This chapter provides some other financial information on the company, in addition to the information set out in chapter 12, in particular with regard to cash flow, liquidity, capital resources and critical accounting policies.

Until 2004, we prepared our consolidated financial statements in accordance with Dutch GAAP. As of 2005, all European listed companies are required to prepare their consolidated financial statements in accordance with IFRS as adopted by the European Union. For TNT, there are no differences between the IFRS as adopted by the European Union and the IFRS as issued by the International Accounting Standards Board. As a result our 2005 consolidated financial statements have been prepared in accordance with IFRS and the comparative 2004 numbers have been adjusted. A detailed explanation of the transition to IFRS and the impact on our financial numbers is given in chapter 12.

CASH FLOW DATA

Cash and cash equivalents totalled €559 million at 31 December 2005, compared to €633 million at 31 December 2004. Of the cash and cash equivalents of €633 million as at 31 December 2004, €71 million related to our discontinued logistics business. The following table provides a summary of cash flows from continuing operations for the past two years:

NET CASH FROM OPERATING ACTIVITIES

2005
In 2005 net cash provided by operating activities was €984 million, which is an increase of 39% compared to 2004 (€708 million). Profit before income taxes contributed €1,151 million, or €1,471 million if adjusted for the non-cash impact of depreciation, amortisation and impairments, an increase of €72 million or 5% compared to 2004 (€1,399 million).

The changes in pension liabilities of €123 million reflect the total non-cash charges for the defined benefit pension schemes of €141 million, offset by our total cash contributions of €166 million to various pension funds, the majority of which for our Dutch employees, who fall under our collective labour agreement, plus our cash contributions of €98 million for pensions, which fall under the transitional plan of our Dutch collective labour agreement and which are directly paid by TNT (see note 10 to our consolidated financial statements). In total the cash contributions are €168 million lower than last year, mainly due to contributions of €142 million related to the Personal Senior Arrangement in 2004 and due to €32 million lower contributions as prescribed by the minimum funding requirements of De Nederlandsche Bank (DNB), which amounted to €59 million in 2005.

The non-cash impact of €52 million from other provisions included provisions related to employee benefits mainly in express, provisions taken for the uninsured part of the damage caused by major fires in three different warehouses in the United States, Spain and the United Kingdom, increased provisions for employer liability in the United Kingdom and reorganisation provisions, mainly in mail.

Working capital increased by €180 million in 2005, compared to a decrease of €21 million in 2004. Most of the increase of the accounts receivable position related to an increase of trade receivables that moved unfavourably by €165 million due to a combination of additional revenue and increased debtor days. Trade payables negatively impacted the cash flow by €77 million as a result of a decrease of creditor days compared to last year. Other current liabilities moved favourably by €66 million, including higher accruals for subcontractors and claims.

NET CASH USED IN INVESTING ACTIVITIES

Net cash used for acquisitions and disposals

2005
In 2005, the total payments for acquisitions of group companies amounted to €36 million and no cash was acquired as part of the total acquisitions. Most acquisitions took place in our mail division (€30 million), the largest being Euro Mail B.V. (€18 million), the remaining shares in Circular Distributors (€6 million) and Rheinkurier GmbH (€3 million). Express acquired for a total amount of €6 million, mainly related to Door-to-Door d.o.o. and Asinus d.o.o. and the remaining share of our business in Israel. During 2005 all proceeds or payments related to acquisitions were in cash. The investments in associated companies primarily related to additional capital contributions in one of our associates and amounted to €13 million.

During 2005, we disposed our interest in Global Collect B.V. for a negative amount of €5 million, which consists of the total consideration received of €4 million and €9 million cash that was divested with the disposal. During 2005 all proceeds or payments related to disposals were in cash. The disposal of associated companies related to disposal of Postal Preference Service Limited in the mail segment and Mistral Air in the express segment.

Our capital expenditure on property, plant and equipment and other intangible assets by segment for the years 2004 and 2005 was as follows:

In 2005, capital expenditures on property, plant and equipment amounted to €233 million (2004: 225). Of this amount, €80 million (2004: 75) related to mail, €143 million (2004: 144) to the express business and to our freight management business and €10 million (2004: 6) to non-allocated. The capital expenditures on intangible assets of €80 million (2004: 59), mostly related to software. In 2005 and 2004, capital expenditures were funded primarily by cash generated from operations.

Proceeds from the sale of property, plant and equipment in 2005 totalled €43 million (2004: 21), which mainly related to several buildings of TNT Real Estate B.V. and TNT Real Estate Development B.V. (€23 million) and buildings and equipment of the joint venture Postkantoren B.V. (€7 million) in the mail division and equipment in our express operations in the United Kingdom (€4 million).

MAIL
2005
Capital expenditure on property, plant and equipment and other intangible assets by our mail division totalled €102 million in 2005, which was an increase of 4% compared to 2004. The main capital expenditures in 2005 related to machinery (€24 million), software (€19 million), hardware (€9 million), and housing (€17 million). The remaining €33 million of capital expenditure related to various smaller projects. Most of these were less than €1 million individually and included building refurbishments mainly in the Netherlands, renewal of IT equipment and software, operational equipment, and various other capital expenditures.

Significant investments were made in the sorting and distribution process, with a total amount of €19 million invested in sequence sorting machines and sequence sorting software and €10 million invested in housing following the restructuring of operations in the Netherlands.

2004
Capital expenditure on property, plant and equipment and other intangible assets by our mail division totalled €98 million in 2004. The main capital expenditures in 2004 related to machinery (€22 million), software (€19 million), hardware (€12 million) and housing (€11 million). The remaining €34 million of capital expenditure related to various smaller projects, most of these were individually less than €1 million and included building refurbishments mainly in the Netherlands, replacement of IT equipment, and various other capital expenditures.

Significant investments were made in the sorting process, with a total amount of €23 million invested in sequence sorting machines and sequence sorting software and €6 million invested in tray cart unloaders.

2004
The net cash generated by other investing activities included €164 million, of which €160 million was attributable to the settlement of a $435 million cross currency interest rate swap, which provided a hedge against US dollar denominated assets. In 2004 interest received amounted to €33 million and no dividends were received.

NET CASH USED IN FINANCING ACTIVITIES

Net cash used for dividends and other changes in shareholders’ equity

2005
A final cash dividend for 2004, amounting to €168 million or €0.37 per ordinary share and a cash interim dividend for 2005 of €100 million or €0.22 per ordinary share were paid in 2005. The proposed final dividend for 2005 is estimated to result in an aggregate €172 million payment to be made in the second quarter of 2006.

In 2005, a cash outflow of €259 million was included as consideration for the repurchase of 13.1 million shares from the State of the Netherlands. These shares were delivered by the State of the Netherlands as a result of a purchase agreement signed in September 2004. Under our share buy back programme announced on 6 December 2005 we purchased 9,020,000 of our ordinary shares for an amount of €231million. As at 31 December 2005, we paid €214 million relating to 8,372,000 shares with the remainder of the amount being paid in January 2006.

An amount of €16 million was received as a result of the exercise of options and share grants.

In 2005 the net cash flow used in financing our discontinued logistics business amounted to €28 million.

2004
A final cash dividend for 2003, amounting to €142 million, and a cash interim dividend for 2004 of €95 million were paid in 2004. The final dividend for 2004 of €0.37 per share resulted in an aggregate €168 million payment made in April 2005.

In 2004, €151 million was paid as consideration for the repurchase of 7.6 million shares from the State of the Netherlands. An amount of €3 million was received as a result of the exercise of options and share grants.

In 2004 the net cash flow provided by financing our discontinued logistics business amounted to €211 million.

Net cash from debt financing activities

2005
Movements in long term borrowings resulted in a net cash inflow of €29 million. The total proceeds from long term borrowing of €35 million consist mainly of a €14 million additional issuance of the 3.875% 2015 Eurobond, a €13 million increase in bank loans, and a €7 million income from finance leases. A total of €6 million of repayments to long term borrowings related, amongst others, to a €4 million scheduled payment on aircraft leases and other leases, and to a €2 million repayment of bank loans.

For buy back of shares and any acquisitions that exceed the company’s immediate cash resources, the company would seek to raise capital in the financial markets by means of bank borrowings and private or publicly traded debt. For very substantial transactions, we would also consider issuing equity in order to protect our credit rating position. Given the strength of our financial position, credit ratings, and bank relationships, we do not foresee an inability to access a wide range of capital markets including equity, public debt, private debt and bank borrowing. We monitor and manage key financial ratios that are consistent with a strong credit rating. There are no aspects of our current capital structure that we believe would trigger a material increase in the cost of our debt or access to capital markets.

For details on the interest rates charged on our more significant long term loans as well as the maturity of our long term loans and commitments, see notes 13 and 28 to our consolidated financial statements.

We do not hold or issue financial instruments for trading purposes, nor do we allow our subsidiaries to do so. For details on our use of financial derivatives for hedging purposes, see notes 3 and 14 to our consolidated financial statements.

Off-balance sheet items

Other than guarantees and other similar arrangements that could be considered off-balance sheet and that are disclosed in this annual report, we have no off-balance arrangements.

CASH AND NET DEBT

At 31 December 2005, our total cash position amounted to €559 million. Despite cash paid of €473 million relating to our share buy backs during the year, our cash as at 31 December 2005 was only €74 million lower than compared to year end 2004. Included in the €559 million of total cash was €140 million of restricted cash (2004: 171) held mainly by joint ventures and insurance captives. The cash held in joint ventures is considered to be restricted by virtue of the fact that we require the agreement of our joint venture partners before we are able to access this cash. Our total cash position was primarily denominated in euro.

At 31 December 2005, our net debt position was €725 million (2004: 858). This consisted of €213 million of short term debt (2004: 51) and €1,071 million (2004: 1,440) of long term debt, offset by €559 million of cash and cash equivalents (2004: 633).

At 31 December 2005, short term borrowings consisted of €65 million (2004: 36) of bank debt bearing variable interest rates, and €148 million (2004: 15) of numerous other liabilities at fixed and variable rates, including a €129 million bilateral loan agreement maturing in 2006 with a fixed interest of 2.54%.

CASH OBLIGATIONS

At 31 December 2005, our gross interest bearing borrowings, including finance lease obligations, totalled €1,284 million (2004: 1,491), of which 94% (2004: 84%) was at fixed rates of interest and €1,071 million (2004: 1,440) represented long term debt. We had operating lease commitments of €1,251 million (2004: 1,675).

The following table show the maturity of these amounts:

Total financial guarantees at 31 December 2005 were €267 million (2004: 350) of which €99 million (2004: 164) amounted to corporate guarantees. These guarantees were mainly issued in connection with our obligations under lease contracts, custom duty deferment and local credit lines. The increase of corporate guarantees to banks was mainly due to local credit lines.

Furthermore, banks and other financial institutions have issued guarantees to cover obligations of group companies up to an amount of €147 million (2004: 127). These guarantees were mainly issued in connection with our obligations under lease contracts, customs duty deferment and local credit lines. The obligations under the guarantees issued by banks and other financial institutions have been secured by TNT N.V. or by its subsidiaries. The €21 million (2004: 59) of remaining guarantees in 2005 relates to bank guarantees issued locally by group companies.

CONTINGENCIES

OPERATING LEASE COMMITMENTS
Our total operating lease commitments at the end of the year were €1,251 million (2004: 1,675). The total commitments as at 31 December 2005 relating to capital expenditure were €16 million (2004: 33).

SHARE BUY BACK
On 6 December 2005, we announced to return capital to our shareholders by repurchasing ordinary shares. This share buy back programme started on 6 December 2005 and is expected to end 6 April 2006 unless prior to such date: (a) the aggregate value of shares acquired would exceed € 1 billion; (b) 10% of the outstanding ordinary shares have been repurchased, including any ordinary shares already held by the company; or (c) if a cash or exchange offer with respect to our shares is publicly launched through the publication of an offer document.

As previously disclosed, since August 2004, we have been preparing an addendum to our original report to the UK tax authorities that will cover UK tax matters that were not the subject of the original investigation. We are in continuing discussions with the UK tax authorities in this connection, and we do not expect that these matters will be resolved with the UK tax authorities before the end of 2006.

In late 2005 and early 2006 our audit committee conducted an independent investigation with respect to whether illegal acts occurred in connection with certain past tax matters. Although the investigation concluded that such acts had occurred, we have determined that no provision or contingent liability is required as a result of this investigation.

We have also analysed and continue to analyse the tax positions of some of our subsidiaries with respect to other countries.

Our investigations and analyses, which are ongoing, concern, among other things, the substance and implementation of tax structures set up in connection with the acquisition, in December 1996 (prior to our formation in 1998), by our former parent company of the Australian company TNT Limited through a UK subsidiary, and the integration and structuring of those and related businesses after our demerger in 1998. Some of these structures, which were set up in consultation with outside advisors, have been, or might be, challenged by various tax authorities.

An item that will be addressed in the addendum to our report to the UK tax authorities concerns whether some of our subsidiaries might have been resident in the United Kingdom prior to the acquisition of TNT Limited in December 1996 and, if so, whether tax on capital gains would have been due when the tax residency of those subsidiaries later may have moved to another European country. We are still investigating the residency of the relevant subsidiaries, but even if they were UK resident, we believe that the imposition of such a tax on capital gains would be impermissibly discriminatory under EU law.

The addendum will also deal among other things, with certain transfer pricing issues in respect of which on 9 February 2005 we made a payment on account to the UK tax authorities of €22 million. We charged this payment against a tax accrual that we recorded in 2004 in connection with this issue.

OTHER

We are involved in several legal proceedings relating to the normal conduct of our business. We do not expect any liability arising from any of these legal proceedings to have a material effect on our results of operations, liquidity, capital resources or financial position. We believe we have provided for all probable liabilities deriving from the normal course of business.

Equity reconciliation as per

Reconciliation profit for the period attributable to the shareholders

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our reported financial condition and results of operations are sensitive to accounting policies, assumptions and estimates that underlie the preparation of our financial statements. The profile of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered, together with reviewing our financial statements and the discussion in this item.

We make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below. We have discussed the development and selection of these critical accounting policies and estimates with our independent auditors. In addition, our financial statements contain a summary of our significant accounting policies.

BUSINESS COMBINATIONS AND IMPAIRMENT OF GOODWILL AND OTHER LONG LIVED INTANGIBLE ASSETS

Under IFRS all of our business combinations are accounted for as purchases. The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires us to make estimates and use valuation techniques when market value is not readily available. Any excess of purchase price over the fair value of the tangible and intangible assets acquired is allocated to goodwill.

Under IFRS we evaluate our goodwill for impairment at least annually and more frequently if specific events indicate that impairment in value may have occurred. Our goodwill impairment tests include judgements regarding assumptions relating to the level of testing, future cash flow and discount rates.

The level we identify for impairment testing and the criteria we use to determine which groups should be aggregated also require judgement. A difference in testing levels could affect whether an impairment is recorded and the extent of impairment loss. Changes in our business activities or structure may result in changes to the level of testing in future periods. Additionally, the level of testing for IFRS may be lower than the level of testing for US GAAP, which adds another layer of complexity.

To determine whether goodwill is impaired, we use valuation techniques that involve estimating cash flows for future periods and discounting these cash flows to determine value in use.

POST-EMPLOYMENT BENEFITS

First time adoption of International Financial Reporting Standards

As permitted under IFRS 1, at the date of transition to IFRS we have elected to recognise all cumulative actuarial gains and losses and the unrecognised prior year service costs for all our defined benefit pension plans. For US GAAP purposes the actuarial gains and losses continue to be recognised under the corridor approach while unrecognised prior year service costs are recognised during the future service periods of the active employees. This has resulted in a difference in the pension expense and pension liability between IFRS and US GAAP.

Under IFRS, we have accounted for certain defined benefit obligations in Italy by using the actuarial present value of the vested benefits to which an employee is currently entitled, but based on the employee’s expected date of separation or retirement. For US GAAP purposes, we have accounted for these obligations using the nominal value of the vested benefits to which the employee is entitled to if an employee separates immediately. This option is permitted under Emerging Issues Task Force (EITF) No. 88-1, Determination of Vested Benefit Obligation for Defined Benefit Plan.

Pension cost

Inherent to the valuation of our pension liabilities and the determination of our pension cost are key assumptions, which include employee turnover, mortality and retirement ages, discount rates, expected long term returns on plan assets, and future wage increases, which are usually updated on an annual basis at the beginning of each financial year. Actual circumstances may vary from these assumptions, giving rise to a different pension liability, which would be reflected as an additional profit or expense in our statement of income. Included in note 10 in chapter 12 is a table that indicates the change in employer pension expense with a 0.5% change in certain key assumptions.

In 2005, our employer pension expense was €141 million (2004: 185). Total cash contributions in 2005 amounted to €264 million (2004: 437) and are expected to amount to approximately €222 million in 2006. Cash contributions to the various pension funds totalled €166 million. Of these payments €59 million was contributed as prescribed by the minimum funding requirements of the DNB. Our cash payments for pensions, which fall under the transitional plan for early retirement in the Netherlands and are directly paid by us (see note 10 to our consolidated financial statements), amounted to €98 million.

RESTRUCTURING

We periodically record restructuring charges resulting from restructuring operations, including consolidations and/or relocations of operations, changes in our strategic plan, or managerial responses to declines in demand, increasing costs or other market factors. Restructuring provisions reflect many estimates, including those pertaining to separation costs, consolidation of excess facilities, contract settlements and tangible asset impairments. Actual experience has been and may continue to be different from these estimates. As at 31 December 2005 and 2004, restructuring provisions were €43 million and €49 million, respectively.

RECONCILIATION OF IFRS TO US GAAP

Our financial statements are prepared in accordance with IFRS, which differ in certain respects from US GAAP. In the case that our IFRS accounting policies do not correspond with the required US GAAP accounting treatment and this is estimated to have a significant effect on our consolidated net income and shareholders’ equity, we have highlighted these differences in the reconciliation of our IFRS net income and shareholders’ equity to those under US GAAP, as presented in note 34 to our consolidated financial statements.

Net income determined in accordance with US GAAP was €632 million in 2005 (2004: 714), which was €27 million lower than net income determined in accordance with IFRS in 2005 compared to €38 million lower in 2004. This difference mainly relates to employee benefits. As permitted under IFRS 1, First-time Adoption of International Financial Reporting Standards, at the date of transition to IFRS we have elected to recognise all cumulative actuarial gains and losses and the unrecognised prior year service costs for all our defined benefit pension plans. For US GAAP purposes the actuarial gains and losses and unrecognised prior year service costs continue to be recognised under the corridor approach. This has resulted in a difference in the pension expense and pension liability between IFRS and US GAAP.

The main differences in our 2004 net income relate to the unwinding of an insurance contract in the mail division with a remaining balance of €130 million at the moment of the termination of the contract, which was offset by lower pension costs under US GAAP, the realisation of gains on real estate sales and a positive tax effect on the reconciling items.

Our shareholders’ equity determined in accordance with US GAAP was €2,757 million at 31 December 2005 (2004: 2,622), which was €505 million lower at 31 December 2005 and €703 million lower at 31 December 2004 than shareholders’ equity determined in accordance with IFRS. The lower equity under US GAAP was mainly caused by a direct equity movement related to a minimum pension liability of €587 million at 31 December 2005 (2004: 454), net of taxes. This was partly offset by differences relating to goodwill and employee benefits.

Under US GAAP we are required to record a minimum pension liability in the event the accumulated benefit obligation (ABO) exceeds the fair value of the pension plan assets with a corresponding reduction in shareholders’ equity net of deferred taxes. Under IFRS such a minimum pension liability is not required.

As at 31 December 2005 and 2004, the ABO amounted to €5,194 million and €4,643 million, respectively. The increase in the ABO was mainly due to a decrease in interest rates from 4.8% in 2004 to 4.3% in 2005 (impact approximately €440 million). As at 31 December 2005 and 2004 the ABO for certain of our pension plans in the Netherlands, in Germany, and in the United States exceeded the plan assets, we were required to record a minimum pension liability of €843 million.

Depreciation and amortisation from 6 December 2005 to 31 December 2005 for our discontinued logistics business other than the French activities that we sold during 2005 amounted to €8 million and is included as a reconciling item between IFRS and US GAAP.

In 2005 the IFRS operating income in the mail division was higher by €14 million as compared with the operating income under US GAAP. Certain employee benefit expenses related to payments expected to be made to certain employees on reaching a specific number of years of service. As permitted under IFRS 1, First-time Adoption of International Financial Reporting Standards, at the date of transition to IFRS, we recorded a liability with a corresponding adjustment to shareholders’ equity as at that date. For US GAAP purposes, we have included the amount in the income statement resulting in a difference in the profit for the period between IFRS and US GAAP. This was partly offset by higher pension expenses under IFRS.

In 2004 the IFRS operating income in the mail division was higher than under US GAAP. This was caused by the unwinding of an insurance contract. The agreement with an insurance company related to settling future wage guarantees that was entered in 2001, was terminated in December 2004 following an unfavourable court decision with regard to the timing of the deductibility of the consideration for tax purposes. This higher result under IFRS was partly offset by higher pension charges. Within express the difference between IFRS and US GAAP operating income was primarily the result of amortisation of other long lived intangible assets recognised under US GAAP prior to 1 January 2004 and higher pension expenses and expenses relating to share based payments under IFRS. Freight management operating income has no material differences between IFRS and US GAAP.

RECENT US GAAP ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board in the United States (FASB) has issued certain Statements of Financial Accounting Standards (SFAS), each of which, when adopted, could affect our consolidated financial statements for US GAAP reporting.

In December 2004, the FASB issued a revised version of SFAS 123, Share-based payments, Revised 2004 (SFAS 123(R)). The SEC has issued Staff Accounting Bulletin No. 107, relating to the adoption of SFAS 123(R). SFAS 123(R) requires us to measure all employee share based compensation awards using a fair value method, estimate award forfeitures, and record such expense in our consolidated statements of income. This statement supersedes APB Opinion No. 25, Accounting for Stock issued to Employees. The provisions of this statement were effective 1 January 2006. As permitted by FASB Statement No. 148, Accounting for Stock-Based Compensation– Transition and Disclosure , we have elected, effective I January 2005, to measure our share based payments using a fair value method under SFAS 123 using the transition provisions of SFAS 148. Accordingly, we do not expect the adoption of SFAS 123(R) to have a material impact on our financial statements. The Emerging Issues Task Force (EITF) issued EITF 05-6,Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination . This pronouncement requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of the lease should be amortised over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of acquisition of the leasehold improvement. We are required to adopt this pronouncement effective 1 January 2006 and do not expect the adoption the EITF 05-6 to have a material impact on our financial statements.