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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
of
ARRIS GROUP, INC.
(Formerly named Broadband Parent Corporation and successor
registrant to ANTEC Corporation)
A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 001-16631
11450 TECHNOLOGY CIRCLE
DULUTH, GA 30097
(678) 473-2000
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.
As of October 31, 2001, 75,150,498 shares of the registrant's Common
Stock, $0.01 par value, were outstanding.
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ARRIS GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
a) Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000 3
b) Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2001 and 2000 (unaudited) 4
c) Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 (unaudited) 5 - 6
d) Notes to the Consolidated Financial Statements (unaudited) 7 - 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19 - 28
Item 3. Quantitative and Qualitative Disclosures on Market Risk 29
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 4,995 $ 8,788
Accounts receivable (net of allowance for doubtful accounts of $8,951 in 2001 and $6,686 in 2000) 115,995 138,537
Accounts receivable from AT&T 25,974 21,662
Inventories 248,123 263,683
Income taxes recoverable -- 17,895
Deferred income taxes 5,066 18,928
Investments held for resale 713 1,561
Other current assets 22,098 19,098
---------- ----------
Total current assets 422,964 490,152
Property, plant and equipment (net of accumulated depreciation of $56,850 in 2001 and $55,443
in 2000) 55,926 53,353
Goodwill (net of accumulated amortization of $57,966 in 2001 and $51,559 in 2000) 298,490 144,919
Investments 12,309 12,085
Deferred income taxes -- 6,773
Other assets 10,962 24,213
---------- ----------
$ 800,651 $ 731,495
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,748 $ 138,774
Accrued compensation, benefits and related taxes 34,188 17,350
Other accrued liabilities 58,557 28,107
---------- ----------
Total current liabilities 144,493 184,231
Long-term debt 142,263 204,000
Deferred income taxes -- 1,362
---------- ----------
Total liabilities 286,756 389,593
Membership interest - Nortel 100,000 --
---------- ----------
Total liabilities and membership interest 386,756 389,593
Stockholders' equity:
Preferred stock, par value $1.00 per share, 5 million shares authorized, none issued
and outstanding -- --
Common stock, par value $0.01 per share, 150 million shares authorized; 75.1 million and
38.1 million shares issued and outstanding in 2001 and 2000, respectively 754 383
Capital in excess of par value 493,381 266,216
(Accumulated deficit) retained earnings (76,602) 77,569
Unrealized holding loss on marketable securities (2,685) (1,668)
Unearned compensation (745) (678)
Cumulative translation adjustments (208) 80
---------- ----------
Total stockholders' equity 413,895 341,902
---------- ----------
$ 800,651 $ 731,495
========== ==========
See accompanying notes to the consolidated financial statements
3
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------- ----------- ----------- -----------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 174,159 $ 281,413 $ 564,132 $ 821,000
Cost of sales 160,289 229,096 495,504 664,577
----------- ----------- ----------- -----------
Gross profit 13,870 52,317 68,628 156,423
Operating expenses:
Selling, general and administrative
and development 44,376 34,772 116,068 99,410
Restructuring and impairment charges 32,541 -- 32,541 --
Write-off of in-process R&D 18,800 -- 18,800 --
Amortization of goodwill 3,949 1,230 6,408 3,688
----------- ----------- ----------- -----------
99,666 36,002 173,817 103,098
----------- ----------- ----------- -----------
Operating (loss) income (85,796) 16,315 (105,189) 53,325
Interest expense 2,431 2,821 7,490 7,960
Membership interest expense 1,609 -- 1,609 --
Other expense, net 2,571 170 9,562 1,885
Loss (gain) on marketable securities 88 3,414 849 (2,486)
----------- ----------- ----------- -----------
(Loss) income before income taxes (92,495) 9,910 (124,699) 45,966
Income tax expense 38,117 4,050 27,619 18,785
----------- ----------- ----------- -----------
Net (loss) income before extraordinary loss (130,612) 5,860 (152,318) 27,181
Extraordinary loss 1,853 -- 1,853 --
----------- ----------- ----------- -----------
Net (loss) income $ (132,465) $ 5,860 $ (154,171) $ 27,181
=========== =========== =========== ===========
Net (loss) income per common share:
Basic: (Loss) income before extraordinary loss $ (2.10) $ 0.15 $ (3.29) $ 0.72
Extraordinary loss (0.03) -- (0.04) --
----------- ----------- ----------- -----------
Net (loss) income $ (2.13) $ 0.15 $ (3.33) $ 0.72
=========== =========== =========== ===========
Diluted: (Loss) income before extraordinary loss $ (2.10) $ 0.15 $ (3.29) $ 0.67
Extraordinary loss (0.03) -- (0.04) --
----------- ----------- ----------- -----------
Net (loss) income $ (2.13) $ 0.15 $ (3.33) $ 0.67
=========== =========== =========== ===========
Weighted average common shares:
Basic 62,110 38,100 46,305 37,886
=========== =========== =========== ===========
Diluted 62,110 39,849 46,305 44,629
=========== =========== =========== ===========
See accompanying notes to the consolidated financial statements.
4
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
----------- -----------
2001 2000
----------- -----------
Operating activities:
Net (loss) income $ (154,171) $ 27,181
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation 12,743 10,052
Amortization of goodwill and intangibles 6,408 3,688
Amortization of deferred finance fees 1,085 861
Amortization of unearned compensation 907 707
Provision for doubtful accounts 4,096 980
Deferred income taxes 19,294 (874)
Loss (gain) on marketable securities 849 (2,486)
Loss from equity investment 8,607 --
Write-off of acquired in-process R & D 18,800 --
Impairment of goodwill 5,877 --
Impairment of fixed assets 14,722 --
Write-down of inventories 31,970 3,500
Gain on sale of building (448) --
Changes in operating assets and liabilities, net of effects of acquisition
Decrease (increase) in accounts receivable 16,076 (51,580)
Decrease in inventories 74,964 5,511
Decrease in income taxes recoverable 17,895 5,373
(Decrease) increase in accounts payable and accrued liabilities (3,201) 19,937
Decrease (increase) in other, net 2,778 (13,430)
----------- -----------
Net cash provided by operating activities 79,251 9,420
Investing activities:
Purchases of property, plant and equipment (7,441) (12,867)
Cash proceeds from sale of building 1,061 --
Cash paid for acquisition, net of cash acquired (7,693) --
Other investments (1,500) (4,570)
----------- -----------
Net cash used in investing activities (15,573) (17,437)
Financing activities:
Borrowings under credit facilities 193,767 267,000
Reductions in borrowings under credit facilities (255,504) (249,500)
Deferred financing costs paid (6,627) (7)
Proceeds from issuance of common stock 893 7,101
----------- -----------
Net cash (used in) provided by financing activities (67,471) 24,594
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,793) 16,577
Cash and cash equivalents at beginning of period 8,788 2,971
----------- -----------
Cash and cash equivalents at end of period $ 4,995 $ 19,548
=========== ===========
See accompanying notes to the consolidated financial statements.
5
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
----------- -----------
2001 2000
----------- -----------
Noncash investing and financing activities:
Net tangible assets acquired, excluding cash $ 58,055 $ --
Intangible assets acquired, including goodwill 193,263 --
Noncash purchase price, including 37,000,000 shares of common stock (243,625) --
----------- -----------
Cash paid for acquisition, net of cash acquired $ 7,693 $ --
=========== ===========
Supplemental cash flow information:
Interest paid during the period $ 2,936 $ 3,531
=========== ===========
Income taxes paid during the period $ 270 $ 15,194
=========== ===========
See accompanying notes to the consolidated financial statements.
6
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
ARRIS Group, Inc., formerly known as ANTEC Corporation (together with
its consolidated subsidiaries, except as the context otherwise indicates,
"ARRIS" or the "Company") is an international communications technology company,
headquartered in Duluth, Georgia. The Company specializes in the design and
engineering of hybrid fiber-coax ("HFC") architectures and the development and
distribution of products for broadband networks. The Company provides its
customers with products and services that enable reliable, high-speed, two-way
broadband transmission of video, telephony, and data.
ARRIS operates in one business segment, Communications, providing a
range of customers with network and system products and services, primarily HFC
networks and systems for the communications industry. This segment accounts for
100% of consolidated sales, operating profit and identifiable assets of the
Company. ARRIS provides a broad range of products and services to cable system
operators and telecommunications providers. The Company is a leading developer,
manufacturer and supplier of telephony, optical transmission, construction,
rebuild and maintenance equipment for the broadband communications industry. The
Company supplies most of the products required in a broadband communication
system including headend, distribution, drop and in-home subscriber products.
The consolidated financial statements furnished herein reflect all
adjustments (consisting of normal recurring accruals) that are, in the opinion
of management, necessary for a fair presentation of the consolidated financial
statements for the periods shown. Additionally, certain prior year amounts have
been reclassified to conform to the 2001 financial statement presentation.
Interim results of operations are not necessarily indicative of results to be
expected from a twelve-month period. These interim financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K/A for the Company's year ended December 31, 2000 (as restated).
NOTE 2. LANCITY TRANSACTION AND RESTATEMENT
During the first quarter of 1999, the Company and Nortel Networks
("Nortel") completed the combination of the Broadband Technology Division of
Nortel Networks, referred to as LANcity, with Arris Interactive, L.L.C. ("Arris
Interactive"), a joint venture between the Company and Nortel. This combination
was effected by the contribution of the LANcity assets and business into Arris
Interactive. The Company's interest in the joint venture was reduced from 25.0%
to 18.75% with potential dilution to 12.50%, while Nortel's interest was
increased from 75.0% to 81.25% with the potential to increase to 87.5%.
In connection with the transaction, as previously disclosed in the
first quarter of 1999, the Company recorded a one-time, pre-tax, non-cash gain
of $60.0 million, net of $2.5 million of transaction related expenses, based
upon an independent valuation of LANcity. The transaction was accounted for, in
effect, as if it were a gain on the sale of a 12.50% interest in Arris
Interactive by the Company to Nortel in exchange for a 12.50% interest in
LANcity. The Company elected to recognize gains or losses on the sale of
previously unissued stock of a subsidiary or investee based on the difference
between the carrying amount of the equity interest in the investee immediately
before and after the transaction and deferred income taxes were provided on such
gain.
The Company's interest in Arris Interactive was subject to further
dilution based upon its performance over the eighteen-month period ended June
30, 2000. At the expiration of the eighteen-month period, no further dilution of
the Company's share of the joint venture occurred, and, based upon the initial
independent valuation, the Company previously recorded an additional one-time,
pre-tax, non-cash gain of $31.25 million to reflect the Company's final
ownership percentage in the joint venture of 18.75%.
The Company has restated its consolidated financial statements for the
years ended December 31, 2000 and 1999 by eliminating the gain of $31.25 million
and $62.5 million, respectively, recorded on the LANcity transaction in the
second quarter of the year ended December 31, 2000 and the first quarter of the
7
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
year ended December 31, 1999. See the Company's restated consolidated financial
statements in its amended Form 10-K/A. The gains previously recorded for the
years ended December 31, 2000 and 1999 were based on the fair value of the
LANcity assets contributed to Arris Interactive by Nortel. Upon further review,
in connection with the acquisition of Nortel's interest in Arris Interactive,
the Company determined that Arris Interactive accounted for the contribution of
LANcity into Arris Interactive at historical cost in a manner similar to a
pooling of interests since LANcity and Arris Interactive were under the common
control of Nortel. Accordingly, the Company revised its accounting for the
LANcity transaction to be consistent with the accounting by Arris Interactive.
As Arris Interactive continued to have a deficit in members' equity subsequent
to the LANcity transaction and the Company's accounting for the transaction is
predicated on the accounting by Arris Interactive, the Company has eliminated
its one-time, pre-tax, non-cash gains on the LANcity transaction. The effects of
the restatement on the Company's financial statements as of December 31, 2000
and for the three and nine months ended September 30, 2000 are as follows (in
thousands except for per share amounts):
Three Months Ended Nine Months Ended
December 31, 2000 September 30, 2000 September 30, 2000
---------------------------- --------------------------- ---------------------------
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
Investments $ 105,835 $ 12,085 * * * *
Non-current deferred
income tax assets 5,292 6,773 * * * *
Total assets 823,764 731,495 * * * *
Non-current deferred
income tax liabilities 36,912 1,362 * * * *
Total liabilities 425,143 389,593 * * * *
Retained earnings 134,288 77,569 * * * *
Income tax expense * * 3,741 4,050 31,410 18,785
Net income * * 6,169 5,860 45,807 27,181
Net income per common
share:
Basic * * $ 0.16 $ 0.15 $ 1.21 $ 0.72
Diluted * * $ 0.15 $ 0.15 $ 1.09 $ 0.67
* These items are not reported in this Form 10-Q and, therefore, are not
included in this table.
NOTE 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations, and FASB Statement No. 142, Goodwill
and Other Intangible Assets. Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of
Statement No. 142 apply to goodwill and intangible assets acquired after June
30, 2001. The new accounting rules have been adopted for the goodwill and
intangible assets acquired with the Arris Interactive, L.L.C. transaction, as
the acquisition occurred on August 3, 2001 (See Note 12 of Notes to the
Consolidated Financial Statements). The Company will apply the new accounting
rules to goodwill and intangible assets acquired prior to July 1, 2001 at the
beginning of fiscal year 2002. The Company is in the process of reviewing the
effects that the adoption of FASB Statement No. 142 will have on the Company's
results of operations and financial position.
In 2000, the Emerging Issues Task Force reached a consensus on EITF No.
00-10, Accounting for Shipping and Handling Fees and Costs ("EITF 00-10") that
states all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should
8
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
be classified as revenue. Historically, the Company had not included amounts
billed to customers for shipping and handling as revenues. These amounts were
not previously recorded as revenue and the related costs as cost of sales
because they were netted as pass-through expenses, reimbursed in total by the
Company's customers. For the three and nine months ended September 30, 2001,
shipping and handling costs, in aggregate, were approximately $1.6 million and
$5.6 million, respectively, as compared to $6.9 million and $20.0 million for
the same periods in 2000. All shipping and handling costs have been
appropriately reflected in net sales and cost of sales.
In June 1998, the Financial Accounting Standards Board issued FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
FASB Statement No. 133 was originally effective for fiscal years beginning June
15, 1999. However, on May 19, 1999, the FASB voted to delay the effective date
for one year, to fiscal years beginning after June 15, 2000 by issuing FASB
Statement No. 137. The Statement requires the Company to disclose certain
information regarding derivative financial instruments. The Company adopted FASB
Statement No. 133 as of December 31, 2000 and, other than additional disclosure
requirements, the effects were immaterial to the Company's financial statements.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
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. The plan entails the implementation of an expanded
manufacturing outsourcing strategy and the related closure of the four factories
located in El Paso, Texas and Juarez, Mexico. The closure of the factories is
anticipated to be complete during the first half of 2002. As a result, the
Company recorded restructuring and impairment charges of $66.2 million. Included
in these charges was approximately $32.0 million related to the write-down of
inventories and approximately $1.7 million related to the write-off of remaining
warranty and purchase order commitments, which have been reflected in cost of
sales. Also included in the restructuring and impairment charge was
approximately $5.7 million related to severance and associated personnel costs,
$5.9 million related to the impairment of goodwill, $14.8 million related to the
impairment of fixed assets, and approximately $6.1 million related to lease
termination and other shutdown expenses of factories and office space. The
personnel-related costs included termination expenses for the involuntary
dismissal of 807 employees, primarily engaged in production and assembly
functions performed at the facilities. ARRIS offered terminated employees
separation amounts in accordance with the Company's severance policy and
provided the employees with specific separation dates. The severance and
associated personnel costs will be paid upon closure of the factories. As of
September 30, 2001, approximately $11.1 million of expenses relating to the
restructuring and impairment charges remained to be paid.
In accordance with FASB Statement No. 109, Accounting for Income Taxes,
a valuation reserve of $38.1 million against deferred tax assets was recorded.
As a result of the restructuring and impairment charges described above, the
Company was placed in a cumulative loss position for recent years, which
provides significant negative evidence to recognize deferred tax assets.
NOTE 5. INVENTORIES
Inventories are stated at the lower of average, approximating first-in,
first-out, cost or market. The components of inventory are as follows (in
thousands):
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
Raw material $ 56,254 $ 62,458
Work in process 10,021 9,119
Finished goods 181,848 192,106
---------- ----------
Total inventories $ 248,123 $ 263,683
========== ==========
9
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost, consists of the following (in
thousands):
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
Land $ 2,164 $ 2,549
Building and leasehold improvements 12,885 15,394
Machinery and equipment 97,727 90,853
----------- -----------
112,776 108,796
Less: Accumulated depreciation (56,850) (55,443)
----------- -----------
Total property, plant and equipment, net $ 55,926 $ 53,353
=========== ===========
NOTE 7. LONG TERM DEBT
Long-term debt consists of the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
Revolving Credit Facility $ 27,263 $ 89,000
4.5% Convertible Subordinated Notes 115,000 115,000
---------- ----------
Total long term debt $ 142,263 $ 204,000
========== ==========
In 1998, the Company issued $115.0 million of 4.5% Convertible
Subordinated Notes ("Notes") due May 15, 2003. The Notes are convertible, at the
option of the holder, at any time prior to maturity, into the Company's common
stock ("Common Stock") at a conversion price of $24.00 per share. The Notes
became redeemable, in whole or in part, at the Company's option, on May 15,
2001. If the Notes are redeemed prior to May 15, 2002, the Company will be
required to pay a premium of 1.8% of the principal amount or approximately $2.1
million. As of September 30, 2001, the Company had not exercised its option to
redeem these Notes.
The Company's bank indebtedness was refinanced on August 3, 2001, in
connection with the Arris Interactive L.L.C. acquisition. (See Note 12 of Notes
to the Consolidated Financial Statements.) The new facility is an asset-based
revolving credit facility, which initially permitted the borrowers (including
the Company and Arris Interactive) to borrow up to $175 million (which can be
increased under certain conditions by up to $25 million), based upon
availability under a borrowing base calculation. In general, the borrowing base
is limited to 85% of net eligible receivables (with special limitations in
relation to foreign receivables) and 80% of the orderly liquidation value of
eligible inventory (not to exceed $80 million). The facility contains
traditional financial covenants, including fixed charge coverage, senior debt
leverage, minimum net worth, and minimum inventory turns ratios, and a $10
million minimum borrowing base availability covenant. The facility is secured by
substantially all of the borrowers' assets. The facility expires August 3, 2004
and requires the Company to refinance its 4.5% Subordinated Convertible Notes
due 2003, prior to December 31, 2002.
As of September 30, 2001, the Company had approximately $99.6 million
of available borrowings under the Credit Facility.
NOTE 8. COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) for the three and nine-month periods ended
September 30, 2001 was $(131.2) million and $(152.8) million, respectively.
Total comprehensive income for the three and nine-
10
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
month periods ended September 30, 2000 was $5.9 million and $27.3 million,
respectively. The difference in the comprehensive income (loss) as compared to
the net income (loss) for all periods was immaterial.
NOTE 9. SALES INFORMATION
A significant portion of the Company's revenue is derived from sales to
AT&T (including MediaOne Group, which was acquired by AT&T during 2000),
aggregating $42.5 million and $125.8 million for the quarters ended September
30, 2001 and 2000, respectively. Through the first nine months of 2001, revenue
generated by sales to AT&T were approximately $188.0 million, as compared to the
same period in 2000 when sales to AT&T totaled $381.5 million. Liberty Media
Corporation owns approximately 10% of the Company's outstanding common stock on
a fully diluted basis. The ownership includes options to acquire an additional
854,341 shares. Until August 2001, AT&T controlled Liberty Media Corporation.
The Company operates globally and offers products and services that are
sold to cable system operators and telecommunications providers. ARRIS Group's
products and services are summarized in three new product categories instead of
the previous four categories: broadband (previously cable telephony and Internet
access); transmission, optical, and outside plant; and supplies and services.
All prior period revenues have been restated to conform to the new product
categories. Consolidated revenues by principal products and services for the
three and nine months ended September 30, 2001 and 2000, respectively were as
follows (in thousands)(unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
PRODUCT CATEGORY
Broadband $ 87,562 $ 89,025 $ 258,690 $ 258,118
Transmission, Optical, and Outside Plant 52,804 119,515 182,876 356,000
Supplies and Services 33,793 72,873 122,566 206,882
---------- ---------- ---------- ----------
Total Revenue $ 174,159 $ 281,413 $ 564,132 $ 821,000
========== ========== ========== ==========
The Company sells its products primarily in the United States with its
international revenue being generated from Asia Pacific, Europe, Latin America
and Canada. The Asia Pacific market includes Australia, China, Hong Kong, India,
Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Sampan, Singapore,
Taiwan, and Thailand. The European market includes France, Ireland, Italy,
Netherlands, Portugal, Spain and the United Kingdom. International sales for the
three and nine months ended September 30, 2001 and 2000 are as follows (in
thousands) (unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
--------- --------- --------- ---------
2001 * 2000 2001 * 2000
--------- --------- --------- ---------
INTERNATIONAL REGION
Asia Pacific $ 8,306 $ 3,735 $ 15,832 $ 11,771
Europe 16,680 8,477 26,886 26,663
Latin America 4,534 11,924 15,488 25,255
Canada 1,852 1,191 2,915 3,450
--------- --------- --------- ---------
Total International Sales $ 31,372 $ 25,327 $ 61,121 $ 67,139
========= ========= ========= =========
*The periods in 2001 included approximately two months of Arris Interactive,
L.L.C. revenue. Under the previous joint venture agreement with Nortel, the
Company was not able to sell the Arris Interactive, L.L.C products
internationally. This agreement terminated upon the Company's acquisition of
Nortel's share of Arris Interactive, L.L.C. on August 3, 2001.
11
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share ("EPS") computations for the periods
indicated (in thousands except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Basic:
Net (loss) income before extraordinary loss $ (130,612) $ 5,860 $ (152,318) $ 27,181
Extraordinary loss 1,853 -- 1,853 --
----------- --------- ----------- ---------
Net (loss) income $ (132,465) $ 5,860 $ (154,171) $ 27,181
=========== ========= =========== =========
Weighted average shares outstanding 62,110 38,100 46,305 37,886
=========== ========= =========== =========
Basic (loss) earnings per share $ (2.13) $ 0.15 $ (3.33) $ 0.72
=========== ========= =========== =========
Diluted:
Net (loss) income before extraordinary loss $ (130,612) $ 5,860 $ (152,318) $ 27,181
Extraordinary loss 1,853 -- 1,853 --
----------- --------- ----------- ---------
Net (loss) income (132,465) 5,860 (154,171) 27,181
Add:
4.5% convertible subordinated notes interest
and fees, net of federal income tax effect -- -- -- 2,661
----------- --------- ----------- ---------
Total $ (132,465) $ 5,860 $ (154,171) $ 29,842
=========== ========= =========== =========
Weighted average shares outstanding 62,110 38,100 46,305 37,886
Dilutive securities net of income tax benefit:
Add options / warrants -- 1,749 -- 1,951
Add assumed conversion of
4.5 % convertible subordinated notes -- -- -- 4,792
----------- --------- ----------- ---------
Total 62,110 39,849 46,305 44,629
=========== ========= =========== =========
Diluted earnings per share $ (2.13) $ 0.15 $ (3.33) $ 0.67
=========== ========= =========== =========
The 4.5% Convertible Subordinated Notes were antidilutive for the three
and nine month periods ended September 30, 2001, and for the three month period
ended September 30, 2000. The effects of the options and warrants were not
presented for the three and nine months ended September 30, 2001 as the Company
incurred a net loss and inclusion of these securities would be antidilutive.
12
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes the Company's quarterly consolidated
financial information (in thousands, except share data):
Quarters ending in 2001
-----------------------------------------------
March 31 June 30 September 30
(restated) (restated)
----------- ----------- ------------
Net sales .............................. $ 212,788 $ 177,185 $ 174,159
Gross profit (5)(6)(9) ................. 32,090 22,668 13,870
Operating (loss) (5)(9)(10) ............ (4,345) (15,048) (85,796)
(Loss) before income taxes and
extraordinary loss (4)(13) .......... (10,420) (21,784) (92,495)
Net (loss) (11)(12) .................... $ (7,218) $ (14,488) $ (132,465)
Net (loss) per common share:
Basic ................................ $ (0.19) $ (0.38) $ (2.13)
Diluted .............................. $ (0.19) $ (0.38) $ (2.13)
Quarters ending in 2000
------------------------------------------------
March 31 June 30 September 30
---------- ---------- ------------
Net sales (7) .......................... $ 256,571 $ 283,016 $ 281,413
Gross profit (3)(5) .................... 51,280 52,826 52,317
Operating income (1) ................... 19,320 17,690 16,315
Income before income taxes and
extraordinary loss (2)(4) ........... 16,449 19,607 9,910
Net income (8)(11)(12) ................. $ 9,727 $ 11,594 $ 5,860
Net income per common share:
Basic ................................ $ 0.26 $ 0.31 $ 0.15
Diluted .............................. $ 0.24 $ 0.28 $ 0.15
SUPPLEMENTAL FINANCIAL INFORMATION (excluding the effects of non-recurring items
in 2001 - closure of certain manufacturing facilities and offices, write-down of
Powering product line assets, inventory write-offs, acquired in-process R&D
write-off, deferred finance fees write-off, mark-to-market adjustments on
investments, warranty expense, severance expenses, and valuation reserves for
deferred taxes; and excluding the effects of non-recurring items in 2000 -
pension curtailment gain, additional inventory write-off related to the
restructuring charge, mark-to-market adjustments on investments, and accrual of
LANcity transaction expense which was later reversed in the fourth quarter of
2000):
Quarters ending in 2001
--------------------------------------------
March 31 June 30 September 30
(restated) (restated)
---------- ---------- ------------
Gross profit (5)(6)(9) ................. $ 32,090 $ 28,643 $ 47,538
Operating (loss) (5)(9)(10) ............ (4,345) (5,317) (787)
(Loss) before income taxes
and extraordinary loss (4)(13) ...... (10,061) (11,651) (7,398)
Net (loss) (11)(12) .................... $ (7,013) $ (8,566) $ (7,398)
Net (loss) income per common share:
Diluted .............................. $ (0.18) $ (0.22) $ (0.12)
Weighted average diluted share ....... 38,252 38,290 62,110
Quarters ending in 2000
-----------------------------------------
March 31 June 30 September 30
--------- --------- ------------
Gross profit (3)(5) .................... $ 51,280 $ 56,326 $ 52,317
Operating income (1) ................... 17,212 21,190 16,315
Income before income taxes
and extraordinary loss (2)(4) ....... 14,341 18,457 13,324
Net income (8)(11)(12) ................. $ 8,392 $ 12,102 $ 7,806
Net income per common share:
Diluted .............................. $ 0.21 $ 0.29 $ 0.19
Weighted average diluted share ....... 44,513 44,733 39,849
13
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) As of January 1, 2000, the Company froze the defined pension plan
benefits for 569 participants. These participants elected to
participate in the Company's 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. As a result of the curtailment, as
outlined under FASB Statement No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, the Company recorded a $2.1 million pre-tax gain
on the curtailment during the first quarter 2000.
(2) During the second quarter of 2000, the Company accrued $1.25 million
for expenses relating to the LANcity transaction. This accrual was
reversed in the fourth quarter in 2000, due to a change in estimate for
costs related to the transaction.
(3) During the second quarter of 2000, the Company evaluated its powering
and RF products and recorded a pre-tax charge of $3.5 million to cost
of goods sold.
(4) Because the Company's investment of Lucent and Avaya stock are
considered trading securities held for resale, they are required to be
carried at their fair market value with any gains or losses being
included in earnings. In calculating the fair market value of the
Lucent and Avaya investments as of June 30 and September 30, 2000, the
Company recognized a pre-tax gain of $5.9 million and a pre-tax loss of
$3.4 million, respectively. As of March 31, June 30, and September 30,
2001, the Company recognized pre-tax write-downs of $0.3 million, $0.4
million, and $0.1 million, respectively, for each quarter.
(5) During the second quarter of 2001, a workforce reduction program was
implemented which significantly reduced the Company's overall
employment levels. This action resulted in a pre-tax charge to cost of
goods sold of approximately $1.3 million for severance and related
costs incurred at the factory level. Additionally, a pre-tax charge of
$3.7 million was recorded to operating expenses.
(6) During the second quarter of 2001, a one-time warranty expense relating
to a specific product was recorded, resulting in a pre-tax charge of
$4.7 million for the expected replacement cost of this product. The
Company does not anticipate any further warranty expenses to be
incurred in connection with this product.
(7) Net sales and cost of sales for the quarters ended March 31, June 30,
and September 30, 2000 differ from the amounts reported as net sales
and cost of sales in the respective Form 10-Q's, due to the adoption of
EITF No. 00-10, Accounting for Shipping and Handling Fees and Costs, in
the fourth quarter of 2000.
(8) During the year, the Company provides for income taxes using
anticipated effective annual tax rates. The rates are based on expected
operating results and permanent differences between book and tax
income. Due to the restatement of the consolidated financial statements
in 2000 to eliminate the LANcity gain (See Note 2), the Company also
restated income tax expense (benefit) for each of the quarters in the
year ended December 31, 2000 to reflect the Company's effective annual
tax rate after restatement. Therefore, the income tax expense (benefit)
amounts for the each of the quarters in the year ended December 31,
2000 were adjusted to maintain the Company's effective annual tax rate
of 40.9% for that year.
(9) In the third quarter 2001, in connection with the restructuring plan to
outsource most of its manufacturing functions, the Company recorded
restructuring and impairment charges of approximately $66.2 million.
Included in these charges was approximately $32.0 million related to
the write-down of inventories and $1.7 million related to the write-off
of remaining warranty and purchase order commitments, which have been
reflected in cost of sales. Also included in these charges was
approximately $5.7 million related to severance and associated
personnel costs, $5.9 million related to the impairment of goodwill,
$14.8 million related to the impairment of fixed assets, and
approximately $6.1 million related to lease termination of factories
and office space and other shutdown expenses.
(10) During the third quarter 2001, the Company wrote off in-process R&D of
$18.8 million in connection with the Arris Interactive L.L.C.
acquisition.
(11) During the third quarter 2001, unamortized deferred finance fees of
$1.9 million were written off and recorded as an extraordinary loss on
the extinguishment of debt. These fees related to a loan agreement,
which was replaced in connection with the Arris Interactive L.L.C.
acquisition.
(12) As a result of the restructuring and impairment charges during the
third quarter 2001, a valuation reserve of approximately $38.1 million
against deferred tax assets was recorded in accordance with FASB
Statement No. 109, Accounting for Income Taxes. (See Note 4 of Notes to
the Consolidated Financial Statements.)
(13) In accordance with APB No. 18, The Equity Method of Accounting for
Investments in Common Stock, the quarters ended March 31, 2001 and June
30, 2001 were restated as a result of the Arris Interactive, L.L.C.
acquisition. (See Note 12 of Notes to the Consolidated Financial
Statements.)
14
NOTE 12. ACQUISITION OF ARRIS INTERACTIVE, L.L.C.
On August 3, 2001, the Company completed the acquisition from Nortel
Networks L.L.C of the portion of Arris Interactive, L.L.C. that the Company did
not own. As part of this transaction:
- A new holding company, ARRIS Group, Inc., was formed,
- The Company merged with a subsidiary of ARRIS Group, Inc. and
the outstanding ANTEC common stock was converted, on a
share-for-share basis, into common stock of ARRIS Group, Inc.
- Nortel and the Company contributed to Arris Interactive
approximately $131.6 million in outstanding indebtedness and
adjusted their ownership percentages in Arris Interactive to
reflect these contributions,
- Nortel exchanged its remaining ownership interest in Arris
Interactive for 37 million shares of ARRIS Group, Inc. common
stock (approximately 49.2% of the total shares outstanding
following the transaction) and a subordinated redeemable
preferred interest in Arris Interactive with a face amount of
$100 million, and - ANTEC Corporation, now a wholly-owned
subsidiary of ARRIS Group, Inc., changed its name to Arris
International, Inc.
The preferred interest is redeemable in approximately four quarterly
installments commencing February 3, 2002, provided that certain availability and
other tests are met under the Company's credit facility as described in Note 7.
The following is a summary of the purchase price allocation to record
the Company's purchase of Nortel Networks' ownership interest in Arris
Interactive for 37,000,000 shares of ARRIS common stock on August 3, 2001 at
$6.14 per share as quoted on the Nasdaq National Market System:
(in thousands)
----------------
37,000,000 shares of ARRIS $0.01 par value common stock at $6.14 per share $ 227,180
Acquisition costs (banking fees, legal and accounting fees, printing
costs) 8,457
Write-off of abandoned leases and related leasehold improvements 2,568
Fair value of stock options to Arris Interactive, L.L.C. employees 12,531
Other 1,346
---------------
Adjusted Purchase Price $ 252,082
===============
Allocation of Purchase Price:
Net tangible assets acquired* $ 58,819
Existing technology 51,500
In-process research and development 18,800
Goodwill 122,963
---------------
$ 252,082
===============
* Net tangible assets of Arris Interactive acquired ($74,762 @ 81.25%
owned by Nortel) $ (60,744)
Contribution to capital by Nortel Networks as part of the transaction 119,563
---------------
$ 58,819
===============
15
ARRIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The value assigned to in-process research and development, in
accordance with accounting principles generally accepted in the United States,
was written off at the time of acquisition. The $18.8 million of in-process
technology valued for the transaction related to two projects that were targeted
at the carrier-grade telephone and high-speed data markets. The value of the
in-process technology was calculated separately from all other acquired assets.
The projects included:
- Multi-service Access System ("MSAS"), a high-density multiple
stream cable modem termination system providing carrier-grade
availability and high-speed routing technology on the same
headend targeted at the carrier-grade telephone and high-speed
data market. There are specific risks associated with this
in-process technology. As the MSAS has a unique capability to
perform hardware sparing through its functionality via use of
a radio frequency switching matrix, there is risk involved in
being able to achieve the isolation specifications related to
this type of technology. Additionally, because of the
complexity of its design and the routing of signals through
the radio frequency switching matrix, meeting FCC
specifications is a challenge. It is anticipated that the MSAS
project will be in service in field trials during the latter
part of the fourth quarter of 2001 and is expected to begin
contributing to consolidated revenues by July of 2002.
Currently, prototype versions of all hardware circuit packs
are available and all hardware and software functions have
been tested. In addition, full mechanicals, cabling and power
have been demonstrated.
- Packet Port II, an outside voice over Internet protocol
terminal targeted at the carrier-grade telephone market. There
are specific risks associated with this in-process technology.
Based on the key product objectives of the Packet Port II,
from a hardware perspective, the product is required to
achieve power supply performance capable of meeting a wide
range of input power, operating conditions and loads. From a
software perspective, the Company is dependent on a third
party for reference design software critical to this product.
Since development of this reference design software is
currently in process, the ordinary risks associated with the
completion and timely delivery of the software are inherent to
this project. Additionally, there are sophisticated power
management techniques required to meet the target power
consumption of this product. There are technical/schedule
risks associated with implementing processor power down that
can simultaneously meet power consumption targets without
affecting the voice or data functionality of this technology
application. It is anticipated that the Packet Port II project
will be in service in field trials during the latter part of
the fourth quarter of 2001 and is expected to begin
contributing to consolidated revenues by the end of the first
quarter 2002. First prototypes of the Packet Port II are
currently being developed. This will allow testing on the
functionality of the major subsystems of this product.
The following table identifies specific assumptions for the projects,
in millions:
- ------------------ ------------------ -------------------- --------------- ------------------- ---------------
Project Fair value Estimated Expected Expected
at date of percentage of cost to date to Discount
valuation completion complete complete rate
------------------ -------------------- --------------- ------------------- ---------------
MSAS $16.9 68.9% $9.9 July 2002 32%
Packet $1.9 41.5% $11.3 March 2002 32%
Port II
16
ARRIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Valuation of in-process research and development
The fair values assigned to each developed technology as related to
this transaction were valued using an income approach based upon the current
stage of completion of each project in order to calculate the net present value
of each in-process technology's cash flows. The cash flows used in determining
the fair value of these projects were based on projected revenues and estimated
expenses for each project. Revenues were estimated based on relevant market size
and growth factors, expected industry trends, individual product sales cycles,
the estimated life of each product's underlying technology, and historical
pricing. Estimated expenses include cost of goods sold, selling, general and
administrative and research and development expenses. The estimated research and
development expenses include costs to maintain the products once they have been
introduced into the market, and costs to complete the in-process research and
development. It is anticipated that the acquired in-process technologies will
yield similar prices and margins that have been historically recognized by Arris
Interactive and expense levels consistent with historical expense levels for
similar products.
A risk-adjusted discount rate was applied to the cash flows related to
each existing products' projected income stream for the years 2002 through 2006.
This discount rate assumes that the risk of revenue streams from new technology
is higher than that of existing revenue streams. The discount rate used in the
present value calculations was generally derived from a weighted average cost of
capital, adjusted upward to reflect the additional risks inherent in the
development life cycle, including the useful life of the technology,
profitability levels of the technology, and the uncertainty of technology
advances that are known at the assumed transaction date. Product-specific risk
includes the stage of completion of each product, the complexity of the
development work completed to date, the likelihood of achieving technological
feasibility, and market acceptance.
We present below summary unaudited pro forma combined financial
information for the Company and Arris Interactive to give effect to the
transaction. This summary unaudited pro forma combined financial information is
derived from the historical financial statements of the Company and Arris
Interactive. This information assumes the transaction was consummated at the
beginning of the applicable period. This information is presented for
illustrative purposes only and does not purport to represent what the financial
position or results of operations of the Company, Arris Interactive or the
combined entity would actually have been had the transaction occurred at the
applicable dates, or to project the Company's, Arris Interactive's or the
combined entity's results of operations for any future period or date.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000
---------------- ---------------
Net sales $ 605,646 $ 1,036,590
Gross profit 93,165 298,438
Operating (loss) income(1)(3) (142,614) 107,897
(Loss) income before income taxes (167,670) 101,538
Net (loss) income (2) (195,289) 61,313
================ ===============
Net (loss) income per common share:
Basic $ (0.63) $ 0.82
================ ===============
Diluted $ (0.63) $ 0.78
================ ===============
Weighted average common shares:
Basic 75,271 74,886
================ ===============
Diluted 75,271 81,629
================ ===============
(1) In accordance with FASB Statement No. 142, Goodwill and Other
Intangible Assets, goodwill is no longer amortized, but
reviewed annually for impairment. The provisions of Statement
No. 142 state that goodwill and indefinite lived intangible
assets acquired after June 30, 2001 will not be amortized. The
information presented above, therefore, does not include
amortization expense on the goodwill acquired in this
transaction.
(2) In accordance with FASB Statement No. 109, Accounting for
Income Taxes, a valuation reserve against deferred tax assets
was recorded as a result of the restructuring and impairment
charges during the third quarter 2001. Therefore, no
additional adjustment for tax expense (benefit) was reflected
in the information presented above.
17
ARRIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) In accordance with SEC regulations, the in-process R&D
write-off is not reflected as an adjustment to the unaudited
pro forma combined statements of operations as it represents a
non-recurring charge directly attributable to the transaction.
In connection with the Arris Interactive, L.L.C. acquisition, the
quarters ended March 31, 2001 and June 30, 2001 were restated in accordance with
Accounting Principles Board ("APB") No. 18, The Equity Method of Accounting for
Investments in Common Stock. This APB states that an investment in common stock
of an investee that was previously accounted for by the cost method becomes
qualified for use of the equity method by an increase in the level of ownership.
The Company adopted the use of the equity method upon acquisition of Nortel's
portion of Arris Interactive, L.L.C., and all prior periods presented have been
adjusted retroactively to reflect the equity method of accounting. During 2000,
Arris Interactive, L.L.C. recorded net income. However, in the periods prior to
2000, Arris Interactive, L.L.C. incurred net losses, of which the Company did
not recognize its proportionate share due to its investment in Arris
Interactive, L.L.C being reduced to zero. APB No. 18 states that the Company
should recognize gains only after its share of net income equals its share of
net losses not recognized. The Company's share of Arris Interactive's net income
in 2000 did not exceed the losses unrecognized in previous years, and therefore,
these periods have not been restated. However, during the periods ending March
31, 2001 and June 30, 2001, Arris Interactive, L.L.C. recorded net losses and
the Company has restated these periods to reflect its share of the losses under
the equity method of accounting due to the Company's investment in and advances
to Arris Interactive at December 31, 2000 being sufficient to record such
losses.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000
Net Sales. The Company's sales for the third quarter 2001 decreased by
38.1% to $174.2 million as compared to the third quarter 2000 sales of $281.4
million, and decreased $3.0 million from the previous quarter's sales of $177.2
million. For the nine-month periods ended September 30, 2001 and 2000, net sales
were $564.1 million and $821.0 million, respectively, a decrease of 31.3%
year-over-year. The reduced volumes recorded in the three and nine months ended
September 30, 2001 were a result of the widespread slowdown in
telecommunications infrastructure spending. The slowdown in spending began in
the fourth quarter of 2000 and continued throughout 2001. Through the three and
nine months ended September 30, 2001, reduced volumes in all product categories
reflect the financial and market conditions that impacted the telecommunications
industry in general.
The Company's products and services are summarized in three new product
categories instead of the previous four categories: broadband (previously cable
telephony and Internet access); transmission, optical, and outside plant; and
supplies and services. All prior period revenues have been aggregated to conform
to the new product categories.
- - Broadband product revenues decreased by approximately 1.6% to $87.6
million in the third quarter 2001 as compared to $89.0 million in the
same quarter last year. Broadband product revenues accounted for
approximately 50.3% of sales in the third quarter 2001 as compared to
31.6% for the same quarter last year. Revenues for the first nine
months of 2001 increased approximately 0.2% to $258.7 million as
compared to $258.1 million for the same period in 2000. However,
revenues in 2001 included approximately $30.0 million of sales to AT&T
that were carried over from the fourth quarter in 2000.
- - Transmission, optical and outside plant product revenues decreased by
approximately 55.8% to $52.8 million in the third quarter 2001 as
compared to $119.5 million in the same quarter last year. This revenue
accounted for approximately 30.3% of sales in the third quarter 2001 as
compared to 42.5% for the same quarter last year. Revenues for the
first nine months of 2001 decreased 48.6% to $182.9 million as compared
to $356.0 million for the same period in 2000. Although all product
lines within this category experienced a decline in sales
year-over-year for this nine-month period, the areas with the most
significant decreases included optronics & nodes, RF, and taps, which
decreased by approximately 53.0%, 69.7%, and 66.9%, respectively.
- - Supplies and services product revenues decreased by approximately 53.6%
to $33.8 million in the third quarter 2001 as compared to $72.9 million
in the same quarter last year. Supplies and services product revenue
accounted for approximately 19.4% of sales in the third quarter 2001,
as compared to 25.9% for the same quarter last year. Revenues for the
first nine months decreased 40.8% to $122.5 million as compared to
$206.9 million for the same period in 2000. Engineering service revenue
for the first nine months of 2001 grew approximately 57.1% as compared
to the same period last year. However, this increase was entirely
offset by reduced sales of other product lines within this category,
including fiber optic cable, outside plant, and installation materials
and tools, which decreased by approximately 49.0%, 51.6%, and 26.7%,
respectively, as compared to the first nine months of 2000.
Sales to the Company's largest customer, AT&T (including MediaOne
Group, which was acquired by AT&T during 2000), were approximately $42.5 million
during the third quarter 2001, or approximately 24.4% of the total quarterly
volume. This compares to third quarter 2000 when sales to AT&T (including
MediaOne Group) were $125.8 million or 44.7% of the volume for the quarter. Year
to date, sales to AT&T decreased 50.7% to $188.0 million in 2001 as compared to
$381.5 million in 2000. This marks a $193.5 million year-over-year decrease in
revenue from the combined AT&T entity when comparing the nine-month periods.
19
International sales for the three months ended September 30, 2001
increased 23.9% to $31.4 million as compared to the third quarter of last year,
but decreased 9.0% for the nine months ended September 30, 2001 as compared to
the same period last year. International sales of the Cornerstone product line
for the months of August and September were approximately $16.9 million. Under
the previous agreement with Nortel, the Company was not able to sell Cornerstone
internationally. This agreement terminated upon the acquisition of Arris
Interactive, L.L.C. on August 3, 2001. Exclusive of the Cornerstone revenue,
international sales for the quarter of $14.5 million during the quarter ended
September 30, 2001 marked a decrease of approximately 42.7% as compared to the
same period last year. International revenue for the three and nine months ended
September 30, 2001 represented approximately 18.5% and 16.2% of total sales,
respectively, net of the Cornerstone product sales during the period from
January through July 2001. This compares to international revenue of 13.6% and
12.1% of the Company's total revenue for the same periods during 2000, also net
of the Cornerstone product sales for the entire period.
Gross Profit. Gross profit for the three and nine months ended
September 30, 2001 were $13.9 and $68.6 million, respectively, as compared to
$52.3 million and $156.4 million for the comparable periods of 2000. Gross
profit margins for the first nine months of 2001 slipped 6.9 percentage points
to 12.2% as compared to 19.1% for the same period in 2000. As a result of the
planned restructuring of manufacturing operations, approximately $32.0 million
of inventory related to the factories was written down in the third quarter of
2001, significantly impacting the gross margin. Additionally, remaining warranty
and purchase order commitments of approximately $1.7 million were charged to
cost of goods sold during the third quarter of 2001. During the second quarter
of 2001, severance costs of approximately $1.3 million were incurred in
connection with the workforce reduction program incurred at the factory level.
Also negatively impacting gross margins during the second quarter of 2001 was a
one-time warranty expense of $4.7 million for a specific product. During the
second quarter of 2000, the Company recorded an additional $3.5 million charge
for product discontinuation costs, as an increase to cost of goods sold, related
to the reorganization that occurred in the fourth quarter of 1999. Excluding
these charges, the gross profit margin for the first nine months of 2001 and
2000 would have been approximately 19.2% and 19.5%, respectively.
Selling, General, Administrative, and Development ("SGA&D") Expenses.
SGA&D expenses for the three and nine-month periods ended September 30, 2001
were $44.4 million and $116.10 million, respectively, as compared to $34.8
million and $99.4 million during the comparable periods in 2000. SGA&D expenses
for the first nine months of 2001 included approximately $3.7 million of
severance costs related to workforce reductions. The SGA&D expenses for the
first nine months of 2000 included a one-time pre-tax gain of $2.1 million
realized as a result of employee elections associated with a new and enhanced
benefit plan and the resultant effect on the Company's defined benefit pension
plan. Excluding the effects of these unusual charges, the expenses for the first
nine months of 2001 and 2000 would have been $112.4 million and $101.5 million,
respectively. This year-over-year increase is primarily the result of the
additional expenses for two months from the acquired Arris Interactive, L.L.C.
(See Note 12 of Notes to the Consolidated Financial Statements).
Restructuring and Impairment Charges. 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. The plan entails the
implementation of an expanded manufacturing outsourcing strategy and the related
closure of the four factories located in El Paso, Texas and Juarez, Mexico. The
closure of the factories is anticipated to be complete during the first half of
2002. As a result, the Company recorded restructuring and impairment charges of
$32.5 million. Included in these charges was approximately $5.7 million related
to severance and associated personnel costs, $5.9 million related to the
impairment of goodwill, $14.8 million related to the impairment of fixed assets,
and approximately $6.1 million related to lease termination and other shutdown
expenses of factories and office space. The personnel-related costs included
termination expenses for the involuntary dismissal of 807 employees, primarily
engaged in production and assembly functions performed at the facilities. ARRIS
offered terminated employees separation amounts in accordance with the Company's
severance policy and provided the employees with specific separation dates. The
severance and associated personnel costs will be paid upon closure of the
factories. As of September 30, 2001, approximately $11.1 million of expenses
relating to the restructuring and impairment charges remained to be paid.
20
In accordance with FASB Statement No. 109, Accounting for Income Taxes,
a valuation reserve of $38.1 million against deferred tax assets was recorded.
As a result of the restructuring and impairment charges described above, the
Company was in a cumulative loss position for recent years, which provides
significant negative evidence to recognize deferred tax assets.
Write-off of in-process R&D. In accordance with accounting principles
generally accepted in the United States, acquired in-process research and
development was written off in connection with the Arris Interactive, L.L.C.
acquisition during the third quarter 2001 (See Notes 12 of Notes to the
Consolidated Financial Statements).
Loss on Marketable Securities. In 2000, the Company made a $1.0 million
strategic investment in Chromatis Networks, Inc., receiving shares of the
company's preferred stock. On June 28, 2000, Lucent Technologies announced it
had completed an acquisition of Chromatis, making it part of Lucent's Optical
Networking Group. As a result of this acquisition, the Company's shares of
Chromatis stock were converted into shares of Lucent stock. Additionally, as a
result of Lucent's spin off of Avaya, Inc., during the third quarter of 2000,
the Company was issued shares of Avaya stock.
Because these shares of Lucent and Avaya stock are considered trading
securities held for resale, they are carried at their fair market value with any
unrealized gains or losses being included in earnings. In calculating the fair
market value of these investments on September 30, 2001, ARRIS recognized a $0.1
million pre-tax write down of the investments for the third quarter, resulting
in a year-to-date market loss of $0.8 million as compared to the pre-tax gain of
$2.5 million recorded during the first nine months of 2000.
As of September 30, 2001, the carrying value of the Lucent and Avaya
stock was $0.7 million.
Interest Expense. Interest expense for the quarters ended September 30,
2001 and 2000 was $2.4 million and $2.8 million, respectively. Interest expense
for the first nine months of 2001 was $7.5 million, as compared to $8.0 million
recorded during the first nine months of 2000. Interest expense for all periods
reflects the cost of borrowings on the Company's revolving line of credit and
the interest paid on the 4.5% Convertible Subordinated Notes due 2003. As of
September 30, 2001, the Company had a balance of $27.3 million outstanding under
its Credit Facility in floating debt, as compared to $86.0 million outstanding
at September 30, 2000. As of September 30, 2001, the average interest rate on
its outstanding line of credit borrowings was 8.00% with an overall blended rate
of approximately 5.17% including the subordinated notes. As of September 30,
2000, the average interest rate on the Company's outstanding line of credit
borrowings was 8.22%, with an overall blended rate of approximately 6.10%
including the subordinated notes.
Income Tax Expense. In accordance with FASB Statement No. 109, a
valuation reserve of $38.1 million against deferred tax assets was recorded (See
Note 4 of Notes to the Consolidated Financial Statements). This resulted in an
income tax expense of $38.1 million for the quarter ended September 30, 2001 as
compared to an expense of approximately $4.1 million for the same period during
2000. During the first nine months of 2001, a tax expense of $27.6 million was
recorded as compared to an expense of approximately $18.8 million during the
same period in 2000.
Net (Loss) Income. A net loss of $(132.5) million was recorded for the
third quarter of 2001, as compared to net income of $5.9 million for the third
quarter of 2000. The quarterly results for 2001 included restructuring and
impairment expenses of approximately $32.5 million, inventory write-offs of
$32.0 million, warranty and purchase order commitment write-offs of $1.7
million, income tax valuation charges of $38.1 million, an in-process R&D
write-off of $18.8 million, a market adjustment of $0.1 million on the Company's
investment in Lucent and Avaya, and an extraordinary loss of $1.9 million in
connection with the write-off of the remaining deferred finance fees on the
previous credit facility. The quarterly results for 2000 included a pre-tax loss
of $3.4 million on the Company's investment in Lucent and Avaya, and a charge of
$3.5 million in connection with product discontinuation costs reflected as an
increase in cost of goods sold. Exclusive of the above transactions, the net
loss recorded for the third quarter 2001 was $(7.4) million or a loss of $(0.12)
per diluted share as compared to net income of $7.8 million or $0.19 per diluted
share in the third quarter 2000. A net loss of $(154.2) million was recorded for
the nine-month period ended September 30, 2001 as compared to net income of
$27.2 million for the same period last year. In addition to the above-mentioned
items, the year to date loss in 2001
21
included an additional pre-tax write down of $0.7 million on the Company's
investment in Lucent and Avaya, severance expenses of approximately $5.0
million, and a one-time warranty expense of $4.7 million. The year to date
income in 2000 included a pre-tax gain of $5.9 million on the Company's
investment in Lucent and Avaya, and $1.3 million of LANcity transaction
expenses, which were later reversed in the fourth quarter of 2000. Exclusive of
these one-time items, the net loss for the nine months ended September 30, 2001
was $(23.0) million or $(0.50) per diluted share as compared to the net income
of $28.3 million or $0.69 per diluted share for the comparable period in 2000.
Acquisition of Arris Interactive, L.L.C. On August 3, 2001, the Company
completed the acquisition from Nortel Networks L.L.C of the portion of Arris
Interactive L.L.C. that the Company did not own. As part of this transaction:
- A new holding company, ARRIS Group, Inc., was formed,
- The Company merged with a subsidiary of ARRIS Group, Inc. and
the outstanding ANTEC common stock was converted, on a
share-for-share basis, into common stock of ARRIS Group, Inc.
- Nortel and the Company contributed to Arris Interactive
approximately $131.6 million in outstanding indebtedness and
adjusted their ownership percentages in Arris Interactive to
reflect these contributions,
- Nortel exchanged its remaining ownership interest in Arris
Interactive for 37 million shares of ARRIS Group Inc. common
stock (approximately 49.2% of the total shares outstanding
following the transaction) and a subordinated redeemable
preferred interest in Arris Interactive with a face amount of
$100 million, and
- ANTEC Corporation, now a wholly-owned subsidiary of ARRIS
Group, Inc., changed its name to Arris International, Inc.
INDUSTRY CONDITIONS
The Company's performance is largely dependent on capital spending for
constructing, rebuilding, maintaining or upgrading broadband communications
systems. After a period of intense consolidation and rapid stock-price
acceleration within the industry during 1999, the fourth quarter of 2000 brought
a sudden tightening of credit availability throughout the telecom industry and a
broad-based and severe drop in market capitalization for the sector during the
period. This caused broadband system operators to become more judicious in their
capital spending, adversely affecting the Company and other equipment providers,
generally.
In response to this downturn, the Company has significantly reduced
expense levels, including workforce reductions during the first quarter of 2001
and the more significant reductions announced and implemented in early April
2001. The action taken in April resulted in a pre-tax charge of approximately
$5.0 million in the second quarter of 2001 for severance and related separation
costs in connection with the workforce reduction program, which reduced overall
employment levels by approximately 545 employees. Additionally, ARRIS has
evaluated underperforming assets to assess their long-term strategic role within
the Company. As a result of the evaluation, the Company has made the decision to
restructure the manufacturing operations and is in the process of implementing
an outsourcing strategy. This manufacturing restructuring resulted in the
closure of four factories in El Paso, Texas and Juarez, Mexico and the
associated involuntary termination of 807 employees. The outsourcing plan is
anticipated to be completed during the first half of 2002.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
FINANCING
In connection with the Arris Interactive L.L.C. acquisition, all of the
Company's existing bank indebtedness was refinanced. The new facility is an
asset-based revolving credit facility initially permitting the borrowers
(including the Company and Arris Interactive) to borrow up to $175 million
(which can be increased under certain conditions by up to $25 million), based
upon availability under a borrowing base calculation. In general, the borrowing
base is limited to 85% of net eligible receivables (with special
22
limitations in relation to foreign receivables) and 80% of the orderly
liquidation value of eligible inventory (not to exceed $80 million). The
facility contains traditional financial covenants, including fixed charge
coverage, senior debt leverage, minimum net worth, and minimum inventory turns
ratios, and a $10 million minimum borrowing base availability covenant. The
facility is secured by substantially all of the borrowers' assets. The facility
expires August 3, 2004 and requires the Company to refinance its 4.5%
Subordinated Convertible Notes due in 2003 prior to December 31, 2002.
As of September 30, 2001, the Company had approximately $27.3 million
outstanding under its Credit Facility and $99.6 million of available borrowings.
The commitment fee on unused borrowings is approximately 0.2%. The average
annual interest rate on these outstanding borrowings was approximately 8.00% at
September 30, 2001 as compared to 8.22% at September 30, 2000.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company, 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 a longer collection period for accounts receivable
and slower cash inflows from operations and/or could result in the deferral of
revenue.
INVESTMENTS
In the ordinary course of business, the Company may make strategic
investments in the equity securities of various companies, both public and
private. The Company holds investments in the common stock of Lucent
Technologies and Avaya, Inc. totaling approximately $0.7 million at September
30, 2001. These investments are considered trading securities, and accounted for
approximately 5% of the Company's total investments at September 30, 2001.
Changes in the market value of these securities are recognized in income and
resulted in a pre-tax loss of approximately $0.1 million and $0.8 million for
the three and nine month periods ending September 30, 2001, respectively, as
compared to the pre-tax (loss) gain of $(3.4) and $2.5 million recorded during
the three and nine months ended September 30, 2000. The Company's remaining
investments in marketable securities, totaling $0.9 million, are classified as
available-for-sale and accounted for approximately 7% of the Company's total
investments at September 30, 2001. The remaining 88% of the Company's
investments at September 30, 2001 consist of securities that are not traded
actively in a liquid market.
CAPITAL EXPENDITURES
The Company's capital expenditures were $3.0 million and $3.8 million
in the three months ended September 30, 2001 and 2000, respectively. Capital
expenditures were $7.4 million for the nine months of 2001 as compared to $12.9
million during the same period in 2000. The Company had no significant
commitments for capital expenditures at September 30, 2001.
CASH FLOW
Cash levels decreased by approximately $3.8 million during the first
nine months of 2001 as compared to an increase of approximately $16.6 million
during the same period of the prior year. As discussed in more detail below,
operating activities in 2001 provided approximately $79.3 million in positive
cash flow while investing activities used approximately $15.6 million and
financing activities used approximately $67.5 million in cash flow.
Operating activities provided cash of $79.3 million during the first
nine months of 2001. A net loss used $154.2 million in cash flow during this
period. Other non-cash items such as depreciation, amortization, deferred income
taxes, provisions for doubtful accounts, and losses on marketable securities and
equity investments accounted for positive cash flow of approximately $53.9
million during the first nine months of 2001. Additionally, the write-off of
acquired in-process R&D provided $18.8 million, and the impairment of goodwill
and fixed assets accounted for $20.6 million of positive cash flow. The
write-
23
down of inventories provided approximately $32.0 million, while the gain
recognized on the sale of a building used approximately $0.4 million. Decreases
in accounts receivable and inventory, net of the effects of the acquisition, of
approximately $16.1 million and $75.0 million, respectively, provided positive
cash flow. A decrease in income taxes recoverable and other, net, also net of
the effects of acquisition, provided cash of approximately $20.7 million, and a
decrease in accounts payable and accrued liabilities, net, used approximately
$3.2 million in cash through September 30, 2001.
Days sales outstanding ("DSO") was approximately 73 days at September
30, 2001 as compared to 75 days outstanding at the close of the third quarter
2000. Despite the marked decrease in revenue during 2001 along with the
correlating decrease in receivable levels, the Company has maintained a
relatively level number of days of uncollected sales in receivables.
Current inventory levels related to operating activities decreased by
$75.0 million, net of the effects of the acquisition, during the nine months
ended September 30, 2001. Inventory turns during the third quarter 2001 were 2.7
times as compared to 4.5 times in the third quarter 2000. This decrease was
mainly driven by the reduction in sales volume when comparing the two periods.
A decrease in accounts payable and accrued liabilities, net of the
effects of the acquisition, used approximately $3.2 million in cash during the
first nine months of 2001. This decrease in the level of payables and accrued
expenses is related to the timing of the processing of vendor invoices and the
payment of same.
During the first nine months of 2000, net cash provided by operating
activities was $9.4 million. Net income provided $27.2 million in cash flow
during this period. Other non-cash items such as depreciation, amortization,
deferred income tax, provisions for doubtful accounts and losses on marketable
securities accounted for positive cash flow of approximately $12.9 million
during the first nine months of 2000. The write-down of inventories provided
approximately $3.5 million. Increases in accounts receivable and other, net,
used cash of $51.6 million and $13.4 million, respectively. These operating cash
outlays in 2000 were offset by decreases of $5.5 million in inventory, $5.4
million in income taxes recoverable, and $19.9 million in accounts payable and
accrued liabilities.
Cash flows used in investing activities were $15.6 million and $17.4
million for the nine months ended September 30, 2001 and 2000, respectively.
These investment amounts reflect $7.4 million and $12.9 million in purchases of
capital assets during the respective periods. The Company also funded
approximately $1.5 million and $4.6 million in strategic investments during the
nine months ended September 30, 2001 and 2000, respectively. During the nine
months of 2001, proceeds from the sale of a building provided cash of
approximately $1.1 million. The funds paid for the Arris Interactive, L.L.C.
acquisition, net of the cash acquired in the transaction, utilized cash of
approximately $7.7 million for the nine months ended September 30, 2001.
Cash flows used in financing activities were $67.5 million for the nine
months ended September 30, 2001 as compared to a cash inflow of $24.6 million
for the same period in 2000. During the first nine months of 2001 the Company
paid down approximately $61.7 million on its credit facility, as compared to net
borrowings of $17.5 million during the same period in 2000. Deferred financing
fees paid used approximately $6.6 million during the first nine months in 2001.
The results for both 2001 and 2000 were also affected by the issuance of common
stock that provided positive cash flows of approximately $0.9 million and $7.1
million, respectively.
Based upon current levels of operations, the Company expects that
sufficient cash flow will be generated from operations so that, combined with
other financing alternatives available, including bank credit facilities, the
Company will be able to meet all of its current debt service, capital
expenditure and working capital requirements. The Company also is in the process
of exploring various alternatives to retire some or all of the 4.5% Convertible
Subordinated Notes due in 2003.
24
FORWARD-LOOKING STATEMENTS
Certain information and statements contained in this Management's
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 are forward-looking
statements, including statements that are based on current expectations,
estimates, forecasts, and projections about the markets in which the Company
operates, restructuring effects (estimated savings), and sufficiency of funding,
The Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance and that a variety of factors
could cause the Company's actual results to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Important factors that could cause results or events
to differ from current expectations are described in the risk factors below.
These factors are not an all-encompassing list of risks and uncertainties that
may affect the operations, performance, development and results of the Company's
business. In providing forward-looking statements, the Company expressly
disclaims any obligation to update publicly or otherwise these statements,
whether as a result of new information, future events or otherwise.
RISK FACTORS
THE COMPANY'S BUSINESS HAS MAINLY COME FROM TWO KEY CUSTOMERS. THE LOSS
OF ONE OR BOTH OF THESE CUSTOMERS OR A SIGNIFICANT REDUCTION IN SERVICES TO ONE
OR BOTH OF THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS.
The Company's two largest customers are AT&T and Cox Communications.
For the nine-month period ended September 30, 2001, sales to AT&T (including
sales to MediaOne Group, which was acquired by AT&T during 2000) accounted for
approximately 33.3% of the Company's total sales, while Cox Communications
accounted for approximately 14.9%. Other than Adelphia Communications Corp. and
Insight Communications, which accounted for 8.4% and 6.1% of the Company's total
revenues, respectively, for the first nine months of 2001, no other customer
provided more than 5.0% of the Company's total sales for this period. The
Company is the exclusive provider of all of Cox Communication's cable telephony
products currently being deployed in nine metro areas. Additionally, the Company
is the sole provider of cable telephony products for AT&T within nine additional
metro markets. Although the Company's relationships with AT&T and Cox
Communications are expected to continue, the loss of one or both of these
customers, or a significant reduction in services provided to one or both of
them, would have a material adverse impact on the Company.
Liberty Media Corporation, which had been a part of the Liberty Media
Group of AT&T (whose financial performance was "tracked" by a separate class of
AT&T stock), effectively controls approximately 10% of the Company's outstanding
common stock on a fully diluted basis. In August of 2001, AT&T spun off Liberty
Media to the holders of its tracking stock, and AT&T subsequently no longer
indirectly owns that interest in the Company.
In addition, on October 25, 2000, AT&T announced that it will
voluntarily break itself up into four separate publicly traded companies that
will bundle each other's services through inter-company agreements. The
immediate consequences, if any, to the Company, regarding product orders from
AT&T, as a result of this split-up are not yet determinable. It is possible that
the AT&T break-up will have a future material adverse effect on the Company's
business.
THE COMPANY'S BUSINESS IS DEPENDENT ON CUSTOMERS' CAPITAL SPENDING ON
BROADBAND COMMUNICATIONS SYSTEMS, AND REDUCTIONS BY CUSTOMERS IN CAPITAL
SPENDING COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The Company's 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, the Company's sales and profits, including:
25
- - general economic conditions,
- - availability and cost of capital,
- - other demands on and opportunities for capital,
- - regulations,
- - demands for network services,
- - competition and technology, and
- - real or perceived trends or uncertainties in these factors.
THE MARKETS IN WHICH THE COMPANY OPERATES ARE INTENSELY COMPETITIVE,
AND COMPETITIVE PRESSURES MAY ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS.
The markets for broadband communications systems are extremely
competitive and dynamic, requiring the companies that compete in these markets
to react quickly and capitalize on change. This will require the Company to
retain skilled and experienced personnel as well as deploy substantial resources
toward meeting the ever-changing demands of the industry. The Company competes
with national and international manufacturers, distributors and wholesales,
including many companies larger than the Company. The Company's major
competitors include:
- - ADC Telecommunications, Inc.,
- - C-COR.net Corporation,
- - General Instrument Corporation, now a part of Motorola, Inc.,
- - Harmonic Inc.,
- - Philips, and
- - Scientific-Atlanta, Inc.
The rapid technological changes occurring in the broadband markets may
lead to the entry of new competitors, including those with substantially greater
resources than the Company. Since the markets in which the Company competes 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 the Company's 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 the Company's current products, which could have a
material adverse effect on the Company's business.
Further, many of the Company's 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 the Company's competitors have been in operation longer
than the Company and therefore have more long-standing and established
relationships with domestic and foreign broadband service users. The Company may
not be able to compete successfully in the future, and competition may harm the
Company's business.
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 the Company's products. The technology applications currently
under development by the Company may not be successfully developed. Even if the
developmental products are successfully developed, they may not be widely used
or ARRIS Group, Inc. may not be able to successfully exploit these technology
applications. To compete successfully, the Company must quickly design, develop,
manufacture and sell new or enhanced products that provide increasingly higher
levels of performance and reliability. However, the Company may not be able to
successfully develop or introduce these products if its products:
- - are not cost effective;
26
- - are not brought to market in a timely manner; or
- - fail to achieve market acceptance.
Furthermore, the competitors may develop similar or alternative new
technology solutions and applications that, if successful, could have a material
adverse effect on the Company. The Company's 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 COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The telecommunications industry has experienced the consolidation of
many industry participants and this trend is expected to continue. The Company
and one or more of its competitors may each supply products to businesses that
have merged or will merge in the future. Consolidations could result in delays
in purchasing decisions by merged businesses, with the Company playing a greater
or lesser role in supplying the communications products to the merged entity.
These purchasing decisions of the merged companies could have a material adverse
effect on the Company's business.
Mergers among the supplier base also have increased, and this trend may
continue. The larger combined companies with pooled capital resources may be
able to provide solution alternatives with which the Company 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 its product
needs. These consolidated supplier companies could have a material adverse
effect on the Company's business.
THE COMPANY'S SUCCESS DEPENDS IN LARGE PART ON ITS ABILITY TO ATTRACT
AND RETAIN QUALIFIED PERSONNEL IN ALL FACETS OF ITS OPERATIONS.
Competition for qualified personnel is intense, and the Company may not
be successful in attracting and retaining key executives, marketing, engineering
and sales personnel, which could impact its ability to maintain and grow its
operations. The Company's future success will depend, to a significant extent,
on the ability of its management to operate effectively. In the past,
competitors and others have attempted to recruit the Company's employees and in
the future, these attempts may continue. The loss of services of any key
personnel, the 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 the Company's business.
THE COMPANY'S INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY ANY
DECLINE IN THE DEMAND FOR BROADBAND SYSTEMS DESIGNS AND EQUIPMENT IN
INTERNATIONAL MARKETS.
Historically, sales of broadband communications equipment into
international markets have been an important part of the Company's business, a
trend that the Company expects to continue. In addition, United States broadband
system designs and equipment are increasingly being deployed 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 the
Company's future business, there can be no assurances that international markets
will continue to develop or that the Company will receive additional contracts
to supply equipment in these markets. The Company's international operations may
be adversely affected by changes in the foreign laws or trade in the countries
in which it has manufacturing or assembly plants. A significant portion of the
Company's products are manufactured or assembled in Mexico and other countries
outside the United States.
27
The Company's foreign operations are subject to risks inherent in
conducting operations abroad, including risks with respect to:
- currency exchange rates between the United States and Mexico and other
countries in which the Company has operations;
- economic and political destabilization;
- restrictive actions and taxation by foreign governments in countries
where the Company has operations;
- difficulty in converting earnings to U.S. dollars or moving funds out
of the country in which they were earned;
- longer accounts receivable payment cycles and difficulties in
collecting these accounts receivable in countries where the Company
has operations;
- nationalization of the Company's businesses;
- the laws and policies of the United States affecting trade;
- foreign investment and loans; and
- foreign tax laws.
THE COMPANY'S PROFITABILITY HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE,
WHICH COULD ADVERSELY AFFECT THE PRICE OF THE COMPANY'S STOCK.
The Company has experienced years with significant operating losses.
Although the Company has been profitable during recent years, the Company's
business 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 the Company's stock price.
THE COMPANY MAY DISPOSE OF EXISTING PRODUCT LINES OR ACQUIRE NEW
PRODUCT LINES IN TRANSACTIONS THAT MAY ADVERSELY IMPACT IT AND ITS FUTURE
RESULTS.
On an ongoing basis, the Company evaluates its various product
offerings in order to determine whether any should be sold or closed and whether
there are businesses that it should pursue acquiring. ARRIS currently is
exploring whether to dispose of one of its minor product lines, although it has
not entered into any sale agreements in connection therewith. In some instances,
confidentiality agreements and other considerations might prohibit the Company
from disclosing the terms of the divestitures until they close, if even then.
Future acquisitions and divestitures entail various risks, including:
- the risk that the Company will not be able to find a buyer for a
product line, while product line sales and employee morale will have
been damaged because of general awareness that the product line is for
sale;
- the risk that the purchase price obtained will not be equal to the
book value of the assets for the product line that it sells; and
- the risk that acquisitions will not be integrated or otherwise perform
as expected.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's 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.
The Company is exposed to various market risks, including interest
rates and foreign currency rates. Changes in these rates may adversely affect
its results of operations and financial condition. To manage the volatility
relating to these typical business exposures, the Company may enter into various
derivative transactions, when appropriate. The Company does not hold or issue
derivative instruments for trading or other speculative purposes. Taking into
account the effects of interest rate changes on the Company's revolving debt
facility, a hypothetical 100 basis point adverse change in interest rates would
increase interest expense by approximately $0.6 million annually. As of
September 30, 2001, the Company had no material contracts denominated in foreign
currencies.
In the past, the Company has used interest rate swap agreements, with
large creditworthy financial institutions, to manage its exposure to interest
rate changes. These swaps would involve the exchange of fixed and variable
interest rate payments without exchanging the notional principal amount. At
September 30, 2001 the Company did not have any outstanding interest rate swap
agreements.
The Company is exposed to foreign currency exchange rate risk as a
result of sales of its products in various foreign countries and manufacturing
operations conducted in Juarez, Mexico. In order to minimize the risks
associated with foreign currency fluctuations, most sales contracts are issued
in U.S. dollars. The Company has previously used foreign currency contracts to
hedge the risks associated from foreign currency fluctuations for significant
sales contracts, however, no significant contracts were in place at September
30, 2001. The Company constantly monitors the exchange rate between the U.S.
dollar and Mexican peso to determine if any adverse exposure exists relative to
its costs of manufacturing. The Company does not maintain Mexican peso
denominated currency. Instead, U.S. dollars are exchanged for pesos at the time
of payment.
29
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of the stockholders of ANTEC Corporation, which is the
predecessor registrant to ARRIS Group, Inc., held on July 25, 2001:
A proposal was made and adopted to approve and adopt the Agreement and Plan
of Reorganization, by and among ARRIS Group, Inc., ANTEC Corporation (now known
as Arris International, Inc.), Broadband Transition Corporation, Nortel Networks
Inc., Nortel Networks LLC and Arris Interactive L.L.C., and the shares present
were voted as follows:
<Table>
<Caption>
Number of Number of Shares Number of
Shares Voted For Voted Against Shares Withheld
---------------- ---------------- ---------------
Approval and adoption of the Agreement and Plan
of Reorganization and related transactions 26,354,327 95,750 35,359
</Table>
A proposal was made and adopted to approve ARRIS Group's 2001 Stock
Incentive Plan, and the shares present were voted as follows:
<Table>
<Caption>
Number of Number of Shares Number of
Shares Voted For Voted Against Shares Withheld
---------------- ---------------- ---------------
Approval of the 2001 Stock Incentive Plan 21,780,275 4,091,719 613,442
</Table>
A proposal was made and adopted to approve ARRIS Group's Management
Incentive Plan, and the shares present were voted as follows:
<Table>
<Caption>
Number of Number of Shares Number of
Shares Voted For Voted Against Shares Withheld
---------------- ---------------- ---------------
Approval of the Management Incentive Plan 25,977,273 5,881,721 613,278
</Table>
A proposal was made and adopted to approve ARRIS Group's Employee Stock
Purchase Plan, and the shares to present were voted as follows:
<Table>
<Caption>
Number of Number of Shares Number of
Shares Voted For Voted Against Shares Withheld
---------------- ---------------- ---------------
Approval of the Employee Stock Purchase Plan 31,704,561 153,824 613,887
</Table>
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Each management contract or compensation plan required to be
filed as an exhibit is identified by an asterisk (*)
10.4 (g)* Form of Employee Stock Option Grant
10.4 (h)* Employee Stock Option Terms
10.4 (i)* Form of Employee Truncated Stock Option Grant
10.4 (j)* Form of Director Stock Option Grant
10.4 (k)* Director Stock Option Terms
10.4 (l)* Form of Director Truncated Stock Option Grant
10.10 (c)* Amended and Restated Employment Agreement, dated
August 6, 2001, with Robert J. Stanzione
10.10 (d)* Supplemental Executive Retirement Plan for Robert
J. Stanzione
(b) Reports on Form 8-K
On August 13, 2001, ARRIS Group, Inc. filed a report on Form
8-K relating to Item 2, Acquisition or Disposition of Assets,
in connection with the Arris Interactive transaction.
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SIGNATURES
Pursuant to the requirements 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/ LAWRENCE A. MARGOLIS
Lawrence A. Margolis
Executive Vice President
(Principal Financial Officer, duly
authorized to sign on behalf of
the registrant)
Dated: November 14, 2001
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