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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950144-02-003171.txt : 20020415
<SEC-HEADER>0000950144-02-003171.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950144-02-003171
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020401
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARRIS GROUP INC
CENTRAL INDEX KEY: 0001141107
STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
IRS NUMBER: 582588724
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-16631
FILM NUMBER: 02595194
BUSINESS ADDRESS:
STREET 1: 11450 TECHNOLOGY CIRCLE
CITY: DULUTH
STATE: GA
ZIP: 30097
BUSINESS PHONE: 6784732000
MAIL ADDRESS:
STREET 1: 11450 TECHNOLOGY CIRCLE
CITY: DULUTH
STATE: GA
ZIP: 30097
FORMER COMPANY:
FORMER CONFORMED NAME: BROADBAND PARENT CORP
DATE OF NAME CHANGE: 20010521
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>g75005e10-k.txt
<DESCRIPTION>ARRIS GROUP, INC.
<TEXT>
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OF
ARRIS GROUP, INC.
(Formerly named Broadband Parent Corporation and successor registrant to ANTEC
Corporation)
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 58-2588724
SEC FILE NUMBER 001-16631
11450 TECHNOLOGY CIRCLE
DULUTH, GA 30097
(678) 473-2000
ARRIS Group's Common Stock is registered pursuant to Section 12(g) of the
Act. ARRIS Group (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.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in a definitive proxy statement, portions of which are incorporated by
reference in Part III of this Form 10-K.
The aggregate market value of ARRIS Group's Common Stock (computed on the
basis of the last reported sales price per share $8.48 of such stock on the
Nasdaq National Market System) held by non-affiliates as of February 28, 2002
was approximately $303,897,124. As of February 28, 2002, 80,518,266 shares of
the registrant's Common Stock were outstanding. For these purposes, directors,
officers and 10% shareholders have been assumed to be affiliates.
Portions of ARRIS Group's Proxy Statement for its 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.
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<PAGE>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
<S> <C> <C>
PART I
ITEM 1. Business.................................................... 1
- General................................................... 1
- Industry Overview......................................... 1
- Our Principal Products.................................... 3
- Sales and Marketing....................................... 6
- Customers................................................. 6
- Research and Development.................................. 7
- Intellectual Property..................................... 8
- Product Sourcing and Distribution......................... 8
- Backlog................................................... 9
- International Opportunities............................... 9
- Competition............................................... 10
- Employees................................................. 10
- Background and History.................................... 10
ITEM 2. Properties.................................................. 11
ITEM 3. Legal Proceedings........................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 14
ITEM 6. Selected Consolidated Historical Financial Data............. 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 39
ITEM 8. Consolidated Financial Statements and Supplementary Data.... 40
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 74
ITEM 11. Executive Compensation...................................... 74
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 74
ITEM 13. Certain Relationships and Related Transactions.............. 74
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 74
ITEM 14(a). Index to Consolidated Financial Statements and Financial
Statement Schedules......................................... 75
Signatures............................................................... 79
</Table>
i
<PAGE>
PART I
ITEM 1. BUSINESS
As used in this Annual Report, "we", "our", "us", "the Company", and
"ARRIS" refer to Arris Group, Inc. and our consolidated subsidiaries, unless the
context otherwise requires.
GENERAL
ARRIS, the successor to ANTEC Corporation, develops and supplies equipment
and technology for cable system operators and other broadband service providers.
We specialize in developing advanced cable telephony equipment enabling the
delivery of converged services, (voice, video and data) through broadband local
access networks and designing and engineering hybrid fiber-coax architectures.
Our complete solutions for internet protocol ("IP") and optical transport allow
broadband service providers to deliver a full range of integrated voice, video
and data services to their subscribers.
INDUSTRY OVERVIEW
The demand for broadband access has increased significantly in recent years
due to the powerful growth of the internet facilitated by the widespread use of
the world wide web for communicating and accessing information. Rapid growth in
the number of internet users and the demand for high-speed, high-volume
interactive services has strained existing communication networks. Increasingly,
the high-speed internet access experienced at work is being demanded at home.
The increase in volume and complexity of the signals transmitted through the
network has continually pushed broadband system operators to deploy new
technologies as they evolve. Additionally, system operators are looking for
products and technology that is flexible, cost effective, easily deployable and
scalable to meet future demand and mix of services. Because the technologies are
evolving and the signals are growing in complexity and volume, broadband system
operators need equipment that provides the necessary technical capacity at a
reasonable cost at the time of initial deployment and the flexibility to
accommodate expansion and technological advances. There also is a need to
customize equipment to allow for different types and combinations of services.
Our product offerings position us well to meet these industry challenges,
offering a full range of end-to-end solutions.
A broadband system consists of three principal segments.
- Headend. The headend is where the cable system operator receives
television signals via satellite and other sources and interfaces with
the internet and public switched networks, such as traditional telephone
systems. The headend facility organizes, processes and retransmits those
signals through the distribution network to subscribers.
- Distribution Network. The distribution network consists of fiber optic
and coaxial cables and associated optical and electronic equipment that
take the original signal from the headend and transmits it throughout the
cable system to nodes.
- Drop. Drops extend from nodes to subscribers' homes and connect to a
subscriber's television set, converter box, voice port device or computer
modem. A converter box may be addressable or non-addressable. An
addressable converter box permits the delivery of premium cable services,
including pay-per-view programming, by enabling the cable operator to
control the subscriber services through the headend. A non-addressable
converter box is one in which premium channels are activated or
eliminated by traps installed in the drop system outside the home.
Historically, cable systems offered one-way video only service. As a result
of technological advancements throughout the communications industry, these
systems are going through dramatic changes:
- to compete against other communications technologies, including digital
subscriber lines, local multiport distribution service and direct
broadcast satellite technologies, cable operators are upgrading their
networks to two-way, interactive broadband networks providing new and
improved services,
1
<PAGE>
- to increase share value through higher revenue growth, cable operators
are offering enhanced subscriber services such as high-speed data,
telephony, digital video, and video on demand which present incremental
revenue sources), and
- to provide greater bandwidth, service capacity, and reduced operating
expenses, cable operators must increase and deepen their utilization of
fiber optic technology, including dense wavelength division multiplexing
(a process by which more information is transmitted over a fiber optic
line than previously could be transmitted) products.
Traditionally, cable systems used coaxial cable and a series of radio
frequency, or RF amplifiers throughout a distribution network. Today, almost
every substantial upgrade or rebuild replaces elements of the traditional system
with fiber optic technology. The use of fiber optic technology enables operators
to transmit higher bandwidth signals greater distances and with less signal
degradation than in a traditional coaxial system. In addition, fiber optic
cable's capacity to transmit a wider bandwidth over greater distances than
coaxial cable allows for the transmission of more video, data and telephony
services to subscribers' premises. The use of fiber optic technology also
reduces the need for overall maintenance costs associated with active electronic
components. In a fiber optic network, optical signals are transmitted throughout
the distribution system along a fiber optic cable from the headend to the node,
where the signal is received and converted to RF electronic signals, and
transferred via coaxial cable to the subscriber premises.
The most recent significant advancements in cable technology have occurred
in cable telephony. Historically, cable telephone service was provided using
constant bit rate, or CBR technology, which utilizes the switched-circuit
technology currently used in traditional phone networks. Cable telephony using
CBR technology is an established cable telephony solution deployed in
approximately twenty-six countries and designed to provide telephone services,
including all of the custom calling features, to subscribers' home or office
over a hybrid fiber-coax network. This is a proven carrier-class telephony
solution that enables operators to directly compete with incumbent telephone
carriers with voice services and class-features, which include caller ID,
call-waiting and three-party conferencing. At the end of 2001, ARRIS
Cornerstone(R) CBR cable telephone products served over 2.2 million subscriber
lines with more than thirty operators worldwide.
A new technology is telephony using internet protocol, or IP. This
technology, called voice over IP, or VoIP, permits cable operators to provide
toll-quality cable telephony at costs substantially below those associated with
CBR technology. VoIP technology has been deployed by several system operators
throughout the world and is being tested in trials being conducted by other
system operators.
Data and voice over IP services are governed by a set of technical
standards promulgated by CableLabs(R) in North America and TComLabs(R) in
Europe, two industry trade associations. While the standards set out by these
two bodies necessarily differ in some ways to accommodate the differences in
hybrid fiber-coax network architectures between North America and Europe, they
have a great deal of commonality. The primary data standard specification for
North America is entitled "Data Over Cable Service Interface Specification", or
DOCSIS. Release 1.1 of this specification currently is the governing standard
for data services in North America. The "EuroDOCSIS" standard Release 1.1 is the
same for Europe. A new version of the standard, DOCSIS 2.0, recently has been
released which, will probably not be implemented until 2003. DOCSIS 2.0 builds
upon the capabilities of DOCSIS 1.0 and DOCSIS 1.1 and adds throughput in the
upstream portion of the cable plant -from the consumer out to the Internet. In
addition to the DOCSIS standards which govern data transmission, CableLabs(R)
has defined the PacketCable(R) standard for Voice over IP. This standard defines
the interfaces among network elements such as cable modem termination systems,
terminal devices, and servers to provide a high quality IP telephony service
over the hybrid fiber-coax network.
2
<PAGE>
OUR PRINCIPAL PRODUCTS
We provide cable system operators with a comprehensive product offering
that meets their end-to-end needs, from headend to subscriber premises. We
divide our product offerings into three categories:
<Table>
<S> <C>
Broadband................................ CBR and VoIP products, including headend
and subscriber premises equipment. This
category also includes our
state-of-the-art Operations,
Administration, Maintenance, and
Provisioning software and our systems
integration services.
Transmission, Optical and Outside Fiber optic related transmission
Plant.................................. products, including optical transmission
products, radio frequency transmission
products, and interconnectivity products.
Supplies and Services.................... Infrastructure products for fiber optic
or coaxial networks built under or above
ground, including cable and strand,
vaults, conduit, drop materials, tools,
and test equipment.
</Table>
BROADBAND
Constant Bit Rate Products
Headend -- We market our headend equipment under the brand name
Cornerstone(R) Voice. Cornerstone Voice products for CBR technology include host
digital terminals, or HDT. An HDT is the device that interfaces between
public-switched networks and the hybrid fiber-coax network. Because the
Cornerstone Voice system is easy to implement, economical and scaleable, network
operators can offer telephony at a low penetration level and expand as customer
demand increases. ARRIS designs its equipment to meet the strict performance
reliability specifications and demanding environmental requirements expected of
a lifeline, carrier-class residential telephone service. This reliability and
robust design enables ARRIS' Cornerstone customers to compete at parity with the
incumbent local telephone company.
Subscriber Premises -- The key equipment at subscriber premises is a
network interface unit, or NIU. We market our NIUs under the brand name Voice
Port(TM). Voice Port(TM)s are the most widely deployed CBR network interface
units. Voice Ports work with the Cornerstone HDT to provide cable telephony and
pass through video signals. Operators who are deploying Cornerstone Data
(high-speed data) will deploy cable modems inside the home or work premises and
overlay the signal on to the same hybrid fiber-coax network as the Cornerstone
Voice application. This combination of product solutions provides subscribers
with voice and high-speed data functionality from the same operator. The Voice
Port portfolio includes a two-line single-family residence Voice Port NIU, a
two-line integrated indoor Voice Port NIU, a four-line Voice Port NIU, and a
twenty-four-line Voice Port NIU.
Voice over IP and Data Products
Headend -- The heart of a voice over IP headend is a "cable modem
termination system", or CMTS. A CMTS, along with a call agent and a gateway,
provide the ability to integrate a public-switched network, the Internet and a
hybrid fiber-coax network. The CMTS provides format conversion between the
formats used in the Internet and the formats used in the hybrid coax-networks.
It also is responsible for initializing and monitoring all cable modems
connected to the hybrid fiber-coax network. ARRIS provides two products that are
used in the cable operator's headend to provide voice over IP and high-speed
data services to residential subscribers. These are the Cornerstone Data CMTS
1500 and the Cadant C4 CMTS:
- The Cornerstone(R) Data CMTS 1500 is DOCSIS 1.1 and EuroDOCSIS 1.0
qualified. It is a scaleable headend solution, providing high-speed data
and VoIP services in headends from several thousand to 50,000
subscribers. We also provide a modular redundant chassis to enable CMTS
1500's to be
3
<PAGE>
grouped together with a 4:1 redundant architecture providing the
requisite reliability for telephony operation.
- The Cadant(R) C4(TM) CMTS is a highly dense, chassis-based product that
provides built-in redundancy for carrier-grade performance. It is DOCSIS
1.1 qualified and will support recently released DOCSIS 2.0 and
PacketCable standards. Each chassis supports up to 32 downstream channels
and 128 upstream channels making it one of the highest density scaleable
headend products currently available. It will provide high-speed data and
VoIP services in headends from 10,000 to hundreds of thousands of
subscribers.
Subscriber Premises -- This subscriber premises equipment includes cable
modems (DOCSIS 1.0 and 1.1 certified) for high-speed data applications and
embedded multimedia terminal adapters, or E-MTA for high-speed data and
telephony applications. We produce the Touchstone(TM) E-MTA line for deployments
in DOCSIS 1.1 hybrid fiber-coax networks. The Touchstone product line consists
of the Touchstone telephony modem for indoor applications and the Touchstone
telephony port for outdoor deployments. These E-MTAs support enhanced services
of IP telephony and high-speed data on the same network to residential and
business subscribers. The Touchstone product line complies with both DOCSIS and
PacketCable standards. The Touchstone telephony modem is DOCSIS 1.1 certified.
The Touchstone telephony port is based on the same design as the modem but has
not been submitted for certification. The PacketCable solution builds on DOCSIS
1.1 and its quality of service enhancements to support lifeline telephony
deployed over hybrid fiber-coax networks. The Touchstone product line provides
carrier-grade performance to enable operators to provide all IP and video
services on the same network using common equipment. We also are actively
involved with the new evolving DOCSIS 2.0 standard and are participating in
early interoperability testing with the Touchstone product family at CableLabs.
OAM&P -- OAM&P stands for Operations, Administration, Maintenance and
Provisioning. It is a software suite that enables operators to automate many of
the functions required to manage and grow subscribers for the multiple services
offered. Without OAM&P automation, it would be difficult for an operator to
manage subscriber growth effectively.
Our subscriber management products provide operators with the ability to
automatically provision headend and subscriber premises equipment to reflect
subscribers' parameters, provide key data for third party billing software, and
complete maintenance operations. Our Cornerstone(R) Cable Provisioning System
2000, or CPS2000, provides automated provisioning software for control of the
CMTS and cable modems. CPS 2000 works with various billing and middle-ware
software programs. ARRIS has formed strategic relationships with vendors to
integrate existing Cornerstone software for CMTS and Cable Modem OAM&P
functions. Operators are able to perform OAM&P functions across Cornerstone
Voice and Cornerstone Data employing the Cadant CMTS and Touchstone product
lines using a common OAM&P solution. The Cadant G2 IMS software supports
configuration performance and fault management of the Cadant C4 CMTS through
easy to use graphical user interfaces. A single G2 IMS server can support up to
100 C4 CMTS chassis and 20 simultaneous client applications.
System Integration -- We are a full service system integrator for converged
services over hybrid fiber-coax networks. We historically have been a pioneer in
the voice and data over hybrid fiber-coax business and have the experience and
infrastructure in place to help operators launch these services. Systems
integration offers the service provider a fully integrated solution that has
been tested end-to-end for interoperability, performance, capacity, scalability,
and reliability prior to ever being installed at the customer facility. This
system integration can be followed up by complete headend and operations center
design, installation, activation, and traffic planning. We offer the operator
coordination of the project management (for the suppliers and the overall
program), and future solution assurance services for the long-term, including
upgrade support, system audits, and configuration management. Our systems
integration service enables operators to rapidly deploy new services on their
networks with the assurance that all of the components of the network will
interoperate seamlessly.
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TRANSMISSION, OPTICAL AND OUTSIDE PLANT
We are a leading supplier of fiber optic related transmission products to
the cable industry. We have three primary product lines:
- OPTICAL TRANSMISSION products consisting of optical transmitters,
receivers and amplifiers, optical nodes, dense wavelength division
multiplexing transport systems, block converters, and element management
software.
- RF TRANSMISSION products, which include RF amplifiers and headend RF
management equipment.
- INTERCONNECTIVITY products, including a full line of fiber management
solutions such as optical entrance enclosures, outside plant fiber optic,
splice closures, transmission equipment and demarcation housings.
Our Laser Link(R) product line supplies the components for transmission and
switching of fiber optic lines within headends and hubs. These products deliver
high-quality signals and can be tailored to meet specific operator requirements.
The Laser Link 1550 nm optical laser transmitters and receivers for headends
convert incoming electronic video signals to an optical signal for transmission
over the fiber optic cable to hubs. The 1310 nm optical lasers, typically
located within hubs are used for a small number of homes passed. The
Transplex(R) Transport System with dense wavelength division multiplexing
provides optical switching within the headend to route fiber optic signals to
the appropriate hubs. The product line also includes RF Integrator(R) systems
for headend/hub RF signal management and fiber pre-amplifiers. LightLink(TM)
termination, couplers, optical and splice enclosures route fiber optics
throughout the headend and hub locations. We also provide an integrated assembly
consisting of the Laser Link mainframe shelves and LightLink(TM) equipment frame
system to provide optimal space and performance efficiencies within headends and
hubs.
Nodes are located between the hub and the subscriber premises and provide
the interface between the fiber optic network and the coaxial distribution
system. The Proteus(TM) scaleable node digital return transmitter detects the
light coming out of the cable and converts it back into electronic signals for
transmission to subscriber premises via coaxial cable. The RF Link(TM) 870 MHz
mini-bridger strengthens the signal either on its way to the node or from the
node. If line distances require it, RF Link 870 MHz line extenders provide
additional amplification to provide high-quality signals to the subscriber
premises. LightGuard(TM) enclosures are used for external splicing of the fiber
optic signals as the plant design extends to reach more homes. Regal(R) taps and
line passives split the signal for transmission along various branches of the
distribution system.
The physical distribution of the RF signal to the subscriber premises
requires a flexible selection of enclosures, connectors and drop assemblies to
meet different geographical and environmental needs. We provide MONARCH(TM)
enclosures for above ground and underground fiber and RF cable distribution as
well as network interface devices, or NIDs, for the customer premises. With the
advent of advanced services, connectors have become a critical element in the
reproduction of quality signals and reduction of noise interference. Our
Digicon(R) connector provides a high quality and easy to install component for
installations.
We also are a large supplier of other telecommunications products,
including T1 and digital subscriber technology components, for broadband signals
in traditional telephony architectures.
SUPPLIES AND SERVICES
We provide the infrastructure products for fiber optic or coaxial networks
built above ground (aerial) or underground. Operators with aerial system
requirements may obtain galvanized steel cables or strand to support the
transmission cables that run pole-to-pole as well as the support and attachment
hardware necessary to complete the system. For underground systems, we also
supply MONARCH(TM) underground vaults, pedestals, and conduit for plant
build-out. Aerial and underground drop installations to subscriber premises
needs are provided with Regal(R) taps, line and house passives. We provide a
wide selection of products from tools, test equipment, power protection and
other materials in order to meet the installation and operational needs for
operators anywhere in the world.
5
<PAGE>
SALES AND MARKETING
Our sales force is divided into two groups, North American and
International. Our North American sales force, in turn, is divided into one
group that focuses on the seven largest multiple system operators, or MSOs, and
a second group that focuses on smaller system operators, overbuilders, regional
Bell telephone companies and major communications companies and competitive
local exchange carriers. Our North American sales force is headquartered in both
Duluth, Georgia and Denver, Colorado.
Following our 2001 acquisition of Arris Interactive L.L.C. we significantly
expanded our international sales organization to facilitate sales to customers
previously served by Nortel Networks and to include sales of products for
high-speed data and cable telephony. This expansion included sales offices in
Barcelona, Spain (to service Southern Europe) and in Amsterdam, Netherlands (to
service Northern Europe). A new sales and service office was also added in
Japan, complementing our already existing Hong Kong office.
We maintain an inside sales group that is responsible for regular phone
contact, prompt order entry, timely and accurate delivery and effective sales
administration for the many changes frequently required in any substantial
rebuild or upgrade activity. In addition, the sales structure includes sales
engineers and technicians that can assist customers in system design and
specification and can promptly be on site to "trouble shoot" any problems as
they arise during a project.
We also have marketing and product management teams that focus on each of
the various product categories and work with our engineers and various
technology partners on new products and product improvements. These teams are
responsible for inventory levels and pricing, delivery requirements, 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 and sophisticated information systems to bring additional
value to our customers and provide significant value to our operations
management. Through these information systems, we can provide our customers with
product information ranging from operational manuals to the latest in order
processing information. Through on-going development and refinement, these
programs will help to improve our productivity and enable us to further improve
our customer-focused services.
CUSTOMERS
Although we do sell products to traditional telephone companies and our
broadband products can be deployed not only by cable system operators, but also
by traditional telephone companies, electric utilities and others, the
substantial majority of our sales are to cable system operators. In 2001, as the
US cable industry continued a trend toward consolidation, the seven largest
multiple system operators control over 90% of the US cable market, thereby
making our sales to those MSOs critical to our success. Internationally, the
market is dominated by approximately ten cable system operators, comprised of
US-based MSOs, government entities, and foreign-based multi-media owners. This
group controls approximately 60% of the total international "addressable"
market.
Our sales are substantially dependent upon (1) a system operator's
selection of our equipment, (2) demand for increased broadband services by
subscribers, and (3) general capital expenditure levels by system operators.
Although many of our non-Cornerstone products, e.g., transmission and outside
plant equipment, are purchased by system operators that do not use Cornerstone
technology, Cornerstone sales are critical to our success. Currently 30 MSOs
utilize the Cornerstone product in 56 cities in 15 countries.
According to Kagan World Media, as of June 2001, of the 107.6 million homes
passed by the top twenty-five MSOs in the United States, only 17.5% subscribed
to more than "basic cable." Therefore, substantial opportunity exists for
demand-driven growth in the sales of our products. This demand is dependent,
however, on subscriber demand for higher speed internet, alternative telephony,
and other services requiring more sophisticated equipment.
6
<PAGE>
General capital expenditures by system operators are a product of many
factors, including the general economy, competitive responses to their expansion
by traditional telephone companies, consumer demand, cost and availability of
capital. According to Gartner Dataquest, capital expenditures industry-wide
increased from $179.7 billion in 1999 to $217.6 billion in 2000, and decreased
to $210.7 billion in 2001, due to various factors. Industry analysts expect
capital spending to increase as demand for broadband services increase and new
technology is implemented -- such as the Cadant CMTS voice over IP system -- but
there can be no assurances that this will occur.
Our two largest customers are AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000) and Cox Communications. Their sales for
2001, 2000, and 1999 are set forth below:
<Table>
<Caption>
AT&T (INCLUDING MEDIA ONE) COX COMMUNICATIONS
-------------------------- ------------------
(IN MILLIONS)
<S> <C> <C>
2001 sales................................. $237.9 $113.5
2001 percentage of total sales............. 31.8% 15.2%
2000 sales................................. $431.5 $117.9
2000 percentage of total sales............. 43.2% 11.8%
1999 sales................................. $391.1 $ 58.5
1999 percentage of total sales............. 46.3% 6.9%
</Table>
Other than Adelphia Communications Corp. and Insight, which accounted for
approximately 8.1% and 5.3%, respectively, of ARRIS' total sales for 2001, no
other customer provided more than 5% of ARRIS' total sales for the year ended
December 31, 2001. Adelphia accounted for approximately 5% of ARRIS' total sales
for December 31, 2000, and no other customer (other than AT&T and Cox
Communications) provided more than 5% of ARRIS' total sales for the year ended
December 31, 2000. No customer other than AT&T and Cox Communications provided
more than 5% of ARRIS' total sales for the year ended December 31, 1999.
Liberty Media Corporation, which had been a part of the Liberty Media Group
of AT&T (whose financial performance was "tracked" by a separate class of AT&T
stock), effectively controls approximately 10% of ARRIS' outstanding common
stock on a fully diluted basis. In August 2001, AT&T spun off Liberty Media to
the holders of its tracking stock, and AT&T subsequently no longer indirectly
owns that interest in ARRIS.
On December 19, 2001, AT&T Broadband and Comcast Corporation announced a
definitive agreement to combine AT&T Broadband with Comcast.
RESEARCH AND DEVELOPMENT
We are committed to the development of new technology in the evolving
broadband market. New products are developed in our research and development
laboratories in Duluth, Georgia; Andover, Massachusetts; and, as a result of our
2002 acquisition of Cadant, Inc., Lisle, Illinois. We also attempt to form
strategic alliances with world-class producers of complementary technology to
leverage its technologies and provide "best-in-class" solutions.
Research and development expenses in 2001, 2000, and 1999 were
approximately $54.5 million, $23.4 million, and $16.6 million, respectively. The
increase in 2001 was attributable primarily to the inclusion of Arris
Interactive's research and development activities beginning August 3, 2001. We
expect that research and development expenses will increase in 2002 compared to
2001 due to the inclusion of Arris Interactive for the entire year and the
development of new technologies from the recent acquisition of Cadant's assets.
We believe that our future success depends on rapid adoption and
implementation of Broadband local access industry specifications, as well as
rapid innovation and introduction of technologies that provide service and
performance differentiation. Examples of this include the industry-leading
DOCSIS 1.1 qualified CMTS1500 products and Cadant C4 product line (which was
acquired in January 2002), as well as the DOCSIS 1.1 certified Touchstone
telephony modem and the embedded multi-media terminal adapter.
7
<PAGE>
We believe the demand for new services requiring intensive, high-touch
processing and sophisticated management techniques will continue to increase. We
also believe this standards-based market place will continue to exert
significant pricing pressures. As a result, our product development activities
are primarily directed at the following areas:
- continued development of our IP-based products, such as the Cadant C4
- the Touchstone telephony Modem product line
- sharp focus on product cost and cost reduction
- extensive partnerships with best-in-class Call Management and Network OSS
vendors
- network solution testing and end-to-end integration services
We also continue to invest in the development of fiber optic products
targeted at broadband local access for residential and small business needs.
INTELLECTUAL PROPERTY
We have an aggressive program for protecting our intellectual property. The
program consists of maintaining our portfolio of 99 issued patents (both US and
foreign) and pursuing patent protection on new inventions (currently 83 patent
applications are pending). 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, and patent applications are filed on the
inventions that meet the criteria. Our patents and patent applications generally
are in the areas of optics, telecommunications hardware and software, and
related technologies. Recent research and development has led to a number of
patent applications in technology related to DOCSIS. The January 2002 purchase
of the assets of Cadant resulted in the acquisition of 19 US patent
applications, 7 PCT applications, 5 trademark applications, 1 US registered
trademark and 5 registered copyrights. The Cadant patents are in the area of
cable modems and cable modem termination systems.
For critical 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 its industry.
We have a program for protecting and developing trademarks. The 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 will develop strong
brand loyalty and name recognition. This is intended to protect our trademarks
from dilution or cancellation.
PRODUCT SOURCING AND DISTRIBUTION
Formerly, we manufactured or assembled a substantial portion of our
products. Manufacturing operations ranged from electro/mechanical,
labor-intensive assembly to sophisticated electronic surface mount automated
assembly lines. We operated five major manufacturing facilities as our primary
method of product sourcing. However, during the third quarter of 2001, we made
the decision to outsource most of our manufacturing and close four facilities
located in El Paso, Texas and Juarez, Mexico. The closure of the factories is
expected to be completed during the first half of 2002. Our remaining factory is
a 130,000 square foot, ISO certified facility in Rock Falls, Illinois. This
facility manufactures various outside plant equipment including T1 repeater
cases and transition cable.
Our decision to outsource manufacturing reflects the ongoing weakness in
industry capital spending and our evaluation of under-performing assets. Our new
product sourcing strategy centers around the use of contract manufacturers to
subcontract production where the scale and capacity make it economical to do so.
The facilities owned and operated by the contract manufacturers currently being
used are located in the United States, Mexico and the Philippines. Our largest
outsource manufacturers are Solectron and Mitsumi,
8
<PAGE>
located in Mexico and Japan, respectively. We distribute a substantial number of
products that are not designed or trademarked by us in order to provide our
customers with a comprehensive product offering. For instance, we distribute
hardware and installation products. These products are distributed through
regional warehouses in North Carolina, California and Rotterdam, Netherlands and
through drop shipments from our contract manufacturers located throughout the
world.
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, 2001 was approximately $132.8
million, at December 31, 2000 was approximately $209.5 million and at December
31, 1999 was approximately $105.4 million.
We believe that substantially all of the backlog existing at December 31,
2001, will be shipped in 2002.
INTERNATIONAL OPPORTUNITIES
We sell our products primarily in North America. Our international revenue
is generated from Asia Pacific, Europe, Latin America and Canada. The Asia
Pacific market includes Australia, China, Hong Kong, India, Indonesia, Japan,
Korea, Malaysia, New Zealand, Philippines, Sampan, Singapore, Taiwan and
Thailand. The European market includes France, Ireland, Italy, Netherlands,
Portugal, Spain and the United Kingdom. Sales to international customers were
approximately 14.6%, 8.5% and 6.4% of total sales for the years ended December
31, 2001, 2000 and 1999, respectively. International sales for the years ended
December 31, 2001, 2000 and 1999 were as follows:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001* 2000 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
International region
Asia Pacific.................................. $ 29,946 $15,500 $12,445
Europe........................................ 52,199 36,378 19,035
Latin America................................. 20,531 29,232 19,545
Canada........................................ 6,232 3,820 3,347
-------- ------- -------
Total international sales....................... $108,908 $84,930 $54,372
======== ======= =======
</Table>
* The year ended December 31, 2001 included approximately five months of
international Cornerstone revenue. Under the previous joint venture agreement
with Nortel Networks, ARRIS was not able to sell the Arris Interactive L.L.C.
products internationally. This agreement terminated upon our acquisition of
Nortel Networks' share of Arris Interactive L.L.C. on August 3, 2001.
We believe that international opportunities exist and continues to
strategically invest in worldwide marketing efforts, which have yielded some
promising results in several regions. During 2001, our international group was
actively engaged in replacing the Nortel Networks sales and support
infrastructure that was in place with Arris Interactive L.L.C. We made some
significant operational and geographical changes in the international
marketplace. We consolidated our international offices and warehouses to the
Netherlands from the United Kingdom to service all of Europe. We also opened a
sales office in Chile to address the growing market in that region. We plan on
expanding our international presence in the Far East by opening a sales and
warehouse facility in Japan by the second quarter of 2002. We currently maintain
sales offices in Argentina, Australia, Chile, China, Hong Kong, Mexico, Spain
and the Netherlands.
9
<PAGE>
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 ever-changing demands of the
industry. We compete with national, regional and local manufacturers,
distributors and wholesalers including some companies larger than us. Our major
competitors include:
- ADC Telecommunications, Inc.
- C-COR.net Corporation
- Cisco Systems
- Harmonic Inc.
- Juniper Networks
- Motorola, Inc.
- Phillips
- Riverstone Networks, Inc.
- Scientific-Atlanta
- Tellabs Inc.
- Terayon Communication Systems
Various manufacturers who are suppliers to us sell directly, as well as
through distributors, into the cable marketplace. In addition, because of the
convergence of the cable, telecommunications and computer industries and rapid
technological development, new competitors are entering the cable market. Many
of our competitors or potential competitors are substantially larger and have
greater resources than us.
Our products are marketed with emphasis on quality and are competitively
priced. Product reliability and performance, superior and responsive technical
and administrative support, and breadth of product offerings are key criteria
for competition. Technological innovations and speed to market are an additional
basis for competition.
EMPLOYEES
As of February 28, 2002, we had 1,416 full-time employees of which
approximately 66 were members of a union. We believe that we have maintained an
excellent relationship with our employees. Our future success depends, in part,
on our ability to attract and retain key executive, marketing, engineering and
sales personnel. Competition for qualified personnel in the cable industry is
intense, and the loss of certain key personnel could have a material adverse
effect on us. We have entered into employment contracts with our key executive
officers and have non-compete agreements with substantially all of our
employees. We also have a stock option program that is intended to provide
substantial incentives for our key employees to remain with us.
BACKGROUND AND HISTORY
ARRIS is the successor to ANTEC Corporation. From its inception until its
initial public offering in 1993, ANTEC was primarily a distributor of cable
television equipment and was owned and operated by Anixter, Inc. Subsequently
ANTEC completed several important strategic transactions and formed joint
ventures designed to expand significantly its product offerings. Most recently,
ANTEC formed a new holding company, ARRIS, and acquired Nortel Networks'
interest in Arris Interactive L.L.C., which previously had been a joint venture
between ANTEC and Nortel Networks.
10
<PAGE>
A synopsis of ARRIS' evolution:
- 1969 -- Anixter entered the cable industry
- 1987 -- Anixter acquired TeleWire Supply
- 1988 -- Anixter and AT&T developed the first analog video laser
transmitter for the cable industry (Laser Link 1)
- 1991 -- ANTEC was established
- 1993 -- ANTEC's initial public offering
- 1994 -- ANTEC completed the acquisition of the following companies, which
significantly expanded its product development and manufacturing
capabilities:
- Electronic System Products, Inc. ("ESP"), an engineering consulting firm
with core capabilities in digital design, RF design and application
specific integrated circuit development for the broadband communications
industry
- Power Guard, Inc., a manufacturer of power supplies and high security
enclosures for broadband communications networks
- Keptel, Inc., a designer, manufacturer and marketer of outside plant
telecommunications and transmission equipment for both residential and
commercial use, primarily by telephone companies
- 1995 -- ANTEC and Nortel Networks formed Arris Interactive L.L.C.,
focused on the development, manufacture and sale of products that
enable the provision of a broad range of telephone and data
services over HFC architectures; ANTEC initially owned 25% and
Nortel Networks owned 75% of the Arris Interactive joint venture
- 1997 -- ANTEC acquired TSX Corporation, which provided electronic
manufacturing capabilities and expanded the Company's product
lines to include amplifiers and line extenders and enhanced laser
transmitters and receivers and optical node product lines
- 1998 -- ANTEC introduced the industry's first 1550 nm narrowcast
transmitter and dense wavelength division multiplexing ("DWDM")
optical transmission system
- 1999 -- ANTEC completed the combination of the Broadband Technology
Division of Nortel Networks, which is known as LANcity, with
Arris Interactive, resulting in an increase in Nortel Networks'
interest in the joint venture to 81.25% while ANTEC's interest
was reduced to 18.75%
- 1999 -- ANTEC introduced the industry's first 18 band block converter and
combined that with the DWDM allowing 144 bands on a single fiber
- 2001 -- ARRIS acquired all of Nortel Networks' ownership interest in
Arris Interactive in exchange for approximately 49% of the common
stock of a newly formed holding company, ARRIS, and a preferred
membership interest in Arris Interactive.
- 2001 -- ARRIS sold substantially all of its power product lines. During
2000, sales in those product lines were approximately $18.0
million, and during 2001 (through the date of the sale), sales
were approximately $8.1 million. ARRIS continues as an authorized
distributor and representative for these power product lines.
- 2002 -- ARRIS acquired substantially all of the assets of Cadant, Inc., a
privately held designer and manufacturer of next-generation cable
modem termination systems
ITEM 2. PROPERTIES
We currently conduct our operations from 13 different locations; one of
which we own, while the remaining 12 are leased. These facilities consist of
sales and administrative offices, warehouses and
11
<PAGE>
manufacturing facilities totaling approximately 900,000 square feet. ARRIS'
long-term leases expire at various dates through 2009. The principal properties
are located in Ontario, California; Duluth, Georgia; Suwanee, Georgia;
Englewood, Colorado; El Paso, Texas; Cary, North Carolina; Rock Falls, Illinois;
and Juarez, Mexico. ARRIS believes that its current properties are adequate for
its operations. During 2001, ARRIS began to implement a plan to expand on its
manufacturing outsourcing strategy and close down the factories located in El
Paso, Texas and Juarez, Mexico. The closure of the factories is anticipated to
be complete during the first half of 2002. We currently are under lease
obligations in three facilities, which we are not conducting operations in,
however these facilities are subleased to third parties.
A summary of our leased properties that are currently in use is as follows:
<Table>
<Caption>
LOCATION DESCRIPTION AREA (SQ. FT.) LEASE EXPIRATION
- -------- ----------- -------------- -----------------
<S> <C> <C> <C>
Ontario, California............ Warehouse 191,853 December 31, 2003
Duluth, Georgia................ Office space 143,000 June 14, 2009
Rock Falls, Illinois........... Manufacturing facility 108,550 April 30, 2002
Suwanee, Georgia............... Office space 97,319 February 28, 2007
Andover, Massachusetts......... Office space 75,037 July 7, 2004
Englewood, Colorado............ Warehouse/Office space 42,880 March 30, 2006
El Paso, Texas................. Warehouse 37,500 June 14, 2003
Lisle, Illinois*............... Office space 35,249 March 31, 2005
Greenville, Mississippi........ Warehouse 30,000 May 31, 2002
Amsterdam...................... Office space 6,181 December 31, 2004
Barcelona...................... Office space 3,600 June 30, 2004
Tokyo.......................... Office space 2,665 February 14, 2004
</Table>
* This location is in relation to the Cadant acquisition, which occurred in
January 2002.
- ---------------
We own the following properties. These facilities have been pledged as
collateral to secure payment of our credit facility. The following table sets
forth the location and approximate square footage of each of our owned
properties:
<Table>
<Caption>
LOCATION DESCRIPTION AREA (SQ. FT.)
- -------- ----------- --------------
<S> <C> <C>
Juarez, Mexico**................................... Manufacturing facility 152,000
Cary, North Carolina............................... Warehouse 151,500
</Table>
- ---------------
** We are not currently conducting operations out of this facility, due to the
decision to outsource the manufacturing functions. This property is currently
for sale.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently engaged in any litigation that it believes
would have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matters were submitted to a vote of
the Company's security holders.
12
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John M. Egan.............................. 54 Chairman and Director
Robert J. Stanzione....................... 53 President, Chief Executive Officer and Director
Lawrence A. Margolis...................... 53 Executive Vice President, Chief Financial Officer,
and Secretary
Gordon E. Halverson....................... 59 Executive Vice President and Chief Executive
Officer, TeleWire Supply
James D. Lakin............................ 58 President, Broadband
Bryant K. Isaacs.......................... 42 President, Network Technologies
Robert Puccini............................ 40 President, TeleWire Supply
Ronald M. Coppock......................... 47 President, International
David B. Potts............................ 44 Senior Vice President, Finance and Chief Information
Officer
Leonard E. Travis......................... 39 Vice President and Controller
James E. Knox............................. 64 General Counsel and Assistant Secretary
Michael H. Durant......................... 44 Treasurer
</Table>
John M. Egan joined the Company in 1973 and has been Chairman of ARRIS'
Board of Directors since 1997. Mr. Egan was President and Chief Executive
Officer of ARRIS and its predecessors from 1980 to December 31, 1999. On January
1, 2000, Mr. Egan stepped down from his role as Chief Executive Officer of
ARRIS. He remains a full-time employee until June 2002. Mr. Egan is on the Board
of Directors of the National Cable Television Association ("NCTA"), the Walter
Kaitz Foundation, an association seeking to help the cable industry diversify
its management workforce to include minorities, and has been actively involved
with the Society of Cable Television Engineers and Cable Labs, Inc. Mr. Egan
received the NCTA's 1990 Vanguard Award for Associates.
Robert J. Stanzione has been President and Chief Executive Officer since
January 1, 2000. From January 1998 through 1999, Mr. Stanzione was President and
Chief Operating Officer of ARRIS. Mr. Stanzione has been a director of ARRIS
since 1997. From October 1995 to December 1997, he was President and Chief
Executive Officer of Arris Interactive. From 1969 to 1995, he held various
positions with AT&T Corporation.
Lawrence A. Margolis has been Executive Vice President, Chief Financial
Officer and Secretary of ARRIS since 1992 and 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.
Gordon E. Halverson has been Executive Vice President and Chief Executive
Officer, of ARRIS TeleWire Supply since April 1997. From 1990 to April 1997, he
was Executive Vice President, Sales of ARRIS. During the period 1969 to 1990, he
held various executive positions with predecessors of ARRIS. He received the
NCTA's 1993 Vanguard Award for Associates. Mr. Halverson is a member of the
NCTA, Society of Cable Television Engineers, Illinois Cable Association, Cable
Television Administration and Marketing Society.
James D. Lakin has been President, ARRIS Broadband since the acquisition of
Arris Interactive in August 2001. From October 2000 through August 2001, he was
President and Chief Operating Officer of Arris Interactive. From November 1995
until October 2000, Mr. Lakin was Chief Marketing Officer of Arris Interactive.
Prior to 1995, he held various executive positions with Compression Labs, Inc.
and its successor General Instrument Corporation.
Bryant K. Isaacs has been 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.
13
<PAGE>
Robert Puccini has been President of ARRIS TeleWire Supply since 1999, and
prior to that served as Chief Financial Officer of TeleWire for two years. 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. Most recently, Puccini served as Vice
President, Project Management for the company's AT&T account. Mr. Puccini is a
CPA and received a bachelor's degree from DePaul University.
Ronald M. Coppock has been President of ARRIS International 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.
David B. Potts has been the Senior Vice President of Finance and Chief
Information Officer since the acquisition of Arris Interactive, L.L.C. in August
2001. Prior to joining ARRIS, he was Chief Financial Officer of Arris
Interactive 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.
Leonard E. Travis has been Vice President and Controller of ARRIS since
March 2001. From 1998 through 2001, he was the Finance Director -- Europe of
RELTEC Corporation and the Vice President of Finance of Marconi
Services --Americas, a division of RELTEC's successor, Marconi, Plc. Prior to
1998, Mr. Travis held various controller positions in finance and operations at
RELTEC Corporation. Prior to RELTEC, Mr. Travis was with Material Sciences and
Ernst & Whinney. Mr. Travis is a CPA and a CMA.
James E. Knox has been General Counsel and Assistant Secretary since
February 1996. He has been Senior Vice President and Secretary of Anixter
International Inc. since 1986 and was a partner of the law firm of Mayer, Brown
& Platt from 1992 to 1996.
Michael H. Durant has been Treasurer since the acquisition of Arris
Interactive in August 2001. Prior to joining ARRIS, he was the Controller of
Arris Interactive L.L.C. from 2000 through 2001. Mr. Durant held various roles
at Bay Networks and its successor, Nortel Networks from 1996 to 2000, and served
as the Chief Financial Officer of LANcity from 1995 through 1996. Prior to 1995,
Mr. Durant held several finance and operations positions with EDS.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Beginning on August 6, 2001, ARRIS' common stock trades on the Nasdaq
National Market System under the symbol "ARRS". Prior to the ARRIS
reorganization, on August 3, 2001, the Company's common stock traded on the
Nasdaq National Market System under the symbol "ANTC". (See Note 16 of Notes to
14
<PAGE>
the Consolidated Financial Statements.) The following table reports the high and
low trading prices per share of the Company's common stock as listed on the
Nasdaq National Market System:
<Table>
<Caption>
HIGH LOW
------ ------
<S> <C> <C>
2000
First Quarter............................................... $61.25 $28.94
Second Quarter.............................................. 57.00 34.38
Third Quarter............................................... 50.00 20.44
Fourth Quarter.............................................. 29.75 6.88
2001
First Quarter............................................... $14.38 $ 6.63
Second Quarter.............................................. 15.76 5.25
Third Quarter............................................... 13.59 2.68
Fourth Quarter.............................................. 11.65 3.18
</Table>
ARRIS has not paid dividends on its common stock since its inception. The
Company's primary loan agreement contains covenants that prohibit the Company
from paying dividends. (See Note 7 of the Notes to the Consolidated Financial
Statements.)
As of February 28, 2002, there were approximately 163 holders of record of
ARRIS common stock. This number excludes shareholders holding stock under
nominee or street name accounts with brokers.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected consolidated financial data as of December 31, 2001 and 2000
and for each of the three years in the period ended December 31, 2001 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, 1999, 1998 and 1997 and for the years ended December 31, 1998 and 1997 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this document. See
Note 15 of the Notes to the Consolidated Financial Statements for a summary of
our quarterly consolidated financial information.
<Table>
<Caption>
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Net sales............................ $ 747,670 $998,730 $844,756 $546,767 $480,078
Cost of sales(1)(4)(5)(6)(7)......... 628,700 812,958 679,774 404,999 365,860
--------- -------- -------- -------- --------
Gross profit......................... 118,970 185,772 164,982 141,768 114,218
Selling, general, administrative and
development expenses(2)(5)(7)..... 165,670 133,988 111,937 105,643 110,803
Amortization of goodwill............. 4,872 4,917 4,946 4,910 4,927
Amortization of intangibles.......... 7,012 -- -- -- --
In-process R&D write-off(8).......... 18,800 -- -- -- --
Restructuring and other(1)(3)(4)..... 36,541 -- 5,647 9,119 21,550
--------- -------- -------- -------- --------
Operating (loss) income.............. (113,925) 46,867 42,452 22,096 (23,062)
Interest expense..................... 9,315 11,053 12,406 9,337 6,264
Membership interest.................. 4,110 -- -- -- --
Other expense (income), net.......... 10,142 87 (745) (977) (348)
Loss on marketable securities........ 767 773 275 -- --
--------- -------- -------- -------- --------
(Loss) income before income taxes and
extraordinary loss................ (138,259) 34,954 30,516 13,736 (28,978)
Income tax expense (benefit)(10)..... 27,619 14,285 13,806 7,911 (7,534)
--------- -------- -------- -------- --------
Net (loss) income before
extraordinary loss................ (165,878) 20,669 16,710 5,825 (21,444)
Extraordinary loss(9)................ 1,853 -- -- -- --
--------- -------- -------- -------- --------
Net (loss) income.................... $(167,731) $ 20,669 $ 16,710 $ 5,825 $(21,444)
========= ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $ 250,862 $305,921 $255,000 $200,194 $133,302
Total assets......................... 752,115 731,495 700,541 532,645 443,883
Long-term debt....................... 115,000 204,000 183,500 181,000 72,339
Stockholders' equity................. 414,543 341,902 309,338 249,778 295,785
NET (LOSS) INCOME PER COMMON SHARE:
Basic................................ $ (3.13) $ 0.54 $ 0.46 $ 0.16 $ (0.55)
========= ======== ======== ======== ========
Diluted.............................. $ (3.13) $ 0.52 $ 0.43 $ 0.15 $ (0.55)
========= ======== ======== ======== ========
Dividends paid....................... $ -- $ -- $ -- $ -- $ --
========= ======== ======== ======== ========
</Table>
16
<PAGE>
The Company believes that cash loss, cash loss per share, and cash loss
excluding unusual items are additional meaningful measures of operating
performance. However, this information will necessarily be different from
comparable information provided by other companies and should not be used as an
alternative to our operating and other financial information as determined under
accounting principles generally accepted in the United States. This table should
not be considered in isolation or as a measure of a company's profitability or
liquidity.
CALCULATION OF CASH EARNINGS, EXCLUDING UNUSUAL ITEMS:
<Table>
<Caption>
2001 2000
------------ ----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
NET (LOSS) INCOME, INCLUDING UNUSUAL ITEMS.................. $(167,731) $20,669
Add back: Goodwill amortization............................. 11,884 4,917
--------- -------
(155,847) 25,586
UNUSUAL ITEMS:
Impacting gross profit
Inventory write-offs(1)(7)................................ (27,834) (3,500)
Write-down of the Powering product line assets(7)......... (5,834) --
Severance related to workforce reduction(5)............... (1,275) --
One-time warranty expense for specific product(6)......... (4,700) --
Write-off of assets related to Argentinean customer(12)... (4,388) --
Impacting operating (loss) income
Pension curtailment gain(2)............................... -- 2,108
Severance related to workforce reduction(5)............... (3,756) --
Restructuring and impairment charges:
Severance related to factory closure(7)................ (7,479) --
Impairment of fixed assets(7).......................... (14,972) --
Impairment of goodwill -- Powering(7).................. (5,877) --
Lease commitments(7)................................... (3,521) --
Facilities shutdown expenses(7)........................ (4,692) --
Write-off of acquired in-process R&D(8)................... (18,800) --
Impacting net (loss) income
Gain (loss) on marketable securities(9)................... (767) (773)
Write-off of deferred financing costs..................... (1,853) --
Third quarter valuation allowance adjustment for deferred
taxes.................................................. (38,117) --
Related tax effect on all items, as applicable............ 4,367 (75)
--------- -------
NET EFFECT OF UNUSUAL ITEMS............................ (139,498) (2,240)
NET CASH (LOSS) INCOME, EXCLUDING UNUSUAL ITEMS........ $ (16,349) $27,826
========= =======
NET CASH (LOSS) INCOME PER COMMON SHARE -- DILUTED..... $ (0.30) $ 0.70
========= =======
</Table>
- ---------------
(1) In 1999, ARRIS recorded pre-tax charges of approximately $16.0 million in
conjunction with the closure of its New Jersey facility and the
discontinuance of certain products. The charges included approximately $2.6
million related to personnel costs and approximately $3.0 million related
to lease termination and other costs. The charges also included an
inventory write-down of approximately $10.4 million reflected in cost of
sales. In 2000, ARRIS recorded an additional $3.5 million pre-tax charge to
cost of sales related to the 1999 reorganization. (See Note 4 of the Notes
to the Consolidated Financial Statements.)
(2) In 2000, ARRIS recorded a pre-tax gain of $2.1 million as a result of the
curtailment of ARRIS' defined benefit pension plan. (See Note 13 of the
Notes to the Consolidated Financial Statements.)
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<PAGE>
(3) In 1998, ARRIS recorded pre-tax charges of approximately $10.0 million in
conjunction with the consolidation of its corporate and administrative
functions. The charges included approximately $7.6 million related to
personnel costs and approximately $2.4 million related to lease termination
and other costs. (See Note 4 of the Notes to the Consolidated Financial
Statements.)
(4) In 1997 ARRIS recorded pre-tax charges of approximately $28.0 million in
connection with its acquisition of TSX Corporation. The charges included
are inventory, write-downs of approximately $6.5 million reflected in cost
of sales. The acquisition was accounted for as a pooling of interests.
(5) During 2001, ARRIS significantly reduced its overall employment levels.
This resulted in a pre-tax charge to cost of sales of approximately $1.3
million for severance and related costs and a pre-tax charge of $3.7
million to operating expenses.
(6) During 2001, a one-time warranty expense relating to a specific product was
recorded, resulting in a pre-tax charge of $4.7 million for the expected
replacement cost of this product. ARRIS does not anticipate any further
warranty expenses to be incurred in connection with this product.
(7) In 2001, in connection with the outsourcing of most of its manufacturing
functions, ARRIS recorded pre-tax restructuring and impairment charges of
approximately $66.2 million. Included in these charges was approximately
$32.0 million related to the write-down of inventories, and remaining
warranty and purchase order commitments of approximately $1.7 million were
charged to cost of goods sold. Also included in these charges was
approximately $5.7 million related to severance and associated personnel
costs, $5.9 million related to the impairment of goodwill due to the sale
of the power product lines, $14.8 million related to the impairment of
fixed assets, and approximately $6.1 million related to lease terminations
of factories and office space and other shutdown expenses. (See Note 4 of
the Notes to the Consolidated Financial Statements.)
(8) During 2001, ARRIS recorded a pre-tax write-off of in-process R&D of $18.8
million in connection with the Arris Interactive L.L.C. acquisition. (See
Note 16 of the Notes to the Consolidated Financial Statements.)
(9) During 2001, ARRIS recorded pre-tax charges of $1.9 million as an
extraordinary loss on the extinguishment of debt in accordance with EITF
96-19 Debtor's Accounting for a Modification or Exchange of Debt
Instruments. The amount reflected unamortized deferred finance fees related
to a loan agreement, which was replaced in connection with the Arris
Interactive L.L.C. acquisition. (See Note 7 of the Notes to the
Consolidated Financial Statements.)
(10) As a result of the restructuring and impairment charges during the third
quarter of 2001, a valuation allowance of approximately $38.1 million
against deferred tax assets was recorded in accordance with FASB Statement
No. 109, Accounting for Income Taxes. (See Note 4 of Notes to the
Consolidated Financial Statements.) This is offset by approximately $4.4
million of related taxes associated with the unusual items.
(11) In the fourth quarter of 2001, ARRIS closed a research and development
facility in Raleigh, North Carolina and recorded a $4.0 million charge
related to severance and other costs associated with closing that facility.
(12) Due to the economic disturbances in Argentina, we recorded a write-off of
$4.4 million related to unrecoverable amounts due from a customer in that
region during the fourth quarter of 2001.
(13) Because the Company's investment in Lucent and Avaya stock are considered
trading securities held for resale, they are required to be carried at
their fair market value with any gains or losses being included in
earnings. In calculating the fair market value of the Lucent and Avaya
investments and including $1.3 million of impairment losses on investments
available for sale in 2000, the Company recognized pre-tax losses of $0.8
million and $0.8 million, as of December 31, 2001 and 2000, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses ARRIS' Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. On an on-going basis, management evaluates its
estimates and judgments, including those related to customer incentives, product
returns, bad debts, inventories, investments, intangible assets, income taxes,
financing operations, warranty obligations, restructuring costs, retirement
benefits, and contingencies and litigation. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
(a) Inventories
Our largest tangible asset is inventory, which net of reserves aggregated
$188.0 million as of December 31, 2001. Inventory is reflected in our financial
statements at the lower of average, approximating first-in, first-out cost or
market value. We continuously reevaluate future usage of product and where
supply exceeds demand, we establish a reserve. In reviewing inventory valuations
we also review for excess and 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 and when we recognize that overestimate we will have to adjust for
that overstatement through an increase in cost of sales in a future period.
b) Accounts Receivable
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. As a result, our reserve is small relative to our
level of accounts receivable. Unlike businesses with relatively small individual
accounts receivables from a large number of customers, if we were to have a
collectibility problem with one of our major customers, it is possible that the
reserve that we have established will not be sufficient.
(c) Investments
Prior to March 1999, we owned a 25% interest in Arris Interactive L.L.C., a
joint venture with Nortel Networks ("Nortel") that was accounted for under the
equity method. Arris Interactive L.L.C. was focused on the development,
manufacture and sale of products that enable the provision of a broad range of
telephone and data services over hybrid fiber-coax systems. From March 1999 to
August 2001 we owned an 18.75% interest in Arris Interactive L.L.C., which was
accounted for on the cost method.
In connection with the Arris Interactive L.L.C. acquisition, the quarters
ended March 31, 2001 and June 30, 2001 were restated in accordance with
Accounting Principles Board ("APB") No. 18, The Equity Method of Accounting for
Investments in Common Stock. This APB states that an investment in common stock
of an investee that was previously accounted for by the cost method becomes
qualified for use of the equity method by an increase in the level of ownership.
We adopted the use of the equity method upon acquisition of Nortel's portion of
Arris Interactive L.L.C., and all prior periods presented have been adjusted
retroactively to reflect the equity method of accounting. During 2000, Arris
Interactive L.L.C. recorded net
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<PAGE>
income. However, in the periods prior to 2000, Arris Interactive L.L.C. incurred
net losses, of which we did not recognize our proportionate share due to our
investment in Arris Interactive L.L.C being reduced to zero. APB No. 18 states
that the Company should recognize gains only after its share of net income
equals its share of net losses not recognized. Our share of Arris Interactive's
net income in 2000 did not exceed the losses unrecognized in previous years, and
therefore, these periods have not been restated. However, during the periods
ending March 31, 2001 and June 30, 2001, Arris Interactive L.L.C. recorded net
losses. We have restated, under the equity method of accounting, these periods
to reflect our share of the losses due to our investment in and advances to
Arris Interactive at December 31, 2000 being sufficient to record such losses.
(d) Goodwill and Long-Lived Assets
Goodwill relates to the excess of cost over net assets resulting from an
acquisition. Goodwill resulting from the 1986 acquisition of Anixter (ARRIS'
former owner) by Anixter International was allocated to ARRIS based on ARRIS'
proportionate share of total operating earnings of Anixter for the period
subsequent to the acquisition. Goodwill also has resulted from acquisitions of
business by Anixter and ARRIS subsequent to 1986 that now are owned by ARRIS.
ARRIS assesses the recoverability of goodwill and other long-lived assets
whenever events or changes in circumstances indicate that expected future
undiscounted cash flows might not be sufficient to support the carrying amount
of an asset. If expected future undiscounted cash flows from operations are less
than a business' carrying amount, an asset is determined to be impaired, and a
loss is recorded for the amount by which the carrying value of the asset exceeds
its fair value. Fair value is based on discounting estimated future cash flows
or using other valuation methods as appropriate. Non-cash amortization expense
is being recognized as a result of amortization of goodwill on a straight-line
basis over a period of 40 years from the respective dates of acquisition. The
estimation of future cash flows is critical to the valuation of goodwill. Our
industry is subject to rapid technological changes and significant variations in
capital spending by system operators. As a result, estimations of future cash
flows are difficult, and to the extent that we have overestimated those cash
flows we also may have underestimated the need to reduce any attendant goodwill.
Effective January 1, 2002, we will adopt Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. In general, SFAS No.
142 requires that during 2002 we assess the fair value of the net assets
underlying our acquisition related goodwill on a business by business basis.
Where that fair value is less than the related carrying value, we will be
required to reduce the amount of the goodwill. These reductions will be made
retroactive to January 1, 2002. SFAS No. 142 also requires that we discontinue
the amortization of our acquisition related goodwill.
As of December 31, 2001, our financial statements included acquisition
related goodwill of $259.1 million, net of previous amortization. Although the
process of implementing Statement No. 142 will take several more months, we
preliminarily believe that a portion of this goodwill may be impaired and may
need to be reduced. In addition, we no longer will be amortizing acquisition
related goodwill, which aggregated $4.9 million in 2001, 2000, and 1999.
As of December 31, 2001, our financial statements included intangibles of
$44.5 million, net of amortization of $7.0 million. These intangibles are
related to the existing technology acquired from Arris Interactive L.L.C. on
August 3, 2001, and will be amortized over a three year period. The valuation
process to determine the fair market value of the existing technology was
performed by an outside valuation service. The value assigned was calculated
using an income approach utilizing the cash flow generated by this technology.
(e) Warranty
ARRIS provides, by a current charge to cost of sales in the period in which
the related revenue is recognized, an amount it estimates will be needed to
cover future warranty obligations. This estimate is based upon historical
experience. In the event of an unusual warranty claim, the amount of the reserve
may not be sufficient. For instance, in 2001 ARRIS had a one-time warranty
expense related to a single product and recorded a one-time charge of $4.7
million against cost of sales in connection with it. To the extent that other
unexpected warranty claims occur in the future, the reserves that ARRIS has
established may not be sufficient, cost of sales may have been understated, and
a charge against future costs of sales may be necessary.
20
<PAGE>
(f) Income Taxes
ARRIS uses the liability method of accounting for income taxes, which
requires recognition of temporary differences between financial statement and
income tax basis of assets and liabilities, measured by enacted tax rates.
ARRIS established a valuation allowance in accordance with the provisions
of FASB Statement No. 109, Accounting for Income Taxes. The Company continually
reviews the adequacy of the valuation allowance and recognizes the benefits of
deferred tax assets only as reassessment indicates that it is more likely than
not that the deferred tax assets will be realized.
OVERVIEW
Last year was a year of significant change. Our industry experienced a
significant reduction in capital spending beginning at the end of 2000 that was
with us throughout 2001. Nortel Networks, our partner in Arris Interactive,
L.L.C., decided to exit that business, thereby providing us the opportunity to
purchase its interest in the joint venture. In December of 2001, we agreed to
purchase the business of Cadant Inc., a manufacturer of cable modem termination
systems that had developed a leading design in the industry for the critical
component in a voice over IP telephony system. We also refocused our business on
our core skills by substantially exiting manufacturing. We now outsource most of
our manufacturing to some of the leading contract manufacturers of electronic
products. Further, we have reduced workforce and other operating expenses
throughout our organization. As a result of these efforts, we believe that we
are well positioned for 2002.
Set forth below is a more detailed description of how our business
performed over the last two years. We urge you to read it carefully together
with the financial statements and description of our business that are included
in this report. You should be aware, however, that as a result of our
acquisition of Arris Interactive on August 3, 2001, our business has changed
significantly and our historical results of operations will not be as indicative
of future results of operations as they otherwise might be. Some of these
differences are discussed below.
ACQUISITION OF ARRIS INTERACTIVE L.L.C.
On August 3, 2001, we completed the acquisition from Nortel of the portion
of Arris Interactive that we did not own. Arris Interactive was a joint venture
formed by Nortel and us in 1995, and immediately prior to the acquisition we
owned 18.75% and Nortel owned the remainder. As part of this transaction:
- A new holding company, ARRIS, was formed
- ANTEC, our predecessor, merged with a subsidiary of ARRIS and the
outstanding ANTEC common stock was converted, on a share-for-share basis,
into common stock of ARRIS.
- Nortel and the Company contributed to Arris Interactive approximately
$131.6 million in outstanding indebtedness and adjusted their ownership
percentages in Arris Interactive to reflect these contributions
- Nortel exchanged its remaining ownership interest in Arris Interactive
for 37 million shares of ARRIS common stock (approximately 49.2% of the
total shares outstanding following the transaction) and a subordinated
redeemable preferred interest in Arris Interactive with a face amount of
$100 million
- ANTEC, now a wholly-owned subsidiary of ARRIS, changed its name to Arris
International, Inc.
In connection with this transaction, our bank indebtedness was refinanced
on August 3, 2001. The new facility is an asset-based revolving credit facility,
which permits us to borrow up to $175.0 million based upon availability under a
borrowing base calculation.
Following the transactions, Nortel designated two new members to our board
of directors. Nortel's ownership interest in ARRIS is governed in part, by an
Investor Rights Agreement that is filed as an exhibit in [ITEM 14(a) 3] Exhibit
List.
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ACQUISITION OF CADANT, INC.
On January 8, 2002, we completed our acquisition of substantially all of
the assets of Cadant, Inc., a privately held designer and manufacturer of next
generation cable modem termination systems. Under the terms of the transaction,
we paid 5.25 million shares of our common stock and assumed $17 million in
liabilities in exchange for the assets. We also agreed to pay up to 2.0 million
additional shares based upon future sales of the CMTS product.
INDUSTRY CONDITIONS
ARRIS' performance is largely dependent on capital spending for
constructing, rebuilding, maintaining and upgrading broadband communications
systems. After a period of intense consolidation and rapid stock-price
acceleration within the industry during 1999, the fourth quarter of 2000 brought
a sudden tightening of credit availability throughout the telecommunications
industry and a broad-based and severe drop in market capitalization for the
sector during the period. This caused broadband system operators to become more
judicious in their capital spending, adversely affecting us and other equipment
providers, generally.
In response to this downturn, we significantly reduced expense levels,
including workforce reductions during the first quarter of 2001 and the more
significant reductions announced and implemented in April 2001. The actions
taken in April resulted in a pre-tax charge of approximately $5.0 million in the
second quarter of 2001 for severance and related separation costs, and we
reduced overall employment levels by approximately 545 employees. Additionally,
as part of our continuing review and evaluation of underperforming assets to
assess their long-term strategic role within ARRIS, as well as strategic
opportunities we face, we restructured our manufacturing operations and are in
the process of implementing an outsourcing strategy. This manufacturing
restructuring resulted in the closure of four factories in El Paso, Texas and
Juarez, Mexico and the termination of 807 employees. The outsourcing is
anticipated to be completed during the first half of 2002.
RESULTS OF OPERATIONS
The following table sets forth ARRIS' key operating data as a percentage of
net sales:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 84.1 81.4 80.5
----- ----- -----
Gross profit................................................ 15.9 18.6 19.5
Selling, general, administrative and development expenses... 22.2 13.4 13.2
In process R&D write-off.................................... 2.5 -- --
Restructuring and impairment charges........................ 4.9 -- --
Amortization of goodwill.................................... 0.7 0.5 0.6
Amortization of intangibles................................. 0.9 -- --
Restructuring and other..................................... -- -- 0.7
----- ----- -----
Operating (loss) income..................................... (15.3) 4.7 5.0
Interest expense............................................ 1.2 1.1 1.4
Membership interest......................................... 0.5 -- --
Other (income) expense, net................................. 1.4 -- --
Loss on marketable securities............................... 0.1 0.1 --
----- ----- -----
(Loss) income before income tax expense and extraordinary
loss...................................................... (18.5) 3.5 3.6
Income tax expense.......................................... 3.7 1.4 1.6
----- ----- -----
Net income before extraordinary loss........................ (22.2) -- --
Extraordinary loss.......................................... 0.2 -- --
----- ----- -----
Net (loss) income........................................... (22.4)% 2.1% 2.0%
===== ===== =====
</Table>
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SIGNIFICANT CUSTOMERS
Our two largest customers are AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000) and Cox Communications.
<Table>
<Caption>
AT&T (INCLUDING MEDIA ONE) COX COMMUNICATIONS
-------------------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
2001 sales.................................. $237.9 $113.5
2001 percentage of total sales.............. 31.8% 15.2%
2000 sales.................................. $431.5 $119.0
2000 percentage of total sales.............. 43.2% 11.9%
1999 sales.................................. $391.1 $ 58.5
1999 percentage of total sales.............. 46.3% 6.9%
</Table>
Other than Adelphia Communications Corp. and Insight, which accounted for
approximately 8.1% and 5.3% of ARRIS' total sales for 2001, no other customer
provided more than 5% of ARRIS' total sales for the year.
Liberty Media Corporation, which had been a part of the Liberty Media Group
of AT&T (whose financial performance was "tracked" by a separate class of AT&T
stock), effectively controls approximately 10% of the Company's outstanding
common stock on a fully diluted basis. In August 2001, AT&T spun off Liberty
Media to the holders of its tracking stock, and AT&T subsequently no longer
indirectly owns that interest in the Company.
On December 19, 2001, AT&T Broadband and Comcast Corporation announced a
definitive agreement to combine AT&T Broadband with Comcast.
COMPARISON OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Net Sales. ARRIS' sales for 2001 decreased by 25.1% to $747.7 million, as
compared to sales levels achieved in 2000. The reduction generally was the
result of the widespread slowdown in telecommunications infrastructure spending.
The slowdown in spending began in the fourth quarter of 2000 and continued
throughout 2001. All of our product categories experienced the reduction.
Our products and services are summarized in three new product categories
instead of the previous four categories: broadband (previously cable telephony
and internet access); transmission, optical, and outside plant; and supplies and
services. All prior period amounts have been aggregated to conform to the new
product categories.
- Broadband product revenues increased by approximately 18.0% to $368.5
million. Broadband product revenues accounted for approximately 49.3% of
2001 sales as compared to 31.3% for 2000. However, revenues in 2001
included approximately $30.0 million of sales to AT&T that were carried
over from the fourth quarter of 2000. Further, 2001 included five months
of additional international revenues due to the acquisition of Arris
Interactive, L.L.C. on August 3, 2001.
- Transmission, optical and outside plant product revenues decreased by
approximately 46.8% to $227.8 million. This revenue accounted for
approximately 30.5% of 2001 sales as compared to 42.8% for 2000. Although
all product lines within this category experienced a decline in sales
year-over-year, the areas with the most significant decreases included
optronics & nodes, RF, and taps, which decreased by approximately 49.7%,
73.8%, and 61.6%, respectively.
- Supplies and services product revenues decreased by approximately 41.4%
to $151.4 million. Supplies and services product revenue accounted for
approximately 20.2% of 2001 sales as compared to 25.9% for 2000.
Engineering service revenue in 2001 decreased approximately 34.7%. We
also experienced reduced sales of other product lines within this
category, including fiber optic cable, outside plant, and installation
materials and tools, which decreased by approximately 61.4%, 49.7%, and
23.3%, respectively.
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<PAGE>
International sales increased 28.2% to $108.9 million. This increase was
primarily the result of the addition of international sales of the Cornerstone
product line following our August 3, 2001 acquisition of Arris Interactive.
Under a previous agreement with Nortel, ARRIS had not been able to sell
Cornerstone products internationally. International sales in 2001 represented
approximately 14.6% of total sales, as compared to international sales of 8.5%
of the Company's total revenue in 2000.
Gross Profit. Gross profit decreased to $119.0 million in 2001 from $185.8
million in 2000. Gross profit margins for the year ended December 31, 2001
decreased 2.7 percentage points to 15.9% as compared to 18.6% for 2000. As a
result of the planned restructuring of manufacturing operations, approximately
$27.8 million of inventory related to the factories was written down, $5.8
million was incurred with the sale of the powering product line assets,
severance costs of approximately $1.3 million were incurred in connection with
the workforce reduction program incurred at the factory level, a one-time
warranty expense of $4.7 million for a specific product, and due to the economic
disturbances in Argentina, we recorded a write-off of $4.4 million (reflected in
the cost of sales) related to unrecoverable amounts due from a customer in that
region during 2001. During 2000, ARRIS recorded an additional $3.5 million
charge for product discontinuation costs, as an increase to cost of goods sold,
related to the reorganization that occurred in the fourth quarter of 1999.
However, after adjusting for unusual items in 2001 and 2000 the gross profit
margins for 2001 and 2000 would have been approximately 21.8% and 19.0%,
respectively.
The Company believes that excluding unusual items is a meaningful measure
of operating performance. However, this information will necessarily be
different from comparable information provided by other companies and should not
be used as an alternative to our operating and other financial information as
determined under accounting principles generally accepted in the United States.
This table should not be considered in isolation or in accordance with generally
accepted accounting principles, or as a measure of a company's profitability or
liquidity. The table below summarizes the effects of the unusual items on our
gross profit margin:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
GROSS PROFIT BEFORE ADJUSTING FOR UNUSUAL ITEMS............. $118,970 $185,772
UNUSUAL ITEMS:
Inventory write-offs...................................... 27,834 3,500
Write-down of the Powering product line assets............ 5,834 --
Severance related to workforce reduction.................. 1,275 --
One-time warranty expense for specific product............ 4,700 --
Write-off of assets related to Argentinean customer....... 4,388 --
-------- --------
GROSS PROFIT AFTER ADJUSTING FOR UNUSUAL ITEMS.............. $163,001 $189,272
======== ========
</Table>
Selling, General, Administrative, and Development ("SGA&D")
Expenses. SGA&D expenses increased to $165.7 million from $134.0 million. SGA&D
expenses for 2001 included approximately $3.7 million of severance costs related
to workforce reductions. The SGA&D expenses for the year ended December 31, 2000
included a one-time pre-tax gain of $2.1 million realized as a result of
employee elections associated with a new and enhanced benefit plan and the
resultant effect on the Company's defined benefit pension plan. Excluding the
effects of these charges, the expenses for 2001 and 2000 would have been $162.0
million and $136.1 million, respectively. This year-over-year increase is
primarily the result of the additional expenses for five months following the
acquisition of Arris Interactive.
Restructuring and Impairment Charges. In the fourth quarter of 2001, ARRIS
closed a research and development facility in Raleigh, North Carolina and
recorded a $4.0 million charge related to severance and other costs associated
with closing that facility. In the third quarter of 2001, the Company announced
a restructuring plan to outsource the functions of most of its manufacturing
facilities. This decision to reorganize was due in part to the ongoing weakness
in industry spending patterns. The plan entails an expanded manufacturing
outsourcing strategy and the related closure of the four factories located in El
Paso, Texas and Juarez, Mexico. The closure of the factories is anticipated to
be complete during the first half of 2002. As a
24
<PAGE>
result, we recorded restructuring and impairment charges of $32.5 million.
Included in these charges was approximately $5.7 million related to severance
and associated personnel costs, $5.9 million related to the impairment of
goodwill due to the pending sale of the power product lines, $14.8 million
related to the impairment of fixed assets, and approximately $6.1 million
related to lease termination and other shutdown expenses of factories and office
space. The personnel-related costs included termination expenses for the
involuntary dismissal of 807 employees, primarily engaged in production and
assembly functions performed at the facilities. ARRIS offered terminated
employees separation amounts in accordance with our severance policy and
provided the employees with specific separation dates. The severance and
associated personnel costs will be paid upon closure of the factories. As of
December 31, 2001, approximately $14.9 million of expenses relating to the
restructuring and impairment charges remained in our restructuring accrual.
In accordance with FASB Statement No. 109, Accounting for Income Taxes, a
valuation allowance of $38.1 million against deferred tax assets was recorded in
the third quarter of 2001 because the restructuring and impairment charges
described above put the Company in a cumulative loss position for recent years.
Write-off of in-process R&D. Acquired in-process research and development
totaling $18.8 million of acquired in-process research and development was
written off in connection with the Arris Interactive acquisition during the
third quarter of 2001.
Loss on Marketable Securities. In 2000, we made a $1.0 million strategic
investment in Chromatis Networks, Inc., receiving shares of the company's
preferred stock. On June 28, 2000, Lucent Technologies acquired Chromatis. As a
result of this acquisition, our shares of Chromatis stock were converted into
shares of Lucent stock. Subsequently, as a result of Lucent's spin off of Avaya,
Inc. during the third quarter of 2000, we were issued shares of Avaya stock.
Because the Company's investment in Lucent and Avaya stock are considered
trading securities held for resale, they are required to be carried at their
fair market value with any gains or losses being included in earnings. In
calculating the fair market value of the Lucent and Avaya investments and
including $1.3 million of impairment losses on investments available for sale in
2000, the Company recognized pre-tax losses of $0.8 million and $0.8 million, as
of December 31, 2001 and 2000, respectively.
Interest Expense. Interest expense for the years ended December 31, 2001
and 2000 were $9.3 million and $11.1 million, respectively. Interest expense for
all periods reflects the cost of borrowings on our revolving line of credit and
the interest paid on the 4.5% Convertible Subordinated Notes due 2003. As of
December 31, 2001, we did not have a balance outstanding under our credit
facility, as compared to $89.0 million outstanding at December 31, 2000. For the
year ended December 31, 2001, the average interest rate on our outstanding line
of credit borrowings was 7.2% with an overall blended rate of approximately 5.2%
including the subordinated notes. For the year ended December 31, 2000, the
average interest rate on the Company's outstanding line of credit borrowings was
7.9%, with an overall blended rate of approximately 5.9% including the
subordinated notes.
Membership Interest Expense. In conjunction with the acquisition of Arris
Interactive L.L.C., we issued to Nortel Networks a subordinated redeemable
preferred interest in Arris Interactive with a face amount of $100.0 million.
This membership interest earns a return of 10% per annum, compounded annually.
For the year ended December 31, 2001, we recorded membership interest expense of
$4.1 million.
Income Tax Expense. The Company recognized income tax expense of $27.6
million for the year ended December 31, 2001 as compared to an expense of
approximately $14.3 million during 2000. The increase in expense was due
primarily to the Company increasing its valuation allowance against deferred tax
assets.
Net (Loss) Income. A net loss of $(167.7) million was recorded for in
2001, as compared to net income of $20.7 million in 2000. The yearly results for
2001 included restructuring and impairment expenses of $36.5 million, inventory
write-offs of $32.0 million, severance related to workforce reduction of $5.0
million, a reserve of $4.4 million (reflected in the cost of sales) related to
unrecoverable amounts due from an Argentinean customer, purchase order
commitment write-offs of $0.7 million, warranty charges $5.7 million, income tax
valuation charges of $38.1 million, an in-process R&D write-off of $18.8
million, a market adjustment of $0.8 million on the Company's investment in
Lucent and Avaya and impairment losses on
25
<PAGE>
investments available for sale, an extraordinary loss of $1.9 million in
connection with the write-off of the remaining deferred financing costs on the
previous credit facility, and the related tax effect of all unusual items of
$4.4 million. The yearly results for 2000 included a pre-tax loss of $0.8
million on the Company's investment in Lucent and Avaya, a charge of $3.5
million in connection with product discontinuation costs reflected as an
increase in cost of goods sold, a pension curtailment gain of $2.1 million, and
the related tax effect of all unusual items of $0.1 million.
The Company believes that excluding unusual items is a meaningful measure
of operating performance. However, this information will necessarily be
different from comparable information provided by other companies and should not
be used as an alternative to our operating and other financial information as
determined under accounting principles generally accepted in the United States.
This table should not be considered in isolation or in accordance with generally
accepted accounting principles, or as a measure of a company's profitability or
liquidity. The table below summarizes the effects of the unusual items on our
net (loss) income.
<Table>
<Caption>
2001 2000
--------- -------
(IN THOUSANDS)
<S> <C> <C>
NET (LOSS) INCOME, INCLUDING UNUSUAL ITEMS.................. $(167,731) $20,669
UNUSUAL ITEMS:
Impacting gross profit
Inventory write-offs...................................... (27,834) (3,500)
Write-down of the Powering product line assets............ (5,834) --
Severance related to workforce reduction.................. (1,275) --
One-time warranty expense for specific product............ (4,700) --
Write-off of assets related to Argentinean customer....... (4,388) --
Impacting operating (loss) income
Pension curtailment gain.................................. -- 2,108
Severance related to workforce reduction.................. (3,756) --
Restructuring and impairment charges:
Severance related to factory closure................... (7,479) --
Impairment of fixed assets............................. (14,972) --
Impairment of goodwill -- Powering..................... (5,877) --
Lease commitments...................................... (3,521) --
Facilities shutdown expenses........................... (4,692) --
Write-off of acquired in-process R&D...................... (18,800) --
Impacting net (loss) income
Gain (loss) on marketable securities...................... (767) (773)
Write-off of deferred financing costs..................... (1,853) --
Third quarter valuation allowance adjustment for deferred
taxes.................................................. (38,117) --
Related tax effect on all items........................... 4,367 (75)
--------- -------
NET EFFECT OF UNUSUAL ITEMS............................ (139,498) (2,240)
NET CASH (LOSS) INCOME, EXCLUDING UNUSUAL ITEMS........ $ (28,233) $22,909
========= =======
</Table>
Exclusive of the above items, the net loss recorded for the year ended
December 31, 2001 was $(28.2) million or a loss of $(0.53) per diluted share as
compared to net income of $22.9 million or $0.58 per diluted share for the year
ended December 31, 2000.
COMPARISON OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Sales. ARRIS' consolidated sales for 2000 increased by 18.2% to $998.7
million as compared to 1999 sales of $844.8 million. In 2000 and 1999, ARRIS
experienced a rise in sales resulting from earlier investments in new products,
primarily for cable telephony and the increase in capital spending by
26
<PAGE>
communication providers, particularly the multiple system operators ("MSOs,") as
they rebuild their plants in an effort to provide additional services, such as
telephony. Through the twelve months ended December 31, 2000, all of ARRIS'
product lines, cable telephony and internet access products in particular,
benefited from the growth in capital spending despite the slow down experienced
during the fourth quarter of the year. ARRIS' Cornerstone voice and data product
revenues grew from approximately $237.4 million in 1999 to approximately $312.3
million in 2000, an increase of approximately 31.6%. Cornerstone's growth
focused on host digital terminal sales. The HDT product provides an interface
between the hybrid fiber-coax system and digital telephone switches.
Additionally, the introduction of revenue from LANcity cable product sales,
Cornerstone "data," was included in the results for the final three quarters of
1999 and all of 2000. These cable modems and cable modem termination systems
have an open scaleable architecture ideal for small to large networks, allowing
end users to work at speeds hundreds of times faster than conventional dial-up
connections. Sales of these data products amounted to approximately $18.5
million for 2000 and $38.2 million for 1999. The decline in data product sales
during 2000 is a result of the general market shift from proprietary technology
to a standards-based technology or data over cable standards interface system
("DOCSIS"). The DOCSIS modems are a commodity product that face strong pricing
pressure. Also, during the fourth quarter of 1999, ARRIS recorded revenue of
approximately $28.7 million in connection with the sale of RF Concentration
software to AT&T. This software is used in conjunction with the host digital
terminal, and AT&T bought licenses equivalent to the number of HDTs purchased
during 1999.
The balance of the revenue increase for 2000, as compared to the prior
year, was from revenue growth related to ARRIS' other product offerings.
Exclusive of the Cornerstone voice and data growth, combined sales for the
remaining product lines increased approximately $79.1 million:
- Broadband product revenues increased by approximately 32.0% to $312.3
million for the year ended December 31, 2000 as compared to $236.5
million for 1999. Broadband product revenues accounted for approximately
31.3% of sales for the year ended December 31, 2000 as compared to 28.0%
for 1999.
- Transmission, optical and outside plant product revenues increased by
approximately 10.1% to $427.9 million for the year ended December 31,
2000 as compared to $388.6 million in 1999. This revenue accounted for
approximately 42.8% of sales for the year ended December 31, 2000 as
compared to 46.0% for 1999.
- Supplies and services revenue increased approximately 17.7% to $258.5
million for the year ended December 31, 2000 as compared to $219.6
million for 1999. Sales of fiber optic cable products and engineering
services drove this increase. This revenue accounted for approximately
25.9% of sales for the year ended December 31, 2000 as compared to 26.0%
for 1999.
Sales to ARRIS' largest customer, AT&T (including MediaOne Communications,
which was acquired by AT&T during 2000), reached approximately $431.5 million
during 2000, or approximately 43.2% of the annual volume. This compares to 1999
when sales to AT&T were $355.0 million or 42.0% of the volume for the year.
Giving effect to AT&T's acquisition of MediaOne Communications, sales to the
combined entity were $391.1 million for 1999 or 46.3% of the annual volume. This
marks a $40.4 million increase in revenue from the combined AT&T entity despite
their fourth quarter decision to hold off on equipment shipments until 2001.
International sales for the twelve months ended December 31, 2000 increased
59.2% to $86.6 million as compared to the twelve months ended December 31, 1999
when sales were $54.4 million. International revenue for 2000 represented
approximately 12.9% of ARRIS' total revenue for the year, exclusive of the
Cornerstone products, which ARRIS did not sell internationally. This compares to
international revenue of 9.0% of ARRIS' total revenue for 1999, also net of the
Cornerstone product sales.
Gross Profit. The abrupt decline of business during the fourth quarter
adversely affected ARRIS' overall gross margin results for 2000. Gross profit in
2000 was $185.8 million as compared to $165.0 million in 1999. Gross profit
margins for 2000 slipped 0.9 percentage points to 18.6% versus 19.5% for the
prior year.
When comparing the overall 2000 gross profit results to the overall 1999
gross profit results, both years were affected by a variety of factors,
including those listed below. It is important to note that in 2000 and 1999,
27
<PAGE>
ANTEC, the predecessor to ARRIS, distributed Arris Interactive, L.L.C.
Cornerstone products. ANTEC's margins were approximately 15% for the Cornerstone
product line.
- Cost of sales for 1999 includes a $10.4 million pre-tax charge related to
the elimination of certain product lines and the resulting inventory
obsolescence charge. ARRIS discontinued certain older product lines not
consistent with the Company's focus on two-way, high-speed internet,
voice and video communications equipment. This discontinuance affected
the uninterruptible common ferroresonant and security lock powering
products and included a narrowing of the Company's radio frequency ("RF")
and optical products. During the second quarter of 2000, ARRIS recorded
an additional $3.5 million pre-tax charge to cost of goods sold for
product discontinuation costs, related to the continued evaluation of the
estimated costs associated with these actions.
- Cornerstone voice and data sales growth began during 1999 and continued
during 2000. Sales of these products accounted for approximately 31.3%
and 28.1% of the consolidated sales for the years ended December 31, 2000
and 1999, respectively. ARRIS had exclusive domestic distribution rights
for the Cornerstone voice and data products to cable MSOs. This agreement
afforded ARRIS distribution-type margins traditionally in the 15% range.
- A portion of the increased revenue from some customers during 2000
required aggressive pricing for products already experiencing strong
margin pressure.
- During 2000, ARRIS' customers shifted the focus of their capital spending
from higher margin, basic network infrastructure type products towards
more revenue generating investments such as cable telephony, which
carried lower margins.
- Partially offsetting some of the unfavorable gross margin issues, during
1999, ARRIS recognized approximately $2.1 million in previously deferred
gross margin related to intercompany profit in inventory pertaining to
sales of ARRIS' products to the Tanco joint venture. This venture
provided turnkey construction or upgrading of broadband distribution
services. ARRIS deferred its ownership portion of this profit on sales to
Tanco until Tanco effectively transferred the inventory to the ultimate
customer. During 1999, AT&T exercised its right to terminate, for
convenience, its contracts with the joint venture and to take over the
management of these projects directly. The joint venture was not intended
to generate profits and the termination of the contracts and the
dissolution of this venture did not have any material adverse effect on
ARRIS or its product sales to AT&T.
Selling, General, Administrative and Development ("SGA&D") Expenses. SGA&D
expenses in 2000 were $134.0 million as compared to $111.9 million in 1999. As a
percentage of sales, SGA&D was 13.4% in 2000 as compared with 13.2% in 1999.
Research and development expenses related to new product development and
introductions accounted for approximately $6.9 million of the year-over-year
increase. Selling expenses accounted for approximately $12.6 million of the
year-over-year expense increase as resources were added in support of the top
line growth. General and administrative costs accounted for the remaining
expense increase. These additional costs were somewhat offset by the reversal of
approximately $1.8 million in over-accrued expenses made early in 1999 due to
changes in estimated bonuses and a reduction in self-insurance reserves from
year end 1998.
It should be noted that the 2000 results include a one-time pre-tax gain of
$2.1 million realized as a result of employee elections associated with a new
and enhanced benefit plan and the resultant effect on ARRIS' defined benefit
pension plan. Additionally, approximately $0.7 million has been charged to
expense during 2000 incurred in connection with the New Jersey facility closure.
(See Note 4 of the Notes to the Consolidated Financial Statements.)
Restructuring. In the fourth quarter of 1999, in conjunction with the
announced consolidation of the New Jersey facility to Georgia and the Southwest,
coupled with the discontinuance of certain product offerings, ARRIS recorded a
pre-tax charge of approximately $16.0 million. Included in the charge was
approximately $2.6 million related to personnel costs and approximately $3.0
million related to lease termination and other facility shutdown charges.
Included in the restructuring was the elimination of certain product lines
resulting in an inventory obsolescence charge totaling approximately $10.4
million, which has
28
<PAGE>
been reflected in the cost of sales. The personnel-related costs included
termination expenses for the involuntary dismissal of 87 employees, primarily
engaged in engineering, inside sales and warehouse functions performed at the
New Jersey facility. ARRIS offered terminated employees separation amounts in
accordance with ARRIS' severance policy and provided the employees with specific
separation dates. In connection with customer demand shifting to ARRIS' newer
product offerings, such as the Scaleable and Micro Node products, ARRIS
discontinued certain older product lines that were not consistent with ARRIS'
focus on two-way, high-speed internet, voice and video communications equipment.
This discontinuance affected the uninterruptible common ferroresonant and
security lock powering products and included the narrowing of ARRIS' RF and
optical products.
During the second quarter of 2000, ARRIS further evaluated its powering and
RF products and recorded an additional pre-tax charge of $3.5 million to cost of
goods sold, bringing the total reorganization related charge to $19.5 million.
In addition to the charges totaling $19.5 million, ARRIS incurred expenses of
$0.7 million in connection with the New Jersey facility closure. As of December
31, 2001, $0.2 million related to personnel costs and $0.6 million related to
lease termination remained to be paid in the restructuring accrual.
Interest Expense. Interest expense for 2000 was approximately $11.1
million as compared to $12.4 million in 1999. Both years reflect the cost of
borrowings on ARRIS' revolving line of credit as well as interest on $115.0
million of 4.5% Convertible Subordinated Notes issued during 1998. As of
December 31, 2000, ARRIS had approximately $89.0 million of floating debt
outstanding under its Credit Facility. The average annual interest rate on these
outstanding borrowings was approximately 8.1% at December 31, 2000 with an
overall blended rate of approximately 6.1% when considering the subordinated
debt. This compares to approximately $68.5 million outstanding under its Credit
Facility with an average annual interest rate of approximately 7.6% at December
31, 1999 with an overall blended rate of approximately 5.7% including the
subordinated debt.
Other Income and Expenses, net. The results for 1999 include the impact of
approximately $2.2 million of channel fees recorded related to LANcity's first
quarter sales to domestic cable companies. Beginning in April 1999, all LANcity
revenue pertaining to cable modem and headend products sold into the Company's
market was recorded by ARRIS. Due to the timing of the completion of the
transaction, a channel fee of 15% was earned by ARRIS for sales of LANcity
products sold in the first quarter of 1999. In addition, in connection with
Nortel's contribution of LANcity to Arris Interactive, the Company recorded
approximately $2.5 million of transaction related expenses.
Income Tax Expense. Income tax expense for the year ended December 31,
2000 was approximately $14.3 million as compared to 1999 income tax expense of
$13.8 million due to the increase in pre-tax earnings for 2000 as compared to
1999. During 1999, ARRIS shifted its focus towards a more aggressive tax savings
and planning strategy. In line with this strategy, ARRIS was able to record
benefits from filing amended foreign sales corporation ("FSC") returns as well
as research and development ("R&D") credits from previous years. During 2000,
with this tax strategy in place, ARRIS was able to reduce its effective tax rate
from that of prior years.
Net Income. Net income in 2000 was $20.7 million as compared to a net
income of $16.7 million recorded in 1999. The results for 2000 included a $2.1
million pre-tax pension curtailment gain, an additional $3.5 million pre-tax
charge to cost of goods sold related to the reorganizational charge taken in the
fourth quarter of 1999, as well as several mark-to-market adjustments on
investments which netted to a pre-tax loss of $0.8 million. Included in the 1999
results was the fourth quarter pre-tax restructuring charge of approximately
$16.0 million. (See Financial Liquidity and Capital Resources.)
Eliminating the gain transaction and the respective charges for 2000 and
1999, as identified above, net income for the year ended December 31, 2000 was
approximately $22.9 million or $0.58 per diluted share as compared to 1999
results of approximately $29.6 million or $0.76 per diluted share.
29
<PAGE>
COMMITMENTS
In the ordinary course of our business we enter into contracts with
landlords, suppliers and others that involve multi-year commitments on our part.
Note 11 to our Consolidated Financial Statements summarizes our commitments with
respect to real estate leases. Of those leases the most significant
(financially) is the lease for our headquarters in Duluth, Georgia. That lease
requires annual payments of $1.4 million, subject to adjustment, through 2009.
See item [1] [2], [Business] [Properties] for a discussion of other significant
leases.
We also are party to various multi-year contracts with vendors. These
contracts generally do not require minimum purchases by us. The two most
significant of these are with Solectron and Mitsumi for contract manufacturing
and are filed as exhibits to our SEC reports.
Lastly, we have several multi-year commitments that are not related to the
ordinary operation of our business. These include registration rights agreements
with Nortel and Liberty Media as well as registration rights obligations with
Cadant. Although our monetary commitments under these agreements may not be
significant, they could impact our business in other ways that investors might
consider material.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Overview
Our liquidity position is primarily the product of the cash flows that we
generate from operations and the funding available to us under our revolving
credit facility. During 2001, we managed our inventory and other current assets
carefully and were able to generate substantial cash from our business despite
incurring an operating loss. In the future, we may not have the same cash
generating opportunities and may be more dependent upon cash generated from
operations and our revolving credit facility.
As discussed elsewhere, our operating results are dependent upon capital
expenditures by cable system operators, which were at reduced levels throughout
2001. We believe industry capital spending for 2002 is likely to be flat but
concentrated in customers and products that should favor us to some degree, and,
as a result, we believe we will achieve more favorable results for 2002. If we
are correct, we should generate sufficient funds from operations, when combined
with modest borrowing under our revolving credit facility, to meet our operating
liquidity needs. If not, we will need to borrow more funds. In the event of
extremely unfavorable results, we may even need to raise additional equity.
We have outstanding $115.0 million 4.5% convertible subordinated notes due
May 15, 2003. Our revolving credit facility requires that we redeem those notes
not later than December 31, 2002. We currently are exploring ways of doing that,
including, among others, exchanging common stock for the notes and issuing
common stock in order to provide funds to redeem the notes (either at maturity
or through defeasance). We also may seek to amend our revolving credit facility
in order to permit us to borrow sufficient funds under that facility in order to
redeem the notes in combination with such exchange or issuances. Refinancing or
converting the convertible subordinated notes could result in a significant
charge to earnings.
ARRIS has not paid dividends on its common stock since its inception. The
Company's primary loan agreement contains covenants that prohibit the Company
from paying dividends.
30
<PAGE>
Several key indicators of our liquidity are summarized in the following
table:
Liquidity Table
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Working capital............................................ $250.9 $305.9 $255.0
Current ratio.............................................. 3.1 2.7 2.2
Cash provided by (used in) operations...................... $111.5 $ 4.7 $ (4.3)
Proceeds from issuance of common stock..................... $ 1.1 $ 5.5 $ 21.3
Capital expenditures....................................... $ 9.6 $ 15.5 $ 20.8
A/R collection period (days)............................... 72.8 65.3 70.9
Inventory turnover......................................... 2.8 3.4 3.5
</Table>
Financing
In connection with the Arris Interactive acquisition, all of our existing
bank indebtedness was refinanced. The new facility is an asset-based revolving
credit facility initially permitting the borrowers (including Arris
International and Arris Interactive) to borrow up to $175 million (which can be
increased under certain conditions by up to $25 million), based upon
availability under a borrowing base calculation. In general, the borrowing base
is limited to 85% of net eligible receivables (with special limitations in
relation to foreign receivables) plus 80% of the orderly liquidation value of
eligible inventory (not to exceed $80 million). The facility contains
traditional financial covenants, including fixed charge coverage, senior debt
leverage, minimum net worth, minimum inventory turns ratios, and a $10 million
minimum borrowing base availability covenant. The facility is secured by
substantially all of the borrowers' assets. The credit facility has a maturity
date of August 31, 2004. However, the maturity date of the credit facility will
be December 31, 2002 in the event that the Company's convertible subordinated
notes due May 15, 2003 are not either fully refinanced or fully converted to
ARRIS common stock prior to December 31, 2002 in a manner satisfactory to the
lenders under the credit facility. Refinancing or converting the convertible
subordinated notes could result in a significant charge to earnings. The
commitment fee on unused borrowings is approximately 0.5%. The average annual
interest rate on these outstanding borrowings was approximately 7.2% at December
31, 2001 as compared to 8.1% at December 31, 2000 under our prior credit
facility.
As of December 31, 2001, we had no borrowings outstanding under our credit
facility and $86.0 million of available capacity. We were in compliance with all
covenants contained in the credit facility.
Contractual Obligations and Commercial Commitments
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
----------------------------------------------
CONTRACTUAL OBLIGATIONS 1-3 YEARS 3-5 YEARS AFTER 5 YEARS TOTAL
- ----------------------- --------- --------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long term debt................................ $115.0 $ -- $ -- $115.0
Operating leases.............................. 23.6 9.2 4.6 37.4
Sublease income............................... (2.8) (0.5) -- (3.3)
Membership interest........................... -- 104.1 -- 104.1
------ ------ ---- ------
Total contractual cash obligations............ $135.8 $112.8 $4.6 $253.2
====== ====== ==== ======
</Table>
Interest Rates
As of December 31, 2001, ARRIS did not have any floating rate indebtedness.
The average interest rate on its outstanding line of credit borrowings was 7.2%
during the year, with an overall blended rate of 5.2% when including the
subordinated debt. At December 31, 2001, ARRIS did not have any outstanding
interest rate swap agreements.
31
<PAGE>
Foreign Currency
A significant portion of ARRIS' products are manufactured or assembled in
Mexico and other countries outside the United States. ARRIS' sales of its
equipment 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. Even though most of ARRIS' international sales have
been denominated in U.S. dollars, ARRIS' business could be adversely affected if
relevant currencies fluctuate relative to the United States dollar.
Financial Instruments
In the ordinary course of business, ARRIS, 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,
2001, we had approximately $1.6 million outstanding under letters of credit with
our banks.
Investments
In the ordinary course of business, the Company may make strategic
investments in the equity securities of various companies, both public and
private. The Company holds investments in the common stock of Lucent
Technologies and Avaya, Inc. totaling approximately $0.8 million at December 31,
2001. These investments are considered trading securities, and accounted for
approximately 5% of the Company's total investments at December 31, 2001.
Changes in the market value of these securities are recognized in income and
resulted in pre-tax losses of approximately $0.8 million for each of the years
ended December 31, 2001 and 2000. The Company's remaining investments in
marketable securities, totaling $2.1 million, are classified as
available-for-sale and accounted for approximately 14% of the Company's total
investments at December 31, 2001. The remaining 81% of the Company's investments
at December 31, 2001 consist of securities that are not traded actively in a
liquid market.
Capital Expenditures
Capital expenditures are made at a level designed to support the strategic
and operating needs of the business. ARRIS' capital expenditures were $9.6
million in 2001 as compared to $15.5 million in 2000 and $20.8 million in 1999.
ARRIS had no significant commitments for capital expenditures at December 31,
2001. Management expects to invest approximately $14.0 million in capital
expenditures for the year 2002.
Cash Flow
Cash levels decreased by approximately $3.5 million during 2001 as compared
to an increase of approximately $5.8 million in 2000 and a decrease of
approximately $1.5 million during 1999. As discussed in more detail below,
operating activities in 2001 provided approximately $111.5 million in positive
cash flow while investing activities used approximately $19.3 million and
financing activities used approximately $95.7 million. During 2000, net cash
provided by operating activities was $4.7 million. Cash provided by operations
was primarily resultant of net income of $20.7 million and decreases in accounts
receivable of $36.0 million being offset by increases in accounts payable and
inventory levels in support of our 2000 growth of $48.5 million and $21.6
million, respectively, and an increase in other, net, which used $4.4 million.
These operating cash outlays in 2000 were somewhat offset by non-cash activities
which provided $22.5 million. ARRIS spent $23.7 million in investing activities
during 2000. These cash outlays during 2000 were partially offset by positive
cash flows of $24.8 million provided through financing activities. Cash used by
operating activities during 1999 was $4.3 million primarily driven by increases
in accounts receivable and inventories from the low levels at year end 1998,
which were partially offset by increases in accounts payable and accrued
32
<PAGE>
liabilities. Investment activity in 1999 consumed $20.8 million. These 1999
outlays were partially offset by $23.6 million of positive cash flow from
financing activities.
Operating activities provided cash of $111.5 million during 2001. Net loss
used $167.7 million in during 2001. Non-cash items such as depreciation,
amortization, provisions for doubtful accounts, deferred income taxes, losses on
marketable securities, losses from equity investments, write-offs of acquired in
process R&D and inventories, impairment of goodwill and fixed assets, and a sale
of powering assets accounted for positive cash flow of approximately $151.6
million. Additionally, positive cash flow was generated from decreases in the
following areas: accounts receivable of $17.8 million, inventory of $125.9
million, income taxes of $17.9 million and $0.8 million in other, net primarily
from royalty receivables. These positive cash flows were offset by the following
uses of cash: a $24.6 million decrease in accounts payable and accrued expenses
and a $10.0 million increase in other receivables.
Days sales outstanding ("DSO") in accounts receivable was approximately 73
days at December 31, 2001 as compared to 65 days outstanding at year-end 2000.
This increase in DSOs was primarily due to the higher volume of international
sales as a result of the Arris Interactive L.L.C. acquisition. We historically
experience longer payment terms with our international customers.
Current inventory levels decreased by $75.7 million, as compared to
December 31, 2000. This decrease in inventory is comprised of approximately
$16.4 million in raw material and approximately $52.0 million in finished goods
and by a $7.3 million decrease in work in process. This decrease is net of
write-offs of $32.0 million, the sale of powering assets of $9.2 million and
additions from the acquisitions of Arris Interactive L.L.C. of $91.4 million.
Excluding the write-offs and the acquisition impacts, inventory decreased $125.9
million. This inventory decrease is reflective of the abrupt slow down in ARRIS'
business late in 2000. During the fourth quarter AT&T announced that it would
delay equipment shipments until later in 2001. Changes in both the financial
markets in general and in the telecommunications equipment market specifically,
created a slow down in capital spending by ARRIS' customers late in 2000. With
these events unfolding during the fourth quarter, ARRIS was unable to adjust its
inventory levels to account for the delays in equipment spending from key
customers. Inventory turns decreased to 2.8 times in 2001 as compared to 3.4
times recorded in 2000 and 3.5 times recorded in 1999. This decrease was mainly
driven by the reduction in sales volume when comparing the two periods.
A decrease in accounts payable and accrued liabilities, net of the effects
of the acquisition, used approximately $24.6 million in cash during 2001. This
decrease in the level of payables and accrued expenses is reflective of the
decline in product demand volumes during the fourth quarter of 2000 and the
subsequent slow down of purchasing levels.
Cash flows used by investing activities were approximately $19.3 million
for 2001 as compared to $23.7 million and $20.8 million used during 2000 and
1999, respectively. The investments made during 2001 included: (a) $9.6 million
to purchase capital assets, (b) the funds paid for the Arris Interactive
acquisition, net of the cash acquired in the transaction, utilized cash of
approximately $6.9 million, (c) proceeds from the sale of a building provided
$1.1 million and (d) ARRIS funded an additional $3.9 million in strategic
business investments. The investments during 2000 included $15.5 million spent
on capital assets and $8.3 million in strategic investments. The $20.8 million
in investments made during 1999 pertained to the purchase of capital assets.
Cash flows used in financing activities were $95.7 million for 2001 as
compared to cash inflows of $24.8 million and $23.6 million in 2000 and 1999,
respectively. During the year ended December 31, 2001 ARRIS paid down
approximately $89.0 million on its credit facility compared to net borrowings of
$20.5 million and $2.5 million in 2000 and 1999, respectively. Deferred
financing fees paid used approximately $7.8 million compared to $1.2 million and
$0.2 million in 2000 and 1999, respectively. The issuance of common stock
provided positive cash flows of $1.1 million, $5.5 million, and $21.3 million in
2001, 2000 and 1999, respectively.
33
<PAGE>
Net Operating Loss Carryforwards
As of December 31, 2001, ARRIS had net operating loss ("NOL") carryforwards
for domestic and foreign income tax purposes of approximately $51.0 million and
$6.9 million, respectively. We established a valuation allowance against
deferred tax assets in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes during 2001. 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.
The availability of tax benefits of NOL carryforwards to reduce ARRIS'
federal and state income tax liability is subject to various limitations under
the Internal Revenue Code. The availability of tax benefits of NOL carryforwards
to reduce ARRIS' foreign income tax liability is subject to the various tax
provisions of the respective countries.
As of December 31, 2001, tax benefits arising from NOL carryforwards of
approximately $2.4 million originating prior to TSX's quasi-reorganization would
be credited directly to additional paid-in capital if and when realized.
FORWARD-LOOKING STATEMENTS
Certain information and statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this report, including statements using terms such as "may,"
"expect," "anticipate," "intend," "estimate," "believe," "plan," "continue,"
"could be," or similar variations or the negative thereof 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 the Company operates and management's beliefs and assumptions regarding
these markets. These and any other statements in this document that are not
statements about historical facts are "forward-looking statements." In order to
comply with the terms of the safe harbor, the Company cautions investors that
any forward-looking statements made by the Company are not guarantees of future
performance and that a variety of factors could cause the Company's actual
results to differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. Important factors that
could cause results or events to differ from current expectations are described
in the risk factors below. These factors are not intended to be an
all-encompassing list of risks and uncertainties that may affect the operations,
performance, development and results of the Company's business. In providing
forward-looking statements, ARRIS is not undertaking any obligation to update
publicly or otherwise these statements, whether as a result of new information,
future events or otherwise.
RISK FACTORS
ARRIS' business is dependent on customers' capital spending on broadband
communication systems, and reductions by customers in capital spending could
adversely affect ARRIS' business.
ARRIS' performance has been largely dependent on customers' capital
spending for constructing, rebuilding, maintaining or upgrading broadband
communications systems. Capital spending in the telecommunications industry is
cyclical. A variety of factors will affect the amount of capital spending, and
therefore, ARRIS' sales and profits, including:
- general economic conditions,
- availability and cost of capital,
- other demands and opportunities for capital,
- regulations,
- demands for network services,
34
<PAGE>
- competition and technology, and
- real or perceived trends or uncertainties in these factors.
The markets in which ARRIS operates are intensely competitive, and
competitive pressures may adversely affect ARRIS' 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 ARRIS to retain skilled and
experienced personnel as well as deploy substantial resources toward meeting the
ever-changing demands of the industry. ARRIS competes with national and
international manufacturers, distributors and wholesales, including many
companies larger than ARRIS. ARRIS' major competitors include:
- ADC Telecommunications, Inc.
- C-COR.net Corporation
- Cisco Systems
- Harmonic Inc.
- Juniper Networks
- Motorola, Inc.
- Phillips
- Riverstone Networks, Inc.
- Scientific-Atlanta
- Tellabs Inc.
- Terayon Communication Systems
The rapid technological changes occurring in the broadband markets may lead
to the entry of new competitors, including those with substantially greater
resources than ARRIS. Since the markets in which the Company competes are
characterized by rapid growth and, in some cases, low barriers to entry, smaller
niche market companies and start-up ventures also may become principal
competitors in the future. Actions by existing competitors and the entry of new
competitors may have an adverse effect on ARRIS' 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 ARRIS' current products, which could have a material
adverse effect on ARRIS' business.
Further, many of ARRIS' 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 ARRIS' competitors have been in operation longer than ARRIS and
therefore have more long-standing and established relationships with domestic
and foreign broadband service users. ARRIS may not be able to compete
successfully in the future, and competition may harm ARRIS' business.
ARRIS' BUSINESS HAS PRIMARILY COME FROM TWO KEY CUSTOMERS. THE LOSS OF ONE OR
BOTH OF THESE CUSTOMERS OR A SIGNIFICANT REDUCTION IN SERVICES TO ONE OR BOTH OF
THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON ARRIS' BUSINESS.
ARRIS' two largest customers are AT&T and Cox Communications. For the
twelve months ended December 31, 2001, sales to AT&T (including sales to
MediaOne Communications, which was acquired by AT&T during 2000) accounted for
approximately 31.8% of ARRIS' total sales, while Cox Communications accounted
for approximately 15.2%. In addition, there are two other customers that each
provided more than 5% of ARRIS' total sales for the year ended December 31,
2001. ARRIS currently is the exclusive provider of
35
<PAGE>
telephony products for both AT&T and Cox Communications in eight metro areas.
The loss of either AT&T, Cox Communications or one of our other large customers,
or a significant reduction in the services provided to any of them would have a
material adverse impact on ARRIS.
On December 19, 2001, AT&T Broadband and Comcast Corporation announced a
definitive agreement to combine AT&T Broadband with Comcast. We believe that
this transaction will have a positive impact on our business.
AN INABILITY TO FULLY DEVELOP A SALES, DISTRIBUTION, AND SUPPORT INFRASTRUCTURE
IN INTERNATIONAL MARKETS AND THE COSTS ASSOCIATED WITH DEVELOPING THIS
INFRASTRUCTURE MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Historically, Arris Interactive L.L.C. relied upon Nortel Networks
exclusively for sales, distribution and support of its products in the
international markets and for certain customers in the North American market. We
entered into a non-exclusive sales representation agreement with Nortel Networks
to market our products. This agreement terminated on December 31, 2001 with
respect to North American markets and this agreement will terminate on December
31, 2003 with respect to international markets. In June 2001, Nortel Networks
announced that it was realigning its business, which will include the
discontinuance of Nortel Networks' access solutions operations (which includes
its ARRIS related operations). To avoid reliance on Nortel Networks and other
third parties, we have attempted to develop our own sales, marketing,
distribution, and support infrastructure, particularly to support and enhance
our international sales. However, these efforts may not be successful, or if
successful, might not be sufficient to offset sales lost from the discontinuance
of our relationship with Nortel Networks.
OUR CREDIT FACILITY IMPOSES FINANCIAL COVENANTS THAT MAY ADVERSELY AFFECT THE
REALIZATION OF OUR STRATEGIC OBJECTIVES.
ARRIS and certain of its subsidiaries have entered into a revolving credit
facility providing for borrowing up to a committed amount of $175 million, with
borrowing also limited by a borrowing base determined by reference to eligible
accounts receivable and eligible inventory. The committed amount under this
revolving credit facility may be increased to $200 million at a later date upon
the agreement of the lenders thereunder. This credit facility imposes, among
other things, covenants limiting the incurrence of additional debt and liens and
requires us to meet certain financial objectives.
The credit facility has a maturity date of August 3, 2004. However, the
maturity date of the credit facility will be December 31, 2002 in the event that
the Company's convertible subordinated notes due May 15, 2003 are not either
fully refinanced or fully converted to ARRIS common stock prior to December 31,
2002 in a manner satisfactory to the lenders under the credit facility. The
acceleration of the maturity date of the credit facility could have a material
adverse effect on our business.
WE HAVE SUBSTANTIAL STOCKHOLDERS THAT MAY NOT ACT CONSISTENT WITH THE INTERESTS
OF THE OTHER STOCKHOLDERS.
Nortel Networks owns approximately 49% of our common stock and Liberty
Media Corporation beneficially owns approximately 10% of our common stock. These
respective ownership interests results in both Nortel Networks and Liberty Media
having a substantial influence over ARRIS. Nortel Networks and Liberty Media may
not exert their respective influences in a manner that is consistent with the
interest of other stockholders. Nortel Networks is, in its capacity as a
stockholder, able to block stockholder action, including, for instance,
stockholder approval of a merger or large acquisition.
THE TWO LARGEST STOCKHOLDERS HAVE THE POWER TO SELL A LARGE PORTION OF ARRIS
STOCK IN THE FUTURE, WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Any sales of substantial amounts of our common stock in the public market,
or the perception that such sales might occur, could lower the price of our
common stock. We have entered into a registration rights agreement with Nortel
Networks. Under this agreement, Nortel Networks has the power to cause us to
initiate a public offering for all or part of Nortel Networks' shares of ARRIS
common stock, and we expect it to do so in the near future. Further, Nortel
Networks could cause us to file a shelf registration statement,
36
<PAGE>
which would allow Nortel Networks to sell its ARRIS shares on the open market at
an undetermined point in the future. Liberty Media currently has similar
registration rights. Through the exercise of their registration rights, either
Nortel Networks or Liberty Media or both could sell a large number of shares to
the public.
Nortel Networks also owns a redeemable membership interest in Arris
Interactive. The terms of the membership interest require Nortel Networks to
exchange the membership interest for common stock, preferred stock (which may be
convertible), or notes (which may be convertible, upon the happening of certain
circumstances). The exchange for, and conversion into, our common stock would
occur at the then prevailing market price of the common stock. Since some of the
circumstances under which exchange and/or conversion is permitted may occur in
the event that we are in significant financial distress, it is possible that the
market price of the common stock would be quite low and the Nortel Networks
would be able to convert its new membership interest into significant, but
presently undeterminable, portion of ARRIS common stock which could dilute our
other stockholders.
ARRIS MAY DISPOSE OF EXISTING PRODUCT LINES OR ACQUIRE NEW PRODUCT LINES IN
TRANSACTIONS THAT MAY ADVERSELY IMPACT OUR FUTURE RESULTS.
On an ongoing basis, we evaluate our various product offerings in order to
determine whether any should be sold or closed and whether there are businesses
that we should pursue acquiring. Future acquisitions and divestitures entail
various risks, including:
- the risk that we will not be able to find a buyer for a product line,
while product line sales and employee morale will have been damaged
because of general awareness that the product line is for sale;
- the risk that the purchase price obtained will not be equal to the book
value of the assets for the product line that it sells; and
- the risk that acquisitions will not be integrated or otherwise perform as
expected.
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 ARRIS' products. The technology applications currently under
development by ARRIS may not be successfully developed. Even if the
developmental products are successfully developed, they may not be widely used
or ARRIS may not be able to successfully exploit these technology applications.
To compete successfully, ARRIS must quickly design, develop, manufacture and
sell new or enhanced products that provide increasingly higher levels of
performance and reliability. However, ARRIS may not be able to successfully
develop or introduce these products if our products:
- are not cost effective;
- are not brought to market in a timely manner; or
- fail to achieve market acceptance.
Furthermore, ARRIS' competitors may develop similar or alternative new
technology solutions and applications that, if successful, could have a material
adverse effect on ARRIS. ARRIS' strategic alliances are based on business
relationships that have not been the subject of written agreements expressly
providing for the alliance to continue for a significant period of time. The
loss of a strategic partner could have a material adverse effect on the progress
of new products under development with that partner.
CONSOLIDATIONS IN THE TELECOMMUNICATIONS INDUSTRY COULD RESULT IN DELAYS OR
REDUCTIONS IN PURCHASES OF PRODUCTS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON ARRIS' BUSINESS.
The telecommunications industry has experienced the consolidation of many
industry participants and this trend is expected to continue. ARRIS and one or
more of its competitors may each supply products to businesses that have merged
or will merge in the future. Consolidations could result in delays in purchasing
37
<PAGE>
decisions by merged businesses, with ARRIS playing a greater or lesser role in
supplying the communications products to the merged entity. These purchasing
decisions of the merged companies could have a material adverse effect on ARRIS'
business.
Mergers among the supplier base also have increased, and this trend may
continue. The larger combined companies with pooled capital resources may be
able to provide solution alternatives with which ARRIS 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. These consolidated supplier companies could have a material adverse
effect on ARRIS' business.
ARRIS' 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 ARRIS may not be
successful in attracting and retaining key executives, marketing, engineering
and sales personnel, which could impact our ability to maintain and grow our
operations. ARRIS' 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 ARRIS employees and in the future, these
attempts may continue. The loss of services of any key personnel, the inability
to attract and retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and other technical professionals
could negatively affect ARRIS' 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 ARRIS products are obtained from a sole supplier or a limited
group of suppliers, including Nortel Networks. 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.
ARRIS' 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 ARRIS products is marketed
and made available to existing and potential international customers. In
addition, United States broadband system designs and equipment are increasingly
being employed in international markets, where market penetration is relatively
lower than in the United States. While international operations are expected to
comprise an integral part of our future business, international markets may no
longer continue to develop at the current rate, or at all. We may fail to
receive additional contracts to supply equipment in these markets.
OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY CHANGES IN THE FOREIGN
LAWS IN THE COUNTRIES IN WHICH WE HAVE MANUFACTURING OR ASSEMBLY PLANTS.
A significant portion of our products are manufactured or assembled in
Mexico and the Philippines and other countries outside of the United States. The
governments of the foreign countries in which we have plants may pass laws that
impair our operations, such as laws that impose exorbitant tax obligations on
the business or nationalize segments of our businesses.
38
<PAGE>
WE MAY FACE DIFFICULTIES IN CONVERTING EARNINGS FROM INTERNATIONAL OPERATIONS TO
U.S. DOLLARS.
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.
ARRIS' PROFITABILITY HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, WHICH COULD
ADVERSELY AFFECT THE PRICE OF ARRIS' STOCK.
The Company has experienced years with significant operating losses.
Although we have been profitable during the preceding years, 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 ARRIS' stock price.
WE MAY FACE HIGHER COSTS ASSOCIATED WITH PROTECTING OUR INTELLECTUAL PROPERTY.
ARRIS' 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 ARRIS accompanies have infringed upon third-party patents or other
proprietary rights. Any of these claims, whether with or without merit, could
result in costly litigation, divert the time, attention and resources of our
management, delay our product shipments, or require us to enter into royalty or
licensing agreements. If a claim of product infringement against ARRIS is
successful and we fail to obtain a license or develop a license non-infringing
technology, our business and operating results could be adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of ARRIS' 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.
ARRIS is exposed to various market risks, including interest rates and
foreign currency rates. Changes in these rates may adversely affect our results
of operations and financial condition. To manage the volatility relating to
these typical business exposures, ARRIS may enter into various derivative
transactions, when appropriate. ARRIS does not hold or issue derivative
instruments for trading or other speculative purposes. Taking into account the
effects of interest rate changes on the Company's revolving debt facility, a
hypothetical 100 basis point adverse change in interest rates would increase
interest expense by approximately $0.6 million annually. As of December 31,
2001, the Company had no material contracts denominated in foreign currencies.
In the past, ARRIS has used interest rate swap agreements, with large
creditworthy financial institutions, to manage its exposure to interest rate
changes. These swaps would involve the exchange of fixed and variable interest
rate payments without exchanging the notional principal amount. During the year
ended December 31, 2001, ARRIS did not have any outstanding interest rate swap
agreements.
The Company is exposed to foreign currency exchange rate risk as a result
of sales of our products in various foreign countries. In order to minimize the
risks associated with foreign currency fluctuations, most sales contracts are
issued in U.S. dollars. The Company has previously used foreign currency
contracts to hedge the risks associated from foreign currency fluctuations for
significant sales contracts, however, no significant contracts were in place
during the year ended December 31, 2001. ARRIS constantly monitors the exchange
rate between the U.S. dollar and Mexican peso to determine if any adverse
exposure exists relative to its costs of manufacturing. The Company does not
maintain Mexican peso denominated currency. Instead, U.S. dollars are exchanged
for pesos at the time of payment.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors 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
40
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 42
Consolidated Balance Sheets at December 31, 2001 and 2000... 43
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 44
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... 45
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. 46
Notes to the Consolidated Financial Statements.............. 47
</Table>
41
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(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 auditing standards generally
accepted in the 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, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of ARRIS Group, Inc. at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. 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 3 of the Notes to the Consolidated Financial
Statements, the Company has not yet adopted Statement of Financial Accounting
Standards No. 142. However, the transition provisions of the Statement preclude
the amortization of goodwill acquired in a business combination for which the
acquisition date is after June 30, 2001.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 7, 2002
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CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,337 $ 8,788
Accounts receivable (net of allowances for doubtful
accounts of $9,409 in 2001 and $6,686 in 2000).......... 83,224 138,336
Accounts receivable from AT&T............................. 35,915 21,662
Accounts receivable from Nortel Networks.................. 18,857 201
Other receivables......................................... 10,049 --
Inventories............................................... 187,971 263,683
Income taxes recoverable.................................. 5,066 17,895
Deferred income taxes..................................... -- 18,928
Investments held for resale............................... 795 1,561
Other current assets...................................... 22,110 19,098
-------- --------
Total current assets............................... 369,324 490,152
Property, plant and equipment (net of accumulated
depreciation of $39,057 in 2001 and $55,443 in 2000)...... 52,694 53,353
Goodwill (net of accumulated amortization of $56,430 in 2001
and $51,559 in 2000)...................................... 259,062 144,919
Intangibles (net of accumulated amortization of $7,012 in
2001 and $0 in 2000)...................................... 44,488 --
Investments................................................. 14,037 12,085
Deferred income taxes....................................... -- 6,773
Other assets................................................ 12,510 24,213
-------- --------
$752,115 $731,495
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,620 $138,774
Accrued compensation, benefits and related taxes.......... 32,747 17,350
Accounts payable and accrued expenses -- Nortel
Networks................................................ 21,373 --
Other accrued liabilities................................. 45,722 28,107
-------- --------
Total current liabilities.......................... 118,462 184,231
Long-term debt.............................................. 115,000 204,000
Deferred income taxes....................................... -- 1,362
-------- --------
Total liabilities.................................. 233,462 389,593
Membership interest -- Nortel Networks...................... 104,110 --
-------- --------
Total liabilities & membership interest............ 337,572 389,593
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, 150.0 million
shares authorized; 75.2 million and 38.1 million shares
issued and outstanding in 2001 and 2000, respectively... 755 383
Capital in excess of par value............................ 507,650 266,216
Retained earnings (deficit)............................... (90,162) 77,569
Unrealized holding loss on marketable securities.......... (3,211) (1,668)
Unearned compensation..................................... (577) (678)
Cumulative translation adjustments........................ 88 80
-------- --------
Total stockholders' equity......................... 414,543 341,902
-------- --------
$752,115 $731,495
======== ========
</Table>
See accompanying notes to the consolidated financial statements.
43
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CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales (includes sales to AT&T of $237.9 million, $431.5
million and $355.0 million for the years ended December
31, 2001, 2000, and 1999, respectively, and includes sales
to Nortel Networks of $23.4 million, $1.6 million and $-0-
for the years ended December 31, 2001, 2000, and 1999,
respectively)............................................. $ 747,670 $998,730 $844,756
Cost of sales............................................... 628,700 812,958 679,774
--------- -------- --------
Gross profit.............................................. 118,970 185,772 164,982
Operating expenses:
Selling, general, administrative and development
expenses............................................... 165,670 133,988 111,937
In-process R&D write-off.................................. 18,800 -- --
Restructuring and impairment charges...................... 36,541 -- 5,647
Amortization of goodwill.................................. 4,872 4,917 4,946
Amortization of intangibles............................... 7,012 -- --
--------- -------- --------
232,895 138,905 122,530
--------- -------- --------
Operating (loss) income..................................... (113,925) 46,867 42,452
Other expense (income):
Interest expense.......................................... 9,315 11,053 12,406
Membership interest....................................... 4,110 -- --
Other (income) expense, net............................... 10,142 87 (745)
Loss on marketable securities............................. 767 773 275
--------- -------- --------
(Loss) income before income tax expense and extraordinary
loss...................................................... (138,259) 34,954 30,516
Income tax expense.......................................... 27,619 14,285 13,806
--------- -------- --------
Net (loss) income before extraordinary loss................. $(165,878) $ 20,669 $ 16,710
Extraordinary loss.......................................... 1,853 -- --
--------- -------- --------
Net (loss) income........................................... $(167,731) $ 20,669 $ 16,710
========= ======== ========
Net (loss) income per common share:
Basic: Net (loss) income before extraordinary loss........ $ (3.09) $ 0.54 $ 0.46
Extraordinary loss..................................... (0.04) -- --
--------- -------- --------
Net (loss) income...................................... $ (3.13) $ 0.54 $ 0.46
========= ======== ========
Diluted: Net (loss) income before extraordinary loss...... $ (3.09) $ 0.52 $ 0.43
Extraordinary loss..................................... (0.04) -- --
--------- -------- --------
Net (loss) income...................................... $ (3.13) $ 0.52 $ 0.43
========= ======== ========
Weighted average common shares:
Basic..................................................... 53,624 37,965 36,600
========= ======== ========
Diluted................................................... 53,624 39,571 38,867
========= ======== ========
</Table>
See accompanying notes to the consolidated financial statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net (loss) income......................................... $(167,731) $ 20,669 $ 16,710
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 31,745 19,631 17,075
Provision for doubtful accounts......................... 5,820 1,117 5,859
Deferred income taxes................................... 19,273 30 (405)
Loss on marketable securities........................... 788 773 275
Amortization of unearned compensation................... 1,076 950 389
Loss from equity investment............................. 8,607 -- --
Write-off of acquired in-process R&D.................... 18,800 -- --
Impairment of goodwill.................................. 5,877 -- --
Impairment of fixed assets.............................. 14,722 -- --
Write-down of inventories............................... 31,970 -- --
Sale of Powering inventory.............................. 9,225 -- --
Change in membership accrued interest................... 4,110 -- --
Gain on sale of building................................ (448) -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in accounts receivable............ 17,771 36,034 (79,250)
Increase in other receivables......................... (10,049) -- --
Decrease (increase) in inventories.................... 125,891 (48,467) (64,228)
(Decrease) increase in accounts payable and accrued
liabilities......................................... (24,644) (21,629) 114,106
Decrease (increase) in income taxes recoverable....... 17,895 (7,492) (10,403)
Decrease (increase) in other, net..................... 795 3,106 (4,404)
--------- --------- ---------
Net cash provided by (used in) operating activities......... 111,493 4,722 (4,276)
Investing activities:
Purchases of property, plant and equipment................ (9,556) (15,498) (20,802)
Cash proceeds from sale of building....................... 1,061 -- --
Cash paid for acquisition, net of cash acquired........... (6,852) -- --
Other investments......................................... (3,930) (8,198) --
--------- --------- ---------
Net cash (used in) investing activities..................... (19,277) (23,696) (20,802)
--------- --------- ---------
Net cash provided (used) before financing activities........ 92,216 (18,974) (25,078)
Financing activities:
Borrowings under credit facilities........................ $ 302,726 $ 352,000 $ 251,500
Reductions in borrowings under credit facilities.......... (391,726) (331,500) (249,000)
Deferred financing costs paid............................. (7,813) (1,163) (166)
Proceeds from issuance of common stock.................... 1,146 5,454 21,279
--------- --------- ---------
Net cash provided by financing activities................... 95,667 24,791 23,613
Net (decrease) increase in cash and cash equivalents........ (3,451) 5,817 (1,465)
Cash and cash equivalents at beginning of year.............. 8,788 2,971 4,436
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 5,337 $ 8,788 $ 2,971
========= ========= =========
Noncash investing and financing activities:
Net tangible assets acquired, excluding cash.............. $ 55,284 $ -- $ --
Intangible assets acquired, including goodwill............ 195,193 -- --
Noncash purchase price, including 37 million shares of
common stock............................................ (243,625) -- --
--------- --------- ---------
Cash paid for acquisition, net of cash acquired........... $ 6,852 $ -- $ --
Equity received in exchange for services provided......... $ 1,000 $ -- $ --
Supplemental cash flow information:
Interest paid during the year............................. $ 8,952 $ 10,966 $ 10,893
========= ========= =========
Income taxes paid during the year......................... $ 465 $ 15,286 $ 5,690
========= ========= =========
</Table>
See accompanying notes to the consolidated financial statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
RETAINED UNREALIZED
CAPITAL IN EARNINGS LOSS ON CUMULATIVE
COMMON EXCESS OF (ACCUMULATED MARKETABLE UNEARNED TRANSLATION
STOCK PAR VALUE DEFICIT) SECURITIES COMPENSATION ADJUSTMENTS TOTAL
--------- ---------- ------------ ---------- ------------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998.................. $ 358 $209,193 $ 40,190 $ -- $ (211) $37 $249,567
Comprehensive income:
Net income............ -- -- 16,710 -- -- -- 16,710
Translation
adjustment.......... -- -- -- -- -- (38) (38)
--------
Comprehensive
income.............. 16,672
Shares granted under
stock award plan.... -- 362 -- -- (362) -- --
Compensation under
stock award plan.... -- -- -- -- 389 -- 389
Issuance of common
stock and other..... 20 21,259 -- -- -- -- 21,279
Tax benefit related to
exercise of stock
options............. -- 21,431 -- -- -- -- 21,431
--------- -------- --------- ------- ------- --- --------
Balance, December 31,
1999.................. 378 252,245 56,900 -- (184) (1) 309,338
Comprehensive income:
Net income............ -- -- 20,669 -- -- -- 20,669
Unrealized loss on
marketable
securities.......... -- -- -- (1,668) -- -- (1,668)
Translation
adjustment.......... -- -- -- -- -- 81 81
--------
Comprehensive
income.............. 19,082
Shares granted under
stock award plan.... -- 1,444 -- -- (1,444) -- --
Compensation under
stock award plan.... -- -- -- -- 950 -- 950
Issuance of common
stock and other..... 5 5,449 -- -- -- -- 5,454
Tax benefit related to
exercise of stock
options............. -- 7,078 -- -- -- -- 7,078
--------- -------- --------- ------- ------- --- --------
Balance, December 31,
2000.................. 383 266,216 77,569 (1,668) (678) 80 341,902
--------- -------- --------- ------- ------- --- --------
Comprehensive (loss)
Net (loss)............ -- -- (167,731) -- -- -- (167,731)
Unrealized loss on
marketable
securities.......... -- -- -- (1,543) -- -- (1,543)
Translation
adjustment.......... -- -- -- -- -- 8 8
--------
Comprehensive
(loss).............. (169,266)
Shares granted under
stock award plan.... -- 975 -- -- (975) -- --
Compensation under
stock award plan.... -- -- -- -- 1,076 -- 1,076
Issuance of common
stock to acquire
Arris Interactive
L.L.C............... 370 226,810 -- -- -- -- 227,180
Issuance of stock
options in
acquisition of Arris
Interactive
L.L.C............... -- 12,531 -- -- -- -- 12,531
Issuance of common
stock and other..... 2 1,118 -- -- -- -- 1,120
--------- -------- --------- ------- ------- --- --------
Balance, December 31,
2001.................. $ 755 $507,650 $ (90,162) $(3,211) $ (577) $88 $414,543
========= ======== ========= ======= ======= === ========
</Table>
See accompanying notes to the consolidated financial statements.
46
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ARRIS Group, Inc., the successor to ANTEC Corporation (together with its
consolidated subsidiaries, except as the context otherwise indicates, "ARRIS" or
the "Company"), is an international communications technology company,
headquartered in Duluth, Georgia. ARRIS specializes in the design and
engineering of hybrid fiber-coax architectures and the development and
distribution of products for these broadband networks. The Company provides its
customers with products and services that enable reliable, high-speed, two-way
broadband transmission of video, telephony, and data.
ARRIS operates in one business segment, Communications, providing a range
of customers with network and system products and services, primarily hybrid
fiber-coax networks and systems for the communications industry. This segment
accounts for 100% of consolidated sales, operating profit and identifiable
assets of the Company. ARRIS provides a broad range of products and services to
cable system operators and telecommunication providers. ARRIS is a leading
developer, manufacturer and supplier of telephony, optical transmission,
construction, rebuild and maintenance equipment for the broadband communications
industry. ARRIS supplies most of the products required in a broadband
communication system, including headend, distribution, drop and in-home
subscriber products.
On August 3, 2001, the Company acquired Nortel Networks' portion of Arris
Interactive L.L.C., which was a joint venture formed by Nortel and us in 1995.
Nortel exchanged its ownership interest in Arris Interactive L.L.C. for a
subordinated redeemable preferred membership interest in Arris Interactive with
a face amount of $100 million and 37 million shares of ARRIS Group, Inc. common
stock (See Note 16 of the Notes to the Consolidated Financial Statements). As of
December 31, 2001, Nortel Networks effectively controlled approximately 49% of
the outstanding ARRIS common stock on a fully diluted basis. Following the
acquisition, Nortel designated two new members of our Board of Directors.
As of December 31, 2001, Liberty Media Corporation, which is part of the
Liberty Media Group of AT&T whose financial performance is "tracked" by a
separate class of AT&T stock, effectively controlled approximately 10% of the
outstanding ARRIS common stock on a fully diluted basis. In August 2001, AT&T
spun off Liberty Media to the holders of its tracking stock, and AT&T
subsequently no longer indirectly owns that interest in the Company. The
effective ownership includes options to acquire an additional 854,341 shares. A
significant portion of the Company's revenue is derived from sales to AT&T
(including MediaOne Communications, which was acquired by AT&T during 2000)
aggregating $237.9 million, $431.5 million and $355.0 million for the years
ended December 31, 2001, 2000 and 1999, respectively. Giving effect to AT&T's
acquisition of MediaOne Communications, sales to the combined entity aggregated
$391.1 million for 1999. ARRIS had accounts receivable from AT&T of
approximately $35.9 million, $21.7 million and $90.4 million at December 31,
2001, 2000 and 1999, respectively.
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
accounting principles generally accepted in the United States 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.
47
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(c) Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's 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.
(e) Inventories
Inventories are stated at the lower of average, approximating first-in,
first-out, cost or market. The cost of finished goods and work in process
comprises material, labor, and manufacturing overhead.
(f) Investments
Prior to March 1999, the Company owned a 25% interest in Arris Interactive
L.L.C., a joint venture with Nortel Networks ("Nortel") that was accounted for
under the equity method. Arris Interactive L.L.C. was focused on the
development, manufacture and sale of products that enable the provision of a
broad range of telephone and data services over hybrid fiber-coax architectures
typically used for video distribution. From March 1999 to August 2001 we owned
an 18.75% interest in Arris Interactive L.L.C., which was accounted for on the
cost method.
In connection with the Arris Interactive L.L.C. acquisition, the quarters
ended March 31, 2001 and June 30, 2001 were restated in accordance with
Accounting Principles Board ("APB") No. 18, The Equity Method of Accounting for
Investments in Common Stock. This APB states that an investment in common stock
of an investee that was previously accounted for by the cost method becomes
qualified for use of the equity method by an increase in the level of ownership.
We adopted the use of the equity method upon acquisition of Nortel's portion of
Arris Interactive L.L.C., and all prior periods presented have been adjusted
retroactively to reflect the equity method of accounting. During 2000, Arris
Interactive L.L.C. recorded net income. However, in the periods prior to 2000,
Arris Interactive L.L.C. incurred net losses, of which we did not recognize our
proportionate share due to our investment in Arris Interactive L.L.C being
reduced to zero. APB No. 18 states that the Company should recognize gains only
after its share of net income equals its share of net losses not recognized. Our
share of Arris Interactive's net income in 2000 did not exceed the losses
unrecognized in previous years, and therefore, these periods have not been
restated. However, during the periods ending March 31, 2001 and June 30, 2001,
Arris Interactive L.L.C. recorded net losses and we have restated these periods
to reflect our share of the losses under the equity method of accounting due to
the our investment in and advances to Arris Interactive at December 31, 2000
being sufficient to record such losses.
The Company holds investments in the common stock of Lucent Technologies
and Avaya, Inc. totaling approximately $0.8 million at December 31, 2001, which
are classified as trading securities. Changes in the market value of these
securities are recognized in income and resulted in a net pre-tax loss of
approximately $0.8 million during the year ended December 31, 2001 and a pretax
gain of approximately $0.5 million during the year ended December 31, 2000.
The Company's remaining investments in marketable securities, totaling
approximately $2.1 million, are classified as available-for-sale. At December
31, 2001 and 2000, ARRIS had unrealized losses related to these
available-for-sale equity securities of approximately $3.2 million and $1.7
million respectively, included in comprehensive income. In 2000, the Company
recognized a pre-tax loss of approximately $1.3 million relating to investments
with other than temporary impairments.
48
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
During the ordinary course of business, the Company has made strategic
investments in private companies, which total approximately $12.0 million at
December 31, 2001. These strategic investments are recorded at cost and are
periodically evaluated for impairment.
(g) Revenue Recognition
ARRIS' revenue recognition policies are in compliance with Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, as issued by the
Securities and Exchange Commission. Sales and related cost of sales are
recognized at the time products are shipped or title passes pursuant to the
terms of the agreement with the customer, the amount due from the customer is
fixed and collectibility of the related receivable is reasonably assured. Sales
of services are recognized at the time of performance. ARRIS resells software
developed by outside third parties. Software sold by ARRIS does not require
significant production, modification or customization. Software revenue is
generally recognized when shipment is made, no significant vendor obligations
remain and collection is considered probable.
(h) Depreciation of Property, Plant and Equipment
The Company provides for depreciation of property, plant and equipment
principally on the straight-line basis over the estimated useful lives of 25 to
40 years for buildings and improvements, 3 to 10 years for machinery and
equipment, and the term of the lease for leasehold improvements. Depreciation
expense for the three years ended December 31, 2001, 2000, and 1999 was
approximately $18.1 million, $13.6 million and $11.0 million, respectively.
(i) Goodwill and Long-Lived Assets
Goodwill relates to the excess of cost over net assets resulting from an
acquisition. Goodwill resulting from the 1986 acquisition of Anixter (ARRIS'
former owner) by Anixter International was allocated to ARRIS based on ARRIS'
proportionate share of total operating earnings of Anixter for the period
subsequent to the acquisition. Goodwill also has resulted from acquisitions of
businesses by Anixter and ARRIS subsequent to 1986 that now are owned by ARRIS.
ARRIS assesses the recoverability of goodwill and other long-lived assets
whenever events or changes in circumstances indicate that expected future
undiscounted cash flows might not be sufficient to support the carrying amount
of an asset. If expected future undiscounted cash flows from operations are less
than their carrying amounts, an asset is determined to be impaired, and a loss
is recorded for the amount by which the carrying value of the asset exceeds its
fair value. Fair value is based on discounting estimated future cash flows or
using other valuation methods as appropriate. Non-cash amortization expense is
being recognized as a result of amortization of goodwill on a straight-line
basis over a period of 40 years from the respective dates of acquisition. The
estimation of future cash flows is critical to the valuation of goodwill. The
communications industry is subject to rapid technological changes and
significant variations in capital spending by system operators. As a result,
estimations of future cash flows are difficult, and to the extent that the
Company has overestimated those cash flows the Company may also have
underestimated the need to reduce any attendant goodwill.
Effective January 1, 2002, we will adopt Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. In general,
SFAS No. 142 requires that during 2002 the Company assesses the fair value of
the net assets underlying its acquisition related goodwill on a business by
business basis. Where that fair value is less than the related carrying value,
the Company will be required to reduce the amount of the goodwill. These
reductions will be made retroactive to January 1, 2002. SFAS No. 142 also
requires that the Company discontinue the amortization of its acquisition
related goodwill.
As of December 31, 2001, the financial statements include acquisition
related goodwill of $259.1 million, net of previous amortization. Although the
process of implementing SFAS No. 142 will take several more months, it is
possible that a portion of this goodwill may be impaired and may need to be
reduced. In addition,
49
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
the Company no longer will be amortizing acquisition related goodwill, which
aggregated $4.9 million in 2001, 2000, and 1999.
As of December 31, 2001, the financial statements included intangibles of
$44.5 million, net of amortization of $7.0 million. These intangibles are
related to the existing technology acquired from Arris Interactive L.L.C. on
August 3, 2001, and will be amortized over a three year period. The valuation
process to determine the fair market value of the existing technology was
performed by an outside valuation service. The value assigned was calculated
using an income approach utilizing the cash flow generated by this technology.
(j) Advertising and Sales Promotion
Advertising and sales promotion costs are expensed as incurred. Advertising
expense was approximately $1.3 million, $3.3 million and $2.8 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
(k) Research and Development
Research and development ("R&D") costs are expensed as incurred. ARRIS'
research and development expenditures for the years ended December 31, 2001,
2000 and 1999 were approximately $54.5 million, $23.4 million and $16.6 million,
respectively. Acquired in-process research and development in the amount of
$18.8 million was written off in connection with the Arris Interactive
acquisition during the third quarter of 2001.
(l) Warranty
ARRIS provides, by a current charge to income in the period in which the
related revenue is recognized, an amount it estimates will be needed to cover
future warranty obligations.
(m) 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. The
Company continually reviews the adequacy of the valuation allowance and
recognizes the benefits of deferred tax assets only as reassessment indicates
that it is more likely than not that the deferred tax assets will be realized.
(n) Foreign Currency
The financial position and operating results of ARRIS' foreign operations
are consolidated using the local currency 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, which are translated at historical cost. Income statement items are
translated at average currency exchange rates. The resulting translation
adjustment is recorded as a separate component of stockholders' equity.
(o) Stock-Based Compensation
ARRIS grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and, accordingly, does not
recognize compensation expense for the stock option grants. As required by
Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation, ARRIS presents supplemental information disclosing pro
forma net income and net income per common share as if the Company had
recognized compensation expense on stock options granted subsequent to December
31, 1994 under the fair value method of that statement. (See Note 12 of Notes to
the Consolidated Financial Statements.)
50
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(p) Interest Rate Agreements
As of December 31, 2001, the Company had a zero balance in floating rate
indebtedness and had no outstanding interest rate swap agreements.
(q) Concentrations of Credit
Financial instruments that potentially subject ARRIS to concentrations of
credit risk consist principally of temporary cash investments and accounts
receivable. ARRIS places its temporary cash investments with high credit quality
financial institutions in accordance with debt agreements. Concentrations with
respect to accounts receivable occur as the Company sells primarily to large,
well established companies including companies outside of the United States,
however, the credit quality of these customers significantly diminishes the risk
of loss from extension of credit. Our credit policy generally does not require
collateral from our 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. Due to the economic
disturbances in Argentina, the Company recorded a write-off of $4.4 million
(reflected in cost of sales) related to unrecoverable amounts due from a
customer in that region during 2001.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
- Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
- Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable
approximate their fair values.
- Marketable securities: The fair values for trading and available-for-sale
equity securities are based on quoted market prices.
- Long-term debt: The carrying amounts of the Company's borrowings under
its long-term revolving credit arrangements approximate their fair value.
The fair value of the Company's convertible subordinated debt is based on
its quoted market price and totaled approximately $89.7 million and $62.1
million at December 31, 2001 and 2000, respectively.
- Foreign exchange contracts and interest rate swaps: The fair values of
the Company's foreign currency contracts and interest rate swaps 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 using current assumptions. As of December 31, 2001,
the Company did not have any foreign exchange contracts. The Company had
no interest rate swap agreements outstanding as of December 31, 2001.
(r) Accounting for Derivative Instruments
ARRIS uses various derivative financial instruments, including foreign
exchange contracts, and in the past, interest rate swap agreements to enhance
the Company's ability to manage risk. Derivative instruments are entered into
for periods consistent with related underlying exposures and do not constitute
positions independent of those exposures. ARRIS' derivative financial
instruments are for purposes other than trading. ARRIS' non-derivative financial
instruments include letters of credit, commitments to extend credit and
guarantees of debt. ARRIS generally does not require collateral to support its
financial instruments.
It is the Company's policy to recognize all derivative financial
instruments, such as interest rate swap contracts and foreign exchange
contracts, in the consolidated financial statements at fair value regardless of
the purpose or intent for holding the instrument. Changes in the fair value of
derivative financial instruments are either recognized periodically in income or
in shareholders' equity as a component of comprehensive
51
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
income depending on whether the derivative financial instrument qualifies for
hedge accounting, and if so, whether it qualifies as a fair value hedge or cash
flow hedge. Generally, changes in fair values of derivatives accounted for as
fair value hedges are recorded in income along with the portions of the changes
in the fair values of the hedged items that relate to the hedged risk(s).
Changes in fair values of derivatives accounted for as cash flow hedges, to the
extent they are effective as hedges, are recorded in comprehensive income net of
applicable deferred taxes. Changes in fair values of derivatives, not qualifying
as hedges, are reported in income. These amounts were immaterial for the years
ended December 31, 2001, 2000 and 1999, respectively.
NOTE 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The Statement supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, however it retains the fundamental provisions of that
statement related to the recognition and measurement of the impairment of
long-lived assets to be "held and used." The Statement is effective for
year-ends beginning after December 15, 2001 (e.g. January 1, 2002 for a
calendar-year company). The Company is in the process of evaluating the impact
SFAS 144 will have upon adoption, but does not anticipate it will have a
significant impact on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment, or more frequently if impairment indicators arise. The
review process will entail assessing the fair value of the net assets underlying
our acquisition related goodwill on a business by business basis. If the fair
value is deemed less than the related carrying value, we will be required to
reduce the amount of the goodwill. These reductions will be made retroactive to
January 1, 2002. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. The transitional provisions of
SFAS No. 142 have been adopted for the goodwill and intangible assets acquired
with the Arris Interactive L.L.C. transaction, as the acquisition occurred on
August 3, 2001. The Company will apply the new accounting rules to goodwill and
intangible assets acquired prior to July 1, 2001 at the beginning of fiscal year
2002. As of December 31, 2001, our financial statements included acquisition
related goodwill of $259.1 million, net of previous amortization. The process of
implementing Statement No. 142 has begun and will be complete during the first
half of 2002. In addition, we no longer will be amortizing acquisition related
goodwill, which amortization aggregated, $4.9 million in 2001, $4.9 million in
2000 and $4.9 million in 1999. If the goodwill acquired with the Arris
Interactive L.L.C. transaction had been amortized over a ten year useful life,
it would have resulted in approximately $5.1 million of additional amortization
expense for the year ended December 31, 2001.
In 2000, the Emerging Issues Task Force reached a consensus on EITF No.
00-10, Accounting for Shipping and Handling Fees and Costs ("EITF 00-10") that
states all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. In 1999 and 2000, shipping revenue and the
related cost of sales were netted as pass-through expenses, reimbursed in total
by the Company's customers. However, all shipping and handling costs, in
aggregate have now been reclassified to net sales and cost of sales. Shipping
and handling costs for the years ended December 31, 2001, 2000 and 1999 were
approximately $7.3 million, $20.0 million and $18.2 million, respectively, and
are appropriately classified to net sales and cost of sales.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2001, ARRIS closed a research and development
facility in Raleigh, North Carolina and recorded a $4.0 million charge related
to severance and other costs associated with closing that
52
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
facility. This charge included termination expenses of $2.2 million related to
the involuntary dismissal of 48 employees, primarily engaged in engineering
functions at that facility. Also included in the $4.0 million charge was $0.7
million related to lease commitments, $0.2 million related to the impairment of
fixed assets, and $0.9 million related to other shutdown expenses. As of
December 31, 2001, approximately $2.0 million related to severance, $0.7 million
related to lease commitments, and $0.9 million of shutdown expenses remained in
the restructuring accrual to be paid. The Company anticipates disposing of $0.2
million of fixed assets during the second quarter of 2002.
In the third quarter of 2001, the Company announced a restructuring plan to
outsource the functions of most of its manufacturing facilities. This decision
to reorganize was due in part to the ongoing weakness in industry spending
patterns. The plan entails the implementation of an expanded manufacturing
outsourcing strategy and the related closure of the four factories located in El
Paso, Texas and Juarez, Mexico. The closure of the factories is anticipated to
be complete during the first half of 2002. As a result, the Company recorded
restructuring and impairment charges of $66.2 million. Included in these charges
was approximately $32.0 million related to the write-down of inventories and
approximately $1.7 million related to remaining warranty and purchase order
commitments, which have been reflected in cost of sales. Also included in the
restructuring and impairment charge was approximately $5.7 million related to
severance and associated personnel costs, $5.9 million related to the impairment
of goodwill due to the pending sale of the power product lines, $14.8 million
related to the impairment of fixed assets, and approximately $6.1 million
related to lease termination and other shutdown expenses of factories and office
space. The personnel-related costs included termination expenses for the
involuntary dismissal of 807 employees, primarily engaged in production and
assembly functions performed at the facilities. ARRIS offered terminated
employees separation amounts in accordance with the Company's severance policy
and provided the employees with specific separation dates. The severance and
associated personnel costs will be paid upon closure of the factories. As of
December 31, 2001, approximately $3.7 million related to severance, $2.6 million
related to lease commitments, $0.7 million related to purchase order
commitments, $1.0 million related to the warranty reserve, and $1.8 million of
other shutdown expenses relating to the restructuring and impairment charges
remained in the accrual to be paid. The fixed assets will be disposed of in the
first half of 2002.
In accordance with SFAS No. 109, Accounting for Income Taxes, an adjustment
to the valuation allowance of $38.1 million against deferred tax assets was
recorded in the third quarter of 2001. As a result of the restructuring and
impairment charges described above, the Company was placed in a cumulative loss
position for recent years, which provides significant negative evidence to not
recognize deferred tax assets.
In the fourth quarter of 1999, in conjunction with the announced
consolidation of the New Jersey facility to Georgia and the Southwest, coupled
with the discontinuance of certain product offerings, the Company recorded a
pre-tax charge of approximately $16.0 million. Included in the charge was
approximately $2.6 million related to personnel costs and approximately $3.0
million related to lease termination and other facility shutdown charges.
Included in the restructuring was the elimination of certain product lines
resulting in an inventory obsolescence charge totaling approximately $10.4
million, which has been reflected in the cost of sales. The personnel-related
costs included termination expenses for the involuntary dismissal of 87
employees, primarily engaged in engineering, inside sales and warehouse
functions performed at the New Jersey facility. ARRIS offered terminated
employees separation amounts in accordance with ARRIS' severance policy and
provided the employees with specific separation dates. In connection with
customer demand shifting to ARRIS' newer product offerings, such as the
Scaleable and Micro Node products, ARRIS discontinued certain older product
lines that were not consistent with ARRIS' focus on two-way, high-speed
internet, voice and video communications equipment. This discontinuance affected
the uninterruptible common ferroresonant and security lock powering products and
included the narrowing of ARRIS' radio frequency and optical products.
During the second quarter of 2000, ARRIS further evaluated its powering and
radio frequency products and recorded an additional pre-tax charge of $3.5
million to cost of goods sold, bringing the total reorganization related charge
to $19.5 million. In addition to the charges totaling $19.5 million, ARRIS also
53
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
incurred $0.7 million in connection with the New Jersey facility closure. As of
December 31, 2001, $0.2 million related to personnel costs and $0.6 million
related to lease termination remained to be paid in the restructuring accrual.
In January 1998, ARRIS announced a consolidation plan implemented
concurrently with the creation of the new organization in Georgia. ARRIS
completed the consolidation of its Rolling Meadows, Illinois corporate and
administrative functions into the Duluth, Georgia and the Englewood, Colorado
locations during 1999. As part of the consolidation, the two principal
facilities located in Georgia were consolidated and some international operating
and administrative functions located in Miami and Chicago were also consolidated
into Georgia. In connection with these consolidations, ARRIS recorded a pre-tax
charge of approximately $10.0 million in the first quarter of 1998. The
components of the restructuring charge included approximately $7.6 million
related to personnel costs and approximately $2.4 million related to lease
termination payments and other costs. Subsequently, during the fourth quarter of
1998, ARRIS reduced this charge by $0.9 million as a result of the ongoing
evaluation of the estimated costs associated with these actions. The
personnel-related costs included termination expenses related to the involuntary
termination of 177 employees, primarily related to the finance and management
information systems activities as well as international operational functions
located in Chicago and Miami. ARRIS offered terminated employees separation
amounts in accordance with ARRIS' severance policy and provided the employees
with specific separation dates. As of December 31, 1999, 139 of the 177
employees had been terminated and it was determined that 38 employees originally
included as part of the 177 employees to be terminated would remain as
employees. Additionally, ARRIS' actual cost of terminating or sub-letting real
estate obligations in Georgia and Illinois were slightly higher than
anticipated. As of December 31, 1999, approximately $0.6 million of accrued
costs related to the obligations resulting from this restructuring remained.
ARRIS expended this remaining balance during the first quarter of 2000.
NOTE 5. INVENTORIES
Inventories are stated at the lower of average, approximating first-in,
first-out, cost or market. The components of inventory are as follows (in
thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
-------- --------
<S> <C> <C>
Raw material........................................... $ 46,104 $ 62,458
Work in process........................................ 1,797 9,119
Finished goods......................................... 140,070 192,106
-------- --------
Total inventories............................ $187,971 $263,683
======== ========
</Table>
During the year ended December 31, 2001, the Company sold approximately
$9.2 million of inventory related to the sale of power product lines.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following (in
thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
-------- --------
<S> <C> <C>
Land................................................... $ 1,964 $ 2,549
Buildings and leasehold improvements................... 11,258 15,394
Machinery and equipment................................ 78,529 90,853
-------- --------
91,751 108,796
Less: Accumulated depreciation......................... (39,057) (55,443)
-------- --------
Total property, plant and equipment, net..... $ 52,694 $ 53,353
======== ========
</Table>
54
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE 7. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
-------- --------
<S> <C> <C>
Revolving Credit Facility.............................. $ -- $ 89,000
4.5% Convertible Subordinated Notes.................... 115,000 115,000
-------- --------
$115,000 $204,000
======== ========
</Table>
In 1998, the Company issued $115.0 million of 4.5% Convertible Subordinated
Notes ("Notes") due May 15, 2003. The Notes are convertible, at the option of
the holder, at any time prior to maturity, into the Company's common stock
("Common Stock") at a conversion price of $24.00 per share. The Notes became
redeemable, in whole or in part, at the Company's option, on May 15, 2001. If
the Notes are redeemed prior to May 15, 2002, the Company will be required to
pay a premium of 1.8% of the principal amount or approximately $2.1 million. As
of December 31, 2001, ARRIS had not exercised its option to redeem these Notes.
The Company's bank indebtedness was refinanced on August 3, 2001, in
connection with the Arris Interactive L.L.C. acquisition. (See Note 16 of Notes
to the Consolidated Financial Statements.) At this time, unamortized deferred
financing costs of $1.9 million, or $0.03 per diluted share, relating to the
previous credit facility were written off. In accordance with EITF 96-19,
Debtor's Accounting for a Modification or Exchange of Debt Instruments, this
charge was recorded as an extraordinary loss on the extinguishment of debt. As a
result of the restructuring and impairment charges described in Note 4 of Notes
to the Consolidated Financial Statements, the Company was placed in a cumulative
loss position for recent years and therefore no tax effect was recorded in
relation to this extraordinary loss.
The new facility is an asset-based revolving credit facility, which
initially permitted the borrowers (including the Company and Arris Interactive)
to borrow up to $175 million (which can be increased under certain conditions by
up to $25 million), based upon availability under a borrowing base calculation.
In general, the borrowing base is limited to 85% of net eligible receivables
(with special limitations in relation to foreign receivables) and 80% of the
orderly liquidation value of eligible inventory (not to exceed $80 million). The
facility contains traditional financial covenants, including fixed charge
coverage, senior debt leverage, minimum net worth, and minimum inventory turns
ratios, and a $10 million minimum borrowing base availability covenant. The
facility is secured by substantially all of the borrowers' assets. The credit
facility has a maturity date of August 3, 2004. However, the maturity date of
the credit facility will be December 31, 2002 in the event that the Company's
convertible subordinated notes due May 15, 2003 are not either fully refinanced
or fully converted to ARRIS common stock prior to December 31, 2002 in a manner
satisfactory to the lenders under the credit facility. Refinancing or converting
the convertible subordinated notes could result in a significant charge to
earnings.
As of December 31, 2001, ARRIS had approximately $86.0 million of available
borrowings under the Credit Facility.
In conjunction with the acquisition of Arris Interactive L.L.C., we issued
to Nortel Networks a subordinated redeemable preferred membership interest in
Arris Interactive with a face amount of $100.0 million. This membership interest
earns a return of 10% per annum, compounded annually. For the year ended
December 31, 2001, we recorded membership interest expense of $4.1 million.
ARRIS has not paid dividends on its common stock since its inception. The
Company's primary loan agreement contains covenants that prohibit the Company
from paying dividends.
55
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE 8. COMMON STOCK
The following shares of Common Stock have been reserved for future
issuance:
<Table>
<Caption>
DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
Convertible subordinated notes................. 4,791,667 4,791,667 4,791,667
Stock options.................................. 14,640,106 7,251,775 4,742,112
Director stock units........................... 71,200 40,500 36,900
Employee stock purchase plan................... 800,000 448,298 466,907
Liberty Media options.......................... 854,341 854,341 854,341
Nortel Networks................................ -- -- 2,747,252
---------- ---------- ----------
Total.......................................... 21,157,314 13,386,581 13,639,179
========== ========== ==========
</Table>
NOTE 9. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the periods
indicated (in thousands except per share data):
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
---------- -------- --------
<S> <C> <C> <C>
Basic:
Net (loss) income before extraordinary loss......... $(165,878) $20,669 $16,710
Extraordinary loss.................................. (1,853) -- --
--------- ------- -------
Net (loss) income................................... $(167,731) $20,669 $16,710
========= ======= =======
Weighted average shares outstanding................. 53,624 37,965 36,600
========= ======= =======
Basic (loss) earnings per share..................... $ (3.13) $ 0.54 $ 0.46
========= ======= =======
Diluted:
Net (loss) income before extraordinary loss......... $(165,878) $20,669 $16,710
Extraordinary loss.................................. (1,853) -- --
--------- ------- -------
Net (loss) income................................... $(167,731) $20,669 $16,710
========= ======= =======
Weighted average shares outstanding................. 53,624 37,965 36,600
Net effect of dilutive securities:
Add: options, net of tax benefit................. -- 1,606 2,267
--------- ------- -------
Total............................................... 53,624 39,571 38,867
========= ======= =======
Diluted (loss) earnings per share................... $ (3.13) $ 0.52 $ 0.43
========= ======= =======
</Table>
The 4.5% Convertible Subordinated Notes were antidilutive for all periods
presented. The effects of the options were not presented for the year ended
December 31, 2001 as the Company incurred a net loss and inclusion of these
securities would be antidilutive.
On January 8, 2002, ARRIS issued 5.25 million shares of ARRIS common stock
for the purchase of substantially all of the assets and certain liabilities of
Cadant, Inc. (See Note 17 of Notes to the Consolidated Financial Statements).
56
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE 10. INCOME TAXES
Income tax expense (benefit) consisted of the following (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Current -- Federal.................................. $(4,636) $12,496 $11,698
State.................................... (430) 1,759 2,513
------- ------- -------
(5,066) 14,255 14,211
------- ------- -------
Deferred -- Federal................................. 29,908 26 (355)
State................................... 2,777 4 (50)
------- ------- -------
32,685 30 (405)
------- ------- -------
$27,619 $14,285 $13,806
======= ======= =======
</Table>
A reconciliation of the Statutory Federal tax rate of 35% and the effective
rates is as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ ----- -----
<S> <C> <C> <C>
Statutory Federal income tax expense (benefit).............. (35.0)% 35.0% 35.0%
Effects of:
Amortization of goodwill.................................. 1.1% 4.4% 5.0%
State income taxes, net of Federal benefit................ (3.3)% 2.1% 3.4%
Meals and entertainment................................... 0.3% 1.1% 1.3%
Write-off of acquired in-process R&D...................... 4.7% 0.0% 0.0%
Change in valuation allowance............................. 51.9% (2.8)% 0.0%
Other, net................................................ 0.0% 1.1% 0.5%
------ ----- -----
19.7% 40.9% 45.2%
====== ===== =====
</Table>
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.
57
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Significant components of ARRIS' net deferred tax assets (liabilities) were
as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- -------
<S> <C> <C>
Current deferred tax assets:
Inventory costs..................................... $ 16,853 $11,678
Merger/restructuring related reserves............... 6,481 3,897
Allowance for uncollectible accounts................ 3,599 2,058
Accrued pension..................................... 4,707 2,211
Other, principally operating expenses............... 14,274 (916)
-------- -------
Total current deferred tax assets........... 45,914 18,928
Long-term deferred tax assets:
Federal/state net operating loss carryforwards...... 19,521 3,076
Foreign net operating loss carryforwards............ 2,358 2,358
Plant and equipment, depreciation and basis
differences...................................... 7,687 3,697
-------- -------
Total long-term deferred tax assets......... 29,566 9,131
-------- -------
Long-term deferred tax liabilities:
Purchased technology................................ (17,017) --
Goodwill and other.................................. (2,040) (1,362)
-------- -------
Total long-term deferred tax liabilities.... (19,057) (1,362)
Net deferred tax assets............................... 56,423 26,697
Valuation allowance on deferred tax assets.......... (56,423) (2,358)
-------- -------
Net deferred tax assets..................... $ -- $24,339
======== =======
</Table>
As of December 31, 2001, ARRIS has estimated federal and foreign tax loss
carryforwards of $51.0 million and $6.9 million, respectively. The federal and
foreign tax loss carryforwards expire through 2016 and 2005, respectively. As of
December 31, 2001, tax benefits arising from loss carryforwards of approximately
$2.4 million originating prior to TSX's quasi-reorganization on November 22,
1985 would be credited directly to additional paid in capital if and when
realized.
ARRIS established a valuation allowance in accordance with the provisions
of FASB Statement No. 109, Accounting for Income Taxes. The Company continually
reviews the adequacy of the valuation allowance and recognizes the benefits of
deferred tax assets only as reassessment indicates that it is more likely than
not that the deferred tax assets will be realized. As of December 31, 2001, the
Company will be able to realize approximately $5,066,000 of NOL carrybacks.
58
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The Company had U.S. and foreign net operating loss carryforwards at
December 31, 2001 expiring as follows (in thousands):
<Table>
<Caption>
U.S. FOREIGN
EXPIRATION IN CALENDAR YEAR AMOUNT AMOUNT
- --------------------------- ------- -------
<S> <C> <C>
2002..................................................... $ 1,099 $ --
2004..................................................... 501 --
2005..................................................... 1,967 6,935
2007..................................................... 2,745 --
2008..................................................... 1,379 --
2016..................................................... 43,343 --
------- ------
$51,034 $6,935
======= ======
</Table>
NOTE 11. COMMITMENTS
ARRIS leases office, distribution, and manufacturing facilities as well as
equipment under long-term operating leases expiring at various dates through
2009. Future minimum lease payments under non-cancelable operating leases at
December 31, 2001 were as follows (in thousands):
<Table>
<S> <C>
2002...................................................... $ 9,879
2003...................................................... 7,458
2004...................................................... 6,266
2005...................................................... 5,201
2006...................................................... 4,043
Thereafter................................................ 4,557
Less sublease income...................................... (3,326)
-------
Total minimum lease payments.............................. $34,078
=======
</Table>
Total rental expense for all operating leases amounted to approximately
$7.8 million, $5.3 million and $7.6 million for the years ended December 31,
2001, 2000 and 1999, respectively. We currently lease approximately 75,000
square feet of office space from Nortel Networks with an annual rental charge of
approximately $675,000 expiring July 2004.
As of December 31, 2001, the Company had approximately $1.6 million
outstanding under letters of credit with its banks.
NOTE 12. STOCK-BASED COMPENSATION
ARRIS grants stock options for a fixed number of shares to employees and
directors with an exercise price equal to the market price of the shares at the
date of grant. ARRIS accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly, does
not recognize compensation expense for the stock option grants. The Company has
elected to follow APB Opinion No. 25 because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires use of option valuation models that were
not developed for use in valuing employee stock options.
ARRIS grants stock options under its 2001 Stock Incentive Plan ("2001 SIP")
and issues stock purchase rights under its Employee Stock Purchase Plan
("ESPP"). In connection with the Company's reorganization on August 3, 2001, the
Company froze additional grants under its prior plans, which are the 2000 Stock
59
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
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. These plans are described below.
As required by SFAS No. 123, ARRIS presents below supplemental information
disclosing pro forma net (loss) income and net (loss) income per common share as
if ARRIS had recognized compensation expense on stock options granted subsequent
to December 31, 1994 under the fair value method of that statement. The fair
value for these options was estimated using a Black-Scholes option-pricing
model. The weighted average assumptions used in this model to estimate the fair
value of options granted under the 2001 SIP, 2000 SIP, MIP, SIP, ESIP, DSOP and
LTIP for 2001, 2000 and 1999 were as follows: risk-free interest rates of 4.27%,
5.03% and 5.41%, respectively; a dividend yield of 0%; volatility factor of the
expected market price of ARRIS' common stock of .71, .64 and .56, respectively;
and a weighted average expected life of 4, 5, and 7 years, respectively. The
weighted average assumptions used to estimate the fair value of purchase rights
granted under the ESPP for 2001, 2000, and 1999 were as follows: risk-free
interest rates of 2.70%, 5.52% and 5.66% respectively; a dividend yield of 0%;
volatility factor of the expected market price of ARRIS' common stock of .64,
.64 and .56, respectively; and a weighted average expected life of .5, 1 and 1
year, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because ARRIS' employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. ARRIS' pro
forma information follows (in thousands, except per share data):
<Table>
<Caption>
2001 2000 1999
--------- ------- -------
<S> <C> <C> <C>
Pro forma net (loss) income........................... $(176,991) $14,454 $12,766
========= ======= =======
Pro forma net (loss) income per common share:
Basic............................................... $ (3.30) $ 0.38 $ 0.35
========= ======= =======
Diluted............................................. $ (3.30) $ 0.37 $ 0.33
========= ======= =======
</Table>
Compensation expense recognized for pro forma purposes was approximately
$9.3 million, $10.4 million and $6.6 million for 2001, 2000 and 1999,
respectively. SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994.
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
Company's common stock may be issued pursuant to 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.
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 Company's
stock at $10.20 per share. The truncated options to purchase stock of the
Company pursuant to the Company's 2001 Stock Incentive Plan, 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
60
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
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 2000, the Board of Directors approved the 2000 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 2000 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
Company's 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. No compensation was recorded in relation to these options.
In 2000, the Board of Directors approved the 2000 MIP established to
facilitate the retention and continued motivation of key mid-level employees and
to align more closely their interests with those of the Company and its
stockholders. Awards under this plan were in the form of non-qualified stock
options. A total of 500,000 shares of ARRIS' common stock were originally
reserved for issuance under this plan. As only mid-level employees of the
Company are eligible to receive grants under this plan, no options under this
plan were granted to officers of ARRIS. No mid-level employee received more than
7,500 options to purchase shares of the Company's stock under this plan and no
option may be granted under this plan after the date of the 2000 annual meeting
of stockholders. 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.
In 1997, the Board of Directors approved the SIP to facilitate the hiring,
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 SIP 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 3,750,000 shares of the Company's common stock
were originally reserved for issuance under this plan. Vesting requirements for
issuance under the SIP may vary as may the related date of termination.
Approximately three-fourths of the SIP options granted were tied to a
vesting schedule that would accelerate if ARRIS' stock closed above specified
prices ($15, $20 and $25) for 20 consecutive days and the Company's diluted
earnings per common share (before non-recurring items) over a period of four
consecutive quarters exceed $1.00 per common share. As of March 31, 1999 the
$1.00 per diluted share trigger for the vesting of these grants was met. The $15
and $20 stock value targets had already been met. Accordingly two-thirds of
these options were vested. Further, on May 26, 1999, the final third was vested
upon meeting the $25 per share value target. Under the terms of the options, one
half of the vested options became exercisable when the target was reached and
the remaining options become exercisable one year later. A portion of all other
options granted under this plan vest each year on the anniversary of the date of
grant beginning with the second anniversary and terminate seven years from the
date of grant. The remaining portion of options granted under the SIP plan vest
in fourths on the anniversary of the date of grant beginning with the first
anniversary and have an extended life of ten years from the date of grant.
In 1993, the Board of Directors approved the ESIP that provides for
granting key employees and consultants options to purchase up to 1,925,000
shares of ARRIS common stock. In 1996, an amendment to the ESIP was approved
increasing the number of shares of ARRIS common stock that may be issued
pursuant to that plan from 1,925,000 shares to 3,225,000 shares. One-third of
these options vests each year on the anniversary of the date of grant beginning
with the second anniversary. The options terminate seven years from the date of
grant.
61
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
In 1993, the Board of Directors also approved the DSOP that provides for
the granting, to each director of the Company who has not been granted any
options under the ESIP each January 1, commencing January 1, 1994, an option to
purchase 2,500 shares of ARRIS common stock for the average closing price for
the ten trading days preceding the date of grant. A total of 75,000 shares of
ARRIS common stock have been were originally reserved for issuance under this
plan. These options vest six months from the date of grant and terminate seven
years from the date of grant. No options have been issued pursuant to this plan
after 1997.
In connection with ARRIS' acquisition of TSX in 1997, each option to
purchase TSX common stock under the LTIP was converted to a fully vested option
to purchase ARRIS common stock. A total of 883,900 shares of ARRIS common stock
have been allocated to this plan. The options under the LTIP terminate ten years
from the original grant date.
A summary of activity of ARRIS' options granted under its 2001 SIP, 2000
SIP, MIP, SIP, ESIP, DSOP, and LTIP is presented below:
<Table>
<Caption>
2001 2000 1999
--------------------------- --------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance.......... 5,378,727 $16.27 3,940,717 $14.34 5,450,903 $11.55
Grants..................... 4,169,778 $10.17 2,389,017 $21.11 774,500 $23.86
Exercises.................. (59,328) $11.80 (490,337) $10.71 (1,870,357) $10.83
Terminations............... (535,227) $17.45 (460,003) $30.85 (403,496) $11.07
Expirations................ (41,724) $22.22 (667) $15.88 (10,833) $20.48
---------- ---------- -----------
Ending balance............. 8,912,226 $13.34 5,378,727 $16.27 3,940,717 $14.34
========== ========== ===========
Vested at period end....... 3,605,738 $13.64 2,261,708 $12.46 965,275 $12.49
========== ========== ===========
Weighted average fair value
of options granted during
year..................... $ 5.71 $ 21.11 $ 14.67
========== ========== ===========
</Table>
The following table summarizes information about 2001 SIP, 2000 SIP, MIP,
SIP, ESIP, DSOP, and LTIP options outstanding at December 31, 2001.
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/01 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/01 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.00 to $ 4.00..... 20,000 2.17 years $ 2.00 20,000 $ 2.00
$ 5.00 to $ 8.00..... 1,251,500 8.97 years $ 7.99 314,021 $ 7.99
$ 8.88 to $10.20..... 4,861,372 8.31 years $ 9.96 1,372,286 $ 9.37
$10.50 to $15.88..... 1,157,266 2.22 years $12.70 1,112,097 $12.59
$16.60 to $19.75..... 298,501 2.44 years $18.01 242,335 $18.27
$22.88 to $59.31..... 1,323,587 7.59 years $30.50 544,599 $28.16
--------- ---------
$ 2.00 to $59.31..... 8,912,226 7.30 years $13.34 3,605,738 $13.64
========= =========
</Table>
Pursuant to the Merger Agreement between ARRIS and Keptel, on November 17,
1994 under the ARRIS/Keptel Exchange Option Plan ("EOP"), each Keptel stock
option, whether or not then exercisable, was canceled and substituted with an
ARRIS/Keptel exchange option to acquire shares of ARRIS common stock. Each
ARRIS/Keptel exchange option provides the option holder with rights and benefits
that are no less favorable than were provided under the former Keptel stock
option plan. A total of 360,850 shares of ARRIS common stock have been allocated
to this plan. There were no options granted under the EOP during the years ended
December 31, 2001, 2000, and 1999. Additionally, as of December 31, 2001 no
options issued under this plan remain outstanding.
62
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Additionally, ARRIS has an ESPP that initially enabled its employees to
purchase a total of 300,000 shares of ARRIS common stock over a period of time.
In 1999, an amendment to the ESPP was approved increasing the number of shares
of ARRIS common stock that may be issued pursuant to that plan to 800,000
shares. The Company accounts for the ESPP in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and accordingly recognizes no
compensation expense. 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 in any one year.
The exercise price is the lower of 85% of the fair market value of the ARRIS
common stock at the date of grant or at the later exercise date. Under the ESPP,
employees of ARRIS purchased 15,092, 18,709 and 44,451 shares of ARRIS common
stock in 2001, 2000 and 1999, respectively. In connection with the Company's
reorganization on August 3, 2001, the existing plan was frozen and a new plan
was authorized under which 800,000 shares are available. At December 31, 2001,
approximately 231,306 shares are subject to purchase under the new ESPP at a
price of no more than $3.04 per share.
In 2001, 2000 and 1999, ARRIS paid its non-employee directors annual
retainer fees of $50,000 in the form of stock units. These stock units, which
are granted out of the various stock option plans, convert to Common Stock of
the Company at the prearranged time selected by each director. The Company
amortizes the compensation expense related to these stock units on a
straight-line basis over a period of one year. At December 31, 2001, 2000 and
1999 there were 71,200 units, 40,300 units and 36,700 units issued and
outstanding, respectively.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company sponsors two non-contributory defined benefit pension plans
that cover the majority of the Company's U.S. employees. As of January 1, 2000,
the Company froze the defined pension plan benefits for 569 participants. These
participants elected to participate 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. As a result of the curtailment, as outlined
under FASB Statement No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, the
Company recorded a $2.1 million pre-tax gain on the curtailment during the first
quarter 2000. In addition, during the year ended December 31, 2001, the Company
recognized approximately $3.6 million in pension expense related to supplemental
pension plan benefits.
The U.S. pension plan benefit formulas generally provide for payments to
retired employees based upon their length of service and compensation as defined
in the plans. ARRIS' 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.
<Table>
<Caption>
2001 2000
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at the beginning of year............ $ 17,851 $17,791
Service cost........................................... 431 597
Interest cost.......................................... 1,269 1,143
Plan amendment......................................... 3,955 86
Actuarial loss......................................... 2,207 1,829
Benefit payments....................................... (329) (259)
Curtailment............................................ 3,589 (3,336)
-------- -------
Benefit obligation at end of year...................... $ 28,973 $17,851
======== =======
</Table>
63
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
<Table>
<Caption>
2001 2000
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Change in Plan Assets:
Fair value of plan assets at beginning of year......... $ 11,513 $11,468
Actual return on plan assets........................... (56) 304
Company contributions.................................. 11 --
Benefits paid from plan assets......................... (328) (259)
-------- -------
Fair value of plan assets at end of year............... $ 11,140 $11,513
======== =======
Funded Status:
Funded status of plan.................................. $(17,833) $(6,338)
Unrecognized actuarial loss (gain)..................... 1,486 (1,713)
Unamortized prior service cost......................... 4,106 2,108
-------- -------
(Accrued) benefit cost................................. $(12,241) $(5,943)
======== =======
</Table>
The plans' assets consist of corporate and government debt securities and
equity securities. Net periodic pension cost for 2001, 2000 and 1999 for pension
and supplemental benefit plans includes the following components (in thousands):
<Table>
<Caption>
2001 2000 1999
------ ------- ------
<S> <C> <C> <C>
Service cost.............................................. $ 431 $ 597 $1,629
Interest cost............................................. 1,269 1,143 1,446
Return on assets (expected)............................... (914) (901) (940)
Recognized net actuarial loss............................. (23) (141) 104
Amortization of prior service cost........................ 313 308 128
------ ------- ------
Net periodic pension cost................................. 1,076 1,006 2,367
Additional pension (income) due to curtailment............ 3,589 (2,108) --
------ ------- ------
Net periodic pension cost (income)........................ $4,665 $(1,102) $2,367
====== ======= ======
</Table>
The assumptions used in accounting for the Company's defined benefit plans
for the three years presented are set forth below:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Assumed discount rate for active participants............... 7.25% 7.75% 7.5%
Assumed discount rate for inactive participants............. 6.5% 6.5% --
Rates of compensation increase.............................. 6.0% 6.0% 6.0%
Expected long-term rate of return on plan assets............ 8.0% 8.0% 8.0%
</Table>
Additionally, ARRIS has established defined contribution plans pursuant to
the Internal Revenue Code Section 401(a) that cover all eligible U.S. employees.
ARRIS contributes to these plans based upon the dollar amount of each
participant's contribution. ARRIS made contributions to these plans of
approximately $1.1 million, $1.1 million and $0.7 million in 2001, 2000, and
1999, respectively. In conjunction with the Company's reorganization in August
2001, all the terms and conditions of the plan remain the same.
NOTE 14. SALES INFORMATION
As of December 31, 2001, Liberty Media Corporation, which is part of the
Liberty Media Group of AT&T whose financial performance is "tracked" by a
separate class of AT&T stock, effectively controlled approximately 10% of the
outstanding ARRIS common stock on a fully diluted basis. The effective ownership
includes options to acquire an additional 854,341 shares. In August 2001, AT&T
spun off Liberty Media to the holders of its tracking stock, and AT&T no longer
indirectly owns an interest in ARRIS. A significant
64
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
portion of the Company's revenue is derived from sales to AT&T (including
MediaOne Communications, which was acquired by AT&T during 2000) aggregating
$237.9 million, $431.5 million and $355.0 million for the years ended December
31, 2001, 2000 and 1999, respectively. Giving effect to AT&T's acquisition of
MediaOne Communications, sales to the combined entity aggregated $391.1 million
for 1999.
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 three new product categories instead of the previous
four categories: broadband (previously cable telephony and internet access);
transmission, optical, and outside plant; and supplies and services. All prior
period revenues have been aggregated to conform to the new product categories.
Consolidated revenues by principal products and services for the years ended
December 31, 2001, 2000 and 1999, respectively were as follows (in thousands):
<Table>
<Caption>
TRANSMISSION,
OPTICAL, AND SUPPLIES AND
BROADBAND OUTSIDE PLANT SERVICES TOTAL
--------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Annual sales:
December 31, 2001.............................. $368,511 $227,759 $151,400 $747,670
December 31, 2000.............................. $312,310 $427,878 $258,542 $998,730
December 31, 1999.............................. $236,532 $388,588 $219,636 $844,756
</Table>
The Company sells its products primarily in the United States with its
international revenue being generated from Asia Pacific, Europe, Latin America
and Canada. The Asia Pacific market includes Australia, China, Hong Kong, India,
Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Sampan, Singapore,
Taiwan, and Thailand. The European market includes France, Ireland, Italy,
Netherlands, Portugal, Spain and the United Kingdom. Sales to international
customers were approximately 14.6%, 8.5% and 6.4% of total sales for the years
ended December 31, 2001, 2000 and 1999, respectively. Sales for the three years
ended December 31, 2001, 2000 and 1999 are as follows:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001* 2000 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
International region
Asia Pacific.................................. $ 29,946 $ 15,500 $ 12,445
Europe........................................ 52,199 36,378 19,035
Latin America................................. 20,531 29,232 19,545
Canada........................................ 6,232 3,820 3,347
-------- -------- --------
Total international sales............. 108,908 84,930 54,372
Domestic sales........................ 638,762 913,800 790,384
-------- -------- --------
Total sales........................... $747,670 $998,730 $844,756
======== ======== ========
</Table>
- ---------------
* The year ended December 31, 2001 included approximately five months of
international Cornerstone revenue. Under the previous joint venture agreement
with Nortel, the Company was not able to sell the Arris Interactive L.L.C
products internationally. This agreement terminated upon the Company's
acquisition of Nortel's share of Arris Interactive L.L.C. on August 3, 2001.
Total identifiable international assets were immaterial.
65
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE 15. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes ARRIS' quarterly consolidated financial
information (in thousands, except share data).
<Table>
<Caption>
QUARTERS IN 2001 ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.............................. $212,788 $177,185 $ 174,159 $183,538
Gross profit........................... 32,090 22,668 13,870 50,342
Operating (loss)....................... (4,345) (15,048) (85,796) (8,736)
(Loss) before income taxes and
extraordinary loss(15)............... (10,420) (21,784) (92,495) (13,560)
Net (loss)............................. $ (7,218) $(14,488) $(132,465) $(13,560)
======== ======== ========= ========
Net (loss) per common share:
Basic................................ $ (0.19) $ (0.38) $ (2.13) $ (0.18)
======== ======== ========= ========
Diluted.............................. $ (0.19) $ (0.38) $ (2.13) $ (0.18)
======== ======== ========= ========
</Table>
Supplemental financial information (excluding the effects of unusual items):
<Table>
<S> <C> <C> <C> <C>
Gross profit(1)(2)(3)(13)(14).......... $ 32,090 $ 28,643 $ 47,538 $ 54,730
======== ======== ========= ========
Operating income (loss)(3)(4)(13)...... $ (4,345) $ (5,317) $ (787) $ (348)
======== ======== ========= ========
(Loss) before income taxes............. $(10.061) $(11,651) $ (7,398) $ (5,254)
======== ======== ========= ========
Net (loss)(5)(6)....................... $ (7,013) $ (8,566) $ (7,398) $ (5,254)
======== ======== ========= ========
Net (loss) per common share:
Diluted.............................. $ (0.18) $ (0.22) $ (0.12) $ (0.07)
======== ======== ========= ========
Weighted average diluted shares...... 38,252 38,290 62,110 75,398
======== ======== ========= ========
</Table>
<Table>
<Caption>
QUARTERS IN 2000 ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.............................. $256,571 $283,016 $ 281,413 $177,730
Gross profit........................... 51,280 52,826 52,317 29,349
Operating income (loss)................ 19,320 17,690 16,315 (6,458)
Income (loss) before income taxes...... 16,449 19,607 9,910 (11,012)
Net income (loss)...................... $ 9,727 $ 11,594 $ 5,860 $ (6,512)
======== ======== ========= ========
Net income (loss) per common share:
Basic................................ $ 0.26 $ 0.31 $ 0.15 $ (0.17)
======== ======== ========= ========
Diluted.............................. $ 0.24 $ 0.28 $ 0.15 $ (0.17)
======== ======== ========= ========
</Table>
66
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Supplemental financial information (excluding the effects of unusual items):
<Table>
<S> <C> <C> <C> <C>
Gross profit(7)........................ $ 51,280 $ 56,326 $ 52,317 $ 29,347
======== ======== ========= ========
Operating income (loss)(8)............. $ 17,212 $ 21,190 $ 16,315 $ (6,460)
======== ======== ========= ========
Income (loss) before income
taxes(9)(10)(11)(12)................. $ 14,341 $ 18,457 $ 13,324 $ (9,005)
======== ======== ========= ========
Net income (loss)...................... $ 8,392 $ 12,102 $ 7,806 $ (5,394)
======== ======== ========= ========
Net income (loss) per common share:
Diluted.............................. $ 0.21 $ 0.29 $ 0.19 $ (0.14)
======== ======== ========= ========
Weighted average diluted shares...... 44,513 44,733 44,641 38,772
</Table>
- ---------------
(1) During the second quarter of 2001, a workforce reduction program was
implemented which significantly reduced the Company's overall employment
levels. This action resulted in a pre-tax charge to cost of goods sold of
approximately $1.3 million for severance and related costs incurred at the
factory level. Additionally, a pre-tax charge of $3.7 million was recorded
to operating expenses.
(2) During the second quarter of 2001, a one-time warranty expense relating to
a specific product was recorded, resulting in a pre-tax charge of $4.7
million for the expected replacement cost of this product. The Company does
not anticipate any further warranty expenses to be incurred in connection
with this product.
(3) In the third quarter 2001, in connection with the restructuring plan to
outsource most of its manufacturing functions, the Company recorded
restructuring and impairment charges of approximately $66.2 million.
Included in these charges was approximately $32.0 million related to the
write-down of inventories. Additionally, remaining warranty and purchase
order commitments of approximately $1.7 million were charged to cost of
goods sold. Also included in these charges was approximately $5.7 million
related to severance and associated personnel costs, $5.9 million related
to the impairment of goodwill due to the pending sale of the power product
lines, $14.8 million related to the impairment of fixed assets, and
approximately $6.1 million related to lease termination of factories and
office space and other shutdown expenses.
(4) During the third quarter 2001, the Company wrote off in-process R&D of
$18.8 million in connection with the Arris Interactive L.L.C. acquisition.
(5) During the third quarter 2001, unamortized deferred finance fees of $1.9
million were written off and recorded as an extraordinary loss on the
extinguishment of debt. These fees related to a revolving credit facility,
which was replaced in connection with the Arris Interactive L.L.C.
acquisition.
(6) As a result of the restructuring and impairment charges during the third
quarter 2001, a valuation allowance of approximately $38.1 million against
deferred tax assets was recorded in accordance with FASB Statement No. 109,
Accounting for Income Taxes. (See Note 4 of Notes to the Consolidated
Financial Statements.)
(7) During the second quarter of 2000, ARRIS further evaluated its powering and
RF products and recorded an additional pre-tax charge of $3.5 million to
cost of goods sold, bringing the total 1999 reorganization related charge
to $19.5 million. (See Note 4 of the Notes to the Consolidated Financial
Statements.)
(8) As of January 1, 2000, the Company froze the defined pension plan benefits
for 569 participants. These participants elected to participate 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.
As a result of the curtailment, as outlined under FASB Statement No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, the
67
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Company recorded a $2.1 million pre-tax gain on the curtailment during the
first quarter 2000. (See Note 13 of the Notes to the Consolidated Financial
Statements.)
(9) During the fourth quarter of 2000, the Company reversed $1.25 million of
accrued expenses related to the LANcity transaction, due to a change in
estimate for costs related to the transaction.
(10) During the second quarter of 2000, ARRIS made a strategic investment in
Chromatis Networks, Inc. ("Chromatis"), receiving 56,882 shares of the
company's preferred stock. On June 28, 2000, Lucent Technologies announced
it had completed an acquisition of Chromatis. The conversion of the
Chromatis shares into Lucent shares resulted in ARRIS receiving 120,809
shares of Lucent's stock. Lucent's stock price on the date of the completed
transaction was $57.48, valuing ARRIS' investment at approximately $6.9
million, thus producing a pre-tax gain of $5.9 million. These shares of
Lucent stock are considered trading securities held for resale.
(11) Because the shares of Lucent stock discussed in the footnote above, are
considered trading securities held for resale, they are required to be
carried at their fair market value with any gains or losses being included
in earnings. Additionally, as a result of Lucent's spin-off of Avaya Inc.,
ARRIS was issued approximately 9,060 shares of Avaya stock on September 19,
2000. These securities are also being held for resale. By the end of the
third quarter, the stock price of Lucent dropped significantly. In
calculating the fair market value of the investments as of September 30,
2000, ARRIS recognized a $3.4 million pre-tax write down of the investments
in Lucent and Avaya.
(12) During the fourth quarter of 2000, ARRIS calculated the fair market value
of its available for sale investments and recorded an additional pre-tax
mark-to-market write down on its investments of approximately $3.3 million.
(13) In the fourth quarter of 2001, ARRIS closed a research and development
facility in Raleigh, North Carolina and recorded a $4.0 million charge
related to severance and other costs associated with closing that facility.
(14) Due to economic disturbance in Argentina, the Company recorded a write-off
of $4.4 million related to unrecoverable amounts due from a customer in
that region during the fourth quarter of 2001.
(15) In accordance with APB No. 18, The Equity Method of Accounting for
Investments in Common Stock, the quarters ended March 31, 2001 and June 30,
2001 were restated as a result of the Arris Interactive L.L.C. acquisition.
(See Note 16 of Notes to the Consolidated Financial Statements.)
NOTE 16. ACQUISITION OF ARRIS INTERACTIVE L.L.C.
On August 3, 2001, the Company completed the acquisition from Nortel
Networks of the portion of Arris Interactive that it did not own. Arris
Interactive was a joint venture formed by Nortel and the Company in 1995, that
developed products for delivering voice and data services over hybrid fiber
coax-networks. The Company decided to complete this transaction because it would
have a positive impact on the Company's future results. Immediately prior to the
acquisition we owned approximately 18.75% and Nortel owned the remainder. As
part of this transaction:
- A new holding company, ARRIS, was formed
- ANTEC, our predecessor, merged with a subsidiary of ARRIS and the
outstanding ANTEC common stock was converted, on a share-for-share basis,
into common stock of ARRIS Group, Inc.
- Nortel and the Company contributed to Arris Interactive approximately
$131.6 million in outstanding indebtedness and adjusted their ownership
percentages in Arris Interactive to reflect these contributions
- Nortel exchanged its remaining ownership interest in Arris Interactive
for 37 million shares of ARRIS common stock (approximately 49.2% of the
total shares outstanding following the transaction) and a
68
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
subordinated redeemable preferred membership interest in Arris Interactive with
a face amount of $100 million
- ANTEC, now a wholly-owned subsidiary of ARRIS, changed its name to Arris
International, Inc.
Following the transactions, Nortel designated two new members to our board
of directors. Nortel's ownership interest in ARRIS is governed in part, by an
Investor Rights Agreement.
The preferred membership interest is redeemable in approximately four
quarterly installments commencing February 3, 2002, provided that certain
availability and other tests are met under the Company's revolving credit
facility as described in Note 7 of the Notes to the Consolidated Financial
Statements.
The following is a summary of the purchase price allocation to record the
Company's purchase of Nortel Networks' ownership interest in Arris Interactive
for 37,000,000 shares of ARRIS Group, Inc. common stock on August 3, 2001 at
$6.14 per share as of April 9, 2001 (date of definitive agreement):
<Table>
<Caption>
(IN THOUSANDS)
--------------
<S> <C>
37,000,000 shares of ARRIS' $0.01 par value common stock at
$6.14 per share........................................... $227,180
Acquisition costs (banking fees, legal and accounting fees,
printing costs)........................................... 7,616
Write-off of abandoned leases and related leasehold
improvements.............................................. 2,568
Fair value of stock options to Arris Interactive, L.L.C.
employees................................................. 12,531
Other....................................................... 1,346
--------
Adjusted Purchase Price........................... $251,241
========
Allocation of Purchase Price:
Net tangible assets acquired.............................. $ 56,048
Existing technology (to be amortized over 3 years)........ 51,500
In-process research and development....................... 18,800
Goodwill (not deductible for income tax purposes)......... 124,893
--------
Total Allocated Purchase Price.................... $251,241
========
</Table>
The value assigned to in-process research and development, in accordance
with accounting principles generally accepted in the United States, was written
off at the time of acquisition. The $18.8 million of in-process research and
development valued for the transaction related to two projects that were
targeted at the carrier-grade telephone and high-speed data markets. The value
of the in-process research and development was calculated separately from all
other acquired assets. The projects included:
- Multi-service Access System ("MSAS"), a high-density multiple stream
cable modem termination system providing carrier-grade availability and
high-speed routing technology on the same headend targeted at the
carrier-grade telephone and high-speed data market. There are specific
risks associated with this in-process technology. As the MSAS has a
unique capability to perform hardware sparing through its functionality
via use of a radio frequency switching matrix, there is risk involved in
being able to achieve the isolation specifications related to this type
of technology. Subsequent to December 31, 2001 the MSAS project was
discontinued because of a product overlap with Cadant, Inc.
- Packet Port II, an outside voice over internet protocol terminal targeted
at the carrier-grade telephone market. There are specific risks
associated with this in-process technology. Based on the key product
objectives of the Packet Port II, from a hardware perspective, the
product is required to achieve power supply performance capable of
meeting a wide range of input power, operating conditions and loads. From
a software perspective, the Company is dependent on a third party for
reference design software critical to this product. Since development of
this reference design software is currently in process, the
69
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
ordinary risks associated with the completion and timely delivery of the
software are inherent to this project. Additionally, there are
sophisticated power management techniques required to meet the target
power consumption of this product. There are technical/schedule risks
associated with implementing processor power down that can simultaneously
meet power consumption targets without affecting the voice or data
functionality of this technology application. It is anticipated that the
Packet Port II project will be in service in field trials during 2002 and
is expected to begin contributing to consolidated revenues in 2002. First
prototypes of the Packet Port II are currently being developed. This will
allow testing on the functionality of the major subsystems of this
product.
The following table identifies specific assumptions for the projects, in
millions:
<Table>
<Caption>
FAIR VALUE AT ESTIMATED EXPECTED
DATE OF PERCENTAGE OF COST TO EXPECTED DATE DISCOUNT
PROJECT VALUATION COMPLETION COMPLETE TO COMPLETE RATE
- ------- ------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
MSAS................................ $16.9 68.9% $ 9.9 July 2002 32%
Packet Port II...................... $ 1.9 41.5% $11.3 March 2002 32%
</Table>
Valuation of in-process research and development
The fair values assigned to each developed technology as related to this
transaction were valued using an income approach based upon the current stage of
completion of each project in order to calculate the net present value of each
in-process technology's cash flows. The cash flows used in determining the fair
value of these projects were based on projected revenues and estimated expenses
for each project. Revenues were estimated based on relevant market size and
growth factors, expected industry trends, individual product sales cycles, the
estimated life of each product's underlying technology, and historical pricing.
Estimated expenses include cost of goods sold, selling, general and
administrative and research and development expenses. The estimated research and
development expenses include costs to maintain the products once they have been
introduced into the market, and costs to complete the in-process research and
development. It is anticipated that the acquired in-process technologies will
yield similar prices and margins that have been historically recognized by Arris
Interactive and expense levels consistent with historical expense levels for
similar products.
A risk-adjusted discount rate was applied to the cash flows related to each
existing products' projected income stream for the years 2002 through 2006. This
discount rate assumes that the risk of revenue streams from new technology is
higher than that of existing revenue streams. The discount rate used in the
present value calculations was generally derived from a weighted average cost of
capital, adjusted upward to reflect the additional risks inherent in the
development life cycle, including the useful life of the technology,
profitability levels of the technology, and the uncertainty of technology
advances that are known at the assumed transaction date. Product-specific risk
includes the stage of completion of each product, the complexity of the
development work completed to date, the likelihood of achieving technological
feasibility, and market acceptance.
70
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
We present below summary unaudited pro forma combined financial information
for the Company and Arris Interactive to give effect to the transaction. This
summary unaudited pro forma combined financial information is derived from the
historical financial statements of the Company and Arris Interactive. This
information assumes the transaction was consummated at the beginning of the
applicable period. This information is presented for illustrative purposes only
and does not purport to represent what the financial position or results of
operations of the Company, Arris Interactive or the combined entity would
actually have been had the transaction occurred at the applicable dates, or to
project the Company's, Arris Interactive's or the combined entity's results of
operations for any future period or date. The actual results of Arris
Interactive are included in the Company's operations from August 4, 2001 through
the end of 2001.
<Table>
<Caption>
(UNAUDITED)
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------
2001 2000
------------ --------------
(IN THOUSANDS,
EXCEPT FOR EARNINGS PER SHARE
DATA)
<S> <C> <C>
Net sales............................................ $789,184 $1,293,602
Gross profit......................................... 144,118 352,845
Operating (loss) income(1)(3)........................ (155,034) 96,043
(Loss) income before income taxes.................... (177,390) 85,137
Net (loss) income(2)................................. (205,010) 51,481
======== ==========
Net (loss) income per common share:
Basic.............................................. $ (2.72) $ 0.69
======== ==========
Diluted............................................ $ (2.72) $ 0.67
======== ==========
Weighted average common shares:
Basic.............................................. 75,281 74,965
======== ==========
Diluted............................................ 75,281 76,571
======== ==========
</Table>
- ---------------
(1) In accordance with FASB Statement No. 142, Goodwill and Other Intangible
Assets, goodwill is no longer amortized, but reviewed annually for
impairment. The provisions of Statement No. 142 state that goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not be
amortized. The information presented above, therefore, does not include
amortization expense on the goodwill acquired in this transaction.
(2) In accordance with FASB Statement No. 109, Accounting for Income Taxes, a
valuation reserve against deferred tax assets was recorded as a result of
the restructuring and impairment charges during the third quarter 2001.
Therefore, no additional adjustment for tax expense (benefit) was reflected
in the information presented above.
(3) In accordance with SEC regulations, the in-process R&D write-off is not
reflected as an adjustment to the unaudited pro forma combined statements of
operations as it represents a non-recurring charge directly attributable to
the transaction.
71
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The following table represents the amount assigned to each major asset and
liability caption of Arris Interactive as of August 3, 2001.
<Table>
<Caption>
(IN THOUSANDS)
<S> <C>
Total current assets........................................ $179,909
Property, plant and equipment, net.......................... $ 23,209
Goodwill.................................................... $124,893
Intangible assets........................................... $ 51,500
Total assets................................................ $379,511
Total current liabilities................................... $ 64,724
Total long-term liabilities................................. $ 2,484
Total liabilities and membership interest................... $167,208
Total stockholders' equity.................................. $212,303
</Table>
In connection with the Arris Interactive L.L.C. acquisition, the quarters
ended March 31, 2001 and June 30, 2001 were restated in accordance with
Accounting Principles Board ("APB") No. 18, The Equity Method of Accounting for
Investments in Common Stock. This APB states that an investment in common stock
of an investee that was previously accounted for by the cost method becomes
qualified for use of the equity method by an increase in the level of ownership.
The Company adopted the use of the equity method upon acquisition of Nortel's
portion of Arris Interactive L.L.C., and all prior periods presented have been
adjusted retroactively to reflect the equity method of accounting. During 2000,
Arris Interactive L.L.C. recorded net income. However, in the periods prior to
2000, Arris Interactive L.L.C. incurred net losses, of which the Company did not
recognize its proportionate share due to its investment in Arris Interactive
L.L.C. being reduced to zero. APB No. 18 states that the Company should
recognize gains only after its share of net income equals its share of net
losses not recognized. The Company's share of Arris Interactive's net income in
2000 did not exceed the losses unrecognized in previous years, and therefore,
these periods have not been restated. However, during the periods ending March
31, 2001 and June 30, 2001, Arris Interactive L.L.C. recorded net losses and the
Company has restated these periods to reflect its share of the losses under the
equity method of accounting due to the Company's investment in and advances to
Arris Interactive at December 31, 2000 being sufficient to record such losses.
NOTE 17. ACQUISITION OF CADANT, INC.
On January 8, 2002, ARRIS completed the acquisition of all of the assets of
Cadant Inc., a privately held designer and manufacturer of next generation Cable
Modem Termination Systems ("CMTS"). The Company decided to complete this
transaction because it would have a positive impact on future results of the
Company.
- ARRIS issued 5.25 million shares of ARRIS common stock for the purchase
of substantially all of Cadant's assets and certain liabilities.
- ARRIS agreed to pay up to 2.0 million shares based upon future sales of
the CMTS product through January 8, 2003.
72
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The following is a summary of the preliminary purchase price allocation to
record ARRIS' purchase price of the assets and certain liabilities of Cadant
Inc. for 5,250,000 shares of ARRIS Group, Inc. common stock based on the average
closing price of ARRIS' common stock for 5 days prior and 5 days after the date
of the transaction as quoted on the Nasdaq National Market System.
The excess of the purchase price over the fair value of the net tangible
and intangible assets acquired has been allocated to goodwill. Although the
purchase price and its allocation are not final, it is anticipated that a
portion of the purchase price will be allocated to existing technology. The
final allocation of the purchase price will be determined after completion of
thorough analyses to identify and determine the fair values of Cadant's tangible
and identifiable intangible assets and liabilities as of the date the
transaction is completed. Any change in the fair value of the net assets of
Cadant will change the amount of the purchase price allocable to goodwill.
<Table>
<Caption>
UNAUDITED
(IN THOUSANDS)
<S> <C>
5,250,000 shares of ARRIS Group, Inc.'s $0.01 par value
common stock at $10.631 per common share.................. $55,813
Acquisition costs (banking fees, legal and accounting fees,
printing costs)........................................... 600
Fair value of stock options to Cadant, Inc. employees....... 12,760
Assumption of certain liabilities of Cadant, Inc............ 17,039
-------
Adjusted preliminary purchase price....................... $86,212
=======
Allocation of Preliminary Purchase Price:
Net tangible assets acquired.............................. $ 4,588
Existing technology (to be amortized over 3 years)........ 53,000
Goodwill (not deductible for income tax purposes)......... 28,624
-------
Total allocated preliminary purchase price................ $86,212
=======
</Table>
The following table represents the amount assigned to each major asset and
liability caption of Cadant, Inc. as of January 8, 2002.
<Table>
<Caption>
(IN THOUSANDS)
<S> <C>
Total current assets........................................ $ 307
Property, plant and equipment, net.......................... $ 4,281
Goodwill.................................................... $28,624
Intangibles................................................. $53,000
Total assets................................................ $86,212
Total current liabilities and long-term debt................ $17,039
</Table>
73
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors and officers of ARRIS is set forth under
the captions entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the 2002
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".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of officers and directors of ARRIS is
set forth under the captions entitled "Executive Compensation", "Compensation of
Directors", and "Employment Contracts and Termination of Employment and
Change-In-Control Arrangements" in the Proxy Statement incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the ARRIS' common stock is set forth
under the captions entitled "Security Ownership of Management" and "Security
Ownership of Principal Stockholders" in the Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
ARRIS is set forth under the captions entitled "Compensation of Directors" and
"Certain Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) EXHIBITS.
The exhibits listed below in Item 14 (a) 1, 2 and 3 are filed as part of
this document. Each management contract or compensatory plan required to be
filed as an exhibit is identified by an asterisk (*).
(B) REPORTS ON FORM 8-K.
None.
74
<PAGE>
ITEM 14(A) 1 & 2. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
FINANCIAL STATEMENTS
The following Consolidated Financial Statements of ARRIS Group, Inc. and
Report of Independent Auditors are filed as part of this Report.
<Table>
<Caption>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 42
Consolidated Balance Sheets at December 31, 2001 and 2000... 43
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 44
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... 45
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. 46
Notes to the Consolidated Financial Statements.............. 47
</Table>
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of ARRIS is
included in Item 14 (a) 2 pursuant to paragraph (d) of Item 14:
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
<Table>
<Caption>
BALANCE AT RESERVES BALANCE AT
BEGINNING FROM CHARGE TO END OF
DESCRIPTION OF PERIOD ACQUISITION EXPENSES DEDUCTIONS PERIOD
- ----------- ---------- ----------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 2001
Reserves and allowance deducted from
asset accounts:
Allowance for uncollectible
accounts............................ $ 6,686 $ 2,046 $ 5,820 $ 5,143(1) $ 9,409
Reserve for obsolescence and excess
inventory(2)........................ $30,160 $14,704 $53,279 $54,084 $44,059
YEAR ENDED DECEMBER 31, 2000
Reserves and allowance deducted from
asset accounts:
Allowance for uncollectible
accounts............................ $ 7,505 $ -- $ 1,117 $ 1,936(1) $ 6,686
Reserve for obsolescence and excess
inventory(2)........................ $26,541 $ -- $ 5,485 $ 1,866 $30,160
YEAR ENDED DECEMBER 31, 1999
Reserves and allowance deducted from
asset accounts:
Allowance for uncollectible
accounts............................ $ 4,609 $ -- $ 5,859 $ 2,963(1) $ 7,505
Reserve for obsolescence and excess
inventory(2)........................ $17,026 $ -- $10,230 $ 715 $26,541
</Table>
- ---------------
(1) Uncollectible accounts written off, net of recoveries
(2) The reserve for obsolescence and excess inventory is included in inventories
75
<PAGE>
ITEM 14(A)3. EXHIBIT LIST
Each management contract or compensation plan required to be filed as an
exhibit is identified by an asterisk (*).
<Table>
<Caption>
THE FILINGS REFERENCED FOR
INCORPORATION BY REFERENCE ARE
ARRIS (FORMERLY KNOWN AS
EXHIBIT BROADBAND PARENT, INC.) FILINGS
NUMBER DESCRIPTION OF EXHIBIT UNLESS OTHERWISE NOTED
- ------- ---------------------- -------------------------------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization dated as of
October 18, 2000.................................... October 25, 2000, Form 8-K,
Exhibit 2.1, filed by ANTEC
Corporation.
2.2 First Amendment to Agreement and Plan of
Reorganization dated as of April 9, 2001............ April 13, 2001, Form 8-K,
Exhibit 2.1, filed by ANTEC
Corporation.
2.3 Side Letter dated as of August 3, 2001.............. August 13, 2001, Form 8-K,
Exhibit 2.3.
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 4 1/2% Convertible Subordinated Notes due 2003 dated
May 5, 1998......................................... March 31, 1998, Form 10-Q,
Exhibit 10.28, filed by ANTEC
Corporation.
4.2(a) Supplemental Indenture dated August 3, 2001......... Filed herewith.
4.2(b) Supplemental Indenture dated August 29, 2001........ Filed herewith.
10.1 Credit Agreement, dated August 3, 2001.............. August 13, 2001, Form 8-K,
Exhibit 10.1.
10.1(a) First Amendment to Credit Agreement dated January 8,
2002................................................ Filed herewith.
10.2 Second Amended and Restated Limited Liability
Company Agreement of Arris Interactive, L.L.C.,
dated August 3, 2001................................ August 13, 2001, Form 8-K,
Exhibit 10.4.
10.3 Amended and Restated Investor Rights Agreement dated
April 9, 2001....................................... April 13, 2001, Form 8-K,
Exhibit 10.1, filed by ANTEC
Corporation.
</Table>
76
<PAGE>
<Table>
<Caption>
THE FILINGS REFERENCED FOR
INCORPORATION BY REFERENCE ARE
ARRIS (FORMERLY KNOWN AS
EXHIBIT BROADBAND PARENT, INC.) FILINGS
NUMBER DESCRIPTION OF EXHIBIT UNLESS OTHERWISE NOTED
- ------- ---------------------- -------------------------------
<C> <S> <C>
10.3(a) First Amendment to Amended and Restated Investor
Rights Agreement dated August 3, 2001............... August 3, 2001, Form 8-A,
Exhibit 10.2.
10.4 (Nortel Networks LLC) Registration Rights
Agreement........................................... August 13, 2001, Form 8-K,
Exhibit 10.3.
10.5 (Cadant, Inc.) Asset Purchase Agreement dated
December 8, 2001.................................... February 8, 2002, Form S-3,
Exhibit 2.
10.6(a)* Agreement with Robert J. Stanzione for the
conversion of special 2001 bonus to stock units..... December 31, 1999, Form 10-K,
Exhibit 10.10(b), filed by
ANTEC Corporation.
10.6(b)* Amended and Restated Employment Agreement, dated
August 6, 2001, with Robert J Stanzione............. September 30, 2001, Form 10-Q,
Exhibit 10.10(c).
10.6(c)* Supplemental Executive Retirement Plan for Robert J
Stanzione........................................... September 30, 2001, Form 10-Q,
Exhibit 10.10(d).
10.7(a)* Amended and Restated Employment Agreement dated
April 29, 1999, with John M. Egan................... June 30, 1999, Form 10-Q,
Exhibit 10.31(a).
10.7(b)* Consulting Agreement, dated April 27, 1999 with John
M. Egan............................................. June 30, 1999, Form 10-Q,
Exhibit 10.31(b), filed by
ANTEC Corporation.
10.7(c)* Supplemental Executive Retirement Plan for John M.
Egan................................................ June 30, 1999, Form 10-Q,
Exhibit 10.31(c), filed by
ANTEC Corporation.
10.8* Amended and Restated Employment Agreement, dated
April 29, 1999, with Lawrence A. Margolis........... June 30, 1999, Form 10-Q,
Exhibit 10.33, filed by ANTEC
Corporation.
10.9* Form of Employment Agreement with Gordon E.
Halverson........................................... December 31, 2000, Form 10-K,
Exhibit 10.13, filed by ANTEC
Corporation.
10.10* Retainer Agreement with James E. Knox............... December 31, 1996, Form 10-K,
Exhibit 10.17, filed by ANTEC
Corporation.
10.11* Consulting Agreement dated February 1, 1998 for
James L. Faust...................................... December 31, 1998, Form 10-K,
Exhibit 10.14, filed by ANTEC
Corporation.
</Table>
77
<PAGE>
<Table>
<Caption>
THE FILINGS REFERENCED FOR
INCORPORATION BY REFERENCE ARE
ARRIS (FORMERLY KNOWN AS
EXHIBIT BROADBAND PARENT, INC.) FILINGS
NUMBER DESCRIPTION OF EXHIBIT UNLESS OTHERWISE NOTED
- ------- ---------------------- -------------------------------
<C> <S> <C>
10.12* Stock Option Agreement with William H. Lambert dated
March 14, 1994...................................... April 30, 1994, TSX Corporation
Form 10-K, Exhibit 10(A)(1)(3)
10.13* 2001 Stock Incentive Plan........................... July 2, 2001 Appendix III of
Proxy Statement filed as part
of, Registration Statement
#333-61524, filed by Broadband
Parent Corporation.
10.14* Management Incentive Plan........................... July 2, 2001, Appendix IV of
Proxy Statement filed as part
of Registration Statement
#333-61524, filed by Broadband
Parent Corporation.
10.15* Solectron Manufacturing Agreement and Addendum...... Filed herewith.
10.16 Mitsumi Agreement................................... Filed herewith.
10.17 Form of Employment Agreement with Ronald M.
Coppock............................................. Filed herewith.
21 Subsidiaries of the Registrant...................... Filed herewith.
23 Consent of Ernst & Young LLP........................ Filed herewith.
24 Powers of Attorney.................................. Filed herewith.
</Table>
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARRIS GROUP, INC.
/s/ LAWRENCE A. MARGOLIS
--------------------------------------
Lawrence A. Margolis
Executive Vice President,
Chief Financial Officer
Dated: March 29, 2002
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.
<Table>
<C> <C> <S> <C>
/s/ JOHN M. EGAN Chairman and Director March 29, 2002
- ---------------------------------------------------
John M. Egan
/s/ ROBERT J. STANZIONE President, Chief Executive March 29, 2002
- --------------------------------------------------- Officer and Director
Robert J. Stanzione
/s/ LAWRENCE A. MARGOLIS Executive Vice President, Chief March 29, 2002
- --------------------------------------------------- Financial Officer
Lawrence A. Margolis
/s/ DAVID B. POTTS Senior Vice President of Finance, March 29, 2002
- --------------------------------------------------- Chief Information Officer
David B. Potts
/s/ JOHN IAN ANDERSON CRAIG* Director March 29, 2002
- ---------------------------------------------------
John Ian Anderson Craig
/s/ ROD F. DAMMEYER* Director March 29, 2002
- ---------------------------------------------------
Rod F. Dammeyer
/s/ JAMES L. FAUST* Director March 29, 2002
- ---------------------------------------------------
James L. Faust
/s/ WILLIAM H. LAMBERT* Director March 29, 2002
- ---------------------------------------------------
William H. Lambert
/s/ JOHN R. PETTY* Director March 29, 2002
- ---------------------------------------------------
John R. Petty
/s/ LARRY ROMRELL* Director March 29, 2002
- ---------------------------------------------------
Larry Romrell
/s/ SAMUEL K. SKINNER* Director March 29, 2002
- ---------------------------------------------------
Samuel K. Skinner
/s/ BRUCE VAN WAGNER* Director March 29, 2002
- ---------------------------------------------------
Bruce Van Wagner
</Table>
79
<PAGE>
<Table>
<C> <C> <S> <C>
/s/ CRAIG JOHNSON* Director March 29, 2002
- ---------------------------------------------------
Craig Johnson
/s/ VICKIE YOHE* Director March 29, 2002
- ---------------------------------------------------
Vickie Yohe
*By: /s/ LAWRENCE A. MARGOLIS
---------------------------------------------
Lawrence A. Margolis
(as attorney in fact for each
person indicated)
</Table>
80
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2(A)
<SEQUENCE>3
<FILENAME>g75005ex4-2a.txt
<DESCRIPTION>SUPPLEMENTAL INDENTURE
<TEXT>
<PAGE>
EXHIBIT 4.2(a)
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (the "SUPPLEMENTAL INDENTURE"), dated as of
August 3, 2001, between ANTEC Corporation, a Delaware corporation (the
"Company"), Arris Group, Inc. (f/k/a Broadband Parent Corporation), a Delaware
corporation ("ARRIS GROUP"), and The Bank of New York, a New York banking
corporation, as Trustee (the "TRUSTEE"), to the Indenture between the Company
and the Trustee, dated as of May 8, 1998, as amended or supplemented from time
to time (the "INDENTURE"). Capitalized terms not otherwise defined herein shall
have the meanings given such terms in the Indenture.
WITNESSETH:
WHEREAS, pursuant to an Agreement and Plan of Reorganization, dated as
of October 18, 2000, as amended (as amended, the "PLAN OF REORGANIZATION") by
and among the Company, Arris Group, Broadband Transition Corporation
("TRANSITION"), Nortel Networks Inc., Nortel Networks LLC and Arris Interactive
L.L.C., Transition, a wholly-owned subsidiary of Arris Group and in indirect
wholly-owned subsidiary of the Company, will merge (the "MERGER") with and into
the Company and each share of common stock, par value $0.01 per share, of the
Company (the "COMPANY COMMON STOCK") then outstanding will become one (1) share
of common stock, par value $0.01 per share, of Arris Group ("ARRIS GROUP COMMON
STOCK");
WHEREAS, the Indenture provides that, subject to the provisions of the
Indenture, any Security may at any time, be converted into fully paid and
non-assessable shares of Company Common Stock;
WHEREAS, pursuant to Section 13.6 of the Indenture (all section
references herein are to the Indenture) the Company and Arris Group are
delivering to the Trustee this Supplemental Indenture, which provides that on
and after the effective time of the Merger (the "EFFECTIVE TIME"), the Holder of
each Security then outstanding shall have the right thereafter to convert such
Security into shares of Arris Group Common Stock upon the same terms as such
Security was convertible into Company Common Stock immediately prior to the
Effective Time;
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto agree as follows for the benefit of each other party and for the equal
and ratable benefit of the Holders of the Company's 4 1/2% Convertible
Subordinated Notes due 2003:
ARTICLE I
CONTINUATION OF CONVERSION PRIVILEGE FOR
ARRIS GROUP COMMON STOCK
Section 1.1 Subject to and upon compliance with the provisions of
Article XIII of the Identure, on and after the Effective Time, at the option of
the Holder thereof, each Security shall be convertible into fully paid and
non-assessable shares of Arris Group Common Stock at the
<PAGE>
same Conversion Price (as subseqently adjusted from time to time in accordance
with the terms of the Indenture) as such Security was convertible into Company
Common Stock immediately prior to the Effective Time of the Merger. From and
after the Effective Time, all references in the Indenture to "Common Stock"
shall mean Arris Group Common Stock.
Section 1.2 The Company shall notify the Trustee of the Effective
Time of the Merger in the Officers' Certificate contemplated by Section 2.1
hereof.
ARTICLE II
EFFECTIVE TIME
Section 2.1 This Supplemental Indenture shall become effective
upon the last to occur of:
(a) execution of this Supplemental Indenture by the
parties;
(b) receipt by the Trustee of a duly executed Officers'
Certificate substantially in the form attached hereto as Exhibit A; and
(c) receipt by the Trustee of an opinion of counsel of
the Company in the form required by the Indenture.
ARTICLE III
MISCELLANEOUS
Section 3.1 The Indenture, as amended and modified by this
Supplemental Indenture, is in all respects ratified and confirmed; this
Supplemental Indenture shall be deemed part of the Indenture in the manner and
to the extent herein and therein provided; and all the terms, conditions, and
provisions of the Indenture shall remain in full force and effect, as amended
and modified hereby.
Section 3.2 THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AS
APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK.
Section 3.3 All parties may sign any number of copies or
counterparts of this Supplemental Indenture. Each signed copy or counterpart
shall be an original, but all of them together shall represent the same
agreement.
Section 3.4 The recitals contained herein shall be taken as the
statements of the Company and Arris Group, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Supplemental Indenture.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed.
ANTEC CORPORATION
By: /s/ Lawrence A. Margolis
---------------------------------
Name: Lawrence A. Margolis
Title: Executive Vice President
ARRIS GROUP, INC.
By: /s/ Lawrence A. Margolis
---------------------------------
Name: Lawrence A. Margolis
Title: Vice President
THE BANK OF NEW YORK, as Trustee
By: /s/ Mary LaGumina
---------------------------------
Name: Mary LaGumina
Title: Vice President
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2(B)
<SEQUENCE>4
<FILENAME>g75005ex4-2b.txt
<DESCRIPTION>SUPPLEMENTA INDENTURE
<TEXT>
<PAGE>
EXHIBIT 4.2(b)
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (the "SUPPLEMENTAL INDENTURE"), dated as of
August 29, 2001, between Arris International, Inc. f/k/a ANTEC Corporation, a
Delaware corporation (the "COMPANY"), and The Bank of New York, a New York
banking corporation, as Trustee (the "TRUSTEE"), to the Indenture between the
Company and the Trustee, dated as of May 8, 1998, as amended or supplemented
from time to time (the "INDENTURE"). Capitalized terms not otherwise defined
herein shall have the meanings given such terms in the Indenture.
WITNESSETH:
WHEREAS, Section 9.1 of the Indenture provides that without the consent
of any Holder, the Company and the Trustee may enter into a supplement to the
Indenture for the purpose of curing any ambiguity, defect or inconsistency or
questions arising under the Indenture which shall not be inconsistent with the
provisions of the Indenture, provided that such action does not adversely affect
the interests of any Holder in any respect;
WHEREAS, the Indenture is ambiguous with respect to the use of the
defined but not used term "Designated Senior Debt" and undefined but used term
"Designated Senior Indebtedness"; and
WHEREAS, this Supplemental Indenture is being entered into to clarify
that the terms "Designated Senior Debt" and "Designated Senior Indebtedness" are
synonymous and that the term "Designated Senior Indebtedness" used throughout
the Indenture means the defined the term "Designated Senior Debt";
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto agree as follows for the benefit of each other party and for the equal
and ratable benefit of the Holders of the Company's 4 1/2% Convertible
Subordinated Notes due 2003:
ARTICLE I
CLARIFICATION OF THE INDENTURE
Section 1.1 All occurrences in the Indenture of the phrase
"Designated Senior Indebtedness" shall be amended to read "Designated Senior
Debt."
<PAGE>
ARTICLE II
EFFECTIVE TIME
Section 2.1 This Supplemental Indenture shall become effective
upon the last to occur of:
(a) execution of this Supplemental Indenture by the
parties; and
(b) receipt by the Trustee of an opinion of counsel of
the Company in the form required by the Indenture.
ARTICLE III
MISCELLANEOUS
Section 3.1 The Indenture, as amended and modified by this
Supplemental Indenture, is in all respects ratified and confirmed; this
Supplemental Indenture shall be deemed part of the Indenture in the manner and
to the extent herein and therein provided; and all the terms, conditions, and
provisions of the Indenture shall remain in full force and effect, as amended
and modified hereby.
Section 3.2 THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AS
APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK.
Section 3.3 All parties may sign any number of copies or
counterparts of this Supplemental Indenture. Each signed copy or counterpart
shall be an original, but all of them together shall represent the same
agreement.
Section 3.4 The recitals contained herein shall be taken as the
statements of the Company, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Supplemental Indenture.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed.
ARRIS INTERNATIONAL, INC.
f/k/a ANTEC CORPORATION
By: /s/ Robert J. Stanzione
---------------------------------
Name: Robert J. Stanzione
Title: President
THE BANK OF NEW YORK, as Trustee
By: /s/ Mary LaGumina
---------------------------------
Name: Mary LaGumina
Title: Vice President
Agreed to and Acknowledged by ARRIS
GROUP, INC., obligor under the
conversion provisions of the Indenture
ARRIS GROUP, INC.
By: /s/ Robert J. Stanzione
------------------------------
Name: Robert J. Stanzione
Title: President
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1(A)
<SEQUENCE>5
<FILENAME>g75005ex10-1a.txt
<DESCRIPTION>FIRST AMENDMENT TO CREDIT AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.1(a)
EXECUTION
FIRST AMENDMENT
TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is
dated as of January 8, 2002 and entered into by and among ARRIS INTERNATIONAL,
INC., a Delaware corporation (the "COMPANY"), ARRIS INTERACTIVE L.L.C., a
Delaware limited liability company ("ARRIS"), EACH OF COMPANY'S SUBSIDIARIES
LISTED ON THE SIGNATURE PAGES HEREOF (Company, Arris and each such subsidiary
are individually referred to herein as a "BORROWER" and, collectively, on a
joint and several basis, as the "BORROWERS"), THE FINANCIAL INSTITUTIONS LISTED
ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a
"LENDER" and collectively as "LENDERS"), CREDIT SUISSE FIRST BOSTON, as
syndication agent for Lenders (in such capacity, "SYNDICATION AGENT") and THE
CIT GROUP/BUSINESS CREDIT, INC., as administrative agent and collateral agent
for Lenders (in such capacity, "ADMINISTRATIVE AGENT), and is made with
reference to that certain Credit Agreement dated as of August 31, 2001 (as
amended, restated, supplemented or otherwise modified as of the date hereof, the
"CREDIT AGREEMENT"), by and among the Borrowers, Lenders, Syndication Agent and
Administrative Agent. Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, Holdings and Cadant, Inc., a Delaware corporation
("CADANT") have entered into the Cadant Asset Purchase Agreement (as defined
below), pursuant to which Holdings has agreed to purchase substantially all of
the assets and assume certain liabilities of Cadant and Holdings has assigned
all of its rights and obligations under the Asset Purchase Agreement to Company
pursuant to the Cadant Assignment and Assumption Agreement (as defined below);
and
WHEREAS, Borrowers and Lenders desire to amend the Credit
Agreement to (i) permit Company to acquire substantially all of the assets and
assume certain liabilities of Cadant, (ii) provide the terms pursuant to which
Company may convert the Convertible Subordinated Notes in an aggregate principal
amount not to exceed $115,000,000 to shares of common stock of Holdings, (iii)
permit Holdings to guaranty the obligations of Company under the Comdisco Lease
(as defined below) in an aggregate amount no to exceed $3,500,000; (iv) amend
the minimum fixed coverage ratio set forth in subsection 7.6A for the period
ending March 31, 2002, and (iv) make certain other amendments as set forth
below;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENTS TO SECTION 1: PROVISIONS RELATING TO
DEFINED TERMS
A. Subsection 1.1 of the Credit Agreement is hereby
amended by adding thereto the following definitions, which shall be inserted in
proper alphabetical order:
"CADANT" means Cadant, Inc., a Delaware corporation.
"CADANT ACQUISITION" means the purchase by Holdings of
substantially all of Cadant's assets and certain liabilities of Cadant
on the First Amendment Effective Date, pursuant to the Cadant
Acquisition Documents.
"CADANT ACQUISITION DOCUMENTS" means the Cadant Asset Purchase
Agreement, the Cadant Voting Agreement, the Cadant Assignment and
Assumption Agreement and all other instruments or documents delivered
or entered into in connection with any of the foregoing, in each case
including all schedules, annexes and exhibits thereto, as such Cadant
Acquisition Documents may be amended, restated, supplemented or
otherwise modified from time to time to the extent permitted under
subsection 7.12.
"CADANT ASSET PURCHASE AGREEMENT" means that certain Asset
Purchase Agreement, dated December 8, 2001, as supplemented by that
certain letter dated January 8, 2002, by and between Holdings and
Cadant, as further amended, restated, supplemented or otherwise
modified from time to time to the extent permitted under subsection
7.12.
"CADANT ASSIGNMENT AND ASSUMPTION AGREEMENT" means that
certain Assumption Agreement dated as of January 8, 2002, by and
between Holdings and Company, as amended, restated, supplemented or
otherwise modified from time to time to the extent permitted under
subsection 7.12.
"CADANT VOTING AGREEMENT" means that certain Voting Agreement,
dated as of December 8, 2001 among Holdings, Cadant and the equity
holders of Cadant listed on the signature pages thereto, as amended,
restated, supplemented or otherwise modified from time to time to the
extent permitted under subsection 7.12.
"COMDISCO LEASE" means that certain Master Lease Agreement
dated September 8, 2000, by and between Comdisco, Inc. and Cadant, Inc.
that was assigned to Company pursuant to the Cadant Acquisition
Documents.
2
<PAGE>
"FIRST AMENDMENT EFFECTIVE DATE" means the date the First
Amendment to this Agreement became effective in accordance with its
terms.
"HOLDINGS COMDISCO GUARANTY" means a guaranty by Holdings of
the obligations of Company under the Comdisco Lease, in form and
substance satisfactory to Administrative Agent.
"HOLDINGS COMMON STOCK" means the common stock of Holdings,
par value $.01 per share.
B. Subsection 1.1 of the Credit Agreement is hereby
further amended by deleting the definitions of "Acquired Business" and
"Permitted Acquisition" therefrom in their entirety.
C. Subsection 1.1 of the Credit Agreement is hereby
further amended by deleting the definitions of "First Priority" and "Pro Forma"
therefrom in their entirety and substituting the following therefor:
"FIRST PRIORITY" means, with respect to any Lien purported to
be created in any Collateral pursuant to any Collateral Document, that
(i) such Lien is perfected and has priority over any other Lien on such
Collateral (other than (w) Permitted Encumbrances which are given
priority as a matter of law, (x) Liens described on Schedule 7.2, so
long as such Liens are only on the assets encumbered by such Liens on
the Closing Date and (y) Liens securing Purchase Money Indebtedness, so
long as such Liens only attach to the assets being acquired with such
Purchase Money Indebtedness and are otherwise permitted by subsection
7.2(vii)) and (ii) such Lien is the only Lien (other than Liens
permitted pursuant to subsection 7.2) to which such Collateral is
subject.
"PRO FORMA BASIS" means, as of any date of determination, in
connection with (i) the calculation of Consolidated EBITDA or
Consolidated Capital Expenditures for the Fiscal Quarter ending June
30, 2001 and for that portion of the Fiscal Quarter ending September
30, 2001 that is prior to the Closing Date, the Consolidated EBITDA or
Consolidated Capital Expenditures for such Fiscal Quarter, after giving
effect on a pro forma basis to the Reorganization and (ii) in
connection with the compliance of the Borrowers with the financial
covenants set forth in subsection 7.6 as of the last day of the four
Fiscal Quarter period most recently ended prior to such date of
determination for which the relevant financial information is available
(the "COMPLIANCE PERIOD"), after giving effect on a pro forma basis to
any dispositions made during such Compliance Period, other than sales
of inventory in the ordinary course of business and dispositions of
obsolete equipment, in each case on the following basis:
(i) any Indebtedness incurred or assumed by
Holdings or any of its Subsidiaries in connection with the
Reorganization and any Indebtedness repaid in connection with
the Reorganization and/or dispositions, as the case may be,
shall be deemed to have been incurred or repaid, respectively,
as of April 1, 2001
3
<PAGE>
in the case of the Reorganization and as of the first day of
the Compliance Period, in the case of dispositions;
(ii) if such Indebtedness incurred or assumed by
Holdings or any of its Subsidiaries in connection with the
Reorganization has a floating or formula rate, then the rate
of interest for such Indebtedness for the applicable period
shall be computed as if the rate in effect for such
Indebtedness on the relevant measurement date had been the
applicable rate for the entire applicable period;
(iii) income statement items (whether positive or
negative) attributable to the property or business acquired or
disposed in the Reorganization and/or dispositions, as the
case may be, shall be included as if such acquisitions took
place on April 1, 2001, in the case of the Reorganization, and
as of the first day of the Compliance Period, in the case of
dispositions, in each case on a pro forma basis; and
(iv) any historical extraordinary non-recurring
costs or expenses or other verifiable costs or expenses that
will not continue after the Closing Date, in the case of the
Reorganization may be eliminated and other expenses and cost
reductions may be reflected on a basis consistent with
Regulation S-X promulgated by the Securities and Exchange
Commission.
Such pro forma calculations shall, in the case of the
Reorganization, be based on the audited or reviewed financial
delivered pursuant to subsection 4.1G. All pro forma
adjustments shall be approved by the Administrative Agent."
1.2 AMENDMENTS TO SECTION 7: BORROWERS' NEGATIVE
COVENANTS
A. Subsection 7.1 of the Credit Agreement is hereby amended
by deleting clause (viii) and substituting the following therefor:
"(viii) Company may remain liable with respect to Indebtedness
evidenced by the Convertible Subordinated Notes, in an aggregate
principal amount not to exceed $115 million; provided, that prior to
December 31, 2002, such Indebtedness shall be refinanced pursuant to
documentation in form and substance satisfactory to Requisite Lenders
or converted into shares of Holdings Common Stock in accordance with
subsection 7.5(ix);"
B. Subsection 7.2 of the Credit Agreement is hereby amended
by deleting clause (v) and substituting the following therefor:
"(v) Liens (other than Liens on any (x) Accounts or Inventory
of Holdings, any Borrower or any Domestic Subsidiary or Mexican
Subsidiary of any Borrower or (y) Capital Stock) granted by Borrowers
and their Subsidiaries securing Indebtedness permitted by subsections
7.1(vi), 7.1(vii) and 7.1(xii) in an aggregate amount not to exceed
$10,000,000 at any time outstanding; provided, however, that Borrowers
and their Domestic Subsidiaries shall not grant such Liens in
connection with any Indebtedness of any Foreign Subsidiary of any
Borrower incurred pursuant to subsection 7.1(vii); provided, further,
that (i) Holdings and its Subsidiaries may not grant any Liens in
4
<PAGE>
connection with any Indebtedness assumed by Holdings or any of its
Subsidiaries in connection with the Cadant Acquisition and (ii) no
assets acquired pursuant to the Cadant Acquisition may be subject to
any Liens under any such assumed Indebtedness except to the extent such
Liens evidence Capital Leases and are otherwise permitted by subsection
7.2(vii)."
C. Subsection 7.3 of the Credit Agreement is hereby amended
by deleting clause (vii) and substituting the following therefor:
"(vii) So long as no Event of Default or Potential Event of
Default has occurred and is continuing, Holdings and Company may
consummate the Cadant Acquisition, in accordance with (1) the Cadant
Acquisition Documents and (2) the following terms:
(a) the aggregate amount of consideration paid by
Holdings and Company for the Cadant Acquisition shall not
exceed 7,250,000 shares of Holdings Common Stock and
$4,500,000 in cash;
(b) as of the consummation of the Cadant Acquisition,
any assets or liabilities acquired or assumed by Holdings
pursuant to the Cadant Acquisition Documents shall have been
assigned to Company pursuant to the Cadant Assignment and
Assumption Agreement;
(c) the aggregate amount of all liabilities being
assumed by Company in connection with the Cadant Acquisition,
including any Indebtedness and Capital Leases, shall not
exceed $14,000,000; provided, that such amount shall include
all Indebtedness owed by Cadant to Company and interest
thereon in an aggregate amount of approximately $2,500,000;
(d) concurrently with the consummation of the Cadant
Acquisition, Borrowers shall have fully complied with the
requirements of subsections 6.8 and 6.9 of this Agreement and
Section 5 of the Security Agreement, with respect to the
Cadant Acquisition;
(e) Company shall have delivered to Administrative
Agent (i) the results of recent searches, by a Person or
Persons satisfactory to Administrative Agent, of all effective
UCC financing statements and fixture filings and all judgment
and tax lien filings which may have been made with respect to
any personal or mixed property acquired in the Cadant
Acquisition, together with copies of all such filings
disclosed by such search, (ii) UCC termination statements duly
executed by all applicable Persons for filing in all
applicable jurisdictions as may be necessary to terminate any
effective UCC financing statements or fixture filings
disclosed in such search, (iii) to the extent requested by
Administrative Agent, recent searches, by Person or Persons
satisfactory to Administrative Agent of all effective filings
with the PTO or United States Copyright Office which may have
been made with respect to any patents, trademarks or
copyrights being acquired in the Cadant Acquisition and (iv)
and all other documents or instruments necessary to release
all Liens on any personal or mixed property acquired in the
Cadant
5
<PAGE>
Acquisition, in each case in form and substance satisfactory
to Administrative Agent;
(f) Company shall have delivered an Officer's
Certificate, in form and substance satisfactory to
Administrative Agent, (1) certifying that no Potential Event
of Default or Event of Default shall then exist or shall occur
as a result of the Cadant Acquisition, and (2) demonstrating
that on the First Amendment Effective Date, after giving
effect to the Cadant Acquisition, the Borrowers will be in
compliance with subsection 7.6C.
D. Subsection 7.4 of the Credit Agreement is hereby amended
by (i) deleting the "and" at the end of subsection (xiv) thereof, deleting the
"." at the end of subsection (xv) thereof and substituting therefor "; and" and
(ii) adding the following subsection (xvi) to the end thereof:
"(xvi) Holdings may become and remain liable with respect to
Contingent Obligations arising under the Holdings Comdisco Guaranty in
an aggregate amount not to exceed $3,500,000 at any time."
E. Subsection 7.5 of the Credit Agreement is hereby amended
by (i) deleting the "and" at the end of subsection (vii) thereof, deleting the
"." at the end of subsection (viii) thereof and substituting therefor "; and"
and (ii) adding the following subsections (ix) and (x) to the end thereof:
"(ix) Company may exchange Convertible Subordinated Notes in
an aggregate principal amount not to exceed $115,000,000 for Holdings
Common; provided, that (i) the fair market value of such Holdings
Common Stock at the time of any such exchange does not exceed the
principal amount of the Convertible Subordinated Notes so exchanged,
(ii) no other consideration is paid by Holdings or any of its
Subsidiaries in connection with such exchange other than cash in lieu
of fractional shares of Holdings Common Stock in a nominal amount
satisfactory to Administrative Agent; and (iii) the other terms and the
documentation pursuant to which any such exchange occurs is in form and
substance satisfactory to Administrative Agent;"
(x) So long as no Event of Default or Potential Event of
Default has occurred and is continuing, Company may make Restricted
Junior Payments in connection with the payment of cash in lieu of
fractional shares of Holdings Common Stock pursuant to clause (ix)
above and to the extent required under the Convertible Subordinated
Note Indenture."
F. Subsection 7.6 of the Credit Agreement is hereby amended
by deleting the table contained in subsection 7.6A and substituting therefor the
following:
<TABLE>
<CAPTION>
MINIMUM FIXED
"PERIOD CHARGE COVERAGE RATIO
------- ---------------------
<S> <C>
Closing Date through December 31, 2001 1.10:1.00
January 1, 2002 through March 31, 2002 0.75:1.00
April 1, 2002 through June 30, 2002 1.25:1.00
July 1, 2002 and thereafter 1.50:1.00"
</TABLE>
6
<PAGE>
G. Subsection 7.11 of the Credit Agreement is hereby amended
by deleting the proviso contained in such subsection.
H. Subsection 7.12 of the Credit Agreement is hereby amended
by:
(i) deleting subsection 7.12A and substituting therefor
the following:
"A. AMENDMENTS OR WAIVERS OF CERTAIN AGREEMENTS.
Neither any Borrower nor any of its Subsidiaries will agree to
any amendment to, or waive any of its rights under, any
Reorganization Document, Mexican Intercompany Security
Document, Tax Abatement Transaction Document, or Cadant
Acquisition Document after the Closing Date, without in each
case obtaining the prior written consent of Requisite Lenders
to such amendment or waiver."; and
(ii) adding the following proviso to the end of
subsection 7.12B:
"; provided, however, that Holdings and the Company
may amend the Convertible Subordinated Note Indenture to
provide for the Subordinated Holdings Guaranty, pursuant to
documentation in form and substance reasonably satisfactory to
Administrative Agent"
1.3 AMENDMENTS TO SECTION 8: EVENTS OF DEFAULT
Subsection 8.13 of the Credit Agreement is hereby amended by deleting
part (b) of clause (i) of such subsection in its entirety and substituting the
following therefor:
"(b) entering into and performing its obligations under and in
accordance with the Subordinated Holdings Guaranty, Holdings Comdisco
Guaranty and the Loan Documents, Reorganization Documents, or Cadant
Acquisition Documents to which it is a party, or"
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon
the satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "FIRST AMENDMENT
EFFECTIVE DATE"):
A. Borrowers shall deliver to Lenders (or to Agents for
Lenders with sufficient originally executed copies, where appropriate, for each
Lender and its counsel) reliance letters addressed to the Agents and each of the
Lenders dated the First Amendment Effective Date with respect to all legal
opinions delivered in connection with Cadant Acquisition, which legal
7
<PAGE>
opinions and reliance letters shall be in form and substance reasonably
satisfactory to the Administrative Agent.
B. Lenders shall have received from Administrative Agent a
completed audit of the Inventory and Accounts to be acquired in the Cadant
Acquisition and Administrative Agent shall have determined the extent to which
such Accounts and Inventory shall be included as Eligible Accounts and Eligible
Inventory immediately after the consummation of the Cadant Acquisition.
C. Administrative Agent shall have implemented a reserve of
$20,000,000 against the Borrowing Base in connection with the Cadant Acquisition
that shall not be removed without the consent of Requisite Lenders.
D. On the First Amendment Effective Date, all conditions to
the consummation of the Cadant Acquisition (other than payment of the purchase
price therefor and the conveyance of assets resulting therefrom) shall have been
satisfied or waived with the consent of Administrative Agent and the Requisite
Lenders and Administrative Agent shall have received (i) a fully executed or
conformed copy of each Cadant Acquisition Document to be entered into on or
prior to the First Amendment Effective Date, in form and substance reasonably
satisfactory to the Administrative Agent and Requisite Lenders, and each such
Cadant Acquisition Document shall be in full force and effect and no provision
thereof shall have been modified or waived without the consent of Administrative
Agent and Requisite Lenders, and the parties to the Cadant Acquisition Documents
shall not have failed in any material respect to perform any material obligation
or covenant required by the Cadant Asset Purchase Agreement, respectively, to be
performed or complied with by any of them on or before the First Amendment
Effective Date, and (ii) an Officer's Certificate of Company (1) to the effect
set forth in clause (i) and (2) stating that Holdings, Company and Cadant will
proceed to consummate the Cadant Acquisition contemporaneously with the
effectiveness of this Amendment.
E. Company shall have paid to Administrative Agent an
amendment fee equal to $218,750, to be distributed among each Lender that has
executed and delivered a counterpart of this Amendment on or prior to 5:00 PM
(New York City time) on December 28, 2001, in proportion to the amount of each
such Lender's Revolving Loan Exposure to the aggregate amount of the Revolving
Loan Exposure of all such Lenders.
F. Administrative Agent shall have received evidence
satisfactory to it that all outstanding statements of O'Melveny & Myers LLP have
been paid in full.
SECTION 3. BORROWERS' REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, Borrowers represent
and warrant to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Each Borrower has all
requisite corporate power and authority to enter into this Amendment, and
perform its obligations under, the Credit Agreement as amended by this Amendment
(the "AMENDED AGREEMENT").
8
<PAGE>
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of each of the
Borrowers.
C. NO CONFLICT. The execution and delivery by Borrowers of
this Amendment and the performance by Borrowers of the Amended Agreement do not
and will not (i) violate any provision of any law or any governmental rule or
regulation applicable to any Borrower or any of their respective Subsidiaries,
the Certificate or Articles of Incorporation or Bylaws or Certificate of
Formation or Operating Agreement, as applicable, of any Borrower or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on any Borrower or any of its Subsidiaries, (ii) conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any Contractual Obligation of any Borrower or any of its
Subsidiaries, (iii) result in or require the creation or imposition of any Lien
upon any of the properties or assets of any Borrower or any of its Subsidiaries
(other than Liens created under any of the Loan Documents in favor of
Administrative Agent on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any Contractual
Obligation of any Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each
Borrower of this Amendment and the performance by the Borrowers of the Amended
Agreement and the transactions contemplated by this Amendment do not and will
not require any registration with, consent or approval of, or notice to, or
other action to, with or by, any federal, state or other governmental authority
or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended
Agreement have been duly executed and delivered by each Borrower and is the
legally valid and binding obligations of the Borrowers, enforceable against the
Borrowers in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM
CREDIT AGREEMENT. The representations and warranties contained in Section 5 of
the Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. ABSENCE OF DEFAULT. No event has occurred and is
continuing or will result from the consummation of the transactions contemplated
by this Amendment that would constitute an Event of Default or a Potential Event
of Default.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Holdings, each Borrower and each Subsidiary Guarantor hereby
acknowledges that such Loan Party has read this Amendment and consents to the
terms hereof and further hereby confirms and agrees that, notwithstanding the
effectiveness of this Amendment, the
9
<PAGE>
obligations of such Loan Party under each of the Loan Documents to which such
Loan Party is a party shall not be impaired and each of the Loan Documents to
which such Loan Party is a party are, and shall continue to be, in full force
and effect and are hereby confirmed and ratified in all respects.
Holdings and each Subsidiary Guarantor acknowledges and agrees
that (i) notwithstanding the conditions to effectiveness set forth in this
Amendment, such Loan Party is not required by the terms of the Credit Agreement
or any other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment and (ii) nothing in the Credit Agreement,
this Amendment or any other Loan Document shall be deemed to require the consent
of such Loan Party to any future amendments to the Credit Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
(i) On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to the "Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement shall mean
and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a waiver of
any provision of, or operate as a waiver of any right, power or remedy of
Administrative Agent or any Lender under, the Credit Agreement or any of the
other Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all costs,
fees and expenses as described in subsection 10.2 of the Credit Agreement
incurred by Agents and their counsel with respect to this Amendment and the
documents and transactions contemplated hereby shall be for the account of
Borrowers.
C. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW
YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW
OF THE
10
<PAGE>
STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon (i) the execution of a counterpart hereof by each of the
Borrowers, each of the Subsidiary Guarantors, Holdings and Requisite Lenders and
receipt by Company and Administrative Agent of written or telephonic
notification of such execution and authorization of delivery thereof and (ii)
the satisfaction of the conditions precedent contained in Section 2 hereof.
[Remainder of page intentionally left blank]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
HOLDINGS: ARRIS GROUP, INC.
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: Vice President, Chief Financial
Officer & Secretary
COMPANY: ARRIS INTERNATIONAL, INC.
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: Executive Vice President, Chief
Financial Officer & Secretary
ARRIS: ARRIS INTERACTIVE L.L.C.
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: Executive Vice President
SUBSIDIRIES OF COMPANY: ANTEC ASSET MANAGEMENT COMPANY
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: President
ANTEC LICENSING COMPANY
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: President
S-1
<PAGE>
TEXSCAN CORPORATION
By: /s/ Lawrence A. Margolis
--------------------------------------
Name: Lawrence A. Margolis
Title: Chairman of the Board
ELECTRONIC CONNECTOR CORPORATION OF ILLINOIS
By: /s/ Lawrence A. Margolis
--------------------------------------
Name: Lawrence A. Margolis
Title: Vice President
POWER GUARD, INC.
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: Vice President
ELECTRONIC SYSTEM PRODUCTS INC.
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: Vice President
KEPTEL, INC.
By: /s/ Lawrence A. Margolis
---------------------------------------
Name: Lawrence A. Margolis
Title: Vice President
S-2
<PAGE>
SUBSIDIARY GUARATORS,
for purposes of Section 6 only, TEXSCAN DE MEXICO, S.A. DE C.V.
By: /s/ Lawrence A. Margolis
---------------------------------
Name: Lawrence A. Margolis
Title: Chairman
KEPTEL DE MEXICO S.A. DE C.V.
By: /s/ Lawrence A. Margolis
---------------------------------
Name: Lawrence A. Margolis
Title: Chairman
ANTEC INTERNATIONAL CORPORATION
By: /s/ Lawrence A. Margolis
---------------------------------
Name: Lawrence A. Margolis
Title: Director
S-3
<PAGE>
LENDERS: THE CIT GROUP/BUSINESS CREDIT, INC.,
individually and as Administrative Agent
and Collateral Agent
By: /s/ Kenneth B. Butler
----------------------------------
Name: Kenneth B. Butler
Title: Vice President
S-4
<PAGE>
CREDIT SUISSE FIRST BOSTON,
individually and as Syndication Agent
By: /s/ David L. Sawyer
-------------------------------
Name: David L. Sawyer
Title: Vice President
By: /s/ Jay Chall
-------------------------------
Name: Jay Chall
Title: Director
S-5
<PAGE>
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Clare J. D'Cruz
----------------------------------
Name: Clare J. D'Cruz
Title: Vice President
S-6
<PAGE>
COMERICA BANK
By: /s/ David Selden
-----------------------------------
Name: David Selden
Title: Vice President
S-7
<PAGE>
CONGRESS FINANCIAL CORPORATION (SOUTHERN)
By: /s/ Morris P. Holloway
-----------------------------------
Name: Morris P. Holloway
Title: Senior Vice-President
S-8
<PAGE>
FLEET CAPITAL CORPORATION
By: /s/ Douglas Strange
---------------------------------
Name: Douglas Strange
Title: Vice President
S-9
<PAGE>
GMAC COMMERCIAL CREDIT LLC
By: /s/ Arthur A. Mason
---------------------------------
Name: Arthur A. Mason
Title: Executive Vice President
S-10
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Eric Huff
------------------------------------
Name: Eric Huff
Title: Assistant Vice President
S-12
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>6
<FILENAME>g75005ex10-15.txt
<DESCRIPTION>SOLECTRON MANUFACTURING AGREEMENT & ADDENDUM
<TEXT>
<PAGE>
SOLECTRON
MANUFACTURING AGREEMENT
MANUFACTURING SERVICES AGREEMENT
NO. [_______________]
This Manufacturing Agreement ("Agreement") is entered into by and between
Solectron Corporation, a Delaware Corporation, located at 847 Gibraltar Drive,
Milpitas, CA 95035, by and on behalf of its subsidiaries and affiliates
("Solectron" OR "Manufacturer") and Arris Interactive L.L.C., a Delaware
limited liability company, having its principal office at 3871 Lakefield Drive,
Suwanee, Georgia 30024-1242 ("Purchaser"). Solectron and Purchaser hereby agree
as follows:
1. Term
This Agreement shall be effective on July 2, 2001, and shall remain in force
for one (1) year. This Agreement shall automatically be renewed for successive
one (1) year terms unless either Party requests in writing, at least ninety
(90) days prior to the anniversary date, that this Agreement not be so renewed.
2. SPECIFICATION COMMENTS
All products covered under this Agreement shall be in accordance with
Purchaser's specifications and drawings listed herein ("Products").
3. TITLE AND SHIPPING
All shipments by Solectron and EXW: Solectron facility/point of shipment
(Incoterms 2000).
4. PAYMENT TERMS
a. Solectron and Customer agree to payment terms of Net 30 days from the
latter of the date of invoice of shipment.
b. All prices and payments shall be in U.S. Dollars unless otherwise
agreed by the Parties.
c. Except for the net value added taxes, prices are exclusive of all
taxes, duties, customs or similar charges and are subject to an
increase equal in amount to any charge Solectron may be required to
collect or pay upon shipment of the Product.
d. Until Solectron has received payment in full, Solectron retains a
security interest in the Products delivered to Purchaser.
<PAGE>
5. PURCHASE ORDERS AND FORECASTS
a. Purchaser will provide to Manufacturer firm purchase orders for a
minimum of sixty (60) days in advance of delivery of Products.
Further, Purchaser will maintain a six month non-binding forecast by
month of planned purchases of Products and will issue revisions of
that forecast to Manufacturer monthly. Manufacturer will purchase
materials per purchase order and forecast based on lead-time and
inventory-class buy policy. Purchaser is responsible for material
purchased upon Purchaser's purchase order or, with Purchaser's
pre-approval, purchased upon Purchaser's non-binding forecast, in case
of Purchaser requested schedule reductions or cancellations, but only
for items that cannot be rescheduled or cancelled. Purchaser will
maintain a minimum of sixty (60) days of Products on order at all
times. Each purchase order shall become effective upon acceptance of
the order by Manufacturer.
b. Purchaser may reschedule deliveries on Products under purchase orders
in accordance with the following schedule:
<TABLE>
<CAPTION>
Number of days prior to the original schedule Maximum percentage of the Product quantity by which
the delivery date that written notice of a change the scheduled delivery can be decreased or rescheduled
OR rescheduling is received by Solectron. for later delivery without incurring cancellation charges.
<S> <C>
00 - 60 DAYS 0% can be rescheduled. Total volume is firm. Mix changes are
acceptable with thirty (30) calendar days prior written notice.
Purchaser remains fully liable for all material.
61 - 90 DAYS 25% of total volume can be rescheduled, one time per purchase
order, only, for a maximum reschedule of sixty (60) days from
the original delivery date acknowledged by Manufacturer.
Purchaser will be responsible for a one percent per month
carrying charge on Manufacturer's cost of the material acquired
pursuant to the original delivery date that cannot be
rescheduled or cancelled.
91 - 120 DAYS 50% of total volume can be rescheduled. Purchaser will be
responsible for a one percent per month carrying charge on
Manufacturer's cost of the material acquired pursuant to the
original delivery date that cannot be rescheduled or cancelled.
120 + DAYS 100% of total volume can be rescheduled.
</TABLE>
If a Purchaser requested reschedule represents an acceleration or
increase, Manufacturer shall use commercially reasonable efforts to
meet Purchaser's request. Purchaser shall be responsible for the costs
reasonably and directly incurred by Manufacturer to meet
<PAGE>
Purchaser's request, subject to prior written notification to and
written approval by Purchaser.
The maximum amount of rescheduled Product is limited also by the
capability of Manufacturer to produce the remaining Product, as
contracted, within the time remaining in the Term. Should Purchaser
request a reschedule of product (while meeting all other reschedule
constraint conditions) beyond the term of this Agreement or such that
Manufacturer cannot complete the total contracted production within
the Term of this Agreement due to manufacturing capacity constraints,
material procurement constraints, or any other situations not caused
or controlled by Manufacturer, then Manufacturer and Purchaser shall
discuss reasonable solutions to such scheduling problems, including
extending the term of this Agreement to accommodate those problems.
c. Upon Manufacturer's request, Purchaser may give written authorization
to Manufacturer to order or procure materials with long lead-times in
order to improve Manufacturer's ability to respond to changes in
Purchaser's forecast. Specific limits regarding the quantity and/or
dollar value of this material shall be documented in writing and
provided to Purchaser on a case-by-case basis.
d. Purchaser shall not be responsible for rescheduling charges if
Purchaser reschedules delivery of Products as a result of
Manufacturer's failure to deliver Products which meet the requirements
of this Agreement or to deliver Products in accordance with specified
delivery schedules.
e. All purchase orders issued by Purchaser shall contain the following
information:
1. Purchaser's part number, description, and revision level of
Product to be shipped.
2. The delivery schedule.
3. The unit price.
No more than one type of Product can be ordered per purchase order.
6. WARRANTY
a. Product Warranty
Manufacturer warrants that the Products sold hereunder will be free
from defects in material, manufacture and workmanship (to exclude
customer provided materials; i.e. "consigned", and will perform in
accordance with the applicable Specifications under normal handling,
use and operation for a period of eighteen (18) months from the date
Purchaser receives the Product.
Manufacturer's sole obligation under this Product Warranty, and
Purchaser's sole and exclusive remedy, shall be at Manufacturer's
option, to either repair, replace or credit
<PAGE>
Purchaser's account for any Products found to be defective during this
warranty period. This remedy is made on the following conditions:
i. Manufacturer is notified in writing of the defective
Products within a reasonable time after Purchaser or
Purchaser's customer acknowledges receipt of
Products.
ii. Purchaser shall forward defective Products to
Manufacturer at Manufacturer's expense. Manufacturer
shall use its best effort to return the repaired or
replaced Products freight prepaid by Manufacturer to
Purchaser no later than thirty (30) days from the
date Manufacturer receives the defective Products.
Such Products will be returned Manufacturer F.O.B.
destination. The Product Warranty referred to in
this Agreement shall apply to all Products supplied
to replace defective Products.
Repaired Products shall be warranted for a period of
ninety (90) days or the remainder of the original
warranty period, whichever is longer. The
aforementioned warranties shall inure to Purchaser
and its assigns and may be passed through to
Purchaser's customers.
b. The foregoing warranty shall not be valid if the Products or component
parts have been subjected to abuse and the defects are the result of
misuse, accident, neglect, alteration, or improper testing, storage,
and/or improper installation by Purchaser, or its agents and other
subcontractors.
c. Products shall be accepted by Manufacturer once Purchaser has
identified the returned goods with the proper Returned Material
Authorization (RMA) number displayed on the shipping cartons and the
associated Product name. In addition, if there is more than one RMA
lot being returned at any given time, there cannot be more than one
RMA lot per shipping container. RMA numbers shall be issued by the
Program Manager or designate.
d. Once RMA lot receipts are acknowledged by Manufacturer, these lot(s)
will be returned to Purchaser in new shipping containers with proper
RMA number and Product name displayed on the carton. The period for
this return will be thirty (30) calendar days from the date of receipt
at Manufacturer. Should any of the containers be damaged in shipment
from the Purchaser to Manufacturer which in turn causes damage to the
Products contained, Purchaser's carrier will be notified immediately
so insurance claims can be filed by Manufacturer.
e. Product which are returned to Manufacturer with alleged defects, which
Products are found to be in proper working order, upon return to
Purchaser may be subject to a twenty-five dollar ($25.00) surcharge to
cover the costs of handling and testing.
f. Upon Purchaser's request, Manufacturer will repair out-of-warranty
Products. Each such out-or-warranty repair shall be charged as agreed
to by both Parties. This repair cost basis will be one of the
following: (1) charged at a time and material basis; (2) average cost.
re-
<PAGE>
pair cost basis; (3) fixed unit repair cost. Manufacturer warrants
each such repair for a period of four months for material and six
months for manufacturing workmanship from the date of Purchaser's
receipt of the repaired Products. Manufacturer shall pay all freight
charges for repaired Products requiring a second repair under
Manufacturer's warranty for repaired Products as set forth in this
paragraph.
7. DELIVERY
Products shall be delivered to Purchaser in accordance with required delivery
dates as specified on Purchaser's purchase orders as agreed-to by Manufacturer.
Upon learning of any potential delays, Manufacturer shall immediately notify
Purchaser in writing, as to the cause and extent of such delay. The Purchaser
may request overnight or special delivery on Products failing to meet the
ship-dates specified on purchase orders, the incremental cost to be paid by the
Manufacturer if the delay is due to causes within Manufacturer's control. If
the delay is due to causes within Purchaser's control, incremental cost for
overnight or special delivery on Products to be paid by the Purchaser.
8. TERMINATION AND CANCELLATION
a. For Cause - This Agreement may be terminated by either Party at any
time upon occurrence of any one or more of the following Events of
Default:
(1) failure of the other Party: a) to perform pursuant to the
material terms and conditions of this Agreement; and b) to
cure such performance deficiency within sixty (60) days after
receiving written notice thereof given by the aggrieved
Party; or
(2) the entering into or filing by the other Party of a petition.
arrangement or proceeding seeking an order for relief under
the bankruptcy laws of the United States, a receiver- ship
for any assets of the other Party; a composition with or
assignment for the benefit of its creditors; a readjustment
of debt or the dissolution or liquidation of the other Party.
b. For Convenience - Either Party may terminate this Agreement for
convenience upon one hundred and twenty (120) days written notice to
the other Party.
c. Upon termination, Purchaser shall be responsible for any unique,
non-cancelable material acquired plus handling charges pursuant to
purchase orders and mutually agreed upon long lead time items
purchased to forecast. Any such material shall be shipped promptly
Purchaser upon termination and shall be subject to the then current
pricing and payment terms. Purchaser shall also be responsible for any
mutually agreed upon unamortized investment incurred by Manufacturer
at the time of termination in the event that Purchaser terminates the
Agreement.
d. If Manufacturer agrees to purchase order reschedules in excess of
those allowed specified in paragraph 5.b, or if Purchaser suspends,
reschedules or does not issue purchase orders for forecasted shipments
to which long lead-time material purchases have been made,
<PAGE>
then Manufacturer may invoice for finished product and/or raw material
carrying charges. Such carrying charges shall be calculated monthly at
1.0%. :
here:
I = total dollar value at Manufacturer's actual cost of unused raw
material inventory being held by Manufacturer.
P = prime interest rate expressed as a decimal.
9. INSPECTION
a. Upon request and reasonable notice from Purchaser, Manufacturer shall
allow Purchaser to inspect and review the work being performed under
this Agreement, including materials and supplies being used. However,
shipments will not be delayed if Purchaser fails to effect such source
inspection. Source inspection does not constitute acceptance. Final
acceptance shall be at Purchaser's facility.
b. Purchaser shall have a reasonable time not to exceed thirty (30) days
after actual receipt of Products for domestic shipments within which
to inspect prior to Purchaser's acceptance thereof. For shipments of
overseas via boat, Purchaser shall have sixty (60) days after shipment
date within which to inspect prior to Purchaser's acceptance thereof.
Purchaser will notify Manufacturer in writing of all particular
deficiencies of the same during the inspection period.
c. In the course of purchasing component parts on behalf of Purchaser,
Manufacturer must follow Purchaser's Approved Vendors list (AVL) for
all component parts. If Manufacturer offers alternative to Purchaser's
AVL, the alternative may be approved in writing by Purchaser prior to
procurement/ production at Manufacturer's facility.
10. ENGINEERING CHANGE ORDERS
It is recognized that from time to time Manufacturer will be asked to implement
ECOs. The following delineates the procedures to be followed by the Parties:
a. Purchaser must notify Manufacturer in writing of proposed ECO. This
notification will include the documentation of the change to
effectively support Manufacturer's investigation of the impact of this
proposal. The documentation should include: ECO form with written
description of change, revised BOM, drawings, AVL, media, required
implementation date, etc.
b. If such changes cause an increase or decrease in the total number of
Products due under an order issued hereunder or in the time required
for its performance, an equitable adjustment shall be made; provided,
however, that any claim by either Party therefore must be asserted in
writing in the form of a quotation within thirty (30) calendar days
from the acknowledged receipt date of the change notice by
Manufacturer.
<PAGE>
c. Upon notice of a change. Manufacturer shall use commercially
reasonable efforts to review all costs impacted within five (5) days
after Manufacturer's receipt of ECO proposal. All cost impacts and
material availability issues will be presented, mutually reviewed and
agreed to in writing with Purchaser prior to Manufacturer's
implementation.
d. Purchaser will be responsible for all expedite costs associated with
emergency ECO implementation. For non-emergency ECO's, Manufacturer
shall present the cost impacts and material availability issues, to be
mutually reviewed and agreed-to in writing by the Parties prior to
Manufacturer's implementation.
e. Manufacturer shall notify Purchaser in writing of any proposed changes
to the Products. If Purchaser has not given approval of any proposed
changes within fifteen (15) calendar days after receipt of such
written notification, Manufacturer will conclusively presume that
Purchaser has disapproved the change. Manufacturer will continue to
deliver un- changed Products in accordance with the provisions of this
Agreement should Purchaser not approve the proposed change.
11. CONFIDENTIALITY
Both Parties acknowledge that, by reason of their relationship. they may have
access to certain information and materials concerning the other's business,
plans and Products (including, but not limited to, information and materials
contained in technical data provided to the other Party) which is confidential
and of substantial value to the other Party, which value would be impaired if
such information were disclosed to third parties. Neither Party shall use in
any way, for their own account or the account of any third party, nor disclose
to any third party, any such confidential information which is revealed to it
by the other Party hereto, without written consent of the other Party. Each
Party shall take every reasonable precaution to protect the confidentiality of
such information consistent with the efforts exercised by it with respect to
its own confidential information. Each Party shall advise the other if it
considers any particular information or materials to be confidential. This
provision shall survive termination of this Agreement.
All written data such as drawings, plans, reports, designs, schematics, bill of
materials, and other specifications supplied by Purchaser to Manufacturer shall
remain the exclusive property of Purchaser. Such data and any copies thereof,
together with all data furnished by Purchaser and any copies thereof, shall be
returned to the extent requested upon completion of the services, in the event
of termination under the Agreement. or upon the earlier written request
therefore by.
12. INDEMNIFICATION
Each Party shall indemnify and defend the other Party against all claims,
suits, losses, expenses and liabilities for bodily injury, personal injury,
death and property damage directly or indirectly caused by any Products or
through the intentional acts or negligence of a Party or of any. person for
whose actions said Party is legally liable. Both Parties shall carry and
maintain liability insurance coverage to satisfactorily cover its obligations
under this Agreement.
<PAGE>
13. COMPLIANCE WITH APPLICABLE LAWS
Manufacturer and Purchaser has been, and shall continue to be, in material
compliance with the provisions of all federal, state and local laws,
regulations, rules and ordinances to the transactions governed by this
Agreement.
14. FORCE MAJEURE
In the event that performance by either Party of its obligations under this
Agreement is prevented due to any Act of God, fire, casualty, flood,
earthquake, war, strike. lockout, epidemic, destruction of production
facilities, riot, insurrection, material unavailability, or any other cause
beyond reasonable control of the Party invoking this section -and if such Party
shall give prompt written notice to the other Party - its performance shall be
excused, and the time or the performance shall be extended for the period of
delay or inability to perform due to such occurrences as stated above.
15. MISCELLANEOUS
a. SEVERABILITY: In the event that one or more of the provisions, or
parts thereof, contained in this Agreement shall for any reason be
held to be invalid, illegal, or unenforceable by a court of competent
jurisdiction, the same shall not be invalidated or otherwise affect
any provision in the Agreement, and the Agreement shall be construed
as if such invalid, illegal or unenforceable provision had never been
contained herein.
b. INTEGRATION AND MODIFICATION: This Agreement constitutes the entire
and exclusive statement by Purchaser and Manufacturer of the terms of
their Agreement, notwithstanding any additional or different terms
that may be obtained in quotation, acknowledgment, confirmation,
purchase order, invoice or other form of Purchaser or Manufacturer.
All prior and contemporaneous proposals, negotiations, representations
and agreements are merged in the Agreement. These terms of the
Agreement may not be altered, modified, superseded, amended or
rescinded, and no additional terms shall become a part of the
Agreement, except pursuant to a writing specifically referencing the
Agreement and signed by a representative of the Party against whom
enforcement is sought.
<PAGE>
c. NOTICE: Unless otherwise specified in the Agreement, all notices and
other conditions permitted or required by the provisions of those
documents shall be in writing and shall be mailed, telecopied,
telegraphed, telexed, or delivered to the other Party at the ad- dress
set forth below (or at such other address as either Party shall
designate in writing to the other party during the term of this
Agreement) and shall be effective and deemed received: i) if mailed,
when actually received; ii) if telecopied, when actually received;
iii) if telegraphed, when actually received; iv) if telexed, when
dispatched; or v) if personally delivered, when delivered. Each notice
to Manufacturer or Purchaser shall be addressed, until notice of
change thereof as follows:
i. If intended for Manufacturer, to:
Solectron Corporation
847 Gibraltar Drive
Milpitas, CA 95035
ii. If intended for Purchaser, to:
Arris Interactive, LLC
3871 Lakefield Drive, Suite 300
Suwanee, Georgia 30024-1242
d. ASSIGNMENT: This Agreement shall not be assignable by either Party
without the prior written consent of the other Patty, such consent
shall not be unreasonably withheld, and any purported assignment,
including full or partial assignment or delegation to any agency or
subcontractor, not permitted hereunder shall be void. If consent is
given, this contract shall be binding upon and inure to the benefit of
the assigns.
e. WAIVER: No failure or delay on the part of either Party hereto in
exercising any right or remedy under the Agreement shall operate as a
waiver thereof; nor shall any single or partial exercise of any such
right or remedy. No provision of the Agreement may be waived except in
writing signed by the Party granting such waiver.
f. GOVERNING LAW: The Agreement shall be governed by and construed in
accordance with the laws of the State of California. Acceptance or
acquiescence in a course of performance rendered under the Agreement
shall not relevant to determining the meaning if the Agreement, even
though the accepting or acquiescing Party had knowledge of the nature
of the performance and an opportunity for objection. No course of
prior dealing between the Parties and no usage of the trade shall be
relevant to supplement or explain any terms used in the Agreement.
g. CONSEQUENTIAL DAMAGES: In no event shall Purchaser or Manufacturer be
liable for special, incidental or consequential damages including
without limitation, loss of profits, even if advised of the
possibility thereof.
<PAGE>
16. PRICING
a. The prices for the Products shall be those set forth in quotations
provided by Manufacturer and accepted by Purchaser's purchase
order(s). Prices are exclusive of all taxes now in force or enacted in
the future and therefore are subject to increase equal in amount to
any tax Manufacturer may be required to collect or pay upon the sale
or delivery of any Products or on this transaction with Purchaser's
prior approval.
b. Cost reductions will be sought by Purchaser and Manufacturer for each
Product through the terms of this Agreement Manufacturer will revise
pricing for each cost reduction based on the effectivity as follows:
(i) Purchaser identified cost reductions will be reflected in the
pricing 100% after depletion of inventory.
(ii) Manufacturer identified cost reductions will be reflected in
the pricing 50% after depletion of inventory. Thereby sharing
the cost reduction partially with Purchaser, but limited to a
period of 180 days plus depletion of inventory, thereafter
the full cost reduction will be reflected in the base
material cost.
c. Pricing will be reviewed and adjusted each calendar quarter by
Manufacturer to reflect as a minimum; ECOs, present market conditions
for material, cost reductions, present process yields, and changes in
demand.
17. PROGRAM IMPROVEMENTS
Not withstanding Paragraph 16, Purchaser and Manufacturer will jointly work
towards process improvements in me following areas:
* Cost
* Quality
* Cycle Time
* On-time Delivery
* Communication
* Design improvements on manufacturability, quality,
and cost.
* Other
Purchaser and Manufacturer will meet every three (3) months to review current
worldwide material prices for high dollar components and make changes with
mutual agreement to procurement strategy to achieve best total pricing. In
addition, the items listed above will also be included in the review cycle.
18. NON-RECURRING EXPENSES AND PURCHASER OWNED EQUIPMENT
a. Upon prior authorization via a purchaser order by Purchaser,
Manufacturer shall order and purchase for Purchaser at Purchaser's
expense all of the process tooling, assembly tools, and test fixtures
required to manufacture the Products except for tools consigned by
purchaser and listed in Exhibit A. Manufacturer shall submit the
request for authorization to Purchaser in writing and Purchaser shall
grant or deny the request in
<PAGE>
writing within ten (10) days after the date of request. If Purchaser
does not respond to Manufacturer within the prescribed period for each
request, the request shall be canceled. Manufacturer shall not be
liable for the impact to production schedules should Purchaser not
grant authorization or should not respond to a request in a timely
manner. All orders and forecasts for Products requiring the tooling
shall be mutually reviewed and adjusted accordingly.
b. Manufacturer shall provide or contract for all maintenance and
calibration required for the process tooling, manufacturing tooling
and test equipment whether purchased by Manufacturer or consigned by
Purchaser while in the possession of Manufacturer. Preventative
maintenance shall be at the expense of Manufacturer. Remedial
maintenance and scheduled calibration required shall be at the expense
of the Purchaser.
c. Upon termination of this Agreement Manufacturer shall package and ship
to Purchaser, F.O.B. Manufacturer shipping point and at the risk and
expense of Purchaser, all of the process tooling, manufacturing
tooling and test equipment paid for by Purchaser as well as all
consigned tooling and equipment supplied by Purchaser.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
FOR: SOLECTRON CORPORATION, FOR: ARRIS INTERACTIVE L.L.C.
(Manufacturer) (Purchaser)
By: /s/ George W. Moore By: /s/ James D. Lakin
------------------------------- ----------------------------------
Name: George W. Moore Name: James D. Lakin
------------------------------ --------------------------------
Title: Corporate Vice President Title: President
---------------------------- -------------------------------
Date: 6/12/01 Date: 6/29/01
------------------------------ --------------------------------
<PAGE>
APPENDIX A
MANUFACTURING SITES LISTING
As of July 2, 2001, this Manufacturing Services Agreement applies to the
following Solectron manufacturing sites who are conducting business with Arris
Interactive, L.L.C. :
SOLECTRON DE MEXICO, S.A. DE C.V.
Prol. Lopez Mateos Sur 2915, Km. 6.5
Tlajomulco de Zuniga, Jalisco Mexico
SOLECTRON GEORGIA
437 Old Peachtree Road
Suwanee, Georgia 30024
SOLECTRON CALIFORNIA
48233 Warm Springs Blvd.
Fremont, California 94539
Solectron Charlotte
SOLECTRON NORTH CAROLINA
6800 Solectron Drive
Charlotte, North Carolina 28262
SOLECTRON MASSACHUSETTS
125 Fisher St.
Westboro, MA 01581
<PAGE>
ARRIS NETWORK TECHNOLOGIES BUSINESS UNIT ADDENDUM
TO THE
MANUFACTGURING SERVICES AGREEMENT
This ARRIS Network Technologies Business Union Addendum to the
Manufacturing Agreement (this "Addendum") is entered into on the 22 day of
October 2001 ("Effective Date") by and between Solectron Corporation, a
Delaware corporation located at 847 Gibraltar Drive, Milpitas, CA 95035
("Solectron"), and ARRIS International, Inc., a Delaware Corporation having a
principal office at 11450 Technology Circle, Duluth, Georgia 30097 ("ARRIS" and
"Purchaser").
RECITALS:
WHEREAS, Solectron and the Purchaser are parties to that certain
Manufacturing Services Agreement effective on July 2, 2001, as amended, (the
"MSA);
WHEREAS, Solectron and the Purchaser desire to add certain terms
related only to the ARRIS Network Technologies Business Unit manufacturing
services, that in no way modify or alter the MSA, except to add additional
terms applicable only to the ARRIS Network Technologies Business Unit
manufacturing services;
WHEREAS, ARRIS Network Technologies Business Unit currently
manufacturers many of its products at the following facilities:
ANA: that is, ARRIS facilities located at Avenida San Lorenzo 425, Cd.
Juarez, Chihuahua, Mexico;
AA: that is, ARRIS facilities located at C. Tapioca No. 5455-A, Cd.
Juarez, Chihuahua, Mexico;
Plastics: that is, ARRIS facilities located at 12055 Rojas Dr. Suite
A, El Paso, Texas;
WHEREAS, ANA, AA and Plastics are collectively referred to herein as
the "Manufacturing Facilities";
WHEREAS, ARRIS wishes to outsource to Solectron the manufacturing for
the products manufactured at the Manufacturing Facilities ("Products"); and
WHEREAS, the parties agree that Solectron shall become ARRIS'
exclusive manufacturer for the Products, subject to the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Solectron and the Purchaser
hereby agree to the following Addendum terms applicable only the ARRIS Network
Technologies Business Unit manufacturing services for the Products:
1. Solectron and ARRIS hereby agree that the terms and conditions of the MSA,
as specifically added to or modified by this Addendum for the stated limited
purposes related to the
<PAGE>
Product, are applicable to the manufacturing services to be performed on the
Products related to the ARRIS Network Technologies Business Unit.
2. ADDITION TO SECTION 1 OF THE MSA. The following is added to the end of
Section 1: "Solectron will invest significant capital in start-up costs for the
manufacturing of the Products. To make the efforts contemplated under this
Addendum a worthwhile effort, the ARRIS and Solectron agree to a term of two
(2) years, with respect to the Products. ARRIS agrees to such two-year term,
provided that Solectron's performance meets commercially reasonable two-year
term, provided that Solectron's performance meets commercially reasonable
performance measures with respect to quality and delivery, and that its price
and terms are competitive, given Solectron's additional engineering and design
work. Following a two-year term, the term shall revert to the Manufacturing
Service Agreement No. SLRDC180-071001, Section 1.3.
3. PURCHASE ORDERS AND FORECASTS, ADDITION TO SUBSECTION 5.A AND 5.C. The
following is added to the end of Subsections 5.a and 5.c, to read as follows:
5.a. Purchaser will provide to Manufacturer firm purchase orders
for a minimum of sixty days for sales order and target
inventory. Further, Purchaser win maintain a six-month
non-binding forecast by month of planned purchases of
Products and will issue revisions of that forecast to
Manufacturer monthly. Manufacturer will purchase materials
per purchase orders. Purchaser is responsible for material
purchased upon Purchaser's purchase order or, with
Purchaser's pre-approval, in case of Purchaser requested
schedule reductions or cancellations, but only for items
that cannot be rescheduled or cancelled. Each purchase order
shall become effective upon acceptance of the order by
Manufacturer. Manufacturer shall respond to Purchase Order
request within two business days.
5.c. The desired lead time for all products from Manufacturer is
eight weeks or less. Upon Manufacturer's request, Purchaser
may give written authorization to Manufacturer to order or
procure materials with long lead-times in order to improve
Manufacturer's ability to respond to changes in Purchaser's
forecast. Specific limits regarding the quantity and/or
dollar value of this material shall be documented in writing
and provided to Purchaser on a case-by-case basis.
4. AMENDMENT TO SUBSECTION 8.B. Section 8.b is modified for this Addendum to
read as follows: "For Convenience -During the two (2) year term of this
Addendum, there shall be no right of termination for convenience by either
party.
5. AMENDMENT TO SUBSECTION 8.D. Section 8.d is modified to eliminate the
following: "here: I = total dollar value at Manufacturer's actual cost of
unused raw material inventory being held by Manufacturer. P = prime interest
rate expressed as a decimal."
6. AMENDMENT TO SECTION 14. The following phrase is deleted from Section 14:
"material unavailability".
<PAGE>
7. ADDITION TO SUBSECTION 15.D. The following is added to the end of Subsection
15.d.: "It is recognized that ARRIS, from time to time, may choose to exit or
dispose of certain product liens. It is understood that ARRIS has no obligation
to Solectron to remain in business or otherwise continue to purchase products
of such product lines if and when actions are taken, subject to the material
liability terms, and other applicable terms of the MSA."
8. ADDITION TO SUBSECTION 16.C. The following is added to the end of Subsection
16.c, for the purposes of the Products covered by this Addendum:
16.c.(i) Solectron will manufacture and sell the Products to ARRIS at
a price ("Price") that is the same as the ARRIS' standard cost of the
Products ("ARRIS' Cost" or "Cost") for a period not to exceed six (6)
months. To determine the Cost, ARRIS will compile and provide
information to Solectron showing ARRIS Standard Costs, including
components, labor and overhead and ARRIS shall provide such
information to Solectron no later than 15 days from the Effective
Date of this Agreement.
16.c(ii) Solectron shall continue to offer to ARRIS the Products at
the ARRIS' Cost during the first six (6) months of the term of this
Addendum. However, during said six (6) month period, said Cost shall
be subject to adjustment due to the following reasons:
a. A dollar for dollar ("Pro Tanto") increase or decrease in Price
due to bill of materials ("BOM") errors, labor hours errors,
other errors in ARRIS' submitted accounting documents upon which
the Price and ARRIS Cost are based, or as authorized by ARRIS
pursuant to Section 16.;
b. After the first 6 months from the date of this Addendum, based on
inventory depletion, Arris and Solectron shall work together to
target joint Cost Reduction opportunities. The intent shall be to
agree on a pricing model which includes Solectron's costs,
including, but not limited to cost of acquisition and
transformation cost consisting of materials, cost of acquisition,
labor and overhead on future pricing. Pricing will be reviewed
quarterly in accordance with paragraph 16.c. of the current MSA
(SLR DC180-071001); and
c. Negative purchase part variances and cost impacts from
engineering changes.
9. ADDITION TO SECTION 18. Section 18 is modified to add the following one-time
occurrences directly related to this Addendum:
18.d. To support the manufacturing efforts at the Manufacturing
Facilities, ARRlS has a significant amount of assets, typically in
the form of capital equipment. ARRIS will sell to Solectron those as
per the mutually agreed Transfer Schedule those assets which
Solectron determines are necessary or required to manufacture the
Products ("Capital Equipment") at the book value or market value,
whichever is less, as of the Effective Date of this Addendum.
Solectron shall be responsible for the packing and shipping costs of
transferring the Capital Equipment from ARRIS' facilities to
Solectron's facilities.
<PAGE>
18.e. ARRIS will deliver to Solectron the Product-unique assets ("PU
Assets"), such as tooling and test equipment. Solectron will be
allowed to use the PU Assets, at no charge to Solectron. Solectron
shall be responsible for the packing and shipping costs of
transferring the PU Assets from ARRIS' facilities to Solectron's
facilities. ARRIS shall be responsible for packing and shipping costs
associated with the return of the PU from Solectron's facilities to
ARRIS's, or ARRIS designee's facilities.
18.f. Solectron shall pay for all its NRE costs and other costs
associated with Solectron's engineering, manufacturing and other
internal costs associated with the transfer of the manufacturing of
the Products.
18.g. ARRIS shall pay for all their internal costs of crating,
packaging, travel, training, etc. to support the efforts under this
Product transfer.
18.h. The closing of ARRIS' Manufacturing Facilities will result in
the laying off or termination of most of the ARRIS employees from the
Manufacturing Facilities. Solectron Monterrey, Mexico (hereafter
known as "SLR-MTY") will use good faith and commercially reasonable
efforts to hire approximately 15 to 18 of the current ARRIS employees
from the Manufacturing Facilities offer these employees at
Solectron's minimum standard relocation package.
10. THE FOLLOWING SUBSECTION TITLED "19.0 PPM INVENTORY" IS ADDED TO THE MSA IN
RELATION TO THE PRODUCTS AND READS AS FOLLOWS:
19. PPM INVENTORY
19.a. ARRIS currently has in its Manufacturing Facilities a
significant amount or inventory including raw material, components,
and subassemblies, which material ARRIS had been using in the
manufacturing of the Products ("PPM Inventory"). ARRIS will make a
list of all such inventory and its respective cost, provide said list
to Solectron and deliver all the PPM inventory to be stored at
ALMACENADORA USCO LOGISTICS DE MEXICO, S.A. DE C.V., or as otherwise
reasonably determined by Solectron.
19.b. Solectron shall use reasonable commercial efforts to utilize
the PPM Inventory in its manufacture of the Products for ARRIS and
its other global manufacturing operations.
19.c. Solectron shall keep track of its usage of the PPM Inventory,
and issue a bi-weekly report of such usage to ARRIS. Upon issuance of
said bi-weekly reports, Solectron shall issue a purchase order ("PO")
to ARRlS for the consumed PPM Inventory at the Standard Cost or
Weighted Average Cost, whichever is lower. Solectron shall pay ARRIS
for the consumed PPM Inventory within thirty (30) days of the date of
the bi-weekly report.
19.d. If Solectron has not used up all the PPM Inventory within one
year of the Effective Date, ARRIS and Solectron shall negotiate a way
to use, sell or otherwise dispose of the remaining PPM Inventory.
After such one-year period following the Effective Date of this
Addendum, ARRIS shall be responsible for all of Solectron's costs
<PAGE>
associated with the ARRIS PPM Inventory, until such time as the ARRIS
PPM Inventory is depleted.
19.e. ARRlS is responsible for insurance on the ARRIS Owned Inventory
(PPM Inventory) which will be managed by Solectron. Solectron is
responsible for the storage and handling cost of the PPM Inventory,
subject to the terms of Section 19.d, upon receipt of the designated
storage site.
11. SOFTWARE. All software, which ARRIS provides to Solectron, is and shall
remain the property of Arris. Arris grants to Solectron a license to copy,
modify and use such software as required to perform Solectron obligations under
this agreement. All software developed by Solectron to support the production
process or otherwise shall be and remain the property of Solectron.
12. BANKING. The parties acknowledge that ARRIS has in place a secured credit
facility pursuant to a credit agreement (the "Credit Agreement") with a
syndicate of lenders (the "Lenders") led by Credit Suisse First Boston ("CSFB")
and The CIT Group/Business Credit, Inc. ("CIT"). In connection with that Credit
Agreement, the parties further agree that the obligations of ARRIS under this
Addendum shall be subject to the following conditions precedent:
a) Solectron shall have provided to the Lenders all required
consents, releases and acknowledgements in the form of
collateral access agreements, warehousemen's letters, UCC
consignment financing statements or other documents,
recognizing the Lenders' security interests and waiving
any conflicting claims in the ARRIS assets in the
possession of Solectron in such form and covering such
other matters as the Lenders may require, including, but
not limited to, agreeing to act as custodian or depositary
in order to perfect a possessory security interest under
Mexican law in favor of CIT, as agent for the Lenders, in
the assets of Arris held by Solectron, all of the
foregoing to be in form and substance reasonably
satisfactory to CSFB and CIT; and
b) The receipt by Arris of all consents, waivers,
modification or approvals from the Lenders as Arris
believes are necessary or prudent under the Credit
Agreement.
13. LIMITATION ON AMENDMENT. The changes made to the MSA herein apply only to
this Addendum, and except as expressly modified for the purposes of this
Addendum only, the Manufacturing Services Agreement shall remain in full force
and effect, without modification or waiver.
14. GOVERNING LAW. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of California.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized representatives as of the date first
written above.
FOR SOLECTRON CORPORATION: FOR ARRIS International, Inc.
(Solectron) (Purchaser)
By: /s/ Jose Almaraz By: /s/ David B. Potts
--------------------------------------- ------------------------------
Name: Mr. Jose Almaraz Name: David B. Potts
------------------------------------- ----------------------------
Title: General Manager Solectron Monterrey Title: Senior V.P. Finance
------------------------------------ ---------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>7
<FILENAME>g75005ex10-16.txt
<DESCRIPTION>MITSUMI AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.16
ARRIS INTERACTIVE/MITSUMI
ELECTRIC CO., LTD.
MANUFACTURING AGREEMENT
JULY, 1997
<PAGE>
MANUFACTURING AGREEMENT
SECTION 1: DEFINITIONS 4
SECTION 2: SCOPE OF WORK 6
2.1 Design of Products 6
2.2 Manufacturing of Products 6
2.3 Manufacturing Primeship and Location 7
2.4 Manufacturing Scheduling 7
2.5 Quality Assurance 7
2.6 Repairs 7
2.7 New Product Introduction 7
2.8 Cost Reduction and Optimization 7
2.9 Packaging 8
2.10 Program Coordination 8
SECTION 3: PRICING AND PAYMENT TERMS 8
3.1 Pricing of Product and Services 8
3.2 Pricing of New Product(s) 9
3.3 Payment 9
3.4 Invoicing 9
3.5 Taxes 9
3.6 Record Keeping 9
SECTION 4: PURCHASE ORDERS 9
4.1 Purchase Orders 9
4.2 Acceptance of Purchase Orders 9
4.3 Completion 9
SECTION 5: PURCHASE ORDER RESCHEDULING/CANCELLATIONS 10
5.1 Rescheduling 10
5.2 Product Modifications 10
5.3 Cancellation 10
5.4 Cancellation Charges 10
SECTION 6: FORECASTS 11
6.1 Product(s) Forecast 11
SECTION 7: SHIPPING/DELIVERY/TITLE 11
7.1 FOB Terms 11
7.2 Shipping 11
7.3 Delivery in Installments 11
7.4 Title 11
7.5 Late Delivery 12
SECTION 8: MANUFACTURING CAPACITY 12
8.1 Manufacturing Capacity 12
SECTION 9: QUALITY 12
9.1 Quality Assurance 12
9.2 Failure Analysis 13
9.3 Inspection and Acceptance 13
SECTION 10: PREPRODUCTION 13
SECTION 11: SPECIFICATIONS AND COMPONENTS 14
11.1 Specifications 14
11.2 Customer Components 14
11.3 Programs 14
11.4 Design Transfer Process 14
SECTION 12: QUARTERLY OPERATIONS REVIEWS 15
12.1 Reviews 15
SECTION 13: ECNs, CHANGES AND ERRORS, AND EXCESS AND OBSOLETE MATERIALS 15
13.1 Design Control 15
13.2 ECN Class Definitions and Applicability 15
13.3 Responsibility for Cost of ECNs and Actions 15
13.4 Changes and Errors 15
13.5 Approval of Major Changes and Errors 16
13.6 Excess and Obsolete Materials 16
SECTION 14: DEVELOPED INFORMATION 16
SECTION 15: WARRANTY 16
<PAGE>
15.1 Manufacturer's Warranty 16
15.2 Manufacturers Duties 17
15.3 Customer Warranty 17
15.4 Conforming Products 17
15.5 Incoming Inspection 17
15.6 DISCLAIMER. 17
SECTION 16: Repairs 18
16.1 Repairs under Warranty 18
16.2 Repairs out of Warranty 18
16.3 Time Limitations 18
16.4 Repair Process 18
SECTION 17: LIMITATION OF LIABILITY 18
17.1 Exclusion of Certain Damages 18
17.2 Time Limitations 18
SECTION 18: INTELLECTUAL PROPERTY RIGHTS 19
18.1 Manufacturer Indemnity 19
18.2 No Other Rights 19
SECTION 19: TERM AND TERMINATION 19
19.1 Term 19
19.2 Termination of Agreement 19
19.3 Payment Obligations 20
19.4 Survival 20
SECTION 20: GENERAL TERMS 20
20.1 Indemnification 20
20.2 Independent Contractor Status 20
20.3 Confidential Information 20
20.4 Freedom of Action 21
20.5 Trademarks and Trade Names 21
20.6 Compliance with Governmental Legal Requirements 21
20.7 Export Controls 21
20.8 Force Majeure 21
20.9 Notice 22
20.10 Assignment 22
20.11 Governing Law 22
20.12 Waiver 22
20.13 Severability 22
20.14 Complete Agreement 23
<PAGE>
MANUFACTURING AGREEMENT
THIS MANUFACTURING AGREEMENT (the "Agreement) is made effective as of the ____
day of 1997 (the "Effective Date") by and between Mitsumi Electric Co., Ltd. ,
8-8-2 Kokuryo-cho, Chofu-shi, Tokyo, 182 Japan (hereinafter "Manufacturer") and
ARRIS INTERACTIVE L.L.C., a limited liability company organized under the laws
of the State of Delaware, located at 3871 Lakefield Drive, Suwanee, Georgia,
30024 (hereinafter "Customer").
WITNESSETH:
WHEREAS, Customer desires to have Manufacturer manufacture and assemble certain
Products (as hereinafter defined) pursuant to one or more Purchase Orders (as
hereinafter defined) issued by Customer in accordance with this Agreement; and
WHEREAS, Manufacturer desires to manufacture and assemble such Products for
Customer hereunder;
NOW, THEREFORE, Customer and Manufacturer, in consideration of the mutual
premises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, agree as follows:
SECTION 1: DEFINITIONS
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings set forth below.
"Affiliate" of a corporation shall mean its subsidiaries, any company
of which it is a subsidiary, and other subsidiaries of such company.
"Bill of Materials" shall mean a listing or reference for the Hardware,
Firmware and Software components included in or required for the
manufacture or assembly of the Products based on their Specifications.
"Changes and Errors" shall mean material, manufacturing labor and
engineering support incurred as the result of the implementation of
product design changes resulting from engineering change notices
("ECNs") issued by the Customer, and applicable to manufacturing
correction or rework of current production in process.
"Components" shall mean parts, materials, firmware and software
listings included in or required for the manufacturing of each Product,
as provided in the Bill of Materials for such Product.
"Days" shall mean calendar days, unless otherwise specified, provided
that if a deadline falls on a Saturday, Sunday, or holiday, it shall be
extended until the following regular business day.
"Delivery" shall mean delivery of Products, FOB Manufacturer's
facility.
"Effective Date" shall mean the date first written above.
<PAGE>
"Engineering Change Notice [ECN]" shall mean a Product design change,
manufacturing specification change or process change initiated by the
Customer to address product related issues potentially affecting the
performance, reliability, safety, serviceability, cost,
manufacturability or Form, Fit, or Function of the Products.
"Excess and Obsolete" shall mean surplus in material inventory
resulting from a reduction in production forecast by the Customer or as
a result of a procurement strategic decision initiated by the Customer,
and surplus material resulting from implementation of design changes
and ECNs rendering Components obsolete.
"Firmware" shall mean a combination of (1) hardware and (2) software
represented by a pattern of bits contained in such hardware.
"Form" shall mean physical size, appearance, layout, shape, and
dimensions.
"Fit" shall mean mounting, protocol and interface connections and
operations (i.e., electrical or mechanical connections).
"Function" shall mean product operation, functionality and features.
"Intellectual Property Rights" shall mean any rights under patent,
semiconductor chip protection, copyright, trade secret, trademark, or
similar laws which would restrict the manufacture, assembly, or
distribution of the Products or the subsequent use, sale, or repair of
the Products as purchased by Customer from Manufacturer hereunder.
"Known Product Defect" shall mean documented known field product issues
requiring correction resulting from outstanding product ECNs or
manufacturing defects.
"Manufacturing and Design Documentation" shall mean materials and media
provided to Manufacturer by Customer or third-party contractors,
suppliers, or licensers acting at Manufacturer's request, in each case
specifically for use in the manufacture and assembly of Products
hereunder, including drawings, routings, Bill of Materials, schematics,
circuit diagrams, Specifications, and test documents.
"Nonrecurring Charges" shall mean charges for special engineering work
or other activities listed under this designation in a Statement of
Work.
"Preproduction" shall mean the period proceeding standard manufacturing
where initial pilot production runs are being produced to demonstrate
product functionality, manufacturing processes and test yields.
"Product Code" shall mean an identification code for each Product
components; the .product code will include a product identification
code and a vintage release number to provide traceability of product
changes.
"Purchase Order" shall mean an order to purchase a specific quantity of
a Product submitted by Customer and accepted by Manufacturer in
accordance with this Agreement, which refers to the type and volume and
timing of Products to be manufactured and purchased; price terms;
scheduled delivery dates (unless submitted on open delivery terms); and
"sold to," and "ship to" addresses. The terms of this Agreement control
over any printed terms on a purchase order, acknowledgment,
confirmation, or invoice.
<PAGE>
"RF Converter" shall mean printed circuit assembly which converts
coaxial carried RF signals to a digital bit stream, manufactured by
Manufacturer for Customer, and which specifications are listed in
Exhibit "B".
"Specifications" shall mean the description of the Product, performance
and test requirements as provided through detailed drawings, in-process
and final test criteria, or similar documentation.
"Statement of Work" shall mean a document defining a specific task
relating to a particular product or Service, documented and agreed on
by Manufacturer and Customer, which refers to the Specifications for
the Product or Service that the Manufacturer agrees to manufacture,
assemble or perform pursuant to Purchase Orders Customer may submit
hereunder. This Agreement may include multiple Statements of Work and
each Statement of Work shall be considered a separate transaction. The
statement of work shall be within the Scope of Work of this Agreement
as described in Section 2 hereof. The Statement of Work price terms and
applicable manufacturing and testing procedures for each Product will
be set forth in a Statement of Work. A Statement of Work may be
implemented by reference to a new or change in a particular product.
"Tooling" shall mean all patterns, tools, jigs, dies, equipment.
"Voice Ports" shall mean end subscriber located modules, manufactured
by Manufacturer for Customer which interface with the cable network and
provide standard or premium telephone or data services to the connected
subscribers and which specifications are listed in Exhibit "B".
SECTION 2: SCOPE OF WORK
Manufacturer agrees to perform for Customer the tasks and services described
hereafter, with respect to the Products described within this agreement and
according to the accepted schedules and budgets therein, as modified from time
to time by mutual agreement, under the specific direction of the designated
Technical Coordinator of Customer. Specific requirements from Customer will be
addressed with "Statements of Work" defining the task, schedules and budgets
items related to a specific requirement. Each Statement of Work will be within
the boundary of this Scope of Work, unless modified by mutual agreement.
2.1 DESIGN OF PRODUCTS.
Manufacturer shall provide design and manufacturing services and
coordinate with such of its affiliates or subcontractors to produce
product(s) meeting the specifications in Exhibit "B" per the
schedule(s) given in Exhibit "C" as they may be mutually amended.
2.2 MANUFACTURING OF PRODUCTS.
Manufacturer shall manufacture and shall coordinate with such of its
affiliates or subcontractors (as Customer agrees by written consent,
which shall not be unreasonably withheld) and sell Products to
Customer, and Customer shall order and purchase Products from
Manufacturer, in accordance with the terms and conditions of this
Agreement. Manufacturer shall deliver to Customers specified location
only that quantity of Products specified in Customers Purchase Orders,
at prices set forth in such Purchase Orders. Manufacturer shall be
responsible for final assembly and system level testing of all products
assembled and/or manufactured under this agreement. The initial product
list to be manufactured by Manufacturer are outlined in Exhibit "A"
herewith. Customer reserves the right to amend this product list from
time to time based on market requirements.
<PAGE>
2.3 MANUFACTURING PRIMESHIP AND LOCATION.
Manufacturer agrees that Customer has internally qualified Akita
Mitsumi Co., Ltd., Japan facilities as the prime manufacturing
facilities to perform all Manufacturer's obligations under this
Agreement. Accordingly, Manufacturer shall not move or otherwise
transfer production of any Products from this facility without the
prior, written consent of Customer, which consent shall not be
unreasonably withheld. Each party shall provide the other with
reasonable .access to its facilities reasonably required in connection
with the performance of each party's respective, obligations under this
Agreement. Manufacturer can elect to use sub-contractors to manufacture
sub-assemblies of a product. In such case, Manufacturer shall be
responsible for any sub-contracting agreements concerning the
manufacture of products sub-assemblies, the co-ordination of
manufacturing schedule and the overall quality of the finished
products.
2.4 MANUFACTURING SCHEDULING
Manufacturer shall coordinate the manufacturing scheduling and material
planning with regard to the Products to be manufactured with all
necessary affiliates and subcontractors and shall manage the overall
production plan and shipments thereunder in accordance with the
Manufacturing Forecast provided by Customer in accordance with Section
6 hereof, and the Delivery Dates set forth in the Purchase Orders.
2.5 QUALITY ASSURANCE.
Manufacturer shall build and test the Products in accordance with the
test procedures and specifications as developed by Manufacturer and
agreed to by Customer. Manufacturing test data will be maintained by
Manufacturer for at least two (2) years from the date of such test and
will be available for inspection by Customer during normal business
hours upon reasonable notice.
2.6 REPAIRS
Manufacturer shall manage the Repairs process in accordance to Section
16 of this Agreement.
2.7 NEW PRODUCT INTRODUCTION
Upon Customer request, Manufacturer shall provide timely
manufacturability assessment, test and production engineering support
for new and cost reduced Product that is proposed to be introduced by
Customer. Customer shall use commercially reasonable efforts to provide
a forward view of the Product development plan and timing for new
products. Each new Product will be addressed with a separate Statement
of Work defining the deliverables and schedules.
2.8 COST REDUCTION AND OPTIMIZATION.
Manufacturer shall use its best efforts to aid Customer with respect to
its cost reduction of the Products and shall procure materials and
services for the Products such that the lowest overall Product cost is
achieved. Manufacturer shall work with Customer to optimize the
manufacturing of the Products. In the event that lower total product
cost can be achieved through outside subcontracting of manufacturing of
specific Products, Manufacturer and Customer shall use their best
efforts to transfer out manufacturing of these Products by the
Manufacturer in favor of the lower total cost option.
<PAGE>
2.9 PACKAGING
Packaging shall be in accordance with Customer's standards, unless
otherwise mutually agreed in writing. Customer shall specify in each
Statement of Work, or otherwise as agreed by the parties, the
trademarks and trade dress features to appear on the Products and the
publications to be included in packaging.
2.10 PROGRAM COORDINATION.
Each party shall appoint Program coordinators to provide operational,
commercial and technical liaison with the other party hereto in
connection with the manufacture and the delivery of the Products. Each
coordinator shall be responsible to provide the official point of
interface within each party and will be prime to the provide
coordination within their respective organization for all aspect of the
execution of this agreement.
Manufacturer Program Coordinator:
Takeshi Naito
Phone; 81-3-3489-3800
Fax; 81-3-3488-1228
Customer Program Coordinator:
Jeff Milway
Phone; 770-622-8644
Fax; 770-622-8645
SECTION 3: PRICING AND PAYMENT TERMS
3.1 PRICING OF PRODUCT AND SERVICES
Pricing for each Product units shall be mutually agreed upon by the
parties and shall be defined as follow:
(i) a pricing schedule for current Products to be manufactured by
Manufacturer on a "standard production" basis (Exhibit "A");
(ii) a pricing schedule for repair services (Exhibit "D");
All prices are in U.S. dollars unless otherwise stated.
Exhibits "A" and "D" are incorporated herein by reference. Manufacturer
will sell Products and Services to Customer at the prices indicated on
such Exhibits. Changes to pricing schedules shall be mutually agreed on
by the parties in connection with each material change in an applicable
Bill of Materials for each Product. The parties understand that, during
the term hereof, different Products may be manufactured and sold to
Customer by Manufacturer upon mutual agreement of the parties.
Manufacturer and Customer may agree to amend pricing schedules
accordingly. The pricing in Exhibits "B" is subject to periodic review
and change by written agreement of the parties.
Unless otherwise expressly stated in writing, Manufacturer's prices are
exclusive of charges for Product(s) transportation and other related
services, and any sales or other tax or duty which Manufacturer may be
required to collect or pay upon the ordered transaction. Premium
transportation may be used with Customer's concurrence to expedite
delivery but only upon Customer's written request and expense. Premium
transportation shall be used by Manufacturer, at its own cost, if
necessary to meet Order delivery dates.
<PAGE>
3.2 PRICING OF NEW PRODUCT(S)
Prices for new Product units shall be mutually agreed upon by the
parties and shall be defined according to section 3.1 of this
agreement.
3.3 PAYMENT
Payment terms are net/45 days from the date Manufacturer issues an
invoice.
3.4 INVOICING
Manufacturer may invoice for Products upon completion and shipment of
such Products pursuant to Purchase Orders. To the extent Manufacturer
is entitled to do so under a Statement of Work, Manufacturer may
invoice monthly for other Services performed, if any, as set forth in
the applicable Statement of Work.
3.5 TAXES
Customer shall be responsible for sales, use, or custom taxes or duties
resulting from the sale or shipment of Products in accordance with its
Purchase Orders. Customer shall provide tax exemption numbers, if
applicable, for such purchases.
3.6 RECORD KEEPING
Manufacturer shall its maintain records and shall implement mutually
agreeable accounting classifications such that charges to Customer are
separately identified.
SECTION 4: PURCHASE ORDERS
4.1 PURCHASE ORDERS
Customer will provide Purchase Order(s) on a monthly basis, as its
needs require. Such Purchase Order(s) will cover a forward period of a
minimum of 60 days.
4.2 ACCEPTANCE OF PURCHASE ORDERS
Manufacturer shall accept Purchase Orders conforming to the
requirements of this Agreement and Statements of Work then in effect.
Manufacturer shall indicate its acceptance of proposed Purchase
Order(s) by written acknowledgment of the Purchase Order(s) for
quantity and delivery timing requested within ten (10) days after its
receipt thereof. Customer shall expect that delivery quantities and
timing will be as requested provided that such quantities are within
the Product(s) Forecast.
4.3 COMPLETION
Upon acceptance of each Purchase Order, Manufacturer will manufacture
and assemble the Products called for by such Purchase Order, conduct
final testing, and package the Products in accordance with the
Products' Specifications.
<PAGE>
SECTION 5: PURCHASE ORDER RESCHEDULING/CANCELLATIONS
5.1 RESCHEDULING
Manufacturer agrees to use commercially reasonable efforts to
accommodate Customer's requests for rescheduling (both acceleration and
delay), from time to time. Before accepting such rescheduling requests,
Manufacturer may quote applicable charges resulting from changes in
costs associated with such rescheduling to Customer. If the parties are
unable to agree on such changes in charges, then Manufacturer shall
deliver the Products as initially agreed, subject to Customer's right
to cancel Purchase Orders as provided herein.
5.2 PRODUCT MODIFICATIONS
Manufacturer agrees to use commercially reasonable efforts to
accommodate changes in versions of a Product within a reasonable time
after receiving a written request for such change.
5.3 CANCELLATION
Customer may, by written notice, cancel shipments of Products that are
scheduled for delivery more than thirty (30) days after Manufacturer's
receipt of such notice. Upon Manufacturer's receipt of a notice of
cancellation, Manufacturer shall stop work on the canceled Portion of
existing Purchase Orders immediately. Manufacturer agrees to use its
best efforts to return, reuse, or sell any Manufacturer Components that
comprise the canceled portion of the applicable Purchase Order and
Manufacturer will use its best efforts to effectively minimize all
other costs associated with such cancellation.
5.4 CANCELLATION CHARGES
With respect to canceled Purchase Orders, Customer agrees to pay
Manufacturer:
(a) For Components (other than items paid for by Customer)
acquired solely for the execution of such Purchase Order,
Customer shall pay to Manufacturer, Manufacturer's actual
costs for such Components, minus amounts saved as a result of
any return, reuse, or sale of such Components; plus
(b) For completed work and work in progress that cannot be used
to fill other orders, Customer shall reimburse Manufacturer's
costs for actual and reasonable labor and supplies incurred
pursuant to Customer's Purchase Orders up to the date of
receipt of notice of cancellation.
(c) Customer shall be responsible for long lead-time materials
purchased by Manufacturer, with prior written approval from
Customer, outside the immediate 60 day Firm Purchase Order
period.
In no event shall cancellation charges set forth previously exceed the
price of the Products covered by the canceled portion of the Purchase
Order.
Manufacturer will provide Customer with documentation adequate to
support its claim for cancellation charges. Components and completed
work and work in progress that are paid for by Customer pursuant to
such cancellation charges shall be Customer's property and shall be
held or delivered to Customer as Customer may reasonably request
Notwithstanding the foregoing, Customer shall have no obligation to pay
cancellation charges if the cancellation is occasioned by the failure
of Manufacturer to perform its obligations under this Agreement.
<PAGE>
SECTION 6: FORECASTS
6.1 PRODUCT(S) FORECAST
(a) Customer shall provide its Product(s) forecasts in the following
manner:
<TABLE>
<CAPTION>
Days from Shipment Required Specifically
----------------------------------------------------------------
<S> <C>
0 to 60 Days Firm Order
61 to 90 Days 30% variation from previous forecast
91 to 120 Days 75% schedule variation from previous forecast
12 months Rolling forecast updated quarterly
</TABLE>
(b) Orders shall be managed in weekly intervals within the immediate 90 day
period and monthly within the rest of the 12 month period. Customer
shall provide monthly forecasts and except as provided in a Purchase
Order, forecast information shall be for planning purposes only and
shall not represent Customers commitment to purchase any or all of such
units or create any other obligation whatsoever by Customer beyond the
immediate 60 day period.
(c) Manufacturer shall provide acknowledgment and factory delivery
commitments to the above requirements within 5 working days for 0 to 60
day requirements and 10 working days for 61 day and over requirements.
(d) Manufacturer will provide weekly shipment reports detailing all Product
Codes shipped, quantity, value and "Ship to" customer.
SECTION 7: SHIPPING/DELIVERY/TITLE
7.1 FOB TERMS
All deliveries of Products covered under this Agreement shall be made
Manufacturer FOB Manufacturer's facility freight collect, or prepaid by
Manufacturer and charged to Customer per Invoice. Customer may specify
the carrier by so indicating within a mutually agreeable, reasonable
period of time prior to shipment. If Products are designated for
export, Customer is responsible for assuring compliance with applicable
export laws, and Customer will provide Manufacturer with instructions
for the handling of such export shipments.
7.2 SHIPPING
Shipping will be planned to meet commitments with the most economical
shipping arrangements for both Customer and Manufacturer. All shipments
will be marshaled and Product(s) may not be shipped incomplete, except
as may be mutually agreed to by the parties.
7.3 DELIVERY IN INSTALLMENTS
Manufacturer may fill a Purchase Order in installments, but only in
mutually agreeable partial quantities and at mutually agreeable
intervals. Manufacturer may not Ship incomplete Products at any time,
unless pre-approved by Customer.
7.4 TITLE
Title to any Manufacturer Components included in the Products will pass
to Customer upon the earlier of delivery to Customer or Manufacturer's
receipt of payment for such items. To the extent not otherwise provided
in this paragraph, title to Products will pass to Customer at point of
<PAGE>
shipment. Customer Components shall be held by Manufacturer as on
consignment from Customer and shall be accounted for by Manufacturer
and cared for in accordance with commercially reasonable standards.
Title to Customer Components will remain with Customer, but
Manufacturer shall have a purchase money security interest against the
Products until receipt of payment from Customer.
7.5 LATE DELIVERY
Manufacturer agrees that it shall deliver the Products ordered by
Customer hereunder on, or not earlier than 10 calendar days before, the
Delivery Dates specified in the Purchase Orders. Manufacturer shall
immediately notify Customer of any anticipated late deliveries and any
impending plant or facility shutdowns for any reason; including
vacation, tool repair, labor difficulties or governmental order, which
may adversely impact the scheduled Delivery Dates. In the event that
Manufacturer is delinquent on delivering a Product to Customer for
reasons other than a force majeure, Manufacturer shall deliver such
Product to Customer in the most expeditious manner possible and the
payment of premium transportation costs associated with the delivery of
the Product shall be at Manufacturers expense. Furthermore, any
deliveries made more than 30 days beyond the Delivery Date specified in
s Purchase Order shall result in Manufacturer being required to prepare
a written corrective action plan and delivering such to Customer,
specifying the causes for such delay and the corrective action to be
taken as a result thereof, and Customer shall have the right to
terminate the Purchase Order to which such delivery relates without any
liability for such termination.
SECTION 8: MANUFACTURING CAPACITY
8.1 MANUFACTURING CAPACITY
Manufacturer warrants that it currently has the installed capacity to
produce manufacturing output of 10,000 RF Converters per month.
Manufacturer agrees to use its best efforts to accommodate capacity
increases if requested by Customer, from time to time. Notwithstanding
the foregoing, Manufacturer agrees that it will accommodate an increase
in capacity within 90 days with a preapproved forecast or 180 days from
the date of request of production output.
SECTION 9: QUALITY
9.1 QUALITY ASSURANCE
Prior to first Production start for each Product(s), Manufacturer shall
provide Customer with a specific product quality plan satisfactory to
Customer.
Manufacturer agrees that all shipments and products shall be verified
for compliance with the agreed Customer's test specifications for each
Product(s); test and verification records will be logged and kept
available for a period of 24 months from the period of shipment for
each Product(s).
Further, the parties agree that regular quality reviews will be held no
less frequently than on a quarterly basis at such time and place as
mutually agreed to by the parties. Reasons for such meetings may
include, but shall not be limited to:
(a) Review of quality acceptance criteria;
(b) Review of test process for quality or cost improvement;
<PAGE>
(b) Quality performance and receiving inspection/installation
results;
(c) Corrective action results/change control; and
(d) Field problem reviews and regulatory impacts.
In addition, Manufacturer agrees to:
(a) Respond in a timely manner to Customers quality related
corrective action requests as a result of quality
non-conformance;
(b) Allow inspections and periodic quality audits by Customer to
determine product conformance to quality criteria and
(c) Manufacture Products in compliance with applicable
requirements hereunder and as required by law.
Manufacturer shall notify Customer promptly of product(s) or quality
issues identified in the course of the manufacturing process. Customer
shall provide prompt technical assistance to Quality and Product
related issues. Manufacturer has the right to stop manufacturing lines
to limit product defects exposure, except as otherwise provided herein.
9.2 FAILURE ANALYSIS
Manufacturer agrees to support Customer in the performance of failure
Root Cause analysis such that product issues can be solved at the
source.
Customer agrees to share with Manufacturer all pertinent data that can
improve product quality of process reliability.
9.3 INSPECTION AND ACCEPTANCE
Customer may notify Manufacturer in writing of particular deficiencies
in the Products, from time to time, but failure to give such notice
of such deficiencies shall not prejudice warranty claims hereunder.
Products will be deemed accepted by Customer if a notice of
deficiency is not received by Manufacturer within fifteen (15) days
after Customer's receipt of the Products. Manufacturer's
responsibility for deficiencies shall be as provided for under the
warranty provisions of this Agreement.
SECTION 10: PREPRODUCTION
When, requested, Manufacturer shall support Customer in the
introduction of New Product(s) throughout the preproduction product
cycle including the following tasks;
(a) Manufacturability assessment
(b) Product testability assessment
(c) Component sourcing
(c) Manufacturing and test process design
(d) Manufacturing launch
The Preproduction tasks required, for each "new Product will be covered
by specific Statements of Work.
<PAGE>
SECTION 11: SPECIFICATIONS AND COMPONENTS
11.1 SPECIFICATIONS
Customer shall have primary responsibility for the preparation of
Specifications for the Product. Customer shall provide Manufacturer
with copies of preliminary, working draft, and completed portions of
the Specifications for review. The parties agree to cooperate with each
other to implement changes to the Specifications made by Customer from
time to time. The parties shall jointly review the impact of such
changes, and, in the event Manufacturer reasonably believes that any
such change will affect the work performed by Manufacturer under this
Agreement, it shall notify Customer and advise Customer of any such
effect, including any impact on the manufacture or assembly of the
Product, design considerations, and the costs to be incurred by
Manufacturer and Customer as a result of such changes.
11.2 CUSTOMER COMPONENTS
Customer may identify to Manufacturer certain Components that must be
used in the manufacturing of the Product. Either these Components may
be consigned by Customer or Manufacturer may be directed by Customer to
purchase such components from Customer's approved vendor list ("AVL").
If Manufacturer offers alternatives to Customer's AVL, the alternative
must be approved in writing by Customer prior to use in production of
Products.
11.3 PROGRAMS
If third party Software is incorporated in the Products, procurement of
such Software shall be the responsibility of Manufacturer or Customer
as set forth in the applicable Statement of Work or Bill of Materials.
Any restrictions or payment obligations imposed by the original source
on Manufacturer's or Customer's use or handling of such Software shall
be set forth in a separate signed writing. There shall be no payment or
reimbursement obligation on Customer's part for programming obtained or
provided by Manufacturer unless such payments or reimbursements are set
forth in a Bill of Materials that indicates that Customer has accepted
such obligation. Title to any Programs and other Proprietary
Information provided by Customer to Manufacturer (by license or
otherwise) to be used in the manufacturer of Products will remain with
Customer and Manufacturer shall use such Programs and other Proprietary
Information solely for the purpose contemplated by this Agreement.
Customer hereby grants to Manufacturer a personal and nonexclusive
license to use the Programs in and for the Products during the term of
this Agreement. Manufacturer may only make such copies of the Programs
as are necessary for it to perform its duties hereunder, plus one copy.
Manufacturer shall immediately return such Programs, permitted copies
and Proprietary Information to Customer upon termination of this
Agreement.
11.4 DESIGN TRANSFER PROCESS
It is expected that Manufacturer provide capability to allow electronic
transfer of all design information. The actual extent and format of
product design information shall be mutually agreed.
<PAGE>
SECTION 12: QUARTERLY OPERATIONS REVIEWS
12.1 REVIEWS
Customer and Manufacturer agree to review quarterly the business
performance of each party. Such review shall include items such as
product delivery, production forecast, product performance, quality,
pricing, and new designs.
SECTION 13: ECNS, CHANGES AND ERRORS, AND EXCESS AND OBSOLETE MATERIALS
13.1 DESIGN CONTROL
Customer shall be the sole design authority for the Products and as
such may issue, from time to time, Engineering Change Notices [ECNs].
Customer shall retain engineering control over the entire Product,
including Components, sub-assemblies and all other data and material.
Manufacturer shall provide on request, to the Technical Coordinator of
Customer, process information and specifications, Bills of Materials,
updated versions of all drawings, tool drawings, manufacturing and test
documentation, software, and other Information as may be reasonably
required for the manufacture of the Products ("Manufacturing Data")
promptly after such material has been created and thereafter at the
request of Customers Program Coordinator. Such information shall be
furnished in English.
13.2 ECN CLASS DEFINITIONS AND APPLICABILITY
"Class 1 ECNs" apply to hazardous conditions or inoperative conditions
and must be implemented immediately for all new production, work-in
process and stock on hand in Manufacturer's facilities. "Class 2 ECNs"
apply to Products that fail published specifications or experience
excessive field failure rates which must be implemented on any new
production after a planned, mutually agreed to, implementation date as
soon as possible, "Class 3 ECNs" apply to new feature, cost
improvement, or material substitution on Products and shall be
implemented on any new production after a planned, mutually agreed to,
implementation date. "Class 4 ECNs" apply to new feature, cost
improvement, or material substitution on products after a planned
implementation date determined by Manufacturer to minimize scrap
material costs. "Class 5 ECNs" shall be issued by Customer which apply
to new Products produced by Manufacturer indicating product acceptance
by Customer. Customer shall issue ECN's to Manufacturer from time to
time and the responsibility for the costs of such ECN's is set forth in
Section 13.3.
13.3 RESPONSIBILITY FOR COST OF ECNS AND ACTIONS
Charges for ECN's needed due to product specification error/changes are
the responsibility of Customer. All other charges due to ECN's are
responsibility of Manufacturer.
13.4 CHANGES AND ERRORS
Customer is responsible for costs of Changes and Errors resulting from
Engineering Design Changes requested by the Customer and shall be
billed for such costs by Manufacturer. Manufacturer is responsible for
all Changes and Errors resulting from defects in workmanship and
resulting from Engineering Design Changes requested by the
Manufacturer.
<PAGE>
13.5 APPROVAL OF MAJOR CHANGES AND ERRORS
All costs of Changes and Errors in excess of $10,000 must be
pre-approved in writing by Customer. Manufacturer shall provide monthly
Changes and Errors reports to Customer in a format as shall be mutually
agreed.
13.6 EXCESS AND OBSOLETE MATERIALS
Customer is responsible for all costs resulting from a reduction in
forecast exceeding the ordering rules outlined in Section 6.1 and
Customer is responsible for all obsolete material resulting from
engineering design changes requested by Customer. Manufacturer is
responsible for the cost of all other Excess and Obsolete materials.
Customer will accept Excess and Obsolete charges at the time of the
final disposition of such material to the extent Customer is
responsible: for such changes as outlined above. Manufacturer and
Customer shall review such Excess and Obsolete materials monthly to
ensure compliance with the terms herein.
SECTION 14: DEVELOPED INFORMATION
The parties agree that Manufacturer is performing research or
development activities, manufacturing and assembly services for
Customer and it is specifically agreed that Customer is not conferring
on Manufacturer any Intellectual Property Rights or licenses concerning
Customer's Products and that all design plans are the Property of
Customer. If Manufacturer does design or develop anything related to
Customers Products and Product designs, such "Improvements" shall be
promptly disclosed to Customer and they shall be considered "work for
hire" and belong to Customer or alternatively Manufacturer agrees to
promptly disclose to Customer any such "Improvement" and assign all
such rights exclusively to Customer. "Improvements" shall include
improvements, changes, additions, and modifications to Customer's
Product design and Intellectual Property, but shall not include
Manufacturer's general practices and knowledge, pre-existing
intellectual property, designs, and individual components and other
intellectual property not specifically related to the Product.
SECTION 15: WARRANTY
15.1 MANUFACTURER'S WARRANTY
Manufacturer warrants that the Products manufactured hereunder, under
normal use and service, will be free from defective material and faulty
workmanship and will perform in accordance with Customers applicable
Specifications for a period, of 20 months from the date of manufacture;
provided, however, that Manufacturer shall have no liability for any
defects as a result of specification flaws. This warranty does not
apply to items normally consumed in operation, such as lamps and fuses.
Manufacturer's sole obligation and Customer's exclusive remedy under
this warranty is limited to the replacement or repair, at Manufacturers
option and expense, of the defective Products, and such obligation and
remedy are conditioned upon the Products not having been altered by any
party other than Manufacturer without Manufacturer's prior written
consent, and the defect not being the result of mishandling, abuse,
misuse or improper storage, operation, or maintenance, or other causes
not imputable to Manufacturer and upon the Products not having been
damaged by fire, explosion, power failure, or any act of nature or
public enemy. Repair or replacement Products furnished during the
warranty period shall be warranted for a period of one hundred and
twenty (120) days or the remainder of the original warranty whichever
is longer. The aforementioned warranties shall inure to Customer, its
successors and assigns, and those who
<PAGE>
purchase or use each Product Manufacturer warrants that the Product
delivered to Customer is free and clear of all liens and encumbrances.
15.2 MANUFACTURERS DUTIES
Manufacturer shall maintain product test logs for all products shipped
for a period of 24 months and shall make such information available to
Customer on request. Product related issues identified in field returns
shall be documented by Manufacturer and reported in writing to Customer
as soon as practicable. Manufacturer shall assist Customer in
performing root cause analysis of field failures and make such
information available to Customer on request. Manufacturer shall have
no responsibility for defects in Customer Components with no design
root cause; but Manufacturer agrees to cooperate in processing
applicable third-party warranty claims and in taking advantage of
remedies, if any, available from the original sources of such Customer
Components. Issues resulting from Warranty administration must be
reported monthly in writing by Manufacturer and both parties shall use
their best efforts to achieve prompt resolution of any open issues.
15.3 CUSTOMER WARRANTY
Customer warrants it has the right (1) to consign Customer Components
to Manufacturer for incorporation in the Products in accordance with
the Manufacturing and Design Documentation and (2) to authorize
Manufacturer to use, for purposes of manufacturing and assembling the
Products hereunder, any information provided by Customer and contained
in the Manufacturing and Design Documentation.
15.4 CONFORMING PRODUCTS
For Products that are returned to Manufacturer by Customer for warranty
repair or replacement and are found by Manufacturer to conform to the
Product Specifications and such conformity is verified by Customer,
Customer shall pay Manufacturer shipping charges and duties.
15.5 INCOMING INSPECTION
All incoming lots are subject to sampling and inspection according to
MIL STD-105D, level 2, normal inspection, single sampling, AQL level =
1.0. Lots will be subject to acceptance or rejection as per the above
criteria. Rejected lots will be submitted to the Manufacturer for 100%
inspection and correction. Customer and Manufacturer reserve the right
to reject any defective units, regardless of whether the lot as a whole
is accepted or rejected. A unit is considered defective if it (or any
section of it) fails to work or it fails to meet any specification
listed in this document. Units exhibiting inadequate or poor
workmanship may also be considered defective.
15.6 DISCLAIMER.
THE FOREGOING WARRANTIES AND REMEDIES CONSTITUTE THE ONLY WARRANTIES
WITH RESPECT TO PRODUCTS AND ARE CUSTOMER'S EXCLUSIVE REMEDIES IN THE
EVENT SUCH WARRANTIES ARE BREACHED. SUCH WARRANTIES ARE IN LIEU OF ALL
OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPUED.
INCLUDING WITHOUT LIMITATION, ANY WARRANTY WITH RESPECT TO ANY OTHER
SERVICES PROVIDED BY MANUFACTURER HEREUNDER OR OTHERWISE, AND ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
NEITHER PARTY SHALL BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES OF ANY NATURE FOR ANY REASON.
<PAGE>
SECTION 16: REPAIRS
Manufacturer agrees to provide repairs services for Product it
manufactures. Stock classes applicable to repairs are set forth in
Exhibit "F".
16.1 REPAIRS UNDER WARRANTY
Manufacturer is responsible for the cost of repairs where workmanship
defects are identified, subject to the terms set forth in section 15.
Customer shall be responsible for costs of repair where specification
related defects are identified. Manufacturer can replace product with
"like for like" replacement Class B stock.
16.2 REPAIRS OUT OF WARRANTY
The price schedule for out of warranty repairs is set forth in Exhibit
"D".
16.3 TIME LIMITATIONS
Manufacturer must retain repair capabilities for the product component
set forth in Exhibit "A" for a period of 7 years.
16.4 REPAIR PROCESS
a) Manufacturer shall coordinate the management of repairs and
returns, and shall coordinate the management of repairs and
returns with such of its affiliates or subcontractors (as
Customer agrees by written consent, which shall not be
unreasonably withheld).
b) Manufacturer shall proceed with the repair of Class C
product(s) as defined in Exhibit "E" within twenty-one (21)
calendar days from the date of receipt at Manufacturer's site.
In the event that any Product is not capable of being repaired
by Manufacturer on a timely basis, it shall be replaced with a
Class A Product as defined in Exhibit "E".
c) Manufacturer shall establish return depots in North America
and Japan.
SECTION 17: LIMITATION OF LIABILITY
17.1 EXCLUSION OF CERTAIN DAMAGES
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INDIRECT, SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES, LOSS OF PROFITS, LOSS OF USE, OR
DATA OR INTERRUPTION OF BUSINESS, WHETHER SUCH ALLEGED DAMAGES ARE
LABELED IN TORT, CONTRACT, OR INDEMNITY, EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
17.2 TIME LIMITATIONS
Actions by either party, however asserted, other than in respect of any
infringement of Intellectual Property Rights, shall be commenced within
two years from the date the cause of action accrues.
<PAGE>
SECTION 18: INTELLECTUAL PROPERTY RIGHTS
18.1 MANUFACTURER INDEMNITY
Manufacturer, at its own expense, shall protect, defend, hold harmless,
and indemnify Customer and any subsequent owner of the Products, and
shall pay any damages, agreed upon settlement amounts, or necessary
costs (including attorney fees and fines) finally awarded with respect
to all proceedings or claims against it or them for the infringement of
any Intellectual Property Rights resulting from Manufacturer's
manufacture and assembly processes or the use of Manufacturer
Components where such use necessarily and solely causes the
infringement. Manufacturer shall not have any liability hereunder based
on (1) required compliance by Manufacturer with manufacturing and
design documentation originating with and furnished by Customer (or the
combination. of the Products with other apparatus not included in the
deliveries to Customer), if such compliance (or combination)
necessarily and solely gives rise to such proceedings or claims; (2)
infringement or alleged infringement caused solely by Customer
Components; or (3) infringements resulting from modifications or
alterations made after shipment by Manufacturer. Customer shall not
agree to settle any such proceeding or claim without ~e written consent
of Manufacturer, which consent shall not be unreasonably withheld.
18.2 NO OTHER RIGHTS
Except for any licenses and immunities that are expressly granted by
this Agreement, nothing in this Agreement or any course of dealing
between the parties will be deemed to create a license from either
party to the other of any Intellectual Property Right, whether by
estoppel, implication, or otherwise.
SECTION 19: TERM AND TERMINATION
19.1 TERM
This Agreement shall commence on the Effective Date and shall be in
effect until December 31, 1998 Thereafter, this Agreement shall
automatically renew for successive terms of one year unless and until
terminated pursuant to Section 19.2.
19.2 TERMINATION OF AGREEMENT
This Agreement may be terminated by either party at any time upon the
occurrence of any one or more of the following events of default:
(a) The other party defaults in the performance of any material
requirement or obligation under this Agreement or any other
written agreement between the parties concerning the subject
of this Agreement, and such default is not cured within 20
days after written notice of such default is sent to such
party;
(b) Customer fails to make (in full) any payment required by this
Agreement to Manufacturer on the date due, and fails to cure
such default within 20 days after written notice of such
default is sent to Customer; or
(c) The other party ceases to do business, makes a composition or
assignment for the benefit of its creditors, makes a general
arrangement with its creditors concerning any extension or
forgiveness of any of its secured debt, becomes bankrupt or
insolvent, suffers or seeks the
<PAGE>
appointment of a receiver to the whole or any material part of
its business, takes any action to liquidate or wind up the
whole or any material part of its business, is found subject
to any provisions of any bankruptcy code concerning
involuntary bankruptcy or similar proceeding, or suffers a
material adverse change in its financial position such that
payments hereunder may be affected or delayed by a creditor or
administrator of the business of the other party.
In addition, either party may terminate this Agreement for convenience
on a 9 months prior written notice to the other party.
In the event of termination of this Agreement, Manufacturer agrees that
the Customer will have the option to purchase the dedicated test
equipment, texturing and tools used for the manufacturing and test of
the Product(s). Manufacturer agrees to sell such equipment at actual
depreciated book value at the time of termination.
19.3 PAYMENT OBLIGATIONS
No termination of this Agreement shall release Customer from any
obligation to pay Manufacturer any amount that has accrued or become
payable at or prior to the date of termination.
19.4 SURVIVAL
Notwithstanding any termination of this Agreement, the provisions of
Section 20.3 shall continue in accordance with its terms.
SECTION 20: GENERAL TERMS
20.1 INDEMNIFICATION
Each party shall indemnify and defend the other party against all
claims, suits, losses, expenses, and liabilities for bodily injury,
personal injury, death, and property damage directly or indirectly
caused by any Products or through the intentional acts or negligence of
such party or of any person for whose actions said party is legally
liable. Both parties shall carry and maintain liability insurance
coverage to satisfactorily cover its obligations under this Agreement.
20.2 INDEPENDENT CONTRACTOR STATUS
Each of the parties hereto shall conduct the work to be performed
hereunder as an independent contractor and not as an agent or employee
of the other party. Subject to the terms and conditions of this
Agreement, each party shall choose the means to be employed and the
manner of carrying out its obligations hereunder. Each party shall have
sole responsibility for the supervision and payment of its personnel
and, except as agreed in writing, all other costs and expenses required
to perform its obligations hereunder.
20.3 CONFIDENTIAL INFORMATION
All technical information, specifications, drawings, documentation and
"know-how" of every kind and description whatsoever disclosed by either
party to the other under this Agreement ("Information"), except insofar
as it may be in the public domain or be established to have been
independently developed and so documented by the other party or
obtained by the other party from any person not in breach of any
confidentiality obligations to the disclosing party, is the exclusive
property of the disclosing party, and the other party, except as
specifically authorized in writing by the disclosing party, or as
permitted hereunder, shall treat and protect the Information as
<PAGE>
confidential, shall not reproduce the Information except to the extent
reasonably required for the performance of this Agreement, shall not
divulge the Information in whole or in part to any third parties, and
shall use the Information only for purposes necessary for the
performance of this Agreement. This obligation shall survive the
termination of this Agreement. Each party shall disclose the
Information only to those of its employees and agents who shall have a
"need-to-know" the Information for the purposes described herein after
first making such employees or agents aware of the confidentiality
obligations set forth above.
20.4 FREEDOM OF ACTION
Except as restricted by Intellectual Property Rights of a party hereto
or of third parties, nothing in this Agreement shall limit the right of
Customer or Manufacturer to develop, have developed, procure, and/or
market products or services now or in the future, including any that
may be competitive with those that are subject of this Agreement.
Neither party shall be required to disclose planning information to the
other except for the forecast described in Section 6 and as may be
mutually agreed upon by the parties.
20.5 TRADEMARKS AND TRADE NAMES
Neither this Agreement nor the sale of Products hereunder shall be
deemed to give either party any right to use any of the other party's
trademarks or trade names without such other party's specific, written
consent.
20.6 COMPLIANCE WITH GOVERNMENTAL LEGAL REQUIREMENTS
Manufacturer shall comply with the provisions of all applicable
federal, state, and local laws, regulations, rules, and ordinances
applicable to the transactions governed by this Agreement. Customer
shall ensure that the product design complies with FCC regulations and
meets UL and CSA standards. Manufacturer shall ensure compliance of all
manufactured products to applicable UL and CSA standards. Manufacturer
must at all times be ISO 9002 compliant and obtain similar governmental
and safety certifications or approvals. Manufacturer shall perform all
administrative actions required to qualify each Product for
preferential treatment under the rules of any applicable trade treaty.
20.7 EXPORT CONTROLS
Each party agrees that it will not knowingly (1) export or re-export,
directly or indirectly, any technical data (as defined by the U.S.
Export Administration Regulations), including software received from
the other under this Agreement; (2) disclose such technical data for
use in; or (3) export or re-export directly or indirectly, any direct
product of such technical data, including software, to destination to
which such export or re-export is restricted or prohibited by U.S. or
non-U.S. law without obtaining prior authorization from U.S. Department
of Commerce and other competent government authorities to the extent
required by those laws. This clause shall survive termination or
cancellation of this Agreement.
20.8 FORCE MAJEURE
Neither Customer nor Manufacturer shall be considered in default or
liable for any delay or failure to perform any provision of this
Agreement if such delay or failure arises directly or indirectly out of
an act of nature, acts of the public enemy freight embargoes, strikes;
quarantine restrictions, unusually severe weather conditions,
insu