ARRIS GROUP, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2005
of
ARRIS GROUP, INC.
A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 000-31254
3871 Lakefield Drive
Suwanee, GA 30024
(770) 622-8400
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value Nasdaq Global
Market System
Preferred Stock Purchase Rights Nasdaq Global Market
System
ARRIS Group, Inc. is a well-known seasoned issuer.
ARRIS Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has
been subject to such filing requirements for the past
90 days.
ARRIS Group, Inc. is unaware of any delinquent filers pursuant
to Item 405 of
Regulation S-K.
ARRIS Group, Inc. is a large accelerated filer and is not a
shell company.
The aggregate market value of ARRIS Group, Inc.s Common
Stock held by non-affiliates as of June 30, 2005 was
approximately $904.3 million (computed on the basis of the
last reported sales price per share of such stock of $8.71 on
the Nasdaq Global Market System). For these purposes, directors,
officers and 10% shareholders have been assumed to be affiliates.
As of February 28, 2006, 106,432,269 shares of ARRIS
Group, Inc.s Common Stock were outstanding.
Portions of ARRIS Group, Inc.s Proxy Statement for its
2006 Annual Meeting of Stockholders are incorporated by
reference into Part III.
TABLE OF CONTENTS
i
PART I
As used in this Annual Report, we, our,
us, the Company, and ARRIS
refer to Arris Group, Inc. and our consolidated subsidiaries,
including Arris International, Inc. (formerly ANTEC Corporation)
and Arris Interactive L.L.C., unless the context otherwise
requires.
General
Our principal executive offices are located at 3871 Lakefield
Drive, Suwanee, Georgia 30024, and our telephone number is
(770) 622-8400. We also maintain a website at
www.arrisi.com. On our website we provide links to copies of the
annual, quarterly and current reports that we file with the
Securities and Exchange Commission, any amendments to those
reports, and all Company press releases. Investor presentations
are also frequently posted on our website. Copies of our codes
of ethics and the charters of our board committees also are
available on our website. We will provide investors copies of
these documents in electronic or paper form upon request, free
of charge.
Glossary of Terms
Below are commonly used acronyms in our industry and their
meaning:
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Acronym |
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Terminology |
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CAM
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Cable Access Module |
CBR
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Constant Bit Rate |
CLEC
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Competitive Local Exchange Carrier |
CMTS
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Cable Modem Termination System |
CPE
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Customer Premises Equipment |
DBS
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Digital Broadcast Satellite |
DMTS
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Digital Multimedia Termination System |
DOCSIS
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Data Over Cable Service Interface Specification |
DSG
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DOCSIS Set-Top Gateway |
DSL
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Digital Subscriber Line |
E-MTA
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Embedded Multimedia Terminal Adapters |
HDT
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Host Digital Terminal |
HFC
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Hybrid Fiber-Coaxial |
ILEC
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Incumbent Local Exchange Carrier |
IP
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Internet Protocol |
IPTV
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Internet Protocol Television |
Mbps
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Megabits per Second |
MPEG-2
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Moving Picture Experts Group, Standard No. 2 |
M-CMTS
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Modular CMTS |
MSO
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Multiple Systems Operator |
MTA
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Multimedia Terminal Adapter |
NGNA
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Next Generation Network Architecture |
NIU
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Network Interface Units |
PCT
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Patent Convention Treaty |
QAM
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Quadrature Amplitude Modulation |
RF
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Radio Frequency |
VoIP
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Voice over Internet Protocol |
VPN
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Virtual Private Network |
1
Industry Overview
We develop and supply equipment and technology for cable system
operators and other broadband service providers worldwide that
allows them to deliver a full range of integrated voice, video
and data services to their subscribers. Further, we are a
leading supplier of infrastructure products used by cable system
operators in the build-out and maintenance of hybrid
fiber-coaxial, or HFC, networks.
We provide our products and equipment principally to the cable
television market and, more specifically, to operators of
multiple cable systems, or MSOs, on a worldwide basis. In recent
years, the technology used in cable systems has evolved
significantly. Historically, cable systems offered only one-way
analog video service. Due to technological advancements and
large investments in infrastructure upgrades, these systems have
evolved to become two-way broadband systems delivering
high-speed, high-volume, interactive services. MSOs have over
the years aggressively upgraded their networks to
cost-effectively support and deliver enhanced video, voice and
data services. As a result, cable operators have been able to
use broadband systems to increase their revenues by offering
enhanced interactive subscriber services, such as high-speed
data, telephony, digital video and video on demand, and to
effectively compete against other broadband communications
technologies, such as digital subscriber line (DSL), local
multiport distribution service, direct broadcast satellite,
fiber to the home, and fixed wireless. Delivery of enhanced
services also has helped MSOs offset slowing basic video
subscriber growth, reduce their subscriber churn and compete
against alternative video providers; in particular, direct
broadcast satellite, or DBS.
A key factor supporting the growth of broadband systems is the
powerful growth of the Internet. Rapid growth in the number of
Internet users, their desire for ever higher internet access
speeds, and more high-volume interactive services have created
demand for our products. Another key factor supporting the
growth of broadband systems is the evolution of video services
being offered to consumers. Video on demand and high definition
television are two key video services expanding the use of
MSOs broadband systems. The increase in volume and
complexity of the signals transmitted through the network and
emerging competitive pressures from telephone companies with
digital subscriber line and fiber to the premises offerings are
pushing cable operators to deploy new technologies as they
evolve. Further, cable operators are looking for products and
technologies that are flexible, cost effective, easily
deployable and scalable to meet future demand. Because the
technologies are evolving and the services delivered are growing
in complexity and volume, cable operators need equipment that
provides the necessary technical capability at a reasonable cost
at the time of initial deployment and the flexibility later to
accommodate technological advances and network expansion.
Capital spending by MSOs on their networks has shifted over the
past several years. MSOs have largely completed the upgrades and
re-builds required to support advanced services and are now in
the process of enabling those services. As a result, spending
has shifted away from HFC plant equipment and materials to
head-end and customer premises equipment that enable high speed
data, telephony, and digital video services. Global capital
spending by cable operators declined to a low of
$25 billion in 2003 but grew to an estimated
$28 billion in 2004 and $32 billion in 2005 because of
increased spending on telephony, high speed data, and digital
video driven by competitive pressures. Spending on this type of
equipment is expected to continue to grow for the foreseeable
future (Infonetics Research, Canadian Imperial Bank of Commerce,
ARRIS estimates). Also, maintenance and extension spending has
grown steadily, and is expected to continue growing because of
the installed base of the more sophisticated equipment required
to support the advanced services.
One of the fastest growing services is cable telephony. The data
below is Yankee Groups 2005 estimates for the
U.S. market, and illustrates the expected growth in
subscribers for this service. We expect that the international
market for cable telephony should experience similar growth.
2
Cable telephony allows cable operators to offer their customers
local and long distance residential telephone service. It is
presently offered by cable operators using two distinct
technologies: constant bit rate, or CBR, technology and
PacketCable®
certified internet protocol, or IP, technology. CBR technology
utilizes the switched-circuit technology currently used in
traditional phone networks. This is a proven carrier-class
telephony solution that enables operators to directly compete
with incumbent telephone carriers with voice services and class
features, which include caller ID, call waiting and three-party
conferencing.
PacketCable®
certified Voice over IP, or Cable VoIP, permits cable operators
to utilize the ubiquitous IP protocol to deliver toll-quality
cable telephony. IP provides an extremely cost effective
mechanism to the cable operators to provide voice services. Due
to the significant value a bundled voice, video and data service
offers a cable operator, and the rapid maturation of the VoIP
technology in 2003 and 2004; 2005 was a breakout year for
deployment of IP based voice services. The wide reception within
the cable operators of this technology could potentially
cannibalize the deployment of data-only cable modems because the
customer premises devices that support VoIP also offer high
speed data access. We are a leading supplier of both head-end
and customer premises equipment for VoIP services over cable.
Data and VoIP services are governed by a set of technical
specifications promulgated by
CableLabs®
in North America and tComLabs in Europe. While the
specifications developed by these two bodies necessarily differ
in a few details in order to accommodate the differences in HFC
network architectures between North America and Europe, a
significant feature set is common. The primary data standard
specification for cable operators in North America is entitled
DOCSIS®.
Release 2.0 of this specification is the current governing
standard for data services in North America. The parallel
release for European operators is Euro-DOCSIS Release 2.0.
DOCSIS 2.0 builds upon the capabilities of DOCSIS 1.1 and adds
additional throughput in the upstream portion of the cable
plant from the consumer out to the Internet. In
addition to the DOCSIS standards that govern data transmission,
CableLabs has defined the
PacketCabletm
specifications for VoIP. This specification defines the
interfaces between network elements such as cable modem
termination systems, or CMTSs, multimedia terminal adapters, or
MTAs, gateways and call management servers to provide high
quality IP telephony service over the HFC network.
To date, MSOs have offered digital television signals to
subscribers using proprietary technologies offered by a limited
set of vendors, led principally by Cisco and Motorola. The
technologies that have enabled high-speed data and VoIP across
the cable plant are, with modification, also applicable to
video. MSOs are beginning to investigate Video over IP as an
alternative and are engaging the vendor community, including
3
ARRIS, in discussions. The advantage to the operator is to
migrate to one common backbone/technology for all services, and
to eliminate proprietary video technology. We actively are
developing products to compete in the emerging Video over IP
market.
Our Principal Products
A broadband cable system consists of three principal components:
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Headend. The headend is a central point in the cable
system where signals are received via satellite and other
sources. Interfaces that connect the Internet and public
switched telephony networks are located in the headend. The
headend organizes, processes and retransmits those signals
through the distribution network to subscribers. |
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Distribution Network. The distribution network consists
of fiber optic and coaxial cables and associated optical and
electronic equipment that allocates the combined signals from
the headend and transmits them throughout the cable system to
nodes. |
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Subscriber Premises. Cable drops extend from nodes to
subscribers homes and connect to a subscribers
television set, set-top box, telephony network interface device
or high speed cable modem. |
We provide cable system operators with a comprehensive product
offering. We divide our product offerings into two categories:
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Broadband: |
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CBR telephony products, including Host Digital
Terminals (HDTs) in the headend and Network Interface Units
(NIUs) at the subscriber premises |
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VoIP telephony products, including CMTS |
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High-speed data products, including CMTS |
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Video/ IP headend products |
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Operational support systems |
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System integration services |
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Supplies & CPE: |
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Infrastructure products for fiber optic or coaxial
networks built under or above ground, including cable and
strand, vaults, conduit, drop materials, tools, connectors, and
test equipment |
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Subscriber cable modems and
E-MTAs
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Voice over IP and Data Products |
Headend The heart of a Voice over IP headend
is a cable modem termination system, or CMTS. A CMTS, along with
a call agent, a gateway, and provisioning systems provide the
ability to integrate the Public-Switched Telephone Network, or
PSTN and high-speed data services over an HFC network. The CMTS
provides the software and hardware to allow IP traffic from the
Internet or traffic used in VoIP telephony to be converted for
use on HFC networks. It is also responsible for initializing and
monitoring all cable modems connected to the HFC network. We
provide two products used in the cable operators headend
that provide VoIP and high-speed data services to residential or
business subscribers. These are the
Cadant®
C4tm
CMTS, and the
Cadant®
C3tm
CMTS:
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The
Cadant®
C4 CMTS is a high density, chassis-based product that provides
robust built-in redundancy to ensure carrier-grade performance.
It is PacketCable 1.0, DOCSIS 2.0 and
Euro-DOCSIS 2.0 qualified. Each chassis supports up to 32
downstream channels and 192 upstream channels. Three
C4 chassis can be installed in a single seven foot tall
cabinet, making it one of the highest density scaleable headend
products currently available. It can provide high-speed data and
VoIP services in headends that service thousands to hundreds of
thousands of subscribers. The C4 CMTS is deployed by cable
operators in North America, Europe, Latin America, and Asia. |
4
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The
Cadant®
C3 CMTS is a rack mounted, single downstream-based product that
provides high performance packet handling in an extremely
compact package. It is DOCSIS 2.0 and Euro-DOCSIS 2.0
qualified. Each unit supports one downstream channel and up to 6
upstream channels with a selectable choice of modulation
schemes. The C3 CMTS supports markets worldwide with
DOCSIS, Euro-DOCSIS and Japanese DOCSIS parameters that are
selectable via software. The C3 CMTS is in wide use in
North America, Europe, and Asia. |
Subscriber Premises Subscriber premises
equipment includes DOCSIS 2.0 certified cable modems for
high-speed data applications as well as Euro-DOCSIS certified
versions and PacketCable Certified
E-MTAs for VoIP
applications in both DOCSIS and Euro-DOCSIS networks. The
PacketCable solution builds on DOCSIS 1.1 and its quality
of service enhancements to support lifeline telephony deployed
over HFC networks. Our
Touchstonetm
product line provides carrier-grade performance to enable
operators to provide all data, telephony and video services on
the same network using common equipment. The Touchstone product
line consists of the Touchstone 450 series of cable modems, the
Touchstone 402 series of telephony modems for indoor
applications and the Touchstone Telephony Port 40x for outdoor
deployments.
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The Touchstone CM450A Cable Modem is DOCSIS 2.0 certified,
which gives operators the potential to offer much higher
upstream data rates. DOCSIS 2.0 is backward compatible with
DOCSIS 1.0 and 1.1 headend systems. The Touchstone 450B
Cable Modem provides the same features as the CM450A but is
Euro-DOCSIS certified. The Touchstone 450C Cable Modem provides
the same features as the CM450A but is compatible with Japanese
standards. ARRIS also manufactures cable modems that have been
homologated in other countries, including Chile, Argentina,
Israel, Australia, Hong Kong, and Korea. |
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The Touchstone TM402A is a PacketCable and DOCSIS 2.0
indoor E-MTA that
supports enhanced services of high-speed data and up to two
lines of IP telephony in a single unit. The TM402As
innovative, compact design provides for easy installation. This
product is also available in a Euro-DOCSIS version, the
Touchstone TM402B, as well as one designed specifically for the
unique frequency plan of Japanese cable systems, the Touchstone
TM402C. |
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The Touchstone TM401A is a single line, PacketCable and
DOCSIS 2.0 indoor
E-MTA that is
specifically designed to compete at the lowest possible price
point. This product is also available in a Euro-DOCSIS version,
the Touchstone TM401B. |
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The Touchstone TM402P and TM402G are PacketCable and
DOCSIS 2.0 certified
E-MTAs that provide all
of the features of the TM402A with the added benefit of
innovative, integrated lithium-ion battery
back-up systems
enabling the service provider to guarantee service in the event
of a power outage. This allows them to compete directly with the
incumbent local exchange carrier, or ILEC. This product line was
the first on the market to incorporate lithium-ion battery
technology. The resulting products provide extended battery
back-up time over older
lead-acid battery designs. |
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The Touchstone TP402A/404A are PacketCable and DOCSIS 2.0
E-MTAs in a
rugged, environmentally-hardened enclosure used in outdoor
applications. The TP402A/404A provide high-speed data access and
two (TP402A) or four (TP404A) lines of carrier-grade VoIP for
service providers wishing to maintain the demarcation point on
the outside of the residence. This allows them to more closely
parallel the deployment model used by ILECs, which makes service
and maintenance easier over the long term. |
Headend We market our Video/IP headend
equipment under the brand name of
Keystonetm.
The first Keystone product for the headend is the Keystone
D5tm
Digital Multimedia Termination System
(DMTStm).
The
Keystonetm
D5 converts digital video and IP data into radio frequency
signals that can be transmitted on the cable service
providers hybrid fiber-coax plant. The
Keystonetm
D5 is compatible with DOCSIS 2.0 cable modems and MPEG-2 set top
boxes. It is a highly dense device with 48 channels in two rack
units (3.5 inches) of rack space. The Keystone D5 is ideal
for service providers deploying video on
5
demand service where many unicast channels are required. The
Keystone D5 is also forward compatible with emerging modular
CMTS
(M-CMTStm)
standards being developed by CableLabs in 2005-2006. A cable
service provider can deploy the Keystone D5 DMTS today for
MPEG-2 digital video applications and covert it to modular CMTS
and IPTV applications in the future.
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Constant Bit Rate Products |
Headend We market our headend equipment under
the brand name of
Cornerstone®
Voice. Cornerstone Voice products for the headend include host
digital terminals, or HDTs. An HDT is a device that provides the
interfaces, controls and communication channels between
public-switched networks and the HFC network. Because the
Cornerstone Voice system is easy to implement, economical and
scaleable, network operators can offer telephony at low initial
penetration levels and expand as customer demand increases. We
design this equipment to meet the strict performance and
reliability specifications, and demanding environmental
requirements expected of a lifeline, carrier-class residential
telephone service. This reliability and robust design enables
our customers to compete with the incumbent local telephone
company with an equivalent, and often superior, service offering.
Subscriber Premises The key equipment at
subscriber premises is a network interface unit, NIU. We market
our NIUs under the brand name Cornerstone Voice
Port®.
The Cornerstone Voice Port is the most widely deployed of our
CBR NIU. Voice Port units operate in conjunction with the
Cornerstone HDT to provide cable telephony while also
maintaining a subscribers existing video service.
Operators who are also deploying high-speed data services, such
as our Keystone,
Cadant®
and Touchstone brands, may deploy cable modems inside the home
or work premises and multiplex the data service signals onto the
same HFC network as the Cornerstone Voice application. This
combination of solutions provides subscribers with voice and
high-speed data functionality from the same operator. The Voice
Port portfolio includes a two-line single-family residence Voice
Port NIU, a two-line indoor Voice Port NIU with an integrated
backup battery, a four-line Voice Port NIU, and a
twenty-four-line modular Voice Port NIU for multiple dwelling
unit applications.
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Operational Support Systems |
Operational support systems, or OSS, are a group of networked
software suites that enable operators to automate many of the
functions required to install, provision, manage and grow a
subscriber base while managing, maintaining and upgrading the
network for the multiple services offered. Without OSS
automation, operators cannot manage subscriber growth and
network operations effectively.
We interoperate with leading suppliers in the industry to
provide operators with the ability to automatically provision
headend and subscriber premises equipment to reflect
subscribers parameters, provide key data for third-party
billing software, and complete maintenance operations. The
Cadant®
G2
IMStm
software supports configuration, performance and fault
management of the
Cadant®
C4 CMTS through
easy-to-use graphical
user interfaces. A single
Cadant®
G2 IMS server can support up to 100
Cadant®
C4 CMTS chassis and 20 simultaneous client applications.
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System Integration Services |
We are a full service system integrator for converged services
over HFC networks. We historically have been a pioneer in the
voice and data over HFC business and have the experience and
infrastructure in place to help operators launch these services.
System integration offers the service provider a fully
integrated solution that has been tested for
end-to-end
interoperability, performance, capacity, scalability, and
reliability prior to ever being installed at the customer
facility. We offer the operators coordination of the project
management for the suppliers and solution assurance services for
the long term, including upgrade support, system audits, and
configuration management. Our systems integration service
enables operators to rapidly deploy new services on their
networks with the assurance that all of the components of the
network will interoperate seamlessly.
6
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Cable Plant Infrastructure Products |
We offer a variety of products that are used by MSOs to build
and maintain their cable plants. Our products are complemented
by our extensive
channel-to-market
infrastructure, which is focused on providing efficient delivery
of products from stocking or drop-ship locations.
We believe the strength of our products is our broad selection
of trusted name-brand products and strategic proprietary lines
and our experience in distribution. Our name-brand products are
manufactured to our specifications by manufacturing partners.
These products include taps, line passives, house passives and
premises installation equipment marketed under our Regal brand
name;
MONARCHtm
aerial and underground plant construction products and
enclosures; Digicon premium F-connectors; and FiberTel fiber
optic connectivity devices and accessories. Through our product
selection, we are able to address substantially all broadband
infrastructure applications, including fiber optics, outside
plant construction, drop and premises installation, and signal
acquisition and distribution.
We also resell products from hundreds of strategic
supplier-partners, which include widely recognized brands to
small specialty manufacturers. Through our strategic
supplier-partners, we also supply ancillary products like tools
and safety equipment, testing devices and specialty electronics.
Our customers benefit from inventory management and logistics
capabilities and services. These services range from
just-in-time delivery,
product kitting, specialized electronic interfaces,
and customized reporting, to more complex and comprehensive
supply chain management solutions. These services complement our
products offerings with advanced
channel-to-market and
logistics capabilities, extensive product bundling
opportunities, and an ability to deliver carrier-grade
infrastructure solutions in the passive transmission portions of
the network. The depth and breadth of our inventory and service
capabilities enable us to provide our customers with single
supplier flexibility.
Sales and Marketing
We are positioned to serve customers worldwide with both a
strong sales force organization and supporting sales engineering
team. Our sales engineering team can assist customers in system
design and specification and can promptly be on site to resolve
any problems that may arise during the course of a project. We
maintain sales offices in Colorado, Georgia and Pennsylvania in
the United States, and in Chile, Hong Kong, Ireland, Japan,
Korea, the Netherlands, and Spain. Additionally, we have
partnership agreements in various countries and regions with
value-added resellers, or VARs, which extend our sales presence
into markets without established sales offices. We also maintain
an inside sales group that is responsible for regular phone
contact, prompt order entry, timely and accurate delivery, and
effective sales administration for the many changes frequently
required in any substantial rebuild or upgrade activity.
Our marketing and product management teams focus on each of the
various product categories and work with our engineers and
various technology partners on new products and product
enhancements. These teams are responsible for inventory levels
and pricing, delivery requirements, analysis of market demand,
and product positioning and advertising.
We are committed to providing superior levels of customer
service by incorporating innovative customer-centric strategies
and processes supported by business systems designed to deliver
differentiating product support and value-added services. We
have implemented advanced customer relationship management
programs to bring additional value to our customers and provide
significant value to our operations management. Through these
information systems, we can provide our customers with product
information ranging from operational manuals to the latest in
order processing information. Through on-going development and
refinement, these programs will help to improve our productivity
and enable us to further improve our customer-focused services.
Customers
The vast majority of our sales are to cable system operators
worldwide. We also sell products to incumbent local exchange
carriers, or ILEC, competitive local exchange carriers, or
CLECs, and other
7
businesses. Our broadband products can be deployed not only by
cable system operators, but also by traditional telephone
companies, electric utilities and others if they are using HFC
designs. As the U.S. cable industry continued a trend
toward consolidation, the six largest MSOs controlled over 87%
of the U.S. cable market (according to Dataxis in the third
quarter 2005), thereby making our sales to those MSOs critical
to our success.
Our sales are substantially dependent upon a system
operators selection of our equipment, demand for increased
broadband services by subscribers, and general capital
expenditure levels by system operators.
Our four largest customers (including their affiliates, as
applicable) are Comcast, Cox Communications, Liberty Media
International, and Time-Warner Cable. Over the past year,
certain customers beneficial ownership may have changed as
a result of mergers and acquisitions. Therefore the revenue for
our customers for prior periods has been adjusted to include the
affiliates under common control. Our sales to these customers
for 2005, 2004, and 2003 were:
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Years Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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(in millions) | |
Comcast
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$ |
163.3 |
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$ |
126.2 |
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$ |
153.7 |
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% of sales
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24.0 |
% |
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25.8 |
% |
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35.4 |
% |
Cox Communications
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$ |
116.7 |
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$ |
106.3 |
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$ |
104.3 |
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% of sales
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17.2 |
% |
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21.7 |
% |
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24.0 |
% |
Liberty Media International
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$ |
104.4 |
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$ |
84.9 |
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$ |
46.1 |
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% of sales
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15.3 |
% |
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17.3 |
% |
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10.6 |
% |
Time-Warner Cable
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$ |
72.3 |
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$ |
32.5 |
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$ |
14.1 |
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% of sales
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10.6 |
% |
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6.6 |
% |
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3.2 |
% |
No other customer provided more than 10% of total sales for the
years ended December 31, 2005, 2004, or 2003.
Although with some of our customers we have general purchase
agreements, the vast majority of our sales, to those that have
agreements and to our remaining customers, result from purchase
orders or other short-term commitments. A summary of the key
terms of the general purchase agreements with Comcast, Cox
Communications, Liberty Media International and Time Warner
Cable, Inc. are as follows:
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Comcast. In 2005 we extended our non-exclusive agreements
with Comcast to supply Cadant C4 CMTS equipment and to sell
cable television supplies for two-year terms which now expire in
2007. Commercial terms include a requirement to supply product
based on Comcast forecasts (updated quarterly), most favorable
pricing as compared to similarly-situated companies, specific
delivery lead times with penalties for late delivery, and
warranty terms. Included in the C4 CMTS purchase agreement is a
service level agreement which provides Comcast credits for any
delinquent response to service needs with special escalation
guidelines. To date, no penalties have been incurred. Comcast is
not obligated to make any purchases. |
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Cox Communications. We have a non-exclusive agreement
signed January 2006 with Cox Communications to supply all ARRIS
products and services. ARRIS
Touchstonetm
Telephony Modems are to be provided at favorable pricing based
on similarly situated customers that purchase equal or lesser
volumes of the same type product. The agreement has a one-year
term ending on January 1, 2007 and supersedes all previous
agreements. Commercial terms include payment and delivery terms,
warranty terms, penalties for delivery shortfall and delinquent
performance guarantees. To date, no penalties have been
incurred. Cox Communications is not obligated to make any
minimum purchase commitments. |
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Liberty Media International. We have a non-exclusive
agreement with Liberty Media International to supply our entire
line of products for a three-year term expiring in April 2007.
Commercial terms include a requirement to supply product based
on Libertys forecasts (updated quarterly), most favorable |
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pricing as compared to similarly-situated companies, and
specific delivery lead times with penalties for late delivery,
and warranty terms. |
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Time Warner Cable, Inc. We have a non-exclusive agreement
with Time Warner Cable to supply ARRIS
Touchstonetm
Telephony Modems that ends March 31, 2006. We anticipate
that it will be replaced with a new agreement that includes all
ARRIS products and services. Commercial terms in the current
agreement include payment and delivery terms, warranty terms,
penalties for delivery shortfall and delinquent performance
guarantees. |
Research and Development
We are committed to the development of new technology and rapid
innovation in the evolving broadband market. New products are
developed in our research and development laboratories in
Suwanee, Georgia; Cork, Ireland; and Lisle, Illinois. We form
strategic alliances with world-class producers and suppliers of
complementary technology to provide
best-in-class
technologies focused on
time-to-market
solutions.
Research and development expenses in 2005, 2004, and 2003 were
approximately $60.1 million, $63.4 million, and
$62.9 million, respectively. These costs include allocated
common costs associated with information technologies and
facilities.
We believe that our future success depends on rapid adoption and
implementation of broadband local access industry
specifications, as well as rapid innovation and introduction of
technologies that provide service and performance
differentiation. To that end, we believe that the
Cadant®
C4 CMTS product line continues to lead the industry in areas
such as fault tolerance, wire-speed throughput and routing, and
density. The
Cadant®
C3 CMTS is designed for small to mid-size operators who are
looking for a CMTS that delivers superior RF performance while
only occupying one rack unit of space for delivering high-speed
data services, including Virtual Private Network or VPN
services. The
Touchstonetm
product line offers a wide-range of DOCSIS, Euro-DOCSIS and
PacketCable certified products, including Touchstone Cable
Modems, Touchstone Telephony Modems and Touchstone Telephony
Ports. The Keystone D5 DMTS, which began shipping in sample
volumes in the fourth quarter of 2005, is the first dense edge
QAM to provide a forward path to the modular CMTS of the future.
These products are continuously being enhanced to include
innovations that improve subscriber experience and help control
the MSOs operational expenditures.
The following trends impact our current product development
activities:
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Continued development and acceptance of open standards for
delivering voice, video and data; |
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widespread deployment of VoIP; |
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continued increase in
peer-to-peer services
accelerating demand for new services requiring intensive,
high-touch processing and sophisticated management techniques; |
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increasing demand for higher speed broadband connections to the
home; |
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the rapid adoption of video on demand services; |
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innovations in video encode/decode technology making possible
very low bit rate, high quality video streaming; and |
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continued silicon integration and chip fabrication technology
innovations are making possible very low cost, multi-functional
broadband consumer devices, integrating not only telephony but
wireless and video decompression and digital rights management
functionality. |
As a result, our product development activities are directed,
primarily, in the following areas:
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Rapid development and delivery of
Cadant®
C4 and C3 CMTS features, including DOCSIS 2.0 and 3.0, DOCSIS
Set-top Gateway or DSG and PacketCable Multimedia support,
Layer 3 routing enhancements, packet inspection and
filtering features, security enhancements, and increased
downstream/upstream density; |
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expanding the range of next-generation,
lithium-ion-based
Touchstone Telephony Modem
E-MTAs to include
formats to meet country and MSO specific performance and
powering requirements; |
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product cost reductions; and |
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development of network and client technologies to address the
emerging worldwide market opportunities in next generation video
and multimedia delivery (video over IP and PacketCable
multimedia), as embodied in CableLabs DOCSIS 3.0 and
M-CMTS standards
including 100Mbps wideband cable modem service. |
Intellectual Property
We have an aggressive program for protecting our intellectual
property. The program consists of maintaining our portfolio of
67 issued patents (both U.S. and foreign) and pursuing patent
protection on new inventions (currently more than
120 U.S. patent applications and U.S. provisional
patent applications are pending plus 12 pending foreign
applications). In our effort to pursue new patents, we have
created a process whereby employees may submit ideas of
inventions for review by management. The review process
evaluates each submission for novelty, detectability, and
commercial value. Patent applications are filed on the
inventions that meet the criteria. ARRIS has 44 registered or
pending trademarks.
Our patents and patent applications generally are in the areas
of telecommunications hardware and software and related
technologies. Our recent research and development has led to a
number of patent applications in technology related to DOCSIS.
Our January 2002 purchase of the assets of
Cadant®
resulted in the acquisition of 19 U.S. patent applications,
seven Patent Convention Treaty (PCT) applications, five
trademark applications, one U.S. registered trademark and
five registered copyrights. The
Cadant®
patents are in the area of cable modem termination systems. Our
March 2003 purchase of the assets of Atoga Systems resulted in
the acquisition of five U.S. patent applications, which
also have been filed as PCT applications. Our Atoga patents are
in the area of network traffic flow. In August 2003, we acquired
various assets of Com21, Inc. Included in those assets were 16
issued U.S. patents plus 18 U.S. patent applications.
The Com21 patents cover a wide range of technologies, including
wide area networks, fiber and cable systems, ATM networks and
cable modem termination systems. In 2005, we acquired assets of
coaXmedia, Inc. including 7 currently pending U.S. patent
applications, primarily in the field of providing broadband
access in a multi-user environment.
For technology that is not owned by us, we have a program for
obtaining appropriate licenses with the industry leaders to
ensure that the strongest possible patents support the licensed
technology. In addition, we have formed strategic relationships
with leading technology companies that will provide us with
early access to technology and will help keep us at the
forefront of our industry.
We have a program for protecting and developing trademarks. This
program consists of procedures for the use of current trademarks
and for the development of new trademarks. This program is
designed to ensure that our employees properly use those
trademarks and any new trademarks that are expected to develop
strong brand loyalty and name recognition. This is intended to
protect our trademarks from dilution or cancellation.
Product Sourcing and Distribution
Our product sourcing strategy centers on the use of contract
manufacturers to subcontract production. Our largest contract
manufacturers are Solectron, Mitsumi, Plexus Services
Corporation, Flextronics, and ASUSTeK Computer Inc. The
facilities owned and operated by these contract manufacturers
for the production of our products are located in China,
Ireland, Mexico, the Philippines, and the United States.
We have standard agreements with each of these companies. We
provide these vendors with a
6-month or
12-month rolling,
non-binding forecast, and we typically have a minimum of
60 days of purchase orders placed with them for product.
Purchase orders for delivery within 60 days are generally
not cancelable. Purchase orders with delivery past 60 days
generally may be cancelled with penalties in accordance with
each vendors terms. Each contract manufacturer provides us
with an 18-month
warranty.
10
We distribute a substantial number of products that are not
designed or trademarked by us in order to provide our customers
with a comprehensive product offering. For instance, we
distribute hardware and installation products that are
distributed through regional warehouses in North Carolina,
California, Japan, and the Netherlands and through drop
shipments from our contract manufacturers located throughout the
world.
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Components for Our CMTS Product Line |
Broadcom provides several DOCSIS components in our cable modem
termination system, or CMTS, product line. We also make
extensive use of Field Programmable Gate Arrays, or FPGAs,
components in our C4 CMTS.
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Components for Our Customer Premises Equipment Products |
Texas Instruments and Microtune provide components used in some
of our customer premises equipment, or CPE, products (i.e.,
E-MTAs and cable
modems). Our agreements with Texas Instruments include
technology licensing and component purchases. Several of our
competitors have similar agreements with Texas Instruments for
these components.
In addition, we purchase software for operating network and
security systems or sub-systems, and a variety of routing
protocols from different suppliers under standard commercial
terms, including source code buy-out arrangements.
Although alternate supply and technology arrangements similar to
the above are available or could be arranged, an interruption
with any of the above companies could have a material impact on
our business.
Backlog
Our backlog consists of unfilled customer orders believed to be
firm and long-term contracts that have not been completed. With
respect to long-term contracts, we include in our backlog only
amounts representing orders currently released for production
or, in specific instances, the amount we expect to be released
in the succeeding 12 months. The amount contained in
backlog for any contract or order may not be the total amount of
the contract or order. The amount of our backlog at any given
time does not reflect expected revenues for any fiscal period.
Our backlog at December 31, 2005 was approximately
$166.5 million, at December 31, 2004 was approximately
$75.6 million and at December 31, 2003 was
approximately $53.0 million. The increase in backlog from
2004 to 2005 is primarily related to the strong demand for our
E-MTAs.
We believe that all of the backlog existing at December 31,
2005 will be shipped in 2006.
International Opportunities
We sell our products primarily in the United States. Our
international revenue is generated from Asia Pacific, Europe,
Latin America and Canada. The Asia Pacific market primarily
includes China, Hong Kong, Japan, Korea, Singapore, and Taiwan.
The European market primarily includes Austria, Belgium, France,
Germany, Netherlands, Poland, Portugal, Spain, and Switzerland.
The Latin American market primarily includes Argentina, Brazil,
Chile, and Puerto Rico. Sales to international customers were
approximately 27.1%, 25.2% and 18.9% of total sales for 2005,
2004 and 2003, respectively.
We believe that international opportunities exist and continue
to strategically invest in worldwide marketing efforts, which
have yielded some promising results in several regions. We
currently maintain international sales offices in Chile, Hong
Kong, Ireland, Japan, Korea, the Netherlands and Spain.
Competition
All aspects of our business are highly competitive. The
broadband communications industry itself is dynamic, requiring
companies to react quickly and capitalize on change. We must
retain skilled and
11
experienced personnel, as well as deploy substantial resources
to meet the changing demands of the industry. We compete with
national, regional and local manufacturers, distributors and
wholesalers including some companies that are larger than we
are. Our major competitors include:
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Big Band Networks; |
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Cisco Systems, Inc.; |
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Motorola, Inc.; and |
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TVC Communications, Inc. |
In the fourth quarter of 2005, Cisco Systems, Inc. and
Scientific-Atlanta, Inc. announced that Cisco would acquire
Scientific-Atlanta, Inc.. The acquisition was completed in
February 2006. We are uncertain what impact this may have on our
future results, if any.
Various manufacturers, who are suppliers to us of
Supplies & CPE, also sell directly, as well as through
other distributors, into the cable marketplace. In addition,
because of the convergence of the cable, telecommunications and
computer industries and rapid technological development, new
competitors may enter the cable market.
Since the introduction in 1996 of our
Cornerstone®
Voice product line, our customers have deployed over
4.5 million lines, giving us approximately two-thirds of
the overall CBR cable telephony market. We continue to sell this
product to our established customer base. This product will
approach the end of its life over the next few years.
One of the principal growth markets for ARRIS is the high speed
data access market into which we sell cable modem termination
systems, which are the headend product for data and VoIP
services. The largest provider of CMTS products is Cisco, which
took an early lead in the initial deployment of data-only CMTS
products. Cisco is expected to defend its position via both
upgrades to existing products and the introduction of new
products. Cisco continues to be a major competitor in data-only
CMTS markets. Cisco had not previously developed a carrier-grade
telephony CMTS product, but has recently begun to market that
capability. Motorola and Big Band Networks have been emphasizing
routing and carrier-grade performance for their CMTS. During
2005, we believe ARRIS has garnered additional market share in
the newer generation CMTS products that enable both data and
carrier-grade telephony deployments. Consolidation in the CMTS
market continued in 2005. During 2005, Terayon exited the CMTS
business.
The customer premises business consists of cable modems and
voice over IP enabled modems
(E-MTAs). Motorola is
the market leader in cable modems. This position provides them
with volume advantages in manufacturing, distribution and
marketing expense. Motorola also was successful in gaining an
early leader status in
E-MTA sales at MSOs
that were the first to deploy VoIP. However, as this market
accelerated, ARRIS gained significant share. We compete on
product performance and our telephony experience and integration
capabilities. Scientific-Atlanta also has had some success in
the cable modem market. Both Cisco and Terayon also have
E-MTA products and
compete in this market. The
E-MTA market grew
dramatically in 2005 as VoIP deployments accelerated. ARRIS is a
relatively small competitor in the cable modem market, but has a
significantly larger share of the
E-MTA market.
Specifically, ARRIS achieved top
E-MTA market share with
over 40% of the world market in 2005 according to Infonetics
Research.
In the supplies distribution business we compete with national
distributors, like TVC Communications, Inc., and with several
local and regional distributors. Product breadth, price,
availability and service are the principal competitive
advantages in the supply business.
Some of our competitors, notably Cisco and Motorola, are larger
companies with greater financial resources and product breadth
than us. This may enable them to bundle products or be able to
market and price products more aggressively than we can.
Our products are marketed with emphasis on quality, and are
competitively priced. Product reliability and performance,
superior and responsive technical and administrative support,
and breadth of product offerings
12
are key criteria for competition. Technological innovations and
speed to market are additional competitive factors.
Employees
As of February 28, 2006, we had 732 full-time
employees. We believe that we have maintained a strong
relationship with our employees. Our future success depends, in
part, on our ability to attract and retain key executive,
marketing, engineering and sales personnel. Competition for
qualified personnel in the cable industry is intense, and the
loss of certain key personnel could have a material adverse
effect on us. We have entered into employment contracts with our
key executive officers and have confidentiality agreements with
substantially all of our employees. We also have long-term
incentive programs that are intended to provide substantial
incentives for our key employees to remain with us.
Background and History
ARRIS is the successor to ANTEC Corporation. From its inception
until its initial public offering in 1993, ANTEC was primarily a
distributor of cable television equipment and was owned and
operated by Anixter, Inc. Subsequently ANTEC completed several
important strategic transactions and formed joint ventures
designed to expand significantly its product offerings. In 2001,
ANTEC formed a new holding company, ARRIS, and acquired Nortel
Networks interest in Arris Interactive L.L.C., which
previously had been a joint venture between ANTEC and Nortel
Networks.
A synopsis of ARRIS evolution:
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1969 |
Anixter entered the cable industry. |
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1987 |
Anixter acquired TeleWire Supply. |
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1988 |
Anixter and AT&T developed the first analog video laser
transmitter for the cable industry (Laser Link I). |
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1991 |
ANTEC was established. |
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1993 |
ANTECs initial public offering. |
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1994 |
ANTEC completed the acquisition of the following companies,
which significantly expanded its product development and
manufacturing capabilities: |
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Electronic System Products, Inc., or ESP, an engineering
consulting firm with core capabilities in digital design, RF
design and application specific integrated circuit development
for the broadband communications industry. |
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Power Guard, Inc., a manufacturer of power supplies and high
security enclosures for broadband communications networks. |
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Keptel, Inc., a designer, manufacturer and marketer of outside
plant telecommunications and transmission equipment for both
residential and commercial use, primarily by telephone companies. |
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1995 |
ANTEC and Nortel Networks formed Arris Interactive L.L.C.,
focused on the development, manufacture and sale of products
that enable the provision of a broad range of telephone and data
services over HFC architectures; ANTEC initially owned 25% and
Nortel Networks owned 75% of the Arris Interactive L.L.C. joint
venture. |
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1997 |
ANTEC acquired TSX Corporation, which provided electronic
manufacturing capabilities and expanded the Companys
product lines to include amplifiers and line extenders and
enhanced laser transmitters and receivers and optical node
product lines. |
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1998 |
ANTEC introduced the industrys first 1550 nm
narrowcast transmitter and dense wavelength division
multiplexing, or DWDM, optical transmission system. |
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1999 |
The Broadband Technology Division of Nortel Networks, which was
known as LANcity, was combined with Arris Interactive L.L.C.,
resulting in an increase in Nortel Networks interest in
the joint venture to 81.25% while ANTECs interest was
reduced to 18.75%. |
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ANTEC introduced the industrys first 18-band block
converter and combined that with the DWDM allowing 144 bands on
a single fiber. |
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2001 |
ARRIS acquired all of Nortel Networks ownership interest
in Arris Interactive L.L.C. in exchange for approximately 49% of
the common stock of a newly formed holding company, ARRIS, and a
Class B membership interest in Arris Interactive L.L.C. |
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ARRIS sold substantially all of its power product lines. |
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2002 |
ARRIS acquired substantially all of the assets of Cadant, Inc.,
a privately held designer and manufacturer of next- generation
cable modem termination systems. |
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ARRIS sold its Keptel product line. |
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ARRIS sold its Actives product line. |
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ARRIS closed its office in Andover, Massachusetts, which was
primarily a product development and repair facility. |
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Nortel Networks sold 15 million shares of ARRIS through a
public offering reducing their position to
22 million shares. |
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ARRIS redeemed, for cash and stock, $91.1 million of its
convertible notes due May 2003. |
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2003 |
ARRIS acquired certain assets of Atoga Systems, a Fremont,
California-based developer of optical transport systems for
metropolitan area networks. |
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ARRIS completed the redemption of its convertible notes due May
2003. |
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ARRIS raised $125 million through a private placement of
convertible notes due 2008. |
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ARRIS retired, at a discount, the Class B membership
interest due to Nortel Networks for $88.4 million. |
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ARRIS repurchased and retired 8 million shares from Nortel
Networks for an aggregate purchase price of $30 million
(taking into account the return of $2 million forgiven on
the Class B membership interest), reducing Nortels
position to 14 million shares. |
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ARRIS sold ESP, its engineering services product line. |
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ARRIS purchased certain assets of Com21 (including the stock of
its Irish subsidiary), a designer and manufacturer of next
generation cable modem termination systems. |
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Nortel Networks sold 9 million shares of ARRIS through a
public offering reducing their position to 5 million shares. |
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ARRIS terminated its asset-based revolving bank credit facility. |
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2004 |
ARRIS redeemed on March 8, 2004 $50 million of its
convertible notes due 2008. In connection with the redemption,
ARRIS made a make-whole interest payment that included the
issuance of approximately 0.5 million common shares. |
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ARRIS closed its Fremont, CA office. |
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2005 |
ARRIS redeemed the remaining $75.0 million of its
convertible notes due 2008. The Company made a make-whole
interest payment of approximately 0.3 million shares,
resulting in a charge of $2.4 million during the second
quarter 2005. As of December 31, 2005, the Notes have been
fully converted and the Company has no long-term debt. |
14
Our business is dependent on customers capital
spending on broadband communication systems, and reductions by
customers in capital spending would adversely affect our
business.
Our performance has been largely dependent on customers
capital spending for constructing, rebuilding, maintaining or
upgrading broadband communications systems. Capital spending in
the telecommunications industry is cyclical. A variety of
factors will affect the amount of capital spending, and
therefore, our sales and profits, including:
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general economic conditions; |
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availability and cost of capital; |
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other demands and opportunities for capital; |
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regulations; |
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demands for network services; |
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competition and technology; |
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real or perceived trends or uncertainties in these
factors; and |
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acceptance of new services offered by our customers. |
Developments in the industry and in the capital markets over the
past several years reduced access to funding for our customers
in the past and caused delays in the timing and scale of
deployments of our equipment, as well as the postponement or
cancellation of certain projects by our customers. In addition,
we and other vendors received notification from several
customers that they were canceling projects or scaling back
projects or delaying orders to allow them to reduce inventory
levels which were in excess of their then current deployment
requirements.
Further, several of our customers have accumulated significant
levels of debt. In particular, Adelphia has been operating in
bankruptcy since the first half of 2002 and Cabovisaos
Canadian parent, Csii, has been operating under bankruptcy
protection since the middle of 2003. Even if the financial
health of those companies and other customers improves, we
cannot assure you that these customers will be in a position to
purchase new equipment at levels we have seen in the past. In
addition, the bankruptcy filing of Adelphia in June 2002 has
further heightened concerns in the financial markets about the
domestic cable industry. The concern, coupled with the current
uncertainty and volatile capital markets, has affected the
market values of domestic cable operators and may further
restrict their access to capital.
The markets in which we operate are intensely competitive,
and competitive pressures may adversely affect our results of
operations.
The markets for broadband communication systems are extremely
competitive and dynamic, requiring the companies that compete in
these markets to react quickly and capitalize on change. This
will require us to retain skilled and experienced personnel as
well as deploy substantial resources toward meeting the
ever-changing demands of the industry. We compete with national
and international manufacturers, distributors and wholesalers
including many companies larger than ARRIS. Our major
competitors include:
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Big Band Networks; |
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Cisco Systems, Inc.; |
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Motorola, Inc.; and |
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TVC Communications, Inc. |
In the fourth quarter of 2005 Cisco Systems, Inc. and
Scientific-Atlanta, Inc. announced that Cisco will acquire
Scientific-Atlanta. The acquisition was completed in February of
2006. We are uncertain what impact this may have on our future
results, if any.
15
The rapid technological changes occurring in the broadband
markets may lead to the entry of new competitors, including
those with substantially greater resources than ours. Because
the markets in which we compete are characterized by rapid
growth and, in some cases, low barriers to entry, smaller niche
market companies and
start-up ventures also
may become principal competitors in the future. Actions by
existing competitors and the entry of new competitors may have
an adverse effect on our sales and profitability. The broadband
communications industry is further characterized by rapid
technological change. In the future, technological advances
could lead to the obsolescence of some of our current products,
which could have a material adverse effect on our business.
Further, many of our larger competitors are in a better position
to withstand any significant reduction in capital spending by
customers in these markets. They often have broader product
lines and market focus and therefore will not be as susceptible
to downturns in a particular market. In addition, several of our
competitors have been in operation longer than we have been, and
therefore they have more long-standing and established
relationships with domestic and foreign broadband service users.
We may not be able to compete successfully in the future, and
competition may harm our business.
Our business has primarily come from several key
customers. The loss of one of these customers or a significant
reduction in services to one of these customers would have a
material adverse effect on our business.
Our four largest customers (including their affiliates, as
applicable) are Comcast, Cox Communications, Liberty Media
International, and Time-Warner Cable. For the year ended
December 31, 2005, sales to Comcast accounted for
approximately 24.0%, sales to Cox Communications accounted for
approximately 17.2% of our total revenues, sales to Liberty
Media International accounted for approximately 15.3%, and sales
to Time-Warner Cable accounted for approximately 10.6%. The loss
of any of these customers, or one of our other large customers,
or a significant reduction in the products or services provided
to any of them would have a material adverse impact on our
business.
The broadband products that we develop and sell are
subject to technological change and a trend towards open
standards, which may impact our future sales and margins.
The broadband products we sell are subject to continuous
technological evolution. Further, the cable industry has and
will continue to demand a move towards open standards. The move
towards open standards is expected to increase the number of
MSOs who will offer new services, in particular, telephony. This
trend also is expected to increase the number of competitors and
drive capital costs per subscriber deployed down. These factors
may adversely impact both our future revenues and margins.
We have anti-takeover defenses that could delay or prevent
an acquisition of our company.
On October 3, 2002, our Board of Directors approved the
adoption of a shareholder rights plan (commonly known as a
poison pill). This plan is not intended to prevent a
takeover, but is intended to protect and maximize the value of
shareholders interests. This plan could make it more
difficult for a third party to acquire us or may delay that
process.
Products currently under development may fail to realize
anticipated benefits.
Rapidly changing technologies, evolving industry standards,
frequent new product introductions and relatively short product
life cycles characterize the markets for our products. The
technology applications that we are currently developing may not
ultimately be successful. Even if the products in development
are successfully brought to market, they may not be widely used
or we may not be able to successfully exploit these technology
applications. To compete successfully, we must quickly design,
develop, manufacture and sell
16
new or enhanced products that provide increasingly higher levels
of performance and reliability. However, we may not be able to
successfully develop or introduce these products if our products:
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are not cost-effective; |
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are not brought to market in a timely manner; |
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fail to achieve market acceptance; or |
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fail to meet industry certification standards. |
Furthermore, our competitors may develop similar or alternative
new technology applications that, if successful, could have a
material adverse effect on us. Our strategic alliances are based
on business relationships that have not been the subject of
written agreements expressly providing for the alliance to
continue for a significant period of time. The loss of a
strategic partner could have a material adverse effect on the
progress of new products under development with that partner.
Consolidations in the telecommunications industry could
result in delays or reductions in purchases of products, which
would have a material adverse effect on our business.
The telecommunications industry has experienced the
consolidation of many industry participants, and this trend may
continue. For instance, in November 2005, Cox Communications
announced a definitive agreement to sell some of its cable
television systems to Cebridge Connections and, in April 2005,
Adelphia announced that its assets were going to be acquired by
Comcast and Time Warner. When consolidations occur, it is
possible that the acquirer will not continue using the same
suppliers, thereby possibly resulting in an immediate or future
elimination of sales opportunities for us or our competitors,
depending upon who had the business initially. Consolidations
also could result in delays in purchasing decisions by the
merged businesses. The purchasing decisions of the merged
companies could have a material adverse effect on our business.
Mergers among the supplier base also have increased, and this
trend may continue. For example, in the fourth quarter of 2005,
Cisco Systems, Inc. and Scientific-Atlanta, Inc. announced that
Cisco would acquire Scientific-Atlanta. The acquisition was
completed in February of 2006. Larger combined companies with
pooled capital resources may be able to provide solution
alternatives with which we would be put at a disadvantage to
compete. The larger breadth of product offerings by these
consolidated suppliers could result in customers electing to
trim their supplier base for the advantages of one-stop shopping
solutions for all of their product needs. Consolidation of the
supplier base could have a material adverse effect on our
business.
Acquisitions can involve significant risks.
We routinely consider acquisitions of, or investments in, other
businesses. There are a number of risks attendant to any
acquisition, including the possibility that we will overvalue
the assets to be purchased, that we will not be able to
successfully integrate the acquired business or assets, and that
we will not be able to produce the expected level of
profitability from the acquired business or assets. In addition,
we might incur substantial indebtedness in order to finance an
acquisition, which could require substantial payments in the
future, and we might issue common stock or other securities to
pay for an acquisition, in which event the acquisition may
ultimately prove to be dilutive to our current stockholders. As
a result, the impact of any acquisition on our future
performance may not be as favorable as expected and actually may
be adverse.
Our success depends in large part on our ability to
attract and retain qualified personnel in all facets of our
operations.
Competition for qualified personnel is intense, and we may not
be successful in attracting and retaining key executives,
marketing, engineering, technical support and sales personnel,
which could impact our ability to maintain and grow our
operations. Our future success will depend, to a significant
extent, on the ability of our management to operate effectively.
In the past, competitors and others have attempted to recruit
our employees and in the future, their attempts may continue.
The loss of services of any key personnel, the
17
inability to attract and retain qualified personnel in the
future or delays in hiring required personnel, particularly
engineers and other technical professionals, could negatively
affect our business.
We are substantially dependent on contract manufacturers,
and an inability to obtain adequate and timely delivery of
supplies could adversely affect our business.
Many components, subassemblies and modules necessary for the
manufacture or integration of our products are obtained from a
sole supplier or a limited group of suppliers. Our reliance on
sole or limited suppliers, particularly foreign suppliers, and
our reliance on subcontractors involves several risks including
a potential inability to obtain an adequate supply of required
components, subassemblies or modules and reduced control over
pricing, quality and timely delivery of components,
subassemblies or modules. Historically, we have not generally
maintained long-term agreements with any of our suppliers or
subcontractors. An inability to obtain adequate deliveries or
any other circumstance that would require us to seek alternative
sources of supply could affect our ability to ship products on a
timely basis. Any inability to reliably ship our products on
time could damage relationships with current and prospective
customers and harm our business.
Our international operations may be adversely affected by
any decline in the demand for broadband systems designs and
equipment in international markets.
Sales of broadband communications equipment into international
markets are an important part of our business. The entire line
of our products is marketed and made available to existing and
potential international customers. In addition, United States
broadband system designs and equipment are increasingly being
employed in international markets, where market penetration is
relatively lower than in the United States. While international
operations are expected to comprise an integral part of our
future business, international markets may no longer continue to
develop at the current rate, or at all. We may fail to receive
additional contracts to supply equipment in these markets.
Our international operations may be adversely affected by
changes in the foreign laws in the countries in which our
manufacturers and assemblers have plants.
A significant portion of our products are manufactured or
assembled in China, Ireland, Mexico, the Philippines, and other
countries outside of the United States. The governments of the
foreign countries in which our products are manufactured may
pass laws that impair our operations, such as laws that impose
exorbitant tax obligations or nationalize these manufacturing
facilities.
We face risks relating to currency fluctuations and
currency exchange.
We may encounter difficulties in converting our earnings from
international operations to U.S. dollars for use in the
United States. These obstacles may include problems moving funds
out of the countries in which the funds were earned and
difficulties in collecting accounts receivable in foreign
countries where the usual accounts receivable payment cycle is
longer.
We are exposed to various market risk factors such as
fluctuating interest rates and changes in foreign currency
rates. These risk factors can impact our results of operations,
cash flows and financial position. We manage these risks through
regular operating and financing activities and periodically use
derivative financial instruments such as foreign exchange
forward contracts. There can be no assurance that our risk
management strategies will be effective.
Our profitability has been, and may continue to be,
volatile, which could adversely affect the price of our
stock.
We have experienced several years with significant operating
losses. Although we have been profitable in the past, we may not
be profitable or meet the level of expectations of the
investment community in the future, which could have a material
adverse impact on our stock price. In addition, our operating
results may be adversely affected by the timing of sales or a
shift in our product mix.
18
We may face higher costs associated with protecting our
intellectual property.
Our future success depends in part upon our proprietary
technology, product development, technological expertise and
distribution channels. We cannot predict whether we can protect
our technology or whether competitors can develop similar
technology independently. We have received and may continue to
receive from third parties, including some of our competitors,
notices claiming that we have infringed upon third-party patents
or other proprietary rights. Any of these claims, whether with
or without merit, could result in costly litigation, divert the
time, attention and resources of our management, delay our
product shipments, or require us to enter into royalty or
licensing agreements. If a claim of product infringement against
us is successful and we fail to obtain a license or develop
non-infringing technology, our business and operating results
could be adversely affected.
|
|
Item 1B. |
Unresolved Comments |
As of December 31, 2005 we have no unresolved comments.
We currently conduct our operations from 14 different locations;
two of which we own, while the remaining 12 are leased. These
facilities consist of sales and administrative offices and
warehouses totaling approximately 580,000 square feet. Our
long-term leases expire at various dates through 2023. We
believe that our current properties are adequate for our
operations. A summary of our principal leased properties that
are currently in use is as follows:
|
|
|
|
|
|
|
|
|
Location |
|
Description |
|
Area (sq. ft.) | |
|
Lease Expiration |
|
|
|
|
| |
|
|
Ontario, California
|
|
Warehouse |
|
|
83,515 |
|
|
January 31, 2009 |
Suwanee, Georgia
|
|
Office space |
|
|
129,403 |
|
|
April 14, 2012 |
Englewood, Colorado
|
|
Office space |
|
|
32,240 |
|
|
March 31, 2011 |
Lisle, Illinois
|
|
Office space |
|
|
56,008 |
|
|
November 1, 2013 |
Ireland
|
|
Office space |
|
|
13,575 |
|
|
June 30, 2023 |
We own the following properties:
|
|
|
|
|
|
|
|
|
Location |
|
Description | |
|
Area (sq. ft.) | |
|
|
| |
|
| |
Cary, North Carolina
|
|
|
Warehouse |
|
|
|
151,500 |
|
Chicago, Illinois
|
|
|
Warehouse/Office space |
|
|
|
18,000 |
|
|
|
Item 3. |
Legal Proceedings |
From time to time, we are involved in claims, disputes,
litigation or legal proceedings incident to the ordinary course
of our business, such as employment matters, environmental
proceedings, contractual disputes and intellectual property
disputes. Currently there are no material claims or disputes
outstanding. ARRIS is not a defendant in any pending lawsuits
involving intellectual property. ARRIS is however giving
technical assistance to several customers in pending
intellectual property lawsuits against those customers.
Presently, ARRIS does not expect to be a party to any of the
suits and does not anticipate any injunctions to affect any
ARRIS products although ARRIS may be called upon, along with
other suppliers, to indemnify such customers. ARRIS does not
believe any potential claim for indemnification will be material.
19
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
During the fourth quarter of 2005, no matters were submitted to
a vote of our companys security holders.
|
|
Item 4A. |
Executive Officers and Board Committees |
Executive Officers of the Company
The following table sets forth the name, age as of
March 15, 2006, and position of our executive officers.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Robert J. Stanzione
|
|
|
58 |
|
|
Chief Executive Officer, Chairman of the Board |
Lawrence A. Margolis
|
|
|
58 |
|
|
Executive Vice President, Strategic Planning, Administration,
Chief Counsel, and Secretary |
David B. Potts
|
|
|
48 |
|
|
Executive Vice President, Chief Financial Officer and Chief
Information Officer |
Ronald M. Coppock
|
|
|
51 |
|
|
President, ARRIS Worldwide Sales |
Bryant K. Isaacs
|
|
|
46 |
|
|
President, New Business Ventures |
James D. Lakin
|
|
|
62 |
|
|
President, Broadband |
Robert Puccini
|
|
|
44 |
|
|
President, TeleWire Supply |
Marc S. Geraci
|
|
|
53 |
|
|
Vice President, Treasurer |
Daniel Owens
|
|
|
35 |
|
|
Vice President, Controller |
Robert J. Stanzione has been Chief Executive Officer
since January 1, 2000. From 1998 through 1999,
Mr. Stanzione was President and Chief Operating Officer of
ARRIS. Mr. Stanzione has been a director of ARRIS since
1998 and has been the Chairman of the Board of Directors since
May 2003. From 1995 to 1997, he was President and Chief
Executive Officer of Arris Interactive L.L.C. From 1969 to 1995,
he held various positions with AT&T Corporation.
Mr. Stanzione has served as a director of Symmetricon, Inc.
since May 2005. Mr. Stanzione also serves on the boards of
the National Cable Telecommunications Association and the
Georgia Cystic Fibrosis Foundation.
Lawrence A. Margolis has been Executive Vice President,
Strategic Planning, Administration, and Chief Counsel since
March 2004 and has served as the Secretary of ARRIS since 1992.
Mr. Margolis was the Chief Financial Officer from 1992 to
March 2004. Prior to joining ARRIS, Mr. Margolis was Vice
President, General Counsel and Secretary of Anixter, Inc., a
global communications products distribution company, from 1986
to 1992 and General Counsel and Secretary of Anixter from 1984
to 1986. Prior to 1984, he was a partner at the law firm of
Schiff Hardin & Waite.
David B. Potts has been the Chief Financial Officer since
March 2004, and has been Chief Information Officer since the
acquisition of Arris Interactive L.L.C. in August 2001. Prior to
being named Chief Financial Officer in 2004, Mr. Potts was
the Senior Vice President of Finance. Before joining ARRIS, he
was Chief Financial Officer of Arris Interactive L.L.C. from
1995 through 2001. From 1984 through 1995, Mr. Potts held
various executive management positions with Nortel Networks
including Vice President and Chief Financial Officer of Bell
Northern Research in Ottawa and Vice President of Mergers and
Acquisitions in Toronto. Prior to Nortel Networks,
Mr. Potts was with Touche Ross in Toronto. Mr. Potts
is a member of the Institute of Chartered Accountants in Canada.
Ronald M. Coppock has been President of ARRIS Worldwide
Sales since November 2003. Prior to his current role,
Mr. Coppock was President of International Sales since
January 1997 and was formerly Vice President International Sales
and Marketing for TSX Corporation. Mr. Coppock has been in
the cable television and satellite communications industry for
over 20 years, having held senior management positions with
Scientific-Atlanta, Pioneer Communications and Oak
Communications. Mr. Coppock is an active member of the
American Marketing Association, Kappa Alpha Order, Cystic
Fibrosis Foundation Board, and the Auburn University Alumni
Action Committee.
20
Bryant K. Isaacs has been President of ARRIS New Business
Ventures since December 2002. Prior to the sale of the Actives
product line, Mr. Isaacs was President of ARRIS Network
Technologies since September 2000. Prior to joining ARRIS, he
was Founder and General Manager of Lucent Technologies
Wireless Communications Networking Division in Atlanta from 1997
to 2000. From 1995 through 1997, Mr. Isaacs held the
position of Vice President of Digital Network Systems for
General Instrument Corporation where he was responsible for
developing international business strategies and products for
digital video broadcasting systems.
James D. Lakin has been President of ARRIS Broadband
since the acquisition of Arris Interactive L.L.C. in August
2001. From October 2000 through August 2001, he was President
and Chief Operating Officer of Arris Interactive L.L.C. From
November 1995 until October 2000, Mr. Lakin was Chief
Marketing Officer of Arris Interactive L.L.C. Prior to 1995, he
held various executive positions with Compression Labs, Inc. and
its successor General Instrument Corporation.
Robert Puccini has been President of ARRIS TeleWire
Supply since 1999. Prior to his appointment to President,
Mr. Puccini served as Chief Financial Officer of TeleWire
for two years and has served as Vice President, Project
Management for ARRIS AT&T account. Mr. Puccini
brings 20 years of experience in the cable television
industry to ARRIS TeleWire Supply. He has held various
accounting and controller positions within the former Anixter
and ANTEC Corporations. Mr. Puccini is a CPA.
Marc S. Geraci has been Vice President, Treasurer of
ARRIS since January 2003 and has been with ARRIS and the former
ANTEC Corporation since 1994. He began with ARRIS as Controller
for the International Sales Group and in 1997 was named Chief
Financial Officer of that group. Prior to joining ARRIS, he was
a broker/dealer on the Pacific Stock Exchange in
San Francisco for eleven years and, prior to that, in
public accounting in Chicago for four years. Mr. Geraci is
a CPA.
Daniel Owens has been Vice President, Controller of ARRIS
since August 2005. From 1999 to 2005, he held various accounting
positions, including Vice President of Finance. at InterCept,
Inc. Mr. Owens began his career in public accounting at
Ernst & Young LLP. Mr. Owens is a CPA.
Board Committees
Our Board of Directors has three committees: Audit,
Compensation, and Nominating and Corporate Governance. The
charters for all three committees are located on our website at
www.arrisi.com. The Board believes that each of its members,
with the exception of Mr. Stanzione, is independent, as
defined by the SEC and Nasdaq rules. Additionally, the Board has
identified Matthew Kearney and John Petty as audit committee
financial experts, as defined by the SEC.
21
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
ARRIS common stock is traded on the Nasdaq Global Market
System under the symbol ARRS. The following table
reports the high and low trading prices per share of the
Companys common stock as listed on the Nasdaq Global
Market System:
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
11.40 |
|
|
$ |
7.28 |
|
Second Quarter
|
|
|
9.92 |
|
|
|
4.42 |
|
Third Quarter
|
|
|
6.04 |
|
|
|
3.73 |
|
Fourth Quarter
|
|
|
7.23 |
|
|
|
4.34 |
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
7.27 |
|
|
$ |
5.45 |
|
Second Quarter
|
|
|
9.18 |
|
|
|
6.28 |
|
Third Quarter
|
|
|
12.17 |
|
|
|
8.50 |
|
Fourth Quarter
|
|
|
12.79 |
|
|
|
7.12 |
|
We have not paid cash dividends on our common stock since our
inception. On October 3, 2002, to implement our shareholder
rights plan, our board of directors declared a dividend
consisting of one right for each share of our common stock
outstanding at the close of business on October 25, 2002.
Each right represents the right to purchase one one-thousandth
of a share of our Series A Participating Preferred Stock
and becomes exercisable only if a person or group acquires
beneficial ownership of 15% or more of our common stock or
announces a tender or exchange offer for 15% or more of our
common stock or under other similar circumstances.
As of February 28, 2006, there were approximately 396
record holders of our common stock. This number excludes
shareholders holding stock under nominee or street name accounts
with brokers or banks.
|
|
Item 6. |
Selected Consolidated Historical Financial Data |
The selected consolidated financial data as of December 31,
2005 and 2004 and for each of the three years in the period
ended December 31, 2005 set forth below are derived from
the accompanying audited consolidated financial statements of
ARRIS, and should be read in conjunction with such statements
and related notes thereto. The selected consolidated financial
data as of December 31, 2003, 2002 and 2001 and for the
years ended December 31, 2002 and 2001 is derived from
audited consolidated financial statements that have not been
included in this filing. The historical consolidated financial
information is not necessarily indicative of the results of
future operations and should be read in conjunction with
ARRIS historical consolidated financial statements and the
related notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this document. See Note 21 of the
Notes to the Consolidated Financial Statements for a summary of
our quarterly consolidated financial information.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Consolidated Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
680,417 |
|
|
$ |
490,041 |
|
|
$ |
433,986 |
|
|
$ |
651,883 |
|
|
$ |
628,323 |
|
|
Cost of sales
|
|
|
489,703 |
|
|
|
343,864 |
|
|
|
307,726 |
|
|
|
425,231 |
|
|
|
479,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
190,714 |
|
|
|
146,177 |
|
|
|
126,260 |
|
|
|
226,652 |
|
|
|
148,660 |
|
|
Selling, general, administrative and development expenses
|
|
|
134,443 |
|
|
|
131,912 |
|
|
|
151,980 |
|
|
|
200,574 |
|
|
|
129,743 |
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,209 |
|
|
|
|
|
|
Amortization of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,256 |
|
|
Amortization of intangibles
|
|
|
1,212 |
|
|
|
28,690 |
|
|
|
35,249 |
|
|
|
34,494 |
|
|
|
7,012 |
|
|
In-process R&D write-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,800 |
|
|
Restructuring and other
|
|
|
1,331 |
|
|
|
7,648 |
|
|
|
891 |
|
|
|
7,113 |
|
|
|
11,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
53,728 |
|
|
|
(22,073 |
) |
|
|
(61,860 |
) |
|
|
(85,738 |
) |
|
|
(21,753 |
) |
|
Interest expense
|
|
|
2,101 |
|
|
|
5,006 |
|
|
|
10,443 |
|
|
|
8,383 |
|
|
|
11,068 |
|
|
Membership interest
|
|
|
|
|
|
|
|
|
|
|
2,418 |
|
|
|
10,409 |
|
|
|
4,110 |
|
|
Loss (gain) on debt retirement
|
|
|
2,372 |
|
|
|
4,406 |
|
|
|
(26,164 |
) |
|
|
7,302 |
|
|
|
1,853 |
|
|
Other expense (income), net
|
|
|
(2,679 |
) |
|
|
(2,403 |
) |
|
|
(2,329 |
) |
|
|
(5,513 |
) |
|
|
8,120 |
|
|
Loss on investments and notes receivable
|
|
|
146 |
|
|
|
1,320 |
|
|
|
1,436 |
|
|
|
14,894 |
|
|
|
767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
51,788 |
|
|
|
(30,402 |
) |
|
|
(47,664 |
) |
|
|
(121,213 |
) |
|
|
(47,671 |
) |
|
|
Income tax expense (benefit)
|
|
|
513 |
|
|
|
108 |
|
|
|
|
|
|
|
(6,800 |
) |
|
|
35,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
51,275 |
|
|
|
(30,510 |
) |
|
|
(47,664 |
) |
|
|
(114,413 |
) |
|
|
(83,259 |
) |
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations (including a net gain
on disposals of $0.2 million and $2.1 million
$0.4 million for the years ended December 31, 2005,
2004 and 2003, respectively)
|
|
|
208 |
|
|
|
2,114 |
|
|
|
351 |
|
|
|
(18,794 |
) |
|
|
(92,441 |
) |
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
208 |
|
|
|
2,114 |
|
|
|
351 |
|
|
|
(18,794 |
) |
|
|
(84,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of accounting change
|
|
|
51,483 |
|
|
|
(28,396 |
) |
|
|
(47,313 |
) |
|
|
(133,207 |
) |
|
|
(167,731 |
) |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
51,483 |
|
|
$ |
(28,396 |
) |
|
$ |
(47,313 |
) |
|
$ |
(191,167 |
) |
|
$ |
(167,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.53 |
|
|
$ |
(0.36 |
) |
|
$ |
(0.62 |
) |
|
$ |
(1.40 |
) |
|
$ |
(1.55 |
) |
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
(0.23 |
) |
|
|
(1.58 |
) |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.53 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
$ |
(2.33 |
) |
|
$ |
(3.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.52 |
|
|
$ |
(0.36 |
) |
|
$ |
(0.62 |
) |
|
$ |
(1.40 |
) |
|
$ |
(1.55 |
) |
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
(0.23 |
) |
|
|
(1.58 |
) |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.52 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
$ |
(2.33 |
) |
|
$ |
(3.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
529,403 |
|
|
$ |
450,678 |
|
|
$ |
451,859 |
|
|
$ |
563,412 |
|
|
$ |
752,115 |
|
|
Long-term obligations
|
|
$ |
18,230 |
|
|
$ |
91,781 |
|
|
$ |
138,052 |
|
|
$ |
11,500 |
|
|
$ |
115,000 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
Our long-term goal is to continue to increase our leading
position as a worldwide provider of broadband access products
and services. Our primary market and focus is cable providers,
or MSOs.
Industry Conditions
Our performance is largely dependent on capital spending for
constructing, rebuilding, maintaining and upgrading broadband
communications systems necessary for the provision of new voice,
data, and video services. The cable market has evolved and
changed significantly over the past few years. Key developments
that have or may impact us include:
|
|
|
Increase in Spending by MSOs on New Revenue-Generating
Services |
While reducing overall capital expenditures, MSOs have increased
their expenditures on equipment, which allows them to create new
revenue-generating opportunities, including high-speed data,
telephony and digital video. We anticipate future increases in
expenditures by the MSOs on new technologies, which allow them
to capitalize on these opportunities.
|
|
|
Cable Operator Demand of Open Standards for Equipment and
Services Related to High-Speed Data, Telephony and, Digital
Video |
Each of the key new revenue-generating services (high-speed
data, telephony and digital video) was originally made available
to the MSOs by various companies using proprietary products;
however, next-generation products are being developed and
deployed in compliance with open standards established by the
cable industry:
|
|
|
|
|
High-speed data was offered, most significantly by ARRIS
(LANcity), Motorola and Terayon, using proprietary cable modem
termination systems and cable modems. In the United States, the
MSOs founded CableLabs to create an open standard architecture
for high-speed data defined in the Data Over Cable Service
Interface Specification (DOCSIS). The initial version of this
architecture was |
24
|
|
|
|
|
introduced in 1999. Subsequently, a second version,
DOCSIS 2.0, was introduced in 2001, which is todays
standard. ARRIS and its competitors responded to the creation of
these standards, by replacing its proprietary high-speed data
products with DOCSIS-compliant products. Similar open standards
exist in Europe. |
|
|
|
Telephony was first offered, most significantly by ARRIS,
Motorola, ADC and Tellabs, using proprietary constant bit rate,
or CBR, headend and network interface units. ARRIS continues to
sell CBR equipment; however, we experienced a reduction in sales
of this product in 2005 and expect a further decline in 2006 as
cable operators supplant CBR telephony with Voice over IP (VoIP)
telephony technology. The MSOs, through CableLabs, have created
an open architecture for VoIP telephony called PacketCable. We
anticipate that the majority of new telephony deployments will
use this open architecture. ARRIS and its competitors responded
to the creation of this new standard with PacketCable-compliant
products. |
|
|
|
Digital Video was first offered, most significantly by Motorola,
Scientific-Atlanta and Pace, using proprietary set-top boxes. In
1997, CableLabs, at the direction of the MSOs, introduced a
standard for open architecture, secure interactive digital
television known as
OpenCabletm.
More recently, in 2005, certain MSOs, in particular Comcast,
Time Warner and Cox Communications, began the development of
standards for a Next Generation Network Architecture (NGNA),
which, among other things, will drive an open standards
architecture for IP Video. In the latter half of 2005, the NGNA
initiative was transferred to CableLabs. Subsequently, CableLabs
began the development of a third generation DOCSIS standard
(DOCSIS 3.0) and a definition of a next generation cable modem
termination architecture known as Modular CMTS (M-CMTS).
Together DOCSIS 3.0 and M-CMTS embody the concepts of the NGNA
vision. We are actively participating in the development of the
DOCSIS 3.0 and M-CMTS standards and are developing and marketing
products based on these new standards. |
We expect that MSOs will continue to create and demand open
interfaces for all services in the future.
We also expect that MSOs will seek to offer other new services
in the future. For example:
|
|
|
|
|
Some MSOs have expressed interest in offering bundled wireless
telephony as part of their product offering. This product known
as Fixed Mobile Convergence (FMC) will allow cable
subscribers to use mobile phones in their homes, connecting to
the MSOs VoIP network in the home and roam from the home
VoIP network to the cellular network outside of the home and
back seamlessly. We are exploring products and technologies to
support this new offering. |
|
|
|
Some MSOs are increasing their focus on expanding their service
offerings to businesses. We are exploring products and
technologies to support the MSOs expansion into this market
segment. |
|
|
|
Consolidation of Our Customer Base |
Consolidation of our customers has, and may in the future,
affect their purchases of our products. In the fourth quarter of
2002, Comcast completed its purchase of AT&T Broadband.
Since the acquisition, we have not shipped material quantities
of CBR telephony product to Comcast as its focus turned to video
and high-speed data operations. In 2004, Liberty Media
International increased its holdings in international properties
making them one of the largest MSOs in the world. As a result,
we entered into a global Master Purchase agreement with Liberty
and its affiliates for all ARRIS products. In 2004, Adelphia
Communications announced that, as part of its bankruptcy
proceedings, it planned to sell its cable properties. In 2005,
Adelphia announced that it would seek court approval to sell its
cable properties to Time Warner and Comcast, with the closing of
those sales to occur in 2006. It is possible that the sale of
properties may have an impact on our future sales. Time Warner
and Comcast historically have been among our larger customers.
It also is possible that other customer consolidations may occur
that could have an impact on future sales of our products.
25
|
|
|
Decline in Spending by the MSOs on Two-Way Plant
Upgrades |
A significant portion of the MSOs have completed, or are nearing
completion of, their two-way plant upgrade programs.
We, as well as our competitors (in particular,
Scientific-Atlanta, Motorola and TVC), have sold significant
amounts of equipment to the MSOs over the past five years in
support of their upgrade programs. These sales were
predominately of our Supplies & CPE products as well as
our former Transmission, Optical and Outside Plant products.
|
|
|
Consolidation of Competitors |
In the fourth quarter of 2005, Cisco Systems announced that they
would acquire Scientific-Atlanta. The acquisition was completed
in February of 2006. Both Cisco and Scientific-Atlanta are key
competitors of ARRIS. It is possible that this merger may have
an impact on our future sales and profitability. It also is
possible that other competitor consolidations may occur that
could have an impact on future sales and profitability.
Our Strategy
In response to and in anticipation of the factors described
above, we have implemented a long-term business strategy, which
includes the following key elements:
|
|
|
|
|
Transition to VoIP with an Everything IP, Everywhere
philosophy and build on current market successes |
|
|
|
Leverage our current voice and data business |
|
|
|
Strengthen and grow our supplies infrastructure distribution
channel |
|
|
|
Expand our existing product/services portfolio through internal
developments, partnerships and acquisitions |
|
|
|
Maintain and improve an already strong capital structure and
expense structure |
Below is a summary of some of the key actions we have taken in
support of these strategies.
In 2002, we purchased substantially all the assets and assumed
certain liabilities of Cadant, Inc., a manufacturer of cable
modem termination systems that had developed a leading design in
the industry for enabling voice over IP telephony and high-speed
data. In March 2003, we purchased certain assets of Atoga
Systems, a developer of optical transport systems for
metropolitan area networks. In August 2003, we purchased certain
cable modem termination system-related assets of Com21,
including the stock of its Irish subsidiary. These acquisitions
were made to better position us to provide products and services
to our customers that support their growing needs in the areas
of high speed data, telephony and video. We are actively
exploring future acquisition opportunities. Below is a more
detailed description of each of these acquisitions:
|
|
|
Acquisition of Assets of Cadant, Inc. |
In 2002, we acquired substantially all of the assets of Cadant,
Inc., a privately held designer and manufacturer of
next-generation cable modem termination systems. Under the terms
of the transaction, we issued 5.25 million shares of our
common stock and assumed approximately $14.9 million in
liabilities in exchange for the assets. We issued
2.0 million options to purchase our common stock and
250,000 shares of restricted stock to Cadant employees. We
also agreed to issue up to 2.0 million additional shares of
our common stock based upon the achievement of future sales
targets through 2003 for the cable modem termination systems
product. These sales targets were not achieved and no additional
shares of our common stock were issued.
26
|
|
|
Acquisition of Certain Assets of Atoga Systems |
On March 21, 2003, we purchased certain assets of Atoga
Systems, a Fremont, California-based developer of optical
transport systems for metropolitan area networks. Under the
terms of the agreement, we obtained certain inventory, fixed
assets, and intellectual property in consideration for
approximately $0.4 million of cash and the assumption of
certain lease obligations. Further, we retained approximately 28
employees and issued a total of 500,000 shares of
restricted stock to those employees. We were not as successful
in marketing these products as we originally anticipated. As a
result, in 2005 we closed the Fremont location and recorded an
impairment charge of approximately $0.2 million related to
the remaining intangibles associated with these products.
|
|
|
Acquisition of Certain Assets of Com21 |
On August 13, 2003, we acquired certain cable modem
termination system-related assets of Com21, including the stock
of its Irish subsidiary. Under the terms of the agreement, ARRIS
obtained accounts receivable, inventory, fixed assets, other
current prepaid assets, and existing technology in exchange for
approximately $2.4 million of cash, of which
$2.2 million has been paid, and the assumption of
approximately $0.6 million in liabilities. The Company has
retained $0.2 million of the cash consideration for any
liabilities ARRIS may be required to pay resulting from Com21
activity prior to the acquisition date. The Company also
incurred approximately $0.2 million of legal and
professional fees associated with the transaction. ARRIS
retained approximately 50 Com21 employees.
|
|
|
Acquisition of cXm Broadband LLC |
On April 1, 2005, the Company acquired the remaining 75% of
the membership interest of cXm Broadband L.L.C., an entity that
ARRIS previously accounted for under the equity method of
accounting, from January 31, 2005 through March 31,
2005, as ARRIS held a 25% ownership stake in the company. ARRIS
decided to acquire the remaining membership interest in order to
expand its existing Broadband product portfolio and to penetrate
the Korean market for high-speed data access into multi-dwelling
units. ARRIS acquired the remaining ownership percentage from
the other shareholder for cash and the assumption of certain
liabilities of $0.2 million. The allocated purchase price
also includes the Companys existing $1.3 million
equity investment in the L.L.C.
Alliances and Cooperations
In order to enhance our offering to MSOs, in particular, in
relation to their move into VoIP, we perform interoperability
testing with a wide variety of key components for other
manufacturers, including call management servers, media
gateways, central office switches, video on demand servers, and
cable modems. Such testing enables us to assure our customers of
complete compatibility between our products and products
produced by these other manufacturers.
Investment in R&D
We have made significant investments through our research and
development efforts in new products and expansion of our
existing products. Our primary focus has been on products and
services that will enable MSOs to build and operate
high-availability, fault-tolerant networks, which allow them to
generate greater revenue by offering high-speed data, telephony
and digital video. This success-based capital
expenditure is becoming an increasing portion of the cable
operators total capital spending. In 2005, we spent
approximately $60.1 million on research and development, or
8.8% of revenue. We expect to continue to spend similar levels
on research and development in the future.
Key accomplishments in 2005 included:
|
|
|
|
|
Arris achieved top
E-MTA market share with
over 40% of the world market in 2005 according to Infonetics
Research. |
|
|
|
The introduction of the fifth generation of our
E-MTAs, including cost
reduced versions. |
27
|
|
|
|
|
The 500-series Touchstone
E-MTAs achieved both
DOCSIS and EuroDOCSIS 2.0 certification. |
|
|
|
Cost reductions within the CMTS product family. |
|
|
|
Continued work on our Keystone D5 Digital Multimedia Termination
System product, which is expected to be commercially available
in the first half of 2006. This new product recently has
undergone interoperability testing with several video on demand
systems and is currently in trial with customers. |
|
|
|
The
Cadant®
C4 CMTS achieved Euro-DOCSIS 2.0 certification. |
|
|
|
Continued work on a multi-line
E-MTA for use by our
customers in multi-dwelling units (MDU) and
businesses. We expect to launch this product in the first half
of 2006. |
|
|
|
Continued work on a session initiated protocol (SIP)
based version of our
E-MTA for Eastern
European and Asian customers. |
|
|
|
Demonstration of our FlexPath wideband technology enabling
delivery of over 100Mbps to the subscriber over standard cable
plant. FlexPath is currently being evaluated by an Asian
customer and will be commercially available in the first half of
2006. |
Through our work at CableLabs on the DOCSIS 3.0 and Modular CMTS
standards we have developed a Next Generation Architecture. In
2006, based on the technology of our flagship C4 CMTS and D5
Digital Multimedia Termination System, (DMTS), we expect to
commence the development of components which, when added to the
existing installed base should enable MSOs to cost effectively
upgrade their networks to these new standards without the need
to replace the existing equipment. These new products are
expected to cost effectively enable such advanced features as:
|
|
|
|
|
Wideband data services which are at parity with telco-provided
fiber to the home |
|
|
|
IPTV |
|
|
|
High definition video on demand |
During 2006, we plan to continue to innovate in the CPE area. We
intend to introduce a line of wireless
E-MTAs and multi-line
E-MTAs which will
facilitate installation of equipment in homes, apartments, and
small businesses where the inside wiring will not support
advanced services. We also expect to introduce a cost-reduced
version of our FlexPath wideband modem, making 100Mbps
data service to the home more affordable and competitive to
telco-offered fiber to the home offering. We anticipate
introducing the complete 500-series line of
E-MTAs further reducing
the cost while increasing performance. The primary line versions
of the 500-series E-MTA are based around the latest
generation of lithium-ion battery technology with a newly
designed battery pack, which is smaller, lighter, and lower cost
than that used in the 400-series. Our strategy in the CPE area
is to continuously reduce cost and at the same time enhance
performance and add the features our customers tell us they need
to reduce their operating costs and provide advanced services to
their subscribers.
Debt Reduction and Refinancing Actions
We have taken steps over the past three years to restructure and
reduce our debt. At the end of 2005 ARRIS had no long term debt.
In 1998, the Company issued $115.0 million of
41/2% convertible
subordinated notes due May 15, 2003. The notes were
convertible, at the option of the holders, into our common stock
at a conversion price of $24.00 per share. In 2002, we
exchanged 1.6 shares of common stock for approximately
$15.4 million of the notes. Additionally, the Company
redeemed $23.9 million and $75.7 million of the notes
during 2003 and 2002, respectively, using cash. As of
May 15, 2003, all of the notes were redeemed.
28
In 2003, the Company issued $125.0 million of
41/2% convertible
subordinated notes due March 15, 2008. These notes were
convertible at the option of the holder into our common stock at
a conversion price of $5.00 per share. In March 2004, we
called $50.0 million of the notes for redemption, and
holders of the called notes elected to convert their notes into
an aggregate of 10.0 million shares of common stock, rather
than have the notes redeemed. In connection with the exchange,
we made a make-whole interest payment of approximately
0.5 million common shares, resulting in a charge of
$4.4 million. In May 2005, we called the remaining
$75.0 million of the Notes for redemption, and the holders
of the Notes elected to convert the notes into 15.0 million
shares of common stock rather than have the Notes redeemed. In
connection with the exchange, we made a make-whole interest
payment of approximately 0.3 million shares, resulting in a
charge of $2.4 million during the second quarter 2005. As
of December 31, 2005 we no longer have Notes outstanding.
|
|
|
Nortel Class B Membership Interest |
We used $88.4 million of the proceeds of the notes issued
in 2003 to retire the membership interest of
$116.9 million, representing a $28.5 million discount.
We also used the proceeds to repurchase and retire
8 million shares for $30.0 million (including
$2 million for the reduction in the forgiveness of the
return on the membership interest described elsewhere). On the
date of the repurchase, the closing fair market value of the
shares was approximately $32.0 million.
Results of Operations
As highlighted earlier, we have faced, and in the future will
face, significant changes in our industry and business. These
changes have impacted our results of operations and are expected
to do so in the future. As a result, we have implemented
strategies both in anticipation and in reaction to the impact of
these dynamics. These strategies were outlined in the Overview
to the MD&A.
29
Below is a table that shows our key operating data as a
percentage of sales. Following the table is a detailed
description of the major factors impacting the year over year
changes of the key lines of our results of operations.
|
|
|
Key Operating Data (as a percentage of net sales) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales
|
|
|
72.0 |
|
|
|
70.2 |
|
|
|
70.9 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
28.0 |
|
|
|
29.8 |
|
|
|
29.1 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
|
10.9 |
|
|
|
14.0 |
|
|
|
20.6 |
|
Research and development expenses
|
|
|
8.8 |
|
|
|
12.9 |
|
|
|
14.5 |
|
Restructuring and impairment charges
|
|
|
0.2 |
|
|
|
1.6 |
|
|
|
0.2 |
|
Amortization of intangibles
|
|
|
0.2 |
|
|
|
5.9 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7.9 |
|
|
|
(4.5 |
) |
|
|
(14.3 |
) |
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
0.3 |
|
|
|
1.0 |
|
|
|
2.4 |
|
Membership interest
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
Loss (gain) on debt retirement
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
(6.0 |
) |
Loss (gain) on investments
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
Gain on foreign currency
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.5 |
) |
Other expense (income), net
|
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
7.6 |
|
|
|
(6.2 |
) |
|
|
(11.0 |
) |
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
7.6 |
|
|
|
(6.2 |
) |
|
|
(11.0 |
) |
Gain (loss) from discontinued operations
|
|
|
|
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
7.6 |
% |
|
|
(5.8 |
)% |
|
|
(10.9 |
)% |
|
|
|
|
|
|
|
|
|
|
Comparison of Operations for the Three Years Ended
December 31, 2005
The table below sets forth our net sales for the three years
ended December 31, 2005, 2004, and 2003, for each of our
product categories described in Item 1 of this
Form 10-K (in
millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | |
|
Increase (Decrease) Between Periods | |
|
|
| |
|
| |
|
|
For the Years Ended December 31, | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
$ |
315.1 |
|
|
$ |
300.2 |
|
|
$ |
289.6 |
|
|
$ |
14.9 |
|
|
|
5.0 |
|
|
$ |
10.6 |
|
|
|
3.7 |
|
|
Supplies & CPE
|
|
|
365.3 |
|
|
|
189.8 |
|
|
|
144.4 |
|
|
|
175.5 |
|
|
|
92.5 |
|
|
|
45.4 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
680.4 |
|
|
$ |
490.0 |
|
|
$ |
434.0 |
|
|
$ |
190.4 |
|
|
|
38.9 |
|
|
$ |
56.0 |
|
|
|
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The table below sets forth our domestic and international sales
for the three years ended December 31, 2005, 2004, and 2003
(in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | |
|
Increase (Decrease) Between Periods | |
|
|
| |
|
| |
|
|
For the Years Ended December 31, | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Domestic
|
|
$ |
495.8 |
|
|
$ |
366.4 |
|
|
$ |
351.9 |
|
|
$ |
129.4 |
|
|
|
35.3 |
|
|
$ |
14.5 |
|
|
|
4.1 |
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
51.1 |
|
|
|
48.0 |
|
|
|
36.8 |
|
|
|
3.1 |
|
|
|
6.5 |
|
|
|
11.2 |
|
|
|
30.4 |
|
|
Europe
|
|
|
67.4 |
|
|
|
46.2 |
|
|
|
27.2 |
|
|
|
21.2 |
|
|
|
45.9 |
|
|
|
19.0 |
|
|
|
69.9 |
|
|
Latin America
|
|
|
25.0 |
|
|
|
18.2 |
|
|
|
8.0 |
|
|
|
6.8 |
|
|
|
37.4 |
|
|
|
10.2 |
|
|
|
127.5 |
|
|
Canada
|
|
|
41.1 |
|
|
|
11.2 |
|
|
|
10.1 |
|
|
|
29.9 |
|
|
|
267.0 |
|
|
|
1.1 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
184.6 |
|
|
|
123.6 |
|
|
|
82.1 |
|
|
|
61.0 |
|
|
|
49.4 |
|
|
|
41.5 |
|
|
|
50.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
680.4 |
|
|
$ |
490.0 |
|
|
$ |
434.0 |
|
|
$ |
190.4 |
|
|
|
38.9 |
|
|
$ |
56.0 |
|
|
|
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband Net Sales 2005 vs. 2004 |
During 2005, sales of our Broadband products increased by
$14.9 million or 5.0% as compared to 2004.
|
|
|
|
|
Sales of our CMTS product line increased year over year. A
significant portion of the increase relates to sales to new
customers for this product line, most notably Charter
Communications. |
|
|
|
As anticipated, sales of our CBR voice product declined year
over year. Two factors led to the decline. First, the product
line is approaching end of life and as a result our customers,
in particular Cox Communications and JComm, have reduced their
purchases as they transition to VoIP. Second, we reduced the
price of the product in 2005. We expect a further decline in the
sales of our CBR product line in 2006 as customers, in
particular Cox Communications and JComm transition to VoIP. |
|
|
|
Supplies & CPE Net Sales 2005 vs. 2004 |
Supplies & CPE product revenue increased by
approximately $175.5 million or 92.5% in 2005 as compared
to 2004.
|
|
|
|
|
The increase reflects substantial growth in VoIP demand from our
customers as they began to rollout VoIP in volume in 2006, as a
result they purchased more
E-MTAs.
|
|
|
|
The increase in sales was broad based and included sales to many
new customers. |
|
|
|
We believe sales of
E-MTAs will be
robust in 2006. |
|
|
|
Broadband Net Sales 2004 vs. 2003 |
During 2004, sales of our Broadband products increased by
$10.6 million or 3.7% as compared to 2003. The following
factors contributed to this increase:
|
|
|
|
|
Sales of our CMTS product line increased year over year. A
significant portion of this increase is attributable to an
increase in sales to Liberty Media International (including its
affiliates). |
|
|
|
As anticipated, sales of our CBR voice products in 2004 declined
from 2003. However, we continued to have steady sales of CBR
product to Cox Communications and JComm. |
31
|
|
|
Supplies & CPE Net Sales 2004 vs. 2003 |
Supplies & CPE product revenue increased by
approximately $45.4 million or 31.4% in 2004 as compared to
2003.
|
|
|
|
|
Included in the Supplies & CPE product category is
DOCSIS cable modems and
E-MTAs. Sales of these
products increased significantly in 2004. A significant portion
of the increase is attributable to the ramp in sales of our
E-MTAs, as operators
began to deploy VoIP. |
|
|
|
Supplies & CPE product revenue internationally
increased by $23.5 million in 2004 as compared to 2003,
primarily due to an increase in sales of cable modems and
E-MTAs to our
international customers. |
|
|
|
Domestically, sales of our Supplies & CPE products
increased by $21.9 million. A substantial portion of this
increase is related to sales of
E-MTAs, most notably to
Time-Warner Cable. |
The table below sets forth our gross margin for the three years
ended December 31, 2005, 2004, and 2003, for each of our
product categories (in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin $ | |
|
|
|
|
| |
|
Increase (Decrease) Between Periods | |
|
|
|
|
| |
|
|
For the Years Ended | |
|
|
|
|
|
|
December 31, | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
$ |
122.1 |
|
|
$ |
120.7 |
|
|
$ |
110.1 |
|
|
$ |
1.4 |
|
|
|
1.2 |
|
|
$ |
10.6 |
|
|
|
9.6 |
|
|
Supplies & CPE
|
|
|
68.6 |
|
|
|
25.5 |
|
|
|
16.2 |
|
|
|
43.1 |
|
|
|
169.0 |
|
|
|
9.3 |
|
|
|
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
190.7 |
|
|
$ |
146.2 |
|
|
$ |
126.3 |
|
|
$ |
44.5 |
|
|
|
30.4 |
|
|
$ |
19.9 |
|
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth our gross margin percentages for the
three years ended December 31, 2005, 2004, and 2003, for
each of our product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin % | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
For the Years Ended | |
|
Percentage Point Increase | |
|
|
December 31, | |
|
(Decrease) Between Periods | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
38.8 |
% |
|
|
40.2 |
% |
|
|
38.0 |
% |
|
|
(1.4 |
) |
|
|
2.2 |
|
|
Supplies & CPE
|
|
|
18.8 |
|
|
|
13.4 |
|
|
|
11.2 |
|
|
|
5.4 |
|
|
|
2.2 |
|
|
|
Total
|
|
|
28.0 |
% |
|
|
29.8 |
% |
|
|
29.1 |
% |
|
|
(1.8 |
) |
|
|
0.7 |
|
|
|
|
Broadband Gross Margin 2005 vs. 2004 |
The increase in Broadband gross margin dollars and the decrease
in percentages in 2005 as compared to 2004 were related to the
following factors:
|
|
|
|
|
The increase in gross margin dollars year over year is a result
of the $14.9 million increase in sales. |
|
|
|
The decrease in the gross margin percentage year over year
primarily reflects price reductions related to our CBR product
line. |
|
|
|
In 2005, we recorded $2.9 million of inventory reserves
versus $2.7 million in 2004. |
32
|
|
|
Supplies & CPE Gross Margin 2005 vs. 2004 |
The increase in Supplies & CPE gross margin dollars and
percentages in 2005 as compared to 2004 was related to the
following factors:
|
|
|
|
|
The increase in gross margin dollars year over year is a result
of the $175.5 million increase in sales. |
|
|
|
Product cost reductions positively impacted gross margin
percentage year over year. |
|
|
|
In 2005, we recorded $2.0 million of inventory reserves
versus $2.9 million in 2004. |
|
|
|
Broadband Gross Margin 2004 vs. 2003 |
The increase in Broadband gross margin dollars and percentages
in 2004 as compared to 2003 was related to the following factors:
|
|
|
|
|
Gross margin dollars were impacted by year-over-year increases
in revenues. |
|
|
|
Product cost reduction programs were implemented in the second
half of 2003, which helped contribute to an increase in margins. |
|
|
|
In 2004, we recorded $2.7 million of inventory reserves
versus $5.6 million in 2003. |
|
|
|
In the third and fourth quarters of 2004, our Broadband gross
margin percentages were 41.5% and 34.6%, respectively, reduced
from the first half of 2004. The decrease is the result of costs
associated with the introduction of our DOCSIS 2.0 CMTS,
including higher initial product costs as we launched the
product and a change in product mix, more specifically, lower
sales of our higher margin CBR products. |
|
|
|
Supplies & CPE Gross Margin 2004 vs. 2003 |
The increase in Supplies & CPE gross margin dollars and
percentages in 2004 as compared to 2003 was related to the
following factors:
|
|
|
|
|
The increase in revenues year-over-year significantly impacted
gross margin dollars. This was predominantly related to our
increase in sales of E-MTAs.
|
|
|
|
In 2004, we recorded $2.9 million of inventory reserves
versus $6.4 million in 2003. |
In the fourth quarter of 2005 our overall gross margin
percentage was 31.9%, up from the third quarter 2005 level of
27.4% and the fourth quarter 2004 level of 26.1%. The increase
reflected a shift in product mix (higher concentration of
Broadband sales as a result of lower sales of
E-MTAs) and the
achievement of product cost reductions. In the first quarter of
2006 we anticipate a decline in gross margin percentage to a
range of approximately 27% to 29%. The decline reflects a shift
in product mix (higher concentration of
E-MTAs) and anticipated
price reductions. Our overall gross margins are very dependent
upon, amongst other factors, achievement of planned cost
reductions, product mix, and price reductions granted to
customers.
The table below provides detail regarding our operating expenses
(in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses | |
|
Increase (Decrease) Between Periods | |
|
|
| |
|
| |
|
|
For the Years Ended December 31, | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Selling, general, & administrative
|
|
$ |
74.4 |
|
|
$ |
68.6 |
|
|
$ |
89.1 |
|
|
$ |
5.8 |
|
|
|
8.5 |
|
|
$ |
(20.5 |
) |
|
|
(23.0 |
) |
Research & development
|
|
|
60.1 |
|
|
|
63.4 |
|
|
|
62.9 |
|
|
|
(3.3 |
) |
|
|
(5.2 |
) |
|
|
0.5 |
|
|
|
0.8 |
|
Restructuring & impairment
|
|
|
1.3 |
|
|
|
7.6 |
|
|
|
0.9 |
|
|
|
(6.3 |
) |
|
|
(82.9 |
) |
|
|
6.7 |
|
|
|
744.4 |
|
Amortization of intangibles
|
|
|
1.2 |
|
|
|
28.7 |
|
|
|
35.2 |
|
|
|
(27.5 |
) |
|
|
(95.8 |
) |
|
|
(6.5 |
) |
|
|
(18.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
137.0 |
|
|
$ |
168.3 |
|
|
$ |
188.1 |
|
|
$ |
(31.3 |
) |
|
|
(18.6 |
) |
|
$ |
(19.8 |
) |
|
|
(10.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
Selling, General, and Administrative, or SG&A,
Expenses |
2005
vs. 2004
Several factors contributed to the increase year over year:
|
|
|
|
|
In the third quarter of 2005, we chose to early adopt the
provisions of SFAS No. 123R, Share-Based
Payment. Prior to adoption, we followed the provisions of
APB Opinion No. 25 Accounting for Stock Issued to
Employees, and recorded non-cash compensation expense
related to restricted stock grants and stock options subject to
variable accounting. Year over year non-cash compensation costs
increased by $3.6 million, predominantly as a result of
SFAS No. 123R, Share-Based Payment. |
|
|
|
Variable compensation costs (bonuses) increased by
$2.1 million year over year reflecting our strong business
performance relative to targets established by our board of
directors. |
Several factors contributed to the reduction year over year:
|
|
|
|
|
Legal fees and settlement costs decreased significantly in 2004.
In 2003, we incurred approximately $5.0 million of
settlement/legal expenses associated with patent litigation that
ultimately was settled. |
|
|
|
In 2003, we recorded $2.2 million associated with the
write-off of customer relations software. |
|
|
|
In 2003, we incurred $1.4 million of costs associated with
the disposal of ESP. |
|
|
|
The impact of previously implemented cost reduction programs led
to lower operating expenses, offset by higher employee incentive
accruals. |
|
|
|
Reserves for doubtful accounts decreased year over year
primarily as a result of lower year over year requirements for
Cabovisao of $4.9 million, net of a gain of
$1.5 million from the sale of the receivable to a third
party. |
|
|
|
Included in the SG&A expenses for 2004 and 2003 are
severance costs of $0.4 million and $1.1 million,
respectively. |
|
|
|
Research & Development Expenses |
Included in our R&D expenses are costs directly associated
with our development efforts (people, facilities, materials,
etc.) and reasonable allocations of our information technology
and facility costs.
Several factors contributed to the $3.3 million reduction
year over year:
|
|
|
|
|
For the majority of 2004, we continued to invest in certain
products related to our Atoga product line, including a R&D
center in Fremont, California. In late 2004, we closed the
facility and severed 28 employees. In 2005, there were no
expenditures related to this facility and employees. The
resulting year over year decrease was approximately
$4.1 million. |
|
|
|
In the second quarter of 2005, there was a benefit of
approximately $1.2 million representing funding received
from a customer related to development work that ARRIS performed
for it over an 18 month period. The expenses related to the
project were charged to research and development in the periods
in which they were performed. The customer provided progress
payments over the respective time period. The receipt of the
cash was recorded as a liability until we completed the work and
the customer accepted it. The customer accepted the work in the
second quarter of 2005, at which time the payments were offset
against research and development expense. |
|
|
|
Partially offsetting the above decreases were year over year
increases related to variable compensation (bonuses) and
non- cash equity compensation expenses upon adoption of
SFAS No. 123R, Share-Based Payment of
approximately $2.9 million. |
34
R&D expenses increased $0.5 million year over year, or
less than one percent. Our primary focus in research &
development expenditures in 2004 and 2003 was on products that
allow MSOs to garner new revenues, in particular, high-speed
data, VoIP, and Video over IP. Major development efforts in 2004
and 2003 included work on the following: CMTS (C4, C3, D5), CPE
(DOCSIS modems &
E-MTAs), Atoga product
suite, product cost reductions, and new initiatives (including
VoIP).
|
|
|
Restructuring and Impairment Charges |
During 2005, we recorded restructuring and impairment charges of
$1.3 million which predominately relates to changes in
estimates related to real estate leases associated with the
previous consolidation of certain facilities.
During 2004, we consolidated two facilities in Georgia, giving
us the ability to house many of our core technology, marketing,
and corporate headquarter functions in a single building. This
consolidation resulted in a restructuring charge of
$6.2 million. Also during 2004, we adjusted our reserves
related to previously closed facilities. This adjustment was due
to a change in estimates and resulted in a restructuring charge
of approximately $1.1 million. Lastly, our office in
Fremont, California was closed at the end of 2004. This resulted
in a restructuring charge of $0.3 million, of which
$0.2 million related to severance charges and
$0.1 million related to lease commitments.
During 2003, ARRIS evaluated the restructuring accruals related
to previously closed facilities. Upon final review, we recorded
additional restructuring charges of $0.9 million during the
year ended December 31, 2003 as a result of a change to the
initial estimates used.
On an annual basis, we review our goodwill based upon our
analysis and an independent valuation. The valuation is
determined using a combination of the income and market
approaches on an invested capital basis, which is the market
value of equity plus interest-bearing debt. Independent
valuations were performed in the fourth quarters of 2005, 2004,
and 2003, and no impairment was indicated.
|
|
|
Amortization of Intangibles |
Our intangibles amortization expense represents amortization of
existing technology acquired as a result of the Arris
Interactive L.L.C. acquisition in 2001, the Cadant, Inc.
acquisition in 2002, the Atoga and Com21 acquisitions in 2003
and the cXm Broadband LLC acquisition in 2005. As of August
2004, the intangibles with respect to the Arris Interactive
L.L.C. acquisition were fully amortized, and as of January 2005,
the intangibles associated with Cadant, Inc. were fully
amortized.
35
The table below provides detail regarding our other expense
(income) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expense (Income) | |
|
Increase (Decrease) Between Periods | |
|
|
| |
|
| |
|
|
For the Years Ended December 31, | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Interest expense
|
|
$ |
2.1 |
|
|
$ |
5.0 |
|
|
$ |
10.4 |
|
|
$ |
(2.9 |
) |
|
$ |
(5.4 |
) |
Membership interest
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
(2.4 |
) |
Loss (gain) on debt retirement
|
|
|
2.4 |
|
|
|
4.4 |
|
|
|
(26.2 |
) |
|
|
(2.0 |
) |
|
|
30.6 |
|
Loss on investments and notes receivable
|
|
|
0.1 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
(1.2 |
) |
|
|
(0.1 |
) |
Gain on foreign currency
|
|
|
(0.1 |
) |
|
|
(1.3 |
) |
|
|
(2.4 |
) |
|
|
1.2 |
|
|
|
1.1 |
|
Interest income
|
|
|
(3.1 |
) |
|
|
(1.5 |
) |
|
|
(0.4 |
) |
|
|
(1.6 |
) |
|
|
(1.1 |
) |
Other expense (income)
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (income)
|
|
$ |
1.9 |
|
|
$ |
8.3 |
|
|
$ |
(14.2 |
) |
|
$ |
(6.4 |
) |
|
$ |
(22.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense reflects the amortization of deferred finance
fees, and the interest paid on our convertible subordinated
notes and capital leases.
|
|
|
Membership Interest Expense |
In conjunction with the acquisition of Arris Interactive L.L.C.
in August 2001, we issued to Nortel Networks a subordinated
redeemable Class B membership interest in Arris Interactive
L.L.C. with a face amount of $100.0 million. This
membership interest earned a return of 10% per annum,
compounded annually. During the first quarter 2003, we redeemed
the entire Class B membership interest in Arris Interactive
L.L.C. held by Nortel Networks, at a discount, at which point
the membership interest ceased.
|
|
|
Loss (Gain) on Debt Retirement |
During 2004, we called $50.0 million of the Notes due 2008
for redemption, and holders of the Notes elected to convert the
Notes into 10.0 million shares of common stock rather than
have the notes redeemed. Under the indentures terms for
redemptions, we made a make-whole interest payment of
approximately 0.5 million common shares, resulting in a
charge of $4.4 million during the first quarter of 2004.
In May 2005, we called the remaining $75.0 million of the
Notes for redemption and the holders of the Notes elected to
convert the notes into 15.0 million shares of common stock
rather than have the Notes redeemed. Under the indentures
terms for redemptions, we made a make-whole interest payment of
approximately 0.3 million shares resulting in a charge of
$2.4 million during the second quarter of 2005. As of
December 31, 2005, the Notes have been fully converted and
the Company has no long term debt.
The net gain on debt retirement of $26.2 million in 2003
consists of two transactions:
|
|
|
|
|
During the first quarter 2003, we redeemed the entire
Class B membership interest in Arris Interactive L.L.C.
held by Nortel Networks for approximately $88.4 million.
This discounted redemption resulted in a gain of approximately
$28.5 million during the first quarter of 2003. |
|
|
|
During the fourth quarter 2003, we chose to cancel our credit
facility, which was due to expire in August 2004. As a result,
we wrote off approximately $2.3 million of unamortized
finance fees related to the facility upon cancellation. |
36
|
|
|
Loss on Investments and Notes Receivable |
We hold certain investments in the common stock of
publicly-traded companies, a number of non-marketable equity
securities, and an investment in a rabbi trust associated with
our deferred compensation plan. For further discussion on the
classification and the accounting treatment of these
investments, see the Investments section within Financial
Liquidity and Capital Resources contained herein. During the
years ended December 31, 2005, 2004, and 2003, we recorded
net losses related to these investments of $0.1 million,
$1.3 million, and $1.4 million, respectively.
During 2004, we recorded a charge of $0.1 million in
relation to a short-term note receivable that we deemed to be
fully impaired. The note, which was due from an unrelated
private company, became due in October 2004, and the company was
unable to repay the note.
During 2005, 2004 and 2003, we recorded foreign currency gains
related to our international customers whose receivables and
collections are denominated in their local currency. We have
implemented a hedging strategy to mitigate the monetary exchange
fluctuations from the time of invoice to the time of payment,
and have occasionally entered into forward contracts based on a
percentage of expected foreign currency receipts.
In 2005, we recorded $0.5 million of income tax expense for
foreign taxes and Alternative Minimum Tax in the United States.
As we are in a cumulative net loss position for tax purposes, we
had sufficient net operating loss carryforwards to offset our
taxable income.
In 2004, we recorded income tax expense of $0.1 million
related to foreign income taxes. As we were in a cumulative loss
position for tax purposes, we did not incur income tax expense
(benefit) during 2003.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, certain product
lines have been accounted for as discontinued operations upon
their disposal in 2002 and historical results have been
reclassified accordingly.
During 2003, we reduced our accruals for vendor liabilities,
warranty issues, and other estimated costs related to disposals
by $4.8 million. This adjustment was the result of settling
certain vendor liabilities for amounts less than originally
anticipated and changes to our original estimated disposal
costs. Also during 2003, we increased our accrual by
$4.4 million for restructuring liabilities associated with
the discontinued operations of our manufacturing facilities as a
result of changes in estimates. The net result of the above
transactions in 2003 was a gain of $0.4 million in
discontinued operations.
During 2004, we recorded income from discontinued operations of
approximately $1.8 million with respect to the discontinued
product lines as a result of changes in estimates related to
real estate, vendor liabilities, and other accruals.
Additionally, we recognized a partial recovery of
$0.9 million with respect to inventory previously written
off associated with an Argentinean customer, of which
approximately $0.3 million related to the discontinued
operations of Actives and Keptel. The net result of the above
transactions in 2004 was a gain of $2.1 million in
discontinued operations.
In 2005, we recorded income of $0.2 million related to our
reserves for discontinued operations. These adjustments were the
result of the resolution of various vendor liabilities, taxes
and other costs.
37
Financial Liquidity and Capital Resources
As highlighted earlier, one of our key strategies is to maintain
and improve our capital structure. The key metrics we focus on
are summarized in the table below:
|
|
|
Liquidity & Capital Resources Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in millions, except DSO and Turns) | |
Key Working Capital Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$ |
25.5 |
|
|
$ |
21.5 |
|
|
$ |
14.9 |
|
Cash, cash equivalents, and short-term investments
|
|
$ |
129.5 |
|
|
$ |
103.1 |
|
|
$ |
84.9 |
|
Accounts Receivable, net
|
|
$ |
83.5 |
|
|
$ |
55.7 |
|
|
$ |
56.3 |
|
|
- Days Sales Outstanding (Full Year)
|
|
|
37 |
|
|
|
42 |
|
|
|
58 |
|
Inventory
|
|
$ |
113.9 |
|
|
$ |
92.6 |
|
|
$ |
78.6 |
|
|
- Turns (Full Year)
|
|
|
4.7 |
|
|
|
4.0 |
|
|
|
3.4 |
|
Key Debt Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes due 2008
|
|
$ |
|
|
|
$ |
75.0 |
|
|
$ |
125.0 |
|
Capital Expenditures
|
|
$ |
9.6 |
|
|
$ |
10.2 |
|
|
$ |
5.9 |
|
Shares Owned by Nortel
|
|
|
|
|
|
|
3.2 |
|
|
|
5.0 |
|
% Owned by Nortel
|
|
|
0.0 |
% |
|
|
3.6 |
% |
|
|
6.6 |
% |
In managing our liquidity and capital structure, we have been
and are focused on key goals, and we have and will continue in
the future to implement actions to achieve them. They include:
|
|
|
|
|
Liquidity ensure that we have sufficient cash
resources or other short term liquidity to manage day to day
operations |
|
|
|
2008 Notes implement a plan to retire the notes;
which was ultimately accomplished in 2005 and 2004 through
redemptions |
|
|
|
2003 Notes implement a plan to retire the notes;
which was ultimately accomplished in 2002 and 2003 through a
combination of cash redemptions ($99.6 million) and a share
exchange offer ($15.4 million) |
|
|
|
Nortel Class B Membership Interest in Arris Interactive
L.L.C. implement a plan to retire the debt; which
was ultimately accomplished in 2003 at a significant discount |
|
|
|
Growth implement a plan to ensure that we have
adequate capital resources, or access thereto, to execute
acquisitions |
|
|
|
Overhang implement a plan to reduce the overhang on
our stock caused by Nortel Networks holdings; at the end of 2005
Nortel no longer held shares in ARRIS |
Below is a description of key actions taken and an explanation
as to their potential impact:
|
|
|
Inventory & Accounts Receivable Programs |
We use turns to evaluate inventory management and days sales
outstanding, or DSOs, to evaluate accounts receivable
management. From the table above, you will note improvements,
particularly as evidenced by the 2005 turns of 4.7 and DSOs of
37 days. Both inventory and accounts receivable increased
year over year as a result of the growth in our revenues.
38
Looking forward, we do not anticipate a further reduction in
DSOs. It is possible that DSOs may increase, particularly if the
international component of our business increases as customers
internationally typically have longer payment terms. Inventory
turns may modestly improve in the future.
|
|
|
2008 Notes & Nortel Debt/ Shares |
In June 2002, we entered into an option agreement with Nortel
Networks pursuant to which we were entitled to retire the
Class B membership interest in Arris Interactive L.L.C.
held by Nortel Networks at a substantial discount and repurchase
up to 16.0 million shares. The agreement had an expiration
date of June 30, 2003. In addition, we obtained from Nortel
Networks an agreement to forgive approximately $5.9 million
of the return on the membership interest if we redeemed it prior
to March 31, 2003. In the first quarter of 2003, we had
substantially completed the retirement of the notes due 2003,
and had sufficient funds to retire the balance and maintain
sufficient liquidity for our business. We investigated options
to raise capital to take advantage of the agreement with Nortel
Networks and in March 2003, we raised $125.0 million
through the private placement of convertible notes. The terms
were at market and are described elsewhere. We used
$88.4 million of the proceeds of the notes issuance to
retire the membership interest of $116.9 million,
representing a $28.5 million discount. We also used the
funds to repurchase and retire 8.0 million shares for
$30.0 million (including $2.0 million for the
reduction in the forgiveness of the return on the membership
interest described elsewhere). On the date of the repurchase,
the closing fair market value of the shares was approximately
$32.0 million (based on a closing stock price of $4.01).
|
|
|
Redemption of the 2008 Notes |
In February 2004, our stock price had risen to the levels
required under the indenture where we were entitled to redeem,
in full or in part, the Notes due 2008. At that time, we gave
notice of a partial redemption of $50.0 million (with a
make whole payment, described elsewhere, to be paid
in stock). All redeemed note holders chose to convert their
notes into stock, resulting in the issuance of 10.0 million
shares of ARRIS common stock.
In May 2005, our stock price had risen to the levels required
under the indenture where we were entitled to redeem, in full or
in part, the balance of the Notes. We called the remaining
$75.0 million of the Notes for redemption and the holders
of the Notes elected to convert the notes into 15.0 million
shares of common stock rather than have the Notes redeemed. We
made a make-whole interest payment of approximately
0.3 million shares resulting in a charge of
$2.4 million during the second quarter 2005.
|
|
|
Summary of Current Liquidity Position and Potential for
Future Capital Raising |
We believe our current liquidity position, where we have
approximately $129.5 million of cash, cash equivalents, and
short-term investments on hand as of December 31, 2005,
together with the prospects for continued generation of cash
from operations are adequate for our short- and medium-term
business needs. However, a key part of our overall long-term
strategy may be implemented through additional acquisitions.
Either in order to be prepared to make acquisitions generally or
in connection with particular acquisitions, it is possible that
we will raise capital through private, or public, share or debt
offerings. We believe we have the ability to access the capital
markets upon commercially reasonable terms.
39
Following is a summary of our contractual obligations as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period | |
|
|
| |
Contractual Obligations |
|
Less than 1 Year | |
|
1 - 3 Years | |
|
3 - 5 Years | |
|
More than 5 Years | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions) | |
Operating leases(1)
|
|
$ |
6.9 |
|
|
$ |
10.7 |
|
|
$ |
9.5 |
|
|
$ |
4.8 |
|
|
$ |
31.9 |
|
Sublease income
|
|
|
(0.6 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
Purchase obligations(2)
|
|
|
122.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
129.0 |
|
|
$ |
10.4 |
|
|
$ |
9.5 |
|
|
$ |
4.8 |
|
|
$ |
153.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes leases which are reflected in restructuring accruals on
the consolidated balance sheets. |
|
(2) |
Represents obligations under agreements with non-cancelable
terms to purchase goods or services. The agreements are
enforceable and legally binding, and specify terms, including
quantities to be purchased and the timing of the purchase. |
|
|
|
Off-Balance Sheet Arrangements |
Under the definition contained in Item 303(a)(4)(ii) of
Regulation S-K,
the Company does not have any off-balance sheet arrangements.
Below is a table setting forth the key lines of our Consolidated
Statements of Cash Flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash provided by operating activities
|
|
$ |
25.5 |
|
|
$ |
21.5 |
|
|
$ |
14.9 |
|
Cash provided by (used in) investing
|
|
$ |
13.9 |
|
|
$ |
(77.6 |
) |
|
$ |
(17.3 |
) |
Cash provided by (used in) financing
|
|
$ |
10.9 |
|
|
$ |
6.2 |
|
|
$ |
(21.1 |
) |
|
Net increase (decrease) in cash
|
|
$ |
50.2 |
|
|
$ |
(49.8 |
) |
|
$ |
(23.5 |
) |
Below are the key line items affecting cash from operating
activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income (loss) after non-cash adjustments
|
|
$ |
72.9 |
|
|
$ |
17.5 |
|
|
$ |
(4.8 |
) |
(Increase)/Decrease in accounts receivable
|
|
|
(27.2 |
) |
|
|
1.2 |
|
|
|
17.0 |
|
(Increase)/Decrease in inventory
|
|
|
(20.9 |
) |
|
|
(14.1 |
) |
|
|
26.2 |
|
All other net
|
|
|
0.7 |
|
|
|
16.9 |
|
|
|
(23.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$ |
25.5 |
|
|
$ |
21.5 |
|
|
$ |
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As described above, our net income improved significantly year
over year, resulting in an improvement in cash from operating
activities. |
|
|
|
Our inventory increased in 2005 as a result of increased demand
and inventory planning. Our inventory increased in 2004, as
expected, primarily to accommodate a change in contract
manufacturers in the fourth quarter of 2004 and to build a
pipeline of E-MTAs. Our
inventory turns for 2005 were 4.7 as compared to 2004 turns of
4.0. |
|
|
|
Our accounts receivables increased in 2005 as a result of higher
revenues. In 2003, we generated $17.0 million of cash flow
from accounts receivable. This was facilitated by collection of
accounts |
40
|
|
|
|
|
associated with the sale of non-core product lines in late 2002
and a strong management focus on collections. Our 2005 DSO was
37 days as compared to the 2004 DSO of 42 days. |
|
|
|
While we believe we may be able to further improve our working
capital position, future cash flow from operating activities
will be more dependent on net income after adjustment for
non-cash items. |
Below are the key line items affecting investing activities (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Capital expenditures
|
|
$ |
(9.6 |
) |
|
$ |
(10.2 |
) |
|
$ |
(5.9 |
) |
Acquisitions/other
|
|
|
(0.2 |
) |
|
|
|
|
|
|
(3.2 |
) |
Purchases of short-term investments
|
|
|
(59.3 |
) |
|
|
(107.8 |
) |
|
|
(10.0 |
) |
Disposals of short-term investments
|
|
|
83.0 |
|
|
|
39.8 |
|
|
|
|
|
Proceeds from sale of investments
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
Proceeds from sale of product lines
|
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
$ |
13.9 |
|
|
$ |
(77.6 |
) |
|
$ |
(17.3 |
) |
|
|
|
|
|
|
|
|
|
|
Capital Expenditures Capital expenditures are mainly
for test equipment, laboratory equipment, and computing
equipment. We anticipate investing approximately $10.0 to
$12.0 million in 2006.
Acquisitions/ Other This represents cash investments
we have made in our various acquisitions including Com21, Atoga,
and cXm Broadband.
Purchases and Disposals of Short-Term Investments
This represents purchases and disposals of auction rate
securities held as short-term investments.
Proceeds from Sale of Investments This represents
the cash proceeds we received from the liquidation of excess
assets from our deferred compensation plan.
Proceeds from Sale of Product Lines This represents
the remaining cash proceeds we received from the sale of our
Actives product line.
Below are the key items affecting our financing activities (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Retirement of 2003 notes
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(23.9 |
) |
Payments on notes payable
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(0.7 |
) |
Payments on capital leases
|
|
|
|
|
|
|
|
|
|
|
(2.1 |
) |
Redemption of preferred membership interest
|
|
|
|
|
|
|
|
|
|
|
(88.4 |
) |
Borrowing under 2008 notes
|
|
|
|
|
|
|
|
|
|
|
125.0 |
|
Borrowing under notes payable
|
|
|
|
|
|
|
|
|
|
|
1.6 |
|
Proceeds from issuance of common stock
|
|
|
10.9 |
|
|
|
7.4 |
|
|
|
1.2 |
|
Repurchase of common stock and stock units
|
|
|
|
|
|
|
|
|
|
|
(28.0 |
) |
Deferred financing fees paid
|
|
|
|
|
|
|
|
|
|
|
(5.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
$ |
10.9 |
|
|
$ |
6.2 |
|
|
$ |
(21.1 |
) |
|
|
|
|
|
|
|
|
|
|
As can be seen from the above table, we have substantially
refinanced our capital structure over the past three years. We
eliminated our 2003 Notes and Class B Membership Interest.
We did so using cash from operating activities, sale of non-core
product lines and the issuance of $125.0 million through
our 2008 notes offering.
41
In 2004, we converted $50.0 million of our
41/2% convertible
subordinated notes due 2008 in exchange for common stock. In
connection with the redemption, we made a make-whole interest
payment that included the issuance of approximately
0.5 million common shares valued at approximately
$4.4 million which is reflected as a loss on debt
retirement in the first quarter of 2004. Additionally, we wrote
off approximately $1.6 million of deferred finance fees
related to the notes in the first quarter of 2004.
In 2005, we converted the remaining $75.0 million of the
Notes into 15.0 million shares of common stock rather than
have the Notes redeemed. The Company made a make-whole interest
payment of approximately 0.3 million shares resulting in a
charge of $2.4 million during the second quarter of 2005.
As of December 31, 2005, the Notes have been fully
converted and the Company has no long term debt.
Sales of common stock represent the proceeds we received as a
result of exercise of stock options.
As of December 31, 2005, we did not have any floating rate
indebtedness or outstanding interest rate swap agreements.
A significant portion of our products are manufactured or
assembled in Mexico, Taiwan, China, the Philippines, and other
foreign countries. Our sales into international markets have
been and are expected in the future to be an important part of
our business. These foreign operations are subject to the usual
risks inherent in conducting business abroad, including risks
with respect to currency exchange rates, economic and political
destabilization, restrictive actions and taxation by foreign
governments, nationalization, the laws and policies of the
United States affecting trade, foreign investment and loans, and
foreign tax laws.
We have certain international customers who are billed in their
local currency. We use a hedging strategy and enter into forward
or currency option contracts based on a percentage of expected
foreign currency receipts. The percentage can vary, based on the
predictability of cash receipts. We routinely review our
accounts receivable in foreign currency and periodically
initiate forward or option contracts when appropriate.
In the ordinary course of business, we, from time to time, will
enter into financing arrangements with customers. These
financial instruments include letters of credit, commitments to
extend credit and guarantees of debt. These agreements could
include the granting of extended payment terms that result in
longer collection periods for accounts receivable and slower
cash inflows from operations and/or could result in the deferral
of revenue. As of December 31, 2005 and 2004, we had
approximately $6.1 million and $4.0 million,
respectively, outstanding under letters of credit which were
cash collateralized. The cash collateral is held in the form of
restricted cash.
We hold short-term investments consisting of debt securities
classified as available-for-sale, which are stated at estimated
fair value. These debt securities include U.S. treasury
notes, state and municipal bonds, asset-backed securities,
auction rate securities, corporate bonds, commercial paper, and
certificates of deposit. These investments are on deposit with a
major financial institution.
We held certain investments in the common stock of
publicly-traded companies that were classified as trading
securities. The remaining shares of common stock were sold
during 2003 and the investment was $0 at December 31, 2005
and 2004. Changes in the market value of these securities and
gains or losses on related sales of these securities were
recognized in income and resulted in a gain of $0.1 million
in 2003.
42
We held certain investments in the common stock of
publicly-traded companies which were classified as available for
sale. Changes in the market value of these securities are
typically recorded in other comprehensive income. These
securities are also subject to a periodic impairment review,
which requires significant judgment. Because these investments
had been below their cost basis for a period greater than six
months, impairment charges of $1.4 million and
$0.4 million were recorded during the years ended
December 31, 2004 and 2003, respectively. As of
December 31, 2005 and 2004, the carrying value of these
investments was $0.
In addition, we hold a number of non-marketable equity
securities totaling approximately $32 thousand and $827 thousand
at December 31, 2005 and 2004, respectively, which are
classified as available for sale. The non-marketable equity
securities are subject to a periodic impairment review, which
requires significant judgment as there are no open-market
valuations. During the years ended December 31, 2005 and
2004, we recorded charges of approximately $0.2 million and
$0.1 million, respectively, in relation to non-marketable
equity securities deemed to be impaired based on various
factors. During the year ended December 31, 2003, we
recorded an impairment charge of $1.1 million in relation
to an investment in a
start-up company, which
raised a new round of financing at a substantial discount in
early July 2003.
During the third quarter of 2004, we recorded a charge of
$0.1 million in relation to a short-term note receivable
that we deemed to be fully impaired. The note, which was due
from an unrelated private company, became due in October 2004,
and the company has been unable to repay the note.
As of December 31, 2004, ARRIS held a non-marketable equity
security of $0.6 million (included in the total of
$0.8 million described above) and a short-term note
receivable of $0.5 million from a private company. Late in
2004, the investee was unsuccessful in attempts to raise
additional funds to finance its business. On January 31,
2005, we foreclosed on the note receivable. This was a joint
proceeding with the other major note holder of the private
company. A new L.L.C. was formed with the other major note
holder, of which ARRIS held a 25% interest. In March 2005, ARRIS
and the other note holder agreed to ARRIS acquisition of
the other note holders interest in the L.L.C. This
transaction closed on April 1, 2005, and the product line
was integrated into ARRIS in the second quarter 2005.
We offered a deferred compensation arrangement, which allowed
certain employees to defer a portion of their earnings and defer
the related income taxes. These deferred earnings are invested
in a so-called rabbi trust, and are accounted for in
accordance with Emerging Issues Task Force Issue No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested. A
rabbi trust is a funding vehicle used to protect deferred
compensation benefits from various events (but not from
bankruptcy or insolvency). The investment in the rabbi trust is
classified as an investment on our balance sheet. During 2004,
we withdrew the excess of the deferred compensation assets over
the plans liabilities. A portion of the assets were
liquidated, which resulted in a realized gain of approximately
$0.3 million. At December 31, 2005 and 2004, ARRIS had
an accumulated unrealized gain related to the rabbi trust of
approximately $1.1 million and $0.7 million,
respectively, included in other comprehensive income.
Capital expenditures are made at a level designed to support the
strategic and operating needs of the business. ARRIS
capital expenditures were $9.6 million in 2005 as compared
to $10.2 million in 2004 and $5.9 million in 2003.
ARRIS had no significant commitments for capital expenditures at
December 31, 2005. Management expects to invest
approximately $10.0 million to $12.0 million in
capital expenditures for the year 2006.
|
|
|
Net Operating Loss Carryforwards |
As of December 31, 2005, ARRIS had net operating loss, or
NOL, carryforwards for domestic and foreign income tax purposes
of approximately $114.3 million and $18.2 million,
respectively. The federal NOLs expire through 2024. Foreign NOLs
related to our Irish subsidiary in the amount of
$18.2 million have an indefinite life and can only be used
to offset Irish income. The tax benefit associated with the
federal NOLs is offset by a full valuation allowance, in
accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes. We continually review the
adequacy of the valuation allowance and recognize the benefits
only
43
as reassessment indicates that it is more likely than not that
the benefits will be realized. ARRIS generated taxable income
for the first time in several years in 2005. If this trend of
profitability continues, it is possible that ARRIS may reverse
the valuation allowance recorded on its net deferred tax assets.
The availability of tax benefits of NOL carryforwards to reduce
ARRIS federal and state income tax liability is subject to
various limitations under the Internal Revenue Code. The
availability of tax benefits of NOL carryforwards to reduce
ARRIS foreign income tax liability is subject to the
various tax provisions of the respective countries.
|
|
|
Defined Benefit Pension Plans |
We sponsor two non-contributory defined benefit pension plans, a
qualified and nonqualified plan available to a limited group of
employees, which cover our U.S. employees. As of
January 1, 2000 we froze the defined qualified pension plan
benefits. The U.S. pension plan benefit formulas generally
provide for payments to retired employees based upon their
length of service and compensation as defined in the plans. The
plans are accounted for in accordance with
SFAS No. 87, Employers Accounting for
Pensions, which requires that amounts recognized in the
financial statements be determined on an actuarial basis.
Disclosures are made in accordance with SFAS No. 132R,
Employers Disclosures about Pensions and Other
Postretirement Benefits. The actuarial measurement includes
estimates and assumptions relating to the discount rate used to
measure the plan liabilities.
The investment strategies of the plans place a high priority on
benefit security. The plans invest conservatively so as not to
expose assets to depreciation in adverse markets. The
plans strategy also places a high priority on earning a
rate of return greater than the annual inflation rate along with
maintaining average market results. The plan has targeted asset
diversification across different asset classes and markets to
take advantage of economic environments and to also act as a
risk minimizer by dampening the portfolios volatility.
September 30 is the measurement date used for the 2005,
2004 and 2003 reporting years.
The weighted-average actuarial assumptions used to determine the
benefit obligations for the three years presented are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Assumed discount rate for active participants
|
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Assumed discount rate for inactive participants
|
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Rates of compensation increase
|
|
|
3.75 |
% |
|
|
5.94 |
% |
|
|
6.00 |
% |
The weighted-average actuarial assumptions used to determine the
net periodic benefit costs are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Assumed discount rate for active participants
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.75 |
% |
Assumed discount rate for inactive participants
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.50 |
% |
Rates of compensation increase
|
|
|
5.94 |
% |
|
|
5.94 |
% |
|
|
6.00 |
% |
Expected long-term rate of return on plan assets
|
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
The expected long-term rate of return on assets is derived using
the building block approach which includes assumptions for the
long term inflation rate, real return, and equity risk premiums.
44
As of December 31, 2005, the expected benefit payments
related to our defined benefit pension plans were as follows (in
thousands):
|
|
|
|
|
2006
|
|
$ |
509 |
|
2007
|
|
|
597 |
|
2008
|
|
|
742 |
|
2009
|
|
|
804 |
|
2010
|
|
|
1,195 |
|
2011 2015
|
|
|
7,724 |
|
|
|
|
Adoption of SFAS No. 123R, Share-Based Payment |
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R,
Share-Based Payment, which replaces
SFAS No. 123, Accounting for Stock-Based
Compensation, supercedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. SFAS 123R is effective for
public companies for interim or annual periods beginning after
June 15, 2005. As revised, this statement requires all
companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value. We
chose to early adopt SFAS 123R on July 1, 2005 using
the modified prospective method. Prior to the adoption date,
ARRIS used the intrinsic value method for valuing its awards of
stock options and restricted stock and recorded the related
compensation expense, if any, in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees and
related interpretations.
Prior to the adoption of SFAS No. 123R, ARRIS used the
Black-Scholes option valuation model to estimate the fair value
of an option on the date of grant for pro forma purposes.
Upon adoption of SFAS No. 123R, ARRIS elected to
continue to use the Black-Scholes model; however, it engaged an
independent third party to assist the Company in determining the
Black-Scholes weighted average inputs utilized in the valuation
of options granted subsequent to July 1, 2005. Prior to the
adoption of SFAS No. 123R, the Company estimated the
expected volatility exclusively on historical stock prices of
ARRIS common stock over a period of time. Under SFAS
No. 123R, the volatility factors are based upon a
combination of historical volatility over a period of time and
estimates of implied volatility based on traded option contracts
on ARRIS common stock. The change in estimating volatility was
made because the Company felt that the inclusion of the implied
volatility factor was a more accurate estimate of the
stocks future performance. The expected term of the awards
granted are based upon a weighted average life of exercise
activity of the grantee population. The risk-free interest rate
is based upon the U.S. treasury strip yield at the grant
date, using a remaining term equal to the expected life. The
expected dividend yield is 0%, as the Company has not paid cash
dividends on its common stock since its inception. In
calculating the stock compensation expense, ARRIS applies an
estimated post-vesting forfeiture rate based upon historical
rates.
In May 2005, the ARRIS Board of Directors approved the
acceleration of outstanding options with exercise prices equal
to $9.06 and above. All of these options were
out-of-the-money
at the time of acceleration, as the closing stock price on
May 5, 2005 was $7.67. The acceleration covered options to
purchase approximately 1.4 million shares of common stock,
but did not involve any options held by directors or executive
officers. The purpose of the acceleration was to reduce the
expense that would be associated with these options in
accordance with the provisions of SFAS No. 123R,
Share-Based Payment, once adopted. The acceleration
resulted in incremental stock-based employee compensation of
approximately $5.7 million in the pro forma expense for the
second quarter 2005.
In 2003, the Company offered to all eligible employees the
opportunity to exchange certain outstanding stock options for
restricted shares of ARRIS common stock. The Companys
Board of Directors and its eight most highly compensated
executive officers during 2002 were not eligible to participate
in the offer. Employees tendered approximately 76% of the
options eligible to be exchanged under the program and ARRIS
cancelled options to purchase approximately 4.7 million
shares of common stock and granted approximately
1.5 million restricted shares in exchange. The Company
recorded a fixed compensation expense
45
equal to the fair market value of the shares of restricted stock
granted through the offer; this cost is being amortized over the
four-year vesting period for the restricted shares. Prior to the
adoption of SFAS No. 123R, all eligible options that
were not tendered for exchange were subject to variable
accounting. The variable accounting charge fluctuated in
accordance with the market price of the ARRIS common stock at
the end of each accounting period until such stock options were
exercised, forfeited, or expire unexercised. In accordance with
SFAS No. 123R, an equity award that previously was
accounted for as a variable award under APB No. 25 should
no longer be accounted for as a variable award. As of
July 1, 2005, the grant-date fair value is used to
recognize compensation cost for these options.
As of December 31, 2005, there was approximately
$12.4 million of total unrecognized compensation cost
related to unvested share-based awards granted under the
Companys incentive plans. This compensation cost is
expected to be recognized over a weighted-average period of
2.1 years.
|
|
|
Critical Accounting Policies |
The accounting and financial reporting policies of the Company
are in conformity with U.S. generally accepted accounting
principles. The preparation of financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Management has
discussed the development and selection of the critical
accounting estimates communicated below with the audit committee
of the Companys Board of Directors and the audit committee
has reviewed the Companys related disclosures herein.
Our revenue recognition policies are in accordance with Staff
Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, and
SAB No. 104, Revenue Recognition, as issued by
the Securities and Exchange Commission and other applicable
guidance.
Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
collectibility is reasonably assured and all other significant
obligations have been fulfilled. Revenue from the provision of
services is recognized at the time of completion, delivery or
performance of the service. Contracts and customer purchase
orders generally are used to determine the existence of an
arrangement. Shipping documents, proof of delivery and customer
acceptance (when applicable) are used to verify delivery. We
assess whether an amount due from a customer is fixed and
determinable based on the terms of the agreement with the
customer, including, but not limited to, the payment terms
associated with the transaction. ARRIS assesses collection based
on a number of factors, including past transaction history with
the customer and credit-worthiness of the customer. If at the
time of sale we determine that collection of an amount due is
not reasonably assured, we defer recognition of revenue until
such time that collection becomes reasonably assured.
We resell software developed by outside third parties as well as
internally developed software. Software sold by ARRIS does not
require significant production, modification or customization.
We recognize software license revenue and product revenue for
certain products where software is more than an incidental
component of the hardware, in accordance with Statement of
Position No. 97-2, Software Revenue Recognition, as
amended by SOP No. 98-9, Software Recognition, With
Respect to Certain Transactions.
ARRIS internal costs as well as external costs incurred in
developing software are charged to expense as research and
development expense until technological feasibility has been
established for the product, in accordance with
SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. As the
time period between the establishment of technological
feasibility and general release of internally developed software
to its customers is generally very limited, no material
development costs are incurred during this period and,
therefore, no such costs have been capitalized to date.
46
Certain transactions also include multiple deliverables or
elements for the sale of hardware, licensed software,
maintenance/support and professional services. Accounting
principles for arrangements involving multiple elements require
the Company to allocate the arrangement fee to each respective
element based on its relative fair value, and recognize the
revenue for each element as the specific recognition criteria
are met. The determination of the fair value of the elements,
which is based on a variety of factors including the amount
ARRIS charges other customers for the products or services,
price lists or other relevant information, requires judgment by
management. Changes to the elements in an arrangement and our
ability to establish vendor-specific objective evidence for the
elements could affect the timing of the recognition of the
underlying revenue. Maintenance is offered as a separate
element. Maintenance revenue, which is generally billed in
advance, is deferred and recognized ratably over the term of the
related contract.
Generally, revenue is deferred if certain circumstances exist,
including but not limited to the following:
|
|
|
|
|
when undelivered products or services that are essential to the
functionality of the delivered product, or are required under
the terms of the contract to be delivered concurrently exist,
revenue is deferred until such undelivered products or services
are delivered, or |
|
|
|
when final acceptance of the product is specified by the
customer, revenue is deferred until the acceptance criteria have
been met. |
At December 31, 2005 and 2004, we had deferred revenue of
$1.7 million and $0.5 million, respectively, related
to shipments made to customers whereby the customer has the
right of return in addition to deferrals related to various
customer service agreements.
|
|
b) |
Allowance for Doubtful Accounts and Sales Returns |
We establish a reserve for doubtful accounts based upon our
historical experience in collecting accounts receivable. A
majority of our accounts receivable are from a few large cable
system operators, either with investment rated debt outstanding
or with substantial financial resources, and have very favorable
payment histories. Unlike businesses with relatively small
individual accounts receivable from a large number of customers,
if we were to have a collectibility problem with one of our
major customers, it is possible the reserve that we have
established will not be sufficient. We calculate our reserve for
uncollectible accounts using a model that considers customer
payment history, recent customer press releases, bankruptcy
filings, if any, Dun & Bradstreet reports, and
financial statement reviews. The Companys calculation is
reviewed by management to assess whether additional research is
necessary, and if complete, whether there needs to be an
adjustment to the reserve for uncollectible accounts. The
reserve is established through a charge to the provision and
represents amounts of current and past due customer receivable
balances which management estimates may not be collected. In the
past several years, two of our major customers encountered
significant financial difficulty due to the industry downturn
and tightening financial markets. At the end of 2005, we believe
that we do not have a major customer that is in a financially
distressed position.
We also establish a reserve for sales returns and allowances.
The reserve is an estimate of the impact of potential returns
based upon historic trends.
Our reserves for uncollectible accounts and sales returns and
allowances were $3.7 million and $3.8 million as of
December 31, 2005 and 2004, respectively.
Inventory is reflected in our financial statements at the lower
of average, approximating
first-in, first-out,
cost or market value.
47
The table below sets forth inventory balances at
December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Gross inventory
|
|
$ |
129.1 |
|
|
$ |
111.4 |
|
Reserves
|
|
|
(15.2 |
) |
|
|
(18.8 |
) |
|
|
|
|
|
|
|
Net inventory
|
|
$ |
113.9 |
|
|
$ |
92.6 |
|
|
|
|
|
|
|
|
We continuously evaluate future usage of product and where
supply exceeds demand, we may establish a reserve. In reviewing
inventory valuations, we also review for obsolete items. This
requires us to estimate future usage, which, in an industry
where rapid technological changes and significant variations in
capital spending by system operators are prevalent, is
difficult. As a result, to the extent that we have overestimated
future usage of inventory, the value of that inventory on our
financial statements may be overstated. When we believe that we
have overestimated our future usage, we adjust for that
overstatement through an increase in cost of sales in the period
identified as the inventory is written down to its net
realizable value. Inherent in our valuations are certain
management judgments and estimates, including markdowns,
shrinkage, manufacturing schedules, possible alternative uses
and future sales forecasts, which can significantly impact
ending inventory valuation and gross margin. The methodologies
utilized by the Company in its application of the above methods
are consistent for all periods presented.
The Company, to assist in assessing the proper valuation of
inventory, conducts annual physical inventory counts at all
ARRIS locations.
We offer warranties of various lengths to our customers
depending on product specifics and agreement terms with our
customers. We provide, by a current charge to cost of sales in
the period in which the related revenue is recognized, an
estimate of future warranty obligations. The estimate is based
upon historical experience. The embedded product base, failure
rates, cost to repair and warranty periods are used as a basis
for calculating the estimate. We also provide, via a charge to
current cost of sales, estimated expected costs associated with
non-recurring product failures. In the event of a significant
non-recurring product failure, the amount of the reserve may not
be sufficient. To the extent that other non-recurring warranty
claims occur in the future, the reserves that we have
established may not be sufficient, cost of sales may have been
understated, and a charge against future costs of sales may be
necessary. Information regarding the changes in ARRIS
aggregate product warranty liabilities was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
January 1,
|
|
$ |
5,453 |
|
|
$ |
4,633 |
|
Accruals related to warranties (including changes in estimates)
|
|
|
6,881 |
|
|
|
5,343 |
|
Settlements made (in cash or in kind)
|
|
|
(3,855 |
) |
|
|
(4,523 |
) |
|
|
|
|
|
|
|
Balance at December 31,
|
|
$ |
8,479 |
|
|
$ |
5,453 |
|
|
|
|
|
|
|
|
The year over year change in the reserve balance reflects both
increased reserves and usage of our on-going warranty claims. It
also reflects the additions, usages and adjustments attributable
to non-recurring product issues. We review and update our
estimates, with respect to the non-recurring product issues on
an on a routine basis.
|
|
e) |
Stock-Based Compensation |
ARRIS elected to early adopt SFAS No. 123R,
Share-Based Payment in the third quarter of 2005 using
the modified prospective method. SFAS No. 123R,
Share-Based Payment requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements as compensation cost
based on the fair value on the date of grant. The Company
determines fair value of such awards using the Black-Scholes
option pricing model. The Black-Scholes option pricing model
incorporates
48
certain assumptions, such as risk-free interest rate, expected
volatility, and expected life of options, in order to arrive at
a fair value estimate.
Forward-Looking Statements
Certain information and statements contained in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this report,
including statements using terms such as may,
expect, anticipate, intend,
estimate, believe, plan,
continue, could be, or similar
variations or the negative thereof, constitute forward-looking
statements with respect to the financial condition, results of
operations, and business of ARRIS, including statements that are
based on current expectations, estimates, forecasts, and
projections about the markets in which we operate and
managements beliefs and assumptions regarding these
markets. These and any other statements in this document that
are not statements about historical facts are
forward-looking statements. We caution investors
that forward-looking statements made by us are not guarantees of
future performance and that a variety of factors could cause our
actual results to differ materially from the anticipated results
or other expectations expressed in our forward-looking
statements. Important factors that could cause results or events
to differ from current expectations are described in the risk
factors set forth in Item 1A, Risk Factors.
These factors are not intended to be an all-encompassing list of
risks and uncertainties that may affect the operations,
performance, development and results of our business. In
providing forward-looking statements, ARRIS expressly disclaims
any obligation to update publicly or otherwise these statements,
whether as a result of new information, future events or
otherwise except to the extent required by law.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We are exposed to various market risks, including interest rates
and foreign currency rates. The following discussion of our
risk-management activities includes forward-looking
statements that involve risks and uncertainties. Actual
results could differ materially from those projected in the
forward-looking statements.
We have an investment portfolio of auction rate securities that
are classified as available-for-sale securities.
Although these securities have maturity dates of 15 to
30 years, they have characteristics of short-term
investments as the interest rates reset every 28 or 35 days
and we have the potential to liquidate them in an auction
process. Due to the short duration of these investments, a
movement in market interest rates would not have a material
impact on our operating results.
A significant portion of our products are manufactured or
assembled in China, Mexico, the Philippines, Taiwan, and other
countries outside the United States. Our sales into
international markets have been and are expected in the future
to be an important part of our business. These foreign
operations are subject to the usual risks inherent in conducting
business abroad, including risks with respect to currency
exchange rates, economic and political destabilization,
restrictive actions and taxation by foreign governments,
nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and foreign tax
laws.
We have certain international customers who are billed in their
local currency. Changes in the monetary exchange rates may
adversely affect our results of operations and financial
condition. To manage the volatility relating to these typical
business exposures, we may enter into various derivative
transactions, when appropriate. We do not hold or issue
derivative instruments for trading or other speculative
purposes. The euro and the yen are the predominant currencies of
those customers who are billed in their local currency. Taking
into account the effects of foreign currency fluctuations of the
euro and the yen versus the dollar, a hypothetical 10% weakening
of the U.S. dollar (as of December 31, 2005) would
provide a gain on foreign currency of approximately
$0.6 million. Conversely, a hypothetical 10% strengthening
of the U.S. dollar would provide a loss on foreign currency
of approximately $0.6 million. As of December 31,
2005, we had no material contracts, other than accounts
receivable, denominated in foreign currencies.
We regularly review our accounts receivable in foreign currency
and enter into derivative contracts when appropriate. As of
December 31, 2005, we had 31.5 million euros in option
collars outstanding.
49
|
|
Item 8. |
Consolidated Financial Statements and Supplementary
Data |
The report of our independent registered public accounting firm
and consolidated financial statements and notes thereto for the
Company are included in this Report and are listed in the Index
to Consolidated Financial Statements.
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
N/A
|
|
Item 9A. |
Controls and Procedures |
(a) Evaluation of Disclosure Controls and
Procedures. Our principal executive officer and principal
financial officer evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in
Rules 13a-15(e)
under the Securities Exchange Act of 1934 as of the end of the
period covered by this report (the Evaluation Date).
Based on that evaluation, such officers concluded that, as of
the Evaluation Date, our disclosure controls and procedures were
effective as contemplated by the Act.
(b) Changes in Internal Control over Financial
Reporting. Our principal executive officer and principal
financial officer evaluated the changes in our internal control
over financial reporting that occurred during the most recent
fiscal quarter. Based on that evaluation, our principal
executive officer and principal financial officer concluded that
there had been no change in our internal control over financial
reporting during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B. |
Other Information |
N/A
50
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
ARRIS management is responsible for establishing and
maintaining an adequate system of internal control over
financial reporting as required by the Sarbanes-Oxley Act of
2002 and as defined in Exchange Act
Rule 13a-15(f). A
control system can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Under managements supervision, an evaluation of the design
and effectiveness of ARRIS internal control over financial
reporting was conducted based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that
ARRIS internal control over financial reporting was
effective as of December 31, 2005.
Ernst & Young LLP, an independent registered public
accounting firm, as auditors of ARRIS Group, Inc.s
financial statements, has issued an attestation report on
managements assessment of the effectiveness of ARRIS
Group, Inc.s internal control over financial reporting as
of December 31, 2005. Ernst & Young LLPs
report, which expresses unqualified opinions on
managements assessment and on the effectiveness of
ARRIS internal control over financial reporting, is
included herein.
|
|
/s/ ROBERT J. STANZIONE
|
|
|
|
Robert J. Stanzione |
|
Chief Executive Officer, Chairman |
|
|
/s/ DAVID B. POTTS
|
|
|
|
David B. Potts |
|
Executive Vice President, Chief Financial Officer, |
|
Chief Accounting Officer, |
|
and Chief Information Officer |
|
March 15, 2006
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
ARRIS Group, Inc.
We have audited managements assessment, included in the
accompanying Report of Management, that ARRIS Group, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). ARRIS Group, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that ARRIS Group,
Inc. maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, ARRIS Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ARRIS Group, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2005, and our report dated March 15, 2006
expressed an unqualified opinion thereon.
Atlanta, Georgia
March 15, 2006
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
54 |
|
Consolidated Balance Sheets at December 31, 2005 and 2004
|
|
|
55 |
|
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
|
|
|
56 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
57 |
|
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2005, 2004 and 2003
|
|
|
59 |
|
Notes to the Consolidated Financial Statements
|
|
|
60 |
|
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ARRIS Group, Inc.
We have audited the accompanying consolidated balance sheets of
ARRIS Group, Inc. as of December 31, 2005 and 2004 and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2005. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of ARRIS management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of ARRIS Group, Inc. at
December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 of the Notes to the Consolidated
Financial Statements, the Company adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment,
in 2005.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of ARRIS Group, Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 15, 2006
expressed an unqualified opinion thereon.
Atlanta, Georgia
March 15, 2006
54
ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
75,286 |
|
|
$ |
25,072 |
|
|
Short-term investments, at fair value
|
|
|
54,250 |
|
|
|
78,000 |
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments
|
|
|
129,536 |
|
|
|
103,072 |
|
|
Restricted cash
|
|
|
6,073 |
|
|
|
4,017 |
|
|
Accounts receivable (net of allowances for doubtful accounts of
$3,729 in 2005 and $3,829 in 2004)
|
|
|
83,540 |
|
|
|
55,661 |
|
|
Other receivables
|
|
|
286 |
|
|
|
420 |
|
|
Inventories
|
|
|
113,909 |
|
|
|
92,636 |
|
|
Other current assets
|
|
|
15,276 |
|
|
|
9,416 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
348,620 |
|
|
|
265,222 |
|
Property, plant and equipment (net of accumulated depreciation
of $69,309 in 2005 and $61,146 in 2004)
|
|
|
25,557 |
|
|
|
27,125 |
|
Goodwill
|
|
|
150,569 |
|
|
|
150,569 |
|
Intangibles (net of accumulated amortization of $106,200 in 2005
and $105,446 in 2004)
|
|
|
920 |
|
|
|
1,672 |
|
Investments
|
|
|
3,321 |
|
|
|
3,620 |
|
Other assets
|
|
|
416 |
|
|
|
2,470 |
|
|
|
|
|
|
|
|
|
|
$ |
529,403 |
|
|
$ |
450,678 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
35,920 |
|
|
$ |
30,640 |
|
|
Accrued compensation, benefits and related taxes
|
|
|
20,424 |
|
|
|
14,845 |
|
|
Accrued warranty
|
|
|
8,479 |
|
|
|
5,453 |
|
|
Other accrued liabilities
|
|
|
20,633 |
|
|
|
26,658 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
85,456 |
|
|
|
77,596 |
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
75,000 |
|
Accrued pension
|
|
|
12,636 |
|
|
|
10,933 |
|
Other long-term liabilities
|
|
|
5,594 |
|
|
|
5,848 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
103,686 |
|
|
|
169,377 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share,
5.0 million shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 320.0 million
shares authorized; 105.6 million and 87.7 million
shares issued and outstanding in 2005 and 2004, respectively
|
|
|
1,069 |
|
|
|
889 |
|
|
|
Capital in excess of par value
|
|
|
732,405 |
|
|
|
644,838 |
|
|
|
Accumulated deficit
|
|
|
(305,555 |
) |
|
|
(357,038 |
) |
|
|
Unrealized gain on marketable securities
|
|
|
1,077 |
|
|
|
706 |
|
|
|
Unearned compensation
|
|
|
|
|
|
|
(4,566 |
) |
|
|
Unfunded pension losses
|
|
|
(4,618 |
) |
|
|
(3,345 |
) |
|
|
Unrealized gain on derivatives
|
|
|
1,523 |
|
|
|
|
|
|
|
Cumulative translation adjustments
|
|
|
(184 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
425,717 |
|
|
|
281,301 |
|
|
|
|
|
|
|
|
|
|
$ |
529,403 |
|
|
$ |
450,678 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
55
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands, except per share data) | |
Net sales
|
|
$ |
680,417 |
|
|
$ |
490,041 |
|
|
$ |
433,986 |
|
Cost of sales
|
|
|
489,703 |
|
|
|
343,864 |
|
|
|
307,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
190,714 |
|
|
|
146,177 |
|
|
|
126,260 |
|
|
|
Gross margin %
|
|
|
28.0 |
% |
|
|
29.8 |
% |
|
|
29.1 |
% |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
|
74,308 |
|
|
|
68,539 |
|
|
|
89,117 |
|
|
|
Research and development expenses
|
|
|
60,135 |
|
|
|
63,373 |
|
|
|
62,863 |
|
|
|
Restructuring and impairment charges
|
|
|
1,331 |
|
|
|
7,648 |
|
|
|
891 |
|
|
|
Amortization of intangibles
|
|
|
1,212 |
|
|
|
28,690 |
|
|
|
35,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,986 |
|
|
|
168,250 |
|
|
|
188,120 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
53,728 |
|
|
|
(22,073 |
) |
|
|
(61,860 |
) |
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,101 |
|
|
|
5,006 |
|
|
|
10,443 |
|
|
|
Membership interest
|
|
|
|
|
|
|
|
|
|
|
2,418 |
|
|
|
Loss (gain) on debt retirement
|
|
|
2,372 |
|
|
|
4,406 |
|
|
|
(26,164 |
) |
|
|
Loss on investments and notes receivable
|
|
|
146 |
|
|
|
1,320 |
|
|
|
1,436 |
|
|
|
Gain on foreign currency
|
|
|
(65 |
) |
|
|
(1,301 |
) |
|
|
(2,383 |
) |
|
|
Interest income
|
|
|
(3,100 |
) |
|
|
(1,525 |
) |
|
|
(414 |
) |
|
|
Other expense (income), net
|
|
|
486 |
|
|
|
423 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
51,788 |
|
|
|
(30,402 |
) |
|
|
(47,664 |
) |
Income tax expense
|
|
|
513 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
51,275 |
|
|
|
(30,510 |
) |
|
|
(47,664 |
) |
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations (including a net gain
on disposals of $0.2 million and $2.1 million and a
net loss of $0.4 million for the years ended
December 31, 2005, 2004, and 2003, respectively)
|
|
|
208 |
|
|
|
2,114 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
51,483 |
|
|
$ |
(28,396 |
) |
|
$ |
(47,313 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.53 |
|
|
$ |
(0.36 |
) |
|
$ |
(0.62 |
) |
|
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.53 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.52 |
|
|
$ |
(0.36 |
) |
|
$ |
(0.62 |
) |
|
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.52 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
96,581 |
|
|
|
85,283 |
|
|
|
76,839 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
98,264 |
|
|
|
85,283 |
|
|
|
76,839 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
56
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
51,483 |
|
|
$ |
(28,396 |
) |
|
$ |
(47,313 |
) |
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,529 |
|
|
|
10,395 |
|
|
|
16,145 |
|
|
Amortization of intangibles
|
|
|
1,212 |
|
|
|
28,690 |
|
|
|
35,249 |
|
|
Amortization of deferred finance fees
|
|
|
305 |
|
|
|
690 |
|
|
|
4,621 |
|
|
Stock compensation expense
|
|
|
6,915 |
|
|
|
2,826 |
|
|
|
3,370 |
|
|
Provision for doubtful accounts
|
|
|
(438 |
) |
|
|
(543 |
) |
|
|
7,906 |
|
|
Gain on sale of receivable
|
|
|
|
|
|
|
|
|
|
|
(1,477 |
) |
|
Loss on disposal of fixed assets
|
|
|
202 |
|
|
|
182 |
|
|
|
252 |
|
|
Loss on investments and notes receivable
|
|
|
206 |
|
|
|
1,320 |
|
|
|
1,436 |
|
|
Cash proceeds from sale of trading securities
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
Impairment of long-lived assets
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
Loss (gain) on debt retirement
|
|
|
2,372 |
|
|
|
4,406 |
|
|
|
(26,164 |
) |
|
Loss on sale of product line
|
|
|
|
|
|
|
|
|
|
|
1,365 |
|
|
Gain on discontinued product lines
|
|
|
(208 |
) |
|
|
(2,114 |
) |
|
|
(351 |
) |
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(27,191 |
) |
|
|
1,226 |
|
|
|
16,992 |
|
|
Other receivables
|
|
|
134 |
|
|
|
860 |
|
|
|
1,874 |
|
|
Inventories
|
|
|
(20,963 |
) |
|
|
(14,074 |
) |
|
|
26,210 |
|
|
Accounts payable and accrued liabilities
|
|
|
7,348 |
|
|
|
15,510 |
|
|
|
(24,156 |
) |
|
Accrued membership interest
|
|
|
|
|
|
|
|
|
|
|
2,418 |
|
|
Other, net
|
|
|
(6,739 |
) |
|
|
554 |
|
|
|
(3,708 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,458 |
|
|
|
21,532 |
|
|
|
14,895 |
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(59,250 |
) |
|
|
(107,750 |
) |
|
|
(10,000 |
) |
|
Sales of short-term investments
|
|
|
83,032 |
|
|
|
39,750 |
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(9,617 |
) |
|
|
(10,167 |
) |
|
|
(5,916 |
) |
|
Cash proceeds from sale of property, plant, and equipment
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
Cash proceeds from sale of Actives product line
|
|
|
|
|
|
|
|
|
|
|
1,800 |
|
|
Cash paid for acquisition, net of cash acquired
|
|
|
(89 |
) |
|
|
(50 |
) |
|
|
(3,005 |
) |
|
Cash paid for disposal of product line
|
|
|
|
|
|
|
|
|
|
|
(231 |
) |
|
Cash proceeds from sale of investment
|
|
|
|
|
|
|
642 |
|
|
|
|
|
|
Other
|
|
|
(259 |
) |
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
13,859 |
|
|
|
(77,575 |
) |
|
|
(17,326 |
) |
See accompanying notes to the consolidated financial statements.
57
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
$ |
10,897 |
|
|
$ |
7,410 |
|
|
$ |
1,249 |
|
|
Proceeds from issuance of debt
|
|
|
|
|
|
|
|
|
|
|
126,597 |
|
|
Redemption of preferred membership interest
|
|
|
|
|
|
|
|
|
|
|
(88,430 |
) |
|
Repurchase and retirement of common stock
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
|
Payments on capital lease obligations
|
|
|
|
|
|
|
(14 |
) |
|
|
(2,130 |
) |
|
Payments on debt obligations
|
|
|
|
|
|
|
(1,163 |
) |
|
|
(24,585 |
) |
|
Deferred financing costs paid
|
|
|
|
|
|
|
|
|
|
|
(5,797 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
10,897 |
|
|
|
6,233 |
|
|
|
(21,096 |
) |
Net increase (decrease) in cash and cash equivalents
|
|
|
50,214 |
|
|
|
(49,810 |
) |
|
|
(23,527 |
) |
Cash and cash equivalents at beginning of year
|
|
|
25,072 |
|
|
|
74,882 |
|
|
|
98,409 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
75,286 |
|
|
$ |
25,072 |
|
|
$ |
74,882 |
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired, excluding cash
|
|
$ |
799 |
|
|
$ |
|
|
|
$ |
2,267 |
|
|
Net liabilities assumed
|
|
|
(76 |
) |
|
|
50 |
|
|
|
(1,903 |
) |
|
Intangible assets acquired, including goodwill
|
|
|
691 |
|
|
|
|
|
|
|
2,641 |
|
|
Investment in acquired company
|
|
|
(1,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired
|
|
$ |
89 |
|
|
$ |
50 |
|
|
$ |
3,005 |
|
|
|
|
|
|
|
|
|
|
|
Landlord funded leasehold improvements
|
|
$ |
|
|
|
$ |
785 |
|
|
$ |
2,314 |
|
|
|
|
|
|
|
|
|
|
|
Equity issued in exchange for
41/2% convertible
subordinated notes due 2008
|
|
$ |
75,000 |
|
|
$ |
50,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Equity issued for make-whole interest payment
41/2% convertible
subordinated notes due 2008
|
|
$ |
2,372 |
|
|
$ |
4,406 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during the year
|
|
$ |
2,766 |
|
|
$ |
4,642 |
|
|
$ |
4,387 |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid during the year
|
|
$ |
859 |
|
|
$ |
335 |
|
|
$ |
293 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
58
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in | |
|
|
|
(Loss) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of | |
|
|
|
Gain on | |
|
|
|
Unfunded | |
|
Unrealized | |
|
Cumulative | |
|
|
|
|
Common | |
|
Par | |
|
Accumulated | |
|
Marketable | |
|
Unearned | |
|
Pension | |
|
Gain on | |
|
Translation | |
|
|
|
|
Stock | |
|
Value | |
|
Deficit | |
|
Securities | |
|
Compensation | |
|
Losses | |
|
Derivatives | |
|
Adjustments | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2003
|
|
$ |
831 |
|
|
$ |
603,563 |
|
|
$ |
(281,329 |
) |
|
$ |
227 |
|
|
$ |
(1,649 |
) |
|
$ |
(1,219 |
) |
|
$ |
|
|
|
$ |
(34 |
) |
|
$ |
320,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
(47,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,313 |
) |
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544 |
|
|
Minimum liability on unfunded pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,941 |
) |
Shares granted under option exchange program
|
|
|
14 |
|
|
|
7,623 |
|
|
|
|
|
|
|
|
|
|
|
(7,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted under stock award plan
|
|
|
2 |
|
|
|
706 |
|
|
|
|
|
|
|
|
|
|
|
(708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation under stock award plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,370 |
|
Repurchase of Nortel shares
|
|
|
(80 |
) |
|
|
(27,920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
Forfeiture of restricted stock
|
|
|
(1 |
) |
|
|
(674 |
) |
|
|
|
|
|
|
|
|
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock Atoga
|
|
|
5 |
|
|
|
2,150 |
|
|
|
|
|
|
|
|
|
|
|
(2,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock returned Cadant
|
|
|
(1 |
) |
|
|
(683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(684 |
) |
Issuance of common stock and other
|
|
|
3 |
|
|
|
1,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
$ |
773 |
|
|
$ |
586,008 |
|
|
$ |
(328,642 |
) |
|
$ |
771 |
|
|
$ |
(8,104 |
) |
|
$ |
(1,293 |
) |
|
|
|
|
|
$ |
(132 |
) |
|
$ |
249,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
(28,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,396 |
) |
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65 |
) |
|
Minimum liability on unfunded pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,052 |
) |
|
|
|
|
|
|
|
|
|
|
(2,052 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
(51 |
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,564 |
) |
Shares granted under stock award plan
|
|
|
1 |
|
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
(531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation under stock award plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826 |
|
Forfeiture of restricted stock
|
|
|
(3 |
) |
|
|
(1,237 |
) |
|
|
|
|
|
|
|
|
|
|
1,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in conversion of
41/2% notes
due 2008, net of write-off of associated deferred finance fees
|
|
|
105 |
|
|
|
52,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,767 |
|
Issuance of common stock and other
|
|
|
13 |
|
|
|
6,875 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
889 |
|
|
$ |
644,838 |
|
|
$ |
(357,038 |
) |
|
$ |
706 |
|
|
$ |
(4,566 |
) |
|
$ |
(3,345 |
) |
|
|
|
|
|
$ |
(183 |
) |
|
$ |
281,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
51,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,483 |
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371 |
|
|
Unrealized gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523 |
|
|
|
|
|
|
|
1,523 |
|
|
Minimum liability on unfunded pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,273 |
) |
|
|
|
|
|
|
|
|
|
|
(1,273 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,103 |
|
Shares granted under stock award plan
|
|
|
7 |
|
|
|
4,822 |
|
|
|
|
|
|
|
|
|
|
|
(4,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation under stock award plan
|
|
|
|
|
|
|
4,928 |
|
|
|
|
|
|
|
|
|
|
|
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,915 |
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
(174 |
) |
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in conversion of
41/2% notes
due 2008, net of write-off of associated deferred finance fees
|
|
|
153 |
|
|
|
75,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,714 |
|
Issuance of common stock and other
|
|
|
20 |
|
|
|
10,542 |
|
|
|
|
|
|
|
|
|
|
|
(878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,684 |
|
Adoption of SFAS No. 123R
|
|
|
|
|
|
|
(8,112 |
) |
|
|
|
|
|
|
|
|
|
|
8,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$ |
1,069 |
|
|
$ |
732,405 |
|
|
$ |
(305,555 |
) |
|
$ |
1,077 |
|
|
$ |
|
|
|
$ |
(4,618 |
) |
|
$ |
1,523 |
|
|
$ |
(184 |
) |
|
$ |
425,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
ARRIS Group, Inc. (together with its consolidated subsidiaries,
except as the context otherwise indicates, ARRIS or
the Company), is an international communications
technology company, headquartered in Suwanee, Georgia. ARRIS
operates in one business segment, Communications, providing a
range of customers with network and system products and
services, primarily hybrid fiber-coax networks and systems, for
the communications industry. ARRIS is a leading developer,
manufacturer and supplier of telephony, data, video,
construction, rebuild and maintenance equipment for the
broadband communications industry. The Company provides its
customers with products and services that enable reliable,
high-speed, two-way broadband transmission of video, telephony,
and data.
Note 2. Summary of Significant Accounting
Policies
The consolidated financial statements include the accounts of
ARRIS after elimination of intercompany transactions.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Certain prior year amounts have been reclassified to conform to
the current years financial statement presentation.
|
|
|
(d) Cash and Cash Equivalents |
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents. The
carrying amount reported in the consolidated balance sheets for
cash and cash equivalents approximates fair value. During 2005,
2004, and 2003, ARRIS recorded interest income of
$3.1 million, $1.5 million, and $0.4 million
respectively.
|
|
|
(e) Short-Term Investments |
The Companys short-term investments consist of debt
securities classified as available-for-sale, which are stated at
estimated fair value. These debt securities include
U.S. treasury notes, state and municipal bonds,
asset-backed securities, auction rate securities, corporate
bonds, commercial paper, and certificates of deposit. These
investments generally have long-term maturities of 15 to
30 years, but have certain characteristics of short-term
investments due to an interest rate setting mechanism and the
ability to liquidate them through an auction process that occurs
on intervals of 28 or 35 days. Therefore, the Company has
classified these investments as short-term and as
available-for-sale due to managements intent. These
investments are on deposit with a major financial institution.
Inventories are stated at the lower of average cost,
approximating first-in,
first-out, or market. The cost of finished goods is comprised of
material, labor, and overhead.
60
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company held certain investments in the common stock of
publicly-traded companies, which were classified as trading
securities. The remaining shares of common stock were sold
during 2003 and the investment was $0 at December 31, 2005
and 2004. Changes in the market value of these securities and
gains or losses on related sales of these securities were
recognized in income and resulted in a gain of $0.1 million
in 2003.
The Company holds certain investments in the common stock of
publicly-traded companies which were classified as available for
sale. Changes in the market value of these securities are
typically recorded in other comprehensive income. These
securities are also subject to a periodic impairment review,
which requires significant judgment. Because these investments
had been below their cost basis for a period greater than six
months, impairment charges of $1.4 million and
$0.4 million were recorded during the years ended
December 31, 2004 and 2003, respectively. As of
December 31, 2005 and 2004, the carrying value of these
investments was $0.
In addition, ARRIS holds non-marketable equity securities
totaling approximately $32 thousand and $827 thousand at
December 31, 2005 and 2004, respectively, which are
classified as available for sale. The non-marketable equity
securities are subject to a periodic impairment review, which
requires significant judgment as there are no open-market
valuations. During the years ended December 31, 2005 and
2004, the Company recorded charges of approximately
$0.2 million and $0.1 million, respectively, in
relation to non-marketable equity securities deemed to be
impaired based on various factors. During the year ended
December 31, 2003, ARRIS recorded an impairment charge of
$1.1 million in relation to an investment in a
start-up company, which
raised a new round of financing at a substantial discount in
early July 2003.
During the third quarter of 2004, the Company recorded a charge
of $0.1 million in relation to a short-term note receivable
that it deemed to be fully impaired. The note, which was due
from an unrelated private company, became due in October 2004,
and the company has been unable to repay the note.
As of December 31, 2004, ARRIS held a non-marketable equity
security of $0.6 million (included in the total of
$0.8 million described above) and a short-term note
receivable of $0.5 million from a private company. Late in
2004, the investee was unsuccessful in attempts to raise
additional funds to finance its business. On January 31,
2005, ARRIS foreclosed on the note receivable. This was a joint
proceeding with the other major note holder of the private
company. A new company, cXm Broadband L.L.C., was formed with
the other major note holder, of which ARRIS held a 25% interest.
In March 2005, ARRIS and the other note holder agreed in
principle to ARRIS acquisition of the other note
holders interest in the L.L.C. This transaction closed on
April 1, 2005, and the product line was integrated into
ARRIS in the second quarter 2005.
The Company offers a deferred compensation arrangement, which
allows certain employees to defer a portion of their earnings
and defer the related income taxes. These deferred earnings are
invested in a rabbi trust, and are accounted for in
accordance with Emerging Issues Task Force Issue No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested. A
rabbi trust is a funding vehicle used to protect deferred
compensation benefits from various events (but not from
bankruptcy or insolvency). The investment in the rabbi trust is
classified as an investment on our balance sheet. During the
fourth quarter of 2004, ARRIS withdrew the excess of the
deferred compensation assets over the plans liabilities. A
portion of the assets were liquidated, and resulted in a
realized gain of approximately $0.3 million. At
December 31, 2005 and 2004, ARRIS had an accumulated
unrealized gain related to the rabbi trust of approximately
$1.1 million and $0.7 million, respectively, included
in other comprehensive income.
ARRIS revenue recognition policies are in accordance with
Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, and
SAB No. 104, Revenue Recognition, as issued by
the Securities and Exchange Commission and other applicable
guidance.
61
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
collectibility is reasonably assured and all other significant
obligations have been fulfilled. Revenue from services provided
is recognized at the time of completion, delivery or performance
of the service. Contracts and customer purchase orders generally
are used to determine the existence of an arrangement. Shipping
documents, proof of delivery and customer acceptance (when
applicable) are used to verify delivery. The Company assesses
whether an amount due from a customer is fixed or determinable
based upon the terms of the agreement with the customer,
including, but not limited to, the payment terms associated with
the transaction. ARRIS assesses collection based on a number of
factors, including past transaction history and
credit-worthiness of the customer. If the Company determines
that collection of an amount due is not reasonably assured, it
defers recognition of revenue until such time that collection
becomes reasonably assured.
The Company resells software developed by outside third parties
as well as internally developed software. Software sold by ARRIS
does not require significant production, modification or
customization. The Company recognizes software license revenue,
and product revenue for certain products where software is more
than an incidental component of the hardware, in accordance with
Statement of Position (SOP) No. 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended by SOP No. 98-9, Software Recognition, With
Respect to Certain Transactions (SOP 98-9).
ARRIS internal costs as well as external costs incurred in
developing software are charged to expense as research and
development expense until technological feasibility has been
established for the product, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed. As the time period between
the establishment of technological feasibility and general
release of internally developed software to its customers is
generally short, no material development costs are incurred
during this period and, therefore, no such costs have been
capitalized to date.
Certain transactions also include multiple deliverables or
elements for the sale of hardware, licensed software,
maintenance/support and professional services. Accounting
principles for arrangements involving multiple elements require
the Company to allocate the arrangement fee to each respective
element based on its relative fair value, and recognize the
revenue for each element as the specific recognition criteria
are met. The determination of the fair value of the elements,
which is based on a variety of factors including the amount
ARRIS charges other customers for the products or services,
price lists or other relevant information, requires judgment by
management. Changes to the elements in an arrangement and the
Companys ability to establish vendor-specific objective
evidence for the elements could affect the timing of the
recognition of the underlying revenue. Maintenance is offered as
a separate element. Maintenance revenue, which is generally
billed in advance, is deferred and recognized ratably over the
term of the related contract.
Generally, revenue is deferred if certain circumstances exist,
including but not limited to the following:
|
|
|
|
|
when undelivered products or services that are essential to the
functionality of the delivered product, or are required under
the terms of the contract to be delivered concurrently exist,
revenue is deferred until such undelivered products or services
are delivered, or |
|
|
|
when final acceptance of the product is required by the
customer, revenue is deferred until the acceptance criteria have
been met. |
At December 31, 2005 and 2004, the Company had deferred
revenue of $1.7 million and $0.5 million,
respectively, related to shipments made to customers whereby the
customer has the right of return in addition to deferrals
related to various customer service agreements.
|
|
|
(i) Shipping and Handling Fees |
Shipping and handling costs for the years ended
December 31, 2005, 2004, and 2003 were approximately
$4.9 million, $4.3 million and $3.4 million,
respectively, and are classified in net sales and cost of sales.
62
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(j) Depreciation of Property, Plant and Equipment |
The Company provides for depreciation of property, plant and
equipment on the straight-line basis over estimated useful lives
of 25 to 40 years for buildings and improvements, 3 to
10 years for machinery and equipment, and the shorter of
the term of the lease or useful life for leasehold improvements.
Included in depreciation expense is the amortization of landlord
funded tenant improvements which amounted to $0.6 million
in 2005. Depreciation expense for the years ended
December 31, 2005, 2004, and 2003 was approximately
$10.5 million, $10.4 million and $16.1 million,
respectively.
|
|
|
(k) Goodwill and Long-Lived Assets |
Goodwill relates to the excess of cost over the fair value of
net assets resulting from an acquisition. On an annual basis,
our goodwill is reviewed based upon managements analysis
and includes an independent valuation. These valuations based
upon managements analysis were performed in the fourth
quarters of 2005, 2004, and 2003, and no impairment was
indicated.
As of December 31, 2005, the financial statements included
intangibles of $0.9 million, net of accumulated
amortization of $106.2 million. As of December 31,
2004, the financial statements included intangibles of
$1.7 million, net of accumulated amortization of
$105.4 million. These intangibles are primarily related to
the existing technology acquired from Arris Interactive L.L.C.
in 2001, from Cadant, Inc. in 2002, from Com21 in 2003, and cXm
Broadband LLC in 2005, each with an amortization period of three
years, approximating their estimated useful lives. The
intangibles related to Arris Interactive L.L.C. were fully
amortized in August 2004, and the intangibles related to Cadant,
Inc. were fully amortized in January 2005. The valuation process
to determine the fair market values of the existing technology
by management included valuations by an outside valuation
service. The values assigned were calculated using an income
approach utilizing the cash flow expected to be generated by
these technologies.
|
|
|
(l) Advertising and Sales Promotion |
Advertising and sales promotion costs are expensed as incurred.
Advertising expense was approximately $0.3 million,
$0.3 million and $0.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
|
|
|
(m) Research and Development |
Research and development (R&D) costs are
expensed as incurred. ARRIS research and development
expenditures for the years ended December 31, 2005, 2004
and 2003 were approximately $60.1 million,
$63.4 million and $62.9 million, respectively. The
expenditures include compensation costs, materials, other direct
expenses, and allocated costs of information technology,
telecom, and facilities.
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements.
For further discussion, see Note 4, Guarantees.
ARRIS uses the liability method of accounting for income taxes,
which requires recognition of temporary differences between
financial statement and income tax bases of assets and
liabilities, measured by enacted tax rates. The Company
continually reviews the adequacy of the valuation allowance and
recognizes the benefits of deferred tax assets only as
reassessment indicates that it is more likely than not that the
deferred tax assets will be realized.
63
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial position and operating results of ARRIS
foreign operations are consolidated using the U.S. dollar
as the functional currency. All balance sheet accounts of
foreign subsidiaries are translated at the current exchange rate
at the end of the accounting period with the exception of fixed
assets, common stock, and retained earnings, which are
translated at historical cost. Income statement items are
translated at average currency exchange rates. The resulting
translation adjustment is recorded as a gain or loss on foreign
currency in the Companys Consolidated Statement of
Operations. The overall foreign currency loss (gain) includes
the effect of the fluctuation of foreign currency cash and
receivables balances and derivative contracts. The loss (gain)
in foreign currency also reflects the losses (gains) associated
with the ineffective derivative contracts the Company had
outstanding. The loss (gain) in foreign currency for the year
ended December 31, 2005 was $(0.1) million. During the
year ended December 31, 2004, the loss (gain) in foreign
currency was approximately $(1.3) million.
The Company has certain international customers who are billed
in their local currency. From time to time the Company enters
into forward exchange contracts to hedge certain portions of
forecasted sales and the resulting cash flows denominated in
foreign currencies. Beginning in the third quarter of 2005,
where applicable, the Company designated contracts as effective
cash flow hedges and accounted for them as hedges in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The effective portion of
the change in the fair value of contracts which have been
designated as cash flow hedges, are reported in other
comprehensive income until the contract expires or the hedge is
deemed to be no longer effective. Upon expiry of the hedge, the
cumulative gain or loss recorded in other comprehensive income
is reclassified to the applicable income statement line. Any
ineffective or non-designated portion of the change in fair
value of these instruments is recognized as gain or loss on
foreign currency in the applicable period.
As of December 31, 2005, the Company had forward contracts
outstanding totaling 31.5 million euros which expire
between January 2006 and September 2006. As of December 31,
2005 the Company has recorded an unrealized gain of
$1.5 million in other comprehensive income related to these
contracts. During 2005 the company recognized net gains of
$2.3 million related to ineffective hedges, which is
recorded in gain or loss on foreign currency discussed above.
The company also recognized gains of $0.3 million on
effective hedges that were recorded with the corresponding
sales. As of December 31, 2004, no forward contracts were
outstanding. As of December 31, 2003, the Company had one
put option contract outstanding; however, the market value of
the contract was $0.0 million. The Company recorded a loss
of approximately $0.2 million during the fourth quarter
2003 related to this contract.
|
|
|
(q) Stock-Based Compensation |
The Company elected to early adopt the fair value recognition
provisions of SFAS No. 123R, Share-Based Payment
on July 1, 2005, using the modified prospective
approach. Prior to the adoption date, ARRIS used the intrinsic
value method for valuing its awards of stock options and
restricted stock and recorded the related compensation expense,
if any, in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees and related
interpretations. See Note 17, Stock-Based Compensation for
further discussion of the Companys significant accounting
policies related to stock based compensation.
|
|
|
(r) Concentrations of Credit Risk |
Financial instruments that potentially subject ARRIS to
concentrations of credit risk consist principally of cash, cash
equivalents and short-term investments, and accounts receivable.
ARRIS places its temporary cash investments with high credit
quality financial institutions. Concentrations with respect to
accounts receivable occur as the Company sells primarily to
large, well-established companies including companies outside of
the United States. The Companys credit policy generally
does not require collateral from its customers. ARRIS closely
monitors extensions of credit to other parties and, where
necessary, utilizes common financial instruments to mitigate
risk or requires cash on delivery terms. Overall financial
strategies
64
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and the effect of using a hedge are reviewed periodically. When
deemed uncollectible, accounts receivable balances are written
off against the allowance for doubtful accounts.
ARRIS customers have been impacted in the past by several
factors, including an industry downturn and tightening of access
to capital. As described elsewhere, the market which the Company
serves is characterized by a small number of large customers
creating a concentration of risk. As a result, the Company has
incurred significant charges related to uncollectible accounts
related to large customers. The Company incurred an overall
$15.9 million charge related to its Adelphia receivable in
2002 as a result of their bankruptcy filings. Further, in 2003
and 2002, the Company incurred overall charges totaling
$10.8 million related to Cabovisao. Cabovisao is a
Portugal-based customer who owed the Company approximately
$20.6 million in accounts receivable at the end of the
third quarter 2003, all of which was past due. Cabovisao and its
parent company, Csii, filed for court-supervised restructuring
and recapitalization in Canada and are in the process of
restructuring their financing. The Companys analysis of
the allowance for doubtful accounts at the end of 2005 resulted
in a net reduction in expense of $0.4 million for the year.
The mix of the Companys accounts receivable at
December 31, 2005 was weighted heavily toward high quality
accounts from a credit perspective. This, coupled with strong
fourth quarter collections, resulted in a reduction in the
reserve when applying ARRIS reserve methodology.
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments:
|
|
|
|
|
Cash, cash equivalents, and short-term investments: The carrying
amount reported in the balance sheet for cash, cash equivalents,
and short-term investments approximates their fair values. |
|
|
|
Accounts receivable and accounts payable: The carrying amounts
reported in the balance sheet for accounts receivable and
accounts payable approximate their fair values. The Company
establishes a reserve for doubtful accounts based upon its
historical experience in collecting accounts receivable. |
|
|
|
Marketable securities: The fair values for trading and
available-for-sale equity securities are based on quoted market
prices. |
|
|
|
Non-marketable securities: Non-marketable equity securities are
subject to a periodic impairment review; however, there are no
open-market valuations, and the impairment analysis requires
significant judgment. This analysis includes assessment of the
investees financial condition, the business outlook for
its products and technology, its projected results and cash
flow, recent rounds of financing, and the likelihood of
obtaining subsequent rounds of financing. |
|
|
|
Long-term debt: The fair value of the Companys convertible
subordinated debt is based on its quoted market price and
totaled approximately $0.0 million and $117.0 million
at December 31, 2005 and 2004, respectively. |
|
|
|
Foreign exchange contracts: The fair values of the
Companys foreign currency contracts and are estimated
based on dealer quotes, quoted market prices of comparable
contracts adjusted through interpolation where necessary,
maturity differences or if there are no relevant comparable
contracts on pricing models or formulas by using current
assumptions. As of December 31, 2005, ARRIS had
31.5 million euros in option collars outstanding, the fair
value of which was $1.5 million. As of December 31,
2004, no contracts were outstanding. |
Note 3. Impact of Recently Issued Accounting
Standards
In June 2005, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 154, Accounting Changes
and Error Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3. Opinion 20
previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 requires
retrospective application to prior
65
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
periods financial statements of changes in accounting
principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption
of SFAS No. 154 to have an impact on the consolidated
financial statements.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which requires all companies to
measure compensation cost for all share-based payments at fair
value. ARRIS elected to early adopt SFAS No. 123R on
July 1, 2005, using the modified prospective approach.
Under the modified prospective method, the fair value
recognition provisions apply only to new awards or awards
modified after July 1, 2005. Additionally, the fair value
of existing unvested awards at the date of adoption is recorded
in compensation expense over the remaining requisite service
period. Prior to the adoption of SFAS No. 123R, the
Company recognized stock award forfeitures as they occurred. In
accordance with SFAS No. 123R, ARRIS has changed its
accounting policy as of July 1, 2005 from the actual
forfeiture method to an estimate of expected forfeitures in
calculating compensation expense. The cumulative effect of this
change in accounting principle was immaterial.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets An Amendment of
APB Opinion No. 29, Accounting for Nonmonetary
Transactions.The standard requires that nonmonetary asset
exchanges should be recorded and measured at the fair value of
the assets exchanged, with certain exceptions. Productive assets
must be accounted for at fair value, rather than at carryover
basis, unless neither the asset received nor the asset
surrendered has a fair value that is determinable within
reasonable limits or the transactions lack commercial substance.
SFAS No. 153 states that a nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective on January 1,
2006. ARRIS does not expect the adoption of
SFAS No. 153 to have a material impact on its results
of operations.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs An Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 requires that
abnormal amounts of idle facility expense, freight, handling
costs, and waste material be recognized as current period
expense. Further, the standard requires that the allocation of
fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities.
SFAS No. 151 is effective on January 1, 2006.
ARRIS does not expect the adoption of SFAS No. 151 to
have a material impact on its results of operations.
Note 4. Guarantees
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements.
The Company provides for the estimated cost of product
warranties based on historical trends, the embedded base of
product in the field, failure rates, and repair costs at the
time revenue is recognized. Expenses related to product defects
and unusual product warranty problems are recorded in the period
that the problem is identified. While the Company engages in
extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its suppliers,
the estimated warranty obligation could be affected by changes
in ongoing product failure rates, material usage and service
delivery costs incurred in correcting a product failure, as well
as specific product failures outside of ARRIS baseline
experience. If actual product failure rates, material usage or
service delivery costs differ from estimates, revisions (which
could be material) would be recorded against the warranty
liability. ARRIS evaluates its warranty obligations on an
individual product basis.
The Company offers extended warranties and support service
agreements on certain products. Revenue from these agreements is
deferred at the time of the sale and recognized on a
straight-line basis over the contract period. Costs of services
performed under these types of contracts are charged to expense
as incurred, which approximates the timing of the revenue stream.
66
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information regarding the changes in ARRIS aggregate
product warranty liabilities for the year ending
December 31, 2005 and 2004 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
January 1,
|
|
$ |
5,453 |
|
|
$ |
4,633 |
|
Accruals related to warranties (including changes in estimates)
|
|
|
6,881 |
|
|
|
5,343 |
|
Settlements made (in cash or in kind)
|
|
|
(3,855 |
) |
|
|
(4,523 |
) |
|
|
|
|
|
|
|
Balance at December 31,
|
|
$ |
8,479 |
|
|
$ |
5,453 |
|
|
|
|
|
|
|
|
Note 5. Business Acquisitions
|
|
|
Acquisition of cXm Broadband |
On April 1, 2005, the Company acquired the remaining 75% of
the membership interest of cXm Broadband L.L.C., an entity that
was accounted for under the equity method of accounting from
January 31, 2005 through March 31, 2005, as ARRIS held
a 25% ownership stake in the company. ARRIS decided to acquire
the remaining membership interest in order to expand its
existing Broadband product portfolio and to penetrate the Korean
market for high-speed data access into multi-dwelling units.
ARRIS acquired the remaining ownership percentage from the other
shareholder for cash and the assumption of certain liabilities
of $0.2 million. The allocated purchase price also includes
the Companys existing $1.3 million equity investment
in the L.L.C.
The following is a summary of the purchase price allocation to
record our purchase of the net assets of cXm Broadband and is
based upon an independent valuation of the assets. The purchase
price was equal to the net tangible and intangible assets
acquired (in thousands):
|
|
|
|
|
|
Cash paid to other shareholder
|
|
$ |
67 |
|
Acquisition costs
|
|
|
22 |
|
Equity investment balance
|
|
|
1,325 |
|
Assumption of certain liabilities of cXm Broadband
|
|
|
76 |
|
|
|
|
|
|
Adjusted purchase price
|
|
$ |
1,490 |
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
|
Net tangible assets acquired
|
|
$ |
799 |
|
|
Existing technology and customer value (to be amortized over
3 years)
|
|
|
691 |
|
|
|
|
|
|
Total allocated purchase price
|
|
$ |
1,490 |
|
|
|
|
|
|
|
|
Acquisition of Certain Assets of Com21 |
On August 13, 2003, the Company completed the acquisition
of certain cable modem termination system (CMTS)
related assets of Com21, including the stock of its Irish
subsidiary. Under the terms of the agreement, ARRIS obtained
accounts receivable, inventory, fixed assets, other current
prepaid assets, and existing technology in exchange for
approximately $2.4 million of cash, of which
$2.2 million has been paid, and the assumption of
approximately $0.7 million in liabilities. The Company has
retained $0.2 million of the cash consideration for any
liabilities ARRIS may be required to pay resulting from Com21
activity prior to the acquisition date. The Company also
incurred approximately $0.2 million of legal and
professional fees associated with the transaction. ARRIS
retained approximately 50 Com21 employees. The Company completed
this acquisition because it believed that the newly acquired
product line, along with the existing product offerings of
ARRIS, would allow the Company to reach smaller scale cable
systems domestically and internationally.
67
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the purchase price allocation to
record ARRIS purchase of certain assets of Com21,
including the stock of the Irish subsidiary of Com21. The
purchase price was equal to the net tangible and intangible
assets acquired (in thousands):
|
|
|
|
|
|
Cash paid to Com21
|
|
$ |
2,213 |
|
Cash retainer
|
|
|
115 |
|
Acquisition costs
|
|
|
163 |
|
Assumption of certain liabilities of Com21
|
|
|
691 |
|
|
|
|
|
|
Adjusted purchase price
|
|
$ |
3,182 |
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
|
Net tangible assets acquired
|
|
$ |
1,253 |
|
|
Existing technology (to be amortized over 3 years)
|
|
|
1,929 |
|
|
|
|
|
|
Total allocated purchase price
|
|
$ |
3,182 |
|
|
|
|
|
|
|
|
Acquisition of Certain Assets of Atoga Systems |
On March 21, 2003, ARRIS purchased certain assets of Atoga
Systems, a Fremont, California-based developer of optical
transport systems for metropolitan area networks. The Company
decided to undertake this transaction to expand its existing
Broadband product portfolio. Under the terms of the agreement,
ARRIS obtained certain inventory, fixed assets, and existing
technology in exchange for approximately $0.4 million of
cash and the assumption of certain lease obligations. Further,
the Company retained 28 employees and issued a total of
500,000 shares of restricted stock to those employees. The
value of the restricted stock was recognized as compensation
expense over the related vesting period.
During the fourth quarter of 2004, the Company announced that it
would close its office in Fremont, California, which previously
housed Atoga Systems. The marketing and support for certain
products acquired as part of the Atoga Systems acquisition were
transferred to other locations. The closure resulted in a
restructuring charge of $0.3 million related to lease
commitments and severance charges.
During 2005, a decrease in expected future cash flows related to
the Atoga product line indicated that the long-lived assets
associated with these products may be impaired. As a result,
ARRIS analyzed the fair value of those assets, using the
expected cash flow approach, in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The resulting analysis
indicated that the remaining intangibles of $0.2 million
and fixed assets of $0.1 million were fully impaired and a
charge of approximately $0.3 million was recorded in the
first quarter 2005.
The following is a summary of the purchase price allocation to
record ARRIS purchase price of the assets and certain
liabilities of Atoga Systems (in thousands):
|
|
|
|
|
|
Cash paid to Atoga Systems
|
|
$ |
434 |
|
Acquisition costs
|
|
|
106 |
|
Assumption of certain liabilities of Atoga Systems
|
|
|
1,162 |
|
|
|
|
|
|
Adjusted purchase price
|
|
$ |
1,702 |
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
|
Net tangible assets acquired
|
|
$ |
1,013 |
|
|
Existing technology (to be amortized over 3 years)
|
|
|
689 |
|
|
|
|
|
|
Total allocated purchase price
|
|
$ |
1,702 |
|
|
|
|
|
68
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6. |
Discontinued Operations |
During 2004, the Company recognized a partial recovery with
respect to inventory previously written off associated with an
Argentinean customer. Of the total gain of $0.9 million,
approximately $0.3 million related to operations
discontinued in prior years. Also during 2004, the Company
recorded income from discontinued operations of
$0.8 million with respect to these prior operations as a
result of changes in estimates related to real estate, vendor
liabilities, and other accruals. During 2005, the Company
recorded income of $0.2 million related to its reserves for
discontinued operations. These adjustments were the result of
the resolution of various vendor liabilities and other costs. As
of December 31, 2005, the balance of the accrual was
approximately $24 thousand that relates to severance and other
miscellaneous costs. The remaining payments are expected to be
made in 2006.
|
|
Note 7. |
Business Divestiture Electronic System Products
(ESP) |
On August 18, 2003, ARRIS sold its engineering consulting
services product line, known as ESP, to an unrelated third
party. The agreement involved the transfer of net assets of
approximately $1.3 million, which included accounts
receivable, fixed assets, an investment, and other assets
attributable to the product line. Further, the transaction
provided for the transfer of approximately 30 employees.
Additionally, the Company incurred approximately
$0.1 million of related closure costs, primarily legal and
professional fees associated with the closing. ARRIS recognized
a loss on the sale of approximately $1.4 million during the
third quarter 2003. The ESP product line contributed revenue of
approximately $1.3 million during the twelve-month period
ended December 31, 2003 (approximately 7 months of
operations).
|
|
Note 8. |
Restructuring and Impairment Charges |
The Companys restructuring activities, are accounted for
in accordance with Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.
On December 31, 2004, the Company announced that it would
close its office in Fremont, California, which previously housed
Atoga Systems. The marketing and support for certain products
acquired as part of the Atoga Systems acquisition were
transferred to other locations. The Company decided to close the
office in order to reduce operating costs through consolidations
of its facilities. The closure affected seven employees. In
connection with these actions, the Company recorded a net charge
of approximately $0.3 million in the fourth quarter of
2004, which included approximately $0.1 million related to
remaining lease payments and $0.2 million of severance
charges.
During the first quarter of 2004, ARRIS consolidated two
facilities in Georgia, giving the Company the ability to house
many of its core technology, marketing, and corporate
headquarter functions in a single building. This consolidation
resulted in a restructuring charge of $6.2 million in the
first quarter of 2004 related to lease commitments and the
write-off of leasehold improvements and other fixed assets.
During 2005 and 2004, the Company increased its accrual by
$0.7 million and $0.2 million, respectively as a
result of changes in estimates. As of December 31, 2005,
approximately $3.1 million related to the lease commitments
remained in the restructuring accrual to be paid. ARRIS expects
the remaining payments to be made by the
69
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
second quarter of 2009 (end of lease). Below is a table which
summarizes the activity in the restructuring reserve (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Writedown of | |
|
|
|
|
|
|
Leasehold | |
|
Lease | |
|
|
|
|
Improvements | |
|
Commitments | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance as of December 31, 2003
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2004 Provision
|
|
|
1.1 |
|
|
|
5.1 |
|
|
|
6.2 |
|
Non-cash expense
|
|
|
(1.1 |
) |
|
|
|
|
|
|
(1.1 |
) |
2004 payments
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(1.2 |
) |
Adjustments to accrual
|
|
|
|
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
|
|
|
|
4.1 |
|
|
|
4.1 |
|
2005 payments
|
|
|
|
|
|
|
(1.7 |
) |
|
|
(1.7 |
) |
Adjustments to accrual
|
|
|
|
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
|
|
|
$ |
3.1 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
On October 30, 2002, the Company announced that it would
close its office in Andover, Massachusetts, which was primarily
a product development and repair facility. The Company decided
to close the office in order to reduce operating costs through
consolidation of its facilities. The closure affected
approximately 75 employees. In connection with these actions,
the Company recorded a net charge of approximately
$7.1 million in the fourth quarter of 2002. Included in
this restructuring charge was approximately $2.2 million
related to remaining lease payments, $2.7 million of fixed
asset write-offs, $2.2 million of severance, and
$0.5 million of other costs, net of a reduction of a bonus
accrual related to the severed employees of $0.5 million.
During the second quarter 2005, the Company satisfied the
remaining lease payments. Below is a table that summarizes the
activity in the restructuring reserve (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
Employee | |
|
Other | |
|
|
|
|
Commitments | |
|
Severance | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2002
|
|
$ |
2.2 |
|
|
$ |
2.1 |
|
|
$ |
0.5 |
|
|
$ |
4.8 |
|
2003 payments
|
|
|
(1.2 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
(3.1 |
) |
Adjustments to accrual
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
2004 payments
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
2005 payments
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
2005 adjustments to accrual
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2001, the Company announced a
restructuring plan to outsource the functions of most of its
manufacturing facilities. This decision to reorganize was due in
part to the ongoing weakness in industry spending patterns. Also
during the third quarter of 2001, the Company reserved for lease
commitments related to an excess facility in Atlanta. As a
result of market conditions at that time, ARRIS had downsized
and the facility was vacant. As of December 31, 2005, the
remaining $0.4 million balance in the restructuring reserve
related to lease terminations and other shutdown costs. The
remaining costs are
70
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected to be expended by the end of 2006 (end of lease). Below
is a table that summarizes the activity in the accrual account
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
Commitments | |
|
|
|
|
|
|
& Other Costs | |
|
Employee Severance | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance as of December 31, 2002
|
|
$ |
2.0 |
|
|
$ |
0.8 |
|
|
$ |
2.8 |
|
2003 payments
|
|
|
(2.5 |
) |
|
|
(0.5 |
) |
|
|
(3.0 |
) |
2003 adjustments to accrual
|
|
|
5.0 |
|
|
|
(0.2 |
) |
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
4.5 |
|
|
|
0.1 |
|
|
|
4.6 |
|
2004 payments
|
|
|
(3.1 |
) |
|
|
|
|
|
|
(3.1 |
) |
2004 adjustments to accrual
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
1.5 |
|
|
|
|
|
|
|
1.5 |
|
2005 payments
|
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
2005 adjustments to accrual
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
0.4 |
|
|
$ |
|
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Note 9. Inventories
Inventories are stated at the lower of average, approximating
first-in, first-out,
cost or market. The components of inventory are as follows, net
of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw material
|
|
$ |
788 |
|
|
$ |
1,456 |
|
Finished goods
|
|
|
113,121 |
|
|
|
91,180 |
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$ |
113,909 |
|
|
$ |
92,636 |
|
|
|
|
|
|
|
|
Note 10. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
1,822 |
|
|
$ |
1,822 |
|
Buildings and leasehold improvements
|
|
|
11,126 |
|
|
|
11,828 |
|
Machinery and equipment
|
|
|
81,918 |
|
|
|
74,621 |
|
|
|
|
|
|
|
|
|
|
|
94,866 |
|
|
|
88,271 |
|
Less: Accumulated depreciation
|
|
|
(69,309 |
) |
|
|
(61,146 |
) |
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$ |
25,557 |
|
|
$ |
27,125 |
|
|
|
|
|
|
|
|
Note 11. Goodwill and Intangible Assets
The Companys goodwill are reviewed annually for impairment
or more frequently if impairment indicators arise. The annual
valuation is performed during the fourth quarter of each year
and is based upon managements analysis including an
independent valuation. Separable intangible assets that are not
deemed to have an indefinite life are amortized over their
useful lives. Each of the Companys intangible assets has
an amortization period of three years.
71
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys goodwill is reviewed on an annual basis. The
review is based upon managements analysis including an
independent valuation. The annual valuation was performed during
the fourth quarters of 2003, 2004, and 2005 and no impairment
was indicated. The carrying amount of goodwill for the both
years ended December 31, 2005 and 2004 was
$150.6 million.
During the first quarter 2005, a decrease in expected future
cash flows related to the Atoga product line indicated that the
long-lived assets associated with these products may be
impaired. As a result, the Company analyzed the fair value of
those assets, using the expected cash flow approach, in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The resulting
analysis indicated that the remaining intangibles of
$0.2 million were fully impaired and were written off in
the first quarter 2005.
The gross carrying amount and accumulated amortization of the
Companys intangible assets, other than goodwill, as of
December 31, 2005 and December 31, 2004 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
Accumulated | |
|
Net Book | |
|
Gross | |
|
Accumulated | |
|
Net Book | |
|
|
Amount | |
|
Amortization | |
|
Value | |
|
Amount | |
|
Amortization | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Existing technology acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arris Interactive L.L.C
|
|
$ |
51,500 |
|
|
$ |
(51,500 |
) |
|
$ |
|
|
|
$ |
51,500 |
|
|
$ |
(51,500 |
) |
|
$ |
|
|
|
Cadant, Inc.
|
|
|
53,000 |
|
|
|
(53,000 |
) |
|
|
|
|
|
|
53,000 |
|
|
|
(52,661 |
) |
|
|
339 |
|
|
Atoga Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
689 |
|
|
|
(401 |
) |
|
|
288 |
|
|
Com21
|
|
|
1,929 |
|
|
|
(1,527 |
) |
|
|
402 |
|
|
|
1,929 |
|
|
|
(884 |
) |
|
|
1,045 |
|
|
cXm Broadband
|
|
|
691 |
|
|
|
(173 |
) |
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
107,120 |
|
|
$ |
(106,200 |
) |
|
$ |
920 |
|
|
$ |
107,118 |
|
|
$ |
(105,446 |
) |
|
$ |
1,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the intangible assets listed in
the above table for the years ended December 31, 2005,
2004, and 2003 was $1.2 million, $28.7 million, and
$35.2 million, respectively. The estimated total
amortization expense for each of the next five fiscal years is
as follows (in thousands):
|
|
|
|
|
2006
|
|
$ |
632 |
|
2007
|
|
$ |
230 |
|
2008
|
|
$ |
58 |
|
2009
|
|
$ |
|
|
2010
|
|
$ |
|
|
|
|
Note 12. |
Long-Term Obligations |
Long term obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Other long-term liabilities
|
|
$ |
18,230 |
|
|
$ |
16,781 |
|
41/2% convertible
subordinated notes due 2008
|
|
|
|
|
|
|
75,000 |
|
|
|
|
|
|
|
|
|
Total debt, membership interest, and other liabilities
|
|
$ |
18,230 |
|
|
$ |
91,781 |
|
|
|
|
|
|
|
|
On March 18, 2003, the Company issued $125.0 million
of
41/2% convertible
subordinated notes due 2008 (Notes). The Notes were
convertible, at the option of the holder, at any time prior to
maturity, into the Companys common stock at a conversion
price of $5.00 per share, subject to adjustment. In
February 2004, the Company called $50.0 million of the
Notes for redemption, and the holders of the called Notes
elected to convert those Notes into an aggregate of
10.0 million shares of common stock rather than have the
Notes redeemed. The Company also made a make-whole interest
payment of approximately 0.5 million common
72
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares, resulting in a charge of $4.4 million during the
first quarter of 2004. In May 2005, the Company called the
remaining $75.0 million of the Notes for redemption, and
the holders of the Notes elected to convert the notes into
15.0 million shares of common stock rather than have the
Notes redeemed. The Company made a make-whole interest payment
of approximately 0.3 million shares, resulting in a charge
of $2.4 million during the second quarter 2005. As of
December 31, 2005, the Notes have been fully converted and
the Company has no long-term debt.
As of December 31, 2005 and December 31, 2004, the
Company had approximately $6.1 million and
$4.0 million, respectively, outstanding under letters of
credit, which are cash collateralized and classified as
restricted cash on the Consolidated Balance Sheets.
In connection with the acquisition of Arris Interactive L.L.C.
in August 2001, Nortel Networks exchanged its ownership interest
in Arris Interactive L.L.C. for ARRIS common stock and a
subordinated redeemable Class B membership interest in
Arris Interactive L.L.C. with a face amount of
$100.0 million. In June 2002, the Company entered into an
option agreement with Nortel Networks that permitted ARRIS to
redeem the Class B membership interest in Arris Interactive
L.L.C. at a discount of 21% prior to June 30, 2003. To
further induce the Company to redeem the Class B membership
interest, Nortel Networks offered to forgive approximately
$5.9 million of the amount owed to Nortel Networks if the
Company redeemed it prior to March 31, 2003. During the
first quarter of 2003, the Company redeemed the Class B
membership interest. This transaction resulted in a gain of
approximately $28.5 million that was recorded in operations
in accordance with SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections.
As of December 31, 2005, the Company had approximately
$18.2 million of other long-term liabilities, which
included $12.6 million related to its accrued pension,
$3.2 million related to its deferred compensation
obligations, $2.3 million related to landlord funded
leasehold improvements, and $0.1 million related to
security deposits received. As of December 31, 2004, the
Company had approximately $16.8 million of other long-term
liabilities, which included $10.9 million related to its
accrued pension, $3.0 million related to its deferred
compensation obligations, $2.8 million related to landlord
funded leasehold improvements, and $0.1 million related to
security deposits received.
The Company has not paid cash dividends on its common stock
since its inception. In 2002, to implement its shareholder
rights plan, the Companys board of directors declared a
dividend consisting of one right for each share of its common
stock outstanding. Each right represents the right to purchase
one one-thousandth of a share of its Series A Participating
Preferred Stock and becomes exercisable only if a person or
group acquires beneficial ownership of 15% or more of its common
stock or announces a tender or exchange offer for 15% or more of
its common stock or under other similar circumstances.
Note 13. Common Stock
The following shares of Common Stock have been reserved for
future issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Convertible subordinated notes
|
|
|
|
|
|
|
15,000,000 |
|
|
|
25,000,000 |
|
Stock options, stock units, and restricted stock
|
|
|
15,242,459 |
|
|
|
17,393,845 |
|
|
|
15,080,470 |
|
Employee stock purchase plan
|
|
|
684,121 |
|
|
|
865,994 |
|
|
|
1,049,312 |
|
Liberty Media options
|
|
|
84,927 |
|
|
|
302,076 |
|
|
|
854,341 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,011,507 |
|
|
|
33,561,915 |
|
|
|
41,984,123 |
|
|
|
|
|
|
|
|
|
|
|
73
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 14. |
Earnings Per Share |
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations for the periods indicated (in thousands except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
51,275 |
|
|
$ |
(30,510 |
) |
|
$ |
(47,664 |
) |
|
Income (loss) from discontinued operations
|
|
|
208 |
|
|
|
2,114 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
51,483 |
|
|
$ |
(28,396 |
) |
|
$ |
(47,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
96,581 |
|
|
|
85,283 |
|
|
|
76,839 |
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
0.53 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
51,275 |
|
|
$ |
(30,510 |
) |
|
$ |
(47,664 |
) |
|
Income (loss) from discontinued operations
|
|
|
208 |
|
|
|
2,114 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
51,483 |
|
|
$ |
(28,396 |
) |
|
$ |
(47,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
96,581 |
|
|
|
85,283 |
|
|
|
76,839 |
|
|
|
|
|
Net effect of dilutive stock options
|
|
|
1,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
98,264 |
|
|
|
85,283 |
|
|
|
76,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$ |
0.52 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
The
41/2% convertible
subordinated notes due 2003 and due 2008 were antidilutive for
all periods presented. The effects of the options and warrants
were not presented for all periods as the Company incurred net
losses during those periods and inclusion of these securities
would be antidilutive.
Income tax expense (benefit) consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 |
|
|
| |
|
| |
|
|
Current Federal
|
|
$ |
885 |
|
|
$ |
|
|
|
$ |
|
|
State
|
|
|
(163 |
) |
|
|
|
|
|
|
|
|
Foreign
|
|
|
(209 |
) |
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
513 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
513 |
|
|
$ |
108 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005, ARRIS is subject to
the alternative minimum tax (AMT). For 2005, ARRIS
has recorded a current federal AMT provision of $885,000.
Although ARRIS has AMT net operating loss carryforwards in
excess of its AMT tax base, the U.S. federal income tax law
limits the amount of the current utilization of AMT NOL
carryovers to 90% of the AMT tax base. The payment of AMT,
74
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
however, results in an AMT credit that may be carried forward to
offset ARRIS regular income tax liability when and if ARRIS is
subject to the regular income tax in the future. ARRIS has
recorded a full valuation allowance against its AMT credit
carryforward.
For 2005 the Company recorded a current state income tax benefit
related to state income tax refunds received in excess of
anticipated amounts. The Company also recorded a foreign income
tax provision of approximately $139 thousand that is reduced by
a benefit of $348 thousand from the release of reserves related
to foreign jurisdiction tax audits that were settled during the
year.
A reconciliation of the Statutory Federal tax rate of 35% and
the effective rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statutory federal income tax expense (benefit)
|
|
|
35.0 |
% |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
1.7 |
% |
|
|
(3.3 |
)% |
|
|
(3.3 |
)% |
|
Differences between U.S. and foreign income tax rates
|
|
|
(0.3 |
)% |
|
|
0.4 |
% |
|
|
0.0 |
% |
|
Meals and entertainment
|
|
|
0.4 |
% |
|
|
0.8 |
% |
|
|
0.5 |
% |
|
Increase in valuation allowance
|
|
|
0.0 |
% |
|
|
37.5 |
% |
|
|
59.0 |
% |
|
Utilization of net operating loss carryforwards
|
|
|
(36.3 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Gain on debt retirement
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(21.1 |
)% |
|
Other, net
|
|
|
0.5 |
% |
|
|
0.0 |
% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0 |
% |
|
|
0.4 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of ARRIS net deferred
tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$ |
5,487 |
|
|
$ |
8,162 |
|
|
Current portion net operating loss carryforwards
|
|
|
27,226 |
|
|
|
|
|
|
Merger, disposal, and restructuring related reserves
|
|
|
447 |
|
|
|
1,348 |
|
|
Allowance for uncollectible accounts
|
|
|
669 |
|
|
|
943 |
|
|
Other, principally operating expenses
|
|
|
17,703 |
|
|
|
15,661 |
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
51,532 |
|
|
|
26,114 |
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Federal/state net operating loss carryforwards
|
|
|
18,208 |
|
|
|
56,509 |
|
|
Federal capital loss carryforwards
|
|
|
5,671 |
|
|
|
5,316 |
|
|
Foreign net operating loss carryforwards
|
|
|
2,184 |
|
|
|
5,191 |
|
|
Federal AMT Credit
|
|
|
885 |
|
|
|
|
|
|
Pension and deferred compensation
|
|
|
5,902 |
|
|
|
5,344 |
|
|
Goodwill
|
|
|
1,047 |
|
|
|
1,334 |
|
|
Plant and equipment, depreciation and basis differences
|
|
|
2,114 |
|
|
|
2,763 |
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax assets
|
|
|
36,011 |
|
|
|
76,457 |
|
|
|
|
|
|
|
|
75
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
$ |
(341 |
) |
|
$ |
(638 |
) |
|
|
|
|
|
|
|
|
|
Total long-term deferred tax liabilities
|
|
|
(341 |
) |
|
|
(638 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
87,202 |
|
|
|
101,933 |
|
|
Valuation allowance on deferred tax assets
|
|
|
(87,202 |
) |
|
|
(101,933 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
ARRIS established a valuation allowance in accordance with the
provisions of SFAS No. 109, Accounting for Income
Taxes. The Company continually reviews the adequacy of the
valuation allowance and recognizes the benefits of deferred tax
assets only as reassessment indicates that it is more likely
than not that the deferred tax assets will be realized. ARRIS
generated taxable income for the first time in several years in
2005. If this trend of profitability continues, it is possible
that ARRIS may reverse the valuation allowance recorded on its
net deferred tax assets.
As of December 31, 2005, ARRIS had U.S. federal net
operating loss carryovers of approximately $114.3 that will
expire over various years ranging from 2008-2024. As of
December 31, 2005 ARRIS also has state NOLs in all
states where it files a state income tax return available to
offset future taxable income. The amounts available vary by
state due to the apportionment of the Companys income and
the expiration of these NOLs follow the applicable state
law. A foreign NOL of $18.2 million relates to ARRIS
Irish subsidiary and has an indefinite life. Given the close
operating relationship between the Irish subsidiary and the
Company as a whole, ARRIS has recorded a full valuation
allowance on this NOL notwithstanding its indefinite life.
As of December 31, 2005 the federal net operating loss
carryforward includes $26.1 million related to the exercise
of employee stock options and restricted stock. Any benefit
resulting from the utilization of this portion of the net
operating loss carryforward will be credited directly to
additional paid in capital to the extent expense was not
recorded in book income.
ARRIS ability to use federal and state net operating loss
carryforwards to reduce future taxable income is subject to
restrictions attributable to equity transactions that resulted
in a change of ownership during its 2001 and 2004 tax years as
defined in Internal Revenue Code Section 382. ARRIS does
not expect that the limitations placed on its NOLs as a
result of these changes in ownership will result in the
expiration of its NOL carryforwards. However, future equity
transactions could limit the utilization of its existing NOLs.
As of December 31, 2005 the Company had U.S. capital
loss carryforwards of approximately $15.2 million that
expire from 2007 through 2010.
ARRIS intends to indefinitely reinvest the undistributed
earnings of its foreign subsidiaries. Accordingly, no deferred
taxes have been recorded for the difference between its
financial and tax basis investment in its foreign subsidiaries.
If these earnings were distributed to the U.S. in the form of
dividends, or otherwise, ARRIS would have additional
U.S. taxable income and, depending on the companys
tax posture in the year of repatriation, may have to pay
additional U.S. income taxes. Withholding taxes may also
apply to the repatriated earnings. Determination of the amount
of unrecognized income tax liability related to these
permanently reinvested and undistributed foreign subsidiary
earnings is currently not practicable.
ARRIS leases office, distribution, and warehouse facilities as
well as equipment under long-term leases expiring at various
dates through 2023. Included in these operating leases are
certain amounts related to restructuring activities; these lease
payments and related sublease income are included in
restructuring
76
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accruals on the consolidated balance sheets. Future minimum
operating lease payments under non-cancelable leases at
December 31, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases | |
|
|
| |
2006
|
|
$ |
6,918 |
|
2007
|
|
|
5,822 |
|
2008
|
|
|
4,872 |
|
2009
|
|
|
3,666 |
|
2010
|
|
|
2,983 |
|
Thereafter
|
|
|
7,608 |
|
Less sublease income
|
|
|
(939 |
) |
|
|
|
|
Total minimum lease payments
|
|
$ |
30,930 |
|
|
|
|
|
Total rental expense for all operating leases amounted to
approximately $5.7 million, $7.3 million and
$8.9 million for the years ended December 31, 2005,
2004 and 2003, respectively.
As of December 31, 2005, the Company had approximately
$6.1 million outstanding under letters of credit which were
cash collateralized. The cash collateral is held in the form of
restricted cash. Additionally, the Company had contractual
obligations of approximately $122.7 million under
agreements with non-cancelable terms to purchases goods or
services over the next year. All contractual obligations
outstanding at the end of prior years were satisfied within a
12 month period, and the obligations outstanding as of
December 31, 2005 are expected to be satisfied in 2006.
|
|
Note 17. |
Stock-Based Compensation |
ARRIS grants stock options under its 2004 Stock Incentive Plan
(2004 SIP) and issues stock purchase rights under
its Employee Stock Purchase Plan (ESPP). Upon
approval of the 2004 SIP by stockholders on May 26, 2004,
all shares available for grant under the 2002 Stock Incentive
Plan (2002 SIP) and the 2001 Stock Incentive Plan
(2001 SIP) were cancelled. However, those shares
subject to outstanding stock awards issued under the 2002 SIP
and the 2001 SIP that are forfeited, cancelled, or expire
unexercised; shares tendered (either actually or through
attestation) to pay the option exercise price of such
outstanding awards; and shares withheld for the payment of
withholding taxes associated with such outstanding awards return
to the share reserve of the 2002 SIP and 2001 SIP and shall be
available again for issuance under those plans. All options
outstanding as of May 26, 2004 under the 2002 SIP and 2001
SIP remained exercisable. These plans are described below.
In 2004, the Board of Directors approved the 2004 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2004 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 6,000,000 shares of the Companys common
stock may be issued pursuant to this plan. The vesting
requirements for issuance under this plan may vary.
In 2002, the Board of Directors approved the 2002 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2002 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 2,500,000 shares of the Companys common
stock were originally reserved for issuance under this plan. The
vesting requirements for issuance under this plan vary.
77
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2001, the Board of Directors approved the 2001 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2001 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 9,580,000 shares of the Companys common
stock were originally reserved for issuance under this plan. The
vesting requirements for issuance under this plan vary.
In 2001, the Board of Directors approved a proposal to grant
truncated options to employees and board members having previous
stock options with exercise prices more than 33% higher than the
market price of the Companys stock at $10.20 per
share. The truncated options to purchase stock of the Company
pursuant to the Companys 2001 SIP, have the following
terms: (a) one fourth of each option shall be exercisable
immediately and an additional one fourth shall become
exercisable or vest on each anniversary of this grant;
(b) each option shall be exercisable in full after the
closing price of the stock has been at or above the target price
as determined by the agreement for twenty consecutive trading
days (the Accelerated Vesting Date); (c) each
option shall expire on the earliest of (i) the tenth
anniversary of grant, (ii) six months and one day from the
accelerated vesting date, (iii) the occurrence of an
earlier expiration event as provided in the terms of the options
granted by 2000 stock option plans. No compensation was recorded
in relation to these options.
In connection with the Companys reorganization on
August 3, 2001, the Company froze additional grants under
other prior plans, which were the 2000 Stock Incentive Plan
(2000 SIP), the 2000 Mid-Level Stock Option
Plan (MIP), the 1997 Stock Incentive Plan
(SIP), the 1993 Employee Stock Incentive Plan
(ESIP), the Director Stock Option Plan
(DSOP), and the TSX Long-Term Incentive Plan
(LTIP). All options granted under the previous plans
are still exercisable. The Board of Directors approved the prior
plans to facilitate the retention and continued motivation of
key employees, consultants and directors, and to align more
closely their interests with those of the Company and its
stockholders. Awards under these plans were in the form of
incentive stock options, non-qualified stock options, stock
grants, stock units, restricted stock, stock appreciation
rights, performance shares and units, dividend equivalent rights
and reload options. A total of 2,500,000 shares of the
Companys common stock were originally reserved for
issuance under this plan. Options granted under this plan vest
in fourths on the anniversary date of the grant beginning with
the first anniversary and terminate ten years from the date of
grant. Vesting requirements for issuance under the prior plans
varied, as did the related date of termination.
In connection with ARRIS acquisition of TSX in 1997, each
option to purchase TSX common stock under the LTIP was converted
to a fully vested option to purchase ARRIS common stock. A total
of 883,900 shares of ARRIS common stock were allocated to
this plan. The options under the LTIP terminate ten years from
the original grant date.
|
|
|
Adoption of SFAS No. 123R, Share-Based Payment |
The Company elected to early adopt the fair value recognition
provisions of SFAS No. 123R on July 1, 2005,
using the modified prospective approach. Prior to the adoption
date, ARRIS used the intrinsic value method for valuing its
awards of stock options and restricted stock and recorded the
related compensation expense, if any, in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations. With the exception of variable
stock option expense discussed below, no other stock-based
employee or director compensation cost for stock options was
reflected in net income (loss) prior to July 1, 2005, as
all options granted had exercise prices equal to the market
value of the underlying common stock on the date of grant. The
Company records compensation expense related to its restricted
stock awards and director stock units. The effect on net income
of adopting SFAS No. 123R was additional stock
compensation expense of approximately $3.3 million in 2005.
Prior to the adoption of SFAS No. 123R, ARRIS
accounted for stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25, Accounting
for Stock Issued to Employees and related
78
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interpretations. The following table illustrates the pro forma
effect on the three years ended December 31, 2005 had the
Company applied the provisions of SFAS No. 123 in
those periods (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income (loss), as reported
|
|
$ |
51,483 |
|
|
$ |
(28,396 |
) |
|
$ |
(47,313 |
) |
Add: Stock-based compensation included in reported net income,
net of taxes
|
|
|
6,914 |
|
|
|
2,826 |
|
|
|
3,370 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
taxes
|
|
|
(16,811 |
)* |
|
|
(13,547 |
) |
|
|
(21,513 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss), pro forma
|
|
$ |
41,586 |
|
|
$ |
(39,117 |
) |
|
$ |
(65,456 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.53 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
0.43 |
|
|
$ |
(0.46 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
0.52 |
|
|
$ |
(0.33 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
0.42 |
|
|
$ |
(0.46 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
* Includes approximately $5.7 million of expense related to
the acceleration of
out-of-the-money
options in the second quarter of 2005.
ARRIS grants stock options to certain employees. Stock options
generally vest over three or four years of service and have
either seven or ten year contractual terms. The exercise price
of an option is equal to the fair market value of ARRIS
stock on the date of grant. Prior to the adoption of
SFAS No. 123R, ARRIS used the Black-Scholes option
valuation model to estimate the fair value of an option on the
date of grant. Upon adoption of SFAS No. 123R, ARRIS
elected to continue to use the Black-Scholes model; however, it
engaged an independent third party to assist the Company in
determining the Black-Scholes weighted average inputs utilized
in the valuation of options granted subsequent to July 1,
2005. Prior to the adoption of SFAS No. 123R, the
Company estimated the expected volatility exclusively on
historical stock prices of ARRIS common stock over a period of
time. Under SFAS No. 123R, the volatility factors are
based upon a combination of historical volatility over a period
of time and estimates of implied volatility based on traded
option contracts on ARRIS common stock. The change in estimating
volatility was made because the Company felt that the inclusion
of the implied volatility factor was a more accurate estimate of
the stocks future performance. The expected term of the
awards granted are based upon a weighted average life of
exercise activity of the grantee population. The risk-free
interest rate is based upon the U.S. treasury strip yield
at the grant date, using a remaining term equal to the expected
life. The expected dividend yield is 0%, as the Company has not
paid cash dividends on its common stock since its inception. In
calculating the stock compensation expense, ARRIS applies an
estimated post-vesting forfeiture rate based upon historical
rates.
In May 2005, the ARRIS Board of Directors approved the
acceleration of outstanding options with exercise prices equal
to $9.06 and above. All of these options were
out-of-the-money
at the time of acceleration, as the closing stock price on
May 5, 2005 was $7.67. The acceleration covered options to
purchase approximately 1.4 million shares of common stock,
but did not involve any options held by directors or executive
officers. The purpose of the acceleration was to reduce the
expense that would be associated with these options in
accordance with the provisions of SFAS No. 123R,
Share-Based Payment, once adopted. The acceleration
resulted in incremental stock-based employee compensation of
approximately $5.7 million in the pro forma expense for the
second quarter 2005.
79
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2003, the Company offered to all eligible employees the
opportunity to exchange certain outstanding stock options for
restricted shares of ARRIS common stock. The Companys
Board of Directors and its eight most highly compensated
executive officers during 2002 were not eligible to participate
in the offer. Employees tendered approximately 76% of the
options eligible to be exchanged under the program and ARRIS
cancelled options to purchase approximately 4.7 million
shares of common stock and granted approximately
1.5 million restricted shares in exchange. The Company
recorded a fixed compensation expense equal to the fair market
value of the shares of restricted stock granted through the
offer; this cost is being amortized over the four-year vesting
period for the restricted shares. Prior to the adoption of
SFAS No. 123R, all eligible options that were not
tendered for exchange were subject to variable accounting. The
variable accounting charge fluctuated in accordance with the
market price of the ARRIS common stock at the end of each
accounting period until such stock options were exercised,
forfeited, or expire unexercised. In accordance with
SFAS No. 123R, an equity award that previously was
accounted for as a variable award under APB No. 25
should no longer be accounted for as a variable award. As of
July 1, 2005, the grant-date fair value is used to
recognize compensation cost for these options.
A summary of activity of ARRIS options granted under its
stock incentive plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Aggregate | |
|
|
|
|
Weighted | |
|
Average | |
|
Intrinsic | |
|
|
|
|
Average | |
|
Remaining | |
|
Value | |
|
|
Options | |
|
Exercise Price | |
|
Contractual Term | |
|
(in thousands) | |
|
|
| |
|
| |
|
| |
|
| |
Beginning balance, January 1, 2005
|
|
|
9,925,403 |
|
|
$ |
8.48 |
|
|
|
|
|
|
|
|
|
Grants
|
|
|
1,036,774 |
|
|
$ |
6.64 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,081,515 |
) |
|
$ |
4.81 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(178,080 |
) |
|
$ |
6.42 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(188,714 |
) |
|
$ |
12.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2005
|
|
|
8,513,868 |
|
|
$ |
9.10 |
|
|
|
6.39 |
|
|
$ |
18,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005
|
|
|
5,942,022 |
|
|
$ |
10.22 |
|
|
|
6.16 |
|
|
$ |
10,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used in this model to value
ARRIS stock options were as follows: risk-free interest
rates of 3.8%, 3.7% and 3.4%, respectively; a dividend yield of
0%; volatility factor of the expected market price of
ARRIS common stock of 0.92, 0.99 and 1.02, respectively;
and a weighted average expected life of 4.9 years,
5 years, and 5 years, respectively. The weighted
average grant-date fair value of options granted during 2005,
2004, and 2003 were $4.70, $5.83, and $3.69, respectively. The
total intrinsic value of options exercised during 2005, 2004,
and 2003 was approximately $11.3 million, $2.3 million
and $0.1 million, respectively.
|
|
|
Restricted Stock (Non-Performance) and Stock Units |
ARRIS grants restricted stock and stock units to certain
employees and its non-employee directors. The Company records a
fixed compensation expense equal to the fair market value of the
shares of restricted stock granted on a straight-line basis over
the requisite services period for the restricted shares. Prior
to the adoption of SFAS 123R, ARRIS used the actual method
of recording forfeitures. Upon adoption of SFAS 123R, the
Company applies an estimated post-vesting forfeiture rate based
upon historical rates.
80
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes ARRIS unvested restricted
stock (excluding performance-related) and stock unit
transactions during the year ending December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant Date | |
|
|
Shares | |
|
Fair Value | |
|
|
| |
|
| |
Unvested at January 1, 2005
|
|
|
1,026,963 |
|
|
$ |
5.20 |
|
Granted
|
|
|
428,998 |
|
|
$ |
6.68 |
|
Vested
|
|
|
(386,048 |
) |
|
$ |
5.54 |
|
Forfeited
|
|
|
(53,128 |
) |
|
$ |
5.46 |
|
|
|
|
|
|
|
|
Unvested at December 31, 2005
|
|
|
1,016,785 |
|
|
$ |
5.69 |
|
|
|
|
|
|
|
|
The total intrinsic value of restricted shares vested during
2005, 2004 and 2003 was $3.9 million, $4.4 million and
$2.1 million, respectively.
|
|
|
Performance-Related Restricted Shares |
ARRIS grants to certain employees restricted shares, in which
the number of shares is dependent upon performance conditions.
The number of shares which could potentially be issued ranges
from zero to 150% of the target award. Compensation expense is
recognized using the graded method and is based upon the fair
market value of the shares estimated to be earned. The fair
value of the restricted shares is estimated on the date of grant
using the same valuation model as that used for stock options
and other restricted shares. As of December 31, 2005, ARRIS
had recognized compensation expense based upon the achievement
of 150% of the target award as the Companys performance
had reached the level necessary for the maximum award. If these
goals had not been attained, any recognized compensation cost
would have been reversed.
In certain circumstances under its stock-based compensation
plans, ARRIS allows for the vesting of employee awards to
accelerate upon retirement or to continue to vest
post-employment. Prior to the adoption of
SFAS No. 123R, the Company recognized the related
compensation expense over the explicit service period. ARRIS
will continue this practice for awards granted prior to
July 1, 2005. For awards granted subsequent to the adoption
date of SFAS No. 123R, the fair value of the award
will be expensed over the employees minimum service period
rather than over the explicit vesting period.
The following table summarizes ARRIS unvested
performance-related restricted stock transactions during the
year ending December 31, 2005 (includes maximum achievement
of performance goals):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant Date | |
|
|
Shares | |
|
Fair Value | |
|
|
| |
|
| |
Unvested at January 1, 2005
|
|
|
|
|
|
|
|
|
Granted
|
|
|
301,955 |
|
|
$ |
6.44 |
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2005
|
|
|
301,955 |
|
|
$ |
6.44 |
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan (ESPP) |
ARRIS offers an ESPP to certain employees. The plan complies
with Section 423 of the U.S. Internal Revenue Code,
which provides that employees will not be immediately taxed on
the difference between the market price of the stock and a
discounted purchase price if it meets certain requirements.
Participants can request that up to 10% of their base
compensation be applied toward the purchase of ARRIS common
stock under ARRIS ESPP. Purchases by any one participant
are limited to $25,000 (based upon the fair market value) in any
one year. The exercise price is the lower of 85% of the fair
market value of the ARRIS common
81
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock on either the first day of the purchase period or the last
day of the purchase period. A plan provision which allows for
the more favorable of two exercise prices is commonly referred
to as a look-back feature. Under APB Opinion
No. 25, Accounting for Stock Issued to Employees,
the ESPP was deemed noncompensatory, and therefore, no
compensation expense was recognized. However,
SFAS No. 123R narrows the noncompensatory exception
significantly; any discount offered in excess of five percent
generally will be considered compensatory and appropriately
recognized as compensation expense. Additionally, any ESPP
offering a look-back feature is considered compensatory. ARRIS
uses the Black-Scholes option valuation model to value to shares
issued under the ESPP. The valuation is comprised of two
components; the 15% discount of a share of common stock and 85%
of a six month option held (related to the look-back feature).
The weighted average assumptions used to estimate the fair value
of purchase rights granted under the ESPP for 2005, 2004, and
2003 were as follows: risk-free interest rates of 3.7%, 1.60%
and 1.09% respectively; a dividend yield of 0%; volatility
factor of the expected market price of ARRIS common stock
of 0.43, 0.99 and 0.90, respectively; and a weighted average
expected life of 0.5 year for each. Upon adoption of
SFAS No. 123R, Share-Based Payment, the Company
recorded stock compensation expense of approximately
$0.2 million related to the ESPP for the second half of
2005.
|
|
|
Unrecognized Compensation Cost |
As of December 31, 2005, there was approximately
$12.4 million of total unrecognized compensation cost
related to unvested share-based awards granted under the
Companys incentive plans. This compensation cost is
expected to be recognized over a weighted-average period of
2.1 years.
|
|
Note 18. |
Employee Benefit Plans |
The Company sponsors two non-contributory defined benefit
pension plans that cover the Companys U.S. employees.
As of January 1, 2000, the Company froze the defined
pension plan benefits for 569 participants. These
participants elected to enroll in ARRIS enhanced 401(k)
plan. Due to the cessation of plan accruals for such a large
group of participants, a curtailment was considered to have
occurred and the Company accounted for this in accordance with
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits. The Company recognized expense
(income) related to supplemental pension benefits of
$0.0 million, $0.0 million, and $(0.9) million
for the years ended December 31, 2005, 2004, and 2003,
respectively.
The U.S. pension plan benefit formulas generally provide
for payments to retired employees based upon their length of
service and compensation as defined in the plans. ARRIS
investment policy is to fund the plans as required by the
Employee Retirement Income Security Act of 1974
(ERISA) and to the extent that such contributions
are tax deductible. For 2005, the plan assets were comprised of
approximately 70%, 28%, and 2% of equity, debt securities, and
money market funds, respectively. For 2004, the plan assets were
comprised of approximately 65%, 31% and 4% of equity, debt
securities, and money market funds respectively. In 2006, the
plan will target allocations of 65% and 35% equity and debt
securities. Liabilities or amounts in excess of these funding
levels are accrued and reported in the consolidated balance
sheet.
The investment strategies of the plans place a high priority on
benefit security. The plans invest conservatively so as not to
expose assets to depreciation in adverse markets. The
plans strategy also places a high priority on earning a
rate of return greater than the annual inflation rate along with
maintaining average market results. The plan has targeted asset
diversification across different asset classes and markets to
take advantage of economic environments and to also act as a
risk minimizer by dampening the portfolios volatility.
September 30th
is the measurement date used for the 2005, 2004 and 2003
reporting year.
82
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary data for the non-contributory defined benefit pension
plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$ |
22,659 |
|
|
$ |
21,114 |
|
|
Service cost
|
|
|
458 |
|
|
|
484 |
|
|
Interest cost
|
|
|
1,413 |
|
|
|
1,177 |
|
|
Actuarial loss (gain)(1)
|
|
|
1,889 |
|
|
|
342 |
|
|
Benefit payments
|
|
|
(489 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$ |
25,930 |
|
|
$ |
22,659 |
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$ |
12,103 |
|
|
$ |
11,102 |
|
|
Actual return on plan assets
|
|
|
1,301 |
|
|
|
644 |
|
|
Company contributions
|
|
|
863 |
|
|
|
855 |
|
|
Expenses and benefits paid from plan assets
|
|
|
(498 |
) |
|
|
(498 |
) |
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$ |
13,769 |
|
|
$ |
12,103 |
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$ |
(12,160 |
) |
|
$ |
(10,556 |
) |
|
Unrecognized actuarial loss
|
|
|
1,837 |
|
|
|
176 |
|
|
Unamortized prior service cost
|
|
|
2,274 |
|
|
|
2,752 |
|
|
Employer contributions, 9/30 12/31
|
|
|
16 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
(8,033 |
) |
|
$ |
(7,613 |
) |
|
|
|
|
|
|
|
|
|
(1) |
The actuarial loss in 2005 includes updated assumptions for
mortality rates |
Amounts recognized in the statement of financial position
consist of:
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Accrued benefit cost
|
|
$ |
(12,651 |
) |
|
$ |
(10,958 |
) |
Accumulated other comprehensive income
|
|
|
4,618 |
|
|
|
3,345 |
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
(8,033 |
) |
|
$ |
(7,613 |
) |
|
|
|
|
|
|
|
The accumulated benefit obligation and the projected benefit
obligation for the plans are in excess of the plan assets as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Accumulated benefit obligation
|
|
$ |
25,521 |
|
|
$ |
21,621 |
|
Projected benefit obligation
|
|
|
25,930 |
|
|
|
22,659 |
|
Plan assets
|
|
|
13,770 |
|
|
|
12,103 |
|
83
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic pension cost for 2005, 2004 and 2003 for pension
and supplemental benefit plans includes the following components
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Service cost
|
|
$ |
458 |
|
|
$ |
484 |
|
|
$ |
724 |
|
Interest cost
|
|
|
1,413 |
|
|
|
1,177 |
|
|
|
1,338 |
|
Return on assets (expected)
|
|
|
(1,045 |
) |
|
|
(935 |
) |
|
|
(768 |
) |
Recognized net actuarial (gain) loss
|
|
|
(18 |
) |
|
|
(323 |
) |
|
|
|
|
Amortization of prior service cost(1)
|
|
|
477 |
|
|
|
558 |
|
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
|
1,285 |
|
|
|
961 |
|
|
|
1,847 |
|
Additional pension (income) expense due to curtailment
|
|
|
|
|
|
|
|
|
|
|
(944 |
) |
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$ |
1,285 |
|
|
$ |
961 |
|
|
$ |
903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Prior service cost is amortized on a straight-line basis over
the average remaining service period of employees expected to
receive benefits under the plan. |
The weighted-average actuarial assumptions used to determine the
benefit obligations for the three years presented are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Assumed discount rate for non-qualified plans participants
|
|
|
5.50% |
|
|
|
6.00% |
|
|
|
6.00% |
|
Assumed discount rate for qualified plan participants
|
|
|
5.75% |
|
|
|
6.00% |
|
|
|
6.00% |
|
Rates of compensation increase
|
|
|
3.75% |
|
|
|
5.94% |
|
|
|
6.00% |
|
The weighted-average actuarial assumptions used to determine the
net periodic benefit costs are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Assumed discount rate for non-qualified plans participants
|
|
|
6.00% |
|
|
|
6.00% |
|
|
|
6.75% |
|
Assumed discount rate for qualified plan participants
|
|
|
6.00% |
|
|
|
6.00% |
|
|
|
6.50% |
|
Rates of compensation increase
|
|
|
5.94% |
|
|
|
5.94% |
|
|
|
6.00% |
|
Expected long-term rate of return on plan assets
|
|
|
8.00% |
|
|
|
8.00% |
|
|
|
8.00% |
|
The expected long-term rate of return on assets is derived using
the building block approach which includes assumptions for the
long term inflation rate, real return, and equity risk premiums.
No minimum funding contributions are required in 2006 for the
plan, however, the Company may make a voluntary contribution.
As of December 31, 2005, the expected benefit payments
related to the Companys defined benefit pension plans
during the next ten years are as follows (in thousands):
|
|
|
|
|
2006
|
|
$ |
509 |
|
2007
|
|
|
597 |
|
2008
|
|
|
742 |
|
2009
|
|
|
804 |
|
2010
|
|
|
1,195 |
|
2011-2015
|
|
|
7,724 |
|
Additionally, ARRIS has established defined contribution plans
pursuant to the Internal Revenue Code Section 401(a) that
cover all eligible U.S. employees. ARRIS contributes to
these plans based upon the dollar amount of each
participants contribution. ARRIS made matching
contributions to these plans of approxi-
84
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
mately $0.6 million, $0.0 million and
$2.8 million in 2005, 2004, and 2003, respectively. During
2004, the Company made a discretionary contribution of
$1.0 million to the plan. Effective July 1, 2003, the
Company temporarily suspended employer matching contributions to
the plan. The Company reinstated a partial matching contribution
to the plan effective January 1, 2005.
|
|
Note 19. |
Sales Information |
The Companys four largest customers (including their
affiliates, as applicable) are Comcast, Cox Communications,
Liberty Media International and Time-Warner Cable. Over the past
year, certain customers beneficial ownership may have
changed as a result of mergers and acquisitions. Therefore the
revenue for ARRIS customers for prior periods has been
adjusted to include the affiliates under common control. A
summary of sales to these customers for 2005, 2004, and 2003 are
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Comcast and affiliates
|
|
$ |
163.3 |
|
|
$ |
126.2 |
|
|
$ |
153.7 |
|
% of sales
|
|
|
24.0 |
% |
|
|
25.8 |
% |
|
|
35.4 |
% |
Cox Communications
|
|
$ |
116.7 |
|
|
$ |
106.3 |
|
|
$ |
104.3 |
|
% of sales
|
|
|
17.2 |
% |
|
|
21.7 |
% |
|
|
24.0 |
% |
Liberty Media International and affiliates
|
|
$ |
104.4 |
|
|
$ |
84.9 |
|
|
$ |
46.1 |
|
% of sales
|
|
|
15.3 |
% |
|
|
17.3 |
% |
|
|
10.6 |
% |
Time-Warner Cable and affiliates
|
|
$ |
72.3 |
|
|
$ |
32.5 |
|
|
$ |
14.1 |
|
% of sales
|
|
|
10.6 |
% |
|
|
6.6 |
% |
|
|
3.2 |
% |
No other customer provided more than 10% of total sales for the
years ended December 31, 2005, 2004, or 2003.
ARRIS operates globally and offers products and services that
are sold to cable system operators and telecommunications
providers. ARRIS products and services are focused in two
product categories: Broadband and Supplies & Customer
Premises Equipment. Consolidated revenues by principal products
and services for the years ended December 31, 2005, 2004
and 2003, respectively were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband | |
|
Supplies & CPE | |
|
Total | |
|
|
| |
|
| |
|
| |
Years Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
$ |
315,098 |
|
|
$ |
365,319 |
|
|
$ |
680,417 |
|
|
December 31, 2004
|
|
$ |
300,198 |
|
|
$ |
189,843 |
|
|
$ |
490,041 |
|
|
December 31, 2003
|
|
$ |
289,637 |
|
|
$ |
144,349 |
|
|
$ |
433,986 |
|
ARRIS sells its products primarily in the United States. The
Companys international revenue is generated from Asia
Pacific, Europe, Latin America and Canada. The Asia Pacific
market primarily includes China, Hong Kong, Japan, Korea,
Singapore, and Taiwan. The European market primarily includes
Austria, Belgium, France, Germany, the Netherlands, Poland,
Portugal, Spain, and Switzerland. The Latin American market
primarily includes Argentina, Chile, Brazil, and Puerto Rico.
Sales to international customers were
85
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately 27.1%, 25.2% and 18.9% of total sales for the
years ended December 31, 2005, 2004 and 2003, respectively.
International sales for the years ended December 31, 2005,
2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Asia Pacific
|
|
$ |
51,139 |
|
|
$ |
48,025 |
|
|
$ |
36,781 |
|
|
Europe
|
|
|
67,374 |
|
|
|
46,213 |
|
|
|
27,186 |
|
|
Latin America
|
|
|
24,979 |
|
|
|
18,205 |
|
|
|
8,052 |
|
|
Canada
|
|
|
41,100 |
|
|
|
11,175 |
|
|
|
10,091 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
184,592 |
|
|
$ |
123,618 |
|
|
$ |
82,110 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, ARRIS held approximately
$2.2 million of assets in Ireland (related to its Com21
facility), comprised of $1.3 million of cash and
$0.9 million of fixed assets.
Note 20. Summary Quarterly Consolidated Financial
Information (unaudited)
The following table summarizes ARRIS quarterly
consolidated financial information (in thousands, except share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2005 Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
$ |
135,924 |
|
|
$ |
162,201 |
|
|
$ |
200,957 |
|
|
$ |
181,335 |
|
Gross margin(1)
|
|
|
36,791 |
|
|
|
41,083 |
|
|
|
54,978 |
|
|
|
57,862 |
|
Operating income (loss)(2)
|
|
|
4,716 |
|
|
|
9,117 |
|
|
|
18,702 |
|
|
|
21,193 |
|
Income (loss) from continuing operations(3)
|
|
|
3,398 |
|
|
|
7,300 |
|
|
|
19,157 |
|
|
|
22,085 |
|
Income (loss) from discontinued operations(4)
|
|
|
10 |
|
|
|
76 |
|
|
|
(30 |
) |
|
|
152 |
|
Net income (loss)
|
|
$ |
3,408 |
|
|
$ |
7,289 |
|
|
$ |
18,820 |
|
|
$ |
21,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.18 |
|
|
$ |
0.21 |
|
Income (loss) from discontinued operations
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income (loss)
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.18 |
|
|
$ |
0.21 |
|
|
Net (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
Income (loss) from discontinued operations
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income (loss)
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2004 Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
$ |
111,628 |
|
|
$ |
120,537 |
|
|
$ |
128,409 |
|
|
$ |
129,467 |
|
Gross margin(5)
|
|
|
36,294 |
|
|
|
40,352 |
|
|
|
35,746 |
|
|
|
33,785 |
|
Operating income (loss)(6)
|
|
|
(12,568 |
) |
|
|
(4,521 |
) |
|
|
(3,098 |
) |
|
|
(1,886 |
) |
Income (loss) from continuing operations(7)
|
|
|
(18,995 |
) |
|
|
(6,260 |
) |
|
|
(3,748 |
) |
|
|
(1,507 |
) |
Income (loss) from discontinued operations(5)(8)
|
|
|
339 |
|
|
|
832 |
|
|
|
42 |
|
|
|
901 |
|
Net income (loss)
|
|
$ |
(18,656 |
) |
|
$ |
(5,428 |
) |
|
$ |
(3,706 |
) |
|
$ |
(606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(0.24 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
Income (loss) from discontinued operations
|
|
$ |
|
|
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
0.01 |
|
Net income (loss)
|
|
$ |
(0.24 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.01 |
) |
86
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(1) |
ARRIS adopted the fair value recognition provisions of
SFAS No. 123R on July 1, 2005 and began expensing
stock options. Prior to the adoption date, the provisions of APB
Opinion No. 25 were followed. In the periods before the
third quarter of 2005, the Company recorded compensation expense
related to restricted stock and options subject to variable
accounting. During the first, second, third and fourth quarters
of 2005, the Company recognized stock compensation expense of
approximately $31 thousand, $82 thousand, $136 thousand and $125
thousand, respectively, in cost of good sold which effected
gross margins. |
|
(2) |
In addition to (1) above, the following items impacted
operating income (loss) during 2005: |
|
|
|
|
|
During the first, second, third and fourth quarters of 2005, the
Company recognized stock compensation expense of approximately
$0.5 million, $1.1 million, $2.5 million and
$2.5 million, respectively, which related to both
Research & Development and Selling, General &
Administrative. |
|
|
|
During 2005, a decrease in expected future cash flows related to
the Atoga product line indicated that the long-lived assets
associated with these products may be impaired. As a result, we
analyzed the fair value of those assets, using the expected cash
flow approach, in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The resulting analysis indicated that the remaining
intangibles of $0.2 million and fixed assets of
$0.1 million were fully impaired and a charge of
approximately $0.3 million was recorded in the first
quarter of 2005. |
|
|
|
During the fourth quarter of 2005, the Company recorded
restructuring and impairment charges of $0.9 million which
predominantly relates to charges in estimates related to real
estate leases associated with previous consolidation of certain
facilities. |
|
|
(3) |
In addition to (1) and (2) above, the following items
impacted income (loss) from continuing operations during 2005: |
|
|
|
|
|
During the third and fourth quarter of 2005, the Company
recognized (gains)/losses of approximately $(0.1) million,
and $0.1 million, respectively, related to its investments
and notes receivable. |
|
|
(4) |
In addition to (1), (2) and (3) above, the following
items impacted income (loss) during 2005: |
|
|
|
|
|
In the fourth quarter of 2005, the Company recorded expense
(income) of ($0.2) million related to its reserves for
discontinued operations. These adjustments were the result of
the resolution of various vendor liabilities, taxes and other
costs. |
|
|
(5) |
During the first quarter of 2004, the Company recognized a
partial recovery with respect to inventory previously written
off associated with an Argentinean customer. Of this total gain
of $0.9 million, approximately $0.6 million is
reflected in cost of sales, and $0.3 million is reflected
in discontinued operations. |
|
|
|
|
|
ARRIS adopted the fair value recognition provisions of
SFAS No. 123R on July 1, 2005 and began expensing
stock options. Prior to the adoption date, the provisions of
APB 25 were followed. In the periods before the third
quarter of 2005, ARRIS recorded compensation expense related to
restricted stock and options subject to variable accounting.
During the first, second, third and fourth quarters of 2004, the
Company recognized stock compensation expense of approximately
$87 thousand, $16 thousand, $31 thousand and $30 thousand,
respectively, in cost of good sold which effected gross margins. |
|
|
(6) |
In addition to (5) above, the following items impacted
operating income (loss) during 2004: |
|
|
|
|
|
During the first, second, third and fourth quarters of 2004, the
Company recognized stock compensation expense of approximately
$1.0 million, $0.6 million, $0.5 million and
$0.6 million, respectively, which related to both
Research & Development and Selling, General &
Administrative. |
|
|
|
During the first quarter of 2004, ARRIS consolidated two
facilities in Georgia, giving the Company the ability to house
many of its core technology, marketing, and headquarter
functions in a single |
87
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
building. This consolidation resulted in a restructuring charge
of $6.2 million in the first quarter of 2004 related to
lease commitments and the write-off of leasehold improvements. |
|
|
|
During the first quarter of 2004, the Company recorded severance
charges of $0.5 million, which were charged to operating
expenses. These charges were related to general reductions in
force. |
|
|
|
During the fourth quarter of 2004, the Company announced that it
would close its office in Fremont, California, which previously
housed Atoga Systems. The marketing and support for certain
products acquired as part of the Atoga Systems acquisition were
transferred to other locations. The closure resulted in a
restructuring charge of $0.3 million related to lease
commitments and severance charges. |
|
|
|
During 2004, ARRIS evaluated the restructuring accruals related
to previously closed facilities. Upon final review, the Company
recorded additional restructuring charges of approximately
$0.9 million, $0.1 million, and $0.1 million
during the second, third, and fourth quarters, respectively, as
a result of a change to the initial estimates used. |
|
|
(7) |
In addition to the items in (5) and (6) above, the
following items impacted income (loss) from continuing
operations in 2004: |
|
|
|
|
|
During the first quarter 2004, the Company called
$50.0 million of the Notes due 2008 for redemption, and
holders of the called notes elected to convert their notes into
an aggregate of 10.0 million shares of common stock, rather
than have the notes redeemed. Under the indentures terms
for redemptions prior to March 18, 2006, ARRIS made a
make-whole interest payment of approximately 0.5 million
common shares, resulting in a charge of $4.4 million. |
|
|
|
During the first, second and third quarters of 2004, the Company
recognized losses of approximately $0.9 million,
$0.6 million, and $0.1 million, respectively, related
to its investments and notes receivable. |
|
|
(8) |
During 2004, ARRIS evaluated its accruals related to costs
associated with the disposal of discontinued product lines and
costs associated with restructuring charges from previously
closed facilities. As a result of these reviews, the Company
recorded reductions to its accruals of approximately
$0.8 million and $0.9 million during the second and
fourth quarters of 2004, respectively, as a result of a change
to the initial estimates used and the settlement of certain
liabilities. |
88
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
Information relating to directors and officers of ARRIS is set
forth under the captions entitled Election of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance in the Companys Proxy
Statement for the 2006 Annual Meeting of Stockholders and is
incorporated herein by reference. Certain information concerning
the executive officers of the Company is set forth in
Part I of this document under the caption entitled
Executive Officers of the Company.
ARRIS code of ethics and financial code of ethics
(applicable to our CEO, senior financial officers, and all
finance, accounting, and legal managers) are available on the
Company website at www.arrisi.com under Investor Relations,
Corporate Governance. The website also will disclose whether
there have been any amendments or waivers to the Code of Ethics
and Financial Code of Ethics. ARRIS will provide copies of these
documents in electronic or paper form upon request to Investor
Relations, free of charge.
ARRIS board of directors has identified Matthew Kearney
and John Petty, both members of the Audit Committee, as our
audit committee financial experts, as defined by the SEC.
|
|
Item 11. |
Executive Compensation |
Information regarding compensation of officers and directors of
ARRIS is set forth under the captions entitled Executive
Compensation, Compensation of Directors, and
Employment Contracts and Termination of Employment and
Change-In-Control Arrangements in the Proxy Statement
incorporated herein by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners,
Management and Related Stockholders Matters |
Information regarding ownership of ARRIS common stock is set
forth under the captions entitled Equity Compensation Plan
Information, Security Ownership of Management
and Security Ownership of Principal Stockholders in
the Proxy Statement and is incorporated herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Information regarding certain relationships and related
transactions with ARRIS is set forth under the captions entitled
Compensation of Directors and Certain
Relationships and Related Party Transactions in the Proxy
Statement and is incorporated herein by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
Information regarding principal accountant fees and services is
set forth under the caption Relationship with Independent
Registered Public Accounting Firm in the Proxy Statement
and is incorporated herein by reference.
89
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedule |
(a)(1) Financial Statements
The following Consolidated Financial Statements of ARRIS Group,
Inc. and Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm are filed as part of this
Report.
90
(a)(2) Financial Statement Schedules
The following consolidated financial statement schedule of ARRIS
is included in this item pursuant to paragraph (d) of
Item 15:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are not applicable, and therefore have been omitted.
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
Beginning | |
|
Charge to | |
|
|
|
End of | |
Description |
|
of Period | |
|
Expenses | |
|
Deductions(1) | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
YEAR ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
3,829 |
|
|
$ |
(438 |
) |
|
$ |
(338 |
) |
|
$ |
3,729 |
|
|
|
Reserve for obsolete and excess inventory(2)
|
|
$ |
18,832 |
|
|
$ |
4,902 |
|
|
$ |
8,583 |
|
|
$ |
15,151 |
|
YEAR ENDED DECEMBER 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
4,446 |
|
|
$ |
(543 |
) |
|
$ |
74 |
|
|
$ |
3,829 |
|
|
|
Reserve for obsolete and excess inventory(2)
|
|
$ |
19,294 |
|
|
$ |
5,595 |
|
|
$ |
6,057 |
|
|
$ |
18,832 |
|
YEAR ENDED DECEMBER 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
10,698 |
|
|
$ |
7,906 |
|
|
$ |
14,158 |
|
|
$ |
4,446 |
|
|
|
Reserve for obsolete and excess inventory(2)
|
|
$ |
14,285 |
|
|
$ |
12,031 |
|
|
$ |
7,022 |
|
|
$ |
19,294 |
|
|
|
(1) |
Represents: a) Uncollectible accounts written off, net of
recoveries and write-offs, b) Net change in the sales
return and allowance account, and c) Disposal of obsolete
and excess inventory. |
|
(2) |
The reserve for obsolescence and excess inventory is included in
inventories. |
91
(a)(3) Exhibit List
Each management contract or compensation plan required to be
filed as an exhibit is identified by an asterisk (*).
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for |
|
|
|
|
incorporation by reference are |
|
|
|
|
ARRIS (formerly known as Broadband |
Exhibit | |
|
|
|
Parent, Inc.) filings |
Number | |
|
Description of Exhibit |
|
unless otherwise noted |
| |
|
|
|
|
|
3 |
.1 |
|
Amended and Restated Certificate of Incorporation |
|
Registration Statement #333-61524, Exhibit 3.1. |
|
3 |
.2 |
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation |
|
August 3, 2001 Form 8-A, Exhibit 3.2. |
|
3 |
.3 |
|
By-laws |
|
Registration Statement #333-61524, Exhibit 3.2, filed
by Broadband Parent Corporation |
|
4 |
.1 |
|
Form of Certificate for Common Stock |
|
Registration Statement #333-61524, Exhibit 4.1. |
|
4 |
.2 |
|
Rights Agreement dated October 3, 2002 |
|
October 3, 2002 Form 8-K Exhibit 4.1 |
|
4 |
.3 |
|
Indenture dated March 18, 2003 |
|
December 31, 2002 Form 10-K, Exhibit 4.3. |
|
4 |
.4 |
|
41/2% Notes Registration
Rights Agreement dated March 18, 2003 |
|
March 31, 2003 Form 10-Q, Exhibit 10.5. |
|
10 |
.1(a)* |
|
Amended and Restated Employment Agreement with Robert J.
Stanzione, dated August 6, 2001 |
|
September 30, 2001 Form 10-Q, Exhibit 10.10(c). |
|
10 |
.1(b)* |
|
Supplemental Executive Retirement Plan for Robert J. Stanzione,
effective August 6, 2001 |
|
September 30, 2001 Form 10-Q, Exhibit 10.10(d). |
|
10 |
.2* |
|
Amended and Restated Employment Agreement with Lawrence A.
Margolis, dated April 29, 1999 |
|
June 30, 1999 Form 10-Q, Exhibit 10.33, filed by
ANTEC Corporation. |
|
10 |
.3* |
|
2001 Stock Incentive Plan |
|
July 2, 2001 Appendix III of Proxy Statement filed as
part of, Registration Statement #333-61524, filed by Broadband
Parent Corporation. |
|
10 |
.4* |
|
Management Incentive Plan |
|
July 2, 2001 Appendix IV of Proxy Statement filed as
part of Registration Statement #333-61524, filed by Broadband
Parent Corporation. |
|
10 |
.5 |
|
Solectron Manufacturing Agreement and Addendum |
|
December 31, 2001 Form 10-K, Exhibit 10.15. |
|
10 |
.6 |
|
Mitsumi Agreement |
|
December 31, 2001 Form 10-K, Exhibit 10.16. |
92
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for |
|
|
|
|
incorporation by reference are |
|
|
|
|
ARRIS (formerly known as Broadband |
Exhibit | |
|
|
|
Parent, Inc.) filings |
Number | |
|
Description of Exhibit |
|
unless otherwise noted |
| |
|
|
|
|
|
10 |
.7* |
|
Form of Employment Agreement with Ronald M. Coppock |
|
December 31, 2001 Form 10-K, Exhibit 10.17. |
|
10 |
.8* |
|
Employment Agreement and Supplement with James D. Lakin dated
August 5, 2001 |
|
December 31, 2002 Form 10-K, Exhibit 10.19. |
|
10 |
.9* |
|
Employment Agreement with David B. Potts dated August 5,
2001 |
|
December 31, 2002 Form 10-K, Exhibit 10.20. |
|
21 |
|
|
Subsidiaries of the Registrant |
|
December 31, 2003 Form 10-K, Exhibit 21. |
|
23 |
|
|
Consent of Ernst & Young LLP |
|
Filed herewith. |
|
24 |
|
|
Powers of Attorney |
|
Filed herewith. |
|
31 |
.1 |
|
Section 302 Certification of the Chief Executive Officer |
|
Filed herewith. |
|
31 |
.2 |
|
Section 302 Certification of the Chief Financial Officer |
|
Filed herewith. |
|
32 |
.1 |
|
Section 906 Certification of the Chief Executive Officer |
|
Filed herewith. |
|
32 |
.2 |
|
Section 906 Certification of the Chief Financial Officer |
|
Filed herewith. |
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
ARRIS GROUP, INC. |
|
|
/s/ David B. Potts
|
|
|
|
David B. Potts |
|
Executive Vice President, Chief Financial Officer, |
|
Chief Accounting Officer, and |
|
Chief Information Officer |
Dated: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
/s/ Robert J. Stanzione
Robert J. Stanzione |
|
Chief Executive Officer and
Chairman of the Board of Directors |
|
March 15, 2006 |
|
/s/ David B. Potts
David B. Potts |
|
Executive Vice President, Chief Financial Officer, Chief
Accounting Officer, and Chief Information Officer |
|
March 15, 2006 |
|
/s/ Alex B. Best*
Alex B. Best |
|
Director |
|
March 15, 2006 |
|
/s/ Harry L. Bosco*
Harry L. Bosco |
|
Director |
|
March 15, 2006 |
|
/s/ John Anderson
Craig*
John Anderson Craig |
|
Director |
|
March 15, 2006 |
|
/s/ Matthew B. Kearney*
Matthew B. Kearney |
|
Director |
|
March 15, 2006 |
|
/s/ William H. Lambert*
William H. Lambert |
|
Director |
|
March 15, 2006 |
|
/s/ John R. Petty*
John R. Petty |
|
Director |
|
March 15, 2006 |
|
*By: |
|
/s/ Lawrence A.
Margolis
Lawrence A. Margolis
(as attorney in fact
for each person indicated) |
|
|
|
|
94