ARRIS GROUP, INC.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
For the fiscal year ended December 31, 2006
of
ARRIS
GROUP, INC.
A
Delaware Corporation
IRS Employer Identification
No. 58-2588724
SEC File Number
000-31254
3871
Lakefield Drive
Suwanee, GA 30024
(770) 473-2000
Securities registered pursuant to Section 12(b) of the
Act:
Common stock, $0.01 par value NASDAQ Global
Market System
Preferred Stock Purchase Rights NASDAQ Global Market
System
ARRIS Group, Inc. is a well-known seasoned issuer.
ARRIS Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has
been subject to such filing requirements for the past
90 days.
Except as set forth in Item 10, ARRIS Group, Inc. is
unaware of any delinquent filers pursuant to Item 405 of
Regulation S-K.
ARRIS Group, Inc. is a large accelerated filer and is not a
shell company.
The aggregate market value of ARRIS Group, Inc.s Common
Stock held by non-affiliates as of June 30, 2006 was
approximately $1.4 billion (computed on the basis of the
last reported sales price per share of such stock of $13.12 on
the NASDAQ Global Market System). For these purposes, directors,
officers and 10% shareholders have been assumed to be affiliates.
As of January 31, 2007, 108,018,876 shares of ARRIS
Group, Inc.s Common Stock were outstanding.
Portions of ARRIS Group, Inc.s Proxy Statement for its
2007 Annual Meeting of Stockholders are incorporated by
reference into Part III.
PART I
As used in this Annual Report, we, our,
us, the Company, and ARRIS
refer to ARRIS Group, Inc. and our consolidated subsidiaries.
General
Our principal executive offices are located at 3871 Lakefield
Drive, Suwanee, Georgia 30024, and our telephone number is
(678) 473-2000.
We also maintain a website at www.arrisi.com. On our website we
provide links to copies of the annual, quarterly and current
reports that we file with the Securities and Exchange
Commission, any amendments to those reports, and all Company
press releases. Investor presentations are also frequently
posted on our website. Copies of our code of ethics and the
charters of our board committees also are available on our
website. We will provide investors copies of these documents in
electronic or paper form upon request, free of charge.
Glossary
of Terms
Below are commonly used acronyms in our industry and their
meaning:
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Acronym
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Terminology
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Cable VoIP
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PacketCabletm
certified Voice over IP
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CAM
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Cable Access Module
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CBR
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Constant Bit Rate
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CLEC
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Competitive Local Exchange Carrier
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CMTS
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Cable Modem Termination System
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CPE
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Customer Premises Equipment
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DBS
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Digital Broadcast Satellite
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DMTS
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Digital Multimedia Termination
System
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DOCSIS®
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Data Over Cable Service Interface
Specification
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DSG
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DOCSIS Set-Top Gateway
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DSL
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Digital Subscriber Line
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EMTA
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Embedded Multimedia Terminal
Adapters
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FMC
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Fixed Mobile Convergence
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FPGA
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Field Programmable Gate Arrays
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FTTH
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Fiber to the Home
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FTTP
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Fiber to the Premises
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GAAP
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Generally Accepted Accounting
Principles
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GPA
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General Purchase Agreements
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HDT
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Host Digital Terminal
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HDTV
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High Definition Television
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HFC
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Hybrid Fiber-Coaxial
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IFRS
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International Financial Reporting
Standards
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ILEC
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Incumbent Local Exchange Carrier
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IP
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Internet Protocol
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IPTV
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Internet Protocol Television
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Mbps
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Megabits per Second
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MPEG-2
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Moving Picture Experts Group,
Standard No. 2
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MPEG-4
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Moving Picture Experts Group,
Standard No. 4
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1
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Acronym
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Terminology
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M-CMTS
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Modular CMTS
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MSO
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Multiple Systems Operator
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MTA
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Multimedia Terminal Adapter
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NGNA
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Next Generation Network
Architecture
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NIU
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Network Interface Units
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PCT
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Patent Convention Treaty
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PSTN
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Public-Switched Telephone Network
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QAM
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Quadrature Amplitude Modulation
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RF
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Radio Frequency
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VAR
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Value-Added Reseller
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VoIP
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Voice over Internet Protocol
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VPN
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Virtual Private Network
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Overview
We are a global communications technology company specializing
in the design and engineering of equipment for broadband
networks. We develop, manufacture and supply cable telephony,
video and high-speed data equipment, as well as outside plant
construction and maintenance equipment for MSOs. We provide
products and equipment principally to the cable television
market and, more specifically, to operators or MSOs, on a
worldwide basis. Our products allow MSOs and broadband service
providers to deliver a full range of integrated voice, video and
high speed data services to their subscribers. In addition, we
are a leading supplier of infrastructure products used by cable
system operators in the build-out and maintenance of HFC
networks.
Industry
In recent years, the technology used in cable systems has
evolved significantly. Historically, cable systems offered only
one-way analog video service. Due to technological advancements
and large investments in infrastructure upgrades, these systems
have evolved to become two-way broadband systems delivering
high-volume, high-speed, interactive services. MSOs have over
the years aggressively upgraded their networks to
cost-effectively support and deliver enhanced voice, video and
data services. As a result, cable operators have been able to
use broadband systems to increase their revenues by offering
enhanced interactive subscriber services, such as high-speed
data, telephony, digital video and video on demand, and to
effectively compete against other broadband communications
technologies, such as DSL, local multiport distribution service,
DBS, FTTH, and fixed wireless. Delivery of enhanced services
also has helped MSOs offset slowing basic video subscriber
growth, reduce their subscriber churn and compete against
alternative video providers; in particular, DBS.
A key factor supporting the growth of broadband systems is the
powerful growth of the Internet. Rapid growth in the number of
Internet users, their desire for ever higher Internet access
speeds, and more high-volume interactive services have created
demand for our products. Another key factor supporting the
growth of broadband systems is the evolution of video services
being offered to consumers. Video on demand, high definition
television and switched digital video are three key video
services expanding the use of MSOs broadband systems. The
increase in volume and complexity of the signals transmitted
through the network and emerging competitive pressures from
telephone companies with digital subscriber line and fiber to
the premises offerings are pushing cable operators to deploy new
technologies as they evolve. Further, cable operators are
looking for products and technologies that are flexible, cost
effective, easily deployable and scalable to meet future demand.
Because the technologies are evolving and the services delivered
are growing in complexity and volume, cable operators need
equipment that provides the necessary technical capability at a
reasonable cost at the time of initial deployment and the
flexibility later to accommodate technological advances and
network expansion.
Capital spending by MSOs on their networks has shifted over the
past several years. MSOs have largely completed the upgrades and
re-builds required to support advanced services and are now in
the process of enabling those services. As a result, spending
has shifted away from HFC plant equipment and materials to
head-end and
2
customer premises equipment that enable high speed data,
telephony, and digital video services. Global capital spending
by cable operators declined to a low of $25 billion in 2003
but grew to an estimated $28 billion in 2004,
$32 billion in 2005, and $34 billion in 2006 as a
result of increased spending on telephony, high speed data, and
digital video driven by competitive pressures (Source:
Infonetics Capex Reports-1H06 and ARRIS estimates). Spending on
this type of equipment is expected to continue to grow for the
foreseeable future (Infonetics Research, Kagan Report, Canadian
Imperial Bank of Commerce, ARRIS estimates). Also, cable plant
maintenance and extension spending has grown steadily, and is
expected to continue growing because of the installed base of
the more sophisticated equipment required to support the
advanced services.
One of the fastest growing services offered by the MSOs is cable
telephony. Cable telephony allows MSOs to offer their customers
local and long distance residential telephone service. Constant
bit rate, or CBR, technology was the technology of choice to
offer telephone services until late 2004. Rapid maturation of
voice over Internet protocol (VoIP) technology in 2003 and 2004
resulted in
PacketCabletm
certified Internet protocol technology as the technology of
choice for offering next-generation cable IP telephony services
and, as a result, 2005 became a breakout year for the deployment
of IP based voice services in the cable market.
PacketCabletm
certified Voice over IP, or Cable VoIP, permits cable operators
to utilize the ubiquitous IP protocol to deliver toll-quality
cable telephony services. The broad adoption of Cable VoIP by
the MSOs could potentially cannibalize the deployment of
data-only cable modems as the customer premises devices that
support VoIP also offer high speed data access on the same
equipment. We are a leading supplier of both head-end and
customer premises equipment for VoIP services over cable.
Data and VoIP services provided by the MSOs are governed by a
set of technical specifications promulgated by
CableLabs®
in North America and
tComLabs®
in Europe. While the specifications developed by these two
bodies necessarily differ in a few details in order to
accommodate the differences in HFC network architectures between
North America and Europe, a significant feature set is common.
The primary data standard specification for cable operators in
North America is entitled
DOCSIS®
Release 2.0 of
DOCSIS®
is the current governing standard for data services in North
America. The parallel release for European operators is
Euro-DOCSIS Release 2.0. DOCSIS 2.0 builds upon the capabilities
of DOCSIS 1.1 and adds additional throughput in the upstream
portion of the cable plant from the consumer out to
the Internet. In addition to the DOCSIS standards that govern
data transmission,
CableLabs®
has defined the
PacketCabletm
specifications for VoIP. This specification defines the
interfaces between network elements such as cable modem
termination systems, or CMTSs, multimedia terminal adapters, or
MTAs, gateways and call management servers to provide high
quality IP telephony service over the HFC network.
3
As the charts above indicate, industry analysts are projecting
strong growth in both the CMTS and EMTA markets.
In the past two years, operators have invested significantly in
upgrading their installed base of CMTS to DOCSIS 2.0 and
dramatically increasing the amount of bandwidth offered per
subscriber. Because of the ever increasing demand for bandwidth
from the Internet, driven by applications like video downloads,
personalized web pages, sharing of videos and photographs, etc.,
the demand for more CMTS ports will continue to increase.
Further growth opportunities exist in the expansion of cable
modem based services in developing markets like India and China.
Demand for single family residential Voice over IP subscriber
devices (EMTA) is also increasing. Cable operators worldwide
have adopted VoIP as the primary method to offer voice services,
and deployments have
4
started in almost all major cities. Price pressures are strong
in this market and therefore revenue growth is modest compared
to unit growth. However, because of ARRIS current
leadership position in this market, we expect to be able to
maintain cost leadership and to lead in innovations which could
expand the size of the market by creating demand in commercial
enterprise and multiple-dwelling unit applications.
To date, MSOs have offered digital television signals to
subscribers using proprietary technologies offered by a limited
set of vendors, led principally by Cisco (via its
Scientific-Atlanta acquisition) and Motorola. The technologies
that have enabled high-speed data and VoIP across the cable
plant are, with modification, also applicable to video. MSOs are
beginning to investigate Video over IP as an alternative and are
engaging the vendor community, including ARRIS, in discussions.
The advantage to the operator is to migrate to one common
backbone/technology for all services, and to eliminate
proprietary video technology. ARRIS is actively developing
products to compete in the emerging Video over IP market.
Our
Principal Products
A broadband cable system consists of three principal components:
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Headend. The headend is a central point in the
cable system where signals are received via satellite and other
sources. Interfaces that connect the Internet and public
switched telephony networks are located in the headend. The
headend organizes, processes and retransmits those signals
through the distribution network to subscribers.
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Distribution Network. The distribution network
consists of fiber optic and coaxial cables and associated
optical and electronic equipment that allocates the combined
signals from the headend and transmits them throughout the cable
system to nodes.
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Subscriber Premises. Cable drops extend from
nodes to subscribers homes and connect to a
subscribers television set, set-top box, telephony network
interface device or high speed cable modem.
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We provide cable system operators with a comprehensive product
offering for the headend, distribution network and subscriber
premises. We divide our product offerings into two categories:
Broadband:
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VoIP telephony products, including CMTS
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High-speed data products, including CMTS
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Video / IP headend products
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Constant Bit Rate telephony products
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Supplies & CPE:
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Infrastructure products for fiber optic or coaxial networks
built under or above ground, including cable and strand, vaults,
conduit, drop materials, tools, connectors, and test equipment
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VoIP telephony CPE, EMTA
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High-speed data CPE, cable modems
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Video
over IP and Data Products
Headend The heart of a Voice over IP headend
is a CMTS. A CMTS, along with a call agent, a gateway, and
provisioning systems provide the ability to integrate the
Public-Switched Telephone Network, or PSTN and high-speed data
services over a HFC network. The CMTS provides the software and
hardware to allow IP traffic from the Internet, or traffic used
in VoIP telephony, to be converted for use on HFC networks. The
CMTS is also responsible for initializing and monitoring all
cable modems and EMTAs connected to the HFC network. We provide
two products, the
C4®
CMTS and the
C3®
CMTS, used in the cable operators headend that provide
VoIP and high-speed data services to residential or business
subscribers.
5
Subscriber Premises Subscriber
premises equipment includes DOCSIS 2.0 certified cable
modems for high-speed data applications as well as Euro-DOCSIS
certified versions and PacketCable Certified EMTAs for VoIP
applications in both DOCSIS and Euro-DOCSIS networks. The
PacketCable solution builds on DOCSIS 2.0 and its quality
of service enhancements to support lifeline telephony deployed
over HFC networks. Our
Touchstone®
product line provides carrier-grade performance to enable
operators to provide all data, telephony and video services on
the same network using common equipment. The Touchstone product
line consists of the Touchstone CM550 series of cable modems and
the
Touchstone®
TM402 and TM502 series of telephony modems.
Video/IP
Products
Headend We market our Video / IP headend
equipment under the
D5tm
brand name. The first product for the headend is the
D5tm
Universal Edge QAM. The
D5tm
converts digital video and IP data into radio frequency signals
that can be transmitted on the cable service providers HFC
plant. The D5 is compatible with DOCSIS 2.0 cable modems as well
as MPEG-2
and MPEG-4 set top boxes. It is a highly dense device with 48
channels in two rack units (3.5 inches) of rack space. Each
channel is capable of transmitting up to 10 TV signals or
up to 40 Mbps of data. The D5 Universal Edge QAM is ideal
for service providers deploying video on demand and switched
digital broadcast services where many unicast channels are
required. The D5 Universal Edge QAM is also forward
compatible with
M-CMTStm
standards being developed by
CableLabs®.
A cable service provider can deploy the D5 Universal Edge
QAM today for MPEG-2 digital video applications and convert it
to modular CMTS and IPTV applications in the future.
Constant
Bit Rate Products
Historically, we have offered a number of constant bit rate
products. These CBR products have included, for headend
equipment, our products under the brand name
Cornerstone®
Voice, and for subscriber premises, our products marketed under
the brand name
Cornerstone®
Voice Port. However, since 2004, our customers have been
migrating from CBR to VoIP. We expect that CBR product revenues
will continue to decline as end of life purchase orders are
expected to be completed in 2007.
Cable
Plant Infrastructure Products
We offer a variety of products that are used by MSOs to build
and maintain their cable plants. Our products are complemented
by our extensive distribution infrastructure, which is focused
on providing efficient delivery of products from stocking or
drop-ship locations.
We believe the strength of our product portfolio is our broad
offering of trusted name-brand products and strategic
proprietary product lines and our experience in distribution.
Our name-brand products are manufactured to our specifications
by manufacturing partners. These products include taps, line
passives, house passives and premises installation equipment
marketed under our
Regal®
brand name;
MONARCH®
aerial and underground plant construction products and
enclosures;
Digicon®
premium F-connectors; and FiberTel fiber optic connectivity
devices and accessories. Through our product selection, we are
able to address substantially all broadband infrastructure
applications, including fiber optics, outside plant
construction, drop and premises installation, and signal
acquisition and distribution.
We also resell products from hundreds of strategic
supplier-partners, which include widely recognized brands to
small specialty manufacturers. Through our strategic suppliers,
we also supply ancillary products like tools and safety
equipment, testing devices and specialty electronics.
Our customers benefit from our inventory management and
logistics capabilities and services. These services range from
just-in-time
delivery, product kitting, specialized electronic
interfaces, and customized reporting, to more complex and
comprehensive supply chain management solutions. These services
complement our product offerings with advanced
channel-to-market
and logistics capabilities, extensive product bundling
opportunities, and an ability to deliver carrier-grade
infrastructure solutions in the passive transmission portions of
the network. The depth and breadth of our inventory and service
capabilities enable us to provide our customers with single
supplier flexibility.
6
Sales and
Marketing
We are positioned to serve customers worldwide with a strong
sales organization complemented by our sales engineering team.
We maintain sales offices in Colorado, Georgia and Pennsylvania
in the United States, and in Chile, Hong Kong, the UK, Japan,
Korea, The Netherlands, and Spain. Our sales engineering team
assists customers in system design and specification and can
promptly be onsite to resolve any problems that may arise during
the course of a project. Additionally, we have agreements in
various countries and regions with VARs, which extend our sales
presence into markets without established sales offices. We also
maintain an inside sales group that is responsible for regular
phone contact with the customer, prompt order entry, timely and
accurate delivery, and effective sales administration.
Our marketing and product management teams focus on each of the
various product categories and work with our engineers and
various technology suppliers on new products and product
enhancements. These teams are responsible for inventory levels
and pricing, delivery requirements, analysis of market demand,
and product positioning and advertising.
We are committed to providing superior levels of customer
service by incorporating innovative customer-centric strategies
and processes supported by business systems designed to deliver
differentiating product support and value-added services. We
have implemented advanced customer relationship management
programs to bring additional value to our customers and provide
significant value to our operations management. Through these
information systems, we can provide our customers with product
information ranging from operational manuals to the latest
product updates. Through on-going development and refinement,
these programs will help to improve our productivity and enable
us to further improve our customer-focused services.
Customers
The vast majority of our sales are to cable system operators
worldwide. As the U.S. cable industry continued a trend
toward consolidation, the six largest MSOs controlled over 87%
of the U.S. cable market (according to Dataxis in the third
quarter 2006), thereby making our sales to those MSOs critical
to our success. Our sales are substantially dependent upon a
system operators selection of ARRIS network
equipment, demand for increased broadband services by
subscribers, and general capital expenditure levels by system
operators. Our four largest customers (including their
affiliates, as applicable) are Comcast, Cox Communications,
Liberty Media International, and Time Warner Cable. Over the
past year, the affiliates included in our revenues from these
customers have changed as a result of mergers and acquisitions.
Therefore, the revenue for our customers for prior periods has
been adjusted to include, on a comparable basis for all periods
presented, the affiliates currently understood to be under
common control. Our sales to these customers for years ended
December 31, 2006, 2005, and 2004 were:
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Years ended December 31,
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2006
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2005
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2004
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(in millions)
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Comcast
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$
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344.2
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$
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163.3
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$
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126.2
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% of sales
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38.6
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%
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24.0
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%
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25.8
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%
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Cox Communications
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$
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88.0
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$
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116.7
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$
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106.3
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% of sales
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9.9
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%
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17.2
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%
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21.7
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%
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Liberty Media International
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$
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88.8
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$
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99.4
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$
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84.0
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% of sales
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10.0
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%
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14.6
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%
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17.1
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%
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Time Warner Cable
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$
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81.2
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$
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72.3
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$
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32.5
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% of sales
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9.1
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%
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10.6
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%
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6.6
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%
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No other customer provided more than 10% of total sales for the
years ended December 31, 2006, 2005, or 2004.
We have executed general purchase agreements (GPAs) with each of
these four large customers which detail the commercial terms and
conditions. These GPAs do not obligate the customer to a
specific volume of business. The vast majority of our sales,
whether to customers with GPAs or otherwise, result from
periodic purchase orders.
7
A summary of the status of the GPAs with Comcast, Cox
Communications, Liberty Media International and Time Warner
Cable, Inc. follows:
Comcast. In 2006, we extended our nonexclusive
agreements with Comcast to supply
C4®
CMTS equipment and to sell cable television supplies for
two-year terms which expire in 2008. Included in the
C4®
CMTS purchase agreement is a service agreement. In 2006, we also
negotiated an extension to our non-exclusive agreement with
Comcast to supply EMTAs. The terms apply to the TTM502G and
equivalent successor products, and includes certain pricing
commitments in return for a minimum purchase commitment to be
achieved by the end of 2008.
Cox Communications. We have sold product to
Cox Communications under a series of nonexclusive agreements
since 1998. Our current agreement expired on January 1,
2007. However, we continue to sell products to Cox
Communications. There have been no material changes in Cox
Communications purchases of our products since the
expiration of the above mentioned agreement. We are currently
reviewing our prior terms with Cox Communications in
anticipation of renewing the agreement for another year. The
earlier agreement comprehensively provided for the supply of all
of our products and services and provided that
Touchstone®
Telephony Modems were to be offered at favorable pricing based
on similarly situated customers that purchase equal or lesser
volumes of the same type product.
Liberty Media International. We have a
nonexclusive agreement with Liberty Media International to
supply our entire line of products for a three-year term
expiring in April 2007. Commercial terms include a requirement
to supply product based on Libertys forecasts (updated
quarterly) and most favorable pricing as compared to
similarly-situated companies.
Time Warner Cable, Inc. We supply Time Warner
Cable ARRIS Touchstone Telephony Modems and
C4®
CMTS products. The agreement to supply
Touchstone®
Telephony Modems to Time Warner cable expires on
December 31, 2007. The agreement to supply
C4®
CMTS to Time Warner Cable expires on December 31, 2008;
shipments of this product commenced in the third quarter of 2006.
International
Opportunities
Our international revenue is generated from Asia-Pacific,
Europe, Latin America and Canada. The Asia-Pacific market
primarily includes China, Japan, Korea, Singapore, and Taiwan.
The European market primarily includes Austria, Belgium, France,
Germany, the Netherlands, Norway, Poland, Portugal, Spain,
Sweden and Switzerland. The Latin American market primarily
includes Argentina, Brazil, Chile, Mexico and Puerto Rico.
Revenues from international customers were approximately 25.1%,
27.1% and 25.2% of total revenues for 2006, 2005 and 2004,
respectively.
We continue to strategically invest in worldwide marketing and
sales efforts, which have yielded some promising results in
several regions. We currently maintain international sales
offices in Chile, Hong Kong, the UK, Japan, Korea, the
Netherlands and Spain.
Proposed
Acquisition of Tandberg Television ASA
On January 15, 2007, we announced our proposed acquisition
of TANDBERG Television ASA through a tender offer for all of
TANDBERG Televisions outstanding shares at a price of
96 Norwegian Kroner (NOK) per share comprised of a mix of
cash and newly issued ARRIS shares. In the tender offer,
TANDBERG Television shareholders will receive no more than
NOK 16 in ARRIS shares and at least NOK 80 in cash for
each TANDBERG Television share held. The actual number of shares
issued will be determined based upon the average closing price
of ARRIS common stock as reported on the NASDAQ Global Market
for the 10 trading days preceding the second trading day
prior to the date of the closing of the transaction. The number
of shares to be issued will not exceed 19.9% of our outstanding
shares.
The tender offer is being conducted pursuant to a Transaction
Agreement dated January 15, 2007, and amended
February 14, 2007, between ARRIS and TANDBERG Television.
The Transaction Agreement provides for, among other things, the
making of the tender offer, covenants by both parties, including
TANDBERG Televisions covenant to assist us in taking all
reasonably necessary steps to close the financing and bank
facility,
8
restrictions on TANDBERG Televisions ability to further
market the company, and the payment to us of an
$18.0 million termination fee in the event a competing
offer is made, the Transaction Agreement is terminated and an
alternative transaction is consummated within a set period of
time after termination of the Transaction Agreement, or if
TANDBERG Televisions board of directors changes its
recommendation of the transaction.
On February 26, 2007 a third party announced its intent to
make a competing all cash offer for all of TANDBERG
Televisions outstanding shares at a higher price than our
offer of NOK 96. As of the date of this report, we are
evaluating the competing offer and our options with respect to
the proposed transaction.
Research
and Development
We are committed to rapid innovation and the development of new
technologies in the evolving broadband market. New products are
developed in our research and development laboratories in
Suwanee, Georgia; Cork, Ireland; and Lisle, Illinois. We form
strategic alliances with world-class producers and suppliers of
complementary technology to provide
best-in-class
technologies focused on
time-to-market
solutions.
We believe that our future success depends on our rapid adoption
and implementation of broadband local access industry
specifications, as well as rapid innovation and introduction of
technologies that provide service and performance
differentiation. To that end, we believe that the
C4®
CMTS product line continues to lead the industry in areas such
as fault tolerance, wire-speed throughput and routing, and
density. The
C3tm
CMTS is designed for small to mid-size operators who are looking
for a CMTS that delivers superior RF performance while only
occupying one rack unit of space for delivering high-speed data
services, including VPN services. The
Touchstone®
product line offers a wide-range of
DOCSIS®,
Euro-DOCSIS and
PacketCabletm
certified products, including
Touchstone®
Cable Modems,
Touchstone®
Telephony Modems and
Touchstone®
Telephony Ports. The
D5tm
Universal Edge QAM is the first dense edge QAM to provide a
forward path to the modular CMTS of the future. These products
are continuously being enhanced to include innovations that
improve subscriber experience and help control the MSOs
operational expenditures. Research and development expenses in
2006, 2005, and 2004 were approximately $66.0 million,
$60.1 million, and $63.4 million, respectively. These
costs include allocated common costs associated with information
technologies and facilities.
The following trends impact our current product development
activities:
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Continued development and acceptance of open standards for
delivering voice, video and data;
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Widespread deployment of VoIP;
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Continued increase in
peer-to-peer
services accelerating demand for new services requiring
intensive, high-touch processing and sophisticated management
techniques;
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Increasing demand for higher speed broadband connections to the
home;
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The rapid adoption of video on demand and switched digital video
services;
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Expanded deployment of high definition video channels;
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Innovations in video encode/decode technology making possible
very low bit rate, high quality video streaming; and
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Continued silicon integration and chip fabrication technology
innovations are making possible very low cost, multi-functional
broadband consumer devices, integrating not only telephony but
wireless and video decompression and digital rights management
functionality.
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As a result, our product development activities are directed,
primarily, in the following areas:
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Rapid development and delivery of
C4®
and
C3tm
CMTS features, including
DOCSIS®
2.0 and 3.0, DOCSIS Set-top Gateway or DSG and
PacketCabletm
Multimedia support, Layer 3 routing enhancements, packet
inspection and filtering features, security enhancements, and
increased downstream/upstream density;
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Expanding the range of next-generation, lithium-ion-based
Touchstone®
Telephony Modem EMTAs to include formats to meet country and MSO
specific performance and powering requirements;
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Product cost reductions;
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Development of network and client technologies to address the
emerging worldwide market opportunities in next generation video
and multimedia delivery (video over IP and PacketCable
multimedia), as embodied in
CableLabs®
DOCSIS®
3.0 and M-CMTS standards including 100Mbps wideband cable modem
service;
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Development of switched digital video features on the
D5tm
Universal Edge QAM; and
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Development of Fixed Mobile Convergence application server for
seamless call control handling.
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Intellectual
Property
We have an aggressive program for protecting our intellectual
property. As of January 31, 2007, the program consists of
maintaining our portfolio of 86 issued patents (both U.S.
and foreign) and pursuing patent protection on new inventions
(currently more than 141 U.S. patent applications and
U.S. provisional patent applications are pending plus
31 pending foreign applications). In our effort to pursue
new patents, we have created a process whereby employees may
submit ideas of inventions for review by management. The review
process evaluates each submission for novelty, detectability,
and commercial value. Patent applications are filed on the
inventions that meet the criteria. ARRIS has 45 registered
or pending trademarks.
Our patents and patent applications generally are in the areas
of telecommunications hardware and software and related
technologies. Our recent research and development has led to a
number of patent applications in technology related to DOCSIS.
Our January 2002 purchase of the assets of
Cadant®
resulted in the acquisition of 19 U.S. patent
applications, seven Patent Convention Treaty (PCT) applications,
five trademark applications, one U.S. registered trademark
and five registered copyrights. The
Cadant®
patents are in the area of CMTS. Our March 2003 purchase of the
assets of Atoga Systems resulted in the acquisition of five
U.S. patent applications, which also have been filed as PCT
applications. Our Atoga patents are in the area of network
traffic flow. In August 2003, we acquired various assets of
Com21, Inc. Included in those assets were 16 issued
U.S. patents plus 18 U.S. patent applications. The
Com21 patents cover a wide range of technologies, including wide
area networks, fiber and cable systems, automated teller machine
networks and CMTS. In 2005, we acquired assets of coaXmedia,
Inc. including seven currently pending U.S. patent
applications, primarily in the field of providing broadband
access in a multi-user environment.
For technology that is not owned by us, we have a program for
obtaining appropriate licenses with the industry leaders to
ensure that the strongest possible patents support the licensed
technology. In addition, we have formed strategic relationships
with leading technology companies that will provide us with
early access to technology and will help keep us at the
forefront of our industry.
We have a program for protecting and developing trademarks. This
program consists of procedures for the use of current trademarks
and for the development of new trademarks. This program is
designed to ensure that our employees properly use those
trademarks and any new trademarks that are expected to develop
strong brand loyalty and name recognition. This is intended to
protect our trademarks from dilution or cancellation.
Product
Sourcing and Distribution
Our product sourcing strategy centers on the use of contract
manufacturers to subcontract production. Our largest contract
manufacturers are Solectron, Mitsumi, Plexus Services
Corporation, Flextronics, and ASUSTeK Computer Inc. The
facilities owned and operated by these contract manufacturers
for the production of our products are located in China,
Ireland, Mexico, the Philippines, and the United States.
We have executed contracts with each of these companies. We
provide these vendors with a
6-month or
12-month
rolling, non-binding forecast, and we typically have a minimum
of 60 days of purchase orders placed with them for
products. Purchase orders for delivery within 60 days are
generally not cancelable. Purchase orders with delivery past
60 days generally may be cancelled with penalties in
accordance with each vendors terms. Each contract
manufacturer provides us with an
18-month
warranty.
We distribute a substantial number of products that are not
designed or trademarked by us in order to provide our customers
with a comprehensive product offering. For instance, we
distribute hardware and installation
10
products that are distributed through regional warehouses in
North Carolina, California, Japan, and the Netherlands and
through drop shipments from our contract manufacturers located
throughout the world.
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Components
for Our CMTS Product Line
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Broadcom provides several
DOCSIS®
components in our CMTS product line. We also make extensive use
of FPGA in our
C4®
CMTS.
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Components
for Our Customer Premises Equipment Products
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Texas Instruments and Microtune provide components used in some
of our customer premises equipment, or CPE, products
(i.e., EMTAs and cable modems). Our agreements with Texas
Instruments include technology licensing and component
purchases. Several of our competitors have similar agreements
with Texas Instruments for these components.
In addition, we purchase software for operating network and
security systems or
sub-systems,
and a variety of routing protocols from different suppliers
under standard commercial terms, including source code buy-out
arrangements.
Although alternate supply and technology arrangements similar to
the above are available or could be arranged, an interruption
with any of the above companies could have a material impact on
our business.
Backlog
Our backlog consists of unfilled customer orders believed to be
firm and long-term contracts that have not been completed. With
respect to long-term contracts, we include in our backlog only
amounts representing orders currently released for production
or, in specific instances, the amount we expect to be released
in the succeeding 12 months. The amount contained in
backlog for any contract or order may not be the total amount of
the contract or order. The amount of our backlog at any given
time does not reflect expected revenues for any fiscal period.
Our backlog at December 31, 2006 was approximately
$92.7 million, at December 31, 2005 was approximately
$166.5 million and at December 31, 2004 was
approximately $75.6 million. The increase in backlog from
2004 to 2005 was primarily related to the strong demand for our
EMTAs. The decline in backlog from 2005 to 2006 reflects a
shortening of lead times by our customers and lower orders on
hand for CBR equipment as this product nears end of life.
We believe that all of the backlog existing at December 31,
2006 will be shipped in 2007.
Competition
All aspects of our business are highly competitive. The
broadband communications industry itself is dynamic, requiring
companies to react quickly and capitalize on change. We must
retain skilled and experienced personnel, as well as deploy
substantial resources to meet the changing demands of the
industry. We compete with national, regional and local
manufacturers, distributors and wholesalers including some
companies that are larger than us. Our major competitors include:
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Big Band Networks;
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Cisco Systems, Inc.;
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Motorola, Inc.; and
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TVC Communications, Inc.
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Various manufacturers, who are suppliers to us of
Supplies & CPE products, also sell directly to our
customers, as well as through other distributors, into the cable
marketplace. In addition, because of the convergence of the
cable, telecommunications and computer industries and rapid
technological development, new competitors may enter the cable
market.
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Since the introduction in 1996 of the
Cornerstone®
Voice product line, we held a substantial portion of the overall
CBR cable telephony market. We believe that a substantial number
of these CBR lines are no longer in service as operators
transition their subscribers to VoIP through attrition and
planned migrations. During 2006 we began to phase out this
product and migrate our customers to VoIP. We anticipate that
CBR product revenues will decline to a sustaining business in
2007 as our customers complete their transition to voice over
IP. One of the principal growth markets for us is the high speed
data access market into which we sell a CMTS, or, the headend
product for data and VoIP services. The largest provider of CMTS
products is Cisco, which took an early lead in the initial
deployment of data-only CMTS products. Cisco is expected to
defend its position via both upgrades to existing products and
the introduction of new products. Cisco had not previously
developed a carrier-grade telephony CMTS product, but has begun
to market the carrier-grade capability. Motorola and Big Band
Networks have been emphasizing routing and carrier-grade
performance for their CMTS. We believe we have garnered
additional market share in the newer generation CMTS products
that enable both data and carrier-grade telephony deployments
due to our products differentiating features, fault
tolerance, wire-speed throughput, routing, and density.
The customer premises business consists of voice over IP enabled
modems (EMTAs) and cable modems. Motorola is the market leader
in cable modems. Leadership position in the customer premises
category provides Motorola with volume advantages in
manufacturing, distribution and marketing expense. Motorola also
was successful in gaining an early leader status in EMTA sales
with MSOs that were the first to deploy VoIP. However, as this
market accelerated, we have gained significant share. We compete
on product performance and our telephony experience and
integration capabilities. Cisco via its Scientific-Atlanta
acquisition also has had some success in the cable modem market.
Cisco also has EMTA products and competes in this market. The
EMTA market grew dramatically in 2005 and again in 2006 as VoIP
deployments accelerated. We are a relatively small competitor in
the cable modem market, but have a significantly larger share of
the EMTA market.
Specifically, we maintained number one EMTA market share
throughout 2005 and 2006 and had over 50% of the world market in
the third quarter of 2006 according to Infonetics Research
Broadband CPE Quarterly Worldwide Market Share and
Forecasts for 3Q06.
In the supplies distribution business we compete with national
distributors, like TVC Communications, Inc., and with several
local and regional distributors. Product breadth, price,
availability and service are the principal competitive
advantages in the supply business. Our products in the supplies
distribution business are competitively priced and are marketed
with emphasis on quality. Product reliability and performance,
superior and responsive technical and administrative support,
and breadth of product offerings are key criteria for
competition. Technological innovations and speed to market are
additional competitive factors.
Lastly, some of our competitors, notably Cisco and Motorola, are
larger companies with greater financial resources and product
breadth than us. This may enable them to bundle products or be
able to market and price products more aggressively than we can.
Employees
As of January 31, 2007, we had 781 full-time
employees. We believe that we have maintained a strong
relationship with our employees. Our future success depends, in
part, on our ability to attract and retain key personnel.
Competition for qualified personnel in the cable industry is
intense, and the loss of certain key personnel could have a
material adverse effect on us. We have entered into employment
contracts with our key executive officers and have
confidentiality agreements with substantially all of our
employees. We also have long-term incentive programs that are
intended to provide substantial incentives for our key employees
to remain with us.
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Our
business is dependent on customers capital spending on
broadband communication systems, and reductions by customers in
capital spending would adversely affect our
business.
Our performance is 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
affect the amount of capital spending, and, therefore, our sales
and profits, including:
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General economic conditions;
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Availability and cost of capital;
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Governmental regulation;
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Demands for network services;
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Competition from other providers of broadband and high speed
services;
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Acceptance of new services offered by our customers; and
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Real or perceived trends or uncertainties in these factors.
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Several of our customers have accumulated significant levels of
debt. In addition, the bankruptcy filing of Adelphia in June
2002 heightened concerns in the financial markets about the
viability of the domestic cable industry. These historic events,
coupled with the current uncertainty and volatility in the
capital markets, has affected the market values of domestic
cable operators and may restrict their access to capital in the
future. Even if the financial health of our customers remains
intact, we cannot assure you that these customers will be in a
position to purchase new equipment at levels we have seen in the
past.
The
markets in which we operate are intensely competitive, and
competitive pressures may adversely affect our results of
operations.
The markets for broadband communication systems are extremely
competitive and dynamic, requiring the companies that compete in
these markets to react quickly and capitalize on change. This
will require us to retain skilled and experienced personnel as
well as to deploy substantial resources toward meeting the
ever-changing demands of the industry. We compete with national
and international manufacturers, distributors and wholesalers
including many companies larger than ARRIS. Our major
competitors include:
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Big Band Networks;
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Cisco Systems, Inc.;
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Motorola, Inc.; and
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TVC Communications, Inc.
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The rapid technological changes occurring in the broadband
markets may lead to the entry of new competitors, including
those with substantially greater resources than our own. Because
the markets in which we compete are characterized by rapid
growth and, in some cases, low barriers to entry, smaller niche
market companies and
start-up
ventures also may become principal competitors in the future.
Actions by existing competitors and the entry of new competitors
may have an adverse effect on our sales and profitability. The
broadband communications industry is further characterized by
rapid technological change. In the future, technological
advances could lead to the obsolescence of some of our current
products, which could have a material adverse effect on our
business.
Further, many of our larger competitors are in a better position
to withstand any significant reduction in capital spending by
customers in these markets. They often have broader product
lines and market focus and therefore will not be as susceptible
to downturns in a particular market. In addition, several of our
competitors have been in operation longer than we have been, and
therefore they have more established relationships with domestic
and foreign broadband service users. We may not be able to
compete successfully in the future, and competition may
negatively impact our business.
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Consolidations
in the telecommunications industry could result in delays or
reductions in purchases of products, which would have a material
adverse effect on our business.
The telecommunications industry has experienced the
consolidation of many industry participants, and this trend may
continue. For instance, in November 2005, Cox Communications
announced a definitive agreement to sell some of its cable
television systems to Cebridge Connections; this transaction was
completed in May 2006. Also, in April 2005, Adelphia announced
that its assets were going to be acquired by Comcast and Time
Warner; this transaction was completed in July 2006. When
consolidations occur, it is possible that the acquirer will not
continue using the same suppliers, thereby possibly resulting in
an immediate or future elimination of sales opportunities for us
or our competitors, depending upon who had the business
initially. Consolidations also could result in delays in
purchasing decisions by the merged businesses. The purchasing
decisions of the merged companies could have a material adverse
effect on our business.
Mergers among the supplier base also have increased, and this
trend may continue. For example, in February 2006, Cisco
Systems, Inc. completed its acquisition of Scientific-Atlanta,
Inc. Larger combined companies with pooled capital resources may
be able to provide solution alternatives with which we would be
put at a disadvantage to compete. The larger breadth of product
offerings by these consolidated suppliers could result in
customers electing to trim their supplier base for the
advantages of one-stop shopping solutions for all of their
product needs. Consolidation of the supplier base could have a
material adverse effect on our business.
Acquisitions,
including our proposed acquisition of TANDBERG Television, can
involve significant risks.
We routinely consider acquisitions of, or investments in, other
businesses, including acquisitions that could be significant
relative to the size of our business, such as our proposed
acquisition of TANDBERG Television. There are a number of risks
attendant to any acquisition, including the possibility that we
will overvalue the assets to be purchased, that any acquired
business may have liabilities of which we are unaware or which
we are not able to assess at the time of the acquisition, that
we will not be able to successfully integrate and retain a
significant number of new employees at a single time, our
ability to combine and integrate accounting and other systems,
and our ability to capitalize on the expected technological and
customer opportunities. In addition, we might incur substantial
additional indebtedness in order to finance an acquisition,
which could require additional payments in the future, and we
might issue common stock or other securities to pay for an
acquisition, in which event the acquisition may ultimately prove
to be dilutive to our current stockholders. As a result, the
impact of any acquisition, including the proposed TANDBERG
Television acquisition, on our future performance may not be as
favorable as expected and actually may be adverse. Further, no
assurances can be provided that we will complete any such
acquisition.
Our
proposed acquisition of TANDBERG Television involves several
accounting risks.
The TANDBERG Television acquisition also involves accounting
risks. TANDBERG Television provides financial information in
accordance with International Financial Reporting Standards
(IFRS). We report under U.S. GAAP. Under
U.S. securities laws, we will be required to reconcile
TANDBERGs historical financial information to
U.S. GAAP. We are also required to file that information,
together with pro forma information, with the SEC within
seventy-five days following the completion of the acquisition.
That reconciliation will be complicated and will require
significant internal and external resources. If it is not
completed in the required time, we will be in default in our
filing obligations with the SEC, and under the indenture
governing our outstanding convertible notes, will be in default
after 60 days from notice by the Trustee. Such a default
under the convertible notes, if appropriate filings are not made
within an additional 90 days, will result in interest
accruing under the notes at an additional .50% per annum
until cured. In addition we will have to convert TANDBERG
Televisions IFRS based systems to U.S. GAAP systems
and modify some of their practices to conform with
U.S. accounting practices. Until this is complete we may
not be able to produce complete U.S. GAAP financial
information. In addition, following completion of the
acquisition, when reported under U.S. GAAP systems,
TANDBERG Televisions future results included as part of
our consolidated results may not be as attractive as, or
consistent with the IFRS results previously disclosed by
TANDBERG Television.
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In addition, because of the differences between IFRS and GAAP,
including, for example, differences in software revenue
recognition, TANDBERG Televisions historical financial
results, when reconciled to GAAP, may show a material difference
for the periods presented as compared to IFRS. As a result, with
respect to both historical and future financial results
immediately following the completion of the acquisition, we may
not be able to immediately recognize all of the revenues that
were or would be recognized by TANDBERG Television under IFRS,
which may have an adverse effect on our financial results and
could negatively impact the market price of our common stock.
In addition to the proposed TANDBERG Television acquisition, we
continue to consider other acquisitions of, or investments in,
other businesses, including acquisitions that could be
significant relative to the size of our business. There are a
number of risks attendant to any acquisition, including the
possibility that we will overvalue the assets to be purchased,
that any acquired business may have liabilities of which we are
unaware or which we are not able to assess at the time of the
acquisition, that we will not be able to successfully integrate
the acquired business or assets, and that we will not be able to
produce the expected level of profitability from the acquired
business or assets. In addition, we might incur additional
indebtedness in order to finance an acquisition, which could
require additional payments in the future, and we might issue
common stock or other securities to pay for an acquisition, in
which event the acquisition may ultimately prove to be dilutive
to our current stockholders. As a result, the impact of any
acquisition on our future performance may not be as favorable as
expected and actually may be adverse.
Following
the TANDBERG Television acquisition we will have substantial
indebtedness.
We will incur substantial indebtedness in order to finance the
pending acquisition of TANDBERG Television ASA, which will
require substantial payments in the future. Any unexpected
changes in the combined business may reduce our ability to pay
down the debt in a timely manner or access the capital markets
for further refinancing. We may not be able to generate
sufficient cash flows to support the debt structure in the
future. Additionally, the credit agreement pursuant to which we
will borrow most of the indebtedness will contain substantial
affirmative and negative covenants (including restrictions on
indebtedness, restrictions on dividends and repurchases of
securities, restrictions on acquisitions and dispositions of
assets, limitations on leverage, minimum interest coverage
ratios, limitations on capital expenditures), the violation of
which would result in a default and could result in the
acceleration of the indebtedness and that will restrict the
freedom with which we can operate our business. We will also
issue common stock or other securities to pay for this
acquisition, in which event the acquisition may ultimately prove
to be dilutive to our current shareholders.
Our
business has primarily come from several key customers. The loss
of one of these customers or a significant reduction in sales to
one of these customers would have a material adverse effect on
our business.
Our four largest customers (including their affiliates, as
applicable) are Comcast, Cox Communications, Liberty Media
International, and Time Warner Cable. For the year ended
December 31, 2006, sales to Comcast accounted for
approximately 38.6%, sales to Cox Communications accounted for
approximately 9.9%, sales to Liberty Media International
accounted for approximately 10.0%, and sales to Time Warner
Cable accounted for approximately 9.1% of our total revenue. The
loss of any of these customers, or one of our other large
customers, or a significant reduction in the products or
services provided to any of them would have a material adverse
impact on our business.
In addition, more so than historically, in recent years our
customers have submitted their purchase orders less evenly over
the course of each quarter and year and with shorter lead times.
This has made it more difficult for us to forecast sales and
plan accordingly.
The
broadband products that we develop and sell are subject to
technological change and a trend towards open standards, which
may impact our future sales and margins.
The broadband products we sell are subject to continuous
technological evolution. Further, the cable industry has and
will continue to demand a move towards open standards. The move
towards open standards is expected to increase the number of
MSOs that will offer new services, in particular, telephony.
This trend also is expected to
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increase the number of competitors and drive capital costs per
subscriber deployed down. These factors may adversely impact
both our future revenues and margins.
Products
currently under development may fail to realize anticipated
benefits.
Rapidly changing technologies, evolving industry standards,
frequent new product introductions and relatively short product
life cycles characterize the markets for our products. The
technology applications that we currently are developing may not
ultimately be successful.
Even if the products in development are successfully brought to
market, they may not be widely used or we may not be able to
successfully capitalize on their technology. To compete
successfully, we must quickly design, develop, manufacture and
sell new or enhanced products that provide increasingly higher
levels of performance and reliability. However, we may not be
able to successfully develop or introduce these products if our
products:
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Are not cost-effective;
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Are not brought to market in a timely manner;
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Fail to achieve market acceptance; or
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Fail to meet industry certification standards.
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Furthermore, our competitors may develop similar or alternative
technologies that, if successful, could have a material adverse
effect on us. Our strategic alliances are based on business
relationships that have not been the subject of written
agreements expressly providing for the alliance to continue for
a significant period of time. The loss of a strategic
relationship could have a material adverse effect on the
progress of new products under development with that third party.
Our
success depends in large part on our ability to attract and
retain qualified personnel in all facets of our
operations.
Competition for qualified personnel is intense, and we may not
be successful in attracting and retaining key personnel, which
could impact our ability to maintain and grow our operations.
Our future success will depend, to a significant extent, on the
ability of our management to operate effectively. In the past,
competitors and others have attempted to recruit our employees
and in the future, their attempts may continue. The loss of
services of any key personnel, the inability to attract and
retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and other technical
professionals, could negatively affect our business.
We are
substantially dependent on contract manufacturers, and an
inability to obtain adequate and timely delivery of supplies
could adversely affect our business.
Many components, subassemblies and modules necessary for the
manufacture or integration of our products are obtained from a
sole supplier or a limited group of suppliers. Our reliance on
sole or limited suppliers, particularly foreign suppliers, and
our reliance on subcontractors involves several risks including
a potential inability to obtain an adequate supply of required
components, subassemblies or modules and reduced control over
pricing, quality and timely delivery of components,
subassemblies or modules. Historically, we have not generally
maintained long-term agreements with any of our suppliers or
subcontractors. An inability to obtain adequate deliveries or
any other circumstance that would require us to seek alternative
sources of supply could affect our ability to ship products on a
timely basis. Any inability to reliably ship our products on
time could damage relationships with current and prospective
customers and harm our business.
Our
international operations may be adversely affected by any
decline in the demand for broadband systems designs and
equipment in international markets.
Sales of broadband communications equipment into international
markets are an important part of our business. The entire line
of our products is marketed and made available to existing and
potential international customers. In addition, United States
broadband system designs and equipment are increasingly being
employed in international markets, where market penetration is
relatively lower than in the United States. While international
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operations are expected to comprise an integral part of our
future business, international markets may no longer continue to
develop at the current rate, or at all. We may fail to receive
additional contracts to supply equipment in these markets.
Our
international operations may be adversely affected by changes in
the foreign laws in the countries in which our manufacturers and
assemblers have plants.
A significant portion of our products are manufactured or
assembled in China, Ireland, Mexico, the Philippines, and other
countries outside of the United States. The governments of the
foreign countries in which our products are manufactured may
pass laws that impair our operations, such as laws that impose
exorbitant tax obligations or nationalize these manufacturing
facilities.
We
face risks relating to currency fluctuations and currency
exchange.
We may encounter difficulties in converting our earnings from
international operations to U.S. dollars for use in the
United States. These obstacles may include problems moving funds
out of the countries in which the funds were earned and
difficulties in collecting accounts receivable in foreign
countries where the usual accounts receivable payment cycle is
longer.
We are exposed to various market risk factors such as
fluctuating interest rates and changes in foreign currency
rates. These risk factors can impact our results of operations,
cash flows and financial position. We manage these risks through
regular operating and financing activities and periodically use
derivative financial instruments such as foreign exchange
forward and option contracts. There can be no assurance that our
risk management strategies will be effective.
Our
profitability has been, and may continue to be, volatile, which
could adversely affect the price of our stock.
We have experienced several years with significant operating
losses. Although we have been profitable in the last eight
quarters, we may not be profitable or meet the level of
expectations of the investment community in the future, which
could have a material adverse impact on our stock price. In
addition, our operating results may be adversely affected by the
timing of sales or a shift in our product mix.
We may
face higher costs associated with protecting our intellectual
property.
Our future success depends in part upon our proprietary
technology, product development, technological expertise and
distribution channels. We cannot predict whether we can protect
our technology or whether competitors can develop similar
technology independently. We have received and may continue to
receive from third parties, including some of our competitors,
notices claiming that we have infringed upon third-party patents
or other proprietary rights. We are currently a party in
proceedings in federal court in California and in Texas, in
which one of our customers has been sued for patent infringement
and has sued us and several other suppliers for indemnification,
and we may become involved in similar litigation involving other
customers. Any of these claims, whether with or without merit,
could result in costly litigation, divert the time, attention
and resources of our management, delay our product shipments, or
require us to enter into royalty or licensing agreements. If a
claim of product infringement against us is successful and we
fail to obtain a license or develop non-infringing technology,
our business and operating results could be materially and
adversely affected. In addition, the payment of any necessary
licensing fees or indemnification costs associated with a patent
infringement claim could also materially adversely affect our
operating results.
We do
not intend to pay cash dividends on our common stock in the
foreseeable future.
We currently intend to continue our policy of retaining earnings
to finance the growth of our business. In addition, the payment
of dividends in certain circumstances may be prohibited by the
terms of our current and future indebtedness. As a result, we do
not anticipate paying cash dividends on our common stock in the
foreseeable future.
17
We
have anti-takeover defenses that could delay or prevent an
acquisition of our company.
We have a shareholder rights plan (commonly known as a
poison pill). This plan is not intended to prevent a
takeover, but is intended to protect and maximize the value of
stockholders interests. This plan could make it more
difficult for a third party to acquire us or may delay that
process.
We
have the ability to issue preferred shares without stockholder
approval.
Our common shares may be subordinate to classes of preferred
shares issued in the future in the payment of dividends and
other distributions made with respect to common shares,
including distributions upon liquidation or dissolution. Our
Amended and Restated Certificate of Incorporation permits our
board of directors to issue preferred shares without first
obtaining stockholder approval. If we issued preferred shares,
these additional securities may have dividend or liquidation
preferences senior to the common shares. If we issue convertible
preferred shares, a subsequent conversion may dilute the current
common stockholders interest.
|
|
Item 1B.
|
Unresolved
Comments
|
As of December 31, 2006 we have no unresolved comments.
We currently conduct our operations from 15 different locations;
two of which we own, while the remaining 13 are leased. These
facilities consist of sales and administrative offices and
warehouses totaling approximately 500 thousand square feet. Our
long-term leases expire at various dates through 2023. We
believe that our current properties are adequate for our
operations. A summary of our principal leased properties that
are currently in use is as follows:
|
|
|
|
|
|
|
|
|
Location
|
|
Description
|
|
Area (sq. ft.)
|
|
|
Lease Expiration
|
|
Ontario, California
|
|
Warehouse
|
|
|
59,269
|
|
|
January 31, 2009
|
Ontario, California
|
|
Warehouse
|
|
|
24,246
|
|
|
December 31, 2007
|
Suwanee, Georgia
|
|
Office space
|
|
|
129,403
|
|
|
April 14, 2012
|
Englewood, Colorado
|
|
Office space
|
|
|
32,240
|
|
|
March 31, 2011
|
Lisle, Illinois
|
|
Office space
|
|
|
56,008
|
|
|
November 1, 2013
|
Ireland
|
|
Office space
|
|
|
11,135
|
|
|
October 28, 2020
|
We own the following properties:
|
|
|
|
|
|
|
Location
|
|
Description
|
|
Area (sq. ft.)
|
|
|
Cary, North Carolina
|
|
Warehouse
|
|
|
151,500
|
|
Chicago, Illinois
|
|
Warehouse/Office space
|
|
|
18,000
|
|
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, ARRIS is involved in claims, disputes,
litigation or legal proceedings incident to the ordinary course
of its business, such as employment matters, environmental
proceedings, contractual disputes and intellectual property
disputes. Except as described below, ARRIS is not part to or has
not been part to, during a period covering the previous
12 months, any governmental, legal or arbitration
proceedings, including such proceedings which are pending or
threatened of which ARRIS is aware, which may have, or have had
in the recent past, significant effects on ARRIS financial
position or profitability.
Currently, ARRIS is a party in two related proceedings pending
in federal court in Texas and California. ARRIS has sought to
clarify its intellectual property rights to the following four
United States Patents: No. Re 35,774 (revised
no. 5,347,304); No. 5,586,121; No. 5,818, 845;
and No. 5,828,655 (the Patents). In both suits,
ARRIS is seeking that the court declares that it has a
nonexclusive license to, and has the ability to gain ownership
rights in, the Patents. ARRIS allegations are based on the
provisions of a 11 January 1999, license agreement
(License Agreement) between the Patents former
owner, Hybrid Networks, Inc. (HNI), and ARRIS
predecessor in
18
interest, Com21, Inc. (Com21). The License
Agreement, which bound both parties successors, provided
Com21 with a nonexclusive license to use, and a
right-of-first-refusal
to purchase the Patents. Subsequently, ARRIS purchased certain
assets of Com21, including all of Com21s IP assets for the
cable modem termination systems business, which, ARRIS has now
alleged, includes the rights under the License Agreement. Thus,
ARRIS has argued in both cases that it has succeeded to
Com21s licensing and ownership rights to the Patents under
the terms of the License Agreement. HNI has sued or has made
other claims against other customers of ours, and these
customers either have or are expected to request indemnification
from us.
The cases are summarized as follows:
Hybrid Patents, Inc. v. Charter Communications, Inc., Case
No. 2:05-CV-436
(E.D. Tex). Charter Communications, Inc. (Charter)
is one of ARRIS customers, in ARRIS business of
selling cable modem termination systems. Hybrid Patents, Inc.
(Hybrid Patents) claims that it succeeded in
interest as owner of the Patents from HNI. On 13 September
2005, Hybrid Patents sued Charter in this case for infringement
of the Patents. Charter responded by bringing a third-party
claim for indemnification against ARRIS and nine of
Charters other suppliers, alleging that ARRIS
and/or the
other suppliers were responsible for any infringement due to
products which infringed the Patents that any or all of them
sold to Charter. After ARRIS answered, and filed a third-party
claim against Hybrid Patents in which ARRIS asserted its rights
to the Patents, Hybrid Patents brought a third-party claim for
direct and contributory patent infringement against ARRIS. ARRIS
has denied, and will continue to deny, that it is liable for any
patent infringement claims. The Texas court is currently
considering a motion to transfer the case to the California
jurisdiction, brought by Charter and ARRIS.
ARRIS International, Inc. v. Hybrid Patents, Inc., Hybrid
Networks, Inc., HYBR Wireless Industries, Inc., London Pacific
Life & Annuity Company, and Carol Wu, Trustee of the
Estate of Com21, Inc., Case
No. 03-54533MM,
Chapter 7, Adversary Proceeding in Bankruptcy, Adv.
No. 06-5098MM
(Bankr. N.D. Cal.). ARRIS brought this claim after learning that
its customer, Charter, was being sued for infringement of the
Patents in Texas, but before being joined as a party in the
Texas litigation. In this suit, ARRIS seeks that the bankruptcy
court declare that Com21 passed all of its rights under the
License Agreement to its successor in interest, ARRIS, and that
ARRIS thus has a nonexclusive license to, and ownership rights
in, the Patents. The court is currently considering a motion to
dismiss the case, and a motion to transfer the case to the Texas
jurisdiction, brought by Hybrid Patents, HYBR Wireless
Industries, Inc., and London Pacific Life & Annuity
Company.
Commencing in 2005, Rembrandt Technologies, LP filed a series of
at least seven lawsuits in the Federal Court for the Eastern
District of Texas against Charter Communications, Inc, Time
Warner Cable, Inc., Comcast Corporation and others alleging
patent infringement related to the cable systems operators
use of data transmission, video, cable modem,
voice-over-internet,
and other technologies and applications. Although ARRIS is not a
defendant in any of these lawsuits, its customers are, and its
customers either have requested indemnification from, or are
expected to request indemnification from, ARRIS and the other
manufacturers of the equipment that is alleged to infringe.
ARRIS is party to a joint defense agreement with respect to one
of the lawsuits and has various understandings with the
defendants in the remaining lawsuits with respect to cost
sharing. The first of the lawsuits is scheduled to be tried in
July 2007. The defendants are vigorously contesting the
lawsuits, although it is premature to assess the likelihood of a
favorable outcome. In the event of an adverse outcome, ARRIS
could be required to indemnify its customers, pay royalties,
and/or cease
using certain technology.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of 2006, no matters were submitted to
a vote of our companys security holders.
19
|
|
Item 4A.
|
Executive
Officers and Board Committees
|
Executive
Officers of the Company
The following table sets forth the name, age as of
February 28, 2007, and position of our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Robert J. Stanzione
|
|
|
58
|
|
|
Chief Executive Officer, Chairman
of the Board
|
Lawrence A. Margolis
|
|
|
59
|
|
|
Executive Vice President,
Strategic Planning, Administration, Chief Counsel, and Secretary
|
David B. Potts
|
|
|
49
|
|
|
Executive Vice President, Chief
Financial Officer and Chief Information Officer
|
Ronald M. Coppock
|
|
|
52
|
|
|
President, ARRIS Worldwide Sales
|
Bryant K. Isaacs
|
|
|
47
|
|
|
President, New Business Ventures
|
James D. Lakin
|
|
|
63
|
|
|
President, Broadband
|
Robert Puccini
|
|
|
45
|
|
|
President, TeleWire Supply
|
Marc S. Geraci
|
|
|
53
|
|
|
Vice President, Treasurer
|
Daniel Owens
|
|
|
36
|
|
|
Vice President, Controller
|
Robert J. Stanzione has been Chief Executive Officer
since January 1, 2000. From 1998 through 1999,
Mr. Stanzione was President and Chief Operating Officer of
ARRIS. Mr. Stanzione has been a director of ARRIS since
1998 and has been the Chairman of the Board of Directors since
May 2003. From 1995 to 1997, he was President and Chief
Executive Officer of Arris Interactive L.L.C. From 1969 to 1995,
he held various positions with AT&T Corporation.
Mr. Stanzione has served as a director of Symmetricon, Inc.
since May 2005. Mr. Stanzione also serves on the boards of
the National Cable Telecommunications Association and the
Georgia Cystic Fibrosis Foundation.
Lawrence A. Margolis has been Executive Vice President,
Strategic Planning, Administration, and Chief Counsel since
March 2004 and has served as the Secretary of ARRIS since 1992.
Mr. Margolis was the Chief Financial Officer from 1992 to
March 2004. Prior to joining ARRIS, Mr. Margolis was Vice
President, General Counsel and Secretary of Anixter, Inc., a
global communications products distribution company, from 1986
to 1992 and General Counsel and Secretary of Anixter from 1984
to 1986. Prior to 1984, he was a partner at the law firm of
Schiff Hardin & Waite.
David B. Potts has been the Chief Financial Officer since
March 2004, and has been Chief Information Officer since the
acquisition of Arris Interactive L.L.C. in August 2001. Prior to
being named Chief Financial Officer in 2004, Mr. Potts was
the Senior Vice President of Finance. Before joining ARRIS, he
was Chief Financial Officer of Arris Interactive L.L.C. from
1995 through 2001. From 1984 through 1995, Mr. Potts held
various executive management positions with Nortel Networks
including Vice President and Chief Financial Officer of Bell
Northern Research in Ottawa and Vice President of Mergers and
Acquisitions in Toronto. Prior to Nortel Networks,
Mr. Potts was with Touche Ross in Toronto. Mr. Potts
is a member of the Institute of Chartered Accountants in Canada.
Ronald M. Coppock has been President of ARRIS Worldwide
Sales since November 2003. Prior to his current role,
Mr. Coppock was President of International Sales since
January 1997 and was formerly Vice President International Sales
and Marketing for TSX Corporation. Mr. Coppock has been in
the cable television and satellite communications industry for
over 20 years, having held senior management positions with
Scientific-Atlanta, Pioneer Communications and Oak
Communications. Mr. Coppock is an active member of the
American Marketing Association, Kappa Alpha Order, Cystic
Fibrosis Foundation Board, and the Auburn University Alumni
Action Committee.
Bryant K. Isaacs has been President of ARRIS New Business
Ventures since December 2002. Prior to the sale of the Actives
product line, Mr. Isaacs was President of ARRIS Network
Technologies since September 2000. Prior to joining ARRIS, he
was Founder and General Manager of Lucent Technologies
Wireless Communications Networking Division in Atlanta from 1997
to 2000. From 1995 through 1997, Mr. Isaacs held the
position of Vice President of Digital Network Systems for
General Instrument Corporation where he was responsible for
developing international business strategies and products for
digital video broadcasting systems.
20
James D. Lakin has been President of ARRIS Broadband
since the acquisition of Arris Interactive L.L.C. in August
2001. From October 2000 through August 2001, he was President
and Chief Operating Officer of Arris Interactive L.L.C. From
November 1995 until October 2000, Mr. Lakin was Chief
Marketing Officer of Arris Interactive L.L.C. Prior to 1995, he
held various executive positions with Compression Labs, Inc. and
its successor General Instrument Corporation.
Robert Puccini has been President of ARRIS TeleWire
Supply since 1999. Prior to his appointment to President,
Mr. Puccini served as Chief Financial Officer of TeleWire
for two years and has served as Vice President, Project
Management for ARRIS AT&T account. Mr. Puccini
brings 20 years of experience in the cable television
industry to ARRIS TeleWire Supply. He has held various
accounting and controller positions within the former Anixter
and ANTEC Corporations. Mr. Puccini is a CPA.
Marc S. Geraci has been Vice President, Treasurer of
ARRIS since January 2003 and has been with ARRIS and the former
ANTEC Corporation since 1994. He began with ARRIS as Controller
for the International Sales Group and in 1997 was named Chief
Financial Officer of that group. Prior to joining ARRIS, he was
a broker/dealer on the Pacific Stock Exchange in
San Francisco for eleven years and, prior to that, in
public accounting in Chicago for four years. Mr. Geraci is
a CPA.
Daniel Owens has been Vice President, Controller of ARRIS
since August 2005. From 1999 to 2005, he held various accounting
positions, including Vice President of Finance at InterCept,
Inc. Mr. Owens began his career in public accounting at
Ernst & Young LLP. Mr. Owens is a CPA.
Board
Committees
Our Board of Directors has three committees: Audit,
Compensation, and Nominating and Corporate Governance. The
charters for all three committees are located on our website at
www.arrisi.com. The Board believes that each of its members,
with the exception of Mr. Stanzione, is independent, as
defined by the SEC and NASDAQ rules. The Board has identified
John Petty as the lead independent director and audit committee
financial expert, as defined by the SEC. Additionally, the Board
has identified Matthew Kearney as an audit committee financial
expert.
21
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
ARRIS common stock is traded on the Nasdaq Global Select
Market under the symbol ARRS. The following table
reports the high and low trading prices per share of the
Companys common stock as listed on the NASDAQ Global
Market System:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.27
|
|
|
$
|
5.45
|
|
Second Quarter
|
|
|
9.18
|
|
|
|
6.28
|
|
Third Quarter
|
|
|
12.17
|
|
|
|
8.50
|
|
Fourth Quarter
|
|
|
12.79
|
|
|
|
7.12
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
14.30
|
|
|
$
|
9.50
|
|
Second Quarter
|
|
|
14.22
|
|
|
|
10.66
|
|
Third Quarter
|
|
|
13.12
|
|
|
|
9.25
|
|
Fourth Quarter
|
|
|
13.80
|
|
|
|
10.84
|
|
We have not paid cash dividends on our common stock since our
inception. On October 3, 2002, to implement our shareholder
rights plan, our board of directors declared a dividend
consisting of one right for each share of our common stock
outstanding at the close of business on October 25, 2002.
Each right represents the right to purchase one one-thousandth
of a share of our Series A Participating Preferred Stock
and becomes exercisable only if a person or group acquires
beneficial ownership of 15% or more of our common stock or
announces a tender or exchange offer for 15% or more of our
common stock or under other similar circumstances.
As of January 31, 2007, there were approximately 368 record
holders of our common stock. This number excludes shareholders
holding stock under nominee or street name accounts with brokers
or banks.
22
Below is a graph comparing total stockholder return on the
Companys stock from December 31, 2001 through
December 31, 2006, with the Standard & Poors
500 and the Index of NASDAQ U.S. Stocks of entities in the
industry of electronics and electrical equipment and components,
exclusive of computer equipment, (SIC
3600-3699),
prepared by the Research Data Group, Inc.. The stock performance
graph assumes the investment of $100 on December 31, 2001
and reinvestment of all dividends. Notwithstanding anything to
the contrary set forth in any of our filings under the
Securities Act of 1933, or the Securities Exchange Act of 1934
that might incorporate future filings, including this Annual
Report on Form 10-K, in whole or in part, the Performance
Graph presented below shall not be incorporated by reference
into any such filings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
|
12/01
|
|
|
12/02
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
ARRIS Group
Inc.
|
|
|
|
100.00
|
|
|
|
|
36.58
|
|
|
|
|
74.18
|
|
|
|
|
72.13
|
|
|
|
|
97.03
|
|
|
|
|
128.18
|
|
S & P 500
|
|
|
|
100.00
|
|
|
|
|
77.90
|
|
|
|
|
100.24
|
|
|
|
|
111.15
|
|
|
|
|
116.61
|
|
|
|
|
135.03
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
48.66
|
|
|
|
|
88.73
|
|
|
|
|
83.05
|
|
|
|
|
85.53
|
|
|
|
|
82.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copyright
©
2006 Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
|
|
|
|
|
|
www.researchdatagroup.com/S&P.htm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Item 6.
|
Selected
Consolidated Historical Financial Data
|
The selected consolidated financial data as of December 31,
2006 and 2005 and for each of the three years in the period
ended December 31, 2006 set forth below are derived from
the accompanying audited consolidated financial statements of
ARRIS, and should be read in conjunction with such statements
and related notes thereto. The selected consolidated financial
data as of December 31, 2004, 2003 and 2002 and for the
years ended December 31, 2003 and 2002 is derived from
audited consolidated financial statements that have not been
included in this filing. The historical consolidated financial
information is not necessarily indicative of the results of
future operations and should be read in conjunction with
ARRIS historical consolidated financial statements and the
related notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this document. See Note 18 of the
Notes to the Consolidated Financial Statements for a summary of
our quarterly consolidated financial information (in thousands,
except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Consolidated Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
891,551
|
|
|
$
|
680,417
|
|
|
$
|
490,041
|
|
|
$
|
433,986
|
|
|
$
|
651,883
|
|
Cost of sales
|
|
|
639,473
|
|
|
|
489,703
|
|
|
|
343,864
|
|
|
|
307,726
|
|
|
|
425,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
252,078
|
|
|
|
190,714
|
|
|
|
146,177
|
|
|
|
126,260
|
|
|
|
226,652
|
|
Selling, general, and
administrative expenses
|
|
|
87,203
|
|
|
|
74,308
|
|
|
|
68,539
|
|
|
|
89,117
|
|
|
|
128,089
|
|
Research and development expenses
|
|
|
66,040
|
|
|
|
60,135
|
|
|
|
63,373
|
|
|
|
62,863
|
|
|
|
72,485
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,209
|
|
Amortization of intangibles
|
|
|
632
|
|
|
|
1,212
|
|
|
|
28,690
|
|
|
|
35,249
|
|
|
|
34,494
|
|
Restructuring and other
|
|
|
2,210
|
|
|
|
1,331
|
|
|
|
7,648
|
|
|
|
891
|
|
|
|
7,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
95,993
|
|
|
|
53,728
|
|
|
|
(22,073
|
)
|
|
|
(61,860
|
)
|
|
|
(85,738
|
)
|
Interest expense
|
|
|
976
|
|
|
|
2,101
|
|
|
|
5,006
|
|
|
|
10,443
|
|
|
|
8,383
|
|
Membership interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,418
|
|
|
|
10,409
|
|
Loss (gain) on debt retirement
|
|
|
|
|
|
|
2,372
|
|
|
|
4,406
|
|
|
|
(26,164
|
)
|
|
|
7,302
|
|
Other expense (income), net
|
|
|
(12,266
|
)
|
|
|
(2,679
|
)
|
|
|
(2,403
|
)
|
|
|
(2,329
|
)
|
|
|
(5,513
|
)
|
Loss on investments and notes
receivable
|
|
|
29
|
|
|
|
146
|
|
|
|
1,320
|
|
|
|
1,436
|
|
|
|
14,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
107,254
|
|
|
|
51,788
|
|
|
|
(30,402
|
)
|
|
|
(47,664
|
)
|
|
|
(121,213
|
)
|
Income tax expense (benefit)
|
|
|
(34,812
|
)
|
|
|
513
|
|
|
|
108
|
|
|
|
|
|
|
|
(6,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations
|
|
|
142,066
|
|
|
|
51,275
|
|
|
|
(30,510
|
)
|
|
|
(47,664
|
)
|
|
|
(114,413
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
221
|
|
|
|
208
|
|
|
|
2,114
|
|
|
|
351
|
|
|
|
(18,794
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
221
|
|
|
|
208
|
|
|
|
2,114
|
|
|
|
351
|
|
|
|
(18,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
cumulative effect of accounting change
|
|
|
142,287
|
|
|
|
51,483
|
|
|
|
(28,396
|
)
|
|
|
(47,313
|
)
|
|
|
(133,207
|
)
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
|
$
|
(47,313
|
)
|
|
$
|
(191,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Net income (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.32
|
|
|
$
|
0.53
|
|
|
$
|
(0.36
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(1.40
|
)
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
(0.23
|
)
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.33
|
|
|
$
|
0.53
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.36
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(1.40
|
)
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
(0.23
|
)
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.33
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,013,557
|
|
|
$
|
529,403
|
|
|
$
|
450,678
|
|
|
$
|
451,859
|
|
|
$
|
563,412
|
|
Long-term obligations
|
|
$
|
293,682
|
|
|
$
|
18,230
|
|
|
$
|
91,781
|
|
|
$
|
138,052
|
|
|
$
|
11,500
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Our long-term goal is to continue to strengthen our position as
a leading provider of broadband access products and services
worldwide. Our primary market and focus is cable providers, or
MSOs. Our customers, the MSOs, seek new cost effective revenue
generating services that they can market and sell to their
subscribers. The key new services at this time are digital
video, high speed data and IP telephony. Through internal
development and various acquisitions that we have made and plan
to make in the future, we market and sell products that deliver
these services to the MSOs, and to potentially other operators
such as Satellite and Telcos.
Industry
Conditions
Our performance is largely dependent on our customers
capital spending in constructing, rebuilding, maintaining and
upgrading broadband communications systems necessary for the
provision of new voice, data, and video services. The cable
market has evolved and changed significantly over the past few
years. In developing a strategy to achieve our long-term goals
we have considered the following key developments that have or
may impact us:
Increase
in Spending by MSOs on New Revenue-Generating Services
While reducing overall capital expenditures, MSOs have increased
their expenditures on equipment which allows them to create new
revenue-generating opportunities, including high-speed data,
telephony and digital video. We anticipate future increases in
expenditures by the MSOs on new technologies, which allow them
to capitalize on these opportunities.
25
Cable
Operator Demand of Open Standards for Equipment and Services
Related to High-Speed Data, Telephony and, Digital
Video
Each of the key new revenue-generating services (high-speed
data, telephony and digital video) were originally made
available to the MSOs by various companies using proprietary
products; however, next-generation products are being developed
and deployed in compliance with open standards established by
the cable industry:
|
|
|
|
|
High-speed data was first offered, most significantly by ARRIS,
Motorola and Terayon, using proprietary cable modem termination
systems and cable modems. In the United States, the MSOs founded
CableLabs®
to create an open standard architecture for high-speed data
defined in DOCSIS. The initial version of this architecture was
introduced in 1999. Subsequently, a second version, DOCSIS 2.0,
was introduced in 2001, which is todays standard. ARRIS
and its competitors responded to the creation of these standards
by replacing their proprietary high-speed data products with
DOCSIS-compliant products. Similar open standards exist in
Europe.
|
|
|
|
Telephony was first offered, most significantly by ARRIS,
Motorola, ADC and Tellabs, using proprietary constant bit rate
(CBR) headend and network interface units. ARRIS continues to
sell CBR equipment; however, we experienced a reduction in sales
of this product in 2005 and 2006 as cable operators supplant CBR
telephony with Voice over IP (VoIP) telephony technology. We
anticipate that CBR product revenues will continue to decline as
end of life purchase orders are expected to be completed in
2007. The MSOs, through
CableLabs®,
have created an open architecture for VoIP telephony called
PacketCable. We anticipate that the majority of new telephony
deployments will use this open architecture. ARRIS and its
competitors responded to the creation of this new standard with
PacketCable-compliant products.
|
|
|
|
Digital Video was first offered, most significantly by Motorola,
Scientific-Atlanta and Pace, using proprietary set-top boxes. In
1997,
CableLabs®,
at the direction of the MSOs, introduced a standard for open
architecture, secure interactive digital television known as
OpenCabletm.
In 2005, certain MSOs, in particular Comcast, Time Warner and
Cox Communications, began the development of standards for an
NGNA, which, among other things, will drive an open standards
architecture for IP Video. In the latter half of 2005, the NGNA
initiative was transferred to
CableLabs®.
Subsequently,
CableLabs®
began the development of a third generation DOCSIS standard
(DOCSIS 3.0) and a definition of a next generation cable modem
termination architecture known as M-CMTS. Together DOCSIS 3.0
and M-CMTS embody the concepts of the NGNA vision. We are
actively participating in the development of the DOCSIS 3.0 and
M-CMTS standards and are developing and marketing products based
on these new standards.
|
We expect that MSOs will continue to create and demand open
interfaces for all services in the future.
We also expect that MSOs will seek to offer other new services
in the future. For example:
|
|
|
|
|
Some MSOs have expressed interest in offering bundled wireless
telephony as part of their product offering. This product known
as Fixed Mobile Convergence (FMC) will allow cable subscribers
to use mobile phones in their homes, connecting to the
MSOs VoIP network in the home and roam from the home VoIP
network to the cellular network outside of the home and back
seamlessly. We are developing products and technologies to
support this new offering.
|
|
|
|
Some MSOs are increasing their focus on expanding their service
offerings to businesses. We are exploring products and
technologies to support the MSOs expansion into this market
segment.
|
Consolidation
of Our Customer Base
Consolidation of our customers has, and may in the future;
affect their purchases of our products. In the fourth quarter of
2002, Comcast completed its purchase of AT&T Broadband.
Since the acquisition, we have not shipped material quantities
of CBR telephony product to Comcast as its focus turned to video
and high-speed data, most recently VoIP. In 2004, Liberty Media
International increased its holdings in international properties
making them one of the largest MSOs in the world. As a result,
we entered into a global Master Purchase agreement with Liberty
and its affiliates for all ARRIS products. In 2004, Adelphia
Communications announced that, as part of its bankruptcy
proceedings, it planned to sell its cable properties. In 2005,
Adelphia announced that it would seek court
26
approval to sell its cable properties to Time Warner Cable and
Comcast, which closed in 2006. It is possible that the sale of
properties may have an impact on our future sales. Time Warner
Cable and Comcast historically have been among our larger
customers.
It also is possible that other customer consolidations may occur
that could have an impact on future sales of our products.
Decline
in Spending by the MSOs on Two-Way Plant
Upgrades
A significant portion of the MSOs have completed, or are nearing
completion of, their two-way plant upgrade programs.
We, as well as our competitors (in particular, Cisco /
Scientific-Atlanta, Motorola and TVC), have sold significant
amounts of equipment to the MSOs over the past five years in
support of their upgrade programs. These sales were predominant
of our Supplies & CPE products as well as our former
Transmission, Optical and Outside Plant products. There is
recent interest in additional plant upgrades to increase the
amount of usable spectrum from the typical 750 or 860 MHz
to create room for new services such as wideband data and more
HD channels. However, it is not clear how widely the industry
will pursue this option in 2007.
Consolidation
of Competitors
In the fourth quarter of 2005, Cisco Systems announced that they
would acquire Scientific-Atlanta. The acquisition was completed
in February of 2006. Both Cisco and Scientific-Atlanta are key
competitors of ARRIS. It also is possible that other competitor
consolidations may occur that could have an impact on future
sales and profitability.
Our
Strategy and Key Highlights
Taking into consideration the industry conditions, to achieve
our goal of increasing our position as a leading worldwide
provider of broadband access products and services, we have
implemented a long-term business strategy that includes the
following key elements:
|
|
|
|
|
Transition to VoIP with an Everything IP, Everywhere
philosophy and build on current market successes;
|
|
|
|
Leverage our current voice and data business;
|
|
|
|
Strengthen and grow our supplies infrastructure distribution
channel;
|
|
|
|
Expand our existing product/services portfolio through internal
developments, partnerships and acquisitions; and
|
|
|
|
Maintain and improve an already strong capital and expense
structure.
|
Below is a summary of some of our key trends, actions and
highlights relative to these strategies:
Everything
IP, Everywhere is taking hold as MSOs globally have
embraced VoIP and are now rapidly deploying this key new
service.
|
|
|
|
|
Our sales, net income, cash from operating activities, and
earnings per share have significantly improved sequentially as a
result of the growth in the VoIP market and customer acceptance
of our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions)
|
|
|
Sales
|
|
$
|
891.6
|
|
|
$
|
680.4
|
|
|
$
|
490.0
|
|
Net income (loss)
|
|
$
|
142.3
|
|
|
$
|
51.5
|
|
|
$
|
(28.4
|
)
|
Cash provided by operating
activities
|
|
$
|
144.2
|
|
|
$
|
26.7
|
|
|
$
|
22.1
|
|
|
|
|
|
|
We have successfully leveraged our existing market position and
industry experience to increase sales of both EMTA and CMTS
products.
|
27
|
|
|
|
|
We expect demand for CMTS products will continue to increase in
future periods as new services and competition between our
customers and their competitors intensifies the need to provide
ever faster download speeds requiring added CMTS capacity and
features. We expect demand for EMTAs to increase, however, the
rate of future growth for EMTA sales is expected to be lower
than what we have experienced to date as many of our customers
have now passed through the initial launch stage. Our ultimate
level of sales of EMTAs will be affected by, but not limited to,
such factors as the success our customers have marketing IP
telephony to their subscribers in the future, and the success
our customers have retaining their IP telephony subscribers. We
also anticipate increased competition for EMTAs in the future.
|
|
|
|
In 2006, we further expanded our customer list as a result of
the success of our CMTS and EMTA product lines. Of particular
note are the commencement of C4 CMTS sales to Time Warner Cable
in the third quarter of 2006 and the sale of EMTAs to several
MSOs in Canada.
|
|
|
|
Sales of our CBR products, consistent with the expectation that
we previously disclosed, decreased significantly year over year
as this product line nears the end of its life. We anticipate
sales of CBR products to further decline in 2007 as end of life
purchase orders are expected to be substantially fulfilled.
|
We
continue to invest significantly in research and
development.
|
|
|
|
|
We have made significant investments through our research and
development efforts in new products and expansion of our
existing products. Our primary focus has been on products and
services that will enable MSOs to build and operate
high-availability, fault-tolerant networks, which allow them to
generate greater revenue by offering high-speed data, IP
telephony and digital video. This success-based
capital expenditure is becoming an increasing portion of the
cable operators total capital spending. In addition, some
MSOs have expressed interest in offering bundled wireless
telephony as part of their product offering. This product known
as Fixed Mobile Convergence (FMC) will allow cable subscribers
to use mobile phones in their homes, connecting to the
MSOs VoIP network in the home and roam from the home VoIP
network to the cellular network outside of the home and back
seamlessly. We are developing products to support this new
offering. In 2006, we spent approximately $66.0 million on
research and development, or 7.4% of revenue. We expect to
continue to spend similar levels on research and development in
the future.
|
|
|
|
Key research and development accomplishments in 2006 included:
|
|
|
|
|
|
Introduction of the fifth generation (500-series) of our EMTAs,
including cost reduced versions.
|
|
|
|
The
500-series Touchstone®
EMTAs achieved both DOCSIS and Euro DOCSIS 2.0 certification.
|
|
|
|
Introduction of the
TM508/TM512
multiline EMTAs for commercial and multiple dwelling unit
applications.
|
|
|
|
Introduction of the TM552 wireless EMTA for high end home and
office VoIP and high speed data services.
|
|
|
|
Continued work on a session initiated protocol (SIP)
based version of our EMTA for Eastern European and Asian
customers.
|
|
|
|
Introduction of our
FlexPathtm
wideband technology enabling delivery of over 100Mbps to
the subscriber over standard cable plant.
|
|
|
|
Continued work on our
D5tm
Universal Edge QAM product, which was made commercially
available in the first half of 2006.
|
|
|
|
The
C4®
CMTS achieved Euro-DOCSIS 2.0 certification.
|
|
|
|
Introduction of new routing, management, and IP features as well
as continued cost reductions within the CMTS product family.
|
|
|
|
Through our work at
CableLabs®
on the
DOCSIS®
3.0 and Modular CMTS standards we have developed a Next
Generation Network Architecture (NGNA). Based on the technology
of our flagship
C4®
CMTS and
D5®Universal
Edge QAM, we began the development of components which, when
added to the
|
28
|
|
|
|
|
existing installed base should enable MSOs to cost effectively
upgrade their networks to these new standards without the need
to replace the existing equipment.
|
In
November 2006, we issued Convertible Notes to supplement our
cash position in anticipation of potential future
acquisitions.
|
|
|
|
|
In November 2006 we raised $276.0 million through the
issuance of a 2% convertible note offering.
|
|
|
|
We ended 2006 with $549.2 million of cash, cash equivalents
and short-term investments.
|
|
|
|
Proceeds from this offering will be used to fund the potential
acquisitions, including the potential acquisition of TANDBERG
Television.
|
In
January 2007, we announced our intention to purchase TANDBERG
Television
|
|
|
|
|
In January 2007, we announced our intention to purchase the
shares of TANDBERG Television for approximately
$1.2 billion.
|
|
|
|
The acquisition is expected to be funded by a combination of
balance sheet cash, the issuance of common shares, and new term
debt.
|
|
|
|
On February 26, 2007, a third party announced its intent to
make a competing all cash offer for all of TANDBERG
Televisions outstanding shares at a higher price than our
offer of NOK 96 per share of TANDBERGs common stock. As of
the date of this report, we are evaluating the competing offer
and our options with respect to the proposed transaction.
|
Results
of Operations
Overview
As highlighted earlier, we have faced, and in the future will
face, significant changes in our industry and business. These
changes have impacted our results of operations and are expected
to do so in the future. As a result, we have implemented
strategies both in anticipation and in reaction to the impact of
these dynamics. These strategies were outlined in the Overview
to the MD&A.
29
Below is a table that shows our key operating data as a
percentage of sales. Following the table is a detailed
description of the major factors impacting the year over year
changes of the key lines of our results of operations.
Key
Operating Data (as a percentage of net sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
71.7
|
|
|
|
72.0
|
|
|
|
70.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
28.3
|
|
|
|
28.0
|
|
|
|
29.8
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and
administrative expenses
|
|
|
9.8
|
|
|
|
10.9
|
|
|
|
14.0
|
|
Research and development expenses
|
|
|
7.4
|
|
|
|
8.8
|
|
|
|
12.9
|
|
Restructuring and impairment
charges
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
1.6
|
|
Amortization of intangibles
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
10.8
|
|
|
|
7.9
|
|
|
|
(4.5
|
)
|
Other (income)
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
1.0
|
|
Loss (gain) on debt retirement
|
|
|
|
|
|
|
0.3
|
|
|
|
0.9
|
|
Loss (gain) on investments
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Gain on foreign currency
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
Interest income
|
|
|
(1.2
|
)
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
Other expense (income), net
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
12.0
|
|
|
|
7.7
|
|
|
|
(6.2
|
)
|
Income tax expense (benefit)
|
|
|
(3.9
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
continuing operations
|
|
|
15.9
|
|
|
|
7.6
|
|
|
|
(6.2
|
)
|
Gain (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
16.0
|
%
|
|
|
7.6
|
%
|
|
|
(5.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Operations for the Three Years Ended December 31,
2006
Net
Sales
The table below sets forth our net sales for the three years
ended December 31, 2006, 2005, and 2004, for each of our
product categories described in Item 1 of this
Form 10-K
(in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Net Sales
|
|
|
Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
$
|
364.3
|
|
|
$
|
315.1
|
|
|
$
|
300.2
|
|
|
$
|
49.2
|
|
|
|
15.6%
|
|
|
$
|
14.9
|
|
|
|
5.0%
|
|
Supplies & CPE
|
|
|
527.3
|
|
|
|
365.3
|
|
|
|
189.8
|
|
|
|
162.0
|
|
|
|
44.3%
|
|
|
|
175.5
|
|
|
|
92.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
891.6
|
|
|
$
|
680.4
|
|
|
$
|
490.0
|
|
|
$
|
211.2
|
|
|
|
31.0%
|
|
|
$
|
190.4
|
|
|
|
38.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The table below sets forth our domestic and international sales
for the three years ended December 31, 2006, 2005, and 2004
(in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Net Sales
|
|
|
Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Domestic
|
|
$
|
668.1
|
|
|
$
|
495.8
|
|
|
$
|
366.4
|
|
|
$
|
172.3
|
|
|
|
34.8
|
%
|
|
$
|
129.4
|
|
|
|
35.3
|
%
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
52.9
|
|
|
|
51.1
|
|
|
|
48.0
|
|
|
|
1.8
|
|
|
|
3.5
|
|
|
|
3.1
|
|
|
|
6.5
|
|
Europe
|
|
|
75.0
|
|
|
|
67.4
|
|
|
|
46.2
|
|
|
|
7.6
|
|
|
|
11.3
|
|
|
|
21.2
|
|
|
|
45.9
|
|
Latin America
|
|
|
41.7
|
|
|
|
25.0
|
|
|
|
18.2
|
|
|
|
16.7
|
|
|
|
66.8
|
|
|
|
6.8
|
|
|
|
37.4
|
|
Canada
|
|
|
53.9
|
|
|
|
41.1
|
|
|
|
11.2
|
|
|
|
12.8
|
|
|
|
31.1
|
|
|
|
29.9
|
|
|
|
267.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
223.5
|
|
|
|
184.6
|
|
|
|
123.6
|
|
|
|
38.9
|
|
|
|
21.1
|
%
|
|
|
61.0
|
|
|
|
49.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
891.6
|
|
|
$
|
680.4
|
|
|
$
|
490.0
|
|
|
$
|
211.2
|
|
|
|
31.0
|
%
|
|
$
|
190.4
|
|
|
|
38.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
Net Sales 2006 vs. 2005
During the year ended December 31, 2006, sales of our
Broadband products increased $49.2 million or approximately
15.6%, as compared to 2005. This increase in Broadband sales
resulted from several components:
|
|
|
|
|
Sales of our CMTS product increased reflecting higher sales to
Comcast and our success in capturing new customers, for example
Time Warner Cable. Continued increased demand for bandwidth
coupled with the launch of telephony has driven increased demand
for our CMTS products from our customers.
|
|
|
|
Sales of our CBR voice products declined year over year, in
particular in the second half of 2006, as customers migrate to
VoIP products. As previously disclosed, this product is now
nearing end of life.
|
Supplies &
CPE Net Sales 2006 vs. 2005
Supplies & CPE product sales increased
$162.0 million or approximately 44.3% in the year ended
December 31, 2006 as compared to the same period in 2005.
|
|
|
|
|
Sales of our EMTA product increased as operators ramped up
deployment of VoIP. In 2006, we shipped 4.8 million units
as compared to 2.3 million units in 2005. Many of our
customers are now through the initial launch stage of telephony,
and as a result, we do not expect a similar growth rate in 2007.
|
|
|
|
The increase in EMTA sales was broad-based and included sales to
many new customers.
|
|
|
|
Sales of the remaining products in the Supplies & CPE
category were similar in 2006 as compared to 2005.
|
Broadband
Net Sales 2005 vs. 2004
During 2005, sales of our Broadband products increased by
$14.9 million or 5.0% as compared to 2004.
|
|
|
|
|
Sales of our CMTS product line increased year over year. A
significant portion of the increase relates to sales to new
customers for this product line, most notably Charter
Communications.
|
|
|
|
As anticipated, sales of our CBR voice product declined year
over year. Two factors led to the decline. First, the product
line is approaching end of life and as a result our customers,
in particular Cox Communications and JComm, have reduced their
purchases as they transition to VoIP. Second, we reduced the
price of the product in 2005.
|
31
Supplies &
CPE Net Sales 2005 vs. 2004
Supplies & CPE product revenue increased by
approximately $175.5 million or 92.5% in 2005 as compared
to 2004.
|
|
|
|
|
The increase reflects substantial growth in VoIP demand from our
customers as they began to rollout VoIP in volume in 2005, and
as a result, they purchased more EMTAs.
|
|
|
|
The increase in sales was broad based and included sales to many
new customers.
|
Gross
Margin
The table below sets forth our gross margin for the three years
ended December 31, 2006, 2005, and 2004, for each of our
product categories (in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin $
|
|
|
Increase (Decrease)
|
|
|
|
For the Years Ended
|
|
|
Between Periods
|
|
|
|
December 31,
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
$
|
167.6
|
|
|
$
|
122.1
|
|
|
$
|
120.7
|
|
|
$
|
45.5
|
|
|
|
37.3%
|
|
|
$
|
1.4
|
|
|
|
1.2%
|
|
Supplies & CPE
|
|
|
84.5
|
|
|
|
68.6
|
|
|
|
25.5
|
|
|
|
15.9
|
|
|
|
23.2%
|
|
|
|
43.1
|
|
|
|
169.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
252.1
|
|
|
$
|
190.7
|
|
|
$
|
146.2
|
|
|
$
|
61.4
|
|
|
|
32.2%
|
|
|
$
|
44.5
|
|
|
|
30.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth our gross margin percentages for the
three years ended December 31, 2006, 2005, and 2004, for
each of our product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin %
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
Percentage Point Increase
|
|
|
|
December 31,
|
|
|
(Decrease) Between Periods
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
46.0%
|
|
|
|
38.8%
|
|
|
|
40.2%
|
|
|
|
7.2
|
|
|
|
(1.4
|
)
|
Supplies & CPE
|
|
|
16.0%
|
|
|
|
18.8%
|
|
|
|
13.4%
|
|
|
|
(2.8
|
)
|
|
|
5.4
|
|
Total
|
|
|
28.3%
|
|
|
|
28.0%
|
|
|
|
29.8%
|
|
|
|
0.3
|
|
|
|
(1.8
|
)
|
Our overall gross margins are very dependent upon, among other
factors, achievement of planned cost reductions, product mix,
and price reductions granted to customers.
Broadband
Gross Margin 2006 vs. 2005
The increase in Broadband gross margin dollars and percentages
in 2006 as compared to 2005 was related to the following factors:
|
|
|
|
|
The increase in gross margin dollars year over year is a result
of the $49.2 million increase in sales and the improved
gross margin percentage.
|
|
|
|
The increase in the gross margin percentage year over year
primarily reflects cost reductions achieved related to our C4
CMTS.
|
|
|
|
In 2006, we recorded $1.6 million of inventory reserves
versus $2.9 million in 2005.
|
Supplies &
CPE Gross Margin 2006 vs. 2005
The increase in Supplies & CPE gross margin dollars and
the decrease in gross margin percentage in 2006 as compared to
2005 were related to the following factors:
|
|
|
|
|
The increase in gross margin dollars year over year is a result
of the $162.0 million increase in sales, partially offset
by lower gross margin percentage.
|
32
|
|
|
|
|
Gross margin percentage decreased 2.8% points year over year as
a result of lower margins achieved on our EMTA product as we
transitioned models. In order to secure market share we chose to
reduce the price of our Model 4 EMTA in advance of introducing
our cost reduced Model 5 EMTA. As a result our margins were
lower than historical averages until the transition was
completed in the fourth quarter 2006. In the fourth quarter 2006
the Supplies and CPE gross margin percentage was 18.3% as
compared to the full year average of 16.0%.
|
|
|
|
In 2006, we recorded $1.3 million of inventory reserves
versus $2.0 million in 2005.
|
Broadband
Gross Margin 2005 vs. 2004
The increase in Broadband gross margin dollars and the decrease
in percentages in 2005 as compared to 2004 were related to the
following factors:
|
|
|
|
|
The increase in gross margin dollars year over year is a result
of the $14.9 million increase in sales.
|
|
|
|
The decrease in the gross margin percentage year over year
primarily reflects price reductions related to our CBR product
line.
|
|
|
|
In 2005, we recorded $2.9 million of inventory reserves
versus $2.7 million in 2004.
|
Supplies &
CPE Gross Margin 2005 vs. 2004
The increase in Supplies & CPE gross margin dollars and
percentages in 2005 as compared to 2004 was related to the
following factors:
|
|
|
|
|
The increase in gross margin dollars year over year is a result
of the $175.5 million increase in sales.
|
|
|
|
Product cost reductions positively impacted gross margin
percentage year over year.
|
|
|
|
In 2005, we recorded $2.0 million of inventory reserves
versus $2.9 million in 2004.
|
Operating
Expenses
The table below provides detail regarding our operating expenses
(in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Operating Expenses
|
|
|
Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Selling, general, &
administrative
|
|
$
|
87.2
|
|
|
$
|
74.4
|
|
|
$
|
68.6
|
|
|
$
|
12.8
|
|
|
|
17.2
|
%
|
|
$
|
5.8
|
|
|
|
8.5
|
|
Research & development
|
|
|
66.1
|
|
|
|
60.1
|
|
|
|
63.4
|
|
|
|
6.0
|
|
|
|
10.0
|
%
|
|
|
(3.3
|
)
|
|
|
(5.2
|
)
|
Restructuring & impairment
|
|
|
2.2
|
|
|
|
1.3
|
|
|
|
7.6
|
|
|
|
0.9
|
|
|
|
69.2
|
%
|
|
|
(6.3
|
)
|
|
|
(82.9
|
)
|
Amortization of intangibles
|
|
|
0.6
|
|
|
|
1.2
|
|
|
|
28.7
|
|
|
|
(0.6
|
)
|
|
|
(50.0
|
)%
|
|
|
(27.5
|
)
|
|
|
(95.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156.1
|
|
|
$
|
137.0
|
|
|
$
|
168.3
|
|
|
$
|
19.1
|
|
|
|
13.9
|
%
|
|
$
|
(31.3
|
)
|
|
|
(18.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General, and Administrative, or SG&A, Expenses
2006 vs.
2005
Several factors contributed to the $12.8 million increase
year over year:
|
|
|
|
|
Increased costs (salaries, fringe benefits, travel) of
approximately $5.1 million associated with increased
staffing levels, particularly in the sales organization, as a
result of the growth in the business and the decision to further
invest in the sales force.
|
|
|
|
Variable compensation costs (bonuses, commissions) increased by
approximately $2.8 million year over year reflecting the
increase in staff and our strong business performance relative
to targets established by our board of directors.
|
33
|
|
|
|
|
An increase in compensation expense of approximately
$1.5 million related to the full year impact of equity
compensation expense recorded under the provisions of
SFAS No. 123R, Share-Based Payment.
|
|
|
|
Increase in other costs (net) of $3.4 million including
higher health care costs, legal / accounting / professional fees
and sales sample expenses, partially offset by lower bad debt
expense.
|
2005 vs.
2004
Several factors contributed to the $5.8 million increase
year over year:
|
|
|
|
|
In the third quarter of 2005, we chose to early adopt the
provisions of SFAS No. 123R, Share-Based
Payment. Prior to adoption, we followed the
provisions of APB Opinion No. 25 Accounting for Stock
Issued to Employees, and recorded non-cash compensation
expense related to restricted stock grants and stock options
subject to variable accounting. Year over year non-cash
compensation costs increased by $3.6 million, predominantly
as a result of SFAS No. 123R, Share-Based
Payment.
|
|
|
|
Variable compensation costs (bonuses) increased by
$2.1 million year over year reflecting our strong business
performance relative to targets established by our board of
directors.
|
Research &
Development Expenses
Included in our R&D expenses are costs directly associated
with our development efforts (people, facilities, materials,
etc.) and reasonable allocations of our information technology
and facility costs.
2006 vs.
2005
Several factors contributed to the $6.0 million increase
year over year:
|
|
|
|
|
Variable compensation costs and equity compensation costs
increased by approximately $0.9 million.
|
|
|
|
In April 2006, we announced that we entered into a joint
development, licensing and supply agreement with UTStarcom that
will enable the fourth component of the quadruple play for cable
MSOs worldwide. The joint solution will allow customers with
Wi-Fi enabled handsets to seamlessly roam between their cellular
and Wi-Fi connections, or a service commonly referred to as
fixed mobile convergence, or FMC. In the second quarter of 2006,
we recognized R&D expense of $2.4 million related to
this agreement with the remaining license fees of approximately
$2.6 million expected to be expensed in 2007 and 2008, of
which $1.5 million will be recognized in the first quarter
2007.
|
|
|
|
Outside services related to research and development, such as
testing and certifications, increased approximately
$1.7 million year over year.
|
2005 vs.
2004
Several factors contributed to the $3.3 million reduction
year over year:
|
|
|
|
|
For the majority of 2004, we continued to invest in certain
products related to our Atoga product line, including a R&D
center in Fremont, California. In late 2004, we closed the
facility and severed 28 employees. In 2005, there were no
expenditures related to this facility and employees. The
resulting year over year decrease was approximately
$4.1 million.
|
|
|
|
In the second quarter of 2005, there was a benefit of
approximately $1.2 million representing funding received
from a customer related to development work that ARRIS performed
for it over an 18 month period. The expenses related to the
project were charged to research and development in the periods
in which they were performed. The customer provided progress
payments over the respective time period. The receipt of the
cash was recorded as a liability until we completed the work and
the customer accepted it. The customer accepted the work in the
second quarter of 2005, at which time the payments were offset
against research and development expense.
|
34
|
|
|
|
|
Partially offsetting the above decreases were year over year
increases related to variable compensation (bonuses) and
non-cash equity compensation expenses upon adoption of
SFAS No. 123R, Share-Based Payment of
approximately $2.9 million.
|
Restructuring
and Impairment Charges
During 2006 and 2005, we recorded restructuring and impairment
charges of $2.2 million and $1.3 million,
respectively, which predominately relate to changes in estimates
related to real estate leases associated with the previous
consolidation of certain facilities. The adjustment recorded in
2006 relates primarily to a vacant property in Georgia. This
lease has approximately two years remaining. Given the limited
time left on the lease and the information we have gained
through our advisors and continued marketing efforts, we have
concluded we will be unsuccessful in subletting the facility. It
is possible that if the TANDBERG Television acquisition closes
we may consolidate resources in this facility at which point we
would revise our estimates.
During 2004, we consolidated two facilities in Georgia, giving
us the ability to house many of our core technology, marketing,
and corporate headquarter functions in a single building. This
consolidation resulted in a restructuring charge of
$6.2 million. Also during 2004, we adjusted our reserves
related to previously closed facilities. This adjustment was due
to a change in estimates and resulted in a restructuring charge
of approximately $1.1 million. Lastly, our office in
Fremont, California was closed at the end of 2004. This resulted
in a restructuring charge of $0.3 million, of which
$0.2 million related to severance charges and
$0.1 million related to lease commitments.
Impairment
of Goodwill
On an annual basis, we review our goodwill based upon our
analysis and an independent valuation. The valuation is
determined using a combination of the income and market
approaches on an invested capital basis, which is the market
value of equity plus interest-bearing debt. Independent
valuations were performed in the fourth quarters of 2006, 2005,
and 2004, and no impairment was indicated.
Amortization
of Intangibles
Our intangibles amortization expense represents amortization of
existing technology acquired as a result of the Arris
Interactive L.L.C. acquisition in 2001, the Cadant, Inc.
acquisition in 2002, the Atoga and Com21 acquisitions in 2003
and the CoaXmedia Broadband LLC acquisition in 2005. As of
August 2004, the intangibles with respect to the Arris
Interactive L.L.C. acquisition were fully amortized, as of
January 2005, the intangibles associated with Cadant, Inc. were
fully amortized, and as of August 2006, the intangibles
associated with Com21 were fully amortized.
Other
Expense (Income)
The table below provides detail regarding our other expense
(income) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expense (Income)
|
|
|
Increase (Decrease)
|
|
|
|
For the Years Ended December 31,
|
|
|
Between Periods
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
Interest expense
|
|
$
|
1.0
|
|
|
$
|
2.1
|
|
|
$
|
5.0
|
|
|
$
|
(1.1
|
)
|
|
$
|
(2.9
|
)
|
Loss (gain) on debt retirement
|
|
|
|
|
|
|
2.4
|
|
|
|
4.4
|
|
|
|
(2.4
|
)
|
|
|
(2.0
|
)
|
Loss on investments and notes
receivable
|
|
|
|
|
|
|
0.1
|
|
|
|
1.3
|
|
|
|
(0.1
|
)
|
|
|
(1.2
|
)
|
Gain on foreign currency
|
|
|
(1.4
|
)
|
|
|
(0.1
|
)
|
|
|
(1.3
|
)
|
|
|
(1.3
|
)
|
|
|
1.2
|
|
Interest income
|
|
|
(11.2
|
)
|
|
|
(3.1
|
)
|
|
|
(1.5
|
)
|
|
|
(8.1
|
)
|
|
|
(1.6
|
)
|
Other expense (income)
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (income)
|
|
$
|
(11.3
|
)
|
|
$
|
1.9
|
|
|
$
|
8.3
|
|
|
$
|
(13.2
|
)
|
|
$
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Interest
Expense
Interest expense reflects the amortization of deferred finance
fees, and the interest paid on our convertible subordinated
notes and capital leases.
Loss
(Gain) on Debt Retirement
During 2004, we called $50.0 million of the Notes due 2008
for redemption, and holders of the Notes elected to convert the
Notes into 10.0 million shares of common stock rather than
have the notes redeemed. Under the indentures terms for
redemptions, we made a make-whole interest payment of
approximately 0.5 million common shares, resulting in a
charge of $4.4 million during the first quarter of 2004.
In May 2005, we called the remaining $75.0 million of the
Notes for redemption and the holders of the Notes elected to
convert the notes into 15.0 million shares of common stock
rather than have the Notes redeemed. Under the indentures
terms for redemptions, we made a make-whole interest payment of
approximately 0.3 million shares resulting in a charge of
$2.4 million during the second quarter of 2005. As of
December 31, 2005, the Notes had been fully converted.
Loss on
Investments and Notes Receivable
We hold certain investments in the common stock of
publicly-traded companies, a number of non-marketable equity
securities, and an investment in a rabbi trust associated with
our deferred compensation plan. For further discussion on the
classification and the accounting treatment of these
investments, see the Investments section within Financial
Liquidity and Capital Resources contained herein. During the
years ended December 31, 2006, 2005, and 2004, we recorded
net losses related to these investments of $29 thousand,
$0.1 million, and $1.3 million, respectively.
During 2004, we recorded a charge of $0.1 million in
relation to a short-term note receivable that we deemed to be
fully impaired. The note, which was due from an unrelated
private company, became due in October 2004, and the company was
unable to repay the note.
Loss
(Gain) in Foreign Currency
During 2006, 2005 and 2004, we recorded foreign currency losses
(gains) related to our international customers whose receivables
and collections are denominated in their local currency. We have
implemented a hedging strategy to mitigate the monetary exchange
fluctuations.
Income
Tax Expense
Our annual provision for income taxes and determination of the
deferred tax assets and liabilities require management to assess
uncertainties, make judgments regarding outcomes and utilize
estimates. To the extent the final outcome differs from initial
assessments and estimates, future adjustments to our tax assets
and liabilities will be necessary. In 2006, we recorded
$34.8 million of income tax benefits for U.S. federal
and state taxes and foreign taxes. Current tax expense of
$3.7 million attributable to U.S. federal and state
taxes and foreign taxes was more than offset by the reversal of
approximately $31 million of valuation allowances, as ARRIS
emerged from its cumulative net loss position, and
$7.8 million in newly defined research and development tax
credit benefits.
In 2005, we recorded $0.5 million of income tax expense for
foreign taxes and Alternative Minimum Tax in the United States.
As we were in a cumulative net loss position for tax purposes,
we had sufficient net operating loss carryforwards to offset our
taxable income.
In 2004, we recorded income tax expense of $0.1 million
related to foreign income taxes, as we were in a cumulative loss
position for tax purposes.
36
Discontinued
Operations
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, certain product
lines have been accounted for as discontinued operations upon
their disposal in 2002 and historical results have been
reclassified accordingly.
During 2004, we recorded income from discontinued operations of
approximately $1.8 million with respect to the discontinued
product lines as a result of changes in estimates related to
real estate, vendor liabilities, and other accruals.
Additionally, we recognized a partial recovery of
$0.9 million with respect to inventory previously written
off associated with an Argentinean customer, of which
approximately $0.3 million related to the discontinued
operations of Actives and Keptel. The net result of the above
transactions in 2004 was a gain of $2.1 million in
discontinued operations.
In 2005 and 2006, we recorded income of $0.2 million each
year related to our reserves for discontinued operations. These
adjustments were the result of the resolution of various vendor
liabilities, taxes and other costs.
Financial
Liquidity and Capital Resources
Overview
As highlighted earlier, one of our key strategies is to maintain
and improve our capital structure. The key metrics we focus on
are summarized in the table below:
Liquidity &
Capital Resources Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions, except DSO and Turns)
|
|
|
Key Working Capital
Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
144.2
|
|
|
$
|
26.7
|
|
|
$
|
22.1
|
|
Cash, cash equivalents, and
short-term investments
|
|
$
|
549.2
|
|
|
$
|
129.5
|
|
|
$
|
103.1
|
|
Accounts Receivable, net
|
|
$
|
115.3
|
|
|
$
|
83.5
|
|
|
$
|
55.7
|
|
- Days Sales Outstanding
(Full Year)
|
|
|
41
|
|
|
|
37
|
|
|
|
42
|
|
Inventory
|
|
$
|
94.2
|
|
|
$
|
113.9
|
|
|
$
|
92.6
|
|
- Turns (Full Year)
|
|
|
6.1
|
|
|
|
4.7
|
|
|
|
4.0
|
|
Key Debt Items
Convertible notes due
2026
|
|
$
|
276.0
|
|
|
$
|
|
|
|
$
|
|
|
Convertible notes due 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
75.0
|
|
Capital Expenditures
|
|
$
|
12.7
|
|
|
$
|
9.6
|
|
|
$
|
10.2
|
|
In managing our liquidity and capital structure, we have been
and are focused on key goals, and we have and will continue in
the future to implement actions to achieve them. They include:
|
|
|
|
|
Liquidity ensure that we have sufficient cash
resources or other short term liquidity to manage day to day
operations
|
|
|
|
2008 Notes implement a plan to retire the notes;
which was ultimately accomplished in 2005 and 2004 through
redemptions
|
|
|
|
Growth implement a plan to ensure that we have
adequate capital resources, or access thereto, to execute
acquisitions
|
Below is a description of key actions taken and an explanation
as to their potential impact:
Inventory &
Accounts Receivable Programs
We use turns to evaluate inventory management and days sales
outstanding, or DSOs, to evaluate accounts receivable
management. From the table above, you will note improvements,
particularly as evidenced by the 2006
37
turns of 6.1 and DSOs of 41 days. Both inventory and
accounts receivable increased year over year as a result of the
growth in our revenues.
Looking forward, we do not anticipate a further reduction in
DSOs. It is possible that DSOs may increase, particularly if the
international component of our business increases as customers
internationally typically have longer payment terms. Inventory
turns may modestly improve in the future.
Redemption
of the 2008 Notes
In February 2004, our stock price had risen to the levels
required under the indenture where we were entitled to redeem,
in full or in part, the Notes due 2008. At that time, we gave
notice of a partial redemption of $50.0 million (with a
make whole payment, described elsewhere, to be paid
in stock). All redeemed note holders chose to convert their
notes into stock, resulting in the issuance of 10.0 million
shares of ARRIS common stock.
In May 2005, our stock price had risen to the levels required
under the indenture where we were entitled to redeem, in full or
in part, the balance of the Notes. We called the remaining
$75.0 million of the Notes for redemption and the holders
of the Notes elected to convert the notes into 15.0 million
shares of common stock rather than have the Notes redeemed. We
made a make-whole interest payment of approximately
0.3 million shares resulting in a charge of
$2.4 million during the second quarter 2005.
Issuance
of the 2026 Notes
On November 6, 2006, we issued $276.0 million of
2% convertible senior notes due 2026. The notes are
convertible, at the option of the holder, at any time prior to
maturity, based on an initial conversion rate of
62.1504 shares per $1,000 base amount, into cash up to the
principal amount and, if applicable, shares of our common stock,
cash or a combination thereof. Interest is payable on May 15 and
November 15 of each year. We may redeem the notes at any time on
or after November 15, 2013, subject to certain conditions.
As of December 31, 2006, there were $276.0 million of
the notes outstanding. We issued the notes to fund future
acquisitions.
Summary
of Current Liquidity Position and Potential for Future Capital
Raising
We believe our current liquidity position, where we have
approximately $549.2 million of cash, cash equivalents, and
short-term investments on hand as of December 31, 2006,
together with the prospects for continued generation of cash
from operations are adequate for our short-and medium-term
business needs. However, a key part of our overall long-term
strategy may be implemented through additional acquisitions. In
January 2007 we announced our intention to purchase TANDBERG
Television for approximately $1.2 billion based on current
exchange rates. We plan to fund the acquisition with a
combination of cash, common stock and a new term loan. Post the
acquisition we anticipate having $100.0 million of cash and
access to a $25.0 million undrawn revolving credit facility
to provide the necessary liquidity for the business. We believe
that the post acquisition liquidity, together with the prospects
for continued generation of cash from operations should be
adequate for our short- and medium-term business needs, post
acquisition. In addition, in order to be prepared to make future
acquisitions generally or in connection with particular
acquisitions, or to reduce long term debt, it is possible that
we will raise capital through private, or public, share or debt
offerings. We believe we have the ability to access the capital
markets on commercially reasonable terms.
38
Contractual
Obligations
Following is a summary of our contractual obligations as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than 5 Years
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Operating leases(1)
|
|
$
|
6.1
|
|
|
$
|
8.9
|
|
|
$
|
7.6
|
|
|
$
|
3.2
|
|
|
$
|
25.8
|
|
Sublease income
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
Purchase obligations(2)
|
|
|
137.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
143.5
|
|
|
$
|
8.9
|
|
|
$
|
7.6
|
|
|
$
|
3.2
|
|
|
$
|
163.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes leases which are reflected in restructuring accruals on
the consolidated balance sheets. |
|
(2) |
|
Represents obligations under agreements with non-cancelable
terms to purchase goods or services. The agreements are
enforceable and legally binding, and specify terms, including
quantities to be purchased and the timing of the purchase. |
Off-Balance
Sheet Arrangements
Under the definition contained in Item 303(a)(4)(ii) of
Regulation S-K,
the Company does not have any off-balance sheet arrangements.
Cash
Flow
Below is a table setting forth the key lines of our Consolidated
Statements of Cash Flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash provided by operating
activities
|
|
$
|
144.2
|
|
|
$
|
26.7
|
|
|
$
|
22.1
|
|
Cash provided by (used in)
investing
|
|
$
|
(45.8
|
)
|
|
$
|
13.9
|
|
|
$
|
(77.6
|
)
|
Cash provided by (used in)
financing
|
|
$
|
287.9
|
|
|
$
|
9.7
|
|
|
$
|
5.7
|
|
Net increase (decrease) in cash
|
|
$
|
386.3
|
|
|
$
|
50.2
|
|
|
$
|
(49.8
|
)
|
Operating
Activities:
Below are the key line items affecting cash from operating
activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income after non-cash
adjustments
|
|
$
|
121.8
|
|
|
$
|
72.9
|
|
|
$
|
17.5
|
|
(Increase)/Decrease in accounts
receivable
|
|
|
(32.2
|
)
|
|
|
(27.2
|
)
|
|
|
1.2
|
|
(Increase)/Decrease in inventory
|
|
|
19.7
|
|
|
|
(20.9
|
)
|
|
|
(14.1
|
)
|
(Increase)/Decrease in accounts
payable and accrued liabilities
|
|
|
40.8
|
|
|
|
7.1
|
|
|
|
16.1
|
|
Prepaids and other net
|
|
|
(5.9
|
)
|
|
|
(5.2
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
144.2
|
|
|
$
|
26.7
|
|
|
$
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As described above, our net income improved significantly year
over year, resulting in an improvement in cash from operating
activities.
|
|
|
|
Our inventory increased in 2005 as a result of increased demand
and some changes in target inventory planning of our customers.
In 2006, our inventory decreased as we balanced inventory levels
with our customers. Our inventory turns for 2006 were 6.1 as
compared to 2005 turns of 4.7.
|
|
|
|
Our accounts receivable increased in both 2005 and 2006 as a
result of higher revenues. Our DSO in 2006 was 41 as compared to
37 in 2005.
|
39
|
|
|
|
|
While we believe we may be able to further improve our working
capital position, future cash flow from operating activities
will be more dependent on net income after adjustment for
non-cash items.
|
Investing
Activities:
Below are the key line items affecting investing activities (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Capital expenditures
|
|
$
|
(12.7
|
)
|
|
$
|
(9.6
|
)
|
|
$
|
(10.2
|
)
|
Acquisitions/other
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
|
|
|
|
Purchases of short-term investments
|
|
|
(129.5
|
)
|
|
|
(59.3
|
)
|
|
|
(107.8
|
)
|
Disposals of short-term investments
|
|
|
96.2
|
|
|
|
83.0
|
|
|
|
39.8
|
|
Proceeds from sale of investments
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
$
|
(45.8
|
)
|
|
$
|
13.9
|
|
|
$
|
(77.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures Capital expenditures are mainly
for test equipment, laboratory equipment, and computing
equipment. We anticipate investing approximately
$12.0 million in 2007.
Acquisitions/Other This represents cash investments
we have made in our various acquisitions.
Purchases and Disposals of Short-Term Investments
This represents purchases and disposals of auction rate
securities held as short-term investments.
Proceeds from Sale of Investments This represents
the cash proceeds we received from the liquidation of excess
assets from our deferred compensation plan.
Financing
Activities:
Below are the key items affecting our financing activities (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Proceeds from issuance of 2026
notes
|
|
$
|
276.0
|
|
|
$
|
|
|
|
$
|
|
|
Deferred financing fees paid
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
Repurchase of shares to satisfy
employee tax withholdings
|
|
|
(2.0
|
)
|
|
|
(1.2
|
)
|
|
|
(0.5
|
)
|
Proceeds from issuance of common
stock
|
|
|
12.3
|
|
|
|
10.9
|
|
|
|
7.4
|
|
Excess tax benefits from
stock-based compensation plans
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
$
|
287.9
|
|
|
$
|
9.7
|
|
|
$
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 6, 2006, we issued $276.0 million of
2% convertible senior notes due 2026. The notes are
convertible, at the option of the holder, based on an initial
conversion rate, subject to adjustment, of 62.1504 shares
per $1,000 base amount (which represents an initial conversion
price of approximately $16.09 per share of our common
stock), into cash up to the principal amount and, if applicable,
shares of our common stock, cash or a combination thereof. The
notes may be converted during any calendar quarter in which the
closing price of our common stock for 20 or more trading days in
a period of 30 consecutive trading days ending on the last
trading day of the immediately preceding calendar quarter
exceeds 120% of the conversion price in effect at that time
(which, based on the current conversion price would be $19.31)
and upon the occurrence of certain other events. Upon
conversion, the holder will receive the principal amount in cash
and an additional payment, in either cash or stock at the option
of ARRIS. The additional payment will be based on a formula
which calculates the difference between the initial conversion
rate ($16.09) and the market price at the date of the
conversion. As of the date of this report, the notes could not
be convertible by the holders thereof. Interest is payable on
May 15 and November 15 of each year. We may redeem the notes at
any time on or after November 15, 2013, subject to certain
conditions. As of December 31, 2006, there were
$276.0 million of the notes outstanding. We issued the
notes to fund future
40
acquisitions. Additionally, we paid approximately
$7.8 million of finance fees related to the issuance of the
notes. These costs will be amortized over seven years.
Sales of common stock represent the proceeds we received as a
result of exercise of stock options.
During the 2006 year, approximately $9.4 million of
tax benefits were obtained from tax deductions arising from
equity-based compensation deductions. $5.0 million of the
$9.4 million of total tax benefits resulted from 2006
exercises of non-qualified stock options and lapses of
restrictions on restricted stock awards. The remaining
$4.4 million of tax benefits were generated as prior year
net operating losses, generated by equity-based compensation
deductions, were utilized against current year taxable income.
Interest
Rates
As of December 31, 2006, we did not have any floating rate
indebtedness or outstanding interest rate swap agreements.
Foreign
Currency
A significant portion of our products are manufactured or
assembled in Mexico, Taiwan, China, the Philippines, and other
foreign countries. Our sales into international markets have
been and are expected in the future to be an important part of
our business. These foreign operations are subject to the usual
risks inherent in conducting business abroad, including risks
with respect to currency exchange rates, economic and political
destabilization, restrictive actions and taxation by foreign
governments, nationalization, the laws and policies of the
United States affecting trade, foreign investment and loans, and
foreign tax laws.
We have certain international customers who are billed in their
local currency. We use a hedging strategy and enter into forward
or currency option contracts based on a percentage of expected
foreign currency revenues. The percentage can vary, based on the
predictability of the revenues denominated in euros
Financial
Instruments
In the ordinary course of business, we, from time to time, will
enter into financing arrangements with customers. These
financial instruments include letters of credit, commitments to
extend credit and guarantees of debt. These agreements could
include the granting of extended payment terms that result in
longer collection periods for accounts receivable and slower
cash inflows from operations
and/or could
result in the deferral of revenue. As of December 31, 2006
and 2005, we had approximately $3.1 million and
$6.1 million, respectively, outstanding under letters of
credit which were cash collateralized. The cash collateral is
held in the form of restricted cash.
Short-Term
Investments
We hold short-term investments consisting of debt securities
classified as
available-for-sale,
which are stated at estimated fair value. These debt securities
include U.S. treasury notes, state and municipal bonds,
asset-backed securities, auction rate securities, corporate
bonds, commercial paper, and certificates of deposit. These
investments are on deposit with a major financial institution.
Investments
We held certain investments in the common stock of
publicly-traded companies which were classified as available for
sale. Changes in the market value of these securities are
typically recorded in other comprehensive income. These
securities are also subject to a periodic impairment review,
which requires significant judgment. Because the trading value
of these investments had been below their cost basis for a
period greater than six months, impairment charges of
$1.4 million were recorded during the year ended
December 31, 2004. As of December 31, 2006 and 2005,
the carrying value of these investments was $0.
In addition, we held a non-marketable equity security totaling
approximately $32 thousand at December 31, 2005, which is
classified as available for sale. Non-marketable equity
securities are subject to a periodic impairment
41
review, which requires significant judgment as there are no
open-market valuations. During the years ended December 31,
2006 and 2005, we recorded charges of approximately $32 thousand
and $0.2 million, respectively, in relation to
non-marketable equity securities deemed to be impaired based on
various factors. As of December 31, 2006, the carrying
value of this investment was $0.
During the third quarter of 2004, we recorded a charge of
$0.1 million in relation to a short-term note receivable
that we deemed to be fully impaired. The note, which was due
from an unrelated private company, became due in October 2004,
and the company has been unable to repay the note.
As of December 31, 2004, ARRIS held a non-marketable equity
security of $0.6 million and a short-term note receivable
of $0.5 million from a private company. Late in 2004, the
investee was unsuccessful in attempts to raise additional funds
to finance its business. On January 31, 2005, we foreclosed
on the note receivable. This was a joint proceeding with the
other major note holder of the private company. A new limited
liability company was formed with the other major note holder,
of which ARRIS held a 25% interest. In March 2005, ARRIS and the
other note holder agreed to ARRIS acquisition of the other
note holders interest in the limited liability company.
This transaction closed on April 1, 2005, and the product
line was integrated into ARRIS in the second quarter 2005.
We offered a deferred compensation arrangement, which allowed
certain employees to defer a portion of their earnings and defer
the related income taxes. These deferred earnings are invested
in a so-called rabbi trust, and are accounted for in
accordance with Emerging Issues Task Force Issue
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested. A
rabbi trust is a funding vehicle used to protect deferred
compensation benefits from various events (but not from
bankruptcy or insolvency). The investment in the rabbi trust is
classified as an investment on our balance sheet. During 2004,
we withdrew the excess of the deferred compensation assets over
the plans liabilities. A portion of the assets were
liquidated, which resulted in a realized gain of approximately
$0.3 million. At December 31, 2006 and 2005, ARRIS had
an accumulated unrealized gain related to the rabbi trust of
approximately $1.3 million and $1.1 million,
respectively, included in other comprehensive income.
Capital
Expenditures
Capital expenditures are made at a level designed to support the
strategic and operating needs of the business. ARRIS
capital expenditures were $12.7 million in 2006 as compared
to $9.6 million in 2005 and $10.2 million in 2004.
ARRIS had no significant commitments for capital expenditures at
December 31, 2006. Management expects to invest
approximately $12.0 million in capital expenditures for the
year 2007.
Net
Operating Loss Carryforwards and Research and Development Credit
Carryforwards
As of December 31, 2006, ARRIS had net operating loss, or
NOL, carryforwards for domestic and foreign income tax purposes
of approximately $14.0 million and $19.6 million,
respectively. The federal NOLs expire through 2024. Foreign NOLs
related to our Irish subsidiary in the amount of
$17.8 million have an indefinite life and can only be used
to offset Irish income. The tax benefit associated with the
federal NOLs was offset by a full valuation allowance, in
accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes, until we reversed the
valuation allowance in the fourth quarter of 2006. We
continually review the adequacy of the valuation allowance and
recognize the benefits only as reassessment indicates that it is
more likely than not that the benefits will be realized.
In the fourth quarter of 2006, ARRIS completed analysis related
to the availability of federal research and development tax
credits arising from qualified research expenditures for tax
years beginning in 2001 and continuing through 2006. After the
analysis was completed, we recorded a deferred tax asset related
to those research and development tax credits in the amount of
$13.9 million. The research and development tax credits can
be carried back one year and carried forward twenty years.
The availability of tax benefits of NOL and research and
development tax credit carryforwards to reduce ARRIS
federal and state income tax liability is subject to various
limitations under the Internal Revenue Code. The availability of
tax benefits of NOL carryforwards to reduce ARRIS foreign
income tax liability is subject to the various tax provisions of
the respective countries.
42
Defined
Benefit Pension Plans
The Company sponsors two non-contributory defined benefit
pension plans that cover the Companys U.S. employees.
As of January 1, 2000, the Company froze the defined
pension plan benefits. These participants elected to enroll in
ARRIS enhanced 401(k) plan. Due to the cessation of plan
accruals for such a large group of participants, a curtailment
was considered to have occurred and the Company accounted for
this in accordance with SFAS No. 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination
Benefits. The Company has not recognized any expense
(income) related to supplemental pension benefits for years
ended December 31, 2006, 2005, and 2004.
The investment strategies of the plans place a high priority on
benefit security. The plans invest conservatively so as not to
expose assets to depreciation in adverse markets. The
plans strategy also places a high priority on earning a
rate of return greater than the annual inflation rate along with
maintaining average market results. The plan has targeted asset
diversification across different asset classes and markets to
take advantage of economic environments and to also act as a
risk minimizer by dampening the portfolios volatility.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. This statement requires entities
to:
|
|
|
|
|
fully recognize the funded status of defined benefit
plans an asset for an overfunded status or a
liability for an underfunded status,
|
|
|
|
measure a defined benefit plans assets and obligations
that determine its funded status as of the end of the
entitys fiscal year, and
|
|
|
|
recognize changes in the funded status of a defined benefit plan
in comprehensive earnings in the year in which the changes occur.
|
ARRIS adopted SFAS No. 158 as of December 31,
2006. However, the requirement to measure plan assets and
benefit obligations as of the date of the fiscal year-end
balance sheet is effective for fiscal years ending after
December 15, 2008. ARRIS has not yet adopted this provision
and has used September 30 as the measurement date for the
2006, 2005 and 2004 reporting year.
Below is a summary of the impact of applying
SFAS No. 158 as of December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
|
|
|
|
|
|
After
|
|
|
|
Application of
|
|
|
Adoption
|
|
|
Application of
|
|
|
|
SFAS No. 158
|
|
|
Adjustments
|
|
|
SFAS No. 158
|
|
|
Current liabilities
|
|
$
|
N/A
|
|
|
$
|
82
|
|
|
$
|
82
|
|
Accrued pension liability
|
|
|
11,858
|
|
|
|
203
|
|
|
|
12,061
|
|
Accumulated other comprehensive
income
|
|
|
(4,177
|
)
|
|
|
(285
|
)
|
|
|
(4,462
|
)
|
The weighted-average actuarial assumptions used to determine the
benefit obligations for the three years presented are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assumed discount rate for
non-qualified plans participants
|
|
|
5.75%
|
|
|
|
5.50%
|
|
|
|
6.00%
|
|
Assumed discount rate for
qualified plan participants
|
|
|
5.75%
|
|
|
|
5.75%
|
|
|
|
6.00%
|
|
Rates of compensation increase
|
|
|
3.75%
|
|
|
|
3.75%
|
|
|
|
5.94%
|
|
The weighted-average actuarial assumptions used to determine the
net periodic benefit costs are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assumed discount rate for
non-qualified plans participants
|
|
|
5.50%
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
Assumed discount rate for
qualified plan participants
|
|
|
5.75%
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
Rates of compensation increase
|
|
|
3.75%
|
|
|
|
5.94%
|
|
|
|
5.94%
|
|
Expected long-term rate of return
on plan assets
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
8.00%
|
|
43
The expected long-term rate of return on assets is derived using
the building block approach which includes assumptions for the
long term inflation rate, real return, and equity risk premiums.
As of December 31, 2006, the expected benefit payments
related to the Companys defined benefit pension plans
during the next ten years are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
636
|
|
2008
|
|
|
823
|
|
2009
|
|
|
850
|
|
2010
|
|
|
1,226
|
|
2011
|
|
|
1,220
|
|
2012 - 2016
|
|
|
8,752
|
|
Adoption
of SFAS No. 123R, Share-Based Payment
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R,
Share-Based Payment, which replaces
SFAS No. 123, Accounting for Stock-Based
Compensation, supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. SFAS 123R is effective for
public companies for interim or annual periods beginning after
June 15, 2005. As revised, this statement requires all
companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value. We
chose to early adopt SFAS 123R on July 1, 2005 using
the modified prospective method. Prior to the adoption date,
ARRIS used the intrinsic value method for valuing its awards of
stock options and restricted stock and recorded the related
compensation expense, if any, in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees and
related interpretations.
Prior to the adoption of SFAS No. 123R, ARRIS used the
Black-Scholes option valuation model to estimate the fair value
of an option on the date of grant for pro forma purposes. Upon
adoption of SFAS No. 123R, ARRIS elected to continue
to use the Black-Scholes model; however, it engaged an
independent third party to assist the Company in determining the
Black-Scholes weighted average inputs utilized in the valuation
of options granted subsequent to July 1, 2005. Prior to the
adoption of SFAS No. 123R, the Company estimated the
expected volatility exclusively on historical stock prices of
ARRIS common stock over a period of time. Under
SFAS No. 123R, the volatility factors are based upon a
combination of historical volatility over a period of time and
estimates of implied volatility based on traded option contracts
on ARRIS common stock. The change in estimating volatility was
made because the Company felt that the inclusion of the implied
volatility factor was a more accurate estimate of the
stocks future performance. The expected term of the awards
granted are based upon a weighted average life of exercise
activity of the grantee population. The risk-free interest rate
is based upon the U.S. treasury strip yield at the grant
date, using a remaining term equal to the expected life. The
expected dividend yield is 0%, as the Company has not paid cash
dividends on its common stock since its inception. In
calculating the stock compensation expense, ARRIS applies an
estimated post-vesting forfeiture rate based upon historical
rates.
In May 2005, the ARRIS Board of Directors approved the
acceleration of outstanding options with exercise prices equal
to $9.06 and above. All of these options were
out-of-the-money
at the time of acceleration, as the closing stock price on
May 5, 2005 was $7.67. The acceleration covered options to
purchase approximately 1.4 million shares of common stock,
but did not involve any options held by directors or executive
officers. The purpose of the acceleration was to reduce the
expense that would be associated with these options in
accordance with the provisions of SFAS No. 123R, once
adopted. The acceleration resulted in incremental stock-based
employee compensation of approximately $5.7 million in the
pro forma expense for the second quarter 2005.
In 2003, the Company offered to all eligible employees the
opportunity to exchange certain outstanding stock options for
restricted shares of ARRIS common stock. The Companys
Board of Directors and its eight most highly compensated
executive officers during 2002 were not eligible to participate
in the offer. Employees tendered approximately 76% of the
options eligible to be exchanged under the program and ARRIS
cancelled options to purchase approximately 4.7 million
shares of common stock and granted approximately
1.5 million restricted shares in exchange. The Company
recorded a fixed compensation expense equal to the fair market
value of the shares of restricted stock granted through the
offer; this cost is being amortized over the four-year vesting
period for
44
the restricted shares. Prior to the adoption of
SFAS No. 123R, all eligible options that were not
tendered for exchange were subject to variable accounting. The
variable accounting charge fluctuated in accordance with the
market price of the ARRIS common stock at the end of each
accounting period until such stock options were exercised,
forfeited, or expire unexercised. In accordance with
SFAS No. 123R, an equity award that previously was
accounted for as a variable award under APB No. 25 should
no longer be accounted for as a variable award. As of
July 1, 2005, the grant-date fair value is used to
recognize compensation cost for these options.
As of December 31, 2006, there was approximately
$16.1 million of total unrecognized compensation cost
related to unvested share-based awards granted under the
Companys incentive plans. This compensation cost is
expected to be recognized over a weighted-average period of
2.4 years.
Critical
Accounting Policies
The accounting and financial reporting policies of the Company
are in conformity with U.S. generally accepted accounting
principles. The preparation of financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Management has
discussed the development and selection of the critical
accounting estimates communicated below with the audit committee
of the Companys Board of Directors and the audit committee
has reviewed the Companys related disclosures herein.
a) Revenue
Recognition
Our revenue recognition policies are in accordance with Staff
Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, and
SAB No. 104, Revenue Recognition, as issued by
the Securities and Exchange Commission and other applicable
guidance.
Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
collectibility is reasonably assured and all other significant
obligations have been fulfilled. Revenue from the provision of
services is recognized at the time of completion, delivery or
performance of the service. Contracts and customer purchase
orders generally are used to determine the existence of an
arrangement. Shipping documents, proof of delivery and customer
acceptance (when applicable) are used to verify delivery. We
assess whether an amount due from a customer is fixed and
determinable based on the terms of the agreement with the
customer, including, but not limited to, the payment terms
associated with the transaction. ARRIS assesses collection based
on a number of factors, including past transaction history with
the customer and credit-worthiness of the customer. If at the
time of sale we determine that collection of an amount due is
not reasonably assured, we defer recognition of revenue until
such time that collection becomes reasonably assured.
We resell software developed by outside third parties as well as
internally developed software. Software sold by ARRIS does not
require significant production, modification or customization.
We recognize software license revenue and product revenue for
certain products where software is more than an incidental
component of the hardware, in accordance with Statement of
Position
No. 97-2,
Software Revenue Recognition, as amended by
SOP No. 98-9,
Software Recognition, With Respect to Certain
Transactions.
ARRIS internal costs as well as external costs incurred in
developing software are charged to expense as research and
development expense until technological feasibility has been
established for the product, in accordance with
SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. As the
time period between the establishment of technological
feasibility and general release of internally developed software
to its customers is generally very limited, no material
development costs are incurred during this period and,
therefore, no such costs have been capitalized to date.
Certain transactions also include multiple deliverables or
elements for the sale of hardware, licensed software,
maintenance/support and professional services. Accounting
principles for arrangements involving multiple elements require
the Company to allocate the arrangement fee to each respective
element based on its relative fair value, and recognize the
revenue for each element as the specific recognition criteria
are met. The determination of the fair value of the elements,
which is based on a variety of factors including the amount
ARRIS charges other
45
customers for the products or services, price lists or other
relevant information, requires judgment by management. Changes
to the elements in an arrangement and our ability to establish
vendor-specific objective evidence for the elements could affect
the timing of the recognition of the underlying revenue.
Maintenance is offered as a separate element. Maintenance
revenue, which is generally billed in advance, is deferred and
recognized ratably over the term of the related contract.
Generally, revenue is deferred if certain circumstances exist,
including but not limited to the following:
|
|
|
|
|
when undelivered products or services that are essential to the
functionality of the delivered product, or are required under
the terms of the contract to be delivered concurrently exist,
revenue is deferred until such undelivered products or services
are delivered, or
|
|
|
|
when final acceptance of the product is specified by the
customer, revenue is deferred until the acceptance criteria have
been met.
|
Our deferred revenue and deferred costs related to shipments
made to customers whereby the customer has the right of return
in addition to deferrals related to various customer service
agreements are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Inc/(Dec)
|
|
|
Deferred revenue
|
|
$
|
5,498
|
|
|
$
|
1,681
|
|
|
$
|
3,817
|
|
Deferred cost
|
|
|
1,467
|
|
|
|
259
|
|
|
|
1,208
|
|
b) Allowance
for Doubtful Accounts and Sales Returns
We establish a reserve for doubtful accounts based upon our
historical experience in collecting accounts receivable. A
majority of our accounts receivable are from a few large cable
system operators, either with investment rated debt outstanding
or with substantial financial resources, and have very favorable
payment histories. Unlike businesses with relatively small
individual accounts receivable from a large number of customers,
if we were to have a collectibles problem with one of our major
customers, it is possible the reserve that we have established
will not be sufficient. We calculate our reserve for
uncollectible accounts using a model that considers customer
payment history, recent customer press releases, bankruptcy
filings, if any, Dun & Bradstreet reports, and
financial statement reviews. The Companys calculation is
reviewed by management to assess whether additional research is
necessary, and if complete, whether there needs to be an
adjustment to the reserve for uncollectible accounts. The
reserve is established through a charge to the provision and
represents amounts of current and past due customer receivable
balances which management estimates may not be collected. In the
past several years, two of our major customers encountered
significant financial difficulty due to the industry downturn
and tightening financial markets. At the end of 2006, we believe
that we do not have a major customer that is in a financially
distressed position.
We also establish a reserve for sales returns and allowances.
The reserve is an estimate of the impact of potential returns
based upon historic trends.
Our reserves for uncollectible accounts and sales returns and
allowances were $3.6 million and $3.7 million as of
December 31, 2006 and 2005, respectively.
c) Inventory
Valuation
Inventory is reflected in our financial statements at the lower
of average, approximating
first-in,
first-out, cost or market value.
The table below sets forth inventory balances at
December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Gross inventory
|
|
$
|
107.5
|
|
|
$
|
129.1
|
|
Reserves
|
|
|
(13.3
|
)
|
|
|
(15.2
|
)
|
|
|
|
|
|
|
|
|
|
Net inventory
|
|
$
|
94.2
|
|
|
$
|
113.9
|
|
|
|
|
|
|
|
|
|
|
46
We continuously evaluate future usage of product and where
supply exceeds demand, we may establish a reserve. In reviewing
inventory valuations, we also review for obsolete items. This
requires us to estimate future usage, which, in an industry
where rapid technological changes and significant variations in
capital spending by system operators are prevalent, is
difficult. As a result, to the extent that we have overestimated
future usage of inventory, the value of that inventory on our
financial statements may be overstated. When we believe that we
have overestimated our future usage, we adjust for that
overstatement through an increase in cost of sales in the period
identified as the inventory is written down to its net
realizable value. Inherent in our valuations are certain
management judgments and estimates, including markdowns,
shrinkage, manufacturing schedules, possible alternative uses
and future sales forecasts, which can significantly impact
ending inventory valuation and gross margin. The methodologies
utilized by the Company in its application of the above methods
are consistent for all periods presented.
The Company, to assist in assessing the proper valuation of
inventory, conducts annual physical inventory counts at all
ARRIS locations.
d) Warranty
We offer warranties of various lengths to our customers
depending on product specifics and agreement terms with our
customers. We provide, by a current charge to cost of sales in
the period in which the related revenue is recognized, an
estimate of future warranty obligations. The estimate is based
upon historical experience. The embedded product base, failure
rates, cost to repair and warranty periods are used as a basis
for calculating the estimate. We also provide, via a charge to
current cost of sales, estimated expected costs associated with
non-recurring product failures. In the event of a significant
non-recurring product failure, the amount of the reserve may not
be sufficient. To the extent that other non-recurring warranty
claims occur in the future, the reserves that we have
established may not be sufficient, cost of sales may have been
understated, and a charge against future costs of sales may be
necessary. Information regarding the changes in ARRIS
aggregate product warranty liabilities was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
January 1,
|
|
$
|
8,479
|
|
|
$
|
5,453
|
|
Accruals related to warranties
(including changes in estimates)
|
|
|
4,026
|
|
|
|
6,881
|
|
Settlements made (in cash or in
kind)
|
|
|
(4,271
|
)
|
|
|
(3,855
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
8,234
|
|
|
$
|
8,479
|
|
|
|
|
|
|
|
|
|
|
The year over year change in the reserve balance reflects both
increased reserves and usage of our on-going warranty claims. It
also reflects the additions, usages and adjustments attributable
to non-recurring product issues. We review and update our
estimates, with respect to the non-recurring product issues on a
routine basis.
e) Stock-Based
Compensation
SFAS No. 123R, Share-Based Payment requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements as
compensation cost based on the fair value on the date of grant.
The Company determines fair value of such awards using the
Black-Scholes option pricing model. The Black-Scholes option
pricing model incorporates certain assumptions, such as
risk-free interest rate, expected volatility, and expected life
of options, in order to arrive at a fair value estimate.
Forward-Looking
Statements
Certain information and statements contained in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this report,
including statements using terms such as may,
expect, anticipate, intend,
estimate, believe, plan,
continue, could be, or similar
variations or the negative thereof, constitute forward-looking
statements with respect to the financial condition, results of
operations, and business of ARRIS, including statements that are
based on current expectations, estimates, forecasts, and
projections about the markets in which we operate and
managements beliefs and assumptions regarding these
markets. These and any other statements in this document that
are not statements about historical
47
facts are forward-looking statements. We caution
investors that forward-looking statements made by us are not
guarantees of future performance and that a variety of factors
could cause our actual results to differ materially from the
anticipated results or other expectations expressed in our
forward-looking statements. Important factors that could cause
results or events to differ from current expectations are
described in the risk factors set forth in Item 1A,
Risk Factors. These factors are not intended to be
an all-encompassing list of risks and uncertainties that may
affect the operations, performance, development and results of
our business. In providing forward-looking statements, ARRIS
expressly disclaims any obligation to update publicly or
otherwise these statements, whether as a result of new
information, future events or otherwise except to the extent
required by law.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to various market risks, including interest rates
and foreign currency rates. The following discussion of our
risk-management activities includes forward-looking
statements that involve risks and uncertainties. Actual
results could differ materially from those projected in the
forward-looking statements.
We have an investment portfolio of auction rate securities that
are classified as
available-for-sale
securities. Although these securities have maturity dates of 15
to 30 years, they have characteristics of short-term
investments as the interest rates reset every 28 or 35 days
and we have the potential to liquidate them in an auction
process. Due to the short duration of these investments, a
movement in market interest rates would not have a material
impact on our operating results.
A significant portion of our products are manufactured or
assembled in China, Mexico, the Philippines, Taiwan, and other
countries outside the United States. Our sales into
international markets have been and are expected in the future
to be an important part of our business. These foreign
operations are subject to the usual risks inherent in conducting
business abroad, including risks with respect to currency
exchange rates, economic and political destabilization,
restrictive actions and taxation by foreign governments,
nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and foreign tax
laws.
We have certain international customers who are billed in their
local currency. Changes in the monetary exchange rates may
adversely affect our results of operations and financial
condition. To manage the volatility relating to these typical
business exposures, we may enter into various derivative
transactions, when appropriate. We do not hold or issue
derivative instruments for trading or other speculative
purposes. The euro and the yen are the predominant currencies of
those customers who are billed in their local currency. Taking
into account the effects of foreign currency fluctuations of the
euro and the yen versus the dollar, a hypothetical 10% weakening
of the U.S. dollar (as of December 31,
2006) would provide a gain on foreign currency of
approximately $0.5 million. Conversely, a hypothetical 10%
strengthening of the U.S. dollar would provide a loss on
foreign currency of approximately $0.5 million. As of
December 31, 2006, we had no material contracts, other than
accounts receivable, denominated in foreign currencies.
We regularly review our forecasted sales in euros and enter into
option contracts when appropriate. In the event that we
determine a hedge to be ineffective prior to expiration,
earnings may be effected by the change in the hedge value. As of
December 31, 2006, we had option collars outstanding with
notional amounts totaling 23.6 million euros, which mature
through 2007.
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
The report of our independent registered public accounting firm
and consolidated financial statements and notes thereto for the
Company are included in this Report and are listed in the Index
to Consolidated Financial Statements.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
N/A
48
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and
Procedures. Our principal executive officer and
principal financial officer evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 as of the end of the
period covered by this report (the Evaluation Date).
Based on that evaluation, such officers concluded that, as of
the Evaluation Date, our disclosure controls and procedures were
effective as contemplated by the Act.
(b) Changes in Internal Control over Financial
Reporting. Our principal executive officer and
principal financial officer evaluated the changes in our
internal control over financial reporting that occurred during
the most recent fiscal quarter. Based on that evaluation, our
principal executive officer and principal financial officer
concluded that there had been no change in our internal control
over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
N/A
49
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ARRIS management is responsible for establishing and
maintaining an adequate system of internal control over
financial reporting as required by the Sarbanes-Oxley Act of
2002 and as defined in Exchange Act
Rule 13a-15(f).
A control system can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Under managements supervision, an evaluation of the design
and effectiveness of ARRIS internal control over financial
reporting was conducted based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that
ARRIS internal control over financial reporting was
effective as of December 31, 2006.
Ernst & Young LLP, an independent registered public
accounting firm, as auditors of ARRIS Group, Inc.s
financial statements, has issued an attestation report on
managements assessment of the effectiveness of ARRIS
Group, Inc.s internal control over financial reporting as
of December 31, 2006. Ernst & Young LLPs
report, which expresses unqualified opinions on
managements assessment and on the effectiveness of
ARRIS internal control over financial reporting, is
included herein.
Robert J. Stanzione
Chief Executive Officer, Chairman
David B. Potts
Executive Vice President, Chief Financial Officer,
Chief Accounting Officer,
and Chief Information Officer
February 28, 2007
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
ARRIS Group, Inc.
We have audited managements assessment, included in the
accompanying Managements Report On Internal Control Over
Financial Reporting, that ARRIS Group, Inc. maintained effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). ARRIS Group, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that ARRIS Group,
Inc. maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, ARRIS Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ARRIS Group, Inc. as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2006, and our report dated February 28,
2007 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 28, 2007
51
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
53
|
|
Consolidated Balance Sheets at
December 31, 2006 and 2005
|
|
|
54
|
|
Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and
2004
|
|
|
55
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
56
|
|
Consolidated Statements of
Stockholders Equity for the years ended December 31,
2006, 2005 and 2004
|
|
|
58
|
|
Notes to the Consolidated
Financial Statements
|
|
|
60
|
|
52
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders ARRIS Group, Inc.
We have audited the accompanying consolidated balance sheets of
ARRIS Group, Inc. as of December 31, 2006 and 2005 and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2006. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of ARRIS management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of ARRIS Group, Inc. at
December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 of the Notes to the Consolidated
Financial Statements, the Company adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment,
in 2005, and as discussed in Note 3 of the Notes to the
Consolidated Financial Statements, the Company adopted Statement
of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, in 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of ARRIS Group, Inc.s internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2007
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 28, 2007
53
ARRIS
GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
461,618
|
|
|
$
|
75,286
|
|
Short-term investments, at fair
value
|
|
|
87,575
|
|
|
|
54,250
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
|
549,193
|
|
|
|
129,536
|
|
Restricted cash
|
|
|
3,124
|
|
|
|
6,073
|
|
Accounts receivable (net of
allowances for doubtful accounts of $3,576 in 2006 and $3,729 in
2005)
|
|
|
115,304
|
|
|
|
83,540
|
|
Other receivables
|
|
|
2,556
|
|
|
|
286
|
|
Inventories
|
|
|
94,226
|
|
|
|
113,909
|
|
Prepaids
|
|
|
3,547
|
|
|
|
10,945
|
|
Current deferred income tax assets
|
|
|
29,285
|
|
|
|
|
|
Other current assets
|
|
|
3,717
|
|
|
|
4,331
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
800,952
|
|
|
|
348,620
|
|
Property, plant and equipment (net
of accumulated depreciation of $77,311 in 2006 and $69,309 in
2005)
|
|
|
28,287
|
|
|
|
25,557
|
|
Goodwill
|
|
|
150,569
|
|
|
|
150,569
|
|
Intangibles (net of accumulated
amortization of $106,832 in 2006 and $106,200 in 2005)
|
|
|
288
|
|
|
|
920
|
|
Investments
|
|
|
3,520
|
|
|
|
3,321
|
|
Noncurrent deferred income tax
assets
|
|
|
20,874
|
|
|
|
|
|
Other assets
|
|
|
9,067
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,013,557
|
|
|
$
|
529,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
60,853
|
|
|
$
|
35,920
|
|
Accrued compensation, benefits and
related taxes
|
|
|
23,269
|
|
|
|
20,424
|
|
Accrued warranty
|
|
|
8,234
|
|
|
|
8,479
|
|
Other accrued liabilities
|
|
|
32,098
|
|
|
|
20,633
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
124,454
|
|
|
|
85,456
|
|
Long-term debt, net of current
portion
|
|
|
276,000
|
|
|
|
|
|
Accrued pension
|
|
|
12,061
|
|
|
|
12,636
|
|
Other long-term liabilities
|
|
|
5,621
|
|
|
|
5,594
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
418,136
|
|
|
|
103,686
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value
$1.00 per share, 5.0 million shares authorized; none
issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.01 per share, 320.0 million shares authorized;
107.9 million and 105.6 million shares issued and
outstanding in 2006 and 2005, respectively
|
|
|
1,089
|
|
|
|
1,069
|
|
Capital in excess of par value
|
|
|
761,500
|
|
|
|
732,405
|
|
Accumulated deficit
|
|
|
(163,268
|
)
|
|
|
(305,555
|
)
|
Unrealized gain on marketable
securities
|
|
|
1,297
|
|
|
|
1,077
|
|
Unfunded pension losses
|
|
|
(4,462
|
)
|
|
|
(4,618
|
)
|
Unrealized gain (loss) on
derivatives
|
|
|
(551
|
)
|
|
|
1,523
|
|
Cumulative translation adjustments
|
|
|
(184
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
595,421
|
|
|
|
425,717
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,013,557
|
|
|
$
|
529,403
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
54
ARRIS
GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except per share data)
|
|
|
Net sales
|
|
$
|
891,551
|
|
|
$
|
680,417
|
|
|
$
|
490,041
|
|
Cost of sales
|
|
|
639,473
|
|
|
|
489,703
|
|
|
|
343,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
252,078
|
|
|
|
190,714
|
|
|
|
146,177
|
|
Gross margin %
|
|
|
28.3
|
%
|
|
|
28.0
|
%
|
|
|
29.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and
administrative expenses
|
|
|
87,203
|
|
|
|
74,308
|
|
|
|
68,539
|
|
Research and development expenses
|
|
|
66,040
|
|
|
|
60,135
|
|
|
|
63,373
|
|
Restructuring and impairment
charges
|
|
|
2,210
|
|
|
|
1,331
|
|
|
|
7,648
|
|
Amortization of intangibles
|
|
|
632
|
|
|
|
1,212
|
|
|
|
28,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,085
|
|
|
|
136,986
|
|
|
|
168,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
95,993
|
|
|
|
53,728
|
|
|
|
(22,073
|
)
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
976
|
|
|
|
2,101
|
|
|
|
5,006
|
|
Loss (gain) on debt retirement
|
|
|
|
|
|
|
2,372
|
|
|
|
4,406
|
|
Loss on investments and notes
receivable
|
|
|
29
|
|
|
|
146
|
|
|
|
1,320
|
|
Gain on foreign currency
|
|
|
(1,360
|
)
|
|
|
(65
|
)
|
|
|
(1,301
|
)
|
Interest income
|
|
|
(11,174
|
)
|
|
|
(3,100
|
)
|
|
|
(1,525
|
)
|
Other expense (income), net
|
|
|
268
|
|
|
|
486
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
107,254
|
|
|
|
51,788
|
|
|
|
(30,402
|
)
|
Income tax (benefit) expense
|
|
|
(34,812
|
)
|
|
|
513
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations
|
|
|
142,066
|
|
|
|
51,275
|
|
|
|
(30,510
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations (including a net gain on disposals of
$0.2 million and $0.2 million and $2.1 million
for the years ended December 31, 2006, 2005, and 2004,
respectively)
|
|
|
221
|
|
|
|
208
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common
share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.32
|
|
|
$
|
0.53
|
|
|
$
|
(0.36
|
)
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.33
|
|
|
$
|
0.53
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common
share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.36
|
)
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares basic
|
|
|
107,268
|
|
|
|
96,581
|
|
|
|
85,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares diluted
|
|
|
109,490
|
|
|
|
98,264
|
|
|
|
85,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
55
ARRIS
GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
Adjustments to reconcile net
(loss) income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
9,787
|
|
|
|
10,529
|
|
|
|
10,395
|
|
Amortization of intangibles
|
|
|
632
|
|
|
|
1,212
|
|
|
|
28,690
|
|
Amortization of deferred finance
fees
|
|
|
139
|
|
|
|
305
|
|
|
|
690
|
|
Deferred income taxes
|
|
|
(38,490
|
)
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
9,423
|
|
|
|
6,915
|
|
|
|
2,826
|
|
Provision for doubtful accounts
|
|
|
(174
|
)
|
|
|
(438
|
)
|
|
|
(543
|
)
|
Gain related to previously written
off receivables
|
|
|
(1,573
|
)
|
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
(61
|
)
|
|
|
202
|
|
|
|
182
|
|
Loss on investments and notes
receivable
|
|
|
32
|
|
|
|
206
|
|
|
|
1,320
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
291
|
|
|
|
|
|
Loss on debt retirement
|
|
|
|
|
|
|
2,372
|
|
|
|
4,406
|
|
Gain on discontinued product lines
|
|
|
(221
|
)
|
|
|
(208
|
)
|
|
|
(2,114
|
)
|
Changes in operating assets and
liabilities, net of effect of acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(32,153
|
)
|
|
|
(27,191
|
)
|
|
|
1,226
|
|
Other receivables
|
|
|
(2,270
|
)
|
|
|
134
|
|
|
|
860
|
|
Inventories
|
|
|
19,683
|
|
|
|
(20,963
|
)
|
|
|
(14,074
|
)
|
Accounts payable and accrued
liabilities
|
|
|
40,755
|
|
|
|
7,107
|
|
|
|
16,029
|
|
Other, net
|
|
|
(3,555
|
)
|
|
|
(5,290
|
)
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
144,241
|
|
|
|
26,666
|
|
|
|
22,051
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(129,475
|
)
|
|
|
(59,250
|
)
|
|
|
(107,750
|
)
|
Sales of short-term investments
|
|
|
96,150
|
|
|
|
83,032
|
|
|
|
39,750
|
|
Purchases of property, plant and
equipment
|
|
|
(12,728
|
)
|
|
|
(9,617
|
)
|
|
|
(10,167
|
)
|
Cash proceeds from sale of
property, plant, and equipment
|
|
|
212
|
|
|
|
42
|
|
|
|
|
|
Cash paid for acquisition, net of
cash acquired
|
|
|
|
|
|
|
(89
|
)
|
|
|
(50
|
)
|
Cash proceeds from sale of
investment
|
|
|
|
|
|
|
|
|
|
|
642
|
|
Other
|
|
|
|
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(45,841
|
)
|
|
|
13,859
|
|
|
|
(77,575
|
)
|
See accompanying notes to the consolidated financial statements.
56
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
$
|
12,266
|
|
|
$
|
10,897
|
|
|
$
|
7,410
|
|
Proceeds from issuance of debt
|
|
|
276,000
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from
stock-based compensation plans
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
Repurchase of shares to satisfy
employee tax withholdings
|
|
|
(2,019
|
)
|
|
|
(1,208
|
)
|
|
|
(519
|
)
|
Payments on capital lease
obligations
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Payments on debt obligations
|
|
|
|
|
|
|
|
|
|
|
(1,163
|
)
|
Deferred financing costs paid
|
|
|
(7,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
287,932
|
|
|
|
9,689
|
|
|
|
5,714
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
386,332
|
|
|
|
50,214
|
|
|
|
(49,810
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
75,286
|
|
|
|
25,072
|
|
|
|
74,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
461,618
|
|
|
$
|
75,286
|
|
|
$
|
25,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired,
excluding cash
|
|
$
|
|
|
|
$
|
799
|
|
|
$
|
|
|
Net liabilities assumed
|
|
|
|
|
|
|
(76
|
)
|
|
|
50
|
|
Intangible assets acquired,
including goodwill
|
|
|
|
|
|
|
691
|
|
|
|
|
|
Investment in acquired company
|
|
|
|
|
|
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of
cash acquired
|
|
$
|
|
|
|
$
|
89
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landlord funded leasehold
improvements
|
|
$
|
242
|
|
|
$
|
|
|
|
$
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity issued in exchange for
41/2% convertible
subordinated notes due 2008
|
|
$
|
|
|
|
$
|
75,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity issued for make-whole
interest payment
41/2% convertible
subordinated notes due 2008
|
|
$
|
|
|
|
$
|
2,372
|
|
|
$
|
4,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during the year
|
|
$
|
87
|
|
|
$
|
2,766
|
|
|
$
|
4,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid during the year
|
|
$
|
2,482
|
|
|
$
|
859
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
57
ARRIS
GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Gain on
|
|
|
|
|
|
Unfunded
|
|
|
Gain
|
|
|
Cumulative
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Accumulated
|
|
|
Marketable
|
|
|
Unearned
|
|
|
Pension
|
|
|
(Loss) on
|
|
|
Translation
|
|
|
|
|
|
|
Stock
|
|
|
Par Value
|
|
|
Deficit
|
|
|
Securities
|
|
|
Compensation
|
|
|
Losses
|
|
|
Derivatives
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance, January 1,
2004
|
|
$
|
773
|
|
|
$
|
586,008
|
|
|
$
|
(328,642
|
)
|
|
$
|
771
|
|
|
$
|
(8,104
|
)
|
|
$
|
(1,293
|
)
|
|
|
|
|
|
$
|
(132
|
)
|
|
$
|
249,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
(28,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,396
|
)
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
Minimum liability on unfunded
pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,052
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,564
|
)
|
Shares granted under stock award
plan
|
|
|
1
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
(531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826
|
|
Forfeiture of restricted stock
|
|
|
(3
|
)
|
|
|
(1,237
|
)
|
|
|
|
|
|
|
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in
conversion of
41/2% notes
due 2008, net of write-off of associated deferred finance fees
|
|
|
105
|
|
|
|
52,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,767
|
|
Issuance of common stock and other
|
|
|
13
|
|
|
|
6,875
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
$
|
889
|
|
|
$
|
644,838
|
|
|
$
|
(357,038
|
)
|
|
$
|
706
|
|
|
$
|
(4,566
|
)
|
|
$
|
(3,345
|
)
|
|
|
|
|
|
$
|
(183
|
)
|
|
$
|
281,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
51,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,483
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
Unrealized gain on derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523
|
|
|
|
|
|
|
|
1,523
|
|
Minimum liability on unfunded
pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,273
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,273
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,103
|
|
Shares granted under stock award
plan
|
|
|
7
|
|
|
|
4,822
|
|
|
|
|
|
|
|
|
|
|
|
(4,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
4,928
|
|
|
|
|
|
|
|
|
|
|
|
1,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,915
|
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in
conversion of
41/2% notes
due 2008, net of write-off of associated deferred finance fees
|
|
|
153
|
|
|
|
75,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,714
|
|
Issuance of common stock and other
|
|
|
20
|
|
|
|
10,542
|
|
|
|
|
|
|
|
|
|
|
|
(878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,684
|
|
Adoption of SFAS No. 123R
|
|
|
|
|
|
|
(8,112
|
)
|
|
|
|
|
|
|
|
|
|
|
8,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
$
|
1,069
|
|
|
$
|
732,405
|
|
|
$
|
(305,555
|
)
|
|
$
|
1,077
|
|
|
$
|
|
|
|
$
|
(4,618
|
)
|
|
$
|
1,523
|
|
|
$
|
(184
|
)
|
|
$
|
425,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
58
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Gain on
|
|
|
|
|
|
Unfunded
|
|
|
Gain
|
|
|
Cumulative
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Accumulated
|
|
|
Marketable
|
|
|
Unearned
|
|
|
Pension
|
|
|
(Loss) on
|
|
|
Translation
|
|
|
|
|
|
|
Stock
|
|
|
Par Value
|
|
|
Deficit
|
|
|
Securities
|
|
|
Compensation
|
|
|
Losses
|
|
|
Derivatives
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance, December 31,
2005
|
|
$
|
1,069
|
|
|
$
|
732,405
|
|
|
$
|
(305,555
|
)
|
|
$
|
1,077
|
|
|
$
|
|
|
|
$
|
(4,618
|
)
|
|
$
|
1,523
|
|
|
$
|
(184
|
)
|
|
$
|
425,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,287
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Unrealized gain on derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,074
|
)
|
|
|
|
|
|
|
(2,074
|
)
|
Minimum liability on unfunded
pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,589
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
9,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,423
|
|
Tax benefit related to exercise of
stock options in prior years
|
|
|
|
|
|
|
5,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,192
|
|
Tax benefit related to exercise of
stock options due to release of valuation allowance
|
|
|
|
|
|
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,253
|
|
Issuance of common stock and other
|
|
|
20
|
|
|
|
10,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
$
|
1,089
|
|
|
$
|
761,500
|
|
|
$
|
(163,268
|
)
|
|
$
|
1,297
|
|
|
$
|
|
|
|
$
|
(4,462
|
)
|
|
$
|
(551
|
)
|
|
$
|
(184
|
)
|
|
$
|
595,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1.
|
Organization
and Basis of Presentation
|
ARRIS Group, Inc. (together with its consolidated subsidiaries,
except as the context otherwise indicates, ARRIS or
the Company), is an international communications
technology company, headquartered in Suwanee, Georgia. ARRIS
operates in one business segment, Communications, providing a
range of customers with network and system products and
services, primarily hybrid fiber-coax networks and systems, for
the communications industry. ARRIS is a leading developer,
manufacturer and supplier of telephony, data, video,
construction, rebuild and maintenance equipment for the
broadband communications industry. The Company provides its
customers with products and services that enable reliable,
high-speed, two-way broadband transmission of video, telephony,
and data.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
(a) Consolidation
The consolidated financial statements include the accounts of
ARRIS after elimination of intercompany transactions.
(b) Use
of Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
(c) Reclassifications
Certain prior year amounts have been reclassified, such as the
reclassification in the cash flow of the repurchase of shares to
satisfy employee tax withholdings, to conform to the current
years financial statement presentation.
(d) Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents. The
carrying amount reported in the consolidated balance sheets for
cash and cash equivalents approximates fair value. During 2006,
2005, and 2004, ARRIS recorded interest income of
$11.2 million, $3.1 million, and $1.5 million,
respectively.
(e) Short-Term
Investments
The Companys short-term investments consist of debt
securities classified as
available-for-sale
and are stated at cost, which approximates fair value. These
debt securities include U.S. treasury notes, state and
municipal bonds, asset-backed securities, auction rate
securities, corporate bonds, commercial paper, and certificates
of deposit. These investments generally have long-term
maturities of 15 to 30 years, but have certain
characteristics of short-term investments due to an interest
rate setting mechanism and the ability to liquidate them through
an auction process that occurs on intervals of 28 or
35 days. Therefore, the Company has classified these
investments as short-term and as
available-for-sale
due to managements intent. These investments are on
deposit with a major financial institution.
(f) Inventories
Inventories are stated at the lower of average cost,
approximating
first-in,
first-out, or market. The cost of finished goods is comprised of
material, labor, and overhead.
60
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(g) Investments
The Company held certain investments in the common stock of
publicly-traded companies which were classified as available for
sale. Changes in the market value of these securities are
typically recorded in other comprehensive income. These
securities are also subject to a periodic impairment review,
which requires significant judgment. Because these investments
had been below their cost basis for a period greater than six
months, impairment charges of $1.4 million were recorded
during the year ended December 31, 2004. As of
December 31, 2006 and 2005, the carrying value of these
investments was $0.
In addition, ARRIS held a non-marketable equity security
totaling approximately $32 thousand at December 31, 2005,
which is classified as available for sale. Non-marketable equity
securities are subject to a periodic impairment review, which
requires significant judgment as there are no open-market
valuations. During the years ended December 31, 2006, 2005,
and 2004 the Company recorded charges of approximately $32
thousand, $0.2 million and $61 thousand, respectively, in
relation to non-marketable equity securities deemed to be
impaired based on various factors. As of December 31, 2006,
the carrying value of these investments was $0.
During the third quarter of 2004, ARRIS recorded a charge of
$0.1 million in relation to a short-term note receivable
that was deemed to be fully impaired. The note, which was due
from an unrelated private company, became due in October 2004,
and the company has been unable to repay the note.
As of December 31, 2004, ARRIS held a non-marketable equity
security of $0.6 million and a short-term note receivable
of $0.5 million from a private company. Late in 2004, the
investee was unsuccessful in attempts to raise additional funds
to finance its business. On January 31, 2005, the Company
foreclosed on the note receivable. This was a joint proceeding
with the other major note holder of the private company. A new
limited liability company was formed with the other major note
holder, of which ARRIS held a 25% interest. In March 2005, ARRIS
and the other note holder agreed to ARRIS acquisition of
the other note holders interest in the limited liability
company. This transaction closed on April 1, 2005, and the
product line was integrated into ARRIS in the second quarter
2005.
ARRIS offered a deferred compensation arrangement, which allowed
certain employees to defer a portion of their earnings and defer
the related income taxes. These deferred earnings are invested
in a so-called rabbi trust, and are accounted for in
accordance with Emerging Issues Task Force Issue
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and
Invested. A rabbi trust is a funding vehicle used
to protect deferred compensation benefits from various events
(but not from bankruptcy or insolvency). The investment in the
rabbi trust is classified as an investment on our balance sheet.
During 2004, the Company withdrew the excess of the deferred
compensation assets over the plans liabilities. A portion
of the assets were liquidated, which resulted in a realized gain
of approximately $0.3 million. At December 31, 2006
and 2005, ARRIS had an accumulated unrealized gain related to
the rabbi trust of approximately $1.3 million and
$1.1 million, respectively, included in other comprehensive
income.
ARRIS revenue recognition policies are in accordance with
Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, and
SAB No. 104, Revenue Recognition, as issued by
the Securities and Exchange Commission and other applicable
guidance.
Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,
collectibility is reasonably assured and all other significant
obligations have been fulfilled. Revenue from services provided
is recognized at the time of completion, delivery or performance
of the service. Contracts and customer purchase orders generally
are used to determine the existence of an arrangement. Shipping
documents, proof of delivery and customer acceptance (when
applicable) are used to verify delivery. The Company assesses
whether an amount due from a customer is fixed or determinable
based upon the terms of the agreement with the customer,
including, but not limited to, the payment terms associated with
the transaction. ARRIS assesses collection based on a number of
factors, including past transaction history and
credit-worthiness of the customer. If
61
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company determines that collection of an amount due is not
reasonably assured, it defers recognition of revenue until such
time that collection becomes reasonably assured.
The Company resells software developed by outside third parties
as well as internally developed software. Software sold by ARRIS
does not require significant production, modification or
customization. The Company recognizes software license revenue,
and product revenue for certain products where software is more
than an incidental component of the hardware, in accordance with
Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended by
SOP No. 98-9,
Software Recognition, With Respect to Certain Transactions
(SOP 98-9).
ARRIS internal costs as well as external costs incurred in
developing software are charged to expense as research and
development expense until technological feasibility has been
established for the product, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed. As the time period between
the establishment of technological feasibility and general
release of internally developed software to its customers is
generally short, no material development costs are incurred
during this period and, therefore, no such costs have been
capitalized to date.
Certain transactions also include multiple deliverables or
elements for the sale of hardware, licensed software,
maintenance/support and professional services. Accounting
principles for arrangements involving multiple elements require
the Company to allocate the arrangement fee to each respective
element based on its relative fair value, and recognize the
revenue for each element as the specific recognition criteria
are met. The determination of the fair value of the elements,
which is based on a variety of factors including the amount
ARRIS charges other customers for the products or services,
price lists or other relevant information, requires judgment by
management. Changes to the elements in an arrangement and the
Companys ability to establish vendor-specific objective
evidence for the elements could affect the timing of the
recognition of the underlying revenue. Maintenance is offered as
a separate element. Maintenance revenue, which is generally
billed in advance, is deferred and recognized ratably over the
term of the related contract.
Generally, revenue is deferred if certain circumstances exist,
including but not limited to the following:
|
|
|
|
|
when undelivered products or services that are essential to the
functionality of the delivered product, or are required under
the terms of the contract to be delivered concurrently exist,
revenue is deferred until such undelivered products or services
are delivered, or
|
|
|
|
when final acceptance of the product is required by the
customer, revenue is deferred until the acceptance criteria have
been met.
|
ARRIS deferred revenue and deferred costs related to
shipments made to customers whereby the customer has the right
of return in addition to deferrals related to various customer
service agreements are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Increase
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Deferred Revenue
|
|
$
|
5,498
|
|
|
$
|
1,681
|
|
|
$
|
3,817
|
|
Deferred Cost
|
|
$
|
1,467
|
|
|
$
|
259
|
|
|
$
|
1,208
|
|
(i) Shipping
and Handling Fees
Shipping and handling costs for the years ended
December 31, 2006, 2005, and 2004 were approximately
$5.8 million, $4.9 million and $4.3 million,
respectively, and are classified in net sales and cost of sales.
(j) Depreciation
of Property, Plant and Equipment
The Company provides for depreciation of property, plant and
equipment on the straight-line basis over estimated useful lives
of 25 to 40 years for buildings and improvements, 3 to
10 years for machinery and equipment, and the shorter of
the term of the lease or useful life for leasehold improvements.
Included in depreciation expense is
62
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the amortization of landlord funded tenant improvements which
amounted to $0.5 million in 2006. Depreciation expense for
the years ended December 31, 2006, 2005, and 2004 was
approximately $9.8 million, $10.5 million and
$10.4 million, respectively.
(k) Goodwill
and Long-Lived Assets
Goodwill relates to the excess of cost over the fair value of
net assets resulting from an acquisition. On an annual basis,
our goodwill is reviewed based upon managements analysis
and includes an independent valuation. These valuations based
upon managements analysis were performed in the fourth
quarters of 2006, 2005, and 2004, and no impairment was
indicated.
As of December 31, 2006, the financial statements included
intangibles of $0.3 million, net of accumulated
amortization of $106.8 million. As of December 31,
2005, the financial statements included intangibles of
$0.9 million, net of accumulated amortization of
$106.2 million. These intangibles are primarily related to
the existing technology acquired from Arris Interactive L.L.C.
in 2001, from Cadant, Inc. in 2002, from Com21 in 2003, and cXm
Broadband LLC in 2005, each with an amortization period of three
years, approximating their estimated useful lives. The
intangibles related to Arris Interactive L.L.C. were fully
amortized in August 2004, the intangibles related to Cadant,
Inc. were fully amortized in January 2005, and the intangibles
related to Com 21 were fully amortized in August 2006. The
valuation process to determine the fair market values of the
existing technology by management included valuations by an
outside valuation service. The values assigned were calculated
using an income approach utilizing the cash flow expected to be
generated by these technologies.
(l) Advertising
and Sales Promotion
Advertising and sales promotion costs are expensed as incurred.
Advertising expense was approximately $0.5 million,
$0.3 million and $0.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
(m) Research
and Development
Research and development (R&D) costs are
expensed as incurred. ARRIS research and development
expenditures for the years ended December 31, 2006, 2005
and 2004 were approximately $66.0 million,
$60.1 million and $63.4 million, respectively. The
expenditures include compensation costs, materials, other direct
expenses, and allocated costs of information technology,
telecom, and facilities.
(n) Warranty
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements.
For further discussion, see Note 4, Guarantees.
(o) Income
Taxes
ARRIS uses the liability method of accounting for income taxes,
which requires recognition of temporary differences between
financial statement and income tax bases of assets and
liabilities, measured by enacted tax rates. In 2001, a valuation
allowance was calculated in accordance with the provisions of
FASB Statement No. 109, which requires that a valuation
allowance be established and maintained when it is more
likely than not that all or a portion of deferred tax
assets will not be realized. At the end of the fourth quarter of
2006, ARRIS determined that it was more likely than not that it
would be able to realize the benefits of a significant portion
of its U.S. federal and state deferred tax assets and
subsequently reversed the related valuation allowances. As of
December 31, 2006, its ending valuation allowances are
predominantly due to U.S. federal capital loss and foreign
net operating loss carryforwards. The Company continually
reviews the adequacy of the valuation allowance to reassess
whether it is more likely than not to realize its various
deferred tax assets. See Note 13 of Notes to the
Consolidated Financial Statements for further discussion.
63
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(p) Foreign
Currency
The financial position and operating results of ARRIS
foreign operations are consolidated using the U.S. dollar
as the functional currency. All balance sheet accounts of
foreign subsidiaries are translated at the current exchange rate
at the end of the accounting period with the exception of fixed
assets, common stock, and retained earnings, which are
translated at historical cost. Income statement items are
translated at average currency exchange rates. The resulting
translation adjustment is recorded as a gain or loss on foreign
currency in the Companys Consolidated Statement of
Operations. The overall foreign currency loss (gain) includes
the effect of the fluctuation of foreign currency cash and
receivables balances and any ineffectiveness related to
derivative contracts. The loss (gain) in foreign currency for
the year ended December 31, 2006 was $(1.4) million.
During the year ended December 31, 2005, the loss (gain) in
foreign currency was approximately $(0.1) million.
The Company has certain international customers who are billed
in their local currency. From time to time the Company enters
into forward exchange contracts to hedge certain portions of
forecasted sales and the resulting cash flows denominated in
foreign currencies. Beginning in the third quarter of 2005,
where applicable, the Company designated contracts as effective
cash flow hedges and accounted for them as hedges in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The effective portion of
the change in the fair value of contracts which have been
designated as cash flow hedges, are reported in other
comprehensive income until the contract expires or the hedge is
deemed to be no longer effective. Upon expiry of the hedge, the
cumulative gain or loss recorded in other comprehensive income
is reclassified to the applicable income statement line. Any
ineffective or non-designated portion of the change in fair
value of these instruments is recognized as gain or loss on
foreign currency in the applicable period.
As of December 31, 2006 and 2005, the Company had option
contracts outstanding totaling 23.6 million euros and
31.5 million euros, respectively. The option contracts as
of December 31, 2006 expire between January 2007 and
September 2007. As of December 31, 2006 and 2005 the
Company had recorded unrealized losses (gains) of
$0.6 million and $(1.5) million, respectively, in
other comprehensive income related to option contracts. During
2006 and 2005, the Company recognized net losses (gains) of $40
thousand and $(2.3) million, respectively, related to
ineffective hedges, which is recorded in gain or loss on foreign
currency discussed above. During the years ended
December 31, 2006 and 2005, the Company also recognized
losses (gains) of $37 thousand and $(0.3) million, respectively,
on effective hedges that were recorded with the corresponding
sales.
(q) Stock-Based
Compensation
The Company elected to early adopt the fair value recognition
provisions of SFAS No. 123R, Share-Based Payment
on July 1, 2005, using the modified prospective
approach. Prior to the adoption date, ARRIS used the intrinsic
value method for valuing its awards of stock options and
restricted stock and recorded the related compensation expense,
if any, in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees and related
interpretations. See Note 15, Stock-Based Compensation for
further discussion of the Companys significant accounting
policies related to stock based compensation.
(r) Concentrations
of Credit Risk
Financial instruments that potentially subject ARRIS to
concentrations of credit risk consist principally of cash, cash
equivalents and short-term investments, and accounts receivable.
ARRIS places its temporary cash investments with high credit
quality financial institutions. Concentrations with respect to
accounts receivable occur as the Company sells primarily to
large, well-established companies including companies outside of
the United States. The Companys credit policy generally
does not require collateral from its customers. ARRIS closely
monitors extensions of credit to other parties and, where
necessary, utilizes common financial instruments to mitigate
risk or requires cash on delivery terms. Overall financial
strategies and the effect of using a hedge are reviewed
periodically. When deemed uncollectible, accounts receivable
balances are written off against the allowance for doubtful
accounts.
64
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ARRIS customers have been impacted in the past by several
factors, including an industry downturn and tightening of access
to capital. As described elsewhere, the market which the Company
serves is characterized by a small number of large customers
creating a concentration of risk. As a result, the Company has
incurred significant charges related to uncollectible accounts
related to large customers. The Company incurred an overall
$15.9 million charge related to its Adelphia receivable in
2002 as a result of their bankruptcy filings. During the second
quarter of 2002, ARRIS established an allowance for doubtful
accounts of approximately $20.2 million in connection with
its Adelphia accounts receivable. In the third quarter of 2002,
ARRIS sold its Adelphia accounts receivable to an unrelated
third party and received cash for the estimated amounts of
accounts receivable claims that were filed by Adelphia in its
bankruptcy filing. The initial amounts filed by Adelphia with
the courts were less than what ARRIS had recorded as accounts
receivable. This resulted in a net gain of approximately
$4.3 million in the third quarter 2002. During the first
half of 2006, the bankruptcy court approved the remaining
outstanding receivable claims that ARRIS had against Adelphia.
Per the original terms of the agreement with the third party,
ARRIS was paid for the remaining claims and adjusted any
remaining allowances for this receivable, resulting in a net
gain of approximately $1.3 million in 2006. The
Companys analysis of the allowance for doubtful accounts
at the end of 2006 and 2005 resulted in a net reduction in
expense of $0.2 and $0.4 million for the respective years.
The mix of the Companys accounts receivable at
December 31, 2006 was weighted heavily toward high quality
accounts from a credit perspective. This, coupled with strong
fourth quarter collections, resulted in a reduction in the
reserve when applying ARRIS reserve methodology.
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments:
|
|
|
|
|
Cash, cash equivalents, and short-term investments: The carrying
amount reported in the balance sheet for cash, cash equivalents,
and short-term investments approximates their fair values.
|
|
|
|
Accounts receivable and accounts payable: The carrying amounts
reported in the balance sheet for accounts receivable and
accounts payable approximate their fair values. The Company
establishes a reserve for doubtful accounts based upon its
historical experience in collecting accounts receivable.
|
|
|
|
Marketable securities: The fair values for trading and
available-for-sale
equity securities are based on quoted market prices.
|
|
|
|
Non-marketable securities: Non-marketable equity securities are
subject to a periodic impairment review; however, there are no
open-market valuations, and the impairment analysis requires
significant judgment. This analysis includes assessment of the
investees financial condition, the business outlook for
its products and technology, its projected results and cash
flow, recent rounds of financing, and the likelihood of
obtaining subsequent rounds of financing.
|
|
|
|
Long-term debt: The fair value of the Companys convertible
subordinated debt is based on its quoted market price and
totaled approximately $295.3 million and $0.0 million
at December 31, 2006 and 2005, respectively.
|
|
|
|
Foreign exchange contracts: The fair values of the
Companys foreign currency contracts are estimated based on
dealer quotes, quoted market prices of comparable contracts
adjusted through interpolation where necessary, maturity
differences or if there are no relevant comparable contracts on
pricing models or formulas by using current assumptions. ARRIS
had 23.6 million euros in option collars outstanding as of
December 31, 2006. The fair value of these option collars
was a liability/loss of $0.6 million. At the end of
December 31, 2005 ARRIS had 31.5 million euros in
option collars outstanding. The fair value of these option
collars was an asset/ (gain) of $(1.5) million.
|
|
|
Note 3.
|
Impact of
Recently Issued Accounting Standards
|
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. SFAS No. 159 is effective
for our Company January 1, 2008. SFAS No. 159
permits entities to choose to measure
65
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which fair value
option has been elected will be recognized in earnings at each
subsequent report date. ARRIS is currently evaluating the impact
that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. Effective for the fiscal year
ending 2006, the Company is required to fully recognize the
funded status of its defined benefit plan and provide required
disclosures. Effective for the fiscal year ending 2008, the
Company will be required to measure each plans assets and
liabilities as of the end of the fiscal year instead of the
Companys current measurement date of September 30.
ARRIS adopted SFAS No. 158 as of December 31,
2006; however, has not yet adopted the provision to remeasure
plan assets and benefit obligations as of the date of the fiscal
year-end balance sheet. See Note 16 of the Notes to the
Consolidated Financial Statements for further detail.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This
Statement provides guidance with respect to other accounting
pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new
fair value measurements; however, for some entities, the
application of SFAS No. 157 will change current
practice. The provisions of SFAS No. 157 are effective
as of January 1, 2008. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its
consolidated financial statements.
In September 2006, the SEC issued SAB No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements, which provides interpretive guidance regarding
the consideration given to prior year misstatements when
determining materiality in current year financial statements.
SAB No. 108 is effective for fiscal years ending after
November 15, 2006. When applicable, the Company will
evaluate the impact of SAB No. 108 on its consolidated
financial statements.
In July 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes, which clarifies
the accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
Interpretation requires that the Company recognize in the
financial statements the impact of certain tax positions, based
on the technical merits of the position. FIN 48 also
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006 with the cumulative
effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. ARRIS adopted
FIN 48 on January 1, 2007. Based on the Companys
initial analysis, FIN 48 will not have a material effect on
ARRIS consolidated results of operations, cash flows or
financial position.
Warranty
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements.
The Company provides for the estimated cost of product
warranties based on historical trends, the embedded base of
product in the field, failure rates, and repair costs at the
time revenue is recognized. Expenses related to product defects
and unusual product warranty problems are recorded in the period
that the problem is identified. While the Company engages in
extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its suppliers,
the estimated warranty obligation could be affected by changes
in ongoing product failure rates, material usage and service
delivery costs incurred in correcting a product failure, as well
as specific product failures outside of ARRIS baseline
experience. If actual product failure rates, material usage or
service delivery costs differ from estimates, revisions (which
could be material) would be recorded against the warranty
liability. ARRIS evaluates its warranty obligations on an
individual product basis.
66
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company offers extended warranties and support service
agreements on certain products. Revenue from these agreements is
deferred at the time of the sale and recognized on a
straight-line basis over the contract period. Costs of services
performed under these types of contracts are charged to expense
as incurred, which approximates the timing of the revenue stream.
Information regarding the changes in ARRIS aggregate
product warranty liabilities for the year ending
December 31, 2006 and 2005 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
January 1,
|
|
$
|
8,479
|
|
|
$
|
5,453
|
|
Accruals related to warranties
(including changes in estimates)
|
|
|
4,026
|
|
|
|
6,881
|
|
Settlements made (in cash or in
kind)
|
|
|
(4,271
|
)
|
|
|
(3,855
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
8,234
|
|
|
$
|
8,479
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Business
Acquisitions
|
Acquisition
of cXm Broadband
On April 1, 2005, the Company acquired the remaining 75% of
the membership interest of cXm Broadband L.L.C., an entity that
was accounted for under the equity method of accounting from
January 31, 2005 through March 31, 2005, as ARRIS held
a 25% ownership stake in the company. ARRIS decided to acquire
the remaining membership interest in order to expand its
existing Broadband product portfolio and to penetrate the Korean
market for high-speed data access into multi-dwelling units.
ARRIS acquired the remaining ownership percentage from the other
shareholder for cash and the assumption of certain liabilities
of $0.2 million. The allocated purchase price also includes
the Companys existing $1.3 million equity investment
in the L.L.C.
The following is a summary of the purchase price allocation to
record its purchase of the net assets of cXm Broadband and is
based upon an independent valuation of the assets. The purchase
price was equal to the net tangible and intangible assets
acquired (in thousands):
|
|
|
|
|
Cash paid to other shareholder
|
|
$
|
67
|
|
Acquisition costs
|
|
|
22
|
|
Equity investment balance
|
|
|
1,325
|
|
Assumption of certain liabilities
of cXm Broadband
|
|
|
76
|
|
|
|
|
|
|
Adjusted purchase price
|
|
$
|
1,490
|
|
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
Net tangible assets acquired
|
|
$
|
799
|
|
Existing technology and customer
value (to be amortized over 3 years)
|
|
|
691
|
|
|
|
|
|
|
Total allocated purchase price
|
|
$
|
1,490
|
|
|
|
|
|
|
|
|
Note 6.
|
Discontinued
Operations
|
During 2004, the Company recognized a partial recovery with
respect to inventory previously written off associated with an
Argentinean customer. Of the total gain of $0.9 million,
approximately $0.3 million related to operations
discontinued in prior years. Also during 2004, the Company
recorded income from discontinued operations of
$0.8 million with respect to these prior operations as a
result of changes in estimates related to real estate, vendor
liabilities, and other accruals. During 2006 and 2005, the
Company recorded income of $0.2 million related to its
reserves for discontinued operations. These adjustments were the
result of the resolution of various vendor liabilities and other
costs. As of December 31, 2005, the balance of the accrual
was approximately $24 thousand that relates to severance and
other miscellaneous costs. The remaining payments were made in
2006 and as of December 31, 2006 the balance was zero.
67
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7.
|
Restructuring
and Impairment Charges
|
The Companys restructuring activities are accounted for in
accordance with Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.
On December 31, 2004, the Company announced that it would
close its office in Fremont, California, which previously housed
Atoga Systems. The marketing and support for certain products
acquired as part of the Atoga Systems acquisition were
transferred to other locations. The Company decided to close the
office in order to reduce operating costs through consolidations
of its facilities. The closure affected seven employees. In
connection with these actions, the Company recorded a net charge
of approximately $0.3 million in the fourth quarter of
2004, which included approximately $0.1 million related to
remaining lease payments and $0.2 million of severance
charges.
During the first quarter of 2004, ARRIS consolidated two
facilities in Georgia, giving the Company the ability to house
many of its core technology, marketing, and corporate functions
in a single building. This consolidation resulted in a
restructuring charge of $6.2 million in the first quarter
of 2004 related to lease commitments and the write-off of
leasehold improvements and other fixed assets. During 2006, 2005
and 2004, the Company increased its accrual by
$2.1 million, $0.7 million and $0.2 million,
respectively as a result of changes in estimates. The increase
in 2006 was primarily due to ARRIS assumptions related to
timing of sublease income. As of December 31, 2006,
approximately $3.6 million related to the lease commitments
remained in the restructuring accrual to be paid. ARRIS expects
the remaining payments to be made by the second quarter of 2009
(end of lease). Below is a table which summarizes the activity
in the restructuring reserve (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Writedown of
|
|
|
|
|
|
|
|
|
|
Leasehold
|
|
|
Lease
|
|
|
|
|
|
|
Improvements
|
|
|
Commitments
|
|
|
Total
|
|
|
Balance as of December 31,
2003
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2004 Provision
|
|
|
1.1
|
|
|
|
5.1
|
|
|
|
6.2
|
|
Non-cash expense
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(1.1
|
)
|
2004 payments
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(1.2
|
)
|
Adjustments to accrual
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
|
|
|
|
4.1
|
|
|
|
4.1
|
|
2005 payments
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(1.7
|
)
|
Adjustments to accrual
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
|
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 payments
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(1.6
|
)
|
Adjustments to accrual
|
|
|
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
|
|
|
$
|
3.6
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2001, the Company announced a
restructuring plan to outsource the functions of most of its
manufacturing facilities. This decision to reorganize was due in
part to the ongoing weakness in industry spending patterns. Also
during the third quarter of 2001, the Company reserved for lease
commitments related to an excess facility in Atlanta. As a
result of market conditions at that time, ARRIS had downsized
and the facility was
68
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
vacant. As of December 31, 2006, the balance was zero.
Below is a table that summarizes the activity in the accrual
account (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
Employee
|
|
|
|
|
|
|
& Other Costs
|
|
|
Severance
|
|
|
Total
|
|
|
Balance as of December 31,
2003
|
|
$
|
4.5
|
|
|
$
|
0.1
|
|
|
$
|
4.6
|
|
2004 payments
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
(3.1
|
)
|
2004 adjustments to accrual
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
2005 payments
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
(1.0
|
)
|
2005 adjustments to accrual
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 payments
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(0.4
|
)
|
2006 adjustments to accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories are stated at the lower of average, approximating
first-in,
first-out, cost or market. The components of inventory are as
follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw material
|
|
$
|
341
|
|
|
$
|
788
|
|
Finished goods
|
|
|
93,885
|
|
|
|
113,121
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
94,226
|
|
|
$
|
113,909
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Property,
Plant and Equipment
|
Property, plant and equipment, at cost, consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
1,822
|
|
|
$
|
1,822
|
|
Buildings and leasehold
improvements
|
|
|
11,470
|
|
|
|
11,126
|
|
Machinery and equipment
|
|
|
92,306
|
|
|
|
81,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,598
|
|
|
|
94,866
|
|
Less: Accumulated depreciation
|
|
|
(77,311
|
)
|
|
|
(69,309
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and
equipment, net
|
|
$
|
28,287
|
|
|
$
|
25,557
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Goodwill
and Intangible Assets
|
The Companys goodwill is reviewed annually for impairment
or more frequently if impairment indicators arise. The annual
valuation is performed during the fourth quarter of each year
and is based upon managements analysis including an
independent valuation. Separable intangible assets that are not
deemed to have an indefinite life are amortized over their
useful lives. Each of the Companys intangible assets has
an amortization period of three years. The carrying amount of
goodwill for both years ended December 31, 2006 and 2005
was $150.6 million.
69
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the first quarter of 2005, a decrease in expected future
cash flows related to the Atoga product line indicated that the
long-lived assets associated with these products may be
impaired. As a result, the Company analyzed the fair value of
those assets, using the expected cash flow approach, in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The resulting
analysis indicated that the remaining intangibles of
$0.2 million were fully impaired and were written off in
the first quarter 2005.
The gross carrying amount and accumulated amortization of the
Companys intangible assets, other than goodwill, as of
December 31, 2006 and December 31, 2005 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Existing technology acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arris Interactive L.L.C.
|
|
$
|
51,500
|
|
|
$
|
(51,500
|
)
|
|
$
|
|
|
|
$
|
51,500
|
|
|
$
|
(51,500
|
)
|
|
$
|
|
|
Cadant, Inc.
|
|
|
53,000
|
|
|
|
(53,000
|
)
|
|
|
|
|
|
|
53,000
|
|
|
|
(53,000
|
)
|
|
|
|
|
Atoga Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Com21
|
|
|
1,929
|
|
|
|
(1,929
|
)
|
|
|
|
|
|
|
1,929
|
|
|
|
(1,527
|
)
|
|
|
402
|
|
cXm Broadband
|
|
|
691
|
|
|
|
(403
|
)
|
|
|
288
|
|
|
|
691
|
|
|
|
(173
|
)
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,120
|
|
|
$
|
(106,832
|
)
|
|
$
|
288
|
|
|
$
|
107,120
|
|
|
$
|
(106,200
|
)
|
|
$
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the intangible assets listed in
the above table for the years ended December 31, 2006,
2005, and 2004 was $0.6 million, $1.2 million, and
$28.7 million, respectively. The estimated total
amortization expense for each of the next five fiscal years is
as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
230
|
|
2008
|
|
$
|
58
|
|
2009 - 2011
|
|
$
|
|
|
|
|
Note 11.
|
Long-Term
Obligations
|
Debt, capital lease obligations and membership interest consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Other long-term liabilities
|
|
$
|
17,682
|
|
|
$
|
18,230
|
|
2.00% convertible senior
notes due 2026
|
|
|
276,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term debt, and other
long-term liabilities
|
|
$
|
293,682
|
|
|
$
|
18,230
|
|
|
|
|
|
|
|
|
|
|
On November 6, 2006, the Company issued $276.0 million
of 2% convertible senior notes due 2026. The notes are
convertible, at the option of the holder, based on an initial
conversion rate, subject to adjustment, of 62.1504 shares
per $1,000 base amount (which represents an initial conversion
price of approximately $16.09 per share of our common
stock), into cash up to the principal amount and, if applicable,
shares of the Companys common stock, cash or a combination
thereof. The notes may be converted during any calendar quarter
in which the closing price of ARRIS common stock for 20 or
more trading days in a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding
calendar quarter exceeds 120% of the conversion price in effect
at that time (which, based on the current conversion price would
be $19.31) and upon the occurrence of certain other events. Upon
conversion, the holder will receive the principal amount in cash
and an additional payment, in either cash or stock at the option
of the Company. The additional payment will be based on a
formula which calculates the difference between the initial
conversion rate ($16.09) and the market price at the date of the
conversion. As of February 28, 2007, the notes could not be
converted by the holders thereof. Interest is payable on May 15
and November 15 of each year. The Company may redeem the notes
at any time on or after
70
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
November 15, 2013, subject to certain conditions. As of
December 31, 2006, there were $276.0 million of the
notes outstanding.
As of December 31, 2006, the Company had approximately
$17.7 million of other long-term liabilities, which
included $12.1 million related to its accrued pension,
$3.5 million related to its deferred compensation
obligations, and $2.1 million related to landlord funded
leasehold improvements. As of December 31, 2005, the
Company had approximately $18.2 million of other long-term
liabilities, which included $12.6 million related to its
accrued pension, $3.2 million related to its deferred
compensation obligations, $2.3 million related to landlord
funded leasehold improvements, and $0.1 million related to
security deposits received.
The Company has not paid cash dividends on its common stock
since its inception. In 2002, to implement its shareholder
rights plan, the Companys board of directors declared a
dividend consisting of one right for each share of its common
stock outstanding. Each right represents the right to purchase
one one-thousandth of a share of its Series A Participating
Preferred Stock and becomes exercisable only if a person or
group acquires beneficial ownership of 15% or more of its common
stock or announces a tender or exchange offer for 15% or more of
its common stock or under other similar circumstances.
|
|
Note 12.
|
Earnings
Per Share
|
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations for the periods indicated (in thousands except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
142,066
|
|
|
$
|
51,275
|
|
|
$
|
(30,510
|
)
|
Income (loss) from discontinued
operations
|
|
|
221
|
|
|
|
208
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
107,268
|
|
|
|
96,581
|
|
|
|
85,283
|
|
Basic earnings (loss) per share
|
|
$
|
1.33
|
|
|
$
|
0.53
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
142,066
|
|
|
$
|
51,275
|
|
|
$
|
(30,510
|
)
|
Income (loss) from discontinued
operations
|
|
|
221
|
|
|
|
208
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
107,268
|
|
|
|
96,581
|
|
|
|
85,283
|
|
Net effect of dilutive stock
options
|
|
|
2,222
|
|
|
|
1,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
109,490
|
|
|
|
98,264
|
|
|
|
85,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2004 the
41/2% convertible
subordinated notes due 2003 and due 2008 were antidilutive. The
effects of the options and warrants were not presented for 2004
as the Company incurred net losses during those periods and
inclusion of these securities would be antidilutive.
In November 2006, the Company issued $276.0 million of
convertible senior notes. Upon conversion, ARRIS will satisfy at
least the principal amount in cash, rather than common stock.
This reduced the potential earnings dilution to only include the
conversion premium, which is the difference between the
conversion price per share of common stock and the average share
price. The average share price in 2006 was less than the
conversion price of $16.09 and, consequently, did not result in
dilution.
71
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense (benefit) consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current Federal
|
|
$
|
2,235
|
|
|
$
|
885
|
|
|
$
|
|
|
State
|
|
|
1,077
|
|
|
|
(163
|
)
|
|
|
|
|
Foreign
|
|
|
366
|
|
|
|
(209
|
)
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,678
|
|
|
|
513
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal
|
|
|
(32,785
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
(3,429
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(2,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(34,812
|
)
|
|
$
|
513
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal tax rate of 35% and
the effective income tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory federal income tax
expense (benefit)
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal
benefit
|
|
|
1.7
|
%
|
|
|
1.7
|
%
|
|
|
(3.3
|
)%
|
Differences between U.S. and
foreign income tax rates
|
|
|
(0.1
|
)%
|
|
|
(0.3
|
)%
|
|
|
0.4
|
%
|
Meals and entertainment
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
|
|
0.8
|
%
|
Increase (decrease) in valuation
allowance
|
|
|
(62.3
|
)%
|
|
|
(36.3
|
)%
|
|
|
37.5
|
%
|
Research and development tax
credits
|
|
|
(7.2
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other, net
|
|
|
0.3
|
%
|
|
|
0.5
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.4
|
)%
|
|
|
1.0
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of ARRIS net deferred
income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
5,141
|
|
|
$
|
5,487
|
|
Federal alternative minimum tax
AMT credit
|
|
|
850
|
|
|
|
|
|
Federal research & development
credits
|
|
|
13,817
|
|
|
|
|
|
Current portion net operating loss
carryforwards
|
|
|
|
|
|
|
27,226
|
|
Other, principally operating
expenses
|
|
|
14,559
|
|
|
|
13,065
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
34,367
|
|
|
|
45,778
|
|
|
|
|
|
|
|
|
|
|
72
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Non-current deferred income tax
assets:
|
|
|
|
|
|
|
|
|
Federal/state net operating loss
carryforwards
|
|
$
|
1,199
|
|
|
$
|
18,208
|
|
Federal capital loss carryforwards
|
|
|
5,311
|
|
|
|
5,671
|
|
Foreign net operating loss
carryforwards
|
|
|
2,720
|
|
|
|
2,184
|
|
Federal AMT credit
|
|
|
|
|
|
|
885
|
|
Pension and deferred compensation
|
|
|
5,662
|
|
|
|
5,902
|
|
Goodwill
|
|
|
813
|
|
|
|
1,047
|
|
Other, principally operating
expenses
|
|
|
7,231
|
|
|
|
5,754
|
|
Property plant and equipment,
depreciation and basis differences
|
|
|
2,364
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
Total non-current deferred income
tax assets
|
|
|
25,300
|
|
|
|
41,765
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax
liabilities:
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
|
(115
|
)
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred income
tax liabilities
|
|
|
(115
|
)
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
59,552
|
|
|
|
87,202
|
|
Valuation allowance
|
|
|
(9,393
|
)
|
|
|
(87,202
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
50,159
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance for deferred income tax assets of
$9.4 million and $87.2 million at December 31,
2006 and 2005, respectively, relates to the uncertainty of the
utilization of certain deferred income tax assets in various
jurisdictions. The valuation allowance was calculated in
accordance with the provisions of FASB Statement No. 109,
which requires that a valuation allowance be established and
maintained when it is more likely than not that all
or a portion of deferred income tax assets will not be realized.
At the end of the fourth quarter of 2006, ARRIS determined that
it was more likely than not that it would be able to realize the
benefits of a large portion of its U.S. federal and state
deferred income tax assets and subsequently reversed the related
valuation allowances. As of December 31, 2006, the ending
valuation allowances are predominantly due to U.S. federal
capital loss and foreign net operating loss carryforwards. The
Company continually reviews the adequacy of the valuation
allowance to reassess whether it is more likely than not to
realize its various deferred income tax assets.
As of December 31, 2006, ARRIS had U.S. federal net
operating loss carryforwards of approximately
$12.3 million, which expire in 2024, and U.S. state
net operating loss carryforwards of approximately
$1.7 million related to the exercise of employee stock
options and restricted stock (equity compensation).
Any future cash benefit resulting from the utilization of these
U.S. federal and state net operating losses attributable to
this portion of equity compensation will be credited directly to
paid-in capital during the year in which the cash benefit is
realized. ARRIS expects to use this remaining portion of its
U.S. federal net operating losses during 2007. As of
December 31, 2006 ARRIS also has state net operating loss
carryforwards in various states. The amounts available vary by
state due to the apportionment of the Companys taxable
income and state law governing the expiration of these net
operating losses. Additionally, ARRIS has foreign net operating
loss carryforwards, as of December 31, 2006, of
approximately $19.6 million with varying expiration dates.
However, $17.8 million of the total foreign net operating
loss carryforwards relate to ARRIS Irish subsidiary and
have an indefinite life.
ARRIS ability to use federal and state net operating loss
carryforwards to reduce future taxable income, or to use
research and development tax credit carryforwards to reduce
future income tax liabilities, is subject to restrictions
attributable to equity transactions that resulted in a change of
ownership during its 2001 and 2004 tax years as defined in
Internal Revenue Code Section 382. ARRIS does not expect
that the limitations placed on its net operating losses and
research and development tax credits as a result of applying
these rules will result in the
73
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expiration of its net operating loss and research and
development tax credit carryforwards. However, future equity
transactions could limit the utilization of these tax attributes.
As of December 31, 2006 the Company had U.S. capital
loss carryforwards of approximately $13.9 million, of which
$0.8 million expire in 2007, $10.7 million expire in
2008, $1.0 million expire in 2009, and $1.4 million
expire in 2010.
Additionally, based on analysis that was completed during the
fourth quarter of 2006, ARRIS concluded that it should record a
deferred tax asset for federal research and development tax
credits of approximately $13.9 million. These tax credits
relate to qualified research expenditures for tax
years beginning in 2001 and continuing through 2006. The
research and development tax credits can be carried back one
year and carried forward twenty years. Therefore, any unutilized
tax credits will begin to expire in 2021 and will totally expire
by 2026. Approximately $128,000 of these tax credits were used
in 2006 to reduce ARRIS regular income tax liability.
For the year ended December 31, 2005, ARRIS was subject to
the alternative minimum tax (AMT). For 2005, ARRIS
recorded a current federal AMT provision of $885,000. The
payment of AMT, however, results in an AMT credit that may be
carried forward to offset ARRIS regular income tax
liability when and if ARRIS is subject to the regular income tax
in the future. The AMT credit, adjusted to the actual
2005 AMT liability per the federal tax return, is now
recorded at $950,000. For the year ended December 31, 2006,
ARRIS was not an AMT taxpayer. However, its current regular
federal tax liability for 2006 could only be reduced down to its
tentative minimum tax liability. Therefore, the AMT credit that
originated in 2005 continues to be carried forward to 2007.
ARRIS intends to indefinitely reinvest the undistributed
earnings of its foreign subsidiaries. Accordingly, no deferred
taxes have been recorded for the difference between its
financial and tax basis investment in its foreign subsidiaries.
If these earnings were distributed to the U.S. in the form
of dividends, or otherwise, ARRIS would have additional
U.S. taxable income and, depending on the companys
tax posture in the year of repatriation, may have to pay
additional U.S. income taxes. Withholding taxes may also
apply to the repatriated earnings. Determination of the amount
of unrecognized income tax liability related to these
permanently reinvested and undistributed foreign subsidiary
earnings is currently not practicable.
ARRIS leases office, distribution, and warehouse facilities as
well as equipment under long-term leases expiring at various
dates through 2023. Included in these operating leases are
certain amounts related to restructuring activities; these lease
payments and related sublease income are included in
restructuring accruals on the consolidated balance sheets.
Future minimum operating lease payments under non-cancelable
leases at December 31, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
|
2007
|
|
$
|
6,091
|
|
2008
|
|
|
5,082
|
|
2009
|
|
|
3,849
|
|
2010
|
|
|
3,036
|
|
2011
|
|
|
2,846
|
|
Thereafter
|
|
|
4,878
|
|
Less sublease income
|
|
|
(294
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
25,488
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to
approximately $5.4 million, $5.7 million and
$7.3 million for the years ended December 31, 2006,
2005 and 2004, respectively.
As of December 31, 2006, the Company had approximately
$3.1 million outstanding under letters of credit which were
cash collateralized. The cash collateral is held in the form of
restricted cash. Additionally, the Company
74
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
had contractual obligations of approximately $137.7 million
under agreements with non-cancelable terms to purchases goods or
services over the next year. All contractual obligations
outstanding at the end of prior years were satisfied within a
12 month period, and the obligations outstanding as of
December 31, 2006 are expected to be satisfied in 2007.
Note 15. Stock-Based
Compensation
ARRIS grants stock options under its 2004 Stock Incentive Plan
(2004 SIP) and issues stock purchase rights under
its Employee Stock Purchase Plan (ESPP). Upon
approval of the 2004 SIP by stockholders on May 26, 2004,
all shares available for grant under the 2002 Stock Incentive
Plan (2002 SIP) and the 2001 Stock Incentive Plan
(2001 SIP) were cancelled. However, those shares
subject to outstanding stock awards issued under the 2002 SIP
and the 2001 SIP that are forfeited, cancelled, or expire
unexercised; shares tendered (either actually or through
attestation) to pay the option exercise price of such
outstanding awards; and shares withheld for the payment of
withholding taxes associated with such outstanding awards return
to the share reserve of the 2002 SIP and 2001 SIP and shall be
available again for issuance under those plans. All options
outstanding as of May 26, 2004 under the 2002 SIP and 2001
SIP remained exercisable. These plans are described below.
In 2004, the Board of Directors approved the 2004 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2004 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 6,000,000 shares of the Companys common
stock may be issued pursuant to this plan. The vesting
requirements for issuance under this plan may vary.
In 2002, the Board of Directors approved the 2002 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2002 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 2,500,000 shares of the Companys common
stock were originally reserved for issuance under this plan. The
vesting requirements for issuance under this plan vary.
In 2001, the Board of Directors approved the 2001 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2001 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 9,580,000 shares of the Companys common
stock were originally reserved for issuance under this plan. The
vesting requirements for issuance under this plan vary.
In 2001, the Board of Directors approved a proposal to grant
truncated options to employees and board members having previous
stock options with exercise prices more than 33% higher than the
market price of the Companys stock at $10.20 per
share. The truncated options to purchase stock of the Company
pursuant to the Companys 2001 SIP, have the following
terms: (a) one fourth of each option shall be exercisable
immediately and an additional one fourth shall become
exercisable or vest on each anniversary of this grant;
(b) each option shall be exercisable in full after the
closing price of the stock has been at or above the target price
as determined by the agreement for twenty consecutive trading
days (the Accelerated Vesting Date); (c) each
option shall expire on the earliest of (i) the tenth
anniversary of grant, (ii) six months and one day from the
accelerated vesting date, (iii) the occurrence of an
earlier expiration event as provided in the terms of the options
granted by 2000 stock option plans. No compensation was recorded
in relation to these options.
In connection with the Companys reorganization on
August 3, 2001, the Company froze additional grants under
other prior plans, which were the 2000 Stock Incentive Plan
(2000 SIP), the 2000 Mid-Level Stock Option
Plan (MIP), the 1997 Stock Incentive Plan
(SIP), the 1993 Employee Stock Incentive Plan
(ESIP), the Director Stock Option Plan
(DSOP), and the TSX Long-Term Incentive Plan
(LTIP). All options granted under the previous plans
are still exercisable. The Board of Directors approved the prior
plans to facilitate the retention
75
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and continued motivation of key employees, consultants and
directors, and to align more closely their interests with those
of the Company and its stockholders. Awards under these plans
were in the form of incentive stock options, non-qualified stock
options, stock grants, stock units, restricted stock, stock
appreciation rights, performance shares and units, dividend
equivalent rights and reload options. A total of
2,500,000 shares of the Companys common stock were
originally reserved for issuance under this plan. Options
granted under this plan vest in fourths on the anniversary date
of the grant beginning with the first anniversary and terminate
ten years from the date of grant. Vesting requirements for
issuance under the prior plans varied, as did the related date
of termination.
The Company adopted the fair value recognition provisions of
SFAS No. 123R on July 1, 2005 using the modified
prospective approach. Prior to the adoption date, ARRIS used the
intrinsic value method for valuing its awards of stock options
and restricted stock and recorded the related compensation
expense, if any, in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees and related
interpretations. With the exception of variable stock option
expense discussed below, no other stock-based employee or
director compensation cost for stock options was reflected in
net income (loss) prior to July 1, 2005, as all options
granted had exercise prices equal to the market value of the
underlying common stock on the date of grant. The Company
records compensation expense related to its restricted stock
awards and director stock units.
Prior to the adoption of SFAS No. 123R, ARRIS
accounted for stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations.
The following table illustrates the pro forma effect on the
three years ended December 31, 2006, 2005, and 2004 had the
Company applied the provisions of SFAS No. 123 in
those periods (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss), as reported
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
Add: Stock-based compensation
included in reported net income, net of taxes
|
|
|
9,423
|
|
|
|
6,915
|
|
|
|
2,826
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based methods
for all awards
|
|
|
(9,423
|
)
|
|
|
(16,812
|
)*
|
|
|
(13,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), pro forma
|
|
$
|
142,287
|
|
|
$
|
41,586
|
|
|
$
|
(39,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.33
|
|
|
$
|
0.53
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.33
|
|
|
$
|
0.43
|
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.30
|
|
|
$
|
0.42
|
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Includes approximately $5.7 million of expense related to
the acceleration of
out-of-the-money
options in the second quarter of 2005.
|
Stock
Options
ARRIS grants stock options to certain employees. Stock options
generally vest over three or four years of service and have
either seven or ten year contractual terms. The exercise price
of an option is equal to the fair market value of ARRIS
stock on the date of grant. Prior to the adoption of
SFAS No. 123R, ARRIS used the Black-Scholes option
valuation model to estimate the fair value of an option on the
date of grant for pro forma purposes. Upon adoption of
SFAS No. 123R, ARRIS elected to continue to use the
Black-Scholes model; however, it engaged an independent third
party to assist the Company in determining the Black-Scholes
weighted average inputs utilized in the valuation of options
granted subsequent to July 1, 2005. Prior to the adoption
of SFAS No. 123R, the Company estimated the expected
volatility exclusively on historical stock prices of ARRIS
common stock over a period of
76
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
time. Under SFAS No. 123R, the volatility factors are
based upon a combination of historical volatility over a period
of time and estimates of implied volatility based on traded
option contracts on ARRIS common stock. The change in estimating
volatility was made because the Company felt that the inclusion
of the implied volatility factor was a more accurate estimate of
the stocks future performance. The expected term of the
awards granted are based upon a weighted average life of
exercise activity of the grantee population. The risk-free
interest rate is based upon the U.S. treasury strip yield
at the grant date, using a remaining term equal to the expected
life. The expected dividend yield is 0%, as the Company has not
paid cash dividends on its common stock since its inception. In
calculating the stock compensation expense, ARRIS applies an
estimated pre-vesting forfeiture rate based upon historical
rates. The stock compensation expense is amortized over the
vesting period using the straight-line method.
In May 2005, the ARRIS Board of Directors approved the
acceleration of outstanding options with exercise prices equal
to $9.06 and above. All of these options were
out-of-the-money
at the time of acceleration, as the closing stock price on
May 5, 2005 was $7.67. The acceleration covered options to
purchase approximately 1.4 million shares of common stock,
but did not involve any options held by directors or executive
officers. The purpose of the acceleration was to reduce the
expense that would be associated with these options in
accordance with the provisions of SFAS No. 123R,
Share-Based Payment, once adopted. The acceleration
resulted in incremental stock-based employee compensation of
approximately $5.7 million in the pro forma expense for the
second quarter 2005.
In 2003, the Company offered to all eligible employees the
opportunity to exchange certain outstanding stock options for
restricted shares of ARRIS common stock. The Companys
Board of Directors and its eight most highly compensated
executive officers during 2002 were not eligible to participate
in the offer. Employees tendered approximately 76% of the
options eligible to be exchanged under the program and ARRIS
cancelled options to purchase approximately 4.7 million
shares of common stock and granted approximately
1.5 million restricted shares in exchange. The Company
recorded a fixed compensation expense equal to the fair market
value of the shares of restricted stock granted through the
offer; this cost is being amortized over the four-year vesting
period for the restricted shares. Prior to the adoption of
SFAS No. 123R, all eligible options that were not
tendered for exchange were subject to variable accounting. The
variable accounting charge fluctuated in accordance with the
market price of the ARRIS common stock at the end of each
accounting period until such stock options were exercised,
forfeited, or expire unexercised. In accordance with
SFAS No. 123R, an equity award that previously was
accounted for as a variable award under APB No. 25 should
no longer be accounted for as a variable award. As of
July 1, 2005, the grant-date fair value is used to
recognize compensation cost for these options.
A summary of activity of ARRIS options granted under its
stock incentive plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Value
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
(in thousands)
|
|
|
Beginning balance, January 1,
2006
|
|
|
8,513,868
|
|
|
$
|
9.10
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
997,974
|
|
|
$
|
13.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,966,954
|
)
|
|
$
|
5.72
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(61,336
|
)
|
|
$
|
8.48
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(43,921
|
)
|
|
$
|
10.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2006
|
|
|
7,439,631
|
|
|
$
|
10.52
|
|
|
|
5.23
|
|
|
$
|
26,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
5,467,414
|
|
|
$
|
10.87
|
|
|
|
4.92
|
|
|
$
|
19,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used in this model to value
ARRIS stock options during 2006, 2005 and 2004 were as
follows: risk-free interest rates of 4.9%, 3.8% and 3.7%,
respectively; a dividend yield of 0%; volatility factor of the
expected market price of ARRIS common stock of 0.60, 0.92
and 0.99, respectively; and a weighted average expected life of
4.7 years, 4.9 years, and 5.0 years,
respectively. The weighted average grant-date
77
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value of options granted during 2006, 2005, and 2004 were
$7.14, $4.70, and $5.83, respectively. The total intrinsic value
of options exercised during 2006, 2005, and 2004 was
approximately $13.7 million, $11.3 million and
$2.3 million, respectively.
|
|
|
Restricted
Stock (Non-Performance) and Stock Units
|
ARRIS grants restricted stock and stock units to certain
employees and its non-employee directors. The Company records a
fixed compensation expense equal to the fair market value of the
shares of restricted stock granted on a straight-line basis over
the requisite services period for the restricted shares. Prior
to the adoption of SFAS 123R, ARRIS used the actual method
of recording forfeitures. Upon adoption of SFAS 123R, the
Company applies an estimated post-vesting forfeiture rate based
upon historical rates.
The following table summarizes ARRIS unvested restricted
stock (excluding performance-related) and stock unit
transactions during the year ending December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2006
|
|
|
1,016,785
|
|
|
$
|
5.69
|
|
Granted
|
|
|
282,465
|
|
|
$
|
13.08
|
|
Vested
|
|
|
(468,713
|
)
|
|
$
|
6.00
|
|
Forfeited
|
|
|
(46,642
|
)
|
|
$
|
6.80
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
783,895
|
|
|
$
|
8.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Related
Restricted Shares
|
ARRIS grants to certain employees restricted shares, in which
the number of shares is dependent upon performance conditions.
The number of shares which could potentially be issued ranges
from zero to 150% of the target award. Compensation expense is
recognized using the graded method and is based upon the fair
market value of the shares estimated to be earned. The fair
value of the restricted shares is estimated on the date of grant
using the same valuation model as that used for stock options
and other restricted shares. As of December 31, 2006, ARRIS
had recognized compensation expense based upon the achievement
of 150% of the target awards as the Companys 2006
performance had reached the level necessary for the maximum
award for the shares granted in April 2006. If these goals had
not been attained, any recognized compensation cost would have
been reversed.
In certain circumstances under its stock-based compensation
plans, ARRIS allows for the vesting of employee awards to
accelerate upon retirement or to continue to vest
post-employment. Prior to the adoption of
SFAS No. 123R, the Company recognized the related
compensation expense over the explicit service period. ARRIS
will continue this practice for awards granted prior to
July 1, 2005. For awards granted subsequent to the adoption
date of SFAS No. 123R, the fair value of the award
will be expensed over the employees minimum service period
rather than over the explicit vesting period.
The following table summarizes ARRIS unvested
performance-related restricted stock transactions during the
year ending December 31, 2006 (includes maximum achievement
of performance goals):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2006
|
|
|
301,955
|
|
|
$
|
6.44
|
|
Granted
|
|
|
180,723
|
|
|
|
13.28
|
|
Vested
|
|
|
(100,663
|
)
|
|
|
6.44
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
382,015
|
|
|
|
9.68
|
|
|
|
|
|
|
|
|
|
|
78
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total intrinsic value of restricted shares, including both
non-performance and performance-related shares, vested and
issued during 2006, 2005 and 2004 was $6.1 million,
$3.9 million and $4.4 million, respectively.
|
|
|
Employee
Stock Purchase Plan (ESPP)
|
ARRIS offers an ESPP to certain employees. The plan complies
with Section 423 of the U.S. Internal Revenue Code,
which provides that employees will not be immediately taxed on
the difference between the market price of the stock and a
discounted purchase price if it meets certain requirements.
Participants can request that up to 10% of their base
compensation be applied toward the purchase of ARRIS common
stock under ARRIS ESPP. Purchases by any one participant
are limited to $25,000 (based upon the fair market value) in any
one year. The exercise price is the lower of 85% of the fair
market value of the ARRIS common stock on either the first day
of the purchase period or the last day of the purchase period. A
plan provision which allows for the more favorable of two
exercise prices is commonly referred to as a
look-back feature. Under APB Opinion No. 25,
Accounting for Stock Issued to Employees, the ESPP was
deemed noncompensatory, and therefore, no compensation expense
was recognized. However, SFAS No. 123R narrows the
noncompensatory exception significantly; any discount offered in
excess of five percent generally will be considered compensatory
and appropriately recognized as compensation expense.
Additionally, any ESPP offering a look-back feature is
considered compensatory. ARRIS uses the Black-Scholes option
valuation model to value shares issued under the ESPP. The
valuation is comprised of two components; the 15% discount of a
share of common stock and 85% of a six month option held
(related to the look-back feature). The weighted average
assumptions used to estimate the fair value of purchase rights
granted under the ESPP for 2006, 2005, and 2004 were as follows:
risk-free interest rates of 4.6%, 3.7% and 1.6% respectively; a
dividend yield of 0%; volatility factor of the expected market
price of ARRIS common stock of 0.56, 0.43 and 0.99,
respectively; and a weighted average expected life of
0.5 year for each. The Company recorded stock compensation
expense related to the ESPP of approximately $0.4 million,
$0.2 million, and $0 million for the years ended
December 31, 2006, 2005, and 2004, respectively.
|
|
|
Unrecognized
Compensation Cost
|
As of December 31, 2006, there was approximately
$16.1 million of total unrecognized compensation cost
related to unvested share-based awards granted under the
Companys incentive plans. This compensation cost is
expected to be recognized over a weighted-average period of
2.4 years.
|
|
Note 16.
|
Employee
Benefit Plans
|
The Company sponsors two non-contributory defined benefit
pension plans that cover the Companys U.S. employees.
As of January 1, 2000, the Company froze the defined
pension plan benefits for its participants. These participants
elected to enroll in ARRIS enhanced 401(k) plan. Due to
the cessation of plan accruals for such a large group of
participants, a curtailment was considered to have occurred and
the Company accounted for this in accordance with
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits. The Company has not recognized
any expense (income) related to supplemental pension benefits
for years ended December 31, 2006, 2005, and 2004.
The U.S. pension plan benefit formulas generally provide
for payments to retired employees based upon their length of
service and compensation as defined in the plans. ARRIS
investment policy is to fund the plans as required by the
Employee Retirement Income Security Act of 1974
(ERISA) and to the extent that such contributions
are tax deductible. For 2006, the plan assets were comprised of
approximately 68%, 28% and 4% of equity, debt securities, and
money market funds respectively. For 2005, the plan assets were
comprised of approximately 70%, 28%, and 2% of equity, debt
securities, and money market funds, respectively. In 2007, the
plan will target allocations of 50% equity and 50% debt
securities and money market funds. Liabilities or amounts in
excess of these funding levels are accrued and reported in the
consolidated balance sheet.
The investment strategies of the plans place a high priority on
benefit security. The plans invest conservatively so as not to
expose assets to depreciation in adverse markets. The
plans strategy also places a high priority on
79
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earning a rate of return greater than the annual inflation rate
along with maintaining average market results. The plan has
targeted asset diversification across different asset classes
and markets to take advantage of economic environments and to
also act as a risk minimizer by dampening the portfolios
volatility.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. This statement requires entities
to:
|
|
|
|
|
fully recognize the funded status of defined benefit
plans an asset for an overfunded status or a
liability for an underfunded status,
|
|
|
|
measure a defined benefit plans assets and obligations
that determine its funded status as of the end of the
entitys fiscal year, and
|
|
|
|
recognize changes in the funded status of a defined benefit plan
in comprehensive earnings in the year in which the changes occur.
|
ARRIS adopted SFAS No. 158 as of December 31,
2006. However, the requirement to measure plan assets and
benefit obligations as of the date of the fiscal year-end
balance sheet is effective for fiscal years ending after
December 15, 2008. ARRIS has not yet adopted this provision
and has used September 30 as the measurement date for the
2006, 2005 and 2004 reporting year.
Below is a summary of the impact of applying
SFAS No. 158 as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
|
|
|
|
|
|
After
|
|
|
|
Application of
|
|
|
Adoption
|
|
|
Application of
|
|
|
|
SFAS No. 158
|
|
|
Adjustments
|
|
|
SFAS No. 158
|
|
|
Current liabilities
|
|
$
|
N/A
|
|
|
$
|
82
|
|
|
$
|
82
|
|
Accrued pension liability
|
|
|
11,858
|
|
|
|
203
|
|
|
|
12,061
|
|
Accumulated other comprehensive
income
|
|
|
(4,177
|
)
|
|
|
(285
|
)
|
|
|
(4,462
|
)
|
Summary data for the non-contributory defined benefit pension
plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Change in Projected Benefit
Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
beginning of year
|
|
$
|
25,930
|
|
|
$
|
22,659
|
|
Service cost
|
|
|
519
|
|
|
|
458
|
|
Interest cost
|
|
|
1,478
|
|
|
|
1,413
|
|
Actuarial loss (gain)(1)
|
|
|
938
|
|
|
|
1,889
|
|
Benefit payments
|
|
|
(498
|
)
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
end of year
|
|
$
|
28,367
|
|
|
$
|
25,930
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
13,769
|
|
|
$
|
12,103
|
|
Actual return on plan assets
|
|
|
1,227
|
|
|
|
1,292
|
|
Company contributions
|
|
|
1,706
|
|
|
|
863
|
|
Expenses and benefits paid from
plan assets
|
|
|
(498
|
)
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
16,204
|
|
|
$
|
13,769
|
|
|
|
|
|
|
|
|
|
|
80
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(12,162
|
)
|
|
$
|
(12,160
|
)
|
Unrecognized actuarial loss
|
|
|
2,665
|
|
|
|
1,837
|
|
Unamortized prior service cost
|
|
|
1,797
|
|
|
|
2,274
|
|
Employer contributions,
9/30
12/31
|
|
|
19
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(7,681
|
)
|
|
$
|
(8,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The actuarial loss in 2005 includes updated assumptions for
mortality rates |
Amounts recognized in the statement of financial position
consist of:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Current liabilities
|
|
$
|
(82
|
)
|
|
$
|
|
|
Noncurrent liabilities
|
|
|
(12,061
|
)
|
|
|
(12,651
|
)
|
Accumulated other comprehensive
income(1)
|
|
|
4,462
|
|
|
|
4,618
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,681
|
)
|
|
$
|
(8,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2006, the accumulated other
comprehensive income included $2,665 related to the net loss and
$1,797 related to prior service cost. |
Other changes in plan assets and benefit obligations recognized
in other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Net (gain) loss
|
|
$
|
(1,945
|
)
|
|
$
|
1,420
|
|
Amortization of net (loss) gain
|
|
|
(8
|
)
|
|
|
(146
|
)
|
Prior service cost (credit)
|
|
|
2,274
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other
comprehensive income
|
|
$
|
(156
|
)
|
|
$
|
1,274
|
|
|
|
|
|
|
|
|
|
|
The estimated net loss and prior service cost for the defined
benefit pension plans that will be amortized from accumulated
other comprehensive income into net periodic benefit cost over
the next fiscal year are $101,563 and $477,381 respectively.
The accumulated benefit obligation and the projected benefit
obligation for the plans are in excess of the plan assets as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Accumulated benefit obligation
|
|
$
|
26,496
|
|
|
$
|
25,521
|
|
Projected benefit obligation
|
|
$
|
28,367
|
|
|
$
|
25,930
|
|
Plan assets
|
|
$
|
16,204
|
|
|
$
|
13,769
|
|
81
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic pension cost for 2006, 2005 and 2004 for pension
and supplemental benefit plans includes the following components
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service cost
|
|
$
|
519
|
|
|
$
|
458
|
|
|
$
|
484
|
|
Interest cost
|
|
|
1,478
|
|
|
|
1,413
|
|
|
|
1,177
|
|
Return on assets (expected)
|
|
|
(1,125
|
)
|
|
|
(1,045
|
)
|
|
|
(935
|
)
|
Recognized net actuarial (gain)
loss
|
|
|
8
|
|
|
|
(18
|
)
|
|
|
(323
|
)
|
Amortization of prior service
cost(1)
|
|
|
477
|
|
|
|
477
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,357
|
|
|
$
|
1,285
|
|
|
$
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior service cost is amortized on a straight-line basis over
the average remaining service period of employees expected to
receive benefits under the plan. |
The weighted-average actuarial assumptions used to determine the
benefit obligations for the three years presented are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assumed discount rate for
non-qualified plans participants
|
|
|
5.75%
|
|
|
|
5.50%
|
|
|
|
6.00%
|
|
Assumed discount rate for
qualified plan participants
|
|
|
5.75%
|
|
|
|
5.75%
|
|
|
|
6.00%
|
|
Rates of compensation increase
|
|
|
3.75%
|
|
|
|
3.75%
|
|
|
|
5.94%
|
|
The weighted-average actuarial assumptions used to determine the
net periodic benefit costs are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assumed discount rate for
non-qualified plans participants
|
|
|
5.50%
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
Assumed discount rate for
qualified plan participants
|
|
|
5.75%
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
Rates of compensation increase
|
|
|
3.75%
|
|
|
|
5.94%
|
|
|
|
5.94%
|
|
Expected long-term rate of return
on plan assets
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
8.00%
|
|
The expected long-term rate of return on assets is derived using
the building block approach which includes assumptions for the
long term inflation rate, real return, and equity risk premiums.
No minimum funding contributions are required in 2007 for the
plan; however, the Company may make a voluntary contribution.
As of December 31, 2006, the expected benefit payments
related to the Companys defined benefit pension plans
during the next ten years are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
636
|
|
2008
|
|
|
823
|
|
2009
|
|
|
850
|
|
2010
|
|
|
1,226
|
|
2011
|
|
|
1,220
|
|
2012 - 2016
|
|
|
8,752
|
|
Additionally, ARRIS has established defined contribution plans
pursuant to the Internal Revenue Code Section 401(K) that
cover all eligible U.S. employees. ARRIS contributes to
these plans based upon the dollar amount of each
participants contribution. ARRIS made matching
contributions to these plans of approximately $1.5 million,
$0.6 million and $0.0 million in 2006, 2005, and 2004,
respectively. During 2004, the Company made a discretionary
contribution of $1.0 million to the plan. Effective
July 1, 2003, the Company temporarily suspended
82
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employer matching contributions to the plan. The Company
reinstated a partial matching contribution to the plan effective
January 1, 2005.
|
|
Note 17.
|
Sales
Information
|
The Companys four largest customers (including their
affiliates, as applicable) are Comcast, Cox Communications,
Liberty Media International and Time Warner Cable. Over the past
year, certain customers beneficial ownership may have
changed as a result of mergers and acquisitions. Therefore the
revenue for ARRIS customers for prior periods has been
adjusted to include the affiliates under common control. A
summary of sales to these customers for 2006, 2005, and 2004 is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions)
|
|
|
Comcast and affiliates
|
|
$
|
344.2
|
|
|
$
|
163.3
|
|
|
$
|
126.2
|
|
% of sales
|
|
|
38.6
|
%
|
|
|
24.0
|
%
|
|
|
25.8
|
%
|
Cox Communications
|
|
$
|
88.0
|
|
|
$
|
116.7
|
|
|
$
|
106.3
|
|
% of sales
|
|
|
9.9
|
%
|
|
|
17.2
|
%
|
|
|
21.7
|
%
|
Liberty Media International and
affiliates
|
|
$
|
88.8
|
|
|
$
|
99.4
|
|
|
$
|
84.0
|
|
% of sales
|
|
|
10.0
|
%
|
|
|
15.3
|
%
|
|
|
17.3
|
%
|
Time Warner Cable and affiliates
|
|
$
|
81.2
|
|
|
$
|
72.3
|
|
|
$
|
32.5
|
|
% of sales
|
|
|
9.1
|
%
|
|
|
10.6
|
%
|
|
|
6.6
|
%
|
No other customer provided more than 10% of total sales for the
years ended December 31, 2006, 2005, or 2004.
ARRIS operates globally and offers products and services that
are sold to cable system operators and telecommunications
providers. ARRIS products and services are focused in two
product categories: Broadband and Supplies & Customer
Premises Equipment. Consolidated revenues by principal products
and services for the years ended December 31, 2006, 2005
and 2004, respectively, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
Supplies & CPE
|
|
|
Total
|
|
|
Years Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
364,238
|
|
|
$
|
527,313
|
|
|
$
|
891,551
|
|
December 31, 2005
|
|
$
|
315,098
|
|
|
$
|
365,319
|
|
|
$
|
680,417
|
|
December 31, 2004
|
|
$
|
300,198
|
|
|
$
|
189,843
|
|
|
$
|
490,041
|
|
ARRIS sells its products primarily in the United States. The
Companys international revenue is generated from Asia
Pacific, Europe, Latin America and Canada. The Asia Pacific
market primarily includes China, Hong Kong, Japan, Korea,
Singapore, and Taiwan. The European market primarily includes
Austria, Belgium, France, Germany, the Netherlands, Poland,
Portugal, Spain, and Switzerland. The Latin American market
primarily includes Argentina, Chile, Brazil, and Puerto Rico.
Sales to international customers were approximately 25.1%,
83
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
27.1% and 25.2% of total sales for the years ended
December 31, 2006, 2005 and 2004, respectively.
International sales for the years ended December 31, 2006,
2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Asia Pacific
|
|
$
|
52,859
|
|
|
$
|
51,139
|
|
|
$
|
48,025
|
|
Europe
|
|
|
74,991
|
|
|
|
67,374
|
|
|
|
46,213
|
|
Latin America
|
|
|
41,730
|
|
|
|
24,979
|
|
|
|
18,205
|
|
Canada
|
|
|
53,877
|
|
|
|
41,100
|
|
|
|
11,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
223,457
|
|
|
$
|
184,592
|
|
|
$
|
123,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, ARRIS held approximately
$2.3 million of assets in Ireland (related to its Com21
facility), comprised of $1.5 million of cash and
$0.8 million of fixed assets.
|
|
Note 18.
|
Summary
Quarterly Consolidated Financial Information
(unaudited)
|
The following table summarizes ARRIS quarterly
consolidated financial information (in thousands, except share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2006 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Net sales
|
|
$
|
208,344
|
|
|
$
|
219,990
|
|
|
$
|
228,646
|
|
|
$
|
234,571
|
|
Gross margin(1)
|
|
|
56,507
|
|
|
|
63,740
|
|
|
|
63,179
|
|
|
|
68,652
|
|
Operating income (loss)(2)
|
|
|
19,609
|
|
|
|
22,465
|
|
|
|
25,447
|
|
|
|
28,472
|
|
Income (loss) from continuing
operations
|
|
|
20,702
|
|
|
|
24,662
|
|
|
|
26,547
|
|
|
|
70,155
|
|
Income (loss) from discontinued
operations(4)
|
|
|
21
|
|
|
|
88
|
|
|
|
15
|
|
|
|
97
|
|
Net income (loss)(5)
|
|
$
|
20,723
|
|
|
$
|
24,750
|
|
|
$
|
26,562
|
|
|
$
|
70,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.20
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.65
|
|
Income (loss) from discontinued
operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
0.20
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.65
|
|
Net income (loss) per diluted
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.19
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
|
$
|
0.64
|
|
Income (loss) from discontinued
operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
0.19
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
|
$
|
0.64
|
|
84
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2005 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Net sales
|
|
$
|
135,924
|
|
|
$
|
162,201
|
|
|
$
|
200,957
|
|
|
$
|
181,335
|
|
Gross margin(1)
|
|
|
36,791
|
|
|
|
41,083
|
|
|
|
54,978
|
|
|
|
57,862
|
|
Operating income (loss)(2)
|
|
|
4,716
|
|
|
|
9,117
|
|
|
|
18,702
|
|
|
|
21,193
|
|
Income (loss) from continuing
operations(3)
|
|
|
3,398
|
|
|
|
7,213
|
|
|
|
18,850
|
|
|
|
21,814
|
|
Income (loss) from discontinued
operations(4)
|
|
|
10
|
|
|
|
76
|
|
|
|
(30
|
)
|
|
|
152
|
|
Net income (loss)
|
|
$
|
3,408
|
|
|
$
|
7,289
|
|
|
$
|
18,820
|
|
|
$
|
21,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
Income (loss) from discontinued
operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
Net income (loss) per diluted
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
Income (loss) from discontinued
operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
|
|
(1) |
|
During the first, second, third and fourth quarters of 2006, the
Company recognized stock compensation expense of approximately
$108 thousand, $112 thousand, $144 thousand and $142 thousand,
respectively, in cost of goods sold which effected gross
margins. During the first, second, third and fourth quarters of
2005, the Company recognized stock compensation expense of
approximately $31 thousand, $82 thousand, $136 thousand and $125
thousand, respectively, in cost of goods sold which effected
gross margins. |
|
(2) |
|
In addition to (1) above, the following items impacted
operating income (loss) during 2006: |
|
|
|
|
|
During the first, second, third and fourth quarters of 2006, the
Company recognized stock compensation expense of approximately
$2.1 million, $2.3 million, $2.3 million and
$2.2 million, respectively, which related to both
Research & Development and Selling, General, &
Administrative expenses.
|
|
|
|
During the first and fourth quarters of 2006, the Company
recorded restructuring reserve adjustments of $0.3 million
and $1.9 million, respectively, which predominantly related
to changes in estimates related to real estate leases.
|
|
|
|
During the first and second quarters of 2006, ARRIS recorded
gains of $0.5 million and $1.1 million, respectively,
related to previously written off receivables. This resulted in
a reduction in bad debt expense for those quarters.
|
In addition to (1) above, the following items impacted
operating income (loss) during 2005:
|
|
|
|
|
During the first, second, third and fourth quarters of 2005, the
Company recognized stock compensation expense of approximately
$0.5 million, $1.1 million, $2.5 million and
$2.5 million, respectively, which related to both
Research & Development and Selling, General, &
Administrative expenses.
|
|
|
|
During 2005, a decrease in expected future cash flows related to
the Atoga product line indicated that the long-lived assets
associated with these products may be impaired. As a result, we
analyzed the fair value of those assets, using the expected cash
flow approach, in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The resulting analysis indicated that the remaining
intangibles of $0.2 million and fixed assets of
$0.1 million were fully impaired and a charge of
approximately $0.3 million was recorded in the first
quarter of 2005.
|
85
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
During the fourth quarter of 2005, the Company recorded
restructuring and impairment charges of $0.9 million which
predominantly relates to changes in estimates related to real
estate leases associated with previous consolidation of certain
facilities.
|
|
|
|
(3) |
|
During the second quarter of 2005, ARRIS called the remaining
$75.0 million of the Notes for redemption and the holders
of the Notes elected to convert the notes into 15.0 million
shares of common stock rather than have the Notes redeemed.
Under the indentures terms for redemptions, the Company
made a make-whole interest payment of approximately
0.3 million shares resulting in a charge of
$2.4 million during the quarter. |
|
(4) |
|
ARRIS routinely evaluates its accruals related to costs
associated with the disposal of discontinued product lines. As a
result of these reviews, the Company recorded income of
$0.2 million for each of the years ended December 31,
2006 and 2005. |
|
(5) |
|
During the fourth quarter of 2006, ARRIS reduced valuation
allowances related to deferred income tax assets, based on the
current judgment that the benefits will be realized, and also
recorded a tax benefit related to research and development
credits for the period from 2001 -2006. The net result of these
items was a tax benefit of approximately $38.8 million
during the quarter. |
|
|
Note 19.
|
Subsequent
Events
|
Acquisition
of TANDBERG Television
On January 15, 2007, the Company agreed to acquire TANDBERG
Television ASA through a voluntary tender offer conducted in
accordance with Norwegian law. The offer price of NOK 96
consists of at least NOK 80 in cash and up to NOK 16 in shares
of the Company, although ARRIS can increase the cash portion of
the offer at its discretion. On February 26, 2007, a third
party announced its intent to make a competing all cash offer
for all of TANDBERG Televisions outstanding shares at a
higher price than the Companys offer of NOK 96. As of the
date of this report, the Company is evaluating the competing
offer and its options with respect to the proposed transaction.
86
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance
|
Information relating to directors and officers of ARRIS, the
Audit Committee of the board of directors and stockholder
nominations for directors is set forth under the captions
entitled Election of Directors,
Section 16(a) Beneficial Ownership Reporting
Compliance, and Committees of the Board of Directors
and Meeting Attendance in the Companys Proxy
Statement for the 2007 Annual Meeting of Stockholders and is
incorporated herein by reference. Certain information concerning
the executive officers of the Company is set forth in
Part I of this document under the caption entitled
Executive Officers of the Company.
ARRIS code of ethics and financial code of ethics
(applicable to our CEO, senior financial officers, and all
finance, accounting, and legal managers) are available on our
website at www.arrisi.com under Investor Relations,
Corporate Governance. The website also will disclose whether
there have been any amendments or waivers to the Code of Ethics
and Financial Code of Ethics. ARRIS will provide copies of these
documents in electronic or paper form upon request to Investor
Relations, free of charge.
ARRIS board of directors has identified Matthew Kearney
and John Petty, both members of the Audit Committee, as our
audit committee financial experts, as defined by the SEC.
|
|
Item 11.
|
Executive
Compensation
|
Information regarding compensation of officers and directors of
ARRIS is set forth under the captions entitled Executive
Compensation, Compensation of Directors,
Employment Contracts and Termination of Employment and
Change-In-Control
Arrangements, Committees of the Board of Directors
and Meeting Attendance Compensation Committee,
and Compensation Committee Report in the Proxy
Statement and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners, Management and Related
Stockholders Matters
|
Information regarding ownership of ARRIS common stock is set
forth under the captions entitled Equity Compensation Plan
Information, Security Ownership of Management
and Security Ownership of Principal Stockholders in
the Proxy Statement and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships, Related Transactions, and Director
Independence
|
Information regarding certain relationships, related
transactions with ARRIS, and director independence is set forth
under the captions entitled Compensation of
Directors, Certain Relationships and Related Party
Transactions, and Election of Directors in the
Proxy Statement and is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information regarding principal accountant fees and services is
set forth under the caption Relationship with Independent
Registered Public Accounting Firm in the Proxy Statement
and is incorporated herein by reference.
87
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial
Statements
The following Consolidated Financial Statements of ARRIS Group,
Inc. and Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm are filed as part of this
Report.
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
53
|
|
Consolidated Balance Sheets at
December 31, 2006 and 2005
|
|
|
54
|
|
Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and
2004
|
|
|
55
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
56
|
|
Consolidated Statements of
Stockholders Equity for the years ended December 31,
2006, 2005 and 2004
|
|
|
58
|
|
Notes to the Consolidated
Financial Statements
|
|
|
60
|
|
88
(a)(2) Financial
Statement Schedules
The following consolidated financial statement schedule of ARRIS
is included in this item pursuant to paragraph (b) of
Item 15:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are not applicable, and therefore have been omitted.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Charge to
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,729
|
|
|
$
|
(174
|
)
|
|
$
|
(21
|
)
|
|
$
|
3,576
|
|
Reserve for obsolete and excess
inventory(2)
|
|
$
|
15,151
|
|
|
$
|
2,880
|
|
|
$
|
4,786
|
|
|
$
|
13,245
|
|
Income tax valuation allowance(3)
|
|
$
|
87,202
|
|
|
$
|
|
|
|
$
|
77,809
|
|
|
$
|
9,393
|
|
YEAR ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,829
|
|
|
$
|
(438
|
)
|
|
$
|
(338
|
)
|
|
$
|
3,729
|
|
Reserve for obsolete and excess
inventory(2)
|
|
$
|
18,832
|
|
|
$
|
4,902
|
|
|
$
|
8,583
|
|
|
$
|
15,151
|
|
Income tax valuation allowance(3)
|
|
$
|
101,933
|
|
|
$
|
|
|
|
$
|
14,731
|
|
|
$
|
87,202
|
|
YEAR ENDED DECEMBER 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,446
|
|
|
$
|
(543
|
)
|
|
$
|
74
|
|
|
$
|
3,829
|
|
Reserve for obsolete and excess
inventory(2)
|
|
$
|
19,294
|
|
|
$
|
5,595
|
|
|
$
|
6,057
|
|
|
$
|
18,832
|
|
Income tax valuation allowance(3)
|
|
$
|
91,322
|
|
|
$
|
10,611
|
|
|
$
|
|
|
|
$
|
101,933
|
|
|
|
|
(1) |
|
Represents: a) Uncollectible accounts written off, net of
recoveries and write-offs, b) Net change in the sales
return and allowance account, and c) Disposal of obsolete
and excess inventory, and d) Release and correction of
valuation allowances. |
|
(2) |
|
The reserve for obsolescence and excess inventory is included in
inventories. |
|
(3) |
|
The income tax valuation allowance is included in current and
noncurrent deferred income tax assets. |
89
Each management contract or compensation plan required to be
filed as an exhibit is identified by an asterisk (*).
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for
|
|
|
|
|
incorporation by reference are
|
|
|
|
|
ARRIS (formerly known as
|
Exhibit
|
|
|
|
Broadband Parent, Inc.) filings
|
Number
|
|
Description of Exhibit
|
|
unless otherwise noted
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation
|
|
Registration
Statement #333-61524,
Exhibit 3.1.
|
|
3
|
.2
|
|
Certificate of Amendment to
Amended and Restated Certificate of Incorporation
|
|
August 3, 2001
Form 8-A,
Exhibit 3.2.
|
|
3
|
.3
|
|
By-laws
|
|
Registration
Statement #333-61524,
Exhibit 3.2, filed by Broadband Parent Corporation
|
|
4
|
.1
|
|
Form of Certificate for Common
Stock
|
|
Registration
Statement #333-61524,
Exhibit 4.1.
|
|
4
|
.2
|
|
Rights Agreement dated
October 3, 2002
|
|
October 3, 2002
Form 8-K
Exhibit 4.1
|
|
4
|
.3
|
|
Indenture dated November 13,
2006
|
|
November 16, 2006
Form 8-K,
Exhibit 4.5.
|
|
10
|
.1(a)*
|
|
Amended and Restated Employment
Agreement with Robert J. Stanzione, dated August 6, 2001
|
|
September 30, 2001
Form 10-Q,
Exhibit 10.10(c).
|
|
10
|
.1(b)*
|
|
Supplemental Executive Retirement
Plan for Robert J. Stanzione, effective August 6, 2001
|
|
September 30, 2001
Form 10-Q,
Exhibit 10.10(d).
|
|
10
|
.1(c)*
|
|
Amendment to Employment Agreement
with Robert J. Stanzione, dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.7.
|
|
10
|
.2*
|
|
Amended and Restated Employment
Agreement with Lawrence A. Margolis, dated April 29, 1999
|
|
June 30, 1999
Form 10-Q,
Exhibit 10.33, filed by ANTEC Corporation.
|
|
10
|
.1(c)*
|
|
Amendment to Employment Agreement
with Lawrence A. Margolis, dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.6.
|
|
10
|
.3*
|
|
2001 Stock Incentive Plan
|
|
July 2, 2001
Appendix III of Proxy Statement filed as part of,
Registration Statement
#333-61524,
filed by Broadband Parent Corporation.
|
90
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for
|
|
|
|
|
incorporation by reference are
|
|
|
|
|
ARRIS (formerly known as
|
Exhibit
|
|
|
|
Broadband Parent, Inc.) filings
|
Number
|
|
Description of Exhibit
|
|
unless otherwise noted
|
|
|
10
|
.4*
|
|
Management Incentive Plan
|
|
July 2, 2001 Appendix IV
of Proxy Statement filed as part of Registration Statement
#333-61524,
filed by Broadband Parent Corporation.
|
|
10
|
.5
|
|
Solectron Manufacturing Agreement
and Addendum
|
|
December 31, 2001
Form 10-K,
Exhibit 10.15.
|
|
10
|
.6
|
|
Mitsumi Agreement
|
|
December 31, 2001
Form 10-K,
Exhibit 10.16.
|
|
10
|
.7*
|
|
Form of Employment Agreement with
Ronald M. Coppock, dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.1.
|
|
10
|
.8*
|
|
Employment Agreement with James D.
Lakin dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.2.
|
|
10
|
.9*
|
|
Employment Agreement with David B.
Potts dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.4.
|
|
10
|
.10*
|
|
Employment Agreement with Bryant
K. Isaacs, dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.3.
|
|
10
|
.10*
|
|
Employment Agreement with Robert
Puccini, dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.5.
|
|
10
|
.11*
|
|
2004 Stock Incentive Plan
|
|
Appendix B of Proxy Statement
filed on April 20, 2004
|
|
10
|
.12*
|
|
Employment Agreement with David B.
Potts dated December 8, 2006
|
|
December 12, 2006
Form 8-K,
Exhibit 10.4.
|
|
10
|
.13*
|
|
Form of Stock Options Grant under
2001 and 2004 Stock Incentive Plans
|
|
March 31, 2005
Form, 10-Q,
Exhibit 10.20.
|
|
10
|
.14*
|
|
Form of Restricted Stock Grant
under 2001 and 2004 Stock Incentive Plans
|
|
March 31, 2005
Form, 10-Q,
Exhibit 10.21.
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
Filed herewith.
|
|
23
|
|
|
Consent of Ernst & Young
LLP
|
|
Filed herewith.
|
|
24
|
|
|
Powers of Attorney
|
|
Filed herewith.
|
|
31
|
.1
|
|
Section 302 Certification of
the Chief Executive Officer
|
|
Filed herewith.
|
|
31
|
.2
|
|
Section 302 Certification of
the Chief Financial Officer
|
|
Filed herewith.
|
|
32
|
.1
|
|
Section 906 Certification of
the Chief Executive Officer
|
|
Filed herewith.
|
|
32
|
.2
|
|
Section 906 Certification of
the Chief Financial Officer
|
|
Filed herewith.
|
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ARRIS GROUP, INC.
David B. Potts
Executive Vice President, Chief Financial Officer,
Chief Accounting Officer, and
Chief Information Officer
Dated: February 28, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
/s/ Robert
J.
Stanzione Robert
J. Stanzione
|
|
Chief Executive Officer and
Chairman of the Board of Directors
|
|
February 28, 2007
|
|
|
|
|
|
/s/ David
B. Potts
David
B. Potts
|
|
Executive Vice President, Chief
Financial Officer, Chief Accounting Officer, and Chief
Information Officer
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Alex
B. Best*
Alex
B. Best
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Harry
L. Bosco*
Harry
L. Bosco
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ John
Anderson
Craig*
John
Anderson Craig
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Matthew
B. Kearney*
Matthew
B. Kearney
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ William
H. Lambert*
William
H. Lambert
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ John
R. Petty*
John
R. Petty
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Lawrence
A. Margolis
Lawrence
A. Margolis
(as attorney in fact
for each person indicated)
|
|
|
|
|
92