Arrow Electronics - 10-Q quarterly report FY

 

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There were 118,355,921 shares of Common Stock, $1 par value, outstanding as of July 26, 2005.

 

ARROW ELECTRONICS, INC.

INDEX

See accompanying notes.

See accompanying notes.

See accompanying notes.

The accompanying consolidated financial statements of Arrow Electronics, Inc. (the “company”) were prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and consolidated results of operations at and for the periods presented. The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.

These consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the consolidated financial statements and accompanying notes included in the company’s Form 10-Q for the quarterly period ended April 1, 2005, as well as the audited consolidated financial statements and accompanying notes for the year ended December 31, 2004 as filed in the company’s Annual Report on Form 10-K.

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduced reported sales and cost of sales, it had no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales were reduced by $71,946 and $121,446 for the second quarter and first six months of 2004, respectively.

Certain prior year amounts have been reclassified to conform with current year presentation.

The company accounts for stock-based compensation using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. The company adopted the disclosure requirements of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation”, as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (collectively, “Statement No. 123”) which uses a fair-value based method of accounting for stock-based employee compensation plans.

The company’s current method of accounting utilizes the intrinsic value method whereby stock options are granted at market price and therefore no compensation costs are recognized.

If compensation expense had been determined in accordance with Statement No. 123 utilizing the fair value method of accounting at the grant dates for awards under the company’s various stock-based compensation plans, the company’s pro forma net income and net income per share would have been as follows:

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement No. 123R”). Statement No. 123R addresses all forms of share-based payment (“SBP”) awards, including, but not limited to, shares issued under stock options, restricted stock, performance shares, and stock appreciation rights. Statement No. 123R will require companies to record compensation expense for SBP awards measured at fair value. In April 2005, the Securities and Exchange Commission announced the adoption of a new rule which amends the effective date for Statement No. 123R. The new rule does not change any of the accounting provisions. As a result, the company will adopt the accounting provisions of Statement 123R as of January 1, 2006. The company is currently evaluating the impact of applying the various provisions of Statement No. 123R.

The impact of the following acquisitions and dispositions are not deemed to be material to the company’s consolidated financial position and consolidated results of operations.

In June 2005, the company signed an agreement to acquire the component distribution business of Connektron Pty. Ltd (“Connektron”), a leading passive, electromechanical, and connectors distributor in Australia and New Zealand. The acquisition of the component distribution business of Connektron, which was completed on July 1, 2005, has been accounted for as a purchase transaction, and accordingly, its results of operations will be included in the consolidated results of the company from the date of acquisition.

During the second quarter of 2005, the company closed on the sale of its Cable Assembly business, a business unit within the company’s North American Components group that supplies custom cable assembly and associated contract manufacturing services. The $1,300 loss resulting from this sale is reflected as a component of restructuring charges.

In July 2004, the company acquired Disway AG (“Disway”), an electronic components distributor in Italy, Germany, Austria, and Switzerland. The Disway acquisition has been accounted for as a purchase transaction, and accordingly, Disway’s results of operations have been included in the consolidated results of the company from the date of acquisition.

As a result of certain acquisitions, the company may be contractually required to purchase the shareholder interest held by others in its majority (but less than 100%) owned subsidiaries. The payments for such purchases, which are dependent upon the exercise of a put or call option by either party, are based upon a multiple of earnings over a contractually determined period and, in certain instances, capital structure. There are no expiration dates for these agreements. The terms of these agreements generally provide no limitation to the maximum potential future payments; however, in most instances the amount to be paid will not be less than the pro-rata net book value (total assets minus total liabilities) of the subsidiary. There were no such payments made during the first six months of 2005 or 2004. If the put or call options on outstanding agreements were exercised, such payments would be approximately $11,000 at both July 1, 2005 and December 31, 2004, which would be capitalized as cost in excess of net assets of companies acquired partially offset by the carrying value of the related minority interest. As these payments are based on the future earnings of the acquired companies, the amounts will change as the performance of these subsidiaries changes.

The company has a 50% interest in several joint ventures with Marubun Corporation, collectively referred to as Marubun/Arrow, and a 50% interest in Altech Industries (Pty.) Ltd. (“Altech Industries”), a joint venture with Allied Technologies Limited. These investments are accounted for using the equity method.

The following table presents the company’s investment in Marubun/Arrow and the company’s investment and long-term note receivable in Altech Industries:

The equity in earnings of affiliated companies are as follows:

Under the terms of the aforementioned joint venture agreements, the company would be required to pay its pro-rata share, based upon its ownership interests, of the third party debt of the joint ventures in the event that the joint ventures were unable to meet their obligations. At July 1, 2005 and December 31, 2004, the company’s pro-rata share of this debt was $6,850 and $7,750, respectively. The company believes there is sufficient equity in the joint ventures to cover this potential liability.

The company has a 5% interest in World Peace Industrial Co., Ltd. (“WPI”) and an 8.4% interest in Marubun Corporation (“Marubun”), which are accounted for as available-for-sale securities.

The company accounts for these investments in accordance with FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“Statement No. 115”) and Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. Under Statement No. 115 and EITF Issue No. 03-1, if the fair value of an investment is less than the cost basis, the company must determine if an other-than-temporary decline has occurred based on its intent and ability to hold the investment until the cost is recovered and evidence indicates that the cost of the investment is recoverable within a reasonable period of time. If the company determines that an other-than-temporary decline has occurred, the cost basis of the investment must be written down to fair value as the new cost basis and the amount of the write-down is recognized as a loss.

At July 1, 2005, in accordance with Statement No. 115 and EITF Issue No. 03-1, the company determined that an other-than-temporary decline in the fair value of Marubun occurred and, accordingly, recognized a loss of $3,019 ($.03 per share) on the write-down of this investment. The new cost basis of the company’s investment in Marubun at July 1, 2005 was $20,046.

At July 1, 2005, the cost basis of the company’s investment in WPI was $10,798, the fair value was $10,497, and the unrealized holding loss was $301. Although the fair value of the WPI investment was below the cost basis, the company concluded that an other-than-temporary decline had not occurred.

At December 31, 2004, the cost basis of the company’s investment in WPI and Marubun was $33,863, the fair value was $31,086, and the net unrealized holding loss was $2,777.

The fair value of these investments are included in “Other assets” in the accompanying consolidated balance sheet and the related net unrealized holding losses are included in “Other” in the shareholders’ equity section in the accompanying consolidated balance sheet.

The company has a $550,000 asset securitization program (the “program”), which is conducted through Arrow Electronics Funding Corporation (“AFC”), a wholly-owned, bankruptcy remote, special purpose subsidiary. Any receivables held by AFC would likely not be available to creditors of the company in the event of bankruptcy or insolvency proceedings. At July 1, 2005 and December 31, 2004, there were no receivables sold to and held by third parties under the program, and as such, the company had no obligations outstanding under the program. The program has not been utilized by the company since June 2001.

Cost in excess of net assets of companies acquired, related to the company’s electronic components business segment, is as follows:

All existing and future costs in excess of net assets of companies acquired are subject to an annual impairment test as of the first day of the fourth quarter of each year, or earlier if indicators of potential impairment exist.

The company recorded a loss on prepayment of debt of $1,731 ($1,035 net of related taxes or $.01 per share) and $7,051 ($4,216 net of related taxes or $.04 and $.03 per share on a basic and diluted basis, respectively) for the second quarter of 2005 and 2004, respectively, and $2,086 ($1,247 net of related taxes or $.01 per share) and $30,781 ($18,407 net of related taxes or $.17 and $.15 per share on a basic and diluted basis, respectively), for the six months ended July 1, 2005 and June 30, 2004, respectively.

During the second quarter of 2005, the company repurchased, through a series of transactions, $80,835 accreted value of its zero coupon convertible debentures due in 2021, which could have been initially put to the company in February 2006 (“convertible debentures”). The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $1,731 ($1,035 net of related taxes or $.01 per share), of which $338 was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $627 from the dates of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchases.

During the first six months of 2005, the company repurchased, through a series of transactions, $94,045 accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $2,086 ($1,247 net of related taxes or $.01 per share), of which $456 was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $911 from the dates of repurchase through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During the second quarter of 2004, the company repurchased, through a series of transactions, $141,708 accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $7,051 ($4,216 net of related taxes or $.04 and $.03 per share on a basic and diluted basis, respectively), of which $4,702 was cash, and was recognized as a loss on prepayment of debt. As a result of these transactions, interest expense will be reduced by approximately $7,700 from the dates of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchases.

During the first six months of 2004, the company repurchased, through a series of transactions, $233,581 accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $11,860 ($7,092 net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), of which $8,213 was cash. Also during the first six months of 2004, the company repurchased and/or redeemed, through a series of transactions, $250,000 principal amount of its 8.7% senior notes, due in October 2005. The premium paid and the related deferred financing costs written-off upon the repurchase and/or redemption of this debt, net of the gain recognized by terminating the related interest rate swaps, aggregated $18,921 ($11,315 net of related taxes or $.10 and $.09 per share on a basic and diluted basis, respectively), of which $18,399 was cash, and was recognized as a loss on prepayment of debt. The aggregate of these charges is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $33,400 from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

In June 2005, the company amended and restated its revolving credit agreement and, accordingly, increased the facility size from $450,000 to $600,000. The $600,000 revolving credit facility matures in June 2010. The company had no outstanding borrowings under the revolving credit facility at July 1, 2005 and December 31, 2004.

In June 2004, the company entered into a series of interest rate swaps (the “2004 swaps”), with an aggregate notional amount of $300,000. The 2004 swaps modify the company’s interest rate exposure by

effectively converting the fixed 9.15% senior notes and a portion of the fixed 6.875% senior notes to a floating rate based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 7.75% and 5.55% at July 1, 2005 and 6.53% and 3.80% at December 31, 2004, respectively) through their maturities. The 2004 swaps are classified as fair value hedges and had a fair value of $9,060 and $12,650 at July 1, 2005 and December 31, 2004, respectively.

In November 2003, the company entered into a series of interest rate swaps (the “2003 swaps”), with an aggregate notional amount of $200,000, in order to manage the company’s targeted mix of fixed and floating rate debt. The 2003 swaps modify the company’s interest rate exposure by effectively converting the fixed 7% senior notes to a floating rate based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 6.84% and 5.81% at July 1, 2005 and December 31, 2004, respectively) through their maturities. The 2003 swaps, which mature in June 2007, are classified as fair value hedges and had a negative fair value of $2,956 and $746 at July 1, 2005 and December 31, 2004, respectively.

Interest expense, net, includes interest income of $3,122 and $2,931 for the three months ended July 1, 2005 and June 30, 2004, respectively, and $5,371 and $5,868 for the six months ended July 1, 2005 and June 30, 2004, respectively.

The company recorded an aggregate restructuring charge of $4,847 ($2,925 net of related taxes or $.02 per share) and a restructuring gain of $1,241 ($1,914 net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively) in the second quarter of 2005 and 2004, respectively. For the six months ended July 1, 2005 and June 30, 2004, the company recorded restructuring charges of $8,885 ($5,458 net of related taxes or $.04 and $.03 per share on a basic and diluted basis, respectively) and $7,577 ($4,581 net of related taxes or $.04 per share), respectively.

In the first quarter of 2005, the company announced that it would be taking additional actions to better optimize the use of its mainframe, reduce real estate costs, be more efficient in its distribution centers, and to be more productive. These actions are expected to further reduce costs by approximately $50,000 per annum with $40,000 to be realized in 2005. The estimated net restructuring charges associated with these actions are expected to total approximately $7,500 of which $4,460 was recorded in the second quarter of 2005 and $8,520 was recorded in the first six months of 2005 with a third quarter anticipated gain on the sale of a facility which is expected to partially offset the restructuring charges incurred to date. The restructuring charges associated with these actions consisted primarily of personnel costs relating to the elimination of approximately 230 positions, or 2% of the prior year-end worldwide total of 11,500 positions, across multiple locations, segments, and functions. The majority of the total charge is expected to be spent in cash.

The company, during 2004 and 2003, announced a series of steps to make its organizational structure more efficient resulting in annualized savings in excess of $100,000. The estimated restructuring charges associated with these actions total approximately $47,900, of which $570 and $736 were recorded in the second quarter and first six months of 2005, respectively, and a restructuring gain of $699 and restructuring charges of $8,119 were recorded in the second quarter and first six months of 2004, respectively. The company recorded total restructuring charges of $9,830 and $37,965 during 2004 and 2003, respectively, associated with these actions. Approximately 85% of the total charge is expected to be spent in cash.

The aforementioned restructuring charges are comprised of the following at July 1, 2005:

In mid-2001, the company took a number of significant steps related to cost containment and cost reduction actions. In the second quarter and first six months of 2005, the company recorded a restructuring credit against the accrual related to the 2001 restructuring of $183 and $371, respectively. The restructuring charges and other charges recorded as of 2004 total $231,235, which includes a restructuring credit of $542 recorded in the second quarter and first six months of 2004. As of July 1, 2005, cumulative cash payments of $31,017 ($721 and $1,512 in the second quarter and first six months of 2005, respectively) and non-cash usage of $190,879 were recorded against the accrual. As of July 1, 2005 and December 31, 2004, the company had $8,968 and $10,851, respectively, of unused accruals of which $5,286 and $6,774, respectively, are required to address remaining real estate lease commitments. In addition, accruals of $3,682 and $4,077 at July 1, 2005 and December 31, 2004, respectively, primarily relate to the termination of certain customer programs.

As of July 1, 2005, the integration accrual was $5,575 relating to the acquisition of the Industrial Electronics Division of Agilysys, Inc. in 2003, as well as numerous acquisitions made prior to 2000, for remaining contractual obligations as follows:

The remaining balances of the restructuring and integration accruals aggregate $23,000 as of July 1, 2005, of which $18,509 is expected to be spent in cash, and will be utilized as follows:

The company’s restructuring and integration programs primarily impacted its electronic components business segment.

During the first quarter of 2005, Tekelec Europe SA (“Tekelec”), a French subsidiary of the company, entered a settlement agreement with Tekelec Airtronic SA (“Airtronic”) pursuant to which Airtronic paid €1,510 (approximately $2,000) to Tekelec in full settlement of all of Tekelec’s claims for indemnification under the purchase agreement. The company recorded the net amount of the settlement of $1,672 ($1,267 net of related taxes or $.01 per share on a basic basis) as an acquisition indemnification credit.

The following table sets forth the calculation of net income per share on a basic and diluted basis (shares in thousands):

Comprehensive income (loss) is defined as the aggregate change in shareholders’ equity excluding changes in ownership interests. The components of comprehensive income (loss) are as follows:

The company maintains supplemental executive retirement plans and a defined benefit plan. The components of the net periodic benefit costs for these plans are as follows:

Reference is made to Note L to the consolidated financial statements and accompanying notes included in the company’s Form 10-Q for the quarterly period ended April 1, 2005 (“Note L”), as well as Note 16 to the audited consolidated financial statements and accompanying notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2004 (“Note 16”) in which the company has previously disclosed certain environmental contingencies and related litigation arising out of the company’s purchase of Wyle Electronics in 2000 and certain litigation and tax contingencies from its purchase of Tekelec in 2000.

As discussed in Note L and Note 16, Wyle Laboratories, Inc. (a purchaser of assets, including testing facilities, from Wyle Electronics), the company and the California Department of Toxic Substance Control (the “DTSC”) entered into a consent decree pertaining to the remediation of environmental conditions at the Wyle Laboratories, Inc. testing site at Norco, California. The implementation of a May 2004 Removal Action Work Plan has been ongoing at the site and the company currently estimates that the completion of the work will cost approximately $1,500. The implementation of a second Removal Action Work Plan, pertaining to the interim remediation of certain areas immediately adjacent to the site, is also under way, the total completion cost of which is currently estimated at $950.

In March 2005, the DTSC approved a Remedial Investigation Work Plan, covering the characterization of the remainder of the Norco site and potential off-site impacts. The company currently estimates the cost of completing the characterization under that plan at $2,200.

The complete scope of work under the consent decree, which will depend upon the ultimate characterization of the pollutants released at the site, their off-site impact, and the design and implementation of additional remedial actions, has not yet been finalized and the total associated costs have therefore not been determined.

The company and others are defendants in an action filed in January 2005 in the California Superior Court in Riverside County, California (Gloria Austin, et al. v. Wyle Laboratories, Inc. et al.) in which residents and owners of property near the Norco site have sued under a variety of legal theories for unquantified damages allegedly caused by environmental contamination at and around the site. An amended complaint, filed in July 2005, added VEBA Electronics, LLC and E.ON AG as defendants in this matter.

Wyle Laboratories, Inc. has demanded indemnification from the company with respect to the work at the Norco site, at a related site in Huntsville, Alabama, and in connection with the Riverside County litigation, and

the company has, in turn, demanded indemnification from E.ON AG, which has assumed responsibility for the liabilities of VEBA Electronics, LLC (from which Arrow bought Wyle Electronics).

As is also discussed more fully in Note L and Note 16, the company continues to believe that any cost that it may incur in connection with potential remediation at the Wyle Laboratories, Inc. sites and any related litigation is covered by the indemnifications assumed by E.ON AG.

As discussed in Note L and Note 16, the company commenced an action against E.ON AG in federal court in Alabama to secure, among other things, payment of its obligations in connection with the Huntsville and Norco sites. In May 2005, the judge in that case dismissed the initial complaint, but did not rule on the pending amended complaint. The company has filed a notice of appeal of that ruling with the 11th Circuit Court of Appeals. The judge in that case also granted the company’s motion to transfer the case to the United States District Court for the Central District of California, where it has been consolidated with a case commenced by the company and Wyle Laboratories in May 2005 against E.ON AG seeking indemnification, contribution, and a declaration of the parties’ respective rights and obligations in connection with the Riverside County litigation and other costs associated with the Norco site.

As is also discussed in Note L and Note 16, the federal court actions include a claim for the reimbursement of certain pre-acquisition tax liabilities of Wyle Electronics in the amount of $8,729. The amount at issue has been reduced by approximately $1,422 as the result of the company’s direct receipt of tax refunds from certain state tax authorities.

The company believes strongly in the merits of its action against E.ON AG, and is pursuing such action vigorously.

From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such other matters will have a material adverse impact on the company’s financial position, liquidity, or results of operations.

The company is engaged in the distribution of electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers and computer products to value-added resellers and OEMs. As a result of the company’s philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, as well as borrowings, are not directly attributable to the individual operating segments. Computer products includes the company’s North American Computer Products group together with UK Microtronica, ATD (in Spain), and Arrow Computer Products (in France).

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduced reported sales and cost of sales, it had no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales were reduced by $71,946 and $121,446 for the second quarter and first six months of 2004, respectively, for the company’s computer products segment in the United States.

Sales and operating income, by segment, are as follows:

Total assets, by segment, are as follows:

Sales, by geographic area, are as follows:

Total assets, by geographic area, are as follows:

In the fourth quarter of 2004, based upon an evaluation of its business and accounting practices, the company determined that revenue related to the sale of service contracts should more appropriately be classified on an agency basis rather than a gross basis. While this change reduced reported sales and cost of sales, it had no impact on gross profit, operating income, net income, cash flow, or the balance sheet. All prior period sales and cost of sales have been reclassified to present the revenue related to the sale of service contracts on an agency basis. Sales and cost of sales were reduced by $71.9 million and $121.4 million in the second quarter and first six months of 2004, respectively.

Sales in the North American Components (“NAC”) businesses advanced 3.2%, compared with the first quarter of 2005, with sales increases across all customer segments. Sales in the EMEASA (Europe, Middle East, Africa, and South America) components businesses declined 8.0%, compared with the first quarter of 2005, a seasonal decline consistent with prior years. The increase in Asia/Pacific sales of 7.0%, compared with the first quarter of 2005, was the result of the impact of sales initiatives across all regions as well as improved market conditions in China. Sales of computer products advanced 9.3%, compared with the first quarter of 2005, primarily as a result of stronger sales across the North American Enterprise Computing Solutions business. This business has had a strategic initiative underway focused on storage, software, and services.

Net income advanced to $58.4 million in the second quarter of 2005 compared with net income of $57.2 million in the first quarter of 2005. Net income was $66.9 million in the second quarter of 2004. The increase in net income, compared with the first quarter of 2005, is due to the company’s ability to increase sales without operating expenses increasing at the same rate, the impact of efficiency initiatives reducing operating expenses, and lower interest costs as a result of the prepayment of debt. The following items impact the comparability of the company’s results:

The company has two business segments: electronic components and computer products. Consolidated sales for the second quarter and first six months of 2005 increased 3.3% and 3.6% compared with the year-earlier periods. The increase in consolidated sales of $89.3 million over the second quarter of 2004 was driven primarily by an increase of approximately $66.3 million in the company’s North American Computer Products (“NACP”) businesses and an increase of approximately $33.6 million, or 1.6%, in the worldwide components business. The increase in consolidated sales of $190.2 million over the first six months of 2004 was driven primarily by an increase of approximately $128.3 million in the company’s NACP businesses and an increase of approximately $94.5 million, or 2.3%, in the worldwide components business.

The sales increase of 12.0% and 12.3% in the NACP businesses in the second quarter and first six months of 2005, respectively, compared with the year-earlier periods, is primarily due to a company initiative to grow certain strategic products, such as software, services, and storage, in its Enterprise Computing Solutions business and, to a lesser extent for the first six months of 2005, a change by Hewlett-Packard Company (“HP”) in the business model used for the sale of their products during February 2004.

The growth in the worldwide components business was primarily driven by the sales increase of 12.3% and 13.3% in the second quarter and first six months of 2005, respectively, in Asia/Pacific, the impact of a weaker U.S. dollar on the translation of the company’s European financial statements, and the completion, during the third quarter of 2004, of the acquisition of Disway AG (“Disway”). The increase in Asia/Pacific sales, compared with the year-earlier periods, was a result of the region’s strong market growth coupled with the company’s initiative to expand its product offering and customer base. Sales in the EMEASA components businesses increased by 2.1% and 5.2% in the second quarter and first six months of 2005, respectively, compared with the year-earlier periods, primarily due to the impact of a weaker U.S. dollar on the translation of its financial statements and the acquisition of Disway. These increases were offset, in part, by sales in the NAC businesses, which declined by 2.3% and 3.1% in the second quarter and first six months of 2005, respectively, when compared with the year-earlier periods, as product remains readily available.

The translation of the company’s international financial statements into U.S. dollars resulted in increased sales of $32.3 million for the second quarter of 2005 and $69.0 million in the first six months of 2005, compared with the year-earlier periods, due to a weaker U.S. dollar. The increase in consolidated sales, giving effect to the impact of the weaker U.S. dollar, was 2.1% in the second quarter of 2005 and 2.3% in the first six months of 2005.

Sales of electronic components increased by $33.6 million or 1.6% for the second quarter of 2005 and $94.5 million or 2.3% for the first six months of 2005, compared with the year-earlier periods. The overall increase in sales includes the aforementioned factors related to increased sales of electronic components in EMEASA and the Asia/Pacific region, offset by the sales decline in the NAC businesses.

Sales of computer products increased by $55.7 million or 8.8% for the second quarter of 2005 and $95.7 million or 7.8% for the first six months of 2005, compared with the year-earlier periods. The change in the business model with HP increased sales by an estimated $21.2 million for the first six months of 2005. During February 2004, HP modified its agreement with distributors transforming the relationship from that of an agent to that of a distributor and thereby changing the method of recognizing revenue. Excluding the change related to HP, computer product sales would have increased by 6.1% for the first six months of 2005. Sales in the Enterprise Computing Solutions business increased by 22.8% and 23.5% for the second quarter and first six months of 2005, respectively, compared with the year-earlier periods, due to increased sales of services and storage. Sales of industrial related computer products to original equipment manufacturers decreased by 11.6% for the second quarter of 2005 and 11.3% for the first six months of 2005, compared with the year-earlier periods.

The company recorded gross profit of $441.3 million in the second quarter of 2005 and $873.6 million in the first six months of 2005, compared with $451.0 million and $874.3 million in the year-earlier periods. The gross profit margin for the second quarter and first six months of 2005 decreased by approximately 90 and 60 basis points, respectively, when compared with the year-earlier periods. The decrease in gross profit margin is primarily the result of pricing pressures in the marketplace relating to the worldwide components businesses and increased sales in Asia/Pacific and the NACP businesses that have lower margins, which account for a larger part of the company’s sales mix.

The company recorded an aggregate restructuring charge of $4.8 million ($2.9 million net of related taxes or $.02 per share) and a restructuring gain of $1.2 million ($1.9 million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively) in the second quarter of 2005 and 2004, respectively.

For the six months ended July 1, 2005 and June 30, 2004, the company recorded restructuring charges of $8.9 million ($5.5 million net of related taxes or $.04 and $.03 per share on a basic and diluted basis, respectively) and $7.6 million ($4.6 million net of related taxes or $.04 per share), respectively.

In the first quarter of 2005, the company announced that it would be taking additional actions to better optimize the use of its mainframe, reduce real estate costs, be more efficient in its distribution centers, and to be more productive. These actions are expected to further reduce costs by approximately $50.0 million per annum with $40.0 million to be realized in 2005. The estimated net restructuring charges associated with these actions are expected to total approximately $7.5 million of which $4.5 million was recorded in the second quarter of 2005 and $8.5 million was recorded in the first six months of 2005 with a third quarter anticipated gain on the sale of a facility which is expected to partially offset the restructuring charges incurred to date. The restructuring charges associated with these actions consisted primarily of personnel costs relating to the elimination of approximately 230 positions, or 2% of the prior year-end worldwide total of 11,500 positions, across multiple locations, segments, and functions. The majority of the total charge is expected to be spent in cash.

The company, during 2004 and 2003, announced a series of steps to make its organizational structure more efficient resulting in annualized savings in excess of $100.0 million. The estimated restructuring charges associated with these actions total approximately $48.0 million, of which $.6 million and $.7 million were recorded in the second quarter and first six months of 2005, respectively, and a restructuring gain of $.7 million and restructuring charges of $8.1 million were recorded in the second quarter and first six months of 2004, respectively. The company recorded total restructuring charges of $9.8 million and $38.0 million during 2004 and 2003, respectively, associated with these actions. Approximately 85% of the total charge is expected to be spent in cash.

As of July 1, 2005, $8.5 million of the aforementioned charges were accrued but unused of which $5.3 million are for personnel costs, $2.3 million are to address remaining facilities commitments, and $.9 million are for other remaining contractual obligations.

Also in the second quarter and first six months of 2005, the company recorded a restructuring credit against the accrual related to the 2001 restructuring of $.2 million and $.4 million, respectively. In the second quarter and first six months of 2004, the company recorded a restructuring credit of $.5 million against the accrual. As of July 1, 2005, $9.0 million was accrued but unused of which $5.3 million is to address remaining real estate lease commitments and $3.7 million primarily relates to the termination of certain customer programs.

As of July 1, 2005, the integration accrual was $5.6 million relating to the acquisition of the Industrial Electronics Division (“IED”) of Agilysys, Inc. in 2003, as well as numerous acquisitions made prior to 2000, for remaining contractual obligations.

The remaining balances of the restructuring and integration accruals aggregate $23.0 million as of July 1, 2005, of which $18.5 million is expected to be spent in cash, and will be utilized as follows:

During the first quarter of 2005, Tekelec Europe SA (“Tekelec”), a French subsidiary of the company, entered a settlement agreement with Tekelec Airtronic SA (“Airtronic”) pursuant to which Airtronic paid €1.5 million (approximately $2.0 million) to Tekelec in full settlement of all of Tekelec’s claims for indemnification under the purchase agreement. The company recorded the net amount of the settlement of $1.7 million ($1.3 million net of related taxes or $.01 per share on a basic basis) as an acquisition indemnification credit.

The company recorded operating income of $118.8 million in the second quarter of 2005 and $227.3 million in the first six months of 2005, as compared with operating income of $127.9 million and $225.7 million in the year-earlier periods.

Selling, general and administrative expenses decreased $6.1 million in the second quarter of 2005 and increased $1.2 million in the first six months of 2005, compared with the year-earlier periods. The decrease in the second quarter of 2005 is primarily due to a reduction in employee related expenses offset by the impact of foreign exchange rates and the impact of the acquisition of Disway in the third quarter of 2004. The increase in the first six months of 2005 is primarily due to the impact of foreign exchange rates, investments in Asia/Pacific to accelerate growth in that region, the impact of the acquisition of Disway in the third quarter of 2004, and variable expenses related to incremental sales, offset by the cost savings resulting from the company’s initiatives to be more efficiently organized.

The company recorded a loss on prepayment of debt of $1.7 million ($1.0 million net of related taxes or $.01 per share) and $7.1 million ($4.2 million net of related taxes or $.04 and $.03 per share on a basic and diluted basis, respectively) for the second quarter of 2005 and 2004, respectively, and $2.1 million ($1.2 million net of related taxes or $.01 per share) and $30.8 million ($18.4 million net of related taxes or $.17 and $.15 per share on a basic and diluted basis, respectively) for the six months ended July 1, 2005 and June 30, 2004, respectively.

During the second quarter of 2005, the company repurchased, through a series of transactions, $80.8 million accreted value of its zero coupon convertible debentures due in 2021, which could have been initially put to the company in February 2006 (“convertible debentures”). The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $1.7 million ($1.0 million net of related taxes or $.01 per share), of which $.3 million was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $.6 million from the dates of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchases.

During the first six months of 2005, the company repurchased, through a series of transactions, $94.0 million accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $2.1 million ($1.2 million net of related taxes or $.01 per share), of which $.5 million was cash, and is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense will be reduced by approximately $.9 million from the dates of repurchase through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

During the second quarter of 2004, the company repurchased, through a series of transactions, $141.7 million accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $7.1 million ($4.2 million net of related taxes or $.04 and $.03 per share on a basic and diluted basis, respectively) of which $4.7 million was cash, and was recognized as a loss on prepayment of debt. As a result of these transactions, interest

expense will be reduced by approximately $7.7 million from the dates of repurchase through the 2006 put date, based on interest rates in effect at the time of the repurchases.

During the first six months of 2004, the company repurchased, through a series of transactions, $233.6 million accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $11.9 million ($7.1 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), of which $8.2 million was cash. Also during the first six months of 2004, the company repurchased and/or redeemed, through a series of transactions, $250.0 million principal amount of its 8.7% senior notes, due in October 2005. The premium paid and the related deferred financing costs written-off upon the repurchase and/or redemption of this debt, net of the gain recognized by terminating the related interest rate swaps, aggregated $18.9 million ($11.3 million net of related taxes or $.10 and $.09 per share on a basic and diluted basis, respectively), of which $18.4 million was cash, and was recognized as a loss on prepayment of debt. The aggregate of these charges is recognized as a loss on prepayment of debt. As a result of these transactions, net interest expense would be reduced by approximately $33.4 million from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

At July 1, 2005, the company determined that an other-than-temporary decline in the fair value of its investment in Marubun Corporation occurred and, accordingly, recognized a loss of $3.0 million ($.03 per share) on the write-down of this investment.

Net interest expense decreased $.1 million in the second quarter of 2005, compared with the year-earlier period. Net interest expense decreased $6.7 million or 12.2% in the first six months of 2005, compared with the year-earlier period, primarily as a result of lower debt balances. During the first six months of 2005, the company prepaid approximately $94.0 million of debt. During 2004, the company prepaid approximately $570.0 million of debt.

The company recorded an income tax provision of $31.6 million and $59.4 million on income before income taxes and minority interest of $90.2 million and $175.3 million for the second quarter and first six months of 2005, respectively. In the comparable year-earlier periods, the company recorded an income tax provision of $30.0 million and $44.1 million on income before income taxes and minority interest of $97.3 million and $141.0 million, respectively. The income taxes recorded for the second quarter and first six months of 2005 are impacted by the aforementioned restructuring charges and loss on prepayment of debt. The income taxes recorded for the first six months of 2005 were also impacted by the aforementioned acquisition indemnification credit. There was no tax benefit provided on the aforementioned write-down of an investment during the second quarter of 2005 as this unrealized capital loss is not deductible for tax purposes. The income taxes recorded for the second quarter and first six months of 2004 were impacted by the aforementioned restructuring charge (gain) and loss on prepayment of debt. The company’s income tax provision and effective tax rate is primarily impacted by, among other factors, the statutory tax rates in the countries in which it operates, and the related level of income generated by these operations.

The company’s tax rate in 2005 reflects the accelerating growth in earnings in the United States, which has one of the highest tax rates in the regions the company serves when United States federal and state income taxes are combined.

The company recorded net income of $58.4 million in the second quarter of 2005 and $115.6 million in the first six months of 2005, compared with $66.9 million and $96.4 million in the comparable year-earlier periods. Included in the results for the second quarter and first six months of 2005 are the previously discussed restructuring charges of $2.9 million and $5.5 million, respectively, loss on prepayment of debt of

$1.0 million and $1.2 million, respectively, and loss of $3.0 million on the write-down of an investment. Also included for the first six months of 2005 is the previously discussed acquisition indemnification credit of $1.3 million. Included in the results for the second quarter and first six months of 2004 are the previously discussed restructuring gain of $1.9 million and restructuring charges of $4.6 million, respectively, and loss on prepayment of debt of $4.2 million and $18.4 million, respectively.

At July 1, 2005 and December 31, 2004 the company had cash, cash equivalents, and short-term investments of $616.2 million and $463.9 million, respectively. The net amount of cash generated by the company’s operating activities during the six months ended July 1, 2005 was $216.1 million primarily from earnings from operations, adjusted for non-cash items, and a reduction in net working capital as a percentage of sales. The increase in accounts receivable in the second quarter of 2005, resulting from increased sales, was offset by a decrease in inventories and an increase in accounts payable. The net amount of cash provided by investing activities during the six months ended July 1, 2005 was $155.3 million, including $158.6 million for net proceeds from the sale of short-term investments and $3.7 million of other activities, offset, in part, by $4.6 million for various capital expenditures and $2.5 million for consideration paid for acquired businesses. The net amount of cash used for financing activities during the six months ended July 1, 2005 was $51.4 million, including $94.5 million used to repurchase convertible debentures, offset, in part, by $35.6 million for proceeds from the exercise of stock options and a change in short-term borrowings of $9.5 million. The effect of exchange rate changes on cash was a decrease of $9.1 million.

The net amount of cash used for the company’s operating activities during the six months ended June 30, 2004 was $159.8 million, primarily a result of higher working capital requirements resulting from increased sales offset by earnings from operations, adjusted for non-cash items, primarily reflecting depreciation and amortization, as well as the accretion of discounts. The net amount of cash used for investing activities during the six months ended June 30, 2004 was $7.2 million, including $12.2 million for consideration paid for the final portion of the acquisition of IED and $11.7 million for various capital expenditures, offset, in part, by proceeds of $8.3 million from a note receivable and net proceeds of $8.6 million from the sale of the Brookhaven, New York logistics center. The net amount of cash used for financing activities during the six months ended June 30, 2004 was $186.9 million, primarily reflecting $268.4 million used to repay senior notes and $241.8 million used to repurchase convertible debentures, offset, in part, by the net proceeds of $312.8 million from the sale of common stock in February 2004.

The company historically has maintained a significant investment in accounts receivable and inventories. As a percentage of total assets, accounts receivable and inventories were approximately 62.3% and 63.0% at July 1, 2005 and December 31, 2004, respectively.

Net cash provided by operating activities increased by $375.9 million for the six months ended July 1, 2005, as compared with the year-earlier period, primarily reflecting the company’s initiatives to manage working capital more efficiently. Working capital as a percentage of sales was 18.3% in the second quarter of 2005 compared with 20.7% in the second quarter of 2004.

Net cash used for operating activities increased by $186.2 million for the six months ended June 30, 2004, as compared with the year-earlier period, primarily due to higher working capital requirements resulting from increased sales offset by earnings from operations, adjusted for non-cash items.

In June 2005, the company signed an agreement to acquire the component distribution business of Connektron Pty. Ltd (“Connektron”), a leading passive, electromechanical, and connectors distributor in Australia and New Zealand. The acquisition of the component distribution business of Connektron, which was completed on July 1, 2005, has been accounted for as a purchase transaction, and accordingly, its results of operations will be included in the consolidated results of the company from the date of acquisition.

During the second quarter of 2005, the company closed on the sale of its Cable Assembly business, a business unit within the company’s NAC group that supplies custom cable assembly and associated contract manufacturing services. The $1.3 million loss resulting from this sale is reflected as a component of restructuring charges.

During the second quarter of 2004, the company received proceeds of $8.3 million from a note receivable and net proceeds of $8.6 million on the sale of its Brookhaven, New York logistics center.

The net amount of cash used for investing activities during the six months ended June 30, 2004 included $12.2 million for consideration paid for the final portion of the acquisition of IED.

In July 2004, the company acquired Disway, an electronic components distributor in Italy, Germany, Austria, and Switzerland. The Disway acquisition has been accounted for as a purchase transaction, and accordingly, Disway’s results of operations have been included in the consolidated results of the company from the date of acquisition.

As a result of certain acquisitions, the company may be contractually required to purchase the shareholder interest held by others in its majority (but less than 100%) owned subsidiaries. The payments for such purchases, which are dependent upon the exercise of a put or call option by either party, are based upon a multiple of earnings over a contractually determined period and, in certain instances, capital structure. There are no expiration dates for these agreements. The terms of these agreements generally provide no limitation to the maximum potential future payments; however, in most instances the amount to be paid will not be less than the pro-rata net book value (total assets minus total liabilities) of the subsidiary. There were no such payments made during the first six months of 2005 or 2004. If the put or call options on outstanding agreements were exercised, such payments would be approximately $11.0 million at both July 1, 2005 and December 31, 2004, which would be capitalized as cost in excess of net assets of companies acquired partially offset by the carrying value of the related minority interest. As these payments are based on the future earnings of the acquired companies, the amounts will change as the performance of these subsidiaries changes.

Capital expenditures were $4.6 million in the first six months of 2005 compared with $11.7 million in the first six months of 2004.

Cash flow used for financing activities was $51.4 million in the first six months of 2005. Cash flow used for financing activities was $186.9 million in the first six months of 2004.

During the first six months of 2005, the company repurchased, through a series of transactions, $94.0 million accreted value of its convertible debentures. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $2.1 million ($1.2 million net of related taxes or $.01 per share), of which $.5 million was cash. As a result of these transactions, net interest expense will be reduced by approximately $.9 million from the dates of repurchase through the earliest maturity date, based on interest rates in effect at the time of the repurchases. Also in the first six months of 2005, the company received proceeds from the exercise of stock options of $35.6 million and the change in short-term borrowings was $9.5 million.

During the first six months of 2004, the company repurchased, through a series of transactions, $233.6 million accreted value of its convertible debentures. The company made this repurchase primarily with a portion of the proceeds from the sale of common stock in February 2004. The related loss on the repurchases, including the premium paid and the write-off of related deferred financing costs, aggregated $11.9 million ($7.1 million net of related taxes or $.07 and $.06 per share on a basic and diluted basis, respectively), of which $8.2 million was cash. Also during the first six months of 2004, the company repurchased and/or redeemed, through a series of transactions, $250.0 million principal amount of its 8.7% senior notes, due in October 2005. The premium paid and the related deferred financing costs written-off upon the repurchase and/or redemption of this debt, net of the gain recognized by terminating the related interest rate swaps, aggregated $18.9 million ($11.3 million net of related taxes or $.10 and $.09 per share on a basic and diluted basis, respectively), of which $18.4 million was cash. As a result of these transactions,

net interest expense will be reduced by approximately $33.4 million from the dates of repurchase and/or redemption through the earliest maturity date, based on interest rates in effect at the time of the repurchases.

The company has a $550.0 million asset securitization program (the “program”). At July 1, 2005 and December 31, 2004, there were no receivables sold to and held by third parties under the program, and as such, the company had no obligations outstanding under the program. The company has not utilized the program since June 2001. The program’s facility fee is .2%.

In June 2005, the company amended and restated its revolving credit agreement and, accordingly, increased the facility size from $450.0 million to $600.0 million. The company had no outstanding borrowings under the revolving credit facility at July 1, 2005 and December 31, 2004. The $600.0 million revolving credit facility matures in June 2010, for which the company pays a facility fee of .175% per annum.

The net amount of cash used for financing activities during the six months ended June 30, 2004 included net proceeds of $312.8 million from the sale of common stock in February 2004.

Based on the aforementioned restructuring and integration activities, at July 1, 2005, the company has a remaining accrual of $23.0 million, of which $18.5 million is expected to be spent in cash. The expected cash payments are approximately $8.2 million in 2005, $4.8 million in 2006, $1.9 million in 2007, $1.9 million in 2008, and $1.7 million thereafter.

The company’s worldwide operations are subject to local laws and regulations. As previously reported, of particular note at this time are two European Union (“EU”) directives, the first of which is the Restriction of Certain Hazardous Substances Directive (“RoHS”). Effective July 1, 2006, this directive restricts the distribution of products within the EU containing certain substances, including lead. While the enabling legislation of a number of EU member countries has not yet been adopted, it is clear that the company will not be able to sell non-RoHS compliant product to most customers who intend to sell their finished goods in the EU after the effective date. At the present time, much of the company’s inventory contains substances prohibited by the RoHS directive. Upon effectiveness of the RoHS legislation, some of the company’s inventory may become obsolete and unsaleable and, as a result, have to be written off. The company is working closely with its customers and suppliers to minimize this impact. At this time, it is difficult to quantify the financial impact, if any, of such obsolete inventory.

The second directive is the Waste Electrical and Electronic Equipment Directive (“WEEE”), which was supposed to be effective August 13, 2005 in all EU Member countries. A number of Member countries, however, have not yet enacted legislation or delayed their legislation’s effective date. Under WEEE, a manufacturer or importer will be required, at its own cost, to take back and recycle all of the products it manufactured in or imported into the EU.

Both directives will affect the worldwide electronics, and electronic components industries, and collaborative efforts among suppliers, distributors and customers to develop compliant processes are continuing. Pending those developments and the final enactment of enabling legislation for all EU Member countries, it is not possible to estimate the cost of compliance, if any.

The company has contractual obligations for long-term debt, interest on long-term debt, capital leases, operating leases, purchase obligations, and certain other long-term liabilities that were summarized in a table of Contractual Obligations in the company’s Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material changes to the contractual obligations of the company, outside of the ordinary course of the company’s business, since December 31, 2004.

The company does not have any off-balance sheet financing or unconsolidated special purpose entities.

The company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates, including those related to uncollectible receivables, inventories, intangible assets, income taxes, restructuring and integration costs, and contingencies and litigation, on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The company believes there have been no significant changes, during the quarterly period ended July 1, 2005, to the items disclosed as Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the company’s Annual Report on Form 10-K for the year ended December 31, 2004.

See Note B in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the anticipated dates of adoption and effects on results of operations and financial condition.

This report includes forward-looking statements that are subject to certain risks and uncertainties which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, changes in product supply, pricing, customer demand, competition, other vagaries in the electronic components and computer products markets, changes in relationships with key suppliers, the effects of additional actions taken to lower costs, and the company’s ability to generate additional cash flow. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.

There have been no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company’s Annual Report on Form 10-K for the year ended December 31, 2004, except as follows:

The notional amount of the foreign exchange contracts at July 1, 2005 and December 31, 2004 was $232.8 million and $224.7 million, respectively. The carrying amounts, which are nominal, approximated fair value at July 1, 2005 and December 31, 2004. The translation of the financial statements of the non-United States operations is impacted by fluctuations in foreign currency exchange rates. The increase in consolidated sales and operating income was impacted by the translation of the company’s international financial statements into U.S. dollars which resulted in increased sales of $69.0 million and increased operating income of $4.6 million for the six months ended July 1, 2005, compared with the year-earlier period, based on 2004 sales at the average rate for 2005. Sales and operating income would have decreased by approximately $156.9 million and $6.8 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in the first six months of 2005. This amount was determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the company’s international operations.

At July 1, 2005, approximately 62% of the company’s debt was subject to fixed rates, and 38% of its debt was subject to floating rates. A one percentage point change in average interest rates would not have a material impact on interest expense, net of interest income, in the first six months of 2005. This was determined by considering the impact of a hypothetical interest rate on the company’s average floating rate on investments and outstanding debt. This analysis does not consider the effect of the level of overall economic activity that could exist. In the event of a change in the level of economic activity, which may adversely impact interest rates, the company could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that might be taken and their possible effects, the sensitivity analysis assumes no changes in the company’s financial structure.

The company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of July 1, 2005. Based on such evaluation, they have concluded that, as of July 1, 2005, the company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no changes in the company’s internal control over financial reporting or in other factors that has or is reasonably likely to materially affect the company’s internal control over financial reporting during the period covered by this quarterly report.

Item 6. Exhibits

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.