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1: 10-Q Arris Group, Inc. 39 240K
2: EX-31.1 EX-31.1 Section 302 Certification of the Ceo 2± 10K
3: EX-31.2 EX-31.2 Section 302 Certification of the Cfo 2± 10K
4: EX-32.1 EX-32.1 Section 906 Certification of the Ceo 1 7K
5: EX-32.2 EX-32.2 Section 906 Certification of the Cfo 1 7K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
of
ARRIS GROUP, INC.
A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 001-16631
11450 TECHNOLOGY CIRCLE
DULUTH, GA 30097
(678) 473-2000
ARRIS Group, Inc. (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
ARRIS Group, Inc. is an accelerated filer (as defined in Rule 21b-2 of the
Exchange Act).
As of August 8, 2003, 74,882,957 shares of the registrant's Common Stock, $0.01
par value, were outstanding.
================================================================================
ARRIS GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
[Download Table]
Page
Part I. Financial Information
Item 1. Financial Statements
a) Consolidated Balance Sheets
as of June 30, 2003 and December 31, 2002 1
b) Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2003 and 2002 2
c) Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 3
d) Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures on Market Risk 33
Item 4. Controls and Procedures 33
Part II. Other Information
Item 1. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
Certifications 38
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 67,217 $ 98,409
Accounts receivable (net of allowances for doubtful accounts of
$18,704 in 2003 and $10,698 in 2002) ................................. 54,942 78,743
Accounts receivable from Nortel Networks ............................... 215 2,212
Other receivables ...................................................... 1,289 3,154
Inventories ............................................................ 105,980 104,203
Investments held for resale ............................................ 103 137
Other current assets ................................................... 12,453 14,834
--------- ---------
Total current assets ............................................ 242,199 301,692
Property, plant and equipment (net of accumulated depreciation of
$46,165 in 2003 and $44,810 in 2002) ................................. 28,093 34,540
Goodwill ................................................................. 150,569 151,265
Intangibles (net of accumulated amortization of $58,978 in 2003 and
$41,506 in 2002) ..................................................... 48,054 64,843
Investments .............................................................. 3,179 4,594
Other assets ............................................................. 9,723 6,478
--------- ---------
$ 481,817 $ 563,412
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 28,807 $ 24,253
Accrued compensation, benefits and related taxes ....................... 17,187 23,423
Accounts payable and accrued expenses - Nortel Networks ................ 427 11,303
Current portion of long-term debt ...................................... 184 23,887
Current portion of capital lease obligations ........................... 1,171 1,120
Other accrued liabilities .............................................. 39,828 44,360
--------- ---------
Total current liabilities ....................................... 87,604 128,346
Capital lease obligations, net of current portion ........................ 139 158
Long-term debt ........................................................... 125,000 --
--------- ---------
Total liabilities ............................................... 212,743 128,504
Membership interest - Nortel Networks .................................... -- 114,518
--------- ---------
Total liabilities & membership interest ......................... 212,743 243,022
Stockholders' equity:
Preferred stock, par value $1.00 per share, 5.0 million shares
authorized; none issued and outstanding .............................. -- --
Common stock, par value $0.01 per share, 320.0 million shares
authorized; 74.8 million and 82.5 million shares issued and
outstanding in 2003 and 2002, respectively ........................... 757 831
Capital in excess of par value ......................................... 577,592 603,563
Accumulated deficit .................................................... (305,652) (281,329)
Unrealized holding gain on marketable securities ....................... 90 227
Unearned compensation .................................................. (2,397) (1,649)
Unfunded pension losses ................................................ (1,219) (1,219)
Cumulative translation adjustments ..................................... (97) (34)
--------- ---------
Total stockholders' equity ...................................... 269,074 320,390
--------- ---------
$ 481,817 $ 563,412
========= =========
See accompanying notes to the consolidated financial statements.
1
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales (includes sales to Nortel of $215 and
$371 for the three months and $216 and $1,837
for the six months ended June 30, 2003 and
2002, respectively) $ 101,710 $ 176,502 $ 193,053 $ 348,899
Cost of sales 74,525 116,023 141,124 230,189
--------- --------- --------- ---------
Gross profit 27,185 60,479 51,929 118,710
Operating expenses:
Selling, general and administrative and
development 43,681 68,262 80,921 115,445
Restructuring and impairment charges -- -- 336 --
Amortization of intangibles 8,764 8,708 17,472 17,078
--------- --------- --------- ---------
52,445 76,970 98,729 132,523
--------- --------- --------- ---------
Operating income (loss) (25,260) (16,491) (46,800) (13,813)
Interest expense 2,990 2,102 4,654 4,400
Membership interest -- 2,500 2,418 5,000
Loss (gain) on debt retirement -- 9,276 (28,506) 9,276
Loss on investments 1,037 1,356 1,014 1,570
Loss (gain) in foreign currency (1,486) (4,688) (1,968) (3,862)
Other expense (income), net (32) (5) (89) 192
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes (27,769) (27,032) (24,323) (30,389)
Income tax expense (benefit) -- -- -- (6,800)
--------- --------- --------- ---------
Net income (loss) from continuing operations (27,769) (27,032) (24,323) (23,589)
Income (loss) from discontinued operations -- (13,682) -- (19,059)
--------- --------- --------- ---------
Net income (loss) before cumulative effect of
an accounting change (27,769) (40,714) (24,323) (42,648)
Cumulative effect of accounting change -- -- -- 57,960
--------- --------- --------- ---------
Net income (loss) $ (27,769) $ (40,714) $ (24,323) $(100,608)
========= ========= ========= =========
Net income (loss) per common share -
Basic and diluted:
Income (loss) from continuing operations $ (0.37) $ (0.33) $ (0.31) $ (0.29)
Income (loss) from discontinued operations -- (0.17) -- (0.23)
Cumulative effect of an accounting change -- -- -- (0.71)
--------- --------- --------- ---------
Net income (loss) $ (0.37) $ (0.50) $ (0.31) $ (1.24)
========= ========= ========= =========
Weighted average common shares:
Basic and diluted 74,992 82,236 78,509 81,252
========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
2
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
[Enlarge/Download Table]
SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
--------- ---------
Operating activities:
Net income (loss) ..................................................... $ (24,323) $(100,608)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation ......................................................... 9,670 10,851
Amortization of intangibles .......................................... 17,472 17,078
Amortization of deferred financing fees .............................. 2,154 1,276
Amortization of unearned compensation ................................ 1,285 886
Provision for doubtful accounts ...................................... 7,718 23,025
Loss on disposal of fixed assets ..................................... 5 19
Loss on investments .................................................. 1,014 1,570
Cash proceeds from sale of trading securities ........................ 130 --
Loss (gain) on debt retirement ....................................... (28,506) 9,276
Loss (gain) on sale of discontinued product line ..................... (2,000) 8,536
Cumulative effect of an accounting change - goodwill ................. -- 57,960
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions:
Accounts receivable ............................................... 18,080 (32,006)
Other receivables ................................................. 1,865 3,757
Inventory ......................................................... (1,446) 28,781
Accounts payable and accrued liabilities .......................... (14,868) 1,925
Income taxes recoverable .......................................... -- (7,563)
Accrued membership interest ....................................... 2,418 5,000
Other, net ........................................................ 420 (7,783)
--------- ---------
Net cash provided by (used in) operating activities ....................... (8,912) 21,980
Investing activities:
Purchases of property, plant and equipment ........................... (2,618) (3,622)
Cash proceeds from sale of Keptel product line ....................... -- 30,000
Cash proceeds from sale of Actives product line ...................... 1,800 --
Cash paid for acquisition ............................................ (558) (835)
--------- ---------
Net cash provided by (used in) investing activities ....................... (1,376) 25,543
Financing activities:
Proceeds from issuance of bonds ...................................... 125,000 --
Redemption of membership interest .................................... (88,430) --
Repurchase and retirement of common stock ............................ (28,000) --
Payments on capital lease obligations ................................ (834) (403)
Payments on debt obligations ......................................... (23,969) --
Deferred financing costs paid ........................................ (5,278) --
Proceeds from issuance of stock ...................................... 607 755
--------- ---------
Net cash provided by (used in) financing activities ....................... (20,904) 352
--------- ---------
Net increase (decrease) in cash and cash equivalents ...................... (31,192) 47,875
Cash and cash equivalents at beginning of period .......................... 98,409 5,337
--------- ---------
Cash and cash equivalents at end of period ................................ $ 67,217 $ 53,212
========= =========
3
[Enlarge/Download Table]
SIX MONTHS ENDED
JUNE 30,
-------------------------
2003 2002
-------- --------
Noncash investing and financing activities:
Net tangible assets acquired, excluding cash ............................. $ 1,013 $ 4,577
Net liabilities assumed .................................................. (1,162) (16,595)
Intangible assets acquired, including goodwill ........................... 707 81,426
Noncash purchase price, including 5,185,650 shares of common stock and
fair market value of stock options issued ............................. -- (68,573)
-------- --------
Cash paid for acquisition, net of cash acquired .......................... $ 558 $ 835
======== ========
Supplemental cash flow information:
Interest paid during the period .......................................... $ 665 $ 660
======== ========
Income taxes paid during the period ...................................... $ 45 $ 223
======== ========
See accompanying notes to the consolidated financial statements.
4
ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 a global communications technology company, headquartered in
Duluth, Georgia. ARRIS specializes in the design, engineering, development, and
distribution of products for hybrid fiber-coax broadband networks. The Company
provides its customers with products and services that enable reliable,
high-speed, two-way broadband transmission of telephony, data, and video
services.
ARRIS operates in one business segment, Communications, providing a range of
customers with network and system products and services for hybrid fiber-coax
networks 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/supplier of telephony, data, construction, rebuild and maintenance
equipment for the broadband communications industry. ARRIS supplies most of the
products required in a broadband communication system, including headend and
customer premises equipment for the provision of telephony and high-speed data
over broadband cable networks, and a wide variety of construction, maintenance
equipment, and supplies.
In 2002, ARRIS sold the Keptel and Actives product lines, which have been
accounted for as discontinued operations in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. As a result, these two product lines and
historical results have been reclassified for all periods presented. See further
discussion in Note 5 of Notes to the Consolidated Financial Statements.
The consolidated financial statements furnished herein reflect all adjustments
(consisting of normal recurring accruals) that are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
statements for the periods shown. Additionally, certain prior period amounts
have been reclassified to conform to the 2003 financial statement presentation.
Interim results of operations are not necessarily indicative of results to be
expected from a twelve-month period. These interim financial statements should
be read in conjunction with the Company's most recently audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the Company's year ended December 31, 2002, as filed with the
United States Securities and Exchange Commission.
NOTE 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. This Interpretation provides clarification on the consolidation of
certain entities in which equity investors do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. Such entities are defined as variable
interest entities ("VIEs"). This Interpretation requires that VIEs be
consolidated by the entity considered to be the primary beneficiary of the VIE.
The Interpretation is effective immediately for newly created VIEs after January
31, 2003 and effective July 1, 2003 for any VIEs created prior to February 1,
2003. The Company adopted Interpretation No. 46 on July 1, 2003 and is currently
assessing the impact it may have on its financial position or results of
operations.
NOTE 3. STOCK-BASED COMPENSATION
The Company uses the intrinsic value method for valuing its awards of stock
options and restricted stock and records the related compensation expense, if
any, in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. No stock-based employee or director
compensation cost for stock options is reflected in net income, as all options
granted have exercise prices equal to the market value of the underlying common
stock on the date of grant. The Company records compensation expense related to
its restricted
5
stock awards and director stock units. The following table illustrates the
effect on net income and earnings per share as if the Company had applied the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to all stock-based employee compensation.
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- --------- -----------
Net income (loss), as reported ................... $(27,769) $(40,714) $ (24,323) $ (100,608)
Add: Stock-based employee compensation included
in reported net income, net of taxes ........... 809 395 1,285 886
Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of taxes ........... (6,244) (7,496) (13,055) (14,930)
-------- -------- --------- -----------
Net income (loss), pro forma ..................... $(33,204) $(47,815) $ (36,093) $ (114,652)
======== ======== ========= ===========
Net income (loss) per common share:
Basic - as reported ............................ $ (0.37) $ (0.50) $ (0.31) $ (1.24)
======== ======== ========= ===========
Basic - pro forma .............................. $ (0.44) $ (0.58) $ (0.46) $ (1.41)
======== ======== ========= ===========
Diluted - as reported .......................... $ (0.37) $ (0.50) $ (0.31) $ (1.24)
======== ======== ========= ===========
Diluted - pro forma ............................ $ (0.44) $ (0.58) $ (0.46) $ (1.41)
======== ======== ========= ===========
NOTE 4. GUARANTEES
Warranty
ARRIS provides for the estimated cost of product warranties at the time revenue
is recognized. While the Company engages in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of its
suppliers, the estimated warranty obligation is affected by ongoing product
failure rates, material usage and service delivery costs incurred in correcting
a product failure as well as specific product class failures outside of ARRIS'
baseline experience. If actual product failure rates, material usage or service
delivery costs differ from estimates, revisions to the estimated warranty
liability would be required. ARRIS evaluates its warranty obligations on a
product line basis.
Information regarding the changes in ARRIS' aggregate product warranty
liabilities was as follows for the six-month period ended June 30, 2003 (in
thousands):
[Download Table]
Balance at December 31, 2002 ......................................... $ 6,031
Accruals related to warranties (including changes in estimates)....... 1,224
Settlements made (in cash or in kind) ................................ (734)
-------
Balance at June 30, 2003 ............................................. $ 6,521
=======
NOTE 5. DISCONTINUED OPERATIONS
Upon evaluation and review of the ARRIS product portfolio, the Company concluded
that the Keptel product line was not core to its long-term strategy and thus
sold the product line on April 24, 2002. Keptel designed and marketed network
interface systems and fiber optic cable management products primarily for
traditional residential and commercial telecommunications applications. The
transaction generated cash proceeds of $30.0 million. Additionally, ARRIS
retained a potential earn-out over a twenty-four month period based on the
achievement of sales targets. The transaction also included a distribution
agreement whereby the Company will continue to distribute Keptel products until
April 2005. Total assets of approximately $31.1 million were disposed of, which
included inventory, fixed assets, intangibles (formerly classified as goodwill),
and other assets. ARRIS incurred approximately $5.0 million of related closure
costs, including severance, vendor liabilities, outside consulting fees, and
other shutdown expenses. During 2002, a net loss of $6.2 million was recorded in
connection with the sale of the Keptel product line. As of June 30, 2003,
approximately $0.9 million related to outside consulting fees remained in an
accrual to be paid. ARRIS expects to complete the remaining payments by the end
of 2003.
6
Upon continued review of ARRIS' product portfolio, the Company sold its Actives
product line on November 21, 2002, for net proceeds of $31.8 million. Total
assets of approximately $20.3 million were disposed of, which included
inventory, fixed assets, and other assets attributable to the product line.
Additionally, ARRIS incurred approximately $7.3 million of related closure
costs, including severance, vendor liabilities, professional fees, and other
shutdown expenses. In connection with the sale, the Company recognized a gain of
approximately $2.2 million in 2002. During the second quarter of 2003, the
Company has reduced its accrual for vendor liabilities by $2.0 million as a
result of settling certain vendor liabilities for amounts less than originally
anticipated. With this adjustment in the second quarter, the Company has now
recognized a cumulative gain of approximately $4.2 million related to the
transaction. As of June 30, 2003, approximately $0.1 million related to
severance, $2.9 million related to vendor liabilities, and $1.0 million related
to other shutdown expenses remained in an accrual to be paid. ARRIS expects to
complete the remaining payments by the end of 2003.
The Company's Keptel and Actives product lines, as a whole, constituted the
majority of its transmission, optical and outside plant product category and
qualified as discontinued operations in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. Accordingly, the results of
these product lines have been reclassified to discontinued operations for all
periods presented. The remaining product lines within the transmission, optical
and outside plant product category have been reclassified to the supplies and
services product category.
Revenues from discontinued operations were $17.6 million and $36.8 for the three
and six months ended June 30, 2002, respectively. The net loss from discontinued
operations, net of taxes, for the three and six months ending June 30, 2002 was
$(13.7) million and $(19.1) million, respectively. During 2002, the Company
recorded a net loss on these disposals of $(4.0) million. During 2003, the
Company recorded a gain of $2.0 million related to the Actives adjustment
described above, resulting in a cumulative net loss of $(2.0) million related to
the disposal of discontinued operations. This $2.0 million gain on disposal of
discontinued operations is offset by an approximately $2.0 million increase in
the accrual for restructuring liabilities.
NOTE 6. RESTRUCTURING AND OTHER CHARGES
On October 30, 2002, the Company announced that it would close its office in
Andover, Massachusetts, which was primarily a product development and repair
facility. The Company decided to close the office in order to reduce operating
costs through the consolidation of its facilities. The closure affected
approximately 75 employees and will be substantially completed by the end of the
third quarter 2003. In connection with these actions, the Company recorded a
charge of approximately $7.1 million in the fourth quarter of 2002. Included in
this restructuring charge was approximately $2.1 million related to remaining
lease payments, $2.7 million of fixed asset write-offs, $2.1 million of
severance, and $0.2 million of other costs associated with these actions. As of
June 30, 2003, approximately $1.6 million related to lease commitments, $0.5
million related to severance, and $0.2 million related to other costs remained
in the restructuring accrual to be paid. ARRIS expects to complete the remaining
payments by the second quarter of 2006 (end of lease).
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. 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. In June 2003, ARRIS took
advantage of an early buyout clause in connection with the remaining lease
payments, which reduced the Company's original estimate of restructuring expense
by approximately $0.4 million. As of June 30, 2003, the Company has no remaining
liabilities related to this closure.
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 entailed the implementation of an expanded manufacturing
outsourcing strategy and the related closure of the four factories located in El
Paso, Texas and Juarez, Mexico. As a result, the Company recorded restructuring
and impairment charges of $66.2 million, of which approximately $50.1 million
relates to and is classified in discontinued operations. Included in these
charges was approximately $33.7 million related to the
7
write-down of inventories, and remaining warranty and purchase order
commitments of which approximately $8.6 million was reflected in cost of goods
sold and $25.1 million was reflected in discontinued operations. Additional
charges incurred were 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. Of these
charges, approximately $7.5 million is reflected in restructuring expense and
$25.0 million is reflected in discontinued operations. 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. Due to unforeseen delays in exiting the facility
after the shutdown, the Company increased its reserve by approximately $2.4
million and $2.0 million during the fourth quarter 2002 and the second quarter
2003, respectively, to discontinued operations. As of June 30, 2003,
approximately $0.1 million related to severance and associated personnel costs,
and $2.4 million related to lease terminations of factories and office space and
other shutdown costs remained in an accrual to be paid. ARRIS expects to
complete the remaining payments by the end of the first quarter 2004.
NOTE 7. 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):
[Download Table]
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(UNAUDITED)
Raw material ..................................... $ 1,897 $ 3,941
Finished goods ................................... 104,083 100,262
-------- --------
Total inventories .............................. $105,980 $104,203
======== ========
NOTE 8. PROPERTY, PLANT AND EQUIPMENT NET
Property, plant and equipment, at cost, consists of the following (in
thousands):
[Download Table]
JUNE 30, DECEMBER 31,
2003 2002
-------- -----------
(UNAUDITED)
Land ............................................. $ 1,822 $ 1,822
Building and leasehold improvements .............. 7,088 7,295
Machinery and equipment .......................... 65,348 70,233
-------- --------
74,258 79,350
Less: Accumulated depreciation ................... (46,165) (44,810)
-------- --------
Total property, plant and equipment, net ....... $ 28,093 $ 34,540
======== ========
NOTE 9. GOODWILL AND INTANGIBLE ASSETS
ARRIS adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1,
2002. Upon adoption of SFAS No. 142, the Company recorded a goodwill impairment
loss of approximately $58.0 million, primarily related to the Keptel product
line, based upon management's analysis including an independent valuation. The
resulting impairment loss has been recorded as a cumulative effect of a change
in accounting principle on the accompanying Consolidated Statements of
Operations for the six months ended June 30, 2002. The valuation was determined
using a combination of the income and market approaches on an invested capital
basis, which is the market value of equity plus interest-bearing debt. The
Company's remaining goodwill was reviewed in the fourth quarter of 2002, and
based upon management's analysis including an independent valuation, an
impairment charge of $70.2 million was recorded with respect to its supplies and
services product category.
8
The changes in the carrying amount of goodwill for the year ended December 31,
2002 and for the six months ended June 30, 2003 are as follows (in thousands):
[Download Table]
Balance as of December 31, 2001 ...................................... $ 259,062
Transitional impairment charge ....................................... (57,960)
Purchase price allocation adjustment - Arris Interactive L.L.C. ...... 33
Goodwill in connection with Cadant, Inc. acquisition ................. 26,339
Transferred to intangible asset upon adoption of SFAS No. 142 ........ (6,000)
Goodwill impairment charge, October 1, 2002 .......................... (70,209)
---------
Balance as of December 31, 2002 ...................................... $ 151,265
Purchase price allocation adjustments - Cadant, Inc. (see Note 14) ... (696)
---------
Balance as of June 30, 2003 .......................................... $ 150,569
=========
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of June 30, 2003 and December 31,
2002 are as follows (in thousands):
[Enlarge/Download Table]
JUNE 30, 2003 DECEMBER 31, 2002
-------------------------------------- --------------------------------------
GROSS ACCUMULATED NET BOOK GROSS ACCUMULATED NET BOOK
AMOUNT AMORTIZATION VALUE AMOUNT AMORTIZATION VALUE
-------- ------------ -------- -------- ------------ --------
Existing technology acquired:
Arris Interactive L.L.C. ..... $ 51,500 $(32,761) $ 18,739 $ 51,500 $(24,178) $ 27,322
Cadant, Inc. ................. 53,000 (26,161) 26,839 53,000 (17,328) 35,672
Atoga Systems ................ 683 (56) 627 -- -- --
Pension asset ..................... 1,849 -- 1,849 1,849 -- 1,849
-------- -------- -------- -------- -------- --------
Total ........................ $107,032 $(58,978) $ 48,054 $106,349 $(41,506) $ 64,843
======== ======== ======== ======== ======== ========
Amortization expense recorded on the intangible assets listed in the above table
for the three months ended June 30, 2003 and 2002 was $8.8 million and $8.7
million, respectively. Amortization expense for the six months ended June 30,
2003 and 2002 was $17.5 million and $17.1 million, respectively. The estimated
remaining amortization expense is as follows (in thousands):
[Download Table]
2003................ $ 17,531
2004................ $ 28,050
2005................ $ 567
2006................ $ 57
2007................ $ --
NOTE 10. LONG TERM DEBT, CAPITAL LEASE OBLIGATIONS AND MEMBERSHIP INTEREST
Long term debt, capital lease obligations and membership interest consist of the
following (in thousands):
[Enlarge/Download Table]
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
Capital lease obligations $ 1,310 $ 1,278
Equipment loan 184 --
Membership interest - Nortel Networks -- 114,518
4.5% Convertible Subordinated Notes due 2003 -- 23,887
4.5% Convertible Subordinated Notes due 2008 125,000 --
--------- ---------
Total debt, capital lease obligations and membership interest 126,494 139,683
Less current portion (1,355) (25,007)
--------- ---------
Total long term debt, capital lease obligations and membership interest $ 125,139 $ 114,676
========= =========
On March 18, 2003, the Company issued $125.0 million of 4 1/2% Convertible
Subordinated Notes due 2008 ("Notes due 2008"). The Notes due 2008 are
convertible, at the option of the holder, at any time prior to maturity, into
the
9
Company's common stock at a conversion price of $5.00 per share, subject to
adjustment. The Notes due 2008 will pay interest semi-annually, based on an
annual rate of 4 1/2%, on March 15 and September 15 of each year, commencing
September 15, 2003. The Company used approximately $88.4 million of the proceeds
from the issuance, including the reduction in the forgiveness of the Class B
membership interest, to redeem the Class B membership interest in Arris
Interactive held by Nortel Networks resulting in a gain of approximately $28.5
million, recorded in operations in accordance with SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. The Company used approximately $28.0 million of the
proceeds of the issuance to repurchase and retire 8 million shares of its common
stock held by Nortel Networks at a discount. The Company expects to use the
remaining proceeds for general corporate purposes. As of June 30, 2003, there
were $125.0 million of the Notes due 2008 outstanding.
In 1998, the Company issued $115.0 million of 4 1/2% Convertible Subordinated
Notes due May 15, 2003 ("Notes due 2003"). The Notes due 2003 were convertible,
at the option of the holder, at any time prior to maturity, into the Company's
common stock at a conversion price of $24.00 per share. In 2002, ARRIS exchanged
1,593,789 shares of its common stock for approximately $15.4 million of the
Notes due 2003. Additionally, the Company redeemed $23.9 million and $75.7
million of the Notes due 2003 in 2003 and 2002, respectively, using cash. As of
May 15, 2003, all of the Notes due 2003 were redeemed.
As amended, the Company has in place an asset-based revolving credit facility
(the "Credit Facility") permitting the Company to borrow up to $115.0 million
(which can be increased under certain conditions by up to $25.0 million), based
upon availability under a borrowing base calculation. In general, the borrowing
base is limited to 85% of net eligible receivables (with a cap of $5.0 million
in relation to foreign receivables), subject to a reserve of $10.0 million. In
addition, upon obtaining appropriate asset appraisals the Company may include in
the borrowing base calculation 80% of the orderly liquidation value of net
eligible inventory (not to exceed $60.0 million). The Credit Facility contains
traditional financial covenants, including fixed charge coverage, senior debt
leverage, minimum net worth, and minimum inventory turns ratios. The facility is
secured by substantially all of the Company's assets. The Credit Facility has a
maturity date of August 3, 2004. The commitment fee on unused borrowings is
0.75%. The Credit Facility was amended in January 2003 to provide that the
minimum net worth covenant applied only to the period prior to December 31,
2002.
In March 2003, ARRIS amended its credit facility to permit the Company to issue
up to $125.0 million of the Notes due 2008, to use the proceeds of such notes as
described above. The amendment also reduced the revolving loan commitments by
$10.0 million to $115.0 million. As of June 30, 2003, ARRIS had no borrowings
outstanding under its credit facility and approximately $7.6 million outstanding
under letters of credit. The Company had approximately $38.8 million of
available capacity.
In connection with the acquisition of Arris Interactive in August 2001, Nortel
Networks exchanged its remaining ownership interest in Arris Interactive for 37
million shares of ARRIS common stock and a subordinated redeemable Class B
membership interest in Arris Interactive with a face amount of $100.0 million.
The Class B membership interest earned an accreting non-cash return of 10% per
annum, compounded annually, and was redeemable in approximately four quarterly
installments commencing February 3, 2002, provided that certain availability and
other tests are met under the Company's Credit Facility. Those tests were not
met. In June 2002, ARRIS entered into an option agreement with Nortel Networks
that permitted ARRIS to redeem the Class B membership interest in Arris
Interactive at a discount of 21% prior to June 30, 2003. To further induce the
Company to redeem the Class B membership interest, Nortel Networks offered to
forgive approximately $5.9 million of the amount owed Nortel Networks if ARRIS
redeemed it prior to March 31, 2003. The Company used approximately $88.4
million of the proceeds, including the reduction in the forgiveness of the Class
B membership interest, of Notes due 2008 to redeem the Class B membership
interest at a discount resulting in a gain of approximately $28.5 million,
recorded in operations in accordance with SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.
In conjunction with the acquisition of Cadant, Inc. and Atoga Systems, the
Company assumed capital lease obligations and an equipment loan related to
machinery and equipment. The leases require future rental payments until 2005.
The balance of the capital lease obligations and equipment loan at June 30, 2003
was approximately $1.3 million and $0.2 million, respectively.
10
ARRIS has not paid cash dividends on its common stock since its inception. The
Company's credit agreement contains covenants that prohibit it from paying such
dividends. In 2002, to implement its shareholder rights plan, the Company's
board of directors declared a dividend consisting of one right for each share of
its common stock outstanding. Each right represents the right to purchase one
one-thousandth of a share of its Series A Participating Preferred Stock and
becomes exercisable only if a person or group acquires beneficial ownership of
15% or more of its common stock or announces a tender or exchange offer for 15%
or more of its common stock or under other similar circumstances.
NOTE 11. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) for the three-month periods ended June 30,
2003 and 2002 was $(28.2) million and $(41.1) million, respectively. Total
comprehensive income (loss) for the six-month periods ended June 30, 2003 and
2002 was $(24.5) million and $(101.3) million, respectively. Such comprehensive
loss, which is recorded as a separate component of stockholders' equity, is
related to cumulative translation adjustments and unrealized holding gains
(losses) on marketable securities.
NOTE 12. SALES INFORMATION
A significant portion of ARRIS' revenue is derived from sales to Cox
Communications and Comcast (including AT&T Broadband). Sales to these two
customers for the three and six-month periods ended June 30, 2003 and 2002 are
set forth below (in thousands):
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ----------
Comcast (including AT&T Broadband) ..... $ 36,099 $ 77,669 $ 59,903 $ 125,693
% of sales ............................. 35.5% 44.0% 31.0% 36.0%
Cox Communications ..................... $ 19,864 $ 20,312 $ 44,986 $ 52,979
% of sales ............................. 19.5% 11.5% 23.3% 15.2%
ARRIS operates globally and offers products and services that are sold to cable
system operators and telecommunications providers. ARRIS' products and services
are focused in two product categories, Broadband and Supplies & Services,
instead of the previous three categories. As a result of the sale of the
Company's Keptel and Actives product lines in 2002, revenues from the remaining
product lines within the former Transmission, Optical, and Outside Plant product
category are now reported with the Supplies & Services product category. All
prior period revenues have been aggregated to conform to the new product
categories. Consolidated revenues by principal products category for the three
and six-month periods ended June 30, 2003 and 2002 were as follows (in
thousands):
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ----------
PRODUCT CATEGORY
Broadband ........................... $ 66,526 $124,120 $128,182 $238,302
Supplies & Services ................. 35,184 52,382 64,871 110,597
-------- -------- -------- --------
Total sales .................. $101,710 $176,502 $193,053 $348,899
======== ======== ======== ========
11
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 primarily includes China, Hong Kong, Japan,
Korea, and Singapore. The European market primarily includes Austria, Germany,
France, Netherlands, Poland, Portugal, Romania, Spain, and Switzerland. The
Latin American market primarily includes Argentina, the Bahamas, Chile,
Colombia, Mexico, and Puerto Rico. Sales to international customers were
approximately 17.5%, and 24.2% of total sales for the quarters ended June 30,
2003 and 2002, respectively. Sales for the three and six-month periods ended
June 30, 2003 and 2002 are as follows (in thousands):
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTERNATIONAL REGION
Asia Pacific ............................... $ 9,901 $ 16,611 $ 15,269 $ 27,752
Europe ..................................... 3,785 16,514 12,853 44,826
Latin America .............................. 2,198 6,574 3,530 9,473
Canada ..................................... 1,888 3,086 4,836 4,995
-------- -------- -------- --------
Total international sales .............. 17,772 42,785 36,488 87,046
Total domestic sales ................... 83,938 133,717 156,565 261,853
-------- -------- -------- --------
Total sales .......................... $101,710 $176,502 $193,053 $348,899
======== ======== ======== ========
Total identifiable international assets were immaterial.
NOTE 13. 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):
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
--------- -------- -------- --------
Basic:
Income (loss) from continuing operations ....... $ (27,769) $ (27,032) $ (24,323) $ (23,589)
Income (loss) from discontinued operations ..... -- (13,682) -- (19,059)
Cumulative effect of an accounting change ...... -- -- -- (57,960)
--------- --------- --------- ---------
Net income (loss) ............................ $ (27,769) $ (40,714) $ (24,323) $(100,608)
========= ========= ========= =========
Weighted average shares outstanding .......... 74,992 82,236 78,509 81,252
========= ========= ========= =========
Basic earnings (loss) per share .............. $ (0.37) $ (0.50) $ (0.31) $ (1.24)
========= ========= ========= =========
Diluted:
Income (loss) from continuing operations ....... $ (27,769) $ (27,032) $ (24,323) $ (23,589)
Income (loss) from discontinued operations ..... -- (13,682) -- (19,059)
Cumulative effect of an accounting change ...... -- -- -- (57,960)
--------- --------- --------- ---------
Net income (loss) ............................ $ (27,769) $ (40,714) $ (24,323) $(100,608)
========= ========= ========= =========
Weighted average shares outstanding .......... 74,992 82,236 78,509 81,252
Net effect of dilutive stock options ......... -- -- -- --
--------- --------- --------- ---------
Total ................................... 74,992 82,236 78,509 81,252
========= ========= ========= =========
Diluted earnings (loss) per share ....... $ (0.37) $ (0.50) $ (0.31) $ (1.24)
========= ========= ========= =========
The 4 1/2% convertible subordinated notes due 2003 and 2008 were antidilutive
for all periods presented. The effects of the options and warrants were not
presented for all periods as the Company incurred net losses during these
periods and inclusion of these securities would be antidilutive.
12
NOTE 14. BUSINESS ACQUISITIONS
ACQUISITION OF ATOGA SYSTEMS
On March 21, 2003, ARRIS purchased the business and certain assets of Atoga
Systems, a Fremont, California-based developer of optical transport systems for
metropolitan area networks. The Company decided to undertake this transaction
because it would expand the Company's existing broadband product portfolio and
is anticipated to have a positive impact on future results of the Company. Under
the terms of the agreement, ARRIS obtained certain inventory, fixed assets, and
existing technology in exchange for approximately $0.4 million of cash and the
assumption of certain lease obligations. Further, the Company retained 28
employees and issued a total of 500,000 shares of restricted stock to those
employees.
The following is a summary of the preliminary purchase price allocation to
record ARRIS' purchase price of the assets and certain liabilities of Atoga
Systems. The purchase price was equal to the net tangible and intangible assets
acquired. The final allocation of the purchase price will be determined after
completion of thorough analyses to identify and determine the fair values of
Atoga Systems' tangible and identifiable intangible assets and liabilities as of
the date the transaction was completed.
[Download Table]
(IN THOUSANDS)
Cash paid to Atoga Systems ................................. $ 434
Acquisition costs (legal fees) ............................. 100
Assumption of certain liabilities of Atoga Systems ......... 1,162
------
Adjusted preliminary purchase price ...................... $1,696
======
Allocation of purchase price:
Net tangible assets acquired ............................. $1,013
Existing technology (to be amortized over 3 years) ....... 683
------
Total allocated preliminary purchase price ............... $1,696
======
ACQUISITION OF CADANT, INC.
On January 8, 2002, ARRIS completed the acquisition of all of the assets and
business of Cadant, Inc., a privately held designer and manufacturer of next
generation Cable Modem Termination Systems ("CMTS"). The Company acquired Cadant
because it provided significant broadband product and technology extensions and
would have a positive impact on future results of the Company. As a part of this
transaction:
- ARRIS issued 5,250,000 shares of ARRIS common stock for the
purchase of substantially all of Cadant's assets and certain
liabilities.
- During the second quarter of 2003, 64,350 shares of ARRIS
common stock were returned to ARRIS and retired. This
transaction was pursuant to the terms of a settlement
agreement between ARRIS and the trustee in the liquidation of
CDX Corporation (formerly know as Cadant).
- ARRIS agreed to pay up to 2.0 million shares based upon future
sales of the CMTS product through January 8, 2003. These
targets were not met as of January 8, 2003, and therefore, no
further shares were issued.
13
The following is a summary of the 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.
[Download Table]
(IN THOUSANDS)
5,250,000 shares of ARRIS Group, Inc.'s $0.01 par value
common stock at $10.631 per common share ....................... $ 55,813
64,350 returned shares of ARRIS Group, Inc.'s $0.01 par value
common stock at $10.631 per common share ....................... (684)
Acquisition costs (banking fees, legal and accounting fees,
printing costs) ................................................ 898
Fair value of stock options to Cadant, Inc. employees ............ 12,760
Assumption of certain liabilities of Cadant, Inc. ................ 14,919
--------
Adjusted purchase price ........................................ $ 83,706
========
Allocation of Purchase Price:
Net tangible assets acquired ................................... $ 5,063
Existing technology (to be amortized over 3 years) ............. 53,000
Goodwill (not deductible for income tax purposes) .............. 25,643
--------
Total allocated purchase price ................................. $ 83,706
========
SUPPLEMENTAL PRO FORMA INFORMATION
Presented below is summary unaudited pro forma combined financial information
for the Company, Atoga Systems, and Cadant, Inc. to give effect to the
transactions. This summary unaudited pro forma combined financial information is
derived from the historical financial statements of the Company, Atoga Systems,
and Cadant, Inc. 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, Atoga Systems, and Cadant,
Inc., or the combined entity would actually have been had the transaction
occurred at the applicable dates, or to project the Company's, Atoga Systems',
and Cadant, Inc.'s, or the combined entity's results of operations for any
future period or date. The actual results of Atoga Systems are included in the
Company's operations from March 21, 2003 to June 30, 2003. The actual results of
Cadant, Inc. are included in the Company's operations from January 8, 2002 to
June 30, 2003.
[Enlarge/Download Table]
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Net sales ........................................... $ 101,710 $ 176,502 $ 193,053 $ 348,899
Gross profit ........................................ 27,185 60,475 51,929 118,706
Operating income (loss) ............................. (25,260) (20,533) (48,313) (23,124)
Income (loss) before income taxes ................... (27,769) (31,153) (25,930) (39,864)
Income (loss) from continuing operations ............ (27,769) (31,153) (25,930) (33,064)
Income (loss) from discontinued operations .......... -- (13,682) -- (19,059)
Net income (loss) before cumulative effect of an
accounting change ................................. (27,769) (44,835) (25,930) (52,123)
Net income (loss) ................................... $ (27,769) $ (44,835) $ (25,930) $(110,083)
========= ========= ========= =========
Net income (loss) per common share:
Basic and diluted ................................. $ (0.37) $ (0.55) $ (0.33) $ (1.35)
========= ========= ========= =========
Weighted average common shares:
Basic and diluted ................................. 74,992 82,236 78,509 81,484
========= ========= ========= =========
14
The following table represents the amount assigned to each major asset and
liability caption of Atoga Systems as of March 21, 2003 and Cadant, Inc. as of
January 8, 2002, as adjusted:
[Download Table]
AS OF ACQUISITION DATE
(IN THOUSANDS)
----------------------------
ATOGA SYSTEMS CADANT, INC.
------------- ------------
Total current assets....................... $ 330 $ 782
Property, plant and equipment, net......... $ 683 $ 4,281
Goodwill................................... $ -- $ 25,643
Intangible assets ......................... $ 683 $ 53,000
Total assets............................... $ 1,696 $ 83,706
Total current and long-term liabilities ... $ 1,696 $ 14,919
Total liabilities and membership interest.. $ 1,696 $ 14,919
NOTE 15. LEGAL PROCEEDINGS
ARRIS is a party to three lawsuits brought by or against John Mezzalingua
Associates, Inc. d/b/a PPC, including a suit initiated by Mezzalingua in late
July 2003. The Company intends to vigorously pursue all three lawsuits against
Mezzalingua. Additionally, ARRIS is a defendant in a case with Metal Press, in
which Metal Press alleges that ARRIS breached a requirements contract for
certain products. Discovery is substantially complete, and the Company is in the
process of preparing a motion for summary judgment. ARRIS does not believe that
Metal Press' claims are meritorious and intends to vigorously contest them.
NOTE 16. SUBSEQUENT EVENTS
OPTION EXCHANGE PROGRAM
On June 27, 2003, the Company offered to all eligible employees the opportunity
to exchange certain outstanding stock options for restricted shares of ARRIS
common stock. The Company's Board of Directors and its eight most highly
compensated executive officers during 2002 were not eligible to participate in
the offer. The offer expired on July 25, 2003. On July 28, 2003, ARRIS cancelled
options to purchase approximately 4.7 million shares of common stock and granted
approximately 1.5 million restricted shares in exchange. Employees tendered
approximately 78% of the options eligible to be exchanged under the program. In
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
the Company will record a fixed compensation expense equal to the fair market
value of the shares of restricted stock granted through the offer. This cost
will be amortized over the four-year vesting period for the restricted shares,
and equates to a charge of approximately $0.5 million per quarter. All eligible
options that were not surrendered for exchange are subject to variable
accounting. This variable accounting charge will fluctuate in accordance with
the market price of the ARRIS common stock until such stock options are
exercised, forfeited, or expire unexercised.
COM21
On July 22, 2003, the Company announced that it had entered into a definitive
agreement for the acquisition of certain cable modem termination system (CMTS)
related assets of Com21, including the stock of its Irish subsidiary, for a
purchase price of approximately $2.8 million, subject to the approval of the
U.S. Bankruptcy court and certain other closing conditions. ARRIS will retain
approximately 45 Com21 employees and will issue options to purchase a total of
approximately 90 thousand shares of common stock to those employees. The newly
acquired product line, along with the existing product offerings of ARRIS, will
allow the Company to reach smaller scale cable systems domestically and
internationally. The transaction is expected to be completed during the third
quarter of 2003.
REGISTRATION OF NORTEL SHARES
On July 25, 2003, the Company filed a registration statement with the Securities
and Exchange Commission on Form S-3 related to the registration for resale of 14
million shares of ARRIS common stock held by Nortel Networks. Pursuant to this
registration statement, Nortel Networks, over the next two years, may sell up to
14 million shares of the Company's common stock in one or more offerings.
DIVESTITURE OF ESP
In June 2003, ARRIS entered into a non-binding letter of intent agreement with
an undisclosed buyer to sell its ESP consulting services. During the three and
six-month periods ended June 30, 2003, the ESP product line recorded revenue of
approximately $0.6 million and $1.1 million, respectively, classified in
supplies and services revenue. The ESP transaction is expected to be complete by
the end of the third quarter 2003. Under the terms of the letter of intent, the
Company will recognize a loss on sale in the range of $1.0 million to $2.0
million.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Set forth below is a description of how our business performed during the three
and six-month periods ending June 30, 2003 as compared to the same periods in
2002. During the past two years, we have significantly changed our business
through acquisitions, product line rationalizations and cost reduction actions,
allowing us to focus on our long-term business strategy. As a result of our
acquisitions and dispositions, our business has changed significantly and our
historical results of operations are not as indicative of future results of
operations as they otherwise might suggest.
CAPITAL STRUCTURE ACTIONS
Notes due 2008. On March 18, 2003, we issued $125.0 million of 4 1/2%
convertible subordinated notes due March 15, 2008. These notes are convertible
at the option of the holder into our common stock at $5.00 per share, subject to
adjustment. We are entitled to call the notes for redemption at any time,
subject to our making a "make whole" payment if we call them for redemption
prior to March 15, 2006. In addition, we are required to repurchase the notes in
the event of a "change in control."
We used approximately $88.4 million of the proceeds, including the reduction in
the forgiveness of the Class B membership interest, of the notes issuance to
redeem the entire Class B membership interest in Arris Interactive held by
Nortel Networks. We used approximately $28.0 million of the proceeds of the
issuance to repurchase and retire 8 million shares of our common stock held by
Nortel Networks at a discount. We will use the remaining proceeds for general
corporate purposes.
Credit Facility. On several occasions during 2002 we modified our credit
facility in order to allow us to use existing cash reserves and proceeds of
asset sales to purchase or redeem our outstanding 4 1/2% convertible
subordinated notes due 2003. These modifications imposed certain conditions on
the use of such cash to purchase or redeem additional notes. On March 11, 2003,
we amended the credit facility to permit us to issue up to $125.0 million of new
convertible subordinated notes due 2008 and to use the proceeds of the new notes
to redeem the Class B membership interest in Arris Interactive held by Nortel
Networks and to purchase shares of our common stock held by Nortel Networks,
subject to certain limitations. The amendment also reduced the revolving loan
commitments to $115.0 million.
Membership Interest. In connection with the acquisition of Arris Interactive in
August 2001, Nortel Networks exchanged its remaining ownership interest in Arris
Interactive for 37 million shares of our common stock and a subordinated
redeemable Class B membership interest in Arris Interactive with a face amount
of $100.0 million. The Class B membership interest earned an accreting non-cash
return of 10% per annum, compounded annually, and was redeemable in
approximately four quarterly installments commencing February 3, 2002, provided
that certain availability and other tests are met under our revolving credit
facility. Those tests were not met. The balance of the Class B membership
interest as of December 31, 2002 was approximately $114.5 million. In June 2002,
we entered into an option agreement with Nortel Networks that permitted us to
redeem the Class B membership interest in Arris Interactive at a discount of 21%
prior to June 30, 2003. To further induce us to redeem the Class B membership
interest, Nortel Networks offered to forgive an additional $5.9 million of the
amount owed Nortel Networks if we redeemed it prior to March 31, 2003. We used
approximately $88.4 million of the proceeds of the March 2003 convertible note
offering to redeem the entire Class B membership interest.
Notes due 2003. In May 1998, we issued $115.0 million of 4 1/2% convertible
subordinated notes due May 15, 2003. In 2002, we retired $91.1 million of these
notes through cash repurchases and exchanges for our common stock. During the
first quarter 2003, we repurchased an additional $12.4 million of the notes, and
repurchased the remaining $11.5 million of the notes during the second quarter
2003 on the maturity date on May 15, 2003.
Common Stock. Of the 37 million shares of our common stock that Nortel Networks
received in 2001, it sold 15 million in a registered public offering in June
2002. In order to reduce its holdings further, in March 2003 Nortel Networks
granted us an option to purchase up to 16 million shares at a 10% discount to
market, subject to a
16
minimum purchase price of $3.50 per share for 8 million shares and $4.00 per
share for the remainder. In addition, to the extent that we purchased shares at
a price of less than $4.00 per share, we were obligated to return to Nortel
Networks a portion of the return that was forgiven with respect to the Class B
membership interest, up to a maximum of $2.0 million. Pursuant to this option,
on March 24, 2003, we purchased 8 million shares for an aggregate purchase price
of $28.0 million. Contemporaneously with this transaction, we paid Nortel
Networks $2.0 million, which represented the reduction in the forgiveness of the
Class B membership interest. We did not exercise the option to repurchase the
remaining 8 million shares offered by Nortel Networks, which expired on June 30,
2003. On July 25, 2003, we filed a registration statement with the Securities
and Exchange Commission on Form S-3 related to the registration for resale of
the remaining 14 million shares of ARRIS common stock held by Nortel Networks.
Pursuant to this registration statement, Nortel Networks, over the next two
years, may sell up to 14 million shares of the Company's common stock in one or
more offerings.
PRODUCT PORTFOLIO ACTIONS
Acquisition of Com21. On July 22, 2003, we announced that we had entered into a
definitive agreement for the acquisition of certain cable modem termination
systems (CMTS) related assets of Com21, including the stock of its Irish
subsidiary, for a purchase price of approximately $2.8 million, subject to the
approval of the U.S. Bankruptcy court and certain other closing conditions.
ARRIS will retain approximately 45 Com21 employees and will issue options to
purchase a total of approximately 90 thousand shares of common stock to those
employees. The newly acquired product line, along with our existing product
offerings, will allow us to reach smaller scale systems domestically and
internationally. The transaction is expected to be complete during the third
quarter of 2003. We anticipate the transaction to be slightly dilutive to our
earnings per share during the second half of 2003 and accretive in 2004.
Acquisition of Atoga Systems. On 