10-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended..................................February 29, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from............ to ........................... Commission File Number.................................................0-17249 AURA SYSTEMS, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 95-4106894 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2335 Alaska Ave. El Segundo, California 90245 (Address of principal executive offices) (310) 643-5300 Registrant's telephone number Name of each exchange on which registered None Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| On June 12, 2000 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $68,875,417. The aggregate market value has been computed by reference to the last trading price of the stock on June 12, 2000. On such date the Registrant had 239,361,352 shares of Common Stock outstanding. When used in this report, the word "expects," "anticipates," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding future events and the Company's plans and expectations. The Company's actual results may differ significantly from the results discussed in forward-looking statements as a result of certain factors, including those discussed in this Report. The Company expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in the Company's expectations with regard hereto or any change in events, conditions or circumstances on which any such statement is based. This Report includes product names, trade names and marks of companies other than the Company. All such company or product names are trademarks, registered trademarks, trade names or marks of their respective owners and are not the property of the Company. PART I ITEM 1 BUSINESS I. INTRODUCTION Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, was founded in 1987 to engage in the development, commercialization and sales of products, systems and components using its patented and proprietary electromagnetic and electro-optical technology. Since 1987 the Company's proprietary and patented technology has been developed for use in systems and products for commercial, industrial, consumer, and government use. Prior to Fiscal 1992, the Company was engaged in various classified military programs, which allowed the Company to develop its electromagnetic and electro-optical technologies and applications. A number of "one-of-a-kind" systems were built and successfully tested in these fields. Subsequently, the Company developed additional electromagnetic and electro-optics know-how and technology and transitioned from a supplier of defense technology to a supplier of consumer and industrial-related products and services. In 1994, the Company founded NewCom, Inc. ("NewCom"), a Delaware corporation, which engaged in the manufacture, packaging, selling and distribution of computer-related communications and sound-related products, including modems, CD-ROMs, sound cards, speaker systems and multimedia products. As a result, the Company expanded its presence in the growing multimedia, communication and sound-related consumer electronics market. In 1996, the Company acquired 100% of the outstanding shares of MYS Corporation of Japan ("MYS") to expand the range of its sound products and speaker distribution network. MYS engaged in the manufacture and sale of speakers and speaker systems for home, entertainment and computers. In Fiscal 2000, the Company sold MYS to MYS management. In September 1997, NewCom completed an initial public offering, decreasing Aura's ownership in NewCom down to a majority interest at the conclusion of the offering. During the second half of Fiscal 1999 NewCom's business suffered from adverse industry conditions, including increased price reductions and a decline in demand resulting from increased incorporation of computer peripherals at the OEM level. These conditions resulted in heavy losses to NewCom and its competitors, causing a buildup in inventory and difficulty in collecting receivables from mass merchants. NewCom's business reached a critical juncture in the fourth quarter of Fiscal 1999 when Deutsche Financial Services, which maintained NewCom's working capital line, announced that it was unwilling to continue to advance working capital to NewCom under its credit facility. This, in conjunction with the actions of the retail mass merchants, resulted in the cessation of NewCom operations in early Fiscal 2000. Aura anticipated that its working capital needs in Fiscal 1999 would be met from a number of sources, including the repayment by NewCom of approximately $20 million of indebtedness, which was due in September 1998, and proceeds from external debt and equity financing. NewCom was unable to meet its obligations to Aura in September 1998, ultimately creating a significant cash shortfall to Aura. This required Aura beginning in late January 1999 to refocus its operations by shutting down certain operating divisions, selling its MYS subsidiary, licensing and selling proprietary based AuraSound speaker technology and assets, and leasing its Electrotec concert touring sound equipment. The Company also temporarily suspended the further development of certain electro-magnetic projects, including the electromagnetic valve actuator ("EVA"). In Fiscal 2000 the Company entered into agreements providing for the restructuring of more than $85 million of debt and contingent liabilities. Of this amount, over $37 million was either converted into equity or forgiven. Subsequent to Fiscal 2000 the Company sold its Aura Ceramics division. See "Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations. The Company's operations are now focused on manufacturing and commercializing the AuraGen(R) ("AuraGen") family of electromagnetic products, with applications for military, industry and the consumer. The AuraGen is a unique, patented electromagnetic generator that is mounted to the vehicle engine, which generates both 110 and 220 volt AC power at all engine speeds including idle. Commercial production of the AuraGen commenced in Fiscal 1999 and is being distributed and sold through dealers, distributors and OEMs. The Company intends to continue to focus its business on the AuraGen line of products (See "Description of Business - Magnetic Technology"). In addition, the Company is entitled to receive royalties from Daewoo Electronics Co., Ltd. ("Daewoo") for its electro-optics technology ("AMA") licensed to Daewoo in 1992 (See "Description of business - Electro-Optical Technology"). II. DESCRIPTION OF BUSINESS A. Technology 1. Magnetic Technology The Company has developed and patented highly efficient magnetic circuits, which the Company believes provides substantial improvements over devices of similar purpose, available prior to Aura's technology. These designs include the Ferrodisk Induction Motor applied in the Company's electromagnetic power generator technology and electromagnetic actuators, such as the HFATM and the EMATM actuator designs. Ferrodisk Induction Motor (AuraGen(R)) In Fiscal 1993, the Company's research discovered that certain magnetic circuit equations could apply, with different parameters, to describe linear actuators that could provide exceptional high force levels in a device of relatively small volume and weight. As this concept extended from a linear actuator to a rotary actuator, an electrical induction motor called the "Ferrodisk Motor" was developed by the Company. In the latter half of 1995 and in early 1996, a device named the Ferrodisk Alternator Starter (FAS(TM)) was designed, built, tested, installed on a Ford Ranger truck, and displayed publicly at the Society of Automotive Engineers (SAE) trade show. FAS(TM) used its large torque capacity to start the engine with direct drive, that is, with no gearing. After starting, its function converted to that of an alternator, which had a capacity for generating power several times that of a conventional alternator. The Company called this electromagnetic power generation feature the "AuraGen". The AuraGen contains aluminum bars and rings embedded in it. AC voltages, similar to household currents, set up electric currents in the electromagnets, creating a series of magnetic poles that whirl around the rings. When the disk of steel is forced to spin faster than the motion of the magnetic poles, there is an interaction between the magnetism in the disk and the coils of the electromagnets. The electric currents in the wires are pushed so they flow backwards against the voltages, and this effect builds up the electrical energy content in the electronics at the expense of mechanical energy provided by the rotor. The electronic box of the AuraGen provides the alternating voltages to make the device work, stores the electrical energy generated, and prepares the exact type of voltages as in household wiring. The device is controlled by a computer processor that continuously measures the speed of the AuraGen rotor and the power drawn by the user, so that alternating voltages of the best phase and frequency are sent to the electromagnets. Magnetic High Fidelity Actuators (HFATM) Actuators are used in a wide range of applications, including high speed, precision computer-controlled applications such as the control of aircraft flaps, and heavy-duty applications such as the lifting of the bed of a dump truck. Actuators are generally hydraulic, pneumatic, mechanical or voice coil. Hydraulic, pneumatic and mechanical actuators can produce extremely high forces and long strokes in relatively small packages. Voice coil actuators provide high precision and high-speed operation, producing short stroke and very little force. The Company believes that its high fidelity electromagnetic actuator HFATM, is the first "Lorenz's Law" actuator to provide both the high forces and long strokes produced by hydraulic or pneumatic actuators at the speed and precision of response produced by voice coil actuators. This ability is attributable to the patented magnetic design. Standard voice coil actuators typically provide less than one inch of stroke whereas the HFA(TM)'s stroke is virtually unlimited. For example, Aura's HFATM is capable of producing more than 1,000 pounds of force over a 32 inch stroke. The Company has commercially used its HFATM technology in applications such as actuated weld heads and shakers. Electromagnetic Actuator (EMA(TM)) During Fiscal 1995, the Company developed, built and demonstrated a new type of actuator, called the Electromagnetic Actuator, or "EMATM." The Company developed EMATM to fill the performance gap between linear actuators and solenoids. To date, the principal application of the EMATM has been in Aura's Electromagnetic Valve Actuator System ("EVA(TM)"), a patented electromagnetically powered system which opens and closes engine valves at any user specified time interval. What sets EMATM apart from a standard solenoid is its ability to custom-tailor the force produced as a function of stroke. For example, an automotive EGR valve requires peak force at the beginning of the stroke in order to "crack" the valve open. A standard solenoid, by its very nature, produces peak force at the end of its stroke, not at the beginning. Therefore, a solenoid will require a large amount of power to compensate for its inherent limitation. Conversely, the force profile of an EMATM can be customized to provide high force at the beginning of the stroke, resulting in a more efficient device that is much easier to control. Another advantage of EMATM over a solenoid is its actuator-like ability, which provides consistent force over much longer lengths. To be used for an application requiring proportional control, a "proportional" solenoid requires complex electronics to compensate for this inherent non-linearity. An EMATM basically "spreads" the solenoid's peak force over the entire stroke, providing linear force over a greatly extended stroke length without the need for complex electronics. 2. ELECTRO-OPTICAL Technology Light Efficient Displays - Actuated Mirror Array (AMATM) The Company has developed and patented a technology (a "light valve") for generation of images called the Actuated Mirror Array (AMATM). The AMA(TM) utilizes an array of micro actuators in order to control tiny mirrors whose position change is used to cause a variation in intensity. The Company expects this device could have a major impact on applications where light efficiency is paramount, such as in large screen television, movie and exhibition displays, and the testing of electro-optical devices for military or civilian use. Although there can be no assurances, the Company believes that the AMATM can be manufactured at a competitive cost in large quantities, thus making it commercially feasible. Thus, AMATM based devices are expected to potentially offer the combination of increased display intensity at a competitive production cost. The Company believes that the AMATM technology has a technical advantage over other technologies in achieving higher contrast, more intensity and longer lived elements. Light displays, such as projectors and large screen televisions, can be made by a number of techniques, many of which are currently available. These include liquid crystal displays ("LCD"), cathode ray tubes ("CRT"), deformable mirror displays ("DMD"), oil film projectors and plasma tubes. For the segment of the display market addressing large images, the principal requirement is to get more light out per unit watt of electricity in. However, each of these technologies requires the utilization of an element, which causes a loss of light efficiency in order to create the image. Liquid crystals utilize an electric field to change the light polarization properties of a surface, which is divided into an array of cells to paint an image. Cathode ray tubes utilize an electron beam, which is bent by the video signal to create images by colliding with a phosphor on the front surface to create light. DMD's utilize an electric field to bend a mirror at a large angle to switch it to either "on" or "off". Oil film projectors change the transmissive properties of an oil film allowing an image to be created. Plasma tubes create an electrical discharge in a tiny tube with gas. The gas glows allowing an image to be created by an array of such tiny tubes. Each of these technologies has their own advantages and limitations, thus creating niches within the display market where competitive advantages can be achieved. The Company has entered into a license and manufacturing agreement with Daewoo Electronics Co., Ltd. to manufacture televisions and other devices based on AMATM technology (See " Description of Business-Certain Product Risk Factors-AMA"). B. Products 1. AuraGen(R) The AuraGen is a patented technology (US Patent No. 5,734,217) that could potentially have substantial benefits in size, weight and cost for induction type electric motors and generators. The technology allows the construction of induction machines of somewhere between one-half to two-thirds reduction in weight and size for the same output. The machine itself does not use any exotic materials and the components are simple to manufacture with conventional tooling. In addition to the mechanical advantages the system uses a proprietary control system which optimizes efficiency as a function of required load. The AuraGen could potentially offer substantial cost savings due to reduced material requirements and simpler components. While the technology has wide applications over a large range of horsepower it is best utilized for machines in the range of 1.5 to 50 horsepower. The Company has invested substantial resources to develop the technology into a rugged system that can be sold commercially. The first family of products using the AuraGen technology are generators designed to fit under the hood of a full size pickup truck, Sports Utility Vehicle (SUV) or other large vehicle. In the under-the-hood application the AuraGen can provide an effective torque to weight ratio of 0.648 ft-lb/lb with efficiency of 86% as compared to a typical heavy duty brush-less alternator which has an effective torque to weight ratio of 0.109 ft-lb/lb and efficiency of 65%. Thus the AuraGen produces nearly six times more power per pound than typical heavy-duty alternators. The Company has gone through extensive testing of its 5kw (5000 watts) continuous power rated mobile electric generator in both the laboratory and in the field. Over 1000 units have been in the field for up to two years. The Company has begun selling the 5KW 120/240V pure sine wave systems with total harmonic distortion of less than 4%. Aura currently offers systems that fit in over 70 different engine configurations in popular GM, Ford and Chrysler vehicles, as well as some models of full size trucks. In addition, the Company is developing other power rated generators between 3.5KW and 12.5KW, all of which will fit under-the-hood of the types of vehicles described above. The North American market for mobile generators is estimated to be in excess of $4 billion per year and growing at 4% to 5% per year. The worldwide use is estimated to be over $10 billion per year. Traditional mobile power users are found in construction, cable, emergency/rescue, marine, railroad, recreational vehicles, telecommunications, tool sales truck, utilities, municipalities and personal use. In addition to the traditional mobile power market for generators, due to its compactness and clean power, the AuraGen could potentially allow for applications that were not practical until now, particularly in areas that require computers and other sensitive instruments. One area where the AuraGen could be used with great advantages in both cost and logistics is the military. In military applications, getting quiet clean power from vehicles at low speed could potentially be critical as the Army changes to digital applications with numerous sophisticated electronics and sensors. The US Army has been testing the AuraGen product for over two years for numerous applications and to date the results show a reliable and effective system that can be used by the military. The Company is currently working with the US Army for the use of the AuraGen in multiple army vehicle types. Another area where the AuraGen could potentially offer unique possibilities is in the telecommunication industry. Currently the AuraGen is used by a number of broadcasting TV stations in their mobile news vehicles. The AuraGen is also being used by cable companies for numerous applications. The technical possibilities of the AuraGen have generated numerous interests from utilities as well as municipalities across the nation. Over 23 utilities in the U.S. have also purchased and are evaluating the AuraGen for their applications and requirements. The Company has shipped a number of AuraGen units to two major telecommunication companies and numerous state and federal agencies are evaluating the AuraGen for their specific applications. The Company is positioning itself in the market place as a turn key mobile power solution that is safer, more reliable, more convenient, with better quality at an effective cost. The safer solution is based on the following: a) no need to carry fuel in a container, b) no exposed hot components to touch/start, c) nothing heavy to lift, d) no pull start required, e) power outlets located away from hot components and f) not easily stolen. The increased reliability is based on using the standard vehicle engines as compared to small stand-alone engines. The system does not require any maintenance (except normal belt wear and tear) and does not have any starting problems associated with gensets. The system uses the standard vehicle exhaust system, which results in a quieter, cleaner power generating system. The AuraGen solution provides convenient power by: a) not using up valuable cargo space, b) not requiring an additional fuel tank, c) no need to wait for the genset to cool down, d) available power while driving or parked and e) the power setup and use is totally transparent to the user. The quality of power delivered by the AuraGen system is pure 60 or 50 Hz sine wave at a constant voltage. As a result one can operate sensitive equipment such as computers and coarse power such as tools and compressors at the same time. 2. Electromagnetic Valve Actuator (EVA(TM)) EVATM is an electromagnetic actuator capable of opening and closing internal combustion engine valves, replacing the mechanical camshaft on an engine. Two major benefits arise from the EVA's ability to open and close the valve electromagneticaly: 1) the camshaft and associated mechanical hardware can be eliminated; and 2) the opening and closing of the intake and exhaust valves can be commanded by the engine computer. Computer control of the valve timing has potentially material benefits to engine performance, fuel economy and emissions. With EVATM, the computer can precisely control the amount of air that is allowed into the engine in the same way that modern fuel injectors control the amount of fuel. By optimizing this "fuel-air mixture" dynamically as a function of engine RPM and load, optimum engine performance can be achieved over the entire operating range of the engine. With a standard camshaft, the engine can be optimized at only one range of RPM and load conditions. That is why very high performance engines idle "rough", as they are optimized for high RPM, thereby sacrificing smoothness at low RPM. By optimizing the fuel-air mixture dynamically, both performance (horsepower) and fuel economy will increase, while emissions are expected to decrease. The entire camshaft assembly, which includes the timing chain, camshaft and rockerarms is replaced by very simple valve actuators. Other emission systems currently on the vehicle, such as the EGR (exhaust gas recirculation) and IMRC (intake manifold runner control) valves can be eliminated. The throttle assembly can also be eliminated by using EVATM to control the amount of air going into the engine. In recent years, the Company has entered into agreements with 15 companies to retrofit EVA's on different types of diesel, automobile and motorcycle engines for evaluation and testing. During Fiscal 1998 an EVA system was delivered to a major domestic Original Equipment Manufacturer (OEM) for the purpose of evaluating EVA for possible use in its automobile production. In Fiscal 1998, the Company developed a new, more reliable servo control system that provides reduced power usage and reduced noise over the entire RPM range. In addition, the Company started work on an improved latching mechanism for EVA that will further reduce noise in the system. In Fiscal 1999 as part of its refocus, the Company temporarily suspended its activities on further EVA development and commercialization to focus its resources on the AuraGen. The Company is however, pursuing licensing of this technology to third parties. The Company has not yet entered into any licensing agreements for EVA. C. Certain Product Risk Factors The Company's business on a going-forward basis is focused on the AuraGen family of products and on royalties for the AMA technology. While the technology for the AuraGen has been extensively tested and verified , there are significant risks associated with developing a market place for such a new product. The Company is totally dependent on Daewoo Electronics for exploiting the AMA technology. Certain of these risk factors are discussed below. 1. AuraGen(R) The AuraGen is a new product with limited history in the market place. There can be no assurances that the product will succeed in the marketplace. Currently, the Company's AuraGen is being evaluated by the U.S. Army with a potential for a contract to install the AuraGen in thousands of military vehicles. No assurances can be given when or if the contract will materialize and what the ultimate size of the contract may be. The U.S. Army has recently completed the field test of 5kW and 10kW AuraGens. No assurances can be given as to if and when the US Army will conduct other tests. The Company has recently delivered to the U.S. Army 10kW AuraGens. No assurances can be given that the Army will purchase any material quantities of this product. The U.S. Marine Corp. has recently purchased 5kW AuraGens for evaluation. No assurances can be given that any sizable contract will develop. The AuraGen is currently configured for 110 and 240 volts. The 240V systems that are in use in other countries are different from the U.S. 240-Volt system. The Company is currently providing a solution that requires an additional transformer. A future solution may incorporate the required changes into the Electronic Control Unit ("ECU"). While the Company expects it is straightforward to make the changes to the international 240 Volt, it has not been done as yet. No assurances can be given as to when or if the changes will be made. The Company has recently completed the development of a 10kW AuraGen in the same geometric envelope as the 5kW unit. No assurances can be given that such a device will succeed in the market place. The Company is currently working with General Motors, a major automotive OEM in regard to the AuraGen. Recently General Motors has exhibited the AuraGen as a potential option in selected future concept vehicles. No assurances can be given that the Company's AuraGen will be offered by General Motors as an OEM option. 2. Actuated Mirror Array (AMA(TM)) The Company licensed its AMA technology to Daewoo Electronics, Co., Ltd of Korea ("Daewoo"). Since 1992, Daewoo has been responsible for the commercialization, production and sale of the AMA products. Daewoo in Fiscal 1999 announced the completion of the commercialization of the AMA. Due to Daewoo's financial crisis, no assurances can be given as to the future plans of the AMA technology at Daewoo. The AMA(TM)/Aurascope(TM) is a new product without a history in the marketplace. There can be no assurances that the product will succeed in the marketplace. The Company's rights under the license agreement provide for a royalty to be paid on every unit sold by Daewoo and 50% of all sublicensing fees collected by Daewoo. No assurances can be given as to when and if the royalty stream will start. D. Competition The Company is involved in the application of its technology to a variety of products and services and, as such, faces substantial competition from companies offering different and competitive technologies. The Company believes the principal competitive factors in the markets for the Company's products include the ability to develop and market technologically advanced products to meet changing market conditions, price, reliability, product support and the ability to secure sufficient capital resources for the often substantial periods between technological concept and commercialization. The Company's ability to compete will also depend on its continued ability to attract and retain skilled and experienced personnel, to develop and secure patent and other protection for its technology and to exploit commercially its technology prior to the development of competing products by others. The Company competes with many companies that have more experience, name recognition, financial and other resources and expertise in research and development, manufacturing, testing, and obtaining regulatory approvals, marketing and distribution. Other companies may also prove to be significant competitors, particularly through their collaborative arrangements with research and development companies. Portable generators ("Gensets") meet a large market need for auxiliary power. Millions of units per year are sold in North America alone, and millions more are sold across the world to meet market demands for 1 to 10 kilowatts of portable power. The market for these power levels basically addresses the commercial, leisure and residential markets, and divide essentially into: a) higher power, higher quality and higher price commercial level units; and b) lower power, lower quality and lower price level units. There is significant competition in the auxiliary power market from portable generator sets with such companies as Onan, Honda and Kohler which are well-established and respected brand names in the genset market for high reliability auxiliary power generation. There are presently 44-registered genset manufacturers. The following table is a summary comparing the leading Genset products with the AuraGen(TM).
TABLE 1: GENERATORS Onan Honda Honda Kohler AuraGen(TM) Parameters Marquis 5000 EG5000X EX5500 5CKM G5000 ------------------------- ------------------- ----------------- ------------------- ----------------- ----------------- Rated Power 5,000 W 4,500 W 5,000 W 5,000 W 5,000 W Weight 258 lbs/117.3 kg 146 lbs/66.4 kg 393 lbs/178.6 kg 268 lbs/122 kg 68 lbs/30.9 kg Cubic Feet/ Cubic Meters 6.72/.19 5.39/.15 26.80/.76 3.71/0.11 0.25/0.01 Output 120 V 120/240 V 120/240 V 120/240 V 120/240 V Engine RPM @ Rated Output 1,800 3,600 3,600 1,800 1,300 Noise (db @10 Ft.)` 73.5 82 65 88.5 64 Load-Follower Economy No No No No Yes
In addition to competition from gensets, there are six major manufacturers of Inverters in the United States including Vanner, Dimension and Heart. Inverters provide strong competition in specific markets of the overall market place for mobile power. The specific markets where inverters are strong competitors are ambulance, fire and rescue, small recreational vehicles and telecommunications. Limitations of Inverters: o Inverters address a much more limited and specialized market than gensets; o The most significant portion of inverter sales are in the lower power range: i.e., 2500 watts or lower. o True quality inverter power above 2500 watts requires a 24-volt automotive electrical system (twice 12 volts); and the maximum output for quality power in the commercial market is on the order of 4800 watts. (See Table 2). o Higher quality power (pure sine wave and well-regulated 60Hz) is a significant cost factor in inverters (Table 2). o Often, inverters require upgraded vehicle alternator and battery harness, and--for extended use period without battery charging--an additional battery pack.
TABLE 2: INVERTERS Heart I/F Vanner Vanner Vanner AuraGen(TM) Parameters Freedom 25 Bravo 2600 TB30-12 A40-120X G5000 1. Max Rated Power (Watts) 2500 2600 2800 4800 5000 2. Weight (LBS) 56 70 75 110 68 2A. Weight Battery Pack Add/No Add/No Add/No No No 3. Overall Cubic In. 1207.5 1866.73 1800 2595.94 432.73 4. 60 Hz Yes Yes Yes Yes Yes 5. Sine Wave @ All RPM Modified Modified Yes Modified Yes 6. Battery Discharge Operation Yes Yes Yes No No 7. Vehicle Engine Noise (db @ 10Ft.) 64 64 64 64 64 8. Load Follower-Economy Yes Yes Yes Yes Yes
E. Manufacturing The AuraGen is assembled at Aura's facility in El Segundo, California with parts which are produced by various suppliers. In Fiscal 1996 the Company acquired a 27,692 square foot manufacturing facility in El Segundo for the AuraGen production line. In Fiscal 1998, the Company set up the production facilities in the acquired building. This facility is for assembly and testing and has a production capability of 5,000 units per month per operating shift. The Company leases an approximate 38,000 square foot ceramic facility in New Hope, Minnesota. Subsequent to year end the Company sold its ceramics division and no longer leases this facility. F. Quality Assurance and Testing As the Company focuses its activities on the AuraGen, quality assurance and testing is a very important component. The Company performs qualification testing on the AuraGen hardware components, Electronic Control Unit ("ECU"), all software and on installed in-vehicle systems to ensure reliability in the field. The qualification testing includes; 1) in-house endurance testing, 2) in-house parametric thermal testing, 3) in house power quality testing and 4) independent laboratory environmental testing. In addition, field failure testing is performed on all returned units. In addition to the qualification testing, the Company has established a Quality Management system, and is in pursuit of both ISO and QS 9000 registration. Elements include a controlled manufacturing lot traceability system, documentation and configuration control system, as well as acceptance test and compliance procedures at all manufacturing levels, including suppliers. The company also uses automated tools for SPC, In-Process Inspection and Functional Test on its AuraGen assembly line. G. Product Development Expenditures During the fiscal years ended February 29, 2000, February 28, 1999, and February 28, 1998 the Company spent approximately $ 0.1 million, $ 2.0 million and $ .5 million, respectively, on Company sponsored research and development activities. The Company plans to continue its research and may incur substantial costs in doing so. All of the Company's sponsored R & D is focused on technological enhancements and product developments for the AuraGen. H. Patents Since Aura is engaged in the development and commercialization of proprietary technology, it believes patents and the protection of proprietary technology are important to its business. The Company's policy is to protect its technology by, among other ways, filing patent applications for technology which it considers important to the development of its business. The U.S. Patent Office has to date issued 78 patents. A majority of these patents expire between the years 2008 and 2015. The Company's first issued Auragen patent however, expires in the year 2017. Of the issued patents, 29 pertain to its automotive/industrial applications, 21 pertain to its electrooptical applications and 28 pertain to sound applications. There are additional patent applications in various stages of preparation for filing and numerous patents are pending. There are no assurances that any of the patent applications or any new other patents will be issued in the future. The Company believes that its issued and allowed patents enhance its competitive position. I. Employees As of February 29, 2000 the Company employed approximately 85 persons. The Company believes that its relationship with its employees is good. The Company is not a party to any collective bargaining agreements. J. Principal Sources of Revenues For the year ended February 29, 2000, ceramics products were the largest single source of revenue on a consolidated basis, constituting approximately $2.9 million or 40% of net revenues. Sound related products totaled approximately $.6 million or 8% of net revenues. License fees for sound related patents constituted $1.5 million or 21% of revenues. For the year ended February 28, 1999, multi-media products and modems were approximately $46.8 million or 57.4% of net revenues, sound related products were approximately $29 million or 35.6% of net revenues. With the sale of the sound related operations in Fiscal 2000, and the sale of the ceramics facility subsequent to Fiscal 2000, the principal source of revenue going forward will be related to the Company's AuraGen technology. K. Significant Customers The Company sold ceramics related products to a single significant customer during Fiscal 2000 for a total of approximately $2.1 million or 29.7% of net revenues. After Fiscal 2000 this customer will not be a significant customer as the Company has sold the ceramics division. ITEM 2. PROPERTIES The Company owns a 46,000 square foot headquarters facility in El Segundo, California and a 27,692 square foot manufacturing facility also in El Segundo, California for its AuraGen product. These properties are encumbered by a deed of trust securing a Note in the original principal amount of $5,450,000. The Company leases an approximate 38,000 square foot ceramic facility in New Hope, Minnesota. Subsequent to year end the Company sold its ceramics division and no longer leases this facility. ITEM 3. LEGAL PROCEEDINGS The Company is engaged in various legal actions listed below. In the case of a judgment or settlement, appropriate provisions have been made in the financial statements. Shareholder Litigation Barovich/Chiau v. Aura In May, 1995 two lawsuits naming Aura, certain of it directors and executive officers and a former officer as defendants, were filed in the United States District Court for the Central District of California, Barovich v. Aura Systems, Inc. et. al. (Case No. CV 95-3295) and Chiau v. Aura Systems, Inc. et. al. (Case No. CV 95-3296), before the Honorable Manuel Real. The complaints purported to be securities class actions on behalf of all persons who purchased common stock of Aura during the period from May 28, 1993 through January 17, 1995, inclusive. The complaints alleged that as a result of false and misleading information disseminated by the defendants, the market price of Aura's common stock was artificially inflated during the class period. The complaints were consolidated as Barovich v. Aura Systems, Inc., et. al. A settlement agreement for this proceeding was submitted to the Court on July 20, 1998, for preliminary approval, at which time the Court denied the plaintiffs' motion for approval of the settlement. On September 22, 1998, the Company and certain of its officers and directors renoticed their motion for summary judgment. Thereafter, on January 8, 1999, the plaintiffs and the defendants in the Barovich action executed a Stipulation of Settlement pursuant to which the Barovich action would be settled in return for payments by Aura and its insurer to the plaintiff's settlement class and plaintiff's attorneys in the amount of $2.8 million in cash (with $800,000 to be contributed by Aura and $2 million to be contributed by Aura's insurer, subject to a reservation of rights by the insurer against the insureds) and $1.2 million in cash or common stock, at the Company's option, to be paid by Aura. Subsequently the parties and the insurer entered into an amended settlement agreement. As amended the settlement calls for the total settlement amount of $4 million to remain the same, with the insurer contributing $1.8 million, and the remaining $2.2 million to be paid by Aura in cash over a period of three years, with accrued interest at the rate of 8% per annum. The settlement was preliminarily approved by the Court on December 6, 1999, and finally approved in or about April, 2000. Morganstein v. Aura On April 28, 1997, a lawsuit naming Aura, certain of its directors and officers, and the Company's independent accounting firm was filed in the United States District Court for the Central District of California, Morganstein v. Aura Systems, Inc., et. al. (Case No. CV 97-3103), before the Honorable Steven Wilson. A follow-on complaint, Ratner v. Aura Systems, Inc., et. al. (Case No. CV 97-3944), was also filed and later consolidated with the Morganstein complaint. The consolidated amended complaint purports to be a securities class action on behalf of all persons who purchased common stock of Aura during the period from January 18, 1995 to April 25, 1997, inclusive. The complaint alleges that as a result of false and misleading information disseminated by the defendants, the market price of Aura's common stock was artificially inflated during the Class Period. The complaint contains allegations which assert that the company violated federal securities laws by selling Aura Common stock at discounts to the prevailing U.S. market price under Regulation S without informing Aura's shareholders or the public at large. In June, 1998, the Court entered an order staying further discovery in order to facilitate completion of settlement discussions between the parties. On October 12, 1998, the parties entered into a stipulation for settlement of all claims, subject to approval by the Court. Under the stipulation for settlement Aura agreed to pay $4.5 million in cash or stock, at Aura's option, plus 3.5 million warrants at an exercise price of $2.25. In addition, Aura's insurance carrier agreed to pay $10.5 million. The settlement was finally approved by the Court in October 1999 and was thereafter amended in December 1999 to allow Aura to defer payment of the settlement amount until April 2000 in exchange for an additional 2 million shares of Aura Common Stock, subject to certain adjustments.The deferral resulted from the limitation on the number of shares authorized. the final distribution of stock and warrants to class members occured in April and May 2000. NewCom Related Litigation Deutsche Financial Services v. Aura In June, 1999, a lawsuit naming Aura was filed in the United States District Court for the Central District of California, Deutsche Financial Services ("DFS") vs. Aura (Case No. 99-03551 GHK (BQRx)). The complaint follows DFS' termination of its credit facility with NewCom of $11,000,000 and seizure of substantially all of NewCom's collateral in April, 1999. It alleges, among other things, that Aura is liable to DFS for NewCom's indebtedness under the secured credit facility purportedly guaranteed by Aura in 1996, well prior to the NewCom initial public offering of September 1997. In the proceeding, DFS sought an order to attach Aura's assets which was denied following an evidentiary hearing before the Honorable Brian Quinn Robbins, U.S. Magistrate, and the matter has been ordered by the District Court to binding arbitration. Aura has now responded in arbitration, denying DFS'claims and has asserted in its defense, among other things, that the guarantee, if any, is discharged. In addition, Aura through its counsel, has asserted cross-claims for, among other things, tortious lender liability, alleging that DFS wrongfully terminated the NewCom credit facility, wrongfully seized the NewCom collateral and wrongfully foreclosed upon NewCom collateral, acting in a commercially unreasonably manner. A panel of three arbitrators has been selected and appointed by the American Arbitration Association, and a hearing set for May, 2000 was suspended by the panel without yet scheduling a new hearing date. The Company believes it has meritorious defenses and cross-claims. However, no assurances can be given as to the ultimate outcome of this proceeding. Excalibur v. Aura On November 12, 1999, a lawsuit was filed by three investors against Aura and Zvi Kurtzman, Aura's Chief Executive Officer, in Los Angeles Superior Court entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054) arising out of two NewCom, Inc. financings consummated in December 1998. The NewCom financings comprised (1) a $3 million investment into NewCom in exchange for NewCom Common Stock, Warrants for NewCom Common Stock, and certain "Repricing Rights" which entitled the investors to receive additional shares of NewCom Common Stock in the event the price of NewCom Common Stock fell below a specified level, and (2) a loan to NewCom of $1 million in exchange for a Promissory Note and Warrants to purchase NewCom Common Stock. As part of these financings Aura agreed with the investors to allow their Repricing Rights with respect to NewCom Stock to be exercised for Aura Common Stock, at the investors' option. Aura also agreed to register Aura Common Stock relating to these Repricing Rights. The Plaintiffs allege in their complaint that Aura breached its agreements with the Plaintiffs by, among other things, failing to register the Aura Common Stock relating to the Repricing Rights. The Plaintiffs further allege that Aura misrepresented its intention to register the Aura shares in order to induce the Plaintiffs to loan $1.0 million to NewCom. The Complaint seeks damages of not less than $4.5 million. In January 2000 Aura filed counterclaims against the Plaintiffs, including claims that the Plaintiffs made false representations to Aura in order to induce Aura to agree to issue its Common Stock pursuant to the Repricing Rights. The parties have agreed to submit this matter to mediation on June 28, 2000. The Company believes that it has meritorious defenses and counterclaims to the Plaintiffs' allegations. However, no assurances can be given as to the ultimate outcome of this proceeding. Securities and Exchange Commission Settlement. In October, 1996, the Securities and Exchange Commission ("Commission") issued an order (Securities Act Release No. 7352) instituting an administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The proceeding was settled on consent of all the parties, without admitting or denying any of the Commission's findings. In its order, the Commission found that Aura and the others violated the reporting, recordkeeping and anti-fraud provisions of the securities laws in 1993 and 1994 in connection with its reporting on two transactions in reports previously filed with the Commission. The Commission's order directs that each party cease and desist from committing or causing any future violation of these provisions. The Commission did not require Aura to restate any of the previously issued financial statements or otherwise amend any of its prior reports filed with the Commission. Neither Mr. Kurtzman nor anyone else personally benefited in any way from these events. Also, the Commission did not seek any monetary penalties from Aura, Mr. Kurtzman or anyone else. For a more complete description of the Commission's Order, see the Commission's release referred to above. Other Legal Actions The Company is also engaged in other legal actions. In the opinion of management, based upon the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect. ITEM 4. Submission of Matters to a vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since 1988, Aura Common Stock has been quoted on the Nasdaq Stock Market under the trading symbol "AURA". On May 21, 1991, Aura shares became listed on the Nasdaq National Stock Market. On July 21, 1999 the Company's shares were delisted from Nasdaq National Market. This action was taken as a result of the Company's failure to meet the filing, minimum $1.00 bid price and listing of additional shares as stated in the Market Place Rules. Since that date the Company's stock has traded on the over the counter market. Set forth below are high and low sales prices for the Common Stock of Aura for each quarterly period in each of the two most recent fiscal years. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions in the Common Stock. The Company had approximately 4,400 stockholders of record as of June 12, 2000. Period High Low Fiscal 1999 First Quarter ended May 31, 1998 $3.69 $2.59 Second Quarter ended August 31, 1998 $1.25 $1.00 Third Quarter ended November 30, 1998 $1.81 $0.91 Fourth Quarter ended February 28, 1999 $1.50 $0.34 Fiscal 2000 First Quarter ended May 31, 1999 $0.50 $0.22 Second Quarter ended August 31, 1999 $0.28 $0.06 Third Quarter ended November 30, 1999 $0.51 $0.06 Fourth Quarter ended February 29, 2000 $0.42 $0.17 On June 12, 2000, the average high and low reported sales price for the Company's Common Stock was $0.315. Dividend Policy The Company has not paid any dividends on its Common Stock and currently intends to retain any future earnings for use in its business. The Company does not anticipate paying any dividends on its Common Stock in the foreseeable future but has no restrictions preventing it from paying dividends. Changes in Securities and Use of Proceeds For information regarding equity securities sold or issued in restructuring transactions by the Company during Fiscal 2000, see debt restructuring in Liquidity and Capital Resources. ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data has been taken or derived from the audited consolidated financial statements of the Company and should be read in conjunction with and is qualified in its entirety by the full consolidated financial statements, related notes and other information included elsewhere herein. The data for Fiscal 2000, 1999 and 19998 has been restated to reflect discontinued operations. The data for Fiscal 1997 and 1996 hs not been revised as the change in the scope of the Company's operations would not provide additional relevant comparison.
AURA SYSTEMS, INC. AND SUBSIDIARIES February 29, February 28, February 28, February 28, February 29, 2000 1999 1998 1997 1996 Net Revenues $ 5,788,221 $53,650,025 $103,939,641 $109,950,202 $ 77,088,850 ------------- ----------- ------------ ------------ ------------ Cost of goods and overhead 13,424,304 130,437,194 71,774,522 86,350,828 71,849,204 Expenses: Research and development 148,443 1,996,198 475,992 6,022,586 5,225,735 Impairment of long-lived assets -- 5,838,466 -- -- -- Selling, general and administrative expenses 10,725,397 64,131,072 35,266,048 18,542,840 26,399,794 ------------- ---------- ---------- ----------- ---------- Total costs and expenses 24,298,144 202,402,930 107,516,562 110,916,254 103,474,733 ------------- ---------- ---------- ----------- ----------- (Loss) From Operations (18,509,922) (148,752,905) (3,576,921) (966,052) (26,385,883) Other (Income) and Expense Interest expense (income) 4,476,690 11,577,990 6,450,741 1,415,934 289,793 Termination of License Agreements -- -- 3,114,030 -- -- Loss on Disposal of Assets and Investments (259,724) 5,809,811 -- -- -- Gain on Sale and Issuance of Subsidiary Stock -- (811,657) (12,632,265) (250,000) -- Class Action Litigation and Other Settlements 2,777,762 7,717,518 1,700,000 -- -- Equity in Losses of Unconsolidated Joint Ventures -- 6,268,384 1,937,747 -- -- Other (1,101,279) 406,576 (220,291) 40,642 -- Provision (benefit) for taxes -- 566,635 (1,275,555) 570,484 -- Minority interests -- (36,934,376) 946,405 -- -- Loss in excess of basis of subsidiary -- (8,080,695) -- -- -- -------------- ---------- ----------- --------- --------- Loss from continuing operations (24,403,371) (135,273,091) (3,597,733) (2,880,111) (26,087,090) Discontinued Operations: Loss from Discontinued Operations, Net of taxes (4,l31,501) (14,875,065) (8,038,807) -- -- Extraordinary Item Gain on extinguishment of debt obligations, net of income taxes 19,068,916 -- -- -- -- ----------- ----------- ---------- ---------- ----------- Net loss $(9,465,956) $(150,148,156) $(11,636,540) $(2,880,111) $(26,097,090) =========== ============= ============ =========== ============ NET (LOSS) PER COMMON SHARE $ (0.08) $ (1.74) $ (.15) $ (.04) $ (.48) ============== ============= ============== ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES 124,293,861 85,831,688 79,045,290 68,433,521 53,860,527 =========== ============ ========== ========== ========== Working capital (deficit) 1,376,215 (4,869,876) 78,143,895 62,310,715 71,362,882 Total assets 56,122,478 90,143,392 227,302,629 182,528,399 134,080,568 Total liabilities and deferrals 54,959,832 103,797,049 110,400,761 57,050,812 34,917,462 Net stockholders' equity (deficit) 1,162,646 (13,653,657) 116,901,868 125,477,587 99,163,106
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Statements in this report, including those concerning our expectations of future sales revenues, gross profits, research and development, sales and marketing, and administrative expenses, product introductions and cash requirements include forward-looking statements. As such, our actual results may vary materially from our expectations. Factors which could cause our actual results to differ from expectations include, but are not limited to, the following risks and contingencies: changed business conditions in the industrial and automotive industries and the overall economy; increased marketing and manufacturing competition and accompanying price pressures; contingencies in initiating production at new factories along with their potential underutilization, resulting in production inefficiencies and higher costs and start-up expenses and; inefficiencies, delays and increased depreciation costs in connection with the start of production in new plants and expansions. Relating to the above are potential difficulties or delays in the development, production, testing and marketing of products, including, but not limited to, a failure to ship new products and technologies when anticipated. There might exist a difficulty in obtaining raw materials, supplies, natural resources and any other items needed for the production of Company and other products, creating capacity constraints limiting the amounts of orders for certain products and thereby causing effects on the Company's ability to ship its products. Manufacturing economies may fail to develop when planned, products may be defective and/or customers may fail to accept them in the marketplace. In addition to these factors, risks and contingencies may exist as to the amount and rate of growth in the Company's selling, general and administrative expenses, and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. Furthermore, any financing or other financial incentives by the Company under or related to major infrastructure contracts could result in increased bad debt or other expenses or fluctuation of profit margins from period to period. The focus by the Company's business on any large order could entail fluctuating results from quarter to quarter. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and social and economic conditions, such as trade restrictions impose yet other constraints on any Company statements. The cost and other effects of legal and administrative cases and proceedings present another factor which may or may not have an impact. Overview During the Fiscal Year ended February 28, 1999 the Company devoted substantial financial and human resources in furtherance of its plan to manufacture and sell its patented, proprietary AuraGen product. As is often the case with the introduction of a capital intensive product launch, Aura anticipated that in order to implement it's business plan, working capital would be required in an amount that would exceed cash flow generated from any initial sales of the AuraGen. The Company expected that its working capital needs would be met from, among other things, the repayment by NewCom Inc. ("NewCom") of approximately $20 million of indebtedness which was due in September 1998 and with proceeds from external debt and equity financing. NewCom was ultimately unable to meet its obligations to Aura in September 1998, creating a significant cash shortfall to Aura. NewCom's operations in the third quarter of Fiscal 1999 were severely impacted by an industry-wide slump in the computer peripherals industry, causing a buildup in inventory and difficulty in collecting receivables from the mass merchants. NewCom's business reached a critical juncture in the fourth quarter of Fiscal 1999 when Deutsche Financial Services ("DFS"), which provided NewCom's principal working capital line, announced that it was unwilling to continue to advance working capital to NewCom under its credit facility. This, coupled with the retail mass merchants failure to pay NewCom for significant receivables past due and owing, resulted in NewCom ceasing its day-to-day operations, in early Fiscal 2000. These events substantially impacted Aura's results of operations for Fiscal 1999. Commencing January 1999 Aura's management was forced to take steps to curtail and refocus its plans and implement measures to reduce its overhead until such time as additional working capital could be obtained. These steps included employee layoffs, selling the Company's MYS speaker division to its former owners, eliminating the display division, temporarily suspending development activities associated with the EVA program, leasing all the assets of Electrotec, selling the AuraSound subsidiary assets and the licensing of the proprietary NRT and Line Source speaker technologies. In Fiscal 2000 the Company reached an agreement in principle to sell the ceramics assets located in New Hope, Minnesota, to the president of the subsidiary which was consummated in May 2000. The Company's ability to maintain its focused AuraGen operations required an infusion of working capital and the restructure of Aura's principal indebtedness. The Company believed that the restructure of this indebtedness was required in order to obtain working capital from other third parties. Management therefore developed an informal restructure plan under which approximately $35.0 million of indebtedness consisting of convertible debt and other debt obligations would be eliminated. By the end of the fourth quarter of Fiscal 2000 the Company had entered into agreements to eliminate approximately $32.2 million of debt, and providing for the conversion of most of such debt into equity. In addition, the Company has restructured approximately $17.4 million of additional debt ("Infinity Note") into a $12.5 million, 36 month 8 percent note, with interest only payments and a balloon payment at the end of the 36 months. In the third quarter of Fiscal 2000 the Company completed a private placement of $6.9 million in the form of common stock and debt that converted into common stock upon the restructuring of the Infinity Note. Since January 1999 the Company's limited resources have been devoted almost entirely to the AuraGen product, the restructure of debt and the raising of new working capital. Although the Company has experienced delays in the shipping of AuraGen products since the beginning of 1999 as a result of insufficient working capital, necessary parts started to be obtained by late 1999 and limited shipments of AuraGens are now being made. Over 33 state and city governments across the U.S. have purchased evaluation units and some cities have already specified the AuraGen as a requirement for some of their vehicles. Over 23 utilities in the U.S. have also purchased and are evaluating the AuraGen for their applications and requirements. The Company has shipped a number of AuraGen units to two major telecommunication companies and numerous state and federal agencies are evaluating the AuraGen for their specific applications. The Company continues to support the U.S. Army in its evaluation of the AuraGen (known to the U.S. Army as VIPER). The Company has continued to develop different engine mounts for the AuraGen. As of January 2000, the Company has started production of mounts that will fit most of the trucks, pickups and SUV's built in North America by the three major OEMs. The Company's 5KW model is now available for more than 70 different vehicle models and engine configurations. The Company continues to work closely with General Motors which has displayed the AuraGen on both the Sierra 2000 professional concept vehicle and the Terradyne concept vehicle. Fiscal 2000 as Compared to Fiscal 1999 Revenues Net revenues in Fiscal 2000 declined to $5.8 million from $53.7 million in Fiscal 1999, a decrease of 89.2%. In Fiscal 1999, net revenues included the revenues from the Company's Newcom subsidiary in which it held an approximate 41% interest at February 28, 1999. Newcom ceased operations shortly after the end of Fiscal 1999, resulting in no revenue being recorded for Newcom in the current Fiscal year. Included in Fiscal 2000 revenues are license fees pertaining to sound related patents of $1.5 million or 25.9% of revenues. License fees have a pronounced effect on the results of operations since there is little or no cost involved. Cost of Goods and Overhead Cost of goods and overhead decreased to $13.4 million from $130.4 million in the prior Fiscal year primarily as a result of the sale and shutdown of the Company's subsidiaries previously mentioned. Cost of goods and overhead for these subsidiaries totaled approximately $142 million in Fiscal 1999. Included in cost of goods and overhead for Fiscal 2000 is approximately $4.9 million in depreciation related to the AuraGen product. Gross Profit and Net Loss Gross profit for Fiscal 2000 was a negative 131.9% compared to a negative 143% in Fiscal 1999. The negative gross profit in the prior Fiscal year was primarily a result of the Company's Newcom subsidiary. The current year negative gross profit is a result of insufficient sales in the Company's remaining business to cover the overhead costs associated with the ongoing operations. Research and Development Research and development expense for Fiscal 2000 decreased to $.1 million from $2.0 million in Fiscal 1999. This is a result of the Company focusing its efforts on marketing and selling the AuraGen. Selling, General and Administrative Selling, general and administrative expenses decreased to $10.7 million in Fiscal 2000 from $64.1 million in Fiscal 1999. The primary reason for the decrease is the sale and shutdown of the Company's subsidiaries as previously mentioned. The Company also reduced the number of employees at the Company's headquarters in conjunction with the restructuring the Company has undergone in the current Fiscal year. Included in selling, general and administrative expenses for Fiscal 2000 are legal costs and expenses of approximately $1.7 million, and depreciation and amortization of approximately $950,000. Bad Debt Expense Bad debt expense decreased to approximately $163,000 in Fiscal 2000 from $12.8 million in the prior Fiscal year. Interest Expense Interest expense for Fiscal 2000 declined to approximately $ 4.5 million from $12.2 million in Fiscal 1999. This was primarily a result of the elimination of interest expense from the subsidiaries that were either sold or shutdown, and a result of the conversion of debt into equity and the forgiveness of debt. Discontinued Operations Effective March 1, 1999, the Company sold its MYS group of subsidiaries to the management of MYS and in June 1999, the Company sold the assets of its AuraSound division. Accordingly, the results of these operations have been classified as a single item as a discontinued operation. Fourth Quarter Adjustments Certain events occurred in the fourth quarter of Fiscal 2000 which impact the financial statements. The primary item that occurred was the forgiveness of debt by certain of the Company's creditors in the approximate amount of $19.1 million. Fiscal 1999 as Compared to Fiscal 1998 The Company continued its activity in development of commercial applications of its proprietary magnetic technologies. The second half of Fiscal 1999 had significant negative results from operations which caused significant cash shortfall problems that affected the entire operation. Revenues Net revenues in Fiscal 1999 declined to $53.6 million from $103.9 million, a decrease of 48.4%. The decrease was primarily due to the virtual shutdown of operations of NewCom in the last quarter of the fiscal year, coupled with the decline in sales of NewCom in the third quarter of the Fiscal year. The decline in sales was primarily a result of price pressures in the retail channel as well as a substantial decline in sales to one of NewCom's major customers. In the last half of the fiscal year, as NewCom's business began to deteriorate in conjunction with the overall deterioration of the computer peripherals industry, the levels of returned goods began to accelerate. In the last quarter of the fiscal year, when NewCom's operations virtually shutdown, returns increased dramatically as retailers began to ship back product for fear that NewCom would go out of business and would not be able to fulfill warranty and other business obligations. Magnification of this stemmed from its lender "DFS" and a judgement creditor each sending correspondence to the retail mass merchants asking that they remit payments to them. A court battle produced an order describing whom to pay, which was sent to the retail customer. The above actions added to the uncertainties of NewCom's future and further deteriorated NewCom's relationships with its customers. Cost of Goods and Overhead Cost of goods and overhead increased to $130.4 million in Fiscal 1999 from $71.8 million in Fiscal 1998. This increase both in dollar terms and as a percentage of revenues is primarily a result of the price pressures from the retail mass merchants which included the substantial rebates that were required in order to maintain shelf space, as well as the overall business conditions at the Company's NewCom subsidiary as described above. Gross Profit and Net Loss Gross profit for Fiscal 1999 was a negative 143% compared to 30.95% in Fiscal 1998, primarily due to the substantial drop in gross profit at NewCom in the third and fourth quarters of the Fiscal year. In the third and fourth quarters of the Fiscal year, price pressure applied by NewCom's major customers and inventory write-downs which reflected the change in the computer peripherals industry resulted in substantially higher costs of product sold as a percentage of the selling price. Coupled with the substantial rebates NewCom was required to offer, the resulting gross profit was negative. During the fourth quarter of Fiscal 1999 the Company experienced severe cash flow problems that had a major impact on the entire operations of the Company. The Company began to consolidate its operations around the AuraGen technology and product. The Company terminated all of its joint ventures due to its inability to support them. As the Company was cutting down and scaling back its operations the Company evaluated its asset utilization and concluded that certain asset values had been impaired. In addition numerous assets such as machinery and equipment that were no longer needed were sold at a loss. The Company over the years has made strategic investments in order to improve its utilization of certain technologies. As the company eliminated operations, these investments no longer retained their economic value. In addition to the Company`s heavy losses in its NewCom investment the Company was also a party to certain explicit written guarantees that were triggered when NewCom's business deteriorated. The following table summarizes certain fourth quarter events that contribute to the loss in Fiscal 1999. Termination of Joint Ventures $5.6 million Depreciation Expense $4.6 million Accounts Receivable reserves and write-off's $13.0 million Asset Impairment $9.4 million Interest Expense $3.5 million Disposed Assets $1.2 million Investment write-off's and losses $7.0 million Guarantees for NewCom $9.9 million NewCom loss (Aura Share) $45.8 million ------------- Total $100.0 million Research and Development Research and development expense for Fiscal 1999 increased to $2.0 million from $.5 million in Fiscal 1998 as the Company focused all its remaining resources on developing additional engine mounts for the AuraGen, and researching ways to expand its applications. Selling, General & Administrative Selling, general and administrative expenses increased to $64 million in Fiscal 1999 from $35.3 million in Fiscal 1998. The increase is primarily attributable to a substantial increase in sales and marketing related expenses at NewCom as the major retailers required higher levels of sales promotions and marketing allowances. Further, increased amortization of product design related costs were necessary to account for impairment of these assets due to shorter life cycles of products. Bad Debt Expense Bad debt expense in Fiscal 1999 increased to $13.3 million from $3.6 million in Fiscal 1998. Interest Expense Net interest expense for Fiscal 1999 increased to $12.0 million from $6.8 million in the prior Fiscal year. The increase is attributable to higher levels of borrowing and a quarterly fee being charged to interest expense on the $15 million note that was renegotiated in September of 1997. Liquidity and Capital Resources The working capital deficit decreased by approximately $4 million to a deficit of approximately $900,000 at Fiscal 2000 year end, with the current ratio improving slightly to .95:1 from .88:1. The principal differences in the Company's accounts from February 28, 1999 to February 29, 2000 are a decrease in cash and equivalents of $3.6 million, a decrease in net receivables of $5.9 million, a decrease in inventories of $7.3 and a decrease in accounts payable and accrued expenses of $25 million. The primary reason for these changes is the sale of the Company's MYS Corporation subsidiary and the sale of the speaker assets of AuraSound Inc. The Company's cash balances were $260,437 at February 29, 2000, $3,822,210 at February 28, 1999 and $6,079,411 at February 28, 1998. In Fiscal 2000 the Company received net proceeds of $7.4 million in a private placement and proceeds of $24,800 from the exercise of warrants. The net cash used in operating activities of $(15,568,917) million decreased by $8,745,083 million due primarily to the decrease in the loss incurred in addition to the decreases in accounts receivable, inventory and accounts payable as a result of the cessation of NewCom's business. Spending for property and equipment amounted to $15,938 in Fiscal 2000, $4,053,848 in Fiscal 1999 and $18,006,394 in Fiscal 1998. Of the Fiscal 2000, 1999 and 1998 amounts, nil, $1,910,611 and $16,096,180 respectively was due to the manufacture of tooling and the remainder was due to the expansion of facilities and purchases of equipment which was necessary in connection with research and development activities, services performed under various subcontracts and manufacturing requirements. The Company's cash flow generated from operating activities has to date not been sufficient to fund its working capital needs. In the past, the Company has relied upon external sources of financing to maintain its liquidity, principally private and bank indebtedness and equity financing, and the sale of assets. No assurances can be provided that these funding sources will be available in the future, or at the times and in the amounts necessary. The Company currently intends that funding required for future growth, operations or any joint ventures entered into would occur through a combination of existing working capital, operating profits, equity, sale of non-essential assets and favorable financial terms from vendors. The inability of the Company to obtain sufficient working capital at the times and in the amounts required would have a material adverse effect on the Company's business and operations. Current fixed monthly expenses corporate wide, average approximately $900,000, principally for labor, overhead, travel and professional fees. The Company and its subsidiaries lease space located in El Segundo and New Hope, Minnesota. Minimum monthly rents under the leases approximate $55,000. Rent expense was approximately $.9 million for Fiscal 2000, $1.8 million, for Fiscal 1999, and $1.3 million for Fiscal 1998. At February 29, 2000, the Company has no long term operating leases. Debt Restructuring Following is a description of the principal components of Aura's debt restructuring: Restructuring of RGC International Investors, LDC, Debt. Between October 1997 and March 1998 the Company issued an aggregate of $21.5 million of its convertible unsecured debentures to RGC International Investors, LDC ("RGC"). The debentures accrued interest at the rate of 7% per annum, with the entire principle amount due and payable between 2002 and 2003, and were convertible into common stock based upon a formula related to the market price of the Common Stock. In October 1998 the Company issued to RGC a $3 million convertible note which was secured by a lien on certain of the Company's assets. In October 1999 the Company entered into an agreement with RGC International Investors, LDC and a third party investor (AuraSound's assets purchaser) whereby RGC (i) sold to the third party the Company's three Convertible Unsecured Debentures (the "RGC Debentures"), in the aggregate principal amount of $17,365,000, (ii) exchanged with the Company its $3 million Secured Convertible Note for a new non-convertible Secured Note (the "New RGC Note") in the principal amount of $3 million, and (iii) cancelled Warrants to purchase 9,000,770 shares of the Company's Common Stock in exchange for new Warrants to purchase 1,000,000 shares of common stock exercisable at $0.375 per share. The New RGC Note bears interest at the rate of 8% per annum, with principal and interest payable no less frequently than quarterly. The New RGC Note continues to be secured by a lien on certain assets of the Company, including inventory and accounts receivable. Under the agreement with the new holder of the RGC Debentures, the RGC Debentures were convertible into a maximum of 46,500,000 shares of the Company's Common Stock unless Aura failed to complete the restructuring with Infinity. The holder of the RGC Debentures converted a portion of the RGC Debentures into 46,500,000 shares of Common Stock and canceled the remaining outstanding principal and interest owed under the RGC Debentures as of the consummation of the restructuring of approximately $17.4 million of outstanding Debentures held by Infinity. See "Restructuring of Infinity Investors Debt" below. Retirement of JNC Debt In June 1997 the Company issued a $4 million convertible debenture in a private placement JNC Opportunity Fund, Ltd. ("JNC"). The debenture accrued interest at the rate of 7% per annum, payable quarterly, and was due and payable in June 1999. The Debenture was convertible into shares of the Company's Common Stock at the then current market price at the time of conversion. The investor also received 318,000 warrants exercisable at $3.50 per share. In December 1999, the Company consummated an agreement with JNC Opportunity Fund, Ltd. resulting in the surrender for cancellation by JNC of the Company's Convertible Debenture and 318,000 warrants in exchange for a cash payment of $430,000, 3,500,000 shares of the Company's Common Stock and 113,000 Warrants exercisable at $0.375 per share expiring December 1, 2002. Restructuring of Infinity Investors Debt In March 1997 the Company issued $15 million of convertible Debentures to a group of accredited investors in a private placement. The Debentures were convertible into Common Stock of the Company in accordance with a stated formula. In October 1997 the Company and the investors entered into an Agreement modifying the Debentures to eliminate the conversion feature in exchange for increasing the interest rate on the principal to 18% and the payment of a quarterly fee of $935,000 for each quarter during which the Debentures remain outstanding. The stated maturity of the Debentures was shortened from March 2000 to September 1998. The Debentures, as modified, are secured by a Note from NewCom to Aura in the original principal amount of $17 million and 1,250,000 shares of NewCom stock, subject to adjustment under certain circumstances. As part of the modification, the Company issued warrants for an aggregate of 2,500,000 shares of Common Stock at an exercise price of $2.50 per share, subject to adjustment after one year under certain circumstances. The Company was unable to retire the Debentures upon their maturity in September 1998. As of February 28, 1999 these debentures had an outstanding balance of approximately $17.4 million. Subsequent to September 1998 the Company engaged in extensive negotiations with the holders of these Debentures. In February 2000 the Company consummated an agreement with these holders and a third party to exchange (the "Exchange") the Debentures for $3 million in cash, 1,111,111 shares of common stock, 100,000 Warrants exercisable at $0.375 per share, and new Secured Notes (the "New Secured Notes") in the aggregate principal amount of $12.5 million. The New Secured Notes are secured by a lien on the Company's assets, bear interest at the rate of 8% per annum, interest only payable quarterly, with the principal due three years from the date of the exchange. In the event of an uncured default under the New Secured Notes, the holder is entitled to convert the unpaid principal and interest into Common Stock of the Company, at $.60 per share. The Company is entitled to a discount if the New Secured Note is prepaid, which discount is initially 20% of the amount prepaid, and the discount declines ratably over the three year term of the New Secured Note. Restructuring of Trade debt In December 1999, the Company implemented a restructuring of approximately $10.8 million of trade debt held by certain trade creditors whereby the holders of a substantial portion of the trade debt have agreed to the repayment of outstanding trade debt over a period of three years, with interest at 8% per annum, commencing January 2000. Certain trade payables are subject to continuing negotiations with the creditors. Completion of Common Stock Private Placement In November 1999 the Company completed a private placement of approximately 27 million shares of its Common Stock at $0.27 per share, resulting in gross proceeds of approximately $6.9 million. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT Identification of Directors The following table sets forth all of the current directors, executive officers and key employees of Aura, their age and the office they hold with the Company. Executive officers and employees serve at the discretion of the Board. All directors hold office until the next annual meeting of stockholders of the Company and until their successors have been duly elected and qualified. Director Name Age Since Title Zvi Kurtzman 53 1987 Chief Executive Officer, Chairman, Board of Directors, member of Nominating Committee Harvey Cohen 66 1993 Director, member of Audit Committee Salvador Diaz-Verson, Jr. 47 1997 Director, member of Compensation Committees Stephen A. Talesnick 50 1999 Director, member of Compensation and Nominating Committees Norman Reitman 76 2000 Director, member of Audit Committee David F. Hadley 35 2000 Director, member of Compensation and Nominating Committees Sanford R. Edlein 56 2000 Director, member of Audit Committee Business Experience of Directors and Nominees During the Past Five Years Zvi Kurtzman is the CEO and Chairman of the Board of Directors of the Company and has served in this capacity since 1987. Mr. Kurtzman also served as the Company's President from 1987 to 1997. Mr. Kurtzman obtained his B.S. and M.S. degrees in physics from California State University, Northridge in 1970 and 1971, respectively, and completed all course requirements for a Ph.D. in theoretical physics at the University of California, Riverside. He was employed as a senior scientist with the Science Applications International Corp. a scientific research company in San Diego, from 1984 to 1985 and with Hughes Aircraft Company, a scientific and aerospace company, from 1983 to 1984. Prior thereto, Mr. Kurtzman was a consultant to major defense subcontractors in the areas of computers, automation and engineering. In October, 1996, the Securities and Exchange Commission ("Commission") issued an order (Securities Act Release No. 7352) instituting an administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The proceeding was settled on consent of all the parties, without admitting or denying any of the Commission's findings. In its order, the Commission found that Aura and the others violated the reporting, recordkeeping and anti-fraud provisions of the securities laws in 1993 and 1994 in connection with its reporting on two transactions in reports previously filed with the Commission. The Commission's order directs that each party cease and desist from committing or causing any future violation of these provisions. The Commission did not require Aura to restate any of the previously issued financial statements or otherwise amend any of its prior reports filed with the Commission. Neither Mr. Kurtzman nor anyone else personally benefited in any way from these events. Also, the Commission did not seek any monetary penalties from Aura, Mr. Kurtzman or anyone else. For a more complete description of the Commission's Order, see the Commission's release referred to above. Harvey Cohen is a director of the Company and has served in this capacity since August 1993. Mr. Cohen is President of Margate Advisory Group, Inc., an investment advisor registered with the Securities and Exchange Commission, and a management consultant since August 1981. Mr. Cohen has consulted to the Company on various operating and growth strategies since June 1989 and assisted in the sale of certain of the Company's securities. From December 1979 through July 1981, he was President and Chief Operating Officer of Silicon Systems, Inc., a custom integrated circuit manufacturer which made its initial public offering in February 1981 after having raised $4 million in venture capital in 1980. From 1975 until 1979, Mr. Cohen served as President and Chief Executive Officer of International Communication Sciences, Inc., a communications computer manufacturing start-up company for which he raised over $7.5 million in venture capital. From 1966 through 1975, Mr. Cohen was employed by Scientific Data Systems, Inc. ("S.D.S."), a computer manufacturing and service company, which became Xerox Data Systems, Inc. ("X.D.S.") after its acquisition by Xerox in 1979. During that time, he held several senior management positions, including Vice President-Systems Division of S.D.S. and Senior Vice President-Advanced Systems Operating of the Business Planning Group. Mr. Cohen received his B.S. (Honors) in Electrical Engineering in 1955 and an MBA in 1957 from Harvard University. Salvador Diaz-Verson, Jr. is a director of the Company and has served in this capacity since September 1997. Mr. Diaz-Verson is the founder, and since 1991 has been the Chairman and President of Diaz-Verson Capital Investments, Inc., an Investment Adviser registered with the Securities and Exchange Commission. Mr. Diaz-Verson served as president and member of the Board of Directors of American Family Corporation (AFLCAC Inc.) a publicly held insurance holding company, from 1979 until 1991. Mr. Diaz-Verson also served as Executive Vice President and Chief Investment Officer of American Family Life Assurance Company, subsidiary of AFLCAC Inc. from 1976 through 1991. Mr. Diaz-Verson is a graduate of Florida State University. He is currently a director of the board of Miramar Securities, Clemente Capital Inc., Regions Bank of Georgia and The Philippine Strategic Investment Holding Limited. Stephen A. Talesnick is a director of the Company and has served in this capacity since September 1999, following appointment by resolution of the Board of Directors to fill a vacancy pursuant to the Bylaws of the corporation. Mr. Talesnick has owned and maintained a private law practice since 1977, which is presently located in Beverly Hills. Mr. Talesnick specializes in business and financial transactions in addition to entertainment industry related matters. He originally practiced as an associate in the New York law firm of White & Case. In 1992, Mr. Talesnick became a financial advisor in the financial services industry and is registered with the Securities and Exchange Commission. Mr. Talesnick is a graduate of The Wharton School of Finance and Commerce at the University Of Pennsylvania and received his Juris Doctor degree from Columbia University School of Law. Norman Reitman is a director of the Company and has served in this capacity since March 6, 2000. He previously served as a director of the Company from January 1989 to September 1998. Mr. Reitman obtained his B.B.A. degree in business administration from St. Johns University in 1946 and became licensed as a public accountant in New York in 1955. Mr. Reitman is the retired Chairman of the Board and President of Norman Reitman Co., Inc., insurance auditors, where he served from 1979 until June 1990. Mr. Reitman was a senior partner in Norman Reitman Co., a public accounting firm, where he served from 1952 through 1979. Mr. Reitman served on the Board of Directors and was a Vice President of American Family Life Assurance Co., a publicly held insurance company, from 1966 until April 1991. David F. Hadley is a director of the Company and has served in this capacity since March 6, 2000. He is the founder and president of D.F. Hadley & Co., Inc. ("DFH&Co"). DFH&Co is a boutique financial services firm that provides consulting and advisory services to emerging growth companies located in the western United States. The principals of DFH&Co also seek to invest as principals in the equity securities of DFH&Co clients. Prior to founding DFH&Co in August 1999, Mr. Hadley was a managing director in the global investment banking group of BT Alex. Brown Inc., focusing on the media and communications sector. Mr. Hadley was employed by subsidiaries of Bankers Trust Corporation from 1986 to June 1999. He received his MSc. In Economic History (with distinction) from the London School of Economics and his A.B. from Dartmouth College (summa cum laude). Sanford R. Edlein, is a director of the Company and has served in this capacity since March 6,2000. He is a Certified Public Accountant, Certified Turnaround Professional, and has served as a consultant and senior executive for privately held and public companies for more than thirty years and has assisted in financial and operating matters, corporate governance, crisis management and mergers and acquisitions. He has served on the boards of public companies including Sport Supply Group, Inc., BSN Corporation, Tennis Lady, Escalade Corporation and American Equity Financial Corporation. Since 1998 he has been employed with Glass & Associates, Inc. a firm that specializes in turnaround and crisis management. From 1996 to 1998 he was president of Edlein & Associates, LLC. a consulting firm. From 1994 to 1996 he was CEO, COO and a member of the board of directors of Sport Supply Group, Inc. From 1965 through 1980 and 1989 through 1994, respectively, Mr. Edlein served as a partner and then managing partner of Grant Thornton LLP (Boston office). Mr. Edlein has a AAS degree from Bronx Community College and a BBA degree from City University of New York. MANAGEMENT Listed below are Executive Officers of the Company who are not directors or nominees, their ages, titles and background information. All the officers listed below hold their offices at the pleasure of the Board of Directors. Name Age Title Gerald S. Papazian 44 President, Chief Operating Officer Arthur J. Schwartz, Ph.D. 52 Executive Vice President Cipora Kurtzman-Lavut 43 Senior Vice President, Corporate Communications Neal B. Kaufman 55 Senior Vice President, Management Information Systems Steven C. Veen 44 Senior Vice President, Chief Financial Officer Michael I. Froch 38 Senior Vice President, General Counsel and Secretary Keith O. Stuart 43 Senior Vice President, Sales and Marketing Ronald J. Goldstein 58 Senior Vice President, Sales and Marketing Jacob Mail 49 Senior Vice President, AuraGen Operations Richard E. Van Allen 53 Senior Vice President, Industrial and Special Programs Gerald S. Papazian has been the Company's President and Chief Operating Officer since July 1997. He joined the Company in August 1988 from Bear, Stearns & Co., an investment-banking firm, where he served from 1986 as Vice President, Corporate Finance. His responsibilities there included valuation of companies for potential financing, merger or acquisition. Prior to joining Bear Stearns, Mr. Papazian was an Associate in the New York law firm of Stroock & Stroock & Lavan, where he specialized in general corporate and securities law with the extensive experience in public offerings. He received a BA, Economics (magna cum laude) from the University of Southern California in 1977 and a JD and MBA from the University of California, Los Angeles in 1981. He served as a trustee of the University of Southern California from 1994 to 1999. Arthur J. Schwartz, Ph.D. has been the Executive Vice President of the Company since February 1987. Dr. Schwartz obtained his M.S. degree in physics from the University of Chicago in 1971 and a Ph.D. in physics from the University of Pittsburgh in 1978. Dr. Schwartz was employed as a Technical Director with Science Applications International Corp., a scientific research company in San Diego, California from 1983 to 1984 and was a senior physicist with Hughes Aircraft Company, a scientific and aerospace company, from 1980 to 1984. While at Hughes, he was responsible for advanced studies and development where he headed a research and development effort for new technologies to process optical signals detected by space sensors. While at Aura, he served for 3 years on a Joint Tri Services Committee reporting to the U.S. Government on certain technology issues. Cipora Kurtzman-Lavut is Senior Vice President, Corporate Communications, and has served in this capacity since December 1991. She previously served as Vice President in charge of Marketing for the Company since 1988. She graduated in 1984 from California State University at Northridge with a B.S. degree in Business Administration. Neal B. Kaufman is Senior Vice President, Management Information Systems, and has served in this capacity since 1988. Mr. Kaufman graduated from the University of California, Los Angeles, in 1967 where he obtained a B.S. in engineering. He was employed as a software project manager with Abacus Programming Corp., a software development firm, from 1975 to 1985. He headed a team of software specialists on the Gas Centrifuge Nuclear Fuel enrichment program for the United States Department of Energy and developed software related to the Viking and Mariner projects for the California Institute of Technology Jet Propulsion Laboratory in Pasadena, California. Steven C. Veen, a Certified Public Accountant, is Senior Vice President, Chief Financial Officer, and has served in this capacity since March 1994. He joined the Company as its Controller in December 1992. Before that, he had over 12 years experience in varying capacities in the public accounting profession. Mr. Veen served from 1983 to December 1992 with Muller, King, Black, Mathys & Acker, Certified Public Accountants. He received a B.A. in accounting from Michigan State University in 1981. Michael I. Froch is Senior Vice President, General Counsel and Secretary of the Company and has served as General Counsel since March 1997 and as Secretary since July 1997. He joined the Company in 1994 as its corporate counsel. From 1991 through 1994, Mr. Froch was engaged in private law practice in California. Mr. Froch is admitted to the California and District of Columbia bars. He received his Juris Doctor degree from Santa Clara University School of Law in 1989, during which time he served as judicial extern to the Honorable Spencer M. Williams, United States District Judge for the Northern District of California. He received his A.B. degree from the University of California at Berkeley in 1984, serving from 1982 through 1983 as Staff Assistant to the Honorable Tom Lantos, Member of Congress. Keith O. Stuart is Senior Vice President, Sales and Marketing and has served in this capacity since November, 1999. Previously he served as President of the Company's Tech Center division, from 1995 to 1999 and has been in charge of hardware development for Aura since 1988. Mr. Stuart obtained his B.S. and M.S. degrees in electrical engineering from the University of California Los Angeles in 1978 and 1980, respectively. Mr. Stuart worked for Cyphermaster, Inc. during 1986 and was employed by Hughes Aircraft Company, a scientific and aerospace company, prior thereto. Mr. Stuart has designed and fabricated digitally controlled, magnetically supported gimbals that isolate the seeker portion of a United States Space Defense Initiative and has also developed a multi-computer automated test station for the evaluation of sophisticated electro-optical devices. Ronald J. Goldstein is Senior Vice President, Sales and Marketing, serving in this capacity since November, 1999. He is responsible for the marketing and sales of AuraGen to worldwide government agencies and the military and has served in various capacities at Aura since 1989. He holds two M.S. degrees in Computing Technology and the Management of R & D from George Washington University and has completed coursework for a Ph.D. in Nuclear Engineering from North Carolina State University. Mr. Goldstein has over 25 years of experience in high technology both in government and industry. Since 1989 Mr. Goldstein was responsible for all marketing and business development activities for the Company and served since 1995 as President of the Automotive/Industrial division of the Company. Prior to joining Aura, Mr. Goldstein was Manager of Space Initiatives at Hughes Aircraft Company, a scientific and research company, where he was responsible for the design, production and marketing of a wide variety of aerospace systems and hardware. Prior to joining Hughes in 1982, Mr. Goldstein was the Special Assistant for National Programs in the Office of the Secretary of Defense, and before that held high level program management positions with the Defense Department and Central Intelligence Agency. Jacob Mail is Senior Vice President, AuraGen Operations, serving in this capacity since November 1999. Previously he has served as Vice President of Operations from 1995 to 1999. Mr. Mail served over 20 years at Israeli Aircraft Industries, starting as a Lead Engineer and progressing to Program Manager. He was responsible for the development and production of hydraulic actuation, steering control systems, rotor brake systems and other systems and subsystems involved in both commercial and military aircraft. Systems designed by Mr. Mail are being used today all over the western world. In addition, Mr. Mail has extensive experience in the preparation of technical specifications planning and organizing production in accordance with customer specifications at full quality assurance. Dr. Richard E. Van Allen is Senior Vice President, Industrial and Special Programs, serving in this capacity since June 1999. He is currently the Program Manager for the military version of the commercial AuraGen generator. In addition, Dr. Van Allen manages ongoing electromagnetic actuator projects. He joined the company in 1990 and previously was Manager and Vice President of the AuraSound Division, and before that was Division manager of the Magnetics Division. In these positions, Dr. Van Allen has been involved in the development and manufacture of virtually every electromagnetic system produced by Aura Systems. Prior to joining Aura, he was a Laboratory Manager in Advanced Government Programs at the Hughes Aircraft Company Space and Communications Group. Before joining Hughes, Dr. Van Allen served as the Navigation Team Leader for the Voyager outer planets exploration program at the Jet Propulsion Laboratory. He received his B.S. degree in Aeronautical and Astronautical Engineering, along with an M.S. and Ph.D. in Aerospace Engineering, from Purdue University Family Relationships. Cipora Kurtzman-Lavut, a Senior Vice President, Corporate Communications, is the sister of Zvi Kurtzman, who is the Chief Executive Officer and a director of the Company. Jacob Mail, Senior Vice President, AuraGen Operations is a first cousin of Cipora Kurtzman-Lavut and Zvi Kurtzman. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and beneficial owners of more than ten percent of the Common Stock, to file with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. reports of ownership and changes in ownership of the Common Stock. Copies of such reports are required to be furnished to the Company. Based solely on its review of the copies of such reports furnished to the Company, or written representations that no reports were required, the Company believes that during its fiscal year ended February 29, 2000, all filing requirements applicable to its officers, directors, and ten percent beneficial owners were satisfied except that Harvey Cohen, Zvi Kurtzman, Keith Stuart, and Dr. Richard Van Allen failed to timely file a single Form 5 and Norman Reitman failed to file a single Form 3. ITEM 11. EXECUTIVE COMPENSATION Cash Compensation For Executives The following table summarizes all compensation paid to the Company's Chief Executive Officer, and to the four most highly compensated executive officers of the Company other than the Chief Executive Officer whose total compensation exceeded $100,000 during the fiscal year ended February 29, 2000.
SUMMARY COMPENSATION TABLE Annual Long Term All Other Compensation(1) Compensation Awards Compensation(2) Name and Principal Position Year Salary Options/SARs Zvi (Harry) Kurtzman (1) 2000 $386,232 0 $ 0 Chief Executive Officer 1999 384,290 1,000,000 1998 245,018 0 Gerald S. Papazian (1) 2000 $217,777 0 $2,392 President and Chief Operating 1999 203,025 100,000 Officer 1998 154,737 0 Arthur J. Schwartz (1) 2000 $210,192 0 $ 0 Executive Vice President 1999 204,895 500,000 1998 172,115 0 Steven C. Veen(1) 2000 $205,469 0 $2,257 Senior Vice President and 1999 196,412 100,000 Chief Financial Officer 1998 150,127 0 Cipora Kurtzman-Lavut 2000 $203,942 0 $ 0 Senior Vice President 1999 199,221 500,000 1998 162,225 0
(1) The amounts shown are the amounts actually paid to the named officers during the respective fiscal years. Because of the timing of the payments, these amounts do not represent the actual salary accrued by each individual during the period. The actual salary rate for these individuals which was accrued during the fiscal year ended February 2000, 1999 and 1998, respectively, were as follows: Zvi Kurtzman - $385,000, $385,000, $200,000; Gerald S. Papazian - $210,000, $210,000, $140,000; Arthur J. Schwartz - $205,000, $205,000, $160,000; Steven C. Veen - $200,000, $200,000, $150,000; Cipora Kurtzman-Lavut - $195,000, $195,000, $150,000. Of the compensation paid in Fiscal 2000, $144,561, $34,781, $78,201, $44,918 and $58,520 was paid in the form of restricted common stock of the Company to Mr. Kurtzman, Mr. Papazian, Mr. Schwartz, Mr. Veen and Ms. Kurtzman-Lavut, respectively. (2) Such compensation consisted of total Company contributions made to the plan account of each individual pursuant to the Company's Employees Stock Ownership Plan during the fiscal year ended February 29, 2000. No cash bonuses or restricted stock awards were granted to the above individuals during the fiscal years ended February 29, 2000, February 28, 1999 and February 28, 1998. Effective September 1997, each non-employee director is entitled to receive $30,000 per year for serving as a director, and $5,000 per year for each director who serves on the audit committee. The following table summarizes certain information regarding the number and value of all options to purchase Common Stock of the Company held by the Chief Executive Officer and those other executive officers named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Number of Unexercised Value of Unexercised Options/SARs at Fiscal In-the-Money Options/ Name Year End SARs at Fiscal Year End* Exercisable Unexercisable Exercisable Unexercisable Zvi Kurtzman 870,000 600,000 $ 0 $ 0 Gerald S. Papazian 166,000 60,000 $ 0 $ 0 Arthur J. Schwartz 515,000 300,000 $ 0 $ 0 Steven C. Veen 215,000 210,000 $ 0 $ 0 Cipora Kurtzman-Lavut 515,000 300,000 $ 0 $ 0
*Based on the average high and low reported prices of the Company's Common Stock on the last day of the fiscal year ended February 29, 2000. No options were exercised by the above individuals during the fiscal year ended February 29, 2000. Compensation Committee Report The Company maintains a Compensation Committee (the "Committee"), consisting entirely of outside, disinterested, directors who are not employees or former employees of the Company. The Committee recommends salary practices for executive officers of the Company, with all compensation determinations ultimately made by a majority of the outside, disinterested, directors. Compensation Philosophy The Company's policy in compensating executive officers is to establish methods and levels of compensation that will provide strong incentives to promote the profitability and growth of the Company and reward superior performance. Compensation of executive officers includes salary as well as stock-based programs. The Board believes that compensation of the Company's key executives should be sufficient to attract and retain highly qualified personnel and also provide meaningful incentives for measurably superior performance. The Company places special emphasis on equity-based compensation, particularly in the form of options. This approach also serves to match the interests of the executive officers with the interest of the stockholders. The Company seeks to reward achievement of long and short-term performance goals which are measured by a number of factors, including improvements in revenue and achieving profitability. Included in the factors considered by the Committee in setting the compensation of the Company's Chief Executive Officer are the growth in the Company's commercial sales, the development of commercial applications for the Company's technology, and the effective allocation of capital resources. Employment Contracts The Company offers employment contracts to key executives only when it is in the best interest of the Company and its stockholders to attract and retain such key executives and to ensure continuity and stability of management. Effective as of March 1998, the Company entered into employment and severance agreements with Mr. Kurtzman, the Company's Chief Executive Officer, and Messrs. Schwartz and Kaufman and Ms. Kurtzman Lavut (the "Named Executive Officers") and other key executives of the Company. The Committee reviewed and approved such agreements unanimously after consulting with a nationally recognized employee benefits firm and determining that such agreements were necessary in order to retain highly qualified executives whose abilities are critical to the long-term success and competitiveness of the Company. Compensation of Chief Executive Officer and Other Executives The Compensation Committee increased Mr. Kurtzman's salary in March 1998 to $385,000, effective as of December 1997, after consulting with a nationally recognized employee benefits firm. The increase reflected the Compensation Committee's assessment of his performance and Mr. Kurtzman's service to the Company. Salary increases for other senior executives effected during 1998 were based on similar considerations including individual performance, position, tenure, experience and compensation surveys of comparable companies. In March 1998, the Committee reviewed and unanimously approved stock option awards under the Company's stock option plan after consulting with a nationally recognized employee benefits firm. The Committee granted Mr. Kurtzman an option to purchase 1,000,000 shares of Common Stock, which vest 20% per year over five years. The options are exercisable at $3.31 per share which was 105% of the market price of the Company's Common Stock on the date of grant. Senior executives in the Company participate in the stock option plan and the Compensation Committee granted such executives options to purchase Common Stock during Fiscal 1998. In determining the number of shares to award to Mr. Kurtzman and other executives, the Compensation Committee considered several factors, including primarily Mr. Kurtzman's and other executives' actual and potential contributions to the Company's long term success, and the size of awards provided to other executives in comparable companies holding similar positions. In July 1997 the Compensation Committee unanimously recommended the re-pricing of stock options granted to key employees, including Mr. Kurtzman and the Named Executive Officers. The Compensation Committee's re-pricing of options for key employees was made to those persons who have made significant contributions to the Company's business, for the purpose of maintaining corporate morale and creating an incentive for continued employment. Effective in Fiscal 1999 Mr. Kurtzman and the Named Executive Officers are, pursuant to their employment agreements with the Company, entitled to a discretionary annual bonus as determined by the Compensation Committee and a majority of the outside, disinterested, directors of the Board of Directors. In determining the amounts of such bonuses, the Compensation Committee considers the individual performance of each executive and the performance of the Company. Based upon the Company's financial performance during Fiscal 2000 the Compensation Committee determined not to award bonuses to Mr. Kurtzman or the Named Executive Officers. Section 162(m) Policy Section 162(m) of the Internal Revenue Code of 1986, as amended, generally provides that publicly held companies may not deduct compensation paid to certain of its top executive officers to the extent such compensation exceeds $1 million per officer in any year. However, pursuant to regulations issued by the Treasury Department, certain limited exemptions to Section 162(m) apply with respect to "qualified performance-based compensation" and to compensation paid in certain circumstances by companies in the first few years following their initial public offering of stock. The Company has taken steps to provide that these exemptions will apply to compensation paid to its executive officers, and the Company will continue to monitor the applicability of Section 162(m) to its ongoing compensation arrangements. Accordingly, the Company does not expect that amounts of compensation paid to its executive officers will fail to be deductible by reason of Section 162(m). Committee Member Salvador Diaz-Verson, Jr. Compensation Committee Interlocks and Insider Participation The Compensation Committee for the Fiscal year ended February 29, 2000 comprised of Salvador Diaz-Verson, Jr. and Brigadier Ashok Dewan. Decisions regarding compensation of executive officers for the Fiscal year ended February 29, 2000 were made unanimously by the outside, disinterested, directors of the Board of Directors, after reviewing recommendations of the Compensation Committee. As of March 6, 2000, the Compensation Committee of the Board of Directors is comprised of Salvador Diaz-Verson, Jr., David F. Hadley, and Stephen A. Talesnick. Audit Committee Fraud Detection Program In August 1998 a lawsuit captioned Collins v. Kurtzman et al. was filed in U.S. District Court in the Central District of California, which purported to be a derivative shareholder suit on behalf of Aura against members of the Board of Directors of the Company. Aura believes that the action was without merit. In April 1999 a final settlement was entered into by the parties which called for a dismissal of the action and no payments by any of the defendants. In consideration of the plaintiff dismissing its lawsuit Aura agreed to adopt and implement a fraud detection program (the "Program") under the auspices of the Audit Committee, after consulting with the Company's outside legal counsel and independent auditors. The purpose of the Program is to detect and prevent fraud, maintain accurate books and records for financial transactions, establish procedures to ensure the recording of transactions to be in accordance with generally accepted accounting principles, and to ensure that the Company's SEC filings comply with SEC rules and regulations. The Audit Committee is responsible for monitoring the Program on an ongoing basis, with the assistance of the Company's outside legal counsel and its independent auditors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the Company's Common Stock owned as of May 31, 2000 (i) by each person who is known by Aura to be the beneficial owner of more than five percent (5%) of its outstanding Common Stock, (ii) by each of the Company's directors and those executive officers named in the Summary Compensation Table, and (iii) by all directors and executive officers as a group:
Shares of Percent of Common Stock Common Stock Name Beneficially Owned Beneficially Owned Gardner Lewis Asset Management 19,980,436 8.3% Zvi (Harry) Kurtzman 3,391,314 (1)(2) 1.4% Arthur J. Schwartz 2,544,838 (1)(3)(4) 1.1% Cipora Kurtzman Lavut 1,874,512 (5) * Neal B. Kaufman 1,736,870 (1)(7) * Harvey Cohen 468,287 (6) * Salvador Diaz-Verson, Jr. 1,006,037 * Stephen A. Talesnick 2,787,698 1.2% Gerald S. Papazian 443,810 (8) * Steven C. Veen 659,763 (9) * Michael I. Froch 342,735 (10) * Keith O. Stuart 161,188 (11) * Ronald Goldstein 207,579 (12) * Jacob Mail 278,841 (13) * Norman Reitman 587,142 (14) * Sanford R. Edlein 0 * David F. Hadley 600,000 * Richard Van Allen 91,973 (15) * All executive officers and directors 17,182,587 7.2% as a group (16 persons)
-------------------- * Less than 1% of outstanding shares. (1) Includes 175,000 shares held of record by Advanced Integrated Systems, Inc. (2) Includes 870,000 shares which may be purchased pursuant to options and convertible securities exercisable within 60 days of May 31, 2000. (3) Includes 515,000 shares which may be purchased pursuant to options and convertible securities exercisable within 60 days of May 31, 2000. (4) Includes 32,000 shares held by Dr. Schwartz as custodian for his children, and 74,000 owned by Dr. Schwartz' children, to which Dr. Schwartz disclaims any beneficial ownership. (5) Includes 515,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (6) Includes 31,250 shares beneficially owned, and 265,000 shares which may be purchased pursuant to options within 60 days of May 31, 2000 of which 100,000 are beneficially owned. (7) Includes 470,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (8) Includes 166,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (9) Includes 215,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000, and 20,000 shares held by Mr. Veen as custodian for his children, to which Mr. Veen disclaims any beneficial ownership. (10) Includes 130,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (11) Includes 150,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (12) Includes 140,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (13) Includes 150,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000. (14) Includes 345,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000 and 12,500 shares owned by Mr. Reitman's wife, as to which 12,500 shares he disclaims any beneficial ownership. (15) Includes 24,000 shares which may be purchased pursuant to options exercisable within 60 days of May 31, 2000, and 3,000 shares held by Dr. Van Allen as custodian for his children to which Dr. Van Allen disclaims any beneficial ownership. The mailing address for Gardner Lewis Asset Management, L.P. is 285 Wilmington - West Chester Pike, Chadds Ford, Pa. 19317. The mailing address for the others is c/o Aura Systems, Inc., 2335 Alaska Avenue, El Segundo, CA 90245. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS December 1998 Private Placement In December 1998 the Company completed a private placement of Units, each Unit consisting of 10 shares of Common Stock and Warrants to purchase four shares of Common Stock at an exercise price of $1.00 per share for five years. The original subscription price was $10.00 per Unit. Of the total gross offering proceeds of approximately $1.8 million, $100,000 was invested by the mother of Zvi Kurtzman, and $440,000 was invested by Stephen Talesnick, who subsequently became a member of the Board of Directors in 1999. The terms of the offering called for, among other things, the prompt registration of the purchased securities with the SEC. As a result principally of delays in completing the Company's audit for the fiscal year ended February 1999, the Company was unable to timely file the required registration. Consequently in amendments to the offering terms which culminated in March 2000, the Company agreed to increase the number of shares received by each investor based upon an agreed price of $0.33 per share and the investors agreed to surrender the Warrants and their right to receive interest from the Company. Convertible Note Exchange As part of the Company's financial restructuring in Fiscal 1999 the Company offered to exchange convertible notes issued to investors in 1993 for Common Stock. As a result of the restructuring the Company converted the notes at a price of $0.27 per share. These investors among others included Zvi Kurtzman and Arthur J. Schwartz, whose notes entitled them to receive from the Company $100,000 and $80,000, respectively, plus accrued and unpaid interest. Both Messrs. Kurtzman and Schwartz exchanged their notes for Common Stock in March 2000. PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS (a) Documents filed as part of this Form 10-K: (1) Financial Statements See Index to Consolidated Financial Statements at page F-1 (2) Financial Statement Schedules See Index to Consolidated Financial Statements at page F-1 (3) Exhibits See Exhibit Index (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended February 29, 2000. INDEX TO EXHIBITS Description of Documents 3.1(1) Certificate of Incorporation of Registrant 3.2(1) Bylaws of Registrant. 10.1(1) Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee Directors. 10.2(1) Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement. 10.3(1) Deed of Trust and Assignment of Rents, dated as of February 27, 1989, by the Registrant in favor of Chicago Title Insurance Company, as Trustee, for the benefit of City National Bank. 10.4(2) Indenture, dated as of March 1, 1989, between the Registrant and Interwest Transfer Co., Inc. as Trustee, relating to the 7% Secured Convertible Non- Recourse Notes due 1999. 10.5(2) Form of 7% Secured Convertible Non-Recourse Notes due 1999. 10.6(2) Deed of Trust, Assignment of Leases and Rents and Fixture Filing, dated as of March 1, 1989, by the Registrant in favor of Ticor Title Insurance Company, as Trustee, for the benefit of Interwest Transfer Co., Inc.,as trustee under the Indenture. 10.7(3) Form of 7% Secured Convertible Non-Recourse Note due 2000. 10.8(4) 1989 Stock Option Plan. 10.9(5) Joint Development and License Agreement, dated August 24, 1992, between the Registrant and Daewoo Electronics Co., Ltd. 10.10(6) Agreement, dated September 23, 1993, between the Registrant and Burlington Technopole SDN. BHD. 10.11(7) Dedicated Supplier Agreement, dated December 2, 1993, between the Registrant and Daewoo Electronics Co., Ltd. 10.12(8) Form of 7% Secured Convertible Non-Recourse Note due 2002. 10.13(9) Agreement dated July 19, 1995 between the Company and K&K Enterprises. 10.14(9) Agreement dated July 19, 1995 between the Company and K&K Enterprises. 10.15(9) Agreement dated July 12, 1995 between the Company and K&K Enterprises. 10.16(9) Agreement dated July 12, 1995 between the Company and K&K Enterprises. 10.17(9) Stock Purchase and Sale Agreement dated April 30, 1996 between the Company and MYS Corporation 10.18(9) Joint Venture Agreement dated July 26, 1995 between the Company and Microbell 10.19(10) AuraSound Asset Purchase 10.19.1(10) Asset Purchase Agreement dated December 1, 1999 among AuraSound, Inc., Aura Systems, Inc., AlgoSound, Inc., and Algo Technology, Inc. 10.19.2(10) Amendment dated December 22, 1999 to Asset Purchase Agreement dated December 1, 1999. 10.19.3(10) Assignment and License Agreement as of July 15, 1999 between Speaker Acquisition Sub, Algo Technology, Inc., Aura Systems, Inc., AuraSound Inc. 10.20(10) MYS Stock Purchase 10.20.1(10) Escrow Agreement as of March 26, 1999 among the Company, Inc.,Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi, Kazuaki Masayoshi, and Wolf Haldenstein Adler Freeman & Herz LLP. 10.20.2(10) Promissory Note in the amount of $1,000,000 dated March 26, 1999 payable to the Company by Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.20.3(10) Promissory Note in the amount of $3,200,000 dated March 26, 1999 payable to the Company by Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.20.4(10) Stock Purchase Agreement dated March 26, 1999 between the Company and Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi. 10.21(10) Agreement with RGC International Investors, LDC 10.21.1(10) First Amendment to Security Agreement dated October 22, 1999 between RGC International Investors, LDC and the Company. 10.21.2(10) Settlement Agreement and Complete Release of all Claims dated October 22, 1999 between RGC International Investors, LDC, and the Company 10.21.3(10) Stock Purchase Warrant issued to RGC International Investors, LDC by the Company. 10.21.4(10) Amended and Restated Convertible Senior Secured Note dated October 7, 1998 in the amount of $3,000,000 issued to RGC International Investors, LDC by the Company. 10.22(10) Settlement Agreement and Release of Claims dated as of December 1, 1999 between JNC Opportunity Fund, Ltd., and the Company. 10.23(10) Payment Agreement by and between Credit Managers Association of California and Aura Systems, Inc. 10.24 Release from Infinity Investors Limited et al. to Aura Systems, Inc. 10.25 Release from Aura Systems, Inc. to Infinity Investors Limited et al. 10.26 Exchange Agreement dated as of February 22, 2000, by and among Aura Systems, Inc., Infinity Investors Limited et al. 10.27 Guaranty dated as of February 22, 2000, by Aura Systems, Inc. and certain of its subsidiaries. 10.28 Stock Pledge Agreement dated as of February 22, 2000, between Aura Systems, Inc. and HW Partners, L.P. as agent. 10.29 Security Agreement dated as of February 22, 2000, between Aura Systems, Inc., certain subsidiaries of Aura Systems, Inc. and HW Partners L.P. 10.30 Secured Note dated February 22, 2000, from Aura Systems, Inc. to Infinity Investors Limited. 10.31 Secured Note dated February 22, 2000, from Aura Systems, Inc. to Global Growth Limited. 10.32 Secured Note dated February 22, 2000, from Aura Systems, Inc. Summit Capital Limited. 10.33 General Assignment and Bill of Sale dated February 29, 2000, between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.34 Assignment and Assumption of Specified Liabilities dated as of May 3, 2000, by and between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.35 Assignment and Assumption of Lease dated as of May 3, 2000, by and between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.36 Revolving Credit and Term Loan Agreement dated as of May 2000, by and between Alpha Ceramics, Inc. and Excel Bank. 10.37 Asset Purchase Agreement dated February 29, 2000,between Alpha Ceramics, Inc. and Aura Ceramics, Inc. 10.38 Subordination Agreement dated as of May 2000, by Aura Ceramics, Inc. and Aura Systems, Inc. 10.39 Escrow Agreement dated March 6, 2000, by and among Guzik & Associates, Aura Systems, Inc. and Isosceles Fund Limited. 10.40 Subscription Agreement from Isosceles Fund Limited to Aura Systems, Inc. 10.41 Stock Purchase Warrant of Aura Systems, Inc. issued to Isosceles Fund Limited. 10.42 Settlement Agreement and Release of Claims dated as of March 6, 2000, between Aura Systems, Inc. and Isosceles Fund Limited. 21.1 Subsidiaries of Aura Systems, Inc. EX-27 Data Schedule (1) Incorporated by reference to the Exhibits to the Company's Statement on Form S-1 (File No. 33-19530). (2) Incorporated by reference to the Exhibits in the Company's Current Report on Form 8-K dated March 24, 1989 (File No. 0-17249). (3) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 33-27164). (4) Incorporated by reference to the Exhibits to the Company's Statement on Form S-8 (File No. 33-32993). (5) Incorporated by Reference to the Exhibit to the Company's Statement on Form S-1 (File No. 35-57 454). (6) Incorporated by reference to the Company's Current Report in Form 10-Q dated November 30, 1993. (7) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-1 (File No.-33-57454). (8) Incorporated by reference to the Exhibits to the Company's Annual Report Form 10-K for the fiscal year ended February 28, 1994 (File No. 0-17249). (9) Incorporated by reference to the Company's Annual Report Form 10-K for the fiscal year ended February 29, 1996 (File No. 0-17249) (10) Incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal year ended February 28, 1999 (File No. 0-17249) Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AURA SYSTEMS, INC. Dated: 13, 2000 By: /s/ Zvi Kurtzman Zvi Kurtzman Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
Signatures Title Date /s/Zvi Kurtzman Chief Executive Officer and Director June 13, 2000 Zvi Kurtzman (Principal Executive Officer) /s/Steven C. Veen Senior Vice President, June 13, 2000 Steven C. Veen Chief Financial Officer (Principal Financial and Accounting Officer) /s/Sanford R. Edlein Director June 13, 2000 Sanford R. Edlein /s/Norman Reitman Director June 13, 2000 Norman Reitman /s/David F. Hadley Director June 13, 2000 David F. Hadley /s/Salvador Diaz-Verson, Jr. Director June 13, 2000 Salvador Diaz-Verson, Jr. /s/ Stephen A. Talesnick Director June 13, 2000 Stephen A. Talesnick /s/Harvey Cohen Director June 13, 2000 Harvey Cohen
AURA SYSTEMS, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements
Independent Auditors' Report on Consolidated Financial Statements and Financial Statement Schedule F-2 Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries: Consolidated Balance Sheets-February 29, 2000 and February 28, 1999 F-3 to F-4 Consolidated Statements of Operations and Comprehensive Loss- Years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-5 Consolidated Statements of Stockholders' Equity (Deficit) -Years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-6 Consolidated Statements of Cash Flows-Years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-7 to F-9 Notes to Consolidated Financial Statements F-10 to F-24 Consolidated Financial Statement Schedule: II Valuation and Qualifying Accounts F-25
Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the respective consolidated financial statements or notes thereto. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Aura Systems, Inc. El Segundo, California We have audited the consolidated balance sheets of Aura Systems, Inc. and subsidiaries as of February 29, 2000, and February 28, 1999 and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended February 29, 2000 and the related financial statement schedule listed in the accompanying Index at Item 14. These consolidated financial statements, and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aura Systems, Inc. and subsidiaries as of February 29, 2000, and February 28, 1999 and the results of their operations and their cash flows for each of the three years in the period ended February 29, 2000, and the financial statement schedule presents fairly, in all material respects, the information set forth therein, all in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming Aura Systems, Inc. will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has generated significant losses from operations. As the Company has suffered recurring losses from operations, there is substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in note 1. /s/ Pannell Kerr Forster Certified Public Accountants A Professional Corporation Los Angeles, California 90017 June 12, 2000
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 29, February 28, 2000 1999 ASSETS CURRENT ASSETS: Cash and equivalents $ 260,437 $ 3,822,210 Receivables, net 2,459,200 8,380,414 Inventories 11,189,227 18,477,058 Prepayments -- 3,435,645 Other current assets 360,177 2,124,535 Note receivable 3,557,007 250,000 ------------- ------------- Total current assets 17,826,048 36,489,862 ------------- ------------- PROPERTY AND EQUIPMENT, AT COST 42,219,417 47,976,699 Less accumulated depreciation and amortization (15,184,362) (10,994,734) -------------- -------------- Net property and equipment 27,035,055 36,981,965 LONG-TERM Investments 2,123,835 2,923,835 long-term receivables 1,250,000 2,500,000 Patents and trademarks-Net 4,615,769 5,293,278 GOODWILL-NET -- 5,383,208 OTHER ASSETS 3,271,771 571,244 ------------- ------------- Total $ 56,122,478 $ 90,143,392 ============= ============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 29, February 28, LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999 ----------- ------- CURRENT LIABILITIES: Notes payable $ 9,899,531 $ 8,787,113 Convertible note, unsecured 1,250,000 2,000,000 Accounts payable 4,216,004 22,515,842 Accrued expenses and other 1,634,300 8,056,783 ------------- ------------- Total current liabilities 16,999,835 41,359,738 ------------- ------------- NOTES PAYABLE AND OTHER LIABILITIES 37,606,695 25,955,529 ------------- ------------- CONVERITBLE NOTES-SECURED -- 4,000,000 ------------- ------------- CONVERTIBLE NOTES-UNSECURED -- 32,481,782 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock par value $.005 per share and additional paid in capital. Issued and outstanding 196,975,392 and 107,752,042 234,196,092 218,693,245 shares respectively. Common Stock Not Issued 9,132,774 -- Cumulative currency translation adjustment (CTA) (365,932) (365,932) Accumulated deficit (241,496,926) (231,980,970) -------------- -------------- Total stockholders' equity (deficit) 1,516,008 (13,653,657) ------------- -------------- Total $ 56,122,538 $ 90,143,392 ============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss Years ended February 29, 2000, February 28, 1999 and February 28, 1998 2000 1999 1998 ------------- ------------- ------- Net Revenues $ 5,788,221 $ 53,650,025 $103,939,641 Cost of GOODS AND OVERHEAD 13,424,303 130,437,194 71,774,522 ------------- ------------- ------------- GROSS PROFIT (LOSS) (7,636,082) (76,787,169) 32,165,119 -------------- -------------- ------------- EXPENSES: Research and development 148,443 1,996,198 475,992 Impairment of long-lived assets -- 5,838,466 -- Selling, general and administrative expenses 10,725,397 64,131,074 35,266,048 ------------- ------------- ------------- Total expenses 10,873,840 71,965,738 35,742,040 ------------- ------------- ------------- (LOSS) FROM OPERATIONS (18,509,922) (148,752,907) (3,576,921) OTHER (INCOME) AND EXPENSE 5,893,449 30,562,046 349,962 (LOSS) BEFORE INCOME TAXES AND OTHER ITEMS (24,403,371) (179,314,953) (3,926,883) Provision (benefit) for taxes -- 566,635 (1,275,555) Minority interests in consolidated subsidiary -- 10,372,895 (946,405) Loss in excess of basis of subsidiary: Aura Systems, Inc. -- 8,080,695 -- Minority interests -- 26,561,481 -- -------------- -------------- ------------- Loss from continuing operations (24,403,371) (134,866,517) (3,597,733) --------------- --------------- --------------- Discontinued Operations: Loss from Discontinued Operations, Net of taxes of $0 for 2000,1999 & 1998 respectively (1,433,859) (14,875,065) (8,038,807) Loss on Disposal, Net of Taxes of 0 for 2000 (2,697,642) -- -- --------------- -------------- -------------- Loss from Discontinued Operations (4,131,501) (14,875,065) (8,038,807) --------------- --------------- --------------- Loss before extraordinary item (28,534,872) (149,741,582) (11,636,540) Extraordinary Item Gain on extinguishment of debt obligations, net of income taxes of $0 19,068,916 -- -- -------------- -------------- -------------- Net loss (9,465,956) (149,741,582) (11,636,540) Other comprehensive income (loss), net of taxes: -- (406,574) -- -------------- --------------- -------------- Comprehensive loss $ (9,465,956) $ (150,148,156) $ (11,636,540) ============== =============== ============== NET (LOSS) PER COMMON SHARE $ (0.08) $ (1.74) $ (.15) ============== =============== ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 124,294,051 5,831,688 79,045,290 =========== ============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended February 29, 2000, February 28, 1999 and February 28, 1998 Accumulated Other Common Stock Additional Common Comprehensive Paid-in Stock not Accumulated (CTA) Income Shares Amount Capital Issued Deficit (Loss) Total ------ ------ ------- ------ ------- - ------ ----- Balances at February 28, 1997 76,481,666 $382,408 $195,657,385 $ $(70,602,848) $ 40,642 $125,477,587 -- Notes payable converted 3,164,001 15,820 4,528,958 -- -- -- 4,544,778 Exercise of warrants 241,688 1,208 583,642 -- -- -- 584,850 Exercise of stock options 25,000 125 51,375 -- -- 51,500 Proceeds from issuance of warrants -- -- 900,000 -- -- -- 900,000 Repurchase of warrants -- -- (1,679,956) -- -- -- (1,679,956) Stock issued to acquire assets 88,889 445 199,555 -- -- -- 200,000 Expenses of issuances -- -- (1,540,351) -- -- -- (1,540,351) Net (loss) -- -- -- -- (11,636,540) (11,636,540) ----------- ------ ---------- ------ ------------ -------- ------------ Balances at February 28, 1998 80,001,244 400,006 198,700,608 -- (82,239,388) 40,642 116,901,868 Notes payable converted 16,513,282 82,566 10,126,867 -- -- -- 10,209,433 Exercise of warrants 7,475,383 37,377 7,971,198 -- -- -- 8,008,575 Exercise of stock options 50,000 250 102,750 -- -- -- 103,000 Stock issued to acquire assets 114,833 574 28,134 -- -- -- 28,708 Private placements 3,597,300 17,986 1,779,656 -- -- -- 1,797,642 Expenses of issuances -- -- (554,727) -- -- -- (554,727) Other comprehensive income(CTA) -- -- -- -- -- (406,574) (406,574) Net (loss) -- -- -- -- (149,741,582) -- (149,741,582) ----------- -------- ------------ --------- ------------ ------------ ------------ Balances at February 28, 1999 107,752,042 538,759 218,154,486 -- (231,980,970) (365,932) (13,653,657) Notes payable converted 68,534,445 342,672 10,036,430 -- -- -- 10,379,102 Exercise of warrants 120,000 600 44,200 -- -- -- 44,800 Stock issued to satisfy 2,907,275 14,536 770,429 -- -- -- 784,965 liabilities Private placements 17,661,630 88,308 4,400,692 -- -- -- 4,489,000 Expenses of issuances -- -- (195,020) -- -- -- (195,020) Common stock not issued 9,132,774 9,132,774 Net (loss) -- -- -- -- (9,465,956) -- (9,465,956) -------------- -------- ------------ --------- --------------- -------- ---------- Balances at February 29, 2000 196,975,392 $984,875 $233,211,217 $9,132,774 $(241,446,926) $(365,932) $1,516,008 ============== ======== ============ ========== ============== ========== =========
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended February 29, 2000, February 28, 1999 and February 28, 1998 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net loss $ (9,465,956) $(149,741,582) $(11,636,540) ------------- -------------- ---------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 6,853,924 12,985,278 8,362,110 Provision for environmental cleanup 48,812 44,516 40,597 (Gain) Loss on disposition of assets 1,122,119 6,066,168 (555,326) Equity in losses of unconsolidated joint ventures -- 6,268,384 1,937,747 (Gain)loss on sale of subsidiary and other stock investments 1,669,161 (262,804) (12,144,740) Impairment of long-lived assets -- 9,403,687 -- Gain on extinguishment of Debt (19,068,916) -- -- Foreign currency translation adjustment -- (406,574) -- Assets-(Increase) Decrease: Receivables 462,541 46,037,727 (674,443) Inventories 4,019,810 40,236,817 (24,866,579) Prepayments -- 9,891,144 (5,631,521) Other current assets 1,515,787 3,801,107 (5,534,281) Deferred income taxes -- 838,000 (940,000) Liabilities-Increase (Decrease): Accounts payable (1,371,174) (21,479,522) 20,279,113 Accrued expenses (1,577,248) 4,614,005 2,086,583 Litigation and other liabilities 222,223 7,389,649 (345,372) -------------- ------------ ------------ Total adjustments (6,102,961) 125,427,582 (17,986,112) -------------- ----------- ---------- Net cash used by operating activities (15,568,917) (24,314,000) (29,622,652) --------------- ------------ ---------- Cash flows from investing activities: Payments from Notes Receivable 5,674,828 -- -- Proceeds from sale of assets 327,109 2,721,000 920,000 Purchase of property and equipment (16,103) (2,143,237) (1,910,214) Manufacture of special tools and equipment -- (1,910,611) (16,096,180) Investment in joint ventures -- (164,466) 1,202,138 Long-term investments -- (4,940,000) (1,117,465) Long-term receivables -- 3,436,809 3,347,144 Patents and trademarks -- (467,167) (1,903,718) Goodwill and other assets -- 1,425,794 (2,398,400) Proceeds from subsidiary stock -- 1,611,873 5,472,656 -------------- ----------- ----------- Net cash provided (used) by investing activities 5,985,834 (430,005) (12,484,039) -------------- ------------ ----------=
See accompanying notes to consolidated financial statements
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows 2000 1999 1998 ---- ---- ---- Cash flows from financing activities: Net proceeds from borrowings $251,101 $17,922,584 $26,287,632 Repayment of notes payable (1,218,571) (3,396,083) (10,874,683) Proceeds from exercise of options -- 103,000 -- Net proceeds from issuance of common stock 7,393,980 1,675,873 636,350 Net proceeds from exercise of warrants 24,800 7,884,325 -- Proceeds from issuance of warrants -- -- 900,000 Net proceeds from issuance of convertible notes -- 11,720,000 13,959,649 Repayment of convertible notes (430,000) (3,050,000) (5,905,223) Minority interest adjustment -- (10,372,895) 17,749,979 Repurchase of warrants -- -- (1,679,956) ------------ ------------ --------- Net cash provided by financing activities 6,021,310 22,486,804 41,073,748 ------------ ------------ ---------- Net decrease in cash and equivalents (3,561,773) (2,257,201) (1,032,943) Cash and equivalents at beginning of year 3,822,210 6,079,411 7,112,354 ------------ ------------ ----------- Cash and equivalents at end of year $ 260,437 $ 3,822,210 $ 6,079,411 ============ =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 922,708 $ 3,374,992 $ 6,280,859 ============ ============ =========== Income Taxes -- $ 2,244,762 $ 186,310 $ ============ ============ ===========
Supplemental disclosures of non-cash investing and financing activities: During the year ended February 28, 1998, $4,544,778 of convertible notes and accrued interest were converted into 3,164,001 shares of common stock. Effective January 29, 1998, the Company executed a contract to purchase title and interest to the "Aura" trademark name in several locations in Europe, Hong Kong and Taiwan. Partial consideration paid included $200,000 worth of Aura common stock or 88,889 shares, and $1,587,678 of operating assets transferred to the seller of the trademark name. During the year ended February 28, 1998 the Company entered into financing arrangements whereby it acquired assets for notes payable in the amount of $493,781. During the year ended February 28, 1999, $10,209,433 of convertible notes and accrued interest were converted into 16,513,282 shares of common stock. Additionally, 90,510 shares of common stock were issued for services received totaling $90,510. During the year ended February 28, 1999, 2,000,000 shares of the Company's investment in NewCom Inc., valued at $2,820,000, were surrendered to a NewCom creditor pursuant to a security agreement that collateralized a NewCom note in the amount of $1,000,000. During the year ended February 28, 1999, $800,000 in joint ventures assets were transferred to long term investments. During the year ended February 28, 1999, the Company sold a stock investment for $5,499,000, of which $2,750,000 was recorded as a note receivable. During the year ended February 28, 1999, the Company assumed explicitly certain obligations of NewCom, effectively transferring approximately $9,900,000 from current notes and trade payables to litigation payable. The $9,900,000 represents NewCom obligations guaranteed by the Company, including a line of credit with a commercial lending institution and two other trade creditors. During the year ended February 29, 2000, $11,009,102 of convertible notes were converted into 71,054,445 shares of common stock. Additionally, liabilities of $20,000 were satisfied by the exercise of 40,000 warrants with an exercise price of $.50 per share, and 1,020,890 shares of stock were issued as fees in connection with the private placement. The Company issued 2,907,275 shares of common stock in settlement of accrued and unpaid management compensation of $784,965. See accompanying notes to consolidated financial statements Subsequent to year end, the Company issued the following shares of common stock which were recorded as a component of stockholder's equity (common stock not issued) at February 29, 2000. The common stock could not be issued prior to year end due to the limitation on the number of shares authorized (see note 13). The Company issued 2,520,000 shares of common stock for the conversion of notes payable and accrued interest of $686,524; 541,667 shares of common stock in settlement of accrued and unpaid director's fees of $146,250; 12,500,000 shares of common stock, in the amount of $3,100,000 for the Company's private placement, and 14,687,972 shares of common stock with a value of $5,200,000 to satisfy the liability for a class action settlement. In addition, 2,400,000 shares of common stock were issued as a finder's fee for the Company's private placements and 1,775,824 shares of common stock for repricing a prior private placement of the Company. The finder's fee and repricing had no effect on total stockholders' equity. See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 29, 2000, February 28, 1999 and February 28, 1998 (1) Business and Summary of Significant Accounting Policies Business Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, was founded to engage in the development, commercialization and sales of products, systems and components using its patented and proprietary electromagnetic and electro-optical technology. The Company's proprietary and patented technology has been developed for use in systems and products for commercial, industrial, consumer, and government use. The Company's operations are now focused on manufacturing and commercializing the AuraGen(R) ("AuraGen") family of electromagnetic products, with applications for military, industry and the consumer. The AuraGen is a unique, patented electromagnetic generator that is mounted to the vehicle engine, which generates both 110 and 220 volt AC power at all engine speeds including idle. Commercial production of the AuraGen commenced in Fiscal 1999 and is being distributed and sold through dealers, distributors, and OEMs. The Company intends to continue to focus its business on the AuraGen line of products. In addition, the Company is entitled to receive royalties from Daewoo Electronics Co., Ltd. ("Daewoo") for its electro-optics technology ("AMA") licensed to Daewoo in 1992. In 1994, the Company founded NewCom, Inc. ("NewCom"), a Delaware corporation, which engaged in the manufacture, packaging, selling and distribution of computer-related communications and sound-related products, including modems, CD-ROMs, sound cards, speaker systems and multimedia products. During the second half of Fiscal 1999 NewCom's business suffered from adverse industry conditions, including increased price reductions and a decline in demand resulting from increased incorporation of computer peripherals at the OEM level. NewCom ceased operations in early Fiscal 2000. In 1996, the Company acquired 100% of the outstanding shares of MYS Corporation of Japan ("MYS") to expand the range of its sound products and speaker distribution network. MYS engaged in the manufacture and sale of speakers and speaker systems for home, entertainment and computers. In Fiscal 2000, the Company sold MYS to MYS management. AuraSound manufactured and sold professional and consumer sound system components and products. In July 1999, the Company entered into an agreement for the sale of the assets of AuraSound. Basis of Presentation and Going Concern The accompanying consolidated financial statements of the Company have been prepared on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities, except as otherwise disclosed, in the normal course of business. However, as a result of the Company's losses from operations such realization of assets and liquidation of liabilities is subject to significant uncertainties. Management is currently seeking or obtaining additional sources of funds and the Company has restructured a significant portion of its debt obligations. The Company's ability to continue as a going concern is dependent upon the successful achievement of profitable operations and the ability to generate sufficient cash from operations and financing sources to meet the restructured obligations. The Company is now focusing its business on the AuraGen line of products. Except as otherwise disclosed, the consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the possible inability of the Company to continue as a going concern as otherwise disclosed. Principles of Consolidation For the year ended February 29, 2000, the consolidated financial statements include accounts of the Company and its wholly owned subsidiaries Aura Ceramics, Inc. and Electrotec Productions, Inc. (and its wholly owned subsidiary Electrotec Europe). During the year ended February 29, 2000, the Company divested its AuraSound segment (see note 22). The AuraSound segment included the Company's wholly owned subsidiaries AuraSound, Inc. and MYS and its subsidiaries Audio-MYS, MYS America and MYS U.S.A. Subsequent to year-end the Company sold its interest in Aura Ceramics, Inc. to local management. For the year ended February 28, 1999, the consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, MYS and its subsidiaries Audio-MYS, MYS America and MYS U.S.A, Aura Ceramics, Inc., Aura Sound Inc. and Electrotec Productions, Inc. (and its wholly owned subsidiary Electrotec Europe). For the year ended February 28, 1998, the Company's interest in NewCom, a majority owned subsidiary, is reported on a consolidated basis, the consolidated financial statements include 100 percent of the assets and liabilities of the subsidiary, and the ownership percentage of minority interests is recorded as "Minority Interests in Subsidiary." In February 1999, the Company reduced its interest in NewCom to approximately 41%. Accordingly, for the year ended February 28, 1999, the Statement of Operations and Comprehensive Loss reflects the operating results of NewCom through the period of majority ownership. The balance sheet as of February 28, 1999 reflects the Company's investment on an equity basis of accounting. In consolidation, all significant intercompany balances and transactions have been eliminated. For the year ended February 28, 1999, the Company's losses from NewCom, on a consolidated basis, were in excess of the Company's allocation of losses as accounted for under the equity method. In accordance with Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" the Company has recognized losses up to the amount of their investment, advances and guarantees of indebtedness. Losses related to the consolidation of NewCom in excess of losses appropriate under the equity method, in the amount of $8,080,695, are reflected as an other item in the Statement of Operations and Comprehensive Loss. For the year ended February 28, 1999, the minority interest in losses of subsidiary are in excess of minority interests investments. The minority interests loss in excess of investment, in the amount of $26,561,481, are reflected as an other item in the Statement of Operations and Comprehensive Loss. Revenue Recognition The Company recognizes revenue for product sales upon shipment. The Company provides for estimated returns and allowances based upon experience. The Company also earns a portion of its revenues from license fees, and generally records these fees as income when the Company has fulfilled its obligations under the particular agreement. Comprehensive Income In March 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This standard requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balances of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company adopted SFAS 130 in Fiscal 1999. For Fiscal 1999 the Company's other comprehensive loss consists of foreign currency translations. The adoption of this statement did not have any impact on the Company's results of operations, financial position, or cash flows. Cash Equivalents The Company considers all highly liquid assets, having an original maturity of less than three months when purchased, to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual future results could differ from those estimates. Long-Term Investments Investments in equity securities with no readily determinable fair value are stated at cost. Management periodically evaluates these investments as to whether fair value is less than cost. In the event fair value is less than cost, and the decline is determined to be other than temporary, the Company will reduce the carrying value accordingly. Goodwill In Fiscal 1999, goodwill represented the excess purchase price over the fair market value of the assets acquired of certain acquisitions. Goodwill was being amortized over 40 years on a straight-line basis. As a result of the Company's AuraSound sale, there was no goodwill as of February 29, 2000. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Per Share Information The consolidated net loss per common share is based on the weighted average number of common shares outstanding during the year. Common share equivalents have been excluded since inclusion would dilute the reported loss per share. Such common stock equivalents amount to 11,709,000 common shares for convertible debt, warrants and options. Patents and Trademarks The Company capitalizes the costs of obtaining or acquiring patents and trademarks. Amortization of patent and trademark costs is provided for by the straight line method over the shorter of the legal or estimated economic life. If a patent or trademark is rejected, abandoned, or otherwise invalidated the un-amortized cost is expensed in that period. Impairment of long-lived assets The Company reviews long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amounts of the assets against the estimated undiscounted cash flows associated with these assets. At the time such evaluation indicates that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the assets' carrying value, the assets are adjusted to their fair values (based upon discounted cash flows). During Fiscal 1999, the Company's management redirected its strategy to focus on the AuraGen production. The Company made the decision to cease operations in various divisions, reduce overhead and sell or lease Company assets that were not compatible with the Company's strategy. Management reviewed the estimated future cash flows related to these operations and deemed them to be insufficient to fully recover the carrying value of the assets. Accordingly, in Fiscal 1999 the Company recognized a $9,403,687 impairment expense to reduce the assets to their estimated fair value. The impairment includes a write down of property and equipment and goodwill of $8,893,259 and $510,428, respectively. Research and Development Research and development costs are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred. Advertising charged to expense in Fiscal 2000, 1999 and 1998 approximated nil, $9.4 million and $5.8 million, respectively. Buildings, Equipment and Leasehold Improvements Buildings, equipment and leasehold improvements are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows: Buildings 40 years Machinery and equipment 5-10 years Furniture and fixtures 7 years Leasehold improvements Life of lease During Fiscal 2000 and 1999, the Company capitalized costs of nil and $1,910,611, respectively, on special tools and equipment, which have been designed for the manufacturing and development of automotive products. The capitalized amounts, included in machinery and equipment, include allocated costs of direct labor and overhead. During Fiscal 1999, management reduced previously capitalized amounts to their estimated fair value, due to impairment of assets. See note on Impairment of long-lived assets. Depreciation and amortization expense of buildings, machinery and equipment, furniture and fixtures and leasehold improvements approximated $6.5 million, $11.9 million and $5.4 million for Fiscal 2000, 1999 and 1998, respectively. (2) Receivables Receivables consist of the following:
2000 1999 ---- ---- Commercial receivables: Amounts billed $10,100,962 $16,548,666 Advances due from related parties 31,455 102,773 Less allowance for uncollectible receivables and (7,673,217) (8,271,025) ----------- ----------- sales returns $2,459,200 $8,380,414 ========= =========
Bad debt expense was approximately $0.5 million, $13.3 million and $3.6 million in Fiscal 2000, 1999 and 1998 respectively. (3) Notes Receivable Notes receivable consist of the following: 2000 1999 ---- ---- MYS $ 570,092 $ -- Algo 1,736,975 -- Telemac 2,500,000 2,750,000 --------- --------- 4,807,067 2,750,000 Less current portion 3,557,067 250,000 --------- --------- $1,250,000 $2,500,000 ========= ========= During Fiscal 1999, the Company sold a portion of its shares in Telemac Cellular Corp. (Telemac) back to Telemac. The Company then entered into a cancellation of shares agreement whereby it tendered the remaining shares to Telemac in exchange for a note receivable from Telemac resulting in a gain recognized of approximately $850,000. The note matures in Fiscal 2002. In March 1999, the Company sold MYS Corp. and subsidiaries to the management of MYS for a sales price of $4.2 million. In December 1999, the Company finalized the sale of the assets of the AuraSound speaker division, total consideration received was approximately $2.4 million. The purchaser of AuraSound's assets is the same party that acquired the majority of the Company's restructured debt as described at Note 24. (4) Long Term Investments Long-term investments consist of the following:
2000 1999 ---- ---- Aquajet Corporation $ 923,835 $ 923,835 Alaris Industries, Inc. 1,200,000 1,200,000 Other 0 800,000 ---------- ----------- $ 2,123,835 $2,923,835 ========== ==========
(5) Joint Ventures and Other Agreements (a) Malaysian Joint Venture In 1993, the Company entered into an agreement with Burlington Technopole SDN. BHD., a Malaysian corporation (Burlington) for the formation of a joint venture to manufacture and sell speakers using Aura's proprietary technology. In Fiscal 1999 the joint venture was terminated, and a total of $1,064,911 in joint venture losses and write-off's were recorded during Fiscal 1999. (b) Aura-Dewan Joint Venture In 1995, the Company entered into an agreement with K&K Enterprises of India ("K&K") for the formation of a joint venture to manufacture and sell speakers using Aura's proprietary technology. In 1995 the Company also entered into an agreement with K&K for the formation of a joint venture to manufacture Aura's Bass ShakerTM. In Fiscal 1999 the joint venture was terminated, and a total of $534,911 in joint venture losses and write-off's were recorded during Fiscal 1999. In Fiscal 2000 the Company's remaining investment in property of the joint venture was disposed of, and certain claims and liabilities were satisfied. A loss on disposal of assets, in the amount of $800,000, was recorded in Fiscal 2000. (c) Daewoo Agreement In 1992, the Company entered into a joint development and licensing agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and commercialize televisions using Aura's AMA(TM) display technology. Aura is to receive a fixed royalty (depending on television size), for each television set manufactured by Daewoo or licensed by Daewoo to a third party. Daewoo was taken over by its creditors during Fiscal 1999. No assurances can be given as to the future plans of the "AMA" technology at Daewoo. (d) Eric Joint Venture In 1997, the Company entered into an agreement with the European Group to form a joint venture for sales, marketing and further development of motion base simulators using the Company's proprietary technology. In Fiscal 1999, as a result of its financial crisis the Company ceased its commitment to continue to develop improvements to the Company's motion base simulator technology. The parties agreed to terminate the joint venture, and $3,856,091 was written-off to loss in joint ventures in Fiscal 1999. (e) Microbell Joint Venture In 1995 the Company entered into an agreement with Microbell to form a joint venture to further develop and commercialize patented and proprietary technology developed by Microbell. In Fiscal 1999, due to Aura's inability to continue to fund the joint venture as required, the joint venture was terminated, and $635,902 was written-off to loss in joint ventures. (6) Related Party Transactions Notes and advances due from related parties, aggregated $31,455 and $102,773 at February 29, 2000 and February 28, 1999, respectively, included in current receivables. (7) Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, consist of the following:
2000 1999 ---- ---- Raw materials $4,205,828 $11,318,263 Finished goods 7,310,335 15,034,795 Reserves for potential product obsolesence (326,936) (7,876,000) --------------- --------------- $11,189,227 $18,477,058 ============== ==============
At February 29, 2000, inventories consist primarily of components and completed units for the Company's AuraGen product. (8) Property and Equipment Property and Equipment, at cost is comprised as follows:
2000 1999 ---- ---- Land $ 3,187,997 $ 3,877,074 Buildings 8,708,796 9,396,392 Machinery and equipment 27,755,903 32,354,243 Furniture, fixtures and leasehold improvements 2,566,721 2,348,990 ------------ ------------------ $42,219,417 $47,976,699 =========== ===========
(9) Notes Payable and Other Liabilities Notes Payable and Other Liabilities consist of the following:
2000 1999 ---- --- ---- Litigation payable $ 5,722,221 $17,302,047 Lines of Credit 2,584,000 3,000,000 Notes payable-equipment (a) 31,353 194,296 Notes payable-buildings (b) 5,535,693 8,549,854 Unsecured notes payable (c) 6,807,676 5,190,747 Trade debt (d) 10,961,151 -- Secured notes payable (e) 15,309,622 -- ---------- -------------- 46,951,716 34,236,944 Less: current portion 9,899,531 8,787,113 -------------- -------------- Long term portion 37,052,185 25,449,831 Reserve for environmental cleanup 554,510 505,698 ------------- ------------- $ 37,606,695 $25,955,529 ============= ==============
(a) Notes payable-equipment at February 29, 2000 consists of a note maturing in February 2005. (b) Notes payable-buildings consists of a 1st Trust Deed on a building in California, due in Fiscal 2009, and in Fiscal 1999 includes a note due October 2000 collateralized by a building in Malaysia. (c) Unsecured notes payable consists of four notes at February 29, 2000 and three notes at February 28, 1999. (d) Trade debt was restructured with payment terms over a three year period with interest at 8% per annum commencing on January 2000. (e) Secured notes payable consists of three notes. One of the secured notes includes warrants to purchase 1,000,000 shares of the Company's common stock exercisable at $0.375 per share. On another of the secured notes, in the event of default the holder is entitled to convert the unpaid principal and interest into common stock of the Company at $0.60 per share; however, the Company is entitled to a discount if the note is prepaid, which discount is initially 20% of the amount prepaid, and the discount declines proportionally over the three year term of the note. Annual maturities of long term notes payable and litigation payable for the next fiscal years are as follows: Fiscal Year Amount ----------- ------ 2001 $9,899,531 2002 6,578,296 2003 18,882,754 2004 619,521 2005 629,028 thereafter 10,342,586 ---------- $46,951,716 (10) Convertible Notes Payable In Fiscal 1993, the Company issued its Secured 7% Convertible Notes due 2002 in the total amount of $5.5 million. In Fiscal 1999, the remaining obligation of $2,122,900, related to these notes was redeemed by the Company. In Fiscal 1998, the Company issued $34.5 million of unsecured notes payable to investors. During fiscal 1998 the Company redeemed $3.8 million of notes issued in Fiscal 1997 and $2 million of notes issued in Fiscal 1998. Additionally, $4.5 million of notes issued in Fiscal 1997 were converted into 3,164,001 shares of common stock. In Fiscal 1999, the Company issued $8 million of unsecured notes payable to investors and $4,662,900 of secured notes payable to investors. During Fiscal 2000 the Company redeemed $1.6 million of convertible notes issued in Fiscal 1998. Additionally, in Fiscal 1999, $9,662,184 worth of convertible notes issued in Fiscal 1998 plus interest of $547,249, were converted into 16,513,282 shares of common stock. In Fiscal 2000, the Company restructured much of its convertible notes payable through debt forgiveness and equity conversion (see note 24). (11) Accrued Expenses Accrued expenses consist of the following: 2000 1999 ---- ---- Accrued payroll and related expenses $ 582,850 $1,076,185 Bond interest payable 261,328 4,535,789 Other 290,120 2,444,809 ---------- ------------- $ 1,134,298 $8,056,783 ========== ============== (12) Income Taxes At February 29, 2000, the Company had net operating loss carry-forwards for Federal and state income tax purposes of approximately $242 million and $108 million respectively, which expire through 2020. Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the liability method of accounting for income taxes. Accordingly, the Company has recorded a deferred tax benefit of approximately $97 million for Fiscal 2000 and $93 million for Fiscal 1999. The Company has also recorded a valuation account to fully offset the deferred benefit due to the uncertainty of the realization of this benefit. The Company's formerly owned Japanese subsidiary, MYS Corporation, paid income taxes to the Japanese government at an effective rate of approximately fifty eight percent. At February 28, 1999, MYS Corporation had a current income tax receivable of approximately $153,000. (13) Common Stock, Stock Options and Warrants At February 29, 2000, the Company had 200,000,000 shares of $.005 par value common stock authorized for issuance. The number of authorized shares was increased to 500,000,000 subsequent to February 29, 2000 (see Note 23). At February 29, 2000 there were warrants outstanding to purchase 1,213,000 shares of the Company's common stock exercisable at $0.375 a share. The Company has granted nonqualified stock options to certain directors and employees. Options are granted at fair market value at the date of grant, vest immediately, and are exercisable at any time within a five-year period from the date of grant. A summary of activity in the directors stock option plan follows:
Shares Exercise Price Options outstanding at February 28, 1997 1,009,578 $1.44-5.50 --------- ---------- Grants 50,000 2.30 Cancellations -- -- Exercises -- -- ---------- ---------- Options outstanding at February 28, 1998 1,059,578 1.44-5.50 Grants -- -- Cancellations -- -- Exercises -- -- Expired 499,578 1.44-5.50 ------- ----------- Options outstanding at February 28,1999 560,000 2.06-4.75 Grants -- -- Cancellations -- -- Exercises -- -- Expired (60,000) 3.00-4.75 -------- ----------- Options outstanding at February 29, 2000 500,000 $2.06-$2.30 ======= ===========
The following table summarizes information about director stock options at February 29, 2000:
Number Average Weighted Number Range of Outstanding at Remaining Life Average Exercise Exercisable As - Exercise Price 2/29/00 in Years Price of 2/29/00 $2.30 50,000 7.13 $2.30 50,000 $2.06 450,000 7.36 $2.06 400,000
(14) Employee Stock Plans As of February 29, 2000, the Company has one employee benefit plan: The Employee Stock Ownership Plan (ESOP). In addition, the options granted under the 1989 Stock Option Plan are valid and subject to exercise. The ESOP is a qualified discretionary employee stock ownership plan that covers substantially all employees. This plan was formally approved by the Board of Directors during Fiscal 1990. The Company made no contributions to the ESOP in Fiscal 2000, 1999 and 1998 respectively. In March 2000, the Company's Board of Directors adopted the 2000 Stock Option Plan, a nonqualified plan which was subsequently approved by the shareholders. The Stock Option Plan authorizes the grant of options to purchase up to 10% of the Company's outstanding common shares. Shares currently under option generally vest ratably over a five year period. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measure compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock option and similar equity instruments under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined is SFAS No. 123 had been applied. Management accounts for options under APB Opinion No. 25. If the alternative accounting-related provisions of SFAS No. 123 had been adopted as of the beginning of 1995, any effect on 2000, 1999 and 1998 net loss and loss per share would have been immaterial. A summary of activity in the employee stock option plan is as follows:
Shares Exercise Price Options outstanding at February 28, 1997 3,879,800 $1.44-7.31 --------- --------- Grants 2,983,000 1.79-2.15 Cancellations (3,002,800) 1.44-3.06 Exercises (25,000) 2.06 ----------- -------------- Options outstanding at February 28, 1998 3,835,000 1.44-7.31 Grants 2,800,000 3.31 Cancellations (59,700) 1.44-7.31 Exercises (50,000) 2.06 ------------ -------------- Options outstanding at February 28, 1999 6,525,300 1.44-7.31 Grants -- -- Cancellations (454,500) 2.06-7.31 Exercises -- -- Expired (131,800) 3.06-4.12 ------------ ----------- Options outstanding at February 29, 2000 5,939,000 $1.44-7.31 =========== ---==========
The following table summarizes information about employee stock options at February 29, 2000:
Number Average Weighted Number Range of Outstanding at Remaining Life Average Exercise Exercisable As - Exercise Price 2/29/00 in Years Price of 2/29/00 $1.44 431,000 0.92 $1.44 431,000 $7.25 6,000 1.75 $7.25 6,000 $3.00-$4.00 215,000 2.62 $3.47 215,000 $7.31 6,000 3.60 $7.31 6,000 $1.79-$2.15 2,481,000 7.42 $2.04 2,481,000 $3.31 2,800,000 8.05 $3.31 560,000
(15) Leases At February 29, 2000, the Company has no long term operating leases. Rental expense charged to operations approximated $.9 million, $1.8 million and $1.3 million in Fiscal 2000, 1999 and 1998, respectively. (16) Significant Customers The Company sold ceramics related products to a single significant customer during Fiscal 2000 for a total of approximately $2.1 million or 29.7% of net revenues. After Fiscal 2000 this customer will not be a significant customer as the Company has sold the Ceramics division. The Company on a consolidated basis sold sound related products and computer related products to five significant customers during Fiscal 1999. Sales by MYS Corporation to a major electronics retailer accounted for approximately $16.3 million or 20.1% of revenues. Sales of communications and multimedia products to major mass merchandisers Best Buy, Circuit City, and Staples accounted for $12.6 million or 15.5% of revenues. None of these customers are related to the Company or any other customer of the Company. The Company sold sound related products and computer related products to five significant customers during Fiscal 1998. Sales of speakers to a major electronics retailer accounted for approximately $11.8 million or 7.3% of gross revenues. Sales of communications and multimedia products to major mass merchandisers Best Buy, Circuit City, and Staples accounted for $60.1 million or 37.3% of gross revenues. Sales of computer monitors to two customers accounted for approximately $10 million or 6.2% of gross revenues. (17) Commitments and Contingencies The Company is engaged in various legal actions listed below. In the case of a judgment or settlement, appropriate provisions have been made in the financial statements. Shareholder Litigation Barovich/Chiau v. Aura In May, 1995 two lawsuits naming Aura, certain of its directors and executive officers and a former officer as defendants, were filed in the United States District Court for the Central District of California, Barovich v. Aura Systems, Inc. et. al. (Case No. CV 95-3295) and Chiau v. Aura Systems, Inc. et. al. (Case No. CV 95-3296), before the Honorable Manuel Real. The complaints purported to be securities class actions on behalf of all persons who purchased common stock of Aura during the period from May 28, 1993 through January 17, 1995, inclusive. The complaints alleged that as a result of false and misleading information disseminated by the defendants, the market price of Aura's common stock was artificially inflated during the class period. The complaints were consolidated as Barovich v. Aura Systems, Inc., et. al. A settlement agreement for this proceeding was submitted to the Court on July 20, 1998, for preliminary approval, at which time the Court denied the plaintiffs' motion for approval of the settlement. On September 22, 1998, the Company and certain of its officers and directors renoticed their motion for summary judgment. Thereafter, on January 8, 1999, the plaintiffs and the defendants in the Barovich action executed a Stipulation of Settlement pursuant to which the Barovich action would be settled in return for payments by Aura and its insurer to the plaintiff's settlement class and plaintiff's attorneys in the amount of $2.8 million in cash (with $800,000 to be contributed by Aura and $2 million to be contributed by Aura's insurer, subject to a reservation of rights by the insurer against the insureds) and $1.2 million in cash or common stock, at the Company's option, to be paid by Aura. Subsequently the parties and the insurer entered into an amended settlement agreement. As amended the settlement calls for the total settlement amount of $4 million to remain the same, with the insurer contributing $1.8 million and the remaining $2.2 million to be paid by Aura in cash over a period of three years, with accrued interest at the rate of 8% per annum. The settlement was preliminarily approved by the Court on December 6, 1999, and finally approved in or about April, 2000. Morganstein v. Aura. On April 28, 1997, a lawsuit naming Aura, certain of its directors and officers, and the Company's independent accounting firm was filed in the United States District Court for the Central District of California, Morganstein v. Aura Systems, Inc., et. al. (Case No. CV 97-3103), before the Honorable Steven Wilson. A follow-on complaint, Ratner v. Aura Systems, Inc., et. al. (Case No. CV 97-3944), was also filed and later consolidated with the Morganstein complaint. The consolidated amended complaint purports to be a securities class action on behalf of all persons who purchased common stock of Aura during the period from January 18, 1995 to April 25, 1997, inclusive. The complaint alleges that as a result of false and misleading information disseminated by the defendants, the market price of Aura's common stock was artificially inflated during the Class Period. The complaint contains allegations which assert that the company violated federal securities laws by selling Aura Common stock at discounts to the prevailing U.S. market price under Regulation S without informing Aura's shareholders or the public at large. In June, 1998, the Court entered an order staying further discovery in order to facilitate completion of settlement discussions between the parties. On October 12, 1998, the parties entered into a stipulation for settlement of all claims, subject to approval by the Court. Under the stipulation for settlement Aura agreed to pay $4.5 million in cash or stock, at Aura's option, plus 3.5 million warrants at an exercise price of $2.25. In addition, Aura's insurance carrier agreed to pay $10.5 million. The settlement was finally approved by the Court in October 1999 and was thereafter amended in December 1999 to allow Aura to defer payment of the settlement amount until April 2000 in exchange for an additional 2 million shares of Aura Common Stock, subject to certain adjustments. The deferral resulted from the limitation on the number of shares authorized (see note 23). The final distribution of stock and warrants to class members occured in June 2000. NewCom Related Litigation Deutsche Financial Services v. Aura In June, 1999, a lawsuit naming Aura was filed in United States District Court for the Central District of California, Deutsche Financial Services ("DFS") vs. Aura (Case No. 99-03551 GHK (BQRx)). The complaint follows DFS' termination of its credit facility with NewCom of $11,000,000 and seizure of substantially all of NewCom's collateral in April, 1999. It alleges, among other things, that Aura is liable to DFS for NewCom's indebtedness under the secured credit facility purportedly guaranteed by Aura in 1996, well prior to the NewCom initial public offering of September 1997. In the proceeding, DFS sought an order to attach Aura's assets which was denied following an evidentiary hearing before the Honorable Brian Quinn Robbins, U.S. Magistrate, and the matter has been ordered by the District Court to binding arbitration. Aura has now responded in arbitration, denying DFS' claims and has asserted in its defense, among other things, that the guarantee, if any, is discharged. In addition, Aura through its counsel, has asserted cross-claims for, among other things, tortious lender liability, alleging that DFS wrongfully terminated the NewCom credit facility, wrongfully seized the NewCom collateral and wrongfully foreclosed upon NewCom collateral, acting in a commercially unreasonably manner. A panel of three arbitrators has been selected and appointed by the American Arbitration Association and a hearing set for May, 2000 was suspended by the panel without yet scheduling a new hearing date. The Company believes it has meritorious defenses and cross claims. However, no assurances can be given as to the ultimate outcome of this proceeding. Excalibur v. Aura On November 12, 1999, a lawsuit was filed by three investors against Aura and Zvi Kurtzman, Aura's Chief Executive Officer, in Los Angeles Superior Court entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054) arising out of two NewCom, Inc. financings consummated in December 1998. The NewCom financings comprised (1) a $3 million investment into NewCom in exchange for NewCom Common Stock, Warrants for NewCom Common Stock, and certain "Re-pricing Rights" which entitled the investors to receive additional shares of NewCom Common Stock in the event the price of NewCom Common Stock fell below a specified level, and (2) a loan to NewCom of $1 million in exchange for a Promissory Note and Warrants to purchase NewCom Common Stock. As part of these financings Aura agreed with the investors to allow their Re-pricing Rights with respect to NewCom Stock to be exercised for Aura Common Stock, at the investors' option. Aura also agreed to register Aura Common Stock relating to these Re-pricing Rights. The Plaintiffs allege in their complaint that Aura breached its agreements with the Plaintiffs by, among other things, failing to register the Aura Common Stock relating to the Re-pricing Rights. The Plaintiffs further allege that Aura misrepresented its intention to register the Aura shares in order to induce the Plaintiffs to loan $1.0 million to NewCom. The Complaint seeks damages of not less than $4.5 million. In January 2000 Aura filed counterclaims against the Plaintiffs, including claims that the Plaintiffs made false representations to Aura in order to induce Aura to agree to issue its Common Stock pursuant to the Re-pricing Rights. The parties have agreed to submit this matter to mediation on June 28, 2000. The Company believes that it has meritorious defenses and counterclaims to the Plaintiffs' allegations. However, no assurances can be given as to the ultimate outcome of this proceeding. Securities and Exchange Commission Settlement. In October, 1996, the Securities and Exchange Commission ("Commission") issued an order (Securities Act Release No. 7352) instituting an administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The proceeding was settled on consent of all the parties, without admitting or denying any of the Commission's findings. In its order, the Commission found that Aura and the others violated the reporting, record-keeping and anti-fraud provisions of the securities laws in 1993 and 1994 in connection with its reporting on two transactions in reports previously filed with the Commission. The Commission's order directs that each party cease and desist from committing or causing any future violation of these provisions. The Commission did not require Aura to restate any of the previously issued financial statements or otherwise amend any of its prior reports filed with the Commission. Also, the Commission did not seek any monetary penalties from Aura, Mr. Kurtzman or anyone else. Neither Mr. Kurtzman nor anyone else personally benefited in any way from these events. For a more complete description of the Commission's Order, see the Commission's release referred to above. Other Legal Actions The Company is also engaged in other legal actions. In the opinion of management, based upon the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect. (18) Concentrations of Credit Risk Financial instruments that subject the Company to concentration of credit risk are cash equivalents, trade receivables, notes receivable, trade payables and notes payable. The carrying value of these financial instruments approximate their fair value at February 29, 2000. Cash equivalents consist principally of short-term money market funds, these instruments are short term in nature and bear minimal risk. The Company performs credit background checks and evaluates the credit worthiness of all potential new customers prior to granting credit. UCC financing statements are filed, when deemed necessary. (19) Other (Income) and Expenses Other (income) and expenses consist of:
2000 1999 1998 ---- ---- ---- Gain on subsidiary stock and other assets $ -- $ (811,657) $ (12,632,265) Legal settlements 2,777,762 7,717,518 1,700,000 Equity in losses of unconsolidated joint ventures -- 6,268,384 1,937,747 Loss on disposal of assets (259,274) 1,026,972 -- Loss on disposal of investment -- 4,782,839 -- Termination of license arrangement -- -- 3,114,030 Other income (1,101,279) (101,711) (220,291) Interest expense 4,476,690 11,679,701 6,450,741 --------- ---------- ------------- $ 5,893,449 $ 30,562,046 $ 349,962 ========= ============ ============
(20) Fourth Quarter Adjustments Certain fourth quarter adjustments were made in Fiscal 2000 that are significant to the quarter and to comparisons between quarters. During the fourth quarter of Fiscal 2000, in conjunction with the Company's restructuring, $13,218,750 in debt and $5,850,168 in accrued interest was forgiven by the Company's major creditors. This forgiveness of debt is recorded as an extraordinary item in the fourth quarter of Fiscal 2000 (see note 24). (21) Segment Reporting The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," as of February 28, 1999. SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defined operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company has aggregated its business activities into three operating segments: electromagnetic and electro-optical technology (Aura), computer related communications (NewCom) and sound related products including professional and consumer sound system components (AuraSound). The electromagnetic and electro-optical technology operating segment consists of the development, commercialization and sales of products, systems and components using patented and proprietary electromagnetic and electro-optical technology. The Company has aggregated all electromagnetic and electro-optical operating units due to commonality of economic characteristics, technology employed, and class of customer. In addition, this segment also includes our corporate headquarters, revenues generated from the sale of computer monitors and activity from Electrotec. The overall management and operating results for this segment are based on the activities and operations as noted. The computer related communications and sound related products operating segment consists of the manufacturing and selling of high performance computer communication and multimedia products for the personal computer market. The segment also includes internal and external data fax modems, speaker phones, sound cards, and multimedia kits. This operating segment suffered significant operating losses during the year ended February 28, 1999 and ceased operations in early Fiscal 2000. The sound segment consists of the manufacture and sale of professional and consumer sound system components and products, including speakers, amplifiers, and Bass Shakers. AuraSound reflects the aggregate segment operating units based on economic characteristics, products and services, the production process class of customer and distribution process. AuraSound was sold during Fiscal 2000. Aura NewCom AuraSound Consolidated (in thousands) Net Revenues* 2000 $ 5,788 $ -- $ -- $ 5,788 1999 $ 6,830 $ 46,820 $ -- $ 53,650 1998 $ 10,252 $ 93,687 $ -- $ 103,939 Income (loss) from Operations 2000 $ (18,510) $ -- $ -- $ (18,510) 1999 $ (54,396) $ (94,357) $ -- $ (148,753) 1998 $ (15,448) $ 11,872 $ -- $ (3,516) Identifiable Assets 2000 $ 56,036 $ -- $ -- $ 56,036 1999 $ 63,754 $ -- $ 26,389 $ 90,143 1998 $ 96,735 $ 96,127 $ 34,441 $ 227,303 Depreciation and Amortization 2000 $ 6,854 $ -- -- $ 6,854 1999 $ 7,375 $ 1,511 $ 4,099 $ 12,985 1998 $ 3,621 $ 1,274 $ 3,467 $ 8,362 Capital Expenditures 2000 $ 16 $ -- $ -- $ 16 1999 $ 2,450 $ 161 $ 1,443 $ 4,054 1998 $ 15,322 $ 1,455 $ 1,229 $ 18,006 Number of operating locations at year-end (unaudited) 2000 2 -- -- 2 1999 2 2 5 9 1998 2 2 5 9
* Includes revenue from external customers for all groups of products and services in each segment reported. Products and services sold by each segment are generally similar in nature; also it is impracticable to disclose revenues by product. Segment Reporting Net Revenue from customer geographical segments are as follows (in thousands):
2000 1999 1998 ---- ---- ---- U.S., Canada, Latin America $6,845 96.75% $58,871 72.22% $120,517 88.15% Europe 63 .89 772 0.95 451 0.33 Asia 168 2.36 21,875 26.83 15,747 11.52 --- ------- ------ ------- ------- ------ $7,076 100.00% $81,518 100.00% $136,715 100.00% ====== ======= ======= ====== ========= ======
All of the Company's operating long-lived assets are located in the United States (22) Discontinued Operations In June 1999 and March 1999, the Company divested its interest in AuraSound, Inc. and the MYS group of entities, respectively. Pursuant to Accounting Principles Board Option ("APB") No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of the Company have been reclassified to reflect the disposition of the AuraSound segment as a discontinued operation. Net operating revenues for discontinued operations for Fiscal 2000, 1999 and 1998 were approximately $1,037,000, $27,868,000 and $32,776,000 respectively. (23) Subsequent Events Note Conversion On March 6, 2000, the Company entered into a settlement agreement and release of claims for a $1,000,000 convertible note in exchange for 3,000,000 shares of the Company's common stock. Sale of Assets of Aura Ceramics Effective March 1, 2000 the Company entered an agreement for the sale of the assets of Aura Ceramics. The agreement calls for a sales price of $3.5 million with a down payment of $1 million, which was paid on May 2000. The balance, including interest at 8% per annum is due in monthly installments of $31,000, with a balloon payment of the remaining principal and interest due at the end of seven years. Completion of Common Stock Private Placement In May 2000, the Company completed a private placement of approximately 15.5 million shares of its common stock at $0.32 per share resulting in gross proceeds of approximately $5.0 million. Authorized Stock In March 2000, the Company's shareholders approved an amendment to the articles of incorporation to increase the number of common shares authorized to 500,000,000, and to authorize the issuance of up to 10,000,000 shares of preferred stock. 2000 Stock Option Plan At the March 6, 2000 Annual Meeting, the Company's Board of Directors adopted, and shareholders approved, the 2000 Stock Option Plan. (24) Extinguishment of Debt At the start of Fiscal 2000, the Company had $38,481,782 in convertible notes payable, of which most were in default. During the current year the Company restructured much of its convertible notes payable obligation through debt forgiveness and equity conversion. With the debt restructure, $11,009,102 of convertible notes was converted into 71,054,445 shares of the Company's common stock, of which 2,520,000 shares are not reflected as outstanding as of February 29, 2000. The Company also redeemed $430,000 of convertible notes, and $12,535,898 in convertible notes and $5,850,168 in accrued interest were forgiven. A majority of the restructure was accomplished by a single unrelated party acquiring $21,345,000 of the convertible notes payable and subsequently converting $9,224,102 into 65,034,445 shares of the Company's common stock and debt forgiveness of $12,120,898. In addition, $682,852 in accounts payable and accrued expenses was also forgiven. Total debt forgiveness of $19,068,918 is reflected as an extraordinary item in the accompanying consolidated financial statements.
SCHEDULE II AURA SYSTEMS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended February 29, 2000, February 28, 1999 and February 28, 1998 Balance at Charged to Charged to Balance at beginning of costs and other end period expenses Accounts Deductions of period ----------------------------------------------------------------------------------- Allowances are deducted from the assets to which they apply Year ended February 29, 2000 Allowance for: Uncollectible Accounts $8,149,551 $ 456,233 $ -- $ 932,567 $7,673,217 Reserve for returns 121,474 359,488 -- 480,962 -- Reserve for potential product obsolescence 7,876,000 82,913 -- 7,631,977 326,936 --------- -------- ------------ --------- ---------- $16,147,025 $ 898,634 $ -- $9,045,506 $8,000,153 ========== ======= =============== ========== ========= Year ended February 28, 1999 Allowance for: Uncollectible Accounts $ 5,431,525 $13,314,320 $10,000,000 $20,596,294 $ 8,149,551 Reserve for returns 569,605 24,741,084 -- 25,189,215 121,474 Reserve for potential product obsolescence 4,535,000 15,906,337 -- 12,565,337 7,876,000 --------- ---------- ------------ ---------- --------- $10,536,130 $53,961,741 $10,000,000 $58,350,846 $16,147,025 ========== ========== ========== =========== ========== Year ended February 28, 1998: Allowance for: Uncollectible Accounts $2,090,652 $ 3,617,056 $ -- $ 276,183 $5,431,525 Reserve for returns 1,512,679 23,504,148 -- 24,447,222 569,605 Reserve for potential product obsolescence 2,255,000 4,030,000 -- 1,750,000 4,535,000 --------- ------------ ---------- ----------- ---------- $5,858,331 $31,151,204 $ -- $26,473,405 $10,536,130 ========= ========== ========== ========== ==========
Amounts charged to other accounts include amounts charged to price protection and rebates in Fiscal 1999.