Arris Group DEF 14A 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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TABLE OF CONTENTS
ARRIS GROUP, INC.
To the Stockholders of ARRIS Group, Inc.:
The Annual Meeting of Stockholders of ARRIS Group, Inc. will be held at the Companys corporate headquarters, located at 3871 Lakefield Drive, Suwanee, Georgia, on Wednesday, May 28, 2008, at 10:00 a.m. local time, for the purposes of:
These matters are more fully described in the proxy statement accompanying this notice.
Important Notice Regarding the Availability of Proxy Materials for the Stockholders Meeting to be Held on May 28, 2008: Both our 2007 annual report and proxy statement for the Annual Meeting are available online at www.arrisi.com under the caption Investor Relations.
As shareholders of ARRIS, your vote is important. Whether or not you plan to attend the Annual Meeting in person, it is important that you vote as soon as possible to ensure that your shares are represented. Therefore, I urge you to promptly vote and submit your proxy via the Internet, by telephone or by signing, dating, and returning the enclosed proxy card in the accompanying reply envelope. If you decide to attend the annual meeting, you will be able to vote in person, even if you have previously submitted your proxy.
The Board of Directors has fixed the close of business on March 31, 2008, as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting or any adjournment(s) thereof. A complete list of the stockholders entitled to vote at the meeting will be open for examination at the Companys corporate headquarters by any stockholder for any purpose germane to the meeting during ordinary business hours for ten days prior to the meeting and at the meeting.
A copy of ARRIS Group, Inc.s Annual Report to Stockholders for the fiscal year ended December 31, 2007, is enclosed. Additional copies of this report may be obtained without charge by writing the Secretary of ARRIS Group, Inc., 3871 Lakefield Drive, Suwanee, Georgia 30024.
BY ORDER OF THE BOARD OF DIRECTORS
Lawrence A. Margolis, Secretary
April 14, 2008
To Be Held May 28, 2008
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of ARRIS Group, Inc., a Delaware corporation. The Companys corporate headquarters is located at 3871 Lakefield Drive, Suwanee, Georgia 30024 (telephone 678-473-2000). This proxy statement and form of proxy are first being mailed to stockholders on or about April 14, 2008. Proxies solicited by the Board of Directors of the Company are to be voted at the Annual Meeting of Stockholders of the Company to be held on May 28, 2008 at 10:00 a.m. local time at the Companys corporate headquarters, 3871 Lakefield Drive, Suwanee, Georgia and any adjournment(s) thereof.
This solicitation is being made by mail, although directors, officers and regular employees of the Company may solicit proxies from stockholders personally or by telephone or letter. The costs of this solicitation will be borne by the Company. The Company may request brokerage houses, nominees or fiduciaries and other custodians to forward proxy materials to their customers and will reimburse them for their reasonable expenses in so doing. In addition, the Company has retained Morrow & Co., LLC to assist in the solicitation for a fee of approximately $15,000 plus expenses.
Shares of Common Stock of the Company represented by proxies in the accompanying form, which are properly executed and returned to the Company (and which are not effectively revoked), will be voted at the meeting in accordance with the stockholders instructions contained therein. In the absence of contrary instructions, except as discussed below, shares represented by such proxies will be voted IN FAVOR OF Proposal 1 to elect as directors the nominees listed herein, IN FAVOR OF Proposal 2 to approve the Companys 2008 Stock Incentive Plan, IN FAVOR OF Proposal 3 to approve the retention of Ernst & Young LLP as the independent registered public accounting firm for the Company for 2008, and in the discretion of the appointed proxies upon such other business as may properly be brought before the meeting.
Each stockholder has the power to revoke his or her proxy at any time before it is voted by (1) delivering to the Company, prior to or at the meeting, written notice of revocation or a later dated proxy, or (2) attending the meeting and voting his or her shares in person.
The Board of Directors has fixed the close of business on March 31, 2008, as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting or any adjournment(s) thereof. As of that date, 122,389,955 shares of Common Stock were outstanding. Each holder of Common Stock is entitled to one vote per share.
A quorum, which is a majority of the outstanding shares of Common Stock as of the record date, must be present in order to hold the meeting. Your shares will be counted as being present at the meeting if you appear in person at the meeting or if you submit a properly executed proxy.
A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have the discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Broker non-votes are not deemed to be entitled to vote for purposes of determining whether stockholder approval of that matter has been obtained. As a result, broker non-votes are not included in the tabulation of the voting results on the election of directors or issues requiring the approval of a majority of the shares of Common Stock present or represented by proxy and entitled to vote. Proxies that contain a broker non-vote are counted towards a quorum and voted on the matters indicated.
If a quorum is present, the votes required to approve the various matters presented to stockholders at the meeting shall be as follows:
In the absence of contrary instructions, the proxies received will be voted for the election as directors of the nominees listed below, all of whom presently serve on the Board of Directors, to hold office until the next annual meeting of stockholders or until their successors are elected and qualified. Although the Board of Directors does not contemplate that any nominee will decline or be unable to serve as director, in either such event the proxies will be voted for another person selected by the Board of Directors, unless the Board acts to reduce the size of the Board of Directors in accordance with the provisions of ARRIS by-laws. The current number of Directors has been set by the Board at eight. Upon his re-election at this years Annual Meeting, Mr. Stanzione is expected to serve as Chairman of the Board.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THESE NOMINEES.
APPROVAL OF THE 2008 STOCK INCENTIVE PLAN
The Board of Directors has approved the 2008 Stock Incentive Plan (the Plan), subject to approval by the stockholders, pursuant to which the Company can compensate its employees using shares of Common Stock (the
Shares). The following is a summary of the major provisions of the Plan, including a general discussion of the federal income tax aspects of the Plan to the Company and the recipients of awards. For a complete description, please read the Plan in its entirety, a copy of which is attached to this Proxy Statement as Appendix A.
Key features of the Plan include:
Recommendation. The Plan is substantially the same, except for the number of Shares, as the 2007 stock incentive plan. In the technology industry, stock-based compensation remains critical to the recruiting and retention of key personnel, and the Company needs the shares available under the Plan in order to fulfill this need. On March 28, 2008, annual equity awards were made. Approximately 2.6 million restricted stock units were granted. The restricted stock units granted included approximately 0.4 million performance-related Shares. As of March 31, 2008, approximately 14.8 million unvested or unexercised Shares were outstanding, and approximately 132 thousand Shares were available for future grant as options, of which 132 thousand were available as full valued shares. The Board of Directors recommends that you approve the Plan.
Purpose. The purpose of the Plan is to facilitate the hiring, retention and continued motivation of key employees, consultants and directors and to align more closely their interests with those of the Company and its stockholders.
Administration and amendment. The Plan is administered by the Compensation Committee of the Board of Directors or such other Board Compensation Committee consisting solely of independent directors as the Board may designate, or by the Board itself (for purposes of this proposal, the Compensation Committee). The Compensation Committee may, from time to time, suspend, terminate, revise or amend the Plan or terms of any grant except that, without the approval of stockholders, no such revision or amendment may change the number of Shares covered by or specified in the Plan, change the restrictions described below, or expand those eligible for grants under the Plan.
Participation. All key employees, directors, or active consultants of the Company and its subsidiaries are eligible to receive grants under the Plan. The determination of the persons within these categories, which encompass all officers, including those named in the Summary Compensation Table, to receive grants and the terms and the form and level of grants will be made by the Compensation Committee.
Limitations. The exercise price of any option or stock appreciation right cannot be less than the fair market value of the corresponding number of Shares as of the grant date, provided that the options or stock appreciation rights replacing options or rights not granted by the Company or its predecessors e.g., as part of an acquisition may have exercise prices that, in the judgment of the Compensation Committee, result in options or rights
comparable in value to those being replaced. No person may be granted, in any period of two consecutive calendar years, awards under the Plan covering more than 1,500,000 Shares. The maximum amount to be granted to any one person pursuant to performance units, in any calendar year, shall not exceed $2,000,000. No option may be repriced by amendment, substitution or cancellation and regrant, unless authorized by the stockholders. Adjustments as a result of stock splits and other events that adjust the number of Shares covered by the Plan, as explained below, will not be considered repricing. Options and stock appreciation rights shall vest over a minimum of three years (and shall vest no more quickly than ratably), and other awards shall have a minimum vesting or holding period of three years, provided, that (i) awards that are issued in connection with mergers and acquisitions may have vesting and holding periods that are the same as any awards that they are replacing or otherwise as deemed appropriate by the Compensation Committee and (ii) vesting or holding periods may be reduced as a result of death, disability, retirement, merger or sale, termination of employment or other extraordinary event. In the absence of an extraordinary event, the vesting and holding restrictions applicable to an award shall not be reduced or otherwise waived.
Number of Shares. A total of 12,300,000 Shares may be issued under the revised Plan. This number will be adjusted for stock splits, spin-offs, extraordinary cash dividends and similar events. The Shares may be newly issued Shares or Shares acquired by the Company. Awards made in the form of stock options and stock appreciation rights are counted against the share limit on a one-for-one basis. Awards made in shares of common stock other than stock options or stock appreciation rights are counted against the share limit on a 1.58 to one basis. If all or any portion of the Shares otherwise subject to any grant under the Plan are not delivered for any reason including, but not limited to, the cancellation, expiration or termination of any option right or unit, the settlement of any award in cash, the forfeiture of any restricted stock, or the repurchase of any Shares by the Company from a participant for the cost of the participants investment in the Shares, the equivalent number of shares that was charged against the Plan limit upon grant of such Shares shall be available again for issuance under the Plan. The Plan provides that shares issued upon the exercise of options or lapse of conditions on restricted shares or units that were converted to ARRIS options or restricted shares as a result of a merger or other acquisition do not reduce the number of shares available under the Plan. However, with respect to Shares issued under the Plan, Shares tendered to pay the option exercise price, Shares withheld for the payment of withholding taxes and Shares and other awards repurchased by the Company from a person using proceeds from the exercise of awards by that person shall not return to the share reserve, and the determination of the number of Shares used in connection with stock-settled stock appreciation rights shall be based upon the number of Shares with respect to which the rights were based, and not just the number of Shares delivered upon settlement.
Forms of Awards. Under the Plan, awards may be in the form of stock options (including incentive stock options), stock grants, stock units, restricted stock, stock appreciation rights, performance shares and units and dividend equivalent rights. The most likely forms of awards are stock options, restricted stock or units and performance shares.
Stock options will entitle the recipient to purchase a specified number of Shares upon payment of an exercise price. The exercise price cannot be less than the fair market value of one share on the date of grant. Typically, the Compensation Committee issues stock options that expire seven years after their date of grant and that vest ratably over a four-year period. If the recipient ceases to be an employee of the Company, unvested options are forfeited, subject to certain possible exceptions, such as death, disability, retirement or a change in control of the Company, and vested options typically have a limited period during which the recipient can exercise them.
Restricted stock is stock issued subject solely to the recipients remaining an employee of the Company. If the recipient ceases to be an employee of the Company prior to the assigned vesting period, restricted stock is forfeited, subject to certain possible exceptions, such as death, disability, retirement or a change in control of the Company.
Performance shares are shares issued subject to conditions or contingencies. Until the conditions or contingencies are satisfied or lapsed, the performance shares are subject to forfeiture. Such shares like restricted shares may also be subject to designated vesting periods. Typically the Compensation Committee issues performance shares to senior executives that can be earned by the recipient only upon achievement of certain performance criteria. If the recipient ceases to be an employee of the Company prior to the satisfaction of the contingency or any
applicable vesting period, performance shares are forfeited, subject to certain possible exceptions such as death, disability, retirement or a change in control of the Company.
Performance Criteria. Section 162(m) of the Internal Revenue Code limits the amount of deduction that a company may take on its U.S. federal tax return for compensation paid to any covered employees (generally, the individuals named below in the Summary Compensation Table). The limit is $1 million per covered employee per year, with certain exceptions. The deductibility limitation does not apply to performance-based compensation, if approved by the stockholders. The Company believes that certain awards under the Plan will quality as performance-based compensation, if stockholders approve the Plan and it otherwise is administered in compliance with Section 162(m). In order for some awards to be performance based, such as restricted stock, they must be subject to performance criteria. The Plan provides for several different types of performance criteria: revenue, earnings before interest, taxes, depreciation and amortization (EBITDA); cash earnings (earnings before amortization of intangibles); operating income; pre- or after-tax income; earnings per share, net cash flow; net cash flow per share; net earnings; return on equity; return on total capital; return on sales, return on net assets employed, return on assets; economic value added (or an equivalent metric); share price performance; total shareholder return; improvement in or attainment of expense levels; and improvement in or attainment of working capital levels. Performance criteria may be related to a specific customer, group of customers, geographic region, business unit or product group. Performance criteria may be measured solely on a corporate, subsidiary or division basis, or a combination thereof. Performance criteria may reflect absolute entity performance or a relative comparison of entity performance to the performance of a peer group of entities or other external measure of the selected performance criteria. Profit, earnings and revenues used for any performance goal measurement may exclude any extraordinary or nonrecurring items. In approving the Plan, stockholders will be approving these performance criteria, which are contained in the Plan.
Taxes. Generally, under present federal tax laws, a grant of a stock option or a stock unit, a share of restricted stock or a performance share subject to the required risk of forfeiture under the Plan should create no tax consequences for a participant at the time of grant. Generally, the Company will be entitled to tax deductions at the time and to the extent that participants recognize ordinary income. As discussed above in some cases (generally other than options with exercise prices no lower than fair market value of the Shares on the date of grant and performance shares), the Company will not be entitled to this deduction to the extent the amount of such income, together with other compensation received by that person from the Company, exceeds $1,000,000 in any one year.
Upon exercise of an option, which is not an incentive stock option (ISO) within the meaning of Section 422 of the Internal Revenue Code, a participant will be taxed on the excess of the fair market value of the Shares on the date of exercise over the exercise price. A participant generally will have no taxable income upon exercising an ISO. If the participant does not dispose of Shares acquired pursuant to the exercise of an ISO within two years of the grant or one year of the exercise, any gain or loss realized on their subsequent disposition will be capital gain or loss, and the Company will not be entitled to a tax deduction. If such holding period requirements are not satisfied, the participant will generally realize ordinary income at the time of disposition in an amount equal to the excess of the fair market value of the Shares on the date of exercise (or, if less, the amount realized upon disposition) over the option price and the Company will be entitled to a tax deduction. Any remaining gain is taxed as long or short-term capital gain. The value of a stock unit at the time it converts to stock and the value of restricted stock or performance share at the time the restriction lapses or the conditions are fulfilled are taxed as ordinary income to the participant. The Company has not issued ISOs as part of its equity compensation programs.
Accounting. Under Financial Accounting Standards Board Statement No. 123R, Accounting for Stock-Based Compensation, the Company will incur an expense equal to the fair value of the award, which expense would be recognized over the vesting period or term of the award. For more detailed discussion regarding the Companys accounting for awards, see Note 16 to the Companys Consolidated Financial Statements.
Relationship to Current Incentive Plans. The Plan will not have any impact upon awards outstanding under previous Company Stock Incentive Plans and awards will continue to be governed by the express terms and conditions of such plans and the written documents evidencing such awards.
New Plan Benefits. To date, there have been no grants under the Plan. Any future awards under the Plan will be made at the discretion of the Compensation Committee as described above. Consequently, the Company cannot determine, with respect to any particular person or group, the number or value of the awards that will be granted in the future pursuant to the Plan.
The last reported sales price of the Common Stock on March 31, 2008 was $5.82 per Share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.
APPROVAL OF THE APPOINTMENT OF ERNST & YOUNG LLP
AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors has appointed the firm of Ernst & Young LLP to serve as the independent registered public accounting firm of ARRIS Group, Inc. for the fiscal year ending December 31, 2008, subject to stockholder approval. This firm has audited the accounts of the Company since 1993. If stockholders do not approve this appointment, the Committee will consider other independent registered public accounting firms. One or more members of Ernst & Young LLP are expected to be present at the Annual Meeting, will be able to make a statement if they so desire, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL
OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
The following table sets forth, as of March 31, 2008, certain information with respect to the Common Stock of the Company that may be deemed beneficially owned by each director or nominee for director of the Company, the officers named in the Summary Compensation Table and by all directors, officers and nominees as a group.
The following table sets forth information as of March 31, 2008, with respect to each person who is known by the management of the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock. Unless otherwise indicated, the beneficial owner has sole voting and investment power and the information below is based upon SEC filings by the person.
Section 16(a) of the Exchange Act requires the Companys directors and executive officers and persons who own more than ten percent of a registered class of the Companys equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Companys Common Stock and other equity securities. To the Companys knowledge, based solely on review of the copies of such reports furnished to the Company or filed with the SEC and written representations that no other reports were required, for the fiscal year ended December 31, 2007, all Section 16(a) filing requirements applicable to its directors, executive officers and greater-than-ten-percent beneficial owners were properly filed, with the exception of one late report for a single Section 16(a) reporting transaction for each of Alex B. Best, Harry L. Bosco, John Anderson Craig, Matthew B. Kearney, William H. Lambert, and John R. Petty related to their July 1, 2007 stock award disclosed in the Director Compensation Table.
The following table sets forth information concerning Common Stock that may be issued upon exercise of options, warrants and rights under all equity compensation plans as of December 31, 2007:
The following transactions occurred between January 1, 2008, and March 31, 2008:
Giving effect to these transactions, the following table sets forth information concerning Common Stock that may be issued upon exercise of options, warrants and rights under all equity compensation plans as of March 31, 2008:
As of March 31, 2008 the weighted average remaining contractual term for the outstanding options, warrants and rights was 4.40 years.
As of March 31, 2008 the Company had unvested restricted stock awards of 2,741,590 shares and unvested performance based restricted stock awards of 788,048 shares.
As of March 31, 2008 the Company had 122,389,955 shares outstanding.
BOARD AND COMMITTEE MATTERS
The Board of Directors has determined that all of the directors, other than Robert J. Stanzione and David A. Woodle, which constitute a majority of the Board of Directors, are independent in accordance with the current listing standards of the NASDAQ, which the Company has adopted. In making these determinations, the Board of Directors considered that in the ordinary course of business, transactions may occur between the Company and companies at which some of the Directors are or have been outside Directors. The Board of Directors determined that the applicable Directors independence was not affected due to the immaterial nature of the transaction and the fact that the Director is not a member of management of the applicable company. A copy of the director independence standards is available on the Companys website at www.arrisi.com under the caption Investor Relations: Corporate Governance.
Mr. Stanzione, as the Companys Chief Executive Officer and President, and Mr. Woodle, who became a member of the Board effective with the C-COR merger on December 14, 2007, can not be considered independent directors.
COMPENSATION OF DIRECTORS
Cash Fees. Our non-employee directors receive director fees. During 2007, we paid our non-employee directors:
In addition, each member of the Audit Committee received an additional annual cash retainer of $5,000, and the respective Chairmen of our Board committees received the following fees:
Stock Awards. Each non-employee director annually receives $50,000 paid in the form of stock units. Stock units are granted on July 1st of each year and vest in fourths in sequential calendar quarters. The number of units is determined by dividing $50,000 by the closing price of the Common Stock on the most recent trading day rounded to the nearest one hundred units. One-half of the number of stock units convert, on a one for one basis, into shares of
the Companys Common Stock when such director is no longer a member of the Board. The remaining units, if vested, convert into shares of the Companys Common Stock at a date selected by the individual director.
Reimbursements. Non-employee directors are reimbursed for reasonable expenses (including costs of travel, food and lodging) incurred in attending Board, committee and shareowner meetings. Directors use commercial transportation or their own transportation. Directors also are reimbursed for reasonable expenses associated with other business activities related to their Board service, including participation in director education programs and memberships in director organizations.
Liability Insurance. We also pay premiums on directors and officers liability insurance policies we maintain that cover our directors.
Director Compensation Table. The following tables set forth information about the compensation paid to the non-employee members of the Board of Directors for the last fiscal year.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
The Board of Directors has Audit, Compensation, Nominating and Corporate Governance, Technology, and Executive Committees. The table below shows current membership for each of the standing Board committees.
The Board of Directors held eight meetings in 2007. During 2007, each of the directors attended 75% or more of the total of all meetings held by the Board and the committees on which the director served.
The Company has not adopted a formal policy on Board members attendance at annual meetings of stockholders; however, all directors are encouraged to attend the meetings. All of the Companys directors, except Mr. Craig, attended the 2007 annual meeting of stockholders on May 24, 2007.
The Audit Committee in 2007 consisted of Messrs. Petty (Chairperson), Bosco, Craig, and Kearney. Information regarding the functions performed by the Audit Committee is set forth in the Report of the Audit Committee, included in this proxy statement. The Audit Committee is governed by a written charter that is available on the Companys website at www.arrisi.com. The Board of Directors believes that each of its Audit Committee members is independent and financially literate as defined by the SEC and the current listing standards of the NASDAQ. The Board has identified John R. Petty and Matthew B. Kearney as Audit Committee financial experts, as defined by the SEC. The Audit Committee held twelve meetings in 2007.
The Compensation Committee in 2007 consisted of Messrs. Lambert (Chairperson), Best and Craig. No member of the Compensation Committee is currently or has served as an executive officer or employee of the Company and none of the members of the Compensation Committee had any interlocks within the meaning of Item 407(e)(4) of the SEC Regulation S-K during fiscal 2007. The Compensation Committee is governed by a written charter that is available on the Companys website at www.arrisi.com. The Compensation Committee determines the compensation for our executive officers and non-employee directors, establishes our compensation policies and practices, and reviews annual financial performance under our employee incentive plans. The Compensation Committee generally exercises all powers of the Board of Directors in connection with compensation matters, including incentive compensation, benefit plans and stock grants, except as relates to the Chairman and CEO, in which case the entire Board of Directors approves or ratifies all said compensation matters. The Compensation Committee held eight meetings in 2007.
The Nominating and Corporate Governance Committee in 2007 consisted of Messrs. Bosco (Chairperson), Best, Lambert, and Petty. The Nominating and Corporate Governance Committees operations are governed by a written charter that is available on the Companys website at www.arrisi.com. The Nominating and Corporate Governance Committee identifies individuals qualified to become directors and recommends candidates to the Board of Directors. The Nominating and Corporate Governance Committee held two meetings in 2007.
With respect to the Committees evaluation of director nominee candidates, the Committee has no formal requirements or minimum standards for the individuals that it nominates. Rather, the Committee considers each candidate on his or her own merits. However, in evaluating candidates, there are a number of criteria that the Committee generally views as relevant and is likely to consider. Some of these factors include the candidates:
The Committee does not assign a particular weight to the individual factors. Similarly, the Committee does not expect to see all (or even more than a few) of these factors in any individual candidate. Rather, the Committee looks
for a mix of factors that, when considered along with the experience and credentials of the other candidates and existing Board members, will provide stockholders with a diverse and experienced Board of Directors.
With respect to the identification of nominee candidates, the Board recommends candidates whom they are aware of personally or by reputation. The Company historically has not utilized a recruiting firm to assist in the process but could do so in the future.
The Committee welcomes recommendations from stockholders. The Committee evaluates a candidate for director who was recommended by a stockholder in the same manner that the Committee evaluates a candidate recommended by other means. In order to make a recommendation, the Committee asks that a stockholder send the Committee:
This information should be sent to the Nominating and Corporate Governance Committee, c/o Corporate Secretary, ARRIS Group, Inc., 3871 Lakefield Drive, Suwanee, GA 30024, who will forward it to the chairperson of the Committee. The Committee does not necessarily respond to recommendations. The nomination must be accompanied by the name and address of the nominating stockholder and must state the number and class of shares held. For potential nominees to be considered at the 2009 annual stockholders meeting, the Corporate Secretary must receive this information by December 15, 2008.
In addition to the procedures described above for recommending prospective nominees for consideration by the Committee, stockholders may directly nominate directors for consideration at any annual meeting of stockholders.
The Technology Committee consists of Mr. Best (Chairman) and Mr. Stanzione. The Technology Committee monitors the development of the Companys technology and operates as an intermediary between the Company and its customers and the Technology Advisory Board.
The Executive Committee consists of Mr. Bosco (Chairman), Mr. Kearney, Mr. Lambert and Mr. Petty. The Executive Committee was formed of independent directors to consider and act on matters when the full Board can not be convened and action by an executive committee is deemed appropriate by the full Board. The Executive Committee held one meeting in 2007.
Mr. Petty is the lead independent director and presides over meetings of the independent directors. Stockholders may communicate with the Board of Directors, including the lead independent director, by sending a letter
to the ARRIS Group, Inc. Board of Directors, c/o Corporate Secretary, ARRIS Group, Inc., 3871 Lakefield Drive, Suwanee, GA 30024. The Corporate Secretary will submit the correspondence to the Chairman of the Board or to any specific director to whom the correspondence is directed.
Pursuant to its written charter, the Audit Committee oversees the Companys financial reporting process on behalf of the Board of Directors. Our responsibility is to monitor and review these processes. It is not our duty or our responsibility to conduct auditing or accounting reviews or procedures. We are not employees of the Company and we do not represent ourselves to be, or to serve as, accountants or auditors by profession. Therefore, we have relied, without independent verification, on managements representation that the consolidated financial statements have been prepared with integrity and objectivity and in conformity with U.S. generally accepted accounting principles and on the representations of the independent registered public accounting firm included in their report on the Companys consolidated financial statements. Our oversight does not provide us with an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or policies, or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, our considerations and discussions with management and the independent registered public accounting firm do not assure that the Companys consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles, that the audit of our Companys consolidated financial statements has been carried out in accordance with the standards of the Public Company Accounting Oversight Board (United States) or that our Companys independent registered public accounting firm is in fact independent.
Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling our oversight responsibilities, we reviewed the audited financial statements in the Annual Report with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the disclosures in the financial statements.
We reviewed with the independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted accounting principles, its judgments as to the quality, not just the acceptability of the Companys accounting principles required by Statement on Auditing Standards No. 61, as amended by Statement of Auditing Standards No. 90, and such other matters as are required to be discussed with the Committee under the standards of the Public Company Accounting Oversight Board (United States). In addition, we discussed with the independent registered public accounting firm their independence from management and the Company, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1, and considered the compatibility of nonaudit services provided by the independent registered public accounting firm to the Company with their independence.
We discussed with the Companys internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits. We met with the internal auditors and the independent registered public accounting firm, with and, as deemed advisable, without management present, to discuss the results of their examinations, their evaluations of the Companys internal controls and the overall quality of the Companys financial reporting. We reviewed proposed interim financial statements with management and the independent registered public accounting firm. We oversaw the Companys compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
In 2007, we had twelve meetings. In reliance on the reviews and discussions referred to above, we recommended to the Board of Directors (and the Board of Directors has accepted that recommendation) that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2007, for filing with the Securities and Exchange Commission. In addition, we have selected the Companys independent registered public accounting firm.
The Company maintains a corporate governance hotline system in which employees may directly contact the members of the Audit Committee concerning potential failures to meet corporate standards of conduct, including questionable accounting or auditing matters. These calls are completely confidential and anonymous.
John R. Petty
Harry L. Bosco
John A. Craig
Matthew B. Kearney
Notwithstanding anything to the contrary which is or may be set forth in any of the Companys filings under the Securities Act of 1933 or the Exchange Act that might incorporate Company filings, including this proxy statement, in whole or in part, the preceding Report of the Audit Committee shall not be incorporated by reference into any such filings.
Each of the named executive officers has an employment agreement with the Company. Each agreement establishes the base salary for the officer, which is subject to annual review. The target bonus is established at 60% of base salary for each of the named executive officers, except Mr. Stanzione, whose target bonus is 100% of base salary. Each year the Compensation Committee establishes the performance criteria for the bonuses. The agreements also contemplate the grant of equity awards annually in the discretion of the Compensation Committee. The agreements renew annually automatically until the employee reaches age 65 (62 for Mr. Stanzione). In the event an executive is terminated without cause or in connection with takeover of the Company, the executive is entitled to receive one years salary and bonus (two years in the case of Mr. Margolis and Mr. Potts and three years in the case of Mr. Stanzione); all unvested options and stock awards vest immediately and the executive is entitled to continued benefits, for example, life, medical and disability insurance, during the severance period (one, two or three years as noted above).
The Compensation Committee reviews base salaries, bonus plans and equity awards annually. It regularly, but not necessarily annually, retains consultants to review executive compensation levels compared to selected peer companies, companies in the technology industries generally and companies of similar size. The Company has sought to establish salaries at approximately the median levels (with exceptions to recognize outstanding performance) and to have equity and annual bonus target opportunities at or above median levels. The survey conducted for 2007 deliberations indicated that, taken as a whole, the Companys base salaries for its senior executives are at approximately median levels with targeted direct compensation (base salary, target annual incentive, plus targeted long term equity compensation) at or moderately above median levels. Compensation has been actively managed. For example, in 2002 salary levels for executives were frozen for a year and during 2003 executive salaries were reduced by 5%. The reduction was reinstated in 2004. Raises were not reinstated above the 2002 level until 2005 (with the exception of Mr. Stanzione whose salary was not changed until 2006). ARRIS financial performance for 2007 based on the one and three year total shareholder return ranked at the 59th and 95th percentile compared to its peer group companies, respectively.
The Company believes that total direct compensation consisting of base salary, targeted bonus and targeted long term incentive valuation for the senior executive officers in the aggregate is approximately at the 50th percentile levels and all executives are well below the 75th percentile levels of the peer group and survey analysis described below.
This CD&A describes the major elements of our compensation program for the executive officers named in the Summary Compensation Table later in this proxy statement (the named executive officers or NEO). This CD&A also discusses the objectives, philosophy and decisions underlying the compensation of the named executive
officers. The CD&A should be read together with the executive compensation tables and related footnotes found later in this proxy statement.
Authority over compensation of the Companys senior executives is within the province of the Compensation Committee. The Compensation Committee of our Board of Directors is composed entirely of independent outside directors, as determined under the applicable NASDAQ listing standards and Section 162(m) of the Internal Revenue Code. The Compensation Committee reviews and approves executive compensation programs and specific compensation arrangements for the executive officers. The Compensation Committee reports to the Board, and all compensation decisions with respect to the Chief Executive Officer are reviewed and approved by the whole Board, without participation by the Chief Executive Officer.
The principal elements of our executive compensation program for 2007 were:
Programs and Objectives and Reward Philosophy
Our Compensation Committee is guided by the following key objectives and reward philosophies in the design and implementation of our executive compensation program:
In applying these program objectives and reward philosophies, the Compensation Committee takes into account the following key considerations:
Competitive Market Assessment. We regularly, but not necessarily annually, conduct a competitive market assessment for each of the primary elements of our executive compensation program. In setting executive compensation levels, the Compensation Committee reviews market data from the following sources:
Survey data from various sources also are utilized, including the following:
Our Financial and Strategic Objectives. Each year our management team develops an annual operating plan for review and approval by our Board of Directors. The Compensation Committee utilizes the financial plan in the development of compensation plans and performance goals for our named executive officers for the next year.
Considerations for Mr. Stanzione. In setting the compensation arrangements for Mr. Stanzione, the primary factors considered by the Compensation Committee include:
Considerations for Other Named Executive Officers. The Compensation Committee considers the same factors in setting the compensation arrangements for each of the other named executive officers as well as:
Accounting, Tax and Financial Considerations. The Compensation Committee carefully considers the accounting, tax and financial consequences of the executive compensation and benefit programs implemented by us. These were important considerations in connection with the design of the following compensation programs:
The Role of the Compensation Committee and Its Use of Advisors. A summary of the role of the Compensation Committee is found in the section entitled Corporate Governance and Board Matters in this proxy statement. For more information on the role and responsibilities of the Compensation Committee, we encourage you to review the Compensation Committee charter, which is posted on our website at www.arrisi.com.
The Compensation Committee charter permits the Compensation Committee to engage independent outside advisors to assist the Compensation Committee in the fulfillment of its responsibilities. The Compensation Committee engages an independent executive compensation consultant for information, advice and counsel. Typically, the consultant assists the Compensation Committee by providing an independent review of:
For 2007, the Compensation Committee engaged Longnecker and Associates as its independent consultant. This selection was made directly by the Compensation Committee. Longnecker and Associates provides no other compensation or benefit consulting services to ARRIS.
The Role of Executive Management in the Process of Determining Executive Compensation. Mr. Stanzione makes recommendations to the Compensation Committee regarding executive compensation decisions for the other named executive officers. Mr. Margolis, our Executive Vice President of Administration and Chief Counsel, is responsible for administering our executive compensation program and acts as Secretary to the Compensation Committee as well as the full Board and other Board Committees. Mr. Potts, our Chief Financial Officer, provides information and analysis on various aspects of our executive compensation plans, including financial analysis relevant to the process of establishing performance targets for our annual cash incentive plan and long term equity incentive plans. Although members of our management team participate in the process of determining executive compensation, the Compensation Committee also meets regularly in executive session without any members of the management team present. The Compensation Committee makes the final determination of the executive compensation package provided to each of our named executive officers.
Equity awards generally are granted annually from January to May depending on board meeting schedule, shareholder approval of new equity plans and other factors. The Compensation Committee has determined that
grant dates should occur as early as practicable after final budgets for the new year have been approved by the Board of Directors and after year-end results have been announced to the public. Equity grant and annual compensation adjustments and incentive plan performance criteria generally will be decided simultaneously, although they may be implemented at various times. (For example, raises generally are effective April 1, while bonuses generally are paid earlier.) In the future, we anticipate that equity grants generally will occur in the February to March time frame. The exercise price for options is the closing price of the Common Stock on the date of grant.
Annual cash bonuses are tied to Company performance. Annual bonus targets for senior executives have been established as a percentage of base pay level including the annual raise in the relevant years and are set forth in the employment agreements of each executive officer. Mr. Stanziones bonus target is 100% of base salary, which was established when his employment agreement was amended in 1999 in connection with his becoming the Chief Executive Officer. The remaining senior executives annual bonus targets are 60% of base salary. The maximum bonus payout for all named executive officers is 200% of the annual bonus target.
The Compensation Committee seeks to establish variable pay in the form of annual cash bonus opportunity at or above 50th percentile levels of the peer group and survey analysis described above. The Compensation Committee believes that variable pay target should be at or above the 50th percentile levels to encourage and reward exceptional performance, while assuring in years where Company performance is weaker that total cash compensation is less. The Compensation Committee believes that the bonus targets for the senior executives approximate the 50th percentile of the peer group and survey analysis described above.
Specific performance criteria have varied; however, in 2007 the only performance criteria was the achievement of budgeted consolidated operating income for the Company. The Compensation Committee chose this single metric in order to focus the senior executives as a team on earnings growth. The annual budget was developed by management in collaboration with and approved by the Board of Directors. In reviewing the budget, the Board of Directors considers, in addition to the detailed budget as presented, expected capital expenditure growth in the telecommunications industry generally and the cable segment of the telecommunications industry more specifically and the Companys market share and market share growth. In 2008 annual incentives will be measured not only by targeted financial performance, but by individual assigned objectives which may be objectively or subjectively measured.
For 2007, the target for consolidated operating income that would yield 100% payment of the targeted bonus for senior executives was $103.4 million. If actual operating income achieved was below 93% of budgeted operating income, the bonus payout would have been zero. For performance in the range between 93% and 100% of budgeted operating income, the bonus payout would have been between a 25% payout and 100% payout. For performance in the range between budget and 118% of budget, the bonus payout would have been between a 100% payout and 200% payout. For performance between these specific levels, bonus payouts were to be determined by straight line interpolation. Actual performance for 2007, adjusted for the effects of the C-COR acquisition, was approximately 9% of the range spread between target and the maximum payout and, accordingly, bonus payouts were approximately 109% of the annual bonus target payout.
The Compensation Committee has the authority to adjust bonuses, including additions to the bonuses earned (or pay bonuses when no bonus has been earned) under the bonus plan. For example, in 2006, bonuses for Messrs. Lakin, Potts and Coppock exceeded the 150% maximum payout originally established because actual performance was over 244% of budgeted operating income, and in 2007 the amount of bonus for executive officers was adjusted up or down based on individual unit performance as shown in the Summary Compensation Table under the heading Bonus ($). The Company does not have a formal policy for payments above the amounts established under the bonus plans. The Compensation Committee also may adjust the performance criteria if circumstances dictate (e.g., acquisitions, financings or other items that may not have been incorporated in the budget and therefore might require adjustment). In 2008, bonuses will be determined based primarily on budgeted operating income as in the past; however, 20% of the bonus target will be based on individual objectives established by the Compensation Committee.
In the past five years bonuses have ranged from 0% to the maximum as achieved in 2006 based on the performance criteria then in effect. Consistent with our pay for performance reward philosophy, no annual incentives were paid to our named executive officers in fiscal year 2003 because we did not achieve our pre-established financial goals in that year. In 2006 and 2007, we exceeded the budgeted amounts for our pre-established financial goals, which resulted in annual incentive payouts greater than 100% of the targeted amounts. The volatile and challenging industry and market conditions in which we operate contributes to significant variations in annual performance against goals and incentive payout amounts against the target level of payout.
The value of the target payout amounts for our annual incentive plan approximates the median of the short-term incentive payments made by companies included in the market survey data that we used as benchmarks for fiscal year 2007. The dollar amount of annual cash incentive bonus paid in 2007 to each of our named executive officers is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table appearing on page 25 of this proxy statement.
We make long-term equity incentive awards to our executive officers each year. The primary objectives of our equity incentive program are to:
The long term incentive compensation for senior executives in the past three years has consisted of grants of stock options and performance-based restricted stock with time based vesting. Previously long term incentive compensation consisted predominantly of stock options. During the past three years, the Company has included restricted stock to reduce the share dilution associated with equity grants since restricted stock awards are for fewer shares than comparably valued stock option awards. Moreover, recent changes in accounting standards require that stock options as well as restricted stock be expensed. Prior to these changes, the Company, like most companies, utilized primarily stock options to take advantage of the then available favorable accounting treatment for stock options. In future years, the Company may expand its usage of restricted shares relative to stock options to reduce dilution associated with long term incentive compensation and to maintain retention incentive even in challenging periods when our stock price may be depressed.
Stock options have a term of seven years (in some prior years the term was ten years) and vest annually over four years (in some prior years the vesting was annually over three years). For 2007, 2006 and 2005, the Compensation Committee established an aggregate value for equity grants for Company wide distribution focusing primarily on cost to be reflected in the Companys financial statements, the annual grant level as a percent of shares outstanding and, using the Black-Scholes methodology, the value of the aggregate grants as a percentage of the Companys total market cap. A value expressed in dollars was allocated to the senior executives based on the survey data concerning long term incentive values for senior executives in comparable positions and the level of expense and dilution the Compensation Committee deemed appropriate. One-half of that value was awarded in shares of restricted stock and, using the Black-Scholes methodology, one-half in options at the then fair market value of the shares. For Mr. Stanzione, the target value for long term incentives was approximately 200% of base salary, and for the other senior executives, the value ranged from approximately 130% to 170% of base salary. The Compensation Committee seeks to establish long-term incentive targets for senior executives, like bonuses, at or above 50th percentile levels of the peer group and survey analysis described above to emphasize long term stock appreciation. The most recent survey data reviewed in connection with the Compensation Committees 2007 deliberations indicates that awards of long term incentives in 2007 approximated the 50th percentile levels for the senior executive officers in the aggregate.
The restricted stock awarded to the senior executives in 2007, 2006 and 2005 were awarded in the form of performance shares. Under the performance criteria, senior executives earned 100% of the target or assigned value at the time of grant if the Company achieved budgeted consolidated sales for the applicable year. For performance below 94% of budgeted sales in 2007, the restricted stock awards paid out zero shares, and for performance at 94% of budget the shares paid out 50% of the assigned value. For performance at budgeted sales, the shares paid out at 100% of the assigned value. For sales at or above 116% of budgeted sales, the shares paid out a number of shares equal to 150% of the assigned value. Straight line interpolation was applied for performance between the designated levels. The Compensation Committee believes that performance based awards better align the executives and shareholders interests in that awards are reduced or eliminated if Board of Directors approved budgets are not met while achievement beyond targeted achievement is more highly rewarded. The 2007 restricted stock award payout was 115% as actual sales were approximately 105% of budgeted sales. The specific numbers of stock options and restricted stock that were granted to each of our named executive officers in 2007 are set forth on the table entitled Grants of Plan-Based Awards in the executive compensation tables found later in this proxy statement.
The Company has share ownership guidelines that require each senior executive to own shares having a value equal to a multiple of the senior executives annual base salary at the time the executive became subject to the ownership requirement. For Mr. Stanzione, the multiple is three times base salary; for Messrs. Margolis, Potts and Lakin it is twice base salary; and for Mr. Coppock it is one times base salary. Once the ownership level is achieved, the changes in share value are no longer monitored. Each of the senior executives has achieved the requisite level of share ownership.
The summary compensation table below presents the total compensation earned by our Named Executive Officers during 2007. This amount is not the actual compensation received by our NEOs during 2007. In addition to cash and other forms of compensation actually received, total compensation includes the dollar amounts set forth in the Stock Awards and Option Awards columns. These amounts reflect the compensation expense we recognized for financial statement reporting purposes with respect to equity awards granted to our NEOs in 2007, as well as grants made in prior years, to the extent such awards vested during 2007. The compensation expense included in the Stock Awards and Option Awards columns will likely vary from the actual amounts ultimately realized by any NEO based on a number of factors, including the number of shares that ultimately vest, the timing of any exercise or sale of shares, and the price of our stock. The actual value realized by our NEOs from stock awards and options during 2007 is presented in the Option Exercises and Stock Vested table below. Details about the equity awards granted to our NEOs during 2007 can be found in the Grants of Plan-Based Awards table below. Information in the table for salary is lower than each NEOs annualized base salary shown in the Base Salary Table for a given year because ARRIS salary changes are effective April 1st of each year.
Grants of Plan-Based Awards
Option shares for senior executives and for employees generally are granted annually at the same time and are priced at the close of business on the date of grant. Currently, options vest equally over four years and have a seven year life. In the past, some grants have had 10 year lives and some have vested over three years. Exceptions to annual grants have been made in cases such as new hire grants and grants in connection with significant promotions or increases in responsibilities. Target annual equity grants in the last three years for senior executives have consisted of equal amounts of value in restricted shares and in stock options. The restricted share grants to executives during the last three fiscal years have been performance based. The number of shares earned has depended upon on the Companys sales performance in the year of grant. The number of shares earned can vary from zero, if the minimum sales threshold was not reached, to 50% at the minimum level. A 100% level and 150% level were also established. In 2006, the maximum threshold was reached, as sales were more than 120% of targeted sales. In 2007, 115% of target was earned.
Outstanding Equity Awards At Fiscal Year-End
Primary Benefits. Our named executive officers are eligible to participate in the same employee benefit plans in which all other eligible U.S. salaried employees participate. These plans include medical, dental, life insurance, disability and a qualified retirement savings plan. We also maintain a nonqualified retirement plan in which our named executive officers are eligible to participate.
The Company maintains qualified and non-qualified Defined Benefit pension plans. The qualified plan for the named executive officers has been frozen since December 31, 1999, and no further accrual of benefit under that plan has occurred since that date. Neither Mr. Potts nor Mr. Lakin participated in the qualified plan. The non-qualified plan is a mirror image of the qualified plan, but covers only earnings levels and payments levels that are or would be excluded under the qualified plan under applicable Internal Revenue Services regulations. Benefits under the plans are calculated based on the named executive officers base salary and annual bonus amounts. The benefit formula is the number of years of continuous service (up to a maximum of 30 years) times the sum of (a) 0.65% of the individuals final annual compensation up to the named executive officers social security covered compensation level, plus (b) 1.3% of the final average salary in excess of the named executive officers social security covered compensation level. The social security covered compensation level is the 35-year average of the taxable wage bases (for Social Security purposes) in effect prior to the participants Social Security retirement date. Final average salary is the average of the five highest consecutive years of compensation in the ten years preceding retirement. In
calculating benefits under the non-qualified plan, it is assumed that the qualified plan remains in effect; that is, the amount of compensation that would have been covered under the qualified plan had it remained in effect is excluded from the non-qualified plan. The benefit is paid monthly on a single life annuity basis or, subject to discount, on a 50% joint and survivor annuity basis. Normal retirement under the plans is age 65, and benefits are discounted for early retirement, which is available at age 55. Messrs. Stanzione, Margolis and Lakin are 60, 60 and 64 years of age and thus could elect to retire early. The discount is calculated to be the actuarial equivalent of an age 65 retirement using an 8% discount factor. There is no lump sum payment option available, except for Mr. Stanzione (see below).
The Company maintains on Mr. Stanziones behalf a supplemental employee retirement plan (SERP), which is included in the information provided in the Pension Benefits table set forth above. Under the SERP, normal retirement age is 62, and a lump sum payment on termination is available. In addition, under the SERP, final average compensation is Mr. Stanziones actual annual salary at the time of his retirement plus the average of the three highest bonuses received in the five years preceding retirement. Years of continuous service are Mr. Stanziones actual service multiplied by three and are not limited to 30 years. The benefit calculation is otherwise the same as described above although, Mr. Stanziones benefit may not exceed 50% of his final average compensation. In addition to the lump sum payment option, Mr. Stanzione may elect to receive his benefit on a monthly basis as a single life annuity or a joint and survivor annuity with discounts from the single life annuity amount depending on the form of joint and survivor annuity selected. In the event of Mr. Stanziones termination of employment by the Company without cause, termination by him as a result of a material uncured breach of his employment agreement by the Company, or termination by him following a change of control and the diminution of his position, then Mr. Stanziones pension benefit cannot be lower than $33,333 per month.
The Company maintains a 401(k) defined contribution plan to which employees may contribute a portion of their salary and bonus compensation. The Company matches 100% of the first 3% of employee contributions of pay and matches 50% of the next 2% of employee contributions of pay subject to the Internal Revenue Service maximum contribution (which was $15,500 during 2007). The named executives participate in this plan and received the Company match, which could not exceed $9,000 for 2007.
The Company previously maintained a non-qualified deferred compensation plan that enabled certain executives, including the named executives, to defer amounts above the IRS maximum. This plan, and employee contributions and Company matches under it, were frozen in September 2004. No employee contributions or Company matching contributions have been made since that time. The accounts under this plan remain in existence, but the Company has never enhanced the earnings of the accounts, which earnings are determined by the actual earnings of investment vehicles selected by the employee. The table below reflects the increase in value of the named executives account under the Companys Non-Qualified Deferred Compensation arrangement during calendar year 2007. The amounts shown reflect dividends and interest and appreciation (or depreciation) in investments whether or not realized. The change in value reflects the performance of any of several mutual funds which may be selected by the executive.
Other Perquisites. We reimburse certain club membership fees and pay for financial counseling services for our named executive officers.
Executive Severance and Change in Control Pay Arrangements and Practices. Each of the named executive officers is covered by an employment agreement that provides certain termination benefits and contains customary non-competition and other provisions. The named executive officers are entitled to the benefits described below if their employment is terminated by the Company without cause (which is narrowly defined as gross misconduct, permanent disability, or commission of certain felonies), by the executive after a material uncured breach of the agreement by the Company, or after a change of control of the Company in the event the executive is terminated or resigns after a reduction in duties or benefits (except Mr. Margolis provision does not require a reduction of duties or benefits). These benefits include a multiple of base pay and annual bonus (either assuming the bonus criteria had been met or based on average bonus earned in the last two years), acceleration of unvested equity awards, and continuation of benefits for the period of the continuation of base salary. For Mr. Stanzione the multiple is three, for Messrs. Margolis and Potts, two, and for Messrs. Coppock and Lakin, one.
Bonus for Mr. Stanzione is the average of the three highest full-year bonuses during the five years preceding his termination date. Bonus for Mr. Margolis is the most recent bonus paid or payable prior to his termination date. The salary and bonus payments are lump sum for Messrs. Lakin, Potts and Coppock in the event of a termination associated with change of control and are otherwise paid as a continuation of salary and bonus for twelve months (twenty-four months in the case of Mr. Potts); and are paid as a continuation of salary and bonus over the three and two year applicable periods for Messrs. Stanzione and Margolis. The two and three year benefit levels for Messrs. Margolis, Potts and Stanzione are deemed appropriate because their positions are likely to be eliminated following a change of control and their positions are more difficult for them to replace.
The table below sets forth the approximate value of salary, bonus and accelerated equity payable to each NEO assuming a change in control or termination event had occurred on December 31, 2007.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section of this proxy statement with management and, based on such review and discussion, the Compensation Committee recommends to the Board of Directors that it be included in this proxy statement.
William H. Lambert, Chairman
Alex B. Best
John Anderson Craig
Notwithstanding anything to the contrary which is or may be set forth in any of the Companys filings under the Securities Act of 1933 or the Exchange Act that might incorporate Company filings, including this proxy statement, in whole or in part, the preceding Compensation Committee Report shall not be incorporated by reference into any such filings.
The Company has adopted a related person transaction policy that governs the review, approval or ratification of covered related person transactions. Our Audit Committee manages this policy. The policy generally provides that we may enter into a related person transaction only if the Audit Committee approves or ratifies such transaction in accordance with the guidelines set forth in the policy and if the transaction is on terms and conditions that are reasonable under the circumstances and in the best interests of the shareholders.
Under the policy a related party transaction is one in which the Company is a participant and that, individually or taken together with related transactions, exceeds, or is reasonably likely to exceed, $100,000 in amount in any year and in which any of the following individuals (a covered person) has a direct or indirect material interest:
For purposes of the policy, a material interest in a transaction shall not be deemed to exist when a covered persons interest in the transaction results from (a) the covered persons (together with his immediate familys) direct or indirect ownership of less than a 10% economic interest in the other party to the transaction, and/or the covered persons service as a director of the other party to the transaction, or (b) the covered persons pro rata participation in a benefit received by him solely as a security holder.
A transaction is deemed to involve the Company if it involves a vendor or partner of the Company or any of its subsidiaries and relates to the business relationship between the Company or any of its subsidiaries and that vendor or partner.
There have been no related party transactions since the beginning of the 2007 fiscal year nor are there any such transactions proposed.
The Audit Committee has appointed Ernst & Young LLP as the independent registered public accounting firm of the Company for the fiscal year ended December 31, 2008. Ernst & Young LLP also acted in such capacity during the fiscal year ended December 31, 2007. Representatives of Ernst & Young LLP, who are expected to be present at the meeting, will be given an opportunity to make a statement if they so desire and to respond to appropriate questions asked by stockholders. The fees billed by Ernst & Young LLP for the last two Company fiscal years were as follows, all of which were approved by the Audit Committee:
Fees for audit services totaled $3,672,253 and $2,974,486 in 2007 and 2006, respectively, and include fees associated with the annual audits, the Sarbanes-Oxley Section 404 attestation, the reviews of the Companys quarterly reports on Form 10-Q, other SEC filings, audit consultations, and one-time audit procedures related to the acquisition of C-COR and the terminated Tandberg merger.
Fees for audit-related services totaled $474,077 and $505,371 in 2007 and 2006, respectively. Audit-related services include due diligence in connection with acquisitions, consultation on accounting and internal control matters, and audits in connection with employee benefit plans.
Fees for tax services, including tax compliance, tax advice and tax planning, totaled $90,672 and $79,298 in 2007 and 2006, respectively.
All Other Fees
Fees for all other services not included above were $0 for both 2007 and 2006.
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other permissible non-audit services performed by the independent registered public accounting firm. Prior to engagement, the Audit Committee pre-approves independent registered public accounting firm services and fee amounts or ranges within each category. Either the independent registered public accounting firm or the Companys Chief Financial Officer (or his designee) must submit to the Audit Committee requests for services to be provided by the independent registered public accounting firm. The Audit Committee may delegate pre-approval authority to one of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next meeting.
The Audit Committee requires the Companys Internal Audit Director to report to the Audit Committee on a periodic basis the results of the Internal Audit Directors monitoring of the independent registered public accounting firms performance of all services to the Company and whether the performance of those services was in compliance with the Audit Committees pre-approval policy. Both the Internal Audit Director and management are required to report immediately to the Audit Committee any breaches by the independent registered public accounting firm of the policy.
Proposals of stockholders intended to be presented at the 2009 Annual Meeting of Stockholders must be received by the Company at its principal offices by December 15, 2008, in order to be considered for inclusion in the Companys proxy statement and proxy relating to the 2009 Annual Meeting of Stockholders.
The Board of Directors knows of no other matters to be presented for stockholder action at the meeting. However, if other matters do properly come before the meeting, it is intended that the persons named in the proxies will vote upon them in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
Lawrence A. Margolis, Secretary
April 14, 2008
ARRIS GROUP, INC.
2008 STOCK INCENTIVE PLAN
1. PURPOSE AND EFFECTIVE DATE. ARRIS Group, Inc. (the Company) has established this 2008 Stock Incentive Plan (the Plan) to facilitate the retention and continued motivation of key employees, consultants and directors and to align more closely their interests with those of the Company and its stockholders. The effective date of the Plan shall be the date it is approved by the stockholders of the Company (the Effective Date). No grants shall be made under this Plan subsequent to ten (10) years after the Effective Date. This Plan will have no impact on the Companys existing stock incentive plans or the awards outstanding thereunder.
2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Companys Board of Directors or such other Board committee consisting solely of independent directors (as determined by the Board or a committee thereof) as the Board may designate (the Committee). The Committee has the authority and responsibility for the interpretation, administration and application of the provisions of the Plan, and the Committees interpretations of the Plan, and all actions taken by it and determinations made by it, shall be binding on all persons. The Committee may authorize one or more officers to grant awards to the extent permitted by Section 157(c) of the Delaware General Corporation Law. No Board or Committee member shall be liable for any determination, decision or action made in good faith with respect to the Plan.
3. SHARES SUBJECT TO PLAN. A total of 12,300,000 shares of Common Stock, or rights with respect to Common Stock, of the Company (Shares) may be issued pursuant to the Plan. The Shares may be authorized but unissued Shares or Shares reacquired by the Company and held in its treasury. In determining the number of shares available for awards:
(a) Grants of awards under the Plan will reduce the number of Shares available thereunder by the maximum number of Shares obtainable under such grants.
(b) Awards of stock, stock units, restricted stock, performance shares and units, and dividend equivalent rights will reduce the number of shares available thereunder at the rate of 1.58 shares per interest granted.
(c) The aggregate number of Shares with respect to which incentive stock options may be issued under the Plan shall not exceed 4,000,000.
(d) If all or any portion of the Shares otherwise subject to an award under the Plan are not delivered or do not vest for any reason including, but not limited to, the cancellation, expiration or termination of any option right or unit, the settlement of any award in cash, the forfeiture of any restricted stock, or the repurchase of any Shares by the Company from a participant for the cost of the participants investment in the Shares, such number of Shares shall be available again for issuance under the Plan.
(e) Shares tendered (either actually or through attestation) to pay the option exercise price, shares withheld for the payment of withholding taxes and shares and other awards repurchased by the Company from a person using proceeds from the exercise of awards by that person shall not return to the share reserve, and the determination of the number of Shares used in connection with stock-settled stock appreciation rights shall be based upon the number of Shares with respect to which the rights were based and not just the number of Shares delivered upon settlement.
(f) Shares issued in connection with awards that are assumed, converted or substituted pursuant to a merger or an acquisition shall not reduce the share reserve.
The number of Shares covered by or specified in the Plan and the number of Shares and the purchase price for Shares under any outstanding awards, may be adjusted proportionately by the Committee for any increase or decrease in the number of issued Shares or any change in the value of the Shares resulting from a subdivision or consolidation of Shares, reorganization, recapitalization, spin-off, payment of stock dividends on the Shares, any other increase or decrease in the number of issued Shares made without receipt of consideration by the Company, or the payment of an extraordinary cash dividend.
4. ELIGIBILITY. All key employees, active consultants and directors of the Company and its subsidiaries are eligible to be selected to receive a grant under the Plan by the Committee. The Committee may condition eligibility under the Plan, and any grant or exercise of an award under the Plan, on such conditions, limitations or restrictions as the Committee determines to be appropriate for any reason. No person may be granted in any period of two consecutive calendar years, awards covering more than 1,500,000 Shares. The maximum amount to be granted to any one person pursuant to performance units, in any calendar year, shall not exceed $2,000,000.
5. AWARDS. The Committee may grant awards under the Plan to eligible persons in the form of stock options (including incentive stock options within the meaning of section 422 of the Code), stock grants, stock units, restricted stock, stock appreciation rights, performance shares and units and dividend equivalent rights, and shall establish the number of Shares subject to each such grant and the terms thereof, including any adjustments for reorganizations and dividends, subject to the following:
(a) All awards granted under the Plan shall be evidenced by written documents in such form and containing such terms and conditions not inconsistent with the Plan as the Committee shall prescribe.
(b) The exercise price of any option or stock appreciation right shall not be less than the fair market value of a corresponding number of Shares as of the date of grant, except options or stock appreciation rights being granted to replace options or rights not initially granted by the Company or its predecessors may be granted with exercise prices that in the judgment of the Committee result in options or rights having comparable value to the options or rights being replaced. The maximum term on options and stock appreciation rights shall not exceed ten (10) years.
(c) Options and stock appreciation rights shall vest over a minimum of three years (and shall vest no more quickly than ratably), and all other awards shall have a minimum vesting or holding period of three years, provided that (i) awards that are issued in connection with mergers and acquisitions may have vesting and holding periods that are the same as any awards that they are replacing or otherwise as deemed appropriate by the Committee, and (ii) a vesting or holding period may be reduced as a result of death, disability, retirement, a merger or sale, termination of employment, change in control or other extraordinary event. In the absence of an extraordinary event, the vesting and holding restrictions applicable to an award shall not be reduced or otherwise waived.
(d) Awards granted under this Plan shall not be transferred, assigned, pledged or hypothecated or otherwise transferred by the grantee except by will or the laws of descent and distribution to the extent permitted in the award itself.
(e) No option may be repriced by amendment, substitution or cancellation and regrant, unless authorized by the stockholders. Adjustments pursuant to Section 3 above shall not be considered repricing.
(f) When issuing performance shares or units performance criteria may include: revenue; earnings before interest, taxes, depreciation and amortization (EBITDA); cash earnings (earnings before amortization of intangibles); operating income; pre- or after-tax income; earnings per share, net cash flow; net cash flow per share; net earnings; return on equity; return on total capital; return on sales, return on net assets employed, return on assets; economic value added (or an equivalent metric); share price performance; total shareholder return; improvement in or attainment of expense levels; and improvement in or attainment of working capital levels. Performance criteria may be related to a specific customer or group of customers or geographic region. Performance criteria may be measured solely on a corporate, subsidiary or division basis, or a combination thereof. Performance criteria may reflect absolute entity performance or a relative comparison of entity performance to the performance of a peer group of entities or other external measure of the selected performance criteria. Profit, earnings and revenues used for any performance goal measurement may exclude any extraordinary or nonrecurring items.
(g) All awards may be settled in cash, shares or deferred delivery, as authorized by the Committee.
(h) Shares granted from the plan may be used as form of payment for compensation, grants or rights earned or due under other Company plans or arrangements.
6. AMENDMENT OF THE PLAN. The Board of Directors or the Committee may from time to time suspend, terminate, revise or amend the Plan or the terms of any grant in any respect whatsoever, provided that, without the approval of the stockholders of the Company, no such revision or amendment may increase the number of Shares subject to the Plan, change the provisions of Section 5 above, or expand those eligible for grants under the Plan.
7. GENERAL. The laws of the State of Delaware shall apply to the Plan. Nothing herein shall restrict the Board from exercising the authority granted hereunder to the Committee or otherwise from exercising its fiduciary duties.