ARRIS GROUP, INC.

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 21, 2009

 

To the Stockholders of ARRIS Group, Inc.:

 

The Annual Meeting of Stockholders of ARRIS Group, Inc. will be held at the Company’s corporate headquarters, located at 3871 Lakefield Drive, Suwanee, Georgia, on Wednesday, May 21, 2009, at 10:00 a.m. local time, for the purposes of:

 

 

These matters are more fully described in the proxy statement accompanying this notice.

 

As stockholders 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 previously have submitted your proxy.

 

The Board of Directors has fixed the close of business on March 24, 2009, 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 Company’s 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 our 2008 annual report is enclosed. Additional copies of these materials 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

 

Suwanee, Georgia

April 17, 2009

 

NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS

 

Important Notice Regarding Internet Availability of Proxy Materials for the Shareholder Meeting to be Held on May 21, 2009

 

The proxy materials for the Company’s Annual Meeting of Shareholders, including the 2008 10-K, the Proxy Statement and other materials, are available over the Internet at http://www.arrisi.com/proxy.

 

PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
OF ARRIS GROUP, INC.

 

To Be Held May 21, 2009

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of ARRIS Group, Inc., a Delaware corporation, in connection with the Annual Meeting of Stockholders of the Company to be held on May 21, 2009 at 10:00 a.m. local time at the Company’s corporate headquarters, 3871 Lakefield Drive, Suwanee, Georgia, and any adjournment(s) thereof. The Company’s 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 17, 2009.

 

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, e-mail 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, 470 West Ave., Stamford, CT 06902 to assist in the solicitation for a fee of approximately $22,500 plus expenses.

 

VOTING

 

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 ratify the retention of Ernst & Young LLP as the independent registered public accounting firm for the Company for 2009, IN FAVOR OF Proposal 3 to approve the amendment of the Company’s Employees Stock Purchase Plan (“ESPP”), 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 24, 2009, 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, 123,214,164 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:

 

 

PROPOSAL 1
ELECTION OF DIRECTORS

 

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 year’s Annual Meeting, Mr. Stanzione is expected to serve as Chairman of the Board.

 

NOMINEES TO SERVE FOR A ONE-YEAR TERM EXPIRING IN 2010

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THESE NOMINEES.

 

PROPOSAL 2
RATIFICATION 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, 2009, subject to stockholder approval. This firm has audited the accounts of the Company since 1993. If stockholders do not ratify 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” RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.

 

PROPOSAL 3
APPROVAL OF AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN

 

Recommendation.  The Board of Directors has approved an amendment and restatement of the Company’s Employee Stock Purchase Plan (the “ESPP”) to increase the number of shares reserved for issuance under the ESPP from 1,800,000 shares to 3,800,000 shares, an increase of 2,000,000 shares, and make minor compliance changes to the ESPP. A copy of the ESPP reflecting the proposed amendments is attached to this Proxy Statement as Appendix A.

 

Purpose.  The purpose of the ESPP is to align more closely the interest of Company employees with those of the Company and its stockholders by providing employees of the Company and specified subsidiaries the opportunity to purchase shares of common stock at favorable prices and terms. The proposed amendment to the ESPP would increase the number of shares reserved for issuance under the ESPP from 1,800,000 to 3,800,000, subject to adjustments to reflect certain circumstances. The proposed amendment also makes minor changes to the ESPP in order to clarify its administration.

 

Administration and Amendment.  The Plan is administered by the Compensation Committee of the Company’s Board of Directors. Subject to the provisions of the ESPP, the Committee has the authority and responsibility for the interpretation, administration and application of the provisions of the ESPP. The Board of Directors or the Compensation Committee may, from time to time, suspend, terminate, revise or amend the ESPP or the terms of any grant except that, without the approval of stockholders, no such revision or amendment may increase the number of shares subject to the ESPP, reduce the exercise price provided in the ESPP, or cause the ESPP not to be in conformance with the requirements of Section 423 of the Internal Revenue Code of 1986.25 amended (the “code”).

 

Participation.  All employees of the Company or any subsidiary of the Company (provided the Company authorizes such subsidiary to participate) whose customary employment is twenty hours or more per week are eligible to purchase shares through regular payroll deductions. However, no employee who owns (directly or indirectly), or holds options to purchase 5% or more of the Company’s or any subsidiary’s voting securities may participate in the ESPP.

 

Number of Shares.  As of the date of this proxy, only 194,814 shares remained available for purchase by participants. As amended, the ESPP would provide for the issuance of 2,194,814 of the Company’s authorized but unissued shares of common stock. Of this amount 2,000,000 shares are subject to stockholder approval of this Proposal. The ESPP share reserves are subject to adjustments to reflect certain transactions.

 

Time and Manner of Exercise.  The Company will grant eligible employees options to purchase shares through a payroll deduction program. These options are granted once every six months on a date specified by the Compensation Committee. The term of the option is a six-month period beginning on the date of the grant. Eligible employees are able to designate an amount to be withheld from their regular pay within the minimum and maximum limits as specified under the ESPP. No one is permitted, in any year, to receive an option that would be exercisable for the first time during any year in a way that would permit the employee to purchase shares having a total fair

market value on the grant date of greater that $25,000. The maximum number of shares subject to each option is the number of whole shares which the projected payroll deductions, authorized by the participant for the option period, would purchase at an exercise price per share equal to 85% of the fair market value of a share on the grant date.

 

Purchase Price.  An option is exercised automatically on the last day of the six-month option period, the exercise date, at which time the Company deducts, from the participant’s account, an amount which is sufficient to purchase, at the option price, up to the number of shares subject to participant’s option. The balance of the participant’s account is refunded to the participant promptly after the exercise date. The option price per share is equal to 85% of the fair market value of shares on the grant date or exercise date, whichever is less.

 

Withdrawal and Termination of Employment.  Participation in the ESPP is terminated when the participant voluntarily withdraws from the ESPP, resigns or is discharged, or retires or dies. Upon termination of participation, all funds in the participant’s account are refunded to the participant without interest, except that upon retirement or death, the participant or the participant’s executor, as the case may be, may elect to exercise any outstanding options of the participant.

 

Federal Income Tax Consequences.  The ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Code. All payroll deductions elected by a participant under the ESPP are made on an after-tax basis. So long as the ESPP qualifies under Section 423 of the Code, no taxable income will be recognized by a participant, and no deductions will be allowable to the Company, upon either the grant or the exercise of the options. Taxable income will not be recognized until there is a sale or other disposition of the shares acquired under the ESPP or in the event the participant should die while still owning the purchased shares.

 

If the participant sells or otherwise disposes of the purchased shares within two years after the grant date, the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the shares on the exercise date exceeded the exercise price of those shares. Any additional gain or loss upon the disposition will be taxed as a short-or-long-term capital gain or loss, depending on if the participant held the stock for more than one year (long-term if held for more than one year and short-term if otherwise). If the participant sells or otherwise disposes of the purchased shares more than two years after the grant date, then the participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (i) the amount by which the fair market value of the shares on the sale or disposition date exceeded the exercise price paid for those shares or (ii) 15% of the fair market value of the shares on the grant. Any additional gain or loss upon the disposition will be taxed as a long-term capital gain or loss.

 

If the participant still owns shares acquired under the ESPP at the time of death, the lesser of (i) the amount by which the fair market value of the shares on the date of death exceeds the exercise price or (ii) 15% of the fair market value of the shares on the grant date will constitute ordinary income in the year of death.

 

If the purchased shares are sold or otherwise disposed of within two years after the participant’s grant date, the Company will be entitled to a tax deduction in the year of such sale or disposition equal to the amount of ordinary income recognized by the participant as a result of such sale or disposition. In all other cases, no deduction will be allowed. No withholding is required by the Company.

 

New Plan Benefits.  No new plan benefits table for the ESPP, as amended, is included in this proxy statement. Participation in the ESPP is voluntary and dependent on each employee’s election to participate and his or determination as to the level of payroll deductions. Accordingly, future purchases under the ESPP are not determinable.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”

APPROVAL OF THE ESPP AMENDMENT

 

SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS

 

The following table sets forth, as of March 24, 2009, 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.

 

 

 

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS

 

The following table sets forth information as of March 24, 2009, 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) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Company’s Common Stock and other equity securities. To the Company’s 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, 2008 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 late reports for each of Ronald Coppock, Marc Geraci, Bryant Isaacs, James D. Lakin, Lawrence A. Margolis, Bruce McClelland, David B. Potts and Robert J. Stanzione related to the April 18, 2008 withholding of taxes from the restricted stock lapse and for Alex B. Best and John Ian Craig for the purchase of shares on February 19, 2008 and May 2, 2008, respectively.

 

EQUITY COMPENSATION PLAN INFORMATION

 

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, 2008:

 

 

 

BOARD AND COMMITTEE MATTERS

 

DIRECTOR INDEPENDENCE

 

For purposes of determining the independence of its directors, the Board of Directors has adopted the definition of independence used in the listing standards of the NASDAQ. It also considers the definition of independence used in the Internal Revenue Code and Securities Exchange Act of 1934 for purposes of determining whether members of the Audit Committee and Compensation Committee are independent. In making determinations, the Board of Directors considers 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 determines whether the transaction and whether it has any implications to the director’s independence. A copy of the director independence standards is available on the Company’s website at www.arrisi.com under the caption Investor Relations: Corporate Governance. Based upon these standards, the Board of Directors has determined that all of the directors, other than Robert J. Stanzione and David A. Woodle, who constitute a majority of the Board of Directors, are independent. Mr. Stanzione, as the Company’s Chief Executive Officer and President, and Mr. Woodle, as a former officer of C-COR, are not considered independent.

 

COMPENSATION OF DIRECTORS

 

2008 and 2009 Compensation

 

Cash Fees.  The non-employee directors receive director fees. During 2008, the Company paid its non-employee directors:

 

 

For 2009, the annual cash retainer has been increased to $40,000 and all Board meeting fees have been eliminated. Committee meetings fees remain unchanged. Starting in 2009, the Lead Independent Director, John Petty, will receive an additional annual cash retainer of $10,000. Each member of the Audit Committee will continue to receive an additional annual cash retainer of $5,000, and the respective Chairmen of our Board committees will continue to receive the following additional annual cash retainers:

 

 

Stock Awards and minimum holding requirement.  Each non-employee director also receives annual compensation paid in the form of stock units. Stock units have been granted as of July 1 of each year and vest in fourths in sequential calendar quarters. The number of units is determined by dividing the dollar amount of the award 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 converts, on a one-for-one basis, into shares of the Company’s Common Stock when such director is no longer a member of the Board. The remaining units, if vested, convert, on a one-for-one basis, into shares of the Company’s Common Stock at a date selected by the individual director. The number of shares that are granted to directors that they do not convert until no longer a director — i.e., a “hold until retirement” period — functions as a minimum holding requirement. The number of units held by each director that do not convert until he is no longer a director is set forth in the table below under the caption Director Compensation Table.

For 2008, the stock award grant portion of director compensation was $50,000. For 2009, the stock award portion of director compensation has been increased to $75,000. Of the 2009 total award, $50,000 continues to be paid in stock units as of July 1, as described above. The additional $25,000 was paid as of January 2, 2009 and vests in fourths in sequential calendar quarters.

 

Reimbursements.  Non-employee directors are reimbursed for reasonable expenses (including costs of travel, food and lodging) incurred in attending Board, committee and shareholder meetings. 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.  The Company maintains customary directors’ and officers’ liability insurance and is obligated under its bylaws to indemnify its officers and directors under certain circumstances.

 

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 standing Audit, Compensation, Nominating and Corporate Governance, and Technology committees. The table below shows current membership for each of the Board committees.

 

 

 

The Board of Directors held five meetings in 2008. During 2008, 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 Company’s directors attended the 2008 annual meeting of stockholders on May 28, 2008.

 

Audit Committee

 

The Audit Committee in 2008 consisted of Messrs. Petty (Chairman), Bosco, Craig, and Kearney. On February 24, 2009 Mr. Kearney became Chairman of the Committee. The membership of the Committee was not otherwise changed. 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 Company’s 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 eleven meetings in 2008.

 

Compensation Committee

 

The Compensation Committee in 2008 consisted of Messrs. Lambert (Chairman), 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 2008. The Compensation Committee is governed by a written charter that is available on the Company’s 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 six meetings in 2008.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee in 2008 consisted of Messrs. Bosco (Chairperson), Best, Lambert, and Petty. The Nominating and Corporate Governance Committee’s operations are governed by a written charter that is available on the Company’s 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 2008.

 

The Nominating and Corporate Governance Committee supervises the conduct of director self-evaluation procedures including the performance of an anonymous survey of directors as to the Board’s processes and effectiveness and governance practices in general. The Nominating and Governance Committee together with the

Board actively review succession issues and plans for both management and the Board of Directors. It is anticipated that at least one new member of the Board with specific industry expertise or experience may be appointed during the next year or two.

 

With respect to the Committee’s evaluation of director nominee candidates, the Committee considers each candidate on his or her own merits. 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 candidate’s:

 

 

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 of shares held. For potential nominees to be considered at the 2010 annual stockholders’ meeting, the Corporate Secretary must receive this information by December 15, 2009.

 

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.

 

Technology Committee

 

The Technology Committee consists of Mr. Best (Chairman) and Mr. Stanzione. The Technology Committee monitors the development of the Company’s technology and operates as an intermediary between the Company and its customers and the Technology Advisory Board of the Company.

 

Executive Committee

 

The Board of Directors formerly had an Executive Committee consisting 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 cannot be convened and action by an executive committee is deemed appropriate by the full Board. The Executive Committee held one meeting in 2008. The Executive Committee was dissolved in May 2008 since it was rarely used and a special committee could be established if and when the need arises.

 

Executive Sessions

 

The Board of Directors traditionally has held regular Executive Sessions where members of management (including Mr. Stanzione) are excluded. The Company’s Governance Guidelines recently have been amended to require that the Board meet in Executive Session at each regular Board meeting. The Lead Independent Director presides over Executive Sessions.

 

Lead Independent Director

 

The Company’s Governance Guidelines recently were amended to require that at any time the Board of Directors does not have an Independent Chairman, the Board of Directors must have a Lead Independent Director. The Lead Independent Director presides over Executive Sessions of the Board of Directors and other meetings where the Chairman is not present. The Lead Independent Director also approves the agenda for Board meetings and approves the information sent to the Board. He also is the liaison between the Chairman and the independent directors and may call meetings of the independent directors. Lastly, he is available for consultation and direct communications, if so requested by a major shareholder and has various other communications and administrative responsibilities. Mr. Petty currently is the Lead Independent Director.

 

COMMUNICATION WITH THE BOARD

 

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 Lead Independent Director or to any specific director to whom the correspondence is directed.

 

REPORT OF THE AUDIT COMMITTEE

 

Pursuant to its written charter, the Audit Committee oversees the Company’s 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 management’s 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 Company’s 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 Company’s consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles, that the audit of our Company’s consolidated financial statements has been carried out in accordance with the standards of the Public Company Accounting Oversight Board (United States) or that our Company’s 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 Company’s 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 Public Company Accounting Oversight Board Rule 3526, 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 Company’s 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 Company’s internal controls and the overall quality of the Company’s financial reporting. We reviewed proposed interim financial statements with management and the independent registered public accounting firm. We oversaw the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

 

In 2008, we had eleven 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, 2008, for filing with the Securities and Exchange Commission. In addition, we have appointed Ernst & Young LLP as the Company’s independent registered public accounting firm for calendar year 2009, subject to stockholder ratification.

 

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, Chairman until February 24, 2009

Harry L. Bosco

John A. Craig

Matthew B. Kearney, Chairman

Notwithstanding anything to the contrary which is or may be set forth in any of the Company’s 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.

 

EXECUTIVE COMPENSATION

 

Summary

 

Each of the named executive officers has an employment agreement with the Company. Employment agreements were amended in November 2008, primarily to assure compliance with the requirements of section 409A of the Internal Revenue Service and for other harmonizing changes. 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 In the event an executive is terminated without cause or in connection with a change of control of the Company, the executive is entitled to receive one year’s 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, who are not engaged by management for any other matters, 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 the Company’s deliberations for 2008 compensation decisions indicated that, taken as a whole, the Company’s base salaries, target annual incentive, and targeted long term equity compensation are 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). In 2009, normal annual merit raises for the 2009 year (which normally would go into effect April 1, 2009) have been deferred and no raises have occurred for 2009. It is possible that the Compensation Committee may reconsider this deferral if business conditions or performance warrant reconsideration. ARRIS’ shareholder return has been affected by the current financial downturn. ARRIS’ total shareholder return for the three years ended December 31, 2008 was down approximately 16.1% which was above the NASDAQ composite performance, which was down approximately 28.5%.

 

Compensation Discussion and Analysis (“CD&A”)

 

Overview

 

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 Company’s senior executives is within the province of the Compensation Committee of our Board of Directors. The Compensation Committee is composed entirely of independent 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 2006, 2007 and 2008 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:

 

 

Key Considerations

 

In applying these program objectives and reward philosophies, the Compensation Committee takes into account the key considerations discussed below:

 

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:

 

 

 

 

 

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:

 

 

 

Additional Information and Considerations

 

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 2006, 2007 and 2008, 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 Strategic Planning, 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 the cost of 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 subject, in the case of Mr. Stanzione, Chairman and CEO, to full board approval.

 

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.) We plan for equity grants generally to be analyzed, determined and granted in the mid-February to mid-April time frame. The exercise price for options is the closing price of the Common Stock on the date of grant.

Annual Cash Incentives

 

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, if any, in the relevant years and are set forth in the employment agreements of each executive officer. Mr. Stanzione’s 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 each of the 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 may be weaker that total cash compensation is less. The Compensation Committee believes that the bonus targets for the senior executives are at or modestly above the 50th percentile of the peer group and survey analysis described above.

 

In 2008, annual incentives were measured not only by targeted financial performance (for 80% of the target bonus), but by individual assigned objectives which may be objectively or subjectively measured. 20% of the target bonus for Mr. Stanzione and the other senior executives were based on assigned objectives. Specific financial performance criteria have varied; however, in 2006, 2007 and 2008 the only financial performance criterion was the achievement of budgeted adjusted operating income for the Company. The Compensation Committee chose a single earnings 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 trends in the telecommunications industry generally and the cable segment of the telecommunications industry more specifically and the Company’s market share and market share growth.

 

For 2008, 80% of the target bonus was based on financial performance. The target for consolidated adjusted operating income (excluding goodwill amortization, goodwill impairment, restructuring, certain acquisition and other items) that would yield 100% payment of the financial performance part the targeted bonus for senior executives was $167 million. If actual adjusted operating income achieved was below 90% of adjusted operating income for 2007, the bonus payout would have been zero. For performance in the range between that 90% threshold and 100% of budgeted adjusted 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 2008 was approximately 91% of the target performance and, accordingly, the financial performance portion of the bonus payouts were approximately 76% of the annual bonus target payout related to targeted financial performance

 

The 20% assigned subjective portion of the bonus target was based on management objectives established by the Compensation Committee. Bonus awards for individual accomplishments of objectives can range from 0% to 200% of target. For 2008, the management objectives for the senior executives included:

 

1. Complete the C-COR acquisition integration

 

2. Continue to diversify the business on a product and customer basis

 

3. Expand gross margins

 

4. Communicate the ARRIS story to investors, shareholders and employees

 

5. Rationalize overlapping products resulting from acquisition

 

6. Achieve projected expense synergies

 

7. Develop cross product line product strategy

 

8. Use IT to reduce operating expense

 

Based on the success of senior management, particularly with respect to market penetration, timely product development, margin improvement, cash generation and the C-COR acquisition integration, the specific management objective portion of the bonus paid out at between 129% and 133% of target as reflected in the Summary Compensation Table under the heading Non-Equity Incentive Plan Compensation.

 

In the past six years bonuses have ranged from 0% to the maximum as achieved in 2005 and 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. In 2008, 91% of the financial performance target was achieved and the resulting payout was approximately 76% of target. 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 in the aggregate the 50th percentile of the short-term incentive payments made by companies included in the market survey data that we used as benchmarks. The dollar amount of annual cash incentive bonus paid in 2008 to each of our named executive officers is reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table appearing later in this proxy statement.

 

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 reflected 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).

 

Long-Term Equity Incentives

 

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 (in 2008 time vested restricted shares were granted in lieu of 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 option 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 2008 and in future years, the Company intends to use restricted shares instead of 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. When granted stock options had a term of seven years (for some prior grants the term was ten years) and vest annually over four years (in some prior years the vesting was annually over three years).

 

For 2006, 2007 and 2008, the Compensation Committee established an aggregate value for equity grants for Company wide distribution focusing on cost to be reflected in the Company’s 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 Company’s total market capitalization. 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 2008 stock options were replaced with restricted 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 Committee’s 2008 deliberations indicates that awards of long term incentives in 2008 approximated the 50th percentile levels for the senior executive officers in the aggregate.

 

The restricted stock awarded to the senior executives in 2005, 2006 and 2007 and one-half of the restricted stock rewards granted in 2008 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 2007, for performance below 94% of budgeted sales, 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. For 2008, senior executives earned 100% of target shares at 100% of budgeted sales. For performance below approximately 82% of budgeted sales, stock awards paid out zero shares with 50% of target being paid at the approximate 82% of the targeted sales. For sales at or above 105% of targeted sales, the shares paid 150% of targeted shares. 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 2008 restricted stock awards paid out was approximately 55% as actual sales were approximately 84% of budgeted sales. 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 and 2008 are set forth on the table entitled “Grants of Plan-Based Awards” in the executive compensation tables found later in this proxy statement.

 

For 2009, the performance criterion for performance shares was changed. The new criterion is based on the Company’s total shareholder return as compared to the shareholder return of the NASDAQ composite over a three year period (the “TSR measurement”) beginning with the calendar year of 2009. The TSR measurement will allow for payment from 0% and 200% based on underperforming, meeting or exceeding the NASDAQ composite three year return. Both 2009 and 2010 are transition years where a portion of the performance share awards will be paid at 100% since the Company has exceeded the three year NASDAQ composite shareholder return in each of the

last three fiscal years. For 2009, two-thirds of the awards will pay out at 100% vesting on the first and second anniversaries of the grant date, and the remaining one-third will be based on the three-year Total Shareholder Return and will vest on January 31, 2012. The 2010 grant is expected to be similarly structured but only one-third of the grant will be paid at 100% and will vest on the first anniversary of the grant date, and two-thirds will be based on the Total Shareholder Return measurement and will vest on January 31, 2013. The 2011 grant is expected to be 100% based on the Total Shareholder Return measurement and will vest on January 31, 2014.

 

Executive Stock Ownership Guidelines

 

The Company has share ownership guidelines that require each senior executive to own shares having a value equal to a multiple of the senior executive’s annual base salary at the time the executive became subject to the ownership requirement. For Mr. Stanzione, the multiple was three times base salary; for Messrs. Margolis, Potts and Lakin it was twice base salary; and for Mr. Coppock it was 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.

 

Summary Compensation Table

 

The summary compensation table below presents the “total compensation” earned by our Named Executive Officers during 2006, 2007 and 2008. This amount is not the actual compensation received by our NEOs. In addition to cash and other forms of compensation actually received, total compensation includes the amount of the annual change in actuarial present value of accumulated pension benefit which will not be paid, or begin to be paid, until retirement, and the calculated dollar amounts set forth in the “Stock Awards” and “Option Awards” columns. These stock and option amounts reflect the compensation expense we recognized for financial statement reporting purposes with respect to equity awards granted to our NEOs in 2008, as well as grants made in prior years, to the extent such awards vested during 2006, 2007 and 2008. The compensation expense included in the “Stock Awards” and “Option Awards” columns likely will 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 2008 is presented in the “Option Exercises and Stock Vested” table below. Details about the equity awards granted to our NEOs during 2008 can be found in the “Grants of Plan-Based Awards” table below.

Summary Compensation Table

 

 

 

 

 

Grants of Plan-Based Awards 2008

 

 

 

 

Equity awards for senior executives and for employees generally are granted annually at the same time and are priced (if options) 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 performance shares and in restricted shares (or stock options prior to 2008). The number of performance shares earned has depended upon on the Company’s 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. In 2008, no options were granted, instead restricted shares were granted. Half of the restricted shares were performance shares, as in past years, and half of the shares, like options previously granted, are time based and vest over four years. In 2008, the performance shares paid out at approximately 55% as sales reached approximately 84% of the targeted sales.

 

Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

Option Exercises and Stock Vested

 

 

 

 

Executive Benefits and Perquisites

 

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, and a non-qualified retirement savings plan, 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.

 

Pension Benefits

 

 

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 officer’s 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 individual’s “final annual compensation” up to the named executive officer’s social security covered compensation level, plus (b) 1.3% of the “final average salary” in excess of the named executive officer’s 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 participant’s 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 61, 61 and 65 years of age, respectively, 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 has established a Rabbi Trust to hold funds set aside to meet the obligations under the non-qualified defined benefit plans. The Company intends to fully fund the Rabbi Trust such that the amount of the actuarially accrued liability under the non-qualified deferred benefit plan as set forth in the Company’s financial statements has been set aside in a Rabbi Trust by the time the actuarial liability has been established. Amounts contributed to the Rabbi Trust remain the funds of the Company but can be used only to discharge obligations under the non-qualified plan, provided however, the funds in the trust remain subject to the claims of creditors.

 

The Company maintains on Mr. Stanzione’s 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 the form of payment. In addition, under the SERP, final average compensation is Mr. Stanzione’s 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. Stanzione’s actual service multiplied by three and are not limited to 30 years. The benefit calculation is otherwise the same as described above, although Mr. Stanzione’s benefit may not exceed 50% of his final average compensation. In the event of Mr. Stanzione’s 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. Stanzione’s pension benefit cannot be lower than $33,333 per month. The Company has established a separate “Rabbi Trust” to hold funds equal to the Company’s obligations under the non-qualified defined benefit plan and SERP to Mr. Stanzione. Pursuant to Mr. Stanzione’s employment agreement, the Company will fully fund those obligations by the date of Mr. Stanzione’s 62nd birthday. Mr. Stanzione’s defined benefit value at age 62 is frozen. Thereafter such funds will be credited only with the benefit or losses of independently managed investment vehicles elected by Mr. Stanzione from a menu of vehicles made available by the Company.

 

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 2008). The named executives participate in this plan and received the Company match, which could not exceed $9,200 for 2008.

 

In addition, effective as of July 1, 2008, the Company established a non-qualified defined contribution retirement plan (the “401(k) Wrap”) that mirrors the 401(k) plan. The plan allows certain senior executives, including the named executive officers, to contribute amounts in excess of the amounts allowed under applicable tax laws under the 401(k) plan. The tax law for 2008 disallows contribution on income above $230,000 or contributions more than $15,500. The Company will match employee contributions under the 401(k) Wrap in a manner analogous to the 401(k). Provided the employee contributes the maximum amount allowed under the 401(k), the Company will contribute to the 401(k) and 401(k) Wrap in the aggregate 100% on the first 3% of pay and 50% of the next 2% of pay, less the amount of employer matches made to the 401(k). The amounts of employee and employer contributions to the 401(k) Wrap are held in a Rabbi Trust. Funds held under the 401(k) and the 401(k) Wrap are invested in authorized and independently managed mutual funds and other vehicles that the employee elects from a menu of vehicles offered under the plans. The employee account receives the benefit or loss of the increases or decreases based only on such funds performance. The Company does not enhance or guarantee performance.

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 under such plan. 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 change in value of the named executive’s account under the Company’s Non-Qualified Deferred Compensation arrangements (both current and frozen) during calendar year 2008. 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.

 

Nonqualified Deferred Compensation

 

 

 

 

Other Perquisites.  We reimburse certain club membership fees, airline club dues and pay for financial counseling services for our named executive officers.

 

Clawback Policy.

 

In February 2009, the Board of Directors adopted the Executive Compensation Adjustment and Recovery Policy. This policy is a so-called “clawback policy” that enables the Company to recoup compensation paid to any president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, or any other officer routinely performing corresponding functions with respect to the Company when such compensation was based on financial results or operating metrics that were satisfied as the result of a fraudulent or illegal conduct of any of the officers. The Board of Directors is entitled to recover compensation when it concludes that it is attributable to such officers’ conduct and would not have been awarded had such financial results or operating metrics not been satisfied. In addition, if an officer engaged in intentional misconduct that contributed in any material respect to the improper accounting or incorrect financial data, the Board of Directors may seek to

recoup any profits realized from the officer’s sale of securities of the Company during or subsequent to the impacted accounting period. A copy of the Policy is available at www.arrisi.com under the caption Investor Relations.

 

The Company is in the process of implementing the Policy. Beginning in 2008, equity awards contemplated that the Board of Directors might adopt a clawback policy and the compensation committee made those awards subject to any policy that the Board of Directors ultimately adopted. Future long-term incentive awards and annual incentive awards will similarly be subject to the Policy.

 

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

 

Executive employment agreements were amended in November 2008 to comply with the timely payment and other provisions of Section 409A of the Internal Revenue Code and to harmonize certain benefits.

 

The employment agreements generally are one year agreements and automatically renew until normal retirement at age 65, define initial salary and target bonus percent, general employment benefits and business expense reimbursements. The agreements contain one year non-competition, non-solicitation and non-disclosures of trade secret provisions. The amendments provided not only 409A compliance provisions but also that executives terminating their employment who are 62 years old or older with ten or more years of experience, their outstanding equity awards will continue to vest and remain outstanding for their original term (notwithstanding such termination) provided they continue to comply with the non-competition trade secret protection provisions of the agreement. The amendments also reflect for the Rabbi Trust and funding elements described above with respect to the Company’s non-qualified deferred benefit plan and the SERP of Mr. Stanzione. The term of Mr. Margolis’ contract is until he reaches age 65 subject to termination on 24 months’ notice. Mr. Stanzione agreement has been amended so that it is terminable on 24 months’ notice until he reaches age 62 at which time it is terminable on 12 months’ notice. (His prior agreement terminated at age 62). Also, Mr. Stanzione’s SERP benefit is frozen at his age 62 benefit amount, which amount will thereafter be credited with the investment returns or losses of the independently managed funds and investment vehicles elected by Mr. Stanzione from a menu of investment vehicles made available by the Company. Upon his retirement from the Company, Mr. Stanzione is entitled to receive a lump sum benefit. Thus, Mr. Stanzione’s employment as Chairman, CEO and President may continue beyond age 62 subject to termination or resignation of 12 months prior written notice.

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, 2008.

 

Termination Benefit Table