Basler AG — Interim / Quarterly Report 2004

Nov 5, 2004

Quarterly Report

Quarterly Report Q3/2004

The 3rd quarter and the first nine months of 2004 in brief:

• Turnover in 3rd quarter increased to $\epsilon$ 11.4 mill. (+15% compared to $\epsilon$ 9.9 mill. in O3/2003). Earnings before tax increased 16% to $\in$ 0.8 mill. (Q3/2003: $\in$ 0.7 mill.).
• Incoming orders up 24% to $€$ 14.6 mill. (Q3/2003: $€$ 11.8 mill.).
• Slight out-performance of forecast for 2004 of $\epsilon$ 50 mill. turnover (+40% on 2003) and earnings before tax of € 5 mill. (compared to $€$ 0.7 mill. in 2003).

	Q 3 2004	$\overline{\mathbf{Q3}}$ 2003		$+/-$
Sales	11.4		9.9 Mill.€	$+15%$
Vision Systems	7.1	6.1	Mill. $\in$	$+16%$
Vision Components	4.3		3.8 Mill. €	$+15%$
Incoming Orders	14.6		$11.8$ Mill. €	$+24%$
Result
Gross margin	52	54 %		$-2%$
Operative earnings	0.6		$0.6$ Mill. $\in$	$+7%$
EBT	0.8		0.7 Mill. €	$+16%$
Net income	0.5		0.7 Mill. €	$-23%$
Net income margin	5	7	%	$-2%$
Number of shares	3.5	3.5	Mill.
Earnings per share	0.15	$0.20 \in$		$-23%$
FBITDA	$\overline{1.6}$		$1.7$ Mill. $\in$	$-5%$
EBIT	0.9		0,9 Mill. €	$+6%$
Cash (on cut-off date)	3.4		0.9 Mill. $\in$	$+373%$
Balance Sheet (on cut-off date)
Capital employed	14.7	3.1	Mill. $\in$	$+12%$
Equity	9.9	4.0	Mill. $\in$	$+146%$
Equity rate	38	23	%	$+16%$
Employees (on cut-off date)
Number of staff	325	259	T€	$+25%$
Turnover per employee	35.1	38.2	T€	$-8%$
Personal expenditure rate	37	34 %		$-3%$
Share (on cut-off date)
Share price (XETRA)	14,8	7,62 €		$+94%$
Market capitalisation	51,8		26.7 Mill. €
Dates for

Vision Technology

Vision technology is the technology of artificial vision. It is the foundation for computerbased vision systems which make automatic decisions on the basis of picture information. The main applications are currently in the industrial production sector in particular (e.g. in the area of quality control) and serve to optimise production effectivity. The market for vision technology generated sales at a volume of over 6 bill. US-Dollars worldwide in 2003. Only 20-25% of all known industrial use possibilities have been implemented. New fields of application – including in the consumer-related sector - will arise in the coming years, existing markets will continue to grow. Today, Basler addresses five target markets with its two business divisions Vision Systems and Vision Components.

Vision Systems Business Division

Inspection systems for the

• electronics/display industry (Display Inspection)
• optical media industry (Optical Media Inspection)
• rubber/elastomere industry (Sealing Inspection)
• plastics industry (Web Inspection)

Vision Components Business Division

Digital camera solutions for the machine vision industry

Dates for
2004/2005

2004/2005
24 November 2004	Presentation at the German Equity Forum in Frankfurt	www.eigenkapitalforum.com
10 March 2005	2004 annual financial statement released
28 April 2005	First quarterly report 2005 released	www.baslerweb.com
23 June 2005	Annual General Meeting in Ahrensburg

Dear Ladies 2 Gentlemen

The completed third quarter of 2004 confirms the successful trend of the previous quarters. Turnover was increased by 15% and pre-tax earnings by 16% on the year-earlier quarter. Incoming orders rose 24%.

In the first nine months of the year, turnover rose 52%, earnings before tax improved from € -0.1 mill. to € 4.4 mill.

Incoming Orders

Incoming orders increased by 24% on the year-earlier quarter, amounting to € 14.6 mill. across the group (Q3/2003: € 11.8 mill.). Incoming orders in the first nine months of the year thus reached a volume of € 38.7 mill. This is equivalent to a 32% increase on the same period in the previous year (OI-3/2003: € 29.3 mill.).

This growth in the first nine months of the year was generated by both business divisions. Incoming orders in the high-performance camera components business area increased 23% compared to the previous year, while incoming orders for inspection systems during the period under review rose 36% (see Divisional Information).

Turnover

Turnover increased to $\epsilon$ 11.4 mill. in the third quarter. This is equivalent to 15% growth on the year-earlier quarter (€ 9.9 mill.). Total turnover generated in the first nine months of 2004 thus amounted to $\epsilon$ 37.5 mill., 52% above the year-earlier period (Q1-3/2003: € 24.7 mill.). Net sales in the first nine months of 2004 thereby exceeded the sales level of the entire financial year 2003.

This positive turnover development resulted from our high level of innovation activity and the resulting gain of market shares, coupled with continuing strong demand on our target markets.

Earnings

The company's earning capacity remains undiminished. Earnings before tax in the third quarter amounted to € 0.8 mill. - a 16% plus

on the year-earlier quarter ( $Q3/2003$ : $\in 0.7$ mill.). The pre-tax margin remained stable at 7% (Q3/2003: 7%).

Earnings after tax in Q3/2004 were $\epsilon$ 0.5 mill., slightly below the year-earlier level $(Q3/2003: \text{\textsterling} 0.7 \text{ mill.})$ due to depreciation of deferred tax. This is equivalent to $\epsilon$ 0.15 earnings per share $(Q3/2003; \epsilon 0.20)$ . In the first nine months of 2004, $\epsilon$ 4.4 mill. earnings before tax were thus generated (compared to $\epsilon$ – 0.1 mill. in Q1-3/2003). Net earnings in the first nine months of 2004 amount to € 2.8 mill. and thus € 0.79 earnings per share (Q1-3/2003: €-0.1 mill., €-0.03 per share). The net margin is at 7% (Q1- $3/2003: -1\%$ ).

Divisional Information

The Vision Systems Division generated $\epsilon$ 7.1 mill. turnover in the third quarter of 2004. The division thus increased turnover by 16% on the year-earlier quarter (Q3/2004: € 6.1 mill.). Divisional turnover in the first nine months of 2004 amounted to € 24.6 mill., exceeding the previous year's performance by 57% (Q1-3/2003: € 15.7 mill.).

Incoming orders in Vision Systems in the third quarter showed a clear increase on the previous year at € 11.1 mill. (+49% on Q3/2004: € 7.5 mill.). The total increase on the previous year in the first nine months was 36% to € 26.7 mill. (Q1-3/2003: € 19.6 mill.).

Divisional earnings before interest, tax and dividends in Vision Systems amounted to € 0.2 mill. in the third quarter ( $Q3/2003$ : € 0.3 mill.). In the first nine months of the year, earnings increased to $\epsilon$ 2.5 mill. compared to $\epsilon$ -0.4 mill. in the year-earlier period. The individual product categories in the Vision Systems Division showed differing developments.

As expected, investment activity in manufacturing equipment for write-once optical media has diminished perceptibly. This is due to falling prices for these media, based on the extreme increase in production

capacity in recent quarters. Incoming orders in the second quarter in Optical Media Inspection reflect this development. We do not anticipate a perceptible increase in investment in production equipment for recordable media until mid-2005. We expect a slight decrease in demand for manufacturing equipment for pre-recorded media in the coming year compared with 2004. Operations in the area of Sealing Inspection and Web Inspection showed stable development in the past quarter. Trading with inspection systems for flatscreens (Display Inspection) over-compensates for the reduction in orders in Optical Media Inspection in the second half of 2004. Turnover in this area $-$ starting at a lower level $-$ was increased fivefold in the first months of 2004. The large-scale incoming orders of the past quarter in Display Inspection will cause further turnover increases with this product group in the coming quarters.

Turnover in the Vision Components

Division rose 15% in the third quarter of 2004 to € 4.3 mill. (Q3/2003: € 3.8 mill.). Vision Components thus generated $\epsilon$ 12.9 mill. turnover in the first nine months of the year, compared to $\epsilon$ 9.0 mill. in the first nine months of 2003 (+44%). This means that Vision Components reached the turnover level of the whole financial year 2003 in only nine months.

Incoming orders decreased slightly in Vision Components during the past quarter, at $\epsilon$ 3.5 mill. 19% below the year-earlier quarter (Q3/2003: € 4.3 mill.). The background to this development is a large-scale order in Q3/2003, which affected turnover over several quarters. Total incoming orders in the first nine months of the year in Vision Components amounted to € 12.0 mill. (+23% compared to Q1-3/2003: € 9.7 mill.). We expect a clear increase in incoming orders in the fourth quarter compared to the year-earlier quarter. The divisional earnings before interest, tax and dividends fell $-16\%$ in the third quarter, from € 0.7 mill. (Q3/2003) to € 0.6 mill. This is due to depreciation on outside

developments and increased marketing expenditure. In the first nine months of the year, total divisional earnings were raised +96%. from € 1.0 mill. (Q1-3/2003) to € 1.9 mill.

Research & Development

Expenditure for Research & Development in the third quarter increased 60% on the yearearlier quarter, amounting to € 1.9 mill. (Q3/2003: € 1.2 mill.). A total of € 5.6 mill. was thus channelled into Research and Development in the first nine months of the year. This accounts for 15% of the turnover generated during the period and 49% more than in the year-earlier period ( $\epsilon$ 3.8 mill.). Continually high investment in R&D forms a central prerequisite for innovation and stable growth in the future.

Staff

The number of staff as of 30.09.2004 was 325, an increase of 6% on the previous quarter (Q2/2004: 307) and of 25% on the year-earlier quarter (Q3/2003: 259). In view of the sharp turnover growth, recruitment was concentrated in the areas of Research & Development, Production & Logistics and Sales & Service in the foreign subsidiaries. The majority of our staff is employed at the company's headquarters in Ahrensburg (288 compared to O3/2003: 230). Basler Inc. in the USA employed 15 staff as of 30.09.2004 (Q3/2003: 14). Basler Asia Pte. Ltd. in Singapore employed 6 staff (Q3/2003: 5) and Basler Vision Technologies Inc. in Taiwan and the representation in Shanghai employed a total of 16 (Q3/2003: 10).

$\mathsf{Cash}$

Operative cash-flow amounted to $\epsilon$ 2.3 mill. as of 30.09.2004, a +344%% improvement on the year-earlier date. Net cash-flow in the first nine months of the year amounted to $\epsilon$ 1.6 mill. (30.09.2003: € -1.4 mill.). Liquid funds, however, were reduced during the period under review from $\epsilon$ 3.7 mill. as of 01.01.2004 to € 3.4 mill., including repayment

of a shareholder's loan amounting to $\epsilon$ 5.0 mill, and the accommodation of a convertible issue of € 3.0 mill. Shareholders have signed convertible shares worth € 1.8 mill. out of the payback of the shareholder loans.

The Share

Members of the Managing and Supervisory Boards held the following shares and options as of 30.09.2004:

	Shares		Options
	30.09. 2004	30.06. 2004	30.09. 2004	30.06 2004
Supervisory Board
Norbert Basler
(Chairman)	$2.0$ mill.	$2.0$ mill.
Bernd Priske
(Vice-Chairman)
Konrad Ellegast	3.000	3.000
Managing Board
Dr. Dietmar Ley
(Chairman)	135,282	135,282	26.931	4.482
Axel Dancker	3,000	3,000
Peter Krumhoff	500	500	4.800

The following staff options are in circulation as of 30.09.2004 from the staff equity participation scheme of the year 2000 and the convertible issue of 31.07.2004:

	2000	2004
Issued	80,000	51,893
In circulation as of
30.06.2004	43,030	51,893
Subscribed
Fxercised
Invalid since 30.06.2004	600	0
In circulation as of
30.09.2004	42,430	51,893

Code of Corporate Governance

The Managing and Supervisory Boards declare that the recommendations of the Code Commission established by the German Federal Government in the version of May 2003 were complied with in the expired quarter Q3/2004, and that these will be complied with in future, with the exception of the following recommendations:

Sub-section 5.3.1.

Committees will not be formed within the Supervisory Board. The Supervisory Board of Basler AG is composed of three persons, due to the size of the company. The size of the board guarantees efficiency in itself, as the general minimum size of committees is also three persons.

Sub-section 5.4.5.

Compensation of Supervisory Board members is regulated in the articles of association. A variable component of the compensation is unnecessary in view of the low absolute level of payments.

Sub-sections 4.2.3. and 4.2.3.

Compensation of members of the Managing Board consists of variable and fixed components. These are presented along with the overall level of compensation in the appendix to the Annual Report 2003, for the entire Managing Board. The compensation of the Managing Board is not presented on an individualised basis. The Managing and Supervisory Boards aim to maintain the greatest possible transparency towards capital market participants, simultaneously respecting the interests of the company and individuals. The company regards the publication of personal information on individuals in times of increasingly strict data protection laws as excessive, if this might possibly lead to disadvantages for those affected and/or their families.

The declaration of obligation to the Code and the corresponding compliance can be accessed in their latest form via the Investor Relations section of the company's website. Please contact Basler AG's compliance officer should you have any questions on the Code of Corporate Governance:

Christian Höck Tel. +49 (0) 4102-463 175 christian.hoeck@baslerweb.com

Prospects

Basler had a very successful first nine months of the year 2004. The company generated 52% turnover growth on the previous year at a pre-tax return rate of just under 12%. The unexpectedly high return rate is predominately due to the successful introduction of new, innovative products and also to under-proportionate personnel expenditure in the first half of the year. Basler will continue to increase turnover in the final quarter of the year, although demand for investment goods in the optical media industry has decreased in comparison to the first two quarters, in line with our expectations. We anticipate that this weak demand will continue into the first half of 2005. This effect will be more than compensated by growth in other areas particularly in Display Inspection. Incoming orders will show further stable development in the fourth quarter of 2004, however they will be below the unusually high levels of the previous quarter and the year-earlier quarter (large-scale block orders were received from the flatscreen industry in both comparison periods). Pre-tax earnings in the fourth quarter of

2004 are likely to reach the level of the previous quarters, despite increasing investment in staff.

Bearing in mind the successful first three quarters of 2004 and the high volume of incoming orders in the third quarter, we assume that we will once again outperform the forecast raised at the middle of the year of € 50 mill. turnover (+40% on previous year) with pre-tax earnings of approx. $\epsilon$ 5 mill. (earnings before tax 2003: € 0.7 mill.) and thus a pre-tax return rate of 10%. Taking current developments on the technology markets and a further deterioration of the US\$/€ exchange rate into account, we expect to continue our growth course at a slower rate in the financial year 2005.

In our systems operations, we expect a slightly higher total turnover level than in 2004. Turnover in inspection equipment for optical media is likely to be at a slightly lower level than in 2004, due to continuingly weak demand in the first half of 2005. Due to recent signs of overheating in the flatscreen industry, we expect less turnover growth in this area than in 2004. In the rubber/elastomer and plastics industry, we anticipate stronger growth than in the current year, on the basis of a renewed and widened product range and further extended international marketing and service activities.

Our growth course in the components area is likely to continue apace due to the introduction of additional products. The growth rate will be influenced by the development of demand in the semiconductor and electronics industry. In general, we have further reduced Basler's dependency on individual markets over the course of 2004 by successfully building up new business areas in systems and components. The current structure means the company is able to exploit growth potential in new markets faster than previously, can better compensate for fluctuation in demand on our target markets and thus successfully implement our growth strategy, even under more difficult conditions.

The Managing Board

Divetwor by del Devel 1

Consolidated Statement of Operations as of Third Quarter 2004
in Euro thousand (US-GAAP)*

	Q3 2004 $01.07. -$ 30.09.2004	Q1-Q3 2004 $01.01 -$ 30.09.2004	Q3 2003 $01.07. -$ 30.09.2003	QI-Q3 2004 $01.01 -$ 30.09.2004
Sales	11,410	37.544	9,897	24,712
Cost of sales	$-5,466$	$-17.818$	$-4,545$	$-10,764$
Gross profit	5,944	19.726	5,352	13,948
Operating expenses
Research and development expenses	$-1,851$	$-5,626$	$-1,155$	$-3,780$
Selling and marketing expenses	$-1,677$	$-5,371$	$-1,237$	$-3,601$
General and administrative expenses	$-1,771$	$-4,647$	$-2,355$	$-6,489$
Total operating expenses	$-5,299$	$-15,644$	$-4,747$	$-13,870$
Operating result	645	4,082	605	78
Interest income	6	15		$\overline{7}$
Interest expenses	$-135$	$-590$	$-183$	$-527$
Other income	288	856	273	359
Result before income taxes	804	4,363	696	$-83$
Income tax	$-273$	$-1,6$	$-7$	$-29$
Net result	531	2,752	689	$-112$
Weighted average number of shares (basic)	3,500,000	3,500,000	3,500,000	3,500,000
Weighted average number of shares (diluted)
Authorized capital	1,750	1,750	1,750	1,750
Conditional capital	350	350	350	350
Net result per share (basic)	0.15	0.79	0.20	$-0.03$

Consolidated Balance Sheet as of September 30, 2004
in Euro thousand (US-GAAP)*

Assets	as of 30.09.2004	as of 31.12.2003
Current Assets
Cash & Cash equivalents	3,378	3,741
Trade accounts receivable, net	5,575	4.741
Inventories
Finished goods and commodities	2.097	682
Work in process	2,786	2,611
Raw materials and supplies	6,405	5,064
Total inventories	11,288	8,357
Other current assets and prepaid expenses	508	588
Total current assets	20,749	17,427
Property and Equipment
Technical equipment and IT	3.569	3.357
Fixtures, fittings, tools and equipment	2.602	3.114
Accumulated depreciation	$-4, 134$	$-4,310$
Total property and equipment	2,037	2,161
Intangible Assets
Software and licences	1,541	1,316
Accumulated depreciation	$-1,130$	$-974$
Total intangible assets	411	342
Deferred tax assets	2,774	3,931
Total Assets	25,971	23,861

Consolidated Balance Sheet as of September 30, 2004
in Euro thousand (US-GAAP)*

Liabilities and Shareholder's Equity	as of 30.09.2004	as of 31.12.2003
Current Liabilities
Notes payable to shareholders	65	4.960
Short term liabilities to banks	2.587	2.564
Trade accounts payable	1,662	1.556
Accrued expenses	1.590	1.623
Other current liabilities	751	735
Advanced payments received	3,743	3,334
Total current liabilities	10,398	14,772
Commitments and Contingencies
Long term accured expenses	851	413
Convertible bond	3.000	0
Other long term liabilities	511	511
Silent Partnership	1.023	1.023
Total liabilities	15,783	16,719
Shareholder's Equity
Common stock	3.500	3.500
Additional paid-in capital	995	995
Accumulated earnings	5.439	2.687
Accumulated foreign currency translation adjustment	$-61$	$-47$
Total shareholder's equity	9,873	7,135
Deferred tax liabilities	315	7
Total Liabilities and Shareholder's Equity	25,971	23,861

Consolidated Statement of Cash Flow as of September 30, 2004 in Euro thousand (US-GAAP)*

	$01.01 -$ 30.09.2004	$01.01 -$ 30.09.2003
Cash flow from operating activities
Net Result	2,752	$-112$
Depreciation of fixed assets and intangible assets	661	801
Gains on disposal of equipment	167	$\Omega$
Changes in:
Inventories	$-2,931$	$-1,816$
Trade accounts receivable	$-835$	$-152$
Accrued Expenses	405	$-1,100$
Other current assets and prepaid expenses	79	393
Deferred tax assets	1,465	$\Omega$
Foreign currency translation adjustment	$-18$	27
Notes payable to shareholders	65	$-46$
Advanced payments received	413	667
Trade a accounts payable	106	222
Other current liabilities	9	153
Net cash used for operating activities	2,348	$-963$
Cash flow from investing activities
Proceeds from sales of equipment	$-$	23
Purchase of equipment	$-774$	$-479$
Net cash from investing activities	$-775$	$-456$
Cash flow from financing activities
Increase in cash received by bank loan	23	1,081
Increase of cash received by shareholder's loans	$\Omega$	870
Payback of shareholder's loans	-4,960	$\Omega$
Increase of cash received by convertible bond	3,000	$\Omega$
Net cash provided by financing activities	$-1,937$	1,951
Net change in cash	$-364$	532
Cash, beginning of period	3,741	373
Cash, end of period	3,377	905
additional notes
payments for:
interest	425	519
income tax	0	22

Segment Informationen in Euro thousand (US-GAAP)*

	Vision Systems		Vision Components		Reconcilation		Group
	2004	$Q1-Q3$ 2003	2004	$Q1-Q3$ 2003	2004	$Q1-Q3$ 2003	$Q1-Q3$ 2004	2003
Sales revenues	24,615	15,723	12,930	8,990	0	0	37,545	24,713
Germany	3,137	2,422	3,306	2,620	0	0	6,443	5,042
Foreign	21,478	13,301	9,624	6,370	$\circ$	0	31,102	19,671
External sales with a single client accounting for more than 10% of the segment's sales	0	0	$\overline{0}$	0			$\overline{0}$	$\overline{0}$
Number of those clients	$\Omega$	0	$\overline{O}$	$\overline{0}$			$\overline{0}$	$\overline{0}$
Segment results
before interest, taxes and equity	2,531	$-351$	1,896	967	511	$-164$	4,938	452
of which is depreciation/amortisation	83	147	33	122	545	531	661	800
Segment assets
Noncurrent assets	68	35	176	167	530	277	774	479
Fixed-assets investments	172	347	190	357	2,087	1,981	2,449	2,685
Inventories	8.497	4,321	3,056	1,987	$-265$	1,567	11,288	7,875
Receivables	3,133	2,781	2,482	1,738	$-38$	$\Omega$	5,577	4.519
Total assets	11,802	7,449	5,728	4,082	1,784	3,548	19,314	15,079

* unaudited

Consolidated Statement of Changes in Shareholder's Equity in Euro thousand (US-GAAP)*

	capital	Authorized Conditional capital	Number of shares in thousand	Common stock in thousand	Additional paid-in capital	Accu- mulated result	Accumulated foreign currency translation adjustment	Consoli- dated share- holder's equity	Compre- hensive Income
Balance 01. January 2003	1,750	350	3,500	3,500	995	$-291$	$-100$	4,104
Net result						$-112$		$-112$	$-112$
Foreign currency translation adjustment							48	48	48
Comprehensive Income								$\mathbf{0}$	$-64$
Balance 30. September 2003	1,750	350	3,500	3,500	995	$-403$	$-52$	4,040
Net result						3,090		3,090	3,090
Foreign currency translation adjustment							5	5	5
Comprehensive Income								$\mathbf{0}$	3,095
Balance 31. December 2003	1,750	350	3,500	3,500	995	2,687	$-47$	7,135
Net result						2,752		2,725	2,725
Foreign currency translation adjustment							$-14$	$-14$	$-14$
Comprehensive Income								$\mathbf{0}$	2,738
Issue of convertible bond		3,000
Balance 30. September 2004	1,750	350	3,500	3,500	995	5,439	-61	9,873

Basler worldwide

Basler AG - Headquarter

Tel.: +49 4102 463-0 Fax: +49 4102 463-109 An der Strusbek 60 - 62 D-22926 Ahrensburg info@baslerweb.com

Basler, Inc. Tel.: +1 610 280-0171 Fax: +1 610 280-7608 740 Springdale Drive Exton, Pa 19341, USA usa.hq@baslerweb.com Basler, Asia Pte.Ltd. Tel.: + 65 6425 0472 $Fax: + 6564250473$ 25 International Business Park # 02 - 06 German Center Singapore 609916 $main.\dot{s}$ @baslerweb.com

Basler Representative Office Shanghai Tel.: + 86 21 64 31 11 88 Fax: + 86 21 64 74 18 08 Room 2512, Building 288, Zhao Jia Bang Road, Shanghai, 20031 China

Basler Vision Technologies Taiwan Inc. Tel.: + 886 3 401 63 27 Fax: + 886 3 401 63 51 3F, No. 76, Min-Tzu Rd., sec. 2 Siya Chung-Li, Tao-Yuan, Taiwan,
3200, Taiwan R.O.C.