Oce N.V. Report for the Financial Year December 1, 2003 to November 30, 2004

Exhibit 10

 

Océ Annual Report 2004

 


LOGO

 

 


Océ N.V.

 

Report for the financial year December 1, 2003

 

to November 30, 2004

 

Océ enables its customers to manage their documents efficiently and effectively by offering innovative print and document management products and services for professional environments

LOGO

 

 


More copies of the English translation of this Annual Report or of the Dutch-language original version are available on request from Océ N.V. Corporate Communications Department

telephone [+31] 77 359 4000

e-mail [email protected]

 

The Annual Report as well as other publications such as press releases, presentations, speeches and other items related to the annual report can also be accessed via the corporate website [http://www.oce.com].

 


Contents    Océ: innovative by nature    4
     Océ’s ambitions and strategy    6
     Key figures    10
     Report of the Board of Supervisory Directors    11
     Report of the chairman of the Board of    14
     Executive Directors     
Report of the Board of Executive Directors     
     Financial review     
     Results    19
     Dividend    20
     Prospects    20
     Finance    22
     Developments in the markets |     
     Digital Document Systems     
     Corporate Printing    34
     Commercial Printing    37
     Software & Professional Services    39
     Océ Business Services    40
     Developments in the markets |     
     Wide Format Printing Systems     
     Technical Document Systems    42
     Display Graphics Systems    45
     Imaging Supplies    46
     Critical success factors     
     Océ’s core values    50
     Océ’s employees    50
     Sustainable development    53
     Research & Development    55
     Manufacturing and logistics    57
     Océ’s partners    59
     Management aspects     
     Corporate governance    62
     Risks and risk management    69
Annual Financial Statements     
     Consolidated Statement of Operations    79
     Consolidated Balance Sheet    80
     Consolidated Statement of Cash Flow    82
     Summary of Significant Accounting Principles    84
     Notes to the Consolidated Statement of Operations    89
     Notes to the Consolidated Balance Sheet    94
     Company Balance Sheet    112
     Company Statement of Operations    112
     Notes to the Company Balance Sheet and the Statement of Operations    114
Other information     
     Proposed net income appropriation    117
     Authorised capital    118
     Auditors’ report    119
Miscellaneous     
     Board of Supervisory Directors    120
     Board of Executive Directors    121
     Senior Executives Central Services    122
     Principal group companies and their chief executives    123
     Supplementary information for shareholders    125
     Océ 2000-2004    128
     List of terms and abbreviations    130
     Forward-looking statements    132

 


Profile

 

Océ: innovative by nature

 

Océ is one of the world’s leading suppliers of high-quality and innovative products and services for use by professionals in print and document management processes. The company focuses primarily on professional environments in which large volumes of documents are processed. Océ’s customers are therefore mainly active in the industrial and printing sectors as well as in office environments.

 

For this purpose Océ develops and manufactures its own advanced machines and systems for use in the production, distribution and management of documents. Océ also offers its customers innovative services in the areas of consultancy, outsourcing and – in cooperation with partners – financing.

 

Océ has built up a solid reputation as an innovator, both technologically and commercially. Océ’s products and services are renowned for their high quality, reliability, productivity, durability, ease of use, environmental friendliness and low total cost of ownership.

 

Most of Océ’s products and services are offered via the company’s own direct sales and service organisations. The Océ organisation is specifically tailored to serve the market segments that are of strategic relevance to the business. This gives customers direct access to their supplier; at the same time it provides Océ with a constant flow of market and customer information, which allows Océ to anticipate and respond quickly and effectively to changing market needs. In a number of countries part of the product range is made available via specialised distributors.

 

In-house product development and consistent investment in Research & Development are characteristic features of Océ. They provide Océ with its own unique technology base, which largely forms the cornerstone for the success of the product range. Océ’s innovative capacity is also broadened and reinforced via alliances with strategic partners and via cooperation with co-developers.

 

Océ operates in eighty countries and has its own sales companies in some thirty countries. The company has over 21,000 employees, 40 per cent of whom work in sales and service. Océ’s research and manufacturing facilities are located in the Netherlands, Germany, Belgium, France, the Czech Republic, the United States and Canada.

 

In 2004 Océ achieved revenues of €2.7 billion and net income of €78 million.

 

The table on page 6 briefly outlines the key elements of Océ’s ambitions and strategic objectives and also shows the actions taken to achieve these in 2004.

 

4


Profile

 

Board of Supervisory Directors

 

J.L. Brentjens, chairman

F.J. de Wit, vice-chairman

M. Arentsen

A. Baan

P. Bouw

J.V.H. Pennings

 

Mr. L.J.M. Berndsen was a member of the Board of Supervisory Directors until the close of the general meeting of shareholders on March 2, 2004.

 

Board of Executive Directors

 

R.L. van Iperen, chairman

J. van den Belt

J.F. Dix

 

Mr. R.E. Daly was a member of the Board of Executive Directors until September 1, 2004.

 

Staff Director | Company Secretary

 

H.J. Huiberts [until January 1, 2005]

 

Financial year The company’s financial year runs from December 1 to November 30.

 

Articles of Association The present Articles of Association were confirmed by a notarial deed dated December 23, 2004. Océ N.V. is an international holding company within the meaning of Article 153, para. 3b, Book 2 of the Dutch Civil Code.

 

Registered office and commercial registry The company has its registered office in Venlo, the Netherlands, and is registered in the Commercial Registry in Venlo under No. 12002283.

 

Head office The head office is at

 

St. Urbanusweg 43, Venlo, the Netherlands

P.O. BOX 101, 5900 MA Venlo, the Netherlands

telephone [+31] 77 359 2222

fax [+31] 77 354 4700

Océ on Internet: http://www.oce.com

e-mail [email protected]

 

For general information about Océ:

telephone [+31] 77 359 2000

 

5


Océ’s ambitions and strategy

 

Ambitions


 

Strategic objectives


 

Actions taken in 2004


Customers Océ aims to be one of the top-three suppliers in the strategically relevant market segments.  

To strengthen its leading position in black-and-white wide format printing.

To achieve a leading position in display graphics.

To rise to a top-three position in production printing in corporate and commercial environments.

To build up a substantial position in colour in all relevant market segments.

To be a strong supplier of services in the area of document management and business services.

To play a prominent role in Software & Professional Services for the management of documents in selected market segments.

 

Product portfolio strengthened in all environments through introduction of new products [hardware, software and services].

Product road-map for next five years updated.

Technical Document Systems expanded in Japan, China and emerging markets.

Stronger market position of Technical Document Systems in colour segment in Europe.

Intensified investments in marketing programmes and in building brand name awareness.

Greater focus on quality of the Océ Business Services portfolio.

Distributive strength enhanced via expansion of and increased efficiency in the sales organisations.

Expansion of Imaging Supplies range within the Display Graphics segment.


 
 
Employees Océ aims to offer an inspiring working environment.  

To be an attractive employer world-wide.

In the Netherlands, to be one of the ten most attractive companies for graduates and one of the top-five for technical specialists.

 

Roll-out of LearnLink as part of the competence management process.

Corporate leadership labs launched.

Start of Young Océ Professionals programme.

Sales product training courses intensified.

Core Values programme Focus-on-Professionals implemented.


 
 
Shareholders Océ aims to achieve returns that give the company a top position in its sector of industry.  

To achieve a long-term return on total assets [ROA] of 12% and a return on equity [ROE] of 18%.

To achieve an average annual growth of 10% in revenues, of which at least half is organic.

 

Savings programme has reduced costs by €95 million.

Various new cost-reduction exercises initiated as part of focus on operational excellence [IT, purchasing and logistics].

Outsourcing of lease activities [approx. €398 million in 2004].

Océ share now included in various sustainability indexes.


 
 
Partners Océ aims to build up a network of partnerships that is one of the strongest in its industry.  

To co-operate in the area of technology with the best specialists in the industry.

To work together with high-quality suppliers and to contract out work to strong partners.

To co-operate with partners in the market who help to ensure a wider spread of Océ products and standards.

 

Co-operation with universities and top-class technological institutes.

Further outsourcing of R&D activities to public and private institutions.

Start made on relocating part of the assembly activities to Central Europe and –via outsourcing – to the Far East.

Océ PRISMA products further expanded and brought into line with partner products [PRISMA-web].

Outsourcing of lease activities to leading vendor lease partners.


 
 
Society Océ aims to do business in a way that contributes to the sustainable development of society.  

To implement the basic principles of the UN Global Compact.

To minimise any unwanted environmental effects from Océ products.

 

Corporate sustainability report drawn up in accordance with GRI recommendations.

Supplier attention for sustainability aspects promoted.

 

6


Strategic perspective

 

Short term [1-3 years]

 

Strengthening of leading positions and improving growth and profitability Over the past year Océ has seen a clear improvement in sales of machines. Thanks to its market-focused organisation and its new products and services, Océ is in a good position to raise the level of its profitability and revenues. Besides this, the growth in machine sales will in due course lead to a recovery in revenues from service.

 

To support this development over the short term, Océ will continue its efforts to improve operational efficiency.

 

In the year ahead the emphasis will be on further strengthening the efficiency and also the size of the marketing and sales organisation and processes, on improving the purchasing processes and on optimising the IT infrastructure and logistics processes. The outsourcing of lease activities will also be completed.

 

The ultimate aim of all these activities is to enable increasingly better products and services to be supplied to an ever wider circle of customers.

 

Medium term [3-5 years]

 

Safeguarding strong positions in growth markets Océ has already initiated a great many activities that are focused on safeguarding leading positions in growth markets over the medium term. This involves, for example, the strengthening of the positions that are currently held in printing-on-demand, business services and display graphics as well as the positions that the company holds in colour and software. In these activities a key role will be played by various forms of cooperation with strong partners and also by acquisitions.

 

Long term [> 5 years]

 

Expanding the position in document management An increasing demand exists amongst customers for integrated document management solutions. Océ is already providing support to its customers by offering a growing number of services and solutions for the effective and efficient handling of paper and electronic document flows. Responding to this demand is one of the key thrusts of the Business Services and Software & Professional Services business groups.

 

Building a top-three position within selected segments of the market for document management is also one of Océ’s ambitions for the long term.

 

Expanding the position in document management > 5 years

 

Safeguarding strong positions in growth markets 3-5 years

 

Strengthening of leading positions and improving growth and profitability 1-3 years

 

7


LOGO

 

 


Key figures

 

          2004

   2003

   x € million

Total revenues

        2,652.5    2,769.3     
     Change on previous year [%]    –4.2    –12.8     
     Change [organically]    –0.1    –5.1     
     Non-recurring*    10.6    –9.9     
     Recurring*    –3.6    –3.4     

Gross margin

        1,103.4    1,165.2     
     As % of total revenues    41.6    42.1     

Operating income before impairment

        118.3    150.0     

Operating income [EBIT] **

        110.4    124.8     
     Change on previous year [%]    –11.6    –44.8     
     As % of total revenues    4.2    4.5     
     As % of average balance sheet total [ROA]    4.8    4.7     

Net income

        78.1    61.5     
     Change on previous year [%]    27.0    –45.4     
     As % of total revenues    2.9    2.2     

Balance sheet total

        2,233.1    2,421.3     
     Shareholders’ equity    714.1    712.8     
     Net capital expenditure on intangible               
     and tangible fixed assets    122.7    106.4     

Cash flow before financing activities

        370.5    327.8     

Number of employees at November 30

   21,315    22,204    employees

Ordinary net income

   As % of average ordinary               
     shareholders’ equity [ROE]***    11.3    8.5     

Per € 0.50 ordinary share

   Net income    0.89    0.69    euro
     Shareholders’ equity    7.87    7.87     
     Dividend    0.58    0.58     

Number of € 0.50 ordinary shares

   Average number outstanding    83,487,576    83,408,783    shares
     Potential increase from conversion/options    1,271,054    759,019     

Diluted earnings per € 0.50 ordinary share

        0.88    0.69    euro
     Year’s highest/lowest    16.10/10.60    13.70/6.50     
     Year end    11.25    11.92     
    

 

*       Non-recurring revenues: sales from machines, software and professional services. Recurring revenues: revenues from services, materials, rentals, interest and business services.

 

**     EBITDA 2004 amounted to € 266 million.

 

***  The definition of ROE has changed compared to 2003.

 

10


Report of the Board of Supervisory Directors

 

To the Annual General Meeting of Shareholders of Océ N.V., Venlo

 

Annual Report We herewith present to you the Annual Report for 2004 which comprises the Annual Financial Statements for 2004 and was drawn up by the Board of Executive Directors. The Annual Financial Statements have been examined by the external auditors PricewaterhouseCoopers Accountants N.V. They have issued an unqualified audit opinion that is set out on page 119 of this Annual Report.

 

The Annual Report was discussed with the Board of Executive Directors in the presence of the auditors. The discussions and the input of those who took part in them have convinced us that the Annual Report forms a solid basis for the Supervisory Board’s discharge in respect of its accountability and its supervisory function. We recommend that you adopt the Annual Financial Statements, including the dividend proposal, and that you grant a release and discharge to the Board of Executive Directors for their management and to the Board of Supervisory Directors for their supervision over the past financial year.

 

Results and strategic position Océ closed the year under review with a net income of € 78.1 million which is equivalent to € 0.89 per ordinary share. Total revenues were lower than in 2003, but on an organic basis, i.e. after adjustment for exchange rate effects, they remained unchanged.

 

In 2004 much attention was devoted to the strategic positioning of Océ products in the two core areas of Digital Document Systems and Wide Format Printing Systems. Discussions focused on the question of how a leading position can be permanently maintained in both these market segments. To ensure growth and the ongoing healthy development of the company over the longer term the achievement of this objective is of essential importance. The Board of Supervisory Directors has noted that this is being given the highest priority by the Board of Executive Directors and that, across a broad front, the management in the various countries is strongly committed to an alert and effective implementation of this policy.

 

On the other hand, it has to be acknowledged that the economic climate is still disappointing. The provisional absence of a vigorous economic revival obviously has consequences for a more far-reaching improvement in results, margins and shareholder value. However, faced by these circumstances, the company has definitely not been sitting still. Cost structures have been substantially improved and the restructuring plan that was set in motion several years ago made a major contribution in this respect. On the other hand there was no lack of investment in new product developments. In fact, dedicated work was done to improve the quality of Océ’s hardware and software products. It is very important to note that the recently launched products seem to be meeting market demand and are being well received. These two factors, namely a cost-conscious and efficient organisation and attractive offerings of new products, will have a favourable influence on the results as soon as the economy starts to pick up. The Board of Supervisory Directors therefore views the years ahead with confidence.

 

11


Report of the Board of Supervisory Directors

 

Supervision During the year under review the Board of Supervisory Directors held eight meetings with the Board of Executive Directors. As mentioned above, the strategy of the company and that of the Strategic Business Units, focused on improving Océ’s position in its selected countries and market segments, were extensively discussed. The Supervisory Board also held discussions with the Board of Executive Directors about risks and the systems applied to control them. These systems were also the subject of much attention in relation to the specific requirements of the Sarbanes-Oxley Act in the United States and in relation to the new Dutch corporate governance code.

 

At regular intervals the Supervisory Board discussed the commercial and technological developments as well as the financial position of Océ. The plans for relocating certain assembly activities to Central Europe and the Far East were closely monitored. Just as in other years, consultation took place with the internal and external auditors. Other subjects discussed were the composition and functioning of the Board of Executive Directors and the management development programme for key executives within Océ. The functioning of the Board of Supervisory Directors and of the individual supervisory directors was also discussed. The developments in the area of corporate governance resulted in an alteration of the Articles of Association and in the drawing up or revision of regulations governing the work of the Board of Supervisory Directors and of its three committees.

 

These regulations are available on the Océ corporate website: http://www.oce.com.

 

The Audit Committee met six times. All meetings were also attended by the internal and external auditor. Members of the management took part in the meetings when invited to do so. The main tasks of the Audit Committee comprise an extensive assessment of the financial reporting before this is dealt with at the plenary meeting of the Supervisory Board, the supervision of the internal control system and an evaluation of the company’s risk profile. To fulfil these tasks the committee discussed the annual results, the results for the first six months and those for the first and third quarters. The committee also discussed the internal management and control systems, the financial reporting, compliance with the recommendations made by the auditors, the activities of the internal audit department, the activities, remuneration and independence of the external auditor, proposals in the area of tax planning and the company’s financing plan.

 

The Remuneration Committee met five times during the year under review. The committee discussed the remuneration and bonuses of the Board of Executive Directors and prepared changes relating to the remuneration policy of the Board of Executive Directors in general and the introduction of the share plan in particular. The remuneration policy was placed on the agenda for the Annual General Meeting of Shareholders on March 2, 2004 and triggered an extensive discussion with shareholders. It was decided at that time to postpone this agenda item and return to it later in the year. At an Extraordinary Meeting of Shareholders on September 8, 2004 the remuneration policy and a modified management share plan were again discussed, this time also taking into account previous comments and questions from shareholders. The proposals were adopted by a large majority of votes and the approved remuneration policy will therefore be applicable for the coming years.

 

If major changes are proposed in that remuneration policy in the future, these will be submitted to the Annual Meeting of Shareholders for its approval.

 

Extensive details about the remuneration package can be found in the section on corporate governance on page 63 and further.

 

12


Report of the Board of Supervisory Directors

 

The Selection and Nomination Committee met on four occasions. The main topics dealt with were the required quality and staffing of top executive posts which were discussed within the framework of management development.

 

Board of Executive Directors During the year under review there was a change in the composition of the Board of Executive Directors. With effect from September 1, Mr. R.E. Daly resigned as a member of the Board of Executive Directors of Océ N.V. as a result of differences in opinion about strategic policy. The Supervisory Board respected this decision and is grateful to Mr. Daly for the contribution he made to the business. Mr. J.F. Dix, who has successfully developed the American activities over a period of eight years, is provisionally fulfilling the role of CEO in the United States. In the meantime the desired top management structure for the next few years is being prepared and more detailed information on this will follow in the course of 2005.

 

Members of the Board of Supervisory Directors Mr. L. Berndsen made it known during the year under review that, upon expiry of his period of office, he would no longer be available for reappointment. He resigned as a member of the Board of Supervisory Directors at the Annual General Meeting of Shareholders on March 2, 2004. The Supervisory Board is grateful to Mr. Berndsen for the major contribution he made since 1996, most recently as the Audit Committee’s chairman and financial expert. With effect from March 2, 2004 Mr. M. Arentsen was appointed by shareholders as the successor to Mr. Berndsen.

 

An extensive overview of the personal details of the members of the Board of Supervisory Directors, including the year in which they were first appointed, their current term of office and maximum period of office, can be found on page 120 of the Annual Report.

 

Océ again performed relatively well in 2004 despite an adverse economy. With a view to safeguarding a permanently healthy position cutbacks in employee numbers or the transfer of manufacturing activities were unavoidable. The Supervisory Board would like to express its particular appreciation for the efforts that were made by all employees towards achieving the results booked in 2004 and also for the contribution they made to the company’s prospects for the years ahead.

 

January 28, 2005

 

J.L. Brentjens, chairman

F.J. de Wit, vice-chairman

M. Arentsen

A. Baan

P. Bouw

J.V.H. Pennings

 

13


Report of the chairman of the Board of Executive Directors

 

LOGO

 

The year 2004 was a dynamic year for Océ. It was also a successful one in a number of respects. This has, however, still not been reflected in our results.

 

The strong growth in revenues from machines and systems was a positive signal following a period of decline. It underlined the success of the radical renewal of our product range. But our expectation that the growing sales of systems would be followed in 2004 by a recovery in revenues from service, rental and materials did not materialise. These recurring revenues, which represent 72% of total revenues, continued to decline throughout 2004 and therefore had a negative impact on the results. However, we are convinced that this is merely a temporary postponement.

 

In the underlying factors we unmistakably saw changes for the good during the year under review; in many cases these were the direct result of the improvements that we implemented in our company in recent years, which have started to pay off now and will continue in the near future.

 

A stronger Océ

 

In 2004 we again augmented our portfolio by adding many new machines and systems, plus hardware and software. They include further developments of proven systems, but also completely new and highly promising products. In its traditional markets Océ has clearly reinforced its leading position in print and output management systems and has therefore also emphasised its candidacy to take up a leadership position in a number of major growth markets. To ensure that the success of the renewed range can be translated into profitable revenues we have – in line with our strategy – strengthened our distribution efforts in terms of both quality and quantity. Thanks to an expansion of our sales organisations, both centrally and across our group companies, backed by intensive training and hefty investments in marketing, our commercial strength has been substantially boosted. We are seeing the results of this in the sales figures for printing systems.

 

2004 was also the year in which we took the first steps towards the wider-scale outsourcing of the manufacture of modules and complete machines to the Czech Republic and the Far East. Lower wage costs and the benefits of local sourcing mean that the cost-price of the machines can be reduced enough to maintain our competitive edge. Initial results are very promising and, although we are handling this process very carefully, we are seeking to accelerate it.

 

The lease programmes that Océ agreed on with its lease partners were implemented in our principal operating companies during the past year and the partnerships in those countries are now fully operational. In addition, Océ has sold a considerable part of its existing lease portfolio to those same lease partners. More than half of the total lease portfolio has now been out-sourced and the result has been an increase in Océ’s financial strength and a further professionalisation of the financial services that we can offer to our customers.

 

In all our efforts to gear up the company to respond to the latest developments in our markets we are able to build on pillars of strength: our employees, our products, our partners, our customers and, last but not least, the communities that surround us – the outside world in which we aim to do business in a socially responsible way.

 

14


Report of the chairman of the Board of Executive Directors

 

Employees

 

Within the organisation we have completed the restructuring measures of recent years and we are now putting every effort into the further professionalisation of our employees. The outsourcing of production and the related job losses brought some difficult moments, but this year we again experienced that the will to make Océ’s strategy a success can count on broad support within the business.

 

The activities aimed at the further professionalisation of employees link up with this. This involves a qualitative strengthening of the potential of human resources to support the further development of the company. This process cannot be achieved without securing active commitment from our employees. They are therefore being encouraged to take part in a systematic process of ongoing self-development so that within the context of their work they can reach a position where they can realise their potential to the full. Within the organisation itself seven common core values were identified as reference points for this process in terms of the objectives, attitude and style we adopt in how we approach our work. These are the aspects that Océ employees now judge themselves and each other by and they are also the values that we want the outside world to judge us by. Not one of them is new but in their mutual relationship they form a clear guideline for the direction in which the company has to develop. Numerous internal activities have meanwhile been initiated to ensure that everyday work is permeated with the shared core values which we have identified and which are explained in detail elsewhere in this annual report.

 

Customers

 

Finding print solutions for its customers plays a key role in Océ’s business philosophy. Colour is advancing rapidly within the world of our customers: an ever greater proportion of printing activities involves colour and that volume is growing rapidly. Océ has a strong range to offer, including for the commercial markets, especially with our new colour machines that were developed in-house. Our customers have been particularly appreciative of the modular upscalable high speed printers and the machines that can print not only in full colour but also in black-and-white at lower costs.

 

Another important part of our activities is formed by the provision of outsourcing services to customers that have transferred their complete document and print management processes to Océ. Both quantitatively and qualitatively this activity is growing fast and we are able to respond well to the customer’s needs, and also by working in partnership with suppliers of similar services within the IT sector.

 

Thousands of [potential] customers saw our products in action during the Océ Open House in Poing, as well as at the world’s biggest printing industry exhibition, the Drupa in Düsseldorf. For all major market segments the gaps in the range were filled with document and print management products, all of which met with a warm welcome. The same also applies to the software components, many of which were rated as best in their class. To an increasing extent – depending on customer demand – third-party equipment is also being used for the lower-end volume segments.

 

Partners

 

An important element of our strength lies in the fact that over the years we have taken as our basis our own technology and our own sales and service channels and have harnessed the ability, which is specific to Océ, to develop exactly the right solutions for important niche markets. A less obvious element is the fact that we are able to operate at a high level world-wide. This is also due to the way in which we incorporate the activities of others within our business processes. Cooperation at a high level is one of the key features of Océ. Though the outsourcing of production attracted much publicity over the past year, some 95% of our components have already been manufactured

 

15


Report of the chairman of the Board of Executive Directors

 

by partners for years. The financial lease activities are meanwhile also being undertaken in cooperation with financial partners. Both in research and in the development of software programs and machine modules cooperation is standard practice and in the area of sales well-known local distributors supply our equipment in countless regions all over the world. Thanks to its lengthy experience Océ can work effectively with partners and is always receptive to new and challenging forms of cooperation. In the near future this will prove to be of great importance for the further strengthening of our market position.

 

Society

 

In recent years sustainability has been placed ever more firmly on the agenda of Dutch companies – and rightly so. We, however, take pride in the fact that throughout our company’s history our care for people and the environment has always been a key concern. The themes of sustainability and corporate social responsibility have meanwhile also been given a structured form in our reporting. Our Corporate Sustainability Report for 2003, which was published last year, will be followed in 2005 by a report that will also deal with the activities of our biggest European subsidiaries and with the operations of Océ North America, Inc. Everyone will then be able to see the important role that corporate social responsibility and specific sustainability play in the conduct of our business.

 

The right course

 

As can be clearly seen from the above, we have completed numerous successful achievements in 2004. Others are well on track and are heading for success but obviously developments are not moving ahead as fast as we would have liked. We had much higher expectations about the speed with which the various markets would pick up again. But we are confronted with geographical timing differences in terms of distributive strength and the development of markets. We also face lengthy decision-making processes by customers and formidable competition when capturing and recapturing our position in our selected markets. But we are strong enough. And we are also convinced of the correctness of our strategies, for both the shorter and the longer term. Where necessary, we are making adjustments and refinements, for example by expanding our activities in the office segment. Our strategic course, however, remains unchanged.

 

We have the resources and are well placed to play the prominent role that we aspire to in all our markets. Our range is better and more complete than ever before, our distribution has been further strengthened and the skills of our people are increasing by the day. And, most importantly, we have a broad and especially loyal customer base with which we maintain close relations, founded on their confidence in and appreciation of our products and services. Even, or perhaps specifically, in economically adverse surroundings this means that we possess all the ingredients for success.

 

Prospects

 

The year 2004 was not easy and 2005 will not be either. The absence of growth in recurring revenues is still likely to have a negative impact on the results for a while yet. We are convinced, however, that we can maintain the rate of growth in machine sales. That means that in the forthcoming financial year we will be able to take major steps towards achieving our objectives.

 

In seeking to achieve that position we know that we have the support of all parties who work together with us: our customers, our employees, our shareholders and our partners. Our sincere thanks go to all of them for that support.

 

R.L. van Iperen, chairman

 

16


Report of the Board of Executive Directors

 


LOGO

 

The Board of Executive Directors of Océ N.V.

From left to right: J.F. Dix, J. van den Belt and

R.L. van Iperen, chairman.

 

18


Financial review

 

Results

 

In 2004 the results were influenced by factors that need to be taken into account when making a comparison with previous years, but also in the evaluation of future results:

 

  More than half of the existing lease portfolio at the end of 2003 was sold in 2004, which resulted in considerably lower interest revenues [€ 29.4 million lower than in 2003]. In the year 2004 this structural decrease in revenues, which also entailed a substantial reduction of almost € 400 million in lease receivables, was fully offset by a once-off profit on the sale of the lease portfolio [€ 30.9 million].

 

  For the areas in which IFRS do not conflict with Dutch GAAP, IFRS have already been fully implemented in the annual financial statements for 2004. On aggregate the net effect of these changes on the statement of operations and the balance sheet was more or less neutral.

 

  The Euro gained significantly in strength in 2004. This had a material impact on income and on the balance sheet. As compared to 2003, the negative influence of exchange rate changes on operating income was as follows:

 

Translation result

   – 4.7    € million

Transaction result

   – 17.1       

Net influence of hedging [2003 versus 2004]

   – 15.9       
    
      

Total influence of exchange rates on operating income

   – 37.7       

 

On the balance sheet the translation result was:

 

Total assets

   – 62.1    € million

Total shareholders’ equity

   – 25.9       

 

Revenues in 2004 amounted to € 2,652 million [2003: 2,769 million]. On an organic basis revenues remained practically the same as in 2003. The decrease over the past three years was therefore brought to a halt. Revenues in 2004 included the profit on the sale of the lease portfolio [€ 30.9 million].

 

Revenues from printing systems rose, mainly as a result of the introduction of new hardware and software products. Recurring revenues [services, materials, rentals, interest and business services] decreased compared to 2003.

 

Gross margin [41.6%] was lower than in the previous year [42.1%]. Operating expenses [excluding impairment] were down by € 30.1 million on their 2003 level.

 

Operating income amounted to € 110.4 million and was thus € 14.4 million lower than in 2003. As a consequence of significantly lower financial expense [net] and income taxes, net income was € 16.6 million higher than in 2003. Also after adjustment for impairment costs, which were higher in 2003 than in 2004, net income for 2004 was higher than in the previous year. Total assets again decreased during the year under review and amounted to € 2,233 million [2003: € 2,421 million]. The decrease is principally the result of the sale of existing lease receivables [€ 312 million]. Nevertheless, total assets did not decrease further due to the fact that the balance of liquid funds increased by € 257 million.

 

Trade accounts receivable decreased by € 51 million. Lease receivables decreased by € 398 million. Other assets increased by € 4 million.

 

LOGO

 

19


Financial review

 

Free cash flow stood at € 370 million and was at a good level for the fourth year in succession [2003: € 328 million]. The sale of the lease portfolio contributed considerably to this result.

 

Interest-bearing loans decreased by € 68 million; after adjustment for liquid funds the decrease in net debt amounted to € 326 million [down from € 494 million at the end of 2003 to € 168 million at the end of 2004].

 

Group equity amounted to € 752 million, which was the same as at the end of the 2003 financial year.

 

The solvency ratio was 33.7%, which is within the target range of 30 to 40%. The Return on total Assets [ROA] amounted to 4.8% [2003: 4.7%] and the Return on Equity [ROE] was 11.3% [2003: 8.5%]. This was far below the targets of 12% and 18% respectively. In spite of the various positive developments that occurred in 2004, the returns that were achieved are unsatisfactory.

 

In Digital Document Systems [DDS] revenues showed a slight organic increase after three years of decline. The organic growth in non-recurring revenues continued [+ 13.3%]. Recurring revenues were organically 3.6% lower than in 2003.

 

In Wide Format Printing Systems [WFPS] revenues decreased by 1.0% on an organic basis. This decrease is attributable in full to the decrease in revenues from media [due to price pressure] and the lower lease revenues. On an organic basis all other components of WFPS revenues showed an increase.

 

Dividend

 

We propose, as in 2003, to distribute a dividend of € 0.58 per ordinary share of € 0.50 nominal for the 2004 financial year. This dividend involves an amount of € 48.4 million [2003: € 48.4 million]. If the General Meeting of Shareholders adopts this proposal the final dividend will amount to € 0.43; the interim dividend amounted to € 0.15.

 

It is proposed to distribute the final dividend fully in cash. The pay-out ratio, which amounts to 65.0% of net income [2003: 83.5%], is higher than the standard set in the dividend policy [33%].

 

Prospects

 

Océ will invest further in raising its distributive strength in 2005. Supported by the new range, sales of printing systems will show continued growth.

 

This will lead to a turn around in the recurring revenues, which is expected to take place during the course of 2005.

 

Operating income from commercial activities, excluding the book profit on the sale of the lease portfolio, is expected to be higher than in 2004, provided however that the dollar does not fall further in value against the euro.

 

As a result of the lower revenues from leases, net income will be below that of 2004.

 

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20


Financial review

 

Table 1

 

Information by Strategic Business Unit   

Wide Format Printing

Systems


   Digital Document Systems

   total

x € million    2004

   2003

   2004

   2003

   2004

   2003

Total revenues

   818    862    1,834    1,907    2,652    2,769

Operating income [EBIT]

   55    55    55    70    110    125

Assets

   617    674    1,616    1,747    2,233    2,421
                               

 

Table 2

 

Quarterly revenues    2004

   2003

x € million    recurring

   non-recurring

   total

   recurring

   non-recurring

   total

First quarter

   480    142    622    536    141    677

Second quarter

   496    186    682    525    167    692

Third quarter

   473    173    646    494    159    653

Fourth quarter

   468    234    702    525    222    747
    
  
  
  
  
  

Total

   1,917    735    2,652    2,080    689    2,769
                               

 

Table 3

 

Changes [organically] in quarterly revenues compared to the same
quarter of the previous year
   2004

   2003

as %    recurring

   non-recurring

   total

   recurring

   non-recurring

   total

First quarter

   –3.0    +7.9    –0.7    –1.6    –25.5    –7.6

Second quarter

   –1.3    +16.0    +2.9    –5.3    –12.6    –7.1

Third quarter

   –2.7    +10.0    +0.4    –4.5    –5.9    –4.9

Fourth quarter

   –7.5    +8.8    –2.7    –2.2    +3.1    –0.7
                               

 

Table 4

 

Total revenues by geographical area    2004

   2003

     x €
million


   as
%


   x €
million


   as %

United States

   925    35    1,046    38

Germany

   333    13    335    12

The Netherlands

   291    11    284    10

France

   191    7    199    7

United Kingdom

   180    7    183    7

Rest of Europe

   534    20    519    19

Rest of the world

   198    7    203    7
    
  
  
  

Total

   2,652    100    2,769    100

 

21


Financial review

 

Finance

 

Revenues In 2004 total revenues amounted to € 2,652 million [2003: € 2,769 million]. On an organic basis revenues including the profit on the sale of the lease portfolio were the same as in 2003.

 

Non-recurring revenues amounted to € 735 million, an organic increase of 10.6% on the previous year [2003: € 689 million]. Recurring revenues decreased by 3.6% [organically] to € 1,917 million [2003: € 2,080 million].

 

Interest revenues from financial leases decreased by € 29.4 million [30%] to € 68.2 million, mainly due to the sale of the lease portfolio. In 2004 the [once-off] profit on this sale amounted to € 30.9 million.

 

Gross margin The decrease in the gross margin from 42.1% in 2003 to 41.6% in 2004 was caused by the highly negative impact of exchange rates on the results. However, after being adjusted for this impact, i.e. on an organic basis, the gross margin percentage is slightly higher as a result of volume-mix effects.

 

Operating expenses Operating expenses [excluding impairment] decreased by € 30.1 million. In total, operating expenses on an organic basis decreased. In view of the emphasis that Océ is devoting to strengthening its distribution and R&D efforts, the development of operating expenses can be described as satisfactory. One of the factors that contributed to this was formed by the ultimate results of the cost savings that came through from the restructuring operation in 2001/2002.

 

Financial expense [net] Financial expense [net] went down by more than 40% from € 30.6 million in 2003 to € 18.1 million in 2004. This was the consequence of a further decrease in net debt. Interest-bearing capital [net debt] decreased by € 326 million.

 

The average interest rate on loans amounted to 4.7% [2003: 4.4%].

 

Income taxes In 2004 the effective tax rate was low, at 13.2%. In 2003 this had still been 32.4%. The principal reasons for this low tax charge are an exceptional release of provisions as a result of the settlement of the tax risks to which these provisions related and the fact that higher income was achieved in countries with a relatively low level of taxation.

 

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22


Financial review

 

Table 5

 

Commercial and financial activities

 

         2004

   2003

   x € million

Commercial

                  
   

Revenues

   2,584    2,672     
   

Gross margin

   1,035    1,068     
   

Operating income [EBIT]

   62    56     
   

Financial expense [net]

   –1    —       
   

Result before taxation

   63    56     
   

Income taxes

   8    18     
   

Result after taxation

   55    38     
   

Net income

   53    36     
   

Shareholders’ equity

   652    590     
   

Minority interest

   38    39     
        
  
    
   

Group equity

   690    629     
   

Interest-bearing liabilities

   169    –76     
   

Provisions and other liabilities

   962    1,051     
        
  
    
   

Balance sheet total

   1,821    1,604     

Ratios

              
   

Operating income as % of average balance sheet total

   3.7    3.2     
   

Net income as % of average shareholders’ equity

   8.5    5.9     
   

Shareholders’ equity as % of balance sheet total

   35.8    36.8     

Financial

              
   

Interest from financial leases

   68    97     
   

General administrative and selling expenses

   20    28     
   

Operating income [EBIT]

   48    69     
   

Financial expense [net]

   19    31     
   

Result before taxation

   29    38     
   

Income taxes

   4    13     
   

Result after taxation

   25    25     
   

Net income

   25    25     
   

Shareholders’ equity

   62    123     
   

Interest-bearing liabilities

   312    625     
   

Provisions and other liabilities

   38    69     
        
  
    
   

Balance sheet total

   412    817     

Ratios

              
   

Operating income as % of average balance sheet total

   7.6    7.5     
   

Net income as % of average shareholders’ equity

   26.1    18.3     
   

Shareholders’ equity as % of balance sheet total

   15.0    15.0     

 

23


Financial review

 

Net income Net income amounted to € 78.1 million. As a percentage of total revenues, net income amounted to 2.9 % [2003: 2.2%]. Basic earnings per share, calculated on the basis of the average number of ordinary shares outstanding, increased to € 0.89 [2003: € 0.69].

 

Results of commercial and financial activities

 

As in previous years, the results of the commercial and the financial activities in 2003 and 2004 are shown separately in table 5 on page 23. Table 8 on page 27 gives a five-year overview of these results. The actual results themselves are described below.

 

It is important to give a separate breakdown of these results, since more than half of the lease activities have been outsourced and this process will continue further. This implies that revenues from financial activities will decrease further, as will the related assets.

 

In 2004 operating income from the commercial activities was positively influenced by the profit on the sale of part of the lease portfolio [€ 30.9 million as compared to € 6.0 million in 2003]. In the financial activities the interest revenues from leases went down by € 29.4 million to € 68.2 million.

 

When assessing the results of Océ the emphasis in the forthcoming years will – in view of the outsourcing of the lease activities – be on the results of the commercial activities, excluding the once-off profit on the sale of the lease portfolio [€ 31.0 million in 2004 as against € 49.7 million in 2003].

 

What are financial results? The revenues from the financial activities are formed by the interest from financial leases. The costs comprise the costs of financing the lease portfolio and the administrative and selling expenses. Where the financial activities are financed from interest-bearing capital, it has been assumed that this has been done fully on a fixed-interest basis.

 

The costs of financing are then allocated on the basis of the average amount of fixed interest-bearing capital. For the administrative and selling expenses, including provisions for doubtful debtors, a cost level has been applied that corresponds to that of external captive lease companies with similar activities.

 

For the financing of the financial activities it has been assumed that equity amounts to 15% of the balance sheet total. This ratio is likewise derived from captive companies in the financial services industry which publish their own annual financial statements. The remaining part of the equity is allocated to the commercial activities.

 

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24


Financial review

 

Table 6

 

Geographical spread of assets    2004

   2003

     x € million

   as %

   x € million

   as %

The Netherlands

   855    38    626    26

United States

   414    19    626    26

Germany

   347    16    434    18

France

   115    5    163    6

United Kingdom

   100    4    140    6

Rest of Europe

   305    14    333    14

Rest of the world

   97    4    99    4
    
  
  
  

Total

   2,233    100    2,421    100

 

Table 7

 

Statement of cash flow*    2004

   2003

   x € million

Cash flow from operations

   137    340     

Cash flow from investment activities

   233    –12     
    
  
    

Free cash flow [before financing activities]

   370    328     

Financing activities

   –114    –295     

Exchange rate effects

   1    –15     
    
  
    

Change in cash and cash equivalents

   257    18     

 

* For details see pages 82 and 83.

 

25


Financial review

 

Use of funds and finance

 

Gross capital expenditure In 2004 Océ’s gross capital expenditure on property, plant and equipment amounted to € 87 million [2003: € 97 million]. Depreciation and divestments together amounted to € 98 million [2003: € 109 million].

 

Rental equipment and financial lease receivables The book value of rental equipment decreased by € 5.4 million to € 57.9 million. The capitalised value of financial lease receivables [including short term accounts receivable] decreased from € 801 million in 2003 to € 403 million in 2004. For the greater part this decrease was due to the sale of a part of the existing lease portfolio [€ 312 million] and the outsourcing of new leases and the related activities. The aggregate value of rental equipment and financial lease receivables decreased by 46.6% and represented 20.7% of the balance sheet total [2003: 35.7%].

 

The balance sheet value of rental equipment is calculated on the basis of manufacturing cost plus the cost of ensuring that the machine can operate effectively at the customer’s less straight-line depreciation. Financial lease receivables are valued at the net present value of the contracted lease instalments plus the residual value.

 

Interest-bearing capital At the 2004 year end the interest-bearing capital amounted to € 481 million [2003 year end: € 549 million]. As a result of the sale of the existing lease portfolio the cash balance was high at November 30, 2004 [€ 313 million]. This meant that net interest-bearing debt was limited to € 168 million [2003 year end: € 494 million].

 

Group equity At € 752 million, Group equity was the same as in 2003. The composition of Group equity was influenced by the distribution of dividends charged to the General reserve [–€ 52 million], exchanges rate changes [– € 26 million] and addition from the net income [+ € 78 million].

 

Group equity as a percentage of the balance sheet total amounted to 33.7% [2003: 31.0%]. Due to a decrease in interest-bearing borrowings, the ratio between interest-bearing debt and Group equity was 64:100 [2003: 73:100].

 

Shareholders’ equity per ordinary share, calculated on the basis of the number of ordinary shares outstanding at the end of the financial year, amounted to € 7.87 [2003: € 7.87].

 

Cash flow The cash flow from operational activities amounted to € 137 million [2003: € 340 million]. The cash flow from investment activities amounted to € 233 million positive [2003: € 12 million negative]. The cash outflow for investments was more than compensated for by the proceeds from the sale of leases. Net investments in tangible and intangible fixed assets amounted to € 123 million [after proceeds from disposals of tangible fixed assets].

 

The cash flow from financing activities amounted to € 114 million negative [2003: – € 295 million]. The dividend paid in cash to holders of ordinary shares was € 48.4 million. The dividend paid to holders of preference shares amounted to € 3.6 million.

 

26


Financial review

 

Table 8

 

Commercial versus financial results    2004

   2003

   2002

   2001*

   2000

   x € million

Operating income [EBIT]

                             

Commercial

   62    56    142    135    199     

Financial

   48    69    84    90    83     
    
  
  
  
  
    

Total

   110    125    226    225    282     

Net income

                             

Commercial

   53    36    86    79    128     

Financial

   25    25    27    26    24     
    
  
  
  
  
    

Total

   78    61    113    105    152     

Free cash flow [cash flow before financing activities]

                             

Commercial

   –9    195    247    145    68     

Financial

   379    133    91    28    –87     
    
  
  
  
  
    

Total

   370    328    338    173    –19     
                               

Return on total assets [ROA] as %

                             

Commercial

   3.7    3.2    7.5    6.8    10.5     

Financial

   7.6    7.5    7.6    7.5    7.4     
    
  
  
  
  
    

Total

   4.8    4.7    7.5    7.1    9.1     

Net income as % of average shareholders’ equity

                             

Commercial

   8.5    5.9    12.4    10.0    17.4     

Financial

   26.1    18.3    16.1    14.6    14.3     
    
  
  
  
  
    

Total

   10.9    8.3    13.1    10.9    16.8     

 

* Before exceptional items.

 

27


Financial review

 

Credit facilities At the end of the financial year a total of € 660 million of unused credit facilities in the form of multi-year stand-by credit contracts were available to the Océ Group. During the year contracts were entered into for new stand-by facilities amounting to a total of € 410 million.

 

Financial leases

 

An essential element in Océ’s sales concept is that customers can find the complete solution for their needs, including their financing requirements, via one single point of contact. Lease programmes therefore form – and will continue to form – an indispensable component of Océ’s offerings to its customers. More than 50% of the sales of machines are financed via financial leases.

 

In 2003 Océ started outsourcing its lease activities, largely to specialised lease companies. Via this outsourcing the specialised know-how available within the lease partners is used in order to leverage the commercial potential of leasing to the full. Together with these partners new lease programmes are developed and brought to market.

 

The outsourcing of the lease activities also gives Océ the possibility of focusing investments on its core activities and improving the return on total assets [ROA] and the return on equity [ROE].

 

Even after outsourcing, Océ continues to be the face that is presented to the customer. Outside of the United States, i.e. in Europe and the rest of the world, the private label model is therefore used. The lease partners operate under the name ‘Océ Finance’. The one-stop shopping concept is maintained and Océ’s brand name is used to full effect.

 

The outsourcing of lease activities meant that the systems of Océ and of its lease partners had to be harmonised with each other. In the second half of 2004 this harmonisation was achieved and as from that moment there has been a clear acceleration in the outsourcing process.

 

In the Scandinavian countries the lease activities, including the sale of the portfolio, have been transferred in full to Telia Finans AB.

 

In the six European countries served by De Lage Landen International B.V. implementation of the lease partnership was initially slowed down slightly in 2003 due to the above-mentioned harmonisation of systems. In 2004, however, the greater part of the backlog was made good. Most of the new lease contracts are now concluded directly in the name of the lease partner and a substantial part of the existing portfolio in these countries was transferred during the year under review. In the past year De Lage Landen also took over Telia Finans A B, enabling a further simplification and standardisation of processes. In the year under review a framework agreement was concluded with CIT [Commercial Investment Trust] for the outsourcing of the lease activities in Italy, Switzerland, Australia, Central Europe and South East Asia. As a result, a lease partner became available for all Océ subsidiaries that had not yet been included in the vendor lease programme. The partnership with CIT is also based on the private label concept.

 

28


Financial review

 

In the United States Océ operates via its own captive lease company, Océ-Financial Services, Inc. Under this concept new lease contracts are concluded in the name of the Océ captive financing company and are then bundled together and sold to an external partner. Océ remains responsible for activities such as invoicing and the collection of accounts receivable. This model was chosen for the United States as sufficient critical mass exists there for the profitable operation of a captive and because the operations take place within one jurisdiction.

 

In Europe this is much more complicated; besides, at the level of the individual operating companies there is not enough critical mass.

 

Impact In both Europe and the United States good progress has been booked on outsourcing the lease activities. New lease contracts in Europe were placed direct with the external lease partners. In the United States the new lease contracts were concluded by Océ-Financial Services, Inc.; the lease receivables, the ownership of the relevant machines and all related risks were then sold to funding partners. In total, an amount of € 312 million of financial lease receivables and the machines that they related to was sold to external lease partners in the 2004 financial year, € 139 million in the United States and € 173 million in Europe. The transfer of the existing lease portfolio led to a book profit of € 30.9 million.

 

The proceeds from the sale of the total lease portfolio would be sufficient to pay off all existing loans and deferred tax liabilities relating to the leasing activities. However, the resultant financial latitude that has been created will be used to strengthen the company. This will be done in the following order of priority: repayment of loans, investing in assets [including acquisitions] that enable the set financial objectives to be achieved, as well as other options, such as the repurchase of the company’s own shares.

 

29


LOGO

 

 


The world of Océ | Digital Document Systems

 


 

Customer segments


 

Products and services


 

Competitors


Corporate Printing

 

Segments in which Océ operates:

Data centres

Central repro departments

Extensive office environments

 

Departmental printers, black-and-white and colour.

[Very] high volume printers/copiers, black-and-white and colour.

Production printers, black-and-white and colour, cutsheet and continuous feed.

High speed scanners.

 

Canon

IBM

Kodak

Konica Minolta

Ricoh

Xerox

   

Specifically in the sectors:

Financial institutions

Telecom and utility companies

Government and education Trade, transport, industry and consultancy

  Financial services.    

 
 
 

Commercial Printing

 

Marketing Services

Digital Newspaper Network

Printing industry

Digital print providers

Reprographic businesses [quick printers and copy shops]

 

[Very] high volume printers/copiers, black-and-white and colour.

Production printers, black-and-white and colour, cutsheet and continuous feed.

Financial services.

 

Canon

IBM

Kodak

Konica Minolta

Ricoh

Xerox


 
 
 

Océ Business Services

 

All customer segments of:

Corporate Printing

Commercial Printing

Technical Document Systems

  Taking over and carrying out [outsourcing] by Océ of document management processes for both wide and small format applications.  

IKON

Pitney Bowes

Xerox

Local suppliers


 
 
 
Software & Professional Services*  

All customer segments of:

Corporate Printing

Commercial Printing

Technical Document Systems

Display Graphics Systems

  Integrated document management systems: input and output management software, document workflow software, document archiving software. Professional services: training, consultancy, implementation, support.  

Canon

Hewlett-Packard

IBM

PLP Digital Systems

Seal Systems

Xerox

Zeh Software

   

*  The results of the business group Software & Professional Services are integrated in those of the business groups Corporate Printing, Commercial Printing, Technical Document Systems and Display Graphics Systems.

 

32


The world of Océ | Wide Format Printing Systems

 


 

Customer segments


 

Products and services


 

Competitors


Technical Document Systems

 

Print-for-use

Construction companies, architectural and engineering offices

Industrial companies

Utility companies

Telecom businesses

Government

 

Wide format production printers, black-and-white and colour. Wide format scanners.

Print management software.

Financial services.

 

Fuji Xerox

Hewlett-Packard

KIP

Ricoh

Xerox

   

Print-for-pay

Reprographic businesses

Copy shops

       

 
 
 

Display Graphics Systems

 

Print-for-use

Corporate and retail in-house printing

Printing works

Advertising and design agencies

  Wide format production printers [roll-to-roll and flatbed] for indoor and outdoor applications. Print workflow software. Financial services.  

Epson

Hewlett-Packard

Kodak

Mimaki

Mutoh

Nur

Scitex

Vutek

   

Print-for-pay

Digital print providers

Reprographic businesses

Photo processing laboratories

Silkscreen printers

       

 
 
 

Imaging Supplies

 

All customer segments of:

Technical Document Systems

Display Graphics Systems

Corporate Printing

Commercial Printing

Océ Business Services

 

Wide format media.

Specialised display graphics media and inks.

Print media.

 

3M

Hewlett-Packard

Intelicoat

Neusiedler

Paperlinx

Sihl

 

33


Developments in the markets | Digital Document Systems

 

 

Results of Digital Document
Systems
  x € million    2004

   2003

   changes as %

   organic as %

   

Revenues

   1,834    1,907    –3.8    +0.3
   

Non-recurring

   487    444    +9.7    +13.3
   

Recurring

   1,347    1,463    –7.9    –3.6
   

Operating income [EBIT]

   55    70    –20.8    —  

 

General

 

The strategic business unit Digital Document Systems [DDS] concentrates on document output solutions for specific market segments and printing activities that require high productivity.

 

DDS comprises four business groups.

 

The Corporate Printing business group serves financial institutions, telecom companies, utility companies, government institutions, educational institutions and companies engaged in industry and trade. The focus of this business group is on integral solutions for document output management in high-production environments [print-for-use].

 

The Commercial Printing business group serves marketing services companies, digital print providers, the printing industry and repro-graphic businesses. This business group focuses on commercial applications [print-for-pay].

 

The customers of the Software & Professional Services business group are to be found in all target groups of both Corporate and Commercial Printing and Technical Document Systems. This business group concentrates on customer support and software products and project services for the implementation and use of digital solutions.

 

Lastly, the customers of the Océ Business Services business group use the products and services of DDS and WFPS for the outsourcing of document management processes. This business group specialises in document handling, printing and copying activities and complete document management and printing processes.

 

Corporate Printing

 

Market position The Corporate Printing business group focuses on print solutions for customers in high-production environments where it offers integral solutions for document output management. This relates, for example, to EDP environments in big companies, where large numbers of transaction documents are printed electronically, and to central repro-graphic environments with very high volumes of document production. In addition, Océ offers a series of office applications for use at both central and departmental level. Océ’s distinctive feature in this market is that it offers innovative products and services that allow organisations to manage their documents efficiently and effectively.

 

Corporate Printing concentrates on three vertical market segments:

 

    finance, telecommunication and utility companies;

 

    public services: government, health care and education;

 

    trade and industry: manufacturing companies, retail and wholesale trade, transport, logistics and consultancy.

 

For customers in these segments the primary focus is on improving the effectiveness of documents and the information they contain and on achieving maximum efficiency and cost control.

 

An option that is increasingly in demand is the use of colour. Océ has a number of outstanding products available for such applications.

 

For high production applications the company offers the Océ CPS 800 printer/copier and the Océ CPS 900 full colour printer, both of which were introduced during 2004. The machines in the Océ VarioStream family for the high and very high volume segments can print not only in black but also in any desired spot colour or house style colour.

 

34


New products introduced by Digital Documents Systems in 2004

 

Product


  

Business group


  

Application


Océ VarioStream

9210 and 9220

   Corporate and Commercial Printing    Very high volume continuous feed printer family, based on a completely new, innovative technology: ‘Colour-on-Demand’. Océ offers users a development route to move from black-and-white printing via Océ CustomTone to full colour. These machines set a new standard for very high volume printing.

  
  
Océ VarioStream 7000 MICR and CustomTone    Corporate and Commercial Printing    New applications for the Océ VarioStream 7000 family that was launched in 2003. They include a big increase in the number of application speeds for use in MICR [Magnetic Ink Character Recognition] – e.g. for the automated processing of cheques and bank statements.

  
  
Océ VarioPrint 5115 and 5160 document printing and convergence models    Corporate and Commercial Printing    New models of the Océ VarioPrint 5000 series which was introduced in 2003 for document environments. They feature scanning and copying functionality and advanced finishing options such as stapling of brochures and high-capacity storage of finished documents.

  
  
Océ VarioPrint 2110    Corporate and Commercial Printing    Highly advanced multifunctional printer/copier/scanner for high-production mid-volume environments.

  
  
Océ VarioPrint 3070    Corporate and Commercial Printing    Production printer for transaction and document printing, especially in office environments.

  
  
Océ CPS900    Corporate and Commercial Printing    Full colour production printer for reprographic departments and commercial environments.

  
  
Océ CPS800    Corporate and Commercial Printing    High production full colour printer/copier for reprographic departments and commercial environments.

  
  
Océ CS230    Corporate and Commercial Printing    Mid-volume colour printer/copier.

  
  
Océ CS180    Corporate and Commercial Printing    Mid-volume colour printer/copier.

  
  
Océ PRISMA-web    Software & Professional Services    Advanced e-business solution, allowing orders to be placed and processed fully automatically via the internet.

  
  
Océ Document Designer    Software & Professional Services    Variable document processing software for data centres and direct mail applications.

  
  
Océ PRISMA-satellite    Software & Professional Services    Print output management software. Includes new functions that offer more possibilities for cost-effective print management in office environments.

  
  
Océ PRISMA-production new releases    Software & Professional Services    Output management system with maximum productivity and flexibility benefits.

  
  
Océ PRISMA Software bundles    Software & Professional Services    Comprise all functions that are needed for the following customer environments: PRISMA for Office, for Printrooms, for Printshops, for Printing-on-Demand, for Mailers, for Enterprise Resource Planning [ERP], for Transaction.

 

35


Developments in the markets | Digital Document Systems

 

The new Océ VarioStream 9000 family, which was expanded by the launch of the Océ 9210 and the Océ 9220 early in 2004, has again positioned Océ as the innovative leader in high volume printing. The current machines can print in duplex mode in black-and-white and with spot colour. The underlying technology forms the basis for a range of full colour printers that will be introduced in the years ahead.

 

In office and printroom environments customers are increasingly realising the importance of the company-wide management of their machine establishment and their document production. Océ’s offerings in this area relate to services for analysis, implementation and management.

 

These enable the use of installed equipment to be optimised and also bring about a reduction in the related costs.

 

In printroom environments convergence, or the possibility of processing various document flows via one single printer, is essential. Océ has set the standard for intelligent software which can efficiently handle the entire document management process, mostly controlled from one single location.

 

Developments in 2004 During the year under review Océ boosted the competitive strength of its product portfolio in all environments: in the data-processing centre, the printroom and the advanced office. Océ therefore supplies complete solutions, consisting of hardware, software and services, under the names Professional Office, Professional Printroom and Professional Transaction programs respectively.

 

The focus on specific market segments has led to the introduction of products that offer an optimum combination of innovative printing systems, output management software and professional services. During the Océ Open House held in February 2004 in Poing, Germany, a series of ground-breaking products were on display. Special attention was also devoted there to the added value of colour offered by the Océ CPS900 and the Océ VarioStream 9000 family.

 

In the corporate environment the digitisation of documents continued to advance. There was a further decrease in analogue copying during the year under review. Document processes in the office and in document production and transaction printing are being integrated more and more. Printing is replacing copying. Though paper continues to be important, it is increasingly becoming an intermediate working medium. The layout and the use of colour are growing in importance because they make the information that is presented easier to retain. The distribution and archiving of documents will, however, take place more and more in digital form. The introduction of the Océ PRISMA-satellite 1.2 now allows Océ’s corporate clients to manage office documents, whilst at the same time increasing the printing efficiency and reducing the costs for the customer.

 

To meet the growing demand for colour Océ has launched a complete series of colour printers for the office and the printroom.

 

For the mid-volume and for the high volume and very high volume segments Océ has expanded its product range considerably by adding a series of new and upgraded printers, both for cut sheet and for continuous feed. The successful series of cut sheet printers was completed with the introduction of the production printer, the Océ VarioPrint 2110. In the high and very high volumes Océ confirmed its position as a supplier of leading-edge technology with the launch of the Océ VarioStream 9210, a new continuous feed printer. The Océ VarioStream 7000 family was also completed during the year under review. In this way Océ continues to offer its customers a truly complete range of products.

 

36


LOGO   

Trends Growth in the corporate environment is taking place specifically in high-production colour and high volume black-and-white print solutions. Printing speeds are continually being increased and printers that can also print in colour are replacing the mid-volume black-and-white printers and thus paving the way for a greater use of colour in office applications.

 

Many customers realise that the costs involved in the processing of documents have to be brought more under control. This gives rise to the need to replace a large number of decentralised printers with a much smaller number of high-production systems that operate at departmental or central level, since such systems enable substantially lower printing costs. Outsourcing is also a solution that is being chosen more often.

 

Strategy Océ’s strategy for corporate printing is aimed at achieving and strengthening a top position in all high-production printing segments. With this aim in mind Océ offers a complete range of state-of-the-art printing systems, for both black-and-white and colour. In addition, Océ can supply excellent output management software in the form of PRISMA-production and PRISMA - satellite which are efficiently able to control both Océ equipment and third-party machines. To complete its portfolio Océ has opted for strategic cooperation with partners. In all important markets Océ is working on a continuous strengthening of its distribution systems, notably in the United States and the United Kingdom.

 

In the market for continuous feed printing systems Océ is consolidating its leading position by further strengthening its distribution systems and innovation efforts. The introduction of the Océ VarioStream 9000 family has again demonstrated that Océ is the leading innovator in this segment. In response to the increasing customer demand for complete solutions – and the resultant increase in complexity – Océ is investing in its operational organisation, and in sales and consultancy services.

 

Océ also offers an extensive range of services via the Océ Business Services and Software & Professional Services business groups.

 

Commercial Printing

 

Market position The Commercial Printing business group serves customers who use the equipment commercially as a production asset to generate income.

 

Within businesses that concentrate on the production of direct mail [marketing services] Océ holds a leading position world-wide with its high and very high volume printers. In this market Océ also holds a strong position amongst digital print providers. We have recently extended our activities into segments of the printing industry market, especially for time-critical production runs, limited print-runs and personalised mailings or frequently updated instruction manuals. This segment is expected to show strong growth in the years ahead.

 

Over the past years Océ has already built up a strong position in the production of books and newspapers with a limited print-run. Although digital printing is provisionally being used on a limited scale in the printing world, great growth potential exists alongside offset, which continues to be the appropriate technique for bigger print-runs.

 

Developments in 2004 Unwillingness to invest still made itself felt in the commercial printing market, particularly in this market’s most important segment: marketing services. The decline in advertising expenditure also impacted on direct-mail activities. Market conditions were marginally better than in the previous financial year.

 

37


LOGO   

In the printing market the role of digital printing is steadily expanding, despite being slowed down by economic developments. The number of machine placements [net] remained at almost the same level as in the previous year. None-the-less, Océ is gaining more and more ground in this market, especially thanks to the improved and expanded product offerings. This was very clearly demonstrated by the introduction of the Océ VarioStream 9000 family. For Océ opening up this market also entails the development of new competencies in the sales organisations.

 

The printing of daily newspapers in limited print-runs [Digital Newspaper Network] attracted much attention during the year under review, notably because of the activities at the Athens Olympic Games, where major dailies from numerous countries were able to supply their national delegations with newspapers for that day freshly printed on Océ-machines. The most important aspect of this activity, therefore, is that it demonstrates the special possibilities that the equipment has to offer for a specific part of the printing market.

 

Both by expanding its range and by means of its vertical market approach Océ has been able to gain ground in the commercial printing segments. In these highly demanding market segments reliability and productivity are of the utmost importance and Océ machines achieve high scores in this respect. Besides, Océ has translated its lengthy experience of complex printing processes into the development of software that can steer the entire process flexibly and problem-free, even where the system also incorporates non-Océ equipment.

 

Trends The strong growth in the commercial digital printing segment is being driven on the one hand by the outsourcing of printed matter by the corporate environment to commercial printers and, on the other, by the migration to digital printing of printed matter that was traditionally produced on offset presses. This migration has become possible because of decreasing costs, the ever better quality and productivity of digital printers and the availability of workflow solutions tailored to the needs of the commercial segment. The shift towards digital printing is being boosted by the increasing demand for small print-runs and personalised documents for which digital printing is more suitable than offset. The biggest potential growth in colour printing is to be found in the very high production segments [contract printers, book printing and direct mailers]. In absolute terms the share of colour is still small due to what is still a relatively high ‘total cost of ownership’.

 

Strategy Océ’s objective is to achieve a further strengthening of the top position that the company now holds for continuous feed solutions in the very high production segment of digital printing. The Océ VarioStream 9210 and the Océ VarioStream 9220, which were introduced in 2004, represent the benchmark for this part of the market in terms of technology and innovation, partly due to the fact that they can be further developed in phases to become highly productive full colour systems.

 

In the printing industry market - one of the growth markets for digital printing - Océ aims to achieve a prominent position by launching new technologies. Here, too, a key role will be played by the Océ VarioStream 9000 family plus the advanced cut sheet colour printer, the Océ CPS900. Océ’s printing industry sales and sales support organisation is also being strengthened to ensure that it has the know-how and expertise needed to meet the specific requirements, wishes and business processes that exist within this sector.

 

Océ aims to become a major supplier of products to print shop and copy shop chains. The new mid-volume and high volume printing systems, such as the Océ VarioPrint 2110 and the full colour Océ CPS800 and Océ CPS900, are eminently suitable for such applications. A crucial aspect in this market is Océ’s ability to offer hardware and software bundled together in one package.

 


LOGO   

Software & Professional Services

 

Market position The Software & Professional Services business group brings together all of Océ’s expertise in the area of output and document management. The group is a centre of expertise and comprises Océ specialists who, working closely together with the customer’s specialists, analyse the customer’s print output and document processes and formulate proposals for improvements. The systems, consisting of hardware and software, are designed and implemented by Océ’s specialists and consultants. Océ structures these activities by applying its own working method, the Océ Solution Delivery Process. Over the years Océ has also built up in-depth experience of processes, systems and software solutions specifically geared to the needs of each customer sector.

 

In all markets in which Océ operates, paper flows and digital document flows have become increasingly more integrated and more complex. These document processes and workflows need to be managed and controlled. Ever since the introduction of its first digital printers Océ has been developing software for the management of printing processes and printing systems.

 

Océ’s customers are seeking ways to add greater value to their documents and, at the same time, to reduce the costs of document production in their businesses. As part of its Professional Office Programme Océ supplies software and services that enable printing and document flows in businesses to be analysed. On the basis of the information from such analyses new printing configurations are proposed in combination with intelligent software which channels each print job to the equipment that is most suitable and most cost-effective for processing that job. In environments where high and very high volumes are printed Océ is able to ensure not only the very highest degree of efficiency but also to add extra functionality to transaction documents. In this way bank statements or gas or electricity invoices can be given added value as powerful marketing tools. These programs and others like them have been developed in recent years in close cooperation with Océ customers.

 

The entire range of DDS output management programs and applications is available under the Océ PRISMA brand name.

 

Océ harnesses its know-how and expertise to offer businesses and customers solutions in the form of configurations consisting of Océ equipment and software, third-party machines and complete implementation services. The business group advises its customers on the restructuring and improvement of their document management processes. The business group also provides support in cases where customers outsource their entire document and printing processes to the Océ Business Services business group.

 

Developments in 2004 The Software & Professional Services business group has introduced software bundles that are focused on the specific needs of major customer groups. For corporate customers four bundles have been developed: PRISMA for Office, PRISMA for Printrooms, PRISMA for ERP [Enterprise Resource Planning] and PRISMA for Transaction. For the commercial market three bundles have been developed: PRISMA for Printshops, PRISMA for Printing-on-Demand and PRISMA for Mailers. Each PRISMA bundle amalgamates the most important applications and output management system functions for a specific customer segment within a single, compact and complete combination of programs. The bundles improve the customer’s working processes and efficiency and this specifically tailored bundling of software simplifies its implementation process. Various research institutes have already ranked PRISMA software as being the best software that is available within the industry.

 

39


LOGO   

Trends The growing volume of information and documents needs to be effectively managed. Due to the rapid advance of digitisation the enormous quantity of paper documents is being supplemented by an abundance of digital information. Not only the management but also the processing of this information is becoming more complex, as it is supplied simultaneously on paper, by fax, by e-mail or in the form of a PDF file.

 

Customers are increasingly asking for complete solutions, or one single package from one single supplier. The Software & Professional Services business group meets these needs in two ways. On the one hand the PRISMA products package is being further developed through the seamless integration of partner products and, on the other, Océ can draw on an extensive team of its own system consultants, engineers and project managers. These professionals are mainly active in the countries where Océ has its own sales establishments and they are supported in this work by specialised teams. Their task is to design, integrate and implement complex systems which contain both Océ products and third-party equipment.

 

Strategy Océ intends to achieve a substantial strengthening of its position in the market for output management systems by broadening and extending the range and by offering combinations of hardware, software and services that are targeted at specific user environments. With its Océ PRISMA output management software the company is already one of the most important players in the market today. Océ continues to concentrate on the integration of partner systems to supplement the range. The emphasis will be on job preparation and transmission to the production locations.

 

During the year under review Océ further extended the PRISMA family by adding partner products such as Océ PRISMA-web. This product enables corporate and commercial customers to implement web-based ordering and print job management.

 

In addition Océ will, together with partners, steadily expand its output management systems into complete document management solutions in which reliability, productivity, durability, ease of use and a low total cost of ownership will play central roles.

 

Océ Business Services

 

Market position Océ Business Services operates in a distinct growth market for the outsourcing of document management processes and print management activities. Its customers are medium-sized and big companies which want to concentrate on their core activities and wish to have other activities handled by the best provider of such services on the market. The activities comprise all print room processes, the operation and maintenance of complete copier/printer systems, fleet management, electronic and physical archives management, scanning and mailroom activities. Over the past ten years Océ has grown to become one of the leading companies in this field both in the United States and in Europe.

 


LOGO   

Because of its position at the centre of its customers’ document processes Océ is a partner that can offer top-class expertise, not only for the operational side of the processes but also for integrated document management. During the entire contract period possible improvements are constantly investigated, proposed and introduced. Océ acts on the one hand as a consultant who implements ‘best practices’, and on the other as a supplier of hardware and media.

 

Working methods and results are based on service level agreements that are in line with the customer’s wishes and the specific situation. In this way the quality, effectiveness and productivity of the document management process are improved, whilst keeping the costs for the customer at the same level or even reducing them further.

 

Developments in 2004 The activities were again expanded during the year under review, despite what was generally a slower growth-rate for the outsourcing market. Economic conditions are one of the causes of that slowdown. Besides this, a decrease in revenues from existing contracts slowed down revenue growth during the year. Océ continues to focus on the profitability of current contracts via cost control and by introducing new types of services that generate higher added value. As before, Océ Business Services therefore regards its current activities in printrooms and mailrooms as cornerstones but also as launch-pads that will lead to more complex assignments.

 

Trends The outsourcing market is still growing, despite negative economic influences, particularly because of an increasingly wider range in the activities that are being outsourced.

 

There is a noticeable difference between the United States and the United Kingdom compared to the rest of Europe. In the United States the character of the market is changing now that more and more new suppliers are providing services that cross the traditional borders between specialised working areas. Since the existing suppliers are also expanding their package of services, a substantial overlap is being created, leading to fiercer competition. In Europe, where outsourcing is still a relatively young development, expansion towards more complex activities linked to the management of complete information flows can be accomplished more quickly.

 

Strategy Océ is concentrating on boosting the profitability of its business services activities. In the years ahead this will be continued and intensified by improving the contract management processes and by realizing synergy with other parts of the Océ business. In close cooperation with the Software & Professional Services business group, Océ Business Services is developing a series of advanced solutions for the management of complex information flows. The focus will continue to be on the processes in which printing plays an important role. Océ concentrates primarily on the development of those activities which, on the basis of its knowhow and expertise and the availability of excellent equipment, will generate maximum added value. This implies a shift of emphasis away from mailroom and printroom services and towards the more complex management of the physical and electronic document flows within businesses.

 

41


Developments in the markets | Wide Format Printing Systems

 

Results of Wide

Format

Printing Systems

   x € million    2004

   2003

   changes as %

   organic as %

     Revenues    818    862    –5.1    –1.0
    

Non-recurring

   248    245    +1.4    +5.7
    

Recurring

   570    617    –7.8    –3.7
     Operating income [EBIT ]    55    55    +0.1    —  

 

General

 

The strategic business unit Wide Format Printing Systems [WFPS] is subdivided into three business groups.

 

The Technical Document Systems business group serves customers such as construction and industrial companies, architectural and engineering offices, utility and telecom companies and the government as well as reprographic businesses and digital print providers. This business group focuses on technical applications [print-for-use] and on commercial applications [print-for-pay].

 

The Display Graphics Systems business group serves customers in the area of the graphic art industry and advertising agencies and focuses on indoor and outdoor advertising and other forms of graphic communication.

 

Lastly, the Imaging Supplies business group mainly specialises in the supply of print media for all customer categories.

 

Technical Document Systems

 

Market position Océ supplies wide format printers and software for use in the scanning, copying, printing, distributing and archiving of technical documents. Users are to be found in construction companies, in industry, in architectural and engineering offices, in utility and telecom businesses, in the transport sector and in government as well as in the professional print-for-pay environments of reprographic businesses. Océ has a strong, leading position which it has also succeeded in maintaining in the face of today’s difficult economic conditions and growing competitive pressure, mainly thanks to the quality, productivity and user friendliness of its systems.

 

In the process of digitisation Océ has always played a pioneering role. Time after time Océ introduced the innovations that now form part of everyday processes: the scanning of drawings for archiving purposes, electronic distribution and decentralised printing at a location close to the user. At an early stage Océ also introduced such innovations as advanced software for the allocation and management of printing costs and for the supply of print assignments to specialised reprographic businesses via the internet.

 

Océ has a unique reputation world-wide as a supplier of innovative solutions, quality and ease of use and a high level of service. Océ systems therefore stand out because of their high productivity, both during printing and copying and in pre-processing and finishing.

 

42


New products introduced by Wide Format Printing Systems in 2004

 

Product


 

Business group


 

Application


Océ TDS300

  Technical Document Systems   Highly productive wide format printer/copier for decentralised departments in industrial environments.

 
 

Océ CS 40xx scanners

  Technical Document Systems   A new line of stand-alone scanners which enable optimum digitisation of originals [black-and-white and/or colour]. The accompanying software offers the possibility for immediate printing on printers of various makes.

 
 

Océ Account Center

  Technical Document Systems   New software version for automatically generating account information that can be printed, copied and scanned on Océ TDS and TCS systems.

 
 

Océ Power Logic Controller

  Technical Document Systems   New software version for improved control over and variation in document production processes, also via the internet.

 
 

Océ Print Exec Workgroup

  Technical Document Systems   New software version that controls and manages the printing process from the selection of the offerings from internet sites through to the production of physical documents in architectural, development and production environments.

 
 

Océ Repro Desk Server 1.6

  Technical Document Systems and Commercial Printing   Software, accessible via the internet, which enables location independent digital print jobs to be transmitted via central servers to print shops.

 
 

Océ Plan Center 1.6

  Technical Document Systems and Commercial Printing   Software package which is accessible for customers via the internet and which allows digital print assignments to be supplied to print shops via central servers.

 
 

Océ Arizona 600

  Display Graphics Systems   Wide format, high volume colour printer for durable, weather resistant advertisements.

 
 

Océ CS6060

  Display Graphics Systems   Wide format, mid-volume colour printer for durable, weather resistant advertisements.

 
 

Océ Arizona T 220UV

  Display Graphics Systems   Wide format, mid-volume colour printer for durable, weather resistant advertisements using environmentally friendly UV inks. Processes flexible and board materials up to 5 centimetres thick for advertising signs, exhibition materials and signposting.

 

43


LOGO   

Traditionally, the main thrust of the commercial activities has been in Europe and the United States, but in recent years Océ has also shown strong growth in the Asian region. In Japan, Océ has been successfully active in the wide format sector for some years. This relates to an extensive market in which there is strong competition. Océ concentrates on market segments in which the company can excel and it has adapted its most important hardware and software to the language and specific requirements of Japanese users. Major contracts with car manufacturers underline the sound market position that Océ has meanwhile acquired in the home market of its biggest competitors.

 

In China, Océ has its own sales organisation but the company also operates very successfully there together with a number of distributors. In this buoyant market with its unprecedented level of construction activity and growing industrial production there is a great need for technical documents. Though the transition to digitisation is now under way, the emphasis is still on smaller volumes.

 

Developments in 2004 In the black-and-white segment an aggressive marketing approach led to an increase in autonomous revenues from printing systems. Despite an increase in the print volume, revenues from service remained unchanged, particularly because of exchange rate effects.

 

Generally speaking, Océ succeeded in maintaining the number of black-and-white printers sold in all volume segments at the previous year’s level. An important role was played in this by the various innovations aimed at a further increase in productivity and in convenience of use. For example, the introduction at the end of 2003 of the Océ Power Logic Controller in the TDS series was well received in the market.

 

The same also applied to the new versions of Océ’s print management software which were developed in the company’s R&D centres in the United States and France.

 

In the low volume segment Océ introduced the Océ TDS300 at the beginning of 2004. The Océ TDS300 makes it easier for smaller companies in particular to take the step from analogue to digital. With this machine and with the Océ TDS400 and the analogue Océ 7050 Océ now has optimum coverage of the low volume segment.

 

The number of systems sold in the Océ TDS800 series, the most productive machine in the high volume segment, remained practically the same as in the previous year. Specialised reprographic businesses in particular used this machine to replace its successful precursor, the Océ 9800, and to profit from the latest technology and increased functionality and productivity of this new machine. Within industry, by contrast, more and more print volume is being distributed to smaller printers such as the Océ TDS600 and the Océ TDS400.

 


Developments in the markets | Wide Format Printing Systems

 

In the colour segment the Océ TCS400, both the printer and the printer/copier variant, has already built a clear market position, especially in Europe. Océ has therefore succeeded in becoming the first supplier to incorporate the proven black-and-white productivity concept into a colour system as well. As its population expands further, this machine will in the near future make an important contribution to recurring revenues. Although many users of wide format printers are at the moment still sticking with black-and-white printing on the grounds of lower costs and high productivity, there is no doubt that colour will serve as a catalyst for future growth.

 

In the past year Océ was again officially recognised as the supplier with the most complete and best wide format offerings, as regards both hardware and software and both in black-and-white and in colour. The authoritative American test institute BERTL praised the quality and reliability of the TDS series and the Océ TCS400 and pointed to the high standard of Océ service and the high level of customer satisfaction.

 

Trends In general the TDS market will only show very modest further growth in the years ahead. Moreover, the growing exchange and archiving of electronic information will in many cases lead to more decentralised printing, which means that the emphasis will shift from big to smaller machines. The black-and-white printing volume in specialised reprographic businesses is expected to increase further, so that replacement investments will be needed in that sector. The ongoing advance of digitisation is leading to a decline in the volume of analogue printing. In smaller organisations, however, the need for analogue systems will provisionally continue to exist. The shift from black-and-white to colour is continuing unabated, both for printing, scanning and copying. Many organisations use combinations of colour and black-and-white systems.

 

Strategy Despite limited market growth Océ aims to grow further by means of product innovation and greater distributive strength. This will allow Océ to further expand its already strong position in Europe and the United States and to continue its expansion in Japan and China and in various emerging markets.

 

Marketing programmes focusing on customer satisfaction and on expanding the range of products in combination with further intensive training of the sales and service organisations should result in an increase in market share. Océ is continuing, as before, to invest in printers and scanners and in the software required to guarantee their best possible operation. A series of new systems and system and software options are scheduled for release in 2005. They include new print management software versions for specialised reprographic businesses and for organisations which produce wide format prints in-house.

 

Display Graphics Systems

 

Market position Driven by the increasing dynamism in the advertising market, the Display Graphics Systems [DGS] business group focuses on the flexible and fast digital printing of posters, banners, billboards and numerous other wide format graphics products. In this market digital technologies were introduced only a comparatively short time ago as a replacement for highly developed techniques such as silkscreen printing, photographic printing, offset and traditional lettering. Since the value of digital products is becoming increasingly apparent, this market is expected to grow fast. In Europe and the United States Océ is one of the foremost suppliers, offering a range of advanced printers. In Japan Océ successfully started its display graphics business during the year under review. In addition, via Onyx Graphics, Océ holds a leading position worldwide for the software-based control of display graphics printing systems.

 

45


LOGO   

Developments in 2004 On an organic basis, revenues of the DGS business group increased slightly during the year. The main cause is the still slow recovery of the advertising market which was badly hit by the stagnation. The introduction of new products has strengthened the range but these only contributed to the result in the second half of the year. Océ is meanwhile concentrating on a further optimisation of the portfolio with the emphasis on offering complete applications in the form of a combination of hardware, media, inks and expertise.

 

Over the past year Onyx Graphics again booked excellent results.

 

Trends The growth of the display graphics market as a whole is dependent on the development of advertising expenditure. Within the market the growth of the digital segment is comparatively stronger, as digitisation is increasingly giving rise to more productive, flexible and cost-effective production methods. Even though the market is again beginning to grow slightly, the willingness of customers to invest in completely new digital production equipment is still low. The market is also highly fragmented both on the customer side and on the side of the hardware manufacturers. Further consolidation therefore seems likely.

 

Strategy Océ has built up a strong position in display graphics in recent years. DGS is focusing in full on expanding this position further. The world-wide sales and service organisations will make a strong contribution to these efforts. Offerings to customers include a well-balanced package of hardware and software products featuring the right ink-media combinations for specific applications.

 

The business group targets those segments in which the highest rate of growth is expected, notably in the mid-volume segment and in the area of flatbed printers. Product offerings will also be completed by adding strong partner products.

 

Synergy with the TDS activities will be optimally utilised, especially in the areas of sales and service organisation and in technology.

 

Imaging Supplies

 

Market position Media for printers and copying machines form an essential part of Océ’s overall product offerings. That close linkage dates back to the period when images were still formed using chemicals. Since that time, however, Océ’s R&D has constantly concentrated on achieving the best possible interaction between hardware and media. That same expertise also forms the basis for a wide range of specialised media, for example for CAD and display graphics applications on Océ products and on machines from third-party suppliers.

 

The Imaging Supplies business group is active in the entire field of wide format and smaller formats [A3 and A4], both in plain paper and in specialised papers and films. Right from their launch Océ’s offerings of small format colour printers [the Océ CPS700, 800 and 900] were completed by a full range of specialised materials. As a supplier of white bulk paper Océ also holds a relatively strong position in Europe. In the United States the business group is the market leader in the black-and-white wide format sector, which includes CAD materials, whilst it is also strongly positioned in the [wide format] colour market and in the market for display graphics. Both in Europe and in the United States the business group is a leading performer in the areas of logistics and sales support.

 


Developments in the markets | Wide Format Printing Systems

 

Developments in 2004 During the year under review the sluggish recovery of the economy and another fall in paper prices on the world market were factors that affected the revenues and profitability of this sector. Against this background the business group performed well, principally because of the investments that were made in recent years and the continued strengthening of logistics systems. Despite lower revenues, the profitability of Océ’s activities was not impaired.

 

Though the volume of wide format plain paper and CAD materials showed a world-wide decline, Océ grew its paper sales in terms of square metres. This growth in market share is largely attributable to higher sales of materials for use on Océ’s own population of machines. Pro-active promotion of machine sales and pro-active sales support efforts helped to contribute to this. The quality of the materials and the logistic performances also caused a number of major trade partners in Europe and the United States to include Océ materials in their range under their own name.

 

In the display graphics segment the expansion of the range resulted in a direct growth in revenues, with double-digit growth in Europe. Supply coverage for both Océ machines and third-party equipment increased substantially. The range of media and inks [also oil-based and solvent-based] is now one of the most complete in the industry.

 

In the A4 segment the volumes in white bulk grew marginally as compared to the previous year. The range of media for the Océ CPS700 also proved to be a particular success. For the new Océ CPS900 a line of Machine Coated [MC] paper is being developed in close cooperation with R&D and paper mills. The Océ CPS900 is specifically targeted at the printing industry, where this machine is expected to find widespread use in the printing of brochures in smaller print-runs.

 

In the United States there has been a further expansion of the activities in the area of small format specialities [including inkjet photo paper and overhead sheets] that are produced by the company’s own Arkwright plant.

 

Trends The market for imaging supplies is competitive and fragmented. In view of the current difficult economic conditions this will inevitably lead to consolidation, whilst the parties that are left will be forced to optimise their logistics process even further. The growth of the market will be stimulated by the ongoing process of digitisation, which is steadily gaining more ground on the traditional printing techniques. Technological know-how, but also expertise in the area of sourcing, are vital elements to ensure a good performance in this environment. Océ possesses both of these.

 

Strategy The strategy of the Imaging Supplies business group is primarily focused on maintaining its prominent position as a supplier of high-quality, specialised media for wide format printers in the TDS and the DGS segments. In addition, the business group seeks to provide maximum support to the DDS activities by offering a complete and competitive range of small format media. Thanks to its extensive range of imaging supplies Océ is able to enhance the value of its integrated solutions for its customers.

 

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Critical success factors

 

A company’s success is governed by many factors: for example, by the quality of the markets, by economic conditions and by the trading climate. Of the three factors just mentioned, not one can be influenced by the people who run the business.

 

Equally crucial for a company’s success, however, are several factors that are often placed somewhat less in the limelight: motivated and well-trained personnel, a strong position within society, unique technology, an efficient manufacturing process and dedicated partners. These are factors that can be influenced and they are therefore the elements within the business which constantly receive maximum attention and whose importance cannot be easily ignored. Naturally, a sound financial position belongs in the list of these critical success factors, but that is dealt with in ample detail elsewhere in this report.

 

Core values

 

Océ applies seven core values which are firmly anchored within the business and which together form the genetic code for Océ: the DNA that maps out how the company conducts its activities, not only in how its employees work together but also in its contacts with the outside world.

 

They serve as a benchmark for assessing the competencies of employees, and also for parts of the business operations. In all their contacts with the market, with partners, with customers but also with their colleagues, Océ employees are expected to adhere to these core values as the basis for their day-to-day activities.

 

Although the seven core values are in themselves not unique to Océ, they have not been chosen at random: they were selected by Océ employees themselves as the most important commonly shared values for their business. They do not therefore constitute rules or regulations, even though they can be used as such, but rather how our employees think what the character of Océ should be: putting the customer first, being result-driven, being quality-driven, entrepreneurial, innovative, behaving ethically and acting with respect for human values. If the customer is also systematically able to recognise these values, then the circle is complete and the objective has been achieved.

 

Employees

 

In the two years prior to the year to which this report relates a number of radical changes had already been implemented in the composition and numbers of personnel as part of the restructuring of the business. During the year under review a start was made on relocating part of the assembly and manufacturing operations to Central Europe and the Far East, which led to the discontinuation of 175 jobs at the manufacturing facilities in Venlo. The process was virtually completed during the past year.

 

Océ core values

 

Focus Put the customer first

Be result-driven

 

Attitude Be quality-driven

Be entrepreneurial

Be innovative

 

Style Behave ethically

Show regard for human value

 

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Critical success factors

 

Table 9

 

Distribution of employees by geographical area    2004

   2003

     number

   as %

   number

   as %

United States

   8,340    39    8,969    40

The Netherlands

   3,922    18    4,061    18

Germany

   3,028    14    3,063    14

France

   1,160    5    1,203    6

United Kingdom

   1,016    5    1,041    5

Rest of Europe

   2,879    14    2,903    13

Rest of the world

   970    5    964    4
    
  
  
  

Total

   21,315    100    22,204    100
 

 

Table 10

 

Distribution of employees by type of function    2004

   2003

     number

   as %

   number

   as %

Business Services

   6,693    31    7,149    32

Sales

   4,192    20    4,140    19

Service

   4,013    19    4,327    19

Manufacturing & Logistics

   2,512    12    2,514    11

Accounting and other

   2,037    9    2,146    10

Research & Development

   1,868    9    1,928    9
    
  
  
  

Total

   21,315    100    22,204    100

 

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Critical success factors

 

In close consultation with trade unions and the works council Océ acted energetically, but also carefully and with consideration for the interests of the employees involved.

 

Within the framework of Océ’s strategic objective of boosting its sales and distributive strength, last year saw a great emphasis on expanding the marketing and sales organisation. In addition, the training of the sales organisation was greatly intensified world-wide, in both the WFPS and the DDS organisations. Almost all sales employees have taken part in training programmes aimed at boosting their ability to give advice and improving their market and product know-how and their insight into the customers’ document processes.

 

Last year also brought the start of preparations for harmonizing the IT support for Europe. For that reason a central support group will be established. This will have consequences for the IT specialists who are currently active within the group companies.

 

Human resources policy

 

The Corporate Human Resources policy focuses on three main tasks: on the development of leadership potential, on competence management and on anchoring the Océ core values within the organisation.

 

Leadership The aims of the corporate leadership programme are to strengthen the leadership abilities, to retain critical skills within the business and to train new management talent. As an initial step towards strengthening the leadership abilities ‘leadership labs’ were held in the year. These are intensive [self-]assessment programmes that serve as a basis for further personal development. During the past year the entire executive management took part in these labs, as did a substantial proportion of the management teams. In 2005 the remaining management teams and some of the middle management will be taking part in a ‘leadership lab’. In parallel with this, programmes have meanwhile also been initiated for high potentials. Océ’s leadership programme is universally recognised as unique and expectations are therefore high regarding the results it will bring.

 

Competence management Competence management is aimed at raising the level of professional performances, but also at accelerating professional development and at identifying and retaining [young] talent. It is founded on identifying the specific roles required for a particular working environment and the types of behaviours, professional skills and competencies that are needed to fulfil these roles.

 

Competence management has in recent years been introduced in the areas of sales, service and consultancy via the Solution Delivery Process. During the year under review major initiatives were launched to introduce the competence management concept in other areas as well, for example in purchasing, IT and the financial departments. As from 2005 it will form a full part of the day-to-day activities.

 

The Young Océ Professionals programme was also launched during the year. As part of this programme young and highly talented employees work together [on a multidisciplinary basis] on future-oriented projects.

 

Océ’s core values The core values of Océ, as described earlier in this chapter, were intensively brought to the attention of Océ employees during the year and were embedded within their daily working practices. Under the motto Focus on Professionals a wide variety of media and communication channels were used for this purpose, including e-mail and web-video as well as a dedicated website on which activities and ‘best practices’ were posted. A newsletter was also published and regular meetings were held with the core values as their main theme. The core values are increasingly also forming part of the targets that managers set for themselves. Another thrust that has attracted attention world-wide is the Océ Corporate Core Value Award, which is presented every quarter to the employee who performs best in this area.

 

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Critical success factors

 

Sustainable development

 

Océ and sustainable development Care for people, the environment and society is firmly rooted in the Océ culture. Health, ergonomics, working conditions, product safety and the reduction of negative environmental impact have traditionally played a prominent role and are therefore anchored in [policy] regulations and control instruments. Océ is fully aware of its social responsibility in an international working environment that comprises a multitude of cultural principles and customs.

 

The formulation of policy principles and the progress achieved in their implementation were set out in the past year in the company’s Corporate Sustainability Report for the year 2003. This report dealt with the activities of the two most important product manufacturing centres in Venlo and Poing. For the 2004 reporting period the scope of the Océ Corporate Sustainability Report will be extended to include the main international operations within the business. The basis for sustainability reporting is formed by the Global Reporting Initiative recommendations. For a number of years Océ has also subscribed to the principles that are laid down in the Global Compact of the United Nations. Another basic principle is that Océ applies its own code of ethics, even where this goes beyond local standards and customs. The organisation of the company’s sustainable business practices was further strengthened last year by raising the Corporate Sustainability Forum to an international level.

 

Human rights Throughout the world Océ applies high standards and values that stem from its deeply rooted tradition of respect for people. Within the framework of the UN Global Compact these have also been explicitly formulated in a human rights policy that has been published in the Océ Corporate Sustainability Report. This policy, which comprises a declaration of human rights and the company’s responsibilities in this area and a description of how compliance with the policy is monitored, clearly communicates Océ’s position on human rights to people both inside and outside the business. In the next few years this policy will gradually be structured further by anchoring within the organisation concrete procedures and compliance rules for activities in the entire supply chain.

 

The environment In various ways Océ protects the environment against the possible adverse effects of its production processes or the use of Océ products. A wealth of expertise has been gathered with regard to all relevant environmental aspects. As far as its products are concerned, Océ uses a life cycle analysis as its guiding principle during their development, manufacture and use and also in the processing and recycling of waste and residual materials. For example, Océ applies the concept of design for re-use when developing its products, Océ uses safe materials and processes and Océ gives high consideration to environmental aspects when making its choice of packaging materials and means of transport. During the phase in which the products are used much attention is devoted to minimising energy consumption and to the processing of used consumables and, after completing their life cycle, machines are often taken back by Océ and their components and durable parts are re-used.

 

Environmental performances are measured on the basis of environmental performance indicators. Each year these are analysed and compared with the objectives set out in the long term strategy. These are strategic objectives, such as making efficient use of raw materials and energy, increasing the percentage of materials recycled, cutting down on the amount of packaging and reducing emissions in the form of dusts, vapours and gases.

 

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Critical success factors

 

Working conditions and labour relations Océ provides a safe and proper workplace. This applies to the company’s own employees but, because of the nature of the products, it applies just as much to the employees of customers who operate Océ machines. Intrinsic product safety is an important element in the lengthy list of requirements that Océ sets for its products, right from the very first design stage. In most cases these requirements go beyond the standards set in the [increasingly stricter] regulations of various local governments. Monitoring groups keep track of [local] legislation, identify future regulatory developments at an early stage and forecast how Océ is placed to respond to these. Océ machines are designed to deliver constantly optimum performances in the hands of those who operate them. The basis is therefore formed by human factors because these are crucial to the success of the most complicated processes. It is no coincidence, therefore, that Océ machines receive awards at very regular intervals for their ergonomic design and ease of use. This, combined with important aspects such as reliability and productivity, ensures that Océ machines are given high marks by their direct users. Océ products are suitable for a broad group of users, and also for those with a physical handicap. Océ products comply in full with the criteria set in the U.S. Government’s Section 508 Accessibility Standards.

 

Océ provides equal opportunities for all employees and makes clear agreements on working hours and salary. Through training and education Océ ensures that employees are able to develop themselves further and can therefore play their part in achieving the company’s strategic objectives. Océ is an advocate of open communication with employees, as is for example demonstrated via the European Works Council. Océ does not tolerate forced labour or child labour, also not on the part of its suppliers.

 

Society Océ’s basic principles with regard to society are set out in the Océ Policy Principles. All employees have been given a copy of these Principles and are expected to comply with them in full. The Principles include guidelines on integrity and social responsibilities and link up with two of the seven core values identified by the Océ organisation: behaving ethically and showing respect for human value.

 

Océ provides support at both central and local level to a large number of cultural, charitable and sporting initiatives via a series of large and small official sponsorships, purchases of works of art and donations. This emphasises Océ’s commitment towards the communities in which it operates.

 

Progress During the year under review Océ was the subject of studies by sustainability analysts from Triodos Bank and SNS Asset Management. On the basis of these studies ASN Bank, a wholly owned subsidiary of SNS Bank N.V., added Océ to its list of preferred stocks for socially responsible investment. Triodos Bank accorded Océ the status of approved and eligible for ethical investment. During the past year Océ was also included in the Dow Jones sustainability index.

 

More details about Océ and corporate social responsibility can be found in the Corporate Sustainability Reports for 2003 and 2004.

 

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Critical success factors

 

Research & Development

 

Océ has a broad and robust technology portfolio and modern, well equipped R&D facilities. This enables Océ to develop products and services of a high technological standard which offer great added value to the user. The needs of the user form the backbone of product development, which is also fuelled by the practical experiences of the thousands of sales staff and service technicians who provide the product developers with day-to-day feedback of what is happening in the market. The developers operate in centrally managed project groups in which all relevant disciplines are represented. In this way Océ can optimally harness all the know-how, experience and skills available within the business to innovate its range of offerings. In 2004 Océ spent € 207 million on R&D. This is equivalent to 7.8% of revenues [2003: 7.7%]. About 1,900 employees work in R&D, 500 of whom are involved in the development of software.

 

Organisation Océ’s R&D activities are located in six countries. The facilities in Venlo focus on the development of cutsheet and wide format printers and scanners, strategic materials [toners and photoconductors] and software. In Poing [Germany] the R&D activities concentrate on the development of high volume printers and software. North America is the home of the R&D facilities for display graphics wide format colour printers, which are headquartered in San José [California] and in Vancouver [Canada], whilst Arkwright’s R&D department in Fiskeville [Rhode Island] focuses on the development of specialised imaging media. In Créteil [France], Namur [Belgium], Konstanz [Germany] and in the U S cities of Cleveland, Salt Lake City and Phoenix the company has R&D centres for the development of specialised software.

 

Technology Océ’s technology portfolio, which comprises a great many of the company’s own inventions and developments, is efficiently deployed to develop products and services that link up closely with the needs and wishes of users in the company’s selected markets. A good balance is always maintained between short term and long term development work. Whilst valuable basic technology is further developed and applied in new machines, work is simultaneously conducted to advance the [often lengthy] development of new and pioneering technologies that will form the basis for future growth.

 

One example of these proven, but continuously updated technologies is the CopyPress printing technique. In this the toner image is ‘pressed’ directly into the paper; this is a reliable technique that creates a crisp image. CopyPress is applied in combination with the organic photoconductor [OPC] for monochrome prints but it is also used in combination with the Direct Imaging Process [DIP] technique for colour printing. Both these processes were developed in Océ’s own R&D laboratories. DIP is the key technology that is incorporated in the Océ CPS700 and its successors, the Océ CPS800 and the Océ CPS900, a series that is still being further expanded.

 

In the development of colour printers for the wide format segment Océ is working together with partners in the area of thermal inkjet technology. Océ is also booking good progress with its own unique variant.

 

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Critical success factors

 

For the very high volume continuous feed products Océ holds a leading technological position, notably thanks to the quality and reliability that it offers. These systems can be flexibly used for spot colour applications and for the printing of magnetically readable information. A new and unique technology [Colour Belt] has been built into a series of high volume machines that were introduced during 2004 and this technology improves the print quality even further. The addition of extra modules to the existing machine also allows users to upgrade to full colour applications.

 

Amongst the many specific applications that Océ offers to its customers, a special position is occupied by the systems for advanced data recognition technology for applications such as bulk invoice processing.

 

Strategic materials Strategic materials form an essential aspect of Océ’s own technology. These materials comprise black-and-white and colour toners, organic photoconductors, process drums and silicone materials. In combination with the machines in which they operate and the related software, these materials create unique capabilities which clearly distinguish Océ’s products from those of its competitors.

 

Machines When developing new machines, Océ applies a number of key values: productivity, quality, ease of use, low total cost of ownership, reliability and environmental friendliness. The graphic design of all software products is based on an integrated philosophy. This shortens the learning curve for the users and substantially reduces the risk of errors during operation. In the area of man-machine interaction Océ has therefore built up an excellent reputation. In systems development the primary focus is also on creating integrated operational designs [Single Point of Operation]. This allows the user to make sure that the various elements in a document process are efficiently managed.

 

Software Software plays a key role in the world of digital technologies. Here, a distinction is made between embedded software, which governs how the machines operate, and application software, which gives the machines added value for the customer. Software applications basically constitute the link between the machine and its performances and the wishes and requirements of the user. With its strong emphasis on output management, Océ has in recent years brought together an extensive collection of software applications to form a single integrated software package [PRISMA], tailored to the needs of specific users. In the year under review these programs were further harmonised. Océ holds a leading position in the area of output management software.

 

On the basis of the way in which customers use its machines, Océ focuses on two groups of customers. One group of customers uses the machines as part of – and as a cost item in – their own [production] process: print-for-use. They are interested above all in a far-reaching reduction of the costs related to their core activities. Software is the key here because it allows them to concentrate as much volume as possible on a single flexible printer which can be controlled in a simple way. The essential aim is to achieve a simple, transparent workflow.

 

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Critical success factors

 

For another group printing is the core activity and it has to generate maximum profit [print-for-pay]. For these customers Océ offers software that enables them to supply a competitive and flexible product that helps them to stand out from their direct competitors. This relates, for example, to the optimisation of the workflow so that maximum high-quality output can be produced within a given period of time, even when this involves many separate jobs from different clients.

 

Océ’s software comprises workflow management applications [post-press, but also archiving and data recognition and data capture], print servers and controllers. This software is not only extremely efficient at achieving the set objectives, but also works together excellently with existing hardware and software systems from other suppliers that are already installed in the customer’s premises. In practice this means a considerable cost saving in addition to a simplification of the working processes. Besides this, Océ software can function without having to intervene in the operation of third-party software.

 

Manufacturing and logistics

 

Manufacturing Over the past years the manufacturing of machines at Océ, especially in the production facilities in Venlo, has undergone a great change in character. The emphasis has increasingly been to shift from in-house manufacturing towards outsourcing. Initially this only involved components but in recent years complete modules have also been manufactured externally by a selected group of suppliers. In essence, Océ’s actual machine production basically consists of high-grade assembly work. The step towards the outsourcing of a complete machine, as was initiated during the year under review, is therefore not a very big one. The crucial element here is that the manufacturing of machines has to retain the same status within Océ: in a single interrelated process that involves R&D on the one hand and the sales and service organisation on the other. This safeguards the linkage and cooperation between R&D, manufacturing and service, which is essential for a fast and efficient production startup but also of great importance for product improvements.

 

A major development during the past year was the actual start of the outsourcing of complete modules and machines to partners in the Far East. By having its manufacturing activities carried out in lower-wage countries, Océ can bring its manufacturing costs to the same lower level as those of its competing suppliers in the relevant markets.

 

When outsourcing, Océ makes use of the expertise and the networks of contract manufacturers which for quite some time now have already been supplying printer modules direct to the company’s assembly lines in Venlo. They also handle the manufacturing and sourcing of required components and some of these components are already being manufactured in the region. The quality is good and, despite the higher transport costs, the cost price is substantially lower. The activities in the Czech operation have also been expanded and more and more components are being sourced in Central Europe.

 

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Critical success factors

 

Outsourcing at this level obviously takes place with the greatest care. For example, the modules and machines whose manufacturing has been outsourced will still continue to be produced in Venlo for a certain period of time.

 

Parallel to the outsourcing process an extensive programme has also been started to achieve a further streamlining of the supplier base for components. In this case, too, considerations of cost control will mean that a significant proportion of components will be sourced from low-wage countries. For numerous components, which can be regarded as commodities, this is possible without any loss of quality.

 

Océ will continue, as before, to produce strategic materials such as process drums, toners and silicone materials, mainly in its own factories in Venlo. These materials are becoming increasingly more knowledge-intensive and capital-intensive but, thanks to continuous improvements in the Venlo operations, not only has the useful lifetime of the products been extended but there has also been an increase in manufacturing efficiency. In 2004 a new plant for the production of toner for the very high volume VarioStream printers was constructed and came on stream in Venlo.

 

Océ’s own manufacturing facilities are located in Venlo [the Netherlands], in Poing [Germany], Prague and Pardubice [Czech Republic], in San José and Fiskeville [United States] and in Vancouver [Canada].

 

Logistics In the manufacture and supply of machines, service components and supplies Océ has to manage various internal and external logistics processes that have considerable financial consequences, for example the build-up of inventories. Inventories are, to the extent that they are still needed, being concentrated in regional supply centres, which cover large areas [United States, Europe, Asia]. In the past year some of the strategic inventories were relocated to the United States, leading to greater reliability of deliveries, which also has an extremely positive effect on the reputation of Océ. To a large extent the supply chain for service components is now centrally managed. In a subsequent step the smaller local inventories will also be brought within the group system. Thanks to centralised management [which meanwhile covers more than half of all inventories] local inventories can be smaller. This brings a corresponding cost reduction and reduces the risk of products becoming unmarketable. The further development of this is taking place in parallel with the renewal of the systems in the various countries and will take a further two to three years to complete.

 

Transport is the next step on the road towards improved efficiency. Océ’s total logistics costs are being accurately charted, as are the various logistics routes and the transport patterns that are expected in the near future. Certainly in the somewhat further future, fluctuations in market demand may have substantial consequences for logistics, all the more so in cases where modules and machines are assembled in various locations around the world. These complex logistics flows can be managed by means of an even better integration of internal systems, especially where there is a need to bring the logistics and manufacturing systems more rapidly into line with market developments.

 

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Critical success factors

 

Non-product related costs Apart from savings on the costs of transport and logistics services it is also possible to achieve sizeable savings on many other non-product related costs via central purchasing, as was revealed in a worldwide survey. This applies in particular to IT costs, mobility and accommodation, but also to numerous other smaller cost items. The year under review saw the start of a project that is aimed at achieving substantial cost savings in this area over the next years.

 

Océ’s partners

 

Cooperation with partners is an integral part of the Océ business model. Reliable partners enable the business to continue to concentrate on its core capabilities and core activities and thus keep pace with its, mostly bigger, competitors. Océ’s numerous partners make an important contribution to the company’s success.

 

Distribution In regions in which Océ does not have its own sales channels the company works together intensively with independent local distributors. In by far the majority of cases these are energetic entrepreneurs who know the local markets better than anyone and position Océ’s offerings optimally in the market. Venlo and Poing therefore maintain close contacts with these distributors and value added resellers to enable them to carry out their work in the best possible way. As they frequently also take care of all the maintenance and servicing work, they also take part in the training and instruction courses for the machines that they sell. However much Océ believes in the value of having its own sales organisation, there are big areas in the world in which Océ would not succeed in selling its products in so many niche markets and remote areas without the help of its distributors. In a number of instances their activities have also proved crucial in capturing a share of the market. China and Japan are good examples.

 

Manufacturing Océ sources almost 95% of its components, machine modules and, in the years ahead an increasing proportion of its machines from a group of selected suppliers. These suppliers are involved in product development at an early stage. Océ provides the product specification; the partner is responsible for ensuring that the product can be manufactured on an industrial scale as quickly as possible, and is also responsible for setting the right price, for quality and for on-time delivery.

 

Product development In the earliest stage of product development Océ works intensively with universities and other knowledge centres. Because of this close contact Océ has continual access to new knowledge and, conversely, the scientific world is given insight at first hand into the latest technological developments.

 

In later stages of product development Océ works together with technological and system specialists and with suppliers of printer technology and software. R&D assignments are also contracted out to public and private knowledge institutes, such as TNO in the Netherlands, the Fraunhofer-Gesellschaft in Germany and various universities throughout the world. The development of complete modules is also outsourced.

 

Leasing For the outsourcing of lease activities outside of the United States Océ uses the services of vendor lease partners.

 

The partner in Scandinavia, Telia Finans AB, has been acquired by De Lage Landen International B.V. As a result, the cooperation with De Lage Landen – which was already Océ’s partner in the Netherlands, Belgium, Germany, the United Kingdom, France and Spain – has now been further strenghtened.

 

In 2004 a framework agreement was concluded with CIT for the outsourcing of the lease activities under a private label programme in Switzerland, Australia, Italy, Central Europe and South East Asia.

 

In the United States DLL Financial Services, Key Equipment Finance, Bank of America Vendor Finance and CitiCorp are our funding partners for sales of lease activities.

 

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Management aspects

 

Corporate governance

 

Structure, policy and compliance Océ N.V. is an international holding company within the meaning of Article 153, para. 3b, Book 2 of the Dutch Civil Code. This implies that shareholder rights are not restricted by the rules that are applicable in the Netherlands with regard to what is known as the ‘structure regime’. An alteration of the Articles of Association, which was approved at the Extraordinary Meeting of Shareholders held on September 8, 2004, brought the company’s Articles of Association into line with the ‘structure regime’ and with the regulations on corporate governance.

 

Corporate governance is structured within Océ by the legislation, jurisdiction and codes of best practices in the countries in which the company performs its activities.

 

As a result the consequences of the implementation of the Sarbanes-Oxley Act also made themselves felt in 2004. This implementation is based on regulations issued by the SEC and on the adaptation of the corporate governance code that is applicable to companies listed on American stock exchanges.

 

Compliance with these regulations is hampered by the fact that they were primarily drawn up for American companies within the American jurisdiction.

 

In the Netherlands the Dutch Corporate Governance Code, which was published in December 2003 and which consists of 21 principles and 113 best practice provisions, is applicable. This code [the Dutch Code] came into force as from the financial year that commences on or after January 1, 2004 and was given legal status with effect from January 1, 2005. Publicly listed companies are therefore obliged to include a paragraph in their annual report indicating the way in which the company applies the Dutch Code.

 

Océ had already included this paragraph in its annual report for the 2003 financial year and the subject was dealt with at the Annual General Meeting of Shareholders on March 2, 2004 and at the Extraordinary Meeting of Shareholders on September 8, 2004. This information is available on the Océ website [www.oce.com].

 

The Board of Executive Directors and the Supervisory Board of Océ subscribe to the basic principle that was applied when drawing up the Dutch Code: a company is a long-term form of collaboration between the various parties involved. These parties, the stakeholders, are the groups and individuals that directly or indirectly influence [or are influenced by] the achievement of the company’s objectives and includes employees, shareholders and other providers of capital, suppliers and customers, but also government and civil society.

 

The Board of Executive Directors and the Supervisory Board have overall accountability for achieving the right balance between these interests, with a view to ensuring the continuity of the company.

 

An explanation is given below of the areas in which the principles and best practice provisions of the Dutch Code are departed from as regards those that refer to the Board of Executive Directors and the Supervisory Board. This relates to the following provisions in the Dutch Code:

 

II.1.1 Appointment period of a maximum of four years for executive directors.

 

II.2.3 Shares granted to executive directors should be retained for a period of at least five years.

 

II.2.7 Severance pay for executive directors is subject to a maximum amount.

 

III.3.4 Maximum number of supervisory directorships per person.

 

IV.1.1 Limitation of the right to make a binding nomination in cases of appointment and dismissal of executive directors and supervisory directors.

 

IV.1.2 Linking the voting right on financing preference shares to the fair value of the capital contribution.

 

IV.3.1 Prior announcement of all presentations to [institutional] investors, whilst offering all shareholders the possibility of taking part in these in real time.

 

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Management aspects

 

With regard to the other principles and best practice provisions of the Dutch Code that are addressed to the Board of Executive Directors and the Supervisory Board, Océ has noted that these were already being applied or Océ has taken steps to adopt these to the extent that they are applicable to Océ, subject to allowance being made for existing and future legislation. Last year’s report mentioned a departure from best practice provisions II.2.1 and II.2.2 concerning the granting of unconditional options to directors and the related performance criteria. This departure no longer applies, as the option plan has been replaced by a share plan [see page 64].

 

The departure from provision III.3.4 concerns one member of the Board of Supervisory Directors who will reduce the number of supervisory directorships in the course of the 2005 financial year.

 

With regard to departures from the provisions IV.2.2 and IV.2.8 of the Dutch Code that relate to the issue of depositary receipts for shares, see page 67 of this annual report, where an explanation is given about depositary receipts for financing preference shares that do not have a stock exchange listing.

 

Compliance with and application of the Dutch Code Each year Océ will explain the main outlines of its corporate governance structure in the annual report and will submit any substantial changes in this to the General Meeting of Shareholders for discussion. More information on corporate governance and on the related rules and regulations is available on the Océ website [www.oce.com] under corporate governance.

 

Board of Executive Directors

 

The Board of Executive Directors consists of three members who are appointed by the General Meeting of Shareholders. In the case of each appointment the holders of the priority shares have the right to draw up a binding nomination, which can be cancelled by a resolution of the General Meeting of Shareholders that has been adopted by a majority of at least two-thirds of the votes cast, provided that such votes represent at least one-half of the issued share capital. If no binding nomination has been drawn up, the General Meeting is free in its choice. The Supervisory Board appoints the chairman of the Board of Executive Directors and decides on the allocation of the tasks of the Executive Board members in consultation with the Board of Executive Directors. Regardless of the allocation of tasks the Board of Executive Directors acts as a body with collective responsibility.

 

Best practice provision II.1.1 introduces the four-year appointment period for executive directors. This regulation does not correspond to the contractual situation of the executive directors currently in office. Océ will respect this contractual situation and will await future legislation in this area. For severance payments made in the event of involuntary dismissal as meant in II.2.7 Océ has to date applied a policy of paying an amount of compensation that is reasonable on the grounds of the contractual situation, social developments and case law. For such time as no change is made in the statutory regulation of the employment conditions for executive directors Océ also intends to continue to apply this policy in future.

 

Remuneration of the Board of Executive Directors The Supervisory Board fixes the remuneration of the members of the Board of Executive Directors on the basis of the advice of the Remuneration Committee.

 

The remuneration policy is aimed at attracting and retaining the best executives needed to manage a publicly listed company that operates on an international scale in the area of technological activities. This policy was dealt with at the Annual General Meeting of Shareholders held on March 2, 2004 and at the Extraordinary General Meeting held on September 8, 2004. Shareholders approved this policy including the share plan. This remuneration policy, which is aimed at supporting both the short term and the long term objectives of the company, was

 

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implemented with effect from January 1, 2004. The basis is formed by a remuneration which, on balance, corresponds to the median remuneration level of a reference group of companies which are listed on the AEX or Midkap index and which, in terms of size and complexity, are comparable to Océ. This reference group consists of ASML, Buhrmann, DSM, Getronics, VNU, Wolters Kluwer and ASMI.

 

The remuneration package is made up of the following components: base salary, variable pay [i.e. short and long term bonus] and pension scheme. For Dutch members of the Board of Executive Directors the Dutch labour market is used as the frame of reference and for non-Dutch members the market conditions of the relevant country.

 

The total package [base salary, variable pay and pension scheme] is determined on the basis of the median level in the reference group. Variable pay is considered by the company to be an important part of the total package. The performance criteria to which short term and long term bonus are linked are focused on value creation and on increasing shareholder value over the short and longer term respectively.

 

The remuneration package of the members of the Board of Executive Directors is structured as follows:

 

  Base salary

 

The level is at the median of the above-mentioned reference group of comparable companies. In 2004 the individual remuneration of the members of the Board of Executive Directors remained the same as in 2003.

 

  Variable pay

 

Short term bonus For the 2004 financial year the bonus scheme was one in which the performance targets for the Board of Executive Directors were related partly to the Group’s financial results, such as net income and return on total assets [ROA], and partly to individual targets, such as defining and implementing strategy, industrial policy and restructuring operations. With effect from 2005 the bonus scheme will be linked solely to financial performance criteria, i.e. net income and ROA. The maximum level of the bonus that can be earned has been fixed at 50% of base salary. The extent to which the set targets have been achieved is partly determined on the basis of the annual financial statements as verified by the external auditor.

 

Long term bonus With effect from 2005 the existing annual Stock Option Plan will be replaced by a Share Plan that will be linked to performance criteria. These are focused in full on creating shareholder value, i.e. share price gains plus dividend. Each year a three-year cycle will start, whilst performances will be measured each time at the end of the period by comparison with the following peer group of European technology companies that have a comparable business model: Agfa, Akzo Nobel, ASML, ASMI, DSM, Heidelberger Druck, Infineon, Philips and Stork. The position that Océ occupies in the peer group will in each case determine the number of shares awarded. The shares awarded at the end of a three-year cycle should be retained for a maximum period of three years.

 

Océ considers that this period, which is shorter than that recommended in best practice provision II.2.3, is justified because of the fact that the shares that have been awarded can only be sold six years after the commencement of a plan.

 

For an overview of the individual remuneration of the members of the Board of Executive Directors see pages 90 and 91 of the annual report. As at the end of the financial year the members of the Board of Executive Directors held no ordinary shares in Océ and, apart from the options they would be eligible to receive under the Stock Option Plan, no rights to options listed on the Euronext Options Exchange.

 

As regards the duration of employment contracts of members of the Board of Executive Directors, company policy is that these are entered into for an indefinite period or for a specific period until the customary retirement date. The existing contracts are subject to a period of notice of six months.

 

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Pension scheme With effect from January 1, 2003 the pension scheme for the Dutch members of the Board of Executive Directors, which was based on a defined-benefit system, was modified. It was replaced by a combination of a defined-benefit system, which offers a maximum pension salary of € 237,952, and a defined-contribution system for the salary in excess of that amount, which means that the company no longer has any back service liabilities. For non-Dutch members of the Board of Executive Directors the pension system of the relevant country will be applicable.

 

An overview of the accrued pension entitlements can be found on page 91.

 

The related financing costs are shown on page 90. For members of the Board of Executive Directors the contractual retirement age is 62 years and for the chairman 60 years. No contractual arrangements have been made in respect of early retirement.

 

Supervisory Board

 

The Board of Supervisory Directors currently comprises six members who are appointed in the same way as the members of the Board of Executive Directors. The Supervisory Board supervises the policy of the Board of Executive Directors and the course of business in the company and the activities relating thereto. The Supervisory Board is supplied in a timely fashion by the Board of Executive Directors with all information that it requires for the performance of its task.

 

The Supervisory Directors appoint a chairman from their membership.

 

Profile of the Supervisory Board In consultation with the Board of Executive Directors, the Supervisory Board has drawn up the following profile for its own composition: The Board consists of at least three and at most eight members. The members should operate independently of and critically with regard to each other, based on a good relationship of mutual trust. They should be experienced in the management of an international, publicly listed company. The members should have sufficient time available to fulfil the function of Supervisory Director. As to ensure continuity a spread in ages is aimed at.

 

Endeavours are made to ensure a broad representation of know-how and experience in one or more of the disciplines that are relevant to Océ, in particular: R&D, the production of advanced machines and materials, international marketing of high-value products and services, the environment, finance, government policy, human resources and social policy. This outline profile is periodically evaluated and adapted where necessary. In doing so, the factors that are taken into account include developments in the nature and the size of the company and its business activities, the degree of internationalisation, and the extent of the specific risks over the medium and long term.

 

Supervisory Board committees In practice the following committees operate at Océ:

 

Selection and Nomination Committee This selects and nominates candidates for appointment as a member of the Board of Executive Directors and as a member of the Supervisory Board.

 

At periodic intervals this committee also assesses the functioning of individual supervisory directors and executive directors.

 

This committee consists of Mr. J.L. Brentjens, chairman, Mr. F.J. de Wit and Mr. J.V.H. Pennings and, as an advisory member, the chairman of the Board of Executive Directors supported by the director Corporate Personnel & Organisation.

 

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Remuneration Committee This committee advises the Supervisory Board on matters relating to the remuneration of the members of the Board of Executive Directors, draws up the remuneration report as referred to in best practice provision II.2.9. of the Dutch Code and monitors and evaluates the remuneration policy for the managing directors of the Océ Group. It consists of Mr. F.J. de Wit, chairman, Mr. J.L. Brentjens and Mr. J.V.H. Pennings.

 

It is supported and assisted in its work by the chairman of the Board of Executive Directors and by the director Corporate Personnel & Organisation. Decisions on the level of remuneration including the Océ Share Plan and the granting of shares fall within the competencies of the entire Board of Supervisory Directors.

 

Audit Committee This committee has a supervisory task as regards monitoring the integrity of the company’s financial reporting and as regards risk management. The committee was formally established in October 2002 and has its own charter which complies with the requirements set by both the Dutch Code and the American Sarbanes-Oxley Act.

 

The members of this committee are Mr. M. Arentsen, chairman and financial specialist, Mr. P. Bouw and Mr. F.J. de Wit.

 

The role and powers of these committees are further defined in regulations for these committees which have been published on the Océ website.

 

Remuneration of the Supervisory Board In 1998 the General Meeting of Shareholders fixed the remuneration of the Supervisory Board at € 40,840 for its chairman and € 27,227 for its members. The remuneration for any financial year is automatically increased if the CBS Price Index figure for household consumption in September of the preceding year is at least 10% higher than the index figure that was last used as a criterion. This increase corresponds to the percentage increase in the most recently published index figure. No further payments are made to persons who are members of committees.

 

For 2004 the remuneration amounted to € 46,355 for the chairman and € 30,903 for the members.

 

The total remuneration for the 2004 financial year of the present and former members of the Supervisory Board amounts to € 222,281 [2003: € 221,374]. As at the end of the financial year the members of the Supervisory Board held 2,969 ordinary Océ shares [2003: 2,969] and held no rights arising from options listed on the Euronext Options Exchange.

 

Transactions involving a conflict of interests

 

During the financial year no transactions as referred to in best practice provisions II.3.4, II.6.3 and II.6.4 took place involving a conflict of interests between directors, supervisory directors or natural and/or legal persons holding at least 10% of the shares in the company.

 

General Meeting of Shareholders

 

A General Meeting of Shareholders is held each year. Other meetings of shareholders may be held at the request of the Board of Executive Directors, the chairman of the Supervisory Board or two Supervisory Directors.

 

Shareholders who represent at least 10% of the company’s issued capital may also convene a meeting.

 

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The agenda for the meeting is drawn up by the party that convenes the meeting. Shareholders who individually or jointly represent 1% or a value of € 50 million of the issued capital may submit proposals up to thirty days prior to the meeting. All shares carry a voting right pro rata to the nominal value of such shares.

 

Resolutions are adopted by an absolute majority of votes, except in those cases where a qualified majority is prescribed by law or in the company’s Articles of Association.

 

Capital and shares The company’s authorised capital consists of ordinary shares, priority shares and preference shares. For details of the composition of the authorised capital and an explanation of the various classes of shares in issue, see page 118 of this annual report.

 

In best practice provision IV.1.1 it is proposed that the right of the priority shareholder to draw up a binding nomination for the appointment of executive directors and supervisory directors should be limited. Océ does not intend to apply this provision. The right to draw up a binding nomination forms an essential part of Océ’s protective structure. The aim of this structure is to enable the company to protect itself against a hostile takeover, i.e. a takeover on which no agreement has been reached with the Board of Executive Directors and the Supervisory Board.

 

Océ can only operate optimally in a market in which a level playing field exists between the players. The players come from various jurisdictions, such as the European Union, where the absence of a level playing field in the area of anti-takeover measures became clear during the discussions on the introduction of the 13th Directive. In addition, they come from the United States, Central Europe and the Far East. Companies from these countries, too, generally have effective means of protection at their disposal.

 

In order to continue operating in this market, Océ wants to maintain its protective structure, which was built up carefully in the past and with the approval of shareholders, so that the interests of all stakeholders can be scrupulously kept in balance. For such time as the legal framework permits this, Océ will continue to make use of this .

 

Unlisted depositary receipts for financing preference shares form part of Océ’s capital. Upon the introduction of these shares careful attention was paid to the matter of the dilution of voting rights as compared to the ordinary shares. In connection with this it was decided at the time to opt for the issue of depositary receipts [certification] and to structure the composition of the board of the Trust Office in such a way that one director is appointed by the meeting of the holders of depositary receipts, one by the Board of Executive Directors of the company, and three by the General Meeting of Shareholders.

 

This tailor-made construction was introduced at the time with the approval of the shareholders’ meeting and was in line with the corporate governance recommendations that were applicable until recently. Consultation has been held with the holders of depositary receipts for these financing preference shares and also with the Trust Office on the application of best practice provisions IV.1.2 [voting right on the basis of fair capital contribution] and IV.2.1 to IV.2.8 [composition of the Trust Office and the granting of voting proxies to holders of depositary receipts]. None of the parties concerned can currently see the need to make any changes in the existing construction. Another aspect that plays a role in the case of the financing preference shares is the introduction of IFRS, as a result of which the capital contribution made via these shares is classed as borrowings. This is at odds with the legal status of share capital and with its related risk profile. Talks are being held with the holders of depositary receipts to find an acceptable solution for this problem.

 

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Management aspects

 

Proxy solicitation Since the 1980s American institutional investors have been actively making wide-scale use of proxies to participate in the decision-making at the General Meeting. As from December 1999 it has been legally possible in the Netherlands to use a record date, which brings a considerable reduction in the period during which shareholders do not have their shares at their disposal because those shares have to be placed in deposit up to and including the date of the General Meeting.

 

The General Meeting of Shareholders had given authorisation for the use of this record date until March 7, 2006. The Extraordinary Meeting of Shareholders that was held on September 8, 2004 approved the inclusion of this authorisation in the company’s Articles of Association, which means that it is valid for an indefinite period.

 

Dividend policy The dividend policy applied by Océ – as approved by the General Meeting of Shareholders on March 2, 2004 – is to distribute about one-third of the net income attributable to holders of ordinary shares to this class of shareholders.

 

The resultant retention of two-thirds of net income then ensures that the required rate of growth can be achieved by the company, whilst simultaneously maintaining the required balance-sheet ratios. In addition, Océ’s policy is that a reduction in the dividend per ordinary share will not be made in the event that the net income is not sufficient to implement the dividend policy. The latter has been the case in recent years. The dividend policy will be reevaluated after the sale of the existing lease portfolio and after the resultant actions have been completed.

 

Issuing policy Each year the General Meeting of Shareholders has given its authorisation for the issue of shares and for the limiting or preclu-sion of the related statutory pre-emptive right. This item on the agenda is accompanied each year by an explanation of the purposes and restrictions that the Board of Executive Directors and the Supervisory Board will abide by if they make use of the authorisation that has been granted.

 

Investor Relations [IR] policy and communication with shareholders Océ pursues an active IR policy aimed at providing shareholders with regular and extensive information about developments within the company. The CEO and the CFO have primary responsibility for relations with shareholders, other providers of capital, their intermediaries and financial journalists. For more detailed information about Océ’s IR policy see page 125 of the annual report.

 

Chapter IV.3 of the Dutch Code deals with the provision of information to and the logistics of the General Meeting of Shareholders.

 

In line with the regulations relating to price-sensitive information, Océ shareholders and all other parties in the financial market, also including potential shareholders, are provided with information simultaneously and on the basis of equality.

 

Contacts with the media and with financial analysts are handled carefully and the independence of analysts is respected. Important publication dates for results are announced in advance wherever possible. Presentations given during the explanatory comments on the six-monthly and annual results and tele-conferencing meetings on the first and third quarter results are posted on the Océ website.

 

These presentations are made available via webcasting for wider groups of interested parties.

 

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Risks and risk management

 

Market risks

 

The economic cycle Océ’s revenues originate from machine sales, software and professional services [non-recurring] and from service, materials, rental, interest and business services [recurring].

 

The split between non-recurring and recurring revenues in 2004 was 28:72.

 

The relationship between non-recurring and recurring revenues, which in the past showed a time-lag of six to twelve months [before recurring revenues followed the trend in non-recurring revenues], was less marked in 2004. Whereas the growth in revenues from sales of machines, software and professional services has been positive since the fourth quarter of 2003, the aggregate revenues from maintenance, supplies, rental, interest and business services remained below those of the previous year.

 

In Wide Format Printing Systems, where recurring revenues declined organically by 3.7%, the decrease was attributable in full to sales of media and to the lower interest from lease activities.

 

It should be noted here that media, specifically paper, is focused on profit and not on revenues. Revenues from maintenance and toner were organically higher than in the previous year. In WFPS, therefore, the relationship [non-recurring/recurring] is intact.

 

In Digital Document Systems recurring revenues were organically 3.6% lower than in the previous year. In DDS different factors play a role than in WFPS. These factors have an impact on recurring revenues, especially with regard to maintenance:

 

    Since 2002 the number of machines installed in the low volume segment has decreased sharply [–25,000 machines].

 

    The population of analogue machines is decreasing rapidly and this decrease has not yet been fully compensated for by the growth in digital products.

 

The renewed product portfolio in Digital Document Systems and the expected growth in the sales of printing systems will lead to a growing population of digital machines and higher print volumes. This forms the basis for our confidence that the trend in recurring revenues will be turned around in a positive direction. We expect this to take place in the course of 2005.

 

On the cost side susceptibility to the impact of the economic cycle is limited by contracting out the manufacture of components and modules to third parties.

 

The outsourcing of activities to the Far East also limits the foreign exchange risk, as the services supplied are paid for in US dollars. In addition, some of the personnel in the manufacturing locations are temporarily hired, which provides greater flexibility. The logistics activities are also largely outsourced.

 

On the other hand, R&D activities will not be decreased, even in a declining economy.

 

The marketing and sales costs will also increase because Océ is continuing to invest in distributive strength. The general administrative expenses are only flexible to a limited extent within the Océ business model.

 

The foregoing meant that, on balance, good results were achieved in most sales companies in 2004. In the manufacturing locations under-utilisation losses were still incurred, albeit to a lesser extent than in 2003 thanks to the growth in machine sales.

 

For Océ, therefore, revenues growth is one of the most important elements in the achievement of its financial objectives.

 

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Competitive position In terms of size Océ is a relatively small player compared to its direct competitors. In various sub-markets, however, Océ holds a leading position. The difference in size between Océ and its main competitors has a direct influence on the company’s competitive position. Bigger companies with a larger R&D budget are, in theory, more resilient in the event of setbacks in product developments and in view of Océ’s size, investments and acquisitions soon have a major impact on the results.

 

The answer to the above risks is to maintain a strong focus. Océ concentrates on those areas and activities in which, given the know-how and capabilities it possesses, it has the biggest chance of success. In the markets in which the company operates, endeavours are made to achieve a top-three position. In segments where this does not seem attainable, Océ only participates if this will also be possible on a profitable basis over the long term.

 

Océ’s competitive strength hinges on its ability to put distinctive systems on the market and this is the reason why Océ concentrates mainly on professional markets that set high requirements in terms of quality. It does this principally by offering technological concepts that it has developed itself. The most important elements of these are reliability, productivity, durability, ease of use, environmental friendliness and a low total cost of ownership. As in 2003, the year 2004 was a very successful one in terms of new products, which are described in this annual report under the activities of the Strategic Business Units.

 

The Océ business model is founded on a differentiated, in-house technology portfolio in combination with the company’s own direct sales and service organisation. Almost 10% of all company personnel work within R&D. In addition, about 15,000 Océ employees are in constant contact with customers: 4,200 in sales, 4,000 in service and 6,700 in business services. The interaction between R&D and the direct sales and service organisation is crucial for the quality of the products and services.

 

Operational risks

 

Partners For Océ, working together with third parties is an essential part of company strategy. In the case of manufacturing Océ fulfils an overall management function. Selected partners supply components and modules in accordance with specifications that have been precisely defined by Océ and these partners are involved in product development at an early stage. Some 95% of the components used in Océ products are manufactured in this way and an intensive interaction with the suppliers provides a guarantee of quality.

 

Strategic components such as process drums, organic photoconductors, silicone materials and toners are manufactured by Océ itself.

 

During the year under review part of the manufacturing activities for complete machines and modules was transferred to the Far East but initially this has remained limited to the placing of production work with contract manufacturers. These partners have shown that they can achieve the sought-after reduction in manufacturing costs without any loss of product quality. As a result of this relocation of activities greater attention has been focused on logistics and cooperation with external logistics specialists has been further intensified. Delivery reliability, delivery speed and costs will continue to be kept under control thanks to this close cooperation.

 

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Management aspects

 

Health, safety and the environment Océ sets the highest demands as regards the safety and environmental aspects of its products. Before a product is released for manufacture and sale, it must amply comply with the international requirements that are in force in the areas of safety and the environment. The safety and environmental risks during the production of machines and supplies are kept to a minimum in their size and nature. The company regularly conducts risk assessments and evaluations aimed at identifying potential risks and taking appropriate measures in good time. Priority is always given to the health and safety of Océ employees and of its customers.

 

The sustainability report that was issued in 2004 deals in further detail with how these risks are minimised.

 

Technological risks

 

Research & Development [R&D] R&D is one of the critical success factors for the company. The development of new technologies and products can take between five and ten years and this involves high levels of investment and a low tolerance for failures or for the late introduction of new products.

 

In recent years Océ has spent about 7% of revenues each year [2004: 7.8%] on R&D. In absolute terms this is still a substantially lower amount than a number of the company’s competitors spend on R&D. Océ must therefore maintain a tight focus on developing technologies that will be successful in the future and on entering into effective alliances with third parties.

 

The interaction between hardware and software is one of the major preconditions for ensuring a manageable document flow and consequently in R&D about 25% of the employees are currently working on software solutions that link up closely with developments in hardware. In 2004 this resulted in a software portfolio that is in a class of its own.

 

Product portfolio Océ’s product portfolio consists of black-and-white and colour printers and copiers for small and wide formats, scanners and software. The market for black-and-white printers has reached maturity in terms of technology and as a result product development focuses on aspects such as cost-price, total cost of ownership, operational reliability, environmental friendliness, ease of use and productivity. Major technological advances are not called for in the black-and-white sector; it is more a matter of optimising the existing technologies. Océ invests sufficient R&D resources to maintain and improve its competitive position in black-and-white.

 

The most important future trends are the shift towards colour applications, high volume production printing and document management software. Most of the R&D resources are therefore devoted to these technologies.

 

The challenges for Océ are to optimise the effective timing of product launches, to improve the functionality and cost-price of machines and to offer advanced application software. In combination with business services and professional services, Océ is in the best possible position to offer total solutions for document management problems thanks to its range of hardware and software.

 

Financial risks

 

Leasing In 2004 the outsourcing of the lease activities was further accelerated.

 

Outsourcing is done by placing new lease contracts direct with third parties, whilst the existing lease portfolio is being sold on a non-recourse basis. In the United States this is taking place via a captive lease company, Océ-Financial Services, Inc., which itself carries out the administration and collection of accounts receivable on behalf of the funding partners. In Europe and the rest of the world it is being done by using vendor lease partners via a private label concept in which the vendor lease company takes over all the related activities.

 

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The return on assets [ROA] of the lease activities is between 7 and 8% and in view of Océ’s objective of 12% ROA, this is structurally too low. The transfer of the lease activities will have the effect of depressing the net results but this effect will have to be offset by making effective use of the funds that are released.

 

As a result of the outsourcing of the lease portfolio, profitability [ROA/ROE] will in due course increase because the balance sheet will be shortened and capacity will be created for financing new activities that bring a higher return.

 

The debtors risk linked to the transferred lease activities will no longer exist and part of the lease activities [approximately € 225 million] will not be sold. The debtors risk in respect of these retained leases is expected to be higher, which means that the provision for doubtful debtors for financial leases will increase in percentage terms.

 

Leasing generates a very stable flow of revenues and the volatility of Océ’s results will therefore increase as a result of the outsourcing of the lease activities.

 

In 2005 the effect of the lower lease revenues will still be made good in part by book profits on the sale of existing lease contracts.

 

Foreign exchange risks/interest risks Océ achieves some 40% of its revenues within the Euro-zone and 60% outside it. Competing suppliers of relevance for Océ are mainly based in the United States and Japan. The prices that Océ charges its customers for products and services are denominated in the customers’ local currency and the biggest possible proportion of related costs is also incurred in that local currency. Since the manufacture and development of new products mainly takes place in the Euro-zone, a foreign exchange risk arises in respect of the flow of goods from the Euro-zone to countries outside it.

 

Because of the transfer of part of the manufacturing activities to the Far East the net level of the dollar exposure will decrease, since payment for these goods will take place in dollars.

 

At Océ net currency flows [transaction exposure] are the subject of an active foreign exchange management policy implemented in close consultation with the Board of Executive Directors.

 

For many years it has been company policy to always manage the 12-months position of the US dollar and the pound sterling on a roll-over basis, with hedging being applied up to a maximum of 80% of the net transaction exposure.

 

At the balance sheet date the contract value of the forward foreign exchange contracts was € 225 million. The policy that is pursued provides effective cover for the transaction risk over the coming 12 months, but a continued strong euro will have a negative effect on Océ’s results in view of the limitation of the period during which hedging takes place.

 

Currency translation exposures are not hedged, neither for local income nor for equity positions outside the Euro-zone. This risk is regarded as being an inherent part of doing business as a multinational company.

 

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Interest risks relate to the possible mismatch in exposures to fixed interest rates. Fixed interest revenues are generated by lease and rental contracts, whilst fixed-interest charges arise from the financing of these contracts. The extent to which this risk is hedged depends on the desired risk profile.

 

Due to the outsourcing of the lease activities the interest risk has been significantly reduced. The interest policy was the subject of a thorough analysis in 2004 against the background of the sale of the lease contracts during the year. The interest policy with regard to leases on the balance sheet has remained unchanged and the changes made in the interest policy are focused in particular on the newly created situation in which a large proportion of the interest risk is hedged by equity and liquid funds.

 

International Financial Reporting Standards [IFRS] For financial years commencing on or after January 1, 2005, all European publicly listed companies have to report on the basis of IFRS.

 

Starting in the 2006 financial year Océ will therefore draw up its annual financial statements and quarterly reports on the basis of IFRS and therefore the IFRS opening balance sheet will be drawn up as at December 1, 2004.

 

Because of Océ’s listing on NASDAQ and its filing with the SEC in the United States, as much convergence as possible will be sought with the American accounting principles [US GAAP] in those cases where IFRS allows a choice to be made.

 

Océ is well on schedule with the introduction of IFRS: the relevant standards that do not conflict with the current Dutch accounting principles [Dutch GAAP] were implemented as much as possible in the 2004 financial year relating in particular to balance sheet classifications. In addition, existing rules have been tightened up but the impact of this was limited.

 

Thanks to this strategy it is possible to minimise the number of reconciliation items needed to move from Dutch GAAP to the IFRS opening balance sheet. None the less this IFRS opening balance sheet will include a number of items which conflict with Dutch GAAP and whose effect may be material. This relates in particular to the valuation of pension liabilities [reset], the valuation of option and share plans and financial instruments. At the moment it is not possible to give an indication of what the impact of this will be.

 

In the 2005 financial year Océ will publish the IFRS opening balance sheet as well as restated quarterly figures under IFRS.

 

Influence of principal risk factors on the results

for 2005 [changes compared to 2004]

  

operating income

x € million


  

net income

x € million


  

balance sheet total

x € million


Foreign exchange effect [€ 1 = 2004: $ 1.23; 2005: $ 1.40]

   –13    –7    –50

Lease receivables at end of 2005: € 225 million

   *–29    *–14    –178

Increase of 5% in revenues of DDS and WFPS

   +29    +19    +34

 

* The book profit on the sale of the existing lease portfolio in 2004 has not been included in these results. The size of this book profit will partly compensate for these results.

 

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Internal management and control system

 

To provide as much certainty as possible of the financial reporting and the operational controls, Océ applies the following internal control framework:

 

Océ policy principles These policy principles, which are reviewed at regular intervals, provide a high-level indication of the objectives of the Océ Group, how these have to be achieved, and the ethical criteria that should be observed. All Océ employees are obliged to comply with these principles.

 

Ethical code for senior financial officers This code, which is addressed to all members of the Board of Executive Directors and to all senior financial executives within the Océ Group, was drawn up in 2003. It is more detailed than the Océ policy principles and focuses mainly on financial reporting.

 

Information Manual [IM] This manual contains a detailed description of the guidelines for financial reporting.

 

Both the accounting principles for annual reporting [Dutch GAAP] and the IFRS standards [‘non conflicting standards’] that have already been introduced by Océ are included in the Information Manual. Starting from the 2006 financial year Océ will report entirely in accordance with IFRS, but the above-mentioned ‘non conflicting standards’ [i.e. not in conflict with Dutch GAAP] were already implemented in 2004.

 

In connection with its filing with the SEC in the United States, Océ also has to comply with US GAAP by submitting the 20-F Statement.

 

Strategic Plans These are drawn up for all parts of the Océ organisation [operational and non-operational] and converted into budgets which are evaluated in detail on a monthly basis by the Strategic Business Units and by the Board of Executive Directors and are compared with the results actually achieved.

 

Internal and external audits Within the framework of control mechanisms and assurance processes an audit plan is drawn up each year by both the external and the internal auditor. The internal audit plan is focused on the most important business processes and the related risks and the audits relate to the internal financial reporting and to the existence and functioning of operational policy and procedures. The external auditor carries out the activities involved in the issue of an audit opinion on the annual financial statements. The external auditor concentrates on the financial reporting and also takes into consideration the systems that are intended to ensure reliable reporting. Together, the activities of the internal and external auditor represent a very important evaluation of the internal control framework. The internal auditor makes a formal report on the effectiveness of the internal control framework. The external auditor reports on matters relating to the internal control measures to the extent that these have been identified during the auditing of the annual financial statements. The findings of the internal auditor and also the observations of the external auditor are discussed in the central and local Audit Committees.

 

Audit Committee [AC] This committee consists of 3 members of the Supervisory Board and ensures the independent monitoring of the process of risk management on the basis of the supervisory role fulfilled by the Supervisory Board. The Audit Committee focuses on the quality of internal and external reporting, on the effectiveness of internal controls, and on the functioning of the external and internal auditors and meets at least four times a year. The responsible financial officers and the external and internal auditors are generally invited to these meetings and the Audit Committee also holds periodic consultations with the external auditor at which the Océ officers are not present.

 

74


Management aspects

 

Internal Audit Committee [IAC] The Internal Audit Committee consists of the Board of Executive Directors together with the operational directors, the Secretary of the Company, the Group Controller and the Group Internal Auditor, and normally the external auditors are also invited to join this committee. The Internal Audit Committee focuses in detail on the structure of the internal control framework, on how it functions and on the follow-up to the material observations that result from audits. This committee also discusses specific accounting issues and monitors the progress towards implementation of the Sarbanes-Oxley Act and IFRS accounting principles. In view of the size of the operations in the United States an Internal Controls Committee [ICC] has been set up there as an extension of it. The members of the ICC are the CEO and CFO of Océ-USA Holding, Inc. as well as the Presidents of the main operations, the General Counsel and the Internal Audit Director in the United States, plus the CFO of Océ N.V. [who also chairs the ICC].

 

Disclosure Committee [DC] The Disclosure Committee consists of the Group Controller [chairman], representatives of all operational and non-operational parts of Océ, the Secretary of the Company and the Chief Information Officer [CIO] of Océ N.V., the Group Internal Auditor, the Manager Investor Relations and the head of the Group Consolidation department. It advises the CEO and CFO of Océ N.V. on the quality of the internal controls and the financial reporting. The process that precedes this involves in-depth scrutiny and is also discussed in the Audit Committee [see above]. The committee also coordinates the implementation of Section 404 of the Sarbanes-Oxley Act which relates to the quality of the financial reporting and of the processes on which it is based [effectiveness of controls over financial reporting]. As from the 2005 financial year a separate statement in respect of this will be issued by the CEO and CFO of Océ N.V. and by the external auditors, and for this purpose an extensive programme has been drawn up to ensure that the required support activities are in place in all operations in time.

 

Letter of Representation [LOR] All Managing Directors and Controllers of the Group companies as well as all officers who report directly to the CFO of Océ N.V. sign a detailed declaration every quarter with regard to financial reporting, internal controls and ethical principles. Any observations made in the LORS are reported to and discussed by the Board of Executive Directors and the Audit Committee.

 

Whistleblowing Procedure This was formally approved in the Audit Committee in 2004 and will be introduced in the United States in the first quarter of 2005. The procedure serves to ensure that any infringement of the existing policy and procedures can be reported without the person who made the report experiencing any negative consequences as a result. During 2005 the procedure will be introduced in Europe.

 

The above control framework has already been evaluated for 3 years against the requirements of Sarbanes-Oxley Section 302. In 2005, under the terms of Sarbanes-Oxley Section 404, an evaluation and certification will take place of the quality of the control framework with respect to the financial reporting and both these actions will be repeated each year. For this reason the report for the 2005 financial year will state the extent to which the internal risk management and control system is adequate and effective, as well as the way in which the Board of Executive Directors safeguards these systems.

 

Venlo, January 28, 2005

 

The Board of Executive Directors

 

R.L. van Iperen, chairman

J. van den Belt

J.F. Dix

 

75


LOGO

 

 


Annual Financial Statements

 


Consolidated Statement of Operations

 

       
     The figures [ ] refer to the notes    2004

   2003

   x €1,000

Total revenues[1]

        2,652,453    2,769,263     
     Cost-price    1,549,058    1,604,050     
         
  
    

Gross margin

        1,103,395    1,165,213     
     Selling expenses    614,969    623,660     
     Research and development expenses [2]    208,105    208,321     
     General and administrative expenses    162,044    183,226     
     Impairment [3]    7,888    25,175     
         
  
    
          993,006    1,040,382     
         
  
    

Operating income

        110,389    124,831     
     Financial expense [net] [4]    18,089    30,552     
         
  
    

Income before income taxes, equity in income of unconsolidated companies and minority interest

          92,300    94,279     
     Income taxes [5]    12,196    30,522     
         
  
    

Income before equity in income of unconsolidated companies and minority interest

          80,104    63,757     
     Equity in income of minority interests    507    90     
         
  
    

Income before minority interest

   80,611    63,847     
     Minority interest in net income of subsidiaries    2,535    2,385     
         
  
    

Net income

        78,076    61,462     

Earnings per share [6]

   Net income per ordinary share    0.89    0.69    euro
     Diluted net income per ordinary share    0.88    0.69     

 

79


Consolidated Balance Sheet November 30

 

Before net income
appropriation


  

Assets


   2004

   2003

   x €1,000

Intangible fixed assets [7]

        37,207    48,721     

Tangible fixed assets

   Property, plant and equipment [8]    423,490    430,527     
     Rental equipment [9]    57,891    63,279     
         
  
    
          481,381    493,806     

Financial fixed assets

   Minority interests in associates [10]    1,553    2,535     
     Financial lease [11]    230,962    451,848     
     Other long term financial assets [12]    126,654    106,503     
         
  
    
          359,169    560,886     

Current assets

   Inventories [13]    317,335    310,404     
     Accounts receivable [14]    707,910    927,406     
     Prepaid expenses    17,025    24,330     
     Cash and cash equivalents [15]    313,060    55,709     
         
  
    
          1,355,330    1,317,849     
         
  
    

Total

        2,233,087    2,421,262     

 

80


Consolidated Balance Sheet November 30

 

    

Liabilities


   2004

   2003

   x € 1,000

Group equity

  

Ordinary shares [16]

   43,634    43,631     
    

Priority shares [17]

   2    2     
    

Financing preference shares [18]

   10,000    10,000     
    

Paid-in capital [19]

   511,445    511,408     
    

Legal reserve [20]

   2,441    592     
    

Translation differences [21]

   –140,391    –114,477     
    

Other reserves [22]

   208,863    200,147     
    

Net income

   78,076    61,462     
         
  
    
    

Total shareholders’ equity

   714,070    712,765     
    

Minority interest [23]

   38,209    38,822     
         
  
    
          752,279    751,587     

Long term liabilities

[provisions] [24]

        515,977    596,104     

Long term debt [25]

        438,409    380,793     

Current liabilities

  

Short term debt [26]

   42,842    168,421     
    

Other liabilities [27]

   219,066    242,402     
    

Accrued liabilities [28]

   219,359    236,125     
    

Deferred income

   45,155    45,830     
         
  
    
          526,422    692,778     
         
  
    

Total

        2,233,087    2,421,262     

 

81


Consolidated Statement of Cash Flow

 

          2004

   2003

   x € 1,000

Cash flow from operating
activities

  

Net income

   78,076    61,462     
    

Adjustments for:

              
    

Depreciation

   147,626    173,370     
    

Impairment

   7,888    25,175     
    

Installed in rental equipment

   –116,797    –83,025     
    

Divestments in rental equipment

   77,268    67,747     
    

Movements in financial lease

   74,337    45,347     
    

Equity in income of minority interests

   –402    271     
    

Result minority interest

   2,535    2,385     
    

Long term liabilities [provisions]

   –104,640    –41,241     
    

Provisions for financial lease, inventories and trade accounts receivable

   42,470    52,140     
    

Trade accounts receivable and other receivables

   30,938    70,786     
    

Inventories

   –63,003    5,458     
    

Trade accounts payable

   1,806    –31,342     
    

Net change in other working capital accounts*

   –41,329    –8,992     
         
  
    

Cash flow from operating
activities

        136,773    339,541     

Cash flow from investing
activities

  

Capital expenditure:

              
    

Intangible fixed assets

   –9,354    –11,497     
    

Property, plant and equipment

   –86,738    –97,129     
    

Other long term financial assets

   3,340    –1,925     
    

Divestments:

              
    

Intangible fixed assets

   —      94     
    

Property, plant and equipment

   12,910    16,599     
    

Acquisition of minority interests

   —      –17     
    

Disposal of minority interests

   1,305    5     
    

Sale financial lease portfolio

   312,254    79,768     
    

Disposals/acquisitions [net of cash]

   —      2,379     
         
  
    

Cash flow from
investing activities

        233,717    –11,723     

 

* See page 83 for the specification of net change in other working capital accounts.

 

82


Consolidated Statement of Cash Flow

 

          2004

   2003

   x € 1,000

Cash flow from

financing activities

  

Long term debt:

              
    

Proceeds from long term debt

   141,476    9,116     
    

Repayment of long term debt

   –76,524    –329,623     
    

Borrowings and current portion of long term debts

   –124,822    81,727     
    

Movement repurchased shares Option Plan

   1,074    –924     
    

Dividend

   –51,971    –51,963     
    

Minority interest

   –3,099    –3,361     
         
  
    

Cash flow from

financing activities

        –113,866    –295,028     
    

Translation differences

   727    –14,466     
         
  
    

Changes in cash and
cash equivalents

        257,351    18,324     

Cash and cash
equivalents at start
of financial year

        55,709    37,385     

Cash and cash
equivalents at end of
financial year

        313,060    55,709     

 

Specification of net change in other working capital accounts:    2004

   2003

   x €1,000

Prepaid expenses

   6,360    5,138     

Income taxes

   –31,173    12,205     

Other taxes and social security payable

   1,823    2,929     

Pension liabilities

   –586    –2,395     

Other liabilities

   –8,665    –3,229     

Accrued liabilities

   –9,764    –17,037     

Deferred income

   676    –6,603     
    
  
    

Balance

   –41,329    –8,992     

 

83


Summary of Significant Accounting Principles

 

Introduction

 

The following summary of significant accounting principles is intended as a guide in interpreting the financial statements.

 

The accounting principles are unchanged compared to the previous financial year, except for the modifications made to balance sheet classifications. These changes had no impact on income and equity and have been made in order to ensure a better link-up with the International Financial Reporting Standards [IFRS] that will become applicable to Océ as from the 2006 financial year. The principal changes relate to the reclassification of showroom machines from inventories to property, plant and equipment and the classification of all software, which was previously included partly under property, plant and equipment, under intangible fixed assets.

 

The Group’s financial year commences on December 1 and closes on November 30 of the subsequent year.

 

Principles of consolidation

 

The consolidated financial statements comprise the financial data for Océ N.V. and its Group companies. The financial data of Group companies are fully consolidated; the minority interest is stated separately. A company is considered to be a Group company if Océ directly or indirectly holds a majority controlling interest in it. As from the date of control the financial position of the relevant company is included in the consolidation.

 

With effect from December 1, 2000 intangible fixed assets have been capitalised in those cases where the original cost of the acquired assets and liabilities exceeds the fair value. Previously the intangible fixed assets were charged directly to Shareholders’ equity.

 

The principal companies affiliated to the Group are listed on pages 123 and 124 of this report. A number of affiliated companies of minor importance have been omitted by virtue of the provisions of Article 379, par. 2c, Book 2 of the Dutch Civil Code.

 

Balance sheet items of Group companies are translated into euro. As the opening shareholders’ equity and movements in equity during the year are recalculated on the basis of the closing exchange rate at the end of the reporting period, differences arise as compared to the calculation based on the exchange rate used for the previous period. Such differences are charged against or added to Shareholders’ equity under ‘Translation differences’.

 

Statements of Operations items of Group companies are translated into euro at the average exchange rate during the reporting period. The result calculated on this basis differs from that calculated on the basis of the closing exchange rate for the end of the period. This difference is debited or credited directly to Shareholders’ equity under ‘Translation differences’. Unrealised gains on transactions between Group companies are eliminated. Unrealised losses are eliminated unless it is clear that no margin has been realised on inventories transferred.

 

84


Summary of Significant Accounting Principles

 

The preparation of the annual financial statements requires the management to make assumptions and estimates. In doing so, the management uses past experiences as its basis, whilst making the best possible assessment of future developments.

 

Consolidated Statement of Operations

 

Foreign currencies Transactions denominated in foreign currencies are included at the exchange rate applicable at the moment when the transactions take place.

 

Total revenues Revenues comprise the proceeds from the sale of goods and services to third parties excluding the taxes levied on revenues and discounts granted. Revenues are recognised as follows:

 

Machines Revenues are recognised after delivery and installation on the customer’s premises. If a sales contract contains an acceptance clause, the customer should have confirmed acceptance. If the customer has been offered financing by Océ in the form of a financial lease arrangement which qualifies as a sales transaction, then financial lease receivables are likewise accounted for after acceptance, with allowance being made for the unrealised interest and the residual value of the machines. Unrealised interest is shown as ‘Interest from financial lease’ for the duration of the lease, giving rise to fixed periodic interest proceeds on the net investment.

 

When machines are sold to a distributor the revenues are accounted for at the moment of transfer.

 

Proceeds from the rental of machines are included in revenues in case they relate to the relevant reporting period.

 

Service Service proceeds are mostly obtained from maintenance contracts that have been concluded for the machines sold and are recognised pro rata over the period of the contract. If service contracts have been invoiced in advance, these amounts are included in the balance sheet under ‘Deferred income’.

 

Supplies Revenues are recognised at the moment of delivery.

 

Costs Consumption of raw materials and other cost items are based on historical costs. Depreciation on fixed production assets is charged at a fixed percentage of the acquisition value of the relevant asset. Depreciation of rental equipment amounts to a fixed percentage of the all-in manufacturing cost plus the cost of ensuring that the equipment can operate effectively at the customer. Government contributions to operating costs are deducted directly from these costs.

 

Research and development expenses Research costs are charged direct to the statement of operations. Product development costs are capitalised if they comply with the relevant criteria.

 

Development credits and subsidies Development credits received from the government are subject to a contingent repayment liability. This contingent liability, to which a contractual mark-up is applied each year, is not included in the balance sheet. According as the relevant projects prove successful, the liability ceases to be contingent in nature and a real liability arises.

 

Financial expense [net] Besides interest received and interest paid, expenses relating to the raising of loan capital are also included here. The effects of interest rate instruments are also included under this heading.

 

85


Summary of Significant Accounting Principles

 

Income tax This is calculated on the commercial results at the rates applicable in the various countries. This method implies that provisions are made for deferred income taxes. The entitlement to loss compensation is taken into consideration in so far as there is a reasonable expectation that it can be realised. Allowance is made for non-offsettable dividend withholding tax at the moment of dividend distribution by an affiliated company.

 

Earnings per share Earnings per ordinary share are calculated by dividing the net income attributable to holders of ordinary shares by the average number of ordinary shares outstanding during the year. In making this calculation the ordinary shares bought in by the company are deducted from the number of ordinary shares outstanding.

 

The calculation of the diluted earnings per share is based on the weighted average number of shares in issue and the potential increase as a result of conversion and outstanding options. The assumption applied for the conversion arising from convertible debenture loans is that these are converted in full. An adjustment is also made to net income to eliminate interest charges, whilst allowing for the effect of taxation.

 

The calculation of the increase arising from options is based on the value of the options granted, i.e. the number of options times the exercise price, divided by the average share price during the financial year. This increase is only applied if the average share price is higher than the exercise price of the options upon grant. In making this calculation no adjustment is made to net income.

 

Consolidated Balance Sheet

 

Assets and liabilities are included at face values, unless stated otherwise.

 

Foreign currencies Receivables and payables denominated in a foreign currency are translated into local currency at the exchange rate ruling at year end. The exchange rate differences, including results on foreign exchange contracts relating to loan exposures [inter-company], are recorded direct on the Statement of Operations. The differences relating to operational cash flows, including those arising on the relevant foreign exchange contracts, are also included in the Statement of Operations.

 

Intangible fixed assets Intangible fixed assets are valued at acquisition or manufacturing cost, less cumulative depreciation and any impairments. Goodwill and other intangible fixed assets arising upon the acquisition of participations are written off on a straight-line basis over their estimated economic lifetime, subject to a maximum of twenty years. The costs of the development and purchase of software for internal use which generates economic benefits for several years are capitalised. The development costs consist of the direct personnel costs on the basis of an hourly rate in which allowance is made for a mark-up for overhead costs, to the extent that these relate to manufacturing, and third-party costs.

 

Intangible fixed assets are reviewed periodically to assess whether any impairment has occurred; if the latter is the case, they are included at their net realisable value. The net realisable value is the higher of the direct or indirect market value. Product development costs are capitalised if they comply with the relevant criteria and are classified under the category ‘Technology’.

 

The estimated useful lives of the various classes of intangible fixed assets are as follows:

 

goodwill: 10 to 20 years;

software: 3 to 5 years;

technology: 5 to 10 years;

customer base: 6 years;

trade marks: 10 years;

other: 3 years.

 

86


Summary of Significant Accounting Principles

 

Property, plant and equipment Property, plant and equipment are valued at acquisition or manufacturing cost, less cumulative depreciation and any impairments. Depreciation is provided for according to the straight-line method based on the expected useful lifetime of the relevant asset. Depreciation of specific pieces of equipment used for the manufacture of machines takes place pro rata to the expected number of units to be manufactured. Property, plant and equipment are assessed as to a possible impairment; if the latter is the case they are valued at their net realisable value. The net realisable value is the higher of the direct or indirect market value.

 

The estimated useful lives of the various classes of fixed assets are as follows:

 

property and plant: 20 to 50 years;

 

production machines: 8 to 10 years;

 

equipment: 3 to 10 years;

 

vehicles: 4 or 5 years.

 

Rental equipment These are valued at the all-in cost, plus the cost of ensuring that the equipment can operate effectively at the customer, less cumulative depreciation on a straight-line basis. The estimated useful life of the various types of machines ranges from 3 to 5 years.

 

Minority interests in associates These are included at the attributable net asset value, calculated where possible on the basis of the valuation principles applied in these Financial Statements.

 

Financial lease This comprises the long term receivables and residual values in respect of financial lease contracts. They are valued at the present value of the contracted receivables, taking into account the risk of non-collectability.

 

Other long term financial assets These comprise assets such as mortgage debtors, cash advances and guarantee deposits as well as deferred tax assets. These are included at nominal value, after taking into account the risk of non-collectability.

 

Inventories Purchased inventories are valued at purchase price, plus any additional costs, by the First-in-First-out method. Inventories of finished and semi-finished products and spare parts are valued at manufacturing cost inclusive of a surcharge for indirect costs related to the manufacturing, no interest being charged. The risk of obsolescence is allowed for.

 

Accounts receivable Trade debtors, financial leases, other debtors and amounts receivable from minority interests are shown at face value less an allowance for bad and doubtful accounts.

 

Minority interest The minority interest in Group companies is included at the attributable net asset value determined in accordance with the valuation principles used in these Financial Statements.

 

Long term liabilities [provisions] The provision for deferred income tax liabilities is calculated on the differences between valuation of assets and liabilities for commercial and tax purposes, based on the effective rate of income tax in the various countries and is stated at face value.

 

Deferred tax assets are included to the extent that they are considered to be realisable.

 

87


Summary of Significant Accounting Principles

 

Pension liabilities exist both under ‘defined contribution’ plans and under ‘defined benefit’ plans. Both in the Netherlands and in most other countries the latter schemes are mostly insured by external funds.

 

In the case of a defined contribution plan the contribution is booked as a charge in the year to which it relates.

 

In defined benefit plans the entitlements are calculated according to the ‘projected unit credit’ method. All actuarial gains and losses, above a threshold of 10% of the [highest of the] pension liabilities or fair value of the pension assets, are charged to the Statement of Operations over the employees’ remaining periods of service.

 

Changes in pension plans and back service costs are charged direct to the Statement of Operations provided that they are unconditional in nature. These calculations are made each year by qualified actuaries. The pension liabilities as recognised in the balance sheet are shown at the net present value of the promised pension entitlements at balance sheet date, less the fair value of the pension assets and after adding or deducting the actuarial gains or losses that have not yet been incorporated in the result and the back service costs.

 

Early retirement liabilities relate to specific mostly individual agreements.

 

The provisions shown hereafter are included at the nominal value of the costs that are expected to be needed to settle the liabilities; in cases where the time value of money has a significant impact, valuation takes place on the basis of the net present value.

 

Liabilities arising from the termination of employment contracts relate in most cases to statutory liabilities, whereby an amount related to the salary is payable for each year of service. Payment takes place upon leaving company service. These also include liabilities in respect of long-service awards.

 

The reorganisation provision relates to costs connected with the reorganisation of business activities.

 

Other long term liabilities [provisions] relate among other things to [legal] proceedings and guarantee commitments.

 

Long term debt This relates to liabilities that fall due after more than one year.

 

Current liabilities These commitments comprise liabilities falling due within one year.

 

Commitments and contingent liabilities not stated in the balance sheet These are commitments and contingent liabilities arising from contracts, mostly of more than one year [leasing contracts, rental contracts, capital expenditure commitments, repayable development credits, financial instruments, etc.].

 

Consolidated Statement of Cash Flow

 

The Consolidated Statement of Cash Flow has been drawn up on the basis of the indirect method. This statement is derived from the movements in the Consolidated Balance Sheet. In the event of a major acquisition, however, the acquired net asset value, net of cash, is shown separately. Foreign currency translations have been eliminated from the changes in the balance sheet items as they do not give rise to a cash flow. As a result, the changes in the cash flow statement cannot be derived directly from the changes in the relevant balance sheet items. The movement in the portions of long term debt falling due within one year is shown under ‘Long term debt: repayment of long term debt’.

 

88


Notes to the Consolidated Statement of Operations

 

 

     Segmental information                    

Business

segmentation

   x € million    Wide Format Printing Systems

   Digital Document Systems

   total

          2004

   2003

   2004

   2003

   2004

   2003

     [1] Total revenues    818    862    1,834    1,907    2,652    2,769
     Operating income    55    55    55    70    110    125
     Net income    43    30    35    31    78    61
     Assets    617    674    1,616    1,747    2,233    2,421
     Liabilities    328    391    1,153    1,279    1,481    1,670
     Group equity    289    283    463    468    752    751
     Expenditure*    24    24    99    82    123    106
     Depreciation    31    32    98    125    129    157
     Amortisation    11    6    8    11    19    17
     Impairment    8    11    —      14    8    25
Geographical
segmentation
   x € million    total revenues

   assets

   expenditure*

          2004

   2003

   2004

   2003

   2004

   2003

     United States    925    1,046    414    626    19    23
     Germany    333    335    347    434    18    17
     The Netherlands    291    284    855    626    53    39
     France    191    199    115    163    6    5
     United Kingdom    180    183    100    140    4    5
     Rest of Europe    534    519    305    333    18    14
     Rest of the world    198    203    97    99    5    3
         
  
  
  
  
  
     Total    2,652    2,769    2,233    2,421    123    106
Development of total
revenues and gross
margin
   x € million    total revenues

   cost–price

   gross margin

          2004

   2003

   2004

   2003

   2004

   2003

     Proceeds from sales    1,564    1,553    939    944    625    609
     Proceeds from rental and service    1,020    1,119    610    660    410    459
     Interest from financial leases    68    97    —      —      68    97
         
  
  
  
  
  
     Total    2,652    2,769    1,549    1,604    1,103    1,165
     In total revenues and gross                              
     margin the result of €30.9                              
     million on the sale of the lease                              
     portfolio is shown under                              
     ‘Proceeds from sales’.                              
    

*  Net expenditure in intangible and tangible fixed assets.

    

 

89


Notes to the Consolidated Statement of Operations

 

Exchange rates of a number of

currencies of importance to Océ

        average rate in euro

   balance sheet rate in euro

               2004

   2003

   2004

   2003

     Pound sterling         0.68    0.68    0.70    0.70
     US dollar         1.23    1.11    1.32    1.20
     Australian dollar         1.68    1.75    1.72    1.65
     Swiss franc         1.55    1.51    1.52    1.55
     Japanese yen         133.73    130.14    136.64    131.25
                               
     Expenses         2004

   2003

   x €1,000

Depreciation costs

   Intangible fixed assets              19,045    16,542     
     Property, plant and equipment              85,489    91,977     
     Rental equipment              43,092    64,851     
                   
  
    
     Total              147,626    173,370     

Payroll expenses

   Wages and salaries              966,595    999,474     
     Social security              193,638    201,239     
     Pension costs for:                         
     defined contribution plans              13,969    12,725     
     defined benefit plans              53,377    57,477     
                   
  
    
     Total              1,227,579    1,270,915     
     The individual remuneration of the members of the Board of Executive Directors in function this year is:
      
          periodic pay

  

performance related

pay over 2004


   total

  

pension

contributions


   in euro
    

R.L. van Iperen

   612,676    60,000    672,676    338,711     
    

J. van den Belt

   411,590    45,000    456,590    122,871     
    

R.E. Daly

   319,264    —      319,264    9,852     
    

J.F. Dix

   461,321    45,000    506,321    161,395     
    

 

The costs incurred upon termination of the employment contract of Mr. R.E. Daly were €851,373.

 

The remuneration costs and pension scheme contributions of former Executive Board members are nil [2003: nil]. The performance related pay is established as set forth on page 64.

 

Under the Océ Stock Option Plan 2005 no options were granted to the members of the Board of Executive Directors [Option Plan 2004: 81,000 unconditional options]. In 2004 it was decided that the Option Plan for the Board of Executive Directors would be replaced by a Share Plan to be introduced in 2005. A table showing the interests of the Executive Board members in the option plans can be found on page 109 of this annual report. At the end of the financial year the members of the Board of Executive Directors held no ordinary shares in Océ [2003: nil] and no rights to options listed on the Euronext Options Exchange.

 

90


Notes to the Consolidated Statement of Operations

 

amounts in euro    age on 30-11-2004

   final pension age

  

increase in accrued

entitlements 2004


  

accrued pension

rights as at

30-11-2004


  

capital build-up in

defined contribution

plan as at

30-11-2004


R.L. van Iperen

   51    60    20,001    222,336    182,229

J. van den Belt

   58    62    4,260    36,126    142,666

J.F. Dix

   58    62    7,448    190,986    143,648

 

Pension entitlements The table above shows the accrued pension entitlements of the members of the Board of Executive Directors currently in office and the pension amounts that would be paid to them annually on the basis of their years of service as at the end of 2004. With effect from January 2003 the pension scheme for members of the Board of Executive Directors was converted from a defined benefit plan into a hybrid scheme [defined benefit plus defined contribution plan].

 

The remuneration for the 2004 financial year of the present and former members of the Board of Supervisory Directors amounted to € 222,281 [2003: € 221,374]. The remuneration for the Board of Supervisory Directors is fixed at € 46,355 for the chairman and at € 30,903 for the members, in conformity with the scheme set out on page 66.

 

At the end of the financial year the members of the Board of Supervisory Directors held 2,969 ordinary shares in Océ [2003: 2,969] and no rights to options listed on the Euronext Options Exchange.

 

91


Notes to the Consolidated Statement of Operations

 

          2004

   2003

   x €1,000
[2] Research and development expenses   

Total expenditure on research and development

   206,555    212,276     
    

Development credits repayable and net subsidies received

   1,550    –3,955     
         
  
    
     Total    208,105    208,321     

[3] Impairment

   Impairment of intangible and               
     tangible fixed assets    7,888    25,175     
    

 

In the Statement of Operations impairment costs are shown as a separate item so as to provide a clearer picture.

 

Assessment of possible impairment takes place at the level of the business groups that form part of a business unit. A goodwill impairment has been booked for the Display Graphics Systems business group. In addition there was a limited impairment of tangible fixed assets. Since the positive cash flow is lower than previously expected, the value of the intangible assets has been reduced to the expected lower indirect market value.

 

The discount rate applied is 8%.

 

          2004

   2003

   x €1,000
[4] Financial expense [net]    Interest and similar income items    –6,440    –5,753     
     Interest charges and similar expenses    22,103    34,589     
     Other financial expenses    2,426    1,716     
         
  
    
     Total    18,089    30,552     

[5] Income taxes

   A reconciliation of the Dutch statutory income tax rate to the effective income tax rate is set out below:               
     Dutch statutory tax rate    34.5    34.5    per cent
     Non-deductible expenses    2.2    6.6     
     Foreign tax rate deviating from the Dutch tax rate    –12.5    –4.8     
     Tax credits    –2.2    –3.3     
     Movement in unrecognised deferred income tax assets    –6.7    –1.7     
     Other    –2.1    1.1     
         
  
    
     Effective income tax rate    13.2    32.4     
    

 

The ‘Movement in unrecognised deferred income tax assets’ includes a release of € 7.0 million. This release is the result of the final settlement of the tax risks to which these provisions related. As a consequence the effective income tax rate decreased.

 

92


Notes to the Consolidated Statement of Operations

 

          2004

   2003

   x €1,000

[6] Earnings per share

  

Net income attributable to holders of ordinary shares

   74,525    57,911     
    

Weighted average number of shares outstanding [x 1,000]

   83,488    83,409    shares
    

Net income per ordinary share

   0.89    0.69    euro
    

Net income attributable to holders of ordinary shares

   74,525    57,911     
    

Interest costs of convertible loans [net]

   322    300     
         
  
    
    

Net income based on full conversion

   74,847    58,211     
    

Weighted average number of ordinary shares outstanding [x 1,000]

   83,488    83,409    shares
    

Adjustment for assumed conversion [x 1,000]

   728    729     
    

Adjustment for options [x 1,000]

   543    30     
         
  
    
    

Weighted average number of ordinary shares outstanding on the basis of full conversion [x 1,000]

   84,759    84,168     
    

Net income per ordinary share on the basis of full conversion

   0.88    0.69    euro
                     
    

Employees by category


   2004

   2003

   number
    

Business Services

   6,693    7,149     
    

Sales

   4,192    4,140     
    

Service

   4,013    4,327     
    

Manufacturing and Logistics

   2,512    2,514     
    

Accounting and other

   2,037    2,146     
    

Research and Development

   1,868    1,928     
         
  
    
    

Number of employees at November 30

   21,315    22,204     
    

Of whom, employed in the Netherlands

   3,922    4,061     
    

Average number of employees

   21,760    22,346     

 

93


Notes to the Consolidated Balance Sheet

 

[7]    Intangible fixed assets
x €1,000
   goodwill

   software

   technology

   customer
base


   trade marks
and other


   total

    

At December 1, 2002

                             
    

Acquisition value

   31,687    41,709    8,112    13,324    5,731    100,563
    

Accumulated amortisation

   3,181    6,866    1,544    2,238    596    14,425
         
  
  
  
  
  
    

Book value

   28,506    34,843    6,568    11,086    5,135    86,138
    

Movements in book value in 2003:

                             
    

Expenditure

   —      10,212    696    589    —      11,497
    

Divestments

   —      94    —      —      —      94
         
  
  
  
  
  
    

Net expenditure

   —      10,118    696    589    —      11,403
    

Amortisation

   2,701    10,189    1,468    1,650    534    16,542
    

Impairment

   13,530    —      900    8,351    —      22,781
    

Foreign currency translations

   –2,893    –3,639    –978    –1,153    –834    –9,497
         
  
  
  
  
  
    

At November 30, 2003

   9,382    31,133    3,918    521    3,767    48,721
    

Acquisition value

   28,087    47,312    7,399    11,669    4,756    99,223
    

Accumulated amortisation

   18,705    16,179    3,481    11,148    989    50,502
         
  
  
  
  
  
    

Book value at November 30, 2003

   9,382    31,133    3,918    521    3,767    48,721
    

Movements in book value in 2004:

                             
    

Expenditure

   756    6,608    1,990    —      —      9,354
    

Reclassifications

   —      7,891    –73    268    —      8,086
    

Amortisation

   1,063    15,749    1,588    201    444    19,045
    

Impairment

   7,207    —      —      280    —      7,487
    

Foreign currency translations

   –264    –1,560    –271    —      –327    –2,422
         
  
  
  
  
  
    

At November 30, 2004

   1,604    28,323    3,976    308    2,996    37,207
    

Acquisition value

   11,652    71,859    8,737    10,969    4,305    107,522
    

Accumulated amortisation

   10,048    43,536    4,761    10,661    1,309    70,315
         
  
  
  
  
  
    

Book value at November 30, 2004

   1,604    28,323    3,976    308    2,996    37,207

 

Recognition for amortisation costs in the Statement of Operations:    2004

   2003

   x €1,000

Cost-price

   3,225    1,580     

Selling expenses

   8,059    6,383     

Research and development expenses

   1,611    157     

General and administrative expenses

   6,150    8,422     
    
  
    

Total

   19,045    16,542     

 

94


Notes to the Consolidated Balance Sheet

 

     Tangible fixed assets
x €1,000
   property
and
plant


   production
equipment


   other
fixed
assets


   under
construction
and
prepayments


   not in
production
process
and
investment
property


   total

[8] Property, plant and equipment

  

At December 1, 2002

                             
    

Acquisition value

   326,226    432,621    417,387    46,781    19,978    1,242,993
    

Accumulated depreciation

   142,813    321,595    304,376    83    15,274    784,141
         
  
  
  
  
  
    

Book value

   183,413    111,026    113,011    46,698    4,704    458,852
    

Movements in book value in 2003:

                             
    

Expenditure

   17,663    38,384    64,693    –24,529    918    97,129
    

Divestments

   518    2,721    9,496    2,933    931    16,599
         
  
  
  
  
  
    

Net expenditure

   17,145    35,663    55,197    –27,462    –13    80,530
    

Divestment of companies

   —      –21    –112    —      —      –133
    

Depreciation

   10,061    33,221    48,310    —      385    91,977
    

Impairment

   600    1,794    —      —      —      2,394
    

Foreign currency translations

   –3,094    –4,368    –5,873    –944    –72    –14,351
         
  
  
  
  
  
    

At November 30, 2003

   186,803    107,285    113,913    18,292    4,234    430,527
    

Acquisition value

   338,104    434,134    431,341    18,292    19,048    1,240,919
    

Accumulated depreciation

   151,301    326,849    317,428    —      14,814    810,392
         
  
  
  
  
  
    

Book value at

                             
    

November 30, 2003

   186,803    107,285    113,913    18,292    4,234    430,527
    

Movements in book value in 2004:

                             
    

Expenditure

   1,936    23,111    44,413    16,592    686    86,738
    

Divestments

   1,410    911    10,589    —      —      12,910
         
  
  
  
  
  
    

Net expenditure

   526    22,200    33,824    16,592    686    73,828
    

Reclassifications

   3,688    4,040    3,878    —      –947    10,659
    

Depreciation

   10,202    32,848    42,223    —      216    85,489
    

Impairment

   85    206    110    —      —      401
    

Foreign currency translations

   –1,354    –1,934    –2,164    –138    –44    –5,634
         
  
  
  
  
  
    

At November 30, 2004

   179,376    98,537    107,118    34,746    3,713    423,490
    

Acquisition value

   349,396    428,331    420,489    34,746    13,018    1,245,980
    

Accumulated depreciation

   170,020    329,794    313,371    —      9,305    822,490
         
  
  
  
  
  
    

Book value at

                             
    

November 30, 2004

   179,376    98,537    107,118    34,746    3,713    423,490

 

95


Notes to the Consolidated Balance Sheet

 

The book value of ‘Other fixed assets’ contains an amount of € 4.7 million for financial leases [2003: €9.3 million].

 

The reclassifications of € 10,659,000 consist of an addition of showroom machines amounting to € 18,745,000 and a decrease of primarily software amounting to € 8,086,000.

 

Recognition for depreciation costs in the Statement of Operations:

 

         2004

   2003

   x €1,000
   

Cost-price

   49,945    51,945     
   

Selling expenses

   16,871    17,425     
   

Research and development expenses

   12,630    14,829     
   

General and administrative expenses

   6,043    7,778     
        
  
    
   

Total

   85,489    91,977     
[9] Rental equipment   At December 1, 2003/2002               
   

Cost

   364,469    469,131     
   

Accumulated depreciation

   301,190    350,189     
        
  
    
   

Book value

   63,279    118,942     
   

Movements in book value:

              
   

Installed on rental

   116,797    83,025     
   

Divestments

   77,268    68,590     
   

Depreciation

   43,092    64,851     
   

Foreign currency translations

   –1,825    –5,247     
        
  
    
   

At November 30

   57,891    63,279     
   

Cost

   302,798    364,469     
   

Accumulated depreciation

   244,907    301,190     
        
  
    
   

Book value at November 30

   57,891    63,279     
   

In the Statement of Operations depreciation is included in full under ‘Cost-price’.

              

 

96


Notes to the Consolidated Balance Sheet

 

     Financial fixed assets    2004

   2003

   x € 1,000
[10] Minority interests in associates    Book value at December 1, 2003/2002    2,535    2,902     
     Changes in the value of minority interests due to:               
     Equity in income    507    90     
     Increase in/acquisition of companies    —      17     
     Divestments    –1,305    –5     
     Dividend    –105    –361     
     Foreign currency translations    –79    –108     
         
  
    
     Book value at November 30    1,553    2,535     

[11] Financial lease

   Financial lease receivables comprise the following components:               
     Financial lease receivables [gross]    490,806    974,470     
     Unrealised interest    –71,528    –149,428     
     Residual values    3,190    5,015     
         
  
    
          422,468    830,057     
     Provision for lease receivables    –19,011    –29,298     
         
  
    
     Financial lease receivables [net]    403,457    800,759     
     To short term lease receivables    –172,495    –348,911     
         
  
    
     Long term financial lease receivables    230,962    451,848     
     The gross financial lease receivables can be subdivided into the following durations:               
     Less than one year    172,495    348,911     
     More than one year but less than five years    316,071    617,401     
     More than five years    2,240    8,158     
         
  
    
     Total    490,806    974,470     
[12] Other long term financial assets    Book value at December 1, 2003/2002    106,503    99,109     
     New amounts receivable    31,284    13,365     
     Repayments    –7,608    –2,850     
     Foreign currency translations    –3,525    –3,121     
         
  
    
     Book value at November 30    126,654    106,503     
    

 

‘Other long term financial assets’ includes the deferred tax assets of € 106.6 million [2003: € 82.8 million]. This item also includes an amount of € 0.4 million [2003: € 0.4 million] for loans provided to the Board of Executive Directors. The specification of this amount is as follows: R. van Iperen € 0.2 million, J. van den Belt € 0.1 million and J. Dix € 0.1 million. These loans are interest-free and were made available prior to November 30, 2002. Repayment takes place upon exercise of the annual tranche of options in respect of which the loan was provided.

 

An amount of € 1.1 million [2003: € 1.8 million] was provided to personnel in the form of loans.

 

97


Notes to the Consolidated Balance Sheet

 

     Current assets    2004

   2003

   x €1,000

[13] Inventories

   Raw and other materials    35,723    39,733     
     Semi-finished products and spare parts    135,087    107,048     
     Finished products and trade inventories    146,525    163,623     
         
  
    
     Total    317,335    310,404     

[14] Accounts receivable

   Trade accounts receivable    451,911    502,555     
     Discounted trade bills    –11    –324     
     Lease receivables    172,495    348,911     
     Income taxes    25,555    9,256     
     Other receivables    57,960    67,008     
         
  
    
     Total    707,910    927,406     
     Trade debtors have been reduced by a provision for bad debt amounting to € 54 million [2003: € 53.7 million]. During the financial year € 15.5 million [2003: € 22.0 million] in respect of bad debt was charged to the Statement of Operations as selling expenses.               

[15] Cash and cash equivalents

   Cash and bank balances    26,401    44,307     
     Time deposits    286,659    11,402     
         
  
    
     Total    313,060    55,709     
     The effective interest rate on the deposits is 2.09% [2003: 1.0%]. These deposits have an average duration of 5.8 days.               

 

98


Notes to the Consolidated Balance Sheet

 

     Group equity    2004

   2003

   x €1,000

Authorised capital*

   Ordinary shares    72,500    72,500     
     Priority shares    2    2     
     Financing preference shares    15,000    15,000     
     Protective preference shares    87,500    87,500     
         
  
    
     Total    175,002    175,002     

Paid-up share capital

   [16] Ordinary shares               
     Amount at December 1, 2003/2002    43,631    43,631     
     Conversion of convertible loans    3    —       
         
  
    
     At November 30    43,634    43,631     
     [17] Priority shares               
     At November 30    2    2     
     [18] Financing preference shares               
     At November 30    10,000    10,000     

[19] Paid-in capital

   At December 1, 2003/2002    511,408    511,400     
     Conversion of convertible loans    37    8     
         
  
    
     At November 30**    511,445    511,408     

[20] Legal reserve

   Reserve for non-distributed income of minority interests and capitalised development costs               
     At December 1, 2003/2002    592    1,295     
     Movement in reserve of non-distributed income    357    –703     
     Movement in reserve of capitalised development costs    1,492    —       
         
  
    
     At November 30    2,441    592     

[21] Translation differences

   At December 1, 2003/2002    –114,477    –47,879     
     Foreign currency translations    –25,914    –66,598     
         
  
    
     At November 30    –140,391    –114,477     
    

*       For further information about the authorised capital see page118.

 

**     If distributed in the form of shares, this amount is available to shareholders without attracting the Dutch dividend withholding tax.

 

99


Notes to the Consolidated Balance Sheet

 

                   2004

   2003

   x € 1,000

[22] Other reserves

  Retained earnings                         
    At December 1, 2003/2002              253,698    192,459     
    Movement in Legal reserve              –1,849    703     
    Net income previous financial year              61,462    112,531     
    Result on shares purchased via exercise of options              –192    –32     
    Dividend              –51,971    –51,963     
                  
  
    
    At November 30              261,148    253,698     
    Repurchased shares relating to the Stock Option Plan                         
    At December 1, 2003/2002              –53,551    –52,659     
    Repurchased              —      –1,064     
    Exercise of options              1,266    172     
                  
  
    
    At November 30              –52,285    –53,551     
    Repurchased shares are valued at cost; the average purchase price amounts to € 13.94 [2003: € 13.88].                         
    Total other reserves              208,863    200,147     
     
Overview of
movements in number of
shares outstanding
      

number at

1-12-2003


   conversion

   repurchase

  

exercise

of options


   number at
30-11-2004


Ordinary shares        87,263,488    5,074    —      —      87,268,562
Repurchased shares relating to the Stock Option Plan        3,856,942    —      —      106,500    3,750,442
        
  
  
  
  
Number of ordinary shares        83,406,546    5,074    —      106,500    83,518,120
Priority shares        30    —      —      —      30
Financing preference shares        20,000,000    —      —      —      20,000,000
     
                   2004

   2003

   x € 1,000

[23] Minority interest

  At December 1, 2003/2002              38,822    39,798     
    Capital distribution              –3,099    –3,252     
    Share in income              2,535    2,385     
    Foreign currency translations              –49    –109     
                  
  
    
    At November 30              38,209    38,822     

 

100


Notes to the Consolidated Balance Sheet

 

    

Long term liabilities [provisions]

x € 1,000

  

as at

1-12-2003


   addition
charged to
Statement of
Operations


   release to
Statement of
Operations


   withdrawals

   differences in
exchange
rates


  

as at

30-11- 2004


[24]                                   
     Provisions for:                              

.

   Deferred income tax liabilities    29,325    —      —      –22,422    15    6,918
     Pension liabilities    431,727    53,160    —      –75,408    –2,233    407,246
     Early retirement provision    12,122    5,580    —      –1,504    –3    16,195
     Liabilities termination employment contracts    30,502    2,988    —      –983    –51    32,456
     Reorganisation    52,035    11,351    –14,709    –23,734    –142    24,801
     Other    40,393    7,905    –9,865    –9,983    –89    28,361
         
  
  
  
  
  
     Total    596,104    80,984    –24,574    –134,034    –2,503    515,977
     The short term part of these provisions is approximately € 85 million [2003: € 80 million].                              
                                    
          2004

   2003

   x €1,000
        assets

   liabilities

   assets

   liabilities

    
Provision for deferred income tax liabilities    The composition of deferred income tax assets and liabilities is as follows:                         
     Intangible fixed assets    19,917    —      30,837    —       
     Leasing    —      37,942    —      69,021     
     Other fixed assets    45,490    714    24,797    12,055     
     Current assets    44,136    —      38,617    487     
     Long term liabilities and provisions    71,115    —      83,191    —       
     Current liabilities    130    20,264    318    14,136     
         
  
  
  
    
     Total deferred assets/liabilities    180,788    58,920    177,760    95,699     
     Deferred assets/liabilities netted by fiscal entity    128,786    6,918    111,386    29,325     
     Carry forward losses    14,377    —      14,222    —       
     Non-recognised deferred income tax assets    –36,604    —      –42,819    —       
         
  
  
  
    
     Provision for deferred income tax assets and liabilities    106,559    6,918    82,789    29,325     
     Deferred tax assets form part of the balance sheet caption ‘Other long term financial assets’. [12]                         
      
     The claim for carry forward losses as at November
30, 2004 falls due as follows:
   2008

   2009

   after 2009

   unlimited

   total

    

x € million

   0.9    1.0    2.5    10.0    14.4

 

101


Notes to the Consolidated Balance Sheet

 

    

The changes in deferred income tax assets

and liabilities were as follows:

   2004

   2003

   x € 1,000
     At December 1, 2003/2002    –53,464    –48,972     
     Exchange rate differences    –3,262    –484     
     Statement of Operations    –42,915    –3,999     
     Disposals/acquisitions    —      –9     
         
  
    
     At November 30    –99,641    –53,464     
                     
       
Pension liabilities    With effect from 2003 the pension accounting standard ‘IAS 19’ has been applied.               
     The principal actuarial assumptions are:               
     Discount rate    4.87    5.29    per cent
     Expected return on pension assets    6.62    6.59     
     Expected increase in salaries    2.70    2.78     
     Expected increase in benefits    2.05    2.00     
     The amounts charged to the Statement of Operations are as follows:               
     Service costs    42,663    45,058     
     Interest costs    65,285    66,227     
     Expected return on pension assets    –54,322    –53,090     
     Other    –249    –718     
         
  
    
     Pension costs    53,377    57,477     
     The amounts included in the balance sheet are shown below:               
     Present value of funded obligations    –1,169,973    –1,017,321     
     Fair value of plan assets    896,934    788,404     
         
  
    
          –273,039    –228,917     
     Present value of unfunded obligations    –216,981    –186,747     
         
  
    
     Status of the funds    –490,020    –415,664     
     Actuarial losses/gains not yet included    83,515    –15,286     
     Back service not yet included    161    –177     
         
  
    
     Pension provisions included in the balance sheet    –406,344    –431,127     
     An amount of € 902,000 [2003: € 600,000] has been included under ‘Other long term financial assets’.               

 

102


Notes to the Consolidated Balance Sheet

 

     Movements in pension liabilities:    2004

   2003

   x €1,000
    

Pension liabilities at December 1, 2003/2002

   –1,204,068    –1,181,643     
    

Service costs

   –42,663    –45,058     
    

Interest costs

   –65,285    –66,227     
    

Employee contributions

   –12,478    –12,523     
    

Amendments

   684    896     
    

Actuarial losses/gains

   –109,712    32,957     
    

Benefits paid

   33,193    30,702     
    

Exchange rate differences

   13,375    36,828     
         
  
    
    

Pension liabilities at November 30

   –1,386,954    –1,204,068     
    

Changes in pension assets:

              
    

Fair value of pension assets at December 1, 2003/2002

   788,404    743,185     
    

Actual return on investments

   62,456    34,656     
    

Employer contributions

   76,221    55,414     
    

Employee contributions

   12,478    12,523     
    

Benefits paid

   –33,193    –30,702     
    

Exchange rate differences

   –9,432    –26,672     
         
  
    
    

Fair value of pension assets at November 30

   896,934    788,404     
                     
       
[25]    Long term debt    2004

   2003

   x €1,000
    

Convertible debentures to Company personnel

   10,360    10,796     
    

Loans

   424,650    368,497     
    

Capitalised lease obligations

   3,399    1,500     
         
  
    
    

Total

   438,409    380,793     
Convertible debentures to Company personnel    Employees may opt for convertible personnel debentures under the annual profit-sharing scheme. The duration is 6.5 or 7.5 years. The average interest rate is 4.3% and the average conversion price is € 14.66 [2003: € 15.67].

 

103


Notes to the Consolidated Balance Sheet

 

         
Loans         principal
amount
x €1,000


   average interest
rate [%] at
November 30


   redemption

   amounts due after
more than five
years x €1,000


    

Euro debenture loan

   97,381    6.20    2006    —  
    

Euro debenture loan

   128,431    6.13    2007    —  
    

Euro

   54,907    6.46    2006    —  
    

Euro

   4,538    5.84    2013    4,538
    

Euro

   35,000    2.88    2005/2006    —  
    

US dollar

   37,765    2.57    2006    —  
    

US dollar

   46,450    2.83    2005/2007    —  
    

Other

   20,178    2.54    2005/2007    —  
         
            
    

Total

   424,650    5.07         4,538
     The fixed interest rates of the euro [debenture] loans have been fully swapped into variable interest rates. The heading ‘Loans’ also includes multi-year stand-by credit facilities. The total fair value of the above loans is € 26.5 million higher than the principal amount [2003: € 31.6 million].
Capitalised lease obligations    Redemption of the capitalised lease obligations will take place from 2006 up to and including 2009. The short term portion is shown under ‘Current portion of long term debt’. The interest rate amounts to 6%.

 

104


Notes to the Consolidated Balance Sheet

 

       
     Current liabilities    2004

   2003

   x € 1,000
[26] Short term debt   

Borrowings under bank lines of credit

   15,052    1,638     
    

Current portion of long term debt

   27,790    165,895     
    

Short term borrowings

   —      888     
         
  
    
    

Total

   42,842    168,421     
[27] Other liabilities   

Trade accounts payable

   126,579    125,077     
    

Notes payable

   5,832    7,516     
    

Income taxes

   10,622    25,569     
    

Other taxes and social security payable

   57,999    56,528     
    

Pension liabilities

   1,699    2,365     
    

Preference dividend

   3,551    3,551     
    

Other

   12,784    21,796     
         
  
    
    

Total

   219,066    242,402     
         
  
    
[28] Accrued liabilities   

Salary expenses and payroll taxes

   144,949    149,624     
    

Other costs

   74,410    86,501     
         
  
    
    

Total

   219,359    236,125     

 

105


Notes to the Consolidated Balance Sheet

 

Financial instruments

 

Financial instruments are used to hedge against the financial risks that are inherent to the Group’s underlying commercial activities. For an explanation of the foreign exchange management policy, see page 72.

 

Foreign exchange risks The policy for the management of foreign exchange risks is aimed at protecting the operating income and [inter-company] loans held in foreign currencies. Foreign exchange contracts are entered into to control these foreign exchange risks. The contract value and the result of foreign exchange contracts at balance sheet date are as follows [in millions]:

 

  in respect of cash flows: € 225.0 and € 7.9 [2003: € 187.1 and € 8.2];

 

  in respect of [inter-company] loans: € 79.8 and € 1.3 [2003: € 148.0 and € 1.7].

 

Interest rate risks Interest rate instruments are used to achieve the desired risk profile in terms of fixed and variable interest rate exposures. A central objective of the policy is to prevent a mismatch between the portfolio of rentals and leases and the financing of the Group. Efforts are made to achieve a ratio of 60 to 80% between the above fixed-interest assets and the related liabilities. At balance sheet date the contract value/notional amount and the fair value of interest rate instruments [interest rate swaps] are as follows [in millions]: € 431.5 and € 21.0 [2003: € 835.7 and € 21.0].

 

Credit risks These risks are reduced by doing business solely with financial institutions which have a high credit rating, with fixed limits being applicable to each institution.

 

Commitments and contingent liabilities not stated in the Balance Sheet

 

Operational lease receivables These are lease receivables arising from contracts for the machines rented out to third parties. The future minimum rental revenues from non-terminable contracts amount to:

 

x € million


   2004

   2003

Less than one year

   66    83

More than one year but less than 5 years

   87    110
    
  
     153    193
Contingent liabilities          

x € million


   2004

   2003

Guarantee commitments

   2.8    3.9

Government development credits

   49.2    48.3

 

Guarantee commitments include guarantees given in respect of import duties and loans from third parties.

 

106


Notes to the Consolidated Balance Sheet

 

Other commitments Repurchase commitments of € 7.9 million [2003: € 6.2 million] exist on lease contracts with third parties. Of this amount, the expected amount to be paid within one year is nil [2003: nil] and € 7.9 million within five years [2003: € 6.2 million]. As a result of these commitments the machines can be sold again upon their return. The estimated market value upon return is higher than the repurchase commitment. Recourse liabilities in respect of bills discounted amount to nil [2003: €0.3 million].

 

Total contracted operational lease commitments amount to € 313 million [2003: € 320 million]. These commitments fall due over the next 20 years. The maturity dates over the next years are as follows:

 

          x € million

2005

   76     

2006

   55     

2007

   45     

2008

   34     

2009

   29     

after 2009

   74     
    
    

Total

   313     

 

Other commitments, such as buying contracts etc., have been entered into solely as part of normal business operations.

 

Option Plan

 

To encourage the long term achievement of the Company’s objectives Océ operates a Stock Option Plan under which decisions are taken each year on the granting to certain senior company executives of option rights and/or Share Appreciation Rights [SARS] in respect of ordinary shares in Océ. A SAR is the right to receive payment of the share price gain, whereby the share price gain is the difference between the stock market price of the share on the day of exercise and the exercise price that was fixed on the day of granting the options.

 

Instead of receiving payment of the share price gain, a participant may also request delivery of shares.

 

A limited number of participants have also been granted conditional options.

 

In 2004 the option plan for the members of the Board of Executive Directors was replaced by a share plan. At the beginning of 2005 shares will be conditionally granted to the members of the Board of Executive Directors for the first time. During 2005 the option plan for the other participants will also be replaced by a share plan, under which shares will first be granted in 2006.

 

Unconditional option rights/SARs During the financial year an aggregate of 500,000 unconditional options and 17,000 SARs were granted to a total of 167 participants under the Océ Stock Option Plan 2005.

 

For participants in the Netherlands and Belgium the unconditional options have a duration of nine years, whilst their duration for participants in other countries is eight years. The SARs were granted to the Swiss participants and likewise have a duration of eight years.

 

Participants who hold unconditional options or SARs are required to abide by a code of conduct and observe a waiting period, which means that they must not exercise any rights within two and three years after grant if their rights have the duration of eight and nine years respectively.

 

Conditional option rights A limited category of participants has been awarded conditional option rights in addition to unconditional option rights. In cases where conditional options are granted, the number of unconditional options awarded is reduced pro rata. The duration of the conditional option rights is likewise nine years for Dutch participants and eight years for non Dutch participants. The conditions attaching to these option rights are that exercise is only possible three years after granting the options and provided that a performance criterion has been met. For the Océ Stock Option Plan 2002 the basis for the performance criterion is the increase of Earnings Per Share [EPS], whilst the basis for the Océ Stock Option Plan 2003, 2004 and 2005 is formed by the increase of Operating Income Per Share [OIPS].

 

In the Océ Stock Option Plan 2005 conditional option rights were granted to 65 participants. If this criterion is achieved, 246,000 option rights will become unconditional. The maximum possible number of option rights that may become unconditional is 492,000.

 

107


Notes to the Consolidated Balance Sheet

 

Exercise price For the conditional and unconditional options or SARs granted in the financial year to participants outside the Netherlands the exercise price is equal to the opening share price of the Océ share on Euronext Amsterdam on the date of grant and amounts to € 11.25.

 

When participants in the Netherlands were granted the unconditional option rights, they were offered a choice between an exercise price of € 11.25, € 12.38, € 13.50 or € 15.19. The higher the exercise price compared to the price of the Océ share upon grant, the lower the amount that has to be added to taxable income for Dutch participants. Against this, however, the potential result upon exercise will also be lower. Since 2001, as a consequence of the new tax legislation in the Netherlands, it has also been possible to opt not to pay wages tax upon grant, but to pay tax upon exercise over the entire benefit actually received as a result of the exercise of the option rights.

 

Regulations Participation in the Océ Stock Option Plan is subject to regulations so as to prevent the misuse of inside information. Participants are prohibited from trading in Océ options on the Euronext Options Exchange in Amsterdam and are not allowed to dispose of or pledge the options that they have been granted. Participants have to transfer the exercise of their options to an independent Trustee designated by the company. This Trustee will then exercise the options according to the instructions given by the participants. Participants can only give such instructions if they are not in possession of inside information during the designated exercise periods. A designated period is a period of at most 9 stock exchange trading days after publication of the quarterly results.

 

Total number of options/SARs As at November 30, 2004 a total of 3,675,500 unconditional option rights or SARs in respect of ordinary shares were outstanding at an average exercise price of € 13.17, whilst a total of 1,280,000 conditional option rights, based on an EPS norm or OIPS norm of at least 10%, had been granted at an average exercise price of € 11.39. The average remaining duration of these options is five years.

 

Purchase of shares The company’s policy is to purchase the shares required to satisfy the Océ Stock Option Plan either before or upon exercise. Shares may also be issued to cover commitments under existing stock option plans.

 

For the delivery of ordinary shares as a result of the exercise of options, nil shares were purchased in 2004 [2003: nil shares] and nil shares [2003: nil shares] were issued at the moment of exercise.

 

The table on the next page gives an overview of the information relating to the outstanding options and SARs in respect of shares as at November 30, 2004.

 

During 2004 nil shares were bought in [2003: 100,000] to cover commitments under the existing Stock Option Plans and 106,500 shares [2003: 12,000] were used, which means that the total number of shares purchased amounts to 3,750,442 [2003: 3,856,942].

 

108


Notes to the Consolidated Balance Sheet

 

   

Stock Option

Plan of year


  

number of

options granted


   exercise price
in euro


   options
forfeited


   exercised
number of
options


   outstanding at
November 30,
2004


   expiration date

   

2000

        791,000    16.85-22.98    424,000    —      367,000    26-11-2005
   

2001

        847,500    18.10-24.44    99,000    —      748,500    29-11-2005/2006
   

2002

   unconditional    716,000    9.77-13.19    24,000    95,500    596,500    28-11-2009/2010
   

2002

   conditional    392,000    9.77    392,000    —      —      28-11-2009/2010
   

2003

   unconditional    793,000    10.75-14.51    5,000    29,000    759,000    27-11-2010/2011
   

2003

   conditional    470,000    10.75    78,000    —      392,000    27-11-2010/2011
   

2004

   unconditional    692,500    12.21-16.48    2,000    3,000    687,500    26-11-2011/2012
   

2004

   conditional    446,000    12.21    50,000    —      396,000    26-11-2011/2012
   

2005

   unconditional    517,000    11.25-15.19    —      —      517,000    30-11-2012/2013
   

2005

   conditional    492,000    11.25    —