| ARRIS GROUP INC Item 1A Risk Factors Our business is dependent on customers’ capital spending on broadband communication systems, and reductions by customers in capital spending would adversely affect our business |
| Our performance 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, our sales and profits, including: • general economic conditions; • availability and cost of capital; • other demands and opportunities for capital; • regulations; • demands for network services; • competition and technology; • real or perceived trends or uncertainties in these factors; and • acceptance of new services offered by our customers |
| Developments in the industry and in the capital markets over the past several years reduced access to funding for our customers in the past and caused delays in the timing and scale of deployments of our equipment, as well as the postponement or cancellation of certain projects by our customers |
| In addition, we and other vendors received notification from several customers that they were canceling projects or scaling back projects or delaying orders to allow them to reduce inventory levels which were in excess of their then current deployment requirements |
| Further, several of our customers have accumulated significant levels of debt |
| In particular, Adelphia has been operating in bankruptcy since the first half of 2002 and Cabovisao’s Canadian parent, Csii, has been operating under bankruptcy protection since the middle of 2003 |
| Even if the financial health of those companies and other customers improves, we cannot assure you that these customers will be in a position to purchase new equipment at levels we have seen in the past |
| In addition, the bankruptcy filing of Adelphia in June 2002 has further heightened concerns in the financial markets about the domestic cable industry |
| The concern, coupled with the current uncertainty and volatile capital markets, has affected the market values of domestic cable operators and may further restrict their access to capital |
| The markets in which we operate are intensely competitive, and competitive pressures may adversely affect our results of operations |
| The markets for broadband communication systems are extremely competitive and dynamic, requiring the companies that compete in these markets to react quickly and capitalize on change |
| This will require us to retain skilled and experienced personnel as well as deploy substantial resources toward meeting the ever-changing demands of the industry |
| We compete with national and international manufacturers, distributors and wholesalers including many companies larger than ARRIS Our major competitors include: • Big Band Networks; • Cisco Systems, Inc |
| ; • Motorola, Inc |
| ; and • TVC Communications, Inc |
| announced that Cisco will acquire Scientific-Atlanta |
| The acquisition was completed in February of 2006 |
| 15 _________________________________________________________________ [71]Table of Contents The rapid technological changes occurring in the broadband markets may lead to the entry of new competitors, including those with substantially greater resources than ours |
| Because the markets in which we compete are characterized by rapid growth and, in some cases, low barriers to entry, smaller niche market companies and start-up ventures also may become principal competitors in the future |
| Actions by existing competitors and the entry of new competitors may have an adverse effect on our sales and profitability |
| The broadband communications industry is further characterized by rapid technological change |
| In the future, technological advances could lead to the obsolescence of some of our current products, which could have a material adverse effect on our business |
| Further, many of our larger competitors are in a better position to withstand any significant reduction in capital spending by customers in these markets |
| They often have broader product lines and market focus and therefore will not be as susceptible to downturns in a particular market |
| In addition, several of our competitors have been in operation longer than we have been, and therefore they have more long-standing and established relationships with domestic and foreign broadband service users |
| We may not be able to compete successfully in the future, and competition may harm our business |
| Our business has primarily come from several key customers |
| The loss of one of these customers or a significant reduction in services to one of these customers would have a material adverse effect on our business |
| Our four largest customers (including their affiliates, as applicable) are Comcast, Cox Communications, Liberty Media International, and Time-Warner Cable |
| For the year ended December 31, 2005, sales to Comcast accounted for approximately 24dtta0prca, sales to Cox Communications accounted for approximately 17dtta2prca of our total revenues, sales to Liberty Media International accounted for approximately 15dtta3prca, and sales to Time-Warner Cable accounted for approximately 10dtta6prca |
| The loss of any of these customers, or one of our other large customers, or a significant reduction in the products or services provided to any of them would have a material adverse impact on our business |
| The broadband products that we develop and sell are subject to technological change and a trend towards open standards, which may impact our future sales and margins |
| The broadband products we sell are subject to continuous technological evolution |
| This trend also is expected to increase the number of competitors and drive capital costs per subscriber deployed down |
| These factors may adversely impact both our future revenues and margins |
| We have anti-takeover defenses that could delay or prevent an acquisition of our company |
| On October 3, 2002, our Board of Directors approved the adoption of a shareholder rights plan (commonly known as a “poison pill”) |
| This plan is not intended to prevent a takeover, but is intended to protect and maximize the value of shareholders’ interests |
| This plan could make it more difficult for a third party to acquire us or may delay that process |
| Products currently under development may fail to realize anticipated benefits |
| Rapidly changing technologies, evolving industry standards, frequent new product introductions and relatively short product life cycles characterize the markets for our products |
| The technology applications that we are currently developing may not ultimately be successful |
| Even if the products in development are successfully brought to market, they may not be widely used or we may not be able to successfully exploit these technology applications |
| To compete successfully, we must quickly design, develop, manufacture and sell 16 _________________________________________________________________ [72]Table of Contents new or enhanced products that provide increasingly higher levels of performance and reliability |
| However, we may not be able to successfully develop or introduce these products if our products: • are not cost-effective; • are not brought to market in a timely manner; • fail to achieve market acceptance; or • fail to meet industry certification standards |
| Furthermore, our competitors may develop similar or alternative new technology applications that, if successful, could have a material adverse effect on us |
| Our strategic alliances are based on business relationships that have not been the subject of written agreements expressly providing for the alliance to continue for a significant period of time |
| The loss of a strategic 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 would have a material adverse effect on our business |
| The telecommunications industry has experienced the consolidation of many industry participants, and this trend may continue |
| For instance, in November 2005, Cox Communications announced a definitive agreement to sell some of its cable television systems to Cebridge Connections and, in April 2005, Adelphia announced that its assets were going to be acquired by Comcast and Time Warner |
| When consolidations occur, it is possible that the acquirer will not continue using the same suppliers, thereby possibly resulting in an immediate or future elimination of sales opportunities for us or our competitors, depending upon who had the business initially |
| Consolidations also could result in delays in purchasing decisions by the merged businesses |
| The purchasing decisions of the merged companies could have a material adverse effect on our business |
| Mergers among the supplier base also have increased, and this trend may continue |
| For example, in the fourth quarter of 2005, Cisco Systems, Inc |
| and Scientific-Atlanta, Inc |
| announced that Cisco would acquire Scientific-Atlanta |
| Larger combined companies with pooled capital resources may be able to provide solution alternatives with which we would be put at a disadvantage to compete |
| The larger breadth of product offerings by these consolidated suppliers could result in customers electing to trim their supplier base for the advantages of one-stop shopping solutions for all of their product needs |
| Consolidation of the supplier base could have a material adverse effect on our business |
| Acquisitions can involve significant risks |
| We routinely consider acquisitions of, or investments in, other businesses |
| There are a number of risks attendant to any acquisition, including the possibility that we will overvalue the assets to be purchased, that we will not be able to successfully integrate the acquired business or assets, and that we will not be able to produce the expected level of profitability from the acquired business or assets |
| In addition, we might incur substantial indebtedness in order to finance an acquisition, which could require substantial payments in the future, and we might issue common stock or other securities to pay for an acquisition, in which event the acquisition may ultimately prove to be dilutive to our current stockholders |
| As a result, the impact of any acquisition on our future performance may not be as favorable as expected and actually may be adverse |
| Our success depends in large part on our ability to attract and retain qualified personnel in all facets of our operations |
| Competition for qualified personnel is intense, and we may not be successful in attracting and retaining key executives, marketing, engineering, technical support and sales personnel, which could impact our ability to maintain and grow our operations |
| Our future success will depend, to a significant extent, on the ability of our management to operate effectively |
| In the past, competitors and others have attempted to recruit our employees and in the future, their attempts may continue |
| The loss of services of any key personnel, the 17 _________________________________________________________________ [73]Table of Contents inability to attract and retain qualified personnel in the future or delays in hiring required personnel, particularly engineers and other technical professionals, could negatively affect our business |
| We are substantially dependent on contract manufacturers, and an inability to obtain adequate and timely delivery of supplies could adversely affect our business |
| Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or a limited group of suppliers |
| Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on subcontractors involves several risks including a potential inability to obtain an adequate supply of required components, subassemblies or modules and reduced control over pricing, quality and timely delivery of components, subassemblies or modules |
| Historically, we have not generally maintained long-term agreements with any of our suppliers or subcontractors |
| An inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply could affect our ability to ship products on a timely basis |
| Any inability to reliably ship our products on time could damage relationships with current and prospective customers and harm our business |
| Our international operations may be adversely affected by any decline in the demand for broadband systems designs and equipment in international markets |
| Sales of broadband communications equipment into international markets are an important part of our business |
| The entire line of our products is marketed and made available to existing and potential international customers |
| In addition, United States broadband system designs and equipment are increasingly being employed in international markets, where market penetration is relatively lower than in the United States |
| While international operations are expected to comprise an integral part of our future business, international markets may no longer continue to develop at the current rate, or at all |
| We may fail to receive additional contracts to supply equipment in these markets |
| Our international operations may be adversely affected by changes in the foreign laws in the countries in which our manufacturers and assemblers have plants |
| A significant portion of our products are manufactured or assembled in China, Ireland, Mexico, the Philippines, and other countries outside of the United States |
| The governments of the foreign countries in which our products are manufactured may pass laws that impair our operations, such as laws that impose exorbitant tax obligations or nationalize these manufacturing facilities |
| We face risks relating to currency fluctuations and currency exchange |
| We may encounter difficulties in converting our earnings from international operations to US dollars for use in the United States |
| These obstacles may include problems moving funds out of the countries in which the funds were earned and difficulties in collecting accounts receivable in foreign countries where the usual accounts receivable payment cycle is longer |
| We are exposed to various market risk factors such as fluctuating interest rates and changes in foreign currency rates |
| These risk factors can impact our results of operations, cash flows and financial position |
| We manage these risks through regular operating and financing activities and periodically use derivative financial instruments such as foreign exchange forward contracts |
| There can be no assurance that our risk management strategies will be effective |
| Our profitability has been, and may continue to be, volatile, which could adversely affect the price of our stock |
| We have experienced several years with significant operating losses |
| Although we have been profitable in the past, we may not be profitable or meet the level of expectations of the investment community in the future, which could have a material adverse impact on our stock price |
| In addition, our operating results may be adversely affected by the timing of sales or a shift in our product mix |
| 18 _________________________________________________________________ [74]Table of Contents We may face higher costs associated with protecting our intellectual property |
| Our future success depends in part upon our proprietary technology, product development, technological expertise and distribution channels |
| We cannot predict whether we can protect our technology or whether competitors can develop similar technology independently |
| We have received and may continue to receive from third parties, including some of our competitors, notices claiming that we have infringed upon third-party patents or other proprietary rights |
| Any of these claims, whether with or without merit, could result in costly litigation, divert the time, attention and resources of our management, delay our product shipments, or require us to enter into royalty or licensing agreements |
| If a claim of product infringement against us is successful and we fail to obtain a license or develop non-infringing technology, our business and operating results could be adversely affected |