UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a)
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GLENAYRE TECHNOLOGIES, INC.
825 8th Avenue, 23rd floor
New York, New York 10019

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 22, 2007

 

The 2007 Annual Meeting of the Stockholders of Glenayre Technologies, Inc., a Delaware corporation (the “Company”), will be held at the Courtyard by Marriott, 1856 Remount Road, Gastonia, North Carolina 28054 on May 22, 2007 at 9:00 a.m., local time, for the following purposes:

 

 

The close of business on March 26, 2007 has been fixed as the record date for determination of stockholders entitled to notice of and to vote at the 2007 Annual Meeting and any adjournment(s) or postponement(s) thereof. A Proxy Statement, a form of proxy and the Company’s 2007 Annual Report are enclosed with this Notice.

 

A list of stockholders entitled to vote at the 2007 Annual Meeting will be open to the examination of any stockholder for any purpose relevant to the 2007 Annual Meeting, during ordinary business hours, for a period of 10 days prior to the 2007 Annual Meeting at the Company’s offices located at 825 8th Avenue, 23rd floor, New York, New York and will be available at the meeting for such purpose.

 

Stockholders are cordially invited to attend this meeting. Each stockholder, whether or not he or she expects to be present in person at the 2007 Annual Meeting, is requested to SIGN, DATE and RETURN THE ENCLOSED PROXY in the accompanying envelope as promptly as possible.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

Clarke H. Bailey
Chairman

 

April 27, 2007

GLENAYRE TECHNOLOGIES, INC.
PROXY STATEMENT

 

2007 ANNUAL MEETING

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Glenayre Technologies, Inc. (the “Company” or “Glenayre”) of proxies for use at the 2007 Annual Meeting of Stockholders to be held at the Courtyard by Marriott, 1856 Remount Road, Gastonia, North Carolina 28054 on May 22, 2007 at 9:00 a.m., local time, and any adjournment(s) or postponement(s) thereof.

 

This Proxy Statement, the Notice of the 2007 Annual Meeting and the form of proxy were first mailed to stockholders on or about April 27, 2007. The Company’s principal executive offices are located at 825 8th Avenue, 23rd floor, New York, New York.

 

Voting and Record Date

 

As of March 26, 2007, the record date for the determination of stockholders of the Company entitled to notice of and to vote at the 2007 Annual Meeting, the Company had 69,548,782 shares of common stock, $0.02 par value (“Common Stock”), outstanding and entitled to vote. Each holder of Common Stock at the close of business on March 26, 2007 will be entitled to one vote for each share held of record.

 

The three director nominees receiving the most affirmative votes of the shares of Common Stock present or represented and entitled to vote at the meeting will be elected as directors to serve until the expiration of their terms or until their successors have been duly elected or qualified. The affirmative vote of a majority of the votes cast at the meeting is required to ratify the selection of Ernst & Young LLP as the independent registered public accounting firm to audit the financial statements of the Company.

 

One-third of the total outstanding shares of Common Stock will constitute a quorum at the meeting. Abstentions and broker non-votes will be counted for purposes of determining the presence or absence of a quorum for the transaction of business. An abstaining vote in the election of directors is not counted and therefore has no effect on the election; however, an abstaining vote on all other proposals will have the same effect as a negative vote on the proposal. A broker non-vote on any proposal, including the election of directors, will not be included as a vote cast in the tabulation of the voting results and therefore does not affect the outcome of the vote. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee has not received instructions from the beneficial owner and does not have discretionary voting power for that particular item.

 

Solicitation of Proxies

 

Any stockholder giving a proxy for the 2007 Annual Meeting may revoke it at any time prior to the voting thereof by giving written notice to the Chairman or the Secretary of the Company by filing a later-dated proxy with either of them prior to the commencement of the 2007 Annual Meeting, or by voting in person at the 2007 Annual Meeting. Proxies and notices of revocation should be mailed or delivered to Glenayre Technologies, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, New York 11717 for receipt by Broadridge no later than two business days prior to the 2007 Annual Meeting, or should be deposited with the Chairman or the Secretary of the Company immediately prior to the commencement of the 2007 Annual Meeting.

 

All shares of Common Stock represented by proxies will be voted at the 2007 Annual Meeting, and any adjournment(s) or postponement(s) thereof, as specified therein by the persons giving the proxies. If no direction is given, the proxy will be voted:

 

 

Solicitation of proxies is being made primarily by mail; however, there may also be further solicitation in person and by telephone at nominal cost by directors, officers, employees and agents of the Company, who will receive no additional compensation therefor. The Company will bear all costs of soliciting proxies including charges made by brokers and other persons holding stock in their names or in the names of nominees for reasonable expenses incurred in sending proxy material to beneficial owners and obtaining their proxies.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Listed in the following table are the beneficial owners known to the Company as of March 16, 2007, of more than 5% of the outstanding Common Stock. In addition, this table includes the number of shares of Common Stock beneficially owned by each director and each of the executive officers listed in the Summary Compensation Table, and the number of shares owned by directors and executive officers as a group. Except as noted below, the address of the beneficial owners is Glenayre Technologies, Inc., 825 8th Avenue, 23rd floor, New York, New York 10019.

 

 

 

 

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

James Caparro; age 55; President and Chief Executive Officer of the Company since November 2006; President and Chief Executive Officer of Entertainment Distribution Company, LLC, a majority-owned subsidiary (“EDC”), since May 2005; President and Chief Executive Officer of Atari, Inc. from December 2004 to June 2005; Chairman and Chief Executive Officer of Warner Elektra Atlantic from September 2002 through July 2003; Chairman and Chief Executive Officer of Universal Music’s The Island Def Jam Music Group from 1998 through 2001; Chief Executive Officer of PolyGram divisions Group Distribution, PolyMedia, Video, Merchandising, Diversified Entertainment, New Media and Business Development from 1988 to 1998.

 

Jordan M. Copland; age 45; Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company since December 2006; Executive Vice President of Strategic Development and Chief Financial Officer of GSI Commerce, Inc. from February, 2000 to November 2006; Senior Vice President and Chief Financial Officer of Virgin Entertainment Group, Inc. from March 1999 to February 2000; various financial and executive positions within Disney Consumer Products, a division of The Walt Disney Company from October 1990 to March 1999.

 

Matthew K. Behrent; age 36; Senior Vice President & Chief Acquisitions Officer of the Company since July 2005; Vice President of Revolution Partners from March 2004 until June 2005; Associate at Credit Suisse First Boston from June 2000 until January 2003; Associate at Cleary Gottlieb Steen & Hamilton from June 1998 until May 2000.

 

Thomas Costabile; age 53; Executive Vice President and Chief Operating Officer of EDC since May 2005; President of Warner Elektra Atlantic Manufacturing from 2002 to 2004; Senior Vice President of Operations for Sony Music from 1994 to 2002.

 

Roger J. Morgan; age 42; Executive Vice President International Operations of EDC since June 2005; Head of Operations Universal Manufacturing & Logistics International from January 2005 to May 2005; Chief Financial Officer of Universal Manufacturing & Logistics International from July 1999 to December 2004.

 

John V. Madison; age 57; Executive Vice President, Business Development, Sales & Marketing of EDC since December 2005; Executive Vice President for WEA Corp., Warner Music Group’s U.S. sales and distribution company, from 2001 to 2005; Senior Vice President AM/FM Broadcasting from 1996 to 2000.

 

ELECTION OF DIRECTORS

 

The total number of directors on the Company’s Board of Directors is nine. Pursuant to the Company’s Certificate of Incorporation and By-Laws, the Board of Directors is divided into three classes each consisting, as nearly as may be possible, of one-third of the total number of directors, for terms of three years. At the 2007 Annual Meeting, three Class II Directors are to be elected. As proposed and recommended by the Governance and Nominating Committee, the Board of Directors has nominated John J. Hurley, Horace H. Sibley and Howard W. Speaks, Jr., each of whom is currently serving as a director of the Company, for election as Class II Directors to serve for three-year terms expiring at the Annual Meeting of Stockholders in 2010, and until their respective successors shall have been elected and qualified.

 

The Board of Directors recommends a vote FOR all of the nominees. Each of the nominees has indicated his willingness to serve if elected, and the Board of Directors has no reason to believe that any nominee will be unavailable. In the event that a vacancy arises among such nominees by death or any other reason prior to the 2007 Annual Meeting, the proxy may be voted for a substitute nominee or nominees designated by the Board of Directors.

 

Biographical information follows for each person nominated and each person whose term as a director will continue after the 2007 Annual Meeting.

 

Nominees for Election as Class II Directors until the 2010 Annual Meeting

 

Directors Continuing in Office as Class III Directors until the 2008 Annual Meeting

 

 

Directors Continuing in Office as Class I Directors until the 2009 Annual Meeting

 

 

COMMITTEES OF THE BOARD OF DIRECTORS

 

The Board of Directors met 18 times during 2006. The Board of Directors operates under the terms of a charter, a copy of which is available on the Company’s website at www.glenayre.com under the headings “Investors” and “Corporate Governance”. The full Board of Directors has determined that the following directors are independent under the standards set forth in the Board of Directors charter and the listing standards of the Nasdaq Stock Market, Inc. (“Nasdaq”): Donald S. Bates, Cliff O. Bickell, Peter W. Gilson, John J. Hurley, Horace H. Sibley and Howard W. Speaks. The independent directors met in executive session four times during 2006.

 

The Board of Directors has standing Executive, Audit, Governance and Nominating and Compensation and Plan Administration Committees. Each of these committees operates under the terms of a charter, a copy of which is available on the Company’s website at www.glenayre.com under the headings “Investors” and “Corporate Governance.” The Board of Directors also has a Special Litigation Committee, which is an ad hoc committee formed to address issues related to previously announced stock option litigation. The functions and membership of the Executive, Audit, Governance and Nominating and Compensation and Plan Administration Committees are set forth below.

 

Each member of the Board of Directors attended 90% or more of the aggregate number of meetings of the Board of Directors and the meetings of all committees of the Board of Directors on which he served during 2006.

 

Executive Committee

 

Ramon D. Ardizzone, Clarke H. Bailey, Peter W. Gilson, Horace H. Sibley and John J. Hurley currently serve on the Executive Committee. The Executive Committee met three times during 2006. The Executive Committee exercises the full powers of the Board of Directors to the extent permitted by law between Board of Directors meetings.

 

Audit Committee

 

John J. Hurley, Donald S. Bates and Cliff O. Bickell currently serve on the Audit Committee. The Audit Committee met ten times during 2006. All of the members of the Audit Committee are independent directors within the meaning of applicable Nasdaq listing standards. The Board of Directors has determined that Mr. Hurley is an “audit committee financial expert” within the meaning of the regulations of the Securities and Exchange Commission.

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. The Audit Committee’s role includes a particular focus on the qualitative aspects of financial reporting to stockholders and on the Company’s processes and procedures for the management of business and financial risks. The function of the Audit Committee is to provide assistance to the Board of Directors in fulfilling its responsibility to stockholders, potential stockholders and the investment community in monitoring:

 

 

A full description of the Audit Committee’s primary responsibilities, operating principles, and relationship with the internal auditor and the independent registered public accounting firm is contained in the Audit Committee Charter, a copy of which is available on the Company’s website at www.glenayre.com under the headings “Investors” and “Corporate Governance.”

 

Governance and Nominating Committee

 

Horace H. Sibley, Peter W. Gilson and John J. Hurley currently serve on the Governance and Nominating Committee. All of the members of the Governance and Nominating Committee are independent directors within the meaning of applicable Nasdaq listing standards. The Governance and Nominating Committee met five times during 2006. The Governance and Nominating Committee’s functions include assisting the Board of Directors in ensuring that it is appropriately constituted to meet its fiduciary obligations to the stockholders and the Company by developing and implementing policies and processes regarding corporate governance matters, by assessing Board of Directors membership needs, and by proposing director candidates to the Board of Directors. The Governance and Nominating Committee is also responsible for reviewing and recommending action to the Board of Directors concerning related party transactions or relationships involving a possible conflict of interest between the Company and either a director or a senior executive officer.

 

In identifying potential director candidates, the Governance and Nominating Committee seeks input from other members of the Board of Directors and executive officers and also considers recommendations by employees, community leaders, business contacts, third-party search firms and any other sources deemed appropriate by the Governance and Nominating Committee. The Governance and Nominating Committee will also consider director candidates recommended by stockholders to stand for election at the Annual Meeting of Stockholders, so long as such recommendations are submitted in accordance with the procedures described below.

 

The Governance and Nominating Committee has not set specific, minimum qualifications that must be met by a director candidate. Rather, in evaluating candidates for recommendation to the Board of Directors, the Governance and Nominating Committee considers the following factors, in addition to any other factors that it deems appropriate:

 

 

Qualified candidates are selected for recommendation to the Board by majority vote of the Governance and Nominating Committee. The Board of Directors, taking into consideration the recommendations of the Governance and Nominating Committee, is responsible for filling vacancies and selecting nominees for election as directors at the Annual Meeting of Stockholders, with the primary emphasis on the guidelines set forth above.

 

Stockholders who wish to recommend director candidates for consideration by the Governance and Nominating Committee may do so by mailing a written recommendation to Chairman, Governance and Nominating

Committee, c/o Secretary, Glenayre Technologies, Inc., 825 8th Avenue, 23rd floor, New York, New York 10019. Such recommendation must include the following information:

 

 

Recommendations by stockholders for director candidates to be considered by the Governance and Nominating Committee must be submitted not later than the 120th calendar day before the date the Company’s proxy statement was released to stockholders in connection with the previous year’s annual meeting. The submission of a recommendation by a stockholder in compliance with these procedures will not guarantee the selection of the stockholder’s candidate or the inclusion of the candidate in the Company’s proxy statement.

 

The By-Laws of the Company also provide that nominations of persons for election to the Board of Directors may be made at any Annual Meeting of Stockholders by any stockholder entitled to vote on such election. Such nominations must be submitted to the Secretary of the Company in accordance with the procedures specified in Section IX of Article II of the Company’s By-Laws as described under “PROPOSALS OF STOCKHOLDERS” below. The Company’s By-Laws require the presiding officer of the Annual Meeting of Stockholders to refuse to acknowledge the nomination of any person that is not submitted in compliance with such procedures.

 

Compensation and Plan Administration Committee

 

Peter W. Gilson, Donald S. Bates, and Howard W. Speaks, Jr. currently serve on the Compensation and Plan Administration Committee. All of the members of the Compensation and Plan Administration Committee are independent directors within the meaning of applicable Nasdaq listing standards. The Compensation and Plan Administration Committee met six times during 2006. The function of the Compensation and Plan Administration Committee is to develop and review all compensation philosophies and practices and to review and approve all bonus and incentive programs, as well as all compensation and benefits for executive officers. The Compensation and Plan Administration Committee is also responsible for reviewing, overseeing and making recommendations to the Board of Directors on the Company’s incentive stock plans, employee stock purchase plan and 401(k) plan and for reviewing and recommending to the Board of Directors compensation and benefits for the Board of Directors. The charter of the Compensation and Plan Administration Committee does not provide for the delegation by the committee of its duties to any other committee or executive officers of the Company. Regarding most compensation matters, including executive and director compensation, Company management provides recommendations to the Compensation and Plan Administration Committee, which are considered by the committee in the discharge of its duties. Periodically, the Compensation and Plan Administration Committee consults with Pearl Meyer & Partners to provide input on compensation issues, as well as the technical aspects of executive pay programs. The Compensation and Plan Administration Committee also retained the services of Greg Flores, a compensation consultant with experience in the entertainment industry, to evaluate the targets used for the Company’s annual cash bonus program. The charter of the Compensation and Plan Administration Committee is posted on the Company’s website at www.glenayre.com under the headings “Investors” and “Corporate Governance.”

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation and Plan Administration Committee has ever been an officer or employee of the Company. During 2006, no executive officer of the Company served as a director or member of the compensation committee (or other committee performing similar functions) of any other entity of which a member of the Board of Directors of the Company was an executive officer. During 2006, no director or member of the Compensation and Plan Administration Committee served as an executive officer of any other entity of which an executive officer of the Company served as a member the board of directors or compensation committee.

 

DIRECTOR COMPENSATION

 

The following table provides the compensation paid by the Company to non-employee directors during the year ended December 31, 2006.

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Executive Compensation Philosophy

 

The Compensation philosophy of the Company is to ensure that the Company’s various compensation programs are structured in a way that allows the Company to attract and retain a talented employee group and senior management team as well as a Board of Directors.

 

Market Data:  Generally, the Company will select specific independent survey data to be used each year to provide consistency of job matches and survey data. The Company will also select specific market data points (Compensation Ratios) to benchmark each target group. These market data points will generally be at the 50th percentile of the market groups, but can be higher or lower depending on the lifecycle stage the company is in.

 

Internal Equity:  The Company will strive for internal compensation equity and will differentiate based on factors including experience, performance, and value to the Company.

 

The Compensation and Plan Administration Committee (the “Committee”) bases its executive compensation programs on the same objectives that guide the Company in establishing all its compensation programs:

 

 

 

The Committee’s Processes

 

The Committee has established a number of processes to assist it in ensuring that the Company’s executive compensation program is achieving its objectives. Among those are:

 

 

In addition to the processes described above, the compensation of those of the Company’s executive officers who joined the Company in connection with the EDC acquisition was structured as part of the terms of the EDC acquisition through the negotiation of employment agreements and other arrangements relating to ownership of the EDC subsidiary, as further described below. While the Committee’s compensation objectives and processes were taken into account during these negotiations, the overall goals of the acquisition and post-closing integration of the EDC business with the Company’s existing operations were taken into consideration as well.

 

Components of Executive Compensation for 2006

 

For 2006, the compensation of executives contained the same primary components as were provided to other levels of management — base salary and a cash bonus award. No performance-based long term incentive compensation (stock options) was awarded to executive officers during 2006 with two exceptions. As has previously been disclosed, Mr. Bailey and Mr. Behrent are contractually entitled to awards of stock options upon completion of certain acquisition or divestiture events. In his former role as CEO at a time when the Company was focused on acquisitions that would utilize the Company’s cash and tax loss carryforwards to diversify the Company

away from its former telecommunications focus, one of Mr. Bailey’s primary roles was driving acquisition opportunities. In his continuing role as Chairman of the Board, Mr. Bailey remains focused on acquisition opportunities for the Company. Mr. Behrent, as Chief Acquisition Officer, is directly responsible for all Company acquisition activity. Therefore, it was considered important to provide them with compensation incentives tied to achievement of the Company’s goals for acquisitions and divestitures. Stock options were considered appropriate because the awards will only have intrinsic value to these executives if the acquisition or divestiture ultimately results in value to the Company and its stockholders evidenced by an increased stock price after the announcements of the relevant transaction, while the vesting requirements further incent these executives to focus on longer term stock price appreciation. Mr. Morgan received a discretionary cash bonus of $20,000 as recognition for his efforts in connection with the integration of Deluxe Global Media Services Blackburn Limited. Mr. Behrent also received a discretionary cash bonus of $20,000 as recognition of his efforts resulting in the successful completion of the divestiture of the Company’s messaging business, and Mr. Behrent received a discretionary award of 250,000 options as a result of Mr. Behrent’s outstanding performance as a member of the senior management team, his role in the Company’s mergers and acquisitions activity, his performance review and his assumption of new responsibilities for corporate development.

 

Per their employment agreements, the bonus targets for Messrs Caparro and Costabile are set by the compensation committee of EDC’s board of directors. EDC’s compensation committee is comprised of the same individuals (i.e., Messrs Gilson, Bates and Speaks) as the Company’s Compensation Committee. When evaluating Messrs Caparro’s and Costabile’s bonus targets, EDC’s compensation committee uses the same criteria as the Company’s Compensation Committee.

 

Following is a discussion of the Compensation Committee’s considerations in establishing each of the components for the executive officers.

 

Base Salary

 

Base salary is the guaranteed element of employees’ annual cash compensation. The value of base salary reflects the employee’s long-term performance, skill set and the market value of that skill set. In setting base salaries for 2006, the Committee considered the following factors:

 

 

Cash Incentive Bonuses

 

The Company maintains a cash bonus program in order to align employees’ goals with the Company’s sales and earnings growth objectives for the current year. Cash incentive bonuses for all management employees worldwide are determined by the Committee in light of such goals. The bonuses paid for 2006 appear in the Summary Compensation Table under the “Non-equity Incentive Plan Compensation” column. Bonus target amounts for executive officers, expressed as a percentage of base salary, are established each year. Bonus payouts for the year are then determined by the Company’s financial results for the year relative to predetermined performance measures. Per their employment agreements, the bonus payouts for Messrs Caparro and Costabile are determined by EDC’s financial results for the year relative to predetermined performance measures. Satisfactory individual performance is a condition to payment. At the end of the performance period, the Committee has discretion to adjust an award payout downward, but not upward, from the amount yielded by the formula. The Committee considered the following when establishing the awards for 2006:

 

 

Equity Incentives — EDC Profits Interests

 

Upon the completion of the 2005 acquisition of the U.S. and central European CD and DVD manufacturing and distribution operations from Universal Music Group (“Universal”), EDC issued profits interests units to certain executives, including Messrs Caparro, Costabile, and Morgan. Half of these units are Tier 1 Profits Interests, one quarter are Tier 2 Profits Interests and one quarter are Tier 3 Profits Interests, and the total amount of all profits interests are similarly allocated among the tiers. Holders of the profits interests as a group are entitled to up to 27.56% of certain distributions made by EDC, which distributions are subject to the board’s discretion and other conditions. The profits interests are designed to work like options, and they vest over a two-year period or upon a change of control of EDC. Employment agreements and the profits interests granted to management of EDC were negotiated as part of the negotiation of the acquisition of EDC. The profits interest structure was used instead of stock options because at the time of the acquisition, a limited liability company could not grant options without tax risks. EDC was structured as a limited liability company to maximize the utilization of Glenayre’s tax loss carryforwards. As such the profits interest structure was created to incentivise management in lieu of stock options. Before any tiers of profits interests receive a distribution, the Company (the holders of all Class A Units) and the Class B Unit holders (which as discussed below are comprised of Messrs. Costabile and Caparro) must receive a return of their equity capital contributions. In addition, the Tier 2 and Tier 3 Profits Interests are subject to further returns on equity to the Class A and B unit holders of 50% and 100%, respectively, and a 20% internal rate of return. As a result, the Tier 1 Profits Interests function similar to options with an exercise price equal to the original per

share equity investment, and the Tier 2 and Tier 3 profits interests have exercise prices at 50% and 100% premiums, respectively, to that value.

 

As part of the EDC acquisition, the Company sold 772 Class A units of EDC (representing 2.2% of EDC’s outstanding units) to Messrs Caparro and Costabile at the fair value of $1,000 per unit upon which such Class A units were automatically converted into Class B units. The Class A and Class B units carry equivalent economic rights. During 2006, in association with acquisition of the shares of Deluxe Global Media Services Blackburn Limited, the Company purchased additional Class A units and increased its holdings by $8,151,000. Mr. Caparro, pursuant to rights under the EDC LLC Agreement, purchased additional Class B units at the same price per unit that the Company paid for its additional Class A units and increased his holdings by $99,000. As a result of these investments, the thresholds and pro rata percentages applicable to distributions were automatically adjusted pursuant to the terms of the EDC LLC Agreement.

 

As a result of these adjustments, upon a board approved distribution pursuant to the EDC LLC Agreement, the following order and priorities will apply: (i) for distributions up to $43.25 million, 100% of such distributions will be apportioned pro rata to the holders of Class A and Class B units; (ii) for distributions above $43.25 million and up to $68.99 million, 84.02% of such distributions will be apportioned pro rata to the holders of Class A and Class B units, and 15.98% will be apportioned pro rata to the holders of Tier 1 Profits Interests; (iii) for distributions above $68.99 million and up to $96.78 million, 77.8% of such distributions will be apportioned pro rata to the holders of Class A and Class B units, 14.8% of such distributions will be apportioned pro rata to the holders of Tier 1 Profits Interests and 7.4% of such distributions will be apportioned pro rata to the holders of Tier 2 Profits Interests; and (iv) for distributions above $96.78 million, 72.44% of such distributions will be apportioned pro rata to the holders of Class A and Class B units, 13.78% of such distributions would be apportioned pro rata to the holders of Tier 1 Profits Interests, 6.89% of such distributions will be apportioned pro rata to the holders of Tier 2 Profits Interests and 6.89% of such distributions will be apportioned pro rata to the holders of Tier 3 Profits Interests. In all events, if, after receipt of all distributions above, holders of Class A and Class B Units have not received an amount equal to their aggregate contributions plus an amount equal to a return of 20%, compounded annually (the “IRR Hurdle”), then only distributions pursuant to (ii) will be made until satisfaction of the IRR Hurdle, after which distributions pursuant to (iii) and (iv) will resume.

 

If EDC does not undergo an initial public offering prior to the earlier of (1) May 31, 2015 or (2) the date on or after May 31, 2013 on which the terms of EDC’s manufacturing and distribution agreements with Universal have been extended to a term ending on or after May 31, 2018, the holders of Class B units and profits interests will have the right for a five-year period beginning on such date to sell their interests to the Company at fair value.

 

As a consequence of the profit interests structure, Messrs Caparro, Costabile and Morgan have not been issued any stock options or restricted stock in the Company. Messrs Copland and Behrent do not hold profit interests in EDC and thus, receive long term incentive compensation in the form of Glenayre Technologies stock options subject to the Company’s equity compensation programs. In order to align the equity compensation received by all executive officers, the Committee is evaluating whether to exchange the EDC profits interests for equity of the Company.

 

Equity Incentives — Stock Options

 

Stock options align employee incentives with shareholders because options have value only if the stock price increases over time. The Company’s 10-year options, granted at the market price on the date of grant, help focus employees on long-term growth. In addition, options are intended to help retain key employees because they typically vest over time (usually three years) and, if not exercised, are forfeited if the employee leaves the Company. The three-year vesting also helps keep employees focused on long-term performance. The Company does not reprice options; likewise, if the stock price declines after the grant date, the Company does not replace options.

 

Each year, the Committee reviews key employees’ overall compensation, including stock options and provides annual grants based on rating, performance and level. In accordance with this practice, during 2006, the Committee reviewed Mr. Behrent’s and Mr. Bailey’s compensation, including equity compensation, and performed a similar analysis in connection with the employment letter offered to Mr. Copland. The Committee relied on market

compensation survey data, the size of the available option pool and internal equity considerations before approving these equity compensation grants.

 

The Committee’s overall objective was to set combined grant values of stock options and performance awards that were competitive within the broad middle range of peer company long-term incentive grant amounts. The committee approves grant values (expressed in U.S. dollars) prior to the pre-established grant date. Then, on the grant date those values are converted to the equivalent number of shares using the same valuation methodology as the Company uses to determine the accounting expense of the grants under Statement of Financial Accounting Standards (SFAS) No. 123R. As noted above, Mr. Behrent and Mr. Bailey are contractually entitled to grants of stock options upon certain acquisition or divestiture transactions. They are each entitled to receive options to purchase one share per $333.33 in transaction value (or the equivalent of 30,000 stock options for every $10 million of transaction value) subject to an aggregate cap of 150,000 options with respect to Mr. Behrent and 250,000 options with respect to Mr. Bailey. Such options are granted upon disclosure of either the signing or closing of the transaction, whichever occurs first, and are priced based on the closing stock price on the trading day immediately preceding the date of such announcement, i.e., the pre-announcement price. If the transaction is structured so that closing occurs after signing and thus the first announcement occurs upon signing, to reflect the potential risk that a deal is announced, but does not ever close, vesting will begin upon closing of the transaction. Furthermore, if a deal does not close, the options will be forfeited. The pre-announcement price is used to set the option exercise price so that the value of the options, if any, will correctly reflect the market reaction to the announcement of the transaction, through changes in stock price that occur following the announcement.

 

Employee and Post-Employment Benefits

 

The Company offers core employee benefits coverage in order to:

 

 

The benefits available are the same for all U.S. employees and executive officers and include medical and dental coverage, short-term and long-term disability coverage (provided that certain long-term disability benefits are provided only to executive officers at the Company’s expense), and life insurance. In addition, the Company’s 401(k) Plan provides a reasonable level of retirement income reflecting employees’ careers with the Company. All U.S. employees, including executive officers, are eligible to participate in these plans. The cost of both employee and post-employment benefits is partially borne by the employee, including each executive officer.

 

Deferred Compensation Program

 

The Company maintains a deferred compensation plan pursuant to which certain employees may defer receipt of part or all of their cash compensation. The program allows eligible employees to save for retirement in a tax-effective way at minimal cost to the Company and is described in more detail under the heading Non-qualified Deferred Compensation on page 20.

 

Severance Benefits

 

Severance benefits are provided from time to time to executive officers as a result of negotiations of their employment agreements. The Committee does not have a standard program applicable to all executives, but has negotiated severance or other enhanced benefits for named executive officers upon termination of their employment without cause, for good reason, or due to termination for a period of time subsequent to a change of control. Such arrangements are negotiated from time to time in an effort to provide appropriate incentives to executives joining the Company and are negotiated based on the Committee’s understanding of standard market practice in the entertainment or distribution industry, or, for prior arrangements, other relevant industries and terms available to other executives of the Company. In addition, the severance agreements for Mr. Caparro and Mr. Costabile were negotiated as part of the negotiation of the acquisition of EDC. See the discussion of the various severance benefits available to the Company’s named executive officers appearing on pages 21 through 28 of this proxy statement for a detailed description of benefits negotiated with the Company’s executives.

 

Adjustments for Certain Items

 

Consistent with past practice and based on criteria established at the beginning of the performance period, the Committee adjusted the earnings results on which 2006 bonuses were determined to eliminate the effect of certain items, specifically, the impact of the acquisition of Deluxe Global Media Services Blackburn Limited on the EBITDA and net income calculations. The adjustments are intended to ensure that award bonus payments represent the underlying growth of the core business and are not artificially inflated or deflated.

 

Deductibility Cap on Executive Compensation

 

In connection with the negotiation of compensation arrangements and the structuring of the Company’s compensation packages, the Committee takes into account the accounting and tax impact to the Company of the various structures under consideration. The Committee also considers the application of the Internal Revenue Code’s disallowance of corporate deductions for annual compensation in excess of $1 million paid to certain executive officers of publicly held corporations, i.e. Section 162(m), when structuring compensation levels and forms of compensation. While this cap would be applicable to the Company’s named executive officers, their nonexempt compensation levels for 2006 were below this cap. When appropriate, the Committee intends to use performance based compensation within the meaning of 162(m) to avoid any limit on deductibility.

 

Compensation Committee Report

 

The Compensation and Plan Administration Committee (“we” or “the committee”) evaluates and establishes compensation for executive officers and oversees the deferred compensation plan, the Company’s stock plans, and other management incentive, benefit and perquisite programs. Management has the primary responsibility for the Company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, we have reviewed and discussed with management the Compensation Discussion and Analysis found on pages 10-16 of this proxy statement. The committee is satisfied that the Compensation Discussion and Analysis fairly and completely represents the philosophy, intent, and actions of the committee with regard to executive compensation. We recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for filing with the Securities and Exchange Commission.

 

Compensation and Plan Administration Committee

 

Peter W. Gilson
Donald S. Bates
Howard W. Speaks, Jr

Summary Compensation Table

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

 

 

Option Exercises and Stock Vested

 

 

 

 

Non-Qualified Deferred Compensation

 

The Company maintains the Glenayre Electronics, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) pursuant to which employees at the director level and above may defer receipt of part or all of their cash compensation. Under the Deferred Compensation Plan, each year eligible employees may elect to defer a specified portion of their salary, bonus and commissions. Amounts deferred pursuant to the Deferred Compensation Plan will be paid to participants upon the first of following to occur: (i) the termination of the participant’s employment with the Company, (ii) the participant’s total disability, (iii) the participant’s retirement or (iv) such other date elected by the participant. Generally, amounts deferred will be invested in the same manner as the

participant’s investments in the Company’s 401(k) plan. If a participant does not participate in the Company’s 401(k) plan, then the amounts deferred by the participant will be invested equally among certain mutual funds specified in the Deferred Compensation Plan.

 

 

 

 

Employment and Severance Agreements

 

Caparro Employment Agreement.  On May 9, 2005, the Company and Mr. Caparro entered into an employment agreement (the “Caparro Agreement”) which specifies the terms under which Mr. Caparro serves as President and Chief Executive Officer of EDC. On November 6, 2006, the Company, EDC and Mr. Caparro entered into an agreement (the “Supplement”) which supplemented the Caparro Agreement to provide that Mr. Capparo will also serve as the President and Chief Executive Officer of the Company. The Supplement did not alter any of the other material terms of the Caparro Agreement.

 

The Caparro Agreement sets Mr. Caparro’s annual base salary at $750,000, subject to annual review, and provides that he is entitled to receive up to $20,000 per year for social club fees. He is also eligible to participate in the Executive Bonus Plan for EDC pursuant to which Mr. Caparro may earn a bonus of up to 100% of his base salary if EDC performs at 100% of the target established by EDC’s Board. Pursuant to the Caparro Employment Agreement, Mr. Caparro was paid a $215,000 signing bonus in 2005, the after-tax proceeds of which he used to purchase Class B Units of EDC. In addition, under the Caparro Agreement, Mr. Caparro was required to invest an additional $300,000 to purchase Class B Units of EDC, which he purchased during 2005.

 

Under the Caparro Agreement, Mr. Caparro also received grants of profits interests in EDC, which represent the right to receive EDC’s distributed profits after the Company has received a return of its equity capital contribution and certain internal rate of return hurdles and other profitability conditions have been met. One-third of the profits interests vested during each of 2005 and 2006, and the remaining one-third will vest in May 2007. Any unvested profits interests will vest upon (i) a change of control of EDC, (ii) Mr. Caparro’s death or disability, (iii) the termination of Mr. Caparro’s employment without cause or (iv) Mr. Caparro terminating his employment for good reason.

 

If Mr. Caparro’s employment is terminated by the Company without cause or by Mr. Caparro for good reason, Mr. Caparro is entitled to receive: (i) an amount equal to twice his base salary at the time of termination plus the amount of his bonus for the prior fiscal year, payable in 24 equal monthly installments, and (ii) continued medical benefits for Mr. Caparro and his dependents for a period of 12 months following termination.

 

The following table provides the estimated value of the benefits that Mr. Caparro would have received had his employment been terminated on the last business day of 2006 under the scenarios described below or had a change of control of either the Company or EDC occurred on the last business day of 2006. The table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Copland Employment Agreement.  The Company is party to an employment agreement with Mr. Copland (the “Copland Agreement”), dated December 18, 2006, which specifies the terms under which Mr. Copland serves as Executive Vice President and Chief Financial Officer of the Company. Under the Copland Agreement, Mr. Copland’s annual base salary is $325,000, which is subject to annual review. Mr. Copland is also eligible to participate in the Company’s Incentive Bonus Plan with a target bonus of 50% of his base salary if the Company performs at 100% of the criteria established by the Board of Directors. However, the bonus may be adjusted above or below the 50% target depending on his performance relative to the criteria established by the Board of Directors. Pursuant to the Copland Agreement, on December 29, 2006, Mr. Copland was also awarded options to purchase 585,000 shares of common stock of the Company in connection with his appointment as Executive Vice President and Chief Financial Officer.

 

In the event that Mr. Copland’s employment is terminated by the Company without cause or by Mr. Copland with good reason, Mr. Copland is entitled to receive: (i) a lump sum severance payment equal to his then current base salary, (ii) his accrued but unpaid base salary, (iii) his accrued but unpaid vacation pay, (iv) if he was employed with the Company for at least six months of the bonus year, a pro-rated annual bonus, payable in accordance with

the Company’s normal practices at the end of such bonus year, and (v) any other compensation payments or benefits which have accrued and are payable.

 

If Mr. Copland’s employment is terminated within three years after a change of control of the Company, for any reason other than for cause, Mr. Copland is entitled to receive: (i) a lump sum severance payment equal to 250% his base salary at the time of termination (or if greater, his base salary prior to the change of control), (ii) his accrued but unpaid base salary, (iii) his accrued but unpaid vacation pay, (iv) if he was employed with the Company for at least six months of the bonus year, a pro-rated annual bonus, payable in accordance with the Company’s normal practices at the end of such bonus year, (v) any other compensation payments or benefits which have accrued and are payable and (vi) medical and dental coverage for Mr. Copland and his dependents for 12 months.

 

Upon termination of Mr. Copland’s employment (i) for any reason other than cause within three years after a change in control of the Company, (ii) by the Company without cause or (iii) by Mr. Copland for good reason, all options granted to Mr. Copland will become immediately vested and immediately exercisable and will remain exercisable for a period of 12 months following such date of termination.

 

The following table provides the estimated value of the benefits that Mr. Copland would have received had his employment been terminated on the last business day of 2006 under the scenarios described below or had a change of control of either the Company or EDC occurred on the last business day of 2006. The table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Costabile Employment Agreement.  On May 9, 2005, the Company and Mr. Costabile entered into an employment agreement (the “Costabile Agreement”) which specifies the terms under which Mr. Costabile serves as Executive Vice President and Chief Operating Officer of EDC. The Costabile Agreement sets Mr. Costabile’s annual base salary as $450,000, subject to annual review, and provides that he is entitled to receive up to $10,000 per year for social club fees. He is also eligible to participate in the Executive Bonus Plan for EDC pursuant to which Mr. Costabile may earn a bonus of up to 100% of his base salary if EDC performs at 100% of the target established by EDC’s Board. Pursuant to the Costabile Employment Agreement, Mr. Costabile was paid a $200,000 signing

bonus, the after-tax proceeds of which he used to purchase Class B Units of EDC during 2005. In addition, under the Costabile Agreement Mr. Costabile was required to invest an additional $200,000 to purchase Class B Units of EDC, which he purchased during 2005.

 

Under the Costabile Agreement, Mr. Costabile received profits interests in EDC, which represent the right to receive EDC’s distributed profits after the Company has received a return of its equity capital contribution and certain internal rate of return hurdles and other profitability conditions have been met. One-third of the profits interests vested during each of 2005 and 2006, and the remaining one-third will vest in May 2007. Any unvested profits interests will vest upon (i) a change of control of EDC, (ii) Mr. Costabile’s death or disability, (iii) the termination of Mr. Costabile’s employment without cause or (iv) Mr. Costabile terminating his employment for good reason.

 

If Mr. Costabile’s employment is terminated by the Company without cause or by Mr. Costabile for good reason, Mr. Costabile is entitled to receive (i) an amount equal to twice his base salary at the time of termination plus the amount of his bonus under the Executive Bonus Plan for the prior fiscal year, payable in 24 equal monthly installments, and (ii) continued medical benefits for Mr. Costabile and his dependents for a period of 12 months following termination.

 

The following table provides the estimated value of the benefits that Mr. Costabile would have received had his employment been terminated on the last business day of 2006 under the scenarios described below or had a change of control of either the Company or EDC occurred on the last business day of 2006. The table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Behrent Severance Agreement.  On August 26, 2005, the Company and Mr. Behrent entered into a severance agreement (the “Behrent Severance Agreement”). Under the Behrent Severance Agreement, Mr. Behrent is entitled to the severance benefits described below if, within three years after a change of control of the Company, Mr. Behrent’s employment is terminated for any reason other than (i) his death, (ii) his disability, (iii) his retirement, (iv) the Company terminating his employment for cause or (v) Mr. Behrent terminating his employment other than for good reason. Under the Behrent Severance Agreement, the following are the severance benefits Mr. Behrent is entitled to receive: (i) a lump sum payment equal to 150% of the greater of his base salary in effect (a) immediately prior to his termination or (b) the date immediately preceding the change of control, (ii) accrued and unpaid base salary and vacation, (iii) any other compensation or benefits which are accrued and payable in connection with such termination and (iv) continued medical benefits for Mr. Behrent and his dependents for 12 months following his termination. Furthermore, all of Mr. Behrent’s unvested options will vest and remain exercisable for 12 months if his employment is terminated for any reason other than cause following a change of control of the Company.

 

The following table provides the estimated value of the benefits that Mr. Behrent would have received had his employment been terminated on the last business day of 2006 under the scenarios described below or had a change of control of either the Company or EDC occurred on the last business day of 2006. The table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Morgan Service Agreement.  On July 19, 2005, the Company and Mr. Morgan entered into a service agreement (the “Morgan Agreement”) which specifies the terms under which Mr. Morgan serves as Executive Vice President International Operations of Glenayre Electronics (UK) Ltd (“Glenayre (UK)”). The Company guarantees all of Glenayre (UK)’s obligations to Mr. Morgan under the Morgan Agreement. The Morgan Agreement sets Mr. Morgan’s annual base salary at £150,000 per year ($293,685 at an exchange rate of 1.9591 as of December 31, 2006). Glenayre (UK) also makes annual contributions equal to 20% of Mr. Morgan’s base salary to Mr. Morgan’s personal retirement plan. Under the Morgan Agreement, Mr. Morgan is also eligible to

participate in the Executive Bonus Plan pursuant to which Mr. Morgan may earn a bonus of up to 100% of his base salary. Mr. Morgan may elect to have all or a portion of any bonuses paid into his personal retirement plan, in which case Glenayre (UK) will match 12% of the bonus Mr. Morgan allocates to his personal retirement account.

 

Under the Morgan Agreement, Mr. Morgan is also reimbursed for 100% of the cost he incurs to maintain a medical insurance policy, and he also receives and a £5,000 per year allowance for social club fees and a £15,000 per year car allowance ($9,796 and $29,387, respectively, at an exchange rate of 1.9591 as of December 31, 2006). In addition, Mr. Morgan is the beneficiary of the following insurance policies, the premiums on which are paid by Glenayre (UK): (i) a £600,000 ($1,175,460 at an exchange rate of 1.9591 as of December 31, 2006) group life insurance policy, (ii) a group income protection policy covering 60% of Mr. Morgan’s base salary (during the period Mr. Morgan receives payments under this policy, Glenayre will continue to contribute an amount equal 20% of Mr. Morgan’s base salary to his personal retirement plan), (iii) personal accident coverage equal to two times his base salary and (iv) business travel insurance.

 

Under the Morgan Agreement, Mr. Morgan received profits interests in EDC, which represent the right to receive EDC’s distributed profits after the Company has received a return of its equity capital contribution and certain internal rate of return hurdles and other profitability conditions have been met. One-third of the profits interests vested during each of 2005 and 2006, and the remaining one-third will vest in 2007. Any unvested profits interests will vest upon (i) a change of control of EDC, (ii) Mr. Morgan’s death or disability (iii) the termination of Mr. Morgan’s employment without cause or (iv) Mr. Morgan terminating his employment for good reason.

 

If Glenayre (UK) terminates Mr. Morgan’s employment without giving Mr. Morgan 12-months notice (other than termination for gross misconduct) or Mr. Morgan resigns under circumstances that amount to constructive dismissal, then Mr. Morgan is entitled to receive (i) any accrued and unpaid salary, bonus and vacation and (ii) a lump sum payment equal to 95% of the salary and benefits he would have received during the 12-month notice period. The Company may opt to continue providing Mr. Morgan with benefits during the 12-month period in lieu of making a cash payment to him for such benefits.

 

The following table provides the estimated value of the benefits that Mr. Morgan would have received had his employment been terminated on the last business day of 2006 under the scenarios described below or had a change of control of either the Company or EDC occurred on the last business day of 2006. Because Mr. Morgan is based in the United Kingdom and is paid in pounds sterling, the amounts in the table are based upon the prevailing exchange rate from pounds sterling to U.S. dollars on December 31, 2006 of $1.9591 per pound. Furthermore, the table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Payments to Mr. Bailey.  Although Mr. Bailey does not have an employment or severance agreement with the Company, the following table provides the estimated value of the benefits that Mr. Bailey would have received had his employment been terminated on the last business day of 2006 under the scenarios described below or had a

change of control of either the Company or EDC occurred on the last business day of 2006. The table does not include benefits that are generally available to all salaried employees.