Risks from future developments

Deutsche Post World Net employs a uniform method of documenting risks throughout the Group, with responsibility devolved to the individual business and corporate departments and subsidiaries. All these business units are obliged to update their forecasts on a quarterly basis. Potential risks are inventoried by each business unit once a year, and this information forms the basis for our ongoing systematic risk management. The Board of Management receives a twice-yearly report on the major opportunities and risks within the Group. In fiscal year 2001, the risk management system was the subject of internal auditing, and was also examined for its suitability as part of the external audit of the annual financial statements.

Deutsche Post World Net does not currently consider itself at significant risk from macroeconomic factors. The increasing internationalization of our business activities increases our vulnerability to economic fluctuations in our main markets, but minimizes our dependence on individual markets.

There are various sector risks for our four corporate divisions:

Significant risks arise from the special regulatory framework governing the mail market. The EU Directive on competition in the European postal market provides for an upper weight limit of 350g for mail whose transportation can be reserved for traditional postal companies. In accordance with the Postgesetz (German Postal Act), the scope of the exclusive license which is scheduled to lapse at the end of 2007 is much narrower and more restrictive. Furthermore, the Postal Act allows exceptions, on the basis of which competitors in the local post segment are permitted even within the boundaries of the exclusive license. The resulting competitive pressure can be seen from the more than 4,200 licenses issued by the regulatory authority to over 1,000 licensees. Further liberalization of the postal market in the European Union is currently under discussion. At present, a reduction of the weight limit stipulated by the EU Postal Services Directive to 100g as of 2003 and 50g as of 2006 seems realistic. This opens up additional business opportunities for Deutsche Post World Net on the European mail markets. As yet, no agreement has been reached at the political level on a concrete deadline for full deregulation. The prices of services falling under the exclusive license have been approved until December 31, 2002. The possibility of future approval procedures leading to lower tariffs cannot be ruled out.

Due to strong growth in electronic media, we expect losses through substitution in the mail segment. To a large extent we will be able to contain these losses through advertising campaigns promoting mail communication, an attractive product range and high-quality sales activities.

Furthermore, customers and competitors may obtain partial access to our networks. Access and other conditions have been determined by the regulator.

Competition in express and logistics markets has heated up, particularly in Europe. Nevertheless, continued globalization and stronger world trade present further growth opportunities. As Deutsche Post World Net has sufficient critical mass, we will emerge from this competitive environment stronger than before.

In the financial services market, we distinguish between credit risk, market price risk and operational risk. Postbank uses standard hedging instruments to offset bank-specific risks. Liquidity risk is monitored in accordance with the provisions laid down by the German Banking Act and the Federal Banking Supervisory Authority (BAKred). Compliance with specified limits is monitored daily. A risk system for operational risks is currently being established at Postbank which will also take into account the future requirements set out in the second consultation paper of the Basle Committee (“Basle II”).

As a Group, we are predominantly active in the services sector, and so have no primary marketing or production risks. Our domestic sorting centers for letters and parcels are constantly and systematically monitored to prevent business interruptions. In addition,we have contingency plans to ensure continued production even in the event of shutdown at a facility, as seen in the recent cases of alleged anthrax-laced letters in Germany.

Our procurement activities are not dependent upon individual suppliers. Where possible and economically justifiable, we spread contracts across suppliers, and continuously analyze terms and supply relationships.

Financial risks arising from interest rate, currency, market, liquidity and cash flow trends are at most of secondary importance for the Group’s primary financial instruments. The vast majority of these financial instruments are attributable to the Deutsche Postbank group.

In the course of its other operating activities, Deutsche Post World Net is exposed to interest rate and currency risks in particular. In order to limit these risks, we operate a program of financial management using standard derivative instruments. The nominal volume of interest rate and foreign currency hedging transactions at December 31, 2001 was 1,184 million.

Several cases are currently pending before the European Commission in which potential violations of European competition and state aid legislation are being investigated. These present legal risks for the Group.

During the competition proceedings relating to accusations of excessive postage prices, we presented detailed evidence of the reasonableness of our prices. As regards the state aid proceedings against the Federal Republic of Germany relating to accusations of cross-subsidization of the parcel business by the mail sector, both the Federal Government and the company consider the accusations to be unfounded. However, in the competition proceedings the imposition of a fine by the European Commission cannot be ruled out, and in the state aid proceedings, the Commission could call for the repayment of state aid to the Federal Government although such a demand for repayment is highly unlikely. The outcome of the proceedings could have a material adverse effect on the financial position and results of operations of the Group.

The use of modern hardware and software reduces the risk of disruption to our information technology (IT) systems. In addition, we have established a specific IT security management structure whose bodies and functions are described in detail in a manual. Corresponding measures are in place to ensure the availability of computer systems and networks, and data backups.

A significant part of our successful Group restructuring can be put down to the efforts of our employees. We are adapting to the intensely competitive international market for managers and highly skilled professionals by creating corresponding remuneration and incentive programs.

We do not expect asset or liquidity issues to pose a threat to the continued existence of the Group. This can be seen from our high earnings capacity and positive cash flow development. Likewise, our diversified range of services and our large global customer base in particular mean that there is no overall risk to the Group’s existence in the foreseeable future.