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As a technology company, Basler AG is subject to a number of risks. Medium-sized companies like Basler cannot influence or control general fundamental risks. Consequently, risk management is primarily an entrepreneurial task for us that consists of controlling risks on the one hand and exploiting opportunities on the other. The Management and the employees are responsible for optimizing the probability of occurrence of these two factors for the benefit of the company.

Integrated risk management system

Internal control system
The core of our internal control system is a sensible, impermeable division of functions which is ensured by our organizational structure, job descriptions and procedures. The functions are defined in our certified quality management manual and compliance is checked regularly. Given the size of the company and the certified operational control mechanisms, an internal audit department is not required.

Our IT infrastructure security concept is constantly being refined and regularly checked by an external agent. This also applies to compliance with data protection regulations.

Controlling
Strategic, operative and functional controlling is performed in all business divisions. It is based on regular strategy checks and the preparation of balanced scorecards and product road maps. These lead to the systematic formulation of long- and short-term objectives at division level or cost division level.
The achievement of objectives (target/actual comparison) is checked at all management levels in the context of regular meetings where control measures are agreed upon whose effectiveness is also checked.

Early warning systems
Information regarding future developments is documented, exchanged at all levels in regular meetings, reports and minutes and evaluated where appropriate. This system ensures that the risk relevance of both internal and external information is examined at an early stage and that the results can be translated into action at group level.

Risks of the legal environment

Basler’s risks arising from its environment consist of the development of its target markets, its competition and the capital market.
In the year just ended, competition on the Vision Technology market remained intense. Basler’s 2008 expenditure for innovation, sales, cost reduction and quality improvement and the respective expenses planned for the year 2009 take this level of competition into account. Due to these measures, Basler’s competitive position improved again in 2008.

A general slowdown in the growth trend of the Vision Technology market does not seem to be likely in the near future; however, fluctuations in demand in individual client industries which can be substantial in some cases eclipse this general trend. Basler’s sector mix, which has been implemented in the past few years through the company’s multi-sector approach, has meanwhile reduced our dependence on individual markets (notably the optical discs market). Furthermore, the increase in the components business which addresses a number of markets at the same time with standardised products generally contributes to greater risk diversity. Consequently, in case sales in one of our business activities decline, no risks challenging the continued existence of our company as a whole have to be expected. Nevertheless, sales and revenue figures may decline if important target markets such as the semiconductor and electronics industry grow more slowly or even decrease. The high gross income margin which causes increases in earnings when sales are rising results in correspondingly earnings losses in this event. The company counteracts these individual risks, which cannot be influenced, with foresight tools and flexible cost structures. With respect to target market evaluation, both the management and the sales units make use of all available internal and external sources of information in order to identify imminent changes on the markets at the earliest possible moment and to be able to adequately respond to them.
The Vision Technology sector which is characterised by small and medium-sized enterprises is in the middle of a concentration process at the moment. Smaller companies are being acquired and bigger companies merge in order to create further market opportunities and growth potential. Being one of the biggest Vision Technology companies in Europe, Baser is watching this process carefully and will act as player rather than as target when the need arises. Given the current shareholder structure, a hostile take-over can almost be excluded. However, we continuously monitor our shareholder structure closely and at all times in order to identify any significant shifts.

Operating risks

Customer satisfaction is often an indicator of the existing risk level with respect to declining sales and earnings. Consequently, our marketing and development activities focus on the determination of customer value. Also in 2009, Basler carried out customer satisfaction surveys in both divisions and optimizes its marketing mix not least on the basis of the respective results.

The availability of existing or new know-how is particularly important in a growth -orientated enterprise. Basler regularly prepares staff plans in order to cover its demand either internally or through external partners. In addition, development and performance talks are held regularly to strengthen staff loyalty at all levels.
Well-timed high-quality product development represents the backbone of any successful technology company. In the development field, procedures and responsibilities are clearly defined and we have introduced planning tools which contribute towards the completion of the vast majority of development projects within the planned time and cost frame.
Rapidly changing technology markets challenge companies to adjust capacities swiftly and efficiently to fluctuating requirements. Our flexible working hour model enables us to compensate fluctuations in the level of orders. Consequently, we are – within certain limits – in a position to “breathe“ in unison with the market.

In individual cases, the availability of high-quality technological components that have to be procured externally plays an important role for the delivery times of our products. Continuous monitoring and analysis of procurement markets is thus a critical competence for technology companies. In addition, we need to know which external components must be available when and in what quantity. In the past few years, we have developed procedures to deal with these two tasks and have thereby shortened our delivery times and enhanced our compliance with delivery schedules. However, increasing expectations among our customers require us to continually improve key figures in these areas.

It has become a standard requirement among our customers that the quality of our products and procedures has to be checked and ensured according to an integrated quality management system. Since 2001, we have had DIN ISO 9000/2000 certification and are audited once every year by external auditors. In addition, we carry out internal audits in the course of a year to check and improve our procedures.
An essential component of successful product policy is the establishment and maintenance of a brand image. Basler Vision Technologies’ name and logo are registered trademarks and are thus protected against illegal use.

Financial risks

In the case of export-orientated companies, fluctuations in foreign exchange rates affect market performance and earnings before taxes. 73% of our sales volume is generated outside the euro zone. Consequently, exchange rates have an influence on our corporate result. In order to limit the risks associated therewith, the transaction volume generated in foreign currencies is appropriately secured by hedging the foreign exchange risk.
No tax risks affecting liquidity can be seen. Should a reform of company taxation result in a significant tax reduction, this causes a non-recurring, not liquidity-affecting, negative tax result due to the adjustment of deferred tax assets.

Liquidity is ensured by strict receivables management. Basler’s distinctly formulated and strictly administered receivables management system enables the company to ensure the availability of the required liquid funds as well as the ability to plan forthcoming investments.

Transparent monthly reporting and a stable balance sheet structure also contribute towards the limitation of financial risks. These two factors are supported by an early detection system in the form of continuous 15-month sales and financial planning for all divisions as well as an extensive system of key figures. These measures facilitate successful and well-timed discussion of financial requirements with our lenders who generally proceed to provide the required funds. Our banking partners are also involved in our partnership concept for suppliers and service providers. These are subject to certain selection criteria and evaluations as well as permanent monitoring of their performance and suitability for partnership. This reduces the risk of loans being called in at short notice by credit institutions who are frequently subject to strategic changes.

Strategic risks and opportunities

Basler’s corporate strategy focuses on the further development of the growth market of Vision Technology which continues to expand. Since replacement technologies are currently not to be seen, the corporate strategy risk is deemed to be low.
In the context of a group-wide checking and planning procedure, the business models of the divisions are reviewed on a regular basis. The result of these reviews forms the basis for a balanced scorecard system (BSC) which defines assessable strategic goals for each unit and measures to achieve them. Corporate and division strategies as well as the BSC system form the starting point for the development of a four-year plan as well as the budget for the forthcoming fiscal year. The budget is prepared in quarterly intervals for the next 15 months. This procedure ensures that strategic risks are identified in due time and enables the company to implement counter-measures at an early stage.

An essential element of risk management is to early identify opportunities that are opening up in the field of Vision Technology, to check their viability and to quickly submit them for decision on the measures to be taken on the basis of financial key figures. In addition, this is done in the “New Business Development” units based within each of the divisions. These identify, examine, select and develop potential future activities. This includes both organic development of new activities and potential acquisitions.

Overall risk

We have weighted all risks identified to date according to their probability of occurrence and have covered them with compensatory measures. They do not represent obvious challenges to the company’s survival. At present, no additional risks jeopardizing the continued existence of the company are discernable.

No other events of particular significance that cannot be allocated to the ordinary course of business and are not described in the management report have occurred.