and packaging industries. These customers often rate product performance and customer support as important, but prices are becoming increasingly critical to customers in choosing a supplier. To compete effectively in this market, the Performance Polymers division seeks to increase its preferred supplier status with global customers, many of whom demand collaboration in developing specific plastics applications. The division works with suppliers to automotive manufacturers to develop specific applications for parts such as engine components, airbag housings and electronic connectors. The division s customers for engineering plastics, particularly in the automotive industry, are primarily global companies that demand uniform worldwide standards for products and services in all major markets. BASF sells engineering plastics products primarily through its own regional sales force supported by BASF s technical centers in Germany, the United States and Japan. These centers not only help customers to develop applications but also independently research new markets and applications in which plastics can replace more conventional materials such as metal. In Asia, the division is expanding its sales force to build on its solid position in the market. The large-volume markets for caprolactam and other fiber intermediate products are characterized by cyclicality, price competition and commodity pricing. Growth rates are usually low compared to the engineering plastics and extrusion market. The markets for extrusion grades, particularly films for food packaging, are gaining importance as they are less cyclical and show high growth rates, particularly in China. The Performance Polymers division sells products primarily through its own regional sales force, supported by BASF technical and marketing experts. The division is increasingly relying on e-commerce as a channel for distributing its products and operates its own website, PlasticsPortal.com. Major global competitors of the Performance Polymers division are Celanese, DSM, DuPont, General Electric, Lanxess, Rhodia, Solutia and UBE. Polyurethanes BASF s Polyurethanes division is one of the world s three largest producers of polyurethanes: important specialty plastics used to produce a wide spectrum of rigid, flexible, foamed and compact components for consumer products. In 2005, the Polyurethanes division s sales to third parties were 5 4,291 million. Thereof, Europe accounted for 37%; North America (NAFTA) for 30%; Asia Pacific for 27%; and South America, Africa, Middle East for 6 %. BASF offers over 3,500 customized polyurethane solutions. These products, the vast majority of which are sold to external customers, are used to make a variety of automotive parts, including bumpers, steering wheels and instrument panels. BASF s polyurethanes can also be found in household goods, such as mattresses and upholstery, and in sports equipment, such as in-line skates and athletic shoes. The fashion industry is increasingly using BASF s polyurethanes, particularly to manufacture synthetic leathers. To build on its strong relationships with customers, the Polyurethanes division is expanding its regional activities, focusing above all on the Asian market. In Caojing, China, BASF commenced construc- 51

58 tion of an integrated manufacturing facility for MDI and TDI with its local and international joint venture partners that is scheduled to come onstream in BASF also expanded the capacity of its MDI plant in Antwerp, Belgium, in For polyurethane systems and special elastomers, strong relationships with leading industry customers are crucial because of the highly individualized nature of these products. To strengthen its relationships with customers, BASF has established a global network of system houses. System houses are production sites that work closely with customers to provide products specially formulated for individual needs. The Polyurethanes division currently has 27 system houses around the world in locations near customers. BASF will continue to establish or acquire more. Global demand for all polyurethane products is expected to continue growing faster than the global economy as the economic expansion continues. The market for polyurethane basic materials is less cyclical than the market for most other standard plastics, primarily because polyurethane basic materials are relatively specialized. Competition in the market for basic materials is based primarily on price, although product quality and technical application assistance are also important to customers. The markets for polyurethane systems and special elastomers are even less cyclical than those for polyurethane basic materials. Competition in the market for polyurethane systems and special elastomers is based primarily on a supplier s ability to satisfy customers technical application needs by providing tailor-made formulations of isocyanates and polyols and also on a supplier s ability to accommodate customers just-in-time manufacturing by delivering customized products quickly and at the appropriate time. The main competitors of the Polyurethanes division are Bayer, Dow, Huntsman, Lyondell and Shell Chemicals. Performance Products Segment Overview BASF is a leading global producer of performance chemicals, coatings and functional polymers through its Performance Products segment. This segment produces a broad range of high-value chemicals, formulations and integrated chemical systems solutions for the automotive, coatings, oil, paper, packaging, textile, leather, detergent, sanitary care, construction and chemical industries (Million 5) Sales to third parties ,267 8,005 Percentage of total BASF sales % 21% Intersegmental transfers Income from operations ,128 Capital expenditures The Performance Products segment purchases approximately 50% of its raw materials from other BASF operations and does not rely on a dominant external supplier. The segment s principal raw materials are propylene, oxo alcohols, butadiene, styrene, ethylene oxide, propylene oxide, naphthalene, aliphatic alcohols, pigments, solvents and resins. The segment s products often represent the final stages in many value-adding chains within BASF s Verbund. The bulk of the production for the Performance Products segment is located at BASF s Verbund sites to take advantage of the efficiencies offered by these sites. However, in certain cases, plants are located near BASF s customers to reduce transportation costs, such as for polymer dispersions, or in the case of automotive OEM coating, to meet its customer s just in time delivery needs. 52

59 Research and Development In 2005, the segment spent million on research and development activities. The main focus of the segment s research and development is on innovative and eco-efficient products and system solutions that are tailor-made for the processes and technologies of BASF s customers. The goal is to help customers be more successful in their markets, thus opening growth potential for them and for BASF. Close cooperation with customers holding leading market positions is of great importance in order to fully exploit the research resources and reduce the time to market. In addition, state-of-theart application centers and pilot plants, for instance for coatings, paper making, or pressure-sensitive adhesives, are a key success factor. These plants and application centers serve to deepen BASF s understanding of the customers processes and assess new chemical systems under real application conditions. In 2005, BASF established new technical application centers in Thane, India for textile chemicals and in Shanghai, China for textile and leather chemicals, chemicals for detergents and formulators as well as polymer dispersions. Recent examples of successful innovations and system solutions include the following: Developing Belmadur: an innovative BASF technology that enhances the quality of domestic wood species and enables them to compete with tropical hardwood by providing regenerative raw materials for a wide variety of applications. BASF is now working together with partners in the wood industry to develop new applications and markets for this innovative process. Expanding BASF s range of coating products with a new, complete UV product portfolio for automotive refinishing coatings. As a result, BASF will position itself at the leading edge of this trend, e. g., with a new high scratch resistant refinish clearcoat. Car owners benefit from the outstanding reflow properties of this clearcoat which allow light scratches to repair themselves. Launching a new innovative generation of Acrodur binders for non-wovens, e. g., as a thermocuring binder in the production process of glass fibers with various applications. These waterbased acrylate resins make moldings ecologically more favorable, since they can replace the previously used binders such as phenol and formaldehyde resins. Products The Performance Products segment contains the following significant product lines: Performance Chemicals Division Pigments and Resins for Coatings and Plastics The Performance Chemicals division offers organic and inorganic pigments, pigment preparations, non-textile dyes, process chemicals and resins. Resins are film-forming components used in UV (ultraviolet) curing coatings, urethane systems, and melamine based coatings. Pigments are insoluble dry coloring materials for paints, plastics, inks and other special applications. BASF s pigments and resins are used primarily in automotive, decorative, and industrial paint applications, as well as in the plastics industry. Isobutene Derivatives Isobutene is the starting material for polyisobutene, the most important component for BASF s branded fuel additives. Through its highly reactive polyisobutenes, BASF has established a new standard in the fuel and lubricant additives market. BASF is the only industry supplier with a product portfolio spanning low to ultra-high molecular polyisobutenes as well as polyisobutene derivatives. Surfactants BASF produces a wide range of nonionic surfactants based on aliphatic alcohols, ethylene oxide and propylene oxide. Such products are used in detergents and cleaners, textile and leather auxiliaries. 53

60 Hydrocyanic Acid Derivative BASF produces several chelating agents based on hydrocyanic acid, which serve as process chemicals in various industries. Applications include pulp manufacturing, electroplating, laundry detergents, cleaners and photographic chemicals. Performance Chemicals for Textiles BASF offers textile and dyeing auxiliaries, pigment preparations for textile printing, and inks for inkjet printing technology. BASF s product range covers a wide spectrum of textile applications. Leather Dyes and Chemicals BASF is one of the world s leading producers of leather chemicals and dyes, producing a full range of products for nearly every aspect of the leather production process. Coatings Division Automotive OEM (Original Equipment Manufacturer) Coatings Solutions BASF offers complete automobile coatings solutions as well as extensive technical support to major vehicle manufacturers. All of the world s leading automobile manufacturers are long-standing customers of BASF. Automotive Refinish / Commercial Transport Coatings Solutions For the refinishing of cars and commercial vehicles, BASF offers topcoat and undercoat materials under the well-known brand names Glasurit, R-M and Salcomix. Most of these systems, which are sold to paint distributors and automotive repair shops, increasingly use solvent-reducing waterborne coatings as well as high-solid systems. Industrial Coatings Solutions BASF offers environmentally efficient systems for coating industrial products. Application technologies include precoatings, powder, electro-deposition and liquid coatings that are used on household appliances, commercial vehicles, industrial buildings and radiator components. BASF is the second largest coil coatings producer. Decorative Paints BASF is the leading producer of decorative paints for interior and exterior use in the South American market. BASF s dispersion and building paints are marketed under the Suvinil trademark and enjoy a high level of customer recognition. Functional Polymers Division Acrylic Monomers BASF is the world s largest producer of acrylic monomers, which are sold directly to internal and external customers in the form of acrylic acid, acrylic esters and special acrylates. Acrylic monomers are used as precursors to manufacture polymer dispersions for various applications, superabsorbents, detergents, flocculants and fibers for a wide range of industries. 54

61 Polymer Dispersions for the Adhesives and Construction Industries BASF s polymers products consist mainly of polymer dispersions for the manufacture of adhesives, paints and finishes, non-woven materials, and chemicals for the construction industry. BASF is especially strong in its technical expertise for construction chemicals, adhesive raw materials, dispersions for paints and other coating materials. Paper Chemicals BASF offers the paper industry a comprehensive range of chemical products for many aspects of the paper production process, including the manufacture of untreated paper, paper finishing and wastewater treatment. The Functional Polymers division s product range of paper chemicals consists of paper-processing chemicals, paper dyes and polymer dispersions for paper coating. Superabsorbents BASF sells superabsorbents globally to the personal hygiene industry, which uses these products to manufacture diapers and other sanitary care products. Division Information Performance Chemicals BASF is one of the world s largest manufacturers of high-value performance chemicals, which the company sells to a broad range of customers worldwide in a wide variety of industries including the plastics, coatings, construction, detergent, automotive, oil, leather and textile industries. In 2005, the Performance Chemicals division s sales to third parties were 5 2,889 million. Thereof, Europe accounted for 56%; Asia Pacific for 18%; North America (NAFTA) for 17%; and South America, Africa, Middle East for 9 %. The Performance Chemicals division comprises five different businesses: Performance Chemicals for Coatings, Plastics, and Specialties; for Automotive and Oil Industry; for Detergents and Formulators; for Textiles; and for Leather. Each business follows its own strategy, focusing on innovative products and systems solutions for growing markets. The division sells its products globally, with roughly 90% of its products to external customers. BASF s own regional sales network sells most of the Performance Chemicals division s products. Distributors sell the remainder of the products, primarily to smaller customers. In the Asia Pacific region, BASF is increasing its sales activities to meet the needs of the growing markets, especially for the textile and leather industries, which are continuing to relocate their activities from Europe and North America to Asia. Due to the decreasing markets for textile and leather chemicals in Europe, BASF is restructuring European production activities for these businesses and expanding those in Asia. In addition, BASF is building a new production plant for coatings raw materials in Caojing, China. BASF views the detergents industry as one of the division s most important markets. The company is one of the largest producers of nonionic surfactants. Surfactants enhance cleansing efficiency and are used, for example, in household detergents and dishwashing agents as well as in industrial and institutional cleaning applications. The Performance Chemicals division s principal competitors vary according to industry. However, the most significant competitors of the division are Ciba, Clariant, Shell, Sasol, Dow, Akzo Nobel and Bayer. Coatings BASF offers innovative and environmentally friendly products for the automotive industry, including both finishes and refinishes, and for particular segments of the industrial coatings market. BASF also 55

62 sells decorative paints in South America for interior and exterior use in residential and commercial buildings. In 2005, the Coatings division s sales to third parties were 5 2,180 million. Thereof, Europe accounted for 47%; North America (NAFTA) for 25%; South America, Africa, Middle East 17%; and Asia Pacific for 11 %. BASF s Coatings division provides customers with innovative high-solid, waterborne and powder coating systems that reduce or eliminate solvent emissions and are considered environmentally and economically efficient. For example, BASF sees significant growth opportunities for its Integrated Process II for automotive OEM coatings, which is in the market roll-out phase. This innovative system simplifies the conventional process by requiring fewer coating layers, thus offering substantial cost saving potential while reducing the environmental impact of auto body painting. The key to the division s success is maintaining preferred supplier status with major customers by collaborating with them to develop system solutions, such as tailor-made products and services. These system solutions help the division to differentiate its product offerings from those of its competitors and foster lasting relationships with customers. As an example, BASF s Suvinil line of decorative paints competes in South America primarily on the basis of brand recognition, product quality and price. BASF sells products of the Coatings division to customers, particularly those in the automotive industry, primarily through its own sales force. Third-party distributors also sell products of the automotive refinish coatings, industrial coatings and South American decorative paint businesses. The Coatings division sells all of its products to external customers. The Coatings division also uses e-commerce as an important distribution channel, in particular for its automotive refinish coatings. In North America, customers of BASF s automotive refinish technologies business can order products online at bodyshopmall.com. For customers in Europe, the division has established similar e-commerce portals to sell its Glasurit and R-M brands. BASF considers DuPont, PPG Industries and Akzo Nobel to be the primary global competitors of the Coatings division, while Nippon Paint Company and Kansai Paint Company are considered to be the division s key competitors in Asia. Functional Polymers BASF s Functional Polymers division is one of the largest producers of acrylic acid and its downstream products, which are mainly superabsorbents and dispersions. In a polymer dispersion, submicron polymer particles are suspended in water. Polymer dispersions are used in a multitude of industries, including the manufacture of paper, decorative paints, adhesives, construction chemicals, non-woven materials, carpets, fibers and plastics. The Functional Polymers division also manufactures wet-end chemicals for paper production. The most important customers of the Functional Polymers division are in the paper, construction, adhesive, sanitary care, coatings, and chemicals industries. In 2005, the Functional Polymers division s sales to third parties were 5 3,198 million. Thereof, Europe accounted for 49 %; North America (NAFTA) for 26%; Asia Pacific for 16%; and South America, Africa, Middle East for 9 %. The Functional Polymers division s Strategie goal is to achieve long-term profitable growth in all regions and to increase market share in the rapidly growing markets in Asia. The Functional Polymers division continues to strengthen its position in Asia, the fastest-growing market worldwide. In 2005, BASF completed the construction of its second Asian Verbund site in Nanjing, China, where the division started the production of acrylic acid and its esters in the first 56

63 quarter. In Shanghai, China, additional capacity for the production of polymer dispersions used as paper coating binders came onstream in The division sells approximately 90% of its products to external customers. The vast majority of the division s products are primarily sold through BASF s own regional sales network. Some smaller customers purchase products through distributors. The Functional Polymers division continues to develop e-commerce as a distribution channel for its products. The division is increasingly selling its products through Elemica Holding Ltd., an independent business-to-business e-commerce company. The division s participation in WorldAccount, BASF s integrated global extranet platform, is targeted at its customers in the adhesive, construction and paper industries. Acrylic monomers are predominantly commodities and can therefore be affected by cyclicality. Other products, particularly polymer dispersions for adhesives, paints and non-wovens; superabsorbents; and paper process chemicals, are relatively resilient to economic cycles and compete primarily on the basis of product innovation and quality. BASF s main competitor in acrylic monomers and polymer dispersions is Rohm & Haas. Dow and Hercules are BASF s main competitors in paper chemicals. In the superabsorbents business, BASF s main global competitors are Degussa and Nippon Shokubai. Agricultural Products und Nutrition Segment Overview This segment consists of the Agricultural Products and Fine Chemicals divisions, which are treated as separate reportable operating units. The segment offers opportunities for high returns and is typically more resilient to economic cycles. In addition, the segment includes the activities of BASF Plant Science. Key financial information is provided in the following table: (Million 5) Agricultural Products Sales to third parties ,298 3,354 Percentage of total BASF sales % 9% Intersegmental transfers Income from operations Capital expenditures Fine Chemicals Sales to third parties ,732 1,793 Percentage of total BASF sales % 5% Intersegmental transfers Income from operations (58) 56 Capital expenditures Plant Biotechnology BASF is one of the world s leading companies in the field of research and development into plant biotechnology. Plant biotechnology is one of the company s five growth clusters and BASF plans to provide a further million for research in this area in the next three years. BASF s activities in plant biotechnology are combined in its subsidiary BASF Plant Science. Among other things, BASF is focusing on crops for improved nutrition and plants as renewable raw materials green factories to produce specific chemical substances. This includes plants with optimized constituent components such as oils, proteins, starches, vitamins or fatty acids. Another focus is to use biotechnology to protect plants from pests and to increase the yield of important 57

64 crops such as corn (maize), wheat and soybeans. This also involves developing plants that are more resistant to drought. In 2005, BASF signed an extensive licensing agreement and research cooperation with the Belgian biotechnology company CropDesign that BASF expects to give us a competitive advantage. BASF Plant Science operates an international research and technology platform with a team of approximately 500 highly qualified staff at seven sites in Europe and North America. In addition, BASF cooperates with numerous research institutes, universities and biotechnology companies worldwide. BASF s subsidiary Metanomics in Berlin is an important part of this biotechnology network. Metanomics operates a technology platform to identify agronomically important genes on the basis of metabolic functional genomics. This involves determining the metabolic functions of specific genes in living organisms. This information opens up greater possibilities of finding new relevant genes. By combining bioanalysis and bioinformatics, this platform achieves a high level of precision and performance and thus accelerates BASF s research and development processes. In addition to the focus on plant research, this approach also opens up synergies in the areas of pharmacology, toxicology and nutritional science. Agricultural Products Overview The Agricultural Products division is a leading supplier of fungicides, insecticides and herbicides. The division s products are used by farmers to improve crop yields and crop quality and by other customers for uses in non-crop areas such as in public health, structural/urban pest control, turf and ornamental plants, vegetation management, and forestry. Capital expenditures in the Agricultural Products division included mainly optimization measures at several sites. Major Products F 500 (pyraclostrobin) F 500 (pyraclostrobin) is a new fungicidal active ingredient of the strobilurin class of chemistry. It is highly effective, safe for crops and has a favorable toxicological and ecotoxicity profile. As of the end of 2005, F 500 had been approved in more than 50 countries for over 100 crops in over 100 indications. Products containing F 500 have been launched successfully in all regions. Therefore, BASF has updated the 2007 sales target for products containing F 500 from million to million, assuming normal agricultural growing conditions. Boscalid Boscalid is one of the most recent active ingredients from BASF s research and is highly effective for controlling fungal diseases, especially in fruits and vegetables. With its broad spectrum of activity and crop uses, boscalid will become the backbone of BASF s specialty crop business and will complement its strobilurines and other molecules. Launched for the 2003/04 season, it received registrations in over 40 countries for almost 200 crops in over 100 indications by the end of Fipronil Fipronil is an active ingredient of a new class of insecticide chemistry and was acquired from Bayer CropScience on March 21, It plays a strategic role in BASF s insecticides portfolio. Fipronil puts the Agricultural Products division in a position to strongly participate in ongoing and future shifts in demand towards more modern insecticides. Furthermore, it strengthens BASF s position in other 58

65 attractive market segments, such as structural/urban pest control, turf and ornamental plants. BASF also expects to create synergies between fipronil and its current portfolio, especially in fungieides. The CLEARFIELD Production System The CLEARFIELD Production System combines herbicide-resistant seeds developed using enhanced plant breeding methods with custom-designed herbicide solutions. CLEARFIELD crops currently being marketed include canola, sunflower, corn, rice and wheat. Because the CLEARFIELD technology does not involve the introduction of genetic material from other sources, it is characterized as non-gmo (genetically modified organisms), offering advantages to the growers for certain markets. Research and Development BASF s research and development activities in Agricultural Products cover all three areas of crop protection: fungicides, insecticides and herbicides. Agrochemical research activities are directed to the discovery of active ingredients with economic, biological and ecological advantages. BASF Plant Science conducts research in the area of agronomic traits for the division. Development activities are primarily focused on high-value segments in core markets and for core active ingredients. In 2005, research and development spending in the Agricultural Products division was approximately 9 % of the division s sales to third parties. BASF is currently working on developing six new active ingredients and on a new herbicide tolerance project. These inventions are being prepared for market launch and have a peak sales potential of million. Eight additional crop protection active ingredients with a peak sales potential of billion are currently being introduced to the market. In 2005, BASF launched the fungicide metrafenone to the market and reclassified one new insecticide from its promising discovery pipeline to its development pipeline. Uses Projects in market launch Cereals, Soybeans, Specialty 4 fungicides Crops 3 herbicides Cereals, Corn 1 insecticide Non-Crop Projects in development (launch targeted for 2006 and later) 2 fungicides Cereals, Rice, Specialty, Crops 2 herbicides Corn, Non-Crop 1 herbicide tolerance Soybeans 2 insecticide Specialty Crops, Non-Crop Total Total Peak Sales Potential about 5 1,200 million about million about 5 1,900 million Markets and Distribution In 2005, the Agricultural Products division s sales to third parties were 5 3,298 million. Thereof, Europe accounted for 43 %; North America (NAFTA) for 29%; South America, Africa, Middle East for 20%; and Asia Pacific for 8 %. 59

66 The Agricultural Products division markets its products globally, focusing on high-value markets. The following table shows sales by product group: Product Group 2005 Sales (Million 5) Fungicides ,310 Herbicides ,222 Insecticides and other agrochemical products Agricultural Products ,298 The Agricultural Products division directs marketing and sales efforts through multi-staged marketing channels, which include wholesalers and commercial distributors. The global market for agricultural products is seasonal, since the main markets for these products are in the Northern Hemisphere. Sales are higher in the first and second quarters of the year, when the growing season in North America and Europe is underway. Sales during the second half of the year, driven primarily by the main growing season in South America, are lower. BASF considers the main competitors of the Agricultural Products division to be Syngenta, Bayer CropScience, Monsanto, Dow and DuPont. Governmental Regulation In most countries, crop protection products (including genetically modified plants) must obtain government regulatory approval prior to marketing. The regulatory framework for crop protection and environmental health products is directed at ensuring the protection of the consumer, the applicator and the environment. The strictest standards are applied in the United States, Japan and Western Europe. It generally takes five to seven years from the discovery of a new active ingredient until the dossier is submitted to the appropriate regulatory agency for product approval. The standard time frame for registration of an agricultural product is typically 30 to 36 months. Fine Chemicals Overview BASF s Fine Chemicals division develops, manufactures and sells more than 1,000 different products. The Fine Chemicals division serves steadily growing markets driven by a growing world population with increasing needs in healthcare and lifestyle by being a leading supplier of vitamins; carotenoids; pharmaceutical active ingredients and advanced intermediates; polymers for the pharmaceuticals, cosmetics and human nutrition industries; aroma chemicals; UV (ultraviolet light) filters; amino acids; enzymes; and non-antibiotic growth promoters and organic acids for the animal nutrition industry. In all of the division s main product groups except amino acids, BASF is one of the top two suppliers. With the start of its feed enzyme production in Ludwigshafen, Germany, planned for early 2006, BASF will strengthen its leading position in the animal nutrition business. Virtually all of the division s products are sold to external customers. About 60% of the division s raw material purchases are bulk commodities from external and internal sources, such as nutrients for vitamin premixes; sugar and molasses for lysine and pseudoephedrine production; and urea and acetanhydride for purines. There are currently no restrictions in supply for these commodity products. No single product accounts for more than 4% of BASF s total external purchases of specialty (non-commodity) raw materials. 60

67 Strategy The Fine Chemicals division aims to achieve superior growth and leading positions in the markets it serves by leveraging chemical expertise, global presence, reliability of technical service and product quality. The division is focused on delivering innovative products and customized solutions to the markets it serves. New production technologies are continuously being developed and applied to reduce costs. The division envisages strong growth in its exclusive synthesis business for the pharmaceuticals industry, which is still in its emerging stages. Products Vitamins BASF is the second largest vitamins producer worldwide, and vitamins account for approximately one third of sales in the Fine Chemicals division. BASF markets all of the 13 naturally occurring vitamins. In six of these vitamins, which include the five most significant vitamins C, E, A, B2 and Calpan, BASF has a production position. The Fine Chemicals division sells vitamins mainly to the human and animal nutrition industries, with a growing presence in the cosmetics industry. Carotenoids These are nature-identical products that provide certain health benefits and are also used to color foods. This product line includes beta-carotene, canthaxanthine and astaxanthine for the food, feed and nutritional supplement industries for human and animal nutrition. Active Ingredients and Advanced Intermediates The main products in this category are caffeine, pseudoephedrine, theophylline, ibuprofen, povidone iodine and BASF s new isotretinoin. Beverage manufacturers account for approximately 80% of the caffeine demand, and pharmaceutical applications consume the remaining share. Theophylline and pseudoephedrine are used to treat respiratory diseases. Ibuprofen is used in a variety of over-thecounter and prescription products to treat mild to moderate pain, and isotretinoin is the standard for systemic acne therapy. Contract Manufacturing BASF offers a range of customized manufacturing and formulation capabilities to the worldwide pharmaceuticals industry. These activities are complemented by flexible, multi-product cgmp plants, in particular at the Minden site in Germany, and BASF s chemical and biotechnological research and development skills. Polymers The Fine Chemicals division sells highly functional polymers for such diverse uses as binders, disintegrants, coatings and solvents for the pharmaceutical industry, filtration aids for beverages, ingredients in hair care products such as hairsprays, styling mousses, gels and hair conditioners for the cosmetics industry. Amino Acids Amino acids, such as lysine, are feed additives that serve as an efficient protein source for animal nutrition. 61

68 Enzymes Enzymes, which are proteins that function as biochemical catalysts, are used for animal nutrition to improve feed absorption. BASF s enzyme product line includes Natuphos, Natustarch, and Natugrain. Organic Acids These are used as preservatives for grains and compound feeds and more recently as growthenhancing agents. BASF offers a wide range of organic acid products that suppress the growth of molds and bacteria. BASF is the leading supplier of standard and tailor-made organic acids for the feed industry in Europe and Asia. With Formi, BASF offers the first non-antibiotic growth enhancer, an alternative to antibiotics that are to be banned in animal breeding in Europe as of Cosmetics Ingredients These are raw materials for personal care products with the major applications being hair, skin, sun and oral care. The Fine Chemicals division is the world market leader in UV absorbers for cosmetic applications and offers the full range of UVA and UVB absorbers. Aroma Chemicals These are raw materials for flavor and fragrance compounds that are used in many consumer products industries such as the food, personal care and the fabrics and home care industries. Research and Development The focus of the Fine Chemicals division s research and development activities changed in 2005 from process innovation to product innovation. The major product launches comprise various new vitamin and carotenoid formulations, a new conditioning polymer, a new UV filter and a new formulation aid for pharma ingredients. In 2005, the Fine Chemicals division spent approximately 4% of its sales to third parties on Research and Development activities (2004: approximately 5%). Markets and Distribution In 2005, the Fine Chemicals division s sales to third parties were 5 1,732 million. Thereof, Europe accounted for 46%; North America (NAFTA) for 25%; Asia Pacific for 20%; and South America, Africa, Middle East for 9 %. The main customers of the Fine Chemicals division are global players in the animal nutrition, human nutrition, pharmaceuticals, personal care, and flavors and fragrances industries. A significant percentage of the division s products are sold in small, specialty volumes and are often tailor-made to meet specific customer specifications. BASF sells the majority of its fine chemicals products through its own sales force. Key account managers are assigned to major customers. Through its sales and marketing departments, BASF works closely with customers to develop systems and solutions as well as new products. BASF also sells its fine chemicals products through its global e-commerce platform, WorldAccount. BASF s competitive position depends to a large extent on its ability to compete on price, product quality and customer service. BASF expects the trend toward globalization and consolidation for both the manufacturing and the consumer industries to continue. The trend toward commoditization for certain fine chemicals, such as vitamins, is also continuing. Due to the unsatisfactory earnings trend, BASF has started a restructuring program to improve efficiency in this segment. 62

69 BASF considers its main competitors in the animal nutrition area to be DSM, Archer Daniels Midland, Novo Nordisk, Adisseo Group, Rhodia, Eisai and new entrants from China. In the human nutrition area, BASF s main competitors are DSM of the Netherlands and several Asian companies. In pharmaceutical active ingredients, BASF considers Albemarle Corporation, International Specialty Products and FMC Corporation to be its main competitors, as well as a number of Chinese and Indian suppliers. In cosmetics and aroma chemicals, LC United, International Specialty Products, Millennium Specialty Chemicals, National Starch & Chemical, Givaudan, Symrise and Kuraray are BASF s main competitors. Governmental Regulation BASF s various Fine Chemicals products are subject to regulation by government agencies throughout the world. The primary emphasis of these requirements is to assure the safety and effectiveness of BASF s products. Of particular importance in the United States is the Food and Drug Administration (FDA), which regulates many of BASF s Fine Chemicals products. The Federal Trade Commission regulates claims made in the advertising of dietary supplements. Animal health products are also regulated in the United States by the United States Department of Agriculture and the Environmental Protection Agency. In the E. U., similar regulatory systems are established on the national level of different member states as well as on the pan-european government level. Positive lists and negative lists in Europe regulate the usage of various substances in order to ensure consumer safety. Before the substances are added to these lists, they are subject to a rigorous approval procedure. In countries other than the United States and those of the E.U. in which BASF conducts business, BASF is subject to regulatory and legislative environments that are similar to or sometimes even more restrictive than those described above. Oil & Gas Segment Overview BASF conducts the activities of its Oil & Gas segment through its 100% subsidiary Wintershall AG ( Wintershall ). Wintershall and its affiliated companies are active in two sectors: Oil and Natural Gas Exploration and Production, and Natural Gas Distribution and Trading. Key information is provided in the table below: (Million 5) Sales to third parties, net of natural gas taxes ,656 5,263 Percentage of total BASF sales % 14% Intersegmental transfers Sales including intersegmental transfers ,379 5,809 Royalties Sales including intersegmental transfers, less royalties ,098 5,566 Income from operations ( 1 ) ,410 1,643 Capital expenditures ( 1 ) Income taxes on oil production in North Africa and the Middle East that are non-compensable with German corporate income tax in the amount of 5 1,072 million (2004: million) are not deducted from income from operations but are reported as income taxes. Please see Note 10 to the Consolidated Financial Statements included in this Prospectus. Segment Strategy In Europe, the segment strategy is driven by the integration of the Exploration and Production business and the Natural Gas Distribution and Trading business. BASF s Gas for Europe concept is 63

70 based on the increasing demand for natural gas imports into Western Europe. Thus, one of the key drivers of its upstream activities is exploration for and development and production of gas in and around Europe with its midstream business bringing the gas to market. Wintershall focuses on building strong alliances with its business partners to develop new projects. The most prominent examples include BASF s participation with Gazprom, Russia in the Baltic Sea pipeline project, the development of the Achimov formation in the Urengoy field in Western Siberia, and negotiations with Gazprom to jointly develop one of the largest undeveloped Russian gas fields, Yushno-Russkoye, in Western Siberia. In the Oil and Natural Gas Exploration and Production business, BASF has increased production by 41% since This is in line with its long-term objective to increase production during the current decade by 50 %. BASF s goal is to maintain a robust ratio of proved reserves to production and a balanced portfolio of assets operated both by Wintershall and by third parties. To ensure the company s ongoing competitiveness and efficiency, Wintershall focuses geographically on a limited number of hydrocarbon provinces. These are Europe, North Africa, South America (Southern Cone) and Russia (including the Caspian Sea). The Natural Gas Distribution and Trading strategy is based on a strong infrastructure including pipeline and storage facilities that are strategically located for gas imports to and distribution within Germany as well as for transit to other European countries. Marketing activities are regionally focused on Germany, the countries bordering Germany, and the U. K. To support the business expansion into other European countries, BASF has initiated projects to build additional storage capacities outside of Germany, such as Saltfleetby in the U. K. and Haidach in Austria. Reserves The Oil & Gas segment s most significant oil reserves are in Libya and Germany. The most significant natural gas reserves are in Argentina, Germany and the Netherlands. The Oil & Gas segment s proved oil and gas reserves and proved developed oil and gas reserves by geographic area were as follows: Germany Libya Argentina The Netherlands Rest of World Total Rest of World (at equity) At December 31, 2005 Oil (millions of barrels) Proved reserves Proved developed reserves Gas (billions of cubic feet) Proved reserves , ,347 Proved developed reserves , ,763 At December 31, 2004 Oil (millions of barrels) Proved reserves Proved developed reserves Gas (billions of cubic feet) Proved reserves , ,463 Proved developed reserves ,745 At December 31, 2003 Oil (millions of barrels) Proved reserves Proved developed reserves Gas (billions of cubic feet) Proved reserves , ,411 Proved developed reserves ,303 At 2005 levels of production, proved oil reserves would last approximately seven years, and proved gas reserves would last approximately nine years. 64

71 Exploration and Production The net quantities of oil and gas produced as well as the average sales price and production cost (lifting cost) per unit of oil and gas produced in each of the last two years were as follows: Oil Net quantities produced (millions of barrels) Average sales price less royalties (per barrel) Average production cost (lifting cost) (per barrel) Gas Net quantities produced (billions of cubic feet) Average sales price less royalties (per thousand cubic feet) Average production cost (lifting cost) (per thousand cubic feet) Wintershall s total gross and net productive wells, total gross and net developed acres and total gross and net undeveloped acres (both leases and concessions) as of December 31, 2005, were as follows: Germany Libya Argentina The Netherlands Rest of World ( 1 ) Total Rest of World (at equity) Oil Total gross productive wells Total net productive wells Gas Total gross productive wells Total net productive wells Oil and Gas Acreages (thousand of acres) Total gross developed acres Total net developed acres Total gross underdeveloped acres... 2, , , , , ,165.4 Total net underdeveloped acres , , , , ,582.7 ( 1 ) Consolidated activities only In 2005, Wintershall spent million for exploration, acquisition and investment, compared with million in Thereof, million was spent in Europe (2004: million), 5 94 million in South America (2004: 5 76 million), 5 89 million in North Africa/Middle East (2004: million) and 5 70 million in Russia/Caspian Sea (2004: 5 25 million). Either directly or through its subsidiaries, Wintershall was involved in the drilling and completion of 16 exploration and appraisal wells, which resulted in 11 successful wells. As of December 31, 2005, Wintershall had begun drilling nine additional exploratory wells. Europe In Germany, the offshore field Mittelplate, with approximately 200 million barrels of proved initial reserves, is the country s largest known oil reservoir. Wintershall and its 50% partner RWE DEA AG, have completed a pipeline from the offshore production platform to the onshore facilities and can now increase production of this field. This eliminates the need to transport oil through the national park Wattenmeer via double hull barges, which were used incident-free for the last 19 years. In 2005, Wintershall slightly increased its production of natural gas and crude oil in the Netherlands by starting up two new gas fields and successfully rehabilitating an oil field. One additional gas discovery is under development. Wintershall is one of the largest gas producer in the Netherlands. In the U. K. Southern North Sea, Wintershall was awarded six exploration blocks. In Norway, Wintershall farmed into an offshore block operated by Norsk Hydro. Furthermore, Wintershall received shares of 20% each in two offshore licenses during the APA 2005 bidding round. 65

72 North Africa/Middle East In Libya, Wintershall operates six onshore oil fields and produces associated natural gas for local consumption. Production could be increased, compared to 2004, by bringing a new oil field on stream. Successful exploration led to additional hydrocarbon findings. During 2005, Wintershall continued its efforts to tie-in satellite fields to its own pipeline system with the goal of fully utilizing the associated gas produced. Offshore Libya, Wintershall holds a 12.5% interest in the Al Jurf oil field. Onshore Mauritania, two production sharing contracts were signed. In Morocco, two exploration licenses were relinquished. Exploration drilling in Qatar led to an oil discovery that will trigger appraisal activities in South America/Southern Cone Wintershall produces substantial volumes of its natural gas in Argentina. The Carina gas field development off the coast of Tierra del Fuego has been completed, and the field has been on stream since mid Production start-up of the adjacent Aries gas field is expected for early Furthermore, Wintershall continued its exploration efforts with both operated and non-operated licenses. Exploration activities offshore Brazil were abandoned in Russia/Caspian Sea BASF has a cooperation agreement with Gazprom that provides a legal and commercial framework for field development projects. Wintershall and Gazprom are cooperating in the development of large gas/ condensate fields in Western Siberia. The first project, the development of the Achimov formation in a part of the Urengoy field, reached the operational phase early in Start of drilling is scheduled for early In addition, Wintershall and Gazprom are negotiating Wintershall s participation in the development of the Yushno Russkoye gas field in Western Siberia. In the Volga region, the joint venture company Wolgodeminoil, with its partners Wintershall and Lukoil, continued oil exploration and production activities. Offshore Turkmenistan, Wintershall took a share of 20% in each of two blocks offered by the operator Maersk in Part of the commitment is the current drilling of the first exploration well. Risks and Opportunities In general, oil and gas exploration and production activities require high levels of investment and entail special economic risks and opportunities. These activities tend to be highly regulated, and companies engaging in these activities generally may face intervention by governments in matters such as: The award of exploration and production licenses, The imposition of specific drilling and other work-related obligations, Environmental protection measures, Control over the development and abandonment of fields and installations, and Restrictions on production. Crude oil prices are subject to international supply and demand and other factors that are beyond an oil company s control. Such factors can also affect the price of natural gas sold under long-term contracts, because in Germany and in many other countries, natural gas pricing is typically tied to prices of refined products pursuant to a specified time lag. Crude oil prices are generally set in U. S. dollars, while costs may be incurred in a variety of currencies. Fluctuations in exchange rates can therefore give rise to foreign exchange exposures. 66

73 As with most international oil and gas companies, substantial portions of the oil and gas reserves of Wintershall are located in countries which can be considered politically and economically less stable than the OECD countries. To date, political risks have not significantly affected the Oil & Gas segment or had a material adverse effect on BASF s financial condition or results of operations. Wherever possible, Wintershall arranges capital investment guarantees by the German government to protect its investments. German government guarantees currently cover a total investment volume by Wintershall of approximately million, including inventory of raw materials and supplies. General uncertainties are inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. The accuracy of any reserve estimate is a function of the quality of available data, reservoir engineering, as well as geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may require substantial upward or downward revisions. In addition, changes in oil and natural gas prices could have an effect on the economically recoverable reserves. Accordingly, reserve estimates could be materially different from the quantities of oil and natural gas that are ultimately recovered. To reduce uncertainties, Wintershall has used independent, internationally recognized auditors for some years to perform reserves audits of its major oil and gas fields. Natural Gas Distribution and Trading BASF conducts its natural gas distribution and trading activities pursuant to an extensive agreement with OOO Gazexport, a subsidiary of Gazprom. Wintershall and OAO Gazprom established two joint ventures: WINGAS, in which Wintershall has a 65% share and WEIH, in which Wintershall has a 50% share, although profit distributions are differentiated according to customers and countries of sale. WINGAS owns and operates a large pipeline system in Germany that is more than 2,000 kilometers in length and is currently the third largest German natural gas transmission and distribution company. The company also owns and operates the largest underground natural gas storage site in western Europe with a working gas capacity of 157 billion cubic feet. In the United Kingdom, the development of proprietary gas storage facilities continues as scheduled. The natural gas field Saltfleetby, which was acquired in 2004, is going to be converted into a gas storage facility. In May, WINGAS entered into a joint-venture contract with Rohöl-Aufsuchungs AG (RAG) and OOO Gazexport, each partner with 1/3 ownership. According to the contract, the Austrian natural gas field Haidach is going to be converted into a gas storage facility. So far, WINGAS has invested more than 5 3 billion. Capital expenditures in 2005 totaled million. The main project was the extension of the STEGAL, which connects the WINGAS pipeline system with the Czech pipeline system as well as the Polish network via JAGAL. In September 2005, Gazprom, E.ON AG (Germany) and BASF signed a memorandum of understanding to jointly build the North European Gas Pipeline ( NEGP ). Gazprom will participate with 51%, BASF and E.ON AG with 24.5% each. NEGP will run from Vyborg in Russia through the Baltic Sea to the vicinity of Greifswald in Germany where it will be connected with the pipeline systems of WIN- GAS and E.ON Ruhrgas. Procurement of Russian gas is supplemented by purchases of West European gas. In 2005, WINGAS entered into several procurement contracts with a range of West European suppliers to diversify its procurement portfolio as well as to optimize the operation of its pipeline systems. Moreover, WIN- GAS used procurement opportunities at West European trading hubs, such as the National Balancing Point (NBP) in Great Britain and Zeebrugge in Belgium. WIEH exclusively acts as a trading company, purchasing Russian natural gas and marketing it to WIN- GAS and Verbundnetz Gas AG (VNG), a transmission and distribution company in eastern Germany 67

74 in which Wintershall has a 15.8% share. WIEH also markets Russian natural gas in central Europe through its wholly owned Swiss subsidiary WIEE. Due to new European and German legislation, the WINGAS gas transmission division has been spun off into an independently operating company on January 1, The sales volume of WINGAS, WIEH and WIEE totaled 1,127 billion cubic feet compared with 1,037 billion cubic feet the year before. BASF s consolidated sales volume in 2005 was 797 billion cubic feet, representing a 11 % increase over the previous year s sales volume of 718 billion cubic feet. WINGAS s biggest customer is BASF s own Verbund site in Ludwigshafen. In 2005, BASF purchased approximately 102 billion cubic feet for its Ludwigshafen site and other sites in Germany and Belgium. Approximately 29 billion cubic feet were sold to other BASF companies in Germany and Great Britain, and 10 billion cubic feet were sold to WIEH. Environmental Matters BASF is subject to extensive, evolving and increasingly stringent international and local environmental laws and regulations concerning: the production, distribution, handling and storage of BASF s products; the disposal of materials; the practices and procedures applicable to construction and operation of sites; the exploration and production of oil and gas; and the maintenance of safe conditions in the workplace. These environmental protection and remediation laws and regulations govern primarily: The protection of humans and the environment from the harmful effects of dangerous chemical substances; Emissions into the air and other releases into the environment; and The purification and discharge of wastewater and waste management, focusing on waste avoidance and reuse of waste. Although BASF believes that its production sites and operations currently fully comply with all applicable laws and regulations, these laws and regulations have required, and in the future could require, BASF to take action to remediate the effects on the environment of the prior disposal or release of chemicals, petroleum substances, or waste. Such laws and regulations have applied, and in the future could apply, to various sites, including BASF s chemical plants, oil fields, waste disposal sites, chemical warehouses and natural gas storage sites. In addition, such laws and regulations have required, and in the future could require, BASF to install additional controls for certain emission sources, undertake changes in its operations in future years and remediate soil or groundwater contamination at current and/or former sites and facilities. BASF s operating costs for environmental protection totaled million in These costs are recurring or one-time costs associated with sites or measures that are incurred in the avoidance, reduction or elimination of deleterious effects on the environment. They include the costs of disposal sites, such as wastewater treatment plants and residue incinerators. They also comprise different levies such as effluent levies and water levies, costs for disposal services by third parties, monitoring, analyses and surveillance carried out by mobile and stationary units as well as research and development costs for reducing the incidence of residues. BASF spent approximately 5 78 million in 2005 on capital expenditures for pollution control devices and equipment. BASF also incurs costs to remediate the impact of the past disposal as well as the release of chemicals or petroleum substances or waste, both at its own sites and at third-party sites to which BASF sent waste for disposal. Worldwide, BASF had established provisions of million for anticipated investigation and clean-up costs at such sites as of December 31, 2005, and million as of December 31, In the United States, liability for remediation of contamination is imposed generally pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act (Superfund) and 68

75 analogous state laws. Although such U. S. laws generally allow the recovery of the total cost of cleanup from any single responsible party, cleanup costs typically are shared among several responsible parties at third-party sites where multiple parties sent waste to the site for disposal, and sometimes at owned or operated sites where a predecessor or other third-party disposed of waste on-site. BASF has been notified that it may be a potentially responsible party at such sites. The proceedings related to these sites are in various stages. The cleanup process has not been completed at most sites. The number, potential liability and financial viability of other parties are typically not fully resolved, and the status of the insurance coverage for most of these proceedings is uncertain. Consequently, BASF cannot accurately determine the ultimate liability for investigation or cleanup costs at these sites. As events progress at each site for which BASF has been named a potentially responsible party or is otherwise involved in remediation of contamination, BASF accrues, as appropriate, a liability for site cleanup. Such liabilities include all costs that are probable and can be reasonably estimated. In establishing these liabilities, BASF considers its shipments of waste to a site and its percentage of total waste shipped to the site (in the case of third-party sites); the types of waste involved; the conclusions of any studies; the magnitude of any remedial actions which may be necessary; and the number and viability of other potentially responsible parties. Although the ultimate liability may differ from estimates, BASF routinely reviews liabilities and revised estimates, as appropriate, based on the most current information available. BASF has established and continues to establish provisions for environmental remediation liabilities where the amount of such a liability can be reasonably estimated. BASF sets up or adjusts accruals as new remediation commitments arise or additional information becomes available. For further information, see Note 24 to the Consolidated Financial Statements included in this Prospectus. BASF establishes provisions for currently known potential soil contamination at BASF sites that are still in operation. In general, investigations into potential contamination and subsequent cleanups are only required when a site is closed and the existing production facilities dismantled. Taking into account BASF s experience to date regarding environmental matters and currently known facts, BASF believes that capital expenditures and remedial actions necessary to comply with existing laws and conditions governing environmental protection, exceeding the existing provisions, will not have a material effect on BASF s consolidated financial condition or results of operations. In connection with the onshore and offshore oil and gas activities conducted by BASF s subsidiary, Wintershall, BASF is subject to an increasing number of international and national laws, regulations and directives governing the protection of the environment. In connection with the exploration, drilling, production, storage, transportation and distribution of oil and gas, these regulations may, among other things: Require permits; Restrict the types, quantities and concentration of substances that may be released into the environment; Limit or prohibit such activities on land within environmentally protected areas; and/or Impose criminal or civil liability for pollution of soil, water and air as a result of such activities. Wintershall performs environmental impact studies where new oil and gas activities are planned and complies with environmental protection principles when onshore and offshore sites are abandoned. Environmental laws and regulations have an increasing impact on the oil and gas industries and therefore on Wintershall. It is impossible to accurately predict the effect of future developments in such laws and regulations on Wintershall s future earnings and operations. BASF can make no assurance that Wintershall will not incur material costs and liabilities relating to environmental matters. In recent years, the operations of all chemical companies have become subject to increasingly stringent legislation and regulations related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and there can be no assurance that future changes in laws or regulations would not require BASF to install additional controls for certain of its emission sources, to undertake changes in its manufacturing processes, or to investigate possible soil or groundwater contamination and remediate proven contamination at sites where such cleanup is not currently required. 69

76 In the area of emissions trading, the BASF Group has been assigned certificates for nearly 5 million metric tons of CO 2 /year for the first trading period ( ) for all of its European sites. In the second trading period ( ), conditions are expected to be stricter due to higher reduction targets in all E. U. countries, the complete inclusion of chemical plants, and the extension of the legislation to further climate gases. The European Union is currently preparing new legislation on chemicals (REACH) that will alter the registration, evaluation and approval of chemical substances. The new legislation is not expected to come into force before It is not yet possible to place a final figure on the associated costs. Material Contracts BASF did not enter into any contracts not in the ordinary course of business, which could result in any member of the BASF Group being under an obligation or entitlement that is material to BASF Aktiengesellschaft s ability to meets its obligations to the Bondholders in respect of the Bonds. Legal Proceedings General BASF companies are involved in legal, regulatory, governmental and arbitration proceedings in Germany and a number of foreign jurisdictions, including the United States, involving claims by and against them, which arise in the ordinary course of their businesses, including in connection with their business activities, employers, investors and taxpayers. It is not feasible to predict or determine the ultimate outcome of the ending or threatened proceedings. The management does not believe that the outcome of these proceedings, including those discussed below, will have significant effects on the financial position or profitability of BASF Aktiengesellschaft and/or BASF after consideration of any applicable reserves. Antitrust Claims relating to Vitamins On November 21, 2001, the European Commission imposed a fine of million against BASF Aktiengesellschaft in connection with certain violations of antitrust laws relating to the sale of vitamin products in Europe between 1989 and early On appeal of BASF, the European Court of First Instance reduces the fine to million. On December 9, 2004, the European Commission imposed an additional fine of 5 35 million for violations of certain antitrust laws relating to the sale of vitamin B4 (choline chloride) in the mid-nineties. BASF has also appealed against this decisions. Further proceedings are still pending in Brazil and Australia. A few State court lawsuits on behalf of indirect purchasers are still pending in the United States in connection with said antitrust law violations. Further claims for damages have been filed in the United Kingdom. For these proceedings, the company has established provisions for the costs that it anticipates to be sufficient. BASF Aktiengesellschaft has been named as a defendant in Empagran S. A. v. F. Hoffmann-LaRoche, Ltd, et al., a federal class action filed in the U. S. District Court for the District of Columbia purportedly on behalf of all persons who purchased vitamins from the defendants outside the United States between January 1, 1988 and February The Empagran complaint alleges that the plaintiffs were overcharged on their vitamins purchases as the result of a worldwide conspiracy among the defendants to fix vitamin prices. By decision dated June 7, 2001, the District Court for the District of Columbia dismissed the Empagran complaint for lack of subject matter jurisdiction. On January 17, 2003, a divided panel of the United States Court of Appeals for the District of Columbia Circuit reversed the District Court s ruling. The Court of Appeals held that the United States antitrust laws permit the 70

77 assertion of federal subject matter jurisdiction over claims by foreign purchasers based on purchases made and purported damages felt outside the United States. BASF Aktiengesellschaft and the other defendants petitioned for a Writ of Certiorari to the United States Supreme Court. The Supreme Court granted the petition, and on June 14, 2004, vacated the Court of Appeals ruling and remanded the case to the Court of Appeals by an 8-0 decision. On June 28, 2005, the Court of Appeals, on remand, ruled that plaintiffs alleged link between foreign injury and domestic effects was legally insufficient to trigger jurisdiction under the Sherman Act and therefore affirmed the district court s dismissal of the action. On October 26, 2005, plaintiffs filed a new petition for a writ of certiorari to the U. S. Supreme Court. The Supreme Court has denied plaintiffs petition. Other Proceedings The Supreme Court of Minnesota in its decision dated February 19, 2004, upheld a jury verdict against BASF Corporation in an amount of $52 million (with interest now totaling $62 million). The court held that the sale of the plant protection products Poast and Poast Plus at different sales prices violated consumer protection laws. BASF believes that different sales prices are justified because the products are based on different patented formulas and also must be sold as different products under relevant EPA regulations. BASF filed a petition for a Writ of Certiorari seeking review by the Unified States Supreme Court. BASF s petition was granted, and the case was remanded to the Minnesota Supreme Court for reconsideration of its prior opinion in light of an intervening U. S. Supreme Court ruling in another case. In its decision dated March 30, 2006, the Supreme Court of Minnesota affirmed its prior judgment. In 2005, class action lawsuits against BASF Aktiengesellschaft and BASF Corporation had been filed at U. S. courts. It was alleged that sales of TDI, MDI, polyether polyols and MMA had violated antitrust laws. BASF is defending those lawsuits. In February 2006, the U. S. Department of Justice served a Grand Jury subpoena upon BASF Corporation requesting the production of documents relating to the sale of TDI, MDI, polyether polyols and related systems during the period of 1999 through the present. BASF Corporation is cooperating with the U. S. Department of Justice in this regard. In August 2005, the European Commission issued Statements of Objections against several European producers of methacrylates and polymethacrylates for alleged anticompetitive behavior between 1995 and 2000, inter alia against BASF Aktiengesellschaft. Although the evidence induced by the Commission against the company is considered weak, a fine also against the company cannot be excluded. Therefore, the company has established provisions for the costs of this proceeding that it anticipates to be sufficient. For information on legal proceedings regarding environmental matters, see Environmental Matters. Recent Developments On January 9, 2006, Iron Acquisition Corporation, Florham Park, New Jersey, USA, a 100% subsidiary of BASF Aktiengesellschaft, announced a cash offer for all the shares of Engelhard Corporation, Iselin, New Jersey, USA, in the amount of US $37 per share. The total cost of the transaction based on the price per share would be approximately US $4.9 billion. On February 28, 2006, BASF Aktiengesellschaft reached an agreement with Degussa AG, Düsseldorf, Germany, to acquire Degussa AG s construction chemicals business. The purchase price for equity is approximately billion plus assumption of liabilities. As a result, the transaction value for BASF is currently estimated at approximately billion. The transaction, which still requires approval from the relevant authorities, is expected to close by the middle of

78 The construction chemicals business is a reportable segment within Degussa AG s financial reporting. The following figures in accordance with IFRS were reported by Degussa AG for the years 2005 and 2004 (unaudited) ( 1 ) 2004( 1 ) (Million 5) Sales ,968 1,788 Income from operations Segment assets ,472 1,373 ( 1 ) As reported in the preprint of the financial report 2005 of Degussa AG, published for their annual press conference BASF Aktiengesellschaft will provide funds from cash on hand or through the issuance of commercial paper to fulfill the commitments resulting from the transactions. Material Changes/Trend Information Unless described under Recent Developments, there have been no material changes in the financial position or the trading position of BASF since December 31, There has been no material adverse change in the prospects of BASF Aktiengesellschaft since December 31, Outlook for 2006 In 2006, BASF expects the positive economic trend to continue and sees favorable medium-term perspectives for the global economy. Stable geopolitical conditions and sound economic policy are, however, necessary for this. BASF has based its business planning on the following assumptions: Oil prices of around $55/barrel on average in 2006 with a downward trend from the second half of the year; An average euro/dollar exchange rate of $1.25 per euro; and Moderately higher interest rates in the course of 2006 and subsequent years. BASF expects the global economy to grow by 3.2% in 2006 and by an average of 3.1% per year until Under the conditions outlined, BASF expects global chemical production (excluding pharmaceuticals) to grow by 3.0% in

79 TAXATION The following is a general discussion of certain German and Irish tax consequences of the acquisition and ownership of the Bonds. This discussion does not purport to be a comprehensive description of all tax considerations which may be relevant to a decision to purchase Bonds. In particular, this discussion does not consider any specific facts or circumstances that may apply to a particular purchaser. This summary is based on the laws (including tax treaties) currently in force and as applied on the date of this Prospectus, in the Federal Republic of Germany and the Republic of Ireland which are subject to change, possibly with retroactive effect. PROSPECTIVE PURCHASERS OF BONDS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF BONDS INCLUDING THE EFFECT OF ANY STATE OR LOCAL TAXES, UNDER THE TAX LAWS APPLICABLE IN THE FEDERAL REPUBLIC OF GERMANY AND THE REPUBLIC OF IRELAND. Federal Republic of Germany Tax Residents Payments of interest on the Bonds to persons who are tax residents of Germany (i. e., persons whose residence, habitual abode, statutory seat, or place of effective management and control is located in Germany) are subject to German personal or corporate income tax (plus solidarity surcharge (Solidaritätszuschlag)). Such interest may also be subject to trade tax if the Bonds form part of the property of a German trade or business. Upon the disposition of a Bond carrying interest a holder of the Bond will also have to include in his taxable income any consideration invoiced separately for such portion of the interest of the current interest payment period which is attributable to the period up to the disposition of the Bond ( Accrued Interest ). Accrued Interest paid upon the acquisition of the Bonds may be declared as negative income if the Bond is held as a non-business asset. If for the determination of the issue price of the Bond the redemption amount is reduced by a discount or if the redemption amount is increased as compared with the issue price of the Bond (as, for example, in the case of a discounted Bond or a Bond with accrued interest added), the difference between the redemption amount and the issue price of the Bond ( Original Issue Discount ) realized when a Bond held as a non-business asset is redeemed to its initial subscriber will be taxable investment income, however, only if the Original Issue Discount exceeds certain thresholds; in such case, the Bond qualifies as a financial innovation under German tax law. If the Bond qualifies as a financial innovation (Finanzinnovation) (including, among other things, zero coupon bonds or other discounted Bonds or Bonds with accrued interest added as well as floating rate bonds) and is disposed of while outstanding or redeemed at maturity, such portion of the proceeds from the disposition of the Bond or of the redemption amount of the Bond which equals the yield to maturity of the Bond attributable to the period over which the holder has held such Bond, minus interest, including Accrued Interest, already taken into account, will be subject to income tax (plus solidarity surcharge), provided the holder of the Bond is an individual. The yield to maturity is determined by taking into account the Original Issue Discount. If the Bonds do not have a predetermined yield to maturity (e. g. in the case of floating rate Bonds) or the holder does not give proof thereof, the difference between the proceeds from the disposition, assignment or redemption and the issue or purchase price of the Bond is subject to income tax (plus solidarity surcharge) in the year of the disposition, assignment, or redemption of the Bond. Where the Bond is issued in a currency other than euro, such difference will be computed in the foreign currency. Where a Bond forms part of the property of a German trade or business, in each fiscal year the yield to maturity of the Bond to the extent attributable to such period has to be taken into account as interest income by the initial subscriber of the Bond and is subject to personal or corporate income tax (plus solidarity surcharge) and trade tax. 73

80 Capital gains from the disposition of Bonds, other than income described in the preceding paragraph, are only taxable to a German tax-resident individual if the Bonds are disposed of within one year after their acquisition or form part of the property of a German trade or business. In the latter case the capital gains may also be subject to trade tax. Capital gains derived by German-resident corporate holders of Bonds will be subject to levy corporate income tax (plus solidarity surcharge) and trade tax, even if the Bonds do not qualify as financial innovations. If the Bonds are held in a custodial account which the holder of the Bonds (hereinafter referred to as Bondholder ) maintains with a German branch of a German or non-german bank or financial services institution (the Disbursing Agent ) a 30% withholding tax on interest payments (Zinsabschlag), plus 5.5% solidarity surcharge on such tax, will be levied, resulting in a total tax charge of 31.65% of the gross interest payment. Withholding tax is also imposed on Accrued Interest. If the Bonds qualify as financial innovations, as explained above, withholding tax at the aforementioned total rate will also be withheld from the difference between the proceeds from the disposition, assignment or redemption and the issue or purchase price of the Bonds, if the Bond has been kept in a custodial account with such Disbursing Agent since the time of issuance or acquisition, respectively. If the Bonds have been transferred into the custodial account of the Disbursing Agent only after such point in time, withholding tax at the aforementioned rate will be levied on a lump-sum basis on 30% of the proceeds from the disposition, assignment or redemption of the Bonds. In computing the tax to be withheld the Disbursing Agent may deduct from the basis of the withholding tax any Accrued Interest paid by the holder of a Bond to the Disbursing Agent during the same calendar year. In general, no withholding tax will be levied if the holder of a Bond is an individual (i) whose Bond does not form part of the property of a German trade or business nor gives rise to income from the letting and leasing of property, and (ii) who filed a withholding exemption certificate (Freistellungsauftrag) with the Disbursing Agent but only to the extent the interest income derived from the Bond together with other investment income does not exceed the maximum exemption amount shown on the withholding exemption certificate. Similarly, no withholding tax will be deducted if the holder of the Bond has submitted to the Disbursing Agent a certificate of non-assessment (Nichtveranlagungsbescheinigung) issued by the relevant local tax office. Withholding tax and the solidarity surcharge thereon are credited as prepayments against the German personal or corporate income tax and the solidarity surcharge liability of the German resident. Amounts overwithheld will entitle the Bondholder to a refund, based on an assessment to tax. Nonresidents Interest, including Accrued Interest and (in the case of financial innovations) Original Issue Discount, and capital gains are not subject to German taxation, unless (i) the Bonds form part of the business property of a permanent establishment, including a permanent representative, or a fixed base maintained in Germany by the holder of a Bond or (ii) the interest income otherwise constitutes Germansource income (such as income from the letting and leasing of certain German-situs property). If the nonresident of Germany is subject to German taxation with income from the Bonds, a tax regime similar to that explained above at Tax Residents applies; capital gains from the disposition of Bonds are, however, only taxable in the case of (i). Nonresidents of Germany are, in general, exempt from German withholding tax on interest and the solidarity surcharge thereon. However, where the interest is subject to German taxation as set forth in the preceding paragraph and the Bonds are held in a custodial account with a Disbursing Agent, withholding tax is levied as explained above at Tax Residents. 74

81 Republic of Ireland General The following is a summary of the principal Irish tax consequences of ownership of the Bonds for individuals who are resident and ordinarily resident in Ireland for tax purposes and for companies that are resident in Ireland for tax purposes. It is also a summary of Irish withholding tax issues in the context of all holders of Bonds. It is based on the laws and practice of the Revenue Commissioners currently in force in Ireland and may be subject to change. The statements in this summary are based on the understanding that the Bonds will be treated as debt for Irish tax purposes. It deals with Bondholders who beneficially own their Bonds as an investment. Particular rules not discussed below may apply to certain classes of taxpayers holding Bonds, including dealers in securities and trusts. The summary does not constitute tax or legal advice and the comments below are of a general nature only. Prospective investors in the Bonds should consult their professional advisers on the tax implications of the purchase, holding, redemption or sale of the Bonds and the receipt of payments thereon under any laws applicable to them. Tax on Income Individual Bondholders that are resident or ordinarily resident for tax purposes in Ireland are liable to Irish income tax and levies on interest and/or any premium or discount in the nature of interest received on the Bonds at the applicable marginal rate of tax. Bondholders that are companies resident for tax purposes in Ireland are liable to Irish corporation tax (generally at the rate of 25%) on interest received on the Bonds. Encashment Tax Irish tax will be required to be withheld at the standard rate (currently 20%) from interest and/or any premium in the nature of interest on any Bond, where such interest and/or premium in the nature of interest is entrusted to a paying agent in Ireland for payment to any persons in Ireland. In certain circumstances, Irish tax will also be required to be withheld at the standard rate (currently 20%) from interest and/or any premium in the nature of interest on any Bond, where such interest and/or any premium in the nature of interest is collected or realised by a bank or encashment agent in Ireland on behalf of any Bondholder. The withholding tax does not apply where the Bondholder is not resident in Ireland and has made a declaration in the prescribed form to the paying agent, encashment agent or bank. Bondholders should note that the Issuer will not pay additional amounts under 5(e) of the Conditions of Issue in respect of any withholding tax imposed as a result of the Encashment Tax. Tax on Capital Gains A Bondholder that is resident or, in the case of an individual ordinarily resident, or that carries on a trade or business in Ireland through a branch, agency or permanent establishment in respect of which the Bonds were used or held, will be subject to tax on capital gains on a disposal of Bonds. The rate of Irish tax on capital gains is currently 20%. Capital Acquisitions Tax A gift or inheritance comprising of Bonds will not be within the charge to capital acquisitions tax (which, subject to available exemptions and reliefs, is currently levied at 20%) unless either (i) the disponer or the donee/successor in relation to the gift or inheritance is resident or ordinarily resident in Ireland on the relevant date (a foreign domiciled individual will not be regarded as being resident or ordinarily resident in Ireland at the date of the gift or inheritance unless that individual has been 75

82 resident in Ireland for the five consecutive tax years preceding that date and is either resident or ordinarily resident in Ireland on that date) or (ii) if the Bonds are regarded as property situate in Ireland (e. g. if the Bonds are in bearer form and are physically located in Ireland or if a register of the Bonds is maintained in Ireland). Accordingly, if such Bonds are comprised in a gift or inheritance, the gift or inheritance may be within the charge to tax regardless of the residence status of the disponer or the donee/successor. Stamp Duty on Transfer of Bonds No stamp duty or similar tax is imposed in Ireland on the transfer or redemption of the Bonds unless (i) the Bonds are regarded as property situate in Ireland; or (ii) a document of transfer of the Bonds is executed in Ireland; or (iii) the transfer relates to Irish property or to any matter or thing done or to be done in Ireland. Even if a transfer of the Bonds is technically within the charge to Irish stamp duty, no Irish stamp duty will be levied if (i) the Bonds do not carry a right of conversion into stock or marketable securities of an Irish registered company; (ii) the Bonds do not carry rights the same as shares in the capital of a company; (iii) the Bonds are redeemable within 30 years of the date of issue and not thereafter; (iv) the Bonds are issued for a price which is not less than 90% of their nominal value; and (v) the Bonds do not carry a right to receive a sum which is related to movements in an index, for this purpose EURIBOR and such similar indices are not taken into account. EU Savings Tax Directive On June 3, 2003 the Council of the European Union approved a directive on the taxation of savings income in the form of interest payments (the EU Savings Tax Directive ). Accordingly, each EU Member State must require paying agents (within the meaning of such directive) established within its territory to provide to the competent authority of this state details of the payment of interest made to any individual resident in another EU Member State as the beneficial owner of the interest. The competent authority of the EU Member State of the paying agent (within the meaning of the EU Savings Tax Directive) is then required to communicate this information to the competent authority of the EU Member State of which the beneficial owner of the interest is a resident. For a transitional period, Austria, Belgium and Luxembourg may opt instead to withhold tax from interest payments within the meaning of the EU Savings Tax Directive at a rate of 15% for the first three years from application of such provisions of the directive, of 20% for the subsequent three years, and of 35% from the seventh year after application of the provisions of such directive. In conformity with the prerequisites for the application of the EU Savings Tax Directive, Switzerland, Liechtenstein, San Marino, Monaco and Andorra have confirmed that from July 1, 2005 they will apply measures equivalent to those contained in such directive, in accordance with agreements entered into by them with the European Community. It has also been confirmed that certain dependent or associated territories (the Channel Islands, the Isle of Man and certain dependent or associated territories in the Caribbean) will apply from that same date an automatic exchange of information or, during the transitional period described above, a withholding tax in the described manner. Consequently, the Council of the European Union noted that the conditions have been met to enable the provisions of the EU Savings Tax Directive to enter into force as from July 1, By legislative regulations dated January 26, 2004 the German Federal Government enacted the provisions for implementing the EU Savings Tax Directive into German law. These provisions apply as from July 1, Bondholders who are individuals should note that the Issuer will not pay additional amounts under 5 (c) of the Conditions of Issue of the Bonds in respect of any withholding tax imposed as a result of the EU Savings Tax Directive. 76

83 SUBSCRIPTION AND SALE Pursuant to a subscription agreement to be entered into on or about April 19, 2006 (the Subscription Agreement ) between the Issuer and the Managers, the Managers will agree, subject to certain conditions, to subscribe and pay for the Bonds at an issue price of 99.88% less certain management and underwriting commissions. The conditions as referred to in the first sentence of this paragraph will be customary closing conditions as set out in the Subscription Agreement. The Issuer has furthermore agreed to reimburse the Managers for certain expenses incurred in connection with the issue of the Bonds. The expenses of the issue of the Bonds will be approximately 5 60,000,000. In the Subscription Agreement, the Issuer has made certain representations and warranties in respect of its legal and financial matters. The Subscription Agreement entitles the Managers to terminate its obligations thereunder in certain circumstances prior to payment of the purchase price of the Bonds. The Issuer has agreed to indemnify the Managers against certain liabilities in connection with the offer and sale of the Bonds. The Subscription Agreement is governed by German law. The Managers (or their affiliates) have provided from time to time, and expect to provide in the future, investment services to the Issuer (or its affiliates), for which the Managers (or their affiliates) have received or will receive customary fees and commissions. There are no interests of natural and legal persons involved in the issue, including conflicting ones, that are material to the issue. Selling Restrictions European Economic Area In relation to each Member State of the European Economic Area (i.e., the European Union plus Iceland, Norway and Liechtenstein) which has implemented the Prospectus Directive (each, a Relevant Member State ), each Manager has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State (the Relevant Implementation Date ) it has not made and will not make an offer of Bonds to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Bonds which has been approved by the competent authority in that Relevant Member State in accordance with the Prospectus Directive or, where appropriate, published in another Relevant Member State and notified to the competent authority in that Relevant Member State in accordance with Article 18 of the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Bonds to the public in that Relevant Member State at any time: (a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last fiscal year; (2) a total balance sheet of more than 5 43,000,000 and (3) an annual turnover of more than 5 50,000,000, as shown in its last annual or consolidated accounts; (c) to investors who acquire securities for a total consideration of at least 5 50,000 per investor, for each separate offer; or (d) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an offer of Bonds to the public in relation to any Bonds in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Bonds to be offered so as to enable an investor to decide to purchase or subscribe the Bonds, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State. 77

84 United States of America and its Territories The Bonds have not been and will not be registered under the Securities Act and may not be offered, or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act. Each Manager has represented and agreed that it has offered and sold the Bonds, and will offer and sell the Bonds (i) as part of its distribution at any time and (ii) otherwise until 40 days after the completion of the distribution of all the Bonds only in accordance with Rule 903 of the Regulation S under the Securities Act. Neither the Managers, their affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to the Bonds, and it and they have complied and will comply with the offering restrictions requirements of Regulation S under the Securities Act. Each Manager has also agreed that at or prior to confirmation of sale of Bonds, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Bonds from it during the restricted period a confirmation or notice to substantially the following effect: The Bonds covered hereby have not been registered under the U. S. Securities Act of 1933, as amended (the Securities Act ) and may not be offered or sold within the United States or to, or for the account or benefit of, U. S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of the Bonds as determined and certified by each Manager, except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meaning given to them in Regulation S under the Securities Act. Terms used in the preceding paragraphs have the meaning given to them by Regulation S under the Securities Act. In addition, each Manager has represented and agreed that: (a) except to the extent permitted under U. S. Treas. Reg. Section (c)(2)(i)(d) (the TEFRA D Rules ), (i) it has not offered or sold, and during the restricted period will not offer or sell, directly or indirectly, Bonds in bearer form to a person who is within the United States or its possessions or to a United States person, and (ii) it has not delivered and will not deliver, directly or indirectly, within the United States or its possessions definitive Bonds in bearer form that are sold during the restriction period; (b) it has and throughout the restricted period will have in effect procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling Bonds in bearer form are aware that such Bonds may not be offered or sold during the restricted period to a person who is within the United States or its possessions or to a United State person, except as permitted by a TEFRA D Rules; (c) if it was considered a United States person, that is acquiring the Bonds for purposes of resale in connection with their original issuance and agrees that if it retains Bonds in bearer form for its own account, it will only do so in accordance with the requirements of TEFRA D Rules; and (d) with respect to each affiliate that acquires from it Bonds in bearer form for the purpose of offering or selling such Bonds during the restricted period that it will either (i) repeat and confirm the representations and agreements contained in sub-clauses (a), (b) and (c); or (ii) obtain from such affiliate for the benefit of the Issuer the representations and agreements contained in sub-clauses (a), (b) and (c). Terms used in the preceding paragraph have the meanings given to them by the U.S. Internal Revenue Code and regulations thereunder, including the TEFRA D Rules. United Kingdom Each Manager has represented and agreed that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended ( FSMA ) received by it in connection with the issue or sale of the Bonds in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and 78

85 (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom. As used herein, United Kingdom means the United Kingdom of Great Britain and Northern Ireland. France Each Manager has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, Bonds to the public in France and has not distributed or caused to be distributed and will not distribute or cause to be distributed to the public in France the Prospectus or any other offering material relating to the Bonds and that any offer, sale and distribution has been and will only be made in France to qualified investors (investisseurs qualifiøs) acting for their account, all as defined in, and in accordance with, articles L and L of the French Code monøtaire et financier and døcret nð dated 1 October Bonds may only be issued, directly or indirectly, to the public in France in accordance with articles L.411-1, L.411-2, L and L of the French Code monøtaire et financier. Prospective investors are hereby informed that: (i) this Prospectus has not been submitted for clearance to the French financial market authority (AutoritØ des MarchØs Financiers); (ii) in accordance with the døcret nð dated 1 October 1998 any investors subscribing the Bonds in France should be acting for their own account. Italy The offering of the Bonds has not been and will not be registered pursuant to the Italian securities legislation and the Bonds be it in the primary or in the secondary market may not be offered, sold and/or delivered to any individuals in Italy, nor may any document relating to the Bonds be distributed to any individuals in Italy. Accordingly, the Managers have represented that they have not offered or sold, and will not offer or sell, any Bonds in the Republic of Italy in a solicitation to the public, and that sales of the Bonds in the Republic of Italy shall be effected in accordance with all Italian securities, tax, exchange control and other applicable laws and regulations. The Managers have represented that they will not offer, sell or deliver either in the primary or secondary market any Bonds or distribute copies of the Prospectus or any other document relating to the Bonds in the Republic of Italy except to Professional Investors (which does not include individuals), as defined in Article 31.2 of CONSOB Regulation No of 1st July 1998 ( Regulation No ), as amended, pursuant to Articles 30.2 and 100 of Legislative Decree No. 58 of 24th February 1998, as amended ( Decree No. 58 ), or in any other circumstances where an express exemption from compliance with the solicitation restrictions provided by Decree No. 58 or CONSOB Regulation No of 14th May 1999, as amended, applies, provided however, that any such offer, sale or delivery of Bonds or distribution of copies of the Prospectus or any other document relating to the Bonds in the Republic of Italy must be: (a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1st September 1993, as amended ( Decree No. 385 ), Decree No. 58, Regulation No and any other applicable laws and regulations; (b) in compliance with Article 129 of Decree No. 385 and the implementing instructions of the Bank of Italy (Istruzioni di vigilanza della Banca d Italia), pursuant to which the issue, offer or placement of securities in Italy is subject to prior notification to the Bank of Italy, unless an exemption, depending, inter alia, on the aggregate amount of the Bonds, offered or placed in Italy and their characteristics, applies; and (c) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy. General In addition to the specific restrictions set out above, each Manager has represented and agreed that it will comply with all applicable provisions of law in each jurisdiction in or from which it may offer Bonds or distribute any offering material. 79

86 GENERAL INFORMATION (1) Authorisation. The issue of the Bonds has been authorised by a resolution of the Board of Executive Directors (Vorstand) of the Issuer on January 17, (2) Issue Date. The Bonds will be issued on April 21, The rights attached to the Bonds take effect as of such issue date. (3) Availability of Documents. For so long as any Bonds are outstanding, copies of the following documents may be inspected during normal business hours at the specified office of each Paying Agent and as long as the Bonds are listed on the regulated market of the Irish Stock Exchange, the documents set out under (i) through (iv) below will be available (free of charge) in physical form at the head office of the Irish paying agent in Dublin: (i) (ii) the Articles of Association (Satzung) of the Issuer; this Prospectus; and (iii) the audited consolidated annual financial statements as at and for each of the years ended December 31, 2005 and 2004, all prepared in accordance with IFRS. In connection with the application to list the Bonds on the regulated market of the Irish Stock Exchange appearing on the list of regulated markets issued by the E. C., copies of the constitutional documents of the Issuer have been deposited with the Irish listing agent where such documents may be examined and copies obtained. (4) Clearing Systems. The Bonds will initially be represented by a temporary global bond without coupons, which will be exchangeable for a permanent global bond without coupons. The Temporary Global Bond and, upon exchange, the Permanent Global Bond will be deposited with CBF. Co-ownership interests in the temporary global bond and, upon exchange, permanent global bond can be held through participants in CBF. No definitive Bonds will be issued. (5) Listing and Admission to Trading. Application has been made to list the Bonds on the Irish Stock Exchange. The Bonds are expected to be traded on the regulated market from April 13, The total expenses related to the admission to trading are expected to amount to approximately 5 11,000. For as long as any of the Bonds are listed on the Irish Stock Exchange, the Irish Stock Exchange will be informed of all notifications regarding payments. All notices to the Bondholders regarding the Bonds will be published in a leading daily newspaper having general circulation in Ireland (which is expected to be The Irish Times ) or in such other publication or manner conforming to the rules of the Irish Stock Exchange. Payments and transfers of the Bonds will be settled through CBF. (6) Paying Agent. The Issuer has appointed Deutsche Bank Aktiengesellschaft, Frankfurt am Main as Principal Paying Agent and NCB Stockbrokers Ltd., Dublin as the listing agent for the Irish Stock Exchange and as initial Irish paying agent. For as long as any of the Bonds are listed on the Irish Stock Exchange the Issuer will maintain a listing and paying agent in the City of Dublin. (7) Legend on the Global Bonds. The Temporary Global Bond and the Permanent Global Bond will each bear the following legend: Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code. (8) Security Codes. The Bonds have been accepted for clearing by CBF with the following security identification numbers: 80

87 ISIN Code: DE000A0JQF26 Common Code: WKN: A0JQF2 (9) Yield of the Bonds. For the subscribers of the Bonds the yield is 4.027% per annum calculated on the basis of the issue price of 99.88%. 81

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89 FINANCIAL INFORMATION BASF Financial Report 2005 The financial report 2005 of BASF, which includes the consolidated financial statements of BASF as at and for the period ended December 31, 2005, is reprinted below and separately paginated. BASF Financial Report 2004 The financial report 2004 of BASF, which includes the consolidated financial statements of BASF as at and for the period ended December 31, 2004, is reprinted below and separately paginated. F-1

90

91 Shaping the Future Financial Report 2005

92 BASF Group 2005 Income from operations at record high of 5,830 million Premium of 2,354 million earned on our cost of capital (2004: 1,982 million) Dividend increased to 2.00 (2004: 1.70) million shares bought back for a total of 1,435 million Pensions externally financed through a Contractual Trust Arrangement (CTA) Overview Change Million in % Sales 42,745 37, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 8,233 7, Income from operations (EBIT) before special items 6,138 5, Income from operations (EBIT) 5,830 5, Income before taxes and minority interests 5,926 4, Net income 3,007 2, Earnings per share ( ) Earnings per share in accordance with U.S. GAAP ( ) Dividend per share ( ) Cash provided by operating activities 5,250 * 4, Additions to tangible and intangible assets 2,523 2, Depreciation of tangible and intangible assets 2,403 2,492 (3.6) Return on assets (%) Return on equity after tax (%) Research and development expenses 1, Number of employees as of December 31 80,945 81,955 (1.2) * Before external financing of pension obligations Accounting principles for this report Starting in 2005, the accounting and reporting of the BASF Group is performed in accordance with International Financial Reporting Standards (IFRS). The previous year s figures have been restated in accordance with IFRS. Detailed explanations of the application of IFRS can be found in the Notes to the Consolidated Financial Statements on page 106 onward. Cover photo: Yolanda dos Santos, administrative assistant (left) and Alessandra Gonçalves de Freitas, Responsible Care coordinator, both at BASF in Guaratinguetá, Brazil.

93 BASF s Segments Chemicals Significant increase in sales due to higher volumes and prices Higher annual earnings despite startup costs for new plants and the effects of the hurricanes in the United States Business strengthened with electronic chemicals Expansion of our production capacities in Asia Plastics Sales growth thanks to further price increases Increase in earnings in Polyurethanes and Performance Polymer High volatility and further increase in raw material costs Business models successfully optimized Performance Products Increase in sales due to higher prices Improvement in earnings due to double-digit growth in Functional Polymers Growth boosted by positive business performance in Asia Pacific Successful start of operations at production complext for acrylic acid and acrylates in Nanjing, China Agricultural Products & Nutrition Agricultural Products division posts higher earnings Agricultural Products increases research and development expenditure Lower prices for lysine and vitamin C negatively impact sales and earnings in Fine Chemicals Extensive restructuring program launched in Fine Chemicals Oil & Gas Sales and earnings improve Natural gas sales volume rise again Cooperation with our Russian partner Gazprom extended

94 BASF s Segments Segment key data Sales by division Million Change Million % 3 1 in % 1 Inorganics 1, Sales 8,103 7, Petrochemicals 5, Income from operations (EBIT) 3 Intermediates 2, before special items 1,488 1, Income from operations (EBIT) 1,326 1, , Million Change in % Million % 1 Styrenics 4, Sales 11,718 10, Performance Polymers 2, Income from operations (EBIT) before special items 1, Income from operations (EBIT) 1, Polyurethanes 4, , Million Change in % Million % 1 Performance Chemicals 2, Sales 8,267 8, Coatings 2, Income from operations (EBIT) before special items Income from operations (EBIT) 863 1,128 (23.5) 3 Functional Polymers 3, , Million Change in % Sales 5,030 5,147 (2.3) Million % 1 Agricultural Products 3, Fine Chemicals 1, Income from operations (EBIT) before special items (9.2) Income from operations (EBIT) (5.3) 5, Million Change in % Sales 7,656 5, Income from operations (EBIT) before special items 2,410 1, Income from operations (EBIT) 2,410 1, Million % Oil & Gas 7,

95 WHO WE ARE BASF is the world s leading chemical company: The Chemical Company. Our portfolio ranges from chemicals, plastics, performance products, agricultural products and fine chemicals to crude oil and natural gas. As a reliable partner to virtually all industries, our intelligent system solutions and high-value products help customers to be more successful. WHAT WE ACHIEVE Our goal is to use our products and services to successfully shape the future of our customers, business partners and employees. In doing so, we aim to grow profitably and consistently increase the value of our company. HOW WE SHAPE THE FUTURE We develop new technologies and use them to open up additional market opportunities. We combine economic success with environmental protection and social responsibil ity. This is our contribution to a better future for us and for coming generations.

96 Contents 3 Milestones 4 Letter from the Chairman of the Board of Executive Directors 6 Board of Executive Directors 8 BASF Shares Management s Analysis 14 Corporate Profile BASF Group 14 Overview 15 Sites and Markets 16 Structure and Organization 17 Strategy, Goals and Value-based Management at BASF 21 Economic Environment 21 Trends in the Global Economy and the Chemical Industry in Trends in Key Customer Industries in BASF Group Business Review and Analysis 24 Results of Operations in the BASF Group 28 Balance Sheet Structure 30 Liquidity and Capital Resources 35 Results of Operations by Segment 51 Regional Results 53 Research and Development 56 Supplementary Report 57 Outlook 61 Purchasing, Marketing and Sales 64 Corporate Responsibility 64 Employees 66 Environmental Protection and Safety 68 Social Responsibility 69 Risk Management System and Risks of Future Development Corporate Governance 73 Corporate Governance at BASF 76 Management and Supervisory Boards 80 Report of the Supervisory Board 83 Compliance Statement in Accordance with the German Corporate Governance Code Consolidated Financial Statements 86 Statement by the Board of Executive Directors 87 Report of Independent Auditors 88 BASF Group Consolidated Financial Statements and Notes to the Consolidated Financial Statements Glossary, Index and Ten-year Summary 154 Glossary 156 Index 157 Ten-year Summary

97 2 3 Milestones January BASF acquires the global electronic chemicals business of Merck KGaA, Germany, for 270 million. The acquisition makes BASF a leading supplier of electronic chemicals for the rapidly growing semiconductor and flat screen industries. BASF starts to establish a regional shared service center in Kuala Lumpur, Malaysia. The center will provide services in the areas of finance and accounting, information technology and human resources for BASF Group companies in 15 countries in Asia Pacific. February BASF is the world s most admired chemical company according to a poll conducted by the U.S. business magazine FORTUNE. March BASF creates a European shared service center, BASF Services Europe GmbH, in Berlin. More than 500 people will be employed in the areas of finance and accounting as well as human resources. In Caojing, China, BASF starts operations at the world s largest production plant for polytetrahydrofuran (PolyTHF ), a starting material for textiles. The plant improves proximity to customers and supply security in Asia. BASF acquires all shares in BASF NOF Coatings Ltd. in Tokyo, Japan, formerly a joint venture between BASF and the Japanese NOF Corporation. April BASF celebrates its 140th anniversary. BASF and the Russian gas company Gazprom announce that they will extend their cooperation along the entire value adding chain from production and transportation through to marketing of natural gas in Europe. May BASF and Shell Chemicals sell their joint venture Basell, one of the world s leading manufacturers of polyolefins, for 4.4 billion. June A highly efficient combined heat and power (CHP) plant is inaugurated at BASF s Ludwigshafen site. July After three years, the Ludwigshafen Site Project is completed successfully, permanently reducing costs at the production site by 480 million. August BASF announces its plans to expand the capacity of the naphtha steam cracker at its Antwerp site to 1.08 million metric tons per year in The capacity expansion will involve an investment of around 200 million. September Together with its Chinese partner Sinopec, BASF officially inaugurates its new Verbund site in Nanjing, China. The new site is the largest individual investment in BASF s 140-year history, with the two partners investing a total of $2.9 billion. BASF receives an award for its 2004 corporate reporting. It was ranked best annual report by the German business magazine manager magazin. BASF shares are included in the Dow Jones Sustainability Index (DJSI World) the world s most important sustainability index for the fifth year in succession. October Effective October 1, BASF acquires the Swiss fine chemicals company Orgamol to strengthen its pharma solutions business. BASF Aktiengesellschaft announces that it will pay approximately 3.7 billion into a newly established Contractual Trust Arrangement by the end of 2005 to finance pension obligations to its employees and pensioners. BASF Corporation announces its plans to reduce annual costs in North America by a further $150 million by mid This brings the total cost reductions for the program started in 2003 to $400 million per year. November German business magazine manager magazin names Dr. Jürgen Hambrecht and his Board colleagues Manager of the Year 2005 and pays tribute to the achievement of all BASF employees. BASF announces its plans to increase spending on research and development to 1,150 million in 2006 and to create an additional 180 positions for scientists in its Research Verbund. December Construction work starts on the North European Gas Pipeline (NEGP). At the same time, a new German-Russian joint venture, North European Gas Pipeline Company, is created by Gazprom, BASF and E.ON. BASF Plant Science obtains exclusive license rights for technologies to optimize genetic plant traits from the Belgian biotechnology company CropDesign. The focus lies on improving the yield and drought resistance of agricultural crops. BASF buys back shares for 1,435 million in 2005 with the aim of reducing its stockholders equity. To expand its portfolio through forward integration in innovative, high-growth markets, BASF plans to acquire Degussa s construction chemicals business and tenders an offer to acquire the U.S. catalyst manufacturer Engelhard Corporation.

98 Letter from the Chairman of the Board of Executive Directors BASF is shaping the future and has been doing so successfully for more than 140 years. We are The Chemical Company, the world s leading chemical company. Our goal is sustainable success. We aim to create value for our shareholders, our employees and our business partners. We again succeeded in this: The past year was the best ever in the history of our company. I sincerely thank all BASF employees worldwide for their hard work and this exceptional outcome. Our strategy of profitable growth continues to be successful despite weak growth in our home market in Europe. In 2005, we increased sales by 14% to 42.7 billion. As a result, we grew faster than the market, while earning a higher premium on our cost of capital. Our shareholders should also be pleased by this success: In view of our strong earnings, the Board of Executive Directors and the Supervisory Board will propose a dividend of 2.00 to the Annual Meeting, an increase of 18% compared with last year. In addition, we bought back shares for 1,435 million in 2005, and we plan to continue with our share buybacks in ACHIEVING PROFITABLE GROWTH In 2005, we enhanced our efficiency and effectively reduced our costs even further. One example is the Ludwigshafen Site Project, which will permanently reduce costs by 480 million per year. In North America, we reached our savings goal of $250 million ahead of schedule. Now, our new goal is to cut our annual costs by a total of $400 million by We are implementing similar measures in the other regions to strengthen our competitiveness and safeguard jobs with a future. A major step on our path to profitable growth has been the successful start of operations at our new Verbund site in Nanjing, China, in summer This joint venture with our Chinese partner Sinopec is the largest single investment in BASF s history. We now have the advantage of being able to supply customers in the region directly, thus extending our strong position in the rapidly growing Asian market. By investing in the development of Siberian gas fields and in the construction of the North European Gas Pipeline with our partner Gazprom, we are also creating additional growth potential. At the same time, we are helping to ensure long-term energy supplies to Europe. In order to grow successfully, we will build on our strengths and continuously optimize our portfolio. This includes strategic divestitures, like that of our share in the polyolefins producer Basell in At the same time, we strengthened our portfolio last year. For example, BASF acquired Merck s electronic chemicals business and purchased the fine chemicals company Orgamol. CREATING LONG-TERM VALUE We want to continue to shape the future and create long-term value for our business partners. Therefore, we are developing innovative products and intelligent solutions and services for our customers worldwide. Our researchers and developers around the world work to ensure that we can offer our customers those solutions that will give them a competitive edge. We are thus planning to expand our global research and development activities and to further increase expenditures in this area in Furthermore, we are developing new business opportunities in five growth clusters: energy management, raw materials change, nanotechnology, plant biotechnology and white (industrial) biotechnology. To sharpen our competitive edge, we have established a network of approximately 1,300 research partnerships worldwide.

99 4 5 Yet in the end, only the best team is able to create long-term value. We want to remain at the forefront of innovation and customer orientation. To do this, we are implementing appropriate training and education programs for our employees. Every member of BASF s team understands the importance of continuous personal development, of learning from one another, and encouraging each other to become even better. All team members contribute their personal strengths and professional and cultural experience. This diversity helps us to better understand our customers needs. In this way, we can develop the best ideas for our products and solutions to make our customers even more successful. Dr. Jürgen Hambrecht Chairman of the Board of Executive Directors SHAPING A SUSTAINABLE FUTURE We plan and manage our business sustainably that means that we take responsibility for human beings and the environment. You can read more about our activities in all areas of sustainable development in our Corporate Report, which is published in conjunction with this Financial Report. In 2006, our prospects are promising. Having made BASF significantly more competitive in recent years, we now want to further supplement our portfolio. Our goal is to acquire businesses that are even more customer-oriented and driven by innovation and growth. For example, we have tendered offers to acquire the U.S. catalyst company Engelhard Corporation as well as Degussa s construction chemicals business. Our strategy BASF 2015 describes the path we are taking to ensure our future. Our goal is to continue to grow profitably by following our four strategic guidelines: Earn a premium on our cost of capital Help our customers to be more sucessful Form the best team in industry Ensure sustainable development Looking to the future, I see enormous opportunities for BASF that we will be certain to seize. I assure you that the entire BASF team and I will do our utmost to continue to create value for our shareholders and partners as the world s leading chemical company The Chemical Company. Dr. Jürgen Hambrecht Chairman of the Board of Executive Directors

100 Board of Executive Directors Board of Executive Directors Peter Oakley, 53, economist, with BASF for 29 years. Agricultural Products; Fine Chemicals; Specialty Chemicals Research; Plant Biotechnology Research. Dr. Martin Brudermüller, 44, chemist, with BASF for 18 years. (Appointed to the Board of Executive Directors effective January 1, Responsible for Asia as of April 2006). Dr. Kurt Bock, 47, business economist, with BASF for 15 years. Finance; Global Procurement & Logistics; Information Services; Corporate Controlling; Corporate Audit; South America. Klaus Peter Löbbe, 59, economist, with BASF for 39 years. Coatings; North America (NAFTA). Dr. Jürgen Hambrecht, 59, chemist, with BASF for 30 years. Chairman of the Board of Executive Directors. Legal, Taxes & Insurance; Strategic Planning & Controlling; Executive Management & Development; Communications BASF Group; Investor Relations.

101 6 7 Eggert Voscherau, 62, economist, with BASF for 37 years. Vice Chairman of the Board of Executive Directors and Industrial Relations Director. Human Resources; Environment, Safety & Energy; Occupational Medicine & Health Protection; Europe; Ludwigshafen Verbund Site; BASF Antwerpen N.V. Dr. John Feldmann, 56, chemist, with BASF for 18 years. Oil & Gas; Styrenics; Performance Polymers; Polyurethanes; Polymer Research. Dr. Stefan Marcinowski, 53, chemist, with BASF for 27 years. Research Executive Director. Inorganics; Petrochemicals; Intermediates; Chemicals Research & Engineering; Corporate Engineering; University Relations & Research Planning; BASF Future Business GmbH. Dr. Andreas Kreimeyer, 50, biologist, with BASF for 20 years. Performance Chemicals; Functional Polymers; Asia. As of February 24, 2006

102 BASF Shares BASF Shares Dividend increased to 2.00 per share BASF shares increase in value by 26.2% in 2005 Share buybacks for 1,435 million In 2005, BASF shares again performed very well, increasing in value by 26.2%. As a result, BASF shares outperformed the Dow Jones EURO STOXX SM 50 Total Return Index, which rose 24.3%. Germany s DAX 30 index rose 27.1% in the same period. In recent years, long-term investors have profited from the strong performance of BASF shares. Shareholders who invested 1,000 in BASF shares at the end of 1995 and reinvested the dividends (excluding tax credits) in additional BASF shares would have increased the value of the holding to 5,343 after 10 years. This increase of 434% is equivalent to an average annual return of 18.2% and is considerably higher than the corresponding return for the EURO STOXX 50 (11.2%) and DAX 30 (9.1%). Dividend of 2.00 and further buybacks to increase shareholder value The Board of Executive Directors and the Supervisory Board are proposing to increase the dividend from 1.70 to 2.00 per share. As a result, the total amount payable will Dividend be 1,029 million, based on the number of qualifying shares as of December 31, On the basis of the per share dividend and the yearend price, BASF shares provided an attractive dividend yield of 3.09% in We aim to increase our dividend further in the future. In 2005, BASF Aktiengesellschaft bought back million shares on the stock exchange for a total of 1,435 million and an average price of per share. Change in value of an investment in BASF shares in 2005 (with dividends reinvested, indexed) Change in value of an investment in BASF shares in (with dividends reinvested, indexed) Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec BASF (+26.2%) DAX 30 (27.1%) EURO STOXX 50 (+24.3%) BASF (Ø +18.2% per year) DAX 30 (Ø +9.1% per year) EURO STOXX 50 (Ø +11.2% per year)

103 8 9 BASF Aktiengesellschaft had 515 million shares outstanding as of December 31, 2005 and its market capitalization was 33.3 billion with a year-end share price of Since the beginning of 1999, we have bought back a total of million shares for 5.4 billion. As a result, we have reduced the number of shares by 19.8% in the past seven years. We plan to buy back additional shares in the future in order to reduce our high equity ratio. Broad base of international shareholders: 100% free float At the beginning of 2006, BASF had approximately 460,000 shareholders. The development of our shareholder structure reflects the increasing interest of international investors in BASF s shares: At the beginning of 2006, non-german investors held 55% of BASF s share capital compared with 52% in British and American investors are particularly well represented, accounting for 17% and 14% of the share capital, respectively. Institutional investors for example banks and investment companies hold 72% of the share capital; 28% is held by private investors. This distribution has changed little in recent years. Investment in BASF shares average annual performance % 27.1% 24.3% % 3.4% 3.6% % 9.1% 11.2% BASF DAX 30 EURO STOXX 50 In many countries, we offer share purchase programs to encourage our employees to become shareholders and thus co-owners of BASF. Further details are provided on page 147. Share ownership by country Holding of share capital in % 2006* Germany United Kingdom United States Switzerland Belgium Other countries * The shareholder survey was performed in January 2006.

104 BASF Shares In 2005, BASF shares were also included in the Dow Jones Sustainability Index World for the fifth year in succession and remained a member of the FTSE 4 Good Index. Inclusion in such sustainability indices is a sign that we are recognized internationally as a successful company that is managed according to the principles of sustainability. Jennifer Insabella and Christoph Beumelburg conduct information events for investors worldwide. BASF shares included in important indices The price of BASF shares forms part of the calculation of German and international indices. Weighting of BASF shares in important indices as of December 31, 2005 % DAX DJ STOXX DJ EURO STOXX DJ Chemicals 6.1 MSCI World Index 0.2 S&P Global Investor Relations: Close dialogue with the capital markets Our corporate strategy aims to create value sustainably. We support this strategy through regular and open communication with all capital market participants. To help institutional investors assess the business situation and the further development of our company, we held more than 360 individual meetings in Germany and abroad. We considerably increased the number of events for private investors in The presentations on the company are available on the Internet at BASF s investor relations team received a number of awards in For example, we were ranked number one in the Thomson Extel survey for the best investor relations activities of all European companies and by the specialist magazine Institutional Investor for the best investor relations work in the chemical industry. You can reach BASF s investor relations team by phone at or by at investorrelations@basf.com. Further information Stock exchange Securities code number Ticker symbol Deutsche Börse BAS London Stock Exchange BFA Swiss Exchange AN New York Stock Exchange (CUSIP) BF (ADR) ISIN International Stock Identification Number DE

105 10 11 Key BASF share data Year-end price ( ) Year high ( ) Year low ( ) Year average ( ) Daily trade in shares 1 million million shares Number of shares as of December 31 (million shares) Market capitalization as of December 31 (billion ) Earnings per share 2 ( ) Dividend per share ( ) Dividend yield 4 (%) Payout ratio 4 (%) Price-earnings ratio 2, 4 (P/E ratio) Key data for BASF ADRs 5 Year-end price ($) Year high ($) Year low ($) Year average ($) Daily trade in shares million $ thousand shares Average, Xetra trading 2 Starting in 2005, the accounting and reporting of the BASF Group is performed in accordance with International Financial Reporting Standards (IFRS). The previous year s figure has been restated accordingly. Detailed explanations of the first application of IFRS can be found in Note 3 to the Consolidated Financial Statements on page 106 onward. 3 Including extraordinary income of 9.92 per share 4 Based on year-end share price 5 BASF shares are traded on the New York Stock Exchange in the form of ADRs (American Depositary Receipts). Each BASF ADR is equivalent to one BASF share.

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107 > What will tomorrow s markets want?

108

109 >> Intelligent solutions To continue our success in tomorrow s markets, we think strategically and across disciplines when developing new products. Our fungicide boscalid, which won the BASF Innovation Award 2005, is just one example from the field of crop protection. This product is used predominantly in specialty crops such as fruits, vegetables, vines and ornamental plants. Close cooperation with customers like winemaker Helmut Darting helps us to tailor innovations to market needs. Maria Scherer, Global Research Fungicides BASF and member of the innovation team, can confirm this: Our products help protect our customers harvests and increase quality. Boscalid is only one of many success stories at BASF that show that it s worth investing in intelligent solutions.

110 Management s Analysis > Corporate Profile BASF Group Overview Overview With approximately 81,000 employees, customers in over 170 countries and more than 100 production sites, BASF is the world s leading chemical company The Chemical Company. The BASF Group consists of BASF Aktiengesellschaft and over 300 affiliated companies and subsidiaries and is headquartered in Ludwigshafen, Germany. This is where we operate the world s largest integrated chemical site. Twelve operating divisions are responsible for producing and distributing approximately 8,000 products. For reporting purposes, the operating divisions are combined into the segments Chemicals, Plastics, Performance Products, Agricultural Products & Nutrition and Oil & Gas. Chemicals Our portfolio ranges from basic Inorganics and Petrochemicals to Intermediates. Plasticizers, solvents, glues and resins, as well as electronic grade chemicals are just a few examples of our wide variety of products. Key customer segments for our products include the chemical, pharmaceutical, electronics, textile and automotive industries. Furthermore, we achieve around 30% of our sales with other BASF segments, which use our products to manufacture higher value goods. Plastics We are one of the world s leading producers of plastics the eco-efficient materials of the future. Our product portfolio consists of Styrenics, Performance Polymers and Polyurethanes. In standard plastics, we concentrate on selected product lines and highly efficient marketing processes. In our business with specialties, we offer a wide range of high-value products, system solutions and services. In close cooperation with our customers, we constantly extend this range and add new applications. Our main customers are companies in the automotive, packaging, construction, and electrical and electronics industries. Performance Products In our Performance Chemicals and Functional Polymers divisons, we produce a wide range of innovative products and system solutions used to make products for the textile, automotive and paper industries, as well as detergents, hygiene articles, adhesives and construction materials. In our Coatings division, we focus on developing and producing coatings for the automotive industry and for industrial applications. Agricultural Products & Nutrition The Agricultural Products & Nutrition segment consists of the Agricultural Products and Fine Chemicals divisions. Products from our Agricultural Products division protect crops from harmful fungi, insects and weeds, while increasing crop quality and yields. We also conduct research in the field of plant biotechnology, focusing on more efficient agriculture, healthier nutrition and plants as green factories to produce chemical substances. Products in our Fine Chemicals division include vitamins, aroma chemicals, UV filters, as well as various polymers. We offer these high-value products to our customers in the nutrition, pharmaceutical and cosmetic industries. Oil & Gas Our subsidiary Wintershall explores for and produces oil and natural gas in Europe, North Africa, South America, Russia and the Caspian Sea area. Together with its Russian partner Gazprom, Wintershall is also active in European gas trading the transport, storage and distribution of natural gas.

111 Management s Analysis > Corporate Profile BASF Group Sites and Markets Sites and Markets BASF operates six Verbund sites and more than 100 production sites worldwide in proximity to our customers. In our Verbund, we link production plants intelligently to save resources and energy. The largest Verbund site in the BASF Group is located at our headquarters in Ludwigshafen, Germany. This was where the Verbund concept was developed and optimized before it was applied to other sites around the world. Our 12 operating divisions supply approximately 8,000 products to a variety of international business partners. We maintain business relationships with customers in more than 170 countries. In 2005, we generated 56% of our sales in Europe. North America (NAFTA) accounted for 22% of sales, Asia Pacific for 15% and South America, Africa, Middle East for 7%. BASF sites Antwerp (54) Ludwigshafen (250) Freeport (12) Geismar (20) Nanjing (10) Kuantan (12) Verbund site (number of production plants) Major production site

112 Management s Analysis > Corporate Profile BASF Group Structure and Organization Structure and Organization Corporate legal structure BASF Aktiengesellschaft, which is headquartered in Ludwigshafen, Germany, is the largest operating company in the BASF Group. Directly or indirectly, it holds the shares in the companies that belong to the BASF Group. All of BASF Aktiengesellschaft s shares are available for public trading on stock exchanges. The majority of BASF Group companies cover a broad spectrum of the businesses of our operating divisions; other companies concentrate on specific areas such as the Coatings or Polyurethanes divisions or the Oil & Gas segment. The BASF Group Consolidated Financial Statements include BASF Aktiengesellschaft and 164 fully consolidated subsidiaries. We consolidate 15 joint ventures conducted with one or more partners on a proportional basis. In addition, two joint ventures, three major associated companies in which we have a 20% to 50% interest, as well as 11 affiliated companies are reported in the financial result using the equity method. We also have a stake in more than 100 smaller companies that are not material to BASF s operations, either individually or in the aggregate. For further information see Note 1 to the Consolidated Financial Statements on page 93 onward. Organization of the BASF Group Twelve operating divisions bear bottom-line responsibility and manage our 57 regional and global business units. As profit centers, the business units are responsible for all business operations and are organized along business or product lines. In addition, six regional divisions contribute to the strategic development of BASF s business and help exploit market potential. These divisions are also responsible for optimizing the necessary regional infrastructure. For reporting purposes, the divisions are summarized in the following four regions: Europe North America (NAFTA) Asia Pacific South America, Africa, Middle East Corporate divisions and corporate departments have the following responsibilities: Corporate divisions: Finance Legal, Taxes & Insurance Strategic Planning & Controlling Corporate Departments: Communications BASF Group Corporate Audit Corporate Controlling Global HR Executive Management & Development Investor Relations Service functions and Group-wide coordination activities are performed by the competence centers: Chemicals Research & Engineering Corporate Engineering Environment, Safety & Energy Global Procurement & Logistics Human Resources Information Services Occupational Medicine & Health Protection Plant Biotechnology Research Polymer Research Specialty Chemicals Research University Relations & Research Planning

113 Management s Analysis > Strategy, Goals and Value-based Management at BASF Strategies for Value-adding Growth Strategies for Value-adding Growth Chemistry offers enormous opportunities. It stands for the future that we are actively shaping. We are expanding our strengths and making our portfolio more resilient toward cyclicality and oil price fluctuations. We are concentrating on our core activities: in our chemical businesses, in agricultural products and nutrition, and in oil and gas. We are innovative and act sustainably to ensure that we will still be the world s leading chemical company in the future. Innovations are crucial for profitable growth. We are therefore strengthening our global research and development activities. We have combined the important technologydriven issues of the future in five growth clusters : energy management, raw material change, nanotechnology, plant biotechnology and white (industrial) biotechnology. Interdisciplinary cooperation is the key to success. We want to use the potential offered by these broad-spectrum technologies to open up new and attractive business opportunities for our customers and ourselves. For example, we are already one of the world s leading companies in the field of nanotechnology, which we use in many applications such as polymer dispersions, pigments and catalysts. BASF is one of the world s leading companies with regard to research and development in the field of plant biotechnology. We aim to shape this attractive market of the future using our powerful technology platform. Our research activities in this area focus on more efficient agriculture, healthier nutrition, and plants as green factories to produce specific chemical substances. By expanding white biotechnology, we aim to use our expertise in the areas of enzyme catalysis and fermentative manufacturing processes to develop new products and processes outside the current key areas of fine chemicals and intermediates. You can read more about our research activities on page 53. Our four strategic guidelines Four strategic guidelines describe our path to the future: Earn a premium on our cost of capital Help our customers to be more successful Form the best team in industry Ensure sustainable development We align our activities with these four guidelines. They are inextricably linked with one another, and their combination makes us successful. Earn a premium on our cost of capital We earn a premium on our cost of capital to increase the value of BASF. To achieve this goal, we have been expanding on our value-based management strategy. Earnings before interest and taxes (EBIT) after cost of capital is now the key performance and management indicator for our operating divisions and business units. We measure every business decision and our performance on the basis of how it influences earnings after cost of capital in the short and long term. As a result, all of our employees help us to improve cost structures, use our capital more efficiently and grow profitably. Help our customers to be more successful We are there wherever our customers are. We invested in good time in growth markets and are now active in all important markets worldwide. In order to grow profitably, we need to understand our customers businesses as well as our own and offer unique value propositions. To achieve this, we need the best employees who work closely with our customers to identify their needs and come up with intelligent solutions. We then select the best business models suited to our customers needs. This ensures the success of our customers and our own success.

114 Management s Analysis > Strategy, Goals and Value-based Management at BASF Strategies for Value-adding Growth Ensure sustainable development For BASF, sustainable development means combining long-term economic success with environmental protection and social responsibility. Sustainability is therefore a crucial aspect when we develop new products and processes. The necessary strategies are developed and monitored by BASF s Sustainability Council and implemented with the support of regional networks. In 2005, we decided to focus on four key areas climate change and energy, renewable raw materials, corporate social responsibility, and Responsible Care. We systematically identify opportunities and risks in these four areas. We combine our expertise in this area in our Expert Services Sustainability, thus contributing to the sustainable success of our customers. In 2005, BASF presented a special award for outstanding teamwork during the construction of the Verbund site in Nanjing, China. Form the best team in industry We can remain at the forefront in the long term only if we have the best team in industry our highly qualified and dedicated employees. We offer local and international development opportunities, as well as pay linked to individual and company performance to attract the best specialists worldwide. We greatly value personal development, self-learning and managers who act as role models. Our dialogue-oriented management culture plays an important part in this regard. It is shaped by our Values and by BASF s Leadership Compass. As a global company, we build on the professional and cultural experience of each of our team members. This diversity helps us to better understand our customers needs. In this way, we can develop the best ideas for our products and solutions to make our customers even more successful.

115 Management s Analysis > Strategy, Goals and Value-based Management at BASF Segment Strategies Segment Strategies The strategies of our segments are derived from our strategic guidelines: Chemicals We aim to strengthen our market leadership in Europe, improve our cost structure and market position in North America, and expand our activities in Asia. To achive this, we constantly increase our competitiveness by exploiting the synergy potential of our Verbund, by introducing innovative processes and products, and by investing in highgrowth business areas. Plastics In standard plastics, we concentrate on high-volume product lines with efficient production and marketing processes. We have optimized our global product portfolio so that we are able to produce and supply high-quality products reliably and at competitive prices. In our business with specialties, we offer a wide range of high-value products and system solutions that we constantly expand and improve in close cooperation with our customers. Performance Products Our innovative systems from performance chemistry contribute to the comfort and safety of many everyday products, from cars, paper and construction materials to detergents and baby diapers. Our success is based on tailor-made products, system solutions, applications and services that we develop in close cooperation with our customers. A further success factor is our ability to solve our partners problems quickly and according to their needs. We want to help our customers to be more successful with innovative business models tailored to their needs and markets, a global production and technical service network, as well as optimized cost structures. Agricultural Products & Nutrition In the Agricultural Products division, we focus on meeting the wishes of our customers in key agricultural markets. As leaders in innovation, we invest continuously in research and development of novel solutions to protect and improve plant health. In the Fine Chemicals division, we aim to achieve a leadership position in strategically important markets by means of innovative products and customer-oriented solutions. Active portfolio and cost management strengthen our competitiveness in both the Fine Chemicals and the Agricultural Products divisions. Oil & Gas In exploration and production of oil and gas, we benefit from our many years of experience and our technology portfolio. We focus on areas rich in oil and gas in Europe, North Africa, South America as well as in Russia and the Caspian Sea area. In natural gas trading, we and our Russian partner Gazprom are making use of the growth opportunities that are arising from increasing demand and the liberalization of the European gas markets. Exploration and production complement our natural gas trading activities as part of our Gas for Europe strategy. Together with Gazprom, we plan to produce natural gas outside of Europe, transport it to Europe and market it there. We aim to ensure a high degree of supply security by operating and expanding gas transport and storage facilities.

116 Management s Analysis > Strategy, Goals and Value-based Management at BASF Value-based Management at BASF Value-based Management at BASF Our goal is to further increase BASF s value by earning a premium on our cost of capital. Value-based management is therefore one of the key elements of our strategy BASF In 2005, we continued to implement our value-based management concept throughout the BASF Group. In doing so, we are taking a comprehensive approach that includes all functions within the company and encourages all employees to think and act in an entrepreneurial manner. EBIT after cost of capital Earnings before interest and taxes (EBIT) after cost of capital is the key performance and management indicator for our operating divisions and business units. The BASF Group must achieve an EBIT of at least 10% on its operating assets to satisfy the returns expected by providers of equity and debt, and to cover standardized tax expenses. Premium of 2,354 million on our cost of capital EBIT after cost of capital is calculated by subtracting income taxes for oil production that are noncompensable with German taxes ( 1,072 million) and the cost of capital ( 2,811 million) from the BASF Group s EBIT ( 5,830 million). Finally, the EBIT for activities not assigned to the segments ( (407) million) is added, since this is already provided for in the cost of capital percentage. Based on average operating assets of 28.1 billion for the segments in 2005, we achieved an EBIT after cost of capital of 2,354 million. We thus created corresponding value for our shareholders. Calculation of the cost of capital percentage The cost of capital percentage before interest and taxes of 10% corresponds to a weighted average cost of capital (WACC) of approximately 6% after taxes. The WACC calculation is an internationally recognized method of determining a company s cost of capital. The return desired by shareholders and interest rates on debt capital are determined and weighted according to their share of total capital. We calculate our cost of equity on the basis of the market value of BASF shares. The cost of capital percentage is reviewed annually. Value-based management in target agreements Value-based management is only successful if it is firmly rooted in the company and rigorously implemented. An important factor in ensuring its successful implementation is achieved by linking it directly to performance-related pay. We achieve this through target agreements with our employees. Value-based management throughout the company We provide our employees worldwide with relevant information on value-based management. Our goal is to make them more aware of business contexts, thus enabling them to personally create value. We use established learning tools such as an interactive Web-based program, a business simulation game specially adapted for BASF, and a tailor-made range of seminars on value-based management. In 2006, we plan to integrate value-based management even more extensively in our company: Around 8,000 employees worldwide in specialist and managerial positions will exchange their experience with specific approaches to valuecreation in cross-functional groups. In addition, we will provide practice-oriented training on value-based management for employees from non-business backgrounds. The various value drivers that are used by our units throughout the world are available to all our employees in a Good Practice database.

117 Management s Analysis > Economic Environment Trends in the Global Economy and the Chemical Industry in Trends in the Global Economy and the Chemical Industry in 2005 Economic growth impaired by record oil prices Chemical industry curbed by weakening industrial demand Growth remains strong in Asia Overall economic growth in 2005 was somewhat more subdued than in the previous year and slower than our forecast. Global growth slackened during 2005, in particular due to dramatically higher oil prices. In 2005, the global gross domestic product rose 3.1%, one percentage point lower than in the boom year of In Europe, despite gratifying growth in exports, the economy weakened because domestic demand was very moderate. The vigor of the U.S. economy continued despite the effects of the hurricanes and higher interest rates. In China, the economy continued to grow strongly, regardless of the more cautious economic policy. The Japanese economy grew faster than anticipated. Global industrial production grew by 3.3% in 2005 compared with 5.5% in Global chemical production growth (excluding pharmaceuticals) also slowed down considerably since the start of the year. Global growth in 2005 was only 2.7% compared with 4.7% in the previous year. High energy costs affected the chemical industry and its customer sectors. In Europe, chemical production grew by 0.8% in When compared internationally, growth was slight, mainly because of lower domestic demand, in particular from industry. Foreign trade was also weaker than in the previous year. Only Germany reported surprisingly strong growth in chemical production of 4% in This was principally due to exports and solid industrial growth. Gross domestic product Real change compared with previous year (%) Chemical production (excluding pharmaceuticals) Real change compared with previous year (%) 2004 World 4.1 Western Europe 2.3 United States 4.2 Asia excl. Japan 7.3* Japan 2.3 South America World 4.7 Western Europe 1.9 United States 3.3* Asia excl. Japan 10.4 Japan 1.8 South America estimate World 3.1 Western Europe 1.4 United States 3.2 Asia excl. Japan 6.3* Japan 2.0 South America 4.4 * The values for 2004 and 2005 will be corrected in 2006 due to changes in the calculation method by the Chinese National Bureau of Statistics estimate World 2.7 Western Europe 0.8 United States 1.2* Asia excl. Japan 7.2 Japan 0.6 South America 4.3 * The values for 2004 and 2005 will be corrected in 2006 due to changes in production statistics by the Federal Reserve Board.

118 Management s Analysis > Economic Environment Trends in the Global Economy and the Chemical Industry in 2005 Price trends for natural gas (United States) $/mbtu Price trends for crude oil and naphtha $/metric ton $/bbl Naphtha price in $/ton Oil price in $/barrel In the United States, production in the chemical industry increased by 1.2% in The slowdown compared with the previous year was mainly caused by production losses in the southern United States as a result of the hurricanes. In addition, natural gas prices in the United States have doubled since the start of the year. The cost spiral and the associated loss of competitiveness had a negative impact on producers of petrochemical products and fertilizers in particular. In the course of 2005, the rapid expansion of chemical production in Asia (excluding Japan) slowed down parallel to industrial activity and amounted to 7.2%. However, Asia remained by far the most dynamic region. Production growth in China remained above 10%. The chemical industry in India and Malaysia also experienced doubledigit growth. By contrast, growth in Taiwan and South Korea was weaker. Growth in the Japanese chemical industry was particularly slow in the first six months of For the year as a whole, production increased by 0.6%. Following a particularly expansive phase in 2004, production growth in the South American chemical industry in 2005 was much lower but nevertheless healthy at 4.3%. During the third quarter in particular, prices for chemical raw materials such as naphtha again rose significantly, reaching record levels. This was caused by a sharp rise in oil prices (Brent). Oil prices peaked at $67 per barrel in August but have fallen significantly below the $60 mark since November. On an annual basis, oil prices rose by 42% to approximately $55 per barrel; naphtha prices increased by 26% to $474 per metric ton.

119 Management s Analysis > Economic Environment Trends in Key Customer Industries in Trends in Key Customer Industries in 2005 In 2005, global industrial growth reached 3.3%. Global industrial production proved to be resilient despite dramatically higher oil prices. This was noticeable in the stability of the capital goods market, while a decline was noted in the growth of the consumer goods industries and energy-intensive basic industries. Economic activity was bolstered principally by the Asian economies. The industrialized countries lagged considerably behind with growth of 1.8%. In the United States and Europe, in particular, the automotive industry was negatively impacted by oil price increases in Sales volumes and production suffered from the subdued consumer climate. In North America, sales of light trucks, which had been a growth segment in recent years, fell significantly. In Asia, on the other hand, and China in particular, expansion continued, increasing by approximately 11%. Overall, global growth in 2005 declined to 2.8%. At 2.5%, growth in agriculture was slower than in This was primarily due to lower world market prices for key commodities, an unfavorable exchange rate trend for export-oriented farmers in Brazil, as well as dry weather in parts of North and South America and Southern Europe. The construction industry posted further solid growth of 3.3% in 2005; however, growth slackened in the second half of the year. In the United States, housing construction declined in particular. This was due to higher interest rates and the trend toward saturation of the real estate market. The building boom in Asia mainly in China continued unabated with growth of more than 6%. Strong investment activity in the United States and China helped the electrical and electronics industry to achieve persistently high growth of approximately 5%. Only Europe remained static at the previous year s level. With production growth of approximately 12%, Asia retained its position as the most dynamic region. The information and communication industry grew globally by 10% and showed a particularly impressive increase of 14% in the United States. The sector recorded double-digit growth rates for the third consecutive year. The European paper industry was affected by a strike in the Finnish paper industry that lasted for two months. Thanks to growth in Asia, global production grew by approximately 2%. The textile industry in industrialized countries was badly affected by the expiration of the Multi-Fiber Agreement; exports from China to the United States and Europe increased sharply. This led both the United States and Europe to take protectionist measures. Even so, textile production in industrialized countries declined by 2.4%. Asia was responsible for global growth of 2.8%. Growth in key customer industries Real change compared with previous year (%) 2005 Automotive OECD (0.2) (per-unit basis) World 2.8 Agriculture OECD 2.1 World 2.5 Construction OECD 2.6 World 3.3 Electrical OECD 2.4 World 5.1 Information and OECD 5.9 communications World 10.1 Paper OECD 0.3 World 1.9 Textiles OECD (2.4) World 2.8 BASF sales by industry Percentage of sales in 2005 > 15 % each % each 5 10 % each < 5 % each Chemicals (not an industry with end users) Energy Automotive Agriculture Construction Electrical/electronics Furniture Packaging Carpets Health Paper Cosmetics Leather/shoes Textiles Detergents/cleaners Other industries: approximately 10% in total

120 Management s Analysis > BASF Group Business Review and Analysis Results of Operations in the BASF Group Results of Operations in the BASF Group Income from operations at record high Strongest earnings growth in the Plastics and Oil & Gas segments High contribution to earnings from successful restructuring and portfolio optimization measures Dividend increased to 2.00 (2004: 1.70) Overview BASF s business developed very strongly in We increased sales and earnings despite substantially higher raw material prices and the subdued economic environment in our home market, Europe. We increased income from operations by 637 million. This earnings growth of 12.3% compared with our very strong performance in 2004 was due primarily to price increases for many products in our portfolio and to continued restructuring measures. We completed the Ludwigshafen Site Project on schedule in As a result, we permanently lowered costs by 480 million per year at our largest site compared with In North America (NAFTA), we achieved savings of more than $250 million per year. Raw material prices were high and rose even further in the course of the year. We were largely able to offset these increases by raising sales prices for our products. For some products, however, higher raw materials prices could only be passed on after a delay. Our Oil & Gas segment benefited from higher oil prices. We again earned a high premium of 2,354 million on our cost of capital in 2005 (2004: 1,982 million). The financial result increased by almost 1 billion. This was partially due to the gain from the sale of our stake in Basell. Net income improved by 50% thanks to very strong income from operations and the higher financial result. Earnings per share increased by 57% to Sales and earnings* Million Change in % Sales 42,745 37, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 8,233 7, Income from operations (EBIT) before special items 6,138 5, Income from operations (EBIT) 5,830 5, Income from operations (EBIT) as a percentage of sales Financial result 96 (846). Income before taxes and minority interests 5,926 4, Net income 3,007 2, Net income as a percentage of sales Earnings per share ( ) Net income in accordance with U.S. GAAP 3,061 1, Earnings per share in accordance with U.S. GAAP ( ) * Starting in 2005, the accounting and reporting of the BASF Group is performed in accordance with International Financial Reporting Standards (IFRS). The previous year s figures have been restated accordingly. The IFRS figures for 2004 that were published together with the results for the first quarter of 2005 were not attested by the external auditor and have been slightly adjusted. The effects were taken into account in the fourth quarter of Detailed explanations of the first application of IFRS can be found in Note 3 to the Consolidated Financial Statements on page 106 onward.

121 24 25 Sales and earnings by quarter 2005 Million 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2005 Sales 10,083 10,581 10,361 11,720 42,745 Income from operations (EBIT) before special items 1,563 1,657 1,327 1,591 6,138 Income from operations (EBIT) 1,499 1,587 1,262 1,482 5,830 Financial result 45 (82) 176 (43) 96 Income before taxes and minority interests 1,544 1,505 1,438 1,439 5,926 Net income ,007 Earnings per share ( ) Million 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2004 Sales 9,051 9,314 9,314 9,858 37,537 Income from operations (EBIT) before special items 1,175 1,266 1,172 1,617 5,230 Income from operations (EBIT) 1,075 1,250 1,076 1,792 5,193 Financial result (40) 12 (127) (691) (846) Income before taxes and minority interests 1,035 1, ,101 4,347 Net income ,004 Earnings per share ( )

122 Management s Analysis > BASF Group Business Review and Analysis Results of Operations in the BASF Group Sales Sales in 2005 rose 13.9% compared with the previous year to 42,745 million. The change in sales was due to the following factors: Factors influencing sales Million As % of sales Volumes Prices 4, Currencies Acquisitions and additions to the scope of consolidation Divestitures (636) (1.7) 5, Higher sales volumes were achieved mainly in the Chemicals and Oil & Gas segments. We were also able to implement price increases in almost all areas of our portfolio. The appreciation of the U.S. dollar, especially in the second half of the year, had only a minor overall impact on sales. Companies in the Asia Pacific region generated significantly higher sales, one reason being the startup of the plants at our new Verbund site in Nanjing, China. Our acquisitions contributed 325 million to the increase in sales. This was primarily due to the acquisition of the electronic chemicals business of Merck KGaA, Darmstadt, Germany, in April The acquisition of the Swiss fine chemicals company Orgamol and other smaller firms in the Plastics segment took place in the fourth quarter, so there was no substantial effect on sales. Additions to the scope of consolidation contributed 81 million to sales. Divestitures reduced sales by 636 million, particularly as a result of the sale of our printing systems business in the fourth quarter of In addition, the Agricultural Products division continued with its portfolio optimization measures by selling individual products. We also sold our styrenics business in the United States. Income from operations Compared with 2004, we increased income from operations by 637 million to 5,830 million. Income from operations as a percentage of sales was 13.6% compared with 13.8% in The increase in earnings was primarily due to higher prices for our products in almost all segments. The Plastics segment especially increased its earnings substantially despite the high volatility of raw material prices. Higher oil prices also led to significantly higher earnings in our Oil & Gas segment. In addition, restructuring measures introduced in previous years paid off: Earnings were boosted by the Ludwigshafen Site Project, which was completed this year. We also reduced costs in North America (NAFTA) earlier than expected. Special items Income from operations in 2005 contained special charges of 308 million, compared with 37 million in the previous year. In 2004, special items contained the gain from the sale of the printing systems business. 295 million was incurred for restructuring measures chiefly related to measures to increase efficiency at the production site in Ludwigshafen, Germany, as well as the partial closure of the site in Feluy, Belgium. Other special charges were related to the restructuring program for the Fine Chemicals and Intermediates divisions, for example, for the closure of a vitamin C plant in Grenaa, Denmark, as well as plants for THF and PolyTHF in Yokkaichi, Japan. Special gains primarily resulted from divestitures associated with portfolio optimization in the Agricultural Products division. In 2005, the financial result included, in particular, the gain from the sale of the 50% stake in Basell. The 2004 financial result contained write-downs on participations.

123 26 27 Special items 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year Million In income from operations (64) (100) (70) (16) (65) (96) (109) 175 (308) (37) In financial result (21) (1) 222 (16) (580) 222 (618) (64) (121) (70) (17) 157 (112) (109) (405) (86) (655) Income before taxes and minority interests Compared with the previous year, income before taxes and minority interests rose by 1,579 million to 5,926 million in In 2005, the return on assets as a percentage of income before taxes (plus interest expenses) increased to 17.7%, compared with 13.2% in the previous year. Net income/earnings per share Net income was 3,007 million in This represents an increase of 1,003 million, or 50%, compared with Minority interests contained profits of 161 million payable to shareholders of consolidated companies. In 2005, these were primarily our partner companies in natural gas trading and the steam cracker in Port Arthur, Texas. The tax rate declined by 4 percentage points, mostly as a result of tax-free earnings from the sale of our stake in Basell. The previous year contained non-tax-deductible write-downs on participating interests. Noncompensable foreign income taxes on oil production rose by 404 million to 1,072 million as a result of higher oil prices. Earnings per share in 2005 were 5.73 compared with 3.65 in the previous year. In 2005, net income in accordance with U.S. GAAP was 3,061 million, or 5.83 per share, compared with 1,863 million or 3.39 per share in the previous year. Detailed explanations of our net income in accordance with U.S. GAAP are provided in Note 5 to the Consolidated Financial Statements on page 110 onward. Proposed appropriation of profit BASF Aktiengesellschaft achieved net income of 1,273 million. Including profit carried forward from 2004 of 15 million, profit retained was 1,288 million. At the Annual Meeting on May 4, 2006, the Board of Executive Directors and the Supervisory Board will propose a dividend payment of 2.00 per qualifying share. If shareholders approve this proposal, the total dividend payable on qualifying shares as of December 31, 2005 will be 1,029 million. If the number of qualifying shares and the amount of the dividend payable decline by the date of the Annual Meeting as a result of share buybacks, it is further proposed that the remaining profit retained be carried forward.

124 Management s Analysis > BASF Group Business Review and Analysis Balance Sheet Structure Balance Sheet Structure Total assets almost unchanged despite higher volume of business and the rise in the value of the dollar Pension provisions reduced through external financing of pension obligations Shares bought back for 1,435 million Assets Long-term assets Million % Million Intangible assets 3, ,607 Property, plant and equipment 13, ,063 Investments accounted for using the equity method ,100 Other financial assets Deferred taxes 1, ,337 Other long-term assets , ,518 Short-term assets Inventories 5, ,645 Accounts receivable, trade 7, ,861 Other receivables and miscellaneous short-term assets 1, ,133 Liquid funds 1, ,291 15, ,930 Total assets 35, ,448 Stockholders equity and liabilities Stockholders equity Million % Million Subscribed capital 4, ,411 Retained earnings 11, ,923 Other comprehensive income (60) Minority interests , ,602 Long-term liabilities Provisions for pensions and similar obligations 1, ,124 Other provisions 2, ,376 Deferred taxes Financial indebtedness 3, ,845 Other liabilities 1, ,079 9, ,372 Short-term liabilities Accounts payable, trade 2, ,372 Provisions 2, ,364 Tax liabilities Financial indebtedness ,453 Other liabilities 1, ,641 8, ,474 Total stockholders equity and liabilities 35, ,448

125 28 29 BASF s total assets increased slightly by 222 million. The increased working capital due to higher sales was offset by the transfer of 3.7 billion in liquid funds into a Contractual Trust Arrangement (CTA) (see page 65 for further details). Long-term assets remained virtually unchanged. The increase due to the appreciation of the U.S. dollar was offset by the sale of the 50% stake in Basell as well as by capital expenditures below the level of depreciation and amortization (excluding acquisitions). The ratio of longterm to total assets declined slightly to 57.6% from 57.9% in Long-term assets consisted of: Long-term assets % 2005 Intangible assets 18.1 Thereof self-generated assets 0.5 Tangible assets 68.1 Financial assets 5.1 Other long-term assets Further details on the composition of and changes in long-term assets are provided in the Notes to the Consolidated Financial Statements on page 126 onward. The most important capital expenditures are explained on page 32. Inventories increased by 785 million to 5,430 million as a result of the expansion of business and higher raw material prices. We nevertheless reduced days of inventory valued slightly compared with Trade accounts receivable rose by 1,159 million as a result of higher sales and currency effects. Their share of total assets rose by 3.2 percentage points compared with the previous year. Days sales outstanding, however, remained low. The breakdown of tangible assets, inventories and receivables by region is shown in the following table. Stockholders equity increased by 921 million, mainly due to our high earnings and, to a lesser extent, to positive currency effects. These effects were offset by the payment of dividends and the repurchase of million shares for 1,435 million. In addition, we offset actuarial losses from the valuation of our pension obligations of 660 million against stockholders equity in accordance with International Accounting Standard (IAS) 19 for the first time in 2005 (see also page 108). The equity ratio was 49.1% compared with 46.8% in Net debt Million Liquid funds 1,091 2,291 Financial indebtedness 3,941 3,298 Net debt 2,850 1,007 Net debt increased as a result of the transfer of assets to finance pension obligations of BASF Aktiengesellschaft externally and the share buybacks. This was offset partially by the high level of cash provided by operating activities and by cash inflows from divestitures. The types, terms and currencies and lines of credit are explained in Note 25 to the Consolidated Financial Statements on page 143 onward. Long-term liabilities declined by 610 million to 9,762 million. Long-term financial indebtedness rose as a result of the issue of the 3.375% Euro Bond with a volume of 1.4 billion by BASF Aktiengesellschaft. Because of the CTA, however, the ratio of long-term liabilities to total liabilities declined to 27.4% from 29.3% in Short-term liabilities changed only slightly. Financial indebtedness declined primarily as a result of the repayment of BASF Aktiengesellschaft s 1.25 billion 5.75% Euro Bond. Assets by region Tangible assets Inventories Receivables % Europe North America (NAFTA) Asia Pacific South America, Africa, Middle East

126 Management s Analysis > BASF Group Business Review and Analysis Liquidity and Capital Resources Liquidity and Capital Resources Cash provided by operating activities at record level Further reduction in net working capital Liquid funds of 3.7 billion transferred to Contractual Trust Arrangement (CTA) Capital expenditures, including acquisitions, dividends and share buybacks, financed from cash provided by operating activities Cash inflows from portfolio measures Statements of cash flows Million Net income 3,007 2,004 Depreciation and amortization of intangible, tangible and financial assets 2,427 3,119 Changes in working capital 250 (193) Miscellaneous items (434) (296) Cash provided by operating activities before external financing of pension obligations 5,250 4,634 External financing of pension obligations (CTA) (3,660) Cash provided by operating activities 1,590 4,634 Payments related to tangible and intangible assets (1,948) (2,057) Acquisitions/divestitures Financial investments and other items Cash used in investing activities (706) (1,233) Capital increases/repayments (1,425) (781) Changes in financial liabilities 299 (203) Dividends (982) (852) Cash used in financing activities (2,108) (1,836) Net changes in cash and cash equivalents (1,224) 1,565 Cash and cash equivalents as of beginning of year and other changes 2, Cash and cash equivalents as of end of year 908 2,086 Marketable securities Liquid funds 1,091 2,291

127 30 31 PRINCIPLES AND OBJECTIVES OF OUR FINANCIAL MANAGEMENT Financial management in the BASF Group is largely centralized and is supported by regional competence centers. Our financing and investment policy is value-based, with risk management taking precedence over profitability. The risks associated with currencies, interest rate changes and creditworthiness are systematically analyzed as part of our financial management and limited using modern processes and financial instruments. We also employ derivative instruments for this purpose. Further details can be found on page 150 onward. Another objective of our financial management is to provide the BASF Group with the financial flexibility needed to steadily develop its business portfolio and continue its shareholder-oriented dividend and share buyback policy. The fundamental objectives of our financial management are to ensure liquidity, limit financial risks and optimize our cost of capital by means of an appropriate capital structure. Our financial activities are conducted in line with the operational business and the company s strategic direction. As a borrower, we make use of international capital markets. In doing so, we aim to preserve our ability to meet our financial obligations, which is rated very good by independent rating agencies. We thus ensure attractive financing conditions. FINANCIAL POSITION OF THE BASF GROUP IN 2005 Cash provided by operating activities At 5,250 million, cash provided by operating activities before external financing of pension obligations was high in 2005, primarily as a result of the significant increase in earnings. This represents a rise of 13.3% compared with the very strong level in We further reduced net working capital despite a higher volume of business. Balance sheet items nevertheless increased, in particular due to the rise in the value of the U.S. dollar. Miscellaneous items primarily reflects the reclassification of the gain from the sale of the stake in Basell, which is included as part of cash inflows in cash used in investing activities. External financing of pension obligations As of the end of the year, we transferred approximately 3.7 billion into a Contractual Trust Arrangement (CTA). This measure will lessen the impact of pension payments on BASF s future cash flow and will further improve the transparency of our financial reporting (see also page 65). Cash used in investing activities Net capital expenditures declined by 527 million, or 42.7%, compared with This significant decline was due primarily to cash inflows from portfolio measures. We spent 1,948 million, or 5.3% less than in 2004, on additions to tangible and intangible assets. As a result, capital expenditures were again substantially below the level of depreciation and amortization. Expenditures for acquisitions totaled 536 million and were primarily related to the acquisition of the electronic chemicals business of Merck KGaA, Darmstadt, Germany, as well as the Swiss fine chemicals company Orgamol. We generated proceeds of 1,531 million from divestitures, the most important of which was the sale of the stake in Basell. Additional cash inflows were related to further portfolio optimization measures in the Agricultural Products division and the sale of our polystyrene business in the United States. Changes in financial assets, marketable securities and financial receivables resulted in an outflow of 211 million. The sale and disposal of long-term assets and securities generated proceeds of 458 million. In 2005, we invested a total of 2,523 million in tangible and intangible assets, including acquisitions, compared with 2,163 million in On a regional basis, these expenditures were as follows: Capital expenditures by region % Europe North America (NAFTA) Asia Pacific South America, Africa, Middle East

128 Management s Analysis > BASF Group Business Review and Analysis Liquidity and Capital Resources In the Chemicals segment, investments and acquisitions in 2005 rose by 6.3% compared with the previous year to 639 million. Major projects included: Completion and startup of the steam cracker, a syngas plant and production plants for formic acid, C 4 oxo alcohols, ethylene oxide and ethylene glycol, propionic acid, methylamines and dimethylformamide at the new Verbund site in Nanjing, China; Completion and startup of plants for cyclohexane and isopropanolamine in Ludwigshafen; Completion and startup of a THF/PolyTHF plant in Caojing, China; Optimization of plasticizer production in North America (NAFTA); and Acquisition of the electronic chemicals business of Merck KGaA, Darmstadt, Germany. In the Plastics segment, we spent 490 million on capital expenditures and acquisitions in This was an increase of 3.6% compared with the previous year. Among the important investments were: Expansion of MDI production capacity in Antwerp, Belgium; Construction of new MDI and TDI plants in Caojing, China; Acquisition of the global TDI business of Huntsman, United States; Establishment of a PUR systems house in Bangpoo, Thailand; Construction of a PBT plant in Kuantan, Malaysia; Expansion of capacities for engineering plastics compounding in Pasir Gudang, Malaysia; Start of expansion of production capacities for polyamide 6 in Freeport, Texas; and Acquisition of Leuna-Miramid GmbH, Leuna, Germany. In the Performance Products segment, investments in 2005 increased by 14.1% to 347 million. The most important projects were: Completion and startup of plants for acrylic acid and acrylates at the new Verbund site in Nanjing, China; Construction of a superabsorbents plant in Freeport, Texas; and Construction of a plant for raw materials for HDI-based coatings at the site in Caojing, China. In the Agricultural Products & Nutrition segment, we spent 296 million on capital expenditures and acquisitions in 2005 compared with 253 million in the previous year. The Agricultural Products division invested 74 million, mainly in optimization measures at various sites. The Fine Chemicals division spent 222 million on capital expenditures and acquisitions in Major projects included: Construction of a plant for citral derivatives in Ludwigshafen and the completion of a plant for UV absorbers in Ludwigshafen; Construction of a feed enzymes plant in Ludwigshafen; and Acquisition of the Swiss fine chemicals company Orgamol with sites in Switzerland and France. In the Oil & Gas segment, we invested 624 million compared with 388 million in Key projects included: Pipeline connection to the Mittelplate offshore oil field in Germany; Debottlenecking of the STEGAL natural gas pipeline; Start of development of the Achimov horizon in a section of the Urengoy field in Russia; Start of conversion of the Haidach natural gas field in Austria into a natural gas storage facility; Acquisition of the Saltfleetby natural gas field in the United Kingdom; and Development of new natural gas deposits in the Dutch North Sea and in Argentina.

129 32 33 Cash used in financing activities In 2005, cash used in financing activities was 2,108 million compared with 1,836 million in We spent a total of 1,435 million to buy back million shares at an average price of per share (see also page 8). 982 million was paid in dividends and profit transfers in Of this amount, 904 million, or 1.70 per share, was for dividend payments to shareholders of BASF Aktiengesellschaft for fiscal year Shareholders of fully or proportionately consolidated companies received 78 million. Liquid funds declined due to the transfer of funds into the Contractual Trust Arrangement and amounted to 1,091 million at the end of As a result, liquid funds as a proportion of total assets declined to 3.1%. Financial indebtedness increased by 19.5% compared with 2004 and amounted to 3,941 million. Because of the decline in liquid funds, net debt increased by 1,843 million to 2,850 million. Financial liabilities are discussed in detail in Note 25 to the Consolidated Financial Statements on page 143 onward. Detailed information on other financial liabilities is provided in Note 26 to the Consolidated Financial Statements on page 145 onward.

130 Management s Analysis > BASF Group Business Review and Analysis Liquidity and Capital Resources Key ratios and ratings In 2005, we improved key ratios, thus laying the foundation for maintaining good credit ratings. Horizontal balance sheet ratios Fixed asset coverage I (%) = Fixed asset coverage II (%) = Fixed asset coverage III (%) = Stockholders equity* Intangible assets + Tangible assets + Financial assets Stockholders equity* + Long-term liabilities Intangible assets + Tangible assets + Financial assets Stockholders equity* + Long-term liabilities Intangible assets + Tangible assets + Financial assets + Inventories * Minus proposed dividend Liquidity and debt ratios Liquidity I (%) = Liquidity II (%) = Dynamic debt level (%) = Debt-equity ratio (%) = * Before external fi nancing of pension obligations Short-term receivables + Liquid funds Short-term liabilities + Proposed dividend Current assets Short-term liabilities + Proposed dividend Cash provided by operating activities Financial indebtedness 133* 141 Financial indebtedness Financial indebtedness + Stockholders equity Interest coverage EBITDA interest coverage = Income from operations before interest, taxes depreciation and amortization Interest expense The rating agencies Moody s and Standard & Poor s continue to give BASF their best ratings for short-term debt and very good ratings for long-term debt. Moody s has assigned us a short-term debt rating of P-1 and a long-term rating of Aa3; our ratings from Standard & Poor s are A1+ short-term and AA- long-term.

131 Management s Analysis > BASF Group Business Review and Analysis Results of Operations by Segment Results of Operations by Segment Segment overview Sales Income from operations Income from operations before interest, taxes, depreciation (EBIT) before special items and amortization (EBITDA) Million Chemicals 8,103 7,020 1,942 1,857 1,488 1,377 Plastics 11,718 10,532 1,504 1,193 1, Performance Products 8,267 8,005 1,227 1, Agricultural Products & Nutrition 5,030 5, , Thereof Agricultural Products 3,298 3, Fine Chemicals 1,732 1, Oil & Gas 7,656 5,263 2,859 2,098 2,410 1,653 Other* 1,971 1,570 (295) (59) (374) (165) Thereof corporate research costs (225) (168) 42,745 37,537 8,233 7,685 6,138 5,230 Segment overview Income from operations (EBIT) Assets Capital expenditures** Million Chemicals 1,326 1,284 6,146 5, Plastics 1, ,639 6, Performance Products 863 1,128 4,863 4, Agricultural Products & Nutrition ,637 6, Thereof Agricultural Products ,156 4, Fine Chemicals (58) 56 1,481 1, Oil & Gas 2,410 1,643 4,895 4, Other* (407) (214) 6,490 9, Thereof corporate research costs (225) (168) 5,830 5,193 35,670 35,448 2,523 2,163 ** Other includes the fertilizers business and other businesses as well as expenses, income and assets not allocated to the segments. This item also includes foreign currency results from financial indebtedness that are not allocated to the segments, hedging of forecasted sales, as well as from currency positions that are macrohedged ( (97) million, previous year 54 million). ** Capital expenditures in tangible assets (thereof 329 million from acquisitions in 2005) and intangible assets (thereof 257 million from acquisitions in 2005).

132 Management s Analysis > BASF Group Business Review and Analysis Results of Operations by Segment Sales 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Million Chemicals 1,822 1,582 2,007 1,748 2,063 1,811 2,211 1,879 Plastics 2,800 2,307 2,924 2,522 2,957 2,827 3,037 2,876 Performance Products 1,908 1,929 2,098 2,029 2,106 2,068 2,155 1,979 Agricultural Products & Nutrition 1,354 1,441 1,465 1,527 1,008 1,035 1,203 1,144 Thereof Agricultural Products ,043 1, Fine Chemicals Oil & Gas 1,840 1,394 1,650 1,090 1,630 1,163 2,536 1,616 Other* ,083 9,051 10,581 9,314 10,361 9,314 11,720 9,858 Income from operations (EBIT) before special items 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Million Chemicals Plastics Performance Products Agricultural Products & Nutrition (23) Thereof Agricultural Products (24) (11) Fine Chemicals (6) 2 Oil & Gas Other* (137) (84) (185) (99) 5 (54) (57) 72 1,563 1,175 1,657 1,266 1,327 1,172 1,591 1,617 Income from operations (EBIT) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Million Chemicals Plastics Performance Products Agricultural Products & Nutrition (11) (26) Thereof Agricultural Products (12) (29) Fine Chemicals (19) (60) (26) Oil & Gas Other* (207) (139) (171) (100) (49) (78) ,499 1,075 1,587 1,250 1,262 1,076 1,482 1,792 * Other includes the fertilizers business and other businesses as well as expenses, income and assets not allocated to the segments. This item also includes foreign currency results from financial indebtedness that are not allocated to the segments, hedging of forecasted sales, as well as from currency positions that are macrohedged ( (97) million, previous year 54 million).

133 Management s Analysis > BASF Group Business Review and Analysis Chemicals Chemicals Significant increase in sales due to higher volumes and prices Increased earnings despite startup costs for new plants and the effects of the hurricanes in the United States Business strengthened with electronic chemicals Expansion of our production capacities in Asia The Chemicals segment comprises the Inorganics, Petrochemicals and Intermediates divisions. Segment data Million Change in % Sales to third parties 8,103 7, Thereof Inorganics 1, Petrochemicals 5,084 4, Intermediates 2,002 1, Intersegmental transfers 3,826 3, Sales including intersegmental transfers 11,929 10, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 1,942 1, Income from operations (EBIT) before special items 1,488 1, Income from operations (EBIT) 1,326 1, Operating margin (%) Assets 6,146 5, Return on operating assets (%) Research and development expenses Additions to tangible and intangible assets Compared with the previous year, we increased sales to third parties by 1,083 million to 8,103 million in 2005 due to higher prices and volumes (volumes 5%, prices 8%, portfolio 2%). This was primarily due to the plants at our Verbund site in Nanjing, China, as well as the acquisition of the electronic chemicals business of Merck KGaA, Darmstadt, Germany. We increased income from operations again by 3.3% compared with the exceedingly strong level in Earnings grew despite the hurricanes in the United States and additional costs for the startup of our plants in Nanjing and Caojing, China. It was mostly possible to pass on higher raw material prices to customers due to continuing strong demand in many product lines.

134 Management s Analysis > BASF Group Business Review and Analysis Chemicals Innovative catalysts enable emission-free production of cyclohexane at a new plant at the Ludwigshafen site. At 6,146 million, assets were 927 million higher than in 2004 due to the following measures in our key regions: In Europe, we successfully started up new plants. At the Ludwigshafen site, for example, we commenced production of the petrochemical cyclohexane. This year, we started production of triethylenediamine, an important basic product in the manufacture of polyurethanes, in Antwerp, Belgium. In North America (NAFTA), we are aligning production of plasticizers with our customers needs. At our site in Pasadena, Texas, we are converting the 2-ethylhexanol plant to produce 2-propylheptanol. At the same site, a new plant is also being built to produce the plasticizer Palatinol DPHP from 2-propylheptanol. The production capacity of the 2-ethylhexanol plant is also being increased at the site in Freeport, Texas. We aim to start up the new and expanded plants in mid In Asia, we reached several milestones in the expansion of our chemicals business. The purchase of the electronic chemicals business complements our portfolio and strengthens our position in this growth industry in Asia. The creation of a new, global business unit headquartered in Hong Kong is also contributing to this success. In Nanjing, China, we started operations at a Verbund site in this important market together with Sinopec, our Chinese partner. Since then, both the steam cracker and the downstream plants have been operating reliably. This site is a key factor in supplying our Chinese customers with important petrochemical raw materials. We started production of THF and PolyTHF at the world-scale plant at our site in Caojing, China. Among other things, PolyTHF is used to make spandex fibers. In 2006, we expect business to remain stable, with our new plants in Asia contributing significantly to business. Earnings will, above all, be negatively impacted by scheduled plant shutdowns for inspections and maintenance. We also expect raw material costs to remain high and energy costs to increase. In 2006, we nevertheless aim to match the previous year s strong earnings. Inorganics In 2005, we increased sales to third parties by 173 million to 1,017 million (volumes 1%, prices 1%, portfolio 18%). The sales growth was mainly due to the purchase of the electronic chemicals business in April Income from operations in 2005 was slightly higher than the previous year s already high level. Higher natural gas prices, particularly in the second half of 2005, resulted in a slightly lower contribution to earnings from methanebased products. However, this was offset by continued improvement in earnings from basic inorganic chemicals. The acquisition of Merck KGaA s activities serves to develop BASF s electronic chemicals business. It considerably strengthens BASF s market position in Europe and Asia, making BASF the leading provider of electronic chemicals in the growth areas of semiconductors and flat screens.

135 38 39 We expect higher sales in 2006 with contributions from all of the division s business units. We do not expect to match the high earnings level of 2005 because further increases in natural gas and energy prices will put noticeable pressure on margins. Petrochemicals In 2005, we significantly increased sales to third parties by 895 million to 5,084 million (volumes 12%, prices 9%). All product lines contributed to this increase. Sales growth for cracker products, in particular, was higher than average in view of increased prices for crude oil and naphtha. Sales of alkylene oxides and glycols as well as plasticizers and solvents also increased thanks to strong demand. With business remaining strong, income from operations exceeded the very high level recorded in Raw material prices were considerably higher and very volatile, with record highs for crude oil and naphtha. We were largely able to pass on these increases to our customers in the form of higher prices. Capacity utilization rates at our plants were again very high. As a result, our margins were high, especially in the first half of the year. In the fall of 2005, hurricanes forced us to shut down our plants in the Gulf of Mexico for several weeks. In 2006, we expect that our business will continue to develop positively. Although we anticipate sales at the previous year s level, it will be difficult to match the record earnings posted in Additional business volumes will certainly come from the first full operational year of our plants in Nanjing, China. However, these are likely to be offset by scheduled shutdowns of major plants in Europe and the United States. Intermediates Sales to third parties amounted to 2,002 million (volumes 9%, prices 9%, currencies 1%). In line with our value before volume strategy, we offset lower sales volumes compared with 2004 thanks to price increases in all regions and nearly all product lines. Global demand in the strategic business units amines, carboxylic acids and specialty intermediates was strong in From the second quarter onward, however, the butanediol and derivatives business was affected by a decline in demand for PolyTHF, in particular in Asia. This was due to a textile trading dispute lasting several months between China and the United States as well as between China and the E.U. In the second half of 2005, the strategic business unit polyalcohols and specialties recovered following initially weak demand in its most important application, coatings. Income from operations was lower than in 2004 due to special items. In the first half of 2005, raw material costs remained overall constant and price increases led to significantly improved margins. After the hurricanes in the Gulf of Mexico in the third quarter of 2005, however, the prices of almost all important raw materials rose dramatically worldwide. Costs for the startup of six new plants in Caojing and Nanjing, China, also negatively impacted earnings in the second half of the year. Earnings in 2005 were also impaired by special charges: The largest items were the provisions established for the restructuring and partial closure of the site in Feluy, Belgium, and the closure of plants for THF and PolyTHF in Yokkaichi, Japan. We expect sales to increase slightly in Thanks to the restructuring measures we have introduced, we expect to improve earnings despite higher raw material costs and additional capacities at both existing and new competitors.

136 Management s Analysis > BASF Group Business Review and Analysis Plastics Plastics Sales growth thanks to higher prices Increase in earnings in Polyurethanes and Performance Polymers High volatility and further increase in raw material costs Business models successfully optimized The Plastics segment comprises the Styrenics, Performance Polymers and Polyurethanes divisions. Segment data Million Change in % Sales to third parties 11,718 10, Thereof Styrenics 4,518 4, Performance Polymers 2,909 2, Polyurethanes 4,291 3, Intersegmental transfers (30.4) Sales including intersegmental transfers 12,189 11, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 1,504 1, Income from operations (EBIT) before special items 1, Income from operations (EBIT) 1, Operating margin (%) Assets 6,639 6, Return on operating assets (%) Research and development expenses (0.7) Additions to tangible and intangible assets Sales to third parties rose by 1,186 million to 11,718 million in 2005 (volumes 1%, prices 9%, currencies 1%). Income from operations rose by 321 million to 1,015 million compared with last year s strong level. In the Performance Polymers and Polyurethanes divisions, sales and earnings continued to improve as a result of higher prices despite high and volatile raw material costs. Only the Styrenics division fell short of the previous year s high earnings, even though sales remained stable. This was due to both the high volatility of benzene and styrenics prices as well as a decline in market demand. Price increases were necessary to pass on higher raw material costs. As a result, demand in the second half of 2005 was lower than originally forecast. Our margins therefore came under pressure and softened slightly. We further strengthened the polyurethanes and performance polymers businesses through acquisitions. All divisions continued to optimize their business models. Here, we focused on working closer with customers to implement their ideas for new products and applications. Specialties in the Styrenics division were combined in a single global business unit.

137 40 41 In 2005, we invested primarily in the further expansion of our business in the Performance Polymers and Polyurethanes divisions. Inventories and especially receivables rose compared with the previous year as a result of significantly higher sales volumes and prices. This increased the segment s total assets. In 2006, the main focus will be on starting up additional capacities in Asia. The MDI/TDI complex built together with our partners in Caojing, China, is one example of the consistent expansion of our activities in this region. Due to the expansion of our business, we expect sales to increase slightly. In view of the startup costs for our new plants and the ongoing volatility of raw material costs for styrenics and fiber intermediates, we aim to at least match the 2005 earnings level. Styrenics At 4,518 million, sales to third parties in the Styrenics division in 2005 remained at the previous year s level (volumes 3%, prices 4%, currencies 2%, portfolio 1%). This was due to a decline in demand and structural effects. Income from operations was considerably below last year s high level. In contrast to 2004, we were able to pass on further increases in raw material costs to customers only after a considerable delay. The high volatility of benzene and styrene prices had a negative impact on earnings. Furthermore, the decline in demand negatively impacted earnings and was caused to some extent by substitution of styrenics by other materials. We have consistently proceeded to reorient our business models. Since the start of 2005, we have combined specialties in a single global unit. This has the essential advantage that all activities are now coordinated worldwide under one roof. Since then, we have marketed our product range worldwide under the new PlasticsPlus brand. A successful example of a product innovation is the rapid global introduction of Ecovio, a biodegradable plastic partly based on renewable raw materials. Martin Vallo, BASF Elastogran, and Klauss Knörr, adidas, develop a sports shoe sole with an innovative shock-absorbing system. We have reached important milestones in the restructuring of our business in North America (NAFTA). The measures carried out in 2005 included the divestiture of the polystyrene business together with the site in Joliet, Illinois. In addition, we transferred production of Styropor from South Brunswick, New Jersey, to Altamira, Mexico. In 2006, we aim to increase sales and significantly increase earnings. To do this, we want to better manage the significantly higher volatility of prices and raw material costs seen in recent years and further reduce our fixed costs.

138 Management s Analysis > BASF Group Business Review and Analysis Plastics Performance Polymers Sales to third parties rose 322 million to 2,909 million in 2005 (volumes 4%, prices 8%). In particular, sales in Asia increased significantly compared with Income from operations increased despite persistently high raw material prices. We succeeded in implementing substantial price increases, especially for polyamides and intermediates, which made a significant contribution to earnings. We expanded our engineering plastics business worldwide. In Asia, we increased compounding capacities in Pasir Gudang, Malaysia, and in Pudong, China. Additionally, we are building a new PBT plant in Kuantan, Malaysia, together with our Japanese partner Toray Industries Inc. This plant is scheduled to start operations in mid We acquired the company Leuna-Miramid GmbH, in Leuna, Germany, strengthening our position in engineering plastics in Europe. By acquiring the North American business of LATI USA, Inc., we consolidated our market position in this region. The restructuring measures underway in this region will continue. We have rigorously continued to optimize our globally managed commodity business model for polyamides and intermediates. This provides us with the flexibility to exploit regional market advantages. In engineering plastics, we are expanding our cooperation with key customers. Here, we are focusing on new applications and new uses for plastics. On the basis of the measures we are planning, we expect a slight increase in earnings in Polyurethanes Sales to third parties rose by 796 million to 4,291 million in 2005 (volumes 2%, prices 17%, currencies 2%, portfolio 2%). The strongest growth was recorded in the Asia Pacific region. We improved income from operations compared with This was mainly due to sales prices, which rose during the course of the year. Significantly higher raw material and energy costs did, however, impact our business. In 2005, our capital expenditures again focused on Asia: The production facility for the basic materials MDI and TDI, which we are building with our partners in Caojing, China, is scheduled to start operations in summer The additional capacities will be used to meet the constantly rising demand in Asia, and in China in particular. In addition, this facility will provide the necessary starting materials for the production of specialties in Pudong, China, which is planned for At our Verbund site in Antwerp, Belgium, we raised production capacity for MDI from 360,000 to 450,000 metric tons per year in 2005 in order to meet increased demand. In 2006, we expect persistently volatile and generally very high prices for raw materials and energy. The startup costs for the plants in Caojing, China, will additionally reduce earnings. It will therefore be a considerable challenge to match the strong level of earnings posted in 2005.

139 Management s Analysis > BASF Group Business Review and Analysis Performance Products Performance Products Increase in sales mainly due to higher prices Improvement in earnings due to double-digit growth in Functional Polymers Growth boosted by positive business performance in Asia Pacific Successful start of operations at production complex for acrylic acid and acrylates in Nanjing, China The Performance Products segment consists of the Performance Chemicals, Coatings and Functional Polymers divisions. Segment data Million Change in % Sales to third parties 8,267 8, Thereof Peformance Chemicals 2,889 3,228 (10.5) Coatings 2,180 2, Functional Polymers 3,198 2, Intersegmental transfers Sales including intersegmental transfers 8,619 8, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 1,227 1,503 (18.4) Income from operations (EBIT) before special items Income from operations (EBIT) 863 1,128 (23.5) Operating margin (%) Assets 4,863 4, Return on operating assets (%) Research and development expenses (1.4) Additions to tangible and intangible assets Sales to third parties in 2005 climbed 262 million to 8,267 million compared with 2004 (prices 7%, currencies 1%, portfolio 5%). This more than offset the decline in sales due to the sale of the printing systems business in November The sales growth was due mainly to rigorously implemented price increases. The Functional Polymers division, in particular, continued to grow profitably. The positive development of business in Asia gave additional impetus to growth. Income from operations before special items increased by 40 million to 890 million, building on last year s strong level. This was primarily achieved by significantly better margins for functional polymers. On the other hand, income from operations declined by 265 million because the special income from the sale of the printing systems business was recorded in 2004.

140 Management s Analysis > BASF Group Business Review and Analysis Performance Products The innovative coating developed by BASF in the United States is cured using UV light, thus saving time and energy. As a result, 2005 was another successful year for the Peformance Products segment despite further increases in raw material costs and a challenging market environment in some business areas. Our Verbund structure and our strong position in Asia again had a positive impact. We increased capital expenditures by 43 million to 347 million. The most important projects were the integrated production complex for acrylic acid in Nanjing, China, and the construction of a superabsorbents plant in Freeport, Texas. In addition, we started work on the construction of a plant for raw materials for HDI-based coatings in Caojing, China. We expect slightly higher sales in In a challenging market environment, we aim to post higher earnings compared with the strong level in Performance Chemicals As a result of the sale of the printing systems business in 2004, sales to third parties declined by 339 million to 2,889 million (prices 5%, portfolio 16%). Sales from ongoing business increased in all regions due to higher prices for our products. Significantly higher sales compared with 2004 were posted, in particular for performance chemicals for detergents and formulators as well as for the automotive and oil industries. The positive earnings trend in these two business units contrasted with lower earnings for performance chemicals for coatings, plastics and specialties as well as for leather. On the other hand, our restructuring measures enabled us to improve earnings in performance chemicals for textiles despite the persistently difficult environment. In 2006, we expect the positive sales trend to continue and earnings to increase. We expect to achieve this through higher sales volumes and selective price increases. At the same time, we are continuing to restructure our European business for the textiles and leather industries in order to adapt our activities to the ongoing difficult market environment in Europe. Coatings Sales to third parties increased by 158 million to 2,180 million (volumes 2%, prices 3%, currencies 3%, portfolio 4%). In all regions, sales increased in local currency terms. Significantly higher raw material costs put pressure on our margins. As a result, earnings were lower than in Positive currency effects offset the impact of stagnation in the automotive industry only to a limited extent. We increased both volumes and sales of automotive (OEM) and automotive refinish coatings. We continued with our measures to optimize our portfolio and restructure the industrial coatings business unit. In East Asia, we strengthened our business by acquiring the remaining shares in our Japanese joint venture BASF NOF Coatings. Higher raw material costs depressed our margins in the automotive coatings business unit. This was compounded by the impact of sluggish growth in the automotive industry in Europe and North America (NAFTA).

141 44 45 We continued to expand our system supplier concept for reducing the total cost of coating processes for customers. In addition to supplying our products, we provide inventory management and other customer services. In the refinish coatings business, earnings remained at last year s level, although margins were lower because of changes in the product mix and higher raw material costs. We achieved above-average increases in exports to Eastern Europe. In the architectural coatings business in South America, we strengthened our market leadership with our Suvinil brand and improved earnings. We aim to increase sales and earnings in In particular, we expect a positive impact from our newly established regional business unit in Asia. In addition, we are rigorously pursuing the restructuring of our industrial coatings business. We are expanding our presence in growth markets in Eastern Europe and Asia. We plan to continue the measures we have already introduced to increase efficiency in all regions and business units. Functional Polymers At 3,198 million, sales to third parties increased by 443 million compared with 2004 (volumes 1%, prices 14%, currencies 1%). This significant increase was primarily the result of passing on higher raw material costs to our customers. We increased sales volumes considerably, in particular for adhesives raw materials and acrylic monomers. Higher sales volumes of acrylic monomers resulted from the start of operations at our plants in Nanjing, China. Our world-scale plants for the production of acrylic acid and acrylates at this new BASF Verbund site were completed on schedule. Operations started successfully in the first quarter, and full production capacity was available by the end of April. In Europe, we suffered losses in dispersions for paper finishing as a result of the long industrial dispute in the Finnish paper industry. We discontinued our business with dispersions for the carpet industry in Europe because of the unsatisfactory earnings situation and reduced our production capacities by closing an old plant. Income from operations was significantly higher than in All product lines, especially acrylic monomers, contributed to this thanks to high capacity utilization of costefficient plants. In 2006, we expect sales to be slightly higher than in 2005 due to continuing strong demand. In a challenging market environment, we aim to match the very strong earnings posted in 2005.

142 Management s Analysis > BASF Group Business Review and Analysis Agricultural Products & Nutrition Agricultural Products & Nutrition Agricultural Products division posts higher earnings Agricultural Products increases research and development expenditure Lower prices for lysine and vitamin C negatively impact sales and earnings in Fine Chemicals Extensive restructuring program launched in Fine Chemicals The Agricultural Products & Nutrition segment comprises the Agricultural Products and Fine Chemicals divisions. Agricultural Products Operating division data Million Change in % Sales to third parties 3,298 3,354 (1.7) Intersegmental transfers Sales including intersegmental transfers 3,327 3,380 (1.6) Income from operations before interest, taxes, depreciation and amortization (EBITDA) Income from operations (EBIT) before special items Income from operations (EBIT) Operating margin (%) Assets 5,156 4, Return on operating assets (%) Research and development expenses Additions to tangible and intangible assets (26.0) At 3,298 million, sales to third parties were 56 million lower than in 2004 (volumes 1%, prices/currencies 1%). Our sales in Europe declined by 4% to 1,507 million. Persistently dry weather in parts of southern Europe led to lower sales volumes. However, our business in the Central and Eastern European growth markets developed positively. The launch of boscalid, our newly developed fungicide, also had a positive impact on our business. We successfully expanded our business in North America (NAFTA), where sales rose by 9% to 946 million. Here, our product Headline, which contains the active ingredient F 500, made a major contribution thanks to its positive effects on crop health and yields. Sales in Asia declined by 2% to 212 million due to the transfer of distribution in Australia to a third party. This reorganization enabled us to reduce selling expenses and increase our profitability and the market presence of our products. In South America, sales declined by 10% to 633 million. This was mainly due to conditions in Brazil, where persistently dry weather reduced harvests and the appreciation of the real put our export-oriented customers under considerable pressure. In this region, we continued with our cautious business policy, which aims to achieve long-term success. Our fungicide Opera with the active ingredient F 500 continued to affirm its market leadership. In addition, we successfully expanded our insecticide business in Brazil with the seed treatment product Standak, which contains the active ingredient fipronil.

143 46 47 We increased income from operations by 79 million to 681 million. Higher demand for our innovative products offset the negative impact of lower sales and scheduled rises in research and development expenses. We generated special income from the sale of three active ingredients as a result of portfolio optimization measures. We increased research and development expenditure by 31 million to 303 million. As a percentage of sales, research and development expenses amounted to 9.2%, compared with 8.1% in Details of our activities in the area of crop protection research are provided on page 55. Assuming normal seasonal conditions in 2006, we expect to increase sales and maintain earnings at last year s strong level. We aim to develop our business with our high-value, innovative products. At the same time, we plan to provide additional funds to conduct research into new solutions to improve plant health and develop products based on our latest active ingredients. We will continue to manage receivables and inventories strictly in a market that continues to be highly competitive. Plant biotechnology BASF is one of the world s leading companies in the field of plant biotechnology research and development. Plant biotechnology is one of the company s five growth clusters and BASF plans to provide a further 270 million for research in this area in the next three years. You can read more about BASF s growth clusters on page 53. We plan to shape this attractive market of the future with our technology platform and an extensive project portfolio. All our activities in plant biotechnology are combined in our subsidiary BASF Plant Science. Among other things, we are focusing on crops for healthier nutrition and plants as renewable raw materials green factories to produce specific chemical substances. This includes plants with optimized constituent components such as oils, proteins, starches, vitamins or fatty acids. Another focus is to use biotechnology to protect plants from pests and to increase the yield of important crops such as corn (maize), wheat and soybeans. This also involves developing plants that are more resistant to drought. In 2005, we signed an extensive licensing agreement and research cooperation with the Belgian biotechnology company CropDesign that gives us a significant competitive advantage. This automated system increases testing efficiency in the insecticide laboratory. BASF Plant Science operates an international research and technology platform with a team of approximately 500 highly qualified staff at seven sites in Europe and North America. In addition, we cooperate with numerous research institutes, universities and biotechnology companies worldwide. Our subsidiary Metanomics in Berlin is an important part of this biotechnology network. Metanomics operates a technology platform to identify agronomically important genes on the basis of metabolic functional genomics. This involves determining the metabolic functions of specific genes in living organisms. This information offers us greater possibilities of finding new relevant genes. By combining bioanalysis and bioinformatics, this platform gives us a unique level of precision and performance within the industry, and thus accelerates our research and development processes. In addition to the focus on plant research, this approach also opens up synergies in the areas of pharmacology, toxicology and nutritional science.

144 Management s Analysis > BASF Group Business Review and Analysis Agricultural Products & Nutrition Fine Chemicals Operating division data Million Change in % Sales to third parties 1,732 1,793 (3.4) Intersegmental transfers (6.7) Sales including intersegmental transfers 1,760 1,823 (3.5) Income from operations before interest, taxes, depreciation and amortization (EBITDA) (56.8) Income from operations (EBIT) before special items (77.3) Income from operations (EBIT) (58) 56. Operating margin (%) (3.3) 3.1 Assets 1,481 1, Return on operating assets (%) (4.2) 4.2 Research and development expenses (22.2) Additions to tangible and intangible assets In 2005, sales to third parties fell by 61 million to 1,732 million (volumes 3%, prices 7%, currencies 1%). We achieved further profitable growth in the product lines fat-soluble vitamins and organic acids, which are used in animal nutrition, and aroma chemicals. Business with lysine and vitamin C was significantly negatively impacted by falling prices. Regulatory changes for the active ingredient pseudoephedrine in the U.S. pharmaceuticals market led to lower sales in the Pharma Solutions unit. Sales were also reduced by the disposal of the Cramlington production site, which still contributed to business in Effective October 1, 2005, we acquired the Orgamol Group with sites in Switzerland and France. This acquisition will enable us to expand the high-growth contract manufacturing business, which involves the exclusive manufacture of active ingredients and intermediates for the pharmaceutical industry. Following the start of our own production of feed enzymes from 2006 onward, we will be able to realize the added value created by these products and achieve cost advantages. In addition to the decline in sales prices, earnings were negatively affected by increasingly higher costs for raw materials and energy in the course of the year. Cost reductions, for example in the citral product line, only partially offset operating costs. We introduced a restructuring program in view of the unsatisfactory earnings trend. One-time charges related to this program largely accounted for special items. The largest individual items involved the closure of the vitamin C plant in Grenaa, Denmark, and a reduction in the workforce at the production site in Minden, Germany. Assets in the Fine Chemicals division increased in 2005 as a result of the Orgamol acquisition. On a comparable basis, however, we reduced operating assets. On the basis of the measures we are taking, we expect higher sales and earnings in 2006.

145 Management s Analysis > BASF Group Business Review and Analysis Oil & Gas Oil & Gas Sales and earnings improve Natural gas sales volumes rise again Cooperation with our Russian partner Gazprom extended Segment data Million Change in % Sales to third parties 7,656 5, Thereof natural gas trading 4,157 2, Intersegmental transfers Sales including intersegmental transfers 8,379 5, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 2,859 2, Income from operations (EBIT) before special items 2,410 1, Income from operation (EBIT) 2,410 1, Thereof natural gas trading (7.1) Operating margin (%) Assets 4,895 4, Return on operating assets (%) Exploration expenses* (11.3) Additions to tangible and intangible assets * Starting in 2005, expenses in the Oil & Gas segment related to exploration for oil and gas deposits and to dry holes are recorded as other operating expenses rather than as research and development expenses. The previous year s figure was restated accordingly. Sales to third parties in 2005 rose by 2,393 million to 7,656 million (volumes 7%, prices/currencies 38%). This was due to the significant rise in oil prices, increases in crude oil and natural gas production, as well as the expansion of the natural gas business. In the exploration and production business sector, net sales to third parties in 2005 increased by 1,017 million to 3,499 million. The average reference price of crude oil (Brent) rose compared with the previous year by $16 per barrel to $55 per barrel. On a euro basis, this represents a rise of 13 per barrel to 44 per barrel. Crude oil and natural gas production rose by 3.1% to 112 million barrels of oil equivalent. This was mainly due to an increase in crude oil and associated gas production volumes in Libya. In 2004, our production in Libya was temporarily restricted by OPEC resolutions. Natural gas production was expanded in Argentina and the Netherlands. Sales in our natural gas trading business sector rose by 1,376 million to 4,157 million as a result of increased volumes and prices. Gas volumes overall increased by 8.6% to billion kilowatt hours. On a consolidated basis, gas sales volumes rose 11.1% from billion kilowatt hours in 2004 to billion kilowatt hours in In Germany, WINGAS again grew faster than the market and acquired new customers, in particular in the power station sector. We expanded our marketing activities in Belgium, the United Kingdom, the Czech Republic and Austria.

146 Management s Analysis > BASF Group Business Review and Analysis Oil & Gas On the Russian mainland, work starts on the North European Gas Pipeline a joint venture between BASF, Gazprom and E.ON. Income from operations rose 767 million to 2,410 million. Income from operations in the exploration and produc- -tion business sector, which is included in this amount, increased by 791 million to 2,094 million, mainly as a result of higher prices. Income from operations includes income taxes on oil production in North Africa and the Middle East of 1,072 million that are noncompensable with German corporate income tax. These taxes are reported as income tax (see also Note 10 to the Consolidated Financial Statements on page 121). Income from operations from natural gas trading declined by 24 million to 316 million. Our buying and selling prices largely depend on the price of crude oil. However, the time lag between changes is longer for selling prices than for buying prices. The continuous increase in oil prices over a long time therefore impaired our trading margin during the reporting period. Assets in the Oil & Gas segment rose by 832 million to 4,895 million compared with the previous year. Additions to tangible assets mainly involved exploration and production activities in Germany, the Netherlands, Libya and Argentina. In 2005, 16 wildcat and appraisal wells were drilled in the search for new oil and natural gas deposits, 11 of which were successful. As a result, we replenished 52% of the volumes drilled in In the natural gas trading sector, we invested primarily in expanding our infrastructure. Proved crude oil reserves declined by 6% to 63 million tons compared with year-end The reserve-to-production ratio was seven years, compared with eight years at year-end Proved natural gas reserves of 63 billion cubic meters declined by 5% compared with the previous year. The reserve-to-production ratio is nine years. To further extend our long-standing cooperation with our Russian partner Gazprom, we signed a memorandum of understanding covering the entire value-adding chain from production and transportation through to natural gas trading. Under the terms of the memorandum of understanding, Gazprom is to increase its stake in WINGAS. The Yuzhno-Russkoye field in Western Siberia is to be developed jointly. It is also planned to jointly construct the North European Gas Pipeline (NEGP) through the Baltic Sea. Following startup, which is scheduled for 2010, WIN- GAS is to obtain up to 9 billion cubic meters of gas per year for the next 25 years from the new pipeline. In our Achimgaz joint venture with Gazprom, roads and construction site work for the drilling and production facilities have been largely completed. This joint venture will produce natural gas and condensate from the Achimov deposit of the Urengoy gas field in western Siberia. The first drilling facility of the six planned production wells to be drilled in the first phase of the project is expected to start operations at the beginning of In 2006, we expect average prices for crude oil to remain high. We aim to increase sales and earnings in 2006 as a result of the planned expansion of natural gas production and natural gas trading activities.

147 Management s Analysis > BASF Group Business Review and Analysis Regional Results Regional Results Europe: Ludwigshafen Site Project successfully completed North America (NAFTA): Income from operations triples Asia: Significant increase in sales, also as a result of the new Verbund site in Nanjing, China South America: Agricultural Products business subdued Region Sales by location of company Sales by location of customer Income from operations (EBIT) Million Change in % Change in % Change in % Europe 25,093 22, ,755 21, ,385 4, Thereof Germany 17,100 15, ,865 7, ,019 3,131 (3.6) North America (NAFTA) 9,542 8, ,479 8, Asia Pacific* 6,042 4, ,500 5, (17.7) South America, Africa, Middle East* 2,068 1, ,011 2, (5.5) 42,745 37, ,745 37, ,830 5, * Effective January 1, 2005, companies in Asia are reported in the region Asia Pacific. South America, which was previously reported separately, is now reported together with the geographic regions Africa and Middle East in the region South America, Africa, Middle East. Europe Companies in Europe increased sales by 2,557 million in We were able to pass on higher raw materials costs to the market. This, together with greater demand and the appreciation of the U.S. dollar, had a positive impact on our business. The sales growth was due in particular to the contribution of the Plastics and Oil & Gas segments. The Plastics segment increased sales mainly as a result of higher prices. The Oil & Gas segment made the largest contribution to sales thanks to the continued expansion of its natural gas trading business and increased crude oil and natural gas production. Sales in the Performance Products segment were only slightly lower than in 2004; the effect of the divestiture of the printing systems business was largely offset by stronger demand and higher sales prices. Sales in the Agricultural Products division failed to match the previous year s level of sales because of dry weather in parts of southern Europe. In the Fine Chemicals division, sales also declined due to price pressure for important products. Stronger demand and higher selling prices led to an increase in income from operations by 149 million compared with The Plastics segment made a substantial contribution to this result. The Oil & Gas segment benefited from the rise in oil prices. Additionally, our measures to reduce fixed costs paid off. This was particularly the case for the Ludwigshafen Site Project, which was completed on schedule in This project enabled us to permanently reduce annual costs at our largest site by 480 million since In 2005, we rigorously implemented the project Further Development of European Organization, which was started in This project aims to increase growth and efficiency in Europe. To this end, we have aligned the business units and the management organization with the market. We expect these measures to result in total additional cost savings of approximately 90 million per year for the BASF Group. In addition, we are currently establishing a European shared service center in Berlin, where we will combine finance and accounting functions as well as standard human resources functions. North America (NAFTA) Sales by companies in North America (NAFTA) climbed 16.9% to 9,542 million. In local currency terms, sales rose by 17.2%. The largest contribution came from the Chemicals segment, in particular from the Petrochemicals division, which achieved higher sales due to increased volumes and prices. The sales growth was also driven by the C 4 complex in Port Arthur, Texas, that we operate with our U.S.-based joint venture partners Total Petrochemicals and Shell. This plant started operations in 2004, with 2005 being its first full year of sales.

148 Management s Analysis > BASF Group Business Review and Analysis Regional Results Income from operations tripled compared with 2004, rising to 855 million. Increased volumes and therefore higher capacity utilization rates contributed to this growth. This applied, in particular, in the Plastics segment and the Petrochemicals, Functional Polymers and Agricultural Products divisions. Furthermore, we reached our target of reducing fixed costs by $250 million per year by 2006 ahead of schedule in mid This enabled us to offset the consequences of the hurricanes, which significantly impaired our earnings. We aim to rigorously continue with our restructuring program: After attaining in 2005 the goal we set ourselves for 2006, we now intend to reduce annual fixed costs by a further $150 million by mid In addition, we expect the Commercial Effectiveness Program we initiated in 2005 to improve earnings. By 2007, we plan to implement measures to increase income from operations by $200 million per year. To achieve this, we are aligning our price structures, logistics, inventory management and business models more closely with market conditions. Asia Pacific The companies in Asia Pacific increased sales by 23% to 6,042 million. In local currency terms, sales increased by 20.4%. This sales growth was due primarily to the successful startup of all plants at the new Verbund site in Nanjing, China, as well as the THF/PolyTHF plant in Caojing, China. In addition, the Chemicals segment increased its sales by acquiring the electronic chemicals business of Merck KGaA. The higher sales in the Plastics segment were due primarily to stronger demand for MDI, polyurethane systems and engineering plastics. In the Performance Products segment, sales of acrylic acid and acrylates in particular rose due to higher volumes and prices. Compared with 2004, income from operations declined by 64 million to 297 million. The main reasons for this were a difficult market environment for intermediates as well as high and volatile raw material costs for styrenics. Earnings were also negatively impacted by special charges resulting from restructuring measures. These related primarily to the planned closure of plants for THF and PolyTHF in Yokkaichi, Japan. In Kuala Lumpur, Malaysia, we established a regional shared service center to provide finance, accounting, information technology and human resources services to BASF Group companies in 15 countries in the Asia Pacific region. South America, Africa, Middle East Sales by companies in this region rose by 7.4% to 2,068 million. In local currency terms, however, sales declined by 4.9%. Sales in the Agricultural Products division declined because of the dry weather in parts of South America. The appreciation of the Brazilian real impaired our customers competitiveness, and this also had a detrimental effect on our business. The performance of our architectural coatings business, however, was strong, and we also expanded our natural gas business in Argentina. Income from operations declined by 17 million compared with the previous year to 293 million. This was essentially caused by lower volumes in our agricultural products business and also by expenses for dry holes in the Oil & Gas segment in Brazil. This was offset only to some extent by positive effects from the appreciation of individual local currencies against the euro.

149 Management s Analysis Research and Development Research and Development 800 million for five growth clusters between 2006 and 2008 Expansion of our global research activities Almost 1,300 research cooperations worldwide Research and development expenditure increased by 8% Innovations are crucial to BASF s profitable growth. They are essentially driven by customer needs and technological progress. In many cases, our products provide the impetus for progress in other industries, where they act as the starting point for innovative end products. In turn, the success of such products strengthens our own business. Our recipe for success in research and development (R&D) is our Know-How Verbund. At its center are our four global technology platforms: Polymer Research; Chemicals Research & Engineering; Specialty Chemicals Research; and Plant Biotechnology Research. BASF employs approximately 7,000 employees in research and development worldwide. In addition, almost 1,300 cooperations worldwide provide impulses for our research activities. Of these, about two-thirds are with centers of excellence such as universities and research institutes, and one-third with startup companies or other industrial partners throughout the world. Each year, BASF applies for an average of 1,100 chemical patents, making us number one in the world among chemical companies. Our research and development activities are closely focused on market needs. Our goal is to build on impulses for innovation from all regions. To this end, we currently operate 16 research and development centers in Europe, 13 in North America, 17 in Asia and four in South America. At our site in Pudong, China, for example, we are establishing a development platform for performance chemicals and polymer dispersions as well as a polyurethane systems house. We are planning to create further development centers, which will enable us to pick up market signals even more efficiently. We want to expand our R&D team further. We therefore plan to employee approximately 180 additional scientists worldwide. We aim to extend the cooperative model that we use with the Institut de Science et d Ingénierie Supramoléculaires (ISIS) in Strasbourg, France, to other outstanding research establishments. In addition, we are intensifying our research activities in Asia. In 2005, we expanded our team in the synthesis laboratory in Thane, India. A laboratory for research into nanostructured surfaces is scheduled to open in Singapore. In 2005, we spent 1,064 million on research and development compared with 986 million in Of the amount spent in 2005, 78.6% fell under the operational responsibility of the operating divisions, with the remaining 21.4% being accounted for primarily by corporate research. In particular, this includes research activities in BASF s growth clusters as well as research to develop new technologies and methods. Corporate research Between 2006 and 2008, we plan to invest approximately 800 million in our five growth clusters energy management, nanotechnology, white (industrial) biotechnology, plant biotechnology and raw material change as part of our strategy We Innovate for Growth. These clusters involve cross-sectional technologies in which interdisciplinary cooperation is the key to success. In the area of energy management, we are focusing on developing new technologies and materials for energy storage and conversion. In nanotechnology, we are researching possible applications of nanomaterials and nanostructured surfaces for use in various applications including coatings, thermal insulation and hydrogen storage. Our white biotechnology research concentrates on three areas: enzyme catalysis for the production of specialty chemicals; fermentation and industrial proteins; and biopolymers. The plant biotechnology growth cluster includes developing plants to improve agricultural efficiency, providing healthier nutrition and developing plants as green factories to produce chemical substances. In the raw materials change growth cluster, we aim to expand the range of starting materials for the value-adding chains in our Production Verbund; examples include renewable raw materials and natural gas. Details of the R&D activities of our segments are provided on the following page.

150 Management s Analysis Research and Development Research and development expenses in 2005 by segment* Million, % 1 Chemicals % 2 Plastics % 3 Performance Products % 4 Agricultural Products & Nutrition % 5 Corporate research, other % 1, % * Starting in 2005, expenses in the Oil & Gas segment related to exploration for oil and gas deposits and to dry holes are recorded as other operating expenses rather than as research and development expenses. Chemicals Our work centers on process innovations for new and existing products that offer significant competitive advantages. We place particular importance on optimizing and expanding our value-adding chains at Verbund sites. In November 2005, for example, we introduced a new production process for the petrochemical cyclohexane at the Ludwigshafen Verbund site. At the heart of the production plant is a new heterogeneous catalyst that produces an exceptionally high yield with almost no by-products. We are continuously developing our technologies. For example, in the field of gas scrubbing we are working with the Japanese company JGC Corporation on a new process to remove and store the carbon dioxide (CO 2 ) contained in natural gas. Compared with conventional methods, the costs involved in this process are approximately 20% lower. Our gas-scrubbing technology is also being further developed in a European research project to remove CO 2 from power station emissions. In 2005, we successfully launched the plasticizer Hexamoll DINCH in a variety of new applications. This innovative product is particularly suitable for sensitive PVC applications such as medical devices and toys. We offer our customers in the automotive and construction industries market tailor-made liquids based on the inorganic specialty carbonyl iron powder. These liquids are used in damping systems, one example being the cable-stayed bridge in Dubrovnik, Croatia Plastics R&D in the Plastics segment concentrates on production processes as well as product and system development. We aim to optimize existing production processes and develop new, highly efficient processes that offer considerable cost advantages. The innovative HPPO process is one example. Together with the U.S. company Dow, we have developed a very cost-efficient process to manufacture propylene oxide (PO) from propylene and hydrogen peroxide (HP). This process generates no unwanted byproducts. In product and system development, we work closely with our customers to improve existing products and develop new materials. Cooperation with our customers early in the development process enables us to develop successful products quickly and on target. Our product Ultradur High Speed is one example of this. With the help of nanomaterials, this fast-flowing technical plastic offers our customers significant cost benefits in processing. Performance Products In the Performance Products segment, our technical development centers and pilot plants play a key role in successfully understanding our customers needs and testing new products under real-life conditions. This year, we expanded our customer-oriented development facilities. We set up two new technical development centers: for performance chemicals for leather and textiles in Thane, India; and for performance chemicals for leather, textiles, detergents and formulators, as well as dispersions in Pudong, China. We also helped the Chinese Academy of Environmental Sciences (CRAES) in Beijing, China, to build and operate China s first independent engine test laboratory. This cooperation is helping to improve the quality of Chinese fuels. Our researchers are working on a large number of innovations for everyday products. For example, we are expanding our product range with UV-curing automobile refinish coatings. In this area, we are working to introduce a new scratch resistant clear coat for repairs. The coating can self-repair paintwork scratches thanks to its innovative reflow properties. BASF has developed and patented Belmadur technology for the wood products industry. By cross-linking cellulose fibers in domestic woods, the renewable raw material

151 54 55 becomes more durable, harder and has greater dimensional stability. In addition to replacing tropical hardwoods with domestic woods, this opens up new applications for customers in the building sector and for outdoor products. We are rigorously opening up new applications for our innovative fiber binder, Acrodur : for example, in the nonwovens industry as a heat-resistant binder used in the manufacturing of glass nonwovens. Agricultural Products & Nutrition In the Agricultural Products division, we have extended the early phase of research into active ingredients by strengthening our teams with additional scientists. Their work focuses on identifying and optimizing new lead structures for innovative crop protection products. We have also provided additional financial resources for developing products based on our latest active ingredients. As a result, research and development expenses increased by 31 million to 303 million. In relation to sales, spending increased to 9.2% in 2005 compared with 8.1% in Our development pipeline was strengthened with a new insecticide. In addition, we successfully developed the fungicide metrafenone for market launch. Our researchers are currently working on the development of a total of six new active ingredients and on a new herbicide tolerance project. These future product innovations have a peak sales potential of 700 million. A further eight crop protection active ingredients with a peak sales potential of 1,200 million are currently being introduced to the market. Of these, the fungicide F 500 and boscalid have performed particularly well. In view of additional market opportunities for products with the active ingredient F 500, we have increased the peak sales potential from 400 million to 500 million. Assuming seasonal conditions are average, we expect to achieve this target in Our goal is to achieve boscalid sales of 150 million per year. In 2005, we achieved approximately 60% of peak sales potential with currently marketed active ingredients. BASF can thank Walter Ohrbohm (left) for 90 patents on which many modern coating systems are based. His goal: 100 patents by In the Fine Chemicals division, we spent 4.0% of sales on research and development in We shifted the emphasis of our R&D activities from process to product innovation in We brought new products to market in several areas. In Pharma Solutions, for example, we began marketing directly compressible forms of the analgesic ibuprofen and the tablet binder Kollidon VA 64 Fine. In 2006, we expect our research and development expenses to remain at the same level as in The focuses in the individual business units are as follows: products for improved feed utilization in animal nutrition; development of new formulation technologies and globally registered formulations in human nutrition; development of new ingredients based on natural raw materials for skincare, haircare and oral hygiene products in the cosmetics sector; and new solutions to improve drug bioavailability in the Pharma Solutions business unit. In addition, we want to further develop our systematic idea-finding process. The core element is to intensify cooperation with our customers to allow us to align our research goals even more closely with their needs.

152 Management s Analysis Supplementary Report Supplementary Report Offer to acquire Engelhard Corporation On January 3, 2006, BASF officially announced that it had made an all-cash offer to acquire all outstanding shares of common stock of U.S. specialty chemical company Engelhard Corporation, Iselin, New Jersey, for $37 per share. Iron Acquisition Corporation, Florham Park, New Jersey, a wholly owned subsidiary of BASF Aktiengesellschaft, published the official tender offer on January 9, 2006 and submitted the documents necessary under U.S. law to the Securities and Exchange Commission (SEC). On the basis of the offer price of $37 per share, the price to acquire all outstanding shares would be approximately $4.9 billion. The offer is subject to a number of conditions. These include acceptance by a majority of Engelhard s shareholders on a fully diluted basis, as well as Engelhard s board taking all necessary actions to make its shareholders rights plan and the supermajority voting provisions in its certificate of incorporation innapplicable to BASF s offer. The offer is also subject to receipt of the necessary regulatory approvals, in particular merger control approvals. The waiting period under the Hart-Scott-Rodino Antitrusts Improvements Act of 1976, as amended, expired on February 3, 2006 without objections being raised by the Federal Trade Commission (FTC). As a result, BASF is free under U.S. antitrust laws to proceed with its acquisition of Engelhard. The European Commission also granted approval for the transaction for the E.U. on February 23, On February 6, 2006, BASF extended its offer, which has previously been scheduled to expire on February 6, 2006, until March 3, BASF is free to extend the offer further if necessary. Further information on the offer is available on the Internet at corporate.basf.com/ tender-offer and on the SEC s website at Negotiations on the purchase of Degussa s construction chemicals business BASF is negotiating with Degussa AG, Düsseldorf, Germany, on the purchase of its construction chemicals business. The joint aim is to conclude the purchase agreement for the transaction shortly. Degussa s construction chemicals division markets over 40,000 products in the Americas, Europe and Asia Pacific, and is organized in two segments Admixture Systems and Construction Systems. Total sales in 2004 were 1.8 billion.

153 Management s Analysis > Outlook Economic Environment Economic Environment In 2006, we expect the positive economic trend to continue and see favorable medium-term perspectives for the global economy. Stable geopolitical conditions and sound economic policy are, however, necessary for this. We have based our business planning on the following assumptions: Oil prices of around $55/barrel on average in 2006 with a downward trend from the second half of the year An average euro/dollar exchange rate of $1.25 per euro Moderately higher interest rates in the course of 2006 and subsequent years We expect the global economy to grow by 3.2% in 2006 and by an average of 3.1% per year until In Europe, we foresee slightly higher growth in 2006 carried predominantly by exports. We anticipate growth of just under 2%, with domestic demand remaining subdued. We expect investment to pick up despite the ongoing shift in production capacity to Eastern Europe. In the medium term, we expect a further improvement due to reforms of tax and social security systems and in the labor market. Even so, the European economy is not likely to grow by more than just over 2% per year. Growth in North America will likely weaken as a result of rising interest rates and the end of the construction boom in the United States. We anticipate average annual growth of 3% in the medium term. With gross domestic product growth of more than 6% per year, Asia (excluding Japan) is expected to remain by far the fastest growing region thanks primarily to thriving trade within the region, as well as higher levels of disposable income among consumers. China, the region s growth engine, is likely to grow at approximately 8% per year despite its more cautious economic policy. In South America, we expect growth rates to decline slightly in the medium term due to high interest rates and weaker export growth. Africa/Middle East, however, is expected to grow by just under 5% per year, in particular due to higher oil and gas exports and thanks to strong growth in the chemical industry as a result of expanding petrochemical capacity. Outlook for gross domestic product Real change compared with previous year (%) Outlook for chemical production (excl. pharma) Real change compared with previous year (%) 2006 World 3.2 Western Europe 1.9 United States 3.3 Asia excl. Japan 6.3 Japan 1.7 South America World 3.0 Western Europe 1.8 United States 2.0 Asia excl. Japan 7.1 Japan 1.3 South America 3.8 Trends World 3.1 Western Europe 2.1 United States 3.0 Asia excl. Japan 6.3 Japan 1.9 South America 3.7 Trends World 3.1 Western Europe 1.8 United States 1.9 Asia excl. Japan 6.8 Japan 1.3 South America 3.4

154 Management s Analysis > Outlook Economic Environment Outlook for the chemical industry Under the conditions we have outlined, we expect global chemical production (excluding pharmaceuticals) to grow by 3% in In Europe, we anticipate a slight upturn in domestic demand. Together with the rise in net exports, this is likely to benefit chemical production, which is expected to grow by just under 2%. In the medium term, we expect chemical production to grow parallel to European industrial production. The chemical industry in the United States will probably grow only moderately, although domestic demand for chemicals will be supported by the country s stable industrial production. In the medium term, chemical production growth is likely to be significantly slower than that of industry and gross domestic product as a result of structural problems. In 2006, we expect chemical production in Asia (excluding Japan) to increase by more than 7%. Asia remains by far the most dynamic region worldwide, even though growth was slower than in the record year of 2004 in which production grew by over 10%. In particular, growth is being driven by industrial production and the ongoing high level of investment in China and India. In the medium term, the region is likely to continue to benefit from strong growth in industrial customer sectors. We expect annual growth rates of just under 7%. In Japan, chemical production growth is likely to remain slightly lower than industrial growth. Stronger growth is impeded by the strong yen and rising imports. In the medium term, we expect chemical production to grow by more than 1% per year. Following high growth rates in recent years, we anticipate that growth in the chemical industry in South America will decline to just under 4% per year. This is due to a slowdown in industrial production, resulting in lower demand for chemical products.

155 Management s Analysis > Outlook BASF Group Outlook BASF Group Outlook Our business has continued to develop successfully since the beginning of The level of orders remains strong. Taking into account the economic assumptions described above, we expect BASF s business to develop positively in the next two years. Significant opportunities are offered by the improving investment and consumer climate in Europe, the ongoing robustness of the North American economy and continued dynamic growth in Asia. We will fully realize the potential offered by our investments in high-growth regions: For example, we aim to generate 10% of sales in our chemical businesses in China by We see the greatest risks in the following areas: The recent increase in tensions in regional trouble spots The associated growing uncertainty with regard to raw material supplies and increasing volatility of raw material prices, in particular, oil prices A possible downturn in the economy Major exchange rate changes, in particular with regard to the U.S. dollar Additional requirements and regulations, for example for emissions, that differ from region to region and incur extra costs A weaker U.S. dollar causes negative currency effects, in particular in our Agricultural Products and Fine Chemicals divisions and Performance Products segment. Furthermore, record high prices for almost all products make it difficult to pass on further increases in raw material costs in the form of higher sale prices because substitution by alternative products is likely to increase. We anticipate the following developments in specific areas at BASF*: Continuing on our path of value-adding growth We aim to remain the world s leading chemical company. Our goal is to continue to increase BASF s value and earn an attractive premium on our cost of capital. We plan to continue with our measures to optimize our portfolio. This also involves acquisitions in high-growth areas that complement our portfolio. Recent examples include our cash offer for Engelhard Corporation, United States, and our bid for Degussa s construction chemicals business. To ensure our long-term competitiveness, we will also adapt our processes according to changing market requirements. This includes ongoing restructuring measures to further reduce our costs. Sales We aim to continue to grow faster than the market. Earnings We plan to follow on from the strong level of income from operations before special items posted in To make BASF even more successful in the future, we are planning to increase our research and development spending. Dividends and share buybacks We want to offer our shareholders an attractive dividend yield. We therefore aim to increase our dividend. We plan to continue to buy back shares. Research and development In 2006, we expect to further increase our research and development expenditures by 8% to approximately 1.15 billion. In the coming years, we therefore plan to create approximately 180 additional positions for research scientists. More details are provided in the section Research and Development on page 53 onward. Capital expenditures and financing Planned capital expenditures in 2006 will amount to almost 2.0 billion and are thus expected to be below the level of depreciation and amortization. Capital expenditures in 2007 are likely to be comparable. We aim to finance these planned investments from cash provided by operating activities. The most important capital expenditure projects in our segments are listed on the next page. The main focus of our investment commitments is on Europe due to the projects in the Oil & Gas segment. * The outlook for individual segments and operating divisions is given in the section Results of Operations by Segment on page 37 onward.

156 Management s Analysis > Outlook BASF Group Outlook COMMITMENTS FOR INVESTMENTS BY SEGMENT Chemicals Expansion of the Electronic Materials Center Europe Expansion of nitric acid capacity in Antwerp, Belgium Expansion of capacity of the steam cracker in Antwerp, Belgium Plastics Completion and startup of production plants for TDI and MDI in Caojing, China Construction of an HPPO plant in Antwerp, Belgium Establishment of a PUR systems house and construction of a production plant for TPU in Pudong, China Completion and startup of a PBT plant in Kuantan, Malaysia Construction of a compounding plant for engineering plastics in Pudong, China Expansion of production capacities for polyamide 6 in Freeport, Texas Construction of a production plant for Ecoflex in Schwarzheide, Germany Performance Products Construction of a plant for HDI-based coatings in Caojing, China Construction of a superabsorbents plant in Freeport, Texas Agricultural Products & Nutrition Completion and startup of a plant for citral derivatives in Ludwigshafen Completion and startup of a production plant for feed enzymes in Ludwigshafen Oil & Gas Development of new natural gas reserves in the Dutch North Sea and in Argentina Development of new oil fields in Libya and the expansion of existing ones Development of the Achimov horizon in a section of the Urengoy gas field in Russia Debottlenecking of the STEGAL natural gas pipeline Construction of a compressor station for the WEDAL natural gas pipeline in Lippe, Germany Conversion of the Haidach natural gas field in Austria into a natural gas storage facility Conversion of the Saltfleetby natural gas field in the United Kingdom into a natural gas storage facility Commitments for investments by segment Commitments for investments by region % % 1 Chemicals 19 2 Plastics Europe 61 2 North America (NAFTA) Performance Products 16 3 Asia Pacific 15 4 Agricultural Products & Nutrition 7 5 Oil & Gas South America, Africa, Middle East Infrastructure, IT, other

157 Management s Analysis > Purchasing, Marketing and Sales Purchasing Purchasing, Marketing and Sales Our strength: A global Procurement Verbund Regional concentration of purchasing activities Business models tailored to customer needs PURCHASING Procurement Verbund ensures competitive advantages Worldwide in 2005, BASF procured some 500,000 different raw materials, technical goods, as well as services for plant construction and maintenance worth approximately 18.8 billion. We purchased logistics services to the value of about 2.0 billion to ensure these goods reached our sites and customers on time. We aim to further optimize our worldwide Procurement Verbund by further intensifying the coordination of our Group-wide activities. Global and regional procurement teams that network the local purchasing units enable us to pool local needs at different sites. As a result, BASF can have more impact on the market, obtain price advantages and better ensure supplies. Raw materials purchasing The most important materials used in production at our Verbund sites are petrochemical feedstocks such as naphtha and LPG (liquefied petroleum gas). They serve as feedstocks for the steam crackers we operate in Ludwigshafen, Germany; Antwerp, Belgium; Port Arthur, Texas; and, since 2005, Nanjing, China. We also purchase a large number of other raw materials as diverse as ammonia, precious metals and sugar. We coordinate purchasing of key raw materials centrally by means of global or regional product teams. We continue to use decentralized purchasing for raw materials for which demand is concentrated at only one site. Purchasing and research units work closely with one another. Even during the product development phase, purchasing develops a range of procurement alternatives together with research and production, since this is where a large part of the future costs of products is determined. Technical purchasing Global and regional procurement teams coordinate purchases of technical goods and services such as machines, apparatus, laboratory equipment, erection of scaffolding or installation work. Close collaboration with our engineering and maintenance units allows us to combine our requirements quickly and efficiently and to standardize goods and services, thus achieving savings. In addition, we are tapping into the potential of new procurement markets. Procurement of logistics services We secure optimal logistics costs and strengthen our competitiveness by means of: Global coordination of air and sea freight procurement Regional service-provider management for land freight Group-wide coordination of packaging procurement Group-wide management of negotiations with service providers for business travel Supply chain management (SCM) SCM is an important part of our BASF 2015 strategy. As part of this strategy, we have restructured our supply chain management activities to optimize logistics and planning processes. As a result, we not only achieve greater efficiency in our own value-adding chains, but also include customers and suppliers and contribute to their success.

158 Management s Analysis > Purchasing, Marketing and Sales Purchasing E-commerce We continuously improve the efficiency of our purchasing processes using e-commerce. This has a positive impact on process times and process quality. For purchasing technical goods and services, we use the electronic marketplace cc-hubwoo, in which BASF owns a stake. With more than 20 million articles, around 8,000 suppliers and more than 1 million completed transactions in 2005, cchubwoo is one of the world s busiest marketplaces. In addition, more than 2,500 tenders for technical goods and services were processed electronically in We are also expanding our successful e-commerce activities on the sales side. We reap the benefits of e-commerce for BASF and our customers by using tailormade business models. In 2005, we increased our e-commerce sales by almost 50% from 6.5 billion to 9.6 billion. This corresponds to about 27% of total sales (excluding the oil and gas business). The e-commerce trend is also global: All regions at BASF reported higher e-commerce sales in We have integrated the marketplace Elemica in our purchasing processes for raw materials. This allows electronic data exchange with suppliers. Elemica is used as a trading platform for chemical products by more than 230 customers and suppliers. Our uniform, integrated extranet solution WorldAccount is available for small and mediumsized suppliers.

159 Management s Analysis > Purchasing, Marketing and Sales Marketing and Sales MARKETING AND SALES We align BASF s business models to the needs of our customers. Standard products have to be supplied in a defined quality, reliably and at a competitive price. With specialties, we offer our customers tailor-made solutions for their problems. Our focus is on mutual success. We want to achieve this not only by cooperating with customers at an early phase of development, but also by working with them to constantly improve existing products, applications and processes. We organize our marketing and sales activities according to the various business models in our Segments: In our Chemicals segment, we supply standard products to our customers in large volumes with low marketing expenses and usually without distributors. We are strengthening and extending our portfolio of inorganic and organic specialties. In order to develop new applications and attract new customers, we are expanding our activities to market product innovations and tailor-made solutions. BASF s Plastics segment offers standard products, specialties and products tailored to specific customers. Standard products are usually distributed in large quantities and are associated with low marketing expenses. For specialty and customized products, we often work together with our customers at an early stage of development. We are also increasingly using the opportunities offered by e-commerce. In 2005, we posted e-commerce sales of more than 3 billion, and in some businesses e-commerce accounted for over 80% of sales. The Performance Products segment produces a large number of products, formulations and systems. What matters to customers are a product s technical applications and its performance. This requires both tailor-made customer service by our sales staff at the customer s site as well as specialized marketing. We maintain technical development facilities and pilot plants close to our customers in the most important regions. The Agricultural Products division offers a high-value product portfolio tailored to the needs of the major agricultural markets. We focus on the needs of the farmers who use our products and on the needs of the processing industry and the food trade. High-quality, innovative products and services as well as a local presence are the key factors for a successful partnership with these groups. We supply our customers via a global network of trading partners. Our Fine Chemicals division supplies specialties through a global marketing and sales system. The local presence of regional business units ensures customer orientation and competency in our key markets: animal and human nutrition, cosmetics and pharmaceuticals. In the Oil & Gas segment, we sell natural gas primarily to wholesalers through our subsidiaries WINGAS and Wintershall Erdgas Handelshaus and its affiliated companies. We also offer customers transport and storage services. We market the majority of our crude oil through our oil trading company in Switzerland. In 2005, selling expenses, which include distribution, shipping, marketing and advertising costs, were 4,330 million compared with 4,309 million in Corporate advertising costs totaled 40 million in 2005 compared with 19 million in 2004.

160 Management s Analysis > Corporate Responsibility Employees Corporate Responsibility 3.7 billion transferred to a Contractual Trust Arrangement to finance pension obligations Global goals for Responsible Care 56.8 million for specific social responsibility projects EMPLOYEES The BASF Group will be successful in the long run only if it has qualified and motivated employees from around the world. Our management team has members from more than 30 different nations. To attract, retain and train the best talent for each function, we create a working environment that supports our employees so they can perform at their best to make our company successful. The number of BASF Group employees declined by 1,010, or 1.2%, to 80,945 at the end of This change reflects the impact of changes in the scope of consolidation as well as acquisitions and divestitures. The decline in the number of employees was primarily associated with measures to increase efficiency at the Ludwigshafen site and in North America (NAFTA). In 2004, company management and employee representatives signed an agreement that provides clear perspectives for employment at the main production site in Ludwigshafen. Under the terms of the Stability through Change agreement, the number of employees of BASF Aktiengesellschaft will be approximately 32,000 (December 31, 2005: 34,143). This target figure will remain in force until 2010, although the exact headcount may be adjusted depending on natural fluctuation; enforced redundancies will be avoided. The precondition for this agreement is that the site not be impacted by economic factors or negative circumstances that endanger BASF Aktiengesellschaft s competitiveness to such an extent that specific structural measures are necessary. The viability of the agreement will be reviewed with employee representatives each year. Last year, the BASF Group employed 2,330 trainees. In addition, 702 young people were trained by BASF Jobmarkt GmbH together with more than 450 partner companies in the region as part of BASF s Training Verbund. Employees by region % % Europe 56, Thereof Germany 45, Thereof BASF Aktiengesellschaft 34, North America (NAFTA) 9, Asia Pacific 9, South America, Africa, Middle East 4, ,

161 64 65 Trends in personnel costs In 2005, personnel costs declined by 41 million to 5,574 million, and can be broken down as follows: Personnel costs Million Change in % Wages and salaries 4,553 (0.6) Social security and expenses for pensions and assistance 1,021 (1.4) Thereof for pension benefits ,574 (0.7) To maintain the highest level of expertise and qualification among our employees, we invested million in continuing education and training last year in Germany alone. Of this amount, 33.1 million was spent on continuing education programs and 67.6 million on vocational training. Global expenditure on education and training amounted to million. As a result, we spent an average of more than 1,500 per employee on training measures. In addition, we invested approximately 11.6 million in the BASF Training Verbund in the Rhine-Neckar metropolitan region. Sharing in the company s success BASF promotes employee investment in the company with the plus share purchase program. In 2005, approximately 39% of employees of BASF Aktiengesellschaft and BASF Group companies in Germany took advantage of the opportunity to invest part of their annual bonus in BASF shares. Last year, employees bought a total of 565,000 BASF shares under this program. Of this amount, 458,720 shares were acquired by employees of BASF Aktiengesellschaft and 106,280 by employees of other BASF Group companies. If the employees keep their shares for a longer period, they receive additional free shares from the company (see also page 149). Since 1999, senior executives of the BASF Group have been able to participate in the BOP stock option program. The program ties a significant proportion of their compensation to the long-term performance of our shares. In 2005, 82% of approximately 1,000 senior executives eligible to participate worldwide took part in the BOP program and invested up to 30% of their variable compensation in BASF shares. For each share purchased in this way, BASF grants stock option rights whose value is paid out if the price of BASF stock meets ambitious targets (see also page 147). Many of our employees own BASF shares. They can buy them on the intranet or, as shown here, at special terminals. External financing of pensions With effect from the end of 2005, BASF Aktiengesellschaft has paid approximately 3.7 billion into a newly established Contractual Trust Arrangement (CTA) under the name BASF Pensionstreuhand e. V. This money will be used solely to finance pension obligations to the company s employees and pensioners. As a result, virtually all company benefits that exceed those of BASF Pensionskasse VVaG will be financed externally. This measure will lessen the impact on BASF s future operational cash flow from maturing pension payments. In addition, this will improve the transparency of our financial reporting and allow better comparison with our international competitors. There will be no effect on the benefit levels for employees and pensioners of BASF; the pensions will also continue to be paid by BASF. The CTA facilitates a long-term investment strategy that is specially adapted to the development of pension obligations. This strengthens the basis on which pension obligations are funded, despite the additional strain imposed by the growing number of pensioners and by the increased life expectancy of the recipients.

162 Management s Analysis > Corporate Responsibility Environmental Protection and Safety ENVIRONMENTAL PROTECTION AND SAFETY Our goal is to make a positive contribution to ensure a sustainable future. For us, acting responsibly means improving environmental protection and safety and fostering awareness of these issues among our employees, customers and suppliers. Environmental protection costs The cost of operating environmental protection facilities throughout the BASF Group amounted to 623 million in 2005 compared with 624 million in In the same period, we also invested 78 million in new and improved environmental protection plants and facilities. These capital expenditures include both end-of-pipe and productionintegrated measures. Costs are also incurred by BASF for remediation resulting from the previous disposal or discharge of chemicals, crude oil products or waste. This applies to both our own operations and to third-party operations which dispose of waste on behalf of BASF. Provisions established for environmental protection measures and remediation worldwide amounted to 253 million as of December 31, 2005 (December 31, 2004: 204 million). Energy balance In 2005, 25.7 million MWh of fossil fuels and waste fuels was used in our own central power plants to generate steam and electricity for the BASF Group. As a result, 6.3 million MWh el of electrical power was generated (2004: 4.0 million MWh el ), primarily by means of cogeneration technology. This corresponds to approximately 47% of BASF s total electricity needs of 13.5 million MWh el in The remaining electricity was purchased from public grids. In 2005, a total of 53.3 million metric tons of process steam was provided by steam networks within the BASF Group compared with 55.0 million metric tons in Worldwide, approximately 46% of this amount was generated using excess heat from chemical reactions and by thermal recycling of waste. Global Goals for Responsible Care We aim to combine sustainable economic success with environmental protection. We have set ourselves a number of ambitious goals in this area and have already made considerable progress. In view of our goals for growth, major efforts will also be necessary in the future to ensure that we maintain our success in the long term: Global Responsible Care goals 2012 goals Status 2005 Reduction of emissions from chemical operations (baseline 2002) Emission of greenhouse gases per metric ton of sales product 10% 10.9% Emission of air pollutants 40% 40.5% Emission of organic substances to water 60% 51.7% Emission of nitrogen to water 60% 60.5% Emission of heavy metals to water 30% 26.2% Occupational safety (baseline 2002) + distribution safety (baseline 2003) Reduction of lost time accidents per one million working hours 80% 46% Reduction of transportation accidents 70% 16% Product stewardship 2008 goal Status 2005 Completion of the minimum data sets for all chemical substances handled by BASF in quantities of more than 1 metric ton per year Minimum data sets completed worldwide Data sets for Germany available for approx. 98%; portfolio for North America (NAFTA) completed for the most part

163 66 67 Emissions from our chemical operations We are committed to the aims of the 1997 Kyoto Protocol to reduce greenhouse gas emissions. In 2005, BASF s chemical business worldwide emitted 24.8 million metric tons of greenhouse gases compared with 27.6 million metric tons in Compared with the baseline year 2002, we achieved a reduction of 10.9% in greenhouse gas emissions per metric ton of sales product even though our production rose by 13% during the same period. Emissions to air from BASF s chemical operations worldwide totaled 50,900 metric tons of air pollutants, compared with 54,000 metric tons in This represents a reduction of 40.5% compared with This welcome development was primarily due to optimizing treatment of flue gas at plants at European sites. We have also come closer to achieving our targets for emissions to water: In 2005, BASF emitted to water a total of 44,200 metric tons of organic substances calculated as chemical oxygen demand (COD). The figure for 2004 was 86,700 metric tons. Compared to the baseline year, we have reduced emissions by 51.7% overall. Emissions of nitrogen to water totaled 8,800 metric tons, compared with 18,600 metric tons in This is a reduction of 60.5% compared with Wastewater contained 45 metric tons of heavy metals, or a reduction of 26.2% compared with the baseline year Occupational safety and distribution safety We have committed ourselves to promoting and maintaining safe and healthy working conditions. At the same time, safety is a prerequisite for smooth production. In 2005, the BASF Group s lost time accident rate worldwide was 1.8 per one million working hours compared with 1.9 in This corresponds to a reduction of 46% in the rate of accidents compared with At our Ludwigshafen site, we reduced the lost time accident rate by 14% compared with the previous year to 1.8 accidents per million working hours. We have established uniform global standards for the transportation and storage of chemical products. These standards also apply to our partner companies. Our safety checks and training ensure that our partners will fulfill the high demands made on them. Thanks to these measures, we have further improved distribution safety: In 2005, there were 0.47 transportation accidents per 10,000 shipments worldwide compared with 0.5 in the previous year. This corresponds to a reduction of 16% compared with our baseline year Worldwide expansion of substance data sets In Germany, the base data set is available for around 98% of the substances we handle in quantities of more than 1 metric ton per year. In 2005, we compiled data for substances that are new to our portfolio. By the end of 2005, we also completed the basic data for the majority of the substances we handle in North America (NAFTA). Environmental policy The European Union is currently preparing new draft legislation for chemicals (REACH) that aims to regulate their registration, evaluation and authorization. It is expected that the new draft law will come into force in the relevant E.U. member states in It is not yet possible to quantify the associated costs. With regard to E.U. emissions trading, the BASF Group was allocated allowances (EUA) for approximately 3 million metric tons of carbon dioxide (CO 2 ) per year for its European sites for More stringent conditions are expected in the second trading period (2008 to 2012) on the basis of the E.U. Commission s recommendations in December Thereafter, the Commission expects higher reduction targets from the member states. In addition, the auctioning of some allowances and the inclusion of further plants in the trading system is expected.

164 Management s Analysis > Corporate Responsibility Social Responsibility SOCIAL RESPONSIBILITY As a global company, BASF takes its worldwide social responsibilities seriously. We contribute to numerous projects in the form of donations and sponsorship as well as through the individual efforts of our employees. In 2005, the BASF Group spent a total of 56.8 million on specific cultural and social projects and to provide human itarian aid. This corresponded to an increase of 50.3% compared with BASF Group donations, sponsoring and own projects in 2005 Million 1 Science % 2 Charities % 3 Culture % 4 Sports % 5 Schools and training, employmentpromotion % 6 Other % % We Help the Region Win In the future, our economic success will increasingly depend on the social acceptance of our activities. This applies especially in the communities in which our sites are located. We are therefore strongly committed to projects in the Rhein-Neckar metropolitan region of Germany under the title We Help the Region Win. We support projects in the areas of youth/education, future/innovation/ science, as well as culture and sports. In 2005, we increased our funding for these projects to 22 million. The design of this campaign and its underlying philosophy has been confirmed by a very positive response Donations Donations by the BASF Group are governed by a policy for donations and sponsorship. The main focus is on regional needs. In the aftermath of the tsunami that destroyed many coastal areas of southeastern Asia in December 2004, BASF employees donated 1.4 million. This amount was doubled by BASF to 2.8 million. Together with 1 million in immediate aid provided by BASF s Board of Executive Directors just a few days after catastrophe, this brought the total donation by employees and the company to 3.8 million. We also acted quickly following other natural disasters: In the wake of the devastating hurricanes in the United States, we provided $1 million in emergency relief aid. This money was used, among other things, to rebuild communities affected by the disaster. Following the earthquake in Pakistan, BASF also gave assistance, for example, by providing shelter for victims and mobile hospitals. Education Education is a central issue for BASF. What we invest in education and knowledge today pays off in the long run in terms of regional competitiveness. That is why we are intensifying our commitment to the communities in which our sites are located and are taking measures worldwide to facilitate or to promote access to education and knowledge. Basic needs are frequently at the heart of this. Since August 2005, we have supported the Lapdesk Project in South Africa, which aims to improve learning conditions for school children. Last year, BASF companies also donated money to equip local schools in Thailand, Malaysia and India. We are incorporating our regional projects in the Knowledge Factory initiative, of which BASF was one of the founding members in The Knowledge Factory aims to make Germany more sustainable as a business location. Member companies enter into educational partnerships and take part in projects with kindergartens and schools in their respective regions. Further information on the Knowledge Factory is available in German at You can find more details on sustainable management and corporate social responsibility on the Internet at corporate.basf.com/sustainability or in our Corporate Report 2005 available at corporate.basf.com/ corporate-report.

165 Management s Analysis Risk Management System and Risks of Future Development Risk Management System and Risks of Future Development RISK MANAGEMENT SYSTEM Goals and principles of risk management Risk management has the goal of identifying risks as early as possible, limiting business losses by means of suitable measures, and avoiding risks that pose a threat to the company s existence. Our risk management system is based on the following principles and requirements: High safety standards for plant operation to protect man and the environment Codes of conduct to ensure compliance with legal requirements A Leadership Compass that defines high standards of management integrity Review committees to verify important business decisions Organizational measures to prevent abuse of authority Organization, responsibilities and tools Regular risk analyses at the corporate level are conducted by BASF s Chief Compliance Officer and by the units: Corporate Controlling; Environment, Safety & Energy; Finance; Global Procurement & Logistics; Human Resources; Legal, Taxes & Insurance; and Strategic Planning & Controlling. BASF uses various tools for the early recognition and identification of risks. These include risk identification checklists, analyses of various scenarios and value driver trees. We quantify risks to the extent they can be assessed; we also determine the impact on earnings and the likelihood of occurrence. The Board of Executive Directors receives monthly reports on current and forecast business trends from centralized controlling. These reports contain analyses of operating, financial and economic risks. The reports are based on computer-generated risk reports by the responsible decentralized and centralized risk specialists, who are appointed for the various divisions, regions and sites. Strategic opportunities and risks are assessed as part of the continuously monitored product division and regional strategies and balanced against one another. Annually as well as on an interim basis, our independent auditors and Corporate Audit department examine the functioning and effectiveness of our risk management system, as well as its development and integration into business processes. In 2005, we continued to develop the risk management process throughout the BASF Group in accordance with internationally accepted standards. Guidance is taken from the Enterprise Risk Management (ERM) Integrated Framework of the COSO (Committee of Sponsoring Organizations of the Treadway Commission). How individual risk categories are dealt with is described in the Risks of Future Development section on page 70. Specific risks pertaining to operating divisions and units are continually registered and monitored centrally. Defined and regular communications tools ensure that risks are reported quickly to the Board of Executive Directors, providing an up-to-date overview of the current risks to the BASF Group. In addition, we use key data and indicators for constant monitoring of certain risk areas. The reports are drawn up and submitted when defined risk thresholds have been reached. This ensures that risks are recognized early on and that the appropriate information is then immediately reported to the responsible decision-makers. Internal monitoring BASF s Corporate Audit department which acts on behalf of the Board of Executive Directors operates throughout BASF Aktiengesellschaft and the BASF Group. The department checks: adherence to directives, guidelines, approval limits and fair trade regulations; asset security and the attainment of an appropriate rate of return on invested capital; the organization and its processes in terms of efficiency, effectiveness and proper functioning; the functionality and reliability of the risk management system; and the reliability of reporting.

166 Management s Analysis Risk Management System and Risks of Future Development Internal monitoring also takes place in special committees that meet regularly. They analyze our businesses, expected outcomes and related risks, developing trends and structural developments. Basic elements of internal monitoring include general principles of risk avoidance such as the separation of duties and the four-eyes principle for important transactions. In addition, we have introduced guidelines for rate hedging, investments and the use of derivative financial instruments. In 2005, we uniformly documented the internal control process for financial reporting throughout the BASF Group in a new IT system in accordance with Section 404 of the Sarbanes-Oxley Act (SOX). The effectiveness of the internal control process was confirmed on this basis by both self-assessment by management and by the auditors (see also page 73). Risk controlling The Strategic Planning & Controlling division and the Finance division handle centralized risk controlling. They regularly inform the Board of Executive Directors of significant risks. The Strategic Planning & Controlling division ensures that communication about risk management and its continued development takes place in all operating units, corporate divisions, competence centers and regional divisions worldwide. In addition, the division coordinates identification of all significant risks for BASF throughout the company and systematically evaluates them according to uniform standards. Twelve operating divisions bear overall responsibility for business operations within the BASF Group. It therefore follows that operational risk management is focused in these units. We have also established decentralized risk controlling units in the competence centers and regional divisions that work closely with the centralized units. RISKS OF FUTURE DEVELOPMENT Financial risks We monitor and control financial risks in the Treasury department of the Corporate Center or through appropriately authorized Group companies. Detailed guidelines and procedures exist for dealing with financial risks. Among other things, they provide for separate trading and processing functions. Currency, interest rate and price risks: These risks are also hedged using derivative instruments. Detailed explanations on the use of derivatives and information about the book values and fair values of these instruments are provided in Note 29 to the Consolidated Financial Statements on page 150 onward. Liquidity risks: We recognize any risks from cash flow fluctuations in good time using our liquidity planning system. We have ready access to sufficient liquid funds in view of our good credit ratings, the ongoing commercial paper program and committed credit lines from banks. BASF s current short-term and long-term ratings as well as our bond ratings are shown on page 34. Credit risk and default risk: We limit country-specific risks through internal country ratings, which are continuously adapted to changing economic, political and social conditions. We use export credit insurance as the main tool to limit specific country-related risks. We reduce credit risks for our investments by engaging in transactions only with business partners and banks with very good credit ratings and by adhering to fixed limits. Monetary transactions are also conducted through such banks. We reduce the risk of default on receivables by continuously monitoring the creditworthiness and payment behavior of customers and by setting appropriate credit limits. Risks are also limited through the use of credit insurance and bank guarantees.

167 70 71 Pension obligations: We predominantly finance company pension schemes externally through separate pension assets. In addition to the pension plans of our Group companies in North America (NAFTA), this applies in particular to BASF Pensionskasse VVaG in Germany. At the end of 2005, we additionally transferred assets to a newly established Contractual Trust Arrangement (CTA) (see page 65 for further details). Because a portion of these assets has been invested in stocks and fixed-income securities, stock market and bond market losses could result in the accrued assets being insufficient to finance the pensions. In order to limit this risk, we are increasingly offering employees defined contribution schemes. In Germany, the company retirement program has been modified to take account of changing conditions in the capital markets and rising life expectancy. We are limiting financial risks through a revised BASF Pensionskasse tariff for new employees. Supply risks Prices of raw materials, energy, precursors and intermediates that depend on the price of oil present a potential risk for BASF. We reduce this risk through our global purchasing activities, long-term supply contracts and optimized procedures for the purchase of additional quantities of raw materials on spot markets and through commodity derivatives. Purchase agreements for the most strategically important raw materials are negotiated and concluded centrally. In the field of research and development, we are working on new technologies that appropriately address risks relating to the availability and price of basic raw materials. If raw material costs rise over a longer period, it is not always possible to pass on the higher costs fully in the form of higher prices for our products in the short term. However, in the current and expected future economic situation, we believe that we can successfully implement the necessary price adjustments, albeit after a certain delay. as agricultural products, active ingredients and active ingredient precursors for pharmaceuticals and nutrition, and natural gas. In cyclical businesses, we seek to maintain cost leadership and enter into close cooperations with customers that will allow us to tap into new applications and markets quickly. Furthermore, we are expanding business activities in high-growth regions. In response to product substitutions and the declining use of certain products in the Performance Products and Plastics segments, we develop and market products with improved or entirely new properties. We also offer our customers specific system solutions that can be employed over a longer period. In the Northern Hemisphere, sales volumes of crop protection products are affected by the seasonal nature of the market with sales being concentrated in the first half of the year and by the weather. Demand for crop protection products is further influenced by the agricultural policies of governments and multinational organizations. The typical periods allowed for payment in this industry can lead to losses from receivables during regional economic crises. The increased marketing and sale of products in combination with genetically modified seeds could have an adverse effect on the development of our crop protection business. We are responding to these risks with innovative products and solutions that create added value for our customers. Regulatory risks The European Union s new chemicals policy will alter the registration, evaluation and approval process for chemical substances. This poses the risk that BASF and its European customers will be placed at a disadvantage compared with non-european competitors as a result of cost-intensive testing and registration procedures. The new legislation is expected to take effect in It is not yet possible to quantify the associated costs. Market risks Cyclical fluctuations in demand in key customer segments, such as the automotive, construction, electrical/ electronics and textile industries, as well as intense competition in sales markets, present operating risks in our Chemicals, Performance Products and Plastics segments. In addition, these segments are affected by the trend toward offshoring in key customer industries and by overcapacities for some products. We reduce these risks by continually expanding cyclically resilient businesses, such Economic risks We do not expect any serious risks for the chemical industry or for the overall economy in Neither do we expect serious changes to market conditions or the competitive environment. The continued volatility of oil prices and the exchange rate of the U.S. dollar constitute possible risks for global economic development. We believe it is unlikely that there will be a sharp increase in interest rates that would have a negative impact on the economy. Neither do we expect a dramatic downturn in growth in

168 Management s Analysis Risk Management System and Risks of Future Development China. Detailed explanations of expected economic developments can be found under Economic Environment, on page 57 onward. Other significant risks Risks arising from acquisition and investment decisions: The implementation of decisions related to acquisitions and investments is associated with complex risks. These are mainly caused by the high level of capital involved and the long-term capital commitment required. The preparation, implementation and follow-up for such decisions are based on specified responsibilities and approval processes. Exploration risk: In the Oil & Gas segment, future growth in the exploration and production business sector is largely based on the success of exploration activities. The search for new reserves of crude oil and natural gas depends on geological requirements with regard to the presence, quantity and quality of hydrocarbons. We reduce risks by means of a balanced exploration portfolio. IT risks: We use the latest hardware and software to reduce potential risks from the loss or manipulation of data. Throughout the entire BASF Group we have integrated, standardized IT infrastructures, backup systems, replicated databases, virus and access protection, encoding systems and a high degree of internal networking. Research and development: Because of the high degree of complexity and uncertainty involved in chemical and biological research, there is a risk that projects might be discontinued or that developed products will not receive approval for marketing. We reduce this risk through our global Know-how Verbund and our efficient innovation process (see also Research and Development on page 53). Patent risks: The Patents, Trademarks & Licenses department of BASF Aktiengesellschaft, together with the appropriate units of the U.S.-based BASF Corporation and BASF Coatings, Münster, monitors all the intellectual property rights of BASF. At the same time, through our extensive demarcation research we aim to avoid patent and licensing disputes as far as possible. Sufficient provisions have been made for the very small number of existing and pending patent disputes. Prospective candidates for technical and management positions: Our employees performance is essential to the growth and development of the BASF Group. We are increasingly competing with other companies for highly qualified technical and management personnel. We ensure the potential of our management candidates by broadening the international nature of our management team. We also promote entrepreneurship by offering employees attractive assignments, a variety of international development perspectives, a broad spectrum of advanced training and continuing education opportunities, progressive benefits and performance-based compensation. Part of this compensation is a broad-based program that allows employees to share in the company s success. We have also put in place a sophisticated stock option plan for approximately 1,000 BASF Group executives. Further details can be found in Note 28 to the Consolidated Financial Statements on page 147 onward. Corporate Security: Assessing security risks on a global basis and determining their potential impact on BASF has become an extremely difficult undertaking. Through its Group-wide network, BASF s Corporate Security department works in close cooperation with local authorities. In addition, with the help of our constantly updated security measures, we ensure the monitored protection of the company and its employees. We use awareness campaigns and training to increase the sensitivity of our employees in their dealings with specialist and confidential information as well as their judicious use of the Internet and . Legal risks: We limit risks from potential infringements of rights or the law by using compliance programs, legal training and centralized contract management. Details about our current litigation can be found in Note 27 to the Consolidated Financial Statements on page 146 onward. ASSESSMENT OF THE OVERALL RISK SITUATION In our opinion, there are no individual or aggregate risks that pose a threat to the continued existence of the BASF Group at the present time or in the foreseeable future.

169 Corporate Governance Corporate Governance at BASF Corporate Governance at BASF Corporate governance refers to the entire system of managing and overseeing a company as well as all internal and external regulatory and monitoring mechanisms. Effective and transparent corporate governance guarantees that BASF is managed and monitored in a responsible and value-driven manner. This fosters the confidence of our domestic and international investors, the financial markets, our business partners, employees and the public in the management and supervision of the company. Good corporate governance is accorded very high importance at BASF. We therefore support the German Corporate Governance Code, which we regard as an important tool in the capital market-driven development of corporate governance. We follow the recommendations of the German Governance Code in its revised version of June 2005 with a few exceptions. You can find the 2005 joint Declaration of Conformity by the Board of Executive Directors and the Supervisory Board at the end of this section on page 83. The Declaration of Conformity and the German Corporate Governance Code are available on our website at corporate.basf.com/governance_e. Because BASF s shares are listed on the New York Stock Exchange (NYSE), BASF is also subject to U.S. capital market legislation, including the Sarbanes-Oxley Act (SOX) of 2002, as well as the regulations of the U.S. Securities and Exchange Commission (SEC) and the NYSE. To ensure that these extensive new regulations are observed, the Supervisory Board has, for example: established an Audit Committee, introduced a new approval procedure specifically for procuring non-audit services from auditors, established a procedure for receiving and processing accounting-related complaints, and implemented a Code of Conduct for financial issues that supplements the company s general Code of Conduct. Furthermore, Section 404 of SOX was implemented and the internal control processes for financial reporting were uniformly documented throughout the BASF Group in a new, separate IT system. On this basis, the effectiveness of this control system was assessed at all management levels in We came to the conclusion that our control system is effective. The auditors have confirmed the results of our self-assessment in their report. Our system complies in all regards with the requirements of Section 404 of SOX and the COSO Report. As a result, we have implemented Section 404 of SOX successfully and one year earlier than required by the SEC. Implementation of Section 404 of SOX was associated with significantly higher expenses for documentation and review requirements. Corporate management and control by the Board of Executive Directors and Supervisory Board In contrast to the situation in many other countries, two separate bodies work together at German stock corporations: a Board of Executive Directors and a Supervisory Board. Appointments to the two bodies are strictly separate. A member of the Supervisory Board cannot simultaneously be a member of the Board of Executive Directors. BASF s Board of Executive Directors is responsible for the management of the company and represents BASF Aktiengesellschaft in all business undertakings with third parties. Its activities and decisions are geared to the company s interests, and it is dedicated to the goal of increasing the company s value in the long term. The decisions made by the Board of Executive Directors are always based on a simple majority. In the case of a tied vote, the casting vote is given by the Chairman of the Board. The Board of Executive Directors reports to the Supervisory Board regularly, comprehensively and in a timely manner on all material matters concerning the company with regard to strategic planning, business development, risk issues and risk management. Furthermore, it agrees corporate strategy with the Supervisory Board. Where required by the Articles of Association of BASF Aktiengesellschaft, the Board of Executive Directors must have the approval of the Supervisory Board for certain transactions before they are concluded. Such cases include the purchase of corporate shareholdings in excess of 100 million and the commencement of new or the termination of existing business activities.

170 Corporate Governance Corporate Governance at BASF The Supervisory Board of BASF Aktiengesellschaft appoints members of the Board of Executive Directors and monitors and advises the Board of Executive Directors on management issues. The Supervisory Board of BASF Aktiengesellschaft comprises 20 members and in accordance with the German Codetermination Act consists in equal parts of shareholder representatives elected by shareholders at the Annual Meeting and employee representatives. Supervisory Board resolutions require a simple majority. In the case of a tied vote, a second vote is held and the Chairman of the Supervisory Board may cast a deciding vote. Alongside the Mediation Committee, the Supervisory Board has established a Nomination and Compensation Committee (Personalausschuss) and an Audit Committee. The Nomination and Compensation Committee is charged with setting Board members remuneration and related contractual issues. It comprises Supervisory Board Chairman Dr. Jürgen F. Strube (chairman) as well as Supervisory Board members Robert Oswald, Dr. Tessen von Heydebreck and Wolfgang Daniel. The sole task of the Mediation Committee is to make a proposal to appoint a member to the Board of Executive Directors in the event that the necessary two-thirds majority is not attained in the first round of voting in the Supervisory Board. In the second round of voting, a simple majority is sufficient to appoint a member to the Board of Executives. The members of the Mediation Committee are Supervisory Board Chairman Dr. Jürgen F. Strube (chairman), Supervisory Board Deputy Chairman Robert Oswald (deputy chairman), Dr. Tessen von Heydebreck and Michael Vassiliadis. The Audit Committee makes preparations for the negotiations and resolutions of the Supervisory Board for the approval of the Financial Statements of BASF Aktiengesellschaft as well as the Consolidated Financial Statements of BASF Group, reviews the Annual Report on Form 20-F that has to be submitted to the U.S. Securities and Exchange Commission and deals with risk monitoring and internal accounting controls. The Audit Committee is also responsible for business relations with the company s auditors: It prepares the Supervisory Board s proposal to the Annual Meeting regarding the selection of an auditor, monitors the auditor s independence, defines the key aspects of the audit together with the auditor, agrees the auditing fees, and establishes the conditions for the provision of non-audit services. The Audit Committee comprises Max Dietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch and Michael Vassiliadis. The chairman of the Audit Committee is Max Dietrich Kley. As former Chief Financial Officer of BASF and as Chief Financial Officer of Volkswagen AG, respectively, Max Dietrich Kley and Hans Dieter Pötsch have particular knowledge and experience in the application of accounting principles and internal audit procedures, and have been appointed by the Supervisory Board as Audit Committee Financial Experts. The members of the Board of Executive Directors and the Supervisory Board are listed together with remuneration details on pages 76 to 79. Shareholders rights At Annual Meetings, shareholders have rights of participation and supervision. Each BASF share represents one vote. Shareholders may exercise their voting rights at Annual Meetings either personally or through a representative of their choice, or through a company-appointed proxy authorized by shareholders to vote according to their instructions. There are neither voting caps to limit the number of votes a shareholder may cast nor special voting rights. BASF has fully implemented the principle of one share one vote. All shareholders are entitled to participate in Annual Meetings, to speak to and request information from the Board relating to items on the agenda to the extent necessary to make an informed judgment of the company s affairs.

171 74 75 Values and Principles of the BASF Group/ Code of Conduct In order to guarantee a high standard of corporate governance, we have published the Values and Principles of the BASF Group, and the Code of Conduct/Compliance Program. These lay down our business principles and guidelines for the conduct of all activities within the BASF Group. The Code of Conduct describes in detail the conduct we expect from BASF employees based on the principle of integrity. Key areas include observing all relevant legislation, in particular antitrust and competition legislation, sanctions and export controls including those on chemical weapons, labor laws and legislation relating to plant safety. Other issues are bans on insider dealing and providing or receiving bribes from business partners or state officials, and the need to treat BASF s assets responsibly. The Corporate Audit department together with BASF s Chief Compliance Officer monitor compliance on a regular basis. The Values and Principles of the BASF Group and the Code of Conduct are also available on the Internet at corporate.basf.com/values. Share ownership by members of the Board of Executive Directors and the Supervisory Board No member of the Board of Executive Directors or the Supervisory Board owns shares in BASF Aktiengesellschaft and related options or other derivatives that account for 1% or more of the share capital. Furthermore, the entire holdings by members of the Board of Executive Directors and the Supervisory Board account for less than 1% of the shares issued by the company. Since July 1, 2002, in accordance with Section 15a of the German Securities Trading Act, all members of the Board of Executive Directors and the Supervisory Board, as well as certain of their relatives, are required to disclose the purchase or sale of BASF shares and other related rights to the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) and to the company if transactions within the calendar year exceed the threshold of 5,000. In 2005, there were a total of 11 reportable transactions in which members of the Board of Executive Directors and Supervisory Board purchased or sold BASF shares. The transactions involved between 17 and 2,000 shares with a per-share price of between and All transactions reported in 2005 are published on the Internet at corporate.basf.com/governance_e. Directors and officers liability insurance (D&O insurance) BASF has taken out liability insurance that covers the activities of members of the Board of Executive Directors and the Supervisory Board (D&O insurance). The policy provides for a suitable level of deductibles.

172 Corporate Governance Management and Supervisory Boards Management and Supervisory Boards Board of Executive Directors As of December 31, 2005, there were eight members on the Board of Executive Directors of BASF Aktiengesellschaft. On December 16, 2005, the Supervisory Board appointed Dr. Martin Brudermüller as an additional member of the Board of Executive Directors with effect from January 1, DR. JÜRGEN HAMBRECHT Chairman of the Board of Executive Directors Responsibilities: Legal, Taxes & Insurance; Strategic Planning & Controlling; Executive Management & Development; Commu nications BASF Group; Investor Relations First appointed: 1997 (chairman since 2003) Term expires: 2007 Supervisory board memberships (excluding internal memberships): Bilfinger Berger AG (supervisory board member) EGGERT VOSCHERAU Vice Chairman of the Board of Executive Directors Responsibilities: Industrial Relations Director; Human Resources; Environment, Safety & Energy; Ludwigshafen Verbund Site; Antwerp Verbund Site; Occupational Medicine & Health Protection; Europe First appointed: 1996 Term expires: 2008 Supervisory board memberships (excluding internal memberships): HDI Haftpflichtverband der Deutschen Industrie VVaG (supervisory board member) Talanx AG (supervisory board member) Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: BASF Schwarzheide GmbH (supervisory board chairman) Comparable German and non-german controlling bodies: BASF Antwerpen N.V. (administrative council chairman) DR. KURT BOCK Responsibilities: Finance; Global Procurement & Logistics; Information Services; Corporate Controlling; Corporate Audit; South America First appointed: 2003 Term expires: 2007 Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Wintershall AG (supervisory board member) Comparable German and non-german controlling bodies: The Germany Fund Inc. (member of the board of directors) DR. MARTIN BRUDERMÜLLER Responsibilities: Asia (from April 1, 2006) First appointed: 2006 Term expires: 2008 Comparable German and non-german controlling bodies: BASF Antwerpen N.V. (administrative council member) DR. JOHN FELDMANN Responsibilities: Styrenics; Performance Polymers; Polyurethanes; Oil & Gas; Polymer Research First appointed: 2000 Term expires: 2009 Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Wintershall AG (supervisory board chairman) DR. ANDREAS KREIMEYER Responsibilities: Performance Chemicals; Functional Polymers; Asia (until March 31, 2006); Coatings (from April 1, 2006) First appointed: 2003 Term expires: 2007 Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: BASF Coatings AG (supervisory board member) KLAUS PETER LÖBBE Responsibilities: Coatings (until March 31, 2006); North America (NAFTA) First appointed: 2002 Term expires: 2006 Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: BASF Coatings AG (supervisory board chairman) DR. STEFAN MARCINOWSKI Responsibilities: Research Executive Director; Inorganics; Petrochemicals; Intermediates; Chemicals Research and Engineering; Corporate Engineering; University Relations & Research Planning; BASF Future Business GmbH First appointed: 1997 Term expires: 2007 Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Wintershall AG (supervisory board member) PETER OAKLEY Responsibilities: Agricultural Products; Fine Chemicals; Specialty Chemicals Research; BASF Plant Science GmbH First appointed: 1998 Term expires: 2008

173 76 77 Supervisory Board The Supervisory Board of BASF Aktiengesellschaft comprises 20 members. Ten members are elected by shareholders at the Annual Meeting, and the remaining 10 are elected by employees. With the exception of Hans Dieter Pötsch, the shareholder representatives were elected at the Annual Meeting on May 6, Hans Dieter Pötsch was appointed by the district court of Ludwigshafen on March 2, 2004 to replace Helmut Werner, who died on February 6, With the exception of Ralf Sikorski and Michael Vassiliadis, the employee representatives were elected on February 25, 2003 in accordance with the German Codetermination Act. Effective August 7, 2003, Ralf Sikorski was appointed by the district court of Ludwigshafen to replace Gerhard Zibell, who resigned from the Supervisory Board with effect from July 31, Effective August 1, 2004, Michael Vassiliadis, who had been elected to the Supervisory Board by employees, replaced Dr. Jürgen Walter, who retired effective July 31, The current term of all members of the Supervisory Board expires at the end of BASF Aktiengesellschaft s Annual Meeting Members of the Supervisory Board (as of December 31, 2005) DR. JÜRGEN F. STRUBE, Mannheim, Germany Chairman of the Supervisory Board of BASF Aktiengesellschaft Former Chairman of the Board of Executive Directors of BASF Aktiengesellschaft Supervisory board memberships (excluding internal memberships): Allianz Lebensversicherungs-AG (supervisory board member) Bayerische Motoren Werke AG (supervisory board member) Bertelsmann AG (supervisory board deputy chairman) Commerzbank AG (supervisory board member) Fuchs Petrolub AG (supervisory board chairman) Hapag-Lloyd AG (supervisory board member) Linde AG (supervisory board member) ROBERT OSWALD, Altrip, Germany Deputy Chairman of the Supervisory Board of BASF Aktiengesellschaft Chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft and the chairman of the joint works council of the BASF Group RALF BASTIAN, Neuhofen, Germany Member of the works council of the Ludwigshafen site of BASF Aktiengesellschaft WOLFGANG DANIEL, Limburgerhof, Germany Deputy chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft PROF. DR. FRANÇOIS N. DIEDERICH, Zurich, Switzerland Professor at Zurich Technical University MICHAEL DIEKMANN, Munich, Germany Chairman of the Board of Management of Allianz AG Supervisory board memberships (excluding internal memberships): Linde AG (supervisory board deputy chairman) Lufthansa AG (supervisory board member) Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Allianz Deutschland AG (supervisory board chairman) Allianz Global Investors AG (supervisory board chairman) Allianz Lebensversicherungs-AG (supervisory board chairman) (until December 31, 2005) Allianz Versicherungs-AG (supervisory board chairman) (until December 31, 2005) Dresdner Bank AG (supervisory board chairman) Comparable German and non-german controlling bodies: Assurances Générales de France (administratrive council member) Riunione Adriatica di Sicurtà S.p.A. (administrative council member) DR. TESSEN VON HEYDEBRECK, Frankfurt (Main), Germany Member of the Board of Managing Directors of Deutsche Bank AG Supervisory board memberships (excluding internal memberships): BVV Versicherungsverein des Bankgewerbes a. G. (supervisory board member) Dürr AG (supervisory board member) Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Deutsche Bank Privat- und Geschäftskunden AG (supervisory board member) DWS Investment GmbH (supervisory board member) Comparable German and non-german controlling bodies: Deutsche Bank OOO (supervisory board chairman) Deutsche Bank Luxembourg S.A. (administrative council chairman) Deutsche Bank Polska S.A. (supervisory board chairman) Deutsche Bank Rt. (supervisory board chairman) Deutsche Bank Trust Corp. (supervisory board member) DB Trust Company America (supervisory board member) ARTHUR L. KELLY, Chicago, Illinois Chief executive of KEL Enterprises L.P. Supervisory board memberships (excluding internal memberships): Bayerische Motoren Werke AG (supervisory board member) Comparable German and non-german controlling bodies: Data Card Corporation (member of the board of directors) Deere & Company (member of the board of directors) Northern Trust Corporation (member of the board of directors) Snap-on Incorporated (member of the board of directors) ROLF KLEFFMANN, Wehrbleck, Germany

174 Corporate Governance Management and Supervisory Boards Chairman of the works council of Wintershall AG s Barnstorf oil plant MAX DIETRICH KLEY, Heidelberg, Germany Lawyer Former Vice Chairman of the Board of Executive Directors of BASF Aktiengesellschaft Supervisory board memberships (excluding internal memberships): HeidelbergCement AG (supervisory board member) Infineon Technologies AG (supervisory board chairman) Schott AG (supervisory board member) SGL Carbon AG (supervisory board chairman) Comparable German and non-german controlling bodies: UniCredito Italiano S.p.A (member of the administrative council) (as of January 11, 2006) PROFESSOR DR. RENATE KÖCHER, Allensbach, Germany Managing Director of the Institut für Demoskopie Allensbach, Gesellschaft zum Studium der öffentlichen Meinung mbh Supervisory board memberships (excluding internal memberships): Allianz AG (supervisory board member) MAN AG (supervisory board member) Infineon Technologies AG (supervisory board member) EVA KRAUT, Ludwigshafen, Germany Chairwoman of the works council of BASF IT Services GmbH, Ludwigshafen ULRICH KÜPPERS, Ludwigshafen, Germany Regional manager of the Rhineland-Palatinate/Saarland branch of the Mining, Chemical and Energy Industries Union (IG BCE) Supervisory board memberships (excluding internal memberships): Klinikum der Stadt Ludwigshafen ggmbh (supervisory board deputy chairman) STEAG Saar Energie AG (supervisory board deputy chairman) Technische Werke Ludwigshafen AG (TWL) (supervisory board deputy chairman) Verkehrsbetriebe Ludwigshafen GmbH (supervisory board member) Villeroy & Boch AG (supervisory board member) KONRAD MANTEUFFEL, Bensheim, Germany Member of the works council of the Ludwigshafen site of BASF Aktiengesellschaft Supervisory board memberships (excluding internal memberships): BASF Pensionskasse VVaG (supervisory board deputy chairman) LUWOGE Wohnungsunternehmen der BASF GmbH (supervisory board member) DR. KARLHEINZ MESSMER, Weisenheim am Berg, Germany Plant manager at the Ludwigshafen site of BASF Aktiengesellschaft Chairman of the Committee of Executive Representatives of BASF Aktiengesellschaft HANS DIETER PÖTSCH, Wolfsburg, Germany Member of the Board of Management of Volkswagen AG Supervisory board memberships (excluding internal memberships): Allianz Versicherungs AG (supervisory board member) Bizerba GmbH & Co. KG (supervisory board member) DR. HERMANN SCHOLL, Stuttgart, Germany Chairman of the Supervisory Council of Robert Bosch GmbH and Managing Director of Robert Bosch Industrietreuhand KG Supervisory board memberships (excluding internal memberships): Robert Bosch GmbH (supervisory board chairman) Comparable German and non-german controlling bodies: Robert Bosch Internationale Beteiligungen AG (member of the administrative council) Robert Bosch Corporation (member of the board of directors) Sanofi-Aventis S.A. (member of the administrative council) RALF SIKORSKI, Ludwigshafen, Germany Manager of the Ludwigshafen branch of the Mining, Chemical and Energy Industries Union (IG BCE) ROBERT STUDER, Zurich, Switzerland Former Chairman of the Supervisory Board of the Union Bank of Switzerland Comparable German and non-german controlling bodies: Espirito Santo Financial Group S.A. (member of the administrative council) Renault S.A. (member of the administrative council) Schindler Holding AG (member of the administrative council) MICHAEL VASSILIADIS, Hemmingen, Germany Member of the Central Board of Executive Directors of the Mining, Chemical and Energy Industries Union (IG BCE) Supervisory board memberships (excluding internal memberships): Henkel KGaA (supervisory board member) K+S AG (supervisory board deputy chairman) K+S Kali GmbH (supervisory board deputy chairman) STEAG AG (supervisory board member)

175 78 79 Compensation of directors and officers For the year ended December 31, 2005, compensation paid to the members of the Board of Executive Directors totaled 15.3 million; the members of the Supervisory Board received 3.4 million. Million Board of Executive Directors compensation Thereof fixed payments variable payments Exercise of option rights granted under the BASF stock option program Supervisory Board s compensation Thereof fixed payments variable payments Total compensation of former members of the Board of Executive Directors and their surviving dependents Exercise of option rights by former members of the Board of Executive Directors and their surviving dependents Pension provisions for former members of the Board of Executive Directors and their surviving dependents 77.7* 69.9 Loans to members of the Board of Executive Directors and the Supervisory Board Contingent liability for the benefit of members of the Board of Executive Directors and the Supervisory Board * The change compared with 2004 was primarily due to the lower interest rate used to assess pension obligations. The compensation of the Board of Executive Directors consists of a fixed and an annual variable component as well as stock options as a long-term element. The effective annual variable payments is determined by the return on assets. Each Board member may invest 10% to 30% of his variable bonus in the BASF stock option program (BOP). This personal investment is the prerequisite for the granting of option rights according to conditions that apply to all participants in the BOP program (see also page 147). Thus, by far the larger part of the Board s overall compensation is directly linked to the company s performance. In 2005, the members of the Board of Executive Directors were granted 209,792 stock options under the BASF stock option program. In 2005, the issue of option rights resulted in personnel costs totaling 6.3 million. Of this amount, 1.4 million was related to option rights issued in 2005 and 4.9 million to option rights issued in 1999 through In 2005, the exercising of option rights granted under the BASF stock option program between 1999 and 2003 resulted in cash payments totaling 1.4 million to members of the Board of Executive Directors and 2.9 million to previous members or their surviving dependants. The cash payment does not influence personnel costs associated with the issuing of option rights. The compensation of the Supervisory Board is defined in the Articles of Association of BASF Aktiengesellschaft. Pursuant thereto, each member of the Supervisory Board is reimbursed for the past year for out-of-pocket expenses and for value-added tax to be paid with regard to the Board membership. In addition, he or she receives a fixed annual payment of 25,000 and a variable performancerelated bonus amounting to 3,500 for each 0.05 by which the dividend paid to shareholders in a given year exceeds For the year ended December 31, 2005, this will be 119,00 on the basis of the proposed dividend of 2.00 per share that will be submitted to the Annual Meeting on May 4, The chairman of the Supervisory Board receives a payment of twice and the deputy chairman a payment of 1.5 times this amount. In addition, the company grants members of the Supervisory Board a fee of 500 for attending a meeting of the Supervisory Board or one of its committees to which they belong. Each member of the Audit Committee of the Supervisory Board receives an additional payment of 25,000. The chairman of this committee receives a payment of twice and the deputy chairman a payment of 1.5 times this additional amount.

176 Corporate Governance Report of the Supervisory Board Report of the Supervisory Board Dear Shareholders, 2005 was the most successful year in BASF s history to date: Both the net income of the BASF Group as well as earnings per share were at record highs. Primarily, this is not simply the result of an improvement in the economic environment, but is the visible success of a long-term strategy and the efforts of the Board of Executive Directors and the employees of the BASF Group: BASF is on the right path with its strategy BASF At the same time, BASF s success in 2005 is a challenge and an incentive to continue to implement the company s strategic guidelines rigorously: Earn a premium on cost of capital, help customers to be more successful, form the best team in industry, and ensure sustainable development. The Supervisory Board will do its utmost to help the Board of Executive Directors and BASF s employees to reach these goals. The Supervisory Board carefully and regularly monitored company management during the year and provided advice on the company s strategic development and important individual measures. To this end, the Supervisory Board requested detailed information from the Board of Executive Directors at meetings, as well as in written and verbal reports. Topics included business policies, the business situation and business trends, profitability, the company s planning with regard to finances, capital expenditures and human resources at BASF and its major subsidiaries, as well as deviations from business forecasts. The Chairman of the Supervisory Board also regularly requested information from the Chairman of the Board of Executive Directors with regard to current business developments and important events outside of Supervisory Board meetings. The Supervisory Board was involved at an early stage in decisions of major importance. Meetings The Supervisory Board met five times in At these meetings, the Supervisory Board discussed reports from the Board of Executive Directors. The Supervisory Board also discussed the company s prospects as a whole and its individual businesses with the Board of Executive Directors. The members of the Supervisory Board elected by shareholders and by employees prepared for the meetings in separate preliminary discussions. In addition to monitoring management by the Board of Executive Directors, one of the chief duties of the Supervisory Board is to offer advice and discuss BASF s strategy. An important milestone was the offer to acquire the U.S. specialty chemical manufacturer Engelhard Corporation, which was announced on January 3, 2006 and officially tendered on January 9, Engelhard is a leading catalyst manufacturer. If successful, the acquisition the largest ever in the history of BASF would enable BASF to open up a promising and high growth business area. Currently, BASF has only a slight market presence in this field. The deal would significantly expand our existing expertise. A similar situation applies to the planned acquisition of Degussa s construction chemicals business: Here too, a new business area for BASF would complement the company s existing activities in the area of precursors for construction chemicals. Both acquisitions would also support BASF s strategic goal of making its business less susceptible to cyclicality. Independent of possible individual transactions, the Supervisory Board also dealt with the development of BASF s strategy in Asia Pacific, with special emphasis on China and India; the strategy of the Oil & Gas segment; and the company s positioning in the field of biotechnology, and was informed by the Board of Executive Directors of the strategic options as well as the opportunities and risks in these areas. During a visit to the sites in Nanjing and Caojing, China, as well as to Kuala Lumpur and Kuantan, Malaysia, the Supervisory Board gained its own impression of the progress being made in realizing the strategy for the Asia Pacific region. The enormous progress that BASF is making in this important region was welcomed unanimously. Where specific transactions and measures proposed by the Board of Executive Directors required decisions by the Supervisory Board as required by law or the Articles of Association, votes were taken at Supervisory Board meetings. The Supervisory Board approved the sale of the 50% share in Basell N.V., the acquisition of the fine chemicals company Orgamol S.A., the tendering of a cash offer to acquire all shares in the U.S. specialty chemical company Engelhard Corporation, and the acquisition of the construction chemicals business of Degussa AG. At our meeting on December 16, 2005, we also approved the Board of Executive Directors plans for 2006 and empowered the Board of Executive Directors to procure funding.

177 80 81 Corporate governance and compliance statement In 2005, the Supervisory Board again addressed in detail changes to the financial and corporate legal environment in which the company operates, as well as the issue of corporate governance at BASF. In its meeting on December 16, 2005, the Supervisory Board approved the new joint compliance statement by the Supervisory Board and the Board of Executive Directors in accordance with Section 161 of the German Stock Corporation Act. BASF follows the recommendations of the German Corporate Governance Code, in its version of June 2, 2005, with a few exceptions: For example, we do not publish individual remuneration details for the members of the Board of Executive Directors and Supervisory Board, and remuneration of the Board of Executive Directors is dealt with in the Supervisory Board s Nomination and Compensation Committee rather than in a plenary session of the Supervisory Board. From next year, the remuneration of the Board of Executive Directors will be disclosed individually in accordance with the provisions of the German Law on the Disclosure of the Compensation of Members of the Board of Management. The complete text of the compliance statement is provided on page 83 of the Financial Report and is also permanently available to shareholders on BASF s website. Committees The Supervisory Board has established three committees with equal representation from shareholders and em ployee representatives: the Nomination and Compensation Committee (Personalauschuss) created in accordance with Section 89 (4) of the German Stock Corporation Act; the Audit Committee; and the Mediation Committee established in accordance with Section 27 (3) of the German Codetermination Act. The members of the Nomination and Compensation Committee are as follows: Supervisory Board Chairman Dr. Jürgen F. Strube (chairman), Supervisory Board Deputy Chairman Robert Oswald (deputy chairman), Dr. Tessen von Heydebreck and Michael Vassiliadis. The Nomination and Compensation Committee met four times in In its meetings, with the Chairman of Board of Executive Directors, it discussed, in particular, plans for the future appointment of members of the Board of Executive Directors (long-term succession planning), as well as the remuneration of the Board of Executive Directors. The Nomination and Compensation Committee proposed to the Supervisory Board the appointment of Dr. Martin Brudermüller as an additional member of the Board of Executive Directors and the extension of Eggert Voscherau s term by a further two years. The Supervisory Board approved these proposals in its meeting on December 16, In 2005, the Audit Committee comprised Supervisory Board members Max Dietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch and Michael Vassiliadis. The chairman of the Audit Committee is Max Dietrich Kley, who like Hans Dieter Pötsch, has been appointed Audit Committee Financial Expert. The Audit Committee met three times in Its activities primarily included reviewing the Consolidated Financial Statements of BASF Aktiengesellschaft as well as BASF Group; reviewing the Annual Report on Form 20-F prepared in accordance with U.S. accounting standards; advising the Board of Executive Directors on accounting issues; preparing the Supervisory Board s proposal to the Annual Meeting regarding the selection of an auditor; discussing and defining particular features of the audit; regulating business relations with the company s auditors, including the adoption of a resolution regarding the commissioning and provision of non-audit services by the auditors; agreeing the auditing fees; and monitoring the auditor s independence. In 2005, the Audit Committee discussions also focused on the transition of the Consolidated Financial Statements to International Financial Reporting Standards (IFRS) and the creation of an internal control system for financial reporting whose strict formalization, extensive documentation requirements and control processes satisfy the requirements of Section 404 of the U.S. Sarbanes-Oxley Act (SOX). Furthermore, the Audit Committee dealt in detail with the preparation of a proposal by the Supervisory Board to the Annual Meeting for the election of an auditor. In the course of a structured selection process, the Audit Committee evaluated the tenders and services of various audit companies. In accordance with the recommendation of the Audit Committee, the Supervisory Board will propose to the Annual Meeting to elect KPMG as the new auditor for the Financial Statements of BASF Group and BASF Aktiengesellschaft as well as the Annual Report on Form 20-F of BASF Aktiengesellschaft. It was not necessary to convene the Mediation Committee in Its members are Supervisory Board Chairman Dr. Jürgen F. Strube (chairman), Supervisory Board Deputy Chairman Robert Oswald (deputy chairman), Dr. Tessen von Heydebreck and Michael Vassiliadis.

178 Corporate Governance Report of the Supervisory Board Financial Statements of the BASF Group and BASF Aktiengesellschaft On the basis of the preliminary review by the Audit Committee, on which the Chairman of the Audit Committee reported to the Supervisory Board, we have examined the Financial Statements of BASF Aktiengesellschaft for 2005, the proposal by the Board of Executive Directors for the appropriation of profit, the BASF Group Consolidated Financial Statements and Management s Analysis for BASF Aktiengesellschaft and the BASF Group. Deloitte & Touche GmbH, the auditors elected by the Annual Meeting for fiscal 2005, have examined the Financial Statements of BASF Aktiengesellschaft and the BASF Group Consolidated Financial Statements, including the bookkeeping and Management s Analysis, and have approved them free of qualification. The auditors also noted that the Board of Executive Directors, in accordance with Section 91 (2) of the German Stock Corporation Act, had instituted a suitable information and monitoring system which met the needs of the company and appeared suitable, both in de-sign and the way in which it had been applied, to provide early warning of developments that pose a threat to the continued existence of the company. The documents to be examined and the auditors reports were sent in good time to every member of the Supervisory Board. The auditors attended the accounts review meeting of the Audit Committee on February 20, 2006 as well as the accounts meeting of the Supervisory Board on February 28, 2006 and reported on the main findings of their audit. The auditors also provided detailed explanations of their reports on the day before the accounts review meeting. We have reviewed the auditors reports. The results of the preliminary review by the Audit Committee and the results of our own examination fully concur with those of the audit. The Supervisory Board sees no grounds for objections. At the Supervisory Board s accounts meeting on February 28, 2006, we approved the Financial Statements of BASF Aktiengesellschaft drawn up by the Board of Executive Directors and the Consolidated Financial Statements of the BASF Group, making the Financial Statements final. We concur with the proposal of the Board of Executive Directors regarding the appropriation of profit and the payment of a dividend of 2.00 per share. Composition of the Supervisory Board and Board of Executive Directors There were no changes to the composition of the Supervisory Board in In its meeting on December 16, 2005, the Supervisory Board appointed Dr. Martin Brudermüller as a member of the Board of Executive Directors with effect from January 1, This first appointment has a term of three years. Effective April 1, 2006, Dr. Martin Brudermüller will be responsible for Asia and will be headquartered in Hong Kong. The appointment takes account of the importance of the fast growing Asian region for BASF. In the same meeting, the Supervisory Board extended the term of the Vice Chairman of the Board of Executive Directors and Industrial Relations Director, Eggert Voscherau, which would have expired at the end of the Annual Meeting on May 4, 2006, for a further two years until the end of the Annual Meeting in Ludwigshafen, February 28, 2006 The Supervisory Board Dr. Jürgen F. Strube Chairman of the Supervisory Board

179 Corporate Governance Compliance Statement in Accordance with the German Corporate Governance Code Compliance Statement in Accordance with the German Corporate Governance Code Compliance Statement 2005 of the Board of Executive Directors and the Supervisory Board of BASF Aktiengesellschaft 1. Statement of Principles pursuant to 161 AktG [Stock Corporation Act] We declare that the recommendations by the Government Commission on the German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette have been complied with in the year 2005 and will be complied with in the year 2006 subject to the measures outlined below. 2. Deviations a) Compensation of Chair and Membership in Supervisory Board Committees As set forth in Section of the Code, compensation shall take into account the chair position and the membership in Supervisory Board committees. In respect to the Audit Committee we comply with this recommendation in addition to granting an attendance fee for the committee meetings. The membership in the other committees is solely reimbursed by granting an attendance fee for the committee meetings. A supplementary compensation for the chair is not provided for, since this function has to date been exercised by the Chairman of the Supervisory Board. It will be proposed to the 2006 Annual General Meeting to newly regulate Supervisory Board compensation, taking, in principle, the recommendations of Section of the Code into account. Except is the Mediation Committee pursuant to 27 Section 3 of the MitbestG [Codetermination Act], which, at our company, did not have to convene to date. Its members are not entitled to a specific compensation in addition to any possible attendance fee for the meetings. Committees report regularly to the Supervisory Board on the work of the Committees. This includes the work of the Nomination and Compensation Committee (Personalausschuss). Beyond that we do not comply with the abovementioned recommendations, especially not with the recommendation to report on the individualized compensation of the Executive Board and the Supervisory Board in 2005 and c) Publication to the shareholders of candidates proposed for the Supervisory Board Chair In accordance with this recommendation newly included in 2005, candidates for the Supervisory Board Chair shall be published to the shareholders, although those candidates, as a rule, are members of a Supervisory Board still to be elected and the Chairman of the Supervisory Board has to be elected from among them. An early nomination may, therefore, lead, in fact, to a prior determination of the Supervisory Board s future members. In the event of a by-election, separate in time from a Supervisory Board election, there is, a priori, no opportunity to publish the candidates to the shareholders. We, therefore, consider the recommendation to be less practical. Since for the time being an election of the Chairman of the Supervisory Board is not pending, we intend to observe the further development, before we decide on a comply or an explain. d) Compliance Statement Pursuant to Section 3.10 of the Code, the Board of Executive Directors and the Supervisory Board shall report each year in the Company s Annual Report on the Company s corporate governance. This includes the explanation of possible deviations from the recommendations of the Code. By 161 AktG this reporting obligation is regulated with, in part, different content. The Board of Executive Directors and the Supervisory Board resolved to exclusively report as required by law. b) Dealing with the structure of the Executive Board compensation system by the full Supervisory Board; assessment of the appropriateness of the compensation of the members of the Executive Board by also applying performance-related criteria; individualized publication of the compensation of the members of the Executive Board and the Supervisory Board The respective chairmen of the Supervisory Board Ludwigshafen, December 16, 2005 The Supervisory Board of BASF Aktiengesellschaft The Board of Executive Directors of BASF Aktiengesellschaft

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181 > What really makes projects successful?

182

183 >> Partnership Successfully realizing a project like our new Verbund site in Nanjing, China within only four years between groundbreaking and the start of operations is only possible with strong partners. You Houping, Sinopec, and Dr. Bernd Blumenberg, BASF, together head the joint venture BASF-YPC Co. Ltd. that operates the new site. The largest investment in our 140-year history is based on the Verbund concept that we apply at our main site in Ludwigshafen, Germany. The Nanjing site has an area of 220 hectares and produces 1.7 million metric tons of high-value chemicals and plastics. As a result, the site plays an important part in our economic success in the fast growing Chinese market.

184 Consolidated Financial Statements > Statement by the Board of Executive Directors Consolidated Financial Statements Statement by the Board of Executive Directors The Board of Executive Directors of the BASF Group is responsible for preparing the Consolidated Financial Statements and Management s Analysis of BASF Group. The Consolidated Financial Statements were prepared for the first time according to the International Financial Reporting Standards (IFRS) in U.S. genenerally accepted accounting principles (U.S. GAAP) were implemented as far as possible within the scope offered by the accounting and valuation options under IFRS. A reconciliation of net income and stockholders equity to U.S. GAAP is provided to account for the remaining differences. The conversion from the regulations of the German Commercial Code (HGB) to IFRS is shown in detail in a reconciliation in the notes to the financial statements. We have established effective internal control systems over financial reporting, which also comply with the regulations of Section 404 of the Sarbanes Oxley Act, to ensure the adherence of the Consolidated Financial Statements and Management s Analysis with applicable accounting rules, and the truth and fairness of our company reporting. The adherence to uniform, Group-wide accounting and reporting standards and the reliability and effectiveness of our control systems are continuously audited by our internal audit department throughout the Group. Our risk management system complies with the requirements of the German Act on Verification and Transparency in the Corporate Sector (Section 91 (2), Stock Corporation Act). The system identifies substantial risks in a timely manner enabling the Board of Executive Directors to take appropriate action as required. Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft has examined BASF s Consolidated Financial Statements and Management s Analysis and approved them free of qualification. The Consolidated Financial Statements and Management s Analysis and the auditors report were examined at length by the Audit Committee of the Supervisory Board in the presence of the auditors and were discussed in detail at a Supervisory Board meeting at which the auditors were also present. For the results of the Supervisory Board s examination, please refer to the Report of the Supervisory Board. Ludwigshafen, February 20, 2006 Dr. Jürgen Hambrecht Chairman of the Board of Executive Directors of BASF Aktiengesellschaft Dr. Kurt Bock Chief Financial Officer of BASF Aktiengesellschaft

185 Consolidated Financial Statements > Report of Independent Auditors Independent Auditors Report We have audited the accompanying consolidated balance sheets of BASF Aktiengesellschaft and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, recognized income and expense, stockholders equity, and cash flows for the years then ended. 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 audits. We conducted our audits in accordance with auditing standards generally accepted in Germany and the standards of the Public Company Accounting Oversight Board (United States). 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 also 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BASF Aktiengesellschaft and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with International Financial Reporting Standards. Application of accounting principles generally accepted in the United States would have affected stockholders equity as of December 31, 2005 and 2004 and net income for the years then ended to the extent summarized by the Company in Note 5 to the Consolidated Financial Statements. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2006 expressed an unqualified opinion on management s assessment of the effectiveness of the Company s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company s internal control over financial reporting. Frankfurt am Main, February 21, 2006 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft Dr. Künnemann Wirtschaftsprüfer Dr. Beine Wirtschaftsprüfer

186 BASF Group Consolidated Financial Statements and Notes Consolidated Statements of Income Million Explanations in Note Sales (6) 42, ,536.6 Cost of sales 29, ,721.2 Gross profit on sales 13, ,815.4 Selling expenses 4, ,309.2 General and administrative expenses Research and development expenses 1, Other operating income (7) ,046.1 Other operating expenses (8) 1, ,665.9 Income from operations 5, ,192.5 Income from companies accounted for using the equity method 5.6 (7.2) Other income from participations (588.5) Interest result (170.0) (206.1) Other financial result (81.9) (43.9) Financial result (9) 96.1 (845.7) Income before taxes and minority interests 5, ,346.8 Income taxes (10) 2, ,213.5 Income before minority interests 3, ,133.3 Minority interests (11) Net income 3, ,004.3 Earnings per share ( ) (4) Dilution effect Diluted earnings per share ( ) (4)

187 88 89 Consolidated Balance Sheets ASSETS Million Explanations in Note Long-term assets Intangible assets (14) 3, ,606.6 Property, plant and equipment (15) 13, ,062.7 Investments accounted for using the equity method (16) ,100.5 Other financial assets (16) Deferred taxes (10) 1, ,336.6 Other long-term assets (18) , ,518.0 Short-term assets Inventories (17) 5, ,645.4 Accounts receivable, trade 7, ,860.8 Other receivables and other assets (18) 1, ,132.8 Liquid funds (19) 1, , , ,929.5 Total assets 35, ,447.5 STOCKHOLDERS EQUITY AND LIABILITIES Million Explanations in Note Stockholders equity Subscribed capital (20) 1, ,383.5 Capital surplus (20) 3, ,027.6 Retained earnings (21) 11, ,923.1 Other comprehensive income (21) (60.5) Minority interests (22) , ,602.2 Long-term liabilities Provisions for pensions and similar obligations (23) 1, ,124.1 Other provisions (24) 2, ,375.7 Deferred taxes (10) Financial indebtedness (25) 3, ,844.6 Other liabilities (25) 1, , , ,371.2 Short-term liabilities Accounts payable, trade 2, ,371.5 Provisions (24) 2, ,364.1 Tax liabilities (10) Financial indebtedness (25) ,452.8 Other liabilities (25) 1, , , ,474.1 Total stockholders equity and liabilities 35, ,447.5

188 BASF Group Consolidated Financial Statements and Notes Consolidated Statements of Recognized Income and Expense Income and expense items Million Income before minority interests 3, ,133.3 Fair value changes in available-for-sale securities Cash-flow hedges (21.2) (42.4) Change in foreign currency translation adjustments (230.6) Actuarial gains/losses from pensions and similar obligations (1,075.9) (364.5) Deferred taxes Minority interests 29.4 (19.4) Total income and expense recognized in equity (412.9) Total income and expense for the period 3, ,720.4 Thereof BASF 3, ,610.8 Thereof minority interests Development of income and expense recognized directly in equity Retained earnings Other comprehensive income Total income and expense recognized directly in equity Actuarial gains/ losses Foreign currency translation adjustment Fair value changes in available-forsale Cash-flow hedges Total of other comprehensive income Million securities As of January 1, 2005 (233.9) (226.2) (26.9) (60.5) (294.4) Additions (1,075.9) (25.6) (308.5) Releases (11.8) 4.4 (7.4) (7.4) Deferred taxes (13.6) (0.8) 11.6 (2.8) As of December 31, 2005 (893.8) (36.5) (197.1) As of January 1, 2004 under IFRS Additions (364.5) (230.6) (43.1) (172.5) (537.0) Releases (4.3) 0.7 (3.6) (3.6) Deferred taxes (3.4) As of December 31, 2004 (233.9) (226.2) (26.9) (60.5) (294.4)

189 90 91 Consolidated Statements of Stockholders Equity Million Number of subscribed shares outstanding Subscribed capital Capital surplus Retained earnings Other Comprehensive income 1 Minority interests Total stockholders equity As of January 1, ,440,410 1, , ,923.1 (60.5) ,602.2 Share buy-back and cancellation of own shares including own shares intended to be cancelled (26,062,229) (66.7) 67.0 (1,435.1) (1,434.8) Exercise of exchange rights of former Wintershall shareholders 819 Capital withdrawal/contribution Dividends paid (903.9) (78.2) 2 (982.1) Net income 3, ,167.5 Income and expense recognized directly in equity (659.9) Changes in scope of consolidation and other changes (2.9) December 31, ,379,000 1, , , ,523.5 December 31, 2003 under HGB 556,643,410 1, , ,054.8 (971.9) ,878.4 Changes in accounting policies in the financial statements prepared according to German GAAP in 2004 (202.5) (99.4) (66.4) (368.3) Adjustments due to first-time adoption of IFRS (219.8) 1,170.4 (3.0) January 1, 2004 under IFRS 556,643,410 1, , , ,460.3 Share buy-back and cancellation of own shares including own shares intended to be cancelled (16,203,000) (41.5) 39.4 (723.6) (725.7) Capital withdrawal/contribution 4.1 (59.6) (55.5) Dividends paid (774.1) (77.7) 2 (851.8) Net income 2, ,133.3 Income and expense recognized directly in equity (233.9) (159.6) (19.4) (412.9) Changes in scope of consolidation and other changes December 31, ,440,410 1, , ,923.1 (60.5) , Details are provided in the Consolidated Statements of Recognized Income and Expense on page Profit and loss transfers 3 Granting of BASF shares under the employee share program plus 4 The effects of conversion to IFRS are shown in detail in Note 4.

190 BASF Group Consolidated Financial Statements and Notes Consolidated Statements of Cash Flows* Million Net income 3, ,004.3 Depreciation and amortization of intangible assets. property plant and equipment and financial assets 2, ,118.5 Changes in pension provisions, defined benefit assets and other non-cash items (11.8) 87.9 Net gains from disposal of long-term assets and securities (422.1) (383.8) Changes in inventories (412.3) (503.5) Changes in receivables (1,150.4) Changes in operating liabilities and other provisions ,461.0 Cash provided by operating activities before external financing of pension obligations 5, ,634.0 External financing of pension obligations (CTA) (3,660.0) Cash provided by operating activities 1, ,634.0 Payments related to intangible assets and property, plant and equipment (1,947.7) (2,057.0) Payments related to financial assets and securities (211.4) (203.8) Payments related to acquisitions (535.7) (103.6) Proceeds from divestitures 1, Proceeds from the disposal of long-term assets and marketable securities Cash used in investing activities (705.7) (1,233.0) Capital increases/repayments 9.5 (55.5) Share repurchases (1,434.8) (725.7) Proceeds from the addition of financial liabilities 2, Repayment of financial liabilities (1,942.4) (909.7) Dividends paid: to shareholders of BASF Aktiengesellschaft (903.9) (774.1) to minority shareholders (78.2) (77.7) Cash used in financing activities (2,108.3) (1,836.0) Net changes in cash and cash equivalents (1,223.7) 1,565.0 Effects on cash and cash equivalents: from foreign exchange rates 35.3 (17.3) from changes in scope of consolidation Cash and cash equivalents as of beginning of year 2, Cash and cash equivalents as of end of year ,085.9 Marketable securities Liquid funds as shown on the balance sheet 1, ,290.5 * The statements of cash flows are discussed in detail in the Liquidity and Capital Resources section on page 30 onward of the Management s Analysis. For further information regarding Consolidated Statements of Cash Flows, see explanations in Note 12.

191 Summary of accounting policies (a) Basis of presentation The Consolidated Financial Statements of BASF Aktiengesellschaft ( BASF or BASF Aktiengesellschaft ) were prepared for the first time according to the International Financial Reporting Standards (IFRS) valid as of December 31, All those IFRS valid in the reporting year 2005 as well as the pronouncements of the International Financial Reporting Interpretations Committee (IFRIC) were adopted to the extent that they were endorsed by the European Union. IFRS, which had not been endorsed by the European Union until that time, had no effect on BASF s Consolidated Financial Statements. The consolidated financial statements of the BASF Group have been converted to IFRS retrospectively as of January 1, The effects of the first-time adoption of IFRS are shown in Note 3. The Consolidated Financial Statements comply with U.S. Generally Accepted Accounting Principles (U.S. GAAP) as far as permissible under IFRS. The remaining differences are shown in a reconciliation of net income and stockholders equity to U.S. GAAP in Note 5. The Consolidated Financial Statements were approved by the Supervisory Board of BASF Aktiengesellschaft at their meeting on Febraury 28, 2006 after their examination by the Audit Committee of the Supervisory Board Consolidated companies as of January Thereof proportionally consolidated First-time consolidations Thereof proportionally consolidated 4 Thereof changes in the consolidation method (1) Deconsolidations 8 14 Thereof proportionally consolidated Consolidated as of December Thereof proportionally consolidated Subsidiaries and joint ventures whose impact on the net worth, financial position and results of the Company are individually and in aggregate immaterial are not consolidated. The effects of not consolidating immaterial companies on the net worth, financial position and results of the Company account in each case for less than 2.0%. Affiliated companies not consolidated due to immateriality, non-proportionally consolidated jointly-owned companies, as well as the remaining associated companies are accounted for using the equity method. Associated companies are those entities in which the Company has a participation of at least 20% and exercises a significant influence over the operating and financial policies. Overall, this applies to: (b) Scope of consolidation The Consolidated Financial Statements include BASF Aktiengesellschaft, the parent company, with its headquarters in Germany as well as all the material subsidiaries in which BASF Aktiengesellschaft directly or indirectly exercises a majority of the voting rights (collectively, the Company ). Material, jointly-operated companies are included on a proportional consolidation basis Affiliated companies Joint ventures 2 3 Other associated companies

192 BASF Group Consolidated Financial Statements and Notes First-time consolidations in 2005 comprised: Three companies in Asia and four in Europe in connection with the acquisition of the electronic chemicals business of Merck KGaA, Darmstadt, Germany; Leuna Miramid GmbH, Leuna, Germany, which produces and sells polyamide and polyamide compounds; Three companies in connection with the acquisition of a consulting company, plan business market enabling services AG, which is focused on the design of business processes and their mapping in IT systems; Two companies headquartered in Switzerland and one in France as a result of the acquisition of the Swiss fine chemicals company, Orgamol; OOO Achimgaz, the Russian Federation, a joint venture with Gazprom for the exploration of gas, which has been proportionally consolidated; Six further newly-founded companies in Canada, Germany, the United Kingdom and the United States; and Seven further previously unconsolidated companies with headquarters in Germany, China, Taiwan, Malaysia and Turkey due to their increased importance. First time consolidations in 2004 comprised: BASF Performance Polymers GmbH, Rudolstadt, Germany, which produces nylon granules and compounding products; Foam Enterprises Inc., United States, which produces rigid polyurethane foams; BASF Pipeline Holdings LLC, United States, which holds a direct stake in a butadiene pipeline in the United States; Three Wintershall companies in Brazil, which explore for oil and gas in Brazil; Eight previously unconsolidated European and two U.S. companies due to corporate restructuring; and Four further previously unconsolidated companies with headquarters in China, Japan, and Germany due to their increased importance. Deconsolidations in 2004 included two companies due to their decreased significance and five due to restructuring or liquidation. A further seven companies were eliminated from the scope of consolidation as a result of the sale of the printing systems business to CVC Capital Partners. Deconsolidations in 2005 included eight companies due to their decreased importance or due to mergers with other BASF companies. Changes in the scope of consolidation had the following effects on the sales and the balance sheet of the BASF Group: Million % Million % Sales Long-term assets Thereof property, plant and equipment Short-term assets (38.0) (0.3) Thereof liquid funds Assets (34.8) (0.1) Stockholders equity Long-term liabilities Thereof financial indebtedness Short-term liabilities (54.7) (0.6) (17.2) (0.2) Thereof financial indebtedness Stockholders equity and liabilities (34.8) (0.1) Contingent liabilities and other financial obligations

193 94 95 Proportional consolidation Condensed financial information relating to the Company s pro rata interest in jointly operated companies accounted for using the proportional consolidation method is as follows: Million Income statement information Sales 3, ,258.6 Gross profit on sales Income from operations Income before taxes and minority interests Net income Balance sheet information Long-term assets 1, ,241.9 Thereof property, plant and equipment 1, ,177.0 Short-term assets Thereof liquid funds Assets 2, ,769.7 Stockholders equity Long-term liabilities Thereof financial indebtedness Short-term liabilities Thereof financial indebtedness Stockholders equity 2, ,769.7 Warranties and other financial obligations Cash flow information Cash provided by operating activities Cash used in investing activities (205.5) (267.9) Cash provided by financing activities Net change in cash and cash equivalents 16.5 (6.7)

194 BASF Group Consolidated Financial Statements and Notes Associated companies accounted for using the equity method Condensed financial information of the most significant associated companies accounted for using the equity method, including the Solvin Group (BASF s share: 25%) and the Svalöf Weibull Group (BASF s share: 40%) are shown below. The 2004 figures contain the Basell Group, which was sold in 2005 (BASF s share: 50%). Million Income statement information Sales 1, ,052.7 Gross profit on sales ,131.7 Income from operations Income before taxes and minority interests Net income BASF s share of net income Balance sheet information Long-term assets ,258.4 Thereof property, plant, and equipment ,430.0 Short-term assets ,486.4 Thereof liquid funds Total assets 1, ,744.8 Stockholders equity ,540.3 Long-term liabilities ,158.0 Thereof financial indebtedness ,338.7 Short-term liabilities ,046.5 Thereof financial indebtedness Total stockholders equity and liabilities 1, ,744.8 BASF s investment ,695.8 (c) Summary of significant accounting policies Balance sheet date: The individual financial statements of the companies forming part of the group (hereinafter referred to as consolidated companies ) are generally prepared as of the balance sheet date of the Consolidated Financial Statements. In certain cases, interim financial statements or adjusted statements as of the balance sheet date of the Consolidated Financial Statements are prepared and used. Uniform valuation: Assets and liabilities of consolidated companies are accounted for and valued uniformly in accordance with the principles described herein. For companies accounted for using the equity method, significant deviations in the valuations are adjusted. Eliminations: Transactions between consolidated companies as well as inter-company profits resulting from sales and services rendered between consolidated companies are eliminated in full, and those for jointly operated companies on a pro rata basis. Inter-company profits resulting from sales at market prices to companies accounted for using the equity method are not eliminated due to immateriality.

195 96 97 Capital consolidation: Capital consolidation is based on the purchase method, which conforms with U.S. GAAP. Initially, all assets, debts and intangible assets that are to be capitalized are valued at fair value. Finally, the acquisition cost is matched to the proportionate share of the acquired equity. Differences not allocated to individual assets are capitalized as goodwill. Goodwill is not amortized, but written down in the case of impairment (see page 126 for further information on intangible assets). Revenue recognition: Revenues from product sales and the rendering of services are recognized upon shipment to customers or performance of the service upon the transfer of ownership and risks to the buyer. Provisions for discounts, sales returns, rebates to customers, estimated future warranty obligations and other claims are provided for in the same period the related sales are recorded. In certain cases deliveries require customer acceptance. Revenues are deferred in these cases until customer acceptance occurs. Long-term contracts primarily concern the construction of chemical plants for third parties. Realization of revenues and costs takes place according to the stage of completion when the outcome of the construction contract can be estimated reliably. To the extent that the outcome of the construction cannot be estimated reliably, revenue is recognized only to the extent of contract costs incurred. Expected losses on the construction contract are recognized by write-downs to the lower fair value. Revenue from interest-bearing assets is recognized according to the outstanding receivables at reporting date using the effective interest method. Dividends are recognized when the shareholder s right to receive payment is established. Payments relating to the sale or licensing of technologies or technological expertise are recognized in income according to the contractually agreed transfer of the rights and obligations relating to those technologies. Borrowing costs: If the construction phase of property, plant or equipment extends beyond a period of one year, the interest incurred on borrowed capital that is directly attributable to that asset is capitalized as part of the cost of that asset up to the date the asset is ready for its intended use or available for sale. All other borrowing costs are recognized as an expense in the period in which they are incurred. Investment subsidies: Government grants related to the acquisition or construction of property, plant and equipment reduce the acquisition or construction cost of the respective assets. Other government grants or government assistance are set up as deferred income and recognized as income over the underlying period or the expected useful life of the respective asset. Conversion of foreign currency items: The cost of assets acquired in foreign currencies and revenues from sales in foreign currencies are recorded at current rates on transaction dates. Short-term foreign currency receivables and liabilities are valued at the rate on the balance sheet date. Translation of foreign currency financial statements: The translation of foreign currency financial statements conforms with the functional currencies of the consolidated companies. The local currency or the U.S. dollar is the functional currency of BASF subsidiaries and jointly operated companies in North America (NAFTA), Japan, Korea, China, Brazil, Malaysia, Singapore and the Russian Federation. Translation therefore takes place using the

196 BASF Group Consolidated Financial Statements and Notes current rate method. Balance sheet items are translated to euros at year-end rates. Expenses and income are translated at monthly average rates in Euro and accumulated for the year. The effects of rate changes are shown under currency translation adjustment as a component of other comprehensive income in equity and are treated as income or expense in the consolidated statements of income only upon the disposal of a company. The euro is the functional currency for the remaining companies. The temporal method is therefore used to make the conversion: long-term assets except loans, and paid-in capital are translated using historical rates. Other assets, liabilities and provisions are translated using closing rates. Equity is then calculated as the balancing figure. Expenses and income are converted at monthly average rates and cumulated to year-end figures, except for those items derived from balance sheet items converted at historical rates, which are also translated at historical rates. Foreign exchange gains or losses resulting from the conversion process are recognized in profit or loss and shown in other operating expenses or income. Acquired intangible assets excluding goodwill are valued at cost less regularly scheduled straight-line amortization. The useful life is determined based on the period of the underlying contract and the period of time over which the intangible asset is expected to be used. Writedowns are made when the recoverable amount of the asset is lower than the carrying value. The recoverable value is the higher of fair value less selling costs and value in use. Write-backs (reversals of impairment losses) are made if the reasons for the previous years write-downs no longer exist. Internally generated intangible assets primarily comprises internally developed software. Such software as well as other internally generated assets for internal use are valued at cost and amortized over their useful lives. Write-downs are made if the carrying amount of an asset exceeds the recoverable value. Development costs also includes, in addition to those costs directly attributable to the development of the asset, appropriate allocations of material and manufacturing overheads as well as an appropriate share of the administrative costs involved in the development of the intangible assets. Borrowing costs are capitalized if they are material and are incurred during the period of the development of the asset. The average amortization period for intangible assets with finite useful lives is 9 years for 2005 and 8 years for 2004 based on the following expected useful lives: Depreciation periods Years Marketing and similar rights 2 20 Product rights, licenses and trademarks 2 15 Know-how, patents and production technologies 3 15 Internally generated intangible assets 3 5 Other rights and values 2 20 Goodwill: Since 2004, goodwill is only written down if there is an impairment. Impairment testing takes place annually and additionally if there is an indication of an impairment. The goodwill impairment test is based on cash generating units using the discounted cash-flow method. The cash generating units at BASF are principally the business units. Recoverable value is the higher of net sales price and the value in use. Value in use is generally determined using the discounted cashflow method. The estimated cash flows are generally based on the current plans of the Company for the next three years and rely on the expertise of the respective business unit management. For cash flow projections beyond the detailed planning period, growth rates ranging from 0% to 2% were assumed depending on the individual business units. Interest rates used depend on the business unit (business) and the country in which the business unit operates and ranged from 8.7% to 13.8%. If the necessary write-down exceeds the carrying value of goodwill, the write-down is made with the remaining write-down charged evenly to the remaining assets in the cash-generating unit. Goodwill write-downs are reported under other operating expenses.

197 98 99 Emission rights: Emission right certificates granted by the German Emissions Trading Authority (DEHSt) or a similar authority in other European countries are recorded at fair value at the time of issue. Purchased emission rights are recorded at acquisition cost. Property, plant and equipment: Property, plant and equipment is stated at acquisition or production cost less scheduled depreciation over its estimated useful life. Lowvalue assets are fully depreciated in the year of acquisition and are shown as disposals. The revaluation method is not used for the valuation of property, plant and equipment. The cost of self-constructed plants includes direct costs, appropriate allocations of material and manufacturing overheads, and an appropriate share of the administrative costs for those areas involved in the construction of the plants. Borrowing costs which are incurred during the period of construction are capitalized. For companies in Germany, borrowing costs were set at 4.5% whereas country-specific rates were used for Group companies outside Germany. Expected costs involved in the regularly scheduled shut-down of important plants are capitalized as part of the asset and depreciated using the straight-line method over the period to the next planned shut-down. In oil and gas exploration, the estimated discounted costs for rehabilitating sites, especially the filling of wells and the removal of production facilities, are capitalized as part of the individual asset and depreciated over the expected useful life of the asset using the straight-line method. Long-term assets, including long-distance natural gas pipelines, are depreciated using the straight-line method. The weighted-average periods of depreciation used were as follows: Write-downs are made on property, plant and equipment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets that the Company expects to hold and use is based on the discounted expected future cash flows from the use of the asset less costs for its removal. A writedown is made in the amount of the difference between the net carrying value and the discounted future cash flows. In oil and gas exploration, exploration and production costs are accounted for using the successful efforts method. Under this method, costs of successful and incomplete oil and gas drilling operations are capitalized as property, plant and equipment. Successful drillings are depreciated based on the production and estimated available resources. Successful drillings of German operations that were completed before the end of 2000 are depreciated under the declining balance method over 8 years (for drilling in old fields) and 15 years. Geophysical expenditures, including exploratory and dry-hole costs, are charged against income. Investment properties held to realize capital gains or rental income are immaterial. They are valued at acquisition cost less scheduled depreciation or at fair value, if lower. Leasing: According to IAS 17 leasing contracts are classified as either financing or operating leases. Assets used which are subject to operating leases are not capitalized. Leasing payments are charged to income in the year they are incurred. Depreciation periods 2005 (Years) 2004 (Years) Buildings and structural installations Industrial plant and machinery Long-distance natural gas pipelines Working and office equipment and other facilities 8 8

198 BASF Group Consolidated Financial Statements and Notes A lease is classified as a finance lease if it transfers substantially all of the risks and rewards incidental to its ownership. Assets used subject to a finance lease are recorded at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Leasing payments are apportioned between the interest component and the principal component. The principal component reduces the outstanding liability, while the interest component is charged as interest expense. Depreciation takes place over the useful life of the asset or the period of the lease if it is shorter. Details regarding the individual leasing contracts are presented in Note 30. Investments in companies accounted for using the equity method: The capital consolidation of participations accounted for using the equity method is carried out under the same principles as for those companies which are fully consolidated. The carrying values of these companies are adjusted annually based on the pro rata share of income, dividends and other changes in stockholders equity. Goodwill associated with such investments is no longer amortized since 2004 but is written down only in the case of an impairment. Financial instruments Financial assets and financial liabilities are recorded on the balance sheet when BASF Group becomes a party to a financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire or when the financial asset with all risks and rewards of ownership is transferred. Financial liabilities are derecognized when the contractual obligation is discharged, cancelled or expires. Customary purchases or sales of assets are accounted for using settlement date accounting. According to IAS 32, financial instruments include primary instruments such as accounts receivable and accounts payable, investments and equity instruments. Financial instruments also include derivatives, which are matched to underlying primary financial instruments and used to hedge risks, such as those arising from changes in currency exchange and interest rates. Financial assets and liabilities are divided into the following valuation categories: Financial assets and liabilities that are measured at fair value through profit or loss include exclusively derivatives and other trading instruments. Within this valuation category are included cash balances, time deposits and checks, which are shown under liquid funds, as well as derivatives shown under other assets and other liabilities. Loans and receivables comprise financial assets with fixed or determinable payments, which are not quoted on an active market, and are not derivatives or classified as available-for-sale. Other receivables and loans classified under accounts receivable, trade, other receivables and miscellaneous short-term assets, and other long-term assets are included herein. Initial valuation is done at present value, which generally matches the nominal value of the receivable or loan. Interest-free and low-interest long-term loans and receivables are recorded at present value. Subsequent valuations are generally done at historical cost, under consideration of the effective interest method. Held-to-maturity financial instruments consist of financial assets with fixed or determinable payments, and a fixed term, for which the company has the ability and intent to hold until maturity, and which are not derivatives and do not fall into other valuation categories. Initial valuation is done at present value, which generally matches the nominal value. Subsequent valuations are generally done at historical cost, under consideration of the effective interest method. There exist no material financial assets that fall into this category. Available-for-sale financial instruments comprise financial assets, which are not derivatives and do not fall into any of the previously stated valuation categories. Participations booked under the item other financial assets not accounted for using the equity method, and securities which are available for sale as well as long-term securities reported under the item liquid funds are included here. Initial valuation is done at present value. Changes in the present value are booked into equity under the item other comprehensive income, and only flow through the income statement when they are disposed of or have an impairment in value. Participations whose present value cannot be reliably determined are carried at historical cost, and are written off in the case of an impairment in value.

199 Financial liabilities are initially valued at present value, which generally corresponds to the amount received or nominal value. Subsequent valuations are generally done at historical cost, under consideration of the effective interest method. In 2005, there were no reclassifications between these valuation categories. Derivative financial instruments can be embedded within other contracts. Under IFRS, embedded derivatives are recorded separately from their base contracts and shown at fair value. Derivatives within the BASF group are generally used for hedging purposes. The bulk of these contracts, however, are not accounted for using hedge accounting as defined under IFRS. Nonetheless, these derivatives are effective hedges in the context of the group strategy. Changes in the fair value of the derivatives almost completely offset the change in the value of the underlying contracts. The BASF Group uses hedge accounting for certain hedges of future transactions ( cash flow hedge ). The effective portion of the change in fair value is thereby recorded directly in equity under other comprehensive income, taking deferred taxes into account, and does not flow through the income statement. The ineffective portion is recorded immediately in the income statement. In the case of future transactions that will lead to a non-financial asset or a non-financial debt being booked, the cumulated fair value changes in equity are immediately charged against the acquisition cost. For future transactions that will lead to financial debts or assets, the cumulated fair value changes in equity flow through the income statement during the same reporting period in which the underlying contract effects the income statement. The hedging time frame of future transactions generally extends up to one year; the maturity of the hedging instrument is based upon the effective date of the future transaction. All hedged future transactions became effective in the 2005 business year. The use of derivative financial instruments to hedge exchange rate, interest and price risks is detailed in Note 29. If there are indications of impairment in financial instruments, impairment write-downs are carried out. The indications include above all, a reduction in the fair value, a significant reduction in credit quality, the existence of transfer risks, payment delays, higher probability of insolvency, the necessity of debtor recapitalization or the disappearance of an active market. If the reason for a write-down for loans and receivables as well as held-to-maturity financial instruments no longer exists, the write-down is reversed up to the acquisition cost carried forward and recognized in income. In the case of available for sale securities, write-ups principally do not flow through the income statement, but are credited directly to equity (other comprehensive income). Write-ups up to the amount of the original write-down are recognized in income in the case of debt instruments; write-ups beyond are recognized in equity. Write-ups are not made for participations for which a fair value cannot be reliably determined and are therefore carried at acquisition cost. Deferred tax assets: Deferred tax assets are recorded for taxable temporary differences between the valuation of assets and liabilities in the financial statements of the consolidated companies and the carrying amounts for tax purposes. In addition, deferred taxes are recorded for tax loss carryforwards to the extent that it is probable that future taxable profit for the relevant tax authority will be available against which the tax loss carryforwards can be utilized. For companies located in Germany, a 38% tax rate is applied; for other companies, the tax rates applicable in the individual countries are used. Appropriate valuation allowances are made if expected future earnings of a company make it seem more likely than not that the tax benefits will not be realized. Inventories: Inventories are carried at acquisition costs or production costs. Write-downs are made if the fair value or value in use based on the net realizable value is lower than the carrying value. The net realizable value is based on fair value less costs to sell which can be directly allocated to the respective asset incurred prior to sale.

200 BASF Group Consolidated Financial Statements and Notes Production costs include, in addition to direct costs, an appropriate allocation of overhead cost of production using normal utilization rates of the production plants. In addition, pensions, social services and voluntary social benefits are included as well as allocations for administrative costs, provided they relate to the production process. Financing costs are not included in production costs. Pension provisions and other personal obligations: Provisions for pensions are based on actuarial computations made according to the projected unit credit method. Similar obligations, especially those arising from commitments made by North American Group companies to pay the healthcare costs and life insurance premiums of retired staff and their dependents, are included in pension provisions. Actuarial profits and losses are offset against other comprehensive income. The calculation of the pension provisions was based largely on reports prepared by Bode Hewitt AG & Co. KG in Munich, Germany. Other provisions: Other provisions are set up when there is a present obligation as a result of a past event and when there is a probable outflow of resources whose amount can be reliably estimated. The amount of the provision is the probable amount required to settle the obligation. Provisions are recognized for German trade income tax and German corporate income tax and similar income taxes in the amount necessary to meet the expected payment obligations, less any prepayments that have been made. Other taxes assessed are appropriately considered. Provisions are established for certain environmental protection measures and risks if the measures are likely necessary as a result of legal or regulatory obligations or other events and are not capitalized. Provisions for required recultivations associated with oil and gas operations primarily concern the filling of wells and the removal of production facilities upon the termination of production. The present value of the obligation increases the acquisition cost of the respective asset when it is initially recognized. Provisions are made for expected severance payments or similar personnel expenses as well as for demolition expenses and other charges related to the closing down of operations that have been decided upon and publicly announced by management. The probable amount required to settle long-term obligations is discounted if the effect of discounting is material. In this case, valuation of the provision is done at present value. Financing costs are shown in other financial results. Provisions for long-service and anniversary bonuses are largely calculated based on actuarial principles, and discounted using an interest rate of 3.25%. For signed contracts under the pre-retirement part-time programs, provisions for the present value of supplemental (top-up) payments are provided in their full amount and the wage and salary payments due during the passive phase of agreements are accrued through installments and discounted at an interest rate of 3.0%. Provisions are recorded for the expected costs of pre-retirement part-time programs that are anticipated to be contracted during the term of the collective bargaining agreements, taking into consideration the ceilings provided in the collective agreements. The formation of provisions for the BASF stock option program (BOP) and BASF s incentive share program plus is described in detail in Note 28. Deferred tax liabilities: Deferred tax liabilities are recorded for temporary differences between the valuation of assets and liabilities in the financial statements of the consolidated company and the carrying amounts for tax purposes to the extent that there is a surplus of deferred tax liabilities relating to a taxation authority.

201 Earnings per share: The calculation of earnings per share is based on the average number of common shares outstanding during the applicable period and the net income of the period after minority interests. Use of estimates and assumptions in financial statement preparation: The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In the preparation of these Consolidated Financial Statements, estimates and assumptions have been made by management concerning the selection of useful lives of property, plant and equipment and intangible assets, the measurement of provisions, the carrying value of investments, and other similar evaluations of assets and obligations. Given the uncertainty regarding the determination of these factors, actual results could differ from these estimates. The use of estimates at closing date is especially significant for the following items: Goodwill is measured for reporting units and is tested for impairment once a year. Write downs are made when an impairment has been determined, i.e., when the book value of the reporting unit exceeds the net present value of future cash flows. Impairment testing relies on longterm earnings predictions based on economic trends. Deferred taxes are also recognized for tax loss carryforwards. Their realization depends on the future taxable profits of the respective group companies. Write-downs are made when it is uncertain if future earnings will be sufficient to take advantage of the tax loss carryforwards. Pension provisions are influenced by assumptions covering the future development of wages and salaries, future pension payments, interest rates and the value of plan assets. Errors in assumptions could lead to an overor underfunding of pension liabilities which are offset against retained earnings. See Note 23 for additional information. Other provisions also cover risks resulting from legal disputes and proceedings. In order to determine the amount of the provisions, the facts relating to each case, the size of the claim, claims awarded in similar cases and independent expert advice are considered along with assumptions regarding the probability of a successful claim and the range of possible claims. The actual costs can deviate from these estimates (See also Note 27). Other provisions also include expected charges for the rehabilitation of contaminated sites, the re-cultivation of landfills, the removal of environmental contamination at existing production or storage facilities and other similar measures. If the respective group company is the only possible claimant that can be identified, the provision covers the entire expected claim. At sites operated together by one or more partners, the provision covers only BASF s share of the expected claim. The determination of the amount of the claim is complex and is based on the available site data, the technology and processes used as well as current regulations (See Note 24). Assumptions have to be made in determining the interest rate to be used in calculating long-term provisions. Write-downs of assets are made in the case of an impairment. An impairment test is conducted if certain events indicate an impairment. Impairment tests are based on a comparison of the carrying value and the recoverable amount. The recoverable amount is the higher of net realizable value and value in use. The determination of value in use requires the estimation and discounting of cash flows. The estimation of the cash flows considers all the information available at closing date which may deviate from actual developments. This includes, among other things, expected revenue from sales of products, the return on assets, materials and energy costs. If the recoverable value is lower than the carrying value, a write-down in the amount of the difference is made (compare Notes 14 and 15).

202 BASF Group Consolidated Financial Statements and Notes IFRSs and IFRICs not considered in the preparation of these statements The effects of IFRSs and IFRICs not applied or not yet endorsed by the European Union in the reporting year 2005 were reviewed: IFRS 7 Financial Instruments: Disclosures requires more extensive disclosure regarding financial instruments. The disclosure requirements in IAS 32 were incorporated in IFRS 7 and extended. In addition to the existing disclosure requirements regarding the approach, presentation and measurement of financial instruments, additional information is required regarding the type and extent of risks stemming from financial instruments. As BASF already publishes extensive information in its notes to the financial statements regarding risk, it is not expected that this will have any material effect on the Consolidated Financial Statements of the BASF Group. IFRS 7 is to be applied for reporting years beginning on or after January 1, IFRIC 6 Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment was issued to give guidance on the issue of establishing provisions as a result of the European Union s Directive on Waste Electrical and Electronic Equipment. The IFRIC interpretation clearly states when a provision is to be established according to IAS 37 for the decommissioning of equipment that has been sold to private households before August 13, 2005 ( historical household equipment ). IFRIC 6 will have no effect on the Consolidated Financial Statements of BASF Group. In IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time two specific issues related to IAS 29 were treated. On the one hand, it explains how an entity has to restate its financial statements in accordance with IAS 29 in the first year the existence of hyperinflation is identified in the economy of its functional currency. On the other hand, IFRIC 7 gives guidance on how an entity has to treat deferred taxes in the opening balance sheet. IFRIC 7 is to be applied for reporting years beginning on or after March 1, This interpretation will have no effect on the Group Consolidated Financial Statements of BASF. IFRIC 8 Scope of IFRS 2 clarifies that IFRS 2 (Sharebased Payment) also applies to agreements whereby the entity makes payments for which the entity does not receive any goods or services or inadequate consideration. If the identifiable consideration is less than, or appears to be less than, the fair value of the equity instruments granted or liability incurred, IFRIC 8 interprets this circumstance to indicate that other consideration (i.e., goods or services) has been (or will be) received. Therefore, IFRS 2 is to be applied in such cases. IFRIC 8 is to be applied for reporting years beginning on or after May 1, The application of IFRIC 8 has no effects on the Consolidated Financial Statements of BASF Group, as there are no agreements to which IFRIC 8 would apply.

203 Acquisitions/divestitures On January 28, 2005 BASF acquired the electronic chemicals business of Merck KGaA, Darmstadt, Germany, for 270 million. The transaction included production and distribution centers for high purity chemicals in Asia and Europe. Merck s sales in this business amounted to approximately 200 million in This business was included in the Inorganics division. The difference between the acquisition price and the fair value of the equity purchased which could not be allocated to any particular asset was recorded as goodwill. Goodwill includes inseparable assets such as future synergies and the resulting future earnings potential. In total, 122 million was recognized as goodwill. On October 1, 2005, BASF acquired 100% of the shares in the Swiss fine chemicals company Orgamol S.A. The acquisition included, among other things, two production sites for the production of pharma ingredients. In 2004, company sales stood at approximately 100 million. The business was included in the Fine Chemicals division. At acquisition, goodwill of 2 million was recognized for the Orgamol Group. Further acquisitions in 2005 included Leuna Miramid and a consulting company, plan business market enabling services AG, as well as the 50% share of BASF Coatings Japan Ltd. from NOF Corp. In 2004, acquisitions primarily concerned the takeover of the plasticizer business from Sunoco, United States. The transaction included production plants for phthalic anhydride and oxo alcohols in Pasadena, Texas, as well as various intangible assets and inventories. All acquired assets and liabilities are recognized at fair value. Differences between the acquisition price and the net fair value of the cost of the identifiable assets, liabilities and contingent liabilities were recognized as goodwill. Acquisitions had the following effects on the sales and the balance sheet of the BASF Group: Acquisitions Million % Million % Sales Long-term assets Thereof property, plant and equipment Short-term assets (348.3) (2.3) (73.1) (0.6) Thereof liquid funds* (535.7) (23.4) (103.6) (16.1) Assets Long-term liabilities Thereof financial indebtedness Short-term liabilities Thereof financial indebtedness Stockholders equity and liabilities Contingent liabilities and other financial obligations *Primarily due to purchase price payments On May 5, 2005, BASF and Shell Chemicals sold their joint venture Basell to Nell Acquisition S.a.r.l., Luxembourg, a subsidiary of Access Industries, New York. The sales price totaled 4.4 billion including liabilities.

204 BASF Group Consolidated Financial Statements and Notes Furthermore, our polystyrene business in the United States and Canada including our production plant in Joliet, Illinois, was sold to INEOS on April 25, The business and production plant sold belonged to the Styrenics division. Divestitures in 2004 concerned primarily the sale of the printing systems business to CVC Capital Partners. Divestitures had the following effects on the sales and the balance sheet of the BASF Group: Divestitures Million % Million % Sales (636.1) (1.7) (246.7) (0.7) Long-term assets (1,028.3) (5.0) (119.0) (0.5) Thereof property, plant and equipment (52.2) (0.4) (85.4) (0.6) Short-term assets 1, Thereof liquid funds* 1, Assets Stockholders equity Long-term liabilities (59.6) (0.5) Thereof financial indebtedness Short-term liabilities (5.4) (0.1) (105.2) (1.5) Thereof financial indebtedness (0.3) (0.1) Stockholders equity and liabilities Contingent liabilities and other financial obligations (4.5) (0.1) *In particular, due to proceeds from divestitures Discontinuing operations There were no discontinuing operations in Planned acquisitions/divestitures On January 9, 2006, the Iron Acquisition Corporation, Florham Park, New Jersey, a one-hundred percent subsidiary of BASF Aktiengesellschaft, announced a cash offer for all the shares of Engelhard Corporation, Iselin, New Jersey, in the amount of $37 per share. The total cost of the transaction based on the price per share is approximately $4.9 billion. The extended offer expires on March 3, BASF is continuing to complement its portfolio with the purchase of the Degussa construction chemicals business. Exclusive negotiations between BASF and Degussa began on February 14, For additional details, please see the supplementary report (page 56). 3. Effects of the conversion to IFRS The consolidated financial statements of BASF Group were based on the accounting and valuation principles of the German Commercial Code (Handelsgesetzbuch) and the German Stock Corporation Act (Aktiengesetz) as well as the accounting standards of the German Accounting Standards Committee (Deutscher Standardisierungsrat), collectively German GAAP up to and including the 2004 reporting year. International Financial Reporting Standards (IFRS) were followed to the greatest extent allowable under German GAAP. Due to the mandate by the European Union on July 19, 2002, BASF, as a listed company, has completely converted to the International Financial Reporting Standards (IFRS) in accordance with IFRS 1 First-time Adoption starting from January 1, The previous year s figures were restated appropriately. Effects of the conversion were netted against equity as of January 1, 2004.

205 The conversion affected the following items: Reconciliation of stockholders equity to IFRS Million Note January 1, 2004 December 31, 2004 Stockholders equity in accordance with German GAAP 15, ,765.0 Capitalization of interest cost (a) Capitalization of internally generated intangible assets (b) Accounting for pensions (c) (160.8) (62.7) Accounting for provisions (d) Accounting for financial instruments (e) (22.6) Valuation of inventories (f) Reversal of goodwill amortization and write-offs due to impairment (g) Other adjustments (h) (71.2) 52.6 Tax effects of planned dividend payments and other tax effects (i) 57.9 (43.2) Valuation adjustments relating to companies accounted for using the equity method (j) 53.2 Adjustments in accordance with IFRS Stockholders equity in accordance with IFRS 16, ,602.2 The results for the 2004 reporting year are presented according to IFRS. The retroactive adjustment of the results for 2004 led to the following reconciliation items: Reconciliation of income from operations to IFRS Million Note 2004 Income from operations in accordance with German GAAP 4,855.6 Capitalization of interest cost (a) (63.6) Capitalization of internally intangible generated assets (b) (53.5) Accounting for pensions (c) 65.6 Accounting for provisions (d) 13.9 Accounting for financial instruments (e) 95.2 Valuation of inventories (f) (3.4) Reversal of goodwill amortization and write-offs due to impairments (g) Other adjustments (h) (22.8) Change in presentation of net financing cost of personnel obligations Adjustments in accordance with IFRS Income from operations in accordance with IFRS 5,192.5

206 BASF Group Consolidated Financial Statements and Notes Reconciliation of income after taxes and minority interests to IFRS Million Note 2004 Net income after minority interests in accordance with German GAAP 1,883.0 Capitalization of interest cost (a) 4.3 Capitalization of internally generated intangible assets (b) (32.5) Accounting for pensions (c) 41.1 Accounting for provisions (d) (8.5) Accounting for financial instruments (e) Valuation of inventories (f) (2.1) Reversal of goodwill amortization and write-offs due to impairments (g) Other adjustments (h) 16.4 Tax effects of planned dividend payments and other tax effects (i) (107.2) Valuation adjustments relating to companies accounted for using the equity method (j) (53.2) Adjustments in accordance with IFRS Net income after minority interests in accordance with IFRS 2,004.3 The significant adjustments to IFRS are explained below: (a) Capitalization of interest cost According to IFRS, borrowing costs for property, plant and equipment that are directly attributable to the construction period may be capitalized in the period in which they are incurred if the construction period is lengthy. Previously, in accordance with German GAAP, borrowing costs for construction were not capitalized. Under U.S. GAAP the capitalization of construction interest costs is required. In order to minimize the differences between IFRS and U.S. GAAP the allowed alternative treatment of capitalizing interest incurred in lengthy construction projects has been followed. (b) Capitalization of internally generated in tangible assets Costs incurred for computer software developed or obtained for the Company s internal use are to be capitalized as intangible assets and amortized over the expected useful life of the software under IFRS. According to German GAAP, the capitalization of costs for internally generated intangible assets is not permissible. IAS 38 Intangible Assets covers the capitalization of development costs. (c) Accounting for pensions Pension obligations arising from direct promises of the Company to the employees were already recorded in the 2004 annual financial statements according to IAS 19 Employee Benefits. This led to a new valuation whereby the formerly deferred actuarial gains and losses were offset against retained earnings as of January 1, Pension benefits are also provided by legally independent funds, particularly the BASF Pensionskasse VVaG ( BASF Pensionskasse ). As BASF guarantees the commitments of the these funds, they are classified as defined benefit plans according to IFRS and are to be included in the Group consolidated financial statements. This was not permissible under German GAAP. The inclusion of these pension plans was done retroactively to January 1, 2004 according to IFRS. Actuarial gains and losses were not recognized according to IFRS 1 First-time Adoption. BASF exercises the option introduced by an amendment to IAS 19 Employee Benefits, which allows actuarial gains and losses to be recognized against retained earnings in the year they are incurred.

207 Additionally, financing costs for pensions and other personnel obligations are offset against the expected return on plan assets (2004: million) and not shown, as previously, before EBIT, but rather separately under other financial results. (d) Accounting for provisions The reconciliation item contains the following deviations: Provisions are made for deferred maintenance and mandated modifications in connection with the operation of plants according to German GAAP. IFRS requires that these measures are expensed in the period they occur. Under IFRS, provisions for certain environmental measures and recultivation obligations are set-up in the amount of the expected obligations and at the same time increase the acquisition cost of the respective assets. According to German GAAP, such costs were accumulated, whereas according to IFRS they are capitalized and depreciated using the straight-line method. According to German GAAP, provisions are established for cyclical major overhauls whereas IFRS requires that such expenses are capitalized upon performance and are depreciated until the next regularly scheduled overhaul. Long-term provisions are discounted under IFRS. German GAAP stipulates the use of nominal values. (e) Accounting for financial instruments IFRS requires that derivatives are valued on the balance sheet at market value and shown as Other receivables or Other liabilities. Changes in market value, as long as they do not fulfill the strict requirements of hedge accounting, affect income. Under German GAAP, unrealized gains on swaps and other forward contracts are deferred until settlement or termination while unrealized expected losses from pending transactions are charged to income each period. Under German GAAP, long-term receivables and liabilities denominated in a foreign currency are converted into euros at the exchange rates at the dates when the transactions took place or the lower exchange rates at year end for receivables and the higher exchange rates for liabilities. IFRS requires conversion at the exchange rate at the end of the year. Under IFRS, available-for-sale securities are recorded at market values on the balance sheet date. Changes in valuation are recognized outside of profit and loss in equity. Write-downs do not affect income. Under German GAAP, such securities and other investments are valued at the lower of acquisition cost or market value at the balance sheet date and affect income. (f) Valuation of inventories As the LIFO method is not allowed under IFRS, the valuation of inventories was already changed to the weightedaverage method as of January 1, According to German GAAP, raw materials and supplies are to be discounted based on lower replacement costs. Under IFRS write-downs are only allowed based on lower net realizable value. (g) Reversal of goodwill amortization and write-offs due to impairment Goodwill was amortized over its useful life in accordance with German GAAP. IFRS 3 Business Combinations, however, requires that goodwill is tested for impairment at least once a year according to IAS 36 Impairment of Assets. Based on IFRS 1 First-time Adoption and IFRS 3 Business Combinations regularly scheduled depreciation on goodwill was not to be made after January 1, According to impairment tests carried out at the transition date, and at year-end 2004 and 2005, no impairment write-offs were necessary. (h) Other adjustments These refer primarily to the treatment of government grants which are not recognized as income intially but rather reduce the acquisition cost of the respective item of property, plant and equipment. They also refer to reclassifications in the consolidated income statement which is discussed in more detail on the next page under Presentation. (i) Tax effects of planned dividend payments and other tax effects According to IFRS, deferred taxes are recognized for the tax effect of planned dividend distributions from BASF Group companies considering the current financial plans and the change in the German Corporate Income Tax Act (Section 8b KStG).

208 BASF Group Consolidated Financial Statements and Notes (j) Valuation adjustments relating to companies accounted for using the equity method Significant changes resulting from the conversion to IFRS primarily concern the capitalization and the straightline amortization of internally-generated software as well as the accounting for capitalized interest for Group companies accounted for using the equity method. As a result of these adjustments, the book value of these financial assets under IFRS was higher than that recorded under German GAAP as of January 1, The negative reconciliation item to income under IFRS was related to writedowns of these participations. 4. Earnings per share Earnings per share Net income under IFRS (Million ) 3, ,004.3 Number of shares (1,000) Weighted-average number of shares 525, ,714 Earnings per share under IFRS ( ) Presentation The presentation of the income statement as well as the balance sheet is in accordance with IAS 1 Presentation of Financial Statements. Individual positions were summarized to improve clarity and are presented in detail in the notes to the financial statements. Consolidated Balance Sheets IFRS requires the differentiation between long-term and short-term assets. German GAAP, by contrast, distinguished between fixed assets and current assets. The item investments accounted for using the equity method contains in 2004, in particular, our stake in the Basell joint venture, which was sold on May 2, In equity, the new item other comprehensive Income is presented to account for changes that do not affect income. The option under IFRS 1 to net the translation adjustment against retained earnings as of January 1, 2004 was exercised. Liabilities are segmented according to maturity, whereas they are segmented into provisions and liabilities under German GAAP. Consolidated Statements of Income Financing costs for pensions and other personnel obligations netted against expected returns of pension plan assets are not reported before EBIT but after EBIT in a new item other financial results. This also includes the capitalization of interest cost, the accrued interest of other provisions and changes in the fair value of interest rate derivatives. The calculation of earnings per common share is based on the weighted-average number of common shares outstanding during the applicable period. The calculation of diluted earnings per common share reflects the dilutive effect of all potential common shares that were outstanding during the respective period. Shares awarded under the BASF employee participation program plus have been included in the computation of diluted earnings per share. Due to a resolution by the Board of Executive Directors and the Supervisory Board in 2002, settlements of stock options from the BASF stock option program (BOP) for senior management are made in cash, therefore such stock options have no dilutive effect. The earnings per share were not impacted by any dilutive effect in 2005 and in 2004, as the impact of potential common shares was anti-dilutive in each year. 5. Reconciliation of net income and stockholders equity to U.S. GAAP The Consolidated Financial Statements comply with U.S. GAAP as far as permissible under IFRS. The remaining differences concern the following adjustments:

209 Reconciliation of net income to U.S. GAAP Million Note Income after taxes and minority interests to IFRS 3, Adjustments required to conform with U.S. GAAP Accounting for pensions (a) (72.6) (24.6) Accounting for provisions (b) Valuation adjustments relating to companies accounted for using the equity method (e) (108.4) Acquisitions (f) (21.8) Other adjustments (g) (11.0) Deferred taxes (h) (26.2) (2.4) Minority interests (i) 1.1 (1.2) Adjustments to U.S. GAAP 53.9 (141.5) Net income in accordance with U.S. GAAP 3, ,862.8 Earnings per share in accordance with U.S. GAAP ( ) Dilutive effect Diluted earnings per share in accordance with U.S. GAAP ( ) Reconciliation of stockholders equity to U.S. GAAP Million Note Stockholders equity in accordance with IFRS as of December 31 17, ,602.2 Minority interests (481.8) (328.5) Stockholders equity excluding minority interests 17, ,273.7 Adjustments required to conform with U.S. GAAP Accounting for pensions (a) ,020.1 Accounting for provisions (b) Accounting for financial instruments (c) (12.1) Reversal of goodwill amortization and write-offs due to impairment (d) Valuation adjustments relating to companies accounted for using the equity method (e) Acquisitions (f) (21.8) Other adjustments (g) (0.1) (145.7) Deferred taxes (h) (463.4) (441.7) Minority interests (i) (16.1) (17.0) Adjustments to U.S. GAAP Stockholders equity in accordance with U.S. GAAP as of December 31 17, ,159.1

210 BASF Group Consolidated Financial Statements and Notes The calculation of earnings per share is described in detail in Note 4. Earnings per share Net income in accordance with U.S. GAAP (Million ) 3, ,862.8 Number of shares (1,000) Weighted-average undiluted number of shares 525, ,714 Dilutive effect Weighted-average diluted number of shares 525, ,714 Basic earnings per share in accordance with U.S. GAAP ( ) Dilutive effect Diluted earnings per share in accordance with U.S. GAAP (a) Accounting for pensions Pension provisions and expenses which fall under the scope of SFAS 87 are based on the same assumptions as under IFRS (see Note 23). BASF excercises the option allowing actuarial gains and losses to offset directly against retained earnings outside of profit and loss in the year in which they are incurred. According to SFAS 87, these items are charged to income as soon as they ex- ceed 10% of the greater of the Projected Benefit Obligation (PBO) and the pension plan assets. In addition, a difference results because an Additional Minimum Liability reduces stockholders equity according to U.S. GAAP. The Accumulated Benefit Obligation (ABO) amounted to 11,398.0 million in 2005 compared with 9,419.9 million in This obligation relates to pension plans whose plan assets do not completely cover the ABO. Current funding situation Million ABO Plan Assets ABO Plan Assets Unfunded pension plans ,563.1 Partially funded pension plans 6, , , ,686.3 Total of pension plans that are not fully funded 7, , , ,686.3 Fully funded pension plans 3, , , , , , , ,204.3 The balance of the expected return on plan assets and the interest costs pertaining to the pension obligation is recognized in the financial results (see Note 9) as an allowable IFRS option. According to U.S. GAAP, these items are considered in personnel costs. As a result earnings before interest and taxes (EBIT), according to U.S. GAAP, would be lower in 2005 by (2004: million), and the financial result accordingly higher. Actuarial losses amounted to 2,587.1 million as of December 31, 2005 and 1,505.8 million as of December 31, Based on these amounts, 62.2 million was amortized in 2005 and 15.4 million in 2004 in the income statement. As of December 31, 2005, unrecognized prior service costs existed in the amount of 54.2 million and as of December 31, 2004, 64.3 million. Based on these amounts, 10.4 million was amortized in 2005 and 9.2 million in 2004 in the income statement. Disclosure requirements according to SFAS 132 Employers Disclosures about Pensions and Other Postretirement Benefits (revised 2003) are contained in Note 23. (b) Accounting for provisions The reconciliation item contains the following deviations: Provisions for part-time programs for employees nearing retirement age: In these financial statements agreed upon top-up payments within the pre-retirement part-time programs are immediately accrued in their full amount, and discounted at a rate of 3.0%. A provision is also recorded for the expected costs for agreements that

211 are anticipated to be concluded during the term of the collective bargaining agreements, taking into consideration the ceilings on the number of employee participants provided in such collective bargaining agreements. In accordance with U.S. GAAP, provisions may only be recorded for employees who have accepted an offer, and the supplemental payments are accrued over the employee s remaining service period. This resulted in a decrease in income under U.S. GAAP of 29.4 million in 2005 and 22.3 million in Stockholders equity increased by million in 2005 and by million in Provisions for restructuring measures: SFAS 146, Accounting for Costs Associated with Exit and Disposal Activities requires expected costs associated with the exit or disposal of business activities to be accrued only when a liability against a third party exists. In case of a retention period, severance payments to employees are accrued over the term of this period. Discounting of provisions and liabilities: According to IFRS, long-term provisions and liabilities are to be discounted to their present value if the effect from discounting is material. Under U.S. GAAP, however, discounting is only permissible when the amount and timing of the cash flows can be reliably predicted. This resulted in an income effect of 10.8 million in 2005 and 47.0 million in 2004, and a decrease in equity of 30.5 million in 2005 and of 41.3 million in (c) Accounting for financial instruments The guidelines for accounting for financial instruments according to IAS 39 Financial Instruments: Recognition and Measurement and SFAS 133 Accounting for Derivatives and Hedging Activities are very similar in concept. The reconciliation items relate to the differing treatment of fair value changes of derivatives within equity, which are a component of a cash-flow hedge for a future transaction. According to IAS 39, for hedging future transactions, there is an option regarding the accounting treatment of these fair value changes. BASF has chosen the option to net these changes in valuation against the acquisition costs of the non-financial assets or debts. The other option allows the valuation changes to be charged off through the income statement, in the same period in which the hedged transaction flows through the income statement. According to SFAS 133, only the second method is allowed, while netting out against acquisition costs is prohibited. This timing difference leads to a difference in equity, and has no impact on income. (d) Reversal of goodwill amortization and write-offs due to impairment Goodwill is only written down if an impairment exists according to SFAS 142 as of January 1, According to IFRS 1 First-time Adoption in conjunction with IFRS 3 Business combinations, regularly scheduled amortization of goodwill has been replaced by impairment testing effective as of January 1, The amortization on goodwill in 2002 and 2003 has been reversed and added to stockholders equity. (e) Valuation adjustments relating to companies accounted for using the equity method Herein are contained differences from companies accounted for under the equity method that result from different dates on which the scheduled amortization for goodwill has to be discontinued under U.S. GAAP (2002) and IFRS (2004). (f) Acquisitions A difference between U.S. GAAP and IFRS with respect to the first-time consolidation involves the treatment of research and development projects of acquired businesses. Whereas these costs are expensed in the first year of consolidation under U.S. GAAP, IFRS requires that these costs are capitalized as intangible assets and amortized over their useful lives. This resulted in a decrease of income of 25.5 million. Stockholders equity decreased similarly by 25.5 million in There were no research and development costs in connection with acquisitions in According to U.S. GAAP, contingent purchase price adjustments of acquisitions are only accounted for at the time of payment of the contingent price adjustment. IFRS 3, however, requires the recognition of these purchase price adjustments at estimated values in the first consolidation of an acquired business. If a negative difference exists as a result of these differing practices, it is to be booked immediately to the income statement according to IFRS, whereas according to U.S. GAAP it reduces the values assigned to the acquired assets. This resulted in an income effect of 3.7 million in Stockholders equity increased corresepondingly by 3.7 million in There were no such discrepancies in 2004 as a result of contingent price adjustments. (g) Other adjustments This item primarily includes the elimination of provisions for the fair value of stock options granted, differences arising from the accounting of sale and leaseback transactions as well as provisions for major overhauls of large scale plants.

212 BASF Group Consolidated Financial Statements and Notes Following a resolution by the Board of Executive Directors, stock options are to be settled in cash. Under U.S. GAAP, such obligations are to be accounted for as stock appreciation rights based on the intrinsic value of the options on the balance sheet date. However, options granted in prior years, for which cash settlement was not foreseen, are to be accounted for in accordance with SFAS 123 as equity instruments based upon the fair value on the grant date. In the present Financial Statements, all obligations resulting from stock options are accounted for based upon the fair value on the balance sheet date. A provision is accrued over the vesting period of the options. The different accounting methods led to an increase in net income in accordance with U.S. GAAP of 6.1 million in 2005, and 16.1 million in In the present Financial Statements, obligations resulting from stock options are shown as provisions. In accordance with U.S. GAAP, options for which cash settlement was not originally foreseen are recorded as additions to stockholders equity. Overall, the accounting for stock options resulted in a decrease in stockholders equity of 17.4 million in 2005, and 9.4 million in Under IFRS, anticipated costs necessary for the major overhaul of large scale plants prescribed at certain intervals are capitalized as a part of the respective asset and depreciated on a straight-line basis over the period until the next regularly scheduled major overhaul. According to U.S. GAAP, provisions for such costs were established. In 2005 the accounting method was changed to IFRS. The cumulative effect of million was recognized in income. Gains from the sale of assets which continue to be used under operating leases are to be recognized in income under IFRS, if the sale is an arm s length transaction. U.S. GAAP requires the deferral of the gain and its recognition in income over the useful life of the asset. (h) Deferred taxes The adjustments required to conform with U.S. GAAP would result in taxable temporary differences between the valuation of assets and liabilities in the Consolidated Financial Statements and the carrying amount for tax purposes. Resulting adjustments for deferred taxes primarily relate to the following: Stockholders equity Income Million Note Accounting for pensions (a) (348.5) (384.2) Accounting for provisions (b) (51.6) (46.0) (5.2) 10.7 Accounting for financial instruments (c) 4.3 (5.3) Reversal of goodwill amortization and write-offs due to impairment (d) (96.2) (86.9) Acquisitions (f) Other adjustments (g) (52.4) (23.3) (463.4) (441.7) (26.2) (2.4) (i) Minority interests The portion of U.S. GAAP valuation adjustments applying to minority interests is shown separately. Consolidation of majority-owned subsidiaries: First-time consolidations of subsidiaries require the restatement of prior years figures. The effect of first-time consolidated companies on the net worth, financial position and results was immaterial; an adjustment was therefore not performed. New U.S. GAAP accounting standards not yet adopted SFAS 123R Share-Based Payment (revised 2004) replaces SFAS 123 Accounting for Stock-Based Compensation. This disallows the former optional treatments contained in APB 25 Accounting for Stock Issued to Employees. According to SFAS 123R, all listed companies must recognize stock-based payment as an expense during the vesting period. Equity instruments granted as payment are valued at their market value at the time of granting. The market value at reporting date is calculated to value share-based payment which is to be settled in

213 cash. SFAS 123R applies to all reporting years commencing after June 15, As BASF already recognizes share-based payment as an expense, SFAS 123R will have no material effects on BASF s Consolidated Financial Statements. SFAS 154, governing the accounting and reporting of voluntary changes in accounting methods, replaces APB Opinion Nr. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. According to SFAS 154, future impacts on income as a result of voluntary changes in accounting methods will no longer be shown as a separate item cumulative change in accounting principle on the income statement of the current period but rather as an adjustment of the financial statements for all previously published periods as if the new method had always been used. EITF Inventory Exchanges determines when a purchase and sale of inventory is to be seen as a barter transaction. According to APB Opinion No. 29 Accounting for Non-monetary Transactions, barter transactions may not be shown on the income statement. The key criterion is whether the purchase and sale are closely connected. EITF clearly states that no sales revenues may be recognized from these transactions if sale and purchase of inventories are clearly connected. Furthermore, EITF has specified the scope of FASB Statement No. 153 Exchanges of Non-monetary Assets. EITF is to be applied to all new transactions that were concluded in the reporting years beginning after March 15, No revenue was recognized for barter transactions as defined in these standards. The rules are essentially similar to those in IFRS. Other changes in stockholders equity The option allowed by IFRS 1 to offset currency translation adjustments against retained earnings as of January 1, 2004 was exercised. Under U.S. GAAP, the translation adjustment is to be carried forward unchanged under other comprehensive income. According to U.S. GAAP, specifically SFAS 130, certain expenses and income are recognized outside of profit or loss (Other Comprehensive Income): Million Net income in accordance with U.S. GAAP (before other comprehensive income) 3, ,862.8 Change of foreign currency translation adjustments Gross (291.3) Deferred taxes (33.1) 17.2 Changes in unrealized holding gains on securities Gross Deferred taxes Changes in unrealized losses from cash flow hedges Gross (21.2) (54.0) Deferred taxes Additional minimum liability for pensions Gross (1,179.7) (514.7) Deferred taxes Other comprehensive income (loss), net of tax 71.5 (531.2) Comprehensive income, net of tax 3, ,331.6

214 BASF Group Consolidated Financial Statements and Notes Million Stockholders equity in accordance with U.S. GAAP (before accumulated other comprehensive income) 19, ,694.7 Accumulated other comprehensive income Foreign currency translation adjustments Gross (603.4) (1,369.0) Deferred taxes Unrealized holding gains on securities Gross Deferred taxes (40.9) (45.4) Unrealized losses from cash flow hedges Gross (79.3) (58.1) Deferred taxes Additional minimum liability for pensions Gross (1,730.7) (551.0) Deferred taxes Accumulated other comprehensive income (1,464.1) (1,535.6) Total stockholders equity in accordance with U.S. GAAP including comprehensive income 17, , Reporting by segment and region The Company is a worldwide manufacturer and supplier of about 8,000 products. The Company offers a wide range of products, including chemicals, plastics, dyes and pigments, dispersions, automotive and industrial coatings, agricultural products, fine chemicals, crude oil and natural gas. The Company conducts its worldwide operations through 12 operating divisions, which have been aggregated into five reporting segments based on the nature of the products and production processes, the type of customers, the channels of distribution and the nature of the regulatory environment (see also the explanations in the Management s Analysis section on pages 14 onward). The Chemicals segment is made up of the divisions Inorganics, Petrochemicals and Intermediates. Plastics is composed of the divisions Styrenics, Performance Polymers and Polyurethanes. Performance Products comprises the divisions Performance Chemicals, Coatings and Functional Polymers. The segment Agricultural Products & Nutrition comprises the divisions Agricultural Products and Fine Chemicals. The Oil & Gas Segment consists of the operating division Oil & Gas, which conducts oil and gas exploration and production and trades in natural gas. Business activities not allocated to any operating division are shown as other and comprise the sale of feedstock, remaining fertilizers activities, engineering and other services as well as rental income. The income from operations recorded as other includes mainly costs of research related to the Group of million in 2005 and million in Other also includes foreign currency results from financial indebtedness, hedging of forecasted sales, as well as from foreign currency positions that were macro-hedged of (97.0) million in 2005 and 54.0 million in Transfers between the reportable segments are shown separately and generally valued at market-based prices. The allocation of assets and depreciation to the segments is based on economic control. Assets used by more than one segment are allocated based on the percentage of usage. Exploration expenses in the Oil & Gas segment are reported under other operating expenses as of Prior years figures were restated accordingly.

215 Segments Plastics 2005 Chemicals Performance Products Agricultural Products & Nutrition Oil & Gas Other BASF Group Agricultural Fine Chemicalration Total Thereof Explo- Million Products Net sales 8,103 11,718 8,267 3,298 1,732 5,030 7,656 3,499 1,971 42,745 Change (%) (1.7) (3.4) (2.3) Intersegmental transfers 3, ,893 Sales including transfers 11,929 12,189 8,619 3,327 1,760 5,083 8,379 3,734 2,439 48,638 Income from operations 1,326 1, (58) 623 2,410 2,094 (407) 5,830 Change (%) (23.5) (5.3) (90.2) 12.3 Assets 6,146 6,639 4,863 5,156 1,481 6,637 4,895 2,155 6,490 35,670 Thereof goodwill , , ,139 Thereof property, plant and equipment 3,567 3,155 1, ,365 3,033 1, ,987 Return on operating assets (%)* Debt 1,766 1,676 1, ,489 1, ,614 18,147 Research and development expense ,064 Investment in property, plant and equipment and intangible assets ,523 Depreciation and amortization of property, plant and equipment and intangible assets ,403 Thereof due to impairments Plastics 2004 Chemicals Performance Products Agricultural Products & Nutrition Oil & Gas Other BASF Group Agricultural Fine Chemicalration Total Thereof Explo- Million Products Net sales 7,020 10,532 8,005 3,354 1,793 5,147 5,263 2,482 1,570 37,537 Change (%) (2.8) Intersegmental transfers 3, ,423 Sales including transfers 10,415 11,209 8,296 3,380 1,823 5,199 5,809 2,655 2,032 42,960 Income from operations 1, , ,643 1,303 (214) 5,193 Assets 5,219 6,187 4,538 4,985 1,308 6,293 4,063 1,899 9,148 35,448 Thereof goodwill , , ,973 Thereof property, plant and equipment 3,283 2,857 1, ,300 2,814 1, ,063 Return on operating assets (%)* Debt 1,836 1,836 2,287 1, ,804 1,902 1,081 9,181 18,846 Research and development expense Investment in property, plant and equipment and intangible assets ,163 Depreciation and amortization of property, plant and equipment and intangible assets ,492 Thereof due to impairments * EBIT calculations based on average assets of the segments

216 BASF Group Consolidated Financial Statements and Notes Regions 2005 Europe Thereof North Asia South BASF Germany America Pacific America, Group (NAFTA) Africa, Middle Million East Location of customers Sales 23,755 8,865 9,479 6,500 3,011 42,745 Change (%) Share (%) Location of companies Sales 25,093 17,100 9,542 6,042 2,068 42,745 Sales including transfers 28,565 19,932 10,110 6,334 2,160 47,169 Income from operations 4,385 3, ,830 Assets 19,961 13,374 7,789 6,112 1,808 35,670 Thereof property, plant and equipment 7,334 5,045 2,534 3, ,987 Investment in property, plant and equipment and intangible assets 1, ,523 Depreciation and amortization of property, plant and equipment and intangible assets 1, ,403 Employees (December 31) 56,614 45,620 9,826 9,669 4,836 80, Europe Thereof North Asia South BASF Germany America Pacific America, Group (NAFTA) Africa, Middle Million East Location of customers Sales 21,343 7,382 8,182 5,309 2,703 37,537 Change (%) Share (%) Location of companies Sales 22,536 15,216 8,165 4,911 1,925 37,537 Sales including transfers 25,527 17,751 8,655 5,461 1,803 41,446 Income from operations 4,236 3, ,193 Assets 21,815 14,567 7,254 4,888 1,491 35,448 Thereof property, plant and equipment 7,245 5,067 2,364 3, ,063 Investment in property, plant and equipment and intangible assets 1, ,163 Depreciation and amortization of property, plant and equipment and intangible assets 1, ,492 Employees (December 31) 57,540 46,666 10,578 8,916 4,921 81,955 The region Asia Pacific has been shown separately since January 1, 2005 due to its increasing importance. Africa, which was included in the Asia Pacific and Africa region until 2004 and the Middle East have been combined with the formerly independent region South America. The values for the previous year have been appropriately restated.

217 Other operating income Million Release and adjustment of provisions Income from miscellaneous revenue generating activities Gains from foreign currency transactions Gains from foreign currency conversion Gains from disposal of assets and divestitures Other ,046.1 Release and adjustment of provisions relate principally to sales and purchase provisions, provisions for lawsuits and damage claims and various other items in the normal course of business. Provisions are reversed or adjusted if the circumstances at closing date indicate that they are no longer probable or that the probable amount has been reduced. Income from miscellaneous revenue-generating activities primarily represents revenues from energy sales, sales of raw materials as well as income from rentals and logistics services. Gains from foreign currency transactions represent realized gains on receivables and liabilities denominated in foreign currencies, gains resulting from conversion of receivables, liabilities and other items denominated in foreign currencies at the balance sheet date and gains from changed fair values of currency derivatives. Gains from conversion of financial statements of group companies in foreign currencies includes gains from currency exposures of financial statements in foreign currency, which are converted into euros under the temporal method. They are related to a higher net asset exposure or lower net liability exposure after conversion into euros than at the previous balance sheet date. Gains from the disposal of assets primarily include divestitures in the Agricultural Products segment to optimize the portfolio in 2005, and the sale of the printing systems business in Other includes reversal of valuation allowances on receivables, miscellaneous sales and various other sundry items. 8. Other operating expenses Million Integration and restructuring measures Environmental protection and safety measures, costs of demolition and planning costs related to the preparation of capital expenditure projects not subject to mandatory capitalization Amortization of intangible assets and depreciation of property, plant and equipment Thereof internally generated assets Costs from miscellaneous revenue-generating activities Losses from foreign currency transactions Losses from foreign currency conversion Losses from disposal of assets Oil and gas exploration expenses Other , ,665.9

218 BASF Group Consolidated Financial Statements and Notes Integration and restructuring measures in 2005 primarily concerned the restructuring of the Fine Chemicals division as well as measures to further improve the efficiency at the sites in Ludwigshafen, Germany, and Feluy, Belgium. In 2004, this item included additional charges from the Ludwigshafen Site Project and restructuring measures in North America. Further expenses were related to the cost of demolition and removal of fixed assets as well as the preparation of capital expenditure projects not subject to mandatory capitalization. Costs from miscellaneous revenue-generating activities refer to costs relating to the items shown as miscellaneous revenue-generating activities (see Note 7). Losses from foreign currency transactions include losses from foreign currency items and forward contracts as well as the valuation of receivables and liabilities in foreign currencies at the exchange rate on the balance sheet date. Other expenses were incurred as a result of write-offs of no longer usable inventory in the amount of million in 2005 and 83.0 million in 2004 as well as for other reasons affecting various items. 9. Financial result Million Income (losses) from companies accounted for using the equity method 5.6 (7.2) Income from participations in affiliated and associated companies Income from the disposal or write-ups of participations Income from profit transfer agreements Losses from loss transfer agreements (13.6) (15.2) Write-down of, and losses from, retirement of participations (17.9) (625.4) Income from tax allocation to participating interests Other income from participations (588.5) Interest expenses (351.9) (288.9) Interest income Interest and dividend income from securities and receivables Interest result (170.0) (206.1) Write-ups/profits from the sale of securities and receivables Write-downs/losses from the disposal of securities and receivables (6.7) (40.3) Net financing from long-term personnel provisions (121.7) (137.7) Interest accrued on other interest-bearing liabilities (50.8) (48.8) Capitalization of interest cost Other financial expenses and income Other financial result (81.9) (43.9) Financial result 96.1 (845.7) Income from the disposal or write-ups of participations contains the gain of the sale of our 50% share of Basell in In the prior year, in contrast, valuation adjustments on participations were necessary, which were shown under writedown of, and losses from, retirement of financial assets as well as securities held as current assets.

219 Income taxes Million German corporate income tax, solidarity surcharge, German trade income taxes Foreign income tax 1, ,396.5 Taxes for prior years 81.5 (16.1) Current taxes 2, ,912.8 Deferred taxes Income taxes 2, ,213.5 Thereof income taxes on oil-producing operations 1, Other taxes Tax expense 2, ,363.9 Income before taxes and minority interests is broken down by into domestic and foreign taxes as follows: Million Germany 1, ,270.5 Foreign oil production branches of German companies 1, Foreign 2, , , ,346.8 In Germany a uniform corporate tax of 25% and thereon a solidarity surcharge of 5.5% is uniformly levied on all distributed and undistributed earnings. In addition to corporate income tax, income generated in Germany is subject to a trade income tax that varies depending on the municipality in which the company is located. After accounting for trade income tax, which is a deductible operating expense, BASF has a weighted-average trade income tax rate of 15.3%. Because German trade income tax is deductible, it also reduces the assessment basis for corporate income tax. For German companies, deferred taxes are calculated using a tax rate of 38%. Income from foreign Group companies is taxed at the income tax rates applicable in the respective countries of domicile. For foreign Group companies, deferred taxes are calculated using the tax rates applicable in the individual foreign countries. Such rates averaged 29% in 2005 and 29% in Income taxes on foreign oil-producing operations in certain regions are compensated up to the level of the German corporate income tax on this foreign taxable income. The non-compensable amount is shown separately in the following table. Other taxes includes real estate taxes and other comparable taxes in the amount of 90.0 million in 2005 and 93.0 million in 2004; they are allocated to the appropriate functional costs.

220 BASF Group Consolidated Financial Statements and Notes Reconciliation from the statutory tax rate in Germany to the effective tax rate 2005 Million % 2004 Million % German corporate income tax 1, , Solidarity surcharge German trade income tax net of corporate income tax Foreign tax-rate differential Tax exempt income (208.4) (3.5) (209.2) (4.8) Non-deductible expenses Income after taxes of companies accounted for using the equity method (1.4) Taxes for previous years (16.1) (0.4) Income taxes on oil-producing operations non-compensable with German corporate income tax 1, Deferred taxes for planned dividend distributions Other (100.7) (1.7) Income taxes/effective tax rates 2, , Tax exempt earnings arose from the sale of participations or securities. This particularly concerned the sale of the joint venture Basell in 2005 and the sale of the printing systems business in The non-deductible expenses in 2004 include primarily write-downs of participations. Deferred tax assets on tax loss carryforwards including those for prior years are recorded. If expected future taxable profits of a company make it more likely than not that the future tax benefits will not be realized, adequate valuation allowances are established. Deferred taxes result from the following temporary differences between the valuation of assets and liabilities under IFRS and for tax purposes. Deferred tax assets Tax assets Tax liabilities Million Intangible assets (111.0) (30.0) Property, plant and equipment (456.8) (333.6) Financial assets Inventories and accounts receivable 3.6 (57.7) Provisions for pensions (73.0) Other provisions and liabilities (44.2) (127.4) Tax loss carryforwards Other Valuation allowances (134.7) (113.6) Thereof for tax loss carryforwards (37.3) (41.6) Total 1, , Thereof short-term

221 The assessment of the probability of a reversal of the temporary difference between the book and tax values or the use of a tax loss carryforward are decisive for the value of a deferred tax asset. The carrying amount of a deferred tax asset is recognized to the extent to which it is probable that sufficient taxable profit relating to the same taxation authority will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Based on experience and the expected development of taxable income, it is assumed that the advantages of deferred tax assets recognized will be realized. Deferred tax assets were offset against deferred tax liabilities of the same maturity to the degree that these relate to the same taxation authority. Deferred tax assets for undistributed earnings of subsidiaries in the amount of 7,918.7 million in 2005 and 7,245.3 million in 2004 were not recognized, as they are not subject to such taxation or that they are reinvested for indeterminate periods of time. For these timing differences, the calculation of deferred taxes would have only had to consider the respective withholding tax or the German taxation of 5% on dividends paid. The regional distribution of tax loss carryforwards is as follows: Million Germany Foreign 2, , , ,168.7 German tax losses may be carried forward indefinitely. Foreign loss carryforwards exist primarily in North America (NAFTA). These expire starting in North America (NAFTA) recorded a loss before taxes in Loss carryforwards in the NAFTA region could be reduced due to higher earnings but the reduction was partially offset by the appreciation of the U.S. dollar. Considering the restructuring measures that are being implemented and expected future profits as a result, no write-downs on deferred tax assets were made. Write-downs on tax loss carryforwards of 72.2 million in 2005 and 87.0 million in 2004 were made. Tax liabilities comprise tax liabilities and tax provisions. Tax liabilities primarily concern the assessed income tax and other taxes. Tax provisions mainly concern income taxes for the current and the previous year. Tax liabilities Million Tax provisions Tax liabilities Minority interests Million Minority interests in profits Minority interests in losses Minority interests in profits relate primarily to the Group companies engaged in trading and distribution of natural gas and to the operating company for the steam cracker in Port Arthur, Texas. Minority interests in losses mainly related to BASF Plant Science. See Note 22 for a detailed analysis of consolidated subsidiaries with minority shareholdings. 12. Other information Additional information on consolidated statements of cash flows Cash provided by operating activities includes the following cash flows: Million Income tax payments 2, ,543.0 Interest payments Dividends received

222 BASF Group Consolidated Financial Statements and Notes Personnel costs Million Wages and salaries 4, ,579.1 Social security contributions and expenses for pensions and assistance 1, ,035.8 Thereof for pension benefits , ,614.9 German Group companies incurred costs for employee representatives to comply with statutory regulations of 11.4 million in 2005 and 11.2 million in Average number of employees Fully-consolidated companies Proportionally-consolidated companies BASF Group Europe 56,284 59, ,554 60,035 Thereof Germany 45,618 47, ,634 47,844 North America (NAFTA) 9,934 11, ,400 11,490 Asia Pacific 8,732 7,911 1,694 1,912 10,426 9,823 South America, Africa, Middle East 4,827 5,000 4,827 5,000 BASF Group 79,777 83,696 2,430 2,652 82,207 86,348 Thereof with trainee contracts 2,329 2, ,331 2,551 Thereof with limited-term contracts 1,709 1, ,721 1,971 The number of employees in proportionally-consolidated companies is included in the figures above in full. Considered pro-rata, the average number of employees in the BASF Group was 80,992 in 2005 and 85,022 in The number of employees in 2005 fell primarily due to ongoing measures to improve the efficiency of our sites in Europe and North America. As a result of the acquisition of the electronic chemicals business from Merck KGaA, the number of employees increased by 578 in As a result of the sale of the fibers business, 1,214 employees transferred to Honeywell in The sale of the printing systems resulted a reduction in the number of employees by 326 in 2005 and 2,029 in Subsidiaries German subsidiaries which are either joint-stock companies or partnerships make use of the exemptions according to Section 264 (3) and Section 264b of the German Commerical Code. The individual companies are listed in the List of Shares Held. List of Shares Held A list of companies included in the Consolidated Financial Statements as well as a list of all companies in which BASF has a participation, has been deposited in the Commercial Register HRB 3000 in Ludwigshafen (Rhine), Germany, as required by the German Commercial Code, Section 313 (2). The List of Shares Held can be obtained as a separate report from BASF Aktiengesellschaft, and is available on the Internet at corporate.basf.com/governance_e. Statement of compliance according to Section 161 of the German Stock Corporation Act The statement of compliance with the German Corporate Governance Codex according to Section 161 of the German Stock Corporation Act was signed by the Board of Executives and the Supervisory Board. The statement of compliance may be seen on the Internet at corporate. basf.com/cg_berichte.

223 Compensation for the Board of Executive Directors and Supervisory Board of BASF Aktiengesellschaft Compensation for the Board of Executive Directors and Supervisory Board Million Board of Executive Directors compensation Thereof fixed payments Thereof performance-related payments Exercise of option rights by the Board of Executive Directors Supervisory Board s compensation Thereof fixed payments Thereof performance-related payments Total compensation of former members of the Board of Executive Directors and their surviving dependents Exercise of option rights by former members of the Board of Executive Directors and their surviving dependents Pension provisions for former members of the Board of Executive Directors and their surviving dependents Loans to members of the Board of Executive Directors and the Supervisory Board Guarantees to members of the Board of Executive Directors and the Supervisory Board Performance-related compensation for Board members is based on the return on assets which corresponds to earnings before taxes plus borrowing costs as a percentage of average assets. In 2005, the members of the Board of Executive Directors were also granted 209,792 options under the BASF stock option program. Together with the options granted in previous years and the options already exercised, current and former members of the Board of Executive Directors hold 618,456 options. In 2005, the issue of options resulted in additional personnel costs totaling 6.3 million. Of this amount, 1.4 million was related to options issued in 2005, and 4.9 million to options issued between 1999 and 2004, which result in personnel costs over the vesting period. In 2005, the exercising of options granted in 1999 resulted in cash payments totaling 1.4 million to members of the Board of Executive Directors and 2.9 million to previous members or their surviving dependents. Cash payments do not influence personnel costs associated with the issuing of options, as the payments were charged against provisions established for this purpose in previous years. See Note 28 for further details. The change in pension provisions for former members of the Board of Directors compared to 2004 was largely due to the use of a lower interest rate in the valuation. Compensation of the Supervisory Board is further detailed on page 79 of the Management s Analysis. The members of the Board of Executive Directors and the Supervisory Board as well as their memberships on other supervisory boards are shown on pages 76 to 78.

224 BASF Group Consolidated Financial Statements and Notes 14. Intangible assets Developments 2005 Marketing, Product Know-how, Goodwill Internally Other rights Total supply and rights, patents and generated and values* similar rights licenses and production intangible trademarks technology assets Million Acquisition costs Balance as of January 1, , ,301.2 Changes in scope of consolidation Additions Disposals Transfers (0.4) (3.5) 15.9 (44.9) Exchange differences Balance as of December 31, , ,485.7 Amortization Balance as of January 1, ,694.6 Changes in scope of consolidation Additions Disposals Transfers 0.2. (0.1). (0.6) (0.5) Exchange differences Balance as of December 31, Net book value as of December 31, , ,719.6 * Including licenses on such rights and values Additions in 2005 primarily related to the acquisition of the electronic chemicals business of Merck KGaA, Darmstadt, Germany, and the Swiss fine chemicals company Orgamol S.A. Write-downs of 30.4 million in 2005 primarily concerned customer lists. There were no material write-ups. Concessions for oil and gas production of 59.8 million purchased by companies in the Oil & Gas segment were included under other rights and values. The oil and gas concessions allow the production of oil and gas in certain locations and involve obligations to deliver a small portion of the amounts produced to local companies. The rights to produce oil and gas expire at the end of the license period. The emission rights granted without charge were capitalized in the line transfer as other rights and values. Their book value on the balance sheet date equates to the acquisition costs of 52.2 million.

225 Developments 2004 Marketing, Product Know-how, Goodwill Internally Other rights Total supply and rights, patents and generated and values* similar rights licenses and production intangible trademarks technology assets Million Acquisition costs Balance as of January 1, , ,351.9 Changes in scope of consolidation Additions Disposals Transfers (5.6) (1.9) Exchange differences 0.5 (11.3) (5.6) (72.6) (2.2) (33.8) (125.0) Balance as of December 31, , ,301.2 Amortization Balance as of January 1, ,376.6 Changes in scope of consolidation Additions Disposals Transfers (10.4) 56.4 Exchange differences (0.1) (5.4) (2.0) (1.9) (16.1) (25.5) Balance as of December 31, ,694.6 Net book value as of December 31, , ,606.6 * Including licenses on such rights and values Additions in 2004 relate to the acquisition of the polyurethane foams business from Foam Enterprises, Inc., United States. There were no significant write-downs in There were no material write-ups.

226 BASF Group Consolidated Financial Statements and Notes 15. Property, plant and equipment Developments 2005 Land, land rights Machinery Miscellaneous Advance Total and buildings and technical equipment and payments and equipment fixtures construction in progress Million Acquisition costs Balance as of January 1, , , , , ,442.2 Change in scope of consolidation Additions ,187.8 Disposals Transfers , (2,095.9) 29.7 Exchange differences , ,816.4 Balance as of December 31, , , , , ,622.2 Depreciation Balance as of January 1, , , , ,379.5 Change in scope of consolidation Additions , ,034.9 Disposals Transfers 42.5 (3.4) Exchange differences Balance as of December 31, , , , ,635.3 Net book value as of December 31, , , , ,986.9 Additions in 2005 are explained in detail in the Management s Analysis under Liquidity and Capital Resources on page 32. Write-downs of 76.5 million in 2005 primarily relate to restructuring measures in the Intermediates division in Asia. There were no material write-ups.

227 Developments 2004 Land, land rights Machinery Miscellaneous Advance Total and buildings and technical equipment and payments and equipment fixtures construction in progress Million Acquisition costs Balance as of January 1, , , , , ,278.6 Change in scope of consolidation Additions , ,022.1 Disposals ,150.4 Transfers , (1,417.5) (178.7) Exchange differences (87.6) (520.4) (68.5) (5.9) (682.4) Balance as of December 31, , , , , ,442.2 Depreciation Balance as of January 1, , , , ,555.9 Change in scope of consolidation Additions , ,052.8 Disposals Transfers (0.9) 8.0 (21.0) 0.1 (13.8) Exchange differences (42.3) (289.1) (49.7) (381.1) Balance as of December 31, , , , ,379.5 Net book value as of December 31, , , , ,062.7 Additions in 2004 primarily concern the construction of our Verbund site in Nanjing, China. Write-downs of million in 2004 primarily relate to European sites of the Chemicals segment as well as restructuring measures in North America (NAFTA).

228 BASF Group Consolidated Financial Statements and Notes 16. Investments accounted for using the equity method and other financial assets Developments 2005 Investments Investments Investments in Shares in Long-term accounted for in associated other securities using the equity affiliated companies participations method companies Million Acquisition cost carried forward Balance as of January 1, , Change in scope of consolidation (9.3) (11.8) (7.0) Additions Disposals 1, Transfers (9.8) 9.7 (10.6) Exchange differences Balance as of December 31, Depreciation Balance as of January 1, Change in scope of consolidation 0.4 Additions Disposals Transfers 10.2 (10.6) (0.3) Exchange differences 0.4 Balance as of December 21, Net book value as of December 31, Developments 2005 Loans to Loans to Other loans and Other financial Investments affiliated associated investments assets accounted for companies companies and using the equity participating method and interests other financial Million assets Acquisition cost carried forward Balance as of January 1, ,814.8 Changes in scope of consolidation (18.8) (28.1) Additions Disposals ,490.1 Transfers (55.8) (7.2) (20.0) (30.7) (40.5) Exchange differences Balance as of December 31, ,405.5 Depreciation Balance as of January 1, Changes in scope of consolidation Additions Disposals (60.9) 0.2 (50.2) Transfers (3.7) 0.6 (3.8) (3.8) Exchange differences Balance as of December 31, Net book value as of December 31, ,057.3

229 Developments 2004 Investments Investments Investments in Shares in Long-term accounted for in associated other securities using the equity affiliated companies participations method companies Million Acquisition cost carried forward Balance as January 1, , Change in scope of consolidation (21.3) (30.2) 7.8 Additions Disposals Transfers 39.7 (0.7) (6.6) 80.7 (0.1) Exchange differences (0.1) (0.5) (1.3) (0.6) Balance as of December 31, , Depreciation Balance as of January 1, Change in scope of consolidation 0.2 Additions Disposals 10.7 Transfers (7.6) (0.5) Exchange differences (0.2) Balance as of December 31, Net book value as of December 31, , Developments 2004 Loans to Loans to Other loans and Other Investments affiliated associated investments financial assets accounted for companies companies and using the equity participating method and interests other financial Million assets Acquisition cost carried forward Balance as of January 1, ,791.2 Changes in scope of consolidation (8.3) (30.7) (52.0) Additions Disposals Transfers 0.6 (23.2) (14.5) Exchange differences (0.2) (5.0) 1.8 (5.8) (5.9) Balance as of December 31, ,814.8 Depreciation Balance as of January 1, Changes in scope of consolidation Additions Disposals Transfers (18.1) (0.3) (26.5) (26.5) Exchange differences (0.1) (0.3) (0.3) Balance as of December 31, Net book value as of December 31, ,038.6

230 BASF Group Consolidated Financial Statements and Notes Disposals in 2005 within investments accounted for using the equity method relate almost entirely to the sale of our 50% stake in Basell. Additions to investments in affiliated companies in 2005 concern, in particular, BASF Polyurethane Specialties (China) Company Ltd. in the amount of 10.7 million, held by BASF Beteiligungsgesellschaft mbh and BASF Aktiengesellschaft. The shares in other participations and long-term securities are recorded at market value. The market values of available-for-sale long-term securities and shares in other participations as well as the changes of market values recognized in other comprehensive income (OCI) are summarized below: Original acquisition Book/ market Recognized in OCI Original acquisition Book/ market Recognized in OCI Million cost value cost value Shares in funds Shares in other participations and securities The disposal of available-for-sale securities generated proceeds of 6.4 million as well as income of 0.5 million in The disposal of available-for-sale securities generated income of less than 0.1 million in The sale of other participations generated proceeds of 65.2 million as well as income of 7.4 million in Write-downs of 8.3 million in 2005 as well as 20.2 million in 2004 due to impairments of other participations were made. 17. Inventories Million Raw materials and factory supplies 1, ,026.3 Work-in-process, finished goods and merchandise 4, ,552.3 Advance payments and construction in progress , ,645.4 Work-in-process and finished goods and merchandise are combined into one item due to the production conditions in the chemical industry. Construction in progress relates mainly to inventory not invoiced at balance sheet date. Write-downs on inventory amounted to 3.6 million in 2005 and 12.5 million in Of the total inventory 1,074.3 million in 2005 and million in 2004 was valued at net realizable value. Write-backs (reversals of impairment losses) are made if the reasons for the previous years write-downs no longer apply. Write-backs amounted to 35.4 million in 2005 and 21.2 million in Inventories were valued using the weighted-average cost method.

231 Other receivables and other assets Million Thereof short-term Thereof short-term Receivables from affiliated companies Prepaid expenses Defined benefit assets Miscellaneous receivables and other assets 1, , , ,714.6 Thereof: Receivables from associated companies and other participating interests Other assets 1, , , , , , , ,132.8 Prepaid expenses include pre-payments for operating expenses of 32.9 million in 2005 and 29.3 million in 2004 as well as pre-payments for insurance premiums of 28.0 million in 2005 and 23.2 million in Composition of other assets Million Tax refund claims Loans and interest receivables Deferrals from financial derivatives Employee receivables Rents and deposits Insurance claims Receivables from joint venture partners Other , ,911.5 Deferrals from financial derivatives decreased primarily due to an increase in exchange rates of the relevant currencies. Prepaid expenses amounted to 3.9 million in 2005 and 5.2 million in Valuation allowances for doubtful accounts As of January 1, 2005 Additions affecting income Releases affecting income Additions not affecting income Releases not affecting income Balance as of December 31, 2005 Million Accounts receivable, trade Other assets

232 BASF Group Consolidated Financial Statements and Notes Valuation allowances for doubtful accounts As of January 1, 2004 Additions affecting income Releases affecting income Additions not affecting income Releases not affecting income Balance as of December 31, 2004 Million Accounts receivable, trade Miscellaneous receivables and other assets Additions and releases not affecting income related primarily to changes in scope of consolidation, to translation adjustments and write-offs of receivables previously written down. Contingent assets in 2005 and 2004 were immaterial. 19. Marketable securities Liquid funds includes the following marketable securities: Million Original acquisition cost Book/ market value Original acquisition cost Book/ market value Fixed-term, interest-bearing certificates Shares Other securities The sale of short-term securities in 2005 resulted in proceeds of 65.5 million and income of 32.3 million. The sale of short-term securities in 2004 resulted in proceeds of 20.0 million and income of 9.2 million. Maturities of fixed-term securities Million Original acquisition cost Market value Original acquisition cost Market value Less than 1 year Between 1 and 5 years More than 5 years

233 Capital and reserves Conditional capital Authorized capital Million January Conditional capital for the stock option program BOP 1999/2000 and the BOP 2001/2005, decrease due to exercise and experation of option rights (12.3) (1.3) Cancellation of the prior authorization at the annual meeting on April 29, 2004 (500.0) Increase due to authorization for the issuance of new shares against cash or contributions in kind at the annual meeting on April 29, December Subscribed capital Outstanding Subscribed Capital shares capital reserves Million Outstanding shares as of December 31, ,059,000 1, ,100.2 Repurchased shares intended to be cancelled (680,000) (1.7) Outstanding shares as disclosed in the financial statements 514,379,000 1, ,100.2 Share repurchase The Board of Executive Directors received approval at the Annual Meeting on April 28, 2005, to repurchase BASF s shares to a maximum amount of 10% of subscribed capital by October 27, The shares shall be purchased on the stock exchange or through a public purchase offer addressed to all shareholders. If BASF shares are purchased on a stock exchange, the price paid for the shares may not be higher than the highest market price on the buying day and may not be lower than 25% of that market price. In the case of a public purchase offer, the price offered by BASF may be a maximum of 10% higher than the highest market price on the third trading day prior to the publishing of the public purchase offer. This authorization supersedes the validity of the prior authorization to repurchase BASF shares granted by the Annual Meeting on April 29, In addition, the Board of Executive Directors has been authorized at the Annual Meeting on April 28, 2005 to purchase shares through the use of put and call options. The price paid for options purchased may not exceed the theoretical value calculated with recognized financial models using the same assumptions, such as strike price, as the options themselves, while the price received for options sold may not fall beneath this value. In 2005, a total of 26,062,229 shares, or 4.8% of the issued shares, were acquired. The average purchase price was per share. A total of 26,182,229 shares were cancelled by December 31, Thereof were included 800,000 shares that were acquired in As of the balance sheet date, 680,000 shares of BASF stock were held by BASF. These were acquired for the purpose of cancellation. Therefore, these shares were not capitalized, but rather the subscribed capital is shown net of these shares at December 31, During 2004, 16,203,000 shares, or 2.9% of the issued shares, were acquired. The average purchase price was per share. These were cancelled in 2004 and Conditional capital Of the conditioned capital, million serves to fulfill the exercising of warrants related to option bonds. The Board of Executive Directors was authorized at the Annual Meeting on April 26, 2001, to do so until April 1, An additional 27.4 million is reserved to fulfill stock options granted under the BASF Stock Option Program (BOP) 2001/2005 to the members of the Board of Executive Directors and other senior executives of BASF and its subsidiaries; up to 0.3 million is reserved to fulfill stock options from the Stock Option Program /2000.

234 BASF Group Consolidated Financial Statements and Notes Authorized capital At the Annual Meeting of April 29, 2004, shareholders authorized the Board of Executive Directors, with the approval of the Supervisory Board, to increase subscribed capital by issuing new shares in an amount of up to million against cash or contribution in kind through May 1, The Board of Executive Directors is empowered to decide on the exclusion of shareholders subscription rights, for these new shares. Capital surplus Capital surplus includes premiums from the issuance of shares, the fair value of warrants attached to option bonds and negative goodwill from the capital consolidation resulting from acquisitions of subsidiaries in exchange for issue of BASF shares at par value. 21. Retained earnings and other comprehensive income Million Legal reserves Translation adjustments The difference between the historical exchange rate at the time of acquisition and the rate used to translate the equity of a company as of the balance sheet date is recorded directly in equity and only flows through the income statement upon the disposal of a company. Cash flow hedges In 2005, the acquisition costs of inventories were reduced by 17.4 million through cashflow hedges. The entry affecting the income statement related to interest expenses. The total ineffective portion of all fair value changes of derivatives in 2005 affecting the income statement amounted to 3.9 million. Valuation of securities at fair value Changes in value of available-for-sale securities are accounted for in equity, without impacting the income statement, until the securities are disposed of. Upon disposal, the changes accumulated in equity are accounted for in the income statement. Other retained earnings and profit retained 11, ,664.5 Retained earnings 11, ,923.1 The changes in scope of consolidation did not lead to a change in the legal reserves in 2005 but led to a reduction of less than 0.1 million in Transfers from other retained earnings and profit retained increased legal reserves by 33.1 million in 2005, 15.5 million in The offsetting of actuarial gains and losses resulted in a reduction of retained earnings by in 2005 and in Other comprehensive income Certain expenses and income have been recorded according to IFRS outside of the income statement. Included among these are translation adjustments, valuation of securities at fair value and changes in the fair value of derivatives held to hedge future cash flows.

235 Minority interests Company Partner Equity stake Million Equity stake Million (%) (%) WINGAS GmbH, Kassel, Germany Yangzi-BASF Styrenics Co. Ltd., Nanjing, China Gazprom-Group, Moscow, Russia Yangzi Petrochemical Corp. Ltd., Nanjing, China BASF India Ltd., Mumbai, India Publicly traded shares BASF PETRONAS Chemicals Sdn. Bhd., Petaling Jaya, Malaysia PETRONAS (Petroliam Nasional Bhd.), Kuala Lumpur, Malaysia BASF SONATRACH PropanChem S.A., Tarragona, Spain SONATRACH, Algiers, Algeria BASF FINA Petrochemicals Ltd., Port Arthur, Texas Total Petrochemicals Inc., Houston,Texas Other Provisions for pensions and similar obligations In addition to government pension schemes, most employees are entitled to Company pension benefits from either defined contribution or defined benefit plans or both. Benefits generally depend on years of service, contribution or compensation and consider the legal, fiscal and economic conditions of the countries where companies are located. To control the risks of changing conditions in the capital markets, as well the increasing life-expectancies, employees will be increasingly offered defined contribution plans in the future. For BASF Aktiengesellschaft and other German subsidiaries, a basic level of benefits is provided by the legally independent funded plan, BASF Pensionskasse VVaG, which is financed by contributions of employees and the Company and the returns on its assets. Mid-2004, the defined benefit plan of BASF Pensionskasse VVaG, was closed, and a new defined contribution plan was introduced. To fulfill legal solvency obligations (Section 53c VAG), a contribution of million was made to the equity of the BASF Pensionskasse in 2005, which did not flow through the income statement. Additional employee pension commitments at German Group companies were previously financed almost exclusively via pension provisions. In December 2005, BASF established a Contractual Trust Arrangement (CTA), BASF Pensionstreuhand e.v., and contributed liquid funds of 3,660 million to finance employee pension commitments of BASF Aktien-gesellschaft. The funds are administered by this trustee and serve exclusively to finance the pension obligations of BASF Aktiengesellschaft. Since the contributed funds are classified as plan assets according to IAS 19, they are netted against existing pension provisions. In the case of non-german subsidiaries, pension entitlements are covered in some cases by pension provisions, but mainly by external insurance companies or pension funds. The measurement date for most of the pension plans is December 31 of the reporting period. The most recent actuarial mortality tables are used. The valuation using the projected unit credit method per IAS 19 was carried out under the following assumptions:

236 BASF Group Consolidated Financial Statements and Notes Assumptions used to determine the defined benefit obligation (weighted average) Germany in % Foreign in % (in %) 2005 (in %) 2004 (in %) 2005 (in %) 2004 Interest rate Projected increase of wages and salaries Projected pension increase Assumptions used to determine expenses for pension benefit (weighted average) Germany in % Foreign in % Interest rate Projected increase of wages and salaries Projected pension increase Expected return on plan assets Similar obligations refer to commitments by BASF s North American Group companies to provide for the costs of medical and life insurance benefits for employees and eligible dependents after retirement. They are based upon an actuarial valuation, considering the future cost trend and a discount rate of 5.5%. The assumptions regarding the overall expected longterm rate of return are based on forecasts of expected individual asset class returns and the desired portfolio structure. The forecasts are based on long-term historical average returns and take the current yield level and the inflation trend into consideration. Due to yet lower interest rates and the expectations of lower future inflation rates, the long-term expected return on debt securities has been lowered, compared with the prior year. The portfolio structure of the pension plan assets is as follows: Plan asset portfolio structure Average target Plan assets % allocation (in %) Equities Debt securities Real estate Other The high percentage of assets under other in 2005 is due to the inclusion of BASF Pensionstreuhand e.v. for the first time. Funds contributed in December 2005 were first placed in cash, and will be invested according to the target allocation in The target asset allocation has been defined using asset liability studies and is reviewed regularly. This ensures that plan assets are aligned with plan liabilities. The current portfolio structure is generally oriented towards the target asset allocation. In addition, current market views are taken into consideration. In order to mitigate investment risks and to benefit from a large number of return sources, individual investments are globally diversified.

237 Development of the defined benefit obligation Million Defined benefit obligation as of January 1 9, ,220.3 Service cost Interest cost Benefits paid (566.0) (589.2) Participants contributions Change in actuarial assumptions 1, Settlements and other changes Exchange rate changes (123.7) Defined benefit obligation as of December 31 11, ,814.1 Development of plan assets Million Plan assets as of January 1 6, ,952.4 Expected return on plan assets Difference between expected and actual returns Employer contributions One-time contribution to fund the CTA by BASF AG 3,660.0 Participants contributions Benefits paid (336.2) (344.6) Exchange rate changes (110.7) Other changes 89.0 (35.5) Plan assets as of December 31 11, ,204.3 The pension funds held securities issued by BASF Group companies, whose total market value amounted to 13.4 million on December 31, 2005 (2004: 8.6 million). The market value of rental properties held by BASF pension funds rented to BASF Group companies amounted to 43.8 million as of December 31, 2005 (2004: 43.8 million). No material transactions took place between the pension funds and BASF group companies, or related companies in 2005 and in The pension provisions were as follows: Reconciliation of the defined benefit obligation to the pension provisions Million Defined benefit obligation as of December 31 11, ,814.1 Less plan assets as of December 31 11, ,204.3 Funded status ,609.8 Unrecognized past service cost (2.7) (3.5) Asset ceiling in accordance with IAS Capitalized defined benefit asset Provisions for pensions 1, ,791.8 Provisions for similar obligations Provisions for pensions and similar obligations 1, ,124.1

238 BASF Group Consolidated Financial Statements and Notes Actuarial gains and losses are charged directly against retained earnings in the reporting period they occur. Expenses from past service costs are amortized over the average service period of the entitled employees until the benefits become vested. 1,075.9 million and million in actuarial losses were charged outside of income and profit to retained earnings in 2005 and 2004 respectively. Since the introduction of this accounting policy, a total of 1,440.4 million has been charged against retained earnings, not taking deferred taxes into account. The current funding situation of the defined benefit obligation is disclosed in the following table: Current funding situation Million DBO Plan assets DBO Plan assets Unfunded pension plans ,638.5 Partially funded pension plans 7, , , ,687.7 Total of pension plans that are not fully funded 7, , , ,687.7 Fully funded pension plans 4, , , , , , , ,204.3 Due to rising DBOs, the pension liabilities exceeded plan assets for the first time in 2005 for several pension plans leading to their inclusion in the partially funded plan category. The following overview shows the differences between the actuarial assumptions and the actual development relating to the DBO and the plan assets. Differences between actuarial assumptions and the actual development Million Defined benefit obligation 11, ,814.1 Thereof impact of experience adjustments Plan assets 11, ,204.3 Thereof impact of experience adjustments Funded status ,609.8 Payments arising from pension obligations existing as of December 31, 2005 are due as follows: Expected payments resulting from pension obligations existing as of December 31, 2005 Million through ,362.3

239 Composition of expenses for pension benefits Million Service cost Amortization of past service cost Settlement gains/losses (3.6) (10.2) Expenses for similar obligations 0.1. Expenses for defined benefit plans charged to income from operations Interest cost Expected return on plan assets (421.7) (409.6) Expenses for similar obligations Expenses for defined benefit plans charged to financial result Expenses for defined contribution plans Expenses for pension benefits The estimated contribution payments for defined benefit plans for 2006 are million. In addition, contributions to public pension plans amounted to million in 2005 and million in Other provisions Million Total Thereof shortterm Total Thereof shortterm Recultivation obligations Environmental protection and remediation costs Personnel costs 1, , Sales and purchase risks Integration, shutdown and restructuring costs Legal, damage claims, guarantees and related commitments Other 1, , , , , ,364.1 Recultivation obligations concern estimated costs for the filling of wells and the removal of production equipment after the end of production. Environmental protection and remediation costs concern expected costs for rehabilitating contaminated sites, recultivating landfills, removal of environmental contamination at existing production or storage sites and other measures. The personnel cost provision includes obligations to grant long-time service bonuses and anniversary payments, variable compensation including related social security contributions and other accruals as well as provisions for early retirement and short-working programs for employees nearing retirement. Most German BASF companies have various programs that entitle employees who are at least 55 years old to reduce their working hours to 50% for up to six years.

240 BASF Group Consolidated Financial Statements and Notes Under such arrangements, employees generally work full time during the first half of the transition period and leave the Company at the start of the second period. Employees receive a minimum 85% of their net salary throughout the transition period. The sales and purchase risks provision includes warranties, product liability, customer rebates, payment discounts and other price reductions, sales commissions and provisions for expected losses on committed purchases or similar obligations. Integration, shutdown and restructuring costs provisions include severance payments to employees as well as specific site shutdown or restructuring costs, including the costs for demolition and similar measures. Additions in 2005 and in 2004 consisted primarily of personnel measures at the Ludwigshafen site. Additions in2005 also concern restructuring measures in the NAFTA region. Expenses in 2005 include restructuring expenses within the Agricultural Products and Nutrition segment. Amounts paid in 2005 and 2004 are related to the execution of restructuring measures initiated in the prior year. Provisions for guarantees, damage claims, legal and related commitments are recorded for the expected cost of outstanding litigation and claims of third parties, including regulatory authorities, other guarantees and warranties for antitrust proceedings. The significant proceedings are described in Note 27. Other also includes long-term tax provisions. These relate to amounts accrued for expected tax payments as well as risks associated with tax audits. Provisions developed as follows: January 1, Additions Interest Utilization Releases Other December 31, 2005 compounding changes 2005 Million Recultivation obligations (8.4) (11.4) Environmental protection and remediation costs (28.0) (4.6) Personnel costs 1, (784.4) (36.2) ,599.2 Sales and purchase risks , (1,157.1) (96.6) Integration, shutdown and restructuring costs (202.7) (20.4) Legal, damage claims, guarantees and related commitments (94.8) (28.8) Other 1, (418.5) (56.8) , , , (2,693.9) (254.8) ,553.7

241 Liabilities Financial indebtedness Million % Euro Bond 2003/2010 of BASF Aktiengesellschaft % Euro Bond 2005/2012 of BASF Aktiengesellschaft 1, % Euro Bond 2000/2005 of BASF Aktiengesellschaft 1,249.0 Other bonds Commercial paper 7.6 Bonds and other liabilities to the capital market 2, ,517.4 Liabilities to credit institutions 1, , ,297.4 Financial liabilities are denominated predominantly in the following currencies: Million U.S. dollar Euro 2, ,368.8 Malaysian ringgit Korean won Chinese renminbi Other , ,297.4 The weighted-average interest rate on short-term borrowings was 4.7% on December 31, 2005 (2004: 4.2%). Financial liabilities have the following maturities as of December 31, 2005: Million , , ,3 20, ,8 14, ,7 31, ,3 25, and thereafter 2.484, , , ,4 interest rate of this bond is 3.63%. The 5.75% Euro Bond 2000/2005 of BASF Aktiengesellschaft was repaid in July of The effective interest rate of this bond was 5.92%. Interest payments of both currently outstanding bonds is due annually in arrears. Other bonds consist primarily of industrial revenue and pollution control bonds that are used to finance investments in the United States. The weighted-average interest rate of these bonds was 2.7% in 2005, and 1.5% in The weighted-average effective interest rate of these bonds was 2.7% in 2005, and 1.5% in The average maturity amounted to 317 months as of December 31, Liabilities to credit institutions Liabilities to credit institutions relate to a large number of different credit institutions in various countries. Liabilities to credit institutions denominated in ringgit, won und renminbi result from the local financing of investments in Malaysia, Korea and China. BASF Aktiengesellschaft had committed and unused credit lines with variable interest rates of 2,119.2 million as of December 31, 2005, and 1,835.4 million as of December 31, Additional uncommitted credit lines of BASF Aktiengesellschaft amounted to million as of December 31, 2005, and million as of December 31, The 3.375% Euro Bond 2005/2012 of BASF Aktiengesellschaft was issued in May 2005 in the amount of 1,400 million and matures in May The effective interest rate of this bond is 3.42 %. The 3.5 % Euro Benchmark Bond 2003/2010 of BASF Aktiengesellschaft was issued in June 2003 in the amount of 1,000 million. The effective

242 BASF Group Consolidated Financial Statements and Notes Other liabilities Million Thereof short-term Thereof short-term Advances received on account of orders Liabilities on bills Liabilities to companies in which participations are held Liabilities relating to social security Non-trade liabilities to joint venture partners Liabilities arising from deferrals from financial derivatives Liabilities arising from financing leases Miscellaneous Total 2, , , ,527.1 Deferred income Other liabilities 2, , , ,641.4 Liabilities to companies in which participations are held include the portion of liabilities that are not eliminated to jointly owned companies accounted for using the proportional consolidation method of 80.0 million as of December 31, 2005, and 31.6 million as of December 31, Further liabilities relating to associated companies accounted for using the equity or cost method were million as of December 31, 2005, and million as of December 31, Maturities of liabilities Less than 1-5 years More than Less than 1-5 years More than Million 1 year 5 years 1 year 5 years Bonds and other liabilities to the capital market 1, , , ,258.4 Liabilities to credit institutions Accounts payable, trade 2, , Liabilities to affiliated companies Advances received on account of orders Liabilities on bills Liabilities to associated companies Miscellaneous liabilities 1, , , , , , ,253.4 Leasing liabilities are detailed in Note 30.

243 Collateralized liabilities and contingent liabilities are shown below: Secured liabilities and contingent liabilities Million Liabilities to credit institutions Other liabilities Contingent liabilities Certain liabilities are collateralized with mortgages or securities. In addition, BASF Aktiengesellschaft has given covenants in favor of BASF Pensionskasse VVaG with regard to adhering to certain balance sheet ratios and to forgo encumbering property as security for creditors. 26. Accounts payable and other financial obligations The contingencies listed below are stated at nominal value. Contingent liabilities Million Bills of exchange Thereof to affiliated companies Guarantees Thereof to affiliated companies Warranties Granting collateral on behalf of third-party liabilities Other financial obligations Million Remaining cost of construction in progress 1, ,700.7 Thereof purchase commitment Thereof for the purchase of intangible assets Obligation arising from long-term leases (excluding financing leases) Payment and loan commitments and other financial obligations , ,529.0

244 BASF Group Consolidated Financial Statements and Notes Obligations from long-term rental and lease contracts (not financing leases) are due as follows: Million and thereafter Property, plant and equipment held under long-term leases primarily concern buildings and computer infrastructure. Leasing obligation are explained in detail in Note 30. Purchase commitments for raw materials and natural gas from long-term contracts The Company has entered into long-term purchase contracts for natural gas, the vast majority of which are coupled with long-term supply contracts to customers. In addition, the Company purchases raw materials globally, both on the basis of long-term contracts and in spot markets. In general, such commitments are at prices that are regularly adjusted to market conditions. The fixed and determinable portions of long-term purchase contracts with a remaining term of more than one year as of December 31, 2005, are as follows: Million , , , , , and thereafter 32, , Risks from litigation and claims Antitrust Claims Relating to Vitamins On November 21, 2001, the European Commission imposed a fine of million against BASF Aktiengesellschaft in connection with certain violations of antitrust laws relating to the sale of vitamin products in Europe between 1989 and early On December 9, 2004, the European Commission imposed an additional fine of 35 million for violations of certain antitrust laws relating to the sale of vitamin B 4 (choline chloride) in the mid-1990s. BASF has appealed against both decisions. Further proceedings are still pending in Brazil and Australia. A few State court lawsuits on behalf of indirect purchasers are still pending in the United States in connection with said antitrust law violations. Further claims for damages have been filed in the United Kingdom. A class action filed in Australia has been settled, with court approval still outstanding. For these proceedings, the company has established provisions that it anticipates to be sufficient. BASF Aktiengesellschaft has been named as a defendant in Empagran S.A. v. F. Hoffmann-LaRoche, Ltd, et al., a federal class action filed in the U.S. District Court for the District of Columbia purportedly on behalf of all persons who purchased vitamins from the defendants outside the United States between January 1, 1988 and February The Empagran complaint alleges that the plaintiffs were overcharged on their vitamins purchases as the result of a worldwide conspiracy among the defendants to fix vitamin prices. By decision dated June 7, 2001, the District Court for the District of Columbia dismissed the Empagran complaint for lack of subject matter jurisdiction. On January 17, 2003, a divided panel of the United States Court of Appeals for the District of Columbia Circuit reversed the District Court s ruling. The Court of Appeals held that the United States antitrust laws permit the assertion of federal subject matter jurisdiction over claims by foreign purchasers based on purchases made and purported damages felt outside the United States. For information regarding possible contingent liabilities in connection with the acquisition of Englehard Corporation, Iselin, New Jersey, please see the Supplementary Report on page 56.

245 BASF Aktiengesellschaft and the other defendants petitioned for a Writ of Certiorari to the United States Supreme Court. The Supreme Court granted the petition, and on June 14, 2004, vacated the Court of Appeals ruling and remanded the case to the Court of Appeals by an 8-0 decision. On June 28, 2005, the Court of Appeals, on remand, ruled that plaintiffs alleged link between foreign injury and domestic effects was legally insufficient to trigger jurisdiction under the Sherman Act and therefore affirmed the district court s dismissal of the action. On October 26, 2005, plaintiffs filed a new petition for a writ of certiorari to the U.S. Supreme Court. The Supreme Court has denied plaintiffs petition, which BASF and the other defendants have opposed, on January 6, The proceedings are, therefore, terminated and the case is finally dismissed. Meridia Class Actions against BASF Corporation and BASF Aktiengesellschaft In various class actions in the United States, Knoll Pharmaceutical Corporation (KPC) and BASF Corporation (and in two cases BASF Aktiengesellschaft) as well as Abbott Laboratories, Inc. and Glaxo Wellcome were sued for an unknown amount of damages as well as for the reimbursement of costs for preventive medical check-ups. The claims are based on the alleged hazardousness, alleged insufficient trials, and failures during the regulatory approval process of Meridia (trade name of the obesity drug sibutramine). Both actions against BASF Aktiengesellschaft have been dropped or dismissed. The claims against BASF Corporation have similarily been voluntarily dismissed. All cases have now been settled, with payment made by Abbott Laboratories which acquired KPC from BASF. Additional Proceedings The Supreme Court of Minnesota in its decision dated February 19, 2004, upheld a jury verdict against BASF Corporation in an amount of $52 million (with interest now totaling $60 million). The court held that the sale of the plant protection products Poast and Poast Plus at different sales prices violated consumer protection laws. BASF believes that different sales prices are justified because the products are based on different patented formulas and also must be sold as different products under relevant EPA regulations. BASF filed a petition for a Writ of Certiorari seeking review by the United States Supreme Court. BASF s petition was granted, and the case was remanded to the Minnesota Supreme Court for reconsideration of its prior opinion in light of an intervening U.S. Supreme Court ruling in another case. The Court s new ruling is expected during the first quarter of In 2005, class action lawsuits against BASF Aktiengesellschaft and BASF Corporation had been filed at U.S. courts. It was alleged that sales of urethanes and urethanes products had violated antitrust laws. BASF will vigorously defend those lawsuits. In August 2005, the European Commission issued Statements of Objections against several European producers of methacrylates and polymethacrylates for alleged anticompetitive behavior between 1995 and 2000, inter alia against BASF Aktiengesellschaft. Although the evidence induced by the Commission against the company is considered weak, a fine against the company cannot be excluded. Therefore, the company has established provisions for the costs of this proceeding that it anticipates to be sufficient. 28. Stock-based compensation BASF stock option program (BOP) In 2005, BASF continued the BASF stock option program (BOP) for senior executives of the company worldwide. This program has existed since Approximately 1,000 senior executives, including the Board of Executive Directors, are currently entitled to participate in this program. To participate in the stock option program, each participant must hold as a personal investment BASF shares in the amount of 10% to 30% of his or her individual variable compensation. The number of shares is determined by the amount of variable compensation designated by the participant and the weighted-average market price quotation for BASF shares on the first business day after the annual meeting, which was on April 29, 2005 (base price). For each BASF share of the individual investment, a participant receives four options. Each option consists of two parts, right A and right B, which may be exercised if defined thresholds have been met: The threshold of right A is met if the price of the BASF share has increased by more than 30% in comparison to the base price (absolute threshold). The value of right A will be the difference between the market price of BASF shares at the exercise date and the base price; it is limited to 100% of the base price.

246 BASF Group Consolidated Financial Statements and Notes Right B may be exercised if the cumulative percentage performance of BASF shares exceeds (relative threshold) the percentage performance of the MSCI World Chemicals Index SM (MSCI Chemicals). The value of right B will be the base price of the option multiplied by twice the percentage outperformance of BASF shares compared to the MSCI Chemicals index on the exercise date. Shares of the individual investment must be held for at least two years following the granting of the options. The options were granted on July 1, 2005 and may be exercised following a two-year vesting period, between July 1, 2007 and June 30, During the exercise period, it is not possible to exercise options during certain periods (closed periods). Each option right may only be exercised if the performance targets are achieved and may only be exercised once, meaning that if only one performance target is met and that option is exercised, the other option right expires. The maximum gain for a participant from the BOP program is limited to 10 times the original individual investment and will be principally settled in cash. The stock option programs BOP 1999 to BOP 2004 were structured in a similar way to the BOP 2005 program. To participate in the BOP program, each participant must hold BASF shares in the amount of 10% to 30% of his or her individual variable compensation (BOP ) or must make an individual investment in BASF shares in the amount of 10% to 30% of his or her individual variable compensation that is used to purchase BASF shares at the market price on the first business day after the Annual Meeting (BOP 1999 and 2000). The options may be exercised following a vesting period of two years (BOP ) or three years (BOP 1999 and 2000). The benchmark index used to determine the value of right B for BOP 1999 and 2000 is the Dow Jones EURO STOXX SM Total Return Index (EURO STOXX SM ). This was replaced by the Dow Jones Chemicals Total Return Index (DJ Chemicals) between 2001 and 2004, and starting in 2005 by the MSCI Chemicals. The MSCI Chemicals is a global industry index for the chemical industry that measures the performance of the companies contained within it in their respective local currencies, which significantly reduces currency effects. Details on the fair value and the number of options issued are described below. Fair value and parameters used as of December 31, Program years BASF stock option program Fair value Dividend yield of BASF shares 2.63% 2.63% Risk free interest rate 3.22% 3.17% Volatility of BASF shares 26.26% 24.66% Volatility index 2) 17.29% 15.58% Correlation BASF quotation: index 2) 85.05% 68.74% 1 It is assumed that the options will be exercised, based upon the potential gains : MSCI Chemicals; 2004: DJ Chemicals The values for volatility were determined on the basis of the monthly closing prices over a historical period corresponding to the remaining exercise term.

247 Options outstanding Weighted-average base price ( ) Options (Number) Weighted-average base price ( ) Options (Number) Options outstanding as of January ,643, ,833,959 Options granted ,807, ,115,964 Options expired and forfeited , ,464 Options exercised , ,994 Options outstanding as of December ,400, ,643,465 Thereof exercisable options ,493, ,181 1 Option rights lapse if the option holders no longer work for BASF or have sold part of their individual investment before the two-year holding period. They remain valid in the case of retirement. The weighted-average maturity of the outstanding options was 5.86 years on December 31, 2005 and 5.70 years on December 31, The base prices were within a range of to in 2005, and to in Because of a resolution by the Board of Executive Directors and the Supervisory Board in 2002, to settle stock options in cash, options outstanding as of December 31, 2005 are valued with the fair value as of the balance sheet date. This amount is accrued as a provision over the respective vesting period. An amount of 48.5 million was charged to income in 2005, and 36.4 million was charged to income in Previously accrued provisions were increased from 81.8 million on December 31, 2004 to million on December 31, The total intrinsic value of exercisable options amounted to 51.2 million on December 31, 2005 and 2.4 million on December 31, BASF plus incentive share program In 1999, BASF started an incentive share program called plus for all eligible employees except the senior executives entitled to participate in the BOP. Currently, employees of German and of various European and Mexican subsidiaries are entitled to participate in the program. Each participant must make an individual investment in BASF shares from his or her variable compensation. For each 10 BASF shares purchased in the program, a participant receives one BASF share at no cost after one, three, five, seven and 10 years of holding the BASF shares. The first 10 shares entitle the participant to receive one BASF share at no extra cost for each year for the next ten years. The right to receive free BASF shares expires if a participant sells the individual investment in BASF shares, if the participant stops working for the Company or one year after retirement. Details on the incentive share program are described below. Number of shares held under the program Number of shares held as individual investment as of January 1 2,405,230 2,091,400 Number of shares added to the individual investment 565, ,320 Number of subscription rights lapsed (175,100) 154,490 Number of shares held as individual investment as of December 31 2,795,130 2,405,230 The free shares to be provided by the company are valued at the fair value of the grant date. Fair value is determined on the basis of the stock price of BASF shares, taking into account the present value of dividends, which are not paid during the term of the program. The weighted-average fair value at grant date amounted to for the program in 2005 and for the program in The fair value of the free shares to be granted is booked through the income statement against capital surplus over the period until the shares are issued. Provisions for the costs for the program continue to be accrued proportionally on the basis of the BASF closing stock price. Compensation cost of 12.2 million was recorded in 2005 and 10.4 million in 2004 for the employee stock program.

248 BASF Group Consolidated Financial Statements and Notes 29. Derivatives and other financial instruments The use of derivative instruments The Company is exposed to foreign currency, interest rate and commodity price risks during the normal course of business. These risks are hedged through a centrally determined strategy, with the use of derivative instruments. In addition, derivative instruments are used to replace transactions in original financial instruments, such as shares or fixed-interest securities. Derivative instruments are only used if they have a corresponding underlying position or planned transaction arising from the operating business, cash investments, financing or planned sales. The leverage effect that can be achieved with derivatives is deliberately not used. The derivative instruments held by the Company are not held for the purpose of trading. Where derivatives have a positive market value, the Company is exposed to credit risks in the event of nonperformance of their counterparts. This credit risk is minimized by trading contracts exclusively with major creditworthy financial institutions and partners, within pre-defined credit limits. To ensure efficient risk management, market risks are centralized at BASF Aktiengesellschaft, except when certain subsidiaries have been authorized to conclude derivative contracts under the principles mentioned above. Contracting and execution of these instruments is performed according to internal guidelines, and complies with rigorous control mechanisms. The risks arising from changes in exchange rates, interest rates, and prices as a result of the underlying transactions and the derivative transactions concluded to hedge them are monitored constantly. The same is true of the derivative instruments, which are used to replace transactions in original financial instruments. Financial risks Foreign currency risk: Changes in foreign exchange rates could lead to a decline in value in financial instruments. Foreign currency risks are especially prevalent in accounts payable and receivable that are not denominated in the local currency of BASF Group companies, or for future foreign currency transactions. To hedge the exchange rate risk against the U.S. dollar, the British pound, the Brazilian real, and the Korean won, foreign exchange forward contracts, combined interest and currency swaps and currency options are used. Default risk: This is the risk that the counterparties do not fulfill their contractual obligations. The book value of all financial assets plus the nominal value of contingent assets excluding contingent liabilities represents the maximal default risk. Due to the global activities and diversified customer structure of the BASF Group, there is no significant concentration of default risk. Interest rate risk: Interest rate risks result from changes in prevailing interest rates, which can cause a change in the present value of fixed rate instruments, as well as a change in the interest payments of variable rate instruments. To hedge this risk, and in particular to hedge the risk for loans to group companies, interest rate swaps, and combined interest and currency derivatives are used. These risks are relevant in the case of investments and financial obligations but are not of material significance on the operating side. Book value of interest-bearing financial instruments December 31, 2005 December 31, 2004 Million Fixed-interest rate Variable-interest rate Fixed-interest rate Variable-interest rate Loans Securities Financial indebtedness 2, , ,

249 Fair value of financial instruments The fair value of a financial instrument is the price at which the instrument could be exchanged between willing parties. When pricing on an active market is available, for example a stock exchange, this price is used. In other cases a valuation is based on an internal valuation model, using current market parameters. Commonly used techniques include net present value, and option pricing models. The fair value of financial debts is determined on the basis of interbank interest rates. For trade accounts receivable, liquid funds and other assets, trade accounts payable and other liabilities, the book value of short-term items approximates the fair value. Participations which are not traded on an active market and whose net present value could not be reliably determined are contained within other financial assets. These are therefore valued at acquisition cost. The book value of these participations amounts to on December 31, 2005, and on December 31, The book value of financial indebtedness amounted to 3,941.0 million in 2005 and 3,297.4 million in The market value of financial indebtedness amounted to 3,963.4 million in 2005 and 3,334.2 million in The difference between book and market values resulted primarily due to changes in market interest rates. Derivative instruments at market value Nominal value as of December 31 Market value as of December 31 Million Foreign currency contracts 5, , Currency options 3, ,122.1 (33.5) 66.9 Foreign currency derivatives 9, , Interest swaps (2.4) (43.8) Combined interest and currency swaps 1, , Interest derivatives 1, , Commodity derivatives/other derivatives (15.8) (21.8) Forward exchange contracts generally mature within one year. The nominal values are the totals of the purchases and sales of the particular derivatives on a gross basis. The fair market values correspond to resale or termination values, which are determined from market quotations or by the use of option pricing models or, in the case of unlisted contracts, the termination amount in the event of premature cancellation. Offsetting changes in the valuation of the underlying transactions are not taken into account. Positive fair values of derivatives are contained within the item other receivables in the amount of million in 2005 and million in Negative fair values in the amount of million in 2005 and 83.7 million in 2004 are shown under other liabilities. Commodity derivatives in the amount of 4.4 million are used in line with cash flow hedge accounting to hedge prices for raw materials, e.g., naphtha. The hedged rawmaterial inflows will most likely impact the cash-flow and income statement in 2006.

250 BASF Group Consolidated Financial Statements and Notes 30. Leasing Leased assets Property, plant and equipment include those assets which are considered to be economically owned through a financing lease. They primarily concern the following items: Leased assets December 31,.2005 Acquisition cost Net book value Million Land, land rights and building, incl. buildings on land owned by others Machinery and technical equipment Miscellaneous equipment and fixtures Advance payments and construction in progress Liabilities from financing leases Minimum leasing Interest portion Leasing liability payments Million After In the current year less than 0.1 million in additional lease payments were booked to the minimum lease expense (through the income statement) due to contractual obligations. Offsetting these leasing liabilities, expected minimum lease payments from sub-lessees amounted to 0.1 million. In addition, BASF is a lessee in operating leases. The resulting lease obligations totalling million come due in the following years: Liabilities due to operating lease contracts 2005 Less than 1 year 1 5 years More than 5 years in total Nominal value of the future minimum payments

251 Offsetting these leasing liabilities, expected minimum lease payments from sub-lessees amounted to 13.9 million. Minimum lease payments in the amount of 15.6 million, conditional lease payment of 0.6 million, and payments received from sub-lessees of 3.3 million are included in the operating results of the current year. BASF as lessor BASF acts as the lessor only in a minor capacity for financing leases. Receivables from financing leases are below 0.5 million as of December 31, Nominal minimum payments arising from operating leases amount to 7.3 million within one year, and 27.2 million within the next five years. 31. Related-party transactions IAS 24 requires the disclosure of transactions with related parties; both with companies that are not fully consolidated, as well as with individuals. Material supply relationships exist between the proportionally consolidated Group companies Wintershall Erdgas Handelshaus GmbH, Wintershall Erdgas Handelshaus, Switzerland, and companies of the BASF Group for the supply of oil and gas. The unconsolidated portion of these supplies amounted to million in 2005 and million in In addition, a material supply relationship existed between the BASF Group and the Basell Group, which was accounted for by the equity method until Deliveries to the Basell Group amounted to in 2005 and in All transactions were at arm s length. Please see Note 17 for details regarding payables and receivables with companies accounted for proportionally, at acquisition cost, or according to the equity method. There were no transactions between group companies and related individuals that were significant, or of an unusual nature. 32. Services provided by the external auditor BASF Group companies have used the following services of Deloitte & Touche GmbH: Million Annual audit Audit-related services Tax consultation services Other services The annual audit concerned the audit of the annual financial statements of the BASF Group as well as the legally required audit of the financial statements of BASF Aktiengesellschaft and the consolidated subsidiary companies, and joint ventures. Audit-related services concerned billed services primarily for due diligence, confirmation of the conformance to certain contractual obligations as well as audits relating to documentation of the internal control systems required by the Sarbanes-Oxley Act. Tax consultation services primarily concerned tax consultation services in connection with planned or existing transactions, transfer price analysis, as well as consultation with employees on foreign delegation assignments. Other services concern amounts billed in connection with the handling of insurance damage claims as well as numerous other services. Costs for the audit of BASF Aktiengesellschaft amounted to 2.3 million in both 2005 and For other contracted services not related to the annual audit for BASF Aktiengesellschaft, fees paid to Deloitte amounted to 2.0 million in 2005 and 0.8 million in Costs for the audit of proportionally consolidated companies amounted to 0.4 million in 2005 and 0.4 million in For other contracted services not related to the annual audit for proportionally consolidated companies, fees amounted to 0.02 million in 2005 and 0.1 million in 2004.

252 Glossary Glossary 2-ethylhexanol A completely synthetic alcohol used, for example, in the production of plasticizers. 2-propylheptanol Starting product in the production of plasticizers and auxiliaries for chemical and technical industry. acrylic monomers Acrylic monomers are part of the product range of the Performance Chemicals division and are used among other things as starting materials in the production of polymer dispersions. Agricultural Products The Agricultural Products division develops, produces and markets products to protect crops from fungal attack, insect pests and weeds automotive OEM coatings Coating systems for vehicle bodies that protect the vehicle from corrosion (cathodic dip) and gravel and chippings (primer), provide color (basecoat) and offer protection from environmental factors (topcoat). automotive refinish coatings Coatings systems for the repair of vehicles under the trademarks Glasurit and R-M. biotechnology This term covers all processes and products that use living organisms, for example bacteria and yeasts, or their cellular constituents. BASF is using plant biotechnology to develop plants that enable a healthier diet through improved constituents, as well as crops with better cultivation characteristics. In addition, BASF is concentrating on the biocatalytic production of vitamins, amino acids, enzymes and chiral intermediates. C 4 complex Part of the production complex in Port Arthur, Texas. Here, three successive chemical processes are used to obtain butadiene, alkylate gasoline and propylene from a C 4 stream (a mixture of various hydrocarbons each containing four carbon atoms) from the steam cracker. Coatings The Coatings division develops, produces and markets automotive OEM, automotive refinish coatings, industrial coatings and decorative paints. COSO The Committee of Sponsoring Organizations of the Treadway Commission is a voluntary privatesector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls and corporate governance. dividend yield The dividend yield is the return received by a shareholder in the form of a dividend in relation to the year-end share price. It is calculated by dividing the per-share dividend by the year-end share price and multiplying by 100. downstream plant A plant that is downstream of the steam cracker in the chemical value-adding process. earnings per share The amount earned by BASF in euros per share based on the weighted number of shares. EBIT Earnings before interest and taxes. EBIT after cost of capital We use this key performance and management indicator for our operating divisions and business units to ensure that we satisfy the returns expected by providers of equity and debt on the assets employed. EBITDA Earnings before interest, taxes, depreciation and amortization economies of scale Cost advantages derived from modern world-scale plants. energy management The development of new materials and technologies to convert and store energy. Energy management also refers to the responsible use of fossil fuels, for example through the development of energy-saving materials such as insulating materials. Energy management at BASF also involves the exploration for and production of crude oil and natural gas in selected regions by our subsidiary Wintershall AG. ERM Enterprise Risk Management is a supplement to the original COSO model that was published in exploration To investigate and explore an area in the search for mineral resources such as crude oil or natural gas. For successful exploration, it is important to discover oil and gas-bearing structures (deposits, fields) using suitable geophysical processes at sea or on land rather than by means of expensive drilling. FASB The Financial Accounting Standards Board is a U.S.-based body that is accountable to the U.S. Securities and Exchange Commission (SEC). It prepares and publishes Statements of Financial Accounting Standards (SFAS). fermentation Fermentation is a process in which biological materials are reacted with the aid of bacterial, fungal or cell cultures, or with enzymes. Fine Chemicals In the Fine Chemicals division, we develop, produce and market highvalue products for human and animal nutrition and for the cosmetics and pharmaceutical industries. Our primary products are vitamins, pharmaceutical active ingredients, polymers for pharmaceuticals and cosmetics, carotenoids, aroma chemicals, UV filters, the amino acid lysine, as well as enzymes for animal nutrition. Functional Polymers The Functional Polymers division is the global market leader in acrylic acid and superabsorbents and is a leading supplier of functional polymers for the adhesives, construction, carpeting and paper industries. The division operates production facilities in all important regions of the world, consistently capitalizing on the BASF Verbund and expanding its global presence. fungicide An active ingredient that kills fungi or inhibits their growth (for example in plants). futures A binding agreement between two partners to buy or sell a specific amount of an exactly defined commodity or financial instrument at a particular price on a stipulated future date. HDI Hexamethylene diisocyanate is a raw material used in the production of automotive, industrial and plastic coatings. herbicide An active ingredient used to destroy weeds. HPPO process Technology to produce propylene oxide (PO) from propylene and hydrogen peroxide (HP). IAS International Accounting Standards (see also IFRS) IFRIC The International Financial Reporting Interpretations Committee is a committee that publishes proposed guidance on IFRS and IAS. IFRS International Financial Reporting Standards (until 2001 International Accounting Standards, IAS) are developed and published by the International Accounting Standards Board (IASB) headquartered in London, United Kingdom. In accordance with the IAS Regulation, IFRS are mandatory for listed companies in the European Union since industrial coatings Coating materials for industrial goods with the exception of vehicles. Inorganics The Inorganics division produces raw materials such as ammonia, sulfuric acid and nitric acid, as well as the electrolysis products chlorine and sodium hydroxide. The division also produces innovative specialties such as electronic chemicals, heterogeneous catalysts, impregnating resins and powder injection molding technologies. insecticide An active ingredient used to destroy harmful insects. Intermediates The Intermediates division produces and sells amines, diols and polyalcohols, as well as carboxylic acids and specialties such as phosgene derivatives, glyoxal and derivatives, and chiral intermediates for a variety of chemical syntheses; 25% of the division s volumes are for captive use within BASF. Kyoto protocol The Kyoto Protocol is a supplement to the United Nations Framework Convention on Climate Control. Its main goal is to reduce emissions of greenhouse gases.

253 liquefied petroleum gas (LPG) Liquefied natural gases, e.g., propane, butane and propane-butane blends, are used in the heating market, as an alternative feedstock for cracker operations and for other chemical processes. MDI Diphenylmethane diisocyanate: a polyurethane basic product MWh Megawatt hour: a measuring unit for energy MWhel Electric megawatt hour: a measuring unit for electrical energy NAFTA Free trade zone between the United States, Canada and Mexico; established in the North American Free Trade Agreement. This economic region is one of BASF s four business regions. nanotechnology The term nanotechnology applies to materials, structures and technologies with one thing in common: the creation or presence of at least one spatial dimension smaller than a few hundred nanometers. This includes the production of nanoparticles and the creation of nanostructures, which in turn make it possible to produce products with new or improved properties. Examples include starting materials for textiles that absorb UV radiation and waterrepellant surface coatings for the textile and automotive industries. naphtha Liquid petroleum that is obtained as a by-product of oil refining. Heavy naphtha is the starting point for gasoline production. Light naphtha is the most important feedstock for steam crackers. OECD The Organization of Economic Cooperation and Development is an international body headquartered in Paris, France. Oil & Gas Our oil and gas operations are conducted by Wintershall AG and its subsidiaries and include exploration and production of crude oil and natural gas, crude oil and natural gas trading, and the leasing of natural gas storage and transport facilities. payout ratio The distribution ratio shows what proportion of earnings is distributed in the form of a dividend. It is calculated by dividing the total dividend paid by net income and multiplying by 100. PBT Polybutylene terephthalate: a type of plastic Performance Chemicals The Performance Chemicals division includes the business areas Coatings, Plastics & Specialties; Automotive & Oil Industry; Textiles; Leather; and Detergents & Formulators. In all five business areas, we supply high-performance specialties worldwide that add value for our customers directly without further chemical processing. Performance Polymers The Performance Polymers division produces engineering plastics for use in the automotive and electronics industries, for example, as well as fiber intermediates. Petrochemicals The Petrochemicals division operates world-scale facilities to supply the Verbund sites with petrochemical feedstocks such as ethylene and propylene, as well as with technical gases such as hydrogen and oxygen. In later processing stages, products in BASF s plasticizers and solvents value-adding chains are produced, as are alkylene oxides and glycols. Typical examples are butanol, phthalic anhydride and ethylene oxide, which are processed primarily within the BASF Verbund. plant biotechnology An area of biotechnology in which methods of traditional cultivation are optimized using methods from molecular biology and biochemistry. For example, plants can be developed that contain constituents that allow a healthier diet, that grow under adverse conditions, or that form substances that would otherwise have to be produced using complicated chemical processes. PolyTHF Polytetrahydrofuran: a starting material for elastic fibers Polyurethanes The Polyurethanes division is one of the world s leading producers of polyurethanes. Our product range includes the entire spectrum of basic polyurethane products, tailormade polyurethane systems and polyurethane specialties. Polyurethanes are used, for example, as rigid or flexible foams for domestic appliances and mattresses, and as specialty plastics for the automobile and footwear industries. REACH A proposed new EU regulatory framework for the registration, evaluation and authorization of chemicals. Responsible Care A worldwide initiative by the chemical industry to continuously improve its performance in the fields of environmental protection, safety and health. return on assets This describes the return we make on the average assets employed during the year. It is calculated as income from ordinary activities plus interest expenses as a percentage of average assets. return on equity after tax This describes the return we make on the average equity used during a fiscal year. It is calculated as income from minority interests as a percentage of average equity. return on operating assets The return on operating assets describes the return made by an individual segment or the BASF Group on its allocated assets. It is calculated as income from operations as a percentage of average operating assets. return on sales The return on sales describes the return we make from our operations as a percentage of sales. It is calculated as income from operations as a percentage of sales. Sarbanes-Oxley Act (SOX) A law enacted in the United States in 2002 to improve corporate financial reporting. The Sarbanes-Oxley Act applies to U.S. companies and foreign companies listed on U.S. stock exchanges. special items One-time costs or one-time payments that significantly affect the earnings of a segment or the BASF Group. Special items include payments arising from restructuring measures and severance payments. steam cracker A large plant in which steam is used to crack naphtha (petroleum). The resulting petrochemicals above all, ethylene and propylene are the starting materials used to manufacture most of BASF s products. Styrenics This operating division produces and distributes styrene and styrenics worldwide. The production of the primary product styrene is primarily for captive use (backward integration). Styrenics are used in many fields, including the construction, packaging, automotive, electric and leisure industries. swap An agreement between two companies to exchange payment flows in the future. In an interest swap, a fixed interest rate is exchanged for a floating one for an agreed nominal amount. TDI Toluene diisocyanate: a polyurethane basic product THF Tetrahydrofuran: a starting material for PolyTHF TPU Thermoplastic polyurethanes are specialty plastics used in a wide range of applications, e.g., in the automotive, sportswear and footwear industries. U.S. GAAP United States Generally Accepted Accounting Principles value-adding chain Successive steps in a production process, from the raw materials through various intermediate steps to the finished product. Verbund The Verbund is one of BASF s greatest strengths: At our major sites, we link our production plants in a sophisticated system along our value-adding chains: Even by-products or waste from one plant can often be used as raw materials in a neighboring plant. We thus save energy and raw materials, reduce logistics costs and use infrastructure facilities jointly. white biotechnology An area of biotechnology that deals with products and processes in the chemical, textile and food industries. world-scale plants Large production plants in which products can be manufactured on a world scale. The more a plant produces, the lower the fixed costs per metric ton of product (see also: economies of scale). BASF is therefore committed to cost-effective large-scale plants of this kind in all major economic regions.

254 Index Index Acquisitions...30ff., 56, 104f. Agricultural Products & Nutrition... 14, 19, 32, 46ff., 55, 63, 116f. Audit Committee...74, 81 Balance sheet...28f., 89 Basell... 3, 26, 96, 120 Board of Executive Directors... 4f., 6f., 73ff., 76, 79, 82, 83, 86, 125 Capital expenditures... 19, 30ff, 41, 48, 50, 100f. Cash flows, statement of...30ff., 92, 123 Chemicals... 14, 19, 32, 37ff., 54, 60, 63, 116f. Coatings...44f. Code of Conduct...73ff. Compliance statement...83 Consolidated Financial Statements...82, 88ff. Contractual Trust Arrangement (CTA)... 3, 31, 65, 137 Corporate governance...73ff. Cost of capital...20 Crude oil/natural gas... 14, 19, 49f., 72, 117, 146 Derivative financial instruments...70, 100f., 150f. Dispersions...45, 53f. Divestitures... 26, 31f., 105f Dividend...8ff., 33 E-commerce...62 Electronic chemicals...3, 37f., 105 Employees...18, 64f., 124 Environmental protection...18, 66f. F , 55 Financial management...31 Fine Chemicals... 14, 19, 48, 55, 105, 116f. Functional Polymers...45 Growth clusters... 17, 47, 53 Income, statement of...24ff., 88 Innovation...53ff. Inorganics...38f., 105 Intermediates...39 Investor relations...8ff. Joint ventures...16, 95 Key ratios...34, 69 Knowledge Factory...68 Naphtha...20f., 61 Oil & Gas... 14, 19, 32, 49f., 63, 116f. Performance Chemicals...44 Performance Polymers...42 Performance Products... 14, 19, 32, 43ff., 54f., 63, 116f. Petrochemicals...39 Plant biotechnology...47, 53 Plastics... 14, 19, 32, 40ff., 54, 63, 116f. plus share program...65, 149 Polyurethanes...42 Procurement Verbund...61 Products...14, 32, 38f., 42, 53ff. Ratings...34 Regions... 15, 16, 22, 29, 38, 46, 50f., 57 Report of Independent Auditors...82, 87, Research and development...47, 53ff. Responsible Care...66 Risk management...69ff. Sales...26, 35ff., 116ff. Segment reporting...14, 19, 35f., 116f. Share buyback program... 8, 33, 135 Shared service centers...3, 51f. Shareholders...4f., 8ff., 20 Shares/share price...8ff. Sites...15, 80 Social responsibility Special items...26 Statement by the Board of Executive Directors...86 Steamcracker... 32, 38, 60, 61 Stockholders equity...28f., 90f., 135f. Stock option program... 65, 79, 125, 147f. Strategy...17ff., 80 Styrenics...41 Supervisory Board...73ff., 77ff., 81ff., 125 Supply chain management...61 Sustainability... 5, 10, 18, 68 Training Verbund...64f. Value added...8f., 17ff., 59 Value-based management...17, 20 Value-driver trees...69 WINGAS...49f.

255 Ten-year Summary Ten-year Summary 1 Million Financial Statement Sales 24,939 28,520 27,643 29,473 35,946 32,500 32,216 33,361 37,537 42,745 Income from operations (EBIT) 2,195 2,731 2,624 2,009 3,070 1,217 2,641 2,658 5,193 5,830 Income from ordinary activities 2,257 2,726 2,771 2,606 2, ,641 2,168 4,347 5,926 Extraordinary income 6,121 Income before taxes and minority interests 2,257 2,726 2,771 2,606 2,827 6,730 2,641 2,168 4,347 5,926 Income before minority interests 1,452 1,639 1,664 1,245 1,282 5,826 1, ,133 3,168 Net income 1,427 1,654 1,699 1,237 1,240 5,858 1, ,004 3,007 Capital expenditures and depreciation Additions to tangible and intangible assets 2,416 2,564 3,722 3,253 6,931 3,313 3,055 3,415 2,163 2,523 Thereof tangible assets 1,861 2,229 2,899 2,764 3,631 3,037 2,677 2,293 2,022 2,188 Deprecation of tangible and intangible assets 1,797 2,028 2,260 2,662 2,916 2,925 2,464 2,452 2,492 2,403 Thereof tangible assets 1,606 1,732 1,843 2,018 2,245 2,307 2,012 1,951 2,053 2,035 Number of employees At year-end 105, , , , ,273 92,545 89,389 87,159 81,955 80,945 Annual average 108, , , , ,784 94,744 90,899 88,167 85,022 80,992 Personnel costs 5,637 5,790 6,010 6,180 6,596 6,028 5,975 5,891 5,615 5,574 Key data Earnings per share ( ) Earnings per share in accordance with U.S. GAAP ( ) Cash provided by operating activities 3,476 3,291 3,744 3,255 2,992 2,319 2,313 4,878 4,634 5,250 3 Return on sales (%) Return on assets (%) Return on equity after tax (%) Appropriation of profits Net income of BASF AG ,074 1,007 1,265 5,904 1,045 1,103 1,363 1,273 Transfer to retained earnings , Dividend , ,029 5 Dividend per share ( ) Number of shares as December 31 (in thousands) 618, , , , , , , , , ,059 1 Starting in 2005, the accounting and reporting of the BASF Group is performed in accordance with International Financial Reporting Standards (IFRS). The previous year s figures have been restated in accordance with IFRS. The figures for years up to and including 2003 were prepared in accordance with German GAAP. 2 Including extraordinary income 3 Before external financing of pension obligations 4 Calculated in accordance with German GAAP 5 With regard to the number of qualifying shares on December 31, Special dividend of stockholders equity charged with 45% corporate income tax

256 Ten-year Summary Ten-year Summary 1 Balance Sheet (German GAAP) Million Intangible assets 1,297 1,497 1,965 2,147 4,538 3,943 3,464 3,793 Tangible assets 8,217 9,076 10,755 12,416 13,641 14,190 13,745 13,070 Financial assets 2,093 2,132 1,826 1,507 3,590 3,360 3,249 2,600 Fixed assets 11,607 12,705 14,546 16,070 21,769 21,493 20,458 19,463 Inventories 3,665 3,876 3,703 4,028 5,211 5,007 4,798 4,151 Accounts receivable, trade 3,714 4,299 4,017 4,967 6,068 5,875 5,316 4,954 Other receivables 1,341 1,765 1,856 2,211 3,369 2,384 2,947 3,159 Deferred taxes ,077 1,225 1,270 1,373 1,204 1,247 Liquid funds 1,957 1,846 1,503 1, Current assets 10,746 11,831 12,156 13,939 16,788 15,382 14,628 14,139 Assets 22,353 24,536 26,702 30,009 38,557 36,875 35,086 33,602 Subscribed capital 1,580 1,590 1,595 1,590 1,555 1,494 1,460 1,425 Capital surplus 2,515 2,567 2,590 2,675 2,746 2,914 2,948 2,983 Paid-in capital 4,095 4,157 4,185 4,265 4,301 4,408 4,408 4,408 Retained earnings 6,262 7,418 8,695 9,002 8,851 12,222 12,468 12,055 Currency translation adjustment (129) (330) (972) Minority interests Stockholders equity 10,476 12,031 13,250 14,145 14,295 17,522 16,942 15,879 Pensions and other long-term provisions 5,052 4,824 5,561 5,812 6,209 6,809 6,233 6,205 Tax and other short-term provisions 2,391 2,463 2,185 2,826 3,334 3,332 2,764 2,982 Provisions 7,443 7,287 7,746 8,638 9,543 10,141 8,997 9,187 Financial indebtedness 1,042 1,126 1,316 1,294 7,892 2,835 3,610 3,507 Accounts payable, trade 1,628 1,972 1,871 2,316 2,848 2,467 2,344 2,056 Other liabilities 1,764 2,120 2,519 3,616 3,979 3,910 3,193 2,973 Liabilities 4,434 5,218 5,706 7,226 14,719 9,212 9,147 8,536 Provisions and liabilities 11,877 12,505 13,452 15,864 24,262 19,353 18,144 17,723 Thereof long-term liabilities 6,223 6,094 6,898 7,529 9,059 9,955 9,211 10,285 Total stockholders equity and liabilities 22,353 24,536 26,702 30,009 38,557 36,875 35,086 33,602 1 Starting in 2005, the accounting and reporting of the BASF Group is performed in accordance with International Financial Reporting Standards (IFRS). The previous year s figures have been restated in accordance with IFRS. The figures for years up to and including 2003 were prepared in accordance with German GAAP.

257 Balance Sheet (IFRS) Million Intangible assets 3,607 3,720 Property, plant and equipment 13,063 13,987 Investments accounted for using the equity method 1, Other financial assets Deferred taxes 1,337 1,255 Other long-term assets Long-term assets 20,518 20,543 Inventories 4,645 5,430 Accounts receivable, trade 5,861 7,020 Other receivables and miscellaneous short-term assets 2,133 1,586 Liquid funds 2,291 1,091 Short-term assets 14,930 15,127 Assets 35,448 35,670 Subscribed capital 1,383 1,317 Capital surplus 3,028 3,100 Paid-in capital 4,411 4,417 Retained earnings 11,923 11,928 Other comprehensive income (60) 696 Minority interests Stockholders equity 16,602 17,523 Provisions for pensions and other obligations 4,124 1,547 Other provisions 2,376 2,791 Deferred taxes Financial indebtedness 1,845 3,682 Other liabilities 1,079 1,043 Long-term liabilities 10,372 9,762 Accounts payable, trade 2,372 2,777 Provisions 2,364 2,763 Tax liabilities Financial indebtedness 1, Other liabilities 1,641 1,699 Short-term liabilities 8,474 8,385 Total stockholders equity and liabilities 35,448 35,670

258 Registered trademarks/owners Registered trademarks of BASF Aktiengesellschaft: Acrodur, Belmadur, DINCH, Ecovio, F500, Hexamoll, Kollidon, Luviquat, Opera, Palatinol, PlasticsPlus, Poast, Styropor, Ultradur Headline is a registered trademark of BASF Aktiengesellschaft and BASF Corporation Meridia is a registered trademark of Abbott GmbH & Co. KG PolyTHF is a registered trademark of BASF Aktiengesellschaft and BASF Corporation Salcomix is a registered trademark of BASF Coatings AG Standak is a registered trademark of BASF Agro Trademarks GmbH Suvinil is a registered trademark of BASF S.A. and der BASF Coatings AG Publisher: BASF Aktiengesellschaft Ludwigshafen Germany Initial concept: Hilger & Boie, Wiesbaden, Germany Sales (million ) BASF Group sales 42,745 Sales by segment Chemicals 8,103 Plastics 11,718 Performance Products 8,267 Agricultural Products & Nutrition 5,030 Oil & Gas 7,656 Other 1,971 Sales by region (location of customer) Europe 23,755 Thereof Germany 8,865 North America (NAFTA) 9,479 Asia Pacific 6,500 South America, Africa, Middle East 3,011 Earnings (million ) Income from operations (EBIT) 5,830 Income before taxes and minority interests 5,926 Net income 3,007 Net income in accordance with U.S. GAAP 3,061 Other key data Equity ratio (%) 49.1 Return on assets (%) 17.7 Research and development expenses (million ) 1,064 Additions to fixed assets (million ) 2,188 Number of employees (December 31) 80,945 Key BASF share data ( ) Year-end price High Low Per share information Dividend 2.00 Earnings per share 5.73 BASF Aktiengesellschaft Ludwigshafen Germany corporate.basf.com Corporate Media Relations: Michael Grabicki Phone: Fax: Investor Relations: Magdalena Moll Phone: Fax: Design, Layout, Art Direction: Bert Klemp Corporate Design, Frankfurt, Germany daspferd, Rüsselsheim, Germany Photos: Jo Henker, Darmstadt, Germany Andreas Pohlmann, Munich, Germany getty images, BASF Reply BASF Aktiengesellschaft Mediencenter, GPB/BS D Ludwigshafen Germany ZOAC 0502 E Sender: (Please use capital letters) Name Street ZIP Code/City address Please send me the current: Corporate Report Economy Environment Social Responsibility Financial Report As a link to the above address Please remove my name from the distribution list corporate.basf.com/publications

259 Forward looking statements Key data BASF Group 2005 This report contains forward-looking statements under the U.S. Private Securities Litigation Reform Act of These statements are based on current expectations, estimates and projections of BASF management and currently available information. They are not guarantees of future performance, involve certain risks and uncertainties that are difficult to predict and are based upon assumptions as to future events that may not prove to be accurate. Many factors could cause the actual results, performance or achievements of BASF to be materially different from those that may be expressed or implied by such statements. Such factors include those discussed in BASF s Form 20-F filed with the Securities and Exchange Commission. We do not assume any obligation to update the forward-looking statements contained in this report. Yes, please send me further information. BASF is a member of the World Business Council for Sustainable Development. In 2005, BASF shares were included in the Dow Jones Sustainability Index World for the fifth year in succession. This report went to press on February 24, 2006 and was published on March 14, 2006.

260 Important dates Contacts May 4, 2006 Interim Report First Quarter 2006 August 2, 2006 Interim Report Second Quarter 2006 November 2, 2006 Interim Report Third Quarter 2006 Corporate Media Relations: Michael Grabicki Phone: Fax: Investor Relations: Magdalena Moll Phone: Fax: General inquiries: Phone: Fax: Annual Meetings Internet: corporate.basf.com/financial-report May 4, 2006, Mannheim April 26, 2007, Mannheim BASF Aktiengesellschaft Ludwigshafen Germany You can find this and other publications from BASF on the Internet at corporate.basf.com. You can also order the reports by telephone: by fax: by to: on the Internet: corporate.basf.com/mediaorders ZOAC 0602 E

261 Shaping the Future Financial Report 2004

262 BASF s Segments Key data BASF Group Million Change in % Sales 37,537 33, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 7,326 5, Income from operations (EBIT) before special items 4,893 2, Income from operations (EBIT) 4,856 2, Income before taxes and minority interests 4,019 2, Net income 1, Earnings per share ( ) Earnings per share in accordance with U.S. GAAP ( ) Dividend per share ( ) Research and development expenses 1,173 1, Number of employees (as of December 31) 81,955 87,159 (6.0) Sales by segment Million 2004 % 1 Chemicals 7, Plastics 10, Performance Products 8, Agricultural Products & Nutrition 5, Oil & Gas 5, Other 1, , Sales by region (location of customer) Million 2004 % 4 1 Europe 20, Thereof Germany 7, North America (NAFTA) 8, South America 2, Asia, Pacific Area, Africa 6, ,

263 BASF s Segments Chemicals The heart of our Verbund The synergy potential of our Verbund ensures our competitiveness in producing organic and inorganic basic chemicals and intermediates. Integrated production plants, innovative processes and the advantages of modern large-scale plants help us achieve our goal of cost leadership. We participate in the major growth markets by constructing new Verbund sites. We enhance our portfolio with higher-value products through innovations and acquisitions. Plastics Focusing on strengths BASF is a globally leading supplier of plastics the eco-efficient materials of the future. In standard plastics, we have a portfolio of focused product lines and highly efficient marketing processes. In our business with specialties, we offer a wide range of high-value products, system solutions and processes. In close cooperation with our customers, we constantly extend this range and add new applications. Performance Products Close cooperation with customers Our innovative systems from performance chemistry contribute to the comfort and safety of many everyday items, from cars and textiles to detergents and babies diapers. We want to be the key contact for our customers. Our success is based on new products, system solutions and applications that we develop in close cooperation with our customers. Our keys to success are our powerful research and development organization and our ability to solve our partners problems quickly, flexibly and in line with their needs. Agricultural Products & Nutrition Increased customer focus higher competitiveness Our products ensure healthy plants and improve food. We have strengthened our Agricultural Products & Nutrition segment through active cost and portfolio management. We are expanding our position utilizing new active ingredients and our presence in the major agricultural markets. We offer our customers in the nutrition, pharmaceutical and cosmetic industries a broad range of high-value fine chemicals. Innovative solutions strengthen our good position. Our research in plant biotechnology focuses on solutions for effective agriculture, healthier nutrition and plants to make products more efficiently. Oil & Gas Expertise and regional focus In exploration and production we benefit from our many years of experience and our focus on areas that are rich in oil and gas in Europe, North Africa, South America as well as Russia and the Caspian Sea area. In natural gas trading, we are making use of the growth opportunities that are arising from the liberalization of the European gas markets. The earnings contributions from our oil and gas business act as a bridge over the economic troughs.

264 BASF s Segments Segment key data Sales by division Million Change in % Sales 7,020 5, Million % 1 Inorganics Income from operations 2 Petrochemicals 4, before special items 1, Intermediates 1, Income from operations 1, , Million Change in % Sales 10,532 8, Income from operations before special items Million % 1 Styrenics 4, Performance Polymers 2, Polyurethanes 3, Income from operations , Million Change in % Sales 8,005 7, Income from operations before special items Million % 1 Peformance Chemicals 3, Coatings 2, Functional Polymers 2, Income from operations 1, , Million Change in % Sales 5,147 5, Million % 1 Agricultural Products 3, Income from operations 2 Fine Chemicals 1, before special items , Income from operations Million Change in % Million % Sales 5,263 4, Oil & Gas 5, Income from operations before special items 1,647 1, Income from operations 1,637 1,

265 Who we are BASF is the world s leading chemical company: The Chemical Company. Our portfolio ranges from chemicals, plastics, performance products, agricultural products and fine chemicals to crude oil and natural gas. As a reliable partner to virtually all industries, our intelligent solutions and high-value products help our customers to be more successful. What we aim to achieve Our goal is to use our products and services to successfully shape the future of our customers, business partners and employees. In doing so, we aim to grow profitably and consistently increase the value of our company. How we shape the future We develop new technologies and use them to open up additional market opportunities. We combine economic success with environmental protection and social responsibility. This is our contribution to a better future for us and for coming generations. BASF

266 Contents 3 Milestones 4 Letter from the Chairman of the Board of Executive Directors 6 Board of Executive Directors 8 Report of the Supervisory Board 11 BASF Shares 14 Management s Analysis 16 BASF Strategy and Value-based Management 19 Economic Environment Trends in the Global Economy and the Chemical Industry in Production Trends in Key Customer Industries in Outlook 54 Procurement, Production and Distribution Procurement Products and Sites Marketing and Sales 58 Employees 60 Organization of the BASF Group Corporate Legal Structure Organisational Structure of the BASF Group Management and Supervisory Boards Corporate Governance 69 Risk Management System and Risks of Future Development 74 Consolidated Financial Statements 23 BASF Group Business Review and Analysis Results of Operations in the BASF Group Balance Sheet Structure Liquidity and Capital Resources Results of Operations by Segment Regional Results 51 Research and Development 76 Statement by the Board of Executive Directors 77 Report of Independent Auditors 78 BASF Group Consolidated Financial Statements and Notes to the Consolidated Financial Statements 137 Declaration of Conformity in Accordance with the German Corporate Governance Code 138 Glossary and Index 140 Ten-year Summary 2 BASF 2004

267 Milestones January BASF acquires the plasticizers business of Sunoco, United States, increasing its range of products used to give flexibility to plastics. To streamline its crop protection activities, BASF sells its business with phenoxy herbicides to Nufarm, Australia. February Together with Toray Industries, Japan, BASF establishes a joint venture for the production of polybutylene terephthalate (PBT). The joint venture will build a world-scale plant in Kuantan, Malaysia, to supply the Asian growth market. This engineering plastic is primarily used in the automotive, electric and electronics industries. March BASF acquires Foam Enterprises, United States, strengthening its polyurethane systems for rigid foam applications. Applications for such systems include roof and wall insulation, walk-in coolers, spas and boat floatation. In Sighisoara, Romania, BASF subsidiary Wintershall starts producing natural gas together with Romgaz. The production alliance aims to extract 300,000 cubic meters of natural gas per day. BASF signals its path to the future with a new corporate design. April Procter & Gamble launches BASF s Basotect foam on the European market under the trademark Mr. Clean Magic Eraser and honors BASF with an award for outstanding cooperation and innovation. May A representative survey conducted by the Allensbach opinion research institute shows that BASF is considered the most environmentally friendly company in Germany s DAX 30 share index. June The Chinese Research Academy of Environmental Sciences and BASF announce that they will establish an engine test laboratory in Beijing. The goal is to improve the quality of Chinese gasoline and reduce exhaust emissions. July BASF and Shell announce that they will review strategic options regarding their Basell joint venture. The two companies each hold a 50% interest in Basell, which is a global leader in polyolefins. A decision is to be reached by mid August BASF starts operations at its new world-scale plant for citral in Ludwigshafen. This fine chemical intermediate is the starting material for the production of vitamins A and E, carotenoids and a range of aroma chemicals. Together with Dow Chemical, BASF plans to build a joint worldscale plant to produce propylene oxide (PO) from propylene and hydrogen peroxide (HP) at its Verbund site in Antwerp, Belgium. The two companies jointly developed the new technology. BASF, Bayer and Hoechst sell their holding in DyStar the Frankfurt-based manufacturer of textile dyes to financial investor Platinum Equity, United States. BASF expands its activities in the area of polyurethane systems and invests in new plants in Pudong near Shanghai, China. September BASF announces the sale of its printing systems business to the European private equity company CVC Capital Partners. BASF shares are included in the Dow Jones Sustainability Index World (DJSI World) for the fourth year in succession. October The Board of Executive Directors decides to repurchase shares for an additional 500 million. In the course of 2004, BASF buys back 16.2 million shares for a total of 726 million, or an average price of per share. November Interim results of the Site Project Ludwigshafen: The measures implemented to date have permanently reduced costs by more than 350 million. The targeted savings of 450 million per year are to be achieved by project completion in mid BASF takes part in a European Union-sponsored research project set up to investigate ways of removing and storing CO 2 from combustion gases. December BASF announces that it will expand the capacity of its worldscale plant for MDI (diphenylmethane diisocyanate) in Antwerp, Belgium, by 25% to 450,000 metric tons per year. Mechanical completion of the new Verbund site in Nanjing, China, is achieved and the methyl acrylate plant starts operations. BASF

268 Letter from the Chairman of the Board of Executive Directors Letter from the Chairman of the Board of Executive Directors 2004 was a very successful business year for BASF. We made the most of our opportunities in a favorable global economic environment, and we grew faster than the market a sign that our market and competitive position have further improved. Measurable success Last year, we introduced EBIT after cost of capital as our key performance and management indicator. All our employees are aware of the individual contribution they can make to create value at BASF. I am particularly pleased to report that we reached our goal in 2004 and earned a premium of 1,825 million on our cost of capital. This is a great success on the part of the global BASF team. I would like to thank all our employees for their hard work. In the past year, we have once again demonstrated that we have the right strategy and are working hard to achieve it. We are living up to our claim of being The Chemical Company. The Board of Executive Directors will propose to the Annual Meeting that the dividend be increased from 1.40 to 1.70 per share. Since 1994, we have therefore raised the dividend per share in eight out of 10 years. This shows our interest in providing our shareholders with an attractive dividend yield. We aim to increase our dividend further in the future. In 2005, we also plan to continue our share buyback program. Profitable growth How do we want to expand our business? We have a balanced portfolio that we will continue to optimize. By concentrating on our chemical businesses, agricultural products and nutrition, as well as on oil and gas, we have become more resilient toward cyclicality and oil price fluctuations. This portfolio mix is one of our strengths, and we will continue to build on it. In our oil and gas business, we are stepping up our activities in Libya, and we are investing in gas production in Siberia together with our Russian partner Gazprom. We have further streamlined our portfolio through the sale of our printing systems business, and have initiated the divestiture of the Basell joint venture. We will continue to manage our portfolio actively in Initial steps have been the acquisition of Merck s electronic chemicals business and the United Kingdom s largest onshore gas field, Saltfleetby. We recognized the opportunities provided by growth markets in good time and invested there. We are now active in all important markets worldwide. Demand for chemical products is growing especially rapidly in China. Here, we are well positioned, and BASF is one of the largest foreign investors. We know the market and we are close to our customers. In 2005, we will start commercial production at our new Verbund site in Nanjing, China the largest single investment in the history of our company. As a result, we will be able to tap into new growth potential in Asia and strengthen our competitiveness. 4 BASF 2004

269 Strategy for sustainable success Our success depends on the determined implementation of our strategy BASF 2015 and its four guidelines: Earn a premium on cost of capital Help our customers to be more successful Form the best team in industry Ensure sustainable development But what does that mean for us? In order to earn a premium on our cost of capital, we are continuing with our restructuring measures and efforts to reduce costs and optimize our portfolio. Our thoughts and actions center on our customers, whom we help to grow more successfully with innovative solutions and new business models. Examples include our system partnerships in the automotive industry and our research efforts in the areas of materials science, nanomaterials, energy management technologies and biotechnology. To achieve economic success in the face of tough competition, we need the best team in industry. I am aware that implementing our ambitious goals places heavy demands on all our employees. Our team has repeatedly demonstrated what outstanding results it can achieve. Our business activities aim to encourage sustainable development. You can read about how we successfully combine the economic, environmental and social aspects of our work in our Corporate Report, which is published concurrently with this Financial Report. Our long-term success depends on a political framework that ensures our competitiveness, and we therefore actively engage in the social dialogue worldwide. Outlook What can we expect in 2005? Although it is increasingly difficult to forecast economic developments, I am confident that BASF will remain successful in the future. In the course of 2005, we anticipate slower growth in global chemical production, although the mid-term prospects are favorable. The precondition for this is that political trouble spots do not flare up and that there is no sudden downturn in the economic environment. In 2005, we expect to achieve slightly higher sales and follow on from the high level of income from operations (EBIT) before special items posted in We therefore again expect to earn a premium on our cost of capital. We are also confident when we look to 2015 and beyond. With our measures to shape the future, we are on the right track to being the world s leading chemical company in the long term The Chemical Company. We trust that we can count on your continued support. Dr. Jürgen Hambrecht Chairman of the Board of Executive Directors BASF

270 Board of Executive Directors Shaping the Future Sustainably Dr. Jürgen Hambrecht, 58, Chairman of the Board of Executive Directors. Chemist, with BASF for 29 years. Legal, Taxes & Insurance; Strategic Planning & Controlling; Executive Management & Development; Communications BASF Group; Investor Relations. Eggert Voscherau, 61, Vice Chairman of the Board of Executive Directors and Industrial Relations Director. Economist, with BASF for 36 years. Human Resources; Environment, Safety & Energy; Occupational Medicine & Health Protection; Europe; Ludwigshafen Verbund Site; BASF Schwarzheide GmbH; BASF Antwerpen N. V. Dr. Andreas Kreimeyer, 49, biologist, with BASF for 19 years. Functional Polymers; Performance Chemicals; Asia. Klaus Peter Löbbe, 58, economist, with BASF for 39 years. Coatings; North America (NAFTA). 6 BASF 2004

271 Dr. Kurt Bock, 46, business economist, with BASF for 14 years. Finance; Global Procurement & Logistics; Information Services; Corporate Audit; South America. Dr. John Feldmann, 55, chemist, with BASF for 17 years. Oil & Gas; Styrenics; Performance Polymers; Polyurethanes; Polymer Research. Dr. Stefan Marcinowski, 52, chemist, with BASF for 26 years. Research Executive Director. Inorganics; Petrochemicals; Intermediates; Chemicals Research & Engineering; Corporate Engineering; University Relations & Research Planning; BASF Future Business GmbH. Peter Oakley, 52, economist, with BASF for 28 years. Agricultural Products; Fine Chemicals; Specialty Chemicals Research; BASF Plant Science GmbH. As of March 1, 2005 BASF

272 Report of the Supervisory Board Report of the Supervisory Board Dear Shareholders, BASF has set itself the goal of remaining the world s leading chemical company and steadily expanding on this position. Shaping the future is therefore the company s key challenge and task. The strategy BASF 2015 has set the course in this direction with visible success. BASF s outstanding performance in 2004 shows that the company is on the right path. This was due in great part to the enormous efforts of all employees in continuing to implement the four strategic guidelines: Earn a premium on cost of capital, contribute to customers success, form the best team in industry, and ensure sustainable development these are the maxims on which the company will continue to base its business success. The Supervisory Board carefully and regularly monitored company management during the year and provided advice on the company s strategic development and important individual measures. To this end, the Supervisory Board requested detailed information from the Board of Executive Directors at meetings, as well as in written and verbal reports. Topics included the business situation and business trends and policies, profitability, the company s planning with regard to finances, capital expenditures and human resources at BASF and its major subsidiaries, as well as deviations from business forecasts. The Chairman of the Supervisory Board also regularly requested information from the Board of Executive Directors with regard to current business developments and important events outside of Supervisory Board meetings. The Supervisory Board was involved at an early stage in decisions of major importance. Meetings The Supervisory Board met five times in At these meetings, the Supervisory Board discussed reports from the Board of Executive Directors. The Supervisory Board also discussed the company s prospects as a whole and its individual businesses with the Board of Executive Directors. Where specific transactions and measures proposed by the Board of Executive Directors required decisions by the Supervisory Board as required by law or the Articles of Association, votes were taken at Supervisory Board meetings. The sale of the printing systems business and the acquisition of the electronic chemicals business of Merck KGaA were approved. In 2004, the Supervisory Board dealt in particular detail with BASF s development in the various regions. Key issues were the exploitation of growth potential in Asia, and in China in particular, and the future positioning of BASF in this region, as well as the status of restructuring projects and future development possibilities in North America (NAFTA). In the past year, the Supervisory Board also discussed the normative conditions for the chemical industry in Germany and in Europe and the resulting competitive disadvantages compared with other regions. The amendment of German law on gene technology, which places a not inconsiderable burden on research and development in this important field, is particularly worthy of mention in this connection. 8 BASF 2004

273 Corporate governance and compliance statement In 2004, the Supervisory Board again addressed in detail changes to the financial and corporate legal environment in which the company operates, as well as the issue of corporate governance at BASF. In its meeting on December 16, 2004, the Supervisory Board approved the new joint Declaration of Conformity by the Supervisory Board and the Board of Executive Directors in accordance with Section 161 of the German Stock Corporation Act. BASF follows the recommendations of the German Corporate Governance Codex with a few exceptions: For example, we do not publish individual remuneration details for the members of the Board of Executive Directors and Supervisory Board, and remuneration of the Board of Executive Directors is dealt with in the Supervisory Board s Nomination and Compensation Committee rather than in a plenary session of the Supervisory Board. The complete texts of the Declaration of Conformity is provided on page 137 of the Financial Report and is also permanently available to shareholders on BASF s website. Committees The Supervisory Board has established three committees with equal representation from shareholders and employee representatives: the Nomination and Compensation Committee created in accordance with Section 89 (4) of the German Stock Corporation Act (Personalauschuss); the Audit Committee; and the Mediation Committee established in accordance with Section 27 (3) of the German Codetermination Act. The members of the Nomination and Compensation Committee and the Mediation Committee are as follows: Supervisory Board Chairman Dr. Jürgen F. Strube (Chairman), Supervisory Board Deputy Chair - man Robert Oswald (Deputy Chairman), Dr. Tessen von Heydebreck and, since July 31, 2004, Michael Vassiliadis. Dr. Jürgen Walter was a member of both committees until July 31, The Personal Affairs Committee met three times in 2003, while the Mediation Committee did not have to be convened. The Audit Committee met three times in Its activities primarily included reviewing the Consolidated Financial Statements of BASF Aktiengesellschaft as well as BASF Group; reviewing the Annual Report on Form 20-F prepared in accordance with U.S. accounting standards; advising the Board of Executive Directors on accounting issues; preparing the Supervisory Board s proposal to the Annual Meeting regarding the selection of an auditor; discussing and defining particular features of the audit; regulating busing relations with the company s auditors, including the adoption of a resolution regarding the commissioning and provision of non-audit services by the auditors; agreeing the auditing fees; and monitoring the auditor s independence. In 2004, the Audit Committee comprised Supervisory Board members Max Dietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch (since April 29, 2004), Michael Vassiliadis (since October 14, 2004), Dr. Jürgen Walter (until July 31, 2004) and Helmut Werner (until February 6, 2004). The chairman of the Audit Committee is Max Dietrich Kley, who like Hans Dieter Pötsch, has been appointed Audit Committee Financial Expert. BASF

274 Report of the Supervisory Board Financial Statements of the BASF Group and BASF Aktiengesellschaft On the basis of the preliminary review by the Audit Committee, on which the Chairman of the Audit Committee reported to the Supervisory Board, we have examined the Financial Statements of BASF Aktiengesellschaft for 2004, the proposal by the Board of Executive Directors for the appropriation of profit, the BASF Group Consolidated Financial Statements and Management s Analysis for BASF Aktiengesellschaft and the BASF Group. Deloitte & Touche GmbH, the auditors elected by the Annual Meeting, have examined the Financial Statements of BASF Aktiengesellschaft and the BASF Group Consolidated Financial Statements, including the bookkeeping and Management s Analysis, and have approved them free of qualification. The auditors also noted that the Board of Executive Directors, in accordance with Section 91 (2) of the German Stock Corporation Act, had instituted a suitable information and monitoring system which met the needs of the company and appeared suitable, both in design and the way in which it had been applied, to provide early warning of developments that pose a threat to the continued existence of the company. The documents to be examined and the auditors reports were sent to every member of the Supervisory Board. The auditors attended the accounts review meeting of the Audit Committee on March 3, 2004 as well as the accounts meeting of the Supervisory Board on March 8, 2004 and reported on the main findings of their audit. The auditors also provided detailed explanations of their reports on the day before the accounts review meeting. We have approved the auditors reports. The results of the preliminary review by the Audit Committee and the results of our own examination fully concur with those of the audit. The Supervisory Board sees no grounds for objections. At the Supervisory Board s accounts meeting on March 8, 2004, we approved the Financial Statements of BASF Aktiengesellschaft drawn up by the Board of Executive Directors and the Consolidated Financial Statements of the BASF Group, making the Financial Statements final. We concur with the proposal of the Board of Executive Directors regarding the appropriation of profit and the payment of a dividend of 1.70 per share. Composition of the Supervisory Board and Board of Executive Directors On February 6, 2004, Helmut Werner died at the age of 67 years. He had been a member of the Supervisory Board since With his death, BASF has lost an enduring friend and a valuable advisor. On March 2, 2004, the district court of Ludwigshafen appointed Hans Dieter Pötsch, member of the board of directors of Volkswagen AG, Wolfsburg, to replace Helmut Werner on the Supervisory Board. Dr. Jürgen Walter resigned from the Supervisory Board effective July 31, Michael Vassiliadis replaced him, having been elected to the Supervisory Board by employees. There were no changes to the Board of Executive Directors in Ludwigshafen, March 8, 2005 The Supervisory Board Dr. Jürgen F. Strube Chairman of the Supervisory Board 10 BASF 2004

275 BASF Shares BASF Shares Dividend of 1.70 per share BASF shares increase in value by 22.8% in 2004 Share buybacks carried out for 726 million In 2004, BASF shares again performed very well, increasing in value by 22.8%. As a result, BASF shares performed considerably better than the EURO STOXX SM 50 index and Germany s DAX 30 index, which rose by 9.4% and 7.3%, respectively. In recent years, long-term investors have profited from the good performance of BASF shares. Shareholders who invested 1,000 in BASF shares at the end of 1994 and reinvested the dividends (excluding tax credits) in additional BASF shares would have increased the value of the holding to 4,429 after 10 years at the end of This increase of 342.9% corresponds to an average annual return of 16.0%, and is considerably higher than the corresponding return for the EURO STOXX 50 (10.7%) and DAX 30 (7.3%). Dividend of 1.70 and further share buybacks to increase shareholder value The Board of Executive Directors is proposing to increase the dividend from 1.40 to 1.70 per share. As a result, the total amount payable will be 919 million. Taking into account the per share dividend and the yearend price, BASF shares provided a dividend yield of 3.21% in Since 1994, we thus increased our dividend in eight out of 10 years; in two years it remained unchanged. This shows our interest in providing our shareholders with an attractive dividend yield. We aim to increase our dividend further in the future. In 2004, BASF Aktiengesellschaft bought back 16.2 million shares on the stock exchange for a total of 726 million and an average price of per share. Of the repurchased shares, 15.4 million were canceled in This measure reduced our share capital by 2.9%. BASF Aktiengesellschaft had 541,240,410 shares outstanding as of December 31, Since the beginning of 1999, we have bought back a total of 97.5 million shares for 3.98 billion. As a result, we have reduced the number of shares by 15.6% in the past six years. The buyback program is aimed at reducing our cost of capital and increasing earnings per share. We will continue our share buyback program in Change in value of an investment in BASF shares in 2004 (with dividends reinvested, indexed) Change in value of an investment in BASF shares in (with dividends reinvested, indexed) Jan. Feb. Mar. Apr. MayJune July Aug.Sep. Oct. Nov.Dec BASF (+22.8%) DAX 30 (+7.3%) EURO STOXX 50 (+9.4%) BASF (Ø +16.0% per year) DAX 30 (Ø +7.3% per year) EURO STOXX 50 (Ø +10.7% per year) BASF

276 BASF Shares BASF shares included in important indices The price of BASF shares forms part of the calculation of German and international indices. Weighting of BASF shares in important indices as of December 31, 2004 % DAX DJ STOXX DJ EURO STOXX DJ Chemicals 6.6 MSCI World Index 0.2 S&P Global In 2004, BASF shares were included in the Dow Jones Sustainability Index for the fourth year in succession and remained a member of the FTSE 4 Good Index. Our membership in sustainability indices shows that BASF is recognized internationally as a company that conducts its business in accordance with the principles of sustainable development. Broad base of international shareholders Our last shareholder survey carried out at the beginning of 2004 indicated the strong interest of international investors in BASF shares. Non-German investors hold 52% of BASF s share capital. U.K. and U.S. investors are particularly well represented, accounting for 15% and 14% of the share capital, respectively. Institutional investors for example banks and investment companies hold 72% of the share capital; 28% is held by private investors. Many of our employees and executives own BASF shares, and we offer share purchase programs in many countries to encourage them to become shareholders and thus co-owners of BASF (see page 59 for further information). BASF Aktiengesellschaft s entire share capital is listed on the stock market. Investor Relations: Close dialogue with the capital markets Our corporate strategy aims to create value sustainably. We support this strategy through regular and open communication with all capital market participants. In 2004, we held numerous individual meetings and more than 40 roadshows worldwide to inform institutional investors about the business situation and the further development of our company. We also hold information events to give private investors an insight into the world of BASF. Presentations on the company are available on the Internet at Investment in BASF shares average annual performance % 7.3% 9.4% % 9.4% 8.0% % 7.3% 10.7% Dividend in Dividend Special dividend BASF DAX 30 EURO STOXX BASF 2004

277 Key BASF share data Year-end price ( ) Year high ( ) Year low ( ) Daily trade in shares 1 million million shares Number of shares as of December 31 (million shares) Market capitalization as of December 31 (billion ) Earnings per share 2 ( ) Dividend per share ( ) Dividend yield 4 (%) Key data for BASF ADRs 5 Year-end price ($) Year high ($) Year low ($) Daily trade in shares million $ thousand shares Average, Xetra trading 2 Based on the weighted number of shares 3 Thereof special dividend of Based on year-end share price 5 BASF shares are traded on the New York Stock Exchange in the form of ADRs (American Depository Receipts). Each BASF ADR is equivalent to one BASF share. Further information Stock exchange Securities code numbers Ticker symbol Deutsche Börse BAS London Stock Exchange BFA Bourse de Paris BA Swiss Exchange AN New York Stock Exchange (CUSIP) BF (ADR) ISIN International Stock Identification Number DE BASF

278 Management s Analysis Reaching New Heights Our goal is to grow profitably. Because our strategy aims for long-term success, we achieve a consistently high performance. That means that we are well prepared for the challenges of the future. 14 BASF 2004

279 BASF

280 Management s Analysis BASF Strategy and Value-based Management Strategies for Value-adding Growth BASF Strategy and Value-based Management Strategies for Value-adding Growth Chemistry offers enormous opportunities. It is the key to a future that we actively shape. We help our customers to be more successful with a variety of products, applications and intelligent system solutions. Our business activities are governed by innovation and sustainability to ensure that we will still be the world s leading chemical company in 2015 and beyond. We are concentrating on and expanding our strengths in our chemical businesses, in agricultural products and nutrition, and in oil and gas. In doing so, we aim to make our portfolio more resilient toward cyclicality and oil price fluctuations. In addition, we are consistently utilizing technological change to create advantages for BASF. We are using the opportunities afforded by biotechnology, nanomaterials, material sciences and energy-management technologies to offer our customers new or improved properties. In doing so, we open up attractive business opportunities for them and us. In the area of biotechnology, BASF is, for example, conducting research into plants as green factories that can produce specific products. Furthermore, we employ biocatalysis a technology that utilizes microorganisms or isolated enzymes to produce products from renewable raw materials. We are also using nanomaterials to tap into new potential. By adding tailor-made nanomaterials to PBT (polybutylene terephthalate) we have significantly improved the flow properties of the plastic during processing. As a result, Ultradur High Speed reduces the time needed to manufacture components by up to 30% for our customers in the automotive and electronics industries. At the same time, they also save energy because they can use lower processing tem peratures and pressures. Four guidelines for our future Four strategic guidelines describe BASF s path to the future: Earn a premium on our cost of capital Help our customers to be more successful Form the best team in industry Ensure sustainable development Earn a premium on our cost of capital We earn a premium on our cost of capital to increase the value of BASF. To achieve this goal, we have been expanding on our value-based management strategy since EBIT (earnings before interest and taxes) after cost of capital is now the key performance and management indicator for our operating divisions and business units. We measure every business decision and our performance on the basis of how it influences earnings after cost of capital in the short and long term. As a result, all of our employees help us to improve cost structures, use our capital more economically and grow profitably. We achieve profitable growth through long-term value-adding investments, but above all through innovations. These include successful new products as well as more competitive production processes. They are generated by an efficient innovation process in an environment that supports creativity and entrepreneurship. To obtain the best results from our funds, BASF is concentrating its resources even more closely on those business areas that show the greatest potential for success. Help our customers to be more successful We are there wherever our customers are. We invested in good time in growth markets, and are now active in all important markets worldwide. In order to grow profitably, we aim to focus even more closely on our customers needs in the future, and develop and apply the best business models for our customers and for us. 16 BASF 2004

281 Our goal is to increase the benefit of our products and system solutions throughout the value-adding chain. We are therefore looking harder at what our customers, markets and consumers want. In a close dialogue, we also aim to identify requirements that offer us and our customers potential for growth as well as unique selling propositions. The systematic dialogue with our customers plays an important role in this effort: In joint teams, we will look at how we can use our entire knowledge more efficiently to create intelligent solutions that will support our customers success. To do this, we want to develop innovative business models that are oriented to the needs of our customers and their markets. Through our Marketing & Sales Academy, we are working to increase the enthusiasm and expertise of its employees worldwide, and thus sharpen customer focus. By supporting this process with networks to enhance knowledge transfer we will also become more attractive for the best management trainees. Form the best team in industry Our highly qualified, motivated and committed team of employees are crucial for BASF s success in the global market. Attracting and developing the best talent therefore has a high priority at our company. We aim to enhance our employees opportunities for self-learning and learning on the job. In doing so, we utilize novel integrated training concepts as well as new personnel development and qualification systems. To be an attractive employer, we have long used performancerelated pay to encourage entrepreneurial thinking and acting. In the future, we will increasingly link pay at all levels to individual performance and the success of the company. We are taking steps to broaden the international nature of our management team and also develop more women for management positions. By becoming more diverse, we will increase mutual understanding and our ability to tackle problems faster and more creatively. In the area of executive and professional development, we are also paying greater attention to specific leadership skills in addition to technical ability. The Leadership Compass we published in 2004 clearly states what our senior executives undertake to achieve: clarity and a sense of reality, performance and speed, enthusiasm and inspiration, as well as strategic and operational leadership. Ensure sustainable development For BASF, sustainable development means combining long-term economic success with environmental protection and social responsibility. This is how we understand our contribution to ensure a better future for us and coming generations. The strategies needed to achieve this are developed and monitored by BASF s Sustainability Council and implemented with the support of regional networks in Asia, the Americas and Europe. In our view, our social responsibility lies in offering our employees performance-related compensation, investing in their education and life-long learning, and providing flexible, family-oriented arrangements for working hours. The most important sustainability tools for our customers are our eco-efficiency analysis and our Expert Services Sustainability. The eco-efficiency analysis helps customers to decide which products and processes are best suited to their specific application from both economic and environmental viewpoints. Our Expert Services Sustainability combine our know-how in the fields of Responsible Care and sustainability to provide applications for our customers. Together with marketing and sales, we can thus offer services as well as products. As a result, sustainability pays off in the form of a better market position for our customers and BASF. BASF

282 Management s Analysis BASF Strategy and Value-based Management Value-based Management at BASF Value-based Management at BASF Our goal is to further increase our corporate value. A key element of our BASF 2015 strategy is therefore to earn a premium on our cost of capital. In order to meet this goal, we have been extending our value-based management concept throughout the BASF Group since the end of EBIT after cost of capital In 2004, we introduced EBIT after cost of capital as the key performance and management indicator for our operating divisions and business units. This allows us to measure business decisions and performance strictly on the basis of cost of capital. The BASF Group must achieve an EBIT of 10% on its operating assets to satisfy the returns expected by providers of equity and debt, and to cover tax expenses. Based on planned operating assets of 28 billion in 2005, this corresponds to a minimum EBIT of 2.8 billion for the BASF Group. Calculation of the cost of capital percentage The cost of capital percentage before interest and taxes of 10 % corresponds to a weighted average cost of capital (WACC) of approximately 6% after taxes. The WACC calculation is an internationally recognized method of determining a company s cost of capital. The return desired by shareholders and interest rates on debt capital are determined and weighted according to their share of total capital. We calculate our cost of equity on the basis of the market value of BASF shares. The cost of capital percentage is reviewed annually. Implementing value-based management We also use EBIT after cost of capital as the basis for performance-related compensation. The Board of Executive Directors uses this key performance indicator in its annual planning to set targets for the whole BASF Group, and hence for individual operating divisions and business units. At subsequent levels in the organization, the key performance indicator is broken down into financial and operational value drivers. As a result, value drivers can be agreed as business targets at all levels. Target achievement plays an important role in setting the level of variable compensation. Training measures are provided globally to ensure that the value-based management concept is implemented throughout the company. These measures aim to provide all employees with the necessary value-based management skills and increase their understanding of business contexts. Key elements include an interactive training program, a business simulation game specially adapted for BASF, and a tailor-made range of seminars on value-based management. In addition, systematic analyses of value drivers show the cause-and-effect relations between operational and financial value drivers and the key performance indicator EBIT after cost of capital and make them easier to understand. All employees can thus identify their personal contribution to added value and act accordingly. This promotes entrepreneurial thinking and decision-making at all levels throughout BASF. In 2004, we earned a premium of 1,825 million on our cost of capital. EBIT after cost of capital is calculated by subtracting income taxes for oil production that are noncompensable with German taxes ( 668 million) and the cost of capital ( 2,662 million) from the BASF Group s EBIT ( 4,856 million). Finally, the EBIT for activities not assigned to the segments ( (299) million) is added, since this is already provided for in the cost of capital percentage. Based on average operating assets of 26.6 billion for the segments in 2004, we achieved an EBIT after cost of capital of 1,825 million and thus created corresponding value for our shareholders. 18 BASF 2004

283 Management s Analysis Economic Environment Trends in the Global Economy and the Chemical Industry in 2004 Economic Environment Welcome economic growth due to strong activity in the United States and Asia Growth in customer industries stimulates demand for chemicals Mid-term growth trend remains solid 1. Trends in the Global Economy and the Chemical Industry in 2004 The recovery that started at the end of 2003 continued during the first half of Powered by China, Japan and the United States, the global economy expanded suprisingly strongly in the first six months of the year. The rise in oil prices to an average of $38.2/barrel for the year caused growth to level off after the third quarter. The U.S. central bank raised interest rates in the third quarter, after a period of historically low rates. Current leading indicators suggest a slowdown in growth. Helped by the strong growth in world trade, global gross domestic product incresed by an estimated 4.0%, and 2004 may turn out to be one of the strongest years in the last two decades. Europe benefited from this trend as well, due to its export trade. Global chemical production (excluding pharmaceuticals) showed a very positive trend. The striking 5.8% rise in industrial output, especially in Asia and the United States, gave a strong stimulus to chemical demand. In the face of rising oil prices, customer price expectations for chemicals also had a positive effect on demand. Overall, global production rose by 4.4% in Gross domestic product Real change compared with previous year (%) Chemical production (excluding pharmaceuticals) Real change compared with previous year (%) 2003 World 2.8 Western Europe 0.8 United States 2.9 South America 1.5 Asia excl. Japan 6.3 Japan 2.5* 2003 World 2.1 Western Europe (0.2) United States 0.0* South America 3.5 Asia excl. Japan 9.1 Japan estimate World 4.0 Western Europe 2.2 United States 4.3 South America 5.5 Asia excl. Japan 6.8 Japan 4.0* * The values for 2003 and 2004 are corrected in 2005 due to changes in the calculation method by the Japanese Statistics Bureau estimate World 4.4 Western Europe 1.5 United States 4.5* South America 6.0 Asia excl. Japan 9.7 Japan 2.0 * The values for 2003 and 2004 are corrected in 2005 due to changes in the calculation method by the Federal Reserve Board. BASF

284 Management s Analysis Economic Environment Production Trends in Key Customer Industries in 2004 In the UNITED STATES, the chemical industry was able to benefit from the recovery despite continuing very high gas prices. Production of both basic and specialty chemicals was especially strong in the first half of the year. In WESTERN EUROPE, chemical production was, as expected, weaker than the global average. Weak domestic demand was offset by strong exports. Chemical output in ASIA continued to expand into the first half of 2004, supported by strong industrial demand. After mid-year, however, there was a slight slowing, in particular in China and India. In some countries, such as China, Malaysia and Singapore, there was a double-digit increase in production rates. With growth of 2.0%, chemical production in Japan, on the other hand, was unable to match the growth rate posted by Japanese industry overall. By contrast, Asia excluding Japan was by far the world s strongest region in 2004 with growth of about 9.7%. In SOUTH AMERICA, chemical production also developed positively after the weak years 2002 and CHEMICAL RAW MATERIALS prices rose sharply in the second half of the year, due to the increase in oil prices. Oil peaked at $52/barrel, but prices have dropped sharply since November. The average annual price for crude oil (Brent) rose by 33% to about $38.2/ barrel (2003: $28.8/barrel) and for naphtha, our most important raw material, by 38% to $375 per metric ton (2003: $272/metric ton). Due to fierce competition, chemical producer prices have so far not been increased to the full extent necessary. Price trends for crude oil and naphtha $/metric ton Q 2.Q 3.Q 4.Q 1.Q 2.Q 3.Q 4.Q Naphtha price in $/metric ton Oil price in $/barrel $/bbl 2. Production Trends in Key Customer Industries in 2004 In 2004, despite sharply rising oil prices in the second half of the year, there was a noticeable acceleration in production, especially for capital goods and high-tech products. Production of consumer goods, on the other hand, was relatively subdued. Industrial output growth has peaked at 5.8% in the current economic cycle at a rate comparable to that of The AUTOMOTIVE INDUSTRY profited from the global economic recovery only in Asia, Eastern Europe and South America. The significant rise in oil prices dampened growth in the automotive industry in the United States and Europe. The ELECTRICAL AND ELECTRONICS INDUSTRY experienced a boom in The electronics and information technology sectors, in particular, recovered after several years of slow growth. The main driver was renewed investment in the United States and Asia BASF 2004

285 Management s Analysis Economic Environment Production Trends in Key Customer Industries in 2004 Outlook The TEXTILE INDUSTRY continued to be a problem sector, with poor prospects in the industrialized countries. While positive economic development slowed the shrinking of the textile industry in Europe and North America, fundamental structural problems persist with regard to competing imports from lowwage countries, most notably Asia. The PAPER INDUSTRY showed a slight cyclical upturn in 2004, especially in the United States and Europe. Growth was facilitated by the continuing structural transformation in most industrialized countries. Stimulus for the CONSTRUCTION INDUSTRY in the United States came mainly from residential construction. In Western Europe, however, only a few countries such as Spain and the United Kingdom reported growth in the construction industry. Overall, construction activity continued to improve in the industrialized countries in 2004, despite a declining trend in public spending on construction. In Asia, and in China especially, the construction industry profited from the general economic boom. AGRICULTURE had above-average growth in Higher world prices for important agricultural goods had a positive influence on business. BASF sales by industry Percentage of sales in 2004 > 15% Chemicals (not an industry with end users) 10 15% Automotive Energy Agriculture 5 10% Construction < 5% Printing Leather/shoes Textiles Electrical/electronics Furniture Packaging Health Paper Detergents Cosmetics Carpeting and cleaners Other industries: approximately 12% in total Growth in key customer industries Real change compared with previous year (%) 2004 Automotive OECD 1.0 (per-unit basis) World 4.2 Agriculture OECD 3.3 World 3.2 Construction OECD 3.5 World 4.0 Electrical/electronics OECD 7.4 (including IT) World 10.4 Textiles OECD (2.5) World 4.4 Paper OECD 1.4 World Outlook After the strong recovery in 2004, which followed three difficult years of only moderate growth, we continue to see favorable mid-term prospects. The precondition for this is that political trouble spots do not flare up and that there is no sudden downturn in the economic environment. We have based our business planning for 2005 on the following scenario: A decline in oil prices to an average of $35/barrel Moderately higher interest rates in 2005 and subsequent years An average euro/dollar exchange rate of $1.30 per euro For the global economy, we expect average gross domestic product to rise 3.2%, with 3.0% per year forecast for the mid term; Europe, however, is likely to continue to show slower growth in spite of its eastward expansion. This is due to offshoring of production, the strong euro compared with the U.S. dollar, and weak consumer spending as a result of structural changes to social security systems. BASF

286 Management s Analysis Economic Environment Outlook Outlook for gross domestic product Real change compared with previous year (%) Outlook for chemical production (excl. pharma) Real change compared with previous year (%) 2005 World 3.2 Western Europe 2.0 United States 3.3 South America 3.5 Asia excl. Japan 5.9 Japan World 3.1 Western Europe 2.0 United States 2.7 South America 4.4 Asia excl. Japan 5.7 Japan 1.5 Trends World 3.0 Western Europe 2.1 United States 2.8 South America 3.4 Asia excl. Japan 5.8 Japan 2.2 Trends World 2.8 Western Europe 2.0 United States 2.0 South America 3.8 Asia excl. Japan 5.7 Japan 1.3 Trends in the chemical industry After a very strong year in 2004, growth in the global chemical industry is likely to be slower in the course of 2005 because world trade is losing its momentum and demand from industrial customers is growing more slowly. In the UNITED STATES, the decline in industrial activity is likely to result in slower growth in chemical production. In contrast to the other regions, the economy in WESTERN EUROPE is not expected to peak until This is due to the continuing increase in industrial demand and a further strong level of exports. In JAPAN, however, chemical production is expected to weaken moderately in In SOUTH AND EAST ASIA, chemical production is expected to grow much less quickly in However, we believe that China and India will continue to have very high growth rates. We anticipate that the strong economic climate in SOUTH AMERICA will enable the chemical industry there to post high growth rates in 2005, albeit lower than in BASF 2004

287 Management s Analysis BASF Group Business Review and Analysis Results of Operations in the BASF Group BASF Group Business Review and Analysis 1. Results of Operations in the BASF Group Substantial rise in sales due to volume growth Income from operations at record high Strongest growth in Chemicals and Plastics segments Successful cost-cutting and restructuring measures continued Overview Income from operations rose significantly in a positive global economic environment, driven by economic growth in the United States and Asia. We increased production and sales volumes substantially and raised sales prices. In addition, our restructuring measures had a positive effect, enabling us to reduce our fixed costs considerably. The financial result declined compared with 2003, in particular due to the write-down on our stake in Basell. Net income, however, more than doubled thanks to very strong income from operations compared with Sales and earnings Million Change in % Sales 37,537 33, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 7,326 5, Income from operations (EBIT) before special items 4,893 2, Income from operations (EBIT) 4,856 2, Income from operations (EBIT) as a percentage of sales Financial result (837) (490) (70.8) Income before taxes and minority interests 4,019 2, Net income 1, Net income as a percentage of sales Earnings per share ( ) Net income in accordance with U.S. GAAP 1,863 1, Earnings per share in accordance with U.S. GAAP ( ) BASF

288 Management s Analysis BASF Group Business Review and Analysis Results of Operations by Segment Sales and earnings by quarter 2004 Million 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2004 Sales 9,051 9,314 9,314 9,858 37,537 Income from operations (EBIT) before special items 1,138 1,197 1,054 1,504 4,893 Income from operations (EBIT) 1,038 1, ,679 4,856 Financial result (60) (23) (93) (661) (837) Income before taxes and minority interests 978 1, ,018 4,019 Net income ,883 Earnings per share ( ) Million 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2003 Sales 8,832 8,249 7,740 8,540 33,361 Income from operations (EBIT) before special items ,993 Income from operations (EBIT) ,658 Financial result (103) (88) (108) (191) (490) Income before taxes and minority interests ,168 Net income Earnings per share ( ) BASF 2004

289 Sales Sales in 2004 rose 4,176 million compared with the previous year to 37,537 million. The change in sales was due to the following factors: As % Million of sales Volumes 3, Prices 2, Currencies (1,470) (4.4) Acquisitions and additions to the scope of consolidation Divestitures (247) (0.7) 4, Higher sales volumes were achieved mainly in the Chemicals and Plastics segments. Moreover, we were able to pass on higher raw materials costs to the market in the course of the year for many products in our portfolio. Despite the weakness of the U.S. dollar and currencies in South America and Asia that are tied to the dollar, we increased sales in euros in all regions. In local currency terms, our sales increased by 24.5% in North America (NAFTA) and by 28.0% in Asia. Acquisitions increased sales by 505 million. This was mainly due to the purchase of the plasticizers business of Sunoco, United States, and the first full-year s sales from the fipronil business from Bayer CropScience and from Honeywell s engineering plastics business, both of which were acquired in Additions to the scope of consolidation contributed 44 million to sales. Divestitures reduced comparable sales by 247 million. This was primarily due to the sale of our printing systems business to CVC Capital Partners, the sale of our nylon fibers business to Honeywell in 2003, and to streamlining of the portfolio in the Agricultural Products division. Income from operations At 4,856 million, income from operations in 2004 was 2,198 million higher than in the previous year, and as a ratio of sales was 12.9% compared with 8.0% in This increase was primarily due to higher capacity utilization of our plants as well as fixed cost reductions associated with restructuring measures. The Chemicals, Plastics and Performance Products segments more than doubled their earnings. Special items Income from operations in 2004 contained net special charges of 37 million, compared with 335 million in the previous year. The decline was primarily due to the gain from the sale of the printing systems business. 277 million was incurred for restructuring measures related to steps to increase efficiency as part of the Ludwigshafen Site Project, the further development of our organization in Europe, as well as restructuring in North America (NAFTA). Special items also arose due to portfolio measures and litigation. The financial result contains a write-down on our 50% stake in Basell. Special items 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full year Million In income from operations (100) (2) (16) (58) (96) (29) 175 (246) (37) (335) In financial result (21) (1) (3) (16) (27) (580) (133) (618) (163) (121) (2) (17) (61) (112) (56) (405) (379) (655) (498) BASF

290 Management s Analysis BASF Group Business Review and Analysis Results of Operations in the BASF Group Income before taxes and minority interests Compared with 2003, income before taxes and minority interests rose by 1,851 million in 2004 to 4,019 million. This increase was due to the substantial improvement in income from operations. In 2004, the return on assets as a percentage of income before taxes plus interest expenses increased to 12.9%, compared with 7.4% in the previous year. Net income/earnings per share Income before taxes and minority interests was 4,019 million and the tax expense was 2,005 million or 50%. After deducting these taxes and minority interests of 131 million, net income was 1,883 million in In comparison with 2003, net income more than doubled, increasing by 973 million. The tax rate declined by 5 percentage points compared with the previous year. In 2003, a tax refund claim of 124 million had to be written off because of a change in German tax law. In 2004, higher tax-free earnings from the sale of our printing systems business were offset by non-taxdeductible write-downs on participating interests. Noncompensable foreign income taxes on oil production rose by 163 million to 668 million due to higher oil prices. Earnings per share in 2004 were 3.43 compared with 1.62 in the previous year. Our income in accordance with U.S. GAAP was 1,863 million or 3.39 per share in 2004, compared with 1,320 million or 2.35 per share in Proposed appropriation of profit BASF Aktiengesellschaft* achieved net income of 1,363 million. The profit carried forward from 2003 is 5 million. After transferring 449 million to other retained earnings, profit retained was 919 million. At the Annual Meeting on April 28, 2005, the Board of Executive Directors and the Supervisory Board will propose a dividend payment of 1.70 per qualifying share. If shareholders approve this proposal, the total dividend payable on qualifying shares as of December 31, 2004 will be 919 million. If the number of qualifying shares and the amount of the dividend payable decline by the date of the Annual Meeting due to share buy-backs, it is further proposed that the remaining profit retained be carried forward. Sales and earnings forecasts The sales and earnings of the BASF Group are to some extent heavily dependent on the volatility of the U.S. dollar and currencies that are tied to it, and on oil price volatility. In the Agricultural Products and Fine Chemicals divisions and in the Performance Products segment especially, a weaker U.S. dollar may result in negative currency translation effects. Our planning for 2005 is based on an average euro/dollar exchange rate of $1.30 per euro and an oil price of $35/barrel. We further anticipate that the global economy will not cool off substantially. The precondition for this is that political trouble spots do not flare up and that there is no sudden downturn in the economic environment. We will continue to implement our restructuring, cost reduction and portfolio optimization measures. These are the prerequisites for business to remain strong. In 2005, we expect to achieve slightly higher sales and follow on from the high level of income from operations (EBIT) before special items posted in We therefore again expect to earn a premium on our cost of capital. * The auditors have approved the Consolidated Financial Statements of BASF Aktiengesellschaft free of qualification. The Consolidated Financial Statements are published on the Internet at They are also published in the Federal Gazette and filed in the Commercial Register of Ludwigshafen (Rhine) HRB A reprint may be obtained by contacting the address shown on the back of this report. 26 BASF 2004

291 Management s Analysis BASF Group Business Review and Analysis Balance Sheet Structure 2. Balance Sheet Structure Total assets almost unchanged despite higher volume of business Cash and cash equivalents significantly higher 726 million in shares bought back Assets 2004 Million 2004 % 2003 % Intangible assets 3, Tangible assets 12, Financial assets 1, Fixed assets 17, Inventories 4, Accounts receivable, trade 5, Other receivables 2, Deferred taxes 1, Liquid funds 2, Current assets 16, Total assets 33, Stockholders equity and liabilities 2004 Million 2004 % 2003 % Paid-in capital 4, Retained earnings 12, Currency translation adjustments (1,225) (3.6) (2.9) Minority interests Stockholders equity 15, Pension provisions 3, Long-term provisions 2, Long-term financial indebtedness 1, Long-term liabilities 1, Total long-term liabilities 9, Short-term financial indebtedness 1, Accounts payable, trade 2, Other short-term liabilities and provisions 5, Total short-term liabilities 9, Liabilities 18, Total stockholders equity and liabilities 33, BASF

292 Management s Analysis BASF Group Business Review and Analysis Balance Sheet Structure BASF s total assets rose slightly by 314 million. The reduction in fixed assets almost completely offset higher cash and cash equivalents and increased net working capital requirements due to higher sales. Fixed assets declined, primarily due to lower financial assets and capital expenditures below the level of depreciation and amortization. Fixed assets accounted for 52% of total assets and consisted of: % 2004 Intangible assets 18.9 Tangible assets 70.3 Financial assets The breakdown of tangible assets, inventories and receivables by region is shown in the following table. The most important capital expenditures are explained in Liquidity and Capital Resources on page 30 ff. Tangible assets Inventories Receivables % Europe Thereof Germany North America (NAFTA) South America Asia, Pacific Area, Africa Inventories increased by 475 million to 4,626 million as a result of the expansion of business and higher raw materials prices. Their share of total assets was 13.6% compared with 12.4% in Trade accounts receivable rose by 11.2% and their share of assets increased to 16.3% compared with 14.7% in the previous year. The ratio of total current assets to total assets was 47.8%. Stockholders equity declined by 113 million. In addition to the payment of dividends, this was due to the continued buy-back of shares as well as negative currency effects. The equity ratio was 46.5% compared with 47.3% in The BASF Group s net debt fell substantially compared with the previous year as a result of the high cash flow and an inflow of 674 million from divestitures. Million Liquid funds 2, Financial indebtedness 3,303 3,507 Net debt 1,054 2,879 The types, terms and currencies and lines of credit are explained in Note 23 to the Consolidated Financial Statements. 28 BASF 2004

293 Long-term liabilities declined by 1,180 million to 9,105 million. Their share of total liabilities fell from 30.6% in the previous year to 26.8%. 68.2% of longterm liabilities were in provisions, primarily for pensions. Long-term financial indebtedness declined by 1,144 million to 1,851 million. This was primarily due to the reclassification of BASF Aktiengesellschaft s 5.75% Euro Bond, which matures in 2005, as short-term financial indebtedness. As a result, short-term liabilities rose by 21.6% to 9,046 million. Trade accounts payable also increased to a lesser extent from 2,046 million to 2,208 million. Key ratios In 2004, we again improved key ratios, thus laying the foundation for maintaining good credit ratings. The rating agencies Moody s and Standard & Poor s continue to give BASF their best ratings for short-term debt and very good ratings for long-term debt. Moody s has assigned us a short-term debt rating of P-1 and a long-term rating of Aa3; our ratings from Standard & Poor s are A1+ short-term, and AA- longterm. Horizontal balance sheet ratios Fixed asset coverage I (%) = Fixed asset coverage II (%) = Fixed asset coverage III (%) = Stockholders equity* Fixed assets Stockholders equity* + Long-term liabilities Fixed assets Stockholders equity* + Long-term liabilities Fixed assets + Inventories * Less proposed dividend Liquidity and debt ratios Liquidity I (%) = Liquidity II (%) = Dynamic debt level (%) = Debt-equity ratio (%) = Short-term receivables + Liquid funds Short-term liabilities + Proposed dividend Current assets Short-term liabilities + Proposed dividend Cash provided by operating activities Long- and short-term financial indebtedness Long- and short-term financial indebtedness Long- and short-term financial indebtedness + Stockholders equity Interest coverage EBITDA interest coverage = Income from operations before interest, taxes, depreciation and amortization Interest expense BASF

294 Management s Analysis BASF Group Business Review and Analysis Liquidity and Capital Resources 3. Liquidity and Capital Resources Cash provided by operating activities remains high Capital expenditures, dividend payments and share buy-backs financed from cash provided by operating activities Cash inflows from portfolio measures Capital expenditures again below level of depreciation and amortization in 2004 Statements of cash flows Million Net income 1, Depreciation and amortization 3,097 2,682 Change in net working capital (199) 1,118 Miscellaneous items (270) 168 Cash provided by operating activities 4,511 4,878 Payments related to tangible and intangible fixed assets (1,934) (2,071) Acquisitions/divestitures, net 570 (1,394) Financial investment and other items Cash used in investing activities (1,110) (3,260) Capital increases/repayments (781) (500) Changes in financial indebtedness (203) (2) Dividends (852) (857) Cash used in financing activities (1,836) (1,359) Net changes in cash and cash equivalents 1, Cash and cash equivalents as of beginning of year and other changes Cash and cash equivalents 2, Marketable securities Liquid funds 2, BASF 2004

295 Cash provided by operating activities In 2004, cash provided by operating activities was again high at 4,511 million. This was due primarily to the increase in earnings. Despite the considerable expansion in business, it was possible to maintain net working capital at a low level. In 2003, substantial funds were released, mainly through inventory reductions and shortened payment terms. Miscellaneous items primarily reflects the reclassification of gains from divestitures, which are included as part of cash inflows in cash used in investing activities. Cash used in investing activities Cash used in investing activities amounted to (1,110) million. The significant decline was due primarily to cash inflows from portfolio measures, whereas in the previous year there was a cash outflow for the acquisition of the fipronil business. We spent 1,934 million on additions to tangible and intangible assets. We again reduced spending compared with the previous year, bringing it significantly below the level of depreciation and amortization. Expenditures for acquisitions totaled 104 million, and proceeds from divestitures amounted to 674 million. Important transactions included the acquisition of the plasticizer business from Sunoco, United States. Cash inflows from divestitures were mainly related to the sale of the printing systems business. Changes in financial assets, marketable securities and financial receivables resulted in an outflow of 204 million. The sale and disposal of fixed assets and marketable securities generated proceeds of 458 million. On a regional basis, capital expenditures for tangible and intangible assets were as follows: % Europe North America (NAFTA) South America 4 2 Asia, Pacific Area, Africa In the CHEMICALS SEGMENT, investments and acquisitions in 2004 rose by 5.3% compared with 2003 to 555 million. Major projects included: Construction of a Verbund site with our partner SINOPEC in Nanjing, China; Construction of a THF/PolyTHF plant in Caojing, China; Startup of a C 4 complex associated with the steam cracker in Port Arthur, Texas; Startup of a butanediol plant at the Verbund site in Kuantan, Malaysia; and Acquisition of the U.S. plasticizers business of Sunoco, United States, to strengthen our plasticizers business in North America. In the PLASTICS SEGMENT we spent 454 million on capital expenditures and acquisitions in This was a decline of 15.8% compared with the previous year. Among the important projects were: Startup of an ABS plant in Antwerp, Belgium; Startup of expanded MDI production capacity in Yeosu, South Korea; Transfer of Styropor production from the United States to Altamira, Mexico; Expansion of Ultrason production in Ludwigshafen, Germany; and Acquisition of the polyurethane business of Systemhaus Lagomat, Sweden, and the polyurethane foam producer Foam Enterprises, United States. BASF

296 Management s Analysis BASF Group Business Review and Analysis Liquidity and Capital Resources In the PERFORMANCE PRODUCTS SEGMENT, investments increased by 21.2% in 2004 to 286 million. The most important investment project was the construction of plants for acrylic acid and acrylates at the new Verbund site in Nanjing, China. In the AGRICULTURAL PRODUCTS AND NUTRITION SEGMENT, we spent 232 million on capital expenditures and acquisitions in 2004 compared with 1,273 million in Acquisitions in 2003 primarily included the purchase of the insecticide fipronil and selected fungicides from Bayer CropScience. The Agricultural Products division invested 95 million, mainly in optimization measures at various sites. The Fine Chemicals division spent 137 million on capital expenditures in Major projects included: Expansion of plants for vitamin E precursors in Ludwigshafen, Germany; Startup of a new plant for citral in Ludwigshafen; Expansion of capacities for crospovidones and for UV absorbers in Ludwigshafen and for pharmaceutical chemicals in Minden, Germany. Cash used in financing activities Cash used in financing activities was 1,836 million in We spent a total of 726 million to buy back 16.2 million shares at an average price of per share (see page 11). We paid out 852 million in dividends and profit transfers in Of this amount, 774 million or 1.40 per share was for dividend payments to shareholders of BASF Aktiengesellschaft for fiscal year million in profits was paid or transferred to shareholders of fully or proportionately consolidated companies. Financial indebtedness declined compared with 2003 and amounted to 3,303 million. At 1,054 million, net debt was significantly lower because of the increase in liquid assets. Financial indebtedness is discussed in detail in Note 23 to the Consolidated Financial Statements. Liquid funds Liquid funds at the end of 2004 increased significantly to 2,249 million. Their proportion of total assets increased to 6.6%. In the OIL & GAS SEGMENT, we invested 374 million in 2004 compared with 323 million in Most capital expenditures were in the exploration and production business sector. Key projects were: Developing new natural gas deposits in the Dutch North Sea and in Argentina; Expanding and optimizing hydrocarbon production in Libya; and Continuing expansion of our Mittelplate offshore oil field in the German North Sea. 32 BASF 2004

297 Commitments for investments In 2005, we are planning capital expenditures of 1.7 billion. Of this amount, 57% is scheduled to be invested in Europe, 14% in North America (NAFTA), 4% in South America and 25% in the Asia, Pacific Area, Africa region. Major projects are as follows: CHEMICALS SEGMENT Startup of a steam cracker at the new Verbund site under construction in Nanjing, China; Startup of plants for oxo alcohols, ethylene oxide and glycol, methylamines, dimethylformamide, formic acid and propionic acid at the Verbund site in Nanjing, China; and Startup of plants for THF and PolyTHF in Caojing, China. PLASTICS SEGMENT A PBT plant in Kuantan, Malaysia; Construction of production plants for TDI and MDI in Caojing, China; Construction of a site for producing polyurethane specialties in Pudong, China; Expansion of our MDI production plants in Antwerp, Belgium; Expansion of the compounding plant for engineering plastics in Pasir Gudang, Malaysia; and Construction of a compounding plant for engineering plastics in Pudong, China. PERFORMANCE PRODUCTS SEGMENT Startup of plants for acrylic acid and acrylates at the new Verbund site in Nanjing, China; Construction of a plant for raw materials for HDIbased coatings at the site in Caojing, China; and Construction of a plant for super absorbers in Freeport, Texas. AGRICULTURAL PRODUCTS AND NUTRITION SEGMENT Construction of a feed enzyme plant in Ludwigshafen; Construction of plants for geraniol and linalool in Ludwigshafen; Completion of the new plants for UV absorbers in Ludwigshafen and for pharmaceutical chemicals in Minden, Germany. OIL & GAS SEGMENT Pipeline connection to the Mittelplate offshore oil field in Germany; Development of new natural gas reserves in the Dutch North Sea and in Argentina; Development of new oil fields in Libya and expansion of existing ones; Start of development of the Achimov horizon in an area of the Urengoy gas field in Russia; and Debottlenecking of the STEGAL natural gas pipeline. BASF

298 Management s Analysis BASF Group Business Review and Analysis Results of Operations in the BASF Group 4. Results of Operations by Segment Segment overview Sales Income from operations before interest, taxes, depreciation and amortization (EBITDA) Income from operations (EBIT) before special items Million Chemicals 7,020 5,752 1, , Plastics 10,532 8,787 1, Performance Products 8,005 7,633 1, Agricultural Products & Nutrition 5,147 5,021 1, Thereof Agricultural Products 3,354 3, Fine Chemicals 1,793 1, Oil & Gas 5,263 4,791 2,075 1,734 1,647 1,365 Other* 1,570 1,377 (133) (134) (250) (230) Thereof costs of exploratory and biotechnological research (145) (181) 37,537 33,361 7,326 5,110 4,893 2,993 Segment overview Income from operations (EBIT) Assets Capital expenditures** Million Chemicals 1, ,008 4, Plastics ,044 5, Performance Products 1, ,426 4, Agricultural Products & Nutrition ,118 6, ,273 Thereof Agricultural Products ,849 5, ,133 Fine Chemicals ,269 1, Oil & Gas 1,637 1,365 3,876 3, Other* (299) (233) 8,444 8, Thereof costs of exploratory and biotechnological research (145) (181) 4,856 2,658 33,916 33,602 2,040 3,416 * Other includes the fertilizers business and other businesses as well as expenses, income and assets not allocated to the segments. This item also includes foreign currency results from financial indebtedness that are not allocated to the segments as well as from currency positions that are macro-hedged ( (41) million, previous year (1) million). ** Capital expenditures in tangible assets (thereof 59 million from acquisitions in 2004) and intangible assets (thereof 33 million from acquisitions in 2004). 34 BASF 2004

299 Sales 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Million Chemicals 1,582 1,519 1,748 1,433 1,811 1,367 1,879 1,433 Plastics 2,307 2,283 2,522 2,177 2,827 2,135 2,876 2,192 Performance Products 1,929 1,907 2,029 1,911 2,068 1,930 1,979 1,885 Agricultural Products & Nutrition 1,441 1,296 1,527 1,505 1,035 1,054 1,144 1,166 Thereof Agricultural Products ,071 1, Fine Chemicals Oil & Gas 1,394 1,483 1, , ,616 1,453 Other* ,051 8,832 9,314 8,249 9,314 7,740 9,858 8,540 Income from operations (EBIT) before special items 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Million Chemicals Plastics Performance Products Agricultural Products & Nutrition (36) (97) Thereof Agricultural Products (44) (120) Fine Chemicals Oil & Gas Other* (65) (94) (105) (10) (49) (83) (31) (43) 1, , , , Income from operations (EBIT) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Million Chemicals Plastics Performance Products Agricultural Products & Nutrition (66) (114) Thereof Agricultural Products (62) (138) Fine Chemicals (4) 24 (18) 20 Oil & Gas Other* (120) (94) (106) (15) (73) (81) 0 (43) 1, , , * Other includes the fertilizers business and other businesses as well as expenses, income and assets not allocated to the segments. This item also includes foreign currency results from financial indebtedness that are not allocated to the segments as well as from currency positions that are macro-hedged ( (41) million, previous year (1) million). BASF

300 Management s Analysis BASF Group Business Review and Analysis Chemicals Chemicals Significant increase in sales due to higher volumes and adjustment of sales prices to reflect higher raw materials costs Good capacity utilization; income from operations more than triples U.S. plasticizers business strengthened through acquisition The Chemicals segment comprises the Inorganics, Petrochemicals and Intermediates divisions. Segment data Million Change in % Sales to third parties 7,020 5, Thereof Inorganics Petrochemicals 4,189 3, Intermediates 1,987 1, Intersegmental transfers 3,395 2, Sales including intersegmental transfers 10,415 8, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 1, Income from operations (EBIT) before special items 1, Income from operations (EBIT) 1, Operating margin (%) Assets 5,008 4, Return on operating assets (%) Research and development expenses (3.7) Additions to tangible and intangible assets In 2004, we increased sales to third parties by 1,268 million compared with the previous year to 7,020 million, (volumes 13%, portfolio 4%, prices 10%, currencies 5%). All three divisions contributed to higher sales. All three divisions also contributed to the increase in income from operations, which rose by 848 million to 1,241 million. Strong demand made it possible to pass on higher raw materials prices to customers in many product lines. Together with productivity gains resulting from continued rationalization, this led to an improvement in margins compared with the weak previous year. At 5,008 million, assets were 288 million higher than in We strengthened our business with plasticizers in the United States by acquiring the plasticizer activities of Sunoco, United States. In Port Arthur, Texas, we started up a C 4 complex together with our partners Total Petrochemicals, United States, and Shell, United States. This complex will help to supply BASF in North America (NAFTA) with the important raw materials butadiene and propylene, and is closely linked with the cracker that we operate at the same site together with Total Petrochemicals. 36 BASF 2004

301 The new BASIL process results in liquid salts. In 2004, we also started operations at the new butanediol plant at our site in Kuantan, Malaysia. In the future, it will also supply the new PBT (polybutylene terephthalate) plant we are building at this site with our joint venture partner Toray, Japan. In the Petrochemicals and Intermediates divisions, investment projects at the new Verbund site in Nanjing, China, and in Caojing, China, are moving ahead as scheduled. In 2005, a number of world-scale plants will start operations at these sites, making a substantial contribution to our production in the high-growth Asian region. In 2005, we expect sales at the previous year s level. While we anticipate demand to remain strong, we expect a decline in crude oil prices and a weaker U.S. dollar. Startup costs for the new plants in Nanjing and Caojing are likely to negatively impact income from operations. We nevertheless expect to achieve income from operations at the previous year s level. Inorganics In 2004, we increased sales to third parties by 106 million to 844 million (volumes 12%, portfolio 3%, prices 1%, currencies 2%). The sales growth was due primarily to strong volume demand, which was aided by a marked upturn in key customer industries such as electronics and the wood products industries. As a result of the increase in sales, we significantly improved income from operations, which was negatively impacted by the need to convert part of the chlorine facilities to a membrane technology in All business units in the division contributed to the improvement in earnings in The persistent weakness of the U.S. dollar had a negative impact on earnings in The integration of the inorganic specialties business in Evans City, Pennsylvania, which was acquired from the Mine Safety Appliances Company, United States, was successfully completed in the second quarter of With this acquisition, we expanded our portfolio of profitable and fast-growing specialties based on boron and potassium, which are mainly used in the production of pharmaceuticals and herbicides. In addition, there are a number of further applications, for example in the electronics and automotive industries. Another example of successful implementation of our customer-oriented specialty strategy is our market leadership in carbonyl iron powder, an important product for making diamond tools and electronic components. In 2005, we expect sales to remain unchanged compared with We expect income from operations to decline from the strong level posted in 2004 due to narrower margins. We intend to continue to expand profitable business areas in innovative specialties such as catalysts, electronic grade chemicals and powder injection molding technology. Petrochemicals In 2004, we significantly increased sales to third parties by 925 million to 4,189 million (volumes 15%, portfolio 5%, prices 14%, currencies 6%). This was mainly due to higher sales of cracker products in Europe and North America (NAFTA) as well as growth in alkylene oxides and glycols. The plasticizers and solvents product lines also posted significantly stronger sales. Income from operations improved considerably compared with 2003 because of strong business growth and high availability of production capacity. The prices of some raw materials were much higher and very volatile, and prices of crude oil and naphtha reached record levels. We were largely able to pass these changes on to customers in the form of price increases. In addition, high capacity utilization resulted in margin improvements and led to strong earnings growth. Our investment projects were completed as scheduled. In Port Arthur, Texas, we completed and started up a C 4 complex. This complex consists of a butadiene extraction and inalkylation facility as part of our SABINA joint venture with our partners Shell, United States, and Total Petrochemicals, United States, as well as an OCU (olefins conversion unit; metathesis) as part of our cracker joint venture with Total Petrochemicals. The acquisition of the plasticizers business of Sunoco, United States, in January 2004 enabled us to substantially improve our market position in this business in North America (NAFTA). BASF

302 Management s Analysis BASF Group Business Review and Analysis Chemicals In addition, we are investing together with our partner SINOPEC, China, in the new Verbund site in Nanjing, China, which will start operations in In 2005, we expect sales at the same level as in The effects of lower crude oil prices and the additional business from our new plants in Nanjing, China, will probably offset one another. The startup costs at this new site are likely to negatively impact income from operations. Neverthless, we anticipate margins to improve and earnings to match the very strong level achieved in Intermediates In 2004, we increased net sales to third parties by 237 million to 1,987 million (volumes 10%, portfolio 3%, prices 5%, currencies 4%). We particularly increased sales volumes in Asia. All product areas contributed to global sales growth. We significantly increased income from operations compared with Strong demand in Asia reduced import pressures on margins and market share in Europe. In almost all product lines, we increased prices globally to improve our margins. Income from operations also improved due to the reduction of fixed costs, especially in production in Ludwigshafen, and due to a consistent focus on adding value rather than increasing volumes. Capital expenditures were at the previous year s level, and investments again concentrated on Asia: We are building integrated production plants for tetrahydrofuran (THF) and PolyTHF in Caojing, China, and plants for methylamine, dimethylformamide and formic acid and propionic acid in Nanjing, China. In early 2004, we started operations at the butanediol plant of BASF PETRONAS Chemicals (BASF share: 60%) in Kuantan, Malaysia. On a comparable basis, we expect higher sales in 2005, again mainly in Asia. Because of the startup costs for plants in Nanjing and Caojing, China, we do not expect to quite match the 2004 level of income from operations. 38 BASF 2004

303 Management s Analysis BASF Group Business Review and Analysis Plastics Plastics Substantial increase in sales from higher volumes and price increases Income from operations doubled due to higher volumes and fixed cost reductions Massive increases in raw materials prices Product and industry-specific business models implemented The Plastics segment comprises the Styrenics, Performance Polymers and Polyurethanes divisions. Segment data Million Change in % Sales to third parties 10,532 8, Thereof Styrenics 4,450 3, Performance Polymers 2,587 2, Polyurethanes 3,495 2, Intersegmental transfers Sales including intersegmental transfers 11,209 9, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 1, Income from operations (EBIT) before special items Income from operations (EBIT) Operating margin (%) Assets 6,044 5, Return on operating assets (%) Research and development expenses (2.8) Additions to tangible and intangible assets (15.8) Sales to third parties rose by 1,745 million to 10,532 million in 2004 (volumes 9%, portfolio 1%, prices 15%, currencies 5%). Income from operations rose by 373 million to 669 million compared with the weak level in We improved sales and earnings in all divisions. The segment s income from operations increased mainly due to higher volumes and lower fixed costs as a result of restructuring measures. In the Performance Polymers division in particular, earnings improved significantly compared with the previous year s very weak performance. We increased prices considerably during the year to pass on the significantly higher costs of raw materials. However, margins remain less than satisfactory because it was not possible to fully offset the increase in raw materials costs. Earnings were negatively impacted by special charges for restructuring measures, as well as special write-offs. We reduced capital expenditures in The segment s assets increased, with inventories and receivables rising substantially because of much higher sales volumes and prices compared with BASF

304 Management s Analysis BASF Group Business Review and Analysis Plastics In 2004, we continued to reposition our plastics business. Key issues were the implementation of product and industry-specific business models and the longterm optimization of our regional portfolio. We have significantly expanded our position in Asia using new plants. In Europe, we continued to optimize our structures, and in North America (NAFTA) and South America, we further consolidated our production structures. For 2005, we expect sales to remain at the high level of 2004 and a further improvement in income from operations. Styrenics In the Styrenics division, sales to third parties in 2004 rose by 824 million to 4,450 million compared with the previous year (volumes 4%, prices 25%, currencies 6%). The strong rise in raw materials prices since the start of the year could be passed on to customers only after some delay, resulting in significant sales growth in the second half of the year. Income from operations exceeded the previous year s weak level. The rapid rise in raw materials prices depressed margins significantly, especially in the first half of the year. We reduced fixed costs as part of the reorientation of our business model and in the second half of the year passed on higher raw material costs to some extent to our customers. These measures resulted in income from operations that was higher than the previous year in all four quarters, but which is still not satisfactory. We continued to consolidate activities in We are producing and marketing standard products to a greater extent using a commodity business model. Standard products are being separated from specialties, and the streamlined product range will be manufactured and sold at lower costs and prices. With the startup of the new ABS plant in Antwerp, Belgium, we are concentrating our ABS offering in Europe on standard products. We want to produce fewer than 10 products at our three world-scale plants. Specialties will be marketed globally in order to achieve additional growth and better earnings with new applications and innovative products. In 2005, we expect sales to decline slightly. Income from operations is expected to be at the previous year s level due to the continued optimization of our structures. Performance Polymers In 2004, sales to third parties rose by 348 million to 2,587 million (volumes 11%, prices 10%, currencies 5%). Sales were higher in all regions. Income from operations improved significantly despite the substantial rise in raw materials prices. This was due mainly to the further reduction of fixed costs as well as higher sales volumes and the resulting increase in capacity utilization to almost maximum levels. 40 BASF 2004

305 Polyurethanes for the Chinese growth market for example for sport shoes. For intermediate products and extrusion grades in particular, higher raw materials prices were largely passed on to the customer; this was only partially possible for engineering plastics used in injection molding, however. The reduction of fixed costs is primarily due to our successful measures in North America (NAFTA). In this region, we have further improved cost structures by divesting the fibers business, acquiring Honeywell s engineering plastics, and continuing restructuring measures. The successful integration of the businesses acquired from Honeywell, United States, and Ticona, United States, has strengthened our global market position in engineering plastics. As part of this strategy, we are expanding our production capacities in the Asian growth market. We are building a production plant for PBT in Kuantan, Malaysia, as part of the joint venture with Toray, Japan, that we founded in early To extend our capacities for compounding engineering plastics, we want to significantly expand our plant in Pasir Gudang, Malaysia, in 2005 and build a new plant in Pudong, China, by In 2005, we are expecting moderately higher sales and a slight improvement in income from operations on the basis of continuing strong volume demand and further fixed cost reductions. Income from operations increased compared with 2003 despite very high raw materials costs. This was due mainly to significantly higher sales volumes at unchanged fixed costs. Our capital expenditures were again focused on Asia. At our production site in Yeosu, South Korea, we increased the output of our MDI plant. This expanded facility will enable us to achieve an even greater share of growth in the Asian markets. In Caojing, China, construction of the new production site is progressing. Working with our joint venture partners, we want to complete an additional integrated production facility for MDI and TDI by This facility will provide the necessary starting materials for the production of specialties in Pudong, China, which is scheduled to start in In 2005, we are expecting a slight increase in sales and an improvement in income from operations as a result of strong growth in the global polyurethanes market as well as improved margins resulting from higher raw materials costs being passed on to customers to some extent. Polyurethanes Sales to third parties in 2004 rose by 573 million to 3,495 million (volumes 15%, portfolio 2%, prices 8%, currencies 5%). Sales volumes grew strongest in Asia, where we expanded production capacity, but also increased in North America (NAFTA) and in Europe. BASF

306 Management s Analysis BASF Group Business Review and Analysis Performance Products Performance Products Sales increase due to strong demand in key customer industries Income from operations rises due to higher capacity utilization and a reduction in fixed costs Special income from the sale of the printing systems business The Performance Products segment comprises the Performance Chemicals, Coatings and Functional Polymers divisions. Segment data Million Change in % Sales to third parties 8,005 7, Thereof Performance Chemicals 3,228 3, Coatings 2,022 2, Functional Polymers 2,755 2, Intersegmental transfers (3.3) Sales including intersegmental transfers 8,296 7, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 1, Income from operations (EBIT) before special items Income from operations (EBIT) 1, Operating margin (%) Assets 4,426 4,656 (4.9) Return on operating assets (%) Research and development expenses (7.9) Additions to tangible and intangible assets Thanks to strong demand for our products, sales to third parties rose by 372 million compared with 2003 to 8,005 million (volumes 8%, prices 1%, currencies 4%). Demand was especially strong for products from the acrylic acid value-adding chain. Income from operations rose considerably by 590 million to 1,068 million as a result of higher capacity utilization and the reduction of fixed costs in all divisions. Income from operations contains the special income from the sale of the printing systems business. We significantly reduced the segment s assets from 4,656 million in 2003 to 4,426 million as a result of the divestiture of the printing systems business. Capital expenditures increased by 50 million to 286 million. In 2005, we anticipate a slight rise in sales and income from operations on a comparable basis. Performance Chemicals At 3,228 million, sales to third parties rose by 81 million in 2004 compared with the previous year (volumes 8%, portfolio 1%, prices 1%, currencies 3%). 42 BASF 2004

307 Innovative fuel additives cut emissions. In particular, performance chemicals for detergents and formulators significantly exceeded the previous year s sales. We improved income from operations in all product groups, in particular by lowering fixed costs. The significant increase in raw materials costs could not be passed on to our customers in the form of price increases, and so margins declined slightly overall. Special income from the sale of our printing systems business additionally increased earnings. We again significantly reduced inventories and receivables on average for the year. In 2005, we expect that the positive sales trend will continue and that we will further improve income from operations on a comparable basis. Coatings Sales to third parties in 2004 rose slightly by 7 million to 2,022 million (volumes 4%, portfolio 1%, prices 2%, currencies 3%). Ignoring currency translation effects, all regions contributed to the increase in sales. We considerably increased income from operations compared with 2003, despite significantly higher raw materials prices and negative currency effects. All product lines contributed to higher earnings; in particular, industrial coatings improved significantly. The restructuring measures in this area have been very successful. As part of these measures, we optimized our portfolio by exchanging our window and exterior door coatings business for the agricultural and construction machinery paints business of Akzo Nobel, the Netherlands. In automobile coatings, we benefited from our increased market share in the European market. This was aided by our system supplier concept, which we use to optimize the overall costs of coating processes for our customers. The impact of stagnation in the automobile industry was felt in North America (NAFTA). In refinish coatings, we posted an increase in sales and earnings. In the architectural coatings business in South America, we maintained market leadership with our Suvinil brand and improved earnings. In 2005, we intend to further increase sales and income from operations. We are expanding our presence in the growth markets of Eastern Europe and China. In addition, we are restructuring our industrial coatings business and continuing measures to increase efficiency in all regions and business units. Functional Polymers At 2,755 million, sales to third parties in 2004 were up 284 million and were significantly higher than in 2003 (volumes 10%, prices 6%, currencies 4%). We were able to improve sales in all regions due to higher sales volumes. Acrylic monomers were the key growth drivers, but demand was also strong for dispersions for architectural coatings, adhesives, fiber bonding and paper finishing. Our strategy of focusing on key customers with above-average growth potential made a solid contribution to the positive sales trend. Income from operations was significantly higher than in All product groups contributed to this growth, operating at high capacity utilization. In addition, the restructuring measures implemented in previous years enabled us to reduce fixed costs significantly. Higher raw materials prices could largely be passed on to customers in the form of price increases in most product groups. In Nanjing, China, we continued the construction of our second Verbund site in the high-growth Asian region as planned. Production of acrylic acid and acrylic esters at this site is scheduled to start in As a result of continued good volume demand, we expect sales in 2005 to remain at the previous year s level. Income from operations is likely to decline slightly due to the startup costs for our plants at the site in Nanjing, China. BASF

308 Management s Analysis BASF Group Business Review and Analysis Agricultural Products & Nutrition Agricultural Products & Nutrition Significant increase in income from operations in Agricultural Products; mid-term EBITDA return goal already significantly exceeded in 2004 New agricultural products successfully launched Fine Chemicals impacted by weak U.S. dollar and overcapacities Higher sales volumes and continued reduction of fixed costs in Fine Chemicals The Agricultural Products & Nutrition segment comprises the Agricultural Products and Fine Chemicals divisions. Agricultural Products Operating division data Million Change in % Sales to third parties 3,354 3, Intersegmental transfers Sales including intersegmental transfers 3,380 3, Income from operations before interest, taxes, depreciation and amortization (EBITDA) Income from operations (EBIT) before special items Income from operations (EBIT) Operating margin (%) Assets 4,849 5,523 (12.2) Return on operating assets (%) Research and development expenses Additions to tangible and intangible assets 95 1,133 (91.6) Sales in 2004 rose by 178 million to 3,354 million (volumes 9%, portfolio 1%, currencies 4%). The launch of new products, increased prices for a higher-value product range and portfolio measures to focus our activities on attractive markets all contributed to the sales growth. Sales rose as a result of the fipronil insecticide and selected fungicides business acquired from Bayer Crop- Science in March Conversely, sales were reduced by the sale of the soil improvement products business to Kanesho Soil Treatment, Belgium, in December 2003 and the sale of our phenoxy herbicide business to Nufarm, Australia, in March The weak U.S. dollar had a negative effect on sales. 44 BASF 2004

309 The aroma chemical citral has a lemony scent. Higher demand for our products positively affected business in all regions. In Europe, sales by location of company rose by 3% to 1,559 million. In North America (NAFTA), sales increased in local currency terms, but declined by 2% to 869 million as a result of the weaker U.S. dollar. In South America, we increased sales by 36% to 683 million with new products, despite negative currency effects. Our fungicide Opera, which contains the active ingredient F 500, has achieved market leadership in South America in only two years. Opera is successfully used to combat Asian soybean rust, a fungal disease that can severely threaten soybean yields, in particular in Brazil. Opera also helps to increase crop yields by improving general plant health. In Asia, sales declined by 12% to 243 million because of portfolio measures and currency effects. We increased income from operations by 258 million to 492 million. Positive effects on earnings resulting from higher demand in particular for our highvalue, innovative products outweighed negative currency effects. Special charges were primarily related to expenses for lawsuits in the United States (see Note 25 to the Consolidated Financial Statements) and provisions for restructuring. They were partially offset by the net gain from the sale of phenoxy herbicides to Nufarm, Australia. In 2004, we surpassed our medium-term goal of achieving an EBITDA return on sales before special items of 25% sooner than expected with 27.2%. We optimized total assets by 674 million to 4,849 million, in particular by further reducing current assets. We deliver to our customers closer to the application period, thereby optimizing our inventory and receivables management. We increased research and development expenses by 34 million to 273 million. Research into active ingredients for insecticides and fungicides has been intensified. Research spending also increased due to the reclassification of plant biotechnology expenses. As a percentage of sales, research and development expenses amounted to 8.1%, compared with 7.5% in Our researchers are currently working to develop six new crop protection active ingredients, on a new herbicide tolerance project and on numerous products to protect seeds with active ingredients that have already been launched. These product innovations will be ready for market in the coming years and have a peak sales potential of 700 million. A further seven crop protection active ingredients with a peak sales potential of 1 billion are currently being introduced to the market. Of these, F 500 and boscalid in particular developed better than expected and in 2004 helped us achieve approximately 60% of the peak sales potential planned with the active ingredients in market launch. In 2005, we expect sales at the previous year s level based on a normal agricultural season. We anticipate income from operations to improve in a market that continues to be intensely competitive. The growing proportion of high-value, innovative products will likely contribute to this achievement, as will measures to optimize our operational processes. BASF

310 Management s Analysis BASF Group Business Review and Analysis Agricultural Products & Nutrition Fine Chemicals Operating division data Million Change in % Sales to third parties 1,793 1,845 (2.8) Intersegmental transfers Sales including intersegmental transfers 1,823 1,865 (2.3) Income from operations before interest, taxes, depreciation and amortization (EBITDA) (27.3) Income from operations (EBIT) before special items (33.1) Income from operations (EBIT) (61.6) Operating margin (%) (60.3) Assets 1,269 1,303 (2.6) Return on operating assets (%) (60.2) Research and development expenses Additions to tangible and intangible assets (2.1) Sales to third parties declined by 52 million to 1,793 million in 2004 (volumes 6%, prices 4%, currencies 4%). For many products, we experienced further volume growth as prices declined, in part as a result of currency effects. The human nutrition business was affected by significant declines in sales of water-soluble vitamins, mainly due to a fall in prices for vitamin C and the exit from unprofitable businesses. The pharmaceutical solutions product lines all performed well, as did UV absorbers, aroma chemicals and organic acids. In the animal nutrition business, lysine prices and sales increased on average over the course of the year even though they have declined significantly recently; the prices of most vitamins fell in euro terms. Income from operations and sales were impacted by the weakness of the U.S. dollar and declining prices, which we were able to offset partially by reducing our fixed costs. Moreover, earnings were affected by the reclassification of certain research costs for plant biotechnology. Following the dissolution of our long-term cooperation with DSM, the Netherlands, we are pursuing business with the feed enzyme phytase independently. We plan to complete a production plant for this enzyme in Ludwigshafen in Compared with 2003, we reduced the assets of the Fine Chemicals division by 34 million in 2004 to 1,269 million. We reduced inventories and receivables as scheduled. Tangible assets grew as the result of capacity expansion for vitamin E and new plants for vitamin B 2 and citral. In 2005, we expect a slight decline in sales and a moderate increase in income from operations. 46 BASF 2004

311 Management s Analysis BASF Group Business Review and Analysis Oil & Gas Oil & Gas Natural gas production increases further; oil production slightly below previous year Natural gas sales volumes substantially higher Higher oil prices boost sales and income from operations Long-term natural gas supply contracts extended ahead of schedule Segment data Million Change in % Sales to third parties 5,263 4, Thereof natural gas trading 2,781 2, Intersegmental transfers Sales including intersegmental transfers 5,809 5, Income from operations before interest, taxes, depreciation and amortization (EBITDA) 2,075 1, Income from operations (EBIT) before special items 1,647 1, Income from operations (EBIT) 1,637 1, Thereof natural gas trading Operating margin (%) Assets 3,876 3, Return on operating assets (%) Research and development expenses Additions to tangible and intangible assets Sales to third parties in 2004 rose by 472 million to 5,263 million (volumes 7%, prices 6%, currencies 4%). The considerable rise in crude oil prices and the renewed expansion of business activities more than offset the negative effects of the further decline of the U.S. dollar against the euro. In 2004, sales to third parties in our natural gas trading business sector rose 154 million to 2,781 million as a result of increased volumes. Gas volume sales from all gas trading companies increased 6.1% to billion kilowatt-hours. On a consolidated basis, gas sales volumes rose from billion kilowatt-hours in 2003 to billion kilowatt-hours in Sales by WINGAS (BASF share: 65%) on the domestic market again grew much faster than the market. We have successfully expanded our foreign business, in particular in Belgium and the United Kingdom. In the exploration and production business sector, sales to third parties increased by 318 million to 2,482 million. The average price of crude oil (Brent) rose compared with the previous year by $9/barrel to $38/barrel. Because of the weak U.S. dollar, the price of oil on a euro basis rose by only 5/barrel to 31/barrel. Crude oil and natural gas production rose by 4.2% to 109 million barrels of oil equivalent. This was mainly due to the increase in natural gas volumes in the Netherlands and Argentina. Crude oil production remained slightly below the level achieved in BASF

312 Management s Analysis Gas production plant near the Jakhira oasis in Libya. Income from operations climbed 272 million to 1,637 million. Income from operations from natural gas trading, which is included in this amount, rose by 31 million to 342 million due to higher volumes. Earnings were negatively impacted by declining margins. In the exploration and production business sector, income from operations increased by 241 million to 1,295 million in 2004, mainly as a result of higher prices. Income taxes on oil production in North Africa and the Middle East that are noncompensable with German corporate income tax are not deducted from income from operations but are reported as income taxes (see Note 8 to the Consolidated Financial Statements). Assets in the Oil & Gas segment rose 165 million to 3,876 million. Additions to tangible assets mainly involved exploration and production for projects in the Netherlands, Libya, Germany and Argentina. The search for new reserves continued intensively. In 2004, 10 of 24 exploratory and expansion holes were successfully completed. At 68 million metric tons, proved reserves of crude oil at the end of 2004 were 11% below the volumes at the same time in The reserve-to-production ratio was eight years, compared with nine years in Proved natural gas reserves increased slightly by 2% to 66 billion cubic meters. Due to higher production, the reserve-to-production ratio declined by one year to 10 years. The Achimgaz joint venture with Gazprom was founded to produce natural gas and condensate from the Achimov deposit of the Urengoy gas field in western Siberia. In 2004, the foundations were laid for the start of the project in The goal of this first phase is to confirm the feasibility of developing the natural gas and condensate deposit. The development of the entire field is scheduled to begin in At the end of 2004, we signed an agreement with Gazexport, a subsidiary of Gazprom, to extend the long-term gas supply agreements until 2030 ahead of schedule. At the same time, WINGAS signed a long-term supply agreement to supply natural gas until 2019 with Eni, Italy. Furthermore, in January 2005, WINGAS acquired the largest onshore natural gas field in the United Kingdom, Saltfleetby, which will be used in the future for natural gas storage. In 2005, we expect average prices for crude oil to decline compared with 2004, but to remain well above the long-term average. As a result of the planned expansion of crude oil and natural gas production and a further increase in volumes in the natural gas trading business, we anticipate that the Oil & Gas segment will again make an important contribution to BASF Group s sales and income from operations in Earnings, however, are not expected to reach the high level seen in 2004 due to lower oil prices in euros. 48 BASF 2004

313 Management s Analysis BASF Group Business Review and Analysis Regional Results 5. Regional Results Europe: Substantial rise in sales and income from operations in a recovering market environment North America (NAFTA): Welcome improvement in income from operations South America: Double-digit sales growth and higher income from operations Asia: Strong growth continues unchanged; significant increase in earnings Region Sales by location of company Sales by location of customer Income from operations (EBIT) Million Change in % Change in % Change in % Europe 22,482 20, ,967 19, ,961 2, Thereof Germany 15,216 14, ,382 7, ,903 1, North America (NAFTA) 8,165 7, ,182 7, South America 1,733 1, ,064 1, Asia, Pacific Area, Africa 5,157 4, ,324 5, ,537 33, ,537 33, ,856 2, Europe In 2004, companies in Europe increased sales by 2,110 million compared with Because of the global economic recovery, the European economy also experienced an upturn in However, the rise in crude oil prices and the decline in the U.S. dollar exchange rate caused slight weakening of the European economy in the fourth quarter. The Chemicals segment posted significantly higher sales than in The Plastics segment also increased sales thanks to higher margins and prices. This partially offset massive increases in raw materials prices. Sales in the Performance Products segment exceeded the previous year s level despite weak demand for consumer goods and from the construction industry. The Agricultural Products division significantly improved income from operations, although sales were only slightly higher following streamlining of the product portfolio. Severe price pressure, especially for vitamins, resulted in sales just below the previous year s level in the Fine Chemicals division. Income from operations posted by companies in Europe also climbed considerably by 1,737 million to 3,961 million. Our measures to reduce fixed costs were very effective. In addition, high demand meant that higher raw materials prices could largely be passed on to customers, thus improving margins. The Ludwigshafen Site Project continued on schedule in 2004, and measures were implemented that have so far led to permanent savings of 350 million. Savings of 450 million per year are to be achieved by mid The goal is to further develop the Ludwigshafen site as one of the world s most productive and efficient chemical Verbund sites. Since 2000, we have been implementing the project Further Development of European Organization/ Structures in a series of controlled steps. Its goal is to increase competitiveness continuously in the European home market, improve market penetration and strengthen the basis for sustainable growth. We aim to achieve this by optimizing the area organization, the provision of services, as well as corporate and management structures. We aim to achieve annual savings of up to 90 million from 2006 onward. BASF

314 Management s Analysis BASF Group Business Review and Analysis Regional Results North America (NAFTA) In spite of the declining U.S. dollar, we increased sales by location of company in North America (NAFTA) by 13.2% to 8,165 million. In local currency terms, we increased sales by 24.5%. We increased sales due to higher volumes and higher sales prices. The largest contribution came from the Chemicals segment with the steam cracker in Port Arthur, Texas; the plasticizers business acquired from Sunoco, United States; and the startup of the C 4 complex in Port Arthur with our joint venture partners Total Petrochemicals, United States, and Shell, United States. At 246 million, income from operations was 236 million higher than in Stronger demand resulted in higher sales, which improved capacity utilization and margins. In addition, we reduced our fixed costs through restructuring. In the Agricultural Products & Nutrition division, an optimized product portfolio, the launch of new products and sales of the active ingredient fipronil all contributed to the improvement in income from operations. Income from operations contains expenses of 158 million, for example for litigation and for restructuring measures at BASF Corporation, United States. Through these measures, we aim to optimize the product portfolio and site structure in North America, and expect annual cost savings of more than $250 million by South America Sales by companies in South America were well above the previous year s level, rising by 17.7% to 1,733 million. In local currency terms, the increase was 25.0% and came from the dynamic economic growth in the region. The strongest sales growth was posted by the Agricultural Products division, followed by the Plastics segment. With the exception of the Plastics segment, the increase in sales was due mainly to higher volumes. The Oil & Gas segment was also able to further expand its business. Income from operations increased by 90 million to 296 million compared with 2003, primarily due to higher sales. The Agricultural Products division posted the strongest earnings growth. The contribution to earnings from our oil and gas business in Argentina again increased, while an expense was recorded for dry holes in Brazil. Asia, Pacific Area, Africa In the Asia, Pacific Area, Africa region, we increased sales by 19.8% to 5,157 million especially in China, Korea, ASEAN and India in spite of negative currency effects. In local currency terms, sales by location of company rose by 28.0%. This sales growth was due in particular to the Plastics and Chemicals segments and the Functional Polymers division, which posted doubledigit growth rates. Sales declined in the Agricultural Products & Nutrition segment due to restructuring in marketing and sales for agricultural products and the challenging competitive environment for fine chemicals. Income from operations increased significantly by 135 million compared with 2003 to 353 million. The Plastics and Performance Products segments made the greatest contributions to earnings. The Plastics segment improved profitability thanks to higher margins and sales volumes resulting from additional production capacity for TDI and MDI in Korea. Higher earnings in the Performance Products segment were due mainly to an increase in sales and better capacity utilization. 50 BASF 2004

315 Management s Analysis Research and Development Research and Development Innovation at BASF driven by customers needs and technical progress Greater expertise through global research cooperations Research and development expenditure increases slightly Global Know-how Verbund for the innovations of the future Customers needs and technological progress offer opportunities for the innovations of the future. BASF relies on its Know-How Verbund to identify ideas from both perspectives. Our operating units are in close contact with the hub of our Know-how Verbund, which consists of the three central technology platforms: Polymer Research, Specialty Chemicals Research, and Chemicals Research & Engineering. In Ludwigshafen alone, 5,000 employees work in research and development, and a further 2,000 researchers and technicians worldwide are based in development units at BASF subsidiaries or at regional R&D centers close to our markets. However, our Know-how Verbund does not stop at the boundaries to BASF s sites. In addition, approximately 1,200 cooperations provide impulses for our research activities. Of these, 65% are with universities and research institutes, and 35% with startup companies and industry partners worldwide. Efficient innovation processes save time and costs In industry worldwide, less than 1% of ideas on average give rise to successful innovations. A company that wants to grow profitably on the basis of innovations therefore needs an efficient innovation process as well as a pool of outstanding ideas to meet this demand. In stage one, we identify promising ideas for new products, processes or system solutions, before proceeding to a business evaluation in stage two. In the third stage, we use a project portfolio to prioritize projects that should be taken through to the laboratory phase in stage four. In the fifth and final stage, project management in the pilot phase and during market launch focuses on ensuring high cost and time efficiency. Innovations for the success of our customers Our research activities focus closely on the needs of the markets. Our product innovations and system solutions therefore form the basis for profitable growth for BASF and our customers. In addition, we use the potential offered by new technologies to offer our customers products with superior properties. One example is the new generation of binders for the paint industry. These novel dispersions contain nanocomposites polymer particles in which inorganic silica particles measuring 10 to 20 nanometers are distributed homogeneously. These nanomaterials significantly improve the dispersion s properties, rendering exterior paints longer lasting and more dirt-resistant. This provides a competitive advantage for our customers as well as increased quality and durability for consumers. Our customers in the automotive and electronics industry also benefit from the advantages of nanotechnology: We have improved the flow properties of PBT (polybutylene terephthalate) through the addition of nanomaterials. As a result, Ultradur High Speed reduces the time needed to manufacture components by up to 30% compared with the standard plastic. At the same time, our customers also save energy thanks to lower processing temperatures and pressures. BASF

316 Management s Analysis Research and Development Innovative technologies and future business areas Fuel cells are the power and energy sources for the homes of the future. Stationary fuel cells can transform natural gas into heat and power in an efficient and environmentally friendly manner, but the natural gas must first be desulfurized. BASF researchers have succeeded in solving this problem by using newly developed adsorbers. They also improved the catalysts for the sub sequent steps in the fuel cell in which hydrogen is produced from natural gas, making them more costefficient and more reliable over longer periods. Effective storage systems will be needed to provide mobile electronic devices with a hydrogen power supply in the future. Together with partners at the University of Michigan we are developing three-dimensional networks of simple organic compounds that are known as metal-organic frameworks. These structures can easily absorb and release large amounts of gases and therefore provide a compact, low-weight means of storing energy sources. Plant biotechnology: Seizing opportunities Plant biotechnology is opening up new routes to more productive plants for current and future generations. We can use this technology to develop plants with specific characteristics that would be almost impossible to achieve using traditional breeding techniques. We are working in the following areas: More resistant crop varieties that better withstand drought Plants with higher contents of vitamins or unsaturated fatty acids Plants that act as green factories and produce substances that could otherwise only be made using complex chemical processes In potatoes, for example, we have succeeded in increasing the proportion of one type of starch called amylopectin from 75% to almost 100%. Pure amylopectin is better suited for use in the paper, textile and adhesive industries than the starch mixture from conventional potatoes. A further advantage is that this allows the increased use of a renewable raw material. We expect to introduce the new potato to the market in Ensuring competitiveness through process innovations Removing acids from reaction mixtures is now fast and simple thanks to BASF s BASIL (Biphasic Acid Scavenging Utilizing Ionic Liquids) process. Using this unique process, the scavenging of an acid with a base results in a liquid salt instead of solid crystals that can cause problems in large-scale production. The formation of an 52 BASF 2004

317 ionic liquid means that time-consuming and expensive filtration is no longer necessary. Ionic liquids can be separated from the desired products like oil from water, and can also be recycled. In addition, the base acts as a catalyst, thus speeding up the reaction considerably. As a result, it is possible to use a narrow, continuously operated mini-reactor instead of a stirring vessel on the cubic meter scale. The mini-reactor is only thumb-sized but is nevertheless able to produce hundreds of tons of product each year. We also make the advantages of this technology available to our customers: In 2004, we started marketing our portfolio of ionic liquids together with our know-how in applying these materials under the name BASIONICS. Research and development expenses in 2004 by segment Million, % 1 Chemicals % 2 Plastics % 3 Performance Products % 4 Agricultural Products & Nutrition % 5 Oil & Gas % 6 Exploratory and biotechnological research, other % 1, % R&D expenses slightly higher than in 2003 In 2004, BASF spent 1,173 million worldwide on research and development. This corresponds to an increase of 6.2% compared with The Agricultural Products & Nutrition segment is our most research-intensive business area, accounting for 31.1% of R&D expenses in Here, we focus on product innovations, in particular in the attractive market segments of fungicides and insecticides. Costs for exploratory research and for biotechnological research that is not assigned to the segments is pooled under Other. We spent approximately 60% of research costs on developing new or improved products, 30% on developing processes or new methods, and 10% on developing new applications (excluding Oil & Gas). Germany remains the regional focus of our research work, accounting for 87% of R&D expenses. BASF

318 Management s Analysis Procurement, Production and Distribution Procurement Procurement, Production and Distribution Our strength: Global and regional procurement through the Procurement Verbund Regional concentration of purchasing activities Optimization of logistics and planning processes 1. Procurement Procurement Verbund ensures competitive advantages Worldwide in 2004, BASF procured some 500,000 different raw materials, technical goods, as well as services for plant construction and maintenance worth approximately 15.5 billion. We purchased logistics services to the value of 1.6 billion worldwide to ensure these goods reached our sites and customers on time. Our goal is to achieve lasting competitive advantages for BASF through our purchasing strength. To this end, we have intensified our worldwide Procurement Verbund. Global and regional procurement teams pool our needs so we can have more impact on the market, obtain price advantages and better ensure our supplies. Raw materials purchasing The most important materials used in production at our Verbund sites are petrochemical feedstocks such as naphtha and LPG (liquefied petroleum gas). They serve as feedstocks for the steam crackers we operate in Ludwigshafen, Germany; Antwerp, Belgium; and Port Arthur, Texas. We also purchase a large number of other raw materials as diverse as ammonia, precious metals and sugar. We coordinate purchasing of key raw materials centrally by means of global or regional product teams. We continue to use decentralized purchasing for raw materials for which demand is concentrated at only one site. Our logistics procurement unit turns the advantages arising from coordinated purchasing into favorable freight conditions. Purchasing and research units work closely with one another. Even during the product development phase, we provide research and production with procurement alternatives, since this is where a large part of the cost of future products is determined. Technical purchasing Global and regional procurement teams coordinate purchases of technical goods and services such as machines, apparatus, laboratory equipment, erection of scaffolding or installation work. On the one hand, close collaboration with our engineering and maintenance units allows us to combine our requirements quickly and efficiently with regard to suppliers. On the other hand, we can standardize goods and services and thus achieve savings. In addition, we are extensively tapping into the potential of the Asian procurement markets. Supply chain management In the course of our realignment, we have restructured our supply chain activities in order to optimize logistics and planning processes. As a result, we can design processes along the value-adding chain more effectively and more efficiently. This provides advantages for our customers and for us. E-commerce We utilize e-commerce to continuously improve efficiency of procurement processes. This has a positive impact on process times and process quality. For procuring technical goods and services, we use the electronic marketplace cc-hubwoo, in which BASF owns a stake. With more than 20 million articles, over 8,000 suppliers and more than 1 million completed transactions in 2004, cc-hubwoo is one of the world s busiest marketplaces. We now conduct procurement transactions with more than 170 suppliers via cc-hubwoo. 54 BASF 2004

319 Management s Analysis Procurement, Production and Distribution Procurement Products and Sites We have integrated the marketplace Elemica in our purchasing processes for raw materials. This allows electronic data exchange with suppliers. Elemica is used as a trading platform for chemical products by 180 customers and suppliers. We can also reach small and medium sized suppliers of raw materials through the uniform, integrated extranet solution WorldAccount. 2. Products and Sites We have assigned our activities to the individual operating divisions so that we can optimally use BASF s valueadding chains. Accordingly, our products are assigned to our divisions as follows: Chemicals Inorganics Basic chemicals such as ammonia and chlorine; inorganic specialties such as alcoholates, electronic grade chemicals and for powder injection molding (Catamold ); catalysts for hydrogenation (Selop ), for oxychlorination (Oxystar ) and styrene production (Styrostar ); glues and resins such as Kaurit and Kauramin. Petrochemicals Petrochemical feedstocks such as ethylene, propylene, butadiene and benzene; technical gases; plasticizers (Palatinol, Palamoll, Hexamoll ) and plasticizer raw materials; solvents such as butanol and glycol ethers (Solvenon ); alkylene oxides and glycols. Intermediates Amines such as methylamine and ethanolamine; polyalcohols such as neopentylglycol and hexanediol; butanediol and its derivatives such as polytetrahydrofuran (PolyTHF ); carboxylic acids, phosgene derivatives, glyoxal and its derivatives, as well as chiral intermediates (ChiPros ). Plastics Styrenics Styrene; styrene-based polymers such as a polystyrene and expandable polystyrene (Styropor /Neopor ); styrene copolymers such as ABS (Terluran ) and ASA (Luran S); specialty foams such as XPS (Styrodur ) and MF (Basotect ). Performance Polymers Polyamide precursors such as caprolactam; fiber intermediates and extrusion grades such as PA 6 (Ultramid B); materials such as compounded PA 6 and PA 6,6 (Ultramid A and B), PBT (Ultradur ), POM (Ultraform ), and PES and PSU (Ultrason E and S). Polyurethanes Basic polyurethane products such as isocyanates (Lupranat ) and polyols (Lupranol ); systems, for example for flexible foams (Elastoflex ); specialty elastomers such as TPU (Elastollan ). Performance Products Performance Chemicals Raw materials for detergents and cleansers (Lutensol, Sokalan, Trilon ); textile chemicals (Helizarin, Kieralon, Fixapret ) and leather chemicals (Relugan, Luganil, Basyntan ); pigments and special pigment preparations (Heliogen, Paliogen ); lubricant and fuel additives (Keropur, Oppanol, Keroflux ) as well as raw materials for coatings (Laromer ). Coatings Automotive OEM and refinish coatings; industrial coatings (Glasurit, R-M, Salcomix ); Suvinil decorative paints (South America). Functional Polymers Acrylic acid and acrylates; acrylate and styrene/butadiene dispersions (Acronal, Styronal, Styrofan, Butofan, Butonal ); chemicals for paper production and finishing (Afranil, Basazol, Basofloc, Basonal, Basoplast, Fastusol, Polymin ); superabsorbents (ASAP, HySorb, Luquasorb ). BASF

320 Management s Analysis Procurement, Production and Distribution Products and Sites Marketing and Sales Agricultural Products & Nutrition Agricultural Products Primarily crop protection products to protect crops from fungi (fungicides, e.g., Opera, Headline, Allegro, Jewel, Opus, Comet, Polyram, Cantus, Bellis ), insects (insecticides, e.g., fipronil, Fastac, Phantom, Mythic, Termidor, Counter ) and weeds (herbicides, e.g., Basagran, Banvel, Outlook, Pursuit, Lightning, Stomp, Prowl, Pico ), seed-treatment agents (e.g., Jockey ), growth regulators (e.g., Cycocel, Medax Top). Fine Chemicals Products for animal and human nutrition as well as for the pharmaceuticals and cosmetics industries: Lutavit (feed) vitamins, Lucantin (feed) and Lucarotin (food) carotenoids, pharmaceutical active ingredients (no trade names), Kollidon (binder) and Kollicoat (coating) polymers, flavors and fragrances (e.g., Lysmeral ), UV absorbers (Uvinul ), amino acids (Sewon-L-lysine), enzymes (Natuphos ), organic acids (Formi ) and Luprosil (propionic acid preservative) and other fine chemicals. Oil & Gas Exploration and production of crude oil and natural gas as well as crude oil and natural gas trading. BASF s sites We own and operate 190 production sites in 41 countries. BASF s largest site is located in Ludwigshafen, Germany. In addition, BASF operates regional units, distribution centers and research and development facilities worldwide. The Verbund is one of BASF s greatest strengths. We establish profitable value-adding chains by linking production plants. By-products from one plant can be used as raw materials in another plant. Linking production plants also saves energy and resources (Energy Verbund). This principle was first applied in Ludwigshafen and has meanwhile been further developed and extended to further sites around the world. Verbund sites Production plants Ludwigshafen 250 Antwerp, Belgium 54 Geismar, Louisiana 20 Freeport, Texas 12 Kuantan, Malaysia 12 We are currently building a second Verbund site in Asia in Nanjing, China, together with our partner SINOPEC, China. The first production plant started operations at the end of We plan to put all plants into operation by mid Marketing and Sales We align BASF s business models to the needs of our customers. Standard products have to be supplied in a defined quality, reliably and at an appropriate price. With specialties, we offer customers tailor-made solutions for their problems. Our focus is on mutual success. We want to achieve this not only by cooperating with customers at an early phase of development, but also by working with them to constantly improve existing products, applications and processes. We organize our marketing and sales activities according to the various products in our segments: In our Chemicals segment, we supply standard products to our customers in large volumes with low marketing expenses and usually without intermediaries. We are strengthening and extending our range of inorganic and organic specialties. In order to open up new applications and gain new customers, we are expanding our activities to market innovations and tailor-made solutions. 56 BASF 2004

321 Management s Analysis Procurement, Production and Distribution Marketing and Sales BASF s Plastics segment offers standard products, specialties and products tailored to specific customers. Standard products are usually distributed in large quantities and are associated with low marketing expenses. For specialty and customized products, we often work together with our customers on new applications at an early stage of development. In 2004, we posted e-commerce sales of more than 2 billion. Depending on the business area, this corresponds to up to 80% of sales. The Performance Products segment produces a large number of products, formulations and systems. What matters to customers are a product s technical features and its performance. This increases both costs for customer service by our sales staff at the customer s site, as well as marketing expenses. We maintain technical application facilities close to our customers in the most important regions. The Agricultural Products division offers a highvalue product portfolio tailored to the needs of the markets. Innovative products and services, a local presence and quality are the factors for success in partnership with our customers: with wholesalers as direct purchasers, with farmers as the users of our products, with processors, and with the food trade as the farmer s contractual partner. Our Fine Chemicals division supplies specialties through a global marketing and sales system. The local presence of regional business units ensures customer orientation and competency in our key markets animal and human nutrition, cosmetics and pharmaceuticals. In the Oil & Gas segment, we sell natural gas primarily to wholesalers through our subsidiaries WINGAS and Wintershall Erdgas Handelshaus. We also offer customers transport and storage services. We market the majority of our crude oil through our oil trading company in Switzerland. In 2004, selling expenses, which include distribution, shipping, marketing and advertising costs, were 4,523 million compared with 4,519 million in Of this amount, about 127 million was spent on sales promotions and product advertising. Corporate advertising costs totaled 19.1 million. BASF

322 Management s Analysis Employees Employees Qualified and committed employees from around the world International opportunities and diverse challenges Employees have a stake in earnings and in the company The BASF Group will be successful in the long run only if it has qualified and motivated employees around the world. Our management team has members from some 30 different nations. To attract, retain and foster the best talent, we create a working environment in which our employees can perform at their best to make our company successful. Employees by region % % Europe 57, Thereof Germany 46, Thereof BASF Aktiengesellschaft 35, North America 10, South America 4, Asia, Pacific Area, Africa 9, , The number of BASF Group employees including those with limited-term contracts declined by 5,204, or 6.0%, to 81,995 at the end of Due to changes in the scope of consolidation as well as acquisitions and divestitures, the BASF Group s workforce declined by 4,360 through year-end One important reason for this change was the sale of BASF Printing Systems, which reduced the number of employees worldwide by approximately 2,000: almost 1,900 throughout Europe and, in Germany, around 750 employees of BASF Drucksysteme GmbH, Stuttgart. Following the completion of the sale of our carpet fibers business in 2003 to Honeywell, United States, approximately 1,200 employees transferred to Honeywell in The BASF Group also employed 2,610 young people in trainee programs last year. In November 2004, management and employee representatives signed an agreement that provides clear perspectives for Ludwigshafen, the BASF Group s largest site. Under the terms of the Stability through Change agreement, the number of employees of BASF Aktiengesellschaft will be approximately 32,000 by the end of Although this agreement remains in force until 2010, the target headcount may be adjusted depending on natural fluctuation. Enforced redundancies will be avoided. The precondition for this agreement is that the site is not impacted by economic factors or negative circumstances that endanger BASF Aktiengesellschaft s competitiveness to such an extent that specific structural measures are necessary. The viability of the agreement will be reviewed with employee representatives each year. We are implementing a two-phase restructuring program in our North American business. In the course of these restructuring measures, the workforce is being reduced by approximately 1,100 positions (Phase I). A further workforce reduction is scheduled in the second phase of restructuring. 58 BASF 2004

323 Trends in personnel costs Personnel costs declined by approximately 70 million to 5,819 million in the past year. Costs can be broken down as follows: Million Change in % Wages and salaries 4,579 (1.6) Social security contributions and expenses for pensions and assistance 1, Thereof for pension benefits 431 (0.4) 5,819 (1.2) In Germany alone, we invested 109 million in continuing education and training in Of this amount, 31 million was spent on continuing education programs and 78 million on vocational training. At BASF Aktiengesellschaft in Ludwigshafen, we considerably increased efficiency by consolidating training centers and streamlining training processes. Sharing in the company s success Since 1999, BASF has been promoting employee investment in the company with the plus program. In 2004, some 36% of employees of BASF Aktiengesellschaft and BASF companies in Germany took advantage of the opportunity to invest part of their annual bonus in BASF shares. Last year, employees bought a total of 464,480 BASF shares under this program. If the employees keep their shares for a longer period, they receive additional free shares from the company (see Note 26 to the Consolidated Financial Statements). A number of BASF companies in other countries also offered their workers employee shares in Since April 1999, senior executives of the BASF Group have been able to participate in the BOP stock option program. The program links a significant proportion of their compensation to the long-term performance of our shares. In 2004, 78% of some 1,000 senior executives eligible to participate took part worldwide and invested up to 30% of their variable compensation in BASF shares. For each share purchased, BASF grants stock option rights whose value is paid out if ambitious price targets are achieved for BASF shares. The options may be exercised following a vesting period of two years (BOP 2001 onward) or three years (BOP 1999 and 2000). BASF

324 Management s Analysis Organization of the BASF Group Corporate Legal Structure Organization of the BASF Group Twelve operating divisions responsible for business activities and earnings High standard of corporate governance through Values and Principles and Compliance Code Creation of a system to document information and control systems for financial reporting in accordance with the Sarbanes-Oxley Act (SOX) 1. Corporate Legal Structure BASF Aktiengesellschaft in Ludwigshafen, Germany, is the parent company of the BASF Group and its largest operating business. All of its shares are widely held and are traded on stock exchanges such as Frankfurt, London and New York. BASF s subsidiaries, associated companies, affiliated companies and joint ventures are headquartered in almost every country that is important to the global chemical market. The majority of the companies cover activities from a number of operating divisions; other companies concentrate on specific areas, such as coatings or polyurethanes. Oil and gas operations are conducted by Wintershall AG and its affiliated companies. The BASF Group Consolidated Financial Statements include BASF Aktiengesellschaft, and 147 fully consolidated subsidiaries. We consolidate 12 joint ventures conducted with partners on a proportional basis. In addition, three major associated companies in which we have a 20% to 50% interest, as well as three joint ventures and 13 affiliated companies are reported in the financial result using the equity method (see Note 1 to the Consolidated Financial Statements for further information on the scope of consolidation). In this way, we account for more than 98% of BASF s sales and earnings. In addition to the participations accounted for in the Consolidated Financial Statements, we have a stake in more than 100 additional small companies that are not material to BASF s operations, either individually or in the aggregate. The List of Shares Held contains all of the companies in which BASF has a participation and is published on the Internet at e/reports; it can also be obtained from BASF Aktiengesellschaft. 60 BASF 2004

325 Management s Analysis Organization of the BASF Group Organizational Structure Management and Supervisory Boards 2. Organizational Structure of the BASF Group The BASF Group is organized in 12 operating divisions that bear bottom-line responsibility and manage the regional and global business units. The operating divisions use income from operations (EBIT) after cost of capital as their key performance and management indicator. Each operating division reports its EBIT after cost of capital every month. For fi nancial communications, the operating divisions are combined in the segments Chemicals, Plastics, Performance Products, Agricultural Products & Nutrition, and Oil & Gas (see Note 4 to the Consolidated Financial Statements). Business operations are run by 55 regional and global business units, organized along business or product lines. As profit centers, they are responsible for all business operations from production to marketing and sales and their processes are customer-oriented. BASF s business strategy is planned jointly by the Board of Executive Directors and the operating divisions together with six regional divisions. For reporting purposes, the six regional divisions are combined in four regions Europe; North America (NAFTA); South America; and Asia, Pacific Area, Africa (see Note 4 to the Consolidated Financial Statements). In addition, three corporate divisions (Legal, Taxes & Insurance; Strategic Planning & Controlling; and Finance) as well as four corporate departments (Communications BASF Group, Global HR Executive Management & Development, Investor Relations and Corporate Audit) support the Board of Executive Directors in the management of the BASF Group. The competence centers (Polymer Research; Chemicals Research & Engineering; Specialty Chemicals Research; Human Resources; Environment, Safety & Energy; Global Procurement & Logistics; Information Services; Corporate Engineering; Occupational Medicine & Health Protection; and University Relations & Research Planning) also assume Group-wide coordination activities. 3. Management and Supervisory Boards Board of Executive Directors As of December 31, 2004, there were eight members on the Board of Executive Directors of BASF Aktiengesellschaft. DR. JÜRGEN HAMBRECHT Chairman Responsibilities: Legal, Taxes & Insurance; Strategic Planning & Controlling; Executive Management & Development; Communications BASF Group; Investor Relations First appointed: 1997 (Chairman since 2003) Term expires: 2007 Memberships: Supervisory board memberships (excluding internal memberships): Bilfinger Berger AG (supervisory board member) EGGERT VOSCHERAU Vice Chairman Responsibilities: Industrial Relations Director; Human Resources; Environment, Safety & Energy; Ludwigshafen Verbund Site; Antwerp Verbund Site; Occupational Medicine & Health Protection; Europe; BASF Schwarzheide GmbH First appointed: 1996 Term expires: 2006 Memberships: Supervisory board memberships (excluding internal memberships): HDI Haftpflichtverband der Deutschen Industrie VVaG (supervisory board member) Talanx AG (supervisory board member) Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: BASF Schwarzheide GmbH (supervisory board chairman) Comparable German and non-german controlling bodies: Basell N.V. (supervisory board member) BASF Antwerpen N.V. (administrative council member) BASF

326 Management s Analysis Organization of the BASF Group Management and Supervisory Boards DR. KURT BOCK Responsibilities: Finance; Global Procurement & Logistics; Information Services; Corporate Audit; South America First appointed: 2003 Term expires: 2007 Memberships: Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Wintershall AG (supervisory board member) Comparable German and non-german controlling bodies: Basell N.V. (supervisory board member) The Germany Fund Inc. (member of the board of directors) DR. JOHN FELDMANN Responsibilities: Styrenics; Performance Polymers; Polyurethanes; Oil & Gas; Polymer Research First appointed: 2000 Term expires: 2009 Memberships: Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Wintershall AG (supervisory board chairman) Comparable German and non-german controlling bodies: Basell N.V. (supervisory board chairman) DR. ANDREAS KREIMEYER Responsibilities: Functional Polymers; Performance Chemicals; Asia First appointed: 2003 Term expires: 2007 Memberships: Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: BASF Coatings AG (supervisory board member) KLAUS PETER LÖBBE Responsibilities: Coatings; North America (NAFTA) First appointed: 2002 Term expires: 2006 Memberships: Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: BASF Coatings AG (supervisory board chairman) DR. STEFAN MARCINOWSKI Responsibilities: Research Executive Director; Inorganics; Petrochemicals; Intermediates; Chemicals Research & Engineering; Corporate Engineering; University Relations & Research Planning; BASF Future Business GmbH First appointed: 1997 Term expires: 2007 Memberships: Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Wintershall AG (supervisory board member) PETER OAKLEY Responsibilities: Agricultural Products; Fine Chemicals; Specialty Chemicals Research; BASF Plant Science GmbH First appointed: 1998 Term expires: 2008 Supervisory Board The Supervisory Board of BASF Aktiengesellschaft comprises 20 members. Ten members are elected by shareholders at the Annual Meeting, and the remaining 10 are elected by employees. With the exception of Hans Dieter Pötsch, the shareholder representatives were elected at the Annual Meeting on May 6, Hans Dieter Pötsch was appointed by the district court of Ludwigshafen on March 2, 2004 to replace Helmut Werner, who died on February 6, With the exception of Ralf Sikorski and Michael Vassiliadis, the employee representatives were elected on February 25, 2003 in accordance with the German Codetermination Act. Effective August 7, 2003, Ralf Sikorski was appointed by the district court of Ludwigshafen to replace Gerhard Zibell, who resigned from the Supervisory Board with effect from July 31, Effective August 1, 2004, Michael Vassiliadis, who had been elected to the Supervisory Board by employees, replaced Dr. Jürgen Walter, who retired effective July 31, The current term of all members of the Supervisory Board expires at the end of BASF Aktiengesellschaft s Annual Meeting in BASF 2004

327 Members of the Supervisory Board (as of December 31, 2004) DR. JÜRGEN F. STRUBE, Mannheim Chairman of the Supervisory Board of BASF Aktiengesellschaft Former Chairman of the Board of Executive Directors of BASF Aktiengesellschaft Supervisory board memberships (excluding internal memberships): Allianz Lebensversicherungs-AG (supervisory board member) Bayerische Motoren Werke AG (supervisory board member) Bertelsmann AG (supervisory board deputy chairman) Commerzbank AG (supervisory board member) Fuchs Petrolub AG (supervisory board chairman) Hapag-Lloyd AG (supervisory board member) Linde AG (supervisory board member) ROBERT OSWALD, Altrip Deputy Chairman of the Supervisory Board of BASF Aktiengesellschaft Chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft and chairman of the joint works council of the BASF Group RALF BASTIAN, Neuhofen Member of the works council of the Ludwigshafen site of BASF Aktiengesellschaft WOLFGANG DANIEL, Limburgerhof Deputy chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft PROFESSOR DR. FRANÇOIS N. DIEDERICH, Zurich Professor at Zurich Technical University MICHAEL DIEKMANN, Munich Chairman of the Board of Management of Allianz AG Supervisory board memberships (excluding internal memberships): Linde AG (supervisory board deputy chairman) Lufthansa AG (supervisory board member) Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Allianz Global Investors AG (supervisory board chairman) Allianz Lebensversicherungs-AG (supervisory board chairman) Allianz Versicherungs-AG (supervisory board chairman) Dresdner Bank AG (supervisory board chairman) Comparable German and non-german controlling bodies: Assurances Générales de France (administrative council member) Riunione Adriatica di Sicurtà S.p.A. (administrative council member) DR. TESSEN VON HEYDEBRECK, Frankfurt (Main) Member of the Board of Managing Directors of Deutsche Bank AG Supervisory board memberships (excluding internal memberships): BVV Versicherungsverein des Bankgewerbes a.g. (supervisory board member) Dürr AG (supervisory board member) Internal memberships as defined in Section 100 (2) of the German Stock Corporation Act: Deutsche Bank Privat- und Geschäftskunden AG (supervisory board member) DWS Investment GmbH (supervisory board member) Comparable German and non-german controlling bodies: Deutsche Bank OOO (supervisory board chairman) Deutsche Bank Luxembourg S.A. (administrative council chairman) Deutsche Bank Polska S.A. (supervisory board chairman) Deutsche Bank Rt. (supervisory board chairman) Deutsche Bank Trust Corp. (supervisory board member) DB Trust Company America (supervisory board member) ARTHUR L. KELLY, Chicago Chief executive of KEL Enterprises L.P. Supervisory board memberships (excluding internal memberships): Bayerische Motoren Werke AG (supervisory board member) Comparable German and non-german controlling bodies: Data Card Corporation (member of the board of directors) Deere & Company (member of the board of directors) Northern Trust Corporation (member of the board of directors) Snap-on Incorporated (member of the board of directors) ROLF KLEFFMANN, Wehrbleck Chairman of the works council of Wintershall AG s Barnstorf oil plant MAX DIETRICH KLEY, Heidelberg Lawyer Former Vice Chairman of the Board of Executive Directors of BASF Aktiengesellschaft Supervisory board memberships (excluding internal memberships): BASF

328 Management s Analysis Organization of the BASF Group Management and Supervisory Boards Bayerische HypoVereinsbank AG (supervisory board member) HeidelbergCement AG (supervisory board member) Infineon Technologies AG (supervisory board chairman) Schott AG (supervisory board member) SGL Carbon AG (supervisory board chairman) PROFESSOR DR. RENATE KÖCHER, Allensbach Managing Director of the Institut für Demoskopie Allensbach, Gesellschaft zum Studium der öffentlichen Meinung mbh Supervisory board memberships (excluding internal memberships): Allianz AG (supervisory board member) MAN AG (supervisory board member) Since January 25, 2005: Infineon Technologies AG (supervisory board member) EVA KRAUT, Ludwigshafen Chairman of the works council of BASF IT Services GmbH, Ludwigshafen ULRICH KÜPPERS, Ludwigshafen Regional manager of the Rhineland-Palatinate/Saarland branch of the Mining, Chemical and Energy Industries Union (IG BCE) Supervisory board memberships (excluding internal memberships): Klinikum der Stadt Ludwigshafen ggmbh (supervisory board deputy chairman) Saarenergie AG (supervisory board deputy chairman) Technische Werke Ludwigshafen AG (TWL) (supervisory board deputy chairman) Verkehrsbetriebe Ludwigshafen GmbH (supervisory board member) Villeroy & Boch AG (supervisory board member) KONRAD MANTEUFFEL, Bensheim Member of the works council of the Ludwigshafen site of BASF Aktiengesellschaft Supervisory board memberships (excluding internal memberships): BASF Pensionskasse VVaG (supervisory board deputy chairman) LUWOGE Wohnungsunternehmen der BASF GmbH (supervisory board member) DR. KARLHEINZ MESSMER, Weisenheim am Berg Plant manager at the Ludwigshafen site of BASF Aktiengesellschaft HANS DIETER PÖTSCH, Wolfsburg Member of the Board of Management of Volkswagen AG Supervisory board memberships (excluding internal memberships): Allianz Versicherungs AG (supervisory board member) Bizerba GmbH (supervisory board member) DR. HERMANN SCHOLL, Stuttgart Chairman of the Supervisory Council of Robert Bosch GmbH and Managing Director of Robert Bosch Industrietreuhand KG Supervisory board memberships (excluding internal memberships): Allianz AG (supervisory board member) Robert Bosch GmbH (supervisory board chairman) Comparable German and non-german controlling bodies: Robert Bosch Internationale Beteiligungen AG (administrative council member) Robert Bosch Corporation (member of the board of directors) Sanofi-Aventis S.A. (administrative council member) RALF SIKORSKI, Ludwigshafen Manager of the Ludwigshafen branch of the Mining, Chemical and Energy Industries Union (IG BCE) Supervisory board memberships (excluding internal memberships): Pirelli Deutschland AG (supervisory board member) ROBERT STUDER, Zurich Former Chairman of the Supervisory Board of the Union Bank of Switzerland Comparable German and non-german controlling bodies: Espirito Santo Financial Group S.A. (administrative council member) Renault S.A. (administrative council member) Schindler Holding AG (administrative council member) MICHAEL VASSILIADIS, Hemmingen Member of the Central Board of Executive Directors of the Mining, Chemical and Energy Industries Union (IG BCE) Supervisory board memberships (excluding internal memberships): Henkel KGaA (supervisory board member) K+S AG (supervisory board deputy chairman) K+S Kali GmbH (supervisory board deputy chairman) mg Technologies AG (supervisory board member) Retired effective February 6, 2004: HELMUT WERNER, Stuttgart (died February 6, 2004) Retired effective July 31, 2004: DR. JÜRGEN WALTER, Neustadt am Rübenberge 64 BASF 2004

329 Compensation of directors and officers For the year ended December 31, 2004, compensation paid to the members of the Board of Executive Directors totaled 14.0 million; the members of the Supervisory Board received 2.7 million. Million Board of Executive Directors emoluments Thereof: fixed payments variable payments Exercise of options rights granted in 1999 and Supervisory Board emoluments Thereof: fixed payments variable payments Total emoluments of former members of the Board of Executive Directors and their surviving dependents Exercise of option rights by former members of the Board of Executive Directors and their surviving dependents Pension provisions for former members of the Board of Executive Directors and their surviving dependents Loans to the Board of Executive Directors and the Supervisory Board Contingent liability for the benefit of the Board of Executive Directors and the Supervisory Board The return on assets is used as the criterion to determine the size of variable performance-related bonuses. In 2004, the members of the Board of Executive Directors were granted 120,356 stock options under the BASF stock option program. In 2004, the issue of option rights resulted in personnel costs totaling 3.9 million. Of this amount, 0.9 million was related to option rights issued in 2004 and 3.0 million to option rights issued in 1999 through In 2004, the exercising of option rights granted under the BASF stock option program in 1999 and 2000 resulted in cash payments totaling 0.6 million to members of the Board of Executive Directors and 1.3 million to previous members or their surviving dependants. The cash payment does not influence personnel costs associated with the issuing of option rights. BASF

330 Management s Analysis Organization of the BASF Group Management and Supervisory Boards The compensation of the Supervisory Board is defined in the Articles of Association of BASF Aktiengesellschaft. Pursuant thereto, each member of the Supervisory Board is reimbursed for the past year for out-ofpocket expenses and for value-added tax to be paid with regard to the Board membership. In addition, he or she receives a fixed annual payment of 25,000 and a variable performance-related bonus amounting to 3,500 for each 0.05 by which the dividend paid to shareholders in a given year exceeds For the year ended December 31, 2004, this will be 98,000, on the basis of the proposed dividend of 1.70 that will be submitted to the Annual Meeting on April 28, The chairman of the Supervisory Board receives a payment of twice and the deputy chairman a payment of 1.5 times this amount. In addition, the company grants members of the Supervisory Board a fee of 500 for attending a meeting of the Supervisory Board or one of its committees. Each member of the Audit Committee of the Supervisory Board receives an additional payment of 25,000. The chairman of this committee receives a payment of twice and a deputy chairman a payment of 1.5 times this additional amount. Directors and officers liability insurance (D&O insurance) BASF has taken out liability insurance that covers the activities of members of the Board of Executive Directors and the Supervisory Board (D&O insurance). The policy provides for a suitable level of deductibles. Share ownership by members of the Board of Executive Directors and the Supervisory Board No member of the Board of Executive Directors or the Supervisory Board owns shares in BASF Aktiengesellschaft and related options or other derivatives that account for 1% or more of the share capital. Furthermore, the entire holdings by members of the Board of Executive Directors and the Supervisory Board account for less than 1% of the shares issued by the company. Since July 1, 2002, in accordance with Section 15a of the German Securities Trading Act, all members of the Board of Executive Directors and the Supervisory Board, as well as certain of their relatives, are required to disclose the purchase or sale of BASF shares and other related rights to the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) and to the company if transactions within 30 days exceed the threshold of 25,000. Since the German Investor Protection Act (Anlegerschutzverbesserungsgesetz) came into force on October 30, 2004, this threshold is 5,000 per year. In 2004, there were a total of seven reportable transactions in which members of the Board of Executive Directors and Supervisory Board purchased or sold BASF shares. The transactions involved between 500 and 3,000 shares with a per-share price of between and 50. All reported transactions are published on the Internet at governance_e. 66 BASF 2004

331 Management s Analysis Organization of the BASF Group Corporate Governance 4. Corporate Governance Corporate governance refers to the entire system of managing and overseeing a company as well as all internal and external regulatory and monitoring mechanisms. Effective and transparent corporate governance guarantees that BASF is managed and monitored in a responsible and value-driven manner. This fosters the confidence of our domestic and international investors, the financial markets, our business partners, employees and the public in the management and supervision of the company. The German Corporate Governance Code was published in It represents a major step forward in the capital market-driven development of statutory provisions and practical implementation of corporate governance. We welcome the Code and the objectives it sets out. We follow the recommendations of the German Corporate Governance Code in its revised version of May 2003 with a few exceptions. You can find the 2004 joint Declaration of Conformity by the Board of Executive Directors and the Supervisory Board at the end of the Financial Report. The Declaration of Conformity and the German Corporate Governance Code are available on our website at Because BASF s shares are listed on the New York Stock Exchange (NYSE), BASF is also subject to U.S. capital market legislation, including the Sarbanes-Oxley Act (SOX) of SOX contains a number of new corporate governance regulations. To ensure that they are observed, the Supervisory Board has, for example, established an Audit Committee and introduced a new approval procedure for procuring non-audit services from auditors. We are currently establishing a system to document the information and control systems for financial reporting within the BASF Group that will be subject to attestation by our auditors in accordance with Section 404 of SOX for the first time in our 2005 Consolidated Financial Statements. Thanks to this system, we will be better able to evaluate and confirm the completeness and accuracy of our reporting and the effectiveness of the internal control system. In general, the new U.S. regulations considerably increase documentation and review requirements as well as the associated expenses. Corporate management and control by the Board of Executive Directors and Supervisory Board In contrast to the situation in many other countries, two separate bodies work together at German stock corporations: a Board of Executive Directors and a Supervisory Board. Appointments to the two bodies are strictly separate. A member of the Supervisory Board cannot simultaneously be a member of the Board of Executive Directors. BASF s Board of Executive Directors is responsible for the management of the company and represents BASF Aktiengesellschaft in all business undertakings with third parties. Its activities and decisions are geared to the company s interests and it is dedicated to the goal of increasing the company s value in the long term. The decisions made by the Board of Executive Directors are always based on a simple majority. In the case of a tied vote, the casting vote is given by the Chairman of the Board. The Board of Executive Directors reports to the Supervisory Board regularly, comprehensively and in a timely manner on all material matters concerning the company with regard to strategic planning, business development, risk issues and risk management. Furthermore, it agrees corporate strategy with the Supervisory Board. Where required by the Articles of Association of BASF Aktiengesellschaft, the Board of Executive Directors must have the approval of the Supervisory Board for certain transactions before they are concluded. Such cases include the purchase of corporate shareholdings in excess of 100 million, and the commencement of new or the termination of existing business activities. The Supervisory Board of BASF Aktiengesellschaft appoints members of the Board of Executive Directors and monitors and advises the Board of Executive Directors on management issues. The Supervisory Board of BASF Aktiengesellschaft comprises 20 members and in accordance with the German Codetermination Act consists in equal parts of shareholder representatives elected by shareholders at the Annual Meeting and employee representatives. Supervisory Board resolutions require a simple majority. In the case of a tied vote, a second vote is held and the Chairman of the Supervisory Board may cast a deciding vote. BASF

332 Management s Analysis Organization of the BASF Group Corporate Governance Alongside the Mediation Committee, the Supervisory Board has established a Nomination and Compensation Committee (Personalausschuss) and, since 2003, an Audit Committee. The Nomination and Compensation Committee is charged with setting Board members remuneration and related contractual issues. It comprises Supervisory Board Chairman Dr. Jürgen F. Strube (chairman) as well as Supervisory Board members Robert Oswald, Dr. Tessen von Heydebreck and Michael Vassiliadis. The Audit Committee makes preparations for the negotiations and resolutions of the Supervisory Board for the approval of the Consolidated Financial Statements of BASF Aktiengesellschaft as well as BASF Group, reviews the Annual Report on Form 20-F that has to be submitted to the U.S. Securities and Exchange Commission and deals with risk monitoring and internal accounting controls. The Audit Committee is also responsible for business relations with the company s auditors: It prepares the Supervisory Board s proposal to the Annual Meeting regarding the selection of an auditor, monitors the auditor s independence, defines the key aspects of the audit together with the auditor, agrees the auditing fees, and establishes the conditions for the provision of non-audit services. The Audit Committee comprises Max Dietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch and Michael Vassiliadis. The chairman of the Audit Committee is Max Dietrich Kley, who like Hans Dieter Pötsch, has been appointed Audit Committee Financial Expert. The members of the Board of Executive Directors and the Supervisory Board are listed together with remuneration details on pages 61 to 66. Shareholders rights At Annual Meetings, shareholders have rights of participation and supervision. Each BASF share represents one vote. Shareholders may exercise their voting rights at Annual Meetings either personally or through a representative of their choice or through a companyappointed proxy authorized by shareholders to vote according to their instructions. There are neither voting caps to limit the number of votes a shareholder may cast nor special voting rights. BASF has fully implemented the principle of one share one vote. All shareholders are entitled to participate in Annual Meetings, to speak to and request information from the Board relating to items on the agenda to the extent necessary to make an informed judgment of the company s affairs. Values and Principles of the BASF Group/ Code of Conduct In order to guarantee a high standard of corporate governance, we have published the Values and Principles of BASF Group, and the Code of Conduct/Compliance Program. These lay down our business principles and guidelines for the conduct of all activities within the BASF Group. The Code of Conduct describes in detail the conduct we expect from BASF employees based on the principle of integrity. Key areas include observing all relevant legislation, in particular antitrust and competition legislation, sanctions and export controls including those on chemical weapons, labor laws and legislation relating to plant safety. Other issues are bans on insider dealing and providing or receiving bribes from business partners or state officials, and the need to treat BASF s assets responsibly. The Corporate Audit department together with BASF s Chief Compliance Officer monitor compliance on a regular basis. The Values and Principles of the BASF Group and the Code of Conduct are also available on the Internet at corporate/overview/. 68 BASF 2004

333 Management s Analysis Risk Management System and Risks of Future Development Risk Management System and Risks of Future Development Risk Management System Goals of risk management Risk management has the goal of identifying risks as early as possible, limiting business losses by means of suitable measures, and avoiding risks that pose a threat to the company s existence. Corresponding action principles are derived from our Values and Principles. We aim to avoid risks as far as possible through high safety standards for plant operation to protect man and the environment, codes of conduct to ensure legal behavior, review committees to verify important business decisions, as well as organizational measures to prevent abuse of authority. Regular risk analyses at the corporate level are carried out for example by the corporate divisions: Legal, Taxes & Insurance; Human Resources; Finance; Strategic Planning & Controlling; and Global Procurement & Logistics. Specific individual risks to operating divisions and units are registered and monitored centrally. Defined and regular communication tools ensure that risks are reported to the Board of Executive Directors and provide an up-to-date and overall picture of the current and future risks to BASF. Internal monitoring BASF s Corporate Audit department which acts on behalf of the Board of Executive Directors operates throughout BASF Aktiengesellschaft and the BASF Group. The department checks: adherence to directives, guidelines, approval limits and fair trade regulations; asset security and the attainment of an appropriate rate of return on invested capital; organization and processes for their efficiency, effectiveness and propriety; the functionality and reliability of the risk management system; and the reliability of reporting under it. Internal monitoring also takes place in special committees that meet regularly. At the highest management level, they analyze our businesses, expected outcomes and their associated risks, developing trends, and structural developments. For example, this is how hedging strategies for interest rate and currency risks are established. Set approval and controlling procedures must be observed for certain levels of capital expenditure. Basic elements of internal monitoring involve general principles of risk avoidance such as separation of duties and the four-eyes principle for important transactions, as well as guidelines such as those for rate hedging, investments or the use of derivative financial instruments. Risk controlling The corporate divisions Strategic Planning & Controlling and Finance handle centralized risk controlling on an ongoing basis. They inform the Board of Executive Directors of significant risks on a continuous basis during the year by means of risk reports that combine decentrally identified risks. The corporate division Strategic Planning & Controlling communicates on risk management and ensures that continued development of risk management takes place in all operating units, corporate divisions, competence centers and regional divisions worldwide. In addition, the division coordinates identification of all risks significant to BASF throughout the company and systematically evaluates them according to uniform standards. Responsibilities of the corporate division Finance include managing the equity and debt structure of BASF Group companies and ensuring adequate financing capacity in the Group. In addition, the division provides financial analyses to support the Board of Executive Directors and the operating divisions in decisions related to acquisitions and divestitures. Twelve operating divisions bear the overall responsibility for business operations in the BASF Group. It therefore follows that risk management is based in these decentralized units. We have also established decentralized risk controlling in the competence centers and regional divisions. BASF

334 Management s Analysis Risk Management System and Risks of Future Development Decentralized risk controlling works together with the centralized units to reduce global risks that could have cumulative or interdivisional effects. Early warning system We use key data and indicators to constantly monitor certain risk areas. The monthly risk reports in the event that a defined risk threshold is reached ensure that risks are recognized in good time and immediately reported to the responsible decision-makers. Characteristics of the risk management system BASF uses various tools for the early recognition and identification of risks, for example risk identification checklists. If assessable, risks are quantified in terms of impact on earnings and the likelihood of occurrence. As well as receiving monthly reports from the divisions, the Board of Executive Directors continuously receives aggregated reports on operational risks. These reports also contain analyses of financial and economic risks. The reports are based on computer-supported compilation of risk reports by the responsible decentral and central risk specialists, who are appointed for the various divisions, regions and sites. Risks of Future Development Overall risk At the present time and in the foreseeable future there are no individual risks that pose a threat to the company s existence. Nor do the aggregate risks threaten the ongoing existence of the BASF Group. Annually as well as continuously, our independent auditors and Corporate Audit department examine the functioning and effectiveness of our risk management system, as well as its development and integration into business processes. Economic risk We do not expect any pronounced risks in We consider the continued volatility of oil prices and the exchange rate of the U.S. dollar to be possible risks for global economic development. We believe it unlikely that there will be a sharp increase in interest rates, in particular in the United States, that will have a negative impact on the economic situation. We are not expecting a dramatic downturn in growth in China in the form of a hard landing. Currency risk A rise in the euro exchange rate makes our products more expensive when exported to customers outside Europe. This may cause a decline in sales volumes or price reductions resulting in lower margins. We address this currency risk by expanding local production at highly productive sites. On the other hand, the effect of a stronger euro is offset by lower prices for raw materials, which are primarily invoiced in dollars. In addition, depending on expected exchange rate trends, we reduce the currency risk for fixed contracts and planned sales in foreign currencies by using derivative instruments such as forward exchange contracts, currency options and currency swaps. 70 BASF 2004

335 Industry and regulatory risks We do not expect any serious business risks for the chemical industry in Neither do we expect serious changes to market conditions or the competitive environment. The European Union s new chemicals policy will alter the registration, evaluation and approval of chemical substances. This poses the risk that BASF and its European customers are placed at a disadvantage compared with non-european competitors as a result of cost-intensive testing and registration procedures. The new legislation is not expected to come into force before It is not yet possible to quantify the associated costs. In 2004, emission certificates were assigned at the national level as part of the implementation of the Kyoto Protocol. Apart from expenses for administration and for technical adjustments to various plants in the period through 2007, BASF does not expect emissions trading to incur any additional costs. Sufficient provisions have been established for the cost of alterations to those plants for which an official directive already exists. Financial risks Our business is exposed to foreign currency, interest rate and commodity price risks. These are hedged in accordance with a strategy that is determined centrally and uses derivative instruments such as forward exchange contracts, currency options, interest rate and currency swaps or combined instruments. Hedging is used only to offset already existing underlying transactions arising from the product business, cash investments and financing as well as expected sales. Details regarding the book values and fair values of financial instruments are provided in Note 27 to the Consolidated Financial Statements. Financial risks are monitored and hedged against in the Treasury unit of the Corporate Center. This enables risks to be spread across the various companies of the Group. In addition, the principle of separation of functions can be effectively implemented in a centralized manner. We constantly monitor the risks arising from changes in exchange rates and interest rates and the forward exchange contracts, currency options, currency swaps, interest rate swaps and combined interest rate/currency swaps entered into to hedge these risks. There are currently no foreseeable liquidity risks. We recognize possible cash flow fluctuations in good time using our liquidity planning system. We have constant access to sufficient liquid funds in view of our good credit ratings, the ongoing commercial paper program with a volume of $5 billion and committed credit lines from banks. We limit country-specific risks through internal country ratings, which are continuously adapted to changing economic, political and social circumstances. We use export credit insurance as the main tool to limit specific country-related risks. We limit credit risks for our investments by engaging in transactions only with banks and business partners with very good credit ratings and by adhering to fixed limits. Monetary transactions are also conducted through such banks. We reduce the risk of default on receivables by constantly monitoring the creditworthiness and payment behavior of customers and setting appropriate credit limits. Risks are also ruled out by means of credit insurance and bank guarantees. We partially finance company pension schemes through separate pension assets. Because a portion of these assets has been invested in shares and fixedinterest securities, severe stock exchange and bond market losses could result in the accrued assets being insufficient to finance the pensions. In order to limit this risk, we are increasingly offering employees defined contribution schemes. In 2004, the company retirement program in Germany was adjusted to take account of changing conditions in the capital markets and rising life expectancy. We are limiting financial risks through a new BASF Pensionskasse tariff for employees who join the company. BASF

336 Management s Analysis Risk Management System and Risks of Future Development Supply risks There are currently no recognizable risks with regard to the availability of raw materials, energy, precursors or intermediates. However, the oil-price dependent prices of raw materials, energy, precursors and intermediates present a potential risk for BASF. We reduce this risk through our global purchasing activities, long-term supply contracts, as well as optimized procedures for the purchase of additional quantities of raw materials on the spot market. We also use commodity derivatives in the form of options, swaps and futures. Purchase agreements for the most strategically important raw materials are negotiated and concluded centrally for the BASF Group (see page 54, Procurement). If, despite these measures, raw material costs rise, it is not always possible to pass on the higher costs in full in the form of higher prices for our products in the short term. In the field of research and development, we are working on new technologies that will address risks relating to the availability and price of basic raw materials. Market risks Cyclical fluctuations in demand in key customer segments, such as the automotive, construction, electrical and electronics as well as the textile industries, intense competition in our sales markets, the trend toward offshoring in key customer industries and temporary surplus capacity due to new production plants going on stream all present operating risks in our Chemicals, Performance Products and Plastics segments. We address these risks by constantly expanding cyclically resilient businesses, such as agrochemicals, active ingredients and active ingredient precursors for pharmaceuticals and nutritional products, and natural gas. In cyclical businesses, we seek to maintain cost leadership and enter into close cooperations with customers that will allow us to tap into new applications and markets quickly. Furthermore, we are expanding business activities in high-growth regions in particular. We attempt to recognize offshoring moves in good time. We therefore have international investment and restructuring strategies. In response to product substitutions and the declining use of certain products in the Performance Products and Plastics segments, we actively offer customer-specific system solutions that can be employed over a longer period and develop and market products with improved or entirely new properties. In the Northern Hemisphere, sales volumes of crop protection products are affected by the seasonal nature of the market with sales being concentrated in the first half of the year and by the weather. Demand for crop protection products is further influenced by the agricultural policies of governments and multinational organizations. The typical periods allowed for payment in this industry can lead to losses from receivables during local or regional economic crises. The increased marketing and sale of products in combination with genetically modified seeds could have an adverse effect on the development of our business with agricultural products. Furthermore, the effectiveness of products may decline for biological reasons. Prices for crop protection products may also become a more significant competitive factor in periods when prices for agricultural produce are declining. We are responding with innovative products and solutions that create value for our customers. Risks arising from acquisitions and investment decisions The implementation of decisions related to acquisitions and investments is associated with complex risks due to the high level of capital involved and the long-term capital commitment. The preparation, implementation and follow-up for such decisions are based on specified responsibilities and approval processes. 72 BASF 2004

337 Exploration risk In the Oil & Gas segment, future growth in exploration and production is largely based on the success of exploration activities. When searching for new reserves of crude oil and natural gas there are geological risks with regard to the presence, quantity and quality of hydrocarbons. We handle these risks diligently by spreading the risk through a balanced exploration portfolio. IT risks To control potential risks in the IT area, we use the latest hardware and software. Group-wide, we have integrated, standardized IT infrastructures, backup systems, replicated databases, virus and access protection, encoding systems and a high degree of internal networking. Other risks Research and development: Because of the high degree of complexity and uncertainty involved in chemical and biological research, there is a risk that projects might not be continued or that developed products will not receive approval for marketing. We reduce this risk through our global Know-how Verbund and our efficient innovation process (see page 51, Research and Development). Patent risks: Major risks involving patents or licenses are not currently apparent. Sufficient provisions have been established for ongoing, pending patent disputes, which are on a very small scale. Prospective candidates for technical and management positions: Our employees performance is essential to the growth and development of the BASF Group. We are increasingly competing with other companies for highly qualified technical and management personnel. We want to further broaden the international nature of our management team and significantly increase the number of women in managerial positions. In this way, we ensure the potential of our management candidates. We promote entrepreneurship within the organization. To do this we offer employees attractive assignments, a variety of international development perspectives, a broad spectrum of advanced training and continuing education opportunities, progressive benefits and performancebased compensation. Part of this compensation is a broad-based program that allows employees to share in the company s assets. We have also put in place a sophisticated stock option plan for senior executives in the BASF Group. Corporate security: Assessing security risks on a global basis and determining their potential impact on BASF has become an extremely difficult undertaking with regard to terrorist attacks, for example. Through its Group-wide network, BASF s Corporate Security works in close cooperation with local authorities, and constantly updates security measures to protect the company and its employees. Legal risks: For information regarding litigation risks, see Note 25 to the Consolidated Financial Statements. BASF

338 BASF Group Consolidated Financial Statements and Notes to the Consolidated Financial Statements 74 BASF 2004

339 Focusing on Results Our goal is to further increase the value of our company. With intelligent solutions and high-value products, we prove that we create value for the benefit of all. BASF