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Financial Statements
Notes to the consolidated statements of income
ο 16 NET SALES: 9,948 MILLION (2005: 9,274; 2004: 8,798)
The net sales of mail and express relate to the trading activities of these reportable segments, arising from rendering services. Net sales allocated by geographical area in the country or region in which the entity records sales is detailed in note 34.
ο 17 OTHER OPERATING REVENUES: 112 MILLION (2005: 55; 2004: 29)
Other operating revenues relate to the sale of goods and rendering of services not related to our normal trading activities and mainly include rental income of temporarily leased-out property, passenger/ charter revenues, aircraft maintenance and engineering income and custom clearance income.
ο 18 OTHER INCOME: 65 MILLION (2005: 38; 2004: 8)
Other income in 2006 mainly includes net proceeds from the sale of group companies of €24 million (2005: 12 million) and the sale of property, plant and equipment for €37 million (2005: 26; 2004: 8) and other income of €4 million.
ο 19 SALARIES, pensions AND SOCIAL SECURITY CONTRIBUTIONS: 3,384 MILLION (2005: 3,318; 2004: 3,216)
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| Year ended at 31 December | |||
| 2006 | 2005 ¹ | 2004 ¹ | |
| Salaries | 2,823 | 2,756 | 2,599 |
| Share based payments | 9 | 8 | 5 |
| Pension charges: | |||
| Defined benefit plans | 120 | 149 | 188 |
| Defined contribution plans | 35 | 26 | 21 |
| Social security charges | 397 | 379 | 403 |
| Total | 3,384 | 3,318 | 3,216 |
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Included in salaries in 2004 was a positive effect from the settlement for future wage guarantees which resulted in a €134 million refund from an insurance company.
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| Labour force | 2006 | 2005 ¹ | 2004 ¹ |
| Employees ² | |||
| Express | 54,060 | 48,845 | 46,502 |
| 84,731 | 76,619 | 81,129 | |
| Non-allocated | 431 | 836 | 430 |
| Total at year end | 139,222 | 126,300 | 128,061 |
| Employees of joint ventures ³ | 6,691 | 6,315 | 6,735 |
| Number of external agency staff at year end | 38,546 | 40,674 | 12,818 |
| FTE’s year average ⁴ | |||
| Express | 49,858 | 44,847 | 42,876 |
| 42,691 | 41,724 | 43.825 | |
| Non-allocated | 424 | 822 | 417 |
| Total year average | 92,973 | 87,393 | 87,118 |
| FTE’s of joint ventures ³,⁴ | 5,368 | 4,940 | 5,336 |
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At the end of 2006, 6,691 people (2005: 6,315; 2004: 6,735) were employed by joint ventures, of whom 4,824
(2005: 4,562; 2004: 4,964) were on the payroll of Dutch companies, primarily Postkantoren B.V. and 1,867
(2005: 1,753; 2004: 1,771) were on the payroll of companies outside the Netherlands.
In 2006 the average number of average full-time employee equivalents in the mail division was 42,691. This was a increase of 2.3% compared to last year and was mainly caused by the addressed mail expansion of european mail networks of around 2,900 FTE, especially in Germany and the UK. This is partly offset by the decrease in mail Netherlands of around 2,000 FTE, resulting from several efficiency initiatives.
The 11.2% increase of average full-time employee equivalents in express was caused by organic growth as well as the acquisition of TG+ and Speedage.
The total number of employees in our discontinued freight management business was 2,293 as at 31 December 2006, 2,286 as at 31 December 2005 (2004: 2,317). The FTE average was 2,248 in 2006, 2,244 in 2005 (2004: 2,260).
Our operations in logistics were sold during 2006. The total number of employees in discontinued logistics business was 35,285 as at 31 December 2005 (2004: 37,046). The FTE average was 33,436 in 2005 (2004: 36,360). The total number of employees of joint ventures in our discontinued logistics business was 1,666 as at 31 December 2005 (2004: 2,244).
Remuneration of members of the Supervisory Board
Over 2006, the accrued remuneration of the current members of the Supervisory Board, excluding VAT, amounted to €556,000 (2005: 524,897; 2004: 345,437). The remuneration of the individual members of the Supervisory Board is set out in the table below:
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| Supervisory Board compensation | Base compensation | Other payments ¹ | Total remuneration |
| J.H.M. Hommen | 60,000 | 6,500 | 66,500 |
| R.J.N. Abrahamsen | 45,000 | 20,500 | 65,500 |
| J.M.T. Cochrane | 45,000 | 12,500 | 57,500 |
| R. Dahan | 45,000 | 9,000 | 54,000 |
| V. Halberstadt | 45,000 | 18,000 | 63,000 |
| G. Kampouri Monnas | 45,000 | 10,500 | 55,500 |
| R. King ² | 31,500 | 31,500 | |
| W. Kok | 45,000 | 10,500 | 55,500 |
| S. Levy | 45,000 | 10,500 | 55,500 |
| R.W.H. Stomberg | 45,000 | 6,500 | 51,500 |
| Total | 451,500 | 104,500 | 556,000 |
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No options or shares were granted to members of the Supervisory Board and none of the members of the Supervisory Board accrued any pension rights with our company.
Remuneration of members of the Board of Management
In 2006 the total remuneration of the Board of Management consisted of:
- base salary
- other periodic paid compensation
- variable compensation:
- accrued short term incentive
- accrued long term incentive
- pension
In the paragraphs below the 2006 values of each of these remuneration elements will be reported per Member of the Board of Management.
Until 4 November 2006, the Board of Management consisted of five members. As from 4 November 2006, the date of divestment of the logistics division, the Board of Management consists of four members. As announced earlier, Jan Haars has resigned as CFO at the end of March. As per the closure of the Annual General Meeting of Shareholders on 20 April 2006, the Supervisory Board appointed Henk van Dalen as new member of the Board of Management. Henk van Dalen joined TNT on 1 April 2006 as Chief Financial Officer.
TOTAL REMUNERATION
In 2006, the remuneration, including pension and social security contributions, of the current and the former members of the Board of Management amounted to €9,947,362 (2005: 9,784,714).
In 2006, Dave Kulik received a special incentive award of €1,6 million for the successful completion of the sale of the logistics division. Jan Haars received a final severance payment of €60,812. The other part of his severance payment was reported in 2005.
The remuneration of the individual members of the Board of Management is set out in the table below:
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| Compen-sation & benefits Board of Mana-gement | Base salary | Other periodic paid compen-sation ¹ | Accrued short term incentive | Accrued long term incentive | Severance payments | Pension related costs | 2006 Total | 2005 Total |
| Peter Bakker | 900,000 | 61,074 | 741,067 | 353,658 | 121,825 | 2,177,624 | 1,911,788 | |
| Henk van Dalen ² | 450,000 | 361,109 | 378,000 | 40,842 | 314,968 | 1,544,919 | ||
| Harry Koorstra | 600,000 | 51,623 | 507,639 | 177,617 | 113,725 | 1,450,604 | 1,429,495 | |
| Marie-Christine Lombard | 600,000 | 440,736 | 484,914 | 206,775 | 276,000 | 2,008,425 | 1,676,571 | |
| Total current members | 2,550,000 | 914,542 | 2,111,620 | 778,892 | 826,518 | 7,181,572 | 5,017,854 | |
| Jan Haars | 125,000 | 1,438 | 60,812 | 187,250 | 2,974,984 | |||
| Dave Kulik ³ | 508,000 | 79,211 | 1,600,000 | 391,329 | 2,578,540 | 1,791,876 | ||
| Total former members | 633,000 | 80,649 | 1,600,000 | 60,812 | 391,329 | 2,765,790 | 4,766,860 | |
| Total Board of Management | 3,183,000 | 995,191 | 3,711,620 | 778,892 | 60,812 | 1,217,847 | 9,947,362 | 9,784,714 |
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Base salary
In 2006 the members of the Board of Management did not receive a general increase in base salary.
Other periodic paid compensation
According to the employment agreement of Henk van Dalen an amount of €1,300,000 will be paid as compensation for the loss of existing long term incentive rights with his former employer. This amount will become payable in four equal annual installments, provided he is still employed by the company on the payment dates. In 2006 Henk van Dalen received a compensation of €325,000 included in other periodic paid compensation of €361,109. In above table, the amount of other periodic paid compensation for Henk van Dalen does not include the one-off cost allowances of €81,000 related to moving costs.
Variable compensation
In the table below the total variable compensation granted in 2006 to the members of the Board of Management is expressed as a percentage of base salary. For this purpose the costs of the rights on matching shares, share options and rights on performance shares were calculated using the Monte Carlo method and a weighted probability analysis provided by Hewitt Associates.
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| Percentage variable compensation Board of Management | Accrued short term incentive | Accrued long term incentive | Total variable compensation | as % of base pay |
| Peter Bakker | 741,067 | 353,658 | 1,094,725 | 122% |
| Henk van Dalen | 378,000 | 40,842 | 418,842 | 93% |
| Harry Koorstra | 507,639 | 177,617 | 685,256 | 114% |
| Marie-Christine Lombard | 484,914 | 206,775 | 691,689 | 115% |
| Total | 2,111,620 | 778,892 | 2,890,512 | |
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Accrued short term incentive
Since 2002, we account for bonus payments on the basis of the accrued bonuses for the performance of the year reported. In 2006, an amount of €1,922,279 was paid to the members of the Board of Management for performance over 2005.
For 2006 both express and mail exceeded their economic profit targets. The 2006 performance on earnings from continuing operations also exceeded the set targets. The bonus for the members of the Board of Management is paid out partly in cash and partly in shares, see also below the paragraph “share matching plan”. In the table below the amount of €1,953,000 reflects the accrued bonuses for performance over 2006 and the amount of €158,620 reflects the accrued costs for the rights on matching shares that were granted in 2006, 2005, 2004 and 2003. The costs for the rights on matching shares related to the matching shares granted in 2006 for the performance over 2005, amounted for Peter Bakker to €15,990 and for Harry Koorstra and Marie-Christine Lombard €11,699.
The 2006 accrued short term incentive amounts for the members of the Board of Management are accrued as set out below:
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| Short term incentive Board of Management | Accrued for 2006 performance | as % of base pay | Accrued for matching shares ¹ | Accrued short term incentive | as % of base pay |
| Peter Bakker | 675,000 | 75% | 66,067 | 741,067 | 82% |
| Henk van Dalen | 378,000 | 84% | 378,000 | 84% | |
| Harry Koorstra | 450,000 | 75% | 57,639 | 507,639 | 85% |
| Marie-Christine Lombard | 450,000 | 75% | 34,914 | 484,914 | 81% |
| Total | 1,953,000 | 158,620 | 2,111,620 | ||
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Share matching plan
In 2006, the short term incentive related to the realisation of targets over 2005 for the Board of Management amounted to €1,772,279 (2005: €2,288,333). Of this amount, 75% (€1,329,209) was paid in cash and 25% (€443,070) was paid in shares.
The number of shares involved is calculated by dividing the 25% of the bonus by the share price on the day of grant. The day of grant is the day following the announcement of the first quarter results. If at least 50% of the shares are retained for a period of three years, the company will match the amount of shares on a one-to-one basis. In compliance with the Dutch corporate governance code, the members of the Board of Management may not sell their matching shares before the earlier of five years from the date of grant or the end of the employment, although any sale of shares for the purpose of using the proceeds to pay for the tax relating to the grant of these shares is exempted. These bonus shares are held in a trust by our share administrator.
All members of the Board of Management participated in the scheme for the bonus earned during their membership of the Board of Management. Their current matching entitlement is set out in the following table:
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| Bonus-related matching rights Board of Management ¹ | Year | Number of matching rights on shares | Remaining years in contractual life | ||||
| Outstanding as at 1 Jan 2006 | Granted during 2006 | Exercised during 2006 | Forfeited during 2006 | Outstanding as at 31 Dec 2006 | |||
| Peter Bakker | 2003 | 7,042 | 7,042 | ||||
| 2004 | |||||||
| 2005 | 8,211 | 8,211 | 1.3 | ||||
| 2006 | 4,159 | 4,159 | 2.3 | ||||
| Henk van Dalen | 2006 | ||||||
| Harry Koorstra | 2003 | 5,523 | 5,523 | ||||
| 2004 | 2,602 | 2,602 | 0.3 | ||||
| 2005 | 5,474 | 5,474 | 1.3 | ||||
| 2006 | 3,043 | 3,043 | 2.3 | ||||
| Marie-Christine Lombard | 2005 | 4,562 | 4,562 | 1.3 | |||
| 2006 | 3,043 | 3,043 | 2.3 | ||||
| Total current members | 33,414 | 10,245 | 12,565 | 31,094 | |||
| Jan Haars | 2003 | 4,062 | 4,062 | ||||
| 2004 | |||||||
| 2005 | 4,562 | 4,562 | |||||
| Dave Kulik | 2003 | 3,880 | 3,880 | ||||
| 2004 | 1,863 | 1,553 | 310 | ||||
| 2005 | 5,028 | 2,514 | 2,514 | ||||
| 2006 | 2,132 | 356 | 1,776 | ||||
| Total former members | 19,395 | 2,132 | 8,303 | 13,224 | |||
| Total Board of Management | 52,809 | 12,377 | 20,868 | 13,224 | 31,094 | ||
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In 2006 the average price on exercise for matching shares for the (former) members of the Board of Management was €29.68.
accrued LONG TERM INCENTIVE
The maximum numbers of options and performance shares that can vest are disclosed in this report (150% of base allocation share options and 120% of base allocation performance shares). In the table below the costs of the total share options and rights on performance shares granted to the members of the Board of Management are expressed as a percentage of base salary. For the calculation of the costs of the granted long term incentive, the Monte Carlo method is used as well as a weighted probability analysis provided by Hewitt Associates:
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| Long term incentive Board of Management | Share options granted in 2003-2004 | Rights on performance shares granted in 2003-2006 | Accrued long term incentive | as % of base pay |
| Peter Bakker | 85,848 | 267,810 | 353,658 | 39% |
| Henk van Dalen | 40,842 | 40,842 | 9% | |
| Harry Koorstra | 42,924 | 134,693 | 177,617 | 30% |
| Marie-Christine Lombard | 41,261 | 165,514 | 206,775 | 34% |
| Total | 170,033 | 608,859 | 778,892 | |
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The costs of the granted performance shares in 2006 amounted for Peter Bakker: €81,679, for Henk van Dalen and Harry Koorstra: €40,842 and for Marie-Christine Lombard: €74,810.
Vesting of the long term incentive
The vesting of the long term incentive, the share options and the performance shares, depends on the company’s performance on total shareholder return. Our relative total shareholder return over the period from 1 January 2003 through 31 December 2005 governs the share option grant and performance share grant for 2003. Our relative total shareholder return over the period from 1 January 2004 through 31 December 2006 governs the share option grant and performance share grant for 2004. Our relative total shareholder return over the period from 1 January 2005 through 31 December 2007 governs the performance share grant for 2005. Our relative total shareholder return over the period from 4 May 2006 through 3 May 2009 governs the performance share grant for 2006.
Based on the total shareholder return vesting percentages, the next table shows the actual vesting of the 2003 and 2004 share options as well as the 2003 and 2004 performance shares. For the grants after 2004 it shows what would vest if the performance period ended on 31 December 2006.
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| Vesting per year end according to TSR performance schedules | Year | Share options | Performance shares | ||
| Vesting % of base allocation relating to TSR performance schedule | Vesting as per 31 Dec 2006 | Vesting % of base allocation relating to TSR performance schedule | Vesting as per 31 Dec 2006 | ||
| Peter Bakker | 2003 | 75% | 30,000 | 75% | 7,373 |
| 2004 | 100% | 60,000 | 100% | 10,846 | |
| 2005 | 110% | 42,671 | |||
| 2006 | 75% | 20,039 | |||
| Henk van Dalen | 2006 | 75% | 10,020 | ||
| Harry Koorstra | 2003 | 75% | 15,000 | 75% | 4,916 |
| 2004 | 100% | 30,000 | 100% | 5,423 | |
| 2005 | 110% | 21,335 | |||
| 2006 | 75% | 10,020 | |||
| Marie-Christine Lombard | 2003 | 75% | 9,000 | ||
| 2004 | 100% | 30,000 | 100% | 5,423 | |
| 2005 | 110% | 21,335 | |||
| 2006 | 75% | 22,520 | |||
| Total | 174,000 | 181,921 | |||
Long term incentive/share option plan
The table below summarises the status of the number of outstanding options of our ordinary shares granted to the Board of Management. During 2006 all members of the Board exercised options.
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| Options Board of Management ¹ | Year | Number of options | Amounts in € | Remaining years in contractual life | ||||
| Oustanding as at 1 Jan 2006 | Exercised during 2006 | Forfeited during 2006 | Outstanding as at 31 Dec 2006 | Exercise price | Share price on exercise date | |||
| Peter Bakker | 2001 | 20,000 | 20,000 | 23.66 | 27.20 | |||
| 2002 | 30,000 | 30,000 | 22.24 | 27.20 | ||||
| 2003 | 60,000 | 30,000 | 30,000 | 13.85 | 31.84 | |||
| 2004 | 90,000 | 30,000 | 60,000 | 18.44 | 5.3 | |||
| Harry Koorstra | 2001 | 20,000 | 20,000 | 23.66 | 27.29 | |||
| 2002 | 15,000 | 15,000 | 22.24 | 27.24 | ||||
| 2003 | 30,000 | 15,000 | 15,000 | 13.85 | 32.00 | |||
| 2004 | 45,000 | 15,000 | 30,000 | 18.44 | 5.3 | |||
| Marie-Christine Lombard | 2001 | 9,000 | 9,000 | 23.66 | 27.12 | |||
| 2002 | 6,750 | 6,750 | 22.24 | 27.12 | ||||
| 2003 | 18,000 | 9,000 | 9,000 | 13.85 | 31.82 | |||
| 2004 | 45,000 | 15,000 | 30,000 | 18.44 | 5.3 | |||
| Total current members | 388,750 | 154,750 | 114,000 | 120,000 | ||||
| Jan Haars | 2002 | 15,000 | 15,000 | 18.41 | 27.32 | |||
| 2003 | 30,000 | 15,000 | 15,000 | 13.85 | 27.93 | |||
| 2004 | 45,000 | 45,000 | 18.44 | |||||
| Dave Kulik | 2001 | 10,000 | 10,000 | 23.66 | 27.15 | |||
| 2002 | 7,500 | 7,500 | 22.24 | 27.15 | ||||
| 2003 | 18,000 | 9,000 | 9,000 | 13.85 | 0.3 | |||
| 2004 | 45,000 | 15,000 | 30,000 | 18.44 | 0.3 | |||
| Total former members | 170,500 | 47,500 | 84,000 | 39,000 | ||||
| Total Board of Management | 559,250 | 202,250 | 198,000 | 159,000 | ||||
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Long term incentive/performance share plan
The table below summarises the status of the rights awarded under the performance share plan to the members of the Board of Management:
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| Rights on performance shares Board of Management | Year | Number of rights on performance shares | Remaining years in contractual life | ||||
| Outstanding as at 1 Jan 2006 | Granted during 2006 | Exercised during 2006 | Forfeited during 2006 | Outstanding as at 31 Dec 2006 ¹ | |||
| Peter Bakker | 2003 | 11,795 | 7,373 | 4,422 | |||
| 2004 | 13,015 | 2,169 | 10,846 | 0.3 | |||
| 2005 | 46,550 | 46,550 | 1.3 | ||||
| 2006 | 32,062 | 32,062 | 2.3 | ||||
| Henk van Dalen | 2006 | 16,032 | 16,032 | 2.3 | |||
| Harry Koorstra | 2003 | 7,863 | 4,916 | 2,947 | |||
| 2004 | 6,507 | 1,084 | 5,423 | 0.3 | |||
| 2005 | 23,275 | 23,275 | 1.3 | ||||
| 2006 | 16,032 | 16,032 | 2.3 | ||||
| Marie-Christine Lombard | 2004 | 6,507 | 1,084 | 5,423 | 0.3 | ||
| 2005 | 23,275 | 23,275 | 1.3 | ||||
| 2006 | 36,032 | 36,032 | 2.5 | ||||
| Total current members | 138,787 | 100,158 | 12,289 | 11,706 | 214,950 | ||
| Jan Haars | 2003 | 7,863 | 4,916 | 2,947 | |||
| 2004 | 6,507 | 6,507 | |||||
| 2005 | 23,275 | 23,275 | |||||
| Dave Kulik | 2004 | 6,507 | 4,971 | 1,536 | |||
| 2005 | 23,275 | 9,698 | 13,577 | ||||
| 2006 | 16,032 | 1,893 | 14,139 | ||||
| Total former members | 67,427 | 16,032 | 21,478 | 61,981 | |||
| Total Board of Management | 206,214 | 116,190 | 33,767 | 73,687 | 214,950 | ||
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The 2006 performance shares grant for Marie-Christine Lombard includes an additional one-off grant of 20,000 shares.
In 2006 the average price on exercise for performance shares for the (former) members of the Board of Management was €29.01.
Pensions
Peter Bakker, Harry Koorstra and Henk van Dalen are participants in a defined benefit scheme, which provides an annual benefit of 70% of pensionable salary, assuming 35 years of service. Marie-Christine Lombard participates in a defined contribution pension scheme. The pensionable age of all members of the Board of Management is 65 year. The accrued benefits and the transfer values (for participants in a defined benefit scheme) of the members of the Board of Management are as follows:
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| Benefits and transfer value defined benefit plans Board of Management | Age at 31 Dec 2006 | Type of pension scheme ¹ | Defined benefit obligation at 1 Jan 2006 | Defined benefit obligation at 31 Dec 2006 ² | Service costs | Accrued benefits at 31 Dec 2005 | Accrued benefits at 31 Dec 2006 | Changes in accrued benefits during 2006 |
| Peter Bakker | 45 | DB | 2,606,519 | 2,348,646 | 121,825 | 251,861 | 269,845 | 17,984 |
| Henk van Dalen ³ | 54 | DB | 531,118 | 314,968 | 42,949 | 42,949 | ||
| Harry Koorstra | 55 | DB | 4,783,845 | 4,138,283 | 113,725 | 310,345 | 321,930 | 11,585 |
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The pension contribution for Marie-Christine Lombard has been increased up to €276,000 (2005: €180,000) in order to bring the benefit at retirement more in line with the current level of base salary.
According to the employment agreement of Henk van Dalen an amount of €1,350,000 will be made available to be contributed by the company to the Stichting Ondernemingspensioenfonds TPG. This amount will be contributed in four equal annual installments and will only become payable to the Stichting Ondernemingspensioenfonds TPG under the condition that he is still employed by the company on the payment dates. The amount of €314,968 service costs shown in the table above, includes one annual installment, actuarially calculated.
Performance share plan management
The performance share scheme is an equity-settled plan with annual grants. Participants will be granted a conditional right over a number of TNT shares. The number of shares comprised in the share award reflects the position that the participant holds and management’s assessment of their future contribution to the company.
Participants will become owner of the share after a period of three years (vesting period). The plan includes market based vesting conditions such that the number of shares is dependent on TNT’s Total Shareholder Return (TSR) performance relative to certain other stock indices. These conditions are included in the calculation of the fair value at grant date. This plan is similar to the stock option plan as described below with the only difference that the exercise price of performance shares is equal to zero.
- Performance shares were granted in May 2006 to about 776 TNT managers at a fair value of €18.64. These grants were part of the policy of granting rights on performance shares each year to eligible members of senior management from 2005 onwards.
- Shares will become unconditional after the third anniversary of the grant.
- The participant retains the right to be compensated when he/she leaves the company for certain reasons (retirement, certain reorganisations, disability or death).
The total number of rights on performance shares for management granted in 2006 is stated below.
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| Rights on performance shares management | Year | Number of rights on performance shares | Remaining years in contractual life | |||||
| Outstanding as at 1 Jan 2006 | Discontinued operations | Granted during 2006 | Exercised during 2006 | Forfeited during 2006 | Outstanding as at 31 Dec 2006 | |||
| Management | 2005 | 1,210,970 | 366,720 | 10,130 | 56,590 | 777,530 | 1.3 | |
| 2006 | 627,712 | 260 | 33,844 | 593,608 | 2.3 | |||
| Total | 1,210,970 | 366,720 | 627,712 | 10,390 | 90,434 | 1,371,138 | ||
In 2006 the average price on exercise for performance shares for the management was €29.92.
Option plan management
No options were granted in 2006. In 2005 the option plan was replaced by the performance share scheme.
The number of options granted in each of the three years that will ultimately be eligible for exercise is dependent on our total shareholder return relative to a peer group of direct competitors and a peer group of AEX companies.
Option rights were granted in accordance with the management option plan, which is approved by the Supervisory Board. This plan sets out the procedures for share option grants in more than 40 countries around the world.
The significant aspects of the plan are:
- options are granted at the average market price as traded on the Euronext Amsterdam on the date the grant is made (2004:€18.44/share),
- for options granted in 2003 and 2004 the option is exercisable between the third and eighth anniversary of the day of grant; after eight years the outstanding options are forfeited,
- for options granted prior to 2003 the option is exercisable between the third and fifth anniversary of the day of grant; after five years the outstanding options are forfeited,
- the option holder retains the right to exercise his/her option when he/she leaves the company for certain reasons (retirement, certain reorganisations, disability or death), and
- the option holder loses the right to exercise his/her option when he/she leaves the company for reasons other than those mentioned above.
The exercise of options is subject to the TNT Rules concerning Inside Information.
The table below summarises the status of the number of outstanding options granted to the Board of Management and former members of the Board of Management as well as to eligible members of senior managers in the current TNT group.
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| Statement of changes in outstan-ding options | Year | Number of options | Amounts in € | Remain-ing years in contrac-tual life | |||||
| Outstanding as of 1 Jan 2006 | Dis-continued operations | Exercised during 2006 | Forfeited during 2006 | Out-standing as at 31 Dec 2006 | Exer-cise price | Share price on exer-cise date | |||
| Board of Management (incl. former members) ¹ | various | 559,250 | 202,250 | 198,000 | 159,000 | ||||
| Management | 2001 | 640,251 | 198,000 | 366,042 | 76,209 | 23.66 | 26.08 | ||
| 2002 | 654,043 | 172,318 | 415,296 | 14,550 | 51,879 | 22.24 | 28.27 | 0.1 | |
| 2003 | 2,493,600 | 622,500 | 766,923 | 945,900 | 158,277 | 13.85 | 27.84 | 4.1 | |
| 2003 | 19,500 | 13,200 | 6,300 | 14.51 | 29.76 | 4.4 | |||
| 2004 | 2,929,404 | 760,300 | 61,401 | 825,167 | 1,282,536 | 18.44 | 27.81 | 5.3 | |
| Total | 7,296,048 | 1,753,118 | 1,825,112 | 2,059,826 | 1,657,992 | ||||
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| Historic overview outstanding options | 2006 | 2005 | ||
| Number of options | Weighted average exercise price
(in €) |
Number of options | Weighted average exercise price
(in €) |
|
| Balance at beginning of year | 7,296,048 | 17.63 | 10,717,990 | 19.07 |
| Discontinued operations | (1,753,118) | 17.77 | ||
| Exercised | (1,825,112) | 27.37 | (1,101,545) | 25.09 |
| Forfeited | (2,059,826) | 16.38 | (2,320,397) | 22.06 |
| Balance at end of year | 1,657,992 | 18.08 | 7,296,048 | 17.63 |
| Exercisable at 31 December | 225,456 | 15.80 | 1,446,794 | 22.80 |
Statements of changes of outstanding options
The table above also includes the outstanding options of the members of the Board of Management and former members of the Board of Management. All options granted entitle the holder to the allotment of ordinary shares when they are exercised and are equity settled.
Bonus/matching plan for senior management
Members of a select group of senior managers are paid 75% of their 2003, 2004 and 2005 and 2006 bonus in cash and 25% as a grant of TNT shares with an associated matching right in 2006 (67,107), 2005 (121,345), 2004 (107,710) and in 2003 (54,405) if at least 50% of the shares are kept for three years. We see the bonus/matching plan as part of our remuneration package for the members of our top management, and it is particularly aimed at further aligning their interests with the interests of the shareholders. The rights on bonus and matching shares are granted in accordance with the bonus/matching plan, which has been approved by the Supervisory Board.
The significant aspects of the plan are:
- the grant of the right on bonus shares is in lieu of 25% of an individual’s annual bonus payment, and bonus shares are delivered shortly after the right is granted,
- the number of bonus shares is calculated by dividing 25% of an individual’s gross annual bonus relating to the preceding financial year by the weighted average share price on the Euronext Amsterdam on the date the grant is made (2006: €29.94/share),
- the rights on matching shares are granted for zero and the number of shares is equal to the number of bonus shares,
- the matching shares are delivered three years after the delivery of the bonus shares. One matching share is delivered for each bonus share that has been retained for three years,
- for each bonus share that is sold within three years, the associated right to one matching share lapses. If more than 50% of the bonus shares are sold within three years, the entire right to matching shares lapses with immediate effect,
- where a participant leaves the company for certain reasons (retirement, certain reorganisations, disability or death) the right to matching shares will vest immediately and he/she can exercise his/her right pro rata, and
- a participant loses the right to exercise his/her right on matching shares when he/she leaves the company for reasons other than those mentioned above,
The exercise of the rights on matching shares is subject to the TNT rules concerning inside information that apply to our company. All awards under this plan are equity settled.
The table below summarises the status of the number of outstanding rights on matching shares granted to senior managers in the current TNT group:
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| Bonus connecting matching rights Management | Year | Number of matching rights on shares | Remaining years in contractual life | ||||
| Outstanding as at 1 Jan 2006 | Discontinued operations | Granted during 2006 | Exercised or forfeited during 2006 | Outstanding as at 31 Dec 2006 | |||
| Management | 2003 | 44,959 | 1,374 | 43,585 | |||
| 2004 | 94,786 | 16,341 | 5,174 | 73,271 | 0.3 | ||
| 2005 | 114,304 | 21,938 | 5,590 | 86,776 | 1.3 | ||
| 2006 | 67,107 | 1,211 | 65,896 | 2.3 | |||
| Total | 254,049 | 39,653 | 67,107 | 55,560 | 225,943 | ||
In 2006 the average price on exercise for matching shares for the management was €29.36.
Fair value assumptions and hedging
Our share based payments have been measured using the Monte Carlo fair value measurement method. Significant assumptions used in our calculations are as follows:
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| 2006 | 2005 | 2004 | |
| Share price (in €) | 30.05 | 20.71 | 18.44 |
| Volatility (%) | 20.89 | 28.35 | 32.39 |
| Vesting period (in years) | 3 | 3 | 3 |
| Risk free rate (%) | 3.60 | 2.39 | 4.09 |
| Dividend yield (%) | 2.29 | 3.13 | 2.90 |
As of 4 May 2006, the 2006 grant date the fair value of our matching shares awarded was €28.13 and the fair value of our performance shares awarded was €18.64.
As of 5 May 2005, the 2005 grant date, the fair value of our matching shares awarded was €18.62 and the fair value of our performance shares awarded was €14.11. As of 27 April 2004, the 2004 grant date, the fair value of our options awarded was €4.73, of our matching shares was €16.29 and of our performance shares awarded was €10.74.
We manage our risk in connection with the obligations we have under the existing share and option plans by purchasing shares in the market. In 2006, we purchased 2,700,000 shares at an average price per share of €29.34. In 2005, 2004 and 2003 we purchased no shares for hedging purposes.
At 31 December 2006, we held a total of 2,884,441 shares to cover share and options schemes (2005: 3,791,438), purchased at a weighted average price per share of €26.98 (2005: 22.06).
ο 20 DEPRECIATION, AMORTISATION AND IMPAIRMENTS: 318 MILLION (2005: 303; 2004: 296)
Impairment costs for property, plant and equipment of €5 million (2005: 9; 2004: 11) are included in the depreciation expense.
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| Year ended at 31 December | |||
| 2006 | 2005 | 2004 | |
| Amortisation and impairment of other intangibles | 63 | 51 | 47 |
| Depreciation and impairment property, plant and equipment | 255 | 252 | 249 |
| Total | 318 | 303 | 296 |
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ο 21 OTHER OPERATING EXPENSES: 578 MILLION (2005: 608; 2004: 537)
The other operating expenses in express in 2006 were €286 million (2005: 281; 2004: 264) and in mail €291 million (2005: 257; 2004: 248). The operating expenses per division includes cost for shared services cost. The comparative figures for 2005 and 2004 have been adjusted to reflect the transfer of Cendris UK from mail to express.
Total advertising expenses incurred in 2006 amounted to €28 million (2005: 15; 2004: 42), €20 million in express and €8 million in mail.
Included within other operating expenses are costs incurred for services provided by our group statutory auditors, PricewaterhouseCoopers Accountants N.V.
The fees for their services can be divided into the following categories:
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| Year ended at 31 December | ||||
| 2006 | 2005 | 2004 | ||
| Audit fees | 14 | 13 | 12 | |
| Audit related fees | 9 | 5 | 3 | |
| Tax advisory fees | 0 | 0 | 0 | |
| Other fees | 0 | 1 | 1 | |
| Total | 23 | 19 | 16 | |
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Included in the table is approximately €7 million in 2006, €4 million in 2005 and €3 million in 2004 related to fees for services provided to our discontinued business.
Fees for audit services include the audit of TNT’s annual financial statements, testing of internal controls and the attestation of management’s assessment on internal controls, as required by the Sarbanes-Oxley Act of 2002, the review of interim financial statements, statutory audits, services associated with issuing an audit opinion on the postal concession reporting and services that only the independent auditor can reasonably provide. Fees for audit related services include employee benefit plan audits, due diligence related to mergers and acquisitions, internal control reviews, consultation concerning financial accounting, transition to IFRS and reporting matters not classified as audit. Audit related fees in 2005 also include consultation and review of our controls framework related to the Sarbanes-Oxley Act requirements amounting to approximately €2 million. Fees for tax services include tax compliance, tax advice, including all services performed by the independent auditor’s professional staff in its tax division, except those rendered in connection with the audit. Fees for other services include financial risk management reviews and audit of corporate sustainability reports.
ο 22 NET FINANCIAL INCOME AND EXPENSES
Interest and similar income: 199 million (2005: 117; 2004: 100)
Interest and similar income of €199 million (2005: 117; 2004: 100) mainly relates to interest income on banks, loans and deposits of €109 million, of which €93 million relates to a gross up of interest on cash pools (fully offset by an equal amount in interest expenses), interest income on funding our discontinued business (logistics and freight management) of €73 million, and hedge income of €15 million relating to outstanding hedges.
Interest and similar income in 2005 of €117 million mainly relates to interest income on funding our discontinued business (logistics and freight management) of €74 million, interest of €21 million relating to an income tax refund, interest income on loans and deposits of €12 million and interest income of €6 million relating to outstanding hedges.
Interest and similar income in 2004 of €100 million mainly relates to interest income on funding our discontinued business (logistics and freight management) of €67 million, interest income on loans and deposits of €12 million, a one-off gain of €11 million on the unwind of a USD 435 million swap and amortisation of forward points of €3 million relating to outstanding hedges.
Interest and similar expenses: 246 million (2005: 117; 2004: 116)
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| Year ended at 31 December | |||
| 2006 | 2005 | 2004 | |
| Interest on longterm borrowings | 52 | 54 | 61 |
| Interest added to provisions | 2 | 1 | |
| Interest on shortterm borrowings | 117 | 11 | 8 |
| Foreign currency swaps - fair value hedges | 31 | 23 | 9 |
| Net foreign exchange transaction gains/losses | 2 | 2 | |
| Other financial expenses | 46 | 25 | 35 |
| Total | 246 | 117 | 116 |
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Interest and similar expense in 2006 of €246 million mainly relates to interest expense on bank overdrafts and bank loans of €117 million, of which €93 million relates to a gross up of interest on cash pools (fully offset by an equal amount in interest income), interest expense on long term borrowings of €52 million, interest on fundings owed to discontinued business (logistics and freight management) of €21 million, hedge costs and fair value adjustments on outstanding hedges of €31 million and interest expenses on taxes of €21 million. Relating to the interest expenses on taxes an amount of €14 million is to be paid as at 31 December 2006.
Interest and similar expense in 2005 of €117 million mainly relates to interest on long term borrowings of €54 million, interest expense on funding from our discontinued business (logistics and freight management) of €21 million, hedge costs and fair value adjustments on outstanding hedges of €23 million and interest expense on bank overdrafts and bank loans of €7 million.
Interest and similar expense in 2004 of €116 million mainly relates to interest expenses on long term borrowing of €61 million, interest expense on funding from our discontinued logistics business of €18 million, amortisation of forward points relating to hedging instruments of €9 million and interest expense on bank overdrafts and bank loans of €10 million.
ο 23 INCOME TAXES: 395 MILLION (2005: 376; 2004: 372)
Income taxes in the statements of income of 2006 amount to €395 million (2005: 376; 2004: 372), or 32.3%, (2005: 32.8%; 2004: 34.1%) of income before income taxes. Of the €395 million, €213 million of our total income taxes related to tax authorities outside the Netherlands.
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| Year ended at 31 December | |||
| 2006 | 2005 | 2004 | |
| Dutch statutory income tax rate | 29.6 | 31.5 | 34.5 |
| Adjustment regarding effective income tax rates other countries | 0.8 | (0.9) | (1.9) |
| Permanent differences: | |||
| Non and partly deductible costs | 1.5 | 1.4 | 0.9 |
| Exempt income | (0.7) | (0.4) | |
| Other | 1.1 | 1.2 | 0.6 |
| Effective income tax rate | 32.3 | 32.8 | 34.1 |
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Income taxes differ from the amount calculated by multiplying the Dutch statutory corporate income tax rate with the income before income taxes. In 2006, the effective income tax rate was 32.3% (2005: 32.8%; 2004: 34.1%), which is higher than the statutory corporate income tax rate of 29.6% in the Netherlands (2005: 31.5%; 2004: 34.5%).
The item “Other” in 2006 was positively impacted by 6.3% for the recognition of a tax benefit on the liquidation of the remaining relevant entities of our French business. An adverse effect of 4.0% relating to prior years was caused by agreements and expected settlements with tax authorities in various tax jurisdictions. A further one-off adverse effect of 3.4% relates to the tax effects caused by various restructurings. Furthermore, the decrease of the Dutch corporate income tax rate to 25.5% in 2007 lead to an improvement of our deferred tax position which caused the effective tax rate to decrease by 1.9%. The remaining “Other”, amounting to 1.9%, includes the adverse impact of losses.
Income tax expense consists of the following:
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| Year ended at 31 December | |||
| 2006 | 2005 | 2004 | |
| Current tax expense | 396 | 334 | 341 |
| Changes in deferred taxes (excluding acquisitions/foreign exchange effects) | (1) | 42 | 31 |
| Total income taxes | 395 | 376 | 372 |
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In 2006, the current tax expense amounted to €396 million (2005: 334; 2004: 341). The difference between the total income taxes in the statements of income and the current tax expense is due to timing differences. These differences are recognised as deferred tax assets or deferred tax liabilities.
In 2006 we paid income taxes for an amount of €282 million (2005: 125; 2004: 403).
The following table shows the movements in deferred tax assets in 2006.
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| Provisions | Property, plant and equipment | Losses carried forward | Other | Total | |
| Deferred tax assets at 31 December 2005 | 18 | 6 | 71 | 93 | 188 |
| Transfers to assets held for sale | 0 | 0 | (1) | (2) | (3) |
| Changes credited directly to equity | 0 | 0 | 0 | 15 | 15 |
| Other changes | 14 | 2 | (7) | 2 | 11 |
| Deferred tax assets at 31 December 2006 | 32 | 8 | 63 | 108 | 211 |
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Deferred tax assets at 31 December 2006 of €4 million related to our discontinued freight management business are included in assets held for sale.
For deferred tax assets an amount of €14 million is to be recovered within 12 months and an amount of €197 million is to be recovered after 12 months.
Deferred tax assets and liabilities with the same term and the same consolidated tax group are presented net in the balance sheet if we have a legally enforceable right to offset the recognised amounts.
Out of the total “other” deferred tax assets of €108 million (2005: 93; 2004: 104) an amount of €61 million (2005: 42; 2004: 45) relates to temporary differences for assets that are both capitalised and depreciable for tax purposes only.
The total accumulated losses available for carry forward at 31 December 2006 amounted to €689 million (2005: 639; 2004: 602). With these losses carried forward, future tax benefits of €221 million could be recognised (2005: 203; 2004: 194). Tax deductible losses give rise to deferred tax assets at the statutory rate in the relevant country. Deferred tax assets are recognised if it is probable that they will be realised. The probability of the realisation is impacted by uncertainties regarding the utilisation of such benefits, for example as a result of the expiry of tax losses carried forward and projected future income. As a result we have not recognised €158 million (2005: 133; 2004: 116) of the potential future tax benefits and have recorded deferred tax assets of €63 million at the end of 2006 (2005: 70; 2004: 78).
The expiration of total accumulated losses is presented in the table below:
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| 2007 | 3 |
| 2008 | 11 |
| 2009 | 9 |
| 2010 | 20 |
| 2011 and thereafter | 224 |
| Indefinite | 422 |
| Total | 689 |
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The following table shows the movements in deferred tax liabilities in 2006:
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| Provisions | Property, plant and equipment | Other | Total | |
| Deferred tax liabilities at 31 December 2005 | 153 | 62 | 18 | 233 |
| Transfers to liabilities related to assets classified as held for sale | 0 | 0 | (2) | (2) |
| Changes | (8) | 3 | 14 | 9 |
| Deferred tax liabilities at 31 December 2006 | 145 | 65 | 30 | 240 |
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Deferred tax liabilities at 31 December 2006 of €6 million related to our discontinued freight management business are included in liabilities related to assets classified as held for sale.
For deferred tax liabilities an amount of €19 million is to be recovered within 12 months and amount of €221 million is to be recovered after 12 months.
Multinational groups of the size of TNT are exposed to varying degrees of uncertainty related to tax planning and regulatory reviews and audits. We account for our income taxes on the basis of our own internal analyses, supported by external advice. We continually monitor our global tax position, and whenever uncertainties arise, we assess the potential consequences and either accrue the liability or disclose a contingent liability in our financial statements, depending on the strength of our position and the resulting risk of loss.