Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

___________________________

FORM 10-Q

For the quarter ended June 30, 2002

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.

     As of July 31, 2002, 82,370,342 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

Table of Contents

ARRIS GROUP, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002

INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

See accompanying notes to the consolidated financial statements

3

Table of Contents

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

See accompanying notes to the consolidated financial statements.

4

Table of Contents

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the consolidated financial statements.

5

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. 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 the Company in 1995. Nortel exchanged its ownership interest in Arris Interactive L.L.C. for a subordinated redeemable preferred membership interest in Arris Interactive L.L.C. with a face amount of $100 million and 37 million shares of ARRIS common stock. Following the Arris Interactive L.L.C. acquisition, Nortel designated two new members to ARRIS’ Board of Directors. In June 2002, Nortel sold 15 million of its shares of ARRIS through a public offering. As of June 30, 2002, Nortel owned approximately 26.7% of the Company’s outstanding common stock.

     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 2002 financial statement presentation. Interim results of operations are not necessarily indicative of results to be expected from a twelve-month period. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the Company’s year ended December 31, 2001.

NOTE 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and Statement of Financial Accounting Standards (“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 is now complete, and entailed the assessment of the fair value of the net assets underlying the Company’s acquisition related goodwill on a business by business basis. The fair value was deemed less than the related carrying value, and the Company was required to reduce the amount of the goodwill. The Company adopted SFAS No. 142 on January 1, 2002. Under the transitional provisions of SFAS No. 142, ARRIS recorded a goodwill impairment loss of approximately $58.0 million. See Note 6 of Notes to the Consolidated Financial Statements. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.

     In October 2001, the FASB issued 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 was effective for year-ends beginning after December 15, 2001 (e.g. January 1, 2002

6

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

for a calendar-year company). The Company has adopted SFAS No. 144 and has determined that there is no significant impact on its financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement relates to accounting for debt extinguishments, leases, and intangible assets of motor carriers. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. The Company is currently reviewing the provisions of the Statement to determine the impact on its results of operations and financial condition.

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force No. 94-3. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company is currently reviewing the provisions of the Statement to determine the impact on its results of operations and financial condition.

NOTE 3. RESTRUCTURING AND OTHER CHARGES

     On April 25, 2002 ARRIS sold its Keptel product line. Keptel designed and marketed network interface systems and fiber optic cable management products primarily for traditional telco residential and commercial applications. The transaction generated cash proceeds of $30.0 million. Additionally, ARRIS retained a potential earnout over a twenty-four month period based on sales achievements. The transaction also included a distribution agreement whereby ARRIS will continue to distribute Keptel products. The Keptel product line accounted for approximately $58.0 million or 7.8% of ARRIS revenues in 2001. Total assets of approximately $31.1 million were disposed of, which included inventory, fixed assets, intangibles (formerly classified as goodwill), and other assets. Additionally, ARRIS incurred approximately $7.4 million of related closure costs, including severance, vendor liabilities, outside consulting fees, and other shutdown expenses. The net result of the transaction was a loss on the sale of the product line of approximately $8.5 million.

     During the second quarter of 2002, ARRIS established a bad debt reserve in connection with its Adelphia accounts receivable. Adelphia declared bankruptcy in June, 2002. The reserve resulted in a charge of approximately $20.2 million, which impacted the Company’s second quarter 2002 operating expenses.

     During the third quarter of 2001, the Company sold its power product line. At the time of the transaction, remaining inventories (which had not transferred to the buyer) were assessed and the Company wrote them down to the estimated net realizable value. Efforts to deplete the remaining power inventory have not been as successful as planned. During the second quarter of 2002, the Company wrote off the balance of remaining inventory, resulting in a charge to cost of goods sold of approximately $2.1 million.

     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. As of June 30, 2002, approximately $0.6 million related to severance, $0.5 million related to lease commitments, and $0.2 million of shutdown expenses remained in the restructuring accrual to be paid. The Company anticipates completing this restructuring process by the end 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 entailed the implementation of an expanded

7

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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. 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. As of June 30, 2002, approximately $1.2 million related to severance, $1.7 million related to lease commitments, and $2.4 million related to purchase order commitments, warranty reserve, and other shutdown expenses remained in the accrual to be paid. It is anticipated that the restructuring will be predominantly completed during the last half of 2002.

NOTE 4. 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):

NOTE 5. PROPERTY, PLANT AND EQUIPMENT, NET

     Property, plant and equipment, at cost, consists of the following (in thousands):

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

     ARRIS adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Application of the non-amortization provision of SFAS No. 142 will result in the elimination of approximately $10.5 million of amortization expense in fiscal 2002. Under the transitional provisions of SFAS No. 142, the Company recorded a goodwill impairment loss of approximately $58.0 million, based upon an independent valuation. 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 resulting impairment loss has been recorded as a cumulative effect of change in accounting principle on the accompanying Consolidated Statements of Operations for the six months ended June 30, 2002.

8

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

     The following sets forth a reconciliation of net income and earnings per share information for the three and six-month periods ended June 30, 2002 and 2001, as adjusted for the non-amortization provisions of SFAS No. 142:

     The changes in the carrying amount of goodwill for the year ended December 31, 2001 and for the six months ended June 30, 2002 are as follows:

9

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

     The gross carrying amount and accumulated amortization of the Company’s intangible assets, other than goodwill, as of June 30, 2002 and December 31, 2001 are as follows (in thousands):

     Amortization expense recorded on the intangible assets listed in the above table for the three and six months ended June 30, 2002 was $8.7 million and $17.1 million, respectively. No intangible amortization expense was recorded for the three and six months ended June 30, 2001, as the acquisitions of Arris Interactive L.L.C. and Cadant, Inc. occurred after that date. The estimated amortization expense for each of the next five fiscal years is as follows (in thousands):

NOTE 7. DEBT, CAPITAL LEASE OBLIGATIONS AND MEMBERSHIP INTEREST

     Debt, capital lease obligations and membership interest consist of the following (in thousands):

     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 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. In April 2002, ARRIS exchanged 1,017,285 shares of its common stock for $9.7 million of the Notes in private transactions. On May 10, 2002, as part of a public exchange offer, the Company exchanged 576,504 shares of its common stock for approximately $5.7 million of the Notes. The Company recorded the exchanges in accordance with SFAS No. 84, Induced Conversions of Convertible Debt, which requires the recognition of an expense

10

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

equal to the fair value of additional shares of common stock issued in excess of the number of shares that would have been issued upon conversion under the original terms of the Notes. As a result, in connection with these exchanges, ARRIS recorded a non-cash loss of approximately $8.7 million, based upon a weighted average common stock value of $9.10 (as compared with a common stock value of $24.00 per share in the original conversion ratio for the Notes). In connection with the exchanges, the Company also incurred associated fees of $0.6 million, resulting in an overall loss of approximately $9.3 million. As of June 30, 2002, there were approximately $99.6 million of the Notes outstanding.

     In connection with the Arris Interactive L.L.C. acquisition in 2001, all of the Company’s existing bank indebtedness was refinanced. The new facility, as amended, is an asset-based revolving credit facility permitting the Company to borrow up to $143.0 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). In addition, upon attaining appropriate asset appraisals, ARRIS may include in the borrowing base calculation 80% of the orderly liquidation value of eligible inventory (not to exceed $60.0 million). The 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. However, the maturity date of the credit facility will be March 31, 2003 in the event that at least approximately $54.0 million of principal amount of the Company’s remaining Notes are not either refinanced or converted to ARRIS common stock prior to March 31, 2003 in a manner satisfactory to the lenders under the credit facility. The commitment fee on unused borrowing is approximately 0.75%. In connection with the sale of the Keptel product line, the credit facility was amended in April and May 2002 to permit the sale of Keptel, to reduce the commitment amount under the credit facility to $143.0 million, to extend until March 31, 2003 the time period by which the Company must redeem or refinance a portion of its Notes, to utilize the Company’s cash resources to retire the Notes and other incidental matters. The availability under the facility at June 30, 2002 was approximately $46.5 million. As of June 30, 2002, ARRIS had no borrowings on the revolving line of credit outstanding. Due to the reserve recorded in connection with the Company’s Adelphia receivables, ARRIS was in technical default of one of its covenants. The Company subsequently received a waiver for the Adelphia charge.

     In conjunction with the acquisition of Arris Interactive L.L.C., the Company issued to Nortel Networks a subordinated redeemable preferred membership interest in Arris Interactive L.L.C. with a face amount of $100.0 million. This membership interest earns an accreting non-cash return of 10% per annum, compounded annually, and is due six months after the maturity date of the Company’s revolving credit facility, as amended or extended. 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 revolving credit facility. Those tests are not expected to be met in 2002, and if not met, no payments are due. No amounts were redeemed during the quarter ended June 30, 2002. In June 2002, the Company entered into an option agreement with Nortel Networks that permits Arris Interactive L.L.C. to redeem Nortel Networks’ membership interest in Arris Interactive at a discount of 21% prior to June 30, 2003. For the three and six month periods ended June 30, 2002, the Company recorded membership interest expense of $2.5 million and $5.0 million, respectively.

     In conjunction with the acquisition of Cadant, Inc., the Company assumed approximately $2.3 million in capital lease obligations, related to machinery and equipment. The leases require future rental payments until 2003.

     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 such dividends.

NOTE 8. COMPREHENSIVE (LOSS) INCOME

     Total comprehensive (loss) for the three and six-month periods ended June 30, 2002 was $(41.1) million and $(101.3) million, respectively. Total comprehensive (loss) for the three and six-month periods ended June 30, 2001 was $(14.7) million and $(22.0) million, respectively. The difference in the comprehensive loss as compared to the net loss for all periods was immaterial. Such comprehensive loss,

11

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

which is recorded as a separate component of stockholders’ equity is related to cumulative translation adjustments and unrealized holding losses on marketable securities.

NOTE 9. SALES INFORMATION

     A significant portion of ARRIS’ revenue is derived from sales to AT&T, aggregating $83.5 million and $54.6 million for the quarters ended June 30, 2002 and 2001, respectively. Through the first six months of 2002, revenue generated by sales to AT&T were approximately $135.6 million, as compared to the first half of 2001 when sales to AT&T totaled $145.5 million.

     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 product categories: broadband (previously labeled cable telephony and internet access); transmission, optical, and outside plant; and supplies and services. Consolidated sales by principal products and services for the three and six months ended June 30, 2002 and 2001, respectively were as follows (in thousands):

     ARRIS sells its products both in the United States and in the international markets of Asia Pacific, Europe, Latin America and Canada. The Asia Pacific market includes Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Sampan, Singapore, Taiwan, and Thailand. The European market includes France, Ireland, Italy, Netherlands, Portugal, Spain and the United Kingdom. International sales for the three and six months ended June 30, 2002 and 2001 are as follows (in thousands):

•

Under the previous joint venture agreement with Nortel, the Company was not able to sell the Arris Interactive L.L.C. Cornerstone products internationally. This agreement was terminated upon the Company’s acquisition of Nortel’s ownership interest in Arris Interactive L.L.C. on August 3, 2001.

     Total identifiable international assets were immaterial.

12

Table of Contents

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

NOTE 10. EARNINGS PER SHARE

     The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations for the periods indicated (in thousands except per share data):