Chapman Said Glenayre's (GEMS) CEO Needs a Reality Check, Likes Loeb's Third Point Sale Call

In an amended 13D filing on Glenayre Technologies, Inc. (Nasdaq: GEMS), 9.9% holder Chapman Capital discusses improper exchange of EDC Equity Options for Glenayre common stock by CEO Jim Caparro and joins another large holder, Third Point LLC, in calling for a sale of the company.

Chapman Capital's Managing Member Robert L. Chapman, Jr. said, "The fact that Glenayre's Board of Directors (the "Board") gifted you (i.e., for free) the initial $215,000 that you used to obtain, for free, your initial investment in the Class B units of Glenayre subsidiary EDC has not escaped Glenayre's lividly indignant owners. Taking into account that $215,000 "signing bonus," on top of your base salary during partial-2005 EDC employment, "your" entire 2005 investment in Glenayre's EDC subsidiary required essentially not a single penny from your own, pre-Glenayre bank account. Viewed in that light, I must opine that you have Guinness Book of World Records-qualified genitalia of steel to attempt, after watching Glenayre’s stock tumble from nearly $6/share to under $2/share during your CEO tenure, to exchange these "free" and potentially worthless EDC equity options ("profits interests") for actual common shares in Glenayre - the same shares that Chapman Capital and other owners have purchased with their investors’ own, hard earned money."

Commenting on Third Point LLC's 13D last week Chapman said, "It should be noted that Chapman Capital shares the four stated concerns listed in such Item 4, having concluded that what is "clearly best for shareholders" is to "put the Company up for sale." If by now you have not realized that the days of your being paid an annual compensation exceeding $1.8 million (based on the Board’s awarding you a 100% bonus for 2006 performance) for the service of driving Glenayre's owners' collective investment into the ground, it's high time for a reality check."

A Copy of the Letter:

Via Electronic Mail

Re: Litigation vs. Glenayre Technologies et. al. (James M. Caparro) re: Illegal EDC Equity Option Exchange

Mr. Caparro (and the Glenayre Board of Directors):

As many are aware from our widely-read Schedule 13D amendment filed with the SEC on December 14, 2006 (http://www.sec.gov/Archives/edgar/data/808918/000136541706000035/formsc13d.htm), Glenayre Technologies, Inc. (“Glenayre” or the “Company”) 9.9% owner-advisor Chapman Capital views you as nothing more than a “washed-up entertainment industry executive” who was hoisted (by fellow Glenayre “siphoner” and Chairman, Mr. Clarke Bailey) from recent un/self-employment into a public-company position that paid you nearly $2 million annual compensation, plus “EDC profit interests,” in exchange for your supervisory oversight (i.e., not operational management, left to Mr. Thomas Costabile) of a $150 million micro-market capitalization, loss-producer (Source: 2006 Form 10-K: http://www.sec.gov/Archives/edgar/data/808918/000095014407002895/g06102e10vk.htm).

The fact that Glenayre’s Board of Directors (the “Board”) gifted you (i.e., for free) the initial $215,000 that you used to obtain, for free, your initial investment in the Class B units of Glenayre subsidiary EDC has not escaped Glenayre’s lividly indignant owners. Taking into account that $215,000 “signing bonus,” on top of your base salary during partial-2005 EDC employment, “your” entire 2005 investment in Glenayre’s EDC subsidiary required essentially not a single penny from your own, pre-Glenayre bank account. Viewed in that light, I must opine that you have Guinness Book of World Records-qualified genitalia of steel to attempt, after watching Glenayre’s stock tumble from nearly $6/share to under $2/share during your CEO tenure, to exchange these “free” and potentially worthless EDC equity options (“profits interests”) for actual common shares in Glenayre - the same shares that Chapman Capital and other owners have purchased with their investors’ own, hard earned money.

James Caparro Two-Year Refusal to Buy Glenayre Stock: Literally for years, Glenayre’s owners have beseeched you to use your own personal retained earnings (from decades of “success” in the entertainment industry) to purchase, on the open market, the same Glenayre’ common shares that have been purchased by your nearly $2 million/year compensating benefactors, Glenayre’s true owners. Despite a wide variety of periods during which you had the legal right (and arguably ethical devoir) to purchase Glenayre stock, you have refused to purchase even one single share, using defenseless excuses and pretexts that would be accepted as reasonable only by a simian imbecile (this is not to be taken as a direct reference to Mr. Matthew Behrent, Glenayre SVP & Chief Acquisitions Officer, who was rewarded indirectly out of Glenayre’s owners’ pockets for the brilliance of liquidating Glenayre Messaging immediately following its loss of Sprint-Nextel as its primary customer). However, after reading the Glenayre 2007 Proxy Statement on Schedule DEF14A (the “2007 Proxy Statement”) recently filed with the SEC on April 26, 2007 (http://www.sec.gov/Archives/edgar/data/808918/000095014407003810/g06789def14a.htm), Glenayre’s owners finally have gained a sense for what may be Jim Caparro’s true master plan.

Illegal Exchange of EDC Equity Options for Glenayre Common Stock: It is with the utmost seriousness that I caution you and “your” Board against further “evaluating whether to exchange the EDC profits interests for equity of the Company” … “in order to align the equity compensation received by all executive officers." (Source: 2007 Proxy Statement, Page14). By the Board’s own admission per the 2007 Proxy Statement, “the [EDC] profits interests are designed to work like options, and they vest over a two-year period or upon a change of control 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. As such the profits interest structure was created to incentivise [sic] management in lieu of stock options. 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.” If these “EDC Equity Options” (the proper moniker for them, instead of “profits interests,” based on the Board’s own description of their intended design and function) are to be exchanged for anything, it must not be for “equity of the Company”) but instead for Glenayre Equity Options (i.e., options to buy Glenayre common shares) with identical exercise prices a) equal to the original, b) 50% higher and c) 100% higher than" the price at which Glenayre traded upon the announcement that Glenayre’s only business would be EDC. It has been noted by Chapman Capital (and other significant Glenayre owners) that Glenayre cannot claim to have completed any EDC Equity Option-for-Common Stock exchange given that a) no Form 8-K or related press release has been issued by Glenayre making public what would be, without question, the material event of Glenayre’s owners being massively diluted via an (illegal) exchange of “profits interests for equity of the Company”, and b) the two-year tax period following the date of the EDC acquisition’s completion /closing on May 31, 2005 has not elapsed (Source: http://www.sec.gov/Archives/edgar/data/808918/000095014405006192/g95544e8vk.htm).

Litigation by Chapman Capital et. al. a 100% Certainty: Under no circumstances should you expect to avoid litigation by Glenayre’s owners should you exchange your EDC Equity Options for actual Glenayre common stock. Given the state of the physical audio (compact disk) industry, exacerbated by your oversight of the EDC business, it may be argued that the value of EDC has fallen significantly since its May 31, 2005 purchase by Glenayre. As a result, Glenayre’s owners are not so ignorant to be unaware of the fact that those EDC Equity Options (“profit interests”) never may become “in the money,” and thus may prove to be absolutely worthless, as a direct result of a) the decision of the Board, you, Mr. Bailey, and strategic advisor/profit-interest recipient Morgan Joseph & Co. Inc. (http://www.morganjoseph.com) to buy EDC from Universal Music Group in the first place and b) your own (mis)management of EDC/Glenayre into its current and prospective state of cash flow generation and value. I cannot exaggerate the following point: DO NOT force Glenayre’s owners to squander their own and Glenayre's cash resources on prosecuting and defending respective lawyers to rake you over smoldering, white-hot legal coals (figuratively) in response to any further attempt by owners of EDC Equity Options to misappropriate the equity, cash and other assets of the company owned by holders of Glenayre common shares (that excludes you, of course). Your greed has tested our collective patience too long, and too far; moreover, it shall not be difficult to prove in a court of law the outright breach of fiduciary duty by this agedly conflicted Board of Directors.

Fair Exercise Price for Glenayre Equity Options: Based on the market’s own valuation of Glenayre and EDC as one and the same following the sale of Glenayre Messaging, the exercise price on any Glenayre Equity Options received by you and others (in exchange for EDC Equity Options, a.k.a. EDC “profit interests”) must be set at no less than a price between $2.37 and $2.70 per share. On December 14, 2006, in immediate response to the Company’s announcement that it had agreed to sell Glenayre Messaging to IP Unity for $25 million (Form 8-K; http://www.sec.gov/Archives/edgar/data/808918/000111667906002755/glen8k-121506.htm), Glenayre’s common stock closed at $2.61/share; moreover, for the balance of 2006, Glenayre stock traded between $2.40 and $2.60 per share, averaging $2.53/share during those final two weeks of 2006. On January 3, 2007, when the Company’s stock traded and closed at approximately $2.50/share, Glenayre announced “that on December 31, 2006 the Company completed the previously announced sale of its Messaging business to IP Unity for $25 million in cash” (Form 8-K; http://www.sec.gov/Archives/edgar/data/808918/000111667907000117/glen8k.htm ). In the following two months, the market valued Glenayre, once again essentially as the EDC division itself, between $2.37 and $2.70 per share. I repeat, between the date Glenayre Technologies became EDC for all intents and purposes, and March 6, 2007, Glenayre was valued by the market at an average closing price of $2.57/share. Only after the March 6, 2007 conference call in which you introduced disappointing guidance for EDC (and not Glenayre Messaging, which had been sold the prior year), which formed the rationale for the nearly 40% downward revision (from $5.00 to $3.10) in Glenayre’s share target price by its only Wall Street sellside research analyst, did Glenayre’s stock begin its descent to Caparro-induced depths under $2.00 per share. As a result, there is absolutely no justification for setting below $2.37 - $2.70/share the exercise price of any Glenayre common stock options you and others may receive in exchange for potentially worthless EDC Equity Options (“profit interests”).

Excessive Board Compensation: With net losses in two of the last four quarters (or three if you do not count extraordinary items), it seems inconceivable that the Board can justify compensation of roughly three quarters of a million dollars (Source: 2007 Proxy Statement, Page14). Included in this amount are stock awards worth $21,499 per director and option awards reaching as high as $84,066. Chapman Capital finds the awards of any such “rewards” insulting to Glenayre’s owners who endured a 21% loss in share value during calendar 2006. The Compensation Committee claims to believe that compensation should reward performance. Chapman Capital believes that as well.

Misaligned Compensation Structure: Members of Glenayre’s management have economic incentives that are directly opposed to shareholder interests. Despite the fact that EDC was structured as a limited liability company to maximize the utilization of Glenayre’s tax loss carryforwards, Messrs. Bailey and Behrent are contractually entitled to awards of stock options upon completion of certain acquisition or divestiture events, irrespective of their success or failure as measured by an assessment of the return or loss to Glenayre’s owners. It is no wonder then that “Mr. Bailey remains focused on acquisition opportunities for the Company” as he stands to gain from any increase in M&A activity. For his “outstanding performance” in divesting the messaging business (at near liquidation value), Mr. Behrent was awarded a discretionary bonus of 250,000 options (Source: 2007 Proxy Statement, Page 12).

Third Point Activist 13D Filing: Last week’s Schedule 13D filing by Third Point LLC (http://www.sec.gov/Archives/edgar/data/808918/000089914007000879/g3727409b.txt; May 3, 2007) was your first official warning that your continued siphoning off of value from Glenayre had forced yet another large owner to defend its investment via activist, corporate warfare. In such filing’s Item 4, Mr. Loeb also made specific reference to the issue of an improper exchange of EDC Equity Options for Glenayre Common Stock, stating, “the Reporting Persons are concerned that Mr. Caparro will unduly benefit from an exchange of these "options" into Company "equity" [emphasis added] while the Common Stock valuation is temporarily depressed.” The fact that your latest brush with a Glenayre owner seeking to protect his clients’ investment came so soon after your meeting with its representative, Mr. Jeffrey R. Perry, is further testament to the failure of your tyro-level of chicanery and financial slight-of-hand. It should be noted that Chapman Capital shares the four stated concerns listed in such Item 4, having concluded that what is “clearly best for shareholders” is to “put the Company up for sale.” If by now you have not realized that the days of your being paid an annual compensation exceeding $1.8 million (based on the Board’s awarding you a 100% bonus for 2006 performance) for the service of driving Glenayre’s owners’ collective investment into the ground, it’s high time for a reality check.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.

P.S. In preparation for Chapman Capital’s forthcoming Schedule 13D Amendment of its investment in Glenayre Technologies, Inc. (“Glenayre” or “the Company”), I suggest that you read and the Glenayre Board of Directors (“the Board”) the excerpt below from Alan Murray’s Revolt In The Boardroom: The New Rules of Power in Corporate America. Subsequently, you may want to take a break from admiring your 2007 Grammy after-party photos to read the entire book, start-to-finish, and the re-read it. Given that Mr. Thomas Costabile, EDC’s highly paid Chief Operating Officer, is (according to all reporting sources) carrying nearly the entire operational load at EDC (i.e., few can determine what is your contribution to the Company), I doubt you lack the free time to read this book cover to cover.