Form 8-K/A ARRIS International plc For: Jan 04

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February 17, 2016 5:02 PM EST

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

Amendment No. 1

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 4, 2016

ARRIS INTERNATIONAL PLC

(Exact name of registrant as specified in its charter)


England and Wales	001-37672	98-1241619
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

3871 Lakefield Drive

Suwanee, Georgia

30024

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (678) 473-2000

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by ARRIS International plc (the “Company”) on January 4, 2016, to include the financial statements and pro forma financial information required under Item 9.01 in connection with the Company’s acquisition of Pace plc (“Pace”). Such financial statements and information should be read in conjunction with the Company’s Current Report on Form 8-K filed on January 4, 2016.

Item 9.01. Financial Statements and Exhibits.

(a)	Financial Statements of Business Acquired.

The historical consolidated financial information of Pace for the years ended December 31, 2014, 2013 and 2012, together with the notes thereto and the auditors’ report thereon are attached here to as Exhibit 99.1 and incorporated herein by reference. The unaudited historical consolidated financial information of Pace as of and for the six months ended June 30, 2015, together with the notes thereto, are attached here to as Exhibit 99.2 and incorporated herein by reference.

(b)	Pro Forma Financial Information.

The unaudited pro forma condensed combined balance sheet data of the Company as of September 30, 2015 and the unaudited pro forma condensed combined statements of income data of the Company for the nine months ended September 30, 2015 and the fiscal year ended December 31, 2014 that give effect to the acquisition of Pace and the other transactions making up the Combination are attached here to as Exhibit 99.3 and incorporated herein by reference.

(d)

Exhibits.


EXHIBIT NO.		DESCRIPTION

99.1		Audited combined financial statements of Pace plc for the years ended December 31, 2014, 2013 and 2012 (incorporated by reference to the Company’s Registration Statement on Form S-4 filed with the Commission on September 11, 2015 (File No. 333-205442))

99.2		Unaudited combined financial statements of Pace plc for the six months ended June 30, 2015

99.3		Unaudited pro forma financial information of the Company as of and for the nine months ended September 30, 2015

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


ARRIS INTERNATIONAL PLC

By:		/s/ Patrick W. Macken
		Patrick W. Macken
		Senior Vice President, General Counsel, and Secretary

Date: February 17, 2016

EXHIBIT INDEX


EXHIBIT NO.		DESCRIPTION

99.1		Audited combined financial statements of Pace plc for the years ended December 31, 2014, 2013 and 2012 (incorporated by reference to the Company’s Registration Statement on Form S-4 filed with the Commission on September 11, 2015 (File No. 333-205442))

99.2		Unaudited combined financial statements of Pace plc for the six months ended June 30, 2015

99.3		Unaudited pro forma financial information of the Company as of and for the nine months ended September 30, 2015

Exhibit 99.2

Pace plc: Extract from UK announcement of interim results for the six months ended 30 June 2015 and unaudited condensed consolidated interim financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board

Business Review

Key highlights in the period

Pace is continuing to become a more profitable business with a broader product mix and continued strong cash flow generation. As expected, revenue in H1 2015 decreased by 5.3% ($1,078.6m vs $1,138.9m in H1 2014) as challenging economic conditions, the strength of the US Dollar and industry consolidation reduced demand in a number of regions. Operating margin in the period increased from 9.3% to 10.9% reflecting a more favourable product mix, improving supply chain effectiveness and lower operating costs. The cash flow performance of Pace remains strong with $93.9m of free cash flow generated in the period, 79.6% of adjusted EBITA, and net debt was reduced by 97.5% to $2.3m.

Strategic plan

Pace continues to evolve and deliver against the Strategic Plan and goals originally laid out in 2011. We are pleased to report that good progress has been made against these goals in H1 2015 and we are confident of further progress in H2 2015 and beyond.

Continue to transform core economics

In the period, further progress has been made in improving the efficiency and effectiveness of the business. As the major initiatives which commenced in late 2011 continue to deliver tangible benefits, a cost-focussed discipline and high level of accountability is now ingrained across Pace.

•

Continued focus on operating efficiency has enabled Pace to reduce underlying operating costs (excluding IAS 38¹ adjustments) by 11.6% ($17.9m) whilst continuing to further invest in growth opportunities.

•

Net debt was reduced by 97.5% to $2.3m and Pace expects to be in a net cash position in 2015.

Maintain PayTV hardware leadership

In-line with expectations, PayTV CPE revenue decreased 12.1% (H1 2014: 23.2% decrease) to $853.6m (H1 2014: $971.0m) reflecting reduced demand across a number of customers and regions. PayTV CPE revenue is expected to increase in most regions in H2 2015 due to new product launches and increased demand for existing products from key customers.

•

Liberty Global has launched its advanced Horizon TV user interface experience based on Pace developed STBs at UPC Czech Republic – this solution has already been deployed at UPC Poland.

•

Building on Pace’s global partnership with TiVo that was announced in H1 2012, RCN in the US has selected Pace hardware to power their TiVo software solution.

•

Pace High Definition STBs are now being deployed by Sky Italia, via their partnership with Telecom Italia, as part of their Internet Protocol TV (“IPTV”) offering. Telecom Italia is the largest Telecoms operator in Italy.

•

Pace’s recently launched advanced DOCSIS 3.0 Cable Gateways have been selected by Service Electric Cable in the US, and are in trials with a number of operators with further launches expected in H2 2015.

Widening out

In the period, Pace achieved a 34.0% increase in non-CPE revenue (H1 2014: 213.8% increase, following the acquisition of Aurora Networks) to $225.0m (H1 2014: $167.9m) driven by the strong performance of Pace Networks, especially in Latin America. Notable developments in the period include the following:

•

Strong demand for network products has continued from H2 2014 reflecting cable operators’ need for increased bandwidth and Pace’s product set being an efficient way to upgrade network infrastructure.

¹	IAS 38 adjustments are the net of capitalised and amortised development costs under IAS 38 – Intangible Assets.

•

Increased demand for Pace’s next generation software products; Elements and ECO Service Management led to revenue growth which was offset by a reduction in revenue from customer care and legacy software and services contracts.

•

The Elements Software Platform (including Titanium Conditional Access) is now deployed on over 10 million devices, a 26% increase in the last twelve months.

•

Emerging Markets Communications (EMC) is a global satellite and terrestrial communications company specialising in delivering mission-critical, managed, network services for the global energy industry, mobile network operators, carriers, governments, NGOs, Maritime, Aeronautical and worldwide enterprises with locations in remote areas of the world, and has selected Pace to provide an integrated solution consisting of Pace Elements software and Pace hardware.

•

The ECO Service Management Platform is now managing nearly 36 million devices, a 7% increase in the last twelve months and was recently deployed by Cincinnati Bell, a leading local exchange and wireless provider in the US. In addition, Foxtel, the leading Subscription television provider in Australia will deploy ECO Monitor, Pace’s service quality monitoring solution, live in August 2015. This will be the first deployment of this solution in the world.

Business performance

Product type revenue split


	H1 2015 $m		H1 2014 $m		FY 2014 $m
STB and Media Servers		748.4		893.9		2,003.5
Gateways		105.2		77.1		239.7
Software and Services		51.9		54.4		112.2
Networks		173.1		113.5		264.6

Total		1,078.6		1,138.9		2,620.0

The split in revenue across the various product categories is as follows: 69.4% STB and Media Servers (H1 2014: 78.4%), 9.8% Gateways (H1 2014: 6.8%), 4.8% Software and Services (H1 2014: 4.8%) and Networks 16.0% (H1 2014: 10.0%).

The 16.3% decrease in STB and Media Server revenue was expected due to weaker trading conditions in Latin America and Europe and reduced demand following a strong H2 2014. STB and Media Server revenue is expected to increase in H2 2015 due to customer specific new product launches and growing demand for existing products.

Revenue from Gateway products increased by 36.4% vs H1 2014 reflecting the demand for a number of next generation Gateway products launched mid-2014. Gateway revenues are expected to increase further in H2 2015 as customer demand for these new products continues to grow.

Revenue from Software and Services was down 4.6% vs H1 2014, as growth in Pace’s next generation Elements and ECO Software products was offset by a reduction in revenue from Customer Care and legacy software and service contracts. Growth in H2 2015 is expected as key software projects are launched and Customer Care volumes increase.

Networks revenue in the period was up 52.5% vs H1 2014 with strong demand especially in Latin America.

Regional revenue split


	H1 2015 $m		H1 2014 $m		FY 2014 $m
North America		704.9		699.0		1,635.6
Latin America		155.9		185.8		373.2
Europe		100.8		117.1		291.2
Rest of World²		117.0		137.0		320.0

Total		1,078.6		1,138.9		2,620.0

The PayTV and broadband service provider industries which Pace serves continue to remain strong; global digital PayTV revenue and subscribers are at record levels and a Compound Annual Growth Rate (“CAGR”) of 6.2%³ for revenue and 6.4%³ for subscribers is expected between 2014 and 2019.

Pace continues to have a globally diverse customer base and strong customer relationships from which to develop the business: in H1 2015 revenues split: 65.4% North America (H1 2014: 61.4%), 14.5% Latin America (H1 2014: 16.3%), 9.3% Europe (H1 2014: 10.3%), and Rest of World 10.8% (H1 2014: 12.0%).

Revenues in North America were up 0.8% at $704.9m in H1 2015 (H1 2014: $699.0m) as growth in Gateways offset a small reduction in STB and Media Servers following a strong H2 2014. We are confident that Pace will achieve strong revenue growth in North America in H2 2015 from this period due to new product launches and increasing demand for existing products with major customers.

In Latin America, revenue reduced 16.1% to $155.9m (H1 2014: $185.8m) due to challenging economic conditions and the strength of the US Dollar against local currencies leading to reduced demand. The Group remains confident that Pace is strategically well positioned with key customers in the region and in the mid-term Latin America offers opportunities for continuing strong revenues and profitability.

Revenues in Europe were down by 13.9% to $100.8m (H1 2014: $117.1m). The decrease was mainly due to challenging economic conditions in certain countries and the effects of operator consolidation leading to reduced demand, however modest growth is expected in this region in H2 2015 from this period.

Revenues in Rest of World decreased 14.6% to $117.0m (H1 2014: $137.0m). This decrease reflects reduced demand from a number of major customers following a strong H2 2014. We expect that demand will increase and strong revenue growth is expected in this region in H2 2015 from this period.

²	Rest of the World is Asia Pacific, Middle East & Africa

³	IHS Television Intelligence Service July 2015.

Financial Review

Group trading results


	H1 2015 $m			H1 2014 $m			FY2014 $m
Revenue		1,078.6			1,138.9			2,620.0
Gross profit		250.7			245.8			532.5
Gross margin %		23.2	%		21.6	%		20.3	%
Adjusted administrative expenses*		(132.7	)		(139.5	)		(291.4	)
Adjusted EBITA*		118.0			106.3			241.1
Operating margin**		10.9	%		9.3	%		9.2	%
Exceptional costs		(5.0	)		(3.5	)		(7.3	)
Amortisation of other intangible assets		(24.3	)		(27.7	)		(52.9	)
Net finance expense		(3.6	)		(3.1	)		(5.2	)
Profit before tax		85.1			72.0			175.7
Tax credit / (charge)		0.3			(16.6	)		(27.7	)
Profit after tax		85.4			55.4			148.0

*	Pre-exceptional costs and amortisation of other intangible assets. For a reconciliation of adjusted administrative expenses, see below under “Reconciliation of adjusted administrative expenses and underlying operating costs.”

**	Operating margin is adjusted EBITA margin.

Group Revenue of $1,078.6m (H1 2014: $1,138.9m) decreased by 5.3%, in-line with expectations, as challenging economic conditions in certain countries, the strength of the US Dollar and industry consolidation reduced demand in a number of regions, particularly in the STB and Media Servers product segment.

In the period, Pace had three customers which individually account for more than 10% of the Group’s total revenue. Together these account for 53.5% of the Group’s total revenue (H1 2014: 42.7%).

Gross profit was up 2.0% at $250.7m (H1 2014: $245.8m). Gross margin percentage during the period was 23.2%, an increase of 1.6ppt on H1 2014, reflecting improved product mix and supply chain efficiencies. Gross margins are expected to be lower in H2 2015 as the product mix shifts more towards CPE.

Reconciliation of adjusted administrative expenses and underlying operating costs


	H1 2015 $m			H1 2014 $m			FY2014 $m
Total administrative expenses		162.0			170.7			351.6
Exceptional costs		(5.0	)		(3.5	)		(7.3	)
Amortisation of other intangible assets		(24.3	)		(27.7	)		(52.9	)
Adjusted administrative expenses		132.7			139.5			291.4
IAS 38 credit / charge:
Capitalisation		27.3			34.1			66.2
Amortisation		(24.0	)		(19.7	)		(45.4	)
Underlying operating costs		136.0			153.9			312.2

Adjusted administrative expenses decreased by $6.8m (4.9%) to $132.7m (H1 2014: $139.5m). Underlying operating costs, excluding the impact of IAS 38 accounting adjustments, decreased by $17.9m (11.6%) to $136.0m (H1 2014: $153.9m) reflecting the annualised run-rate savings of synergies from the Networks Strategic Business Unit (“SBU”) integration and further efficiencies across the business.

The IAS 38 net credit in H1 2015 was $3.3m ($27.3m of development expenditure was capitalised and $24.0m amortised) reflecting the full period run-rate of the Networks SBU and the development activity ahead of product launches at the end of the half and in H2 2015.

Adjusted EBITA was $118.0m (H1 2014: $106.3m); an operating margin of 10.9% against 9.3% in H1 2014 due to improved product mix, supply chain efficiencies and reduced operating costs. Operating margins are expected to be lower in H2 2015 as the product mix shifts more towards CPE.

Exceptional costs of $5.0m (H1 2014: $3.5m) relate to the transaction costs incurred in the proposed combination with ARRIS ($2.8m), restructuring costs across the business ($1.3m) and aborted acquisition costs ($0.9m).

Amortisation of other intangible assets, reflecting the charge for intangible assets related to acquisitions made in both 2010 and 2014, was $24.3m (H1 2014: $27.7m).

Segmental analysis

The Group operates through SBUs. Pace Americas, Pace International and Pace Networks are deemed by the Board to represent operating segments under IFRS 8, with revenues and adjusted EBITA as follows:


	H1 2015 $m			H1 2014 $m			FY 2014 $m
Revenue
Pace Americas		638.2			675.7			1,561.6
Pace International		267.3			348.2			793.8
Pace Networks		173.1			115.0			264.6
Other		—			—			—

Total revenue		1,078.6			1,138.9			2,620.0

Adjusted EBITA
Pace Americas		74.1			62.6			150.2
Pace International		24.7			49.0			88.3
Pace Networks		45.3			16.2			47.4
Other		(26.1	)		(21.5	)		(44.8	)

Total adjusted EBITA		118.0			106.3			241.1

Movements in revenue are described below. Although not wholly consistent, revenues from STB and Media Servers, Gateways and Software and Services in North America belong primarily to the Americas SBU, in Europe and Rest of World belong largely to the International SBU, and in Latin America belong to both the Americas and International SBUs. All revenue from Network products belong to the Networks SBU.

H1 2015 revenue was split across the business units as follows; Americas 59.2% (H1 2014: 59.3%), International 24.8% (H1 2014: 30.6%), Networks 16.0% (H1 2014: 10.1%) and Other 0.0% (H1 2014: 0.0%).

Pace Americas’ revenue decreased by $37.5m (5.5%), adjusted EBITA increased by $11.5m (18.4%) and operating margin increased to 11.6% compared to H1 2014 at 9.3%. Pace International revenues decreased by $80.9m (23.2%) compared to H1 2014 and adjusted EBITA decreased by $24.3m (49.6%) and operating margin decreased from 14.1% to 9.2%. Pace Networks revenue increased by $58.1m (50.5%) to $173.1m (H1 2014: $115.0m), adjusted EBITA increased by $29.1m (179.6%) to $45.3m (H1 2014: $16.2m) and operating margin increased from 14.1% to 26.2%.

Other amounts include unallocated central costs that are not classified as reportable segments under IFRS 8. The loss in Other, primarily Corporate costs, increased by 21.4% to $26.1m (H1 2014: loss of $21.5m).

Finance costs

Net financing costs of $3.6m (H1 2014: $3.1m) reflect lower interest received due to a different geographical spread of cash balances.

Profit before tax

Profit before tax was $85.1m (H1 2014: $72.0m); an increase of $13.1m (18.2%) on H1 2014.

Taxation

The tax credit of $0.3m (H1 2014: $16.6m charge) reflects one-off prior year adjustments reducing the tax charge by $18.8m. These adjustments resulted from both the release of tax provisions following the closure of previously uncertain prior year tax positions and also the recognition of prior year tax assets relating to a range of items, the largest of which is research and development tax credits now expected to be claimed. Excluding these one-off factors, the underlying tax charge was $18.5m (H1 2014: $16.6m) resulting from an annual effective tax rate of 21.7% (H1 2014: 23.0%). The cash cost of corporate tax was $12.1m (H1 2014: $2.8m), 14.2% of profit before tax (H1 2014: 3.9%).

Profit after tax

Profit after tax was $85.4m (H1 2014: $55.4m); an increase of $30.0m (54.2%) on H1 2014.

Earnings per share

To better reflect underlying performance, adjusted earnings per share is also calculated. This is calculated as profit after tax adjusted to exclude the post-tax impact of exceptional costs and amortisation of other intangibles, and the adjustment to the current tax charge in respect of prior periods, as below:


	H1 2015		H1 2014		FY2014
Adjusted basic earnings per ordinary share (cents)		28.4		25.5		63.6
Adjusted diluted earnings per ordinary share (cents)		27.5		24.4		61.2

Within the adjusted earnings per ordinary share calculations, the earnings amount is calculated as follows:


	H1 2015 $m			H1 2014 $m			FY2014 $m
Profit after tax		85.4			55.4			148.0
Amortisation of other intangible assets		24.3			27.7			52.9
Tax effect of above		(5.3	)		(6.4	)		(8.4	)
Exceptional costs		5.0			3.5			7.3
Tax effect of above		(1.1	)		(0.8	)		(1.2	)
Adjustment to current tax charge in respect of prior periods		(18.8	)		—			—
Adjusted profit after tax		89.5			79.4			198.6

The Group’s annual effective tax rate of 21.7% (30 June 2014: 23.0%) has been used to calculate the tax effect of adjusted items.

Basic EPS was 27.1c (H1 2014: 17.8c), an increase of 52.2%. Adjusted basic EPS, which removes the tax affected impact of the exceptional costs and the amortisation of other intangible assets and the one-off benefits of prior year tax adjustments to reflect underlying performance, was 28.4c (H1 2014: 25.5c), an increase of 11.4%.

Balance sheet

Intangible development expenditure assets increased by $2.8m (H1 2014: $14.9m increase) in the period to $87.8m (31 December 2014: $85.0m), reflecting the full period run-rate of IAS 38 adoption in the Networks SBU. Development expenditure of $27.3m (H1 2014: $34.3m) was offset by amortisation of $24.0m (H1 2014: $19.4m) and a $0.5m reduction due to exchange adjustments (H1 2014: $nil).

Tangible fixed assets decreased by $5.4m in the period as capital expenditure of $9.2m (H1 2014: $12.5m) was offset by a depreciation charge of $13.5m (H1 2014: $14.4m) and a $1.1m reduction due to exchange adjustments (H1 2014: nil).

Working capital

In the period working capital⁴ decreased by $11.1m (7.8%) to $131.4m (as at December 31 2014: $142.5m).

Inventory increased by $69.6m (41.4%) to $237.6m during the period reflecting the build up to meet the expected increased volume in H2 2015. Average stock turn in the period was 2.8 times against 3.7 times in H1 2014 as the inventory build commenced earlier than in the comparative period.

Debtor days were 68 days at the end of the half compared with 66 days at 31 December 2014 and 59 days at 30 June 2014, reflecting customer mix and slow payments by a number of customers.

Creditor days increased to 99 days at the end of the half compared with 90 days at both 31 December 2014 and 30 June 2014, as terms were aligned with Pace’s EMS partners to match our inventory build profile.

Debt

In the period net debt (borrowings less cash and cash equivalents) reduced by $90.8m (97.5%) from $93.1m to $2.3m and the Group expects to be in a net cash position in 2015.

A key target for the Group is to maintain an appropriate balance sheet leverage (calculated as net debt divided by adjusted EBITDA over the preceding 12 months) to provide a strong foundation and the flexibility for Pace to progress its strategic options. At 30 June 2015 the net debt / LTM adjusted EBITDA ratio was 0.01x, well within the 2.0x net debt to EBITDA ratio target set as an appropriate and efficient capital structure for Pace.

⁴	Excluding accrued dividend within trade and other payables of $15.1m at 30 June 2015 (nil at 31 December 2014).

Liquidity and cash flows


	H1 2015 $m			H1 2014 $m			FY2014 $m
Cash generated from operations		145.4			140.8			291.6
Tax paid		(12.1	)		(2.8	)		(11.5	)
Purchase of property, plant and equipment		(9.2	)		(12.5	)		(26.0	)
Development expenditure		(27.3	)		(34.3	)		(66.2	)
Net interest paid		(2.9	)		(2.0	)		(3.6	)
Other acquisition related cash flows		—			19.7			19.7
Free cash flow		93.9			108.9			204.0

A key performance measure for the Group is free cash flow, which was $93.9m (H1 2014: $108.9m) and represented 79.6% of adjusted EBITA (H1 2014: 102.4%). Cash outflows from interest payable net of interest received were $2.9m (H1 2014: $2.0m). Cash spent on exceptional costs was $3.0m (H1 2014: $4.1m) and the net cash cost of tax was $12.1m (H1 2014: $2.8m).

Foreign currency

In the period approximately 81.3% of the Group’s revenues were denominated in US Dollar (H1 2014: 76.9%), 8.0% in Brazilian Real (H1 2014: 13.1%), 7.1% in Euro (H1 2014: 6.4%), 3.1% in South African Rand (H1 2014: 2.7%), 0.4% in Australian Dollar (H1 2014: 0.4%) and 0.1% in Sterling (H1 2014: 0.5%).

The impact of non-US Dollar revenues, costs and overheads continues to be addressed through Pace’s foreign exchange hedging strategy. The group is largely hedged for the remainder of 2015 through a series of forward contracts.

Risks and Uncertainties

Save as referred to above, the principal risks and uncertainties facing the Group have not changed from those set out in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Pace” in the proxy statement/prospectus filed by ARRIS International plc on September 15, 2015. The risks and uncertainties related to: customers and markets, suppliers, royalties, currency, innovation, product liability claims, natural disasters, and IT systems and security. The full Annual Report and Accounts are available at www.pace.com.

Dividend

In view of the proposed combination with ARRIS, the Board does not intend to recommend the payment of any further dividends at this time.

Unaudited Condensed Consolidated Interim Income Statement

for the six months ended 30 June 2015


	Notes	6 months ended 30 June 2015 $m			6 months ended 30 June 2014 $m			Year ended 31 December 2014 $m



Revenue	2		1,078.6			1,138.9			2,620.0
Cost of sales			(827.9	)		(893.1	)		(2,087.5	)

Gross profit			250.7			245.8			532.5


Administrative expenses:
Research and development expenditure			(41.7	)		(46.4	)		(83.7	)
Amortisation of development expenditure			(24.0	)		(19.4	)		(45.4	)
Other administrative expenses
Before exceptional costs			(67.0	)		(73.7	)		(162.3	)
Exceptional costs	4		(5.0	)		(3.5	)		(7.3	)
Amortisation of other intangible assets			(24.3	)		(27.7	)		(52.9	)

Total administrative expenses			(162.0	)		(170.7	)		(351.6	)

Operating profit			88.7			75.1			180.9
Finance income – interest receivable			0.4			1.1			2.5
Finance expenses – interest payable			(4.0	)		(4.2	)		(7.7	)

Profit before tax			85.1			72.0			175.7
Tax credit / (charge)	3		0.3			(16.6	)		(27.7	)

Profit for the period	2		85.4			55.4			148.0


Profit attributable to:
Equity holders of the Company			85.4			55.4			148.0

Basic earnings per ordinary share (cents)	5		27.1			17.8			47.4
Diluted earnings per ordinary share (cents)	5		26.3			17.0			45.6

Unaudited Condensed Consolidated Interim Statement of Comprehensive Income

for the six months ended 30 June 2015


	6 months ended 30 June 2015 $m			6 months ended 30 June 2014 $m			Year ended 31 December 2014 $m
Profit for the period		85.4			55.4			148.0
Other comprehensive income:
Items that are or may be subsequently reclassified to profit or loss:
Exchange differences on translation of foreign operations		(13.9	)		6.4			(19.7	)
Net change in fair value of cash flow hedges transferred to profit or loss, gross of tax		(8.6	)		1.5			2.3
Deferred tax adjustment on above		1.9			(0.3	)		(0.4	)
Effective portion of changes in fair value of cash flow hedges, gross of tax		3.8			(0.1	)		2.7
Deferred tax adjustment on above		(0.8	)		—			(0.4	)

Other comprehensive income for the period, net of tax		(17.6	)		7.5			(15.5	)



Total comprehensive income for the period		67.8			62.9			132.5


Attributable to:
Equity holders of the Company		67.8			62.9			132.5

Unaudited Condensed Consolidated Interim Balance Sheet

at 30 June 2015


	Notes	30 June 2015 $m			30 June 2014 $m			31 December 2014 $m


ASSETS
Non-Current Assets
Property, plant and equipment			57.8			65.0			63.2
Intangible assets – goodwill	6		464.8			489.4			471.1
Intangible assets – other intangibles	6		184.2			233.4			208.2
Intangible assets – development expenditure	6		87.8			79.3			85.0
Deferred tax assets			27.5			42.9			31.2

Total Non-Current Assets			822.1			910.0			858.7

Current Assets
Inventories	7		237.6			166.3			168.0
Trade and other receivables	8		582.8			549.4			909.1
Cash and cash equivalents			254.2			122.4			182.1
Current tax assets			6.1			4.2			4.3

Total Current Assets			1,080.7			842.3			1,263.5

Total Assets			1,902.8			1,752.3			2,122.2

EQUITY
Issued capital			29.5			29.1			29.1
Share premium			86.6			84.6			85.1
Merger reserve			109.9			109.9			109.9
Hedging reserve			0.3			0.9			4.0
Translation reserve			(93.2	)		(53.2	)		(79.3	)
Retained earnings			595.6			430.6			518.3

Total Equity			728.7			601.9			667.1

LIABILITIES
Non-Current Liabilities
Deferred tax liabilities			83.9			96.4			89.7
Provisions	11		85.6			83.7			100.6
Borrowings	12		215.1			256.7			237.8

Total Non-Current Liabilities			384.6			436.8			428.1

Current Liabilities
Trade and other payables	9		704.1			615.5			934.6
Current tax liabilities			10.7			30.9			23.5
Provisions	11		33.3			33.9			31.5
Borrowings	12		41.4			33.3			37.4

Total Current Liabilities			789.5			713.6			1,027.0

Total Liabilities			1,174.1			1,150.4			1,455.1

Total Equity and Liabilities			1,902.8			1,752.3			2,122.2

Unaudited Condensed Consolidated Interim Statement of Changes in Shareholders’ Equity

for the six months ended 30 June 2015


	Share capital $m		Share premium $m		Merger reserve $m		Hedging Reserve $m			Translation reserve $m			Retained earnings $m			Total equity $m


Balance at January 2014		29.0		83.7		109.9		(0.2	)		(59.6	)		384.2			547.0
Profit for the period		—		—		—		—			—			55.4			55.4
Other comprehensive income		—		—		—		1.1			6.4			—			7.5

Total comprehensive income for the period ended June 2014		—		—		—		1.1			6.4			55.4			62.9
Transactions with owners:
Dividends to equity shareholders		—		—		—		—			—			(11.7	)		(11.7	)
Employee share incentive charges		—		—		—		—			—			2.7			2.7
Issue of shares		0.1		0.9		—		—			—			—			1.0

Balance at June 2014		29.1		84.6		109.9		0.9			(53.2	)		430.6			601.9
Profit for the period		—		—		—		—			—			92.6			92.6
Other comprehensive income		—		—		—		3.1			(26.1	)		—			(23.0	)

Total comprehensive income for the period ended December 2014		—		—		—		3.1			(26.1	)		92.6			69.6
Transactions with owners:
Dividends to equity shareholders		—		—		—		—			—			(7.0	)		(7.0	)
Employee share incentive charges		—		—		—		—			—			3.8			3.8
Issue of shares		—		0.5		—		—			—			—			0.5
Purchase of own shares by employee benefit trust		—		—		—		—			—			(1.7	)		(1.7	)

Balance at December 2014		29.1		85.1		109.9		4.0			(79.3	)		518.3			667.1
Profit for the period		—		—		—		—			—			85.4			85.4
Other comprehensive income		—		—		—		(3.7	)		(13.9	)		—			(17.6	)

Total comprehensive income for the period ended June 2015		—		—		—		(3.7	)		(13.9	)		85.4			67.8
Transactions with owners:
Dividends to equity shareholders		—		—		—		—			—			(15.1	)		(15.1	)
Employee share incentive charges		—		—		—		—			—			5.0			5.0
Tax credit relating to share option schemes		—		—		—		—			—			2.0			2.0
Issue of shares		0.4		1.5		—		—			—			—			1.9

Balance at June 2015		29.5		86.6		109.9		0.3			(93.2	)		595.6			728.7

Unaudited Condensed Consolidated Interim Statement of Cash Flows

for the six months ended 30 June 2015


	6 months ended 30 June 2015 $m			6 months ended 30 June 2014 $m			Year ended 31 December 2014 $m



Cash flows from operating activities
Profit before tax		85.1			72.0			175.7
Adjustments for:
Share based payments charge		5.0			2.7			6.5
Depreciation of property, plant and equipment		13.5			14.4			29.0
Amortisation of development expenditure		24.0			19.4			45.4
Amortisation of other intangible assets		24.3			27.7			52.9
Loss on sale of property, plant and equipment		—			—			0.1
Net finance expense		3.6			3.1			5.2
Movement in trade and other receivables		301.6			(18.6	)		(383.4	)
Movement in trade and other payables		(231.8	)		1.9			329.2
Movement in inventories		(75.3	)		33.4			31.7
Movement in provisions		(4.6	)		(15.2	)		(0.7	)

Cash generated from operations		145.4			140.8			291.6

Interest paid		(3.3	)		(3.1	)		(6.1	)
Tax paid		(12.1	)		(2.8	)		(11.5	)

Net cash generated from operating activities		130.0			134.9			274.0


Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(4.3	)		(295.3	)		(295.3	)
Purchase of property, plant and equipment		(9.2	)		(12.5	)		(26.0	)
Development expenditure		(27.3	)		(34.3	)		(66.2	)
Interest received		0.4			1.1			2.5

Net cash used in investing activities		(40.4	)		(341.0	)		(385.0	)


Cash flows from financing activities
Proceeds from external borrowings		—			310.0			310.0
Repayment of external borrowings		(19.4	)		(15.5	)		(31.0	)
Proceeds from issue of share capital		1.9			1.0			1.5
Dividend paid		—			—			(18.7	)
Purchase of own shares by employee benefit trust		—			—			(1.7	)

Net cash (used in) / generated from financing activities		(17.5	)		295.5			260.1

Net change in cash and cash equivalents		72.1			89.4			149.1
Cash and cash equivalents at the start of the period		182.1			33.0			33.0

Cash and cash equivalents at the end of the period		254.2			122.4			182.1

Notes to the Unaudited Condensed Consolidated Interim Financial Statements

for the six months ended 30 June 2015

1.	BASIS OF PREPARATION AND GENERAL INFORMATION

General information

Pace plc (the ‘Company’) is a limited liability company incorporated and domiciled in the UK. The address of its registered office is Victoria Road, Saltaire, BD18 3LF.

The Company is listed on the London Stock Exchange.

The condensed consolidated interim financial statements for the six months ended 30 June 2015 comprise the Company and its subsidiaries (together referred to as the ‘Group’).

These condensed consolidated interim financial statements were approved for issue by the Board of directors of Pace plc on 18 August 2015.

Basis of preparation

This consolidated interim financial information for the six months ended 30 June 2015 has been rounded to the nearest one hundred thousand U.S. dollars and been prepared and approved by the Directors in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (‘IASB’).

The consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2014 are not the Company’s statutory accounts for that financial year. Those accounts have been reported on by the Company’s auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The Board’s assessment of the Group’s ability to continue as a going concern has taken into account the effect of the current economic climate, current market position and the level of borrowings in the year. The principal risks that the Group is challenged with, and which have not changed at 30 June 2015, are set out in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Pace” in the proxy statement/prospectus filed by ARRIS International plc on September 15, 2015 with how the directors intend to mitigate those risks.

The Group has prepared a financial and working capital forecast based upon trading assumptions and other short-term and medium-term plans. The Group has sensitised these plans for a number of potential scenarios, including working capital management and revenue reduction, and has concluded that the Group will continue to meet its financial performance covenants and will have adequate working capital available to continue in operational existence for the foreseeable future.

This consolidated interim financial information has not been audited.

Significant judgements, key assumptions and estimation uncertainty

The preparation of interim statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Key sources of estimation uncertainty and critical accounting judgements are as follows:

Warranty provisions

Pace provides product warranties for its products. Although it is difficult to make accurate predictions of potential failure rates or the possibility of an epidemic failure, as a warranty estimate must be calculated at the outset of a product before field deployment data is available, these estimates improve during the lifetime of the product in the field.

A provision for warranties is recognised when the underlying products are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. The level of warranty provision required is reviewed on a product by product basis and provisions adjusted accordingly in light of actual performance.

Royalty provisions

Pace’s products incorporate third party technology, usually under licence. Inadvertent actions may expose Pace to the risk of infringing third party intellectual property rights. Potential claims can still be submitted many years after a product has been deployed. Any such claims are always vigorously defended.

Provisions for royalty claims are recognised when it is considered more likely than not that an outflow of economic resources will be required to settle a claim that has resulted from the sale of a product allegedly using technology of a patent owner, and the amount of the outflow can be reliably measured. The directors have made provision for the potential royalty payable based on the latest information available, which represents the best estimate of the expenditure required to settle the present obligation. Having taken legal advice, the Board considers that there are defences available that should mitigate the amounts being sought. The Group will vigorously negotiate or defend all claims but, in the absence of agreement, the amounts provided may prove to be different from the amounts at which the potential liabilities are finally settled.

Impairment reviews

As is required by International Accounting Standards, the Group carries out impairment reviews of its non-financial assets on an annual basis, or when indicators of impairment exist. Such reviews involve assessing the value in use of an asset or cash-generating unit (CGU) by reference to its estimated future cash flows, discounted to their present value. The judgements in relation to impairment reviews relate to the assumptions applied in calculating the value in use, and the future performance expectations.

Intangible assets – Capitalised Development costs

The Group business includes a significant element of research and development activity. Under accounting standards, principally IAS 38 “Intangible Assets”, there is a requirement to capitalise and amortise development expenditure to match costs to expected benefits from projects deemed to be commercially viable. The application of this policy involves the ongoing consideration by management of the forecasted economic benefit from such projects compared to the level of capitalised costs, together with the selection of amortisation periods appropriate to the life of the associated revenues from the product.

Such considerations made by management are a key judgement in preparation of the financial statements.

Accounting policies

Except as described below, the accounting policies applied are consistent with those of the financial statements for the year ended 31 December 2014, which are presented beginning on page F-10 of the proxy statement/prospectus filed by ARRIS International plc on September 15, 2015.

Taxes on income in the interim periods are accrued using the weighted average tax rate based on the tax rates expected to be applicable to expected annual earnings.

Changes in accounting policies

The Group has adopted the following new standards with a date of initial application of 1 January 2015:

•

Defined benefit plans: Employee contributions (amendments to IAS 19).

•

Annual improvements to IFRSs 2010 – 2012 and 2011 – 2013 cycles – various standards.

No standards, which were available for early adoption, but not yet mandatory, have been adopted in these condensed consolidated financial statements.

2.	SEGMENTAL REPORTING

In accordance with IFRS 8 “Operating Segments”, the chief operating decision-maker (“CODM”) has been identified as the Board of Directors which reviews internal monthly management reports, budget and forecast information to evaluate the performance of the business and make decisions.

The Group determines operating segments on the basis of Strategic Business Unit (“SBU”) areas, being the basis on which the Group manages its worldwide interests.

The Group has the following operating segments which are also reportable segments for the purpose of IFRS 8 as at 30 June 2015:

•

Pace Americas;

•

Pace International; and

•

Pace Networks.

Other amounts include unallocated central costs that are not classified as reportable segments under IFRS 8.

Performance is measured based on segmental adjusted EBITA, as included in the internal management information which is reviewed by the CODM. Adjusted EBITA is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments, relative to other entities that operate within these industries.

Revenues disclosed below materially represent revenues to external customers and pricing is determined on an arm’s length basis. There are no material inter-segment transactions.


6 months ended 30 June 2015	Pace Americas $m		Pace International $m		Pace Networks $m		Other $m			Total $m
Segmental income statement
Revenues		638.2		267.3		173.1		—			1,078.6
Adjusted EBITA		74.1		24.7		45.3		(26.1	)		118.0

Exceptional costs											(5.0	)
Amortisation of other intangible assets											(24.3	)
Net interest payable											(3.6	)
Tax credit											0.3

Profit for the period											85.4


6 months ended 30 June 2014	Pace Americas $m		Pace International $m		Pace Networks $m		Other $m			Total $m
Segmental income statement
Revenues		675.7		348.2		115.0		—			1,138.9
Adjusted EBITA		62.6		49.0		16.2		(21.5	)		106.3

Exceptional costs											(3.5	)
Amortisation of other intangible assets											(27.7	)
Net interest payable											(3.1	)
Tax charge											(16.6	)

Profit for the period											55.4


Year ended 31 December 2014	Pace Americas $m		Pace International $m		Pace Networks $m		Other $m			Total $m
Segmental income statement
Revenues		1,561.6		793.8		264.6		—			2,620.0
Adjusted EBITA		150.2		88.3		47.4		(44.8	)		241.1

Exceptional costs											(7.3	)
Amortisation of other intangible assets											(52.9	)
Net interest payable											(5.2	)
Tax charge											(27.7	)

Profit for the period											148.0

Geographical analysis

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers.


Revenue by destination	6 months ended 30 June 2015 $m		6 months ended 30 June 2014 $m		Year ended 31 December 2014 $m
North America		704.9		699.0		1,635.6
Latin America		155.9		185.8		373.2
Europe		100.8		117.1		291.2
Rest of World		117.0		137.0		320.0

		1,078.6		1,138.9		2,620.0

The Group has four main revenue streams, being Set-top boxes (STB) and Media Servers, Gateways, Software and Services, and Networks. These revenue streams arise in each operating segment and are not defined by geographical locations.

The following table provides an analysis of the Group’s revenue streams according to those classifications.


	6 months ended 30 June 2015 $m		6 months ended 30 June 2014 $m		Year ended 31 December 2014 $m
Set-top boxes and Media Servers		748.4		893.9		2,003.5
Gateways		105.2		77.1		239.7
Software and Services		51.9		54.4		112.2
Networks		173.1		113.5		264.6

		1,078.6		1,138.9		2,620.0

3.	TAX CHARGE


	6 months ended 30 June 2015 $m			6 months ended 30 June 2014 $m			Year ended 31 December 2014 $m
Current tax charge
Charge for the period		13.8			19.2			31.9
Adjustment in respect of prior periods		(10.7	)		—			(4.1	)

Total current tax charge		3.1			19.2			27.8

Deferred tax charge / (credit)
Origination and reversal of temporary differences in the current period		4.7			(2.6	)		(1.9	)

Adjustment in respect of prior periods		(8.1	)		—			1.8

Total deferred tax charge / (credit)		(3.4	)		(2.6	)		(0.1	)

Total tax charge / (credit)		(0.3	)		16.6			27.7

The tax charge is recognised using the best estimate of the weighted average annual effective tax rate expected for the full financial year. The estimated average annual tax rate used for the year ending 31 December 2014 is 21.7% (2013: 23.0%).

The adjustment in respect of prior periods results from the release of tax provisions following the closure of uncertain prior period tax positions and also the recognition of prior period tax assets relating to a range of items, the most significant being research and development tax credits now expected to be claimed.

4.	EXCEPTIONAL COSTS


	6 months ended 30 June 2015 $m		6 months ended 30 June 2014 $m		Year ended 31 December 2014 $m
ARRIS Group combination costs		2.8		—		—
Restructuring and reorganisation costs		1.3		0.7		1.5
Aborted acquisition costs		0.9		—		—
Acquisition and integration costs		—		2.8		5.8

		5.0		3.5		7.3

ARRIS Group combination costs relate to professional service fees in respect of the proposed combination of Pace plc and ARRIS Group. Restructuring and reorganisation costs relate to restructuring programmes within the Group and represent the costs of redundancy and associated professional fees. Aborted acquisition costs relate to professional service fees in respect of aborted acquisitions. Acquisition and integration costs include professional service fees in respect of the acquisition of Aurora Networks Inc, and subsequent integration costs in 2014.

5.	EARNINGS PER ORDINARY SHARE

The calculation of basic earnings per share is based on profit after tax of $85.4m (30 June 2014: $55.4m) divided by the weighted average number of ordinary shares in issue of 314,634,202 (30 June 2014: 311,916,677), excluding shares held by the Employee Benefit Trust.

Diluted earnings per ordinary share vary from basic earnings per ordinary share due to the effect of the notional exercise of outstanding share options. The diluted weighted average number of ordinary shares in issue during the period is calculated using the treasury stock method which accounts for the fact that not all options are wholly dilutive. The diluted number of qualifying ordinary shares was 324,866,655 (30 June 2014: 325,634,403).

6.	INTANGIBLE ASSETS


	Goodwill $m			Development Expenditure $m			Customer contracts and relationships $m			Technology and patents $m			Other $m		Other intangibles $m
Cost
At 31 December 2014		471.1			167.8			194.3			239.8			10.9		445.0
Additions		—			27.3			—			—			—		—
Exchange adjustments		(6.3	)		(0.5	)		—			—			—		—

At 30 June 2015		464.8			194.6			194.3			239.8			10.9		445.0

Amortisation
At 31 December 2014		—			82.8			95.8			133.2			7.8		236.8
Provided in the period		—			24.0			7.4			16.8			0.1		24.3
Exchange adjustments		—			—			(0.2	)		(0.1	)		—		(0.3	)

At 30 June 2015		—			106.8			103.0			149.9			7.9		260.8

Net book value at 31 December 2014		471.1			85.0			98.5			106.6			3.1		208.2

Net book value at 30 June 2015		464.8			87.8			91.3			89.9			3.0		184.2

7.	INVENTORIES


	As at 30 June 2015 $m		As at 30 June 2014 $m		As at 31 December 2014 $m
Raw materials and consumable stores		37.7		24.7		38.3
Work-in-progress		1.0		4.0		—
Finished goods		198.9		137.6		129.7

		237.6		166.3		168.0

8.	TRADE AND OTHER RECEIVABLES


	As at 30 June 2015 $m		As at 30 June 2014 $m		As at 31 December 2014 $m
Trade receivables		530.1		513.0		843.2
Other receivables		41.5		26.3		57.0
Prepayments and accrued income		11.2		10.1		8.9

		582.8		549.4		909.1

9.	TRADE AND OTHER PAYABLES


	As at 30 June 2015 $m		As at 30 June 2014 $m		As at 31 December 2014 $m
Trade payables		615.4		508.9		825.4
Social security and other taxes		5.8		3.0		3.2
Other payables		12.1		12.3		19.1
Accruals and deferred income		70.8		91.3		86.9

		704.1		615.5		934.6

10.

DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

The Group’s financial instruments qualify for hedge accounting and have an asset fair value at the balance sheet date of $1.1m (31 December 2014: asset of $4.4m). They are disclosed within trade and other receivables. The carrying value is equivalent to the fair value.

The Group’s financial instruments, namely forward exchange contracts, have been determined to represent Level 2 instruments (appropriate where Level 1 quoted prices are not available but fair value is based on observable market data). Level 2 fair values for simple over-the-counter derivative financial instruments are based on broker quotes. Those quotes are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate. There were no transfers between levels during the period.

11.

PROVISIONS


	Royalties under negotiation $m			Warranties $m			Other $m			Total $m
At 31 December 2014		49.9			59.5			22.7			132.1
Charge for the period		4.1			16.0			—			20.1
Utilised		(3.8	)		(11.5	)		(13.1	)		(28.4	)
Transfer		—			0.6			(0.7	)		(0.1	)
Unused amounts reversed		(1.4	)		(1.4	)		(0.1	)		(2.9	)
Exchange adjustments		(0.9	)		(0.8	)		(0.2	)		(1.9	)

At 30 June 2015		47.9			62.4			8.6			118.9


Due within one year		—			27.1			6.2			33.3
Due after more than one year		47.9			35.3			2.4			85.6

Other provisions mainly relate to employee related obligations and exceptional restructuring provisions within the Group.

12.

BORROWINGS

The carrying value of the borrowings position is as follows:


	As at 30 June 2015 $m		As at 30 June 2014 $m		As at 31 December 2014 $m
Non-current liabilities
Bank term loans		215.1		256.7		237.8

Total		215.1		256.7		237.8


Current liabilities
Bank term loans		41.4		33.3		37.4
Bank revolving credit facility		—		—		—

Total		41.4		33.3		37.4

The face value of the borrowings is $217.0m (31 December 2014: $240.2m) in respect of bank term loans within non-current liabilities, $42.6m (31 December 2014: $38.8m) in respect of bank terms loans within current liabilities and $Nil (31 December 2014: $Nil) in respect of the bank revolving credit facility.

The difference between the face value amounts and the amounts in the above table is $1.9m (31 December 2014: $2.4m) in non-current liabilities and $1.2m (31 December 2014: $1.4m) in current liabilities which represents facility arrangement fees and interest costs.

13.

CONTINGENCIES

At present the Group is not a party in any legal proceedings in which the directors believe that is it probable that the resolution of such proceedings will result in a material liability for the Group. Currently there are legal proceedings against the Group in which it is asserted that certain of the Group’s products infringe third-party patents, but in each of those proceedings the Group does not believe that it is probable that the resolution of such proceedings will result in a material liability for the Group.

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On April 22, 2015, ARRIS Group, Inc. (“ARRIS”) announced its proposed combination (the “Combination”) with Pace plc, a company incorporated in England and Wales (“Pace”). In connection with the Combination, (i) ARRIS International plc (formerly ARRIS International Limited) (“New ARRIS”), a company incorporated in England and Wales and wholly-owned subsidiary of ARRIS Group, agreed to acquire all of the outstanding ordinary shares of Pace by means of court-sanctioned scheme of arrangement (the “Scheme”) under English law (the “Pace Acquisition”) and (ii) ARRIS entered into a Merger Agreement (the “Merger Agreement”), dated April 22, 2015, among ARRIS, New ARRIS, ARRIS US Holdings, Inc. (formerly Archie U.S. Holdings LLC) (“ARRIS Holdings”), a Delaware corporation and wholly-owned subsidiary of New ARRIS (“US Holdco”) and Archie U.S. Merger LLC, a Delaware limited liability company and wholly-owned subsidiary of US Holdco (“Merger Sub”), providing that immediately upon the Pace Acquisition, Merger Sub would be merged with and into ARRIS (the “Merger”), with ARRIS surviving the Merger as an indirect wholly-owned subsidiary of New ARRIS. On January 4, 2016, ARRIS completed the Combination.

The following unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the following: (i) the Combination; and (ii) the refinancing of ARRIS’ existing Term Loan A Facility and Revolving Credit Facility and the incurrence of $800.0 million of indebtedness under the Term A-1 Loan Facility (collectively referred to as the “Financing”).

The following unaudited pro forma condensed combined financial information gives effect to the Combination under the acquisition method of accounting in accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 805, Business Combinations, which we refer to as ASC 805, with ARRIS treated as the accounting acquirer. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Combination and Financing, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results of ARRIS and Pace.

The unaudited pro forma condensed combined balance sheet is based on the historical consolidated balance sheets of ARRIS as of September 30, 2015 and Pace as of June 30, 2015, and has been prepared to reflect the Combination and the incurrence of $800 million of indebtedness under the Term A-1 Loan Facility as if they occurred on September 30, 2015. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2014 and the nine months ended September 30, 2015 combine the historical results of operations of ARRIS and Pace, giving effect to the Combination and Financing as if they occurred on January 1, 2014. The unaudited pro forma condensed combined balance sheet at September 30, 2015 utilizes the consolidated balance sheet of ARRIS as of September 30, 2015 and the consolidated balance sheet of Pace as of June 30, 2015. The unaudited pro forma condensed statement of operations for the year ended December 31, 2014 utilizes the historical results of ARRIS and Pace for the year ended December 31, 2014, respectively, the most recent available consolidated financial statements. The unaudited pro forma condensed statement of operations for the nine months ended September 30, 2015 utilizes the consolidated historical results of ARRIS for the nine months ended September 30, 2015 and the nine months ended June 30, 2015 for Pace. As such, these results are not necessarily indicative of the actual results at September 30, 2015 and for the nine months ended September 30, 2015 since the three-month period ended December 31, 2014 is included in the Pace’s nine months ended June 30, 2015 results are higher due to trading performance differences.

The unaudited pro forma condensed combined statements of operations do not reflect future events that may occur after the Combination, including, but not limited to, the anticipated realization of ongoing savings from operating synergies and certain one-time charges New ARRIS expects to incur in connection with the Combination, including, but not limited to, costs in connection with integrating the operations of ARRIS and Pace.

This unaudited pro forma condensed combined financial information is for informational purposes only. It does not purport to indicate the results that would actually have been obtained had the Combination and Financing been completed on the assumed date or for the periods presented, or which may be realized in the future.

To produce the pro forma financial information, ARRIS adjusted Pace’s assets and liabilities to their estimated fair values. As of the date of this filing, ARRIS has not completed the detailed valuation work necessary to arrive at the required estimates of the fair value of the Pace assets acquired and the liabilities assumed and the related accounting for the business combination, nor has it identified all adjustments necessary to conform Pace’s accounting policies to ARRIS’ accounting policies. Accordingly, the accompanying unaudited pro forma accounting for the business combination is preliminary and is subject to further adjustments as additional information becomes available and additional analyses are performed. The preliminary unaudited pro forma accounting for the business combination has been made solely for the purpose of preparing the accompanying unaudited pro forma condensed combined financial information. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured at preliminary estimates of fair value. These preliminary estimates are based on key assumptions related to the Combination and have been developed using publicly disclosed information for other acquisitions in the industry, ARRIS’ historical experience and current available data. As the valuation work is being completed, any increases or decreases in the fair value of relevant statement of financial position amounts will result in adjustments to the balance sheet and/or statements of operations until the accounting for the business combination is finalized.

There can be no assurance that such finalization will not result in material changes from the preliminary accounting for the business combination included in the accompanying unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with:

•

New ARRIS’ Current Report on Form 8-K filed with the SEC on January 4, 2016, as amended by Current Report on Form 8-K/A Amendment No. 1 (the “Form 8-K/A”) of which these unaudited pro forma condensed combined financial statements are included as Exhibit 99.3;

•

The accompanying notes to the unaudited pro forma condensed combined financial information;

•

ARRIS’ audited consolidated financial statements and related notes thereto contained in its Annual Report on Form 10-K for the year ended December 31, 2014 and ARRIS’ unaudited consolidated financial statements and related notes thereto contained in its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015; and

•

Pace’s audited consolidated financial statements and related notes thereto for the years ended December 31, 2014, 2013 and 2012 are incorporated by reference to New ARRIS’ Registration Statement on Form S-4 filed with the Commission on September 11, 2015 (File No. 333-205442). Pace’s unaudited consolidated financial statements and related notes hereto for the six months period ended June 30, 2015 are included in Exhibit 99.2 to the Form 8K/A.

NEW ARRIS

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of September 30, 2015 ⁽¹⁾

($ in thousands, except per share data)


				Pace
	Historical ARRIS			Historical (IFRS)			Accounting Policies and Reclassifications (Note 3)			US GAAP Adjustments (Note 4)			Historical (US GAAP)			Pro Forma Adjustments (Note 6)			New ARRIS Pro Forma Condensed Combined
ASSETS

Current assets:
Cash and cash equivalents	$	673,346		$	254,162		$	—		$	—		$	254,162		$	129,869	*(a)*	$	1,057,377

Short-term investments, at fair value		107,777			—			—			—			—			—			107,777

Total cash, cash equivalents and short-term investments		781,123			254,162			—			—			254,162			129,869			1,165,154

Accounts receivable (net of allowances for doubtful accounts)		647,726			—			530,069			21,959			552,028			—			1,199,754
Trade and other receivables		—			582,833			(582,833	)		—			—			—			—
Other receivables		8,684			—			41,577			—			41,577			—			50,261
Inventories (net of reserves)		367,536			237,627			—			—			237,627			33,600	*(b)*		638,763
Prepaid income taxes		29,071			6,068			—			—			6,068			—			35,139
Prepaids		26,430			—			11,187			—			11,187			—			37,617
Current deferred income tax assets		104,345			—			—			40,855			40,855			—			145,200
Other current assets		153,527			—			—			83,937			83,937			—			237,464

Total current assets		2,118,442			1,080,690			—			146,751			1,227,441			163,469			3,509,352

Property, plant and equipment (net of accumulated depreciation)		319,443			57,813			—			—			57,813			40,558	*(c)*		417,814
Goodwill		1,016,696			464,806			—			—			464,806			645,306	*(d)*		2,126,808
Intangible assets (net of accumulated amortization)		868,054			272,050			—			(87,850	)		184,200			915,800	*(e)*		1,968,054
Investments		74,924			—			—			—			—			—			74,924
Noncurrent deferred income tax assets		70,557			27,488			—			(21,186	)		6,302			—			76,859
Other assets		45,124			—			—			—			—			(938	) *(f)*		44,186

TOTAL ASSETS	$	4,513,240		$	1,902,847		$	—		$	37,715		$	1,940,562		$	1,764,195		$	8,217,997


LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable	$	558,371		$	—		$	559,499		$	—		$	559,499		$	—		$	1,117,870
Trade and other payables		—			704,060			(704,060	)		—			—			—			—
Accrued compensation, benefits and related taxes		97,326			—			16,962			—			16,962			—			114,288
Accrued warranty		35,488			—			27,200			—			27,200			—			62,688
Deferred revenue		97,490			—			4,016			139,677			143,693			(122,349	) *(g)*		118,834
Current portion of long-term debt and financing lease obligations		48,647			41,362			—			21,959			63,321			39,304	*(j)*		151,272
Current income taxes liability		13,139			10,728			—			(7,184	)		3,544			55,000	*(h)*		71,683
Other accrued liabilities		168,870			33,483			96,383			(43,700	)		86,166			58,626	*(i)*		313,662

Total current liabilities		1,019,331			789,633			—			110,752			900,385			30,581			1,950,297

Long-term debt and financing lease obligations, net of current portion		1,525,454			215,115			—			—			215,115			757,453	*(j)*		2,498,022
Accrued pension		67,570			—			—			—			—			—			67,570
Noncurrent income tax liability		38,145			—			—			9,055			9,055			—			47,200
Noncurrent deferred income tax liabilities		329			83,930			—			(10,957	)		72,973			277,344	*(k)*		350,646
Other noncurrent liabilities		71,560			85,404			—			—			85,404			—			156,964

Total liabilities		2,722,389			1,174,082			—			108,850			1,282,932			1,065,378			5,070,699


Stockholders’ equity:
Preferred stock, par value $1.00 per share,		—			—			—			—			—			—			—
Common and ordinary shares		1,819			29,528			—			—			29,528			(27,971	) *(l)*		3,376
Capital in excess of par value		1,762,111			196,432			—			1,887			198,319			910,336	*(l)*		2,870,766
Treasury stock at cost		(331,329	)		—			—			—			—			331,329	*(l)*		—
Retained earnings		328,782			595,614			—			(73,470	)		522,144			(607,238	) *(l)*		243,688
Accumulated other comprehensive loss		(20,236	)		(92,809	)		—			448			(92,361	)		92,361	*(l)*		(20,236	)
Stockholders’ equity attributable to noncontrolling interest		49,704			—			—			—			—			—			49,704

Total stockholders’ equity		1,790,851			728,765			—			(71,135	)		657,630			698,817			3,147,298

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,513,240		$	1,902,847		$	—		$	37,715		$	1,940,562		$	1,764,195		$	8,217,997

(1)	The unaudited pro forma condensed combined balance sheet at September 30, 2015 includes the historical results of Pace at June 30, 2015.

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information

NEW ARRIS

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

Year Ended December 31, 2014

($ in thousands, except per share data)


				Pace
	Historical ARRIS			Historical (IFRS)			Accounting Policies and Reclassifications (Note 3)			US GAAP Adjustments (Note 4)			Historical (US GAAP)			Pro Forma Adjustments (Note 6)			New ARRIS Pro Forma Condensed Combined
Net sales	$	5,322,921		$	2,620,030		$	—		$	(90,855	)	$	2,529,175		$	—		$	7,852,096
Cost of sales		3,740,425			2,087,601			(1,497	)		(73,319	)		2,012,785			(96	) *(m)*		5,753,114

Gross margin		1,582,496			532,429			1,497			(17,536	)		516,390			96			2,098,982
Operating expenses:
Selling, general and administrative expenses		410,568			161,981			(535	)		—			161,446			(91	) *(n)*		571,923
Research and development expenses		556,575			129,316			(4	)		20,760			150,072			(100	) (o)		706,547
Amortization of intangible assets		236,521			52,936			—			—			52,936			143,451	*(p)*		432,908

Integration, acquisition, restructuring and other costs		37,498			7,356			—			—			7,356			—			44,854

Total operating expenses		1,241,162			351,589			(539	)		20,760			371,810			143,260			1,756,232

Operating income		341,334			180,840			2,036			(38,296	)		144,580			(143,164	)		342,750

Other expense (income):
Interest expense		62,901			7,702			—			—			7,702			11,179	*(r)*		81,782
Loss on investments		10,961			—			—			—			—			—			10,961
Loss (gain) on foreign currency		2,637			—			6,207			—			6,207			—			8,844
Interest income		(2,590	)		(2,542	)		—			—			(2,542	)		—			(5,132	)
Other expense, net		28,195			—			(4,171	)		—			(4,171	)		—			24,024

Income before income taxes		239,230			175,680			—			(38,296	)		137,384			(154,343	)		222,271
Income tax expense (benefit)		(87,981	)		27,666			—			(10,327	)		17,339			(44,759	) *(s)*		(115,401	)

Net income	$	327,211		$	148,014		$	—		$	(27,969	)	$	120,045		$	(109,584	)	$	337,672


Net income per common share:
Basic	$	2.27		$	0.47														$	1.75

Diluted	$	2.21		$	0.46														$	1.72


Weighted average common shares
Basic		144,386			312,335												48,705	*(t)*		193,091

Diluted		148,280			324,475												48,116	*(t)*		196,396

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information

NEW ARRIS

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2015⁽¹⁾

($ in thousands, except per share data)


				Pace
	Historical ARRIS			Historical (IFRS)			Accounting Policies and Reclassifications (Note 3)			US GAAP Adjustments (Note 4)			Historical (US GAAP)			Pro Forma Adjustments (Note 6)			New ARRIS Pro Forma Condensed Combined
Net sales	$	3,696,650		$	2,107,692		$	—		$	(92,101	)	$	2,015,591		$	—		$	5,712,241
Cost of sales		2,636,400			1,662,162			(3,208	)		(76,916	)		1,582,038			247	*(m)*		4,218,685

Gross margin		1,060,250			445,530			3,208			(15,185	)		433,553			(247	)		1,493,556
Operating expenses:
Selling, general and administrative expenses		309,219			113,452			(2,201	)		—			111,251			232	*(n)*		420,702
Research and development expenses		400,932			92,409			1,720			8,013			102,142			256	*(o)*		503,330
Amortization of intangible assets		171,062			37,092			—			—			37,092			110,198	*(p)*		318,352
Integration, acquisition, restructuring and other costs		20,996			7,156			—			—			7,156			(19,254	) *(q)*		8,898

Total operating expenses		902,209			250,109			(481	)		8,013			257,641			91,432			1,251,282

Operating income		158,041			195,421			3,689			(23,198	)		175,912			(91,679	)		242,274

Other expense (income):
Interest expense		56,570			5,834			—			—			5,834			(4,149	) *(r)*		58,255
Loss on investments		6,565			—			—			—			—			—			6,565
Loss (gain) on foreign currency		4,204			—			6,273			—			6,273			—			10,477
Interest income		(1,792	)		(1,197	)		—			—			(1,197	)		—			(2,989	)
Other expense, net		5,170			—			(2,584	)		—			(2,584	)		—			2,586

Income before income taxes		87,324			190,784			—			(23,198	)		167,586			(87,530	)		167,380
Income tax expense (benefit)		29,710			11,230			—			(9,921	)		1,309			(25,384	) *(s)*		5,635

Consolidated net income		57,614			179,554			—			(13,277	)		166,277			(62,146	)		161,745
Net loss attributable to noncontrolling interests		(4,526	)		—			—			—			—			—			(4,526	)

Net income	$	62,140		$	179,554		$	—		$	(13,277	)	$	166,277		$	(62,146	)	$	166,271


Net income per common share:
Basic	$	0.43		$	0.57														$	0.85

Diluted	$	0.42		$	0.55														$	0.84


Weighted average common shares
Basic		146,146			313,996												48,705	*(t)*		194,851

Diluted		149,232			325,227												48,023	*(t)*		197,255

(1)	The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2015 includes the historical results of Pace the nine months ended June 30, 2015.

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

1. Description of Combination and Financing

On April 22, 2015, the boards of ARRIS and Pace reached agreement on the terms of the Combination which closed on January 4, 2016, whereby (i) New ARRIS acquired all of the outstanding shares of Pace by means of a court-sanctioned scheme of arrangement under English law and (ii) ARRIS merged with a subsidiary of New ARRIS, with ARRIS surviving the Merger (pursuant to the Merger Agreement). Under the terms of the Combination, (a) Pace Scheme shareholders received 132.5 pence in cash and 0.1455 shares of New ARRIS for each Pace share they held and (b) ARRIS stockholders received one New ARRIS share for each share of ARRIS common stock they held. As the result of the completion of the Combination, Pace shareholders own approximately 24% of issued share capital of New ARRIS on a fully diluted basis and ARRIS stockholders own approximately 76% of the issued share capital of New ARRIS on a fully diluted basis. New ARRIS ordinary shares are listed on NASDAQ under the symbol ARRS. The Combination values the entire share capital of Pace at approximately $2,073.5 million at an opening share price of $30.08 on January 4, 2016 and an exchange rate of 1.4707.

At the closing date, certain awards of Pace stock options, deferred shares and performance shares were canceled and converted into the right to receive 132.5 pence in cash, without interest, and 0.1455 of New ARRIS shares for each Pace award they hold. New ARRIS included as consideration $72.2 million for the fair value of the awards related to pre-combination services including (i) vested stock options, performance shares and deferred shares; (ii) deferred shares for which vesting was accelerated as a result of the change in control provision in the Deferred Share Plan; and (iii) shares for which vesting was accelerated as a result of the change in control provisions in the Approved Option Scheme, Unapproved Option Scheme, Performance Share Plan and International Performance Share Plan and as a result of entering into the Co-operation Agreement.

In addition, several of the executive officers are entitled to severance compensation pursuant to executive employment agreements as their employment was terminated on the effective date of the Combination. Furthermore, employees of Pace are eligible to receive a retention bonus if the employee stays for a period of 90 days after the Combination has been consummated. These charges are recognized as a post-combination expense. As of the closing date of the Combination, it is estimated and expected that New ARRIS will recognize post-combination compensation expense of approximately $11.4 million. This severance compensation and the retention bonus have been excluded from the unaudited pro forma condensed combined financial information as it reflects charges directly attributable to the Combination that will not have a continuing impact on New ARRIS’ operations.

Pursuant to the Merger Agreement, at the effective time of the Merger between ARRIS and New ARRIS, each outstanding ARRIS Option, ARRIS Restricted Share, ARRIS RSU and ARRIS ESPP, subject to applicable law, was converted into a New ARRIS Option, New ARRIS Restricted Share, New ARRIS RSU or New ARRIS ESPP, respectively. The converted awards related to a number of New ARRIS shares equal to the number of ARRIS shares subject to the corresponding pre-conversion award and will continue to have, subject to applicable law and the accelerated vesting described below, the same terms and conditions that were applicable to the corresponding pre-conversion ARRIS award (including settlement in cash or shares, as applicable). This conversion did not result in incremental value to the share/option holders. In addition, non-employee directors and executive officers of ARRIS have certain interests in the Combination that include accelerated vesting of certain outstanding equity awards (intended to avoid excise tax becoming due on such equity awards), continuing non-employee director and executive officer positions with New ARRIS, and rights to ongoing indemnification and insurance coverage.

On June 18, 2015, ARRIS, ARRIS Enterprises, Inc., New ARRIS and certain ARRIS subsidiaries, as borrowers, and Bank of America, N.A., as administrative agent, swing line lender and line of credit lender and the other lender parties thereto entered into the Credit Agreement, which amends and restates ARRIS’ Existing Credit Agreement. The Credit Agreement provides for senior secured credit facilities comprised of (i) a “U.S. Revolving Credit Facility” of $14 million, (ii) a “Multicurrency Revolving Credit Facility” of $486 million, (iii) a “Term Loan A Facility” of $990 million, (iv) a delayed draw “Term A-1 Loan Facility” of $800 million and (v) a “Term Loan B Facility” of $543.8 million. Funding of the Term Loan A Facility refinanced the term loan A facility under the Existing Credit Agreement while the Term Loan B Facility is a continuation of the term loan B facility under the Existing Credit Agreement. Funding of the Term A-1 Loan Facility under the Credit Agreement occurred at the closing of the Combination. The proceeds of the loans under the Term A-1 Loan Facility were used to finance: (i) the payment of the cash consideration by New ARRIS to holders of Pace shares being acquired by New ARRIS in the Combination; (ii) the payment of cash consideration to holders of options or awards to acquire Pace shares pursuant to any proposal under the Takeover Code, (iii) the fees, costs and expenses related to the Combination and issuance of new debt, refinancing, prepayment, repayment, redemption, discharge, defeasance and/or amendment of all existing debt of Pace and (iv) the payment of existing debt at Pace, which was paid subsequent to the Combination.

Although ARRIS uses derivative instruments to manage its interest rate and foreign currency exposure, including the cash portion of the consideration, no pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information with respect to any changes to derivative instruments that have occurred in connection with the Combination or the Financing.

2. Basis of Presentation

The unaudited pro forma condensed combined financial information was prepared in accordance with U.S. GAAP and pursuant to SEC Regulation S-X Article 11, and presents the pro forma financial position and results of operations of the combined companies based upon the historical information after giving effect to the Combination, the Financing and adjustments described in these notes. The unaudited pro forma condensed combined balance sheet is presented as if the Combination and the incurrence of $800 million of indebtedness under Term A-1 Loan Facility had occurred on September 30, 2015; and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2014 and the nine-month period ended September 30, 2015 are presented as if the Combination and Financing had occurred on January 1, 2014.

The historical results of ARRIS have been derived from its financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2014 and ARRIS’ unaudited consolidated financial statements and related notes thereto contained in its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015. The historical results of Pace for the year ended December 31, 2014 have been derived from its audited financial statements which have been included in Exhibit 99.1 to the Form 8-K/A, and the historical financial information as of and for the six months ended June 30, 2015 have been derived from unaudited financial information, which have been included in Exhibit 99.2 to the Form 8K/A. The historical financial information of Pace has been prepared in accordance with IFRS as issued by the IASB. Identified measurement differences in accounting principles between IFRS and U.S. GAAP as they apply to Pace have been adjusted to reflect such results in accordance with U.S. GAAP. See Note 4, “Pace — IFRS to U.S. GAAP Adjustments.” Adjustments have also been made to conform Pace’s significant accounting policies to ARRIS’ accounting policies. See Note 3, “Conforming Accounting Policies and Reclassification Adjustments.”

The Combination is reflected in the unaudited pro forma condensed combined financial information as being accounted for under the acquisition method in accordance with ASC 805, Business Combinations, with ARRIS treated as the accounting acquirer. Under the acquisition method, the total estimated purchase price is calculated as described in Note 5. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured at preliminary estimates of fair value. These preliminary estimates are based on key assumptions related to the Combination and have been developed using publicly disclosed information for other acquisitions in the industry, ARRIS’ historical experience and current available data.

Under ASC 805, acquisition-related transaction costs and acquisition-related restructuring charges are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. For the nine months ended September 30, 2015 and for the nine months ended June 30, 2015, ARRIS and Pace incurred approximately $16.5 million and $2.8 million, respectively, of Combination-related costs. These costs are considered to be directly related to the Combination and are not expected to have a continuing impact and therefore have been excluded from the unaudited pro forma statement of operations.

The unaudited pro forma condensed combined financial information does not reflect ongoing cost savings that ARRIS expects to achieve as a result of the Combination or the costs necessary to achieve these costs savings or synergies.

3. Conforming Accounting Policies and Reclassification Adjustments

ARRIS performed certain procedures for the purpose of identifying any material differences in significant accounting policies between ARRIS and Pace, and any accounting adjustments that would be required in connection with adopting uniform policies. Procedures performed by ARRIS to identify material adjustments involved a review of Pace’s significant accounting policies, including those disclosed in Pace’s Annual Report for the year ended December 31, 2014, and discussion with Pace management regarding Pace’s significant accounting policies.

Additionally, the historical consolidated financial information of Pace presented herein has been adjusted by condensing certain line items and by reclassifying certain line items in order to conform to ARRIS’ financial statement presentation; these reclassifications are reflected in the column “Accounting Policies and Reclassifications.”

The reclassification adjustments on the unaudited pro forma balance sheet pertain to the following:

•

Trade and other receivables have been reclassified into accounts receivable, prepaids and other receivables;

•

Trade and other payables have been reclassified into accounts payable, accrued compensation, benefits and related taxes, deferred revenue and other accrued liabilities;

•

Other accrued current liabilities have been reclassified into accrued warranty for warranty provisions less than one year, deferred revenue, and accrued compensation, benefits and related taxes; and

•

Royalty accruals from accounts payables have been reclassified to other accrued liabilities.

The reclassification adjustments on the unaudited pro forma statements of operations include the reclassification of foreign exchange gains and losses from cost of sales and other expense to loss (gain) on foreign currency.

4. Pace — IFRS to U.S. GAAP Adjustments

The unaudited pro forma condensed combined financial information includes information from (1) historical audited financial statements of Pace for the year ended December 31, 2014 and (2) historical unaudited financial information for the nine months ended June 30, 2015, prepared using IFRS, which have been adjusted to reflect Pace’s consolidated financial statements on a U.S. GAAP basis consistent with ARRIS. The adjustments to U.S. GAAP (which are unaudited) are as follows (in thousands):


	U.S. GAAP Adjustment Reference
Balance Sheet Line Item	(1)			(2)			(3)			(4)			(5)			(6)			(7)			(8)		(9)			Total U.S. GAAP Adj.
Accounts receivable (net of allowances for doubtful accounts)	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	21,959	$	—		$	21,959
Current deferred income tax assets		—			—			1,426			4,614			200			22,953			516			—		11,146			40,855
Intangible assets (net of accumulated amortization)		(87,850	)		—			—			—			—			—			—			—		—			(87,850	)
Noncurrent deferred income tax assets		—			—			582			3,624			—			(25,392	)		—			—		—			(21,186	)
Other current assets		—			—			—			—			—			—			—			—		83,937			83,937


Total Assets		(87,850	)		—			2,008			8,238			200			(2,439	)		516			21,959		95,083			37,715

Deferred revenue		—			—			5,021			20,596			—			—			—			—		114,060			139,677
Current income taxes liability		—			—			—			—			(7,605	)		421			—			—		—			(7,184	)
Current portion of long-term debt and financing lease obligations		—			—			—			—			—			—			—			21,959		—			21,959
Other accrued liabilities		—			(43,700	)		—			—			—			—			—			—		—			(43,700	)
Noncurrent income tax liability		—			—			—			—			9,055			—			—			—		—			9,055
Noncurrent deferred income tax liabilities		(12,030	)		7,238			—			—			(1,250	)		(4,683	)		(232	)		—		—			(10,957	)

Total Liabilities		(12,030	)		(36,462	)		5,021			20,596			200			(4,262	)		(232	)		21,959		114,060			108,850

Capital in excess of par value		—			—			—			—			—			—			1,887			—		—			1,887
Retained earnings		(76,268	)		36,462			(3,013	)		(12,358	)		—			1,823			(1,139	)		—		(18,977	)		(73,470	)
Accumulated other comprehensive loss		448			—			—			—			—			—			—			—		—			448

Total Liabilities and Stockholders’ Equity	$	(87,850	)	$	—		$	2,008		$	8,238		$	200		$	(2,439	)	$	516		$	21,959	$	95,083		$	37,715

For the year ended December 31, 2014


	U.S. GAAP Adjustments
	1			2			3		4			7			9			Total US GAAP Adjustments
Net Sales	$	—		$	—		$	2,670	$	(1,589	)	$	—		$	(91,936	)	$	(90,855	)
Cost of sales		—			(7,787	)		—		—			—			(65,532	)		(73,319	)
Research and development expenses		20,760			—			—		—			—			—			20,760
Income tax expense (benefit)		(480	)		(1,206	)		934		(556	)		750			(9,769	)		(10,327	)

Net income (loss)	$	(20,280	)	$	8,993		$	1,736	$	(1,033	)	$	(750	)	$	(16,635	)	$	(27,969	)

For the nine months ended September 30, 2015


	U.S. GAAP Adjustments
	1			2			3		4		6			7			9			Total US GAAP Adjustments
Net Sales	$	—		$	—		$	1,294	$	2,363	$	—		$	—		$	(95,758	)	$	(92,101	)
Cost of sales		—			(5,504	)		—		—		—			—			(71,412	)		(76,916	)
Research and development expenses		8,013			—			—		—		—			—			—			8,013
Income tax expense (benefit)		100			(238	)		502		773		(134	)		(1,916	)		(9,008	)		(9,921	)

Net income (loss)	$	(8,113	)	$	5,742		$	792	$	1,590	$	134		$	1,916		$	(15,338	)	$	(13,277	)

(1)

Research and development activities — Adjustment reflects the research and product development expenses that are expensed as incurred in accordance with U.S. GAAP. Under IFRS, Pace capitalizes certain development costs which are amortized over a period between six and 30 months depending on the nature of the development project.

(2)

Royalty provisions — Adjustment reflects the reversal of the previously recognized loss contingencies to reflect the difference in the definition of probable between IFRS and U.S. GAAP.

(3)

Deferral of revenue for post contract support — Adjustment reflects an increase to net sales resulting from the additional revenue recognized from the prior period’s deferred revenue balance in accordance with U.S. GAAP partially offset by the revenue previously recognized under IFRS that would otherwise be deferred in accordance with U.S. GAAP.

(4)

Deferral of software and services revenues for professional services and licenses — Adjustment reflects the revenue previously recognized under IFRS that would otherwise be deferred in accordance with U.S. GAAP.

(5)

Uncertain tax positions — Adjustment reflects the reclassification of uncertain tax positions between deferred and current tax accounts.

(6)

Deferred tax assets and liabilities classification — Adjustment reflects the reclassification of deferred tax assets and liabilities as current or noncurrent based on the nature of the related asset or liability in accordance with U.S. GAAP.

(7)

Deferred tax and equity impact of stock based compensation — Adjustment reflects the differences in calculating the deferred tax assets for share-based payment arrangements related to exercised options.

(8)

Transfer of receivables — Adjustment reflects the reversal of previously derecognized receivables under IFRS as the transfer of receivables is accounted for as a secured borrowing under U.S. GAAP.

(9)

Deferral of profit recognized in connection with certain distributor sales – Adjustment reflects the revenue and related cost of sales previously recognized under IFRS that would otherwise be deferred in accordance with U.S. GAAP under sell-through approach.

5. Preliminary Consideration Transferred and Preliminary Fair Value of Net Assets Acquired

The Combination has been accounted for using the acquisition method of accounting in accordance with ASC 805, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. In addition, ASC 805 establishes that the common stock issued to effect the Combination be measured at the closing date of the Combination at the then-current market price.

The total consideration transferred is based on (1) the opening price of ARRIS’ common stock of $30.08 per share on January 4, 2016 (the date of the Combination), (2) the number of Pace shares outstanding as of January 4, 2016, and (3) the number of Pace stock options, deferred shares and performance shares at January 4, 2016. Using the assumptions above, the total consideration approximated $2,073.5 million. At the effective time, each outstanding Pace share was cancelled and converted into the right to receive (1) 132.5 pence in cash, without interest, (converted to $1.95 at an exchange rate of 1.4707 as of January 4, 2016) and (2) 0.1455 New ARRIS shares.

The preliminary estimate of the consideration to be paid by ARRIS in the Combination is as follows (in thousands):


Cash Consideration	$	638,789
Stock Consideration		1,434,690

Total consideration transferred	$	2,073,479

Below is the summary of the cash and stock consideration (in thousands, except share information):


	Number of Pace shares		Number of ARRIS shares		Cash consideration ⁽¹⁾		Stock consideration ⁽²⁾		Total consideration
Total Consideration Transferred		327,806,276		47,695,813	$	638,789	$	1,434,690	$	2,073,479

(1)	Cash consideration represents the cash payment of 132.5 pence (converted to $1.95 at an exchange rate of 1.4707) for each of Pace’s shares and equity awards outstanding.

(2)	Stock consideration represents the conversion of each of Pace’s shares and equity awards outstanding at a conversion rate of 0.1455 with a value of $30.08 at January 4, 2016.

The following is a summary of the preliminary estimated fair values of the net assets acquired (in thousands):


Total estimated consideration transferred	$	2,073,479


Cash and cash equivalents		254,162

Accounts and other receivables		593,605

Inventories		271,227

Prepaids		17,255

Current deferred income tax assets		40,855

Other current assets		83,937

Property, plant and equipment		98,371

Intangible assets		1,100,000

Noncurrent deferred income tax assets		6,302

Accounts payable and other current liabilities		(603,661	)

Deferred revenue		(21,344	)

Short-term borrowings		(21,959	)

Current income taxes liability		(3,544	)

Other accrued liabilities		(150,588	)

Long-term debt and financing lease obligations		(256,477	)

Other noncurrent liabilities		(444,774	)


Net assets acquired		963,367


Goodwill	$	1,110,112

ARRIS has not yet completed the detailed valuation work necessary to arrive at the required estimates of the fair value of Pace assets acquired and liabilities assumed. ARRIS anticipates that the valuations of the acquired assets and liabilities will include, but not be limited to inventory, property, plant, and equipment, customer contracts and relationships, technology and patents and other intangibles, and deferred revenue. The valuations will consist of physical appraisals, discounted cash flow analyses, or other appropriate valuation techniques to determine the fair value of the assets acquired and liabilities assumed. For purposes of the unaudited pro forma condensed combined financial information, it is assumed that the book value approximates fair value for current assets and current liabilities, except for inventories, deferred revenue and other accrued liabilities as described in Note 6(b), Note 6(g) and Note 6(i), respectively.

The final consideration, and amounts allocated to assets acquired and liabilities assumed in the Combination, could differ materially from the preliminary amounts presented in the unaudited pro forma condensed combined financial information. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the Combination from those preliminary valuations presented in the unaudited pro forma condensed combined financial information would result in a dollar-for-dollar corresponding increase in the amount of goodwill that will result from the Combination. In addition, if the value of the acquired assets is higher than the preliminary indication, it may result in higher amortization and depreciation expense than is presented in the unaudited pro forma condensed combined financial information.

6. Preliminary Pro Forma Adjustments

The preliminary pro forma adjustments included in the unaudited pro forma condensed combined financial information related to the Combination and Financing are as follows:

(a) Cash and cash equivalents — Adjustment reflects the preliminary net adjustment to cash in connection with the Combination (in thousands):


Cash portion of Combination Consideration (i)	$	(638,789	)
Payment of transaction related expenses (ii)		(31,342	)
New ARRIS Term A-1 Facility (iii)		800,000

Pro forma adjustment to cash and cash equivalents	$	129,869

Components of the adjustment include (i) a decrease in cash resulting from the payment of the cash component of the Combination consideration, including cash related to the payment to holders of Pace stock options, deferred shares and performance shares, of which $22.3 million relates to Combination consideration; (ii) a decrease in cash related to the estimated transaction related expenses of $31.3 million, consisting of financing fees of $3.4 million, of which an estimated $2.3 million will be capitalized, and advisory costs of $28.0 million expected to be expensed as incurred in connection with the Combination; and (iii) an increase in cash resulting from the proceeds in additional borrowings of an aggregate amount of $800.0 million for the Financing.

(b) Inventories — Adjustment reflects the preliminary estimated fair value adjustment of $33.6 million to inventory acquired in the Combination. As the raw materials inventory was assumed to be at market value, the preliminary adjustment is related to work-in-process and finished goods inventory. The preliminary fair value of work-in-process inventory considered costs to complete inventory and estimated profit on these costs. The preliminary fair value of finished goods inventory to be acquired in the Combination was determined based on an analysis of estimated future selling prices, costs of selling effort, and profit on selling effort. The unaudited pro forma combined statements of operations do not reflect the impact of this preliminary inventory increase in cost of sales as such amounts are directly attributable to the Combination and will not have a continuing impact on the combined results.

(c) Property, plant and equipment — Adjustment reflects the preliminary fair market value of property, plant and equipment acquired in the Combination. The preliminary amounts assigned to property, plant and equipment are as follows (in thousands):


Buildings and Leasehold Improvements	$	8,361

Machinery and Equipment		87,801

Construction in Progress		2,209


Total estimated preliminary fair value of property, plant and equipment		98,371

Less: Pace book value of property, plant and equipment		(57,813	)


Pro forma adjustment to property, plant and equipment	$	40,558

(d) Goodwill — Adjustment reflects the preliminary estimated adjustment to goodwill as a result of the Combination. Goodwill represents the excess of the consideration transferred over the preliminary fair value of the assets acquired and liabilities assumed as described in Note 5. The goodwill is attributable to the expected synergies of the combined business operations, new growth opportunities, and the acquired assembled and trained workforce of Pace. The goodwill is not expected to be deductible for tax purposes. The preliminary pro forma adjustment to goodwill is calculated as follows (in thousands):


Consideration transferred	$	2,073,479

Less: Fair value of net assets to be acquired		(963,367	)


Total estimated goodwill		1,110,112

Less: Pace book value of goodwill		(464,806	)


Pro forma adjustment to goodwill	$	645,306

(e) Intangible assets — Adjustment reflects the preliminary fair market value related to identifiable intangible assets acquired in the Combination. The preliminary fair market value was determined using a market approach. The preliminary amounts assigned to the identifiable intangible assets are as follows (in thousands):


Customer Contracts and Relationships	$	400,000

Technology and Patents		650,000

Other		50,000


Total estimated preliminary fair value of intangible assets		1,100,000

Less: Pace book value of intangible assets		(184,200	)


Pro forma adjustment to intangible assets	$	915,800

(f) Other assets — As of September 30, 2015, ARRIS incurred an estimated $2.3 million in capitalizable debt issuance costs in conjunction with the Financing for the Term A-1 Loan that was funded upon the closing of the Combination. Of this $2.3 million, $1.4 million represents deferred financing fees and will be capitalized as other assets on the balance sheet and amortized over the life of the underlying debt instrument. The remaining $0.9 million represents original issuance discount for the Term A-1 Loan and is presented as a pro forma adjustment to reclassify the original issuance discount from other assets to long-term debt.

(g) Deferred revenue — Adjustment reflects a reduction of $122.3 million related to the preliminary valuation of Pace’s historical deferred revenue balance assumed in the Combination. ARRIS will record the assumed deferred revenue at its acquisition date fair values. The process of determining the fair value of deferred revenue may result in a significant downward adjustment. The revenues associated with this reduction will not be recognized by ARRIS.

(h) Current income taxes liability – In accordance with the Merger Agreement and as a condition to closing the Merger, prior to closing the Merger, ARRIS Holdings transferred the shares of ARRIS Financing II SARL (“ARRIS Lux”) to New ARRIS. Under U.S. tax law, based on the best available information, New ARRIS believes the transfer of ARRIS Lux constituted a deemed distribution from ARRIS Holdings to New ARRIS that is treated as a dividend for U.S. tax purposes. A deemed dividend of this type is subject to U.S. withholding tax to the extent of the current and accumulated earnings and profits (as computed for tax purposes) (“E&P”) of ARRIS Holdings Inc., which include the E&P of the former ARRIS Group, Inc. and subsidiaries through December 31, 2016. Accordingly, ARRIS Holdings remitted U.S. withholding tax in the amount of $55 million based upon its estimated E&P of $1.1 billion and the U.S. dividend withholding tax rate of 5 percent (as provided in Article 10 (Dividends) of the United Kingdom-United States Tax Treaty).

(i) Other accrued liabilities — Adjustment reflects (i) an estimated $19.2 million of Combination related fees and expenses expected to be assumed by New ARRIS, which are payable subsequent to the closing of the Combination, and (ii) the current deferred tax liabilities related to the fair value adjustment of inventory, deferred revenue, acceleration of restricted stock for ARRIS executives, and the Combination related fees and expenses. Refer to adjustment (k) below for additional information regarding current deferred income tax liabilities.

(j) Current and long-term debt — To fund transaction-related items, the cash portion of the Combination consideration and other one-time costs, New ARRIS incurred upon the closing of the Combination $800.0 million of additional debt under the Term A-1 Loan Facility with a maturity of five years and an annual interest rate of LIBOR plus 1.75 basis points on the principal amount of the debt. In addition, in connection with the Term A-1 Loan Facility, ARRIS modified the terms of its existing Term Loan A Facility to extend the term to five years. Refer to adjustment (r) below for additional information regarding pro forma interest expense.

The preliminary adjustment to long-term debt is as follows (in thousands):


Proceeds from Term Loan A-1 Facility	$	800,000

Less: Proceeds from Debt Financing to be repaid within one year		(40,000	)

Less: Original issuance discount, excluding $0.7 million to be amortized within one year		(2,547	)


Pro forma adjustment to long-term debt	$	757,453

The preliminary adjustment to current portion of long-term debt is as follows (in thousands):


Proceeds from Term A-1 Loan to be repaid within one year	$	40,000

Less: Original issuance discount to be amortized within one year		(696	)


Pro forma adjustment to Debt payments due within one year	$	39,304

(k) Deferred income taxes — Management estimated the tax rate at 29.0% which approximates a blended statutory tax rate for the tax jurisdictions where assets acquired and liabilities assumed reside. Adjustment reflects the deferred income tax effects of the preliminary pro forma adjustments made to the pro forma balance sheet, primarily as indicated in the table below (in thousands):


	Adjustment to Asset Acquired (Liability Assumed)			Current Deferred Tax Liability ⁽¹⁾			Noncurrent Deferred Tax Liability

Estimated fair value adjustment of identifiable intangible assets acquired		$ 915,800			$ —			$ 265,582

Estimated fair value adjustment of property, plant and equipment acquired		40,558			—			11,762

Estimated fair value adjustment of inventory acquired		33,600			9,744			—

Estimated fair value adjustment of deferred revenue assumed		(122,349	)		35,481			—

Estimated tax impact of post-combination compensation expense related to the acceleration of restricted stock for ARRIS executives upon completion of the Combination		N/A			(1,987	)		—

Estimated tax impact of Combination related fees and expenses expensed in connection with the Combination		N/A			(3,808	)		—


Deferred tax liabilities related to estimated fair value adjustments					$ 39,430			$ 277,344

(1)	Current deferred tax liabilities related to the fair value adjustment of inventory, deferred revenue, acceleration of restricted stock for ARRIS executives, and the Combination related fees and expenses are reflected in Other accrued liabilities in the unaudited pro forma balance sheet.

(l) Stockholders’ equity — Adjustment reflects (i) the issuance of 47.7 million New ARRIS shares to shareholders of Pace; (ii) the elimination of the historical equity balances of Pace; (iii) the cancelation of treasury stock; (iv) the pro forma reduction to retained earnings of $25.2 million to reflect the estimated Combination related fees and expenses expected to be incurred upon completion of the Combination ($29.0 million expected to be expensed, net of $3.8 million tax benefit); (v) the pro forma reduction to retained earnings of $4.9 million to reflect the estimated post-combination compensation expense associated with the acceleration of restricted stock for ARRIS executive officers ($6.9 million expected to be expensed in connection with the Combination, net of $2.0 million tax benefit); and estimated withholding tax of $55.0 million on deemed dividends in connection with the Combination (refer to adjustment (h) above).

The preliminary unaudited pro forma adjustment to common stock is calculated as follows (in thousands):


Common stock from Combination (47,695,813) shares of New ARRIS common stock issued at par value of £0.01)	$	701
Common stock of New ARRIS (181,900,000 shares issued at par value of £0.01)		856

Less: Pace historical common stock		(29,528	)

Pro forma adjustment to common stock	$	(27,971	)

The preliminary unaudited pro forma adjustment to capital in excess of par is calculated as follows (in thousands):


Capital in excess of par from Combination (47,695,813 shares issued at $30.08)	$	1,433,989

ARRIS unrecognized compensation expense for the acceleration of restricted stock for ARRIS executives upon completion of the Combination		6,851

Less: Treasury stock cancelled as part of the Combination		(331,329	)

Less: Capital in excess of par from conversion to New ARRIS		(856	)

Less: Pace historical capital in excess of par		(198,319	)


Pro forma adjustment to capital in excess of par	$	910,336

The preliminary unaudited pro forma adjustment to treasury stock is calculated as follows (in thousands):


Treasury stock cancelled as part of the Combination		331,329

Pro forma adjustment - treasury stock	$	331,329

The preliminary unaudited pro forma adjustment to retained earnings is calculated as follows (in thousands):


Estimated Combination related fees and expenses of $29.0 million expected to be incurred upon completion of the Combination, net of tax of $3.8 million			$ (25,230)

Estimated post combination expense of $6.9 million related to the acceleration of restricted stock for ARRIS executives upon completion of the Combination, net of tax of $2.0 million			(4,864)
Estimated withholding tax of $55.0 million on deemed dividends in connection with the Combination			(55,000)
Less: Pace historical retained earnings			(522,144)


Pro forma adjustment to retained earnings			$ (607,238)

The estimated fees and expenses have been excluded from the unaudited pro forma condensed combined statements of operations as they reflect charges directly attributable to the Combination that will not have a continuing impact on ARRIS’ operations.

The preliminary unaudited pro forma adjustment to accumulated other comprehensive loss eliminates Pace’s historical accumulated other comprehensive loss of $92.4 million.

(m) Cost of sales — Adjustment reflects the preliminary depreciation expense to be recorded in cost of sales of $0.1 million and $0.2 million for the year ended December 31, 2014 and nine months ended September 30, 2015, respectively, associated with the fair value of property, plant and equipment acquired in the Combination.

The preliminary depreciation expense for property, plant and equipment acquired from Pace is as follows (in thousands):


Property, plant and equipment	Estimated weighted average useful life (years)	Preliminary fair value		Depreciation expense for the year ended December 31, 2014			Depreciation expense for the nine months ended September 30, 2015
Buildings and Leasehold Improvements	9		$ 8,361		$ 929			$ 697

Machinery and Equipment	3 - 4		87,801		27,784			20,838

Construction in progress	-		2,209		—			—


Total estimated preliminary fair value of property, plant and equipment			$ 98,371		28,713			21,535
Less: Pace historical depreciation expense					(29,000	)		(20,800	)


Pro forma adjustment to depreciation expense					$ (287	)		$ 735

Depreciation expense has been estimated based upon the nature of activities associated with the property, plant and equipment acquired. With other assumptions held constant, a 10% increase in the fair value adjustment for property, plant and equipment would increase annual pro forma depreciation expense by approximately $2.1 million. In addition, with other assumptions held constant, a one year change in the estimated useful lives of property, plant and equipment would change annual depreciation expense by approximately $7.2 million.

(n) Selling, general and administrative expenses — Adjustment reflects the preliminary depreciation expense to be recorded in selling, general and administrative expenses of $0.1 million and $0.2 million for the year ended December 31, 2014 and nine months ended September 30, 2015, respectively, associated with the fair value of property, plant and equipment acquired in the Combination. Refer to adjustment (m) above.

(o) Research and development expenses — Adjustment reflects the preliminary depreciation expense to be recorded in research and development expenses of $0.1 million and $0.3 million for the year ended December 31, 2014 and nine months ended September 30, 2015, respectively, associated with the fair value of property, plant and equipment acquired in the Combination. Refer to adjustment (m) above.

(p) Amortization of intangibles assets — Adjustment reflects the preliminary amortization expense associated with the fair value of the identifiable intangible assets acquired in the Combination of $143.5 million and $110.2 million for the year ended December 31, 2014 and the nine months ended September 30, 2015, respectively.

The preliminary amortization expense for the intangible assets acquired from Pace is as follows (in thousands):


Intangible assets	Estimated useful life (years)	Preliminary fair value		Amortization expense for the year ended December 31, 2014			Amortization expense for the nine months ended September 30, 2015
Customer contracts and relationships	7		400,000		$ 61,538			$ 46,154

Technology and Patents	6		650,000		118,182			88,636

Other	3		50,000		16,667			12,500


Total			$1,100,000		196,387			147,290


Less: Pace historical amortization expense					(52,936	)		(37,092	)


Pro forma adjustment to amortization of intangible assets					$ 143,451			$ 110,198

The estimated fair value of amortizable intangible assets is expected to be amortized on a straight-line basis over the estimated useful lives. The amortizable lives reflect the periods over which the assets are expected to provide material economic benefit. With other assumptions held constant, a 10% increase in the fair value adjustment for amortizable intangible assets would increase annual pro forma amortization by approximately $19.6 million. In addition, with other assumptions held constant, a one year change in the estimated useful lives of customer contracts and relationships, technology and patents, and other intangible assets would change annual amortization expense by approximately $8.2 million, $18.2 million, and $4.2 million, respectively.

(q) Integration, acquisition, restructuring and other costs — Adjustment reflects the removal of Combination-related expenses of $2.8 million and $16.5 million incurred by Pace and ARRIS, respectively, as of June 30, 2015 and September 30, 2015. These expenses are considered to be directly related to the Combination and not expected to have a continuing impact on New ARRIS; therefore, these expenses have been excluded from the unaudited pro forma statement of operations.

(r) Interest expense — As described in Note 1, in connection with entering into the Co-operation Agreement, ARRIS entered into a Credit Agreement with various lenders pursuant to which the lenders agreed to amend and extend Term Loan A Facility and the Revolving Credit Facility, as well as enter into a new Term A-1 Loan Facility to fund part of the cash portion of the Combination consideration and fees and expenses in connection with the transactions contemplated by the Co-operation Agreement. For purposes of the unaudited pro forma condensed combined financial information, management assumed that the cash portion of the Combination consideration and transaction costs would be funded by the Financing.

The pro forma adjustment to interest expense reflects the (i) the removal of financing fees of $13.0 million incurred by ARRIS as of September 30, 2015, which are considered to be directly attributable to the Financing and not expected to have a continuing impact on New ARRIS and, therefore, have been excluded from the unaudited pro forma statement of operations; and (ii) additional interest expense that would have been incurred during the historical periods presented assuming the Combination and the Financing had occurred as of January 1, 2014.

The preliminary interest expense for the new debt incurred in connection with the Combination is as follows (in thousands):


Composition of new debt and related interest expense	Weighted Average Interest Rate⁽²⁾			Debt		Interest expense for the year ended December 31, 2014			Interest expense for the nine months ended September 30, 2015
Term A-1 Loan Facility ⁽¹⁾		2.18	%		$800,000		$ 18,311			$ 13,733

Amortization of new and existing ARRIS debt issuance costs							9,605			6,877

Total interest expense on new debt							27,916			20,610


Less: Reversal of Pace historical interest expense							(7,702	)		(5,834	)
Less: Reversal of ARRIS historical amortization of debt issuance costs							(9,035	)		(5,925	)
Less: Reversal of ARRIS debt issuance costs expense as incurred							—			(13,000	)

Pro forma adjustment to interest expense							$ 11,179			$ (4,149	)

(1)

The loan modification extended the term of the Term Loan A Facility to five years without change in principal balance. In addition, the borrowing capacity of the Revolving Credit Facility increased from $250 million to $500 million, all of which remains unused. Therefore, the interest expense only includes interest incurred on the principal balance of $800 million of Term A-1 Loan Facility and the unused commitment fee on the Revolving Credit Facility of 35 basis points.

(2)	An increase (decrease) of 0.125% in the interest rate of Term A-1 Loan Facility and the incremental Revolving Credit Facility would increase (decrease) annual pro forma interest expense by $0.1 million.

Debt issuance costs estimated to be incurred in conjunction with the Combination have been amortized over the term of the respective debt instrument for the purposes of calculating the net pro forma adjustment to interest expense.

(s) Income tax expense (benefit) — Adjustment reflects the income tax impacts of the pro forma adjustments made to the pro forma statement of operations, whereby management estimated the tax rate at 29.0% which approximates a blended statutory tax rate for the tax jurisdictions where the certain assets acquired and liabilities assumed reside.

(t) Basic and diluted net income per common share — The unaudited pro forma adjustment to shares outstanding used in the calculation of basic and diluted earnings per share is calculated as follows (in shares):


	Year ended December 31, 2014				Nine months ended September 30, 2015
	Basic		Diluted		Basic		Diluted
New ARRIS shares to be issued to shareholders of Pace		47,695,813		47,695,813		47,695,813		47,695,813
New ARRIS shares to be issued to ARRIS executives related to the acceleration of restricted stock upon completion of the Combination		1,009,643		420,203		1,009,643		327,447


New ARRIS shares to be issued		48,705,456		48,116,016		48,705,456		48,023,260

As all outstanding Pace shares will be eliminated in the Combination, the unaudited pro forma weighted average number of basic shares outstanding is calculated by adding ARRIS’ historical weighted average number of basic shares outstanding for the period and the number of New ARRIS shares expected to be issued to Pace’s shareholders in the Combination. The unaudited pro forma weighted average number of diluted shares outstanding is calculated by adding ARRIS’ historical weighted average number of diluted shares outstanding for the period and the number of New ARRIS shares expected to be issued in the Combination. Each outstanding stock option, deferred shares or performance shares issued under each of the Pace Share Plans, whether or not then vested or exercisable, will be canceled and terminated at the effective time in exchange for the right to receive New ARRIS shares.

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Form 8-K/A ARRIS International plc For: Jan 04

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