CHICAGO, April 5 -- Commenting on the third quarter results, Rokus van Iperen, chairman of the Board of executive Directors of Oce N.V., said: "Our strategy, whose main thrusts are a strengthening of the sales organization and continual product innovation, is bearing fruit. In the first quarter we achieved a strong increase in sales of printing systems and software. These are the drivers of our business. This development will be reflected in a recovery in the revenues from service. We therefore maintain our previous expectation that the commercial result, excluding the profit on the sale of leases, will be higher than in 2004." Total revenues in the first quarter were equal to those for the first quarter of 2004. After adjustment for exchange rate effects, revenues increased by 1.8%. Non-recurring revenues showed an organic increase of 24.8%. This increase is a clear indication that the new products are being successfully placed in the market, thanks in part to the extra emphasis on marketing and sales activities. Recurring revenues decreased by 5% on an organic basis. This is an improvement as compared to the fourth quarter of 2004, when the decrease still amounted to 7.5%. Of the decrease in recurring revenues, 2.1% was caused by reduced revenues from lease contracts, 1.7% by lower revenues from service, 0.8% by revenues from Business Services and 0.4% by lower sales of media. The gross margin decreased by 1.9% from 42.4% to 40.5%. This was attributable to a decrease of 0.8% in the hedging result and to the fact that revenues from lease interest were 1.1% lower. The gross margin percentage, after adjustment for hedging effects and interest revenues from leases, is equal to the first quarter of the previous year. Operating expenses as a percentage of total revenues increased from 37.5% in the first quarter of 2004 to 38.1% in the first quarter of 2005. Compared to the corresponding quarter of 2004, the organic increase in operating expenses amounted to 2.9% because of extra investments in R&D and higher selling costs. Operating income amounted to euro 14.9 million [-50.9%]. The decrease of euro 15.5 million compared to the first quarter of 2004 is the net result of exchange rate effects [-euro 7.0 million], the previously announced reduction in revenues from leases [-euro 10.9 million] and an organic increase [+ euro 2.4 million]. Financial expense [net] went down by 35.2% to euro 3.1 million due to the decrease in the net debt position. The tax charge amounted to 20.2%, a substantial decrease compared to the first quarter of 2004, when the tax rate amounted to 30.5%. The current level of the tax charge is expected to be an indication of the tax charge for the full financial year. Net income was euro 9.1 million [-46.9%]. On an organic basis, net income decreased by 21.9%. Net income per ordinary share outstanding amounted to euro 0.10 [2004: euro 0.20]. Results by Strategic Business Unit In Digital Document Systems [DDS] revenues in the first quarter amounted to euro 434.4 million [2004: euro 439.3 million]. Revenues increased by 0.6% on an organic basis. The effect of exchange rates was 1.7% negative. Sales of printing systems grew organically by 24.9%. Virtually all of this growth stemmed from products that were introduced during the past two years. Thanks to the ongoing increase in the number of machine placements, the influence of revenues from maintenance contracts during the quarter was -2.6% on an organic basis, as compared to -5.3% in the fourth quarter of 2004. Total recurring revenues in DDS decreased organically by 6.1% [excluding the sale of lease contracts by 3.9%]. The operating income of DDS went down from euro 22.9 million [2004] to euro 5.0 million. This decrease was largely due to exchange rate effects and lower revenues from interest. In Wide Format Printing Systems [WFPS] revenues amounted to euro 188.4 million [2004: euro 183.1 million], an increase of 2.9%. On an organic basis revenues were 4.7% higher. Exchange rate effects depressed revenues by 1.8%. Non-recurring revenues increased organically by 24.6%. In WFPS too, sales of printing systems are picking up strongly. Both in Technical Document Systems and in Display Graphics Systems this growth was achieved because of the success of the new colour printers. Revenues from maintenance contracts and consumables increased organically by 0.7%. Total recurring revenues were down by 2.2% on an organic basis as a result of lower revenues from interest [-1.5%] and lower sales of media [-1.4%]. Operating income amounted to euro 9.9 million [2004: euro 7.5 million]. Outsourcing of lease activities In the first quarter of 2005, new and existing lease contracts to a value of euro 33 million were sold to the company's lease partners. The book profit that was achieved on the sale of the existing lease portfolio amounted to euro 1.5 million [first quarter of 2004: euro 2.2 million]. The total amount of lease receivables on the balance sheet at the end of the quarter amounted to euro 371 million [first quarter of 2004: euro 745 million]. On an organic basis, revenues from commercial activities increased by 3.6%. Operating income excluding the sale of lease contracts decreased by euro 6.0 million [42.9%]. Organically there was an increase of 6.4%. Relocation of machine manufacturing Oce has informed the Works Council and the trade unions of its intention to relocate a larger proportion of the machine manufacturing activities from the Netherlands to Asia. By the end of 2006, about one-half of the relevant production value will be sourced from low-wage countries. As a result, manufacturing cost-prices will be reduced considerably. In addition, the profitability of the company will become less susceptible to exchange rate fluctuations. The expectation is that the related reduction in the number of jobs in the Netherlands can be achieved without the need for compulsory dismissals. The reduction in personnel numbers which resulted from the first phase of the outsourcing operation has meanwhile been almost completed, in conformity with the social plan 2004. No extra provisions are needed for the implementation of the new plan. Oce will open an Oce Asian Technology Centre in the region whose tasks will be to transfer know-how and monitor the sourcing and manufacturing activities. A Manufacturing and Supply Agreement has meanwhile been signed between Oce and Flextronics. Flextronics is one of the biggest companies that specializes in manufacturing for third parties. Balance sheet and cash flow The balance sheet total amounted to euro 2,208 million. This is a decrease of euro 142 million compared to the first quarter of 2004. The main factors that caused the decrease in the balance sheet total were the reduction in lease receivables [-euro 374 million] and an increase in liquid funds [euro 232 million]. The free cash flow was euro 52 million negative. This is attributable to significant, seasonally linked changes in the working capital [-euro 55 million], to the payment of costs previously anticipated [-euro 16 million] and to the increase in inventories [-euro 14 million]. In addition, capital expenditure on property, plant and equipment amounted to euro 20 million net. During the course of 2005 the cash flow will improve and a positive cash flow is expected for the full year. International Financial Reporting Standards [IFRS] The annual financial statements of European publicly listed companies have to be prepared in conformity with IFRS for financial years that commence on or after January 1, 2005. This means that as from the 2006 financial year -- which runs from December 1, 2005 to November 30, 2006 -- Oce will draw up its quarterly reports and annual financial statements in accordance with IFRS. In October 2005, Oce will publish the opening balance sheet and comparable figures on the basis of IFRS. Prospects Oce achieved a big increase in sales of printing systems in the first quarter. It is expected that sales of printing systems will also increase during the remainder of the year, though not to the same degree as in the first quarter. Recurring revenues will follow on from the increase in revenues from the sale of printing systems. Oce maintains the forecast that it issued in the fourth quarter, i.e. that operating income from commercial activities, excluding the book profit on the sale of the lease portfolio, is expected to be higher than in 2004 [euro 31 million], provided however that the dollar does not weaken further substantially against the euro. Net income will, as a result of the lower revenues from leases, work out lower than in 2004.