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INFORMATIONAL MEMO
To: IAE Shareholders
From: John M. Peck
Chairman and CEO
Date: April 27, 2010
RE: Death Spiral Convertible Debenture Financing
As IAE shareholders, I am confident that many of you have had concerns and some confusion over the way our stock (trading symbol: IARO) trades daily on the open market in what appears to be a constant downward spiral. I believe it would be beneficial for me as IAE’s CEO to provide you some basic informational facts on why this is happening to a company that has only been in existence and trading for a little over one year.
IAE has accomplished a number of its initial goals as outlined in our Executive Business Plan which is posted on our web site (www.IAE247.com). I provided a short list of these accomplishments in my Open Letter to Shareholders last month. I would encourage you to read the letter again after reviewing the documents cited in this Informational Memo.
IAE has clearly documented, in its SEC Filings, that our company came into existence through a merger with Lifestem International, Inc. which was operating and trading on the NASDAQ Over The Counter Bulletin Board Exchange ("OTCBB") under the symbol LSTM, at the time of the merger. The documents evidencing the transaction were filed with the SEC in our 8-K filing and 10-K filings. IAE is a fully reporting OTCBB public company which is required to make quarterly and annual SEC filings. Our 2009 year end filing is currently being completed by our PCAOB (Public Company Accounting Oversight Board) auditors. For additional information on PCAOB auditors refer to the Sarbanes-Oxley Act on your favorite search engine.
IAE, the new public company that emerged from the merger, inherited a number of pre-existing issues which IAE is still attempting to resolve today. For example: not only did we inherit all of Lifestem’s shareholders but we also inherited all of Lifestem’s unpaid debts - most noteworthy of which is are Convertible Debenture Promissory Notes which were initially in a principal amount in excess of $2,500,000 USD in addition to interest, warrants and options. Lifestem’s convertible debenture lender was The NIR Group, LLC, a New York based Hedge Fund headed by Mr. Corey Ribotsky. Ultimately, the Lifestem International, Inc. loan was structured unknowingly by Lifestem as one of NIR's Death Spiral Convertible Debenture.
IAE has found it difficult to work with NIR primarily due to the inherent nature of Death Spiral Convertible Debenture loan terms and the profits being made by NIR. (Please feel free to Google search - Corey Ribotsky; NIR Group; Death Spiral Financing and you will find several published articles on Death Spiral Convertible Debentures along with articles on the SEC's ongoing investigations of NIR and Mr. Ribotsky). I believe that when you, our shareholders, read the articles you will have a better understanding of what IAE's management team has been dealing with on a daily basis. I would also like to remind you, our investors, that IAE did not receive a single dollar from the original $2,500,000 +USD NIR Death Spiral Convertible Debenture funding. It was all received by Lifestem International, Inc.
IAE’s management is attempting to resolve this issue for our company and its shareholders through a variety of solutions, including finding a more ethical and Corporate friendly purchasing group to purchase the debt or repurchasing NIR’s debt from our 2010 profits.
I would now like to clarify a number of typical misconceptions held by shareholders when they are frustrated by trading activities and rumors affecting their investments in a company. In order to do this, I have, therefore, decided to close this Informational Memo with a number of definitive statements that should create better communication between IAE’s management and our shareholders. The following are a few of the misconceptions/rumors that I have heard or read through emails over the last several months.
1) Perception/rumor: When shareholders see a large number of shares trading daily with the share price going down as a consequence of that trading they often become suspicious believing that the company’s management is selling their personal shares into the open market.
Actual fact: IAE’s management has not sold a single share of their personal stock received in the merger with Lifestem or from performance bonuses. Please visit the SEC website where you can view our Form 3 and Form 4 filings.
2) Perception/rumor: The principals from the original Lifestem merger with IAE retained a large number of shares and have been selling them into the open market. It has also been alleged by shareholders that the former principals of Lifestem are still functioning in IAE’s ongoing business as, either consultants, Officers, Directors or Board Members or in some other capacity.
Actual fact: The previous principals of Lifestem retained only a few 100,000 shares of our stock. None of the previous Lifestem International principals or employees work in any capacity with IAE.
3) Perception/rumor: The fact that IAE only has two full time employees, renders it unable to meet its first year mission statement and effectuate its Executive Business Plan. The Company's decision to be conservative, maintain control over expenses, hire few full time personnel in favor of consultants and not hire outside, often expensive, Investor Relation Firms is costing the Company both capital and shares.
Actual fact: IAE's business strategy during its first year of operation was to develop a strong business foundation in a highly specialized industry group based on our management's extensive International business experience, management's International contacts within various military and government organizations, and finally, and most importantly, the proven knowledge of IAE's President and myself. As IAE's management, we possess the necessary employment history and skills in this highly specialized military spare parts business. We believe that our professional knowledge and skills are unparalleled for a small developing public company. Furthermore, IAE’s management has not sold any of their shares for personal gain, we have accrued our salaries and expenses waiting until the company is in a better cash flow position. The only payments made have been to our PCAOB Auditing Firm and SEC Attorney who by governmental rule have to be paid independently for their services. Management voluntarily accrued their salaries, expenses and fees since the inception of the company. This can be verified by reviewing the company’s SEC filings.
4) Perception/rumor: " if IAE’s business model is similar to other industries which primarily operate their production, product delivery and sales/marketing efforts in the United States, why does it take so long for IAE to establish its International sales and marketing plan and to process the resulting purchase contracts to receivables and company cash flow?
Actual fact: IAE’s military aircraft spare parts business is unlike other business operations since we exclusively sell to U.S. Defense Department approved and authorized Allied countries throughout the world. IAE’s primarily markets and sells its military aircraft spare parts through International Brokers to and foreign Governments. These foreign country's Air Forces are the largest users of older military aircraft replacement spare parts. IAE's customer base and the very nature of the military spare parts business has inherent security requirements placed on them by the purchaser's which represents a radical departure from typical businesses operating in the United States. IAE is required by the end-purchaser to provide extensive after sale services including manufacturer's traceability verification which takes extensive time to process the thousands of individual part numbers sold. All of these industry protective measures which require a highly information sensitive, detailed document verification system together with the confidential selling environment result in the lengthy sales time frame, parts delivery cycle and payment processing. The contracts we receive must be processed through a number of highly confidential, technical stages starting with the initial sale requirements for manufacturers traceability and concluding with the our company requirement for full payment being received before shipping our parts out of the U.S. We must also meet and follow extensive government enforceable guidelines by the US Department of Defense and State Department for export documentation required by laws which are used by the U.S. Defense Department to control the sale and shipment of military parts throughout the world.
International Aerospace Enterprises Inc. filed its annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2009 (10K filings) on 04 -15 –2010. There have been a number of inquiries by shareholders asking why the $16,000,000 USD in contracts, previously announced by the company, were not booked in the 2009 10-K filing? I would like to direct your attention to the Revenue Recognition Section of the 10- K (summary of accounting policies) pp 22 of the 10-K filing. After lengthy discussions between IAE’s management and the PCAOB auditors, it was determined that IAE’s policy of not shipping military aircraft spare parts to international customers without full payment in advance, even with confirmed sales contracts, that IAE could not Recognize the Revenues of nearly $20,000,000 USD in 2009 because it did not meet one (1) of the four (4) basic criteria, in accordance with Accounting Standards Codification 605-10, Revenue Generation (ASC 605-10). ASC 605-10 requires that all four basic criteria be met before revenues can be recognized. The criteria is as follows: (1) persuasive evidence of an arrangement exists; this criteria has been met by IAE’s previously announced contracts. (2) delivery has occurred; this criteria could not be met because of IAE’s policy of not shipping military parts out of the United States, to potentially hostile foreign territories without advance payment having been made by the customer and received by IAE in advance of shipment. (3) The selling price is fixed and determinable; this criteria has been met in the detailed purchase contracts issued to IAE by its customer. (4) collectability is reasonably assured; this criteria has been met by the contracts terms which requires full payment in advance of shipment by following the company’s strict policy of “full payment before shipping”. The policy enables IAE to avoid booking substantial accounts receivable and the risk of nonpayment when selling to foreign entities.
IAE’s management is in agreement with our PCAOB auditor’s decisions on 2009 Revenue Recognition. Management has taken the position that the risks would simply be too extreme if they shipped their military aircraft spare parts to foreign countries without having received full payment in advance even though a decision to ship the parts would have enabled the company to book the sales as accounts receivable for fiscal year 2009. IAE’s management fully expects that the sales will meet all four criteria under ASC 605-10 for revenue recognition in fiscal year 2010.
I sincerely hope that the above information will assist you, our shareholders, in better understanding the nature of IAE’s business and some of the difficulties management has encountered in dealing with NIR’s Death Spiral Convertible Debenture loan. IAE is has been in an SEC “quiet period” due to our pending 10-K year end SEC filing. Now that the Company has filed its 2009 year end 10-K filings the required quiet period is over, IAE intends to again resume communicating the Company’s significant events through standard National News Release outlets and its web site.
Best Regards
John M. Peck
This Informational Memo contains forward-looking statements, including, without limitation, statements concerning our business and possible or assumed future results of operations. The forward-looking statements are based on current expectations, estimates and projections made by management. We intend for the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words are intended to identify such forward-looking statements. The forward-looking statements contained herein include, statements regarding potential resolution of our debt issue, the success of our business strategy and the skills of our management in this industry. These statements are based upon current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements and include the risk that the debt issue may not be favorably resolved, our stock price will continue to decrease, the failure of our business strategy and cost reduction measures and the other factors discussed in our Annual Report on Form 10-K. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law. |
