questionable and uncharacteristically high margin profile in diligence. Management now admits they were duped in diligence, evidenced by sales in 2012 coming in $11 million less than projected and earnings being restated by $2.2 million in 2013 with a $14 million impairment charge later that year.
The Board and Mr. Gilbert Pursued an Ill-Advised Segmentation of IEC’s Business
Mr. Gilbert and the incumbent Board of Directors decided to split the company between the military/aerospace and medical/industrial segments, increasing overhead and creating vast inefficiencies. At IEC’s plant in Newark, NY, 30% of the manufacturing work was aerospace and defense related, but all of this work was omitted from the aerospace and defense structure headquartered in Albuquerque, NM. Why? If the goal was to split IEC’s operations into two segments, why do it so poorly?
Further, two separate sales force structures were created, resulting in customer confusion, process inefficiencies and lost sales. On top of it all, because the incumbent management team lacks the expertise to fix the problems created by the new split structure — and the incumbent Board of Directors lacks the skills to help them in this process — IEC hired an expensive six-figure consultant to help the company fix its own mistakes. IEC cannot and should not need to spend stockholder money to solve a problem from the outside. Vintage’s nominees have the skills and expertise to delve into these issues directly and act decisively.
MANAGEMENT LACKS CREDIBILITY AND THE INCUMBENT BOARD HAS LET THEM
FOCUS ON THEIR JOBS INSTEAD OF STOCKHOLDER VALUE
Mr. Gilbert’s misleading and opaque statements about the loss of Quintel revenue is not his first attempt to confuse stockholders and further entrench himself and his sidekicks. Time and again, management’s statements have not come to fruition. On an earnings call in early 2014, Mr. Gilbert admitted as much: “In our last conference call we said that we expected the first half of the fiscal year to be flat. In fact, our first-quarter revenues declined 2.6%.” His unfounded optimism continued in May 2014, when he stated “I expect modest but steady revenue growth.” In fact, revenue declined by 5.2% in the subsequent quarter. Yet, when challenged to provide more accurate guidance, Mr. Gilbert has demurred with responses such as, “If I were you, I’d be wondering, can’t these guys get out of their own way?” Why should we believe in management now? Don’t we need a management team that has better answers?
Mr. Gilbert’s regime has also not been able to maintain a consistent Chief Financial Officer for the past 11 years. During this period, IEC has had five CFOs with an average tenure of just 2.2 years. One CFO was only “on contract.” A company cannot operate without an experienced professional with knowledge of IEC’s markets serving in this role. The lack of a consistent CFO has destabilized IEC.
The incumbent management team has not only destroyed your value as a stockholder, but has done so while entrenching themselves and ensuring that they benefit personally no matter how bad IEC’s performance is. They either do not have the capabilities to fix your company or do not wish to do so and have done everything in their power to stay in their high-paying posts. To highlight just one example, here are the key terms of Mr. Gilbert’s employment agreement: (1) severance payments will be made upon Mr. Gilbert’s voluntary resignation; (2) Mr. Gilbert will receive a lucrative seven year consulting contract upon severance, (3) Mr. Gilbert cannot be terminated for cause without having the opportunity to cure the reason for their termination; and (4) a portion of Mr. Gilbert’s bonus payments are made for target achievements and not actual results.
It is perhaps not hard to understand why the incumbent Board of Directors is willing to reward Mr. Gilbert so handsomely for what is, at best, mediocre performance: The incumbent Board is a cozy club, with two directors serving for 20 years and another for 14 years. Vintage believes that, quite simply, the incumbent Board lacks the independence necessary to challenge management.
The incumbent Board of Directors also adopted a “poison pill” that prevents Vintage from buying more shares of IEC. Vintage stands ready to increase its investment in IEC — we are ready to put our money where our mouth is. But the incumbent Board, perhaps in an effort to save their jobs, has decided to stand in our way.
VINTAGE’S NOMINEES WILL ADDRESS IEC’S SHORTCOMINGS
Along with Mr. Schlarbaum, Vintage has a plan to rescue IEC. First and foremost, we must reestablish organic growth. We would repeal recent changes to the business development structure and restore the processes that produced 26% compound growth rates over the seven years under Mr. Schlarbaum. Further, we would fix the new customer acquisition process by turning around the underperformance, focusing the most capable resources only on prospects that fit our skill-set, and ensure effective strategies are put in place to win new business.