-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ildi146jtvgiER+Wc+1vA0WK+I8YrCd/Cngwz/whDOcxM+y96iG4I/FVqdXRyi3c eIEA8NetDXTRiDGPU6t5rw== 0000826253-02-000025.txt : 20020529 0000826253-02-000025.hdr.sgml : 20020529 20020529163253 ACCESSION NUMBER: 0000826253-02-000025 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AURA SYSTEMS INC CENTRAL INDEX KEY: 0000826253 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 954106894 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17249 FILM NUMBER: 02664907 BUSINESS ADDRESS: STREET 1: 2335 ALASKA AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3106435300 MAIL ADDRESS: STREET 1: 2335 ALASKA AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-K 1 both.txt FYE 2002 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 28, 2002 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. |_| On May 24, 2002 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $94,121,000. The aggregate market value has been computed by reference to the last trading price of the stock on May 24, 2002. On such date the Registrant had 408,782,576 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 A. INTRODUCTION Aura Systems, Inc., a Delaware corporation, ("Aura" or the "Company") was founded in 1987. Aura designs, assembles and sells the AuraGen(R), the Company's patented mobile power generator that uses the engine of the vehicle to generate power. It installs under-the-hood in many motor vehicles and delivers on-location, plug-in electricity for any end use including industrial, commercial, recreational and military applications. Compared to the traditional solutions (i.e., gensets and inverters) addressing the multi-billion dollar North American mobile power market, the Company believes the AuraGen(R) uniquely and conveniently provides cleaner electricity with greater reliability and flexibility at a lower cost to the end user. The Company began commercializing the AuraGen(R) in late 1999 as a 5,000 watt 120/240V AC machine compatible with certain Chevrolet engine models. In mid and late 2001, the Company added an 8,500 watt configuration and also introduced AC/DC and Inverter Charger System (ICS) options. The Company now has configurations available for more than 90 different engine types including a majority of General Motors and Ford models, many DaimlerChrysler models and numerous others made by Caterpillar, Detroit Diesel, Cummins, Freightliner and Navistar, among other chassis and engine manufacturers. B. THE AURAGEN(R) The AuraGen(R) is a patented induction power system that uses the engine of a vehicle to produce electrical energy. The AuraGen(R) is the only proven, commercialized power system available that can generate up to 8,500 watts of pure sine wave power and is fully integrated under the hood of a vehicle. While traditional mobile sources of electricity can exhibit voltage fluctuations, spikes, surges and other inconsistencies, the AuraGen(R) delivers pure sine wave (or "clean") power. Pure sine wave power is generally desired and often required to safely and reliably operate highly sensitive digital equipment, such as computers or surveillance equipment. The AuraGen(R) is composed of three basic subsystems. The first subsystem is a mechanical device that is bolted to the vehicle engine. The mechanical subsystem generates electricity when it is rotated by the vehicle engine in a manner similar to a conventional alternator. Unlike an alternator, however, the induction generator is able to generate maximum power at engine RPM's from enhanced idle to redline for gasoline engines and true idle to redline for larger diesel engines. The second subsystem is an electronic control unit that can be mounted anywhere in the vehicle except under the hood. The electronic control unit filters and conditions the electricity to provide clean, steady voltages for both AC and DC power at all engine speeds. The third subsystem is comprised of a set of mounting brackets and supporting components for integration under the hood. The Company sells two basic models with a number of options. The models currently available produce 5,000 watts of continuous power with 7,200 watts peak and 8,000 watts continuous with 9,000 watts peak, respectively. AC output is in the form of dual 120/240 volts pure sine wave at a frequency of 60 Hertz. In addition, both of the above models are available in configurations that divide the maximum power between AC and DC. The DC available power can be either 14 volts or 28 volts. In fiscal 2002, the Company began to offer a new model that generates up to 6,000 watts of power with the vehicle engine either on or off. Whether the engine is on or off is totally transparent to the user. This new model uses auxiliary batteries as a power source in conjunction with the AuraGen(R) system to generate pure sine wave AC power while the engine is off. As soon as the engine is turned on, the system switches automatically from generating AC power from the batteries to generating AC power from the induction power source attached to the vehicle engine. This process occurs up to without any dips or spikes, and at the same time the AuraGen(R) starts charging the auxiliary batteries at the maximum safe charging speed of 125 amps. Aura provides custom engineered brackets for both the 5,000 watt and 8,500 watt systems that attach to over 90 different engine models. The brackets are designed to fit most General Motors gasoline and diesel engines from 4.8 to 7.4 liters, Ford gasoline and diesel engines from 4.2 to 7.3 liters and DaimlerChrysler 5.2 to 5.9 liter engines. In addition the Company has designed custom engineered brackets for numerous diesel engines provided by AM General, Cummins, Detroit Diesel, Navistar, Caterpillar and Freightliner. The Company also provides power-take-off (PTO), as well as hydraulic driven interfaces for the bigger trucks that do not involve direct attachment to the vehicle engine. C. Mobile Power Industry The mobile power generation market is large and growing. Based on studies conducted by the U.S. government, Business Communications Company, Inc. ("BCC") and others, the Company estimates there are at least $2.5 billion in revenues from the North American mobile power generation market in 1999 (not including gensets used in welding machines), an increase of 8.8% from 1998. The Company projects North American market revenues will reach over $3.9 billion in 2006 and estimate the worldwide market to be twice the North American market. Based on these studies, the Company estimates that the worldwide mobile power market will grow between 4% and 5% per annum over the next few years. Worldwide growth is expected to be fueled by increases in the development and construction of industrial infrastructures, adoption of new mobile power applications and increased use of electronic sensors and instruments in less developed areas where grid-based electricity is unavailable or unreliable. Vehicles used in the telecommunications, utilities, catering, public works, construction, oil and gas industries, emergency/rescue, military and recreational vehicles rely heavily on mobile power. Mobile work sites require on-location electricity to power equipment ranging from computers to power tools. Buses require supplemental power to run fare meters and air conditioners. Military and police vehicles require clean mobile power to run sensitive computers and surveillance equipment. Emergency vehicles require supplementary power to operate numerous monitoring devices. Construction and utility vehicles require on-location electricity to run power tools and lights. Oil and gas vehicles require on-site power to run surveying equipment, as well as computers and numerous sensors and instruments. Recreational vehicles require supplemental power to run televisions, refrigerators and other appliances. Mobile backup power has become increasingly important as electric grid system overcrowding and degradation has compromised the quality and reliability of traditional sources of electricity. The two primary options available to users of mobile power today are gensets and inverters. Gensets are large, heavy and inefficient power generation units which are not incorporated into the vehicle and require external fuel, either gasoline or diesel, in order to generate electricity. Gensets are generally noisy and cumbersome to transport because of their weight and size. Genset technology has been utilized since the 1930s and has evolved little since that time. Inverters convert the DC electricity stored in automotive or other batteries to AC electricity, which is required by a wide range of mobile applications. Due to their low power output capabilities, inverters are typically used for applications that require less than 2,500 watts of power. As an inverter does not generate power, the user must rely entirely on the power stored in the batteries for mobile power needs. As the batteries are drained, the user must recharge them by connecting into a grid power source, which is known as "shore power," or through gensets or other means. D. Competitive Advantages Superior Product More Convenient. The AuraGen(R) is significantly smaller and lighter than a conventional genset and more powerful than an inverter, making it a more convenient mobile power solution. Most gensets are large and weigh hundreds of pounds while the AuraGen(R) mechanical system weighs approximately 65 lbs and fits under the hood of a vehicle. Because the AuraGen(R) is installed directly in the vehicle, many hassles associated with gensets (e.g., locating, transporting, positioning and hooking it up) are eliminated, and the units themselves are less vulnerable to theft. Inverters require battery banks for power generation. These batteries are capable of delivering large amounts of electricity for short periods of time, but must be charged frequently, which normally requires overnight charging via shore power. More Cost Effective. For the same output, the AuraGen(R) uses less power and is less expensive to operate than the other currently available mobile power solutions. The Company believes the cost to operate a typical genset is approximately $0.92 per kW/hour and the cost to operate a typical inverter is approximately $0.70 per kW/hour. The cost to operate a comparable AuraGen(R) is approximately $0.46 per kW/hour while the vehicle is stationary. When power is needed while the vehicle is in motion (e.g., recreational vehicles, ambulances, police vehicles, military vehicles), the cost to operate the AuraGen(R) drops to approximately $0.28 per kW/hour. More Reliable. Compared to the other mobile power solutions, the Company believes the AuraGen(R) is more reliable. The AuraGen(R) has a three year warranty compared to the typical one year warranty available for a comparable genset or inverter. The AuraGen(R) warranty imposes no limitation on mileage or hour usage for the end user. Additionally, there are few moving parts in the AuraGen(R) which minimizes repair and replacement costs attributable to normal use. More Flexible. The AuraGen(R) can deliver 120V AC, 240V AC, 12V DC and 24V DC electricity. Other DC voltages can be programmed (such as 42V), thereby making the AuraGen(R) compatible with a wider range of electrical equipment. The AuraGen(R) Inverter Charger System (ICS) unit delivers power with the engine both on and off. This flexibility also allows the AuraGen(R) to satisfy the power generation needs of most end users. Higher Quality Electricity. The quality of electricity has become more important as computers and other technologically advanced products have become more widely available and utilized. This type of equipment generally requires "clean" or pure sine wave electricity. Because gensets usually do not deliver pure sine wave electricity, they are not well-suited for digital instruments and sensors. Gensets occasionally deliver power spikes that can damage sensitive instruments. The AuraGen(R) produces pure sine wave electricity which is safer for sensitive equipment. Inverters that produce pure sine wave electricity are available but more expensive than standard inverters and relatively uncommon. The Company has measured a 2% THD (total harmonic distortion) for the electrical output from an AuraGen(R), which compares favorably to the output of that from a typical power company electric grid. The Company believes the voltage produced by the AuraGen(R) is more stable than the voltage produced by the grid, without expensive filters, due to dips in voltage on grid power that result from sudden load increases. Safer for the Environment. The AuraGen(R) is considerably more fuel efficient than the other currently available mobile power solutions. The AuraGen(R) uses the automotive engine which is the most efficient gasoline or diesel engine available and is highly regulated for environmental protection. Gensets use small engines without the numerous smog controls available on vehicles. Significant Barriers to Entry Patents. The inventions upon which the AuraGen(R)is based are protected by patents issued in the U.S. and key foreign countries. The first of Aura's domestic patents does not expire until 2015. The Company intends to defend its patents vigorously. Capital and Time Intensive Research and Development Required. Creating and patenting the AuraGen(R) required over $150 million and 600 man-years of engineering, research and development. To Aura's knowledge, there are no other patents to this technology. The mobile power technology in existence today was developed approximately 70 years ago and has changed little since then. Research and development in electric motor and power generation is extremely time intensive and has recently been an underdeveloped field of study. The Company believes that it would require a significant capital and time investment to develop a "next generation" technology. Lengthy and Demanding Evaluation and Approval Process Imposed by Manufacturers and End Users. Manufacturers and end users of mobile power solutions (including the military) typically require completion of extensive evaluation and approval processes before embracing new systems. The process by which vehicle manufacturers, fleet purchasers and the military evaluate and adopt new components to be included in their vehicles is lengthy and demanding. In fact, this process can last several years as manufacturers and lobbyists debate specifications with regulators and end users. The Company's largest target customers, including GM, Ford and DaimlerChrysler, have already invested the time and capital required to evaluate and test the AuraGen(R). In addition, after extensive testing, a number of Federal, state and local government departments, utilities and major industrial companies have approved the AuraGen(R) for purchase. Any new competing product would need to initiate the same lengthy and demanding evaluation process. E. Target Markets Based on studies conducted by the U.S. government, BCC and others, the Company estimates that in 1999 the North American market produced revenues of at least $2.5 billion increasing 8.8% from 1998. Based on these same studies, the Company estimates that the worldwide market in 1999 produced over $5.0 billion in revenues and will grow between 4% and 5% per annum over the next several years. The following discussion outlines the target markets that are being pursued by the Company. Recreational Vehicles ("RVs") Currently, 8.6 million households own an RV, according to a University of Michigan study. In 1999, RV manufacturers shipped over 320,000 units of various configurations. The study also projects that the number of RV-owning households will grow to 10.4 million by the year 2010. The AuraGen(R) offers significant benefits to RV users who need electric power. These benefits include fuel savings (the AuraGen(R) uses only the RV engine), reduced maintenance costs (no required scheduled maintenance), no power derating due to altitude or temperature, and the ability to use the system in campgrounds without noise (using the "engine off" mode). The Company's system significantly reduces pollution compared to the existing gensets. In addition, since the AuraGen(R) is located under the hood, the AuraGen(R) system frees up additional space that can be used for storage. Also, the AuraGen(R) is competitive in price with gensets used in the RV industry. Military and Other Federal Agencies The United States Military is an important target market for the AuraGen(R), code named "VIPER" (Vehicle Integrated Primary Electrical Resource). The Company believes the AuraGen(R) is a superior mobile power solution compared with alternatives for virtually all military applications. Producing quiet, clean power from vehicles at low engine speed is critical as the U.S. Army adds digital applications with numerous sophisticated electronics and sensors to its war fighting capabilities. Aura is currently working with the Army to evaluate the use of the AuraGen(R) in multiple vehicle types. Aura is also pursuing discussions with other Federal agencies, including the Federal Bureau of Investigation (FBI), Border Patrol, U.S. Postal Service, Department of Transportation (DOT) and Department of Energy (DOE). Telecommunications The telecommunications industry is an important target market for the AuraGen(R) because the industry regularly uses mobile power in its daily activities. This industry requires reliable, clean mobile power that can be used for sensitive instruments while providing brute power for compressors and tools. In addition, the industry needs a user friendly integrated solution so that employees can focus on the job-at-hand rather than on operating the mobile power unit. Currently the AuraGen(R) is used in limited numbers by several television broadcasting stations in mobile news vehicles, as well as by a number of cable and telephone companies for numerous applications. Utilities Utilities present another major target market for the AuraGen(R) because the industry is heavily dependent on the use of mobile power in maintenance and service activities. The technical advantages of the AuraGen(R) have generated a high level of interest from utility companies across the United States. In addition, the Company believes that for many existing traffic light systems, for which utilities are responsible, the AuraGen(R) is the only mobile power system available which provides the required clean power at constant 120 volts that is needed to power the lights when power company electric power is interrupted. Power interruption can be caused by many events, including, among others, damage to power lines caused by accidents or weather. Numerous utilities in the U.S. have purchased the AuraGen(R) system and continue evaluating the product for their applications to better meet their requirements. Emergency/Rescue The emergency/rescue market consists of fire trucks, ambulances, police vehicles and vehicles from other organizations used during emergencies. This market relies heavily upon mobile power for lights, communications gear, instruments, medical equipment and digital equipment and tools. As the emergency/rescue market has undergone a transition to digital equipment and portable computers, it has experienced constant growth in mobile power needs. The AuraGen(R) provides an effective solution to the needs of this industry. Approximately 20 organizations have already started to use the AuraGen(R). Catering The mobile food industry, in addition to traditional party and event catering, delivers perishable food to remote locations. Some of the catering trucks still use ice for their refrigeration needs, while others use compressors. New health department regulations in some jurisdictions will require fans in trucks that are used for cooking. The need for mobile electricity for refrigeration, microwaves and other appliances is constantly growing, fueled by regulation and customer demand. The AuraGen(R), with its ability to produce electric power whether the engine is on or off, is an excellent and cost effective solution to this industry's needs. Public Works/Construction The public works and construction market comprises a large number of municipalities and construction companies that use portable power for their projects. Approximately 35 municipalities are already using the AuraGen(R) in limited quantities in their service and work trucks. The Company provides significant cost savings when total life-cycle costs are calculated. The AuraGen(R) does not require scheduled maintenance, thereby increasing availability. The public works and construction industry is changing with the introduction of computers and other sensitive digital equipment in the field. These changes require clean, pure sine wave power in order to function efficiently at job sites. Oil and Gas The Company has targeted the field applications of oil and gas companies as a market because the nature of the oil and gas industry is such that many gensets are purchased every year. Reliability and clean power are critical in this industry where "down time" or damage to sensitive equipment can result in large losses. A typical application in an oil or gas field requires the use of mobile power many hours per day, an environment in which gensets are prone to failure, and causing high maintenance costs. Additionally, a typical field site uses digital equipment that requires the clean power available from the AuraGen(R) for numerous measurements and data processing. This is an ideal environment for the AuraGen(R), since life cycle costs are such that payback can be measured in months, and the AuraGen(R) is reliable and produces high quality power. Currently, the Company has numerous units being evaluated and used in locations across the country. F. COMPANY STRENGTHS Aura's unique position in under-the-hood mobile power generation stems from approximately ten years of innovative research and development. This effort has culminated in the Company's unique, patented, fully-integrated products that are totally transparent to the users and provide clean pure sine wave power to industrial, commercial and military users through their vehicles. Technology Leadership Aura has an engineering department with extensive experience in mechanical, electrical, software, manufacturing and system engineering. In addition, the Company has a strong dedicated team that continuously develops engine mount systems for new applications. All engineering, including specifications, acceptance test criteria, packaging and documentation, is performed in-house. The Company's technology allows for the manufacture of induction machines with a one-half to two-thirds reduction in weight and size for the same output. The machine itself does not use any exotic materials (e.g., high energy permanent magnets), and the components are relatively simple to manufacture with conventional tooling. In addition to these mechanical advantages, the system uses a proprietary control system that optimizes efficiency as a function of required load. While the technology has widespread applications over a large range of horsepower, the Company's products are best utilized for machines in the range of 1.5 to 50 horsepower (1,000 watts is approximately equal to 1.5 horsepower). Quality, Reliability and Safety The Company grew out of the aerospace and defense industry. Thus, quality and reliability are an integral part of Aura's business culture. The AuraGen(R) is designed for quality, reliability and safety in heavy industrial, commercial and military usage. To ensure quality the Company uses highly qualified suppliers, the majority of which are ISO 9002 compliant. The Company performs qualification testing on the AuraGen(R) hardware components, the electronic control unit, all software and on fully 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) laboratory environmental testing. Also, field failure analysis is performed on any failed units. In addition to qualification testing, the Company has established a Quality Management system and is pursuing ISO 9001 registration. Elements include a controlled manufacturing lot tracking system, documentation and configuration control system, as well as acceptance test and compliance procedures at all manufacturing levels, including suppliers. The Company also uses Statistical Process Control ("SPC"), in-process inspection and functional tests on its AuraGen(R) assembly line. The Company designed the AuraGen(R) system, both mechanical and electronic components, for durability. Units under test are continuously cycled through demanding endurance operating environments. In addition, the Company performed laboratory destructive testing to determine when the system would fail in order to establish performance limits. The Company sets specifications and designed the system to be well below the performance limits. Besides the laboratory tests, the Company has conducted extensive testing of the AuraGen(R) in the field. There are thousands of units being used for multiple applications and in all types of operating environments, providing a good sample set for reliability analysis. The results show very low failure rates, which are constantly being reduced via minor hardware modifications, better assembly procedures and improved installation training. The U.S. Army has performed its own tests and is continuing to test the AuraGen(R) under severe conditions. In particular, the AuraGen(R) has been air-drop-certified by the Army. The VIPER (the Army name for the AuraGen(R)) is now in use by special operations forces. The AuraGen(R) system was designed for safety by including built-in protection for the user and the machine. There are multiple user safety features that include over-voltage and over-current shutdown, GFI plugs and super fast circuit breakers, and over-RPM shutdown. In addition, all the high voltage lines are encased in grounded metal conduit and any fault causes the idle control to mechanically disengage. In order to protect the system the Company designed automatic shut downs for short-circuits, overheating, battery voltage line interruption and idle control failure. The battery lines are protected with re-settable fuses. Product Support Aura is a system house that provides a turnkey product and service to support the Company's customers in every area. The Company performs all of the development, from basic physics to detailed engineering. This range of core capabilities provides a solid foundation to resolve technical issues, develop an ongoing line of new products and to continually enhance the Company's products. The Company has fully developed training materials and provides several levels of training to installers nationwide. The Company also provides field support through regional resident field engineers. The Company provides technical information via installation manuals, catalogs and service bulletins. The Company's installation software includes a "Call Home" feature that allows those with the proper access to get software upgrades automatically, along with remote diagnostic capability. The Company has a mechanism in place to track performance and field failures to enhance product reliability and to maintain and improve customer satisfaction. The Company's vehicle integration team develops, engineers and supplies all of the brackets, pulleys, idlers, belts, tensioners and other components that comprise a mounting system. The group also specifies all of the requirements of the AuraGen(R) to allow its use with other mobile drives, such as hydraulic systems and Power Take Off ("PTO"). The Company provides a three-year standard warranty for its products. The warranty can be extended for another two years for an additional cost. Strong Management Team The Company has a strong management team in place with in-depth experience covering all principal functional areas. This team has extensive experience in applying new technologies to develop advanced new products. The team is particularly strong in transforming technology into high quality and high reliability industrial products, along with the ability to establish effective sales and distribution channels. G. GROWTH STRATEGY The Company believes it is experiencing a paradigm shift in mobile power delivery and distribution caused by the development and growing adoption of the AuraGen(R). By capitalizing on patented technology to deliver a revolutionary mobile power solution, the Company expects to generate increasing revenue and cash flow. Based on the large and expanding market for mobile power, as well as the technological superiority and cost advantages of the AuraGen(R), the Company expects sales to increase. To date, AuraGen(R) units have been sold to more than 100 customers in more than 10 industries, including recreational, utilities, telecommunications, emergency/rescue, public works, catering, oil and gas, transportation and the military. The Company's objective is to be the leading developer and supplier of fully integrated mobile electric power systems. The key elements of the Company's strategy are: Market Positioning The Company has been positioning the AuraGen(R) as a turnkey mobile power solution that is more reliable, more convenient, higher quality and available at a lower total life cycle cost. Aura's solution is also safer because: 1) there is no need to carry fuel in a container, 2) there are no exposed hot components to touch/start, 3) there is nothing heavy to lift, 4) there is no pull-start required, and 5) power outlets are located away from hot components. Aura provides users of mobile power with value. When the total life cycle cost is considered, the AuraGen(R) delivers savings and increases productivity. Outsource Manufacturing Aura realizes that there are many quality manufacturers with both the capacity and capability who can economically build parts and components to the Company's specifications and drawings. Thus, the Company decided to have others custom build the different sub-assemblies for the AuraGen(R). The Company receives the sub-assemblies and assembles them into finished goods on its assembly line. This strategy ensures that the Company does what it knows best without committing a large capital investment for plants and equipment. The Company also retains full control over the end product and its quality. Aggressively Protect The Company's Intellectual Property Aura believes that a policy of actively protecting the Company's patents and know-how is an important component of its strategy to retain the unique position in under-the-hood mobile power generation and that the active patent protection will provide the Company with a long term competitive advantage. See "Business - Patents and Intellectual Property." Develop Long Term Market Opportunity Aura expects that business relationships with the major automotive OEMs such as General Motors, Ford and DaimlerChrysler will develop more slowly than our the term market opportunities as discussed above. The Company is working with General Motors and Ford on a number of activities that may develop into OEM relationships. The Company has started preliminary discussions with DaimlerChrysler. The Company is working closely with numerous U.S. Army organizations to include the Vehicle Integrated Primary Electrical Resource ("VIPER"), the Company's military version of the AuraGen(R), in their requirements documents, a key step in making the VIPER available for Army-wide purchasing. Early VIPER adopters in the Army, such as Special Forces and the 82nd Airborne, have reported very favorably on the usefulness and performance of their VIPER units. The Company intends to target new business related to various Army applications through numerous ongoing and new activities. Broaden and Enhance the Product Line Aura believes that research and development is essential to improve its product and develop additional versions in order to establish and solidify a leadership position in the power generation industry. The Company has a strong team dedicated to product improvements that will involve incorporating Aura's magnetic technology into different power levels with various options. The AuraGen(R) technology is scalable and future plans include 12kW and 25kW machines in a somewhat larger package and a 3kW to 5kW machine in a smaller package. Marketing Strategy Aura will continue to build brand awareness and consumer demand through a combination of industry specific tradeshows, technical presentations, advertising and other promotional activities. Two sales channels are utilized in North America. Large OEM applications are served directly by Aura and other applications are served through the distributor network. Aura sales and marketing resources support both of these channels. The distributor network is a vital part of the product delivery and support system. The distributors' role includes the finding and development of sales opportunities, as well as the installation and warranty support of AuraGen(R) systems. This requires the distributor to have certified installers and maintenance technicians on staff and to maintain adequate inventory levels. Large OEM's have the option of using their own facilities to install and maintain AuraGen(R) units. Longer term marketing plans include the adaptation of the product line for foreign market distribution where electrical configurations, as well as vehicle mounting requirements are different from those found in the North America market. H. CERTAIN RISK FACTORS RISK FACTORS RELATING TO THE COMPANY The Company has a history of losses and the Company may not be profitable in any future period. In each fiscal year since organization in 1987, the Company has not made a profit. The Company has an accumulated deficit in retained earnings of approximately $288 million from its inception through February 28, 2002. These losses reflect a number of events over the past fourteen years. First, the majority of the Company's revenues during the five years ended February 28,1999 were derived from the Company's NewCom subsidiary, which was engaged in the computer peripherals business until it ceased operations in the first quarter of 1999. NewCom's business was severely impacted by an industry-wide slump in the computer peripherals business in 1998. Second, the Company was established in 1987 to develop technology used primarily in military applications and new commercial and consumer applications. These development activities required significant capital expenditures over the years to develop Aura's electro-magnetic technology and to identify and commercialize new applications for this technology. None of these activities achieved commercial success. The Company cannot assure that it will be able to achieve or maintain profitability or positive cash flow in the future on a quarterly or annual basis. The Company will require additional capital, and there is no assurance that it will be available. The cash flow generated from the Company's operations to date has not been sufficient to fund the working capital needs and the Company does not expect that operating cash flow will be sufficient to fund the working capital needs in fiscal 2003. In the past, in order to maintain liquidity Aura has relied upon external sources of financing, principally equity financing and private and bank indebtedness. The Company expects to fund any operating shortfall in the current fiscal year from cash on hand and third party financings. Aura will be required to obtain external sources of capital such as debt and equity financings in order to maintain the operations. Currently, the Company has no commitments from third parties to provide additional financing. We have no assurances that third party funding will be available at the times or in the amounts required. If future financing involves the issuance of equity securities, existing stockholders may suffer dilution in net tangible book value per share. The limited availability of funds could have a material adverse effect on the Company's financial statements, results of operations and the ability to continue or expand the Company's operations. There are currently a limited number of authorized shares of common stock available for sale by the Company. The Company's authorized capital consists of 500,000,000 shares of common stock and 10,000,000 shares of preferred stock. At May 24, 2002, there were 408,782,576 shares of common stock outstanding and 77,413,000 shares of common stock reserved for future issuances under outstanding options, warrants or rights. No shares of preferred stock were outstanding. Accordingly, unless and until the Company increases its authorized common stock, only a limited number of shares of common stock are available. In this regard, the Company intends to seek authorization from its shareholders to increase its authorized common stock. However, there are no assurances that such authorization will be obtained. The success of the business will depend entirely upon the commercial success of the AuraGen(R) products, as the Company is not currently engaged in any other line of business. In 1999, the Company implemented a business restructuring in which it focused all of its resources on the successful commercialization of the AuraGen(R) product. The Company simultaneously discontinued or sold most of its then ongoing operations, including the computer peripherals, sound and ceramics operations. Because the Company has focused its business on developing a single product line, rather than on diversifying into other areas, the Company's success will be dependent upon the commercial success of the AuraGen(R) product line. Aura's limited operating history in its current line of business makes it difficult to predict how its business will develop and what future operating results will be. Aura has a limited operating history in the current line of business, which is centered on the development, manufacture and sale of the AuraGen(R) family of products. The Company faced many of the risks and uncertainties encountered by early stage companies introducing new products into a mature market. Therefore, it is difficult to predict how the business will develop in the future. Aura's revenues have declined significantly in recent years. The Company has experienced a significant decline in operating revenues over the past few years. The Company's net revenues peaked at approximately $104 million in the fiscal year ended February 28, 1998. Revenues declined to $2.5 million for the fiscal year ended February 28, 2001. Revenues in fiscal 2002 were $3.1 million. The decline in revenues is due primarily to the cessation of operations of the computer peripherals subsidiary, NewCom, Inc., in the first quarter of fiscal year 1999, and the sale of the AuraSound speaker division and ceramics operations. All of the operating revenues are now derived from the sale of the Company's AuraGen(R) products. The Company expects that all of its operating revenues will continue to be derived from AuraGen(R) sales in the foreseeable future. The SEC may pursue a civil action against the Company, which may lead to monetary penalties and other potential liabilities. Aura has been informed by the staff of the Securities and Exchange Commission ("SEC") that it intends to recommend that the SEC bring a civil action against the Company, NewCom (a former subsidiary of Aura), and certain former members of the Company's management team for violations of the antifraud and books and records provisions of the securities laws. The potential action grew out of an investigation into the financial statements for various transactions during fiscal years 1996 through 1999. The staff advised the Company that it would recommend that the SEC seek civil penalties and enjoin the companies and the individuals from future violations. The Company has engaged in conversations with the staff of the SEC regarding settlement of the matter, but no agreements have yet been reached. The Company cannot predict with certainty when or if such a settlement will occur or what the actual effects of such a settlement would be. RISK FACTORS RELATING TO THE COMPANY'S BUSINESS The market acceptance of the AuraGen(R) is uncertain. Aura's business is dependent upon sales generated from the AuraGen(R) family of products. This product uses new technology and has only recently been introduced into the marketplace. The Company is dependent on the broad acceptance by businesses and consumers of the Company's products. Because the Company seeks to introduce new products into a mature market, its success in penetrating this market and the timing of its development cannot be predicted. A mass market may fail to develop or it may develop more slowly than the Company anticipates. The AuraGen(R), while a new unique product with limited history in the marketplace, addresses a multi-billion dollar market for mobile generators in the 3,000 to 15,000 watt range. There can be no assurances that any new product will succeed in the marketplace. Market acceptance of the AuraGen(R) may be delayed due to lengthy evaluation periods. Because the Company's product is radically different from the traditional available mobile power solutions, users may require lengthy evaluation periods in order to gain confidence in the product. In addition, OEMs and large fleet users typically require considerable time to make changes to their planning and production, and further delays can be caused by prior commitments and schedules. No assurances can be given as to when or if the Company's product will be integrated into some of these potential large fleets and OEM users. Aura's business may be adversely affected by industry competition. The industry in which the Company operates is competitive. Many of the Company's competitors have greater financial resources, have larger budgets for research, new product development and marketing and have long-standing customer relationships. Furthermore, the Company must compete with many larger and more established companies in the hiring and retention of qualified personnel. Although the Company believes it has significant technological advantages over its competitors, realizing and maintaining such advantages will require Aura to develop customer relationships and will also depend on market acceptance of the Company's products. The Company faces substantial competition from companies that have been offering traditional solutions such as gensets for the last 50 years, creating an environment of well-entrenched suppliers and users that are not accustomed to change. In addition, the Company faces competition from companies that have offered inverters for the last 20 years. The Company's future revenues and profits will be largely dependent on the successful introduction of new products. These competitive pressures could limit market acceptance of its products. The Company may not have the financial resources, technical expertise or marketing and support capabilities to compete successfully in the future. The Company depends upon its intellectual property to make its products competitive, and if the Company is unable to protect its intellectual property, its business will suffer. The Company protects its proprietary technology by means of patent protection, trade secrets and unpatented proprietary know-how. In particular, the Company is relying on a number of patents and patent applications to protect the AuraGen(R) products from competition, which cover the basic mechanical design of the AuraGen(R) system and some components of the control system. Without patent protection the Company would be vulnerable to competition from third parties who could develop competing products through reverse engineering. The Company cannot provide assurance that the patents pending relating to the AuraGen(R) system or future patent applications will be issued or that any issued patents will not be invalidated, circumvented or challenged. A portion of the Company's proprietary technology depends upon unpatented trade secrets and know-how. Also, where the Company does not have patent protection, competitors may independently develop substantially equivalent technology or otherwise gain access to Aura's trade secrets, know-how or other proprietary information. Aura's future growth could be impaired if the Company is unable to increase its sales and marketing efforts. Aura's future revenue growth will depend, in large part, on the Company's ability to successfully expand the sales efforts. The Company may not be able to successfully manage the expansion of this function or to recruit and train additional direct sales support personnel. If the Company is unable to hire and retain additional highly skilled sales and marketing personnel, the Company may not be able to increase its revenue to the extent necessary to achieve profitability. If the Company is unable to hire highly trained support personnel, the Company may be unable to meet customer demands. Even if the Company is successful in expanding the sales capability, the expansion may not result in revenue growth or profitability. The Company may not be able to establish an effective distribution network or strategic OEM relationships, in which case its sales will not increase as expected. The Company is in the process of developing a distribution network and establishing strategic relationships with OEM customers. The Company may not be able to expand its distribution sales or identify OEM customers on a timely basis. The distributors with which the Company partners may not focus adequate resources on selling the Company's products or may otherwise be unsuccessful in selling them. In addition, the Company cannot provide assurance that it will be able to establish OEM relationships on favorable terms or at all. The lack of success of distributors or OEM customers in marketing the Company's products may adversely affect the financial condition and results of operations. The Company may not be able to effectively manage its growth, which would impair its profitability. If the Company is successful in executing the business plan, the Company will experience growth in the business that could place a significant strain on its management and other resources. Its ability to manage the growth will require Aura to continue to improve the operational, financial and management information systems, to implement new systems and to motivate and effectively manage the employees. It cannot be assured that the management team will be able to effectively manage this growth. The Company may experience delays in product shipments and increased product costs because it depends on third party manufacturers for certain product components. The Company currently has limited capability to manufacture most of the AuraGen(R) components on a commercial scale. Therefore, the Company relies extensively on subcontracts with third party manufacturers for such components. The use of third party manufacturers increases the risk of delay of shipments to the Company's customers and increases the risk of higher costs if the Company's third party manufacturers cannot make components available when required. Aura's suppliers and manufacturers may not supply the Company with a sufficient quantity of components or components of adequate quality, which would delay production of the Company's product. Although the Company generally attempts to use standard parts and components for its products, some of its components are currently available only from a single source or from limited sources. Also, the Company cannot guarantee that the parts or components that it purchases will be of adequate quality. The Company may experience delays in production of the AuraGen(R) if it fails to identify alternate vendors or if any parts supply is interrupted or reduced, or if there is a significant increase in production costs. Each of these factors could have a material adverse affect on the Company's business and operations. I. HISTORICAL SUMMARY The Company, Aura Systems, Inc., 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 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 the field. Subsequently, the Company developed additional electromagnetic and electro-optical 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. In September 1997, NewCom completed an initial public offering, and over the next year and a half Aura's ownership decreased and by February 1999 Aura's ownership dropped to a minority position of approximately 41%. During the second half of fiscal 1999, NewCom's business suffered from adverse industry conditions resulting from increased incorporation of computer peripherals at the OEM level. These conditions resulted in heavy losses to NewCom and its competitors. 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 and subsequently seized NewCom's assets. 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 back to the original owners, who were part of MYS management. 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. Due to NewCom's financial condition, it was unable to meet its obligations to Aura in September 1998, ultimately creating a significant cash shortfall to Aura. This required Aura beginning in January 1999 to refocus its operations by shutting down certain operating divisions, selling its MYS subsidiary, selling proprietary AuraSound speaker technology and assets, and leasing its Electrotec concert touring sound equipment. The Company sold the assets of its ceramics facility effective March 1, 2000. The Company also temporarily suspended the further development of certain electromagnetic projects, including the electromagnetic valve actuator (see "Aura's Other Technologies"). 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. The Company is continuing to focus on debt reduction through payments, settlements and conversion into equity. By the end of February 2002 the Company's debt has declined to approximately $10.8 million of which approximately $5.2 million is the mortgage on the real estate property. J. AURA'S OTHER TECHNOLOGIES Historically, Aura developed electromagnetic and electro-optical technologies with broad applications for industrial, commercial and consumer use. These technologies were transformed into specific applications. During the Company's refocus and restructure in 1999 and 2000 most of the applications were sold or discontinued. While the Company's involvement has been temporarily suspended, Aura retains significant interest in two technology applications, electromagnetic actuators and actuated mirror array. At some time in the future the Company believes it will revive the activities in these two areas. Electromagnetic Actuator (EMA(TM)) During fiscal 1995, the Company developed, built and demonstrated a new type of actuator, called the Electromagnetic Valve Actuator. The Company developed the actuator to fill the performance gap between linear actuators and solenoids. To date, the principal application of this actuator has been in its Electromagnetic Valve Actuator System ("EVA(TM)"), a patented electro-magnetically powered system that opens and closes engine valves at any user specified time interval. EVA(TM) 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(TM)'s ability to open and close the valve electro-magnetically: 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. In recent years, the Company entered into agreements with 15 companies to retrofit EVA(TM)'s on different types of diesel, automobile and motorcycle engines for evaluation and testing. During fiscal 1998, an EVA(TM) system was delivered to a major domestic Original Equipment Manufacturer (OEM) for the purpose of evaluating EVA(TM) 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(TM) 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(TM) development and commercialization to focus its resources on the AuraGen(R). The Company is however, pursuing licensing of this technology to third parties. The Company has not entered into any discussions for a licensing agreement for EVA(TM). Light Efficient Displays - Actuated Mirror Array (AMA(TM)) Aura developed and patented a technology (a "light valve") for generation of images called the Actuated Mirror Array (AMA(TM)). 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 believes that 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 AMA(TM) can be manufactured at a competitive cost in large quantities, thus making it commercially feasible. Thus, AMA(TM) based devices are expected to potentially offer the combination of increased display intensity at a competitive production cost. The Company believes that the AMA(TM) technology has a technical advantage over other technologies in achieving higher contrast, more intensity and longer-lived elements. The Company entered into a license and manufacturing agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to manufacture televisions and other devices based on AMA(TM) technology. Daewoo invested substantial funds to commercialize the technology. However, prior to fiscal 2001 a number of crises have caused Daewoo to be taken over by its creditors. The Company is negotiating with Daewoo about the future of the AMA(TM) technology. K. COMPETITION The Company believes that the AuraGen(R) enhances the competitiveness of the Company by giving it the ability to market technologically advanced products capable of adapting rapidly to changing market conditions. Aura's ability to compete will also depend on the continued ability to attract and retain skilled and experienced personnel and the ability to secure sufficient capital resources for the often-substantial time period between initial introduction and full market acceptance of the Company's product. The competition is fierce in the auxiliary power market from gensets and inverters. Gensets provide the strongest competition across the widest marketplace for auxiliary power. Gensets are large, heavy and inefficient power generation units that require external fuel, either gasoline or diesel, in order to generate electricity. Gensets are generally noisy and cumbersome to transport. Genset technology has been utilized since the 1930s and has evolved little since that time. Millions of portable gensets are sold worldwide each year to meet market demands for 1,000 watts to 10,000 watts of power. Products that achieve these power levels address the commercial, leisure and residential markets. The market for these products can be divided into two broad categories: 1) higher power, higher quality and higher price level units; and 2) lower power, lower quality and lower price level units. Cummins, Inc. (d/b/a Cummins Onan), American Honda Motor Co. (Honda Power Equipment division) and Kohler Co. (Kohler Generators division), among others, are well established and respected brand names in the genset market for higher reliability auxiliary power generation. There are approximately 44 registered genset manufacturers in the United States. Inverters convert the DC electricity stored in batteries to AC electricity, which is required by a wide range of mobile applications. Due to their low power output capabilities, inverters are typically used for applications that require less than 2,500 watts of power. Since an inverter does not generate power, the user must rely entirely on the power stored in the batteries for mobile power needs. As the batteries are drained, the user must recharge them by connecting into a grid power source, which is known as "shore power," or through gensets or other means. Vanner Incorporated and Hart Industries of America, Inc., among others, are leading suppliers in the inverter market. The Company believes that its ability to compete in the marketplace is based on the total economic value the AuraGen(R) delivers to the end user. The value the AuraGen(R) delivers is in its convenience, efficiency, flexibility and reliability. The Company believes that the total life cycle cost of an AuraGen(R) is lower than that of comparable gensets or inverters. Compared to a genset on a per kW (1,000 watts) basis, initial costs of purchasing a unit and fuel usage requirements are comparable. The most important difference is that an AuraGen(R) uses the engine of your vehicle while a genset has a separate engine of its own that will wear out and need to be replaced. Since gensets typically carry a 1-year warranty (compared with the standard 3-year AuraGen(R) warranty), the Company believes that genset engines will need to be replaced in a relatively short time and will result in a higher total life cycle cost. Inverters have comparable initial and operating costs to an AuraGen(R), but inverters require constant recharging of batteries to provide electric power. These batteries have a short life span and the user may need to buy 9 to 12 additional batteries over a 36-month period. As a result, the Company believes that the AuraGen(R) provides the lowest total life cycle cost mobile power solution. L. MANUFACTURING Aura assembles and tests the AuraGen(R) at the Company's 27,690 square foot facility in El Segundo, California with subassemblies and parts which are produced by various suppliers. The Company established these facilities with a maximum production capacity of 5,000 units per month per 8 hour operating shift. The assembly line utilized has not been used to its capacity. The Company expects that the facility utilization will increase significantly in fiscal 2003 due to increasing sales. The Company does not forecast any need to increase capacity in 2003. M. PRODUCT DEVELOPMENT EXPENDITURES During the fiscal years ended February 28, 2002, February 28, 2001, and February 29, 2000 the Company spent approximately $0.8 million, $ 0.5 million and $0.1 million, respectively, on Company research and development activities. The Company plans to continue its research and may incur substantial costs in doing so. All of the Company's R & D is currently focused on technological enhancements and product developments for the AuraGen(R). N. PATENTS AND INTELLECTUAL PROPERTY Aura's intellectual property consists of patents, trademarks and proprietary information in two technical areas: electromagnetic technology and electro-optical technology. In the electromagnetic technology area, the Company has developed numerous magnetic systems and designs that result in a significant increase of magnetic field density per unit volume that can be converted into useful power energy. This field density is increased by a factor of three to four which, when incorporated into mechanical devices, could result in a significant reduction in size and cost for the same performance. The applications of these technological advances are in mechanical machines used daily by industrial and commercial users. The Company has applied the above technology to numerous applications in industrial machines such as generators, motors and actuators. The U.S. Patent Office awarded the Company 29 patents applicable to automotive and industrial applications. Of the above patents, two are focused directly on the AuraGen(R), nine are for basic magnetic actuation, two are for control systems associated with controlling the magnetic fields in different configurations and sixteen are focused on the Electromagnetic Valve Actuator ("EVA(TM)") application. In addition, the Company has two patent applications pending related to its AuraGen(R) technology. Each of the above patents provides the Company with a competitive advantage in the control of magnetic fields for different applications and different configurations. There are two ways that electromagnetic technology can be used for generators, motors and actuators. One method uses permanent magnets, while the other uses electromagnets. The Company is building and selling the AuraGen(R) product with the imbedded magnetic technology covered in the two AuraGen(R) patents using electromagnets. The nine additional basic actuation patents cover designs where rare earth magnets could potentially be used to build similar machines. These patents provide the Company with a significant advantage in the use of either electromagnets or rare-earth magnets for the various applications. The two control patents provide the Company with a competitive advantage in specific techniques that can be used to control the magnetic energy. These types of control techniques, while wide in scope and applicable to many different configurations, are imbedded in the software used to run the AuraGen(R). The sixteen patents associated with EVA(TM) cover the implementation of a controlled magnetic field as applied to linear motors. Many of the same techniques are implemented in the AuraGen(R) control system, in particular, in the control of the high power board used in the new AuraGen(R) inverter module. Currently, the EVA(TM) system is not being developed further. However, numerous industrial and automotive organizations have shown interest in the EVA(TM) system. The Company believes this technology is potentially licensable. The Company has an additional 18 patents in electro-optical technology and a number of other patents in other fields. These patents are not related to any activity that the Company is currently pursuing. O. EMPLOYEES As of February 28, 2002, the Company employed 109 persons. As of May 29, 2002, the Company employed 76 persons. The Company believes that its relationship with its employees is good. The Company is not a party to any collective bargaining agreements. P. PRINCIPAL SOURCES OF REVENUES For the years ended February 28, 2002 and 2001, virtually all of the Company's revenues were AuraGen(R) related. For the year end February 29, 2000, ceramics products were the largest single source of revenue on a consolidated basis, constituting approximately $2.9 million or 50% of net revenues. License fees for sound related patents constituted $1.5 million, or 25.9% of revenues. Q. SIGNIFICANT CUSTOMERS The Company sold its AuraGen(R) product to four significant customers during fiscal 2002 for a total of approximately $2.4 million or 77% of net revenues. The Company expects significant increases in revenues for fiscal 2003 because of more effective sales and marketing efforts, as well as an expanded distribution network that will include numerous other customers. In addition, the Company expects to have other OEM customers in fiscal 2003. ITEM 2. PROPERTIES The Company owns a 47,000 square foot headquarters facility and an adjacent 27,690 square foot manufacturing facility in El Segundo, California for its AuraGen(R) product. These properties are encumbered by a deed of trust securing a note in the original principal amount of $5.4 million. ITEM 3. LEGAL PROCEEDINGS The Company is engaged in the legal actions listed below. In the case of a judgment or settlement, appropriate provisions have been made in the financial statements. Aura Systems Inc. v. CRS Emergency Vehicles, Co., Custom Coaches International and C. Ray Smith. On December 11, 2001 the Company filed a complaint in the United States District Court, Central District of California, against CRS Emergency Vehicles, Co., Custom Coaches International and C. Ray Smith for Breach of Contract, Conversion, Bad Faith, Fraud and Injunctive Relief (Case No. 01-10612DDP). The action arose out of a sale to defendant distributors of approximately $1.2 million of the Company's AuraGen(R) product. Despite requests for payment, no payment was received. Following service of the complaint and defendant's failure to file a responsive pleading in the time required, on January 25, 2002 the Company filed its Request to Enter Default and Application for Clerk Judgment. On February 7, 2002, however, the District Court accepted defendant's answer denying the allegations. On May 7, 2002, following discussions between the parties, the Company entered into a definitive settlement, with defendants agreeing to release or otherwise account for all of the product shipped to the Company. The parties also agreed to terminate the distributorship agreement. Securities and Exchange Commission The Company has been informed by the Staff of the SEC that it intends to recommend that the Commission bring a civil action against Aura, NewCom, Inc. (a former subsidiary of Aura), Zvi Kurtzman, Steven Veen and Gerald Papazian for violations of the antifraud and books and records provisions of the securities laws. This grew out of an investigation into the Company's financial statements for various transactions during fiscal years 1996 through 1999. The Company originally disclosed the investigation by press release in January 1999. The Staff advised the Company that it would recommend that the SEC seek civil penalties and enjoin the companies and the individuals from future violations. In addition, the SEC Staff would recommend that the SEC impose director and officer bars against Messrs. Kurtzman and Veen and a bar against Mr. Veen to prohibit his practicing as an accountant before the SEC. The Company is informed that in order to avoid potential lengthy and costly litigation the individuals have agreed to propose to settle with the SEC without admitting or denying any of the Staff's allegations. The Company has engaged in conversations with the Staff of the SEC regarding settlement of the matter, but no agreements have yet been reached. Although Aura believes that it will reach a settlement in a manner that will not have a material adverse effect on the Company's business, it cannot predict with certainty when or if such a settlement will occur or what the actual effects of such a settlement would be. The Audit Committee of the Board will conduct a full review of the Company's accounting controls and procedures. Other Legal Actions The Company is also engaged in other legal actions. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on financial conditions, results of operations or cash flow. ITEM 4. Submission of Matters to a vote of Security Holders
The Company's 2001 Annual Meeting of Shareholders was held on October 2, 2001. At the annual meeting each of the Company's nominees were elected to serve as Directors of the Company. The election results are as follows: For Withheld Abstain ---------- --------- ------- Zvi (Harry) Kurtzman 223,220,767 23,628,732 729,361 Stephen Talesnick 246,731,136 88,363 729,361 Carl Albert 246,107,715 711,784 729,361 Harvey Cohen 245,872,673 946,826 729,361 Salvador Diaz-Verson, Jr. 246,032,122 787,377 729,361 Harry Haisfield 246,111,275 708,224 729,361 Neal Meehan 246,105,732 713,767 729,361 Norman Reitman 245,906,085 913,414 729,361 William Richbourg 246,115,296 704,203 729,361
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 minimum $1.00 bid price and other requirements as stated in the Market Place Rules. On February 1, 2001, the Company's shares were listed on the OTC Bulletin Board under the symbol "AURA". 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 9,600 stockholders of record as of May 24, 2002.
Period High Low ----- ----- Fiscal 2001 First Quarter ended May 31, 2000 $0.64 $0.24 Second Quarter ended August 31, 2000 $0.52 $0.20 Third Quarter ended November 30, 2000 $1.19 $0.34 Fourth Quarter ended February 28, 2001 $0.53 $0.29 Period High Low ----- ----- Fiscal 2002 First Quarter ended May 31, 2001 $0.78 $0.37 Second Quarter ended August 31, 2001 $0.76 $0.50 Third Quarter ended November 30, 2001 $0.59 $0.36 Fourth Quarter ended February 28, 2002 $0.45 $0.28
On May 24, 2002, the reported closing sales price for the Company's common stock was $0.235. 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 During the fourth quarter of fiscal 2002, 9,309,744 shares of common stock were issued in connection with a private placement to three investors, resulting in aggregate proceeds of approximately $2,744,800. During the fourth quarter of fiscal 2002, 687,178 shares of common stock were issued as finder's fees for private placements. During the fourth quarter of fiscal 2002, 48,993,780 shares were issued to satisfy liabilities in the amount of $16,751,606. All of the foregoing transactions were exempt from registration pursuant to section 4(2) of the Securities Act of 1933 as amended (the "Securities Act") as these offerings were private placements to a limited number of "accredited investors" (as defined in the Securities Act). 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 1999 and 1998 has been restated to reflect discontinued operations.
AURA SYSTEMS, INC. AND SUBSIDIARIES February 28, February 28, February 29, February 28, February 28, 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Net revenues $3,116,295 $2,512,508 $5,788,221 $53,650,025 $103,939,641 Cost of goods sold 1,480,736 1,216,637 1,957,854 83,344,562 58,045,370 ---------- --------- --------- ---------- ---------- Gross profit (loss) 1,635,559 1,295,871 3,830,367 (29,694,537) 45,894,271 Expenses: Engineering expenses 9,924,298 8,214,981 11,466,449 47,092,632 13,729,152 Research and development 810,949 547,812 148,443 1,996,198 475,992 Selling, general and administrative expenses 10,006,844 12,695,833 10,725,397 64,131,074 35,266,048 Class action litigation & other legal settlements (2,750,000) 1,512,769 427,091 7,717,518 1,700,000 Settlement on accounts payable (651,685) (1,046,324) 2,350,671 -- -- ----------- ----------- ---------- ---------- --------- Total expenses 17,340,406 21,925,071 25,118,051 120,937,422 51,171,192 ---------- ---------- ---------- ----------- ---------- Loss from operations (15,704,847) (20,629,200) (21,287,684) (150,631,959) (5,276,921) Other (income) and expense Interest expense 2,495,551 2,263,916 4,476,690 11,679,701 6,450,741 Impairment of long-lived assets 9,095,393 240,000 -- 5,838,466 -- Termination of license agreements -- -- -- -- 3,113,030 (Gain) loss on disposal of assets 65,823 (1,756,746) 93,638 925,525 -- (Gain) loss on sale & issuance of subsidiary stock and investments -- -- -- 4,877,839 (12,632,265) Equity in losses of unconsolidated joint ventures -- -- -- 6,268,384 1,937,747 Other (535,179) (446,399) (1,454,641) (906,921) (220,291) Provision (benefit) for taxes -- -- -- 566,635 (1,275,555) Minority interest -- -- -- (36,934,376) 946,405 Loss in excess of basis of subsidiary -- -- -- (8,080,695) -- ---------- ----------- ---------- ----------- ---------- Loss from continuing operations (26,826,435) (20,929,971) (24,403,371) (134,866,517) (3,596,733) Discontinued operations: Loss from discontinued operations, net of income taxes -- -- (4,131,501) (14,875,065) (8,038,807) Extraordinary Item Gain on extinguishment of debt obligations, net of income taxes 1,889,540 -- 19,068,916 -- -- ---------- ---------- ----------- ------------- ---------- Net loss $ (24,936,895) $(20,929,971) $ (9,465,956) $(149,741,582) $(11,635,540) Other comprehensive loss, net of taxes -- -- -- (406,574) -- ---------- ---------- ----------- ------------ ---------- Comprehensive loss $ (24,936,895) $(20,929,971) $ (9,465,956) $(150,148,156) $(11,635,540) ============== ============= ============= ============= ============ Net loss per common share $ (0.08) $ (0.08) $ (0.08) $ (1.74) $ (0.15) =========== =========== =========== =========== =========== Loss from continuing operations per common share $ (0.08) $ (0.08) $ (0.20) $ (1.57) $ (0.05) =========== =========== =========== =========== ========== Loss from discontinued operations per common share $ -- $ -- $ (0.03) $ (0.17) $ (0.10) =========== =========== =========== =========== ========== Extraordinary income per common share $ -- $ -- $ 0.15 $ -- $ -- =========== =========== =========== =========== ========== Weighted average number of common shares 327,587,590 261,568,346 124,294,051 85,831,688 79,045,290 =========== =========== =========== =========== ========== Working capital (2,512,553) (5,105,345) 826,213 (4,869,876) 78,143,895 Total assets 28,761,990 45,278,043 56,122,538 90,143,392 227,302,629 Total debt 10,895,466 38,485,108 48,756,226 34,236,944 33,968,393 Net stockholders' equity (deficit) 12,652,733 2,045,035 1,516,008 (13,653,657) 116,901,868
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Statements in this report, including those concerning the Company's 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, actual results may vary materially from the Company's expectations. Factors which could cause 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 along with their potential under utilization, resulting in production inefficiencies and higher costs and start-up expenses. 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 develop technologies when anticipated. Manufacturing economies may fail to develop when planned, products may be defective, and customers may fail to accept the products 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. The impact on the Company's business of 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. Results of Operations Fiscal 2002 as Compared to Fiscal 2001 Revenues Net revenues in fiscal 2002 increased to $3.1 million from $2.5 million in fiscal 2001, an increase of 24%. Virtually all sales related to the AuraGen(R) product and related services. The increase in revenue was due to a greater acceptance of the AuraGen(R) in the marketplace as well as the increasing sales activity through the Company's distributors. Although inventory levels are high in relation to current year sales volume, the Company's net inventory is currently comprised solely of AuraGen(R) related items. While most of the inventory is approximately two years old, there have been no significant changes to the product which would render the net value of the inventory as obsolete. The Company fully expects that with increasing sales, the inventory levels in relation to sales will be reduced. Cost of Goods Cost of goods increased to $1.5 million from $1.2 million in the prior fiscal year primarily as a result of the increase in AuraGen(R) revenues. The gross margin in each year was approximately 52%. The Company expects a gross margin of at least 50% in fiscal 2003. Engineering Expense Engineering expense for fiscal 2002 increased to $9.9 million from $8.2 million in the prior fiscal year. Labor and labor related costs amounted to $4.1 million in fiscal 2002, an increase of $1.5 million from $2.6 million in fiscal 2001. Included in engineering expense is $4.9 million in depreciation compared to $4.8 million in the prior fiscal year. Aura anticipates that engineering expenses will decrease substantially in fiscal 2003 due to ongoing cost reduction measures taken by the Company's management. Research and Development Research and development expense for fiscal 2002 increased to $0.8 million from $0.5 million in fiscal 2001. This is a result of the Company focusing its efforts on developing commercial applications in order to market and sell the AuraGen(R). The Company, in the latter part of fiscal 2001, began to once again expand its research and development activities in order to expand its line of AuraGen(R) products. The Company expects these expenses to remain constant as the Company focuses its attention on developing more variations of the basic AuraGen(R), including, but not limited to, the 6kW, 10kW, 25kW, AC/DC versions, and marine and other applications. Selling, General and Administrative Selling, general and administrative expenses were $10.0 million in fiscal 2002. This was a decrease of $2.7 million (21%) compared to the expense of $12.7 million in fiscal 2001. The decrease was primarily due to a reduction in legal costs of approximately $1.2 million. Also included in the prior year costs was a $1.3 million bad debt charge associated with non-AuraGen(R) business lines, which the Company has discontinued. Sales and marketing expenses were slightly lower in 2002 compared to 2001. Aura expects the general and administrative expenses to decrease in 2003 as a result of the ongoing cost reduction measures in place. However, these savings will be offset by substantially more costs incurred for sales and marketing expenses. Impairment Charges Impairment charges increased by $8.9 million, from $0.2 million in fiscal 2001 to $9.1 million in 2002. It is the Company's practice under Statement of Financial Accounting Standards No. 144 to review the valuation of its long-lived assets at least annually. Certain events occurred in the fourth quarter of fiscal 2002 which impacted the financial statements. The increase in the 2002 expense recognized was primarily due to non-cash charges incurred relative to the impairment of certain long-lived assets. In fiscal 2002, these asset impairment charges included non-core investments of $1.4 million, engineered tooling for Aura products amounting to $4.6 million, and trade credits of $3.1 million. In 2001, a reserve against a long term investment was recorded amounting to $0.2 million. Settlements, Net Legal settlements resulted in a gain of $2.8 million in 2002 compared to a loss of $1.5 million in 2001. The 2002 gain resulted from settlements with Excalibur of $2 million and Deutsche Financial of $1.2 million. These settlement gains were partially offset by a litigation loss of $400,000 resulting from a NewCom consumer class action suit. In 2001, the Company recognized losses relative to various lawsuits which were settled. The Company recognized a gain in 2002 on settlement of accounts payable amounting to $0.7 million compared to a gain of $1.0 million in 2001. Interest Expense Interest expense increased slightly from $2.3 million in fiscal 2001 to $2.5 million in fiscal 2002. Due to the elimination of a significant amount of Aura's interest bearing debt, the interest expense will decrease significantly in fiscal 2003. Other Income (Expense), Net Other income, net amounted to $0.5 million in fiscal 2002 compared to $0.4 million in fiscal 2001. The increase of $0.1 million was primarily due to an increase in other income for a gain of $1.3 million relative to a transaction fee, partially offset by an increase in other expenses of $1.1 million for the liability recognized on future severance payments to the former management. Extraordinary Item The extraordinary gain resulted from the forgiveness of debt by certain of the Company's creditors in the third quarter for approximately $0.9 million and in the fourth quarter for approximately $1.0 million. For further information regarding this item, see "Liquidity and Capital Resources," and Note 23 to the Company's Consolidated Financial Statements, appearing elsewhere in this Report. Fiscal 2001 as Compared to Fiscal 2000 Revenues Net revenues in fiscal 2001 totaled $2.5 million. In fiscal 2001 virtually all sales were AuraGen(R) related, up from $0.8 million in AuraGen(R) related sales in fiscal 2000. Overall net revenues declined in 2001 from $5.8 million in fiscal 2000 as approximately $2.9 million, or 50% of fiscal 2000 revenues were derived from the ceramics facility, with an additional $1.5 million, or 25.9% derived from license fees pertaining to sound related patents. The assets of the ceramics facility were sold effective March 1, 2000. Cost of Goods Cost of goods for the year ended February 28, 2001 was $1.2 million, applicable almost entirely to the AuraGen(R) product, resulting in a gross margin of approximately 52%. Cost of goods in the prior year was $2.0 million, resulting in a gross margin of 54%, after excluding the effects of the $1.5 million license fee noted above. Engineering Expense Engineering expenses for fiscal 2001 declined to $8.2 million, including $4.8 million of depreciation, from $11.5 million, which included $4.9 million in depreciation, in the prior fiscal year. The sale of the assets of the ceramics facility account for a reduction of approximately $1.6 million, with cost reduction efforts and facility consolidations accounting for the balance. In fiscal 2001, the Company reclassified certain costs that had been characterized as overhead costs and included in cost of sales. These items were primarily engineering and facility related and have now been classified as engineering expenses in the operating expense category. This was done to more accurately reflect the actual cost of the product sold and provide a gross profit presentation based on the sale of the product itself. This has resulted in a change in the reported gross margins for fiscal 2000 from a negative 131.9% to a positive 66.2%. Research and Development Research and development expenses increased from approximately $0.1 million in fiscal 2000 to approximately $0.5 million in fiscal 2001. The Company, in the latter part of fiscal 2001, began to once again expand its research and development activities in order to expand its line of AuraGen(R) products. The Company expects these expenses to continue to grow as the Company focuses its attention in developing more variations of the basic 5kW AuraGen(R), including, but not limited to, the 6kW, 8.5kW, 10kW, 25kW, AC/DC versions, inverter and battery charger versions, and marine and other applications. Selling, General and Administrative Selling, general and administrative expenses were $12.7 million in fiscal 2001. The increase in these expenses from $10.7 million in the prior year was primarily a result of an increase in legal costs of approximately $1.2 million, and an increase in depreciation and amortization of approximately $1.1 million partially offset by a decrease of $600,000 as a result of the sale of the assets of the ceramics facility. Also included in the fiscal year 2001 expenses is a bad debt charge of $1.3 million associated with non-AuraGen(R) related lines of business the Company is no longer engaged in. This compares to bad debts of $163,000 in the prior fiscal year. Additionally, in the latter part of fiscal 2001, the Company began to increase its sales staff and other sales and marketing expenses. Other Income and Expense In fiscal 2001, other income and expense primarily consisted of a gain of $1,756,746 recorded on the sale of the assets of the ceramics facility and net interest expense of $2,263,916. In fiscal 2000 other income and expense primarily consisted of $93,638 in net losses on disposal of assets, interest expense of $4,476,690, interest income of $357,014 and rent income of $700,513. Liquidity and Capital Resources Working capital was a negative $2.5 million at February 28, 2002 compared to a negative $5.1 million at February 28, 2001. The negative working capital at February 2002 was a result of the reclassification of inventory from current to long-term for that portion not expected to be used within one year. The negative working capital at February 28, 2001 was primarily the result of the $5.5 million litigation liability with DFS which was reclassified to a current liability due to a settlement reached subsequent to year end. This liability was satisfied in the first quarter of fiscal 2002 with the issuance of 10,000,000 shares of Aura common stock valued at $4,000,000 and the payment of $350,000 in cash, resulting in a gain of $1.2 million. The Company's cash and cash equivalents balance was $1.1 million at February 28, 2002 compared to $1.3 million at February 28, 2001. The net cash used by operating activities in fiscal 2002 decreased by approximately $4.6 million from the prior year. The fiscal 2002 net loss was $24.9 million, and $15.0 million of that loss related to non-cash charges for depreciation, amortization and asset impairments. Whereas in fiscal 2001, the net loss was $20.9 million and the similar non-cash charges were $7.9 million. In fiscal 2002, net cash of $0.1 million was used for investing activities that included $0.3 million spent for property, plant and equipment partially offset by $0.2 million cash received on the Alpha Ceramics note receivable from the sale of the Company's ceramics facility in fiscal 2001. In fiscal 2001, investing activities provided $3.8 million of net cash primarily due to the payment of the MYS and Algo notes receivable. During fiscal 2002, the Company received net proceeds of $13.3 million from the sale of its common stock through private placements compared to $12.4 million in the prior year. Current year financing activities also included proceeds of $500,000 from two short term loan agreements entered into with a member of the Board of Directors, one of which was repaid during the third quarter of fiscal 2002 and the other was repaid in March 2002, and approximately $28,000 from the exercise of warrants and stock options. Debt repayments of $5.1 million, including $2.0 million on the line of credit, were made in fiscal 2002, an increase over the $1.8 million of debt paid down in the prior year. During fiscal 2002, the Company restructured $16.2 million of debt and related accrued interest into 46,112,771 shares of common stock valued at $15.2 million, resulting in a pre-tax extraordinary gain for the early extinguishment of debt of $1 million. An indeterminate number of additional shares will be issuable in the future as a result of guaranteed share repricing agreements should the Company sell common stock at less than $0.20 per share through February 2003. At February 28, 2001, the Company was in violation of its loan covenants on its line of credit. The Company received a waiver from the bank for these violations and paid the remaining balance when due in July 2001. Spending for property and equipment amounted to $255,733 in fiscal 2002, $38,200 in fiscal 2001, and $16,103 in fiscal 2000. The additions are due to purchases of equipment which are necessary in connection with research and development activities, services performed under various subcontracts and manufacturing requirements. Current fixed monthly expenses company wide average approximately $1,000,000 principally for labor, materials, overhead, travel and professional fees. The Company leases warehouse space located in Rancho Dominguez, California. Minimum monthly rent under the lease approximates $3,900. Rent expense was approximately $0.1 million for fiscal 2002, $0.1 million for fiscal 2001, and $0.9 million for fiscal 2000. The cash flow generated from the Company's operations to date has not been sufficient to fund its working capital needs, and the Company does not expect that operating cash flow will be sufficient to fund its working capital needs in fiscal 2003. In the past, in order to maintain liquidity the Company has relied upon external sources of financing, principally equity financing and private and bank indebtedness. The Company expects to fund any operating shortfall in the current fiscal year from cash on hand and third party financings in order to continue its operations. Currently, the Company has no commitments from third parties to provide additional financing. The Company has no assurances that third party funding will be available at the times or in the amounts required. If future financing involves the issuance of equity securities, existing stockholders may suffer dilution in net tangible book value per share. The limited availability of funds could have a material adverse effect on the Company's financial statements, results of operations and the ability to continue or expand operations. Recent Developments and Outlook Results of operations in the fourth quarter of 2002 reflect weakness in sales, which has continued into the first quarter of 2003. The Company believes that this weakness reflects a combination of factors. To some extent, sales have been impacted by a general slowdown of the overall economy and the general economic effect of the events of September 11, 2001. The economic downturn has had a significant impact on the telecommunications industry, which is a significant target market for the AuraGen(R) products. In addition, the Company also believes that the recent management transition has had an impact on results of operations during the past few months. In particular, the Company's former Vice President of Sales and Marketing since August 2000 left the Company in December 2001. In addition, in December 2001 Aura and six former members of the Company's senior management, including the Chief Executive Officer, President, and Chief Financial Officer, entered into agreements providing for the termination of their employment with the Company effective February 28, 2002. The Company believes that the disruption of continuity attendant to the transition process has adversely affected the day-to-day operations of the Company in recent months. Effective March 2002, the Company retained Joshua Hauser as the Company's President and Chief Executive Officer and Steven Burdick as the Company's Chief Financial Officer. Both Messrs. Hauser and Burdick bring a wealth of knowledge and experience to the Company which is expected to benefit the Company's operations going forward in Fiscal 2003 and beyond. In addition, the Company has retained Craig B. Lipus as the Company's new Vice President of Sales and Marketing effective June 2002, filling the vacancy created in December 2001. The Company believes that with a new and experienced management team in place it will be able to more effectively exploit the commercialization of the AuraGen family of products. Since March 1, 2002, in order to fund working capital requirements, the Company has raised approximately $4.2 million through the sale of its common stock in private placements to existing shareholders of the Company, including two members of the Company's Board of Directors. As discussed above under "Liquidity and Capital Resources," the Company anticipates that it will continue to be dependent on third party financing through at least the remainder of the Fiscal year in order to maintain operations and to finance future growth. The ability of the Company to execute its business plan will depend, in part, on the availability of adequate working capital. With adequate working capital, the Company expects that AuraGen(R) sales and revenues should increase in fiscal 2003 compared with the prior fiscal year. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At February 28, 2002, the Company did not have any derivative instruments which created exposure to market risk for interest rates, foreign currency rates, commodity prices or other market price risks. The Company's long term notes receivable and long term debt obligations all bear interest at fixed rates and, therefore, have no exposure to interest rate fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 23, 2000, the Company received a notice of resignation from its independent auditors, Pannell Kerr Forster, Certified Public Accountants, a Professional Corporation ("PKF"). The Company had been informed by PKF that their decision was solely due to business reasons. Having served as the independent auditors of the Company since 1992, PKF never had nor does it currently have any disagreements with the Company on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedure or any reportable events. The auditor's reports on the financial statements during its entire engagement period did not contain any adverse opinion or disclaimer of opinion and have not been qualified or modified as to uncertainty, audit scope or accounting principles except for fiscal years 1999 and 2000 when the audit reports were modified with a going concern uncertainty. PKF fully cooperated with the auditor selection and transition process, which was completed on January 9, 2001 when the firm Singer Lewak Greenbaum & Goldstein LLP was engaged by the Company's Board of Directors. Unrelated to its decision and pursuant to SEC rules, under Item 304(a)(1)(v)(C)(1)(i) of Regulation S-K, PKF also advised that information had come to its attention which, if further investigated, may materially impact the fairness or reliability of previously issued audit reports or the underlying financial statements of Aura Systems, Inc. and Subsidiaries. The information concerning officer loans, which took place in fiscal 1997, was contained in court filings of the SEC in regards to the Staff's response to an SEC investigation, reported publicly by the Company in a press release dated January 20, 1999. The Company does not believe that the matters referred to above will have a material effect on the Company's future financial condition or results of operations. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY Directors The following table sets forth all of the current Directors, their age, and the office they hold with the Company. All Directors hold office until the next annual meeting of stockholders of the Company and until their successors have been duly elected and qualified.
Name Age Title Carl Albert......................... 60 Chairman, Board of Directors Stephen Talesnick................... 52 Vice Chairman, Board of Directors, Member of Compensation Committee Harvey Cohen........................ 68 Director, Member of Audit Committee Lawrence Diamant.................... 60 Director, Member of Compensation Committee Salvador Diaz-Verson, Jr............ 49 Director, Member of Compensation Committee Neal Meehan......................... 60 Director, Member of Audit Committee John Pincavage...................... 58 Director, Member of Audit Committee Norman Reitman...................... 77 Director, Member of Audit Committee
CARL ALBERT is the Chairman of the Board of Directors effective March 1, 2002. He has been a Director of the Company since July 10, 2001. Mr. Albert was, until February 2002, a member of the Board of Directors of Fairchild Dornier Corporation, a privately held company in the business of manufacturing aircraft. Mr. Albert held a significant interest in Fairchild Dornier Corporation from 1990, when he provided the venture capital necessary for acquiring ownership control of the company's predecessor corporation, Fairchild Aircraft, until April 2000 when the majority interest in the company was sold. From 1996 through April 2000, following Fairchild Aircraft's purchase of Daimler-Benz's 80% interest in Dornier, he was the Chairman of the Board of Directors of Fairchild Dornier Corporation, its Chief Executive Officer and the majority stockholder. Mr. Albert was the Chairman of the Board of Directors of Fairchild Aircraft, its Chief Executive Officer and the majority stockholder from 1990 through 1996. From 1986 through 1989, he provided venture capital and served as the CEO or President of a California based regional airline, West Wings Airlines, which operated as an American Eagle franchisee until acquired by the parent of American Airlines in 1988. Mr. Albert's business experience includes 18 years as an attorney, specializing in business and corporate law in Los Angeles, California. He also serves and has served as a Member of the Board of Directors of a number of privately and publicly held corporations, including Dr. Pepper Bottling Company of California, K & K Properties, Ozark Airlines and Tulip Corporation. Mr. Albert holds a B.A. from UCLA in political science and an L.L.B. from the UCLA School of Law. STEPHEN TALESNICK is Vice Chairman of the Board of Directors and has served in this capacity since January 2001. He originally joined the Board of Directors in September 1999. Mr. Talesnick has owned and maintained a private law practice since 1977, which is presently located in Beverly Hills, California. 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. 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 with 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 1969. 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 from Harvard University in 1957. LAWRENCE DIAMANT is a Director of the Company and has served in this capacity since April 2002. He is a senior partner of the Los Angeles based law firm Robinson, Diamant & Wolkowitz, a professional corporation. Mr. Diamant is a member of the State Bar of California and of the American Bar Association Business Law Section Committees on Banking Law, Commercial Financial Services and Business Bankruptcy. He has served as a reporter for its Ethics Task Force sub-section and currently serves as a sub-committee vice chair on Courts, Jurisdiction, Venue and Administration. Mr. Diamant has also served as Chairman of the Los Angeles County Bar Association Executive Committee on Commercial Law and Bankruptcy and is a member of the Financial Lawyers Conference. Mr. Diamant is a graduate from UCLA School of Law. 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. Since 1992, Mr. Diaz-Verson has also been a member of the Board of Trustees of the Christopher Columbus Fellowship Foundation, appointed by President George Bush in 1992, and re-appointed by President Clinton in early 2000. NEAL MEEHAN is a Director of the Company and has served in this capacity since October 2000 following appointment by resolution of the Board of Directors, pursuant to the Bylaws of the Corporation. Mr. Meehan's business career spans the transportation and telecommunications sectors. He is currently Managing Partner of air2ground, LLC and is involved in business development and strategic planning for start-up and mature companies. He has served as President and Chief Executive Officer of a number of airlines including New York Air, Midway Airlines, Chicago Air and Continental Express. He has also served in various marketing and operations capacities for American Airlines and Continental Airlines. In addition, he has served in various senior capacities for a number of telecommunications firms including In-Flight Phone Corp., Iridium LLC and Hush Communications USA, Inc., a firm specializing in data encryption. After a successful career in the United States Marine Corps, Mr. Meehan received his MBA from St. Johns University. Mr. Meehan is also the recipient of an honorary doctorate from St. Johns University in Commercial Science. JOHN PINCAVAGE is a Director of the Company and has served on the Board of Directors since March 1, 2002. Mr. Pincavage is a Chartered Financial Analyst with many years of experience on Wall Street. Since 1999, he has been the President and founder of Pincavage & Associates, LLC, a consulting and financial advisory firm for the aviation industry. From 1995 to 1999, he was the executive director for equity research at Warburg Dillon Read, LLC, a Partner and Director at the Transportation Group, LLC heading research efforts from 1989 to 1995, Executive Vice President - Research at Paine Webber Incorporated from 1975 to 1989, and Vice President - Research at Blyth Eastman Dillon from 1971 to 1975. Mr. Pincavage is a member of the New York Society of Securities Analysts and has served on numerous boards including the Board of Directors of the Virginia Engineering Foundation. He holds a Bachelor degree in Aerospace Engineering and an MBA, both from University of Virginia. 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. Officers Listed below are Executive Officers of the Company who are not Directors or nominees, their ages, titles and background information. Executive officers serve at the discretion of the Board.
Name Age Position Joshua Hauser....................... 56 President and Chief Executive Officer Steven Burdick...................... 38 Senior Vice President, Chief Financial Officer Michael Froch....................... 40 Senior Vice President, General Counsel and Secretary Jacob Mail.......................... 51 Senior Vice President, AuraGen(R)Operations
JOSHUA HAUSER is the Company's President and Chief Executive Officer effective March 1, 2002. He is a senior executive with demonstrated success in business/product development for both domestic and international operations. Mr. Hauser is a goal-oriented leader with a record of positioning companies for growth and expansion. He has over 30 years experience in the power control systems industry. From 1999 through 2002, he was a management consultant. Prior to that, he was President of Siebe Power Controls, a division of Siebe plc, with full profit and loss responsibility for a global power systems business employing 6,500 people in 13 locations. Mr. Hauser holds both Bachelor and Master degrees in Electrical Engineering, both from Columbia University. STEVEN BURDICK is the Company's Senior Vice President and Chief Financial Officer effective March 1, 2002. He is a CPA and a senior financial executive with experience working with both publicly traded and private companies. Mr. Burdick was most recently Chief Financial Officer of TRW Ventures from 2000 through 2002, and prior to that was a Senior Manager at Ernst & Young LLP. He received a BS in Accounting from Santa Clara University. MICHAEL 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, presently the Ranking Member of the Committee on International Relations of the United States House of Representatives. JACOB MAIL is Senior Vice President AuraGen(R)Operations. He has served in this capacity since 1995. Mr. Mail served over 20 years at Israeli Aircraft Industries. While at Aura, Mr. Mail has identified, negotiated and contracted all the supply chain arrangements for the AuraGen(R). In addition, Mr. Mail implemented programs to monitor and project needs for production schedules and provide full traceability of all components. Mr. Mail is responsible for the implementation of the "Call Home" programs, which provides the Company with a user database for every AuraGen(R)installed in a vehicle. In addition to the manufacturing and infrastructure implementations, Mr. Mail is also responsible for all engineering and vehicle integration as well as customer service and training. He holds a B.S. degree in Mechanical Engineering from the Technion and a Master degree from the University of Tel Aviv. Change in Management In December 2001, the Company and six former members of the Company's senior management, including Zvi Kurtzman, the former Chief Executive Officer, Gerald Papazian, the former President and Steven Veen, the former Chief Financial Officer, entered into agreements providing for the termination of their employment with the Company effective February 28, 2002. Effective March 2002, the Company retained Joshua Hauser as the Company's President and Chief Executive Officer and Steven Burdick as the Company's Chief Financial Officer. Both Messrs. Hauser and Burdick bring a wealth of knowledge and experience to the Company which is expected to benefit the Company's operations going forward in fiscal 2003 and beyond. In addition, the Company has retained Craig B. Lipus as the Company's new Vice President of Sales and Marketing effective June 2002, filling the vacancy created in December 2001. The Company believes that with a new and experienced management team in place it will be able to more effectively exploit the commercialization of the AuraGen(R) family of products. Family Relationships None. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities 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 for the fiscal year ended February 28, 2002, all filing requirements applicable to its officers, directors, and ten percent beneficial owners were satisfied except that Messrs. Cohen and Diaz-Verson did not timely file a single Form 5 with two transaction acquisitions reported. 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 28, 2002. Each of the individuals named in the table ceased to be executive officers as of February 28, 2002.
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) 2002 $385,000 7,718,750 $0 Chief Executive Officer 2001 385,000 4,500,000 0 2000 386,232 0 0 Gerald S. Papazian (1) 2002 $210,000 2,268,750 $0 President and Chief Operating 2001 210,000 1,000,000 2,029 Officer 2000 217,777 0 0 Arthur J. Schwartz (1) 2002 $205,000 4,143,750 $0 Executive Vice President 2001 205,000 1,000,000 0 2000 210,192 0 0 Steven C. Veen (1) 2002 $200,000 2,175,000 $0 Senior Vice President and 2001 200,000 1,000,000 2,100 Chief Financial Officer 2000 205,469 0 0 Cipora Kurtzman Lavut (1) 2002 $195,000 3,956,250 $0 Senior Vice President 2001 195,000 1,000,000 0 2000 203,942 0 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 always represent the actual salary accrued for each individual during the period. The actual salary rate for these individuals which was accrued during the fiscal year ended February 2002, 2001 and 2000, respectively, were as follows: Zvi (Harry) Kurtzman - $385,000, $385,000, $385,000; Gerald S. Papazian - $210,000, $210,000, $210,000; Arthur J. Schwartz - $205,000, $205,000, $205,000; Steven C. Veen - $200,000, $200,000, $200,000; Cipora Kurtzman Lavut - $195,000, $195,000, $195,000. Of the compensation paid in fiscal 2001, $100,427, $53,140, $50,254, $35,301, $38,027 was paid in the form of 315,361, 166,869, 157,807, 110,851, 119,414 shares, respectively, of restricted common stock of the Company to Mr. Kurtzman, Mr. Papazian, Mr. Schwartz, Mr. Veen and Ms. Kurtzman Lavut, respectively. Of the compensation paid in fiscal 2000, $144,561, $34,781, $78,201, $44,918 and $58,520 was paid in the form of 535,413, 128,818, 289,632, 166,363, and 216,742 shares, respectively, of restricted common stock of the Company, valued as of the date of issuance, to Mr. Kurtzman, Mr. Papazian, Mr. Schwartz, Mr. Veen and Ms. Kurtzman Lavut, respectively. (2) Such compensation consisted of total Company contributions made to the plan account of each individual pursuant to the Company's Employee Retirement Savings Plan during the fiscal year ended February 28, 2002. No cash bonuses or restricted stock awards were granted to the above individuals during the fiscal years ended February 28, 2002, February 28, 2001, and February 29, 2000. Effective fiscal 2002, each non-employee Director is entitled to receive 100,000 stock options per year for serving as a Director, and an additional 25,000 stock options per year for each Director who serves on the Audit Committee. Effective fiscal 2002, new Directors are entitled to receive an initial membership grant of 250,000 stock options. The above options vest six months plus one day from the date of grant and the exercise price is set at or above market as of the date of grant. The following table summarizes certain information regarding option grants to purchase common stock of the Company to the Chief Executive Officer and those other executive officers named in the Summary Compensation Table (the "Named Executive Officers"). OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term* - ----------------------------------------------------------------------------------------------------------------------- Number of % of Securities Total Under- Options/ lying SARs Options/ Granted to Exercise SARs Employees Or Base Granted In fiscal Price Expiration Name (#) Year ($/Sh) Date 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------------- Zvi (Harry) Kurtzman 7,718,750 36.8% 0.55 12/21/11 385,938 3,164,687 Gerald Papazian 2,268,750 10.8% 0.55 12/21/11 113,438 1,043,625 Arthur J. Schwartz 4,143,750 19.8% 0.55 12/21/11 207,188 1,698,938 Steven C. Veen 2,175,000 10.4% 0.55 12/21/11 108,750 891,750 Cipora Kurtzman Lavut 3,956,250 18.9% 0.55 12/21/11 197,813 1,622,063
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 (Harry) Kurtzman 6,734,583 6,804,167 $ 180,000 $ 90,000 Gerald S. Papazian 1,653,917 1,840,833 $ 40,000 $ 20,000 Arthur J. Schwartz 2,717,917 3,170,833 $ 40,000 $ 20,000 Steven C. Veen 1,821,670 1,778,333 $ 40,000 $ 20,000 Cipora Kurtzman Lavut 2,655,417 3,045,833 $ 40,000 $ 20,000
* 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 28, 2002. No options were exercised by the above individuals during the fiscal year ended February 28, 2002. 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. Termination of Certain 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 agreements and severance agreements with Messrs. Kurtzman, Schwartz, Papazian, Veen, Froch, Kaufman, and Ms. Kurtzman Lavut and entered into severance agreements with Messrs. Goldstein, Mail, and Stuart. 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. The employment agreements with Mr. Kurtzman and the Named Executive Officers had an initial term of three years. The term would be automatically extended for one year on each anniversary of the effective date of the employment agreement unless either party gave prior notice of termination of the agreement. Upon the death or disability of these executives, their employment agreements provided for a lump sum payment equal to one year's salary and the immediate vesting of stock based compensation awards. In the event of the executive's termination for cause, the terminated executive was entitled only to compensation accrued through the date of termination. If the executive was terminated by the Company other than by reason of death, disability or cause, the terminated executive would be entitled to continued payment of the base salary through the end of the stated term together with an annual bonus for each of the remaining years under the employment agreement equal to the highest annual bonus amount received by the terminated executive in the three years preceding termination and the immediate vesting of stock based compensation awards. Pursuant to severance agreements entered into effective March 1998 between the Company and key executives of the Company, including Mr. Kurtzman and the Named Executive Officers, these individuals were entitled to certain additional benefits, which would become effective at such time as there was a "change in control" of the Company, as defined in the severance agreements. If such executive's employment was terminated following a change in control other than by reason of death, disability or by the executive without "good reason", or if following a change in control the executive elected to terminate his employment on the one year anniversary following a change in control, the terminating executive would be entitled to specified severance payments in lieu of salary, bonus and other compensation which would otherwise accrue to the executive upon termination of the employment agreement. Specifically, the severance agreements provided that, for Messrs. Kurtzman and Schwartz and Ms. Kurtzman-Lavut, a lump sum severance payment would be due upon termination in the amount of three times the sum of the terminated executive's base salary then in effect plus the highest annual bonus earned in the three years preceding the date of termination; and in the case of Messrs. Veen and Papazian, 1.5 times such base salary and bonus. The severance agreements also provided for the accelerated vesting of stock based awards and the continuation of life and health insurance benefits following the date of termination (36 months for Messrs. Kurtzman and Schwartz, and Ms. Kurtzman-Lavut, and 18 months for Messrs. Papazian and Veen). In March 2000, Mr. Kurtzman proposed to the Board of Directors that consideration be given to restructuring employment and severance agreements to allow the Company the flexibility to implement an orderly management transition, if and when deemed advisable by the Board. Certain members of the Company's senior management believed that at some time in the future, as market acceptance of the AuraGen(R) accelerated and manufacturing operations expanded, it might be desirable to replace all or part of the senior members of the management team with individuals having focused experience in large scale manufacturing and sales operation. Subsequently, the Company's Board of Directors entered into discussions with certain members of senior management with a view towards restructuring the employment and severance agreements. The Board of Directors, through its Compensation Committee, retained independent outside consultants to formulate a proposal whereby the existing employment and severance agreements with senior management would be modified to allow for the possibility of an orderly management transition in the future if and when deemed advisable by the Board. In December 2001, following deliberations by the Compensation Committee and the Board of Directors in consultation with independent consultants and after concluding discussions with the affected members of the management team the Company entered into separation agreements with Mssrs. Kurtzman, Papazian, Schwartz, Kaufman and Veen and Ms. Kurtzman Lavut, terminating their existing employment contracts and restructuring their severance benefits. Pursuant to these separation agreements, these individuals terminated their employment relationship with the Company effective February 28, 2002. Under the terms of the separation agreements, the departing officers relinquished their right to any multi-year cash severance benefits in exchange for a one time grant of stock options and warrants exercisable at a price of $.55 per share, which vest over a period of 18 months from the termination of employment. The aggregate number of shares underlying the options and warrants issued under these separation agreements is 22,218,750. The number of stock options for each person was determined based on the underlying total compensation due to the employee upon termination under each person's existing employment agreement, multiplied by two and divided by $0.32 per share. Each of the officers has agreed to continue as a consultant to the Company for a period of one year at 85% of their former compensation. In addition, each executive is entitled to receive continued medical benefits for three years following termination of employment. 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 Members Salvador Diaz-Verson, Jr., Stephen Talesnick, Lawrence Diamant Compensation Committee Interlocks and Insider Participation The Compensation Committee for the fiscal year ended February 28, 2002 comprised Salvador Diaz-Verson, Jr., Stephen Talesnick, and Harry Haisfield. Decisions regarding compensation of executive officers for the fiscal year ended February 28, 2002 were made unanimously by the outside, disinterested Directors of the Board of Directors, after reviewing recommendations of the Compensation Committee. 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 17, 2002 1) by each person who is known by Aura to be the beneficial owner of more than five percent (5%) of its outstanding common stock, 2) by each of the Company's Directors, 3) the former Chief Executive Officer and the other four most highly compensated executive officers other than the CEO during the fiscal year ended February 28, 2002 (the "Named Executive Officers"), and 4) by all current executive officers and Directors as a group:
Number of Shares of Percent of Common Beneficial Owner Common Stock Stock ---------------- ------------ ----- Gardner Lewis Asset Management L.P. (1).............................................. 23,212,336 6.5% ICM Asset Management Inc. (2)........................................................ 23,499,933 6.6% James M. Simmons (3) ................................................................ 24,980,042 6.6% Harvey Cohen (4) ................................................................... 803,287 * Lawrence Diamant (5)................................................................. 769,727 * Salvador Diaz-Verson, Jr. (6)........................................................ 2,695,128 * Stephen Talesnick (7)................................................................ 3,317,698 * Norman Reitman (8)................................................................... 842,142 * Neal Meehan (9)...................................................................... 440,625 * Carl Albert(10)...................................................................... 1,470,893 * John Pincavage....................................................................... 0 * Neal Kaufman (11).................................................................... 4,041,455 * Zvi Kurtzman (12).................................................................... 9,571,258 2.3% Cipora Kurtzman Lavut (13)........................................................... 4,134,343 1.0% Gerald Papazian (14)................................................................. 2,098,596 * Arthur Schwartz (15)................................................................. 4,905,562 1.2% Steven Veen (16)..................................................................... 2,377,281 * All current executive officers and Directors as a group (12 persons)......................................................................... 13,190,017 3.2%
* Less than 1% of outstanding shares. (1) Based upon information contained in Schedule 13G/A dated February 14, 2002, as filed with the SEC by Gardner Lewis Asset Management Inc. Of the 23,212,336 shares beneficially owned by this person, it has sole dispositive power with respect to all of these shares, sole voting power with respect to 22,345,736 shares, and shared voting power with respect to 338,700 shares. (2) Based upon information contained in Schedule 13G dated February 14, 2002, as filed with the SEC by ICM Asset Management, Inc. ICM Asset Management, Inc. is a registered investment advisor whose clients have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the stock. Such person has neither sole voting nor sole dispositive power with respect to any of the 23,499,933 shares reported as being beneficially owned. Of the 23,499,933 shares beneficially owned by ICM Asset Management, Inc. it has shared dispositive power with respect to all of these shares, and shared voting power with respect to 22,562,390 shares. James M. Simmons is the President of ICM Asset Management, Inc, and is also the beneficial owner of these shares in such capacity. Accordingly, these shares are also included in the shares reflected as being beneficially owned by James M. Simmons. (3) Based upon information contained in Schedule 13G dated February 14, 2002, as filed with the SEC by James M. Simmons. Included in the shares beneficially owned by Mr. Simmons are 23,499,933 shares shown as being beneficially owned by ICM Asset Management, Inc., a registered investment advisor whose clients have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the stock. James M. Simmons is the President of ICM Asset Management, Inc, and is therefore also the beneficial owner of these shares in such capacity. Mr. Simmons has neither sole voting nor sole dispositive power with respect to any of the 24,980,042 shares reported as being beneficially owned by him. Of the 24,980,042 shares beneficially owned by Mr. Simmons, he has shared dispositive power with respect to all of these shares, and shared voting power with respect to 24,042,499 shares. (4) Includes 31,250 shares beneficially owned, and 600,000 shares which may be purchased pursuant to options within 60 days of May 17, 2002. (5) Includes 340,989 shares which are held by the firm Robinson, Diamant & Wolkowitz where Mr. Diamant is a senior partner. Mr. Diamant disclaims beneficial ownership of these shares. (6) Includes 780,000 shares which may be purchased pursuant to options exercisable within 60 days of May 17, 2002. (7) Includes 530,000 shares which may be purchased pursuant to options exercisable within 60 days of May 17, 2002. (8) Includes 600,000 shares which may be purchased pursuant to options exercisable within 60 days of May 17, 2002 and 12,500 shares owned by Mr. Reitman's wife, as to which 12,500 shares he disclaims any beneficial ownership. (9) Includes 296,875 shares which may be purchased pursuant to options and warrants exercisable within 60 days of May 17, 2002. (10) Includes 250,000 shares which may be purchased pursuant to options and warrants exercisable within 60 days of May 17, 2002. (11) Includes 175,000 shares beneficially owned which are held of record by Advanced Integrated Systems, Inc., and 2,224,819 shares which may be purchased pursuant to options within 60 days of May 17, 2002. (12) Includes 175,000 shares beneficially owned which are held of record by Advanced Integrated Systems, Inc., and 5,973,274 shares which may be purchased pursuant to options within 60 days of May 17, 2002. (13) Includes 2,269,819 shares which may be purchased pursuant to options exercisable within 60 days of May 17, 2002 (14) Includes 1,446,287 shares which may be purchased pursuant to options exercisable within 60 days of May 17, 2002 (15) Includes 175,000 shares beneficially owned which are held of record by Advanced Integrated Systems, Inc., and 2,312,545 shares which may be purchased pursuant to options within 60 days of May 17, 2002. (16) Includes 20,000 shares beneficially owned, and 2,377,281 shares which may be purchased pursuant to options within 60 days of May 17, 2002. The mailing address for Gardner Lewis Asset Management, L.P. is 285 Wilmington - West Chester Pike, Chadds Ford, PA 19317. The mailing address for ICM Asset Management, Inc. and James M. Simmons is W. 601 Main Avenue, Suite 600, Spokane, WA 99201. 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 Related Party Transactions In the third quarter of fiscal 2002, the Company entered into a short term loan agreement with Carl Albert, a member of the Board of Directors, for $250,000, bearing interest at a rate of 10%. The note, including accrued interest of $2,500, was repaid within the third quarter. In the fourth quarter of fiscal 2002, the Company entered into a short term loan agreement with Carl Albert for another $250,000, bearing interest at a rate of 10%. The note, which is included in current notes payable at February 28, 2002, and accrued interest of $4,400, was repaid in March 2002. The Company incurred approximately $15,000 in legal fees to Mr. Albert's counsel pursuant to the loan agreements. The Company also entered into security agreements, respectively, whereby the loans were secured by Company receivables. In May 2002, Mr. Albert acquired 500,000 shares of common stock from the Company for $100,000 in connection with a private placement by the Company to a number of third party investors. During fiscal 2002, the law firm of Robinson, Diamant and Wolkowitz received $50,000 and 483,846 shares of Aura common stock valued at approximately $159,000 in consideration of legal services rendered by the firm to Aura. Lawrence Diamant, a Director of the Company, is a member of this law firm. 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 In a report filed on Form 8-K dated December 26, 2001, the Company reported that it had entered into agreements with the former Chairman of the Board and Chief Executive Officer and five other former members of senior management to terminate their employment contracts and restructure their severance benefits.
INDEX TO EXHIBITS Description of Documents 3.1 Certificate of Incorporation of Registrant as amended to date. 3.2 Bylaws of Registrant as amended to date. 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(2) 1989 Stock Option Plan. 10.4(3) Joint Development and License Agreement, dated August 24, 1992, between the Registrant and Daewoo Electronics Co., Ltd. 10.5(4) Dedicated Supplier Agreement, dated December 2, 1993, between the Registrant and Daewoo Electronics Co., Ltd. 10.6(5) Form of 7% Secured Convertible Non-Recourse Note due 2002. 10.7(6) Asset Purchase Agreement dated December 1, 1999 among AuraSound, Inc., Aura Systems, Inc., AlgoSound, Inc., and Algo Technology, Inc. 10.8(6) Amendment dated December 22, 1999 to Asset Purchase Agreement dated December 1, 1999. 10.9(6) Assignment and License Agreement as of July 15, 1999 between Speaker Acquisition Sub, Algo Technology, Inc., Aura Systems, Inc., AuraSound Inc. 10.10(6) Stock Purchase Warrant issued to RGC International Investors, LDC by Aura System's Inc. 10.11(6) Payment Agreement by and between Credit Managers Association of California and Aura Systems, Inc. 10.12(7) Subscription Agreement from Isosceles Fund Limited to Aura Systems, Inc. 10.13(7) Stock Purchase Warrant of Aura Systems, Inc. issued to Isosceles Fund Limited. 10.14(8) Settlement Agreement and Mutual Release dated as of March 12, 2001, between Aura Systems, Inc. and Deutsche Financial Services Corporation. 10.15 Form of Aura Systems, Inc., Director Indemnification Agreement dated as of July 10, 2001. 10.16 Form of Agreement Regarding Termination of Employment dated as of December 21, 2001. 10.17 From of Employment Agreement dated as of March 5, 1998. 10.18 Aura Systems, Inc. Secured Promissory Note dated September 4, 2001, between Aura Systems, Inc. and The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee. 10.19 Aura Systems, Inc. Security Agreement dated September 4, 2001, between Aura Systems, Inc. and The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee. 10.20 Aura Systems, Inc. Secured Promissory Note dated January 23, 2002, between Aura Systems, Inc. and The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee. 10.21 Aura Systems, Inc. Security Agreement dated January 23, 2002, between Aura Systems, Inc. and The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee. 10.22 Escrow Agreement dated as of February 27, 2002, by and among Aura Systems, Inc. and Robinson, Diamant & Wolkowitz, a Professional Corporation, by Lawrence A. Diamant and Purchasers 10.23 Assignment and Transfer of Notes and Security Documents dated as of February 26, 2002, executed by Aura Systems, Inc. and Infinity Investors Limited, et al., in favor of Lawrence A. Diamant, as Agent for various investors. 10.24 Assignment and Transfer of Notes and Security Documents dated as of February 26, 2002, executed by Aura Systems, Inc. and GSS/Array Technology Public Company, Ltd. in favor of Lawrence A. Diamant, as Agent for various investors. 10.25 Settlement Agreement and Mutual Release of All Claims dated as of February 26, 2002, by between Aura Systems Inc., and Infinity Investors Limited, et al. 10.26 Settlement Agreement and Mutual Release of All Claims dated as of February 26, 2002, by between Aura Systems Inc., and GSS/Array Technology, Inc., et al. 10.27 Form of Aura Systems, Inc. Subscription Agreement of May 2002 10.28 Form of Aura Systems, Inc. Registration Rights Agreement of May 2002 10.29 Settlement Agreement and Release dated as of May 7, 2002, by and between Aura Systems, Inc. and CRS Emergency Vehicles, Co. 10.30 Term Sheet dated as of February 12, 2002 10.31 Term Sheet dated as of February 22, 2002 10.32 Employment Letter to Joshua Hauser dated February 26, 2002 21(8) Subsidiaries of Aura Systems, Inc. 23.1 Consent of PKF 23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP.
- -------------------------------------------- (1) Incorporated by reference to the Exhibits to the Company's Statement on Form S-1 (File No. 33-19531) (2) Incorporated by reference to the Exhibits to the Company's Statement on Form S-8 (File No. 33-32993). (3) Incorporated by reference to the Exhibit to the Company's Statement on Form S-1 (File No. 35-57 454). (4) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-1 (File No.-33-57454). (5) 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). (6) 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). (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2000 (File No. 0-17249). (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2001 (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: May 29, 2002 By: /s/ Joshua Hauser ---------------------------------- Joshua Hauser President and 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 and in the capacities and on the date indicated.
Signatures Title Date /s/Joshua Hauser President and Chief Executive Officer May 29, 2002 --------------------------------- Joshua Hauser (Principal Executive Officer) /s/Steve Burdick Senior Vice President, Chief Financial Officer May 29, 2002 --------------------------------- Steve Burdick (Principal Financial and Accounting Officer) /s/Carl Albert Chairman of the Board May 29, 2002 --------------------------------- Carl Albert /s/ Stephen Talesnick Vice Chairman of the Board May 29, 2002 --------------------------------- Stephen Talesnick /s/Harvey Cohen Director May 29, 2002 --------------------------------- Harvey Cohen /s/Lawrence Diamant Director May 29, 2002 --------------------------------- Lawrence Diamant /s/Salvador Diaz-Verson, Jr. Director May 29, 2002 --------------------------------- Salvador Diaz-Verson, Jr. /s/Neal Meehan Director May 29, 2002 --------------------------------- Neal Meehan /s/John Pincavage Director May 29, 2002 --------------------------------- John Pincavage /s/Norman Reitman Director May 29, 2002 --------------------------------- Norman Reitman
F-1 AURA SYSTEMS, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements
Independent Auditors' Reports on Consolidated Financial Statements and Financial Statement Schedule F-2 to F-3 Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries: Consolidated Balance Sheets-February 28, 2002 and February 28, 2001 F-4 to F-5 Consolidated Statements of Operations and Comprehensive Loss- Years ended February 28, 2002, February 28, 2001 and February 29, 2000 F-6 Consolidated Statements of Stockholders' Equity - Years ended February 28, 2002, February 28, 2001 and February 29, 2000 F-7 Consolidated Statements of Cash Flows- Years ended February 28, 2002, February 28, 2001 and February 29, 2000 F-8 to F-9 Notes to Consolidated Financial Statements F-10 to F-22 Consolidated Financial Statement Schedule: II Valuation and Qualifying Accounts F-23 to F-24
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 AUDITOR'S REPORT To the Board of Directors and Stockholders Aura Systems, Inc. El Segundo, California We have audited the accompanying consolidated balance sheets of Aura Systems, Inc. and subsidiaries as of February 28, 2002 and 2001, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 28, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has generated significant losses from operations. Therefore, there is substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California April 30, 2002, except for Note 22, as to which the date is May 24, 2002 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Aura Systems, Inc. El Segundo, California We audited the consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows of Aura Systems, Inc. and subsidiaries for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations and their cash flows of Aura Systems, Inc. and subsidiaries for the year 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 the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has generated significant losses from operations and is involved with significant litigation. 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. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /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 ASSETS February 28, February 28, 2002 2001 ----------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,143,396 $ 1,265,912 Receivables, net 67,491 1,062,041 Inventories, net 5,006,424 9,756,399 Other current assets 228,758 452,940 Note receivable 168,792 1,405,857 ------------- -------------- Total current assets 6,614,861 13,943,149 ----------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, AT COST 16,309,956 41,289,011 Less accumulated depreciation and amortization (5,935,475) (20,966,852) -------------- --------------- Net property, plant and equipment 10,374,481 20,322,159 LONG TERM INVESTMENTS 1,700,000 1,883,835 LONG TERM RECEIVABLES 2,347,346 2,516,139 NON-CURRENT INVENTORIES 4,500,000 -- PATENTS AND TRADEMARKS, NET 3,061,932 3,370,263 OTHER ASSETS 163,370 3,242,498 ------------- -------------- Total $ 28,761,990 $ 45,278,043 ============= ==============
See accompanying notes to consolidated financial statements
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 28, February 28, LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ------------------ ------------------- CURRENT LIABILITIES: Accounts payable $ 3,032,134 $ 3,463,146 Notes payable 3,913,623 14,300,594 Accrued expenses 2,181,657 1,284,754 ------------- ------------- Total current liabilities 9,127,414 19,048,494 NOTES PAYABLE AND OTHER LIABILITIES 6,981,843 24,184,514 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $.005 per share, and additional paid in capital. Authorized 500,000,000 shares; issued and outstanding 387,690,068 shares in 2002 and 291,089,582 shares in 2001. 300,332,457 264,787,864 Accumulated deficit (287,679,724) (262,742,829) ----------- ------------ Total stockholders' equity 12,652,733 2,045,035 ------------- ------------- Total $ 28,761,990 $ 45,278,043 ============== =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss Years ended February 28, 2002, February 28, 2001 and February 29, 2000 2002 2001 2000 ------------- ------------- ------------- NET REVENUES FROM SALE OF PRODUCT $ 3,116,295 $ 2,512,508 $ 4,288,221 PATENT ASSIGNMENT FEES -- -- 1,500,000 ------------- ------------- ------------- TOTAL NET REVENUES 3,116,295 2,512,508 5,788,221 Cost of GOODS 1,480,736 1,216,637 1,957,854 ------------- ------------- ------------- GROSS PROFIT 1,635,559 1,295,871 3,830,367 OPERATING EXPENSES: Engineering expenses 9,924,298 8,214,981 11,466,449 Research and development 810,949 547,812 148,443 Selling, general and administrative expenses 10,006,844 12,695,833 10,725,397 Legal settlements (2,750,000) 1,512,769 427,091 Settlement on accounts payable (651,685) (1,046,324) 2,350,671 -------------- -------------- ------------- Total operating expenses 17,340,406 21,925,071 25,118,051 ------------- ------------- ------------- LOSS FROM OPERATIONS (15,704,847) (20,629,200) (21,287,684) IMPAIRMENT OF LONG-LIVED ASSETS (9,095,393) (240,000) -- OTHER INCOME AND (EXPENSE), NET (2,026,195) (60,771) (3,115,687) -------------- ------------------- ------------------- LOSS BEFORE INCOME TAXES AND OTHER ITEMS (26,826,435) (20,929,971) (24,403,371) Provision for taxes -- -- -- ------------- ------------------ ------------------ Loss from continuing operations (26,826,435) (20,929,971) (24,403,371) Discontinued Operations: Loss from discontinued operations, net of taxes of $0 -- -- (1,433,859) Loss on disposal, net of taxes of $0 -- -- (3,063,574) -------------- -------------- --------------- Loss from discontinued operations -- -- (4,497,433) -------------- -------------- --------------- Loss before extraordinary item (26,826,435) (20,929,971) (28,900,804) Extraordinary item Gain on extinguishment of debt obligations, net of income taxes of $0 1,889,540 -- 19,068,916 -------------- -------------- -------------- NET LOSS (24,936,895) (20,929,971) (9,831,888) Other comprehensive income, net of taxes -- -- 365,932 -------------- -------------- -------------- COMPREHENSIVE LOSS $ (24,936,895) $ (20,929,971) $ (9,465,956) =============== =============== =============== NET LOSS PER COMMON SHARE $ (0.08) $ (0.08) $ (0.08) =============== =============== =============== Loss from continuing operations per common share $ (0.08) $ (0.08) $ (0.20) =============== =============== =============== Loss from discontinued operations per common share $ -- $ -- $ (0.03) ============== ============== =============== Extraordinary income per common share $ -- $ -- $ 0.15 ============== ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 327,587,590 261,568,346 124,294,051 ============== ============== =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended February 28, 2002, February 28, 2001 and February 29, 2000 Accumulated Other Common Stock Additional Committed Comprehensive Paid-in Common Stock Accumulated (CTA) Income Shares Amount Capital Deficit (Loss) Total ------ ------ ------- ------- ------ ----- Balance 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 liabilities 2,907,275 14,536 770,429 -- -- -- 784,965 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 Other comprehensive income -- -- -- -- -- 365,932 365,932 Net loss -- -- -- -- (9,831,888) -- (9,831,888) ----------- -------- ---------- --------- ---------- -------- ---------- Balance at February 29, 2000 196,975,392 984,875 233,211,217 9,132,774 (241,812,858) -- 1,516,008 Notes payable converted 7,324,191 36,621 2,912,744 -- -- -- 2,949,365 Stock issued to satisfy liabilities 11,642,627 58,160 6,093,135 -- -- -- 6,151,295 Private placements 40,721,909 203,610 12,231,830 -- -- -- 12,435,440 Stock issued for prior year 34,425,463 172,128 8,960,646 (9,132,774) -- -- -- Expenses of issuances -- -- (77,102) -- -- -- (77,102) Net loss -- -- -- -- (20,929,971) -- (20,929,971) ----------- ---------- ----------- ----------- ----------- ---------- ----------- Balance at February 28, 2001 291,089,582 1,455,394 263,332,470 -- (262,742,829) -- 2,045,035 Notes payable converted 31,398,771 156,994 11,706,261 -- -- -- 11,863,255 Stock issued to satisfy liabilities 18,500,802 92,504 6,921,208 -- -- -- 7,013,712 Exercise of stock options & warrants 102,500 512 27,263 -- -- -- 27,775 Stock issued repricing requirements 8,947,631 44,738 (44,738) -- -- -- -- Private placements 37,650,782 188,237 13,215,876 -- -- -- 13,404,113 Expenses of issuances -- -- (74,912) -- -- -- (74,912) Shares issuable under repricing agreements -- -- -- 3,310,650 -- -- 3,310,650 Net loss -- -- -- -- (24,936,895) -- (24,936,895) ----------- ------------ ---------- --------- ------------- -------- ----------- Balance at February 28, 2002 387,690,068 $1,938,379 $295,083,428 $3,310,650 $(287,679,724) $ -- $ 12,652,733 =========== ========== ============ ========== ============== ======== ============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended February 28, 2002, February 28, 2001 and February 29, 2000 2002 2001 2000 ------ ------ ------ Cash flows from operating activities: Net loss $(24,936,895) $(20,929,971) $(9,465,956) Adjustments to reconcile net loss to net Cash used by operating activities: Depreciation and amortization 5,868,089 7,619,979 6,853,924 Provision for environmental cleanup -- -- 48,812 (Gain) loss on disposition of assets 65,823 (1,756,746) 93,638 Impairment of long-lived assets 9,095,393 240,000 -- Gain on extinguishment of debt (1,889,540) -- (19,068,916) Settlement on accounts payable (651,685) (1,046,324) 2,350,671 Legal settlements (750,000) -- -- Operating expenses satisfied with stock 278,801 903,935 -- Loss on disposal of discontinued operations -- -- 2,697,642 Changes in operating assets and liabilities: Receivables 965,700 1,397,159 462,541 Inventories 249,975 1,432,828 4,019,810 Other current assets 224,182 (92,763) 1,515,787 Accounts payable 1,587,763 (752,858) (3,721,845) Accrued expenses 1,156,386 (349,546) (1,577,248) Litigation and other liabilities -- -- 222,223 --------- ---------- ----------- Net cash used by operating activities (8,736,008) (13,334,307) (15,568,917) Cash flows from investing activities: Payments from notes receivable 155,857 3,784,681 5,674,828 Proceeds from sale of assets -- -- 327,109 Purchase of property, plant and equipment (255,733) (38,200) (16,103) Other assets (4,300) 3,821 -- --------- --------- --------- Net cash provided (used) by investing activities (104,176) 3,750,302 5,985,834 Cash flows from financing activities: Net proceeds from borrowings 500,000 -- 251,101 Repayment of notes payable (5,139,308) (1,768,859) (1,218,571) Proceeds from exercise of options 775 -- -- Net proceeds from issuance of common stock 13,329,201 12,358,339 7,393,980 Net proceeds from exercise of warrants 27,000 -- 24,800 Repayment of convertible notes -- -- (430,000) --------- --------- --------- Net cash provided by financing activities 8,717,668 10,589,480 6,021,310 --------- --------- --------- Net increase (decrease) in cash and equivalents (122,516) 1,005,475 (3,561,773) Cash and cash equivalents at beginning of year 1,265,912 260,437 3,822,210 --------- --------- ---------- Cash and cash equivalents at end of year $1,143,396 $1,265,912 $ 260,437 ========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $1,081,122 $1,977,239 $ 922,708 ========= ========== ========== Income taxes $ -- $ -- $ -- ========= ========== ==========
See accompanying notes to consolidated financial statements. Supplemental disclosures of non-cash investing and financing activities: During the year ended February 28, 2002, the Company restructured $16,179,900 of debt and related accrued interest into 46,112,771 shares of common stock valued at $15,173,905, resulting in a pre-tax extraordinary gain for the early extinguishment of debt of $1,005,995. Due to guaranteed share repricing agreements, 14,714,000 of the common shares with a value totaling $3,310,650 were not issued as of February 28, 2002 and have been reflected on the Consolidated Statement of Stockholders' Equity as "Committed common stock". The gain, in addition to a $883,846 gain resulting from a creditor's forgiveness of the remaining balance of an unsecured note payable plus accrued interest, has been reflected as an extraordinary item in the accompanying consolidated financial statements. During fiscal 2002, the Company also issued 8,500,502 shares of common stock in satisfaction of $278,801 in operating expenses and $2,734,613 of liabilities, of which $1,416,364 was long term trade debt included in notes payable and other liabilities; 10,000,000 shares of common stock valued at $4,000,000 as partial settlement with Deutsche Financial Services (see Note 9 of Notes to Consolidated Financial Statements); 8,947,631 shares of common stock for repricing a prior year private placement, and 1,743,801 shares of common stock as a finder's fee for a current year private placement. The finder's fee and repricing had no effect on total stockholders' equity. During the year ended February 28, 2001, $2,949,365 of notes payable and accrued interest was converted into 7,324,191 shares of common stock. The Company also issued 11,642,627 shares of common stock in satisfaction of $6,151,295 of liabilities, of which $3,748,384 was long term trade debt included in notes payable and other liabilities. During the year ended February 28, 2001, the Company also issued shares of common stock which were recorded as a component of stockholder's equity (Committed common stock) at February 29, 2000. The common stock could not be issued in fiscal 2000 due to the limitation on the number of shares authorized. 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. The above items total 34,425,463 shares and $9,132,774, which is included in the Consolidated Statement of Stockholders' Equity as Committed common stock at February 28, 2000, and Common Stock at February 28, 2001. During the year ended February 29, 2000, the Company restructured its convertible notes payable obligations (most of which were in default) primarily 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 were not reflected as issued and 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 along with $682,852 in accounts payable and accrued expenses. The remaining balance of the notes became non-convertible and was included in secured notes payable for the year ended February 29, 2000. Total debt forgiveness of $19,068,918 is reflected as an extraordinary item in the accompanying consolidated financial statements and resulted in extraordinary income per share of $0.15. 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. Additionally, liabilities of $20,000 were satisfied by the exercise of 40,000 warrants with an exercise price of $.50 per share; 1,020,890 shares of common stock were issued as fees in connection with a private placement, and 2,907,275 shares of common stock were issued in settlement of accrued and unpaid management compensation of $784,965. Included in net proceeds from issuance of common stock in the Consolidated Statement of Cash Flows is $3.1 million which is included in the line item Common stock not Issued in the Consolidated Statement of Stockholders' Equity. 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 $2,500,000 note receivable from Telemac, resulting in a gain recognized of approximately $850,000. The final payment of $1,250,000 plus interest accrued at 8% was due in February 2002. Per the terms of the agreement, Telemac elected to pay Aura in Telemac common shares at an exchange price of $5 per share rather in cash. Aura received 313,232 common shares in exchange for the final payment. During the year ended February 28, 2001, the Company sold the assets of the ceramics facility for $3.5 million in the form of a note receivable of $2.5 million plus $800,000 paid to third parties in satisfaction of liabilities and payments of $200,000 to Aura. During the year ended February 29, 2000, the Company sold its MYS subsidiary for a total of $4.2 million consisting of a $1 million down payment and a note receivable of $3.2 million. The Company also sold the assets of its AuraSound subsidiary for approximately $2.4 million consisting of a down payment of $100,000 and a note receivable of approximately $2.3 million. See accompanying notes to consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 28, 2002, February 28, 2001 and February 29, 2000 (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. As a technology leader in mobile power, Aura develops and sells AuraGen(R) mobile induction power systems to the industrial, commercial and defense mobile power generation markets. The Company's unique and patented energy solution is the only proven, commercially available pure sine wave power system that can continuously provide thousands of watts of power at low engine speed, and is fully integrated under the vehicle hood. The AuraGen(R) is capable of generating full power up to 8,500 watts at all engine speeds, including enhanced engine idle speed for gasoline engines and at idle speed for bigger diesel engines. The AuraGen(R) combines sophisticated mechanical and electronics design, advanced engineering and break-through electromagnetic technology to produce a highly reliable and flexible mobile power generating system that creates alternating current (AC) and direct current (DC) electricity, both with and without the engine on. Commercial production of the AuraGen(R) commenced in fiscal 1999 and is being distributed and sold through dealers, distributors, and Original Equipment Manufacturers (OEMs). The Company intends to continue to focus its business on the AuraGen(R) line of products. In addition, the Company is entitled to receive royalties for its electro-optics technology ("AMATM") licensed to Daewoo Electronics Co., Ltd. ("Daewoo") in 1992 (see Note 5). 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 fiscal 2000, the Company entered into an agreement for the sale of the assets of AuraSound. Basis of Presentation and Going Concern Certain amounts in the prior year financial statements and related notes have been reclassified to conform to the fiscal 2002 presentation. 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 where 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. 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. Principles of Consolidation The financial statements include the accounts of the Company and its subsidiaries. Investments in affiliated companies are accounted for by the equity or cost method, as appropriate. Intercompany accounts and transactions with Aura Realty, Inc. have been eliminated. For the years ended February 28, 2001 and 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 20). 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. During fiscal 2001, the Company sold its interest in Aura Ceramics, Inc. to management (see Note 3), and the Company divested the Electrotec Productions, Inc. business. Revenue Recognition The Company recognizes revenue for product sales upon shipment and when title is transferred to the customer. When Aura performs the installation of the product, revenue and cost of sales is recognized when the installation is complete. The Company provides for estimated returns and allowances based upon experience and the judgment of management. The Company has in the past earned a portion of its revenues from license fees and recorded those fees as income when the Company fulfilled its obligations under the particular agreement. The Company recognized $1.5 million in revenue from the assignment of patents related to Aura Sound products in fiscal 2000. All revenue other than the patent fees is related to the AuraGen(R). Comprehensive Income The Company's other comprehensive loss in fiscal 1999 consists of foreign currency translations. Cash and Cash Equivalents The Company considers all highly liquid assets, which have an original maturity of less than three months when purchased, to be cash equivalents. At February 28, 2002 and February 28, 2001, the Company's uninsured cash balances totaled $1,091,281 and $1,158,980, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 in the statements of operations during the reporting period. Actual results could differ from those estimates. Long Term Investments The Company accounts for all investments where it holds less than a 20% voting interest, cannot exercise significant influence, and where the fair market value of those securities is not readily determinable, under the cost basis. Investments in voting interests between 20% and 50%, where the company can exercise significant influence are accounted for under the equity method of accounting, and investments greater than 50% are generally consolidated for purposes of financial reporting. As the Company does not hold a sufficient interest in its investments to exercise significant influence, and the fair market value of the investments are not readily determinable, long term investments have been accounted for under the cost method. A decline in the value of any investment below cost that is deemed other than temporary is charged to earnings. 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 75,212,978 common shares for warrants and options at February 28, 2002, 64,612,015 common shares at February 28, 2001, and 11,709,000 common shares at February 29, 2000. 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. The accumulated amortization was $1,964,458 as of February 28, 2002 and $1,656,128 as of February 28, 2001. If a patent or trademark is rejected, abandoned, or otherwise invalidated the unamortized cost is expensed in that period. Impairment of long-lived assets The Company reviews long-lived assets and identifiable intangibles in accordance with Statement of Financial Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", on at least an annual basis or 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. If the future undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are adjusted to their fair values. Research and Development Research and development costs are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred. Advertising costs charged to expense were not material in fiscal 2002, 2001 and 2000. Depreciation Property, plant and equipment are 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 Depreciation and amortization expense of buildings, machinery and equipment, and furniture and fixtures approximated $5.5 million, $6.3 million, and $6.5 million for fiscal 2002, 2001 and 2000, respectively. See Note 8 for further description of the asset impairment charge of $4.6 million in 2002. (2) Accounts Receivable Accounts receivable consist of the following:
2002 2001 ------- ------- Accounts receivable $ 217,491 $ 1,222,041 Less allowance for uncollectible receivables (150,000) (160,000) --------- --------- $ 67,491 $ 1,062,041 ======== ===========
Bad debt expense was $0 in fiscal 2002 and approximately $1.3 million and $456,000 in fiscal 2001 and 2000, respectively. (3) Notes Receivable Notes receivable consist of the following:
2002 2001 ------- ------- Telemac $ -- $1,250,000 Alpha Ceramics 2,516,138 2,671,996 --------- ----------- 2,516,138 3,921,996 Less current portion 168,792 1,405,857 ------- ----------- $ 2,347,346 $2,516,139 =========== ==========
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 $2,500,000 note receivable from Telemac, resulting in a gain recognized of approximately $850,000. The final payment of $1,250,000 plus interest accrued at 8% was due in February 2002. Per the terms of the agreement, Telemac elected to pay Aura in Telemac common shares at an exchange price of $5 per share rather than in cash. Aura received 313,232 common shares in exchange for the final payment (see Note 4). In March 2000, the Company sold the assets of its ceramics facility to the president and management of the facility for $3.5 million resulting in a gain recognized of $1,756,746. The terms of the sale called for a note in the amount of $2.5 million with interest at 8%, a down payment of $100,000 and a payment at closing of $100,000 plus payments to third parties of $800,000. This facility accounted for $2.9 million or 50% of revenues in fiscal 2000. (4) Long Term Investments Long term investments consist of the following:
2002 2001 ------ ------ Aquajet Corporation $ 923,835 $ 923,835 Algo Technology, Inc. 1,348,652 1,348,652 Telemac 1,250,000 -- --------- --------- Subtotal 3,522,487 2,272,487 Reserve (1,822,487) (388,652) ---------- --------- Total, net $1,700,000 $ 1,883,835 ========== ===========
The above investments consist solely of common stock and constitute approximately 4.2% of the outstanding shares of Aquajet Corporation, 2.9% of the outstanding shares of Algo Technology, Inc. and less than 1% of the outstanding shares of Telemac. The Company maintains an investment in Aquajet, Inc., a development stage company that is in the process of developing and marketing its water recreation vehicle. Aquajet has been involved in raising financing for the past several years in order to exploit their business plan. In relation to this, Aquajet has been marginally successful and has developed a strong marketing and potential customer base, but to date has been unable to generate sufficient sales to fund its operations. The Company expects to realize its asset through the eventual public offering or acquisition of Aquajet by a third party. However, that exit is not believed to be likely in the near future. The Company recorded a reserve based on Aura's judgment that Aquajet will likely not continue its operations as a going concern. The investment in Algo Technology, Inc. has been recorded at its net fair value based upon the estimated share value, after giving consideration to an other than temporary decline in the value. The Telemac investment was issued to Aura in lieu of cash at $5 per share as described in Note 3 above. The investment has been recorded at its estimated net fair value based upon the estimated common stock price on the date of the transaction. (5) Joint Ventures and Other Agreements 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 Shaker(TM). In fiscal 1999, the joint venture was terminated and a total of $534,911 in joint venture losses and write-offs were recorded. 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. The $800,000 loss is included in other income and expense on the statement of operations and is disclosed in Note 18 where it is included in the gain or loss on disposal of assets. Daewoo Agreement In 1992, the Company entered into a joint development and licensing agreement with Daewoo to develop and commercialize televisions using Aura's AMA(TM) display technology. Aura was 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(TM) technology at Daewoo. (6) Related Party Transactions In the third quarter of fiscal 2002, the Company entered into a short term loan agreement with a member of the Board of Directors for $250,000, bearing interest at a rate of 10%. The note, including accrued interest of $2,500 was repaid within the third quarter. In the fourth quarter of fiscal 2002, the Company entered into a short term loan agreement with a member of the Board of Directors for another $250,000, bearing interest at a rate of 10%. The note, which is included in current notes payable at February 28, 2002, and accrued interest of $4,400 was repaid in March 2002. Related accrued interest of $2,400 at February 28, 2002 is reported in accrued expenses. (7) Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, consist of the following:
2002 2001 ------ ------ Raw materials $ 4,043,697 $ 3,516,826 Finished goods 7,258,138 6,530,977 Reserve for potential product obsolescence (1,795,411) (291,404) ------------------ ------------------ $ 9,506,424 $ 9,756,399 ================= =================
Inventories consist primarily of components and completed units for the Company's AuraGen(R) product. The net inventories as of February 28, 2002 which are not expected to be realized within a 12 month period during fiscal 2003 have been reclassified as long term. (8) Property, Plant and Equipment Property, plant and equipment, at cost, is comprised as follows:
2002 2001 ------- ------- Land $ 3,187,997 $ 3,187,997 Buildings 8,708,796 8,708,796 Machinery and equipment 1,969,206 26,840,274 Furniture, fixtures and leasehold improvements 2,443,957 2,551,944 ----------------- ------------- $ 16,309,956 $ 41,289,011 ============ ============
In the fourth quarter of fiscal 2002, the Company determined that the tooling fixed assets were impaired based upon the requirements set forth in SFAS No. 144. A comparison of the projected future cash flows of the Company to the carrying value of the assets indicated that the assets were impaired. The tooling was written down by a total net amount of $4.6 million to $0, its estimated fair value based upon the discounted estimated cash flows over the remaining asset lives. (9) Notes Payable and Other Liabilities Notes payable and other liabilities consist of the following:
2002 2001 ------ ------ Litigation payable (a) $2,327,300 $ 3,030,800 Line of credit (b) -- 1,984,000 Notes payable-equipment (c) 20,371 26,093 Notes payable-buildings (d) 5,157,138 5,248,205 Unsecured notes payable (e) -- 7,443,321 Trade debt (f) 3,140,657 7,960,027 Secured notes payable (g) -- 12,792,662 Related party note payable (h) 250,000 -- -------------- ------------- 10,895,466 38,485,108 Less: current portion 3,913,623 14,300,594 -------------- -------------- Long-term portion $ 6,981,843 $ 24,184,514 ============ =============
(a) The litigation payable represents the legal settlements entered into by Aura with various parties. These settlements call for payment terms with 8% interest rate to the plaintiffs through fiscal 2004. See Note 16 for additional information. (b) The line of credit consisted of a single credit line in the amount of $3 million, bearing an interest rate of 12% and secured by a general security interest in the assets of the Company. The line called for a monthly principal payment of $100,000 plus accrued interest, and did not allow for any additional draws. The Company was in violation of substantially all of the original terms of this agreement, for which it received a waiver from the bank effective through June 30, 2001. The line of credit was repaid and eliminated in fiscal 2002. (c) Notes payable-equipment consists of a note maturing in February 2005 with an interest rate of 8.45%. (d) Notes payable-buildings consists of a 1st Trust Deed on two buildings in California bearing interest at the rate of 7.625%. A final balloon payment is due in fiscal 2009. (e) Unsecured notes payable at February 28, 2001 consisted of one note bearing interest at a rate of 8% and an accrued liability of $5,500,000 to Deutsche Financial Services (DFS) as a result of a written guarantee of NewCom debt.The amount due to DFS was classified as a current liability on the balance sheet as a result of a settlement reached with DFS subsequent to the end of fiscal 2001. Following the terms of the settlement, in the first quarter of fiscal 2002 a cash payment of $350,000 was made and 10,000,000 shares of Aura common stock valued at $4,000,000 were issued to DFS, resulting in a gain on the settlement of the recorded liability of $1,150,000. During the third quarter of fiscal 2002, the remaining balance of the unsecured note plus accrued interest was forgiven by the creditor, resulting in an extraordinary pre-tax gain for early extinguishment of debt of approximately $900,000 (see Note 23). (f) Trade debt was restructured with payment terms over a three-year period with interest at 8% per annum commencing in January 2000. (g) Secured notes payable at February 28, 2001 consisted of two notes bearing interest at a rate of 8%. During fiscal 2002, the remaining balance plus accrued interest of one secured note was converted into 1,970,771 shares of the Company's common stock. Additionally, the Company converted the second secured note plus accrued interest into 44,142,000 shares of Aura common stock, resulting in an extraordinary pre-tax gain of approximately $1.0 million (See Note 23). (h) In the fourth quarter of fiscal 2002, the Company entered into a short term loan agreement with a member of the Board of Directors for $250,000. The note accrued interest at a rate of 10% and was repaid in March 2002. Annual maturities of long term notes payable and litigation payable for the next fiscal years are as follows: Fiscal Year Amount 2003 $3,913,623 2004 1,872,903 2005 270,035 2006 123,856 2007 133,778 thereafter 4,581,271 ------------- $10,895,466 (10) Accrued Expenses Accrued expenses consist of the following: 2002 2001 ------- ------- Accrued payroll and related expenses $ 794,481 $ 680,524 Accrued interest 76,848 280,228 Accrued severance 1,080,525 -- Other 229,803 324,002 ----------- ----------- $ 2,181,657 $ 1,284,754 =========== =========== In the fourth quarter of fiscal 2002, the Company recorded a liability for future severance payments to the former management. Aura does not intend to utilize the consulting services of the former management beyond the first quarter of fiscal 2003. The Company has settled various trade payables and accrued liabilities with its vendors as a result of renegotiating the ultimate payment due. These negotiations have resulted in gains and losses as reported in the statements of operations for fiscal 2002, 2001 and 2000. (11) Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At February 28, 2002, the Company had net operating loss carry-forwards for Federal and state income tax purposes of approximately $249.5 million and $93.8 million respectively, which expire through 2022. Under SFAS No. 109, "Accounting for Income Taxes", the Company utilizes the liability method of accounting for income taxes. Accordingly, the Company has recorded a non-current deferred tax benefit of approximately $120 million for fiscal 2002 and $105 million for fiscal 2001. The Company has also recorded a full valuation reserve to fully offset the deferred benefit due to the uncertainty of the realization of this benefit. The deferred tax benefit consists solely of the benefit of the net operating loss carry-forward. The effective income tax rate reconciliation is:
2002 2001 2000 ------- ------- ------- U.S. Statutory income tax rate 40% 40% 40% Valuation allowance (40%) (40%) (40%) ----- ----- ----- 0% 0% 0% =========== =========== ===========
(12) Common Stock, Stock Options and Warrants At February 28, 2002 and 2001, the Company had 500,000,000 shares of $.005 par value common stock authorized for issuance. The Company had 387,690,390 shares of common stock issued and outstanding at February 28, 2002. The Company issued common stock in the fourth quarter 2002 which calls for additional repricing shares upon the issuance of shares at a lower price within a twelve month period. See Note 23 for additional information. The Board of Directors is authorized to issue from time to time up to 10,000,000 shares of preferred stock, in one or more series, and the Board of Directors is authorized to fix the dividend rates, any conversion rights or rights of exchange, any voting right, any rights and terms of redemption (including sinking fund provisions), the redemption price, liquidation preferences and any other rights, preferences, privileges and restrictions of any series of preferred stock. No amounts were outstanding as of February 28, 2002 and 2001. At February 28, 2002 there were warrants outstanding to purchase 33,956,727 shares of the Company's common stock exercisable at an average price of $0.71 per share. The Company has granted nonqualified stock options to certain directors. Options were granted at fair market value at the date of grant, vested immediately, and were exercisable at any time within a ten-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 28,1999 560,000 $ 2.06-4.75 Expired (60,000) $ 3.00-4.75 -------- -------------- Options outstanding at February 29, 2000 500,000 $ 2.06-2.30 ------- -------------- Options outstanding at February 28, 2001 500,000 $ 2.06-2.30 Expired (50,000) $ 2.06-2.30 --------- -------------- Options outstanding at February 28, 2002 450,000 $ 2.06-2.30 =======
The following table summarizes information about director stock options at February 28, 2002:
Number Average Number Range of Outstanding at Remaining Life Weighted Average Exercisable Exercise Price 2/28/02 in Years Exercise Price as of 2/28/02 -------------- ------- -------- -------------- ------------- $2.06 450,000 5.36 $2.06 400,000 $2.30 50,000 5.13 $2.30 50,000
(13) Employee Benefit Plans The Company sponsored two employee benefit plans: The Employee Stock Ownership Plan (ESOP) and a 401(k) plan. In addition, the options granted under the 1989 and 2000 Stock Option Plans 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 2002, 2001 and 2000. The Company sponsors a voluntary defined contribution 401(k) plan. The plan provides for salary reduction contributions by employees and matching contributions by the Company of the first 7% of the employee's pre-tax contributions. The matching contributions by the Company included in SG&A expenses are $58,025, $49,152, and $52,565 in fiscal 2002, 2001, and 2000, respectively. The 1989 Stock Option Plan has granted the maximum allowable number of options authorized. In March 2000, the Company's Board of Directors adopted the 2000 Stock Option Plan, a non-qualified plan which was subsequently approved by the shareholders. The 2000 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 four to five year period. In October 1995, the Financial Accounting Standards Board ("FASB") 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 measures 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 Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted only the disclosure provisions of SFAS No. 123. It applies APB Opinion No. 25 and related interpretations in accounting for its stock issuances to employees and does not recognize compensation expense for its stock-based compensation other than for restricted stock and options issued to outside third parties. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and loss per share would be reduced to the pro forma amounts indicated below: Net loss 2002 2001 ------ ------- As reported $ (24,936,895) $ (20,929,971) Pro forma $ (26,368,716) $ (22,114,397) Basic loss per common share As reported $ (0.08) $ (0.08) Pro forma $ (0.08) $ (0.08) For the year ended February 29, 2000 pro forma amounts related to option grants were not material. For the purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%, expected volatility of 70%, risk-free interest rates of 4.9% to 6.0%, and expected life of 1.5 and 3.0 years. The weighted-average fair value of options granted during the period ended February 28, 2002 for which the exercise price equals the market price on the grant date was $0.09, and the weighted-average exercise price was $0.32. The weighted-average fair value of options granted for which the exercise price was greater than the market price on the grant date was $0.07, and the weighted-average exercise price was $0.36. No options were granted for which the exercise price was less than the market price on the grant date. The weighted-average remaining contractual life of the options outstanding at February 28, 2002 is 8.5 years. The exercise prices of the options outstanding at February 28, 2002 ranged from $0.31 to $7.31, and information relating to these options is as follows:
1989 Plan 2000 Plan ---------------------------------- ---------------------------------- Shares Exercise Price Shares Exercise Price ---------------- ----------------- ------------- ---------------- Options outstanding at February 28, 1999 6,453,300 $1.44-7.31 -- -- Cancellations (454,500) 2.06-7.31 -- -- Expired (131,800) 3.06-4.12 --------- ----------- ----------- ------------- Options outstanding at February 29, 2000 5,867,000 1.44-7.31 -- -- Grants -- -- 17,565,500 $0.31-0.60 Cancellations (5,000) 3.00 (132,500) 0.31 Expired (431,000) .44 -- -- --------- ----------- ----------- ------------- Options outstanding at February 28, 2001 5,431,000 1.79-7.31 17,433,000 0.31-0.60 Grants -- -- 18,849,001 0.45-0.64 Cancellations (20,000) 3.00 (428,250) 0.31-0.45 Exercises -- -- (2,500) 0.31 Expired (6,000) 7.25 -- -- --------- ----------- ----------- ------------- Options outstanding at February 28, 2002 5,405,000 $1.79-7.31 35,851,251 $ 0.31-0.64 ========= ========== ========== ============
The following table summarizes information about employee stock options at February 28, 2002:
Number Average Weighted Number Range of Outstanding at Remaining Life Average Exercise Exercisable As Exercise Prices 2/28/02 in Years Price of 2/28/02 --------------- ------- -------- ----- ---------- $0.31-0.64 35,854,251 8.70 $0.39 7,240,000 $0.65-2.15 2,481,000 5.42 $2.04 2,481,000 $2.16-3.00 15,000 0.62 $3.00 15,000 $3.01-3.31 2,900,000 6.05 $3.30 1,960,000 $3.32-7.31 6,000 1.60 $7.31 6,000
(14) Leases At February 28, 2002, the Company has no significant long term operating leases. Rental expense charged to operations approximated $0.1 million, $0.1 million, and $0.9 million in fiscal 2002, 2001 and 2000, respectively. (15) Significant Customers The Company sold its AuraGen(R) product to four significant customers during fiscal 2002 for a total of approximately $2.4 million or 77% of net revenues. These four customers included Inland Detroit Diesel, Stewart & Stevenson Services, Williams Diesel, and the U.S. Army. The Company sold its AuraGen(R) product to six significant customers during fiscal 2001 for a total of approximately $1.35 million or 53.8% of net revenues. Five of these companies are Stewart & Stevenson Services entities and account for approximately $1.0 million or 40% of net revenues with Americas Body Company accounting for an additional 13.6% or approximately $340,000 of net revenues. The Company sold ceramics related products to Honeywell, Inc. during fiscal 2000 for a total of approximately $2.1 million or 36.3% of net revenues. (16) 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. Deutsche Financial Services v. Aura (Settled) 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") v. Aura (Case No. 99-03551 GHK (BQRx)). The complaint followed 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 alleged, among other things, that Aura was 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. Aura responded, denying DFS' claims and asserted in its defense, among other things, that the guarantee, if any, was discharged. In addition, Aura through its counsel, asserted cross-claims for, among other things, tortuous 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. The Company entered into a definitive Settlement and Mutual Release Agreement effective March 12, 2001 (the "Settlement") providing for the settlement of litigation. Under the terms of the Settlement DFS received cash payments totaling $350,000 and 10,000,000 shares of Aura's common stock in exchange for mutual releases. DFS may not sell more than 5,000,000 shares per year during the first two years following the settlement, may not sell any shares for the first 120 days following the settlement, and may not sell more than 50,000 shares in a single day. Aura will retain the right to repurchase unsold shares under certain conditions for a period of two years. During the first and second years following the Settlement, Aura may repurchase unsold shares in the possession of DFS at a price of $.80 per share in the first year and $1.00 per share in the second year. As part of the Settlement, DFS will assign to Aura its security interest in assets pledged by NewCom, Inc. to DFS to secure NewCom's indebtedness. Aura believes that DFS has already foreclosed upon all known assets, claims, or entitlements, which include inventory and receivables. Going forward, funds received by DFS, if any, with respect to the assets of NewCom, less costs and expenses incurred, will be held in trust by DFS for Aura. Aura may also prosecute or pursue a NewCom claim, asset or entitlement, which is subject to DFS' lien. Aura's receipt of any funds is conditioned upon the bid price of Aura common stock reaching $0.80 per share on ten business days during the first year or $1.00 per share during the second year. To the extent Aura recovers any funds, it will hold it in trust for DFS until the bid price of Aura reaches the above levels, respectively, or until the 730th day following the execution date of the Settlement, when Aura must then pay any recovered funds to DFS if the minimum bid prices set forth above have not been met. Excalibur v. Aura (Settled) On November 12, 1999, a lawsuit was filed by three investors against Aura and others, 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 under certain circumstances, and (2) a loan to NewCom of $1 million in exchange for a promissory note and warrants to purchase NewCom common stock. The Plaintiffs alleged in their complaint that Aura breached its agreements and sought damages of not less than $4.5 million. Aura alleged cross-claims against the Plaintiffs, contending that Plaintiffs violated their contractual obligations to Aura by engaging in unlawful "short sales" of NewCom stock. Aura also has asserted claims against Plaintiffs for damages based on alleged breaches of Plaintiffs' contractual obligations to Aura and on Plaintiffs' alleged misrepresentations to Aura. On October 2, 2001, the parties entered into a General Release and Settlement Agreement ("Settlement"), finally resolving the entire matter. As part of the Settlement, Aura received $2,000,000. The Plaintiffs received repricing shares sought as part of its underlying contract claims. Kerry Morgan, et. al. v. NewCom, Inc. (Settled) In December 1999, a lawsuit was filed against NewCom, Inc. which, as amended, also included Aura Systems, Inc., Steven Veen, Sultan Khan, Asif Khan, Zvi Kurtzman, Deutsche Financial Services, Inc., Best Buy Co., Inc., Circuit City Stores, Inc. a/k/a Compusa, the Computer Super Store, and Staples, Inc., in the Circuit Court for the County of Wayne Michigan (Case No. 98-838563 CP). The plaintiff's sixth amended complaint purported to be a class action on behalf of a class alleged to consist of approximately two hundred thousand persons who purchased a NewCom Inc., a/k/a Atlas Peripherals computer product from Best Buy Co., Inc., Circuit City Stores, Inc., Computer City, and/or Staples, Inc. The complaint alleged that plaintiffs did not receive a rebate of between twenty to fifty dollars on NewCom products, as advertised and promoted by the above mass retailers. Plaintiffs further alleged that the mass retailers, without any justification, failed to pay NewCom for product received and sold. The plaintiffs sought, among other remedies, to recover all or part of the amount that the retailers failed to pay. Circuit City and Deutsche Financial Services filed cross-complaints. In August 2001, all litigants entered into a settlement Memorandum of Understanding which limited the total Aura defendants portion to $400,000, payable in monthly installments of $10,000 to the Plaintiffs. The parties have since entered into a definitive Settlement Agreement incorporating the terms of the Memorandum, which received final approval of the trial court in December 2001. Securities and Exchange Commission The Company has been informed by the Staff of the SEC that it intends to recommend that the Commission bring a civil action against Aura, NewCom, Inc. (a former subsidiary of Aura), Zvi Kurtzman, Steven Veen and Gerald Papazian for violations of the antifraud and books and records provisions of the securities laws. This grew out of an investigation into the Company's financial statements for various transactions during fiscal years 1996 through 1999. The Company originally disclosed the investigation by press release in January 1999. The Staff advised the Company that it would recommend that the SEC seek civil penalties and enjoin the companies and the individuals from future violations. In addition, the SEC Staff would recommend that the SEC impose director and officer bars against Messrs. Kurtzman and Veen and a bar against Mr. Veen to prohibit his practicing as an accountant before the SEC. The Company is informed that in order to avoid potential lengthy and costly litigation the individuals have agreed to propose to settle with the SEC without admitting or denying any of the Staff's allegations. The Company has engaged in conversations with the Staff of the SEC regarding settlement of the matter, but no agreements have yet been reached. Although Aura believes that it will reach a settlement in a manner that will not have a material adverse effect on the Company's business, it cannot predict with certainty when or if such a settlement will occur or what the actual effects of such a settlement would be. The Audit Committee of the Board will conduct a full review of the Company's accounting controls and procedures. Other Legal Actions The Company is also engaged in other legal actions. In the opinion of management the ultimate resolution of these matters will not have a material adverse effect on financial conditions, results of operations or cash flow. (17) Financial Instruments Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents, trade receivables, notes receivable, trade payables and notes payable. The carrying value of these financial instruments approximate their fair value at February 28, 2002. Cash and cash equivalents consist principally of short term money market funds; these instruments are short term in nature and bear minimal risk. For trade receivables and notes receivable, the carrying value of these amounts is a reasonable estimate of their fair value. The fair value of noncurrent receivables, including notes receivable are estimated by using the current rates at which similar loans would be made to such borrowers based on the remaining maturities, consideration of credit risks, and other business issues pertaining to such receivables. The fair value of debt instruments are estimated based on quoted market prices or, where quoted prices are not available, estimated based upon borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The Company does not have any unused borrowing capacity and is therefore unable to determine an applicable incremental borrowing rate. As a result, a fair market value for the debt, other than carrying value, is not determinable. Considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates used are not necessarily indicative of the amounts that the Company would realize in a current market exchange. 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. (18) Other Income and (Expenses) --------------------------- Other income and (expenses) consist of:
2002 2001 2000 ------- ------- ------- Gain (loss) on disposal of assets $ (65,823) $ 1,756,746 $ (93,638) Accrued severance (1,080,525) -- -- Debt transaction fee 1,295,835 -- -- Other income 80,156 14,381 1,097,627 Interest income 239,713 432,018 357,014 Interest expense (2,495,551) (2,263,916) (4,476,690) ----------- ----------- ----------- $(2,026,195) $ (60,771) $ (3,115,687) ============ =========== =============
(19) Segment Reporting The Company is a United States based company providing advanced technology products to various industries. The principal markets for the Company's products are North America, Europe and Asia. All of the Company's operating long-lived assets are located in the United States. The Company operates in one segment. Total net revenues from customer geographical segments are as follows (in thousands):
2002 2001 2000 ------------------ --------------------- --------------------- U.S. $2,792 89.6% $ 2,464 98.1% $ 5,757 99.4% Canada 39 1.3 31 1.2 10 0.2 Europe 218 7.0 -- -- -- -- Asia 67 2.1 18 0.7 21 0.4 -------- ----------- -------- ----------- --------- ----------- $3,116 100.0% $ 2,513 100.0% $ 5,788 100.0% ====== =========== ======= =========== ======= ==========
(20) 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 APB Opinion 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 2002, 2001 were $0 and 2000 was $1,037,000. (21) Recently Issued Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which eliminates the requirement that all gains and losses from extinguishment of debt were to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the requirements of APB Opinion No. 30. Applying the provisions of APB Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Management believes that the adoption of the provisions of SFAS No. 145 will not have a material effect on the Company's results of operations and financial position. In October 2001, the FASB issued SAFS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30 relative to the disposal of a segment of a business. While SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, it expands the scope of discontinued operations to include all distinguishable components of an entity rather than just a segment of a business. This statement becomes effective for financial statements issued for fiscal years beginning after December 15, 2001; however, the Company has adopted the provisions of the statement in its fiscal year ended February 28, 2002 (see Notes 1 and 8). In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement becomes effective for financial statements issued for fiscal years beginning after June 15, 2002. Management is currently evaluating the effect that the adoption of this standard will have on the Company's results of operations and financial position. (22) Subsequent Events On December 11, 2001 the Company filed a complaint in the United States District Court, Central District of California, against CRS Emergency Vehicles, Co., Custom Coaches International and C. Ray Smith for Breach of Contract, Conversion, Bad Faith, Fraud and Injunctive Relief. The action arose out of a sale to defendant distributors of approximately $1.2 million of the Company's AuraGen(R) product. Despite requests for payment, no payment was received. Following service of the complaint and defendant's failure to file a responsive pleading in the time required, on January 25, 2002 the Company filed a Request to Enter Default and Application for Clerk Judgment. On February 7, 2002, however, the District Court accepted defendant's answer denying allegations. On May 7, 2002, following discussions between the parties, the Company entered into a definitive settlement, with defendants agreeing to release or otherwise account for all of the product shipped to the Company. The parties also agreed to terminate the distributorship agreement. The Company has fully accounted for this event in the fourth quarter and reversed revenue of $1.2 million due to the return of the inventory. As a result, revenues in the fourth quarter are a negative $928,000. On February 28, 2002, Aura retired approximately $15.3 million of debt and accrued interest. In the first quarter of fiscal 2003, the Company raised $4.2 million through the placement of 20.8 million shares of its common stock. Several of these same investors participated in the funding to retire the $15.3 million in debt. The original subscription agreement included terms and conditions requiring more common shares be issued to participants in the debt restructuring as a result of price protection clauses. The net financial impact in the fourth quarter was such that the Company recognized other income of $1.3 million for the transaction fee paid to Aura and an extraordinary gain on extinguishment of debt of $1.0 million, which reflects the commitment to issue additional shares due to these price protection clauses. (23) Extinguishment of Debt In the fourth quarter of fiscal 2002 the Company restructured $15.3 million of debt and accrued interest into 44,142,000 of Aura common stock, resulting in an extraordinary gain of approximately $1.0 million. Due to guaranteed share pricing agreements, 14,714,000 of the common shares totaling $3,310,650 were not issued as of February 28, 2002 and have been reflected on the Consolidated Statement of Stockholders' Equity as "Committed common stock". Additionally, in the third quarter of fiscal 2002, the remaining balance of an unsecured note payable plus accrued interest was forgiven by the creditor, resulting in an extraordinary gain on extinguishment of debt of approximately $900,000. The total gain on extinguishment of debt of $1,899,540, which is reflected as an extraordinary item in the accompanying consolidated financial statements, resulted in extraordinary income per share of less than $0.01. At the start of fiscal 2000, the Company had $38,481,782 in convertible notes payable, of which most were in default. During fiscal 2000 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 were 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. The balance of these notes became non-convertible. 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 and resulted in extraordinary income per share of $0.15. (24) Asset Impairment The asset impairment charge consisted of the following:
2002 2001 2000 -------- -------- -------- Equipment-tooling $4,603,582 $ -- $ -- Advertising credits 3,057,976 -- -- Long term investments 1,433,835 240,000 -- --------- ------- ------- $9,095,393 $240,000 $ -- ========== ======== =====
In the fourth quarter of fiscal 2002, the Company determined that the media credit asset was impaired based upon the requirement of SFAS No. 144. A comparison of the projected future cash flows of the Company to the carrying value of the assets indicated that the assets were impaired. The asset was written down to $0, its estimated fair value based upon the discounted estimated cash flows over the remaining asset lives. See Note 8 for equipment-tooling disclosure. See Note 4 regarding long term investments. (25) Selected Quarterly Financial Data (unaudited) (amounts in thousands, except per share data)
2002 --------------------------------------------------------------------------- First Second Third Fourth Full Year ----- ------ ----- ------ --------- Net revenues $2,875 $ 863 $ 306 $ (928) $ 3,116 ====== ===== ====== ======= ======= Gross profit $1,434 $ 550 $ 137 $ (485) $ 1,636 ====== ===== ====== ======= ======= Loss before extraordinary item $(2,106) $(6,035) $(2,627) $(16,058) $(26,826) ======== ======== ======== ========= ========= Net loss $(2,106) $(6,035) $(1,095) $(15,701) $(24,937) ======== ======== ======== ========= ========= Net loss per common share $ (.01) $ (.02) $ (.00) $ (.05) $ (.08) ======= ======= ======== ======== ========
2001 --------------------------------------------------------------------------- First Second Third Fourth Full Year ----- ------ ----- ------ --------- Net revenues $ 382 $ 387 $ 502 $1,242 $ 2,513 ===== ===== ===== ====== ======= Gross profit: As reported on Form 10Q $ (2,133) $ (2,169) $(1,881) $ 679 $(5,504) Adjustment 2,319 2,347 2,134 -- 6,800 ----- ----- ----- -------- ----------- Adjusted report $ 186 $ 178 $ 253 $ 679 $ 1,296 ===== ===== ===== ===== ======= Net loss $ (2,610) $ (6,726) $ (4,653) $(6,941) $(20,930) ========= ========= ========= ======== ========= Net loss per common share $ (.01) $ (.03) $ (.02) $ (.02) $ (.08) ======= ======= ======= ======= ========
The net loss per common share aggregated relative to the four quarters does not necessarily sum to the full year amount since the computations are based on the weighted average number of common shares outstanding during each period. In the fourth quarter of fiscal 2002, the Company recorded various adjustments as recorded in the financial position and operating results of the Company. As a result, the Company reversed revenues (see Note 22), reserved slow moving and obsolete inventory (see Note 7), recognized losses on impaired assets (see Notes 4, 8 and 24), recorded a liability for future severance payments to the former management (see Note 10), and restructured a significant amount of the debt (see Note 23). In fiscal 2001, the Company reclassified certain costs that had been characterized as overhead costs and included in cost of sales. These items were primarily engineering and facility related and have now been classified as engineering expenses in the operating expense category. This was done to more accurately reflect the actual cost of the product sold and provide a gross profit presentation based on the sale of the product itself. This resulted in a change in the reported gross margins for fiscal 2000 from a negative 131.9% to a positive 66.2%. To the Board of Directors and Stockholders Aura Systems, Inc. El Segundo, California Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California April 30, 2002
SCHEDULE II AURA SYSTEMS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended February 28, 2002, February 28, 2001 and February 29, 2000 Balance at Charged to cost Charged to Balance at beginning of period and expenses other accounts Deductions end of period ------------------- ------------ -------------- ---------- ------------- Year ended February 28, 2002: Allowance for: Uncollectible accounts receivable $ 160,000 $ -- $ -- $ 10,000 $ 150,000 Reserve for inventory 291,404 1,510,871 -- 6,864 1,795,411 Reserve for investments 388,652 1,433,835 -- -- 1,822,487 -------- --------- --------- --------- --------- $ 840,056 $2,944,706 $ -- $ 16,864 $3,767,898 ========= ========== ======= ======== ========== Year ended February 28, 2001: Allowance for: Uncollectible accounts receivable $ 7,673,217 $1,339,696 $ -- $8,852,913 $ 160,000 Reserve for inventory 326,936 -- -- 35,532 291,404 Reserve for investments 148,652 240,000 -- -- 388,652 -------- --------- ----------- ----------- ------------ $ 8,148,805 $1,579,696 $ -- $ 8,888,445 $ 840,056 =========== ========== ======= =========== ============ Year ended February 29, 2000: Allowance for: Uncollectible accounts receivable $8,149,551 $ 456,233 $ -- $ 932,567 $ 7,673,217 Reserve for inventory 7,876,000 82,913 -- 7,631,977 326,936 Reserve for investments 148,652 -- -- -- 148,652 ------- --------------- -------------- ------------- ------------ $16,174,203 $ 539,146 $ -- $8,564,544 $ 8,148,805 =========== ============= ============== ========== ===========
EX-99 3 coiandam.txt EX. 3.1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF AURA SYSTEMS, INC. FIRST. The name of this corporation shall be: AURA SYSTEMS, INC. SECOND. Its registered office in the State of is to be located at 1313 Centre Road, in the City of Wilmington, County of New Castle 19805, and its registered agent at such address is CORPORATION SERVICE COMPANY. THIRD. The purpose or purposes of the corporation shall be: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The total number of shares of stock which this corporation is authorized to issue is: One Hundred Million (100,000,000) shares of the par value of $.005 each, amounting to Five Hundred Thousand Dollars ($500,000.00). FIFTH. The name and mailing address of the incorporator is as follows: JANE S. KRAYER Corporation Service Company 1013 Centre Road Wilmington, Delaware 19805 SIXTH. The Board of Directors shall have the power to adopt, amend or repeal the by-laws. SEVENTH. No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct. or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Seventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. IN WITNESS WHEREOF, The undersigned, being the incorporator hereinbefore named, has executed, signed and acknowledged this certificate of incorporation this second day of March, A.D. 1987. /s/ Jane S. Krayer Incorporator CERTIFICATE OF AMENDMENT OF CERTIFCATE OF INCORPORATION OF AURA SYSTEMS, INC. (Under Section 242 of the General Corporation Law) AURA SYSTEMS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: FIRST: The name of the Corporation is AURA SYSTEMS, INC. SECOND: The Certificate of Incorporation of the Corporation is hereby amended by striking out Article "FOURTH" thereof in its entirety and by substituting in lieu of said Article the following provisions: "FOURTH'. The total number of shares of stock which this corporation is authorized to issue is: Two Hundred Million (200.000,000) shares of the par' value of $.005 each, amounting to One Million Dollar, ($1,000,000.00)." THIRD: The Amendment to the Certificate of incorporation herein certified has been duly adopted in accordance with the provisions of Sections 222 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the undersigned has executed this Certificate this 17th day of September, 1997. /s/ Zvi (Harry) Kurtzman, Chairman of The Board and Chief Executive Officer CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF AURA SYSTEMS, INC. Under Section 242 of the General Corporation Law) AURA SYSTEMS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the Corporation"), does hereby certify that: FIRST: The name of the Corporation is AURA SYSTEMS, INC. SECOND: The Certificate of Incorporation of the Corporation is hereby amended by striking out Article "FOURTH" thereof in its entirety and by substituting in lieu of said Article the following provisions: "FOURTH". The total number of shares of stock which this corporation is authorized to issue is: Five Hundred Ten Million (510,000,000) shares of the par value of $.005 each, amounting to Two Million Five Hundred Fifty Thousand Dollars ($2,550,000.00), of which Five Hundred Million (500,000,000) shares shall be Common Stock and Ten Million (10,000,000) Shares shall be Preferred Stock. The Preferred Stock shall have such designations, powers, preferences, rights, qualifications, limitations and restrictions permitted under the General Corporation Law of the State of Delaware which the Board of Directors of the Corporation may fix by resolution. THIRD: The Amendment to the Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Sections 222 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the undersigned have executed this Certificate this 7th day of March, 2000 /s/ Zvi (Harry) Kurtzman, Chairman of The Board and Chief Executive Officer ATTEST: /s/ Michael I. Froch, Secretary EX-99 4 bylw-am.txt EX. 3.2 EXHIBIT 3.2 AURA SYSTEMS, INC. BY- LAWS ARTICLE I - OFFICES Section 1. The registered office of the corporation in the State of Delaware shall be at Corporation Service Co. The registered agent in charge thereof shall be Corporation Service Co. Section 2. The corporation may also have offices at such other places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II - SEAL Section 1. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". ARTICLE III - STOCKHOLDERS' MEETINGS Section 1. Meetings of stockholders shall be held at the registered office of the corporation in this state or at such place, either within or without this state, as may be selected from time to time by the Board of Directors. Section 2. Annual Meetings: The annual meeting of the stockholders shall be held on the second Tuesday of July in each year if not a legal holiday, and if a legal holiday, then on the next secular day following at 10:00 o'clock A.M., when they shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. If the annual meeting for election of directors is not held on the date designated therefore, the directors shall cause the meeting to be held as soon thereafter as convenient. Section 3. Election of Directors: Elections of the directors of the corporation shall be by written ballot. Section 4. Special Meetings: Special meetings of the stockholders may be called at any time by the President, or the Board of Directors, or stockholders entitled to cast at least one-fifth of the votes which all stockholders are entitled to cast at the particular meeting. At any time, upon written request of any person or persons who have duly called a special meeting, it shall be the duty of the Secretary to fix the date of the meeting, to be held not more than sixty days after receipt of the request, and to give due notice thereof. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the person or persons calling the meeting may do so. Business transacted at all special meetings shall be confined to the objects stated in the call and matters germane thereto, unless all stockholders entitled to vote are present and consent. Written notice of a special meeting of stockholders stating the time and place and object thereof, shall be given to each stockholder entitled to vote thereat at least sixty days before such meeting, unless a greater period of notice is required by statute in a particular case. Section 5. Quorum: A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares entitled to vote is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 6. Proxies: Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. All proxies shall be filed with the Secretary of the meeting before being voted upon. Section 7. Notice of Meetings: Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 8. Consent in Lieu of Meetings: Any action required to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall he given to those stockholders who have not consented in writing. Section 9. List of Stockholders: The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. No share of stock upon which any installment is due and unpaid shall be voted at any meeting. The list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE IV - DIRECTORS Section 1. The business and affairs of this corporation shall be managed by its Board of Directors, five in number. The directors need not be residents of this state or stockholders in the corporation. They shall be elected by the stockholders at the annual meeting of stockholders of the corporation, and each director shall be elected for the term of one year, and until his successor shall be elected and shall qualify or until his earlier resignation or removal. Section 2. Regular Meetings: Regular meetings of the Board shall be held without notice on the second Tuesday of May, August, November & February at the registered office of the corporation, or at such other time and place as shall be determined by the Board. Section 3. Special Meetings: Special Meetings of the Board may be called by the President on 2 days notice to each director, either personally or by mail or by telegram; special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of a majority of the directors in office. Section 4. Quorum: A majority of the total number of directors shall constitute a quorum for the transaction of business. Section 5. Consent in Lieu of Meeting: Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. The Board of Directors may hold its meetings, and have an office or offices, outside of this state. Section 6. Conference Telephone: One or more directors may participate in a meeting of the Board, of a committee of the Board or of the stockholders, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other; participation in this manner shall constitute presence in person at such meeting. Section 7. Compensation: Directors as such, shall not receive any stated salary for their services, but by resolution of the Board, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board PROVIDED, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefore. Section 8. Removal: Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except that when cumulative voting is permitted, if less than the entire Board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors, or, if there be classes of directors, at an election of the class of directors of which he is a part. ARTICLE V - OFFICERS Section 1. The executive officers of the corporation shall be chosen by the directors and shall be a President, Secretary and Treasurer. The Board of Directors may also choose a Chairman, one or more Vice Presidents and such other officers as it shall deem necessary. Any number of offices may be held by the same person. Section 2. Salaries: Salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 3. Term of Office: The officers of the corporation shall hold office for one year and until their successors are chosen and have qualified. Any officer or agent elected or appointed by the Board may be removed by the Board of Directors whenever in its judgment the best interest of the corporation will be served thereby. Section 4. President: The President shall be the chief executive officer of the corporation; he shall preside at all meetings of the stockholders and directors; he shall have general and active management of the business of the corporation, shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the corporation. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. He shall be EX-OFFICIO a member of all committees, and shall have the general power and duties of supervision and management usually vested in the office of President of a corporation. Section 5. Secretary: The Secretary shall attend all sessions of the Board and all meetings of the stockholders and act as clerk thereof, and record all the votes of the corporation and the minutes of all its transactions in a book to be kept for that purpose, and shall perform like duties for all committees of the Board of Directors when required. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, and under whose supervision he shall be. He shall keep in safe custody the corporate seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it. Section 6. Treasurer: The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall keep the moneys of the corporation in a separate account to the credit of the corporation. He shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the corporation. ARTICLE VI - VACANCIES Section 1. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of these By-Laws. Section 2. Resignations Effective at Future Date: When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. ARTICLE VII - CORPORATE RECORDS Section 1. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in this state or at its principal place of business. ARTICLE VIII - STOCK CERTIFICATES, DIVIDENDS, ETC. Section 1. The stock certificates of the corporation shall be numbered and registered in the share ledger and transfer books of the corporation as they are issued. They shall bear the corporate seal and shall be signed by the corporate secretary. Section 2. Transfers: Transfers of shares shall be made on the books of the corporation upon surrender of the certificates therefore, endorsed by the person named in the certificate or by attorney, lawfully constituted in writing. No transfer shall be made which is inconsistent with law. Section 3. Lost Certificate: The corporation may issue a new certificate of stock in the place of any certificate theretofore signed by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Record Date: In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (d) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5. Dividends: The Board of Directors may declare and pay dividends upon the outstanding shares of the corporation, from time to time and to such extent as they deem advisable, in the manner and upon the terms and conditions provided by statute and the Certificate of Incorporation. Section 6. Reserves: Before payment of any dividend there may be set. aside out of the net profits of the corporation such sum or sums as the directors, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve in the manner in which it was created. ARTICLE IX - MISCELLANEOUS PROVISIONS Section 1. Checks: All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. Section 2. Fiscal Year: The fiscal year shall begin on the first day of Section 3. Notice: Whenever written notice is required to be given to any person, it may be given to such person, either personally or by sending a copy thereof through the mail, or by telegram, charges prepaid, to his address appearing on the books of the corporation, or supplied by him to the corporation for the purpose of notice. If the notice is sent by mail or by telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting of stockholders, the general nature of the business to be transacted. Section 4. Waiver of Notice: Whenever any written notice is required by statute, or by the Certificate or the By-Laws of this corporation a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of stockholders neither the business to be transacted at nor the purpose of the meeting need be specified in the waiver of notice of such meeting. Attendance of a person either in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Section 5. Disallowed Compensation: Any payments made to an officer or employee of the corporation such as a salary, cornmission, bonus, interest, rent, travel or entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer or employee to the corporation to the full extent of such disallowance. It shall be the duty of the directors, as a Board, to enforce payment of each such amount disallowed. In lieu of payment by the officer or employee, subject to the determination of the directors, proportionate amounts may be withheld from his future compensation payments until the amount owed to the corporation has been recovered. Section 6. Resignations: Any director or other officer may resign at anytime, such resignation to be in writing, and to take effect from the time of its receipt by the corporation, unless some time be fixed in the resignation and then from that date. The acceptance of a resignation shall not be required to make it effective. ARTICLE X - ANNUAL STATMENT Section 1. The President and Board of Directors shall present at each annual meeting a full and complete statement of the business and affairs of the corporation for the preceding year. Such statement shall be prepared and presented in whatever manner the Board of Directors shall deem advisable and need not be verified by a certified public accountant. ARTICLE XI - AMENDMENTS Section 1. These By-Laws may be amended or repealed by the vote of stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast thereon, at any regular or special meeting of the stockholders, duly convened after notice to the stockholders of that purpose. SECRETARY'S CERTIFICATE OF AURA SYSTEMS, INC., a Delaware corporation I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of Aura Systems, Inc., a Delaware corporation; and 2. That the Board of Directors of Aura Systems, Inc. convened a meeting duly held on July 9, 1997, and a quorum was present at such meeting; and 3. That the resolution attached hereto is a true, complete and correct copy of the resolution duly adopted by unanimous vote of the Board of Directors, and that such resolution has not been modified, and remains in full force and effect as of this date. IN WITNESS WHEREOF, I have hereunto subscribed my name this 9th day of July, 1997. /s/ Michael I. Froch AMENDMENT OF BYLAWS IN ORDER TO CONDUCT ORDERLY STOCKHOLDER MEETINGS. WHEREAS, the Corporation's annual meeting of stockholders held in 1997 became disorderly; WHEREAS, the Board of Directors believes that it is in the best interest of the stockholders of the Corporation to conduct an orderly meeting of its stockholders; and WHEREAS, in order to conduct orderly stockholder meetings, the Board of Directors now wishes to amend the Corporation's Bylaws; NOW, THEREFORE, BE IT RESOLVED, that the Bylaws of the Corporation be amended by inserting the following Sections at the end of Article III: Section 10. Advance Notice of Stockholder Nominees and Resolutions. No nominations for director of the corporation by any person other than the board of directors shall be presented to any meeting of stockholders unless the person making the nomination is a record stockholder and shall have delivered a written notice to the secretary of the corporation no later than the close of business 60 days in advance of the stockholder meeting or 10 days after the date on which notice of the meeting is first given to the stockholders, whichever is later. Such notice shall (i) set forth the name and address of the person advancing such nomination and the nominee, together with such information concerning the person making the nomination and the nominee as would be required by the appropriate Rules and Regulations of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the election of such nominee, and (ii) shall include the duly executed written consent of such nominee to serve as director if elected. No proposal by any person other than the board of directors shall be submitted for the approval of the stockholders at any regular or special meeting of the stockholders of the corporation unless the person advancing such proposal shall have delivered a written notice to the secretary of the corporation no later than the close of business 60 days in advance of the stockholder meeting or 10 days after the date on which notice of the meeting is first given to the stockholders, whichever is later. Such notice shall set forth the name and address of the person advancing the proposal, any material interest of such person in the proposal, and such other information concerning the person making such proposal and the proposal itself as would be required by the appropriate Rules and Regulations of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the proposal. Section 11. Conduct of Business. The Chairman of the Board of Directors shall preside at all meetings of stockholders, or at the Chairman's option, the Chairman of the Board of Directors may delegate the authority to preside at any meeting of stockholders to any other director or executive officer of the corporation. The Chairman of the Board or the person authorized by the Chairman of the Board to preside at any stockholder meeting shall determine the order of business and the procedure at the meeting, including, without limitation the regulation of the manner of voting, the conduct of business, and the rules for admission to stockholder meetings. SECRETARY'S CERTIFICATE OF AURA SYSTEMS, INC., a Delaware corporation I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of Aura Systems, Inc., a Delaware corporation; and 2. That the Board of Directors of Aura Systems, Inc. convened a meeting duly held on September 17, 1997, and a quorum was present at such meeting; and 3. That the resolution attached hereto is a true, complete and correct copy of the resolution duly adopted by unanimous vote of the Board of Directors, and that such resolution has not been modified, and remains in full force and effect as of this date. IN WITNESS WHEREOF, I have hereunto subscribed my name this 17th day of September, 1997. /s/ Michael I. Froch AMENDMENT OF BY-LAWS TO INCREASE BOARD SIZE RESOLVED, that the first sentence of Article IV, Section 1, of the By-Laws of the Corporation be amended to read as follows: "The business and affairs of this Corporation shall be managed by its Board of Directors, eleven (11) in number." SECRETARY'S CERTIFICATE OF AURA SYSTEMS, INC., a Delaware corporation I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of Aura Systems, Inc., a Delaware corporation; and 2. That the Board of Directors of Aura Systems, Inc. convened a meeting duly held on June 25, 1998, and a quorum was present at such meeting; and 3. That the resolution attached hereto is a true, complete and correct copy of the resolution duly adopted by unanimous vote of the Board of Directors, and that such resolution has not been modified, and remains in full force and effect as of this date. IN WITNESS WHEREOF, I have hereunto subscribed my name this 25th day of June 1998. /s/ Michael I. Froch AMENDMENT OF BYLAWS. RESOLVED, that Article IV of the Bylaws of the Corporation hereby is amended by adding thereto the following new Section 9: "Section 9. Committees. (a) The Board of Directors may designate one or more committees, each to consist of one or more of the directors. The Board of Directors may designate one or more directors as members of any committee and one or more directors as alternate members of any committee, who may replace any absent or disqualified member to any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not qualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board of Directors may remove any director from membership on any committee at any time, with or without cause. The Board of Directors may fill any vacancy occurring on any committee by reason of death, resignation, disqualification, retirement or removal. "(b) Any such committee, to the extent provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management and business affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by this chapter to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the corporation. "(c) Each committee shall (i) fix its own rules of procedure (which shall not be inconsistent with these Bylaws) and (ii) keep regular minutes of its proceedings (which shall be inserted in the corporate minute book) and report the same to the Board of Directors at each meeting thereof. "(d) The corporation hereby elects to be governed by subsection (2) of section 14 1(c) of the General Corporation Law of the State of Delaware." SECRETARY'S CERTIFICATE OF AURA SYSTEMS, INC. a Delaware corporation I the undersigned, do hereby certify: 1. That I am the duly elected Secretary of Aura Systems, Inc., a Delaware corporation; and 2. That the Board of Directors of Aura Systems, Inc. convened a meeting duly held on January 23, 2001, and a quorum was present at such meeting; and 3. That the Resolution attached hereto is a true, complete and correct copy of the resolution duly adopted by majority vote of the disinterested members of the Board of Directors, and that such resolution has not been modified, and remains in full force and effect as of this date. IN WITNESS WHEREOF, I have hereunto subscribed my name this 23rd day January, 2001. /s/ MICHAEL I FROCH AMENDMENT OF BY-LAWS ESTABLISHING THE OFFICE OF VICE CHAIRMAN WHEREAS, the Board of Directors believes that it is in the best interest of the Corporation to establish the office of Vice Chairman of the Board of Directors; and WHEREAS, pursuant thereto, the Board of Directors now wishes to amend the Corporation's By-Laws; NOW, THEREFORE, BE IT RESOLVED, that the By-Laws of the Corporation be amended by inserting the following Sections to Article 5: Section 1. The executive officers of the corporation shall be chosen by the directors and shall be a President, Secretary and Treasurer. The Board of Directors may also choose a Chairman, Vice Chairman, one or more Vice Presidents and such other officers at it shall deem necessary. Any number of offices may be held by the same person. Section 6. Vice Chairman: The Vice Chairman of the Board of Directors shall be a non-employee, independent director of the Board of Directors. He shall have the duty of presiding at all meetings in the absence of the Chairman of the Board. He shall have such other duties as may be prescribed from time to time by unanimous written consent of the Board of Directors. END OF AMENDMENT JANUARY 23, 2001 EX-99 5 hauser.txt EX. 10.32 EXHIBIT 10.32 February 26, 2002 Via Facsimile & U.S. Mail Joshua A. Hauser 46 Yellow Cote Road Oyster Bay Cove, NY 11771 Re: Employment Dear Mr. Hauser: On behalf of Aura Systems, Inc., I would like to offer you the regular, full-time, salaried position of President and Chief Executive Officer. The terms of your employment are as follows: You will have an eighteen month term of employment, beginning March 1, 2002. Ninety days prior written notice will be required to terminate your employment following expiration of the term. Your annual base salary will be $350,000. You are eligible for a target bonus of 30% at twelve months of employment, based upon subjective critera as determined by the Board of Directors. You will receive as soon as is practicable a $25,000 up-front fee for re-location to the Los Angeles basin. You will receive as soon as is practicable 1,600,000 options to purchase Aura Common Stock at an exercise price of $0.50. The options will vest 1/3 at 6 months plus one day from the date of grant (Feb. 13, 2002), 2/3 rd's at 12 months, and will fully vest 18 months from the date of grant. Provided that you do not voluntarily leave your employment prior to the end of the term and provided you are not otherwise terminated for cause (fraud, gross or willful negligence) during the term, once vested, these stock options will remain exercisable for five years from the date your employment term expires. Your options will fully vest and remain exercisable for five years in the event of a merger or consolidation of Aura Systems, Inc. into any other corporation or acquisition of substantially all of the outstanding shares of Aura Systems, Inc. by another entity. These provisions relating to your options will be enforced according to that which is contained in this section, notwithstanding contrary provisions which may be stated in Aura's standard form Stock Option Agreement. The grant of options is made, subject to the March 2000 Stock Option Plan and the Securities laws of the United States. You will be reporting directly to Carl Albert, Chairman of the Board of Directors. As described in our Benefits Handbook, Aura provides its employees (on the first of the month after 30 days of continuous employment, in your case April 1, 2002) with the following benefits: Vacation, Holidays and Personal leave Medical: POS 90/70% coverage or HMO 100% coverage (California only). Prescription card. Dental: DMO or Traditional Coverage. Flexible Spending Accounts for Healthcare and Dependent care cost. Group Term Life insurance: $100,000 plus $100,000 extra coverage in case of accidental death. Group Long Term Disability: 50% of covered monthly earnings to a maximum benefit of $6,000 per month. Another benefit available on the first quarterly sign-up date following 90 days of continuous employment is: 401(k) Plan: employee tax deferred contributions partially matched by the company. This offer is contingent upon the following: Reporting to work at Aura no later than: March 8, 2002. Please be advised, that you will be subject to all policies and procedures contained in the Aura Systems, Inc. Company Policies and Employee Benefits Handbook. In this regard, it is standard Aura Systems policy for all new employees to submit to a background check and pre-employment drug testing. We are able to begin this process immediately, even while you are still in New York. Finally, should disagreements arise between you and the Company regarding your employment, such disagreements will be resolved by final and binding arbitration as provided in your Handbook and the Mutual Agreement to Mediate and Arbitrate. We look forward to having you join our team. Please acknowledge your acceptance of these terms by signing below. Please also return to me a signed copy via electronic mail or facsimile, at the private number (310) 643-7585, along with an original directed confidentially to my attention via U.S. mail. Sincerely, Acceptance: - ---------------------------- -------------------------------- Michael I. Froch Joshua A. Hauser Date: Senior Vice President General Counsel & Secretary cc: Carl Albert EX-99 6 ts0222.txt EX. 10.31 EXHIBIT 10.31 Aura Systems, Inc. Term Sheet Instrument Registered common shares of the Company Purchase Price $0.30 per share Amount $4 million Shares to be Issued 13,333,333 common shares Use of Proceeds Re-purchase of secured note payment converted into registered common shares Closing By February 22, 2002 Documentation Company will provide registered common shares by March 1, 2002 Conditions Company will raise a minimum of $15 million in preferred shares offering by March 7, 2002. If not, purchase price of shares reduced to $0.25 per share Anti-dilution protection for one year period in that any adjustment will be to lowest stock sale price from closing of this transaction To be paid in registered shares under same terms above in agreements On behalf of Aura Systems, Inc. /s/_________________________ on this date_________________ Zvi (Harry) Kurtzman On behalf of Investor Group: Amount: _______________ /s/_________________________ on this date_________________ Bruce Cowen EX-99 7 ex231.txt EX. 23.1 EXHIBIT 23.1 CONSENT OF PKF, CERTIFIED PUBLIC ACCOUNTANTS, A PROFESSIONAL CORPORATION We hereby consent to the incorporation by reference in the Registration Statements of Aura Systems, Inc. on Form S-3 (File Nos. 333-1315, 33-75160, 333-41509, 333-46773 and 333-57824) and Form S-8 (File No. 33-66982) of our report dated June 12, 2000, on our audit of the consolidated financial statements of Aura Systems, Inc. for the year ended February 29, 2000 which report appears in the Form 10-K of Aura Systems, Inc. for the fiscal year ended February 28, 2002. /s/ PKF, CERTIFIED PUBLIC ACCOUNTANTS, A PROFESSIONAL CORPORATION Los Angeles, California May 24, 2002 EX-99 8 ex232.txt EX. 23.2 EXHIBIT 23.2 Independent Auditor's Consent We consent to the incorporation by reference in previously filed Registration Statements on Form S-3 (File Nos. 333-1315, 33-75160, 333-41509, 333-46773 and 333-57824) and Form S-8 (File No. 33-66982) of Aura Systems, Inc. of our report, dated April 30, 2002, except for Note 22, as to which the date is May 24, 2002, which contains an emphasis paragraph relating to an uncertainty as to the Company's ability to continue as a going concern, appearing in this Annual Report on Form 10-K of Aura System, Inc. for the year ended February 28, 2002. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN, LLP Los Angeles, California May 29, 2002 EX-99 9 indemagr.txt EX. 10.15 EXHIBIT 10.15 INDEMNIFICATION AGREEMENT AGREEMENT, effective as of July 10, 2001, between Aura Systems, Inc., a Delaware corporation (the "Company"), and Harry Haisfield (the "Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; WHEREAS, Indemnitee has agreed to become a director of the Company; WHEREAS, both the Company and Indemnitee recognize the risk of litigation and other claims asserted against directors of public companies; WHEREAS, in recognition of Indemnitee's desire for substantial protection against personal liability in order to enhance Indemnitee's service to the Company, and to provide Indemnitee with specific contractual assurance that the indemnification protection provided by the By-Laws of the Company or authorized by the Delaware General Corporation Law will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of the Company's Certificate of Incorporation and By-Laws or any change in the composition of the Company's Board of Directors), and in order to induce Indemnitee to provide services to the Company as a director thereof, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, if and to the extent insurance is maintained, for the coverage of Indemnitee under any directors' and officers' liability insurance policies maintained by the Company; and WHEREAS, this Agreement has been authorized by the duly adopted resolution of the Board of Directors of the Company; NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions: (a) Claim: any threatened, pending or completed action, suit, proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternate dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (b) Expenses: include attorneys' fees and all other costs, travel expenses, fees of experts, transcript costs, filing fees, witness fees, telephone charges, postage, delivery service fees, expenses and obligations of any nature whatsoever paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any Claim relating to any Indemnifiable Event. (c) Indemnifiable Event: any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (d) Reviewing Party: any appropriate person or body appointed by the Board of Directors and consisting of a member or members of the Company's Board, or any other person or body appointed by the Board who is not a party to the particular Claim for which Indemnitee is seeking indemnification. 2. Basic Indemnification Arrangement (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by the laws of Delaware, as the same exist or may hereafter be amended (but, in the case of any amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than such law permitted the Company to provide prior to such amendment), as soon as practicable but in any event not later than thirty days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. If so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding anything in this Agreement to the contrary and except as provided in Section 3, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim. Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to indemnification pursuant to this Agreement on account of any suit in which a final judicial determination is rendered against Indemnitee for an accounting of profits made from the purchase and sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended. (b) Notwithstanding the foregoing, (i) the obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for Expense Advances shall be unsecured and no interest shall be charged thereon. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in the Court of Chancery of the State of Delaware or in any court in the County of Los Angeles, California, having jurisdiction over the dispute, seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, or the legal or factual bases therefor and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. (c) In the event the Company shall be obligated under Section 2(a) above to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding; provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, or (B) the Reviewing Party shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Claim effected without its prior written consent. The Company may, without the consent of Indemnitee, settle any Claim for which it is obligated to provide indemnity under Section 2(a) above, and Indemnitee shall take all actions required to cooperate in effecting such settlement; provided, however, that the Company shall not settle any Claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor Indemnitee will unreasonably withhold their consent to any proposed settlement. 3. Indemnification for Additional Expenses The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted against or in connection with any action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or Certificate of Incorporation or By-Laws of the Company now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; provided, however, that the Company shall not have any obligation to indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement or to enforce any obligations to indemnification or to advance payment of expenses hereunder, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceedings was not made in good faith or was frivolous. 4. Partial Indemnity, Burden of Proof (a) If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. (b) For purposes of this Agreement, in connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder the burden of proof shall be on the Company to establish by clear and convincing evidence that Indemnitee is not so entitled, and if the Company does not carry such burden of proof with such evidence Indemnitee shall be deemed to be so entitled. 5. No Presumption For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 6. Non-exclusivity, Etc. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Certificate of Incorporation or By-Laws of the Company or the Delaware General Corporation Law or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Certificate of Incorporation and By-Laws of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 7. No Construction as Employment Agreement Nothing contained herein shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 8. Liability Insurance If and to the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage provided to any Company director or officer. 9. Amendments, Etc. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 10. Subrogation In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the executing of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 11. No Duplication of Payments The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Certificate of Incorporation or By-Laws of the Company or otherwise) of the amounts otherwise indemnifiable hereunder. 12. Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, and shall inure to the benefit of Indemnitee's spouse, heirs, and personal and legal representatives and assigns. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director of the Company. 13. Severability The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 14. Governing Law This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. 15. Mutual Acknowledgement The Company and Indemnitee acknowledge that the Securities and Exchange Commission has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws under certain circumstances, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake to submit to the Securities and Exchange Commission the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. If any such circumstance occurs, the Company will vigorously assert and prosecute its rights to indemnify Indemnitee. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the 10th day of July, 2001. AURA SYSTEMS, INC. By: ________________________ Gerald S. Papazian President & C.O.O. AGREED TO AND ACCEPTED: INDEMNITEE By: ________________________ Harry Haisfield EX-99 10 sevagr.txt EX. 10.16 EXHIBIT 10.16 Tier One AGREEMENT REGARDING TERMINATION OF EMPLOYMENT CONTRACT This Agreement Regarding Termination of Employment Contract ("Agreement") is entered into as of this 21st day of December, 2001 by and between Zvi (Harry) Kurtzman ("Executive"), on the one hand, and Aura Systems, Inc., a Delaware corporation ("Company"), on the other hand (collectively, the "Parties"). RECITALS WHEREAS, Executive has been employed by the Company as Chief Executive Officer, pursuant to an employment agreement with the Company dated March 5, 1998 (the "Employment Agreement"); WHEREAS, Executive and the Company wish to voluntarily terminate Executive's Employment Agreement and make Executive an at-will employee of the Company effective December 21, 2001; WHEREAS, pursuant to the terms of the Employment Agreement Executive is entitled to receive a severance payment upon such termination of the Employment Agreement; and WHEREAS, the Company and Executive has determined that it would be in the best interest of Executive, the Company and its shareholders to offer Executive a buyout of the Employment Agreement and the severance package set forth herein, in exchange for covenants and agreements contained herein and in lieu of any severance payment Executive would otherwise be entitled to receive under the Employment Agreement. WHEREAS, Executive and the Compensation Committee of the Board of Directors have negotiated the terms and conditions of this Agreement, which Agreement has been approved by the Board of Directors of the Company. NOW THEREFORE, in consideration of the promises and mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are expressly acknowledged, the Parties agree and promise as follows: 1. TERMINATION OF EXECUTIVE'S EMPLOYMENT AGREEMENT. Pursuant to this Agreement, Executive's Employment Agreement with the Company is terminated effective December 21, 2001 (the "Term Date"). Executive shall continue as an at-will employee of the Company until the Company or Executive terminates such at-will relationship (the "Separation Date"). 2. BUYOUT AND SEVERANCE PAYMENT. In consideration of Executive's covenants and agreements contained herein, the Company shall pay Executive as a severance benefit (the "Severance Benefit") the following: A. Tier One Buy-Out Stock Option The Company shall grant to the Executive an option to purchase that number of shares of Common Stock of the Company (the "Stock") equal to the quotient of (x) three (3) times the Executive's Base Salary (as defined in the Employment Agreement) divided by (y) $0.32 multiplied by (z) two (2), (the "Buy-Out Stock Option"), which option shall have an exercise price equal to $0.55 per share. The Buy-Out Stock Option shall vest and become exercisable over a ten (10) year period from the date of grant, with (i) one-third (1/3) of the total shares represented by the Buy-Out Stock Option (the "Option Shares") vesting and becoming exercisable after the expiration of six (6) months from the date of this Agreement (the "First Vesting Date"), and (ii) two-thirds (2/3) of the Option Shares vesting twelve (12) months after the First Vesting Date. The Buy-Out Stock Option shall be exercisable, to the extent vested, for the full ten (10) year term of the option without regard to the Executive's status as an employee of the Company. The Buy-Out Stock Option shall be subject to such other terms as evidenced by a stock option agreement entered into between Executive and the Company and attached hereto. The Company shall grant the Buy-Out Stock Option pursuant to a shareholder-approved option plan (a "Company Option Plan"), and to the extent of any shortfall where no additional Stock is available for grant of options under any Company Option Plan, then in the form of a warrant to purchase Stock, outside of any Company Option Plan; provided, however, that if the Company shall grant the Executive a warrant, the Executive shall be entitled to receive any piggyback registration rights customarily offered to similarly situated holders of warrants to purchase Stock. B. Medical Benefits Executive shall receive continued medical benefits for a period of three (3) years following termination of employment or be entitled to receive a payment in the form of cash in lieu of such continuation of medical benefits; provided, that the Company shall not be obligated to pay a premium or incur any costs related to the provision of such continued coverage in excess of one thousand dollars ($1,000.00) per month for such three (3) year period. The medical benefits shall be substantially similar to the medical benefits Executive received from the Company prior to termination of employment. C. Limitation of Benefits Except for (i) the Severance Benefit and (ii) Executive's salary and all other compensation through the Separation Date, including any earned but unpaid vacation pay, Executive shall not be entitled to receive any other compensation or benefits of any sort including, without limitation, salary, vacation, bonuses, stock options, short-term or long-term disability benefits, health care coverage and any severance Executive might otherwise be entitled to received under the Employment Agreement from the Company, its affiliates, or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. 3. NO DISPARAGEMENTS. Executive and the Company agree that neither Executive nor the Company shall make any oral or written, public or private, statements that are disparaging of Executive or the Company, its affiliates, or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or their respective predecessors, successors or assigns at any time; provided, however, nothing in this Section 3 shall preclude Executive or the Company from making truthful factual statements regarding Executive or former officers, directors or employees of the Company. 4. NON-COMPETITION. A. For a period of three (3) years from the Separation Date, Executive shall not, directly or indirectly, without the prior written consent of the Company, provide consultative services or otherwise provide services to (whether as an employee or a consultant, with or without pay), own, manage, operate, join, control, participate in, or be connected with (as a stockholder, partner, or otherwise), any business, individual, partner, firm, corporation, or other entity that is a competitor of the Company, its subsidiaries or affiliates in any business now conducted, or conducted at any time through the Separation Date, by the Company, its subsidiaries or affiliates (each such competitor a "Competitor of the Company"). Executive and the Company acknowledge and agree that the business of the Company extends throughout the United States, Europe and Asia, and that the terms of the non-competition agreement set forth herein shall apply throughout the United States, Europe and Asia B. Non-Solicitation of Customers and Suppliers. For a period of three years from the Separation Date, Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company, or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. C. Non-Solicitation of Employees. Executive recognizes that he possesses and will possess confidential information about other employees of the Company, its subsidiaries and affiliates, relating to their education, experience, skills, abilities, compensation and benefits, and inter-personal relationships with customers of the Company, its subsidiaries and affiliates. Executive recognizes that the information he possesses and will possess about these other employees is not generally known, is of substantial value to the Company, its subsidiaries and affiliates in developing their business and in securing and retaining customers, and has been and will be acquired by him because of his business position with the Company, its subsidiaries and affiliates. Executive agrees that for a period of three (3) years from the Separation Date, he will not, directly or indirectly, solicit or recruit any employee of the Company, its subsidiaries and affiliates for the purpose of being employed by him or by any company on whose behalf he is acting as an agent, representative or employee and that he will not convey any such confidential information or trade secrets about other employees of the Company, its subsidiaries and affiliates to any other person. If Executive in any way violates the provisions of this Section 4, all Severance Benefits shall cease, including the continued vesting of the Stock Options. 5. RETURN OF THE COMPANY'S DOCUMENTS AND PROPERTY. Executive agrees to return all records, documents, proposals, notes, lists, files and any and all other materials including, without limitation, computerized and/or electronic information that refers, relates or otherwise pertains to the Company, its affiliates, and/or their respective partners, principals, officers, directors, shareholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. In addition, Executive shall return to the Company all property or equipment that he has been issued during the course of his employment or which he otherwise currently possesses. Executive shall deliver to the Company before the Separation Date at Executive's expense all of the Company's records, documents, proposals, notes, lists, files and materials and property and equipment that are in his possession. Executive is not authorized to retain any copies of any such records, documents, proposals, notes, lists, files or materials. Nor is he authorized to retain any other of the Company's property or equipment. 6. PROPRIETARY INFORMATION. Executive acknowledges that Executive has had or may have had access to proprietary information, trade secrets, and confidential material of the Company or its affiliates, including, but not limited to, all ideas, information and materials, tangible or intangible, not generally known to the public, relating in any manner to the business of the Company, its personnel (including partners, principals, employees and contractors), its clients or others with whom it does business that Executive learned, acquired, or created, or helped to create during the period of Executive's employment with the Company ("Proprietary Information"). Proprietary Information includes, but is not limited to, all trade secrets, patents and pending patents, documents, computer programs, source code, users manuals, algorithms, compilations of technical, financial, legal or other data, client or prospective client lists, names of suppliers, specifications, designs, business or marketing plans, forecasts, financial information, work in progress, and other technical or business information. Executive agrees, without limitation in time or until such Proprietary Information shall become public other than by Executive's unauthorized disclosure, to maintain the confidentiality of such information and to refrain from divulging, disclosing or using said Proprietary Information for any other purpose. Executive acknowledges and affirms that all existing Proprietary Information is the exclusive property of the Company and Executive hereby assigns to the Company any and all rights the Executive may have had or acquired (or hereinafter may have or acquire) in any Proprietary Information. Executive further acknowledges and agrees that the Company is the sole owner of such Proprietary Information and Executive has no claim of ownership to such Proprietary Information. 7. CONSULTING ARRANGEMENT. For a period of one (1) year following the Separation Date, Executive shall consult for the Company and make himself available to the Company as reasonably needed and requested by the Company (the "Consulting Period"). During the Consulting Period Executive shall receive an amount equal to 85% of the Base Salary under Executive's Employment Contract on a monthly basis. All such payments shall be paid in accordance with normal payroll practices of the Company. In the event that the Company and the Executive enter into an arrangement subsequent to the date hereof whereby the Executive accepts a position as an employee of the Company, the provisions of this Section 7 shall be subject to appropriate modification. 8. COOPERATION IN LITIGATION. Executive shall cooperate with the Company, its affiliates, and each of their respective attorneys, barristers, solicitors or other legal representatives (collectively, "Attorneys") in connection with any claim, litigation, or judicial or arbitral proceeding which is now pending or may hereinafter be brought against the Company or its affiliates by any third-p arty. Executive's duty of cooperation shall include, but not be limited to, (a) meeting with the Company's and/or its affiliates' Attorneys by telephone or in person at mutually convenient times and places in order to state truthfully his knowledge of matters at issue and recollection of events; (b) appearing at the Company's, its affiliates' and/or their Attorneys' request (and, to the extent possible, at a time convenient to Executive that does not conflict with the needs or requirements of his then-current employer) as a witness at depositions or trials, without necessity of a subpoena, in order to state truthfully Executive's knowledge of matters at issue; and (c) signing at the Company's, its affiliates' and/or their Attorneys' request declarations or affidavits that truthfully state matters of which Executive has knowledge. The Company and/or its affiliates shall promptly reimburse Executive for his actual and reasonable travel or other expenses that he may incur in cooperating with the Company, its affiliates, and/or their Attorneys pursuant to this Section 8. 9. INDEMNIFICATION. The Company shall continue to indemnify Executive for all actions and inactions related to his service as an officer or director of the Company to the extent such actions and inactions are covered by the Company's Directors and Officers insurance policy as then in effect ("Indemnified Actions") through the expiration of the applicable statute of limitations. Notwithstanding the foregoing, in the event such Indemnified Actions result from Executive's gross negligence or willful misconduct, the indemnification hereunder shall not apply. 10. BINDING EFFECT. This Agreement shall be binding upon the Parties and their respective heirs, administrators, representatives, executors, successors and assigns, and shall inure to the benefit of the Parties and their respective heirs, administrators, representatives, executors, successors and assigns. 11. SEVERABILITY. While the provisions contained in this Agreement are considered by the Parties to be reasonable in all circumstances, it is recognized that some provisions may fail for technical reasons. Accordingly, it is hereby agreed and declared that if any one or more of such provisions shall, either by itself or themselves or taken with others, be adjudged to be invalid as exceeding what is reasonable in all circumstances for the protection of the interests of the Company, but would be valid if any particular restrictions or provisions were deleted or restricted or limited in a particular manner, then the said provisions shall apply with any such deletions, restrictions, limitations, reductions, curtailments, or modifications as may be necessary to make them valid and effective and the remaining provisions shall be unaffected thereby. 12. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the entire understanding among the Parties and may not be modified without the express written consent of the Parties. This Agreement supersedes all prior written and/or oral and all contemporaneous oral agreements, understandings and negotiations regarding the subject matter hereof. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced pursuant to the laws of the State of California applicable to contracts made and entirely to be performed therein. 14. VOLUNTARY AGREEMENT; NO INDUCEMENTS. Each Party to this Agreement acknowledges and represents that he or it (a) has fully and carefully read this Agreement prior to signing it, (b) has been, or has had the opportunity to be, advised by independent legal counsel of his or its own choice as to the legal effect and meaning of each of the terms and conditions of this Agreement, and (c) is signing and entering into this Agreement as a free and voluntary act without duress or undue pressure or influence of any kind or nature whatsoever and has not relied on any promises, representations or warranties regarding the subject matter hereof other than as set forth in this Agreement first written above. IN WITNESS WHEREOF, the Parties have set their hand as of the date EXECUTIVE: [signature] AURA SYSTEMS, INC. Michael I. Froch Sr. Vice President, General Counsel and Secretary Approved [signature] Title: Vice Chairman EX-99 11 emplagr.txt EX. 10.17 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), effective this 5th day of March, 1998 (the "Effective Date"),is entered into by and between Harry Kurtzman ("Executive") and Aura Systems, Inc., a Delaware corporation (the "Company"). WHEREAS, Executive is a founder of the Company and has been employed by the Company for several years in the capacity of Chief Executive Officer; and WHEREAS, the Company desires to establish its right to the continued services of Executive, in the capacity described below, on the terms and conditions hereinafter set forth, and Executive is willing to continue such employment on such terms and conditions. NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, Executive and the Company have agreed and do hereby agree as follows: 1. EMPLOYMENT. The Company does hereby employ Executive and Executive does hereby accept employment as Chief Executive Officer of the Company. Executive shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities of his position and shall render such services on the terms set forth herein and shall report to the Company's Board of Directors. In addition, Executive shall have such other executive and managerial powers and duties with respect to the Company and its subsidiaries as may reasonably be assigned to him by the Company's Board of Directors, to the extent consistent with his positions and status as set forth above. Executive agrees to devote to the Company and its subsidiaries such time as shall be necessary for the effective conduct of his duties hereunder. 2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the Effective Date and shall continue for a period of three (3) years; provided, however, that on the first anniversary of the Effective Date (and on each succeeding anniversary of the Effective Date during the Term), the Term shall automatically be extended by an additional year (unless Executive or the Company shall give the other at least ninety (90) days' prior written notice to the contrary). 3. LOCATION. In connection with Executive's employment by the Company, Executive shall be based at the headquarters of the Company in El Segundo, California, except for required travel on the. Company's. business to an extent substantially consistent with present business travel obligations. 4. COMPENSATION. (a) BASE SALARY. The Company shall pay Executive an initial annual base salary at the rate of $385,000 per year (the "Base Salary"), payable in equal biweekly installments or at such other time or times as Executive and the Company shall agree. The Base Salary shall be effective December 19, 1997, and is subject to increase as recommended by the Compensation Committee and approved by a majority of the disinterested directors of the Board of Directors. The Base Salary shall be adjusted on or prior to each anniversary of the Effective Date pursuant to the normal historical business practices of the Company; provided, however, that the Base Salary shall be no less than the average salary paid to chief executive officers in comparable companies in the Los Angeles metropolitan area as determined by the Company's compensation consultants. (b) DISCRETIONARY BONUS. As recommended by the Compensation Committee and approved by a majority of the disinterested directors of the Board of Directors, Executive shall be entitled to receive an annual performance bonus (the "Discretionary Bonus") from the Company based on such factors as the Compensation Committee may recommend to the disinterested directors of the Board of Directors. (c) TARGET BONUS. Executive shall have the opportunity to earn a target bonus (the "Target Bonus") up to 50% of Executive's Base Salary based on the attainment of certain criteria recommended by the Compensation Committee and approved by a majority of disinterested directors of the Board of directors. Such criteria may include sales of the Company, earnings per share, stock price, return on equity, net earnings growth, net earnings, related return ratios, cash flow, earnings before interest, taxes, depreciation and amortization (EBITDA), return on assets or total stockholder return, reductions in the company's overhead ratio, and expense to sales ratios. (d) LIFE INSURANCE. The Company shall maintain a life insurance policy with a face value equal to two times the Executive's Base Salary on Executive's life (the "Life Insurance Policy"), provided that the annual premiums for such policy shall not exceed $10,000. The beneficiary of such policy shall be designated by Executive. (e) STOCK OPTIONS. Subject to the recommendation of the Compensation Committee and approval by a majority of the disinterested members of the Board of Directors, effective as of the date of this Agreement, the Company shall make a one-time grant (the "Initial Grant") of stock options (the "Options") to Executive to purchase up to 1,000,000 shares of Common Stock, and commencing on the anniversary date of this Agreement and continuing for each year thereafter during the Term, Executive shall be eligible to receive a grant of Options (the "Subsequent Grant") to purchase up to 500,000 shares of Common Stock. Such Subsequent Grants shall be made subject to the recommendation of the Compensation Committee and approval by a majority of the disinterested directors of the Board of Directors. The per share exercise price of the Initial Grant Options shall be equal to $3.31, which amount is equal to 5 % over the fair market value of the Initial Grant Options on the date such Initial Grant Options were granted. The per share exercise price of the Subsequent Grant Options shall equal the fair market value of the Subsequent Grant Options on the date such Subsequent Grant Options are granted. The Options shall vest and become exercisable at the rate of 20% per year on each of the first five anniversaries of the date of grant and the Options shall have a term of ten (10) years from the date of grant. Agreements evidencing such options shall provide that the Options may be exercised by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the aggregate option price by delivery of (i) cash or cash equivalents, (ii) an executed irrevocable exercise notice to the Company to withhold from the number of shares to be purchased as set forth in the notice of exercise that number of shares of Common Stock having a fair market value equal to the aggregate option price of the number of shares to be purchased. The agreements shall also provide that, subject to the unanimous approval by the disinterested directors of the Board of Directors, the Company may make loans available to Executive in connection with the exercise of outstanding Options. The principal amount of the loan will be due and payable (i) in a lump sum at the end of the 2-year period following the exercise date or (ii) upon the earlier sale of the Option stock on a pro-rata basis, and will be with recourse against Executive with respect to principal and interest. The loan will bear interest at the applicable federal rate. (f) FRINGE BENEFITS. Executive shall be entitled to participate in any fringe, welfare and pension benefit and incentive programs adopted from time to time by the Company for the benefit of its executive employees, and Executive shall continue to be entitled to such other fringe and other benefits provided by the Company to Executive as of the Effective Date. Without limiting the generality of the foregoing, Executive shall be entitled to the following benefits: (1) Participation in Retirement/Welfare Plans. Executive shall be eligible to participate in all savings, retirement, and welfare plans, practices, policies and programs applicable generally to senior executive officers of the Company and its subsidiaries. (2) Reimbursement for Business Expenses. The Company shall reimburse Executive for all reasonable and necessary expenses incurred by Executive in performing his duties for the Company and its subsidiaries. (3) Vacation. Executive shall be entitled to the number of paid vacation days in accordance with the Company's policy applicable to executive officers generally. The timing of paid vacations shall be scheduled in a reasonable manner by Executive. (4) Automobile. The Company shall provide Executive during the Term with the use of an automobile in accordance with the Company's practice as of the Effective Date of this Agreement. 5. TERMINATION OF EXECUTIVE'S EMPLOYMENT. (a) DEATH. In the event Executive's employment hereunder is terminated by reason of Executive's death, (i) if Executive is survived by his then spouse, the Company shall within ten (10) days thereof pay to Executive's estate a lump sum in an amount equal to Executive's then Base Salary, (ii) the Company shall pay all benefits payable to Executive under the terms of the Company's compensation and benefit plans, programs or arrangements, and (iii) all outstanding equity incentive awards (including without limitation stock options granted under the Stock Plan) shall immediately vest and any then outstanding stock options or similar awards held by Executive to the extent exercisable shall remain exercisable through the end of the stated term thereof. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness ("Disability"), Executive shall have been absent from the full time performance of his duties with the Company for a period of six (6) consecutive months and, within thirty (30) days after written notice is provided to him by the Company, he shall not have returned to the full-time performance of his duties, Executive's employment under this Agreement may be terminated by the Company or Executive for Disability. During any period prior to such termination during which Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay Executive his Base Salary at the rate in effect at the commencement of such period of Disability. Upon termination of Executive's employment for Disability, (i) the Company shall within ten (10) days thereof pay Executive a lump sum equal to his then Base Salary, the Company shall pay all benefits payable to Executive under the terms of the Company's compensation and benefit plans, programs or arrangements, and (iii) all outstanding equity incentive awards (including without limitation stock options granted under the Stock Plan) shall immediately vest and any then outstanding stock options or similar awards held by Executive to the extent exercisable shall remain exercisable through the end of the stated term thereof. (c) TERMINATION FOR CAUSE. The Company may terminate Executive's employment under this Agreement for Cause at any time prior to expiration of the Term. As used herein, termination for "Cause" shall mean termination upon (1) the willful failure by Executive to materially perform his duties with the Company or to follow the instructions of the Board (other than any such failure resulting from his incapacity due to physical or mental illness), (2) the willful engaging by Executive in conduct that is materially injurious to the Company, monetarily or otherwise, (3) the conviction of Executive of (or the pleading by Executive of nolo contendre to) any felony, fraud or embezzlement or (4) any willful material breach by Executive of the terms of this Agreement, unless any such breach of this Agreement by Executive that is capable of being corrected is corrected in all material respects within thirty (30) days following written notification by the Company to Executive that the Company intends to terminate the employment of Executive hereunder by reason of a willful material breach of this Agreement for Cause as specified in such written notice to Executive. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the entire membership of the Board of Directors of the Company (the "Board") at a meeting of the Board (after reasonable notice to Executive and opportunity for Executive, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of the conduct described herein, and specifying the particulars thereof in full detail. In the event of termination for Cause, this Agreement shall terminate without further obligation by the Company, except for (i) payment of amounts of Base Salary and any fringe benefits accrued through the date of such termination, and (ii) as otherwise may be provided under the terms of any outstanding equity incentive award. (d) TERMINATION BY THE COMPANY OTHER THAN FOR DEATH. DISABILITY OR CAUSE. If Executive's employment is terminated by the Company for any reason other than Executive's death or Disability or for Cause, (i) the Company shall pay Executive as severance (x) his Base Salary at the rate then in effect through the then remaining Term (or for a period of six months, if greater) (either such period, the "Severance Period") as if Executive had remained employed under this Agreement during the Severance Period, and (y) an annual Discretionary Bonus in an amount equal to Executive's highest annual Discretionary Bonus in the three (3) year period immediately preceding such termination (including annual Discretionary Bonuses received by Executive prior to the Effective Date) payable at the end of each remaining fiscal year ending during the Severance Period, with a pro rata Discretionary Bonus payment at the end of the Term with respect to the period, if any, between the end of the last fiscal year ending during the Severance Period and the end of the Term, (ii) the Company shall continue to make payments with respect to premiums on the Life Insurance Policy through the end of the Severance Period, and (iii) all outstanding equity incentive awards (including without limitation stock options granted under the Stock Plan) shall immediately vest and any then outstanding stock options or similar awards held by Executive to the extent exercisable shall remain exercisable through the end of the stated term thereof. (e) NO MITIGATION REQUIRED. Executive shall not be required in any way to mitigate the amount of any payment or benefit provided for under this Section 5, including, but not limited to, by seeking other employment, nor shall the amount of any payment or benefit provided for under this Section 5 be reduced by any compensation earned by Executive as the result of employment with or services provided to another employer after the date of Executive's termination of employment hereunder, or otherwise; provided, however, that in the event Executive shall breach the provisions of Section 6 hereof, the Company shall have the right, in addition to any other remedies it may have with respect to such breach, to offset any amounts payable hereunder or otherwise owing to Executive by the amount of any compensation earned by Executive as the result of employment with or other services provided to another employer after the date of Executive's termination of employment, or otherwise. 6. CONFIDENTIAL INFORMATION AND NON-COMPETITION. (a) CONFIDENTIALITY. Executive acknowledges that in his employment hereunder, and during prior periods of employment with the Company and its subsidiaries, he has occupied and will continue to occupy a position of trust and confidence. Executive shall not, except as may be required to perform his duties hereunder or as required by applicable law, without limitation in time or until such information shall have become public other than by Executive's unauthorized disclosure, disclose to others or use, whether directly or indirectly, any Confidential Information regarding the Company and its subsidiaries. "Confidential Information" shall mean information about the Company and its subsidiaries, and their respective clients and customers that is not disclosed by the Company and its subsidiaries for financial reporting purposes and that was learned by Executive in the course of his employment by the Company and its subsidiaries, including (without limitation) any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists and all papers, resumes, and records (including computer records) of the documents containing such Confidential Information. Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company and its subsidiaries, and that such information gives the Company and its subsidiaries a competitive advantage. Executive agrees to deliver or return to the Company, at the Company's request at any time or upon termination or expiration of his employment or as soon thereafter as possible, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes and written information (and all copies thereof) furnished by the Company and its subsidiaries or prepared by Executive during the term of his employment by the Company and its subsidiaries. (b) NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the period in which he is employed by the Company (and, in the event Executive's employment is terminated by the Company for Cause, for a period of one (1) year beyond the expiration of the Term), Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company or any of its subsidiaries or affiliates to divert their business to any business, individual, partner, firm, corporation., or other entity that. is then a direct competitor of the Company or its subsidiaries with respect to electromagnetic and electro-optical technology (each such competitor a "Competitor of the Company"). (c) NON-SOLICITATION OF EMPLOYEES. Executive recognizes that he possesses and will possess confidential information about other employees of the Company and its subsidiaries relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of the Company and its subsidiaries. Executive recognizes that the information he possesses and will possess about these other employees is not generally known, is of substantial value to the Company and its subsidiaries in developing its business and in securing and retaining customers, and has been and will be acquired by him because of his business position with the Company and its subsidiaries. Executive agrees that, during the period in which he is employed by the Company (and, in the event Executive's employment is terminated by the Company for Cause, for a period of one (1) year beyond the expiration of the Term), he will not, directly or indirectly, solicit or recruit any employee of the Company or its subsidiaries for the purpose of being employed by him or by any Competitor of the Company on whose behalf he is acting as an agent, representative or employee and that he will not convey any such confidential information or trade secrets about other employees of the Company and its subsidiaries to any other person. (d) SURVIVAL OF PROVISIONS. The obligations contained in this Section 6 shall, to the extent provided in this Section 6, survive the termination or expiration of Executive's employment with the Company and, as applicable, shall be fully enforceable thereafter in accordance with the terms of this Agreement. If it is determined by a court of competent jurisdiction in any state that any restriction in this Section 6 is excessive in duration or scope or is unreasonable or unenforceable under the laws of that state, it is the intention of the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by the law of that state. 7. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be given by fax or first-class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below: If to Company: Aura Systems 2335 Alaska Avenue El Segundo, California 90245 Attention: Corporate Secretary Phone: (310) 643-5300 Fax: (310) 643-8719 If to Executive: Harry Kurtzman Phone: Fax: Either party may change such party's address for notices by notice duly given pursuant hereto. 8. DISPUTE RESOLUTION: ATTORNEYS' FEES. The Company and Executive agree that any dispute arising as to the parties' rights and obligations hereunder, other than with respect to Section 6, shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association then in effect before a private judge to be determined by mutually agreeable means. Each party shall have the right, in addition to any other relief granted by such arbitrator (or by any court with respect to relief granted with respect to Section 6), to attorneys' fees based on a determination by the arbitrator (or, with respect to Section 6, the court) of the extent to which each party has prevailed as to the material issues raised in determination of the dispute. 9. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to Executive's employment and compensation by the Company, but only with respect to the matters expressly addressed herein. 10. ASSIGNMENT: SUCCESSORS. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and, such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder. 11. GOVERNING LAW. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of California. 12. WITHHOLDING. The Company shall make such deductions and withhold such amounts from each payment made to the Executive hereunder as may be required from time to time by law, governmental regulation or order. 13. HEADINGS. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 14. WAIVER: MODIFICATION. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 15. SEVERABILITY: POOLING. (a) In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. (b) In the event that the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment then (A) this Agreement shall, to the extent practicable, be interpreted so as to permit such accounting treatment,, and (13) to the extent that the application of clause (A) of this Section 15(b) does not preserve the availability of such accounting treatment, then, to the extent that any provision of the Agreement disqualifies the transaction as a "pooling" transaction (including, if applicable, the entire Agreement), such provision shall be null and void as of the date hereof. All determinations under this Section 15(b) shall be made by the accounting firm whose opinion with respect to "pooling of interests" is required as a condition to the consummation of such transaction. 16. INDEMNIFICATION. The Company and its subsidiaries shall indemnify and hold Executive harmless for acts and omissions in his capacity as an officer, director or employee of the Company and its subsidiaries to the maximum extent permitted under applicable law. 17. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written. AURA SYSTEMS, INC. By: Gerald S. Papazian Its: President [signature] Harry Kurtzman EX-99 12 canote901.txt EX. 10.18 EXHIBIT 10.18 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH NOTE WHICH IS EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 UNDER SUCH ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES. IN THE CASE OF TRANSFERS OR OTHER DISPOSITIONS MADE OTHERWISE THAN PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, THE HOLDER SHALL, AT DEBTOR'S REQUEST, PROVIDE OPINION OF COUNSEL SATISFACTORY TO DEBTOR THAT SUCH REGISTRATION IS NOT REQUIRED. AURA SYSTEMS, INC. SECURED PROMISSORY NOTE $250,000 No._________ September 4, 2001 Los Angeles, California AURA SYSTEMS, INC., a Delaware corporation (the "Debtor"), for value received hereby promises to pay to The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee, or its registered assigns (the "Holder"), the sum of Two Hundred Fifty Thousand Dollars ($250,000), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest hereon, as set forth below, which shall be due and payable on the earliest to occur of (a) (1) February 28, 2002, (2) receipt by Debtor from Telemac Corporation of at least Two Hundred Sixty Thousand Dollars ($260,000) pursuant to that certain Cancellation Agreement, dated November 30, 1998, with a remaining amount due to Debtor of One Million Two Hundred Fifty Thousand Dollars ($1,250,000) plus all accrued and unpaid interest, or (3) receipt by Debtor from CRS of at least Two Hundred Sixty Thousand Dollars ($260,000) of the past-due amount of Eight Hundred Thousand Dollars ($800,000) due to Debtor (the earliest to occur of (1), (2) and (3) being the "Maturity Date") or (b) when declared due and payable by Holder subsequent to the occurrence of an Event of Default. 1. Interest and Payment. This Note shall bear interest on the unpaid principal balance hereof at a rate of ten percent (10%) per annum (the "Interest Rate"), compounded monthly on the first day of each month. Interest shall be calculated on the basis of a 360 day year and charged for the actual number of days elapsed. Interest on the unpaid principal balance of this Note shall be due and payable on the Maturity Date or at the time of any prepayment permitted hereunder. Payment of the principal of, and interest on, this Note shall be made in cash, in lawful money of the United States of America, at such address as Holder shall designate; provided that if no later than the Maturity Date or five (5) days prior to any prepayment permitted hereunder, as applicable, Debtor and Holder have agreed upon the value of options to purchase shares of Debtor's common stock (the "Interest Options") or a procedure for valuing the Interest Options, then Holder may elect (in lieu of cash) to receive payment of the principal of, or interest on, this Note (or both) in Interest Options. 2. Events of Default. If any of the events specified in this Section 2 shall occur (herein individually referred to as an "Event of Default"), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to Debtor: (a) If Debtor shall have failed to pay the full amount of outstanding principal due under this Note and any unpaid accrued interest hereon, as of 5:00 p.m. Los Angeles, California time on the Maturity Date; or (b) The institution by Debtor of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of Debtor, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by Debtor in furtherance of any such action; or (c) If, (i) within sixty (60) days after the commencement of an action against Debtor (and service of process in connection therewith on Debtor) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been dismissed or all orders or proceedings thereunder affecting the operations or the business of Debtor stayed, or (ii) the stay of any such order or proceeding shall thereafter be set aside, or (iii) within sixty (60) days after the appointment without the consent or acquiescence of Debtor or any trustee, receiver or liquidator of Debtor or of all or any substantial part of the properties of Debtor, such appointment shall not have been vacated. 3. Remedies. Upon the occurrence of an Event of Default, and so long as such Event of Default continues, the entire balance of principal together with all accrued interest shall bear interest at the Interest Rate plus three percent (3%). No delay or omission on the part of the Holder in exercising any right under this Note or the Security Agreement (as defined below) will operate as a waiver of such right. 4. Attorneys' Fees. Debtor shall pay the reasonable fees and expenses of counsel to Holder in connection with the preparation and execution of this Note and the Security Agreement. If this Note is not paid when due or if any Event of Default occurs, Debtor shall pay all costs of enforcement and collection, including without limitation, reasonable fees and expenses of counsel, whether or not any action or proceeding is brought to enforce the provisions hereof. 5. Security. This Note is secured by the Security Agreement of even date herewith, by and between Debtor and Holder (the "Security Agreement"), under which Holder has been granted a first priority security interest in the Initial Collateral (as defined in the Security Agreement). 6. Exchange of Note. Holder shall be entitled to exchange this Note for another Note representing the same rights, upon surrender of this Note at the principal office of Debtor. Also, on receipt of evidence reasonably satisfactory to Debtor of the loss, theft, destruction or mutilation of the Note, and in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory to Debtor or, in the case of mutilation, on surrender and cancellation of the mutilated Note, Debtor at its expense shall execute and deliver, in lieu of the Note, a new Note of the same form and amount. 7. Prepayment. Debtor may, without premium or penalty, prepay all or a portion of the outstanding principal balance due under this Note, provided that each such prepayment is accompanied by accrued interest on the amount of principal repaid calculated to the date of such prepayment. 8. Waiver. Debtor hereby waives diligence, presentment, protest and demand, notice of protest, dishonor and nonpayment of this Note, and expressly agrees that, without in any way affecting the liability of Debtor hereunder, Holder may extend the Maturity Date, accept additional security, release any party liable hereunder and release any security now or hereafter securing this Note. Debtor further waives, to the extent permitted by law, the right to plead any and all statutes of limitations as a defense to any demand on this Note, or on the Security Agreement or any deed of trust, security agreement, lease agreement, guaranty or other agreement now or hereafter securing this Note. 9. Amendment. All amendments to this Note require the written consent of Debtor and Holder. 10. Interest Rate Limitation. It is the intent of Debtor and Holder in the execution of this Note and the Security Agreement that the loan evidenced hereby be exempt from the restrictions of the usury laws of the State of California pursuant to Section 25118 of the California Corporations Code. Debtor and Holder stipulate and agree that none of the terms and provisions contained herein or in the Security Agreement shall ever be construed to create a contract for the use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the laws of the State of California. If Holder collects monies which are deemed to constitute interest which would otherwise increase the effective interest rate on this Note to a rate in excess of the maximum rate permitted to be charged by the laws of the State of California, all such sums deemed to constitute interest in excess of such maximum rate will, at the option of Holder, be credited to the payment of the sums due hereunder or returned to Debtor. 11. Signatures. If this Note bears the signatures of individuals who were the proper officers of Debtor at the time of signing, such signatures shall bind Debtor, notwithstanding that any such individuals shall have ceased to hold such offices prior to the delivery of this Note. 12. Notices. All notices to Debtor under this Note shall be in writing and addressed to Debtor at 2335 Alaska Avenue, El Segundo, California 90245, Attn: General Counsel and Corporate Secretary, or to other such address of Debtor as Debtor may notify Holder. 13. Governing Law. This Note shall be construed, interpreted and governed by the laws of the State of California, without regard to its conflicts-of-law provisions. 14. Headings. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. [Remainder of This Page Intentionally Left Blank] In witness whereof, Debtor has caused this Note to be executed by its Chairman and attested by its Secretary, as of this 4th day of September, 2001. Aura Systems, Inc. By ______________________________ Harry Kurtzman Chairman and CEO By ______________________________ Michael Froch Secretary EX-99 13 casa901.txt EX. 10.19 EXHIBIT 10.19 SECURITY AGREEMENT This security agreement (the "Security Agreement") is entered into as of September 4, 2001, by and between Aura Systems, Inc., a Delaware corporation (the "Debtor"), and The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee (the "Holder"). WHEREAS, Holder has made a loan to Debtor of the sum of Two Hundred Fifty Thousand Dollars ($250,000) and Debtor has executed, for the benefit of Holder, a Secured Promissory Note, dated as of even date herewith, in the original principal amount of Two Hundred Fifty Thousand Dollars ($250,000) (the "Note"); and WHEREAS, Debtor has represented to Holder that it owns all of the outstanding stock of Aura Realty Inc., a Delaware corporation ("Realty"), and that Realty owns those certain parcels of real property located at 2335 Alaska Avenue and 2330 Utah Avenue in the City of El Segundo, State of California (collectively, the "Real Property"); and WHEREAS, in order to secure Debtor's obligation to repay the Note when and as due, Debtor has agreed to grant to Holder and Holder has agreed to accept either (a) a security interest in or lien on the Real Property or (b) Realty's interest therein; and WHEREAS, Holder wishes to perform certain due diligence regarding Realty and the Real Property; and WHEREAS, until Holder completes its due diligence regarding Realty and the Real Property, the parties have agreed that Debtor will grant Holder a security interest in certain of Debtor's other assets as set forth more particularly herein; NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Collateral. (a) To secure its obligations under the Note, Debtor hereby grants to Holder a first priority security interest, senior to any present or future liens, in all of Debtor's right, title and interest in and to (i) that certain Cancellation Agreement by and between Debtor and Telemac Corporation, dated November 30, 1998, with a remaining amount due from Telemac to Debtor of $1,250,000 plus all accrued and unpaid interest (the "Telemac Agreement"), and (ii) the past-due $800,000 account receivable owed to Debtor by CRS (together with the Telemac Agreement, the "Initial Collateral"). Debtor shall immediately hereafter deliver possession of the original Telemac Agreement to Holder so that Holder may perfect its security interest in the Telemac Agreement, and Debtor hereby authorizes Holder to file such UCC-1 Financing Statements as Holder believes necessary to perfect its security interests in all of the Initial Collateral. (b) Debtor hereby covenants to use its best efforts and to cooperate in good faith with Holder to take all actions necessary to enable Debtor to grant to Holder a first priority lien or security interest in all of Debtor's interest in the Real Property or Realty's interest therein, such security interest to be evidenced by, at Holder's election, (i) a lien on the Real Property in favor of Holder, to the extent permitted by any existing deed of trust or mortgage on the Real Property, (ii) a pledge of all shares of common stock of Realty owned by Debtor that have not been pledged to a third party prior to the date hereof (the "Pledged Stock"), or (iii) some other security arrangement related directly or indirectly to the Real Property that is satisfactory to Holder (the security interest evidenced by clause (i), (ii) or (iii), the "Real Property Collateral"); (c) Upon receipt of evidence satisfactory to Holder that the Real Property Collateral is sufficient to secure Holder's interest in the Note, Holder may elect to take a lien on or a security interest in the Real Property Collateral in lieu of the Initial Collateral. If Holder notifies Debtor that he has so elected, Debtor will immediately execute such documents or instruments as may be necessary or desirable to grant Holder a lien on or a first priority security interest in the Real Property Collateral (and, if applicable, shall deliver physical possession of the Pledged Stock) and Holder will immediately release its security interest in the Initial Collateral and will return the Telemac Agreement to Debtor. (d) If Holder realizes value from the Initial Collateral or the Real Property Collateral, whether by way of foreclosure, assignment in lieu of foreclosure or otherwise, and the value so received exceeds the full amount due under the Note together with accrued and unpaid interest thereon, plus Holder's costs of enforcement and collection, then Holder shall, in accordance with the Uniform Commercial Code as adopted by the State of California (the "UCC"), remit any such excess value to Debtor. 2. Term of Security Interest. The Initial Collateral and the Real Property Collateral, as applicable, shall remain subject to Holder's security interest until the payment in full of the indebtedness evidenced by the Note. Upon such termination, Holder agrees to execute any documents reasonably requested by Debtor to evidence the release and termination of its security interest. 3. Maintaining a Perfected Security Interest. Debtor agrees to perform all acts which Holder may reasonably request so as to enable Holder to maintain a valid perfected lien on or security interest in the Initial Collateral or Real Property Collateral, as applicable. 4. Representations, Warranties, and Covenants of Debtor. Debtor hereby represents, warrants and covenants the following: (a) Debtor has the power, authority and legal right to own the Initial Collateral and the Pledged Stock and to engage in the transactions contemplated by this Security Agreement, and the execution and delivery of this Security Agreement will not conflict with or result in a breach of the terms or provisions of any agreement with any third party or with any order of any court or governmental body binding on or affecting Debtor. (b) (i) Debtor is the legal and equitable owner of the Initial Collateral and the Pledged Stock; (ii) the Initial Collateral and the Pledged Stock are free and clear of any liens, pledges, encumbrances or agreements whatsoever, other than those liens and encumbrances set forth on Schedule 1 to this Security Agreement; (iii) Debtor has the complete and unconditional authority to pledge the Initial Collateral and the Real Property Collateral to Holder without the consent of any other party; and (iv) Debtor has no notice or knowledge of any facts which will impair the validity of the pledge made hereby or the validity of Holder's security interest in the Initial Collateral or the Real Property Collateral, as applicable. (c) Debtor shall not impose (and shall not permit Realty to impose) any other lien, pledge or encumbrance on any of the assets constituting the Initial Collateral, the Pledged Stock and the Real Property. (d) Debtor hereby represents and warrants that (i) Telemac has paid all amounts due to Debtor pursuant to the Telemac Agreement on time and in cash; (ii) both Debtor and Telemac have fully and completely complied with all of their obligations under the Telemac Agreement and no default by Debtor or Telemac exists thereunder, (iii) the Telemac Agreement is enforceable against each of Debtor and Telemac in accordance with its terms, and (iv) there are no amendments or supplements of any kind to the Telemac Agreement other than Amendments 1, 2 and 3 entered into on December 16, 1998, December 18, 1998 and May 20, 1999, respectively. Debtor hereby covenants that it will not exercise its option under Section 5(a) of the Telemac Agreement to convert the outstanding balance due to Debtor into shares of Telemac common stock. (e) Because the parties intend for the Note to be exempt from the usury provisions of the California Constitution pursuant to Section 25118 of the California Corporations Code, Debtor hereby represents and warrants that as of the date hereof, Debtor has total assets of at least Two Million Dollars ($2,000,000) according to its most recent financial statements. Debtor also represents and warrants that such financial statements are of a date not more than 90 days prior to the date hereof, were prepared in accordance with generally accepted accounting principles and on a consolidated basis, and were prepared in accordance with the rules and requirements of the Securities and Exchange Commission. Debtor further represents and warrants that Debtor and Holder had a preexisting business relationship prior to the date hereof, and Debtor, by reason of its own business and financial experience, could reasonably be assumed to have the capacity to protect its own interests in connection with the issuance of the Note and the negotiation of this Security Agreement. 5. Remedies of Holder. Upon an Event of Default, Holder shall have, with respect to the Initial Collateral or Real Property Collateral, as applicable, and without limitation, all of the rights and obligations of a secured party under the UCC. 6. Application of Proceeds. Proceeds from a sale of the Initial Collateral or the Real Property Collateral, or any part thereof, as applicable, shall be applied by Holder in the following order (or in such other order as may be required by the UCC): (a) To the payment of the costs and expenses of collection incurred by Holder, including, without limitation, attorneys' fees and all other reasonable expenses, liabilities and costs incurred by Holder in connection therewith; (b) To the payment of the unpaid principal and interest due on the Note; and (c) To the payment to Debtor of any surplus then remaining from such proceeds. 7. Miscellaneous. (a) Notices. Any notice to be given pursuant to this Security Agreement may be given personally, by telephone, telegram, telecopy, facsimile or other electronic transmission, or by letter to an officer or administrator of the Debtor at the address set forth on the signature page hereto. Notices may be given in the above manner to Holder at the following address: Mr. Carl Albert P.O. Box 790490 San Antonio, Texas 78279 Fax: 210-824-6841 email: caa@faidor.com (b) Waiver. The waiver by any party to this Security Agreement of any one or more defaults, if any, on the part of any other party, shall not be construed to operate as a waiver of the other or future defaults under this Security Agreement. This Security Agreement may be amended or modified only by the written consent of the parties. (c) Successors and Assigns. This Security Agreement shall inure to the benefit of and shall be binding upon the respective heirs, successors and assigns of the parties hereto. (d) Severability. In case any provision in or obligation under this Security Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. (e) Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Security Agreement for any other purpose or be given any substantive effect. (f) Counterparts. This Security Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. Governing Law. This Security Agreement shall be construed, interpreted and governed by the laws of the State of California, without regard to its conflicts-of-law provisions. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed, as of the day and year first above written. AURA SYSTEMS, INC. By: ______________________________________ Harry Kurtzman Chairman and CEO THE CARL ALBERT TRUST DATED JULY 7, 1991 By: ______________________________________ Carl Albert Trustee Debtor's Address For Notices: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California 90245 Attn: General Counsel fax: 310-643-8719 EX-99 14 canote102.txt EX. 10.20 EXHIBIT 10.20 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH NOTE WHICH IS EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 UNDER SUCH ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES. IN THE CASE OF TRANSFERS OR OTHER DISPOSITIONS MADE OTHERWISE THAN PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, THE HOLDER SHALL, AT DEBTOR'S REQUEST, PROVIDE OPINION OF COUNSEL SATISFACTORY TO DEBTOR THAT SUCH REGISTRATION IS NOT REQUIRED. AURA SYSTEMS, INC. SECURED PROMISSORY NOTE $250,000 No._________ January 23, 2002 Los Angeles, California AURA SYSTEMS, INC., a Delaware corporation (the "Debtor"), for value received hereby promises to pay to The Carl Albert Trust, dated July 7, 1991, Carl Albert, Trustee, or its registered assigns (the "Holder"), the sum of Two Hundred Fifty Thousand Dollars ($250,000), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest hereon, as set forth below, which shall be due and payable upon written demand by the Holder to the Debtor (the "Maturity Date"). 1. Interest and Payment. This Note shall bear interest on the unpaid principal balance hereof at a rate of ten percent (10%) per annum (the "Interest Rate"), compounded monthly on the first day of each month. Interest shall be calculated on the basis of a 360 day year and charged for the actual number of days elapsed. Interest on the unpaid principal balance of this Note shall be due and payable on the Maturity Date or at the time of any prepayment permitted hereunder. Payment of the principal of, and interest on, this Note shall be made in cash, in lawful money of the United States of America, at such address as Holder shall designate; provided that if no later than the Maturity Date or five (5) days prior to any prepayment permitted hereunder, as applicable, Debtor and Holder have agreed upon the value of options to purchase shares of Debtor's common stock (the "Interest Options") or a procedure for valuing the Interest Options, then Holder may elect (in lieu of cash) to receive payment of the principal of, or interest on, this Note (or both) in Interest Options. 2. Events of Default. If any of the events specified in this Section 2 shall occur (herein individually referred to as an "Event of Default"), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable together with such amounts due and payable under Section 3 hereof, by notice in writing to Debtor: (a) If Debtor shall have failed to pay the full amount of outstanding principal due under this Note and any unpaid accrued interest hereon, as of 5:00 p.m. Los Angeles, California time on the first business day following the Maturity Date; or (b) The institution by Debtor of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of Debtor, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by Debtor in furtherance of any such action; or (c) If, (i) within sixty (60) days after the commencement of an action against Debtor (and service of process in connection therewith on Debtor) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been dismissed or all orders or proceedings thereunder affecting the operations or the business of Debtor stayed, or (ii) the stay of any such order or proceeding shall thereafter be set aside, or (iii) within sixty (60) days after the appointment without the consent or acquiescence of Debtor or any trustee, receiver or liquidator of Debtor or of all or any substantial part of the properties of Debtor, such appointment shall not have been vacated. 3. Remedies. Upon the occurrence of an Event of Default, and so long as such Event of Default continues, the entire balance of principal together with all accrued interest shall bear interest at the Interest Rate plus three percent (3%). No delay or omission on the part of the Holder in exercising any right under this Note or the Security Agreement (as defined below) will operate as a waiver of such right. 4. Attorneys' Fees. Debtor shall pay the reasonable fees and expenses of counsel to Holder in connection with the preparation and execution of this Note and the Security Agreement. If this Note is not paid when due or if any Event of Default occurs, Debtor shall pay all costs of enforcement and collection, including without limitation, reasonable fees and expenses of counsel, whether or not any action or proceeding is brought to enforce the provisions hereof. 5. Security. This Note is secured by the Security Agreement of even date herewith, by and between Debtor and Holder (the "Security Agreement"), under which Holder has been granted a first priority security interest in the Initial Collateral (as defined in the Security Agreement). 6. Exchange of Note. Holder shall be entitled to exchange this Note for another Note representing the same rights, upon surrender of this Note at the principal office of Debtor. Also, on receipt of evidence reasonably satisfactory to Debtor of the loss, theft, destruction or mutilation of the Note, and in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory to Debtor or, in the case of mutilation, on surrender and cancellation of the mutilated Note, Debtor at its expense shall execute and deliver, in lieu of the Note, a new Note of the same form and amount. 7. Prepayment. Debtor may, without premium or penalty, prepay all or a portion of the outstanding principal balance due under this Note, provided that each such prepayment is accompanied by accrued interest on the amount of principal repaid calculated to the date of such prepayment. 8. Waiver. Debtor hereby waives diligence, presentment, protest and demand, notice of protest, dishonor and nonpayment of this Note, and expressly agrees that, without in any way affecting the liability of Debtor hereunder, Holder may extend the Maturity Date, accept additional security, release any party liable hereunder and release any security now or hereafter securing this Note. Debtor further waives, to the extent permitted by law, the right to plead any and all statutes of limitations as a defense to any demand on this Note, or on the Security Agreement or any deed of trust, security agreement, lease agreement, guaranty or other agreement now or hereafter securing this Note. 9. Amendment. All amendments to this Note require the written consent of Debtor and Holder. 10. Interest Rate Limitation. It is the intent of Debtor and Holder in the execution of this Note and the Security Agreement that the loan evidenced hereby be exempt from the restrictions of the usury laws of the State of California pursuant to Section 25118 of the California Corporations Code. Debtor and Holder stipulate and agree that none of the terms and provisions contained herein or in the Security Agreement shall ever be construed to create a contract for the use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the laws of the State of California. If Holder collects monies which are deemed to constitute interest which would otherwise increase the effective interest rate on this Note to a rate in excess of the maximum rate permitted to be charged by the laws of the State of California, all such sums deemed to constitute interest in excess of such maximum rate will, at the option of Holder, be credited to the payment of the sums due hereunder or returned to Debtor. 11. Signatures. If this Note bears the signatures of individuals who were the proper officers of Debtor at the time of signing, such signatures shall bind Debtor, notwithstanding that any such individuals shall have ceased to hold such offices prior to the delivery of this Note. 12. Notices. All notices to Debtor under this Note shall be in writing and addressed to Debtor at 2335 Alaska Avenue, El Segundo, California 90245, Attn: General Counsel and Corporate Secretary, or to other such address of Debtor as Debtor may notify Holder. 13. Governing Law. This Note shall be construed, interpreted and governed by the laws of the State of California, without regard to its conflicts-of-law provisions. 14. Headings. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. [Remainder of This Page Intentionally Left Blank] In witness whereof, Debtor has caused this Note to be executed by its Chairman and attested by its Secretary, as of this 23rd day of January, 2002. Aura Systems, Inc. By ______________________________ Harry Kurtzman Chairman and CEO By ______________________________ Michael Froch Secretary EX-99 15 casa102.txt EX. 10.21 EXHIBIT 10.21 SECURITY AGREEMENT This security agreement (the "Security Agreement") is entered into as of January 23, 2002, by and between Aura Systems, Inc., a Delaware corporation (the "Debtor"), and The Carl Albert Trust dated July 7, 1991, Carl Albert, Trustee (the "Holder"). WHEREAS, Holder has made a loan to Debtor of the sum of Two Hundred Fifty Thousand Dollars ($250,000) and Debtor has executed, for the benefit of Holder, a Secured Promissory Note, dated as of even date herewith, in the original principal amount of Two Hundred Fifty Thousand Dollars ($250,000) (the "Note"); and WHEREAS, Debtor has represented to Holder that it owns all of the outstanding stock of Aura Realty Inc., a Delaware corporation ("Realty"), and that Realty owns those certain parcels of real property located at 2335 Alaska Avenue and 2330 Utah Avenue in the City of El Segundo, State of California (collectively, the "Real Property"); and WHEREAS, in order to secure Debtor's obligation to repay the Note when and as due, Debtor has agreed to grant to Holder and Holder has agreed to accept either (a) a security interest in or lien on the Real Property or (b) Realty's interest therein; and WHEREAS, Holder wishes to perform certain due diligence regarding Realty and the Real Property; and WHEREAS, until Holder completes its due diligence regarding Realty and the Real Property, the parties have agreed that Debtor will grant Holder a security interest in certain of Debtor's other assets as set forth more particularly herein; NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Collateral. (a) To secure its obligations under the Note, Debtor hereby grants to Holder a first priority security interest, senior to any present or future liens, in all of Debtor's right, title and interest in and to that certain Cancellation Agreement by and between Debtor and Telemac Corporation, dated November 30, 1998, with a remaining amount due from Telemac to Debtor of $1,250,000 plus all accrued and unpaid interest (the "Telemac Agreement," also sometimes referred to as the "Initial Collateral"). Debtor shall immediately hereafter deliver possession of the original Telemac Agreement to Holder so that Holder may perfect its security interest in the Telemac Agreement, and Debtor hereby authorizes Holder to file such UCC-1 Financing Statements as Holder believes necessary to perfect its security interests in the Telemac Agreement. (b) Debtor hereby covenants to use its best efforts and to cooperate in good faith with Holder to take all actions necessary to enable Debtor to grant to Holder a first priority lien or security interest in all of Debtor's interest in the Real Property or Realty's interest therein, such security interest to be evidenced by, at Holder's election, (i) a lien on the Real Property in favor of Holder, to the extent permitted by any existing deed of trust or mortgage on the Real Property, (ii) a pledge of all shares of common stock of Realty owned by Debtor that have not been pledged to a third party prior to the date hereof (the "Pledged Stock"), or (iii) some other security arrangement related directly or indirectly to the Real Property that is satisfactory to Holder (the security interest evidenced by clause (i), (ii) or (iii), the "Real Property Collateral"); (c) Upon receipt of evidence satisfactory to Holder that the Real Property Collateral is sufficient to secure Holder's interest in the Note, Holder may elect to take a lien on or a security interest in the Real Property Collateral in lieu of the Initial Collateral. If Holder notifies Debtor that he has so elected, Debtor will immediately execute such documents or instruments as may be necessary or desirable to grant Holder a lien on or a first priority security interest in the Real Property Collateral (and, if applicable, shall deliver physical possession of the Pledged Stock) and Holder will immediately release its security interest in the Initial Collateral and will return the Telemac Agreement to Debtor. (d) If Holder realizes value from the Initial Collateral or the Real Property Collateral, whether by way of foreclosure, assignment in lieu of foreclosure or otherwise, and the value so received exceeds the full amount due under the Note together with accrued and unpaid interest thereon, plus Holder's costs of enforcement and collection, then Holder shall, in accordance with the Uniform Commercial Code as adopted by the State of California (the "UCC"), remit any such excess value to Debtor. 2. Term of Security Interest. The Initial Collateral and the Real Property Collateral, as applicable, shall remain subject to Holder's security interest until the payment in full of the indebtedness evidenced by the Note. Upon such termination, Holder agrees to execute any documents reasonably requested by Debtor to evidence the release and termination of its security interest. 3. Maintaining a Perfected Security Interest. Debtor agrees to perform all acts which Holder may reasonably request so as to enable Holder to maintain a valid perfected lien on or security interest in the Initial Collateral or Real Property Collateral, as applicable. 4. Representations, Warranties, and Covenants of Debtor. Debtor hereby represents, warrants and covenants the following: (a) Debtor has the power, authority and legal right to own the Initial Collateral and the Pledged Stock and to engage in the transactions contemplated by this Security Agreement, and the execution and delivery of this Security Agreement will not conflict with or result in a breach of the terms or provisions of any agreement with any third party or with any order of any court or governmental body binding on or affecting Debtor. (b) (i) Debtor is the legal and equitable owner of the Initial Collateral and the Pledged Stock; (ii) the Initial Collateral and the Pledged Stock are free and clear of any liens, pledges, encumbrances or agreements whatsoever, other than those liens and encumbrances set forth on Schedule 1 to this Security Agreement; (iii) Debtor has the complete and unconditional authority to pledge the Initial Collateral and the Real Property Collateral to Holder without the consent of any other party; and (iv) Debtor has no notice or knowledge of any facts which will impair the validity of the pledge made hereby or the validity of Holder's security interest in the Initial Collateral or the Real Property Collateral, as applicable. (c) Debtor shall not impose (and shall not permit Realty to impose) any other lien, pledge or encumbrance on any of the assets constituting the Initial Collateral, the Pledged Stock and the Real Property. (d) Debtor hereby represents and warrants that (i) Telemac has paid all amounts due to Debtor pursuant to the Telemac Agreement on time and in cash; (ii) both Debtor and Telemac have fully and completely complied with all of their obligations under the Telemac Agreement and no default by Debtor or Telemac exists thereunder, (iii) the Telemac Agreement is enforceable against each of Debtor and Telemac in accordance with its terms, and (iv) there are no amendments or supplements of any kind to the Telemac Agreement other than Amendments 1, 2 and 3 entered into on December 16, 1998, December 18, 1998 and May 20, 1999, respectively. Debtor hereby covenants that it will not exercise its option under Section 5(a) of the Telemac Agreement to convert the outstanding balance due to Debtor into shares of Telemac common stock. (e) Because the parties intend for the Note to be exempt from the usury provisions of the California Constitution pursuant to Section 25118 of the California Corporations Code, Debtor hereby represents and warrants that as of the date hereof, Debtor has total assets of at least Two Million Dollars ($2,000,000) according to its most recent financial statements. Debtor also represents and warrants that such financial statements are of a date not more than 90 days prior to the date hereof, were prepared in accordance with generally accepted accounting principles and on a consolidated basis, and were prepared in accordance with the rules and requirements of the Securities and Exchange Commission. Debtor further represents and warrants that Debtor and Holder had a preexisting business relationship prior to the date hereof, and Debtor, by reason of its own business and financial experience, could reasonably be assumed to have the capacity to protect its own interests in connection with the issuance of the Note and the negotiation of this Security Agreement. 5. Remedies of Holder. Upon an Event of Default, Holder shall have, with respect to the Initial Collateral or Real Property Collateral, as applicable, and without limitation, all of the rights and obligations of a secured party under the UCC. 6. Application of Proceeds. Proceeds from a sale of the Initial Collateral or the Real Property Collateral, or any part thereof, as applicable, shall be applied by Holder in the following order (or in such other order as may be required by the UCC): (a) To the payment of the costs and expenses of collection incurred by Holder, including, without limitation, attorneys' fees and all other reasonable expenses, liabilities and costs incurred by Holder in connection therewith; (b) To the payment of the unpaid principal and interest due on the Note; and (c) To the payment to Debtor of any surplus then remaining from such proceeds. 7. Miscellaneous. (a) Notices. Any notice to be given pursuant to this Security Agreement may be given personally, by telephone, telegram, telecopy, facsimile or other electronic transmission, or by letter to an officer or administrator of the Debtor at the address set forth on the signature page hereto. Notices may be given in the above manner to Holder at the following address: Mr. Carl Albert P.O. Box 790490 San Antonio, Texas 78279 Fax: 210-824-6841 email: caa@faidor.com (b) Waiver. The waiver by any party to this Security Agreement of any one or more defaults, if any, on the part of any other party, shall not be construed to operate as a waiver of the other or future defaults under this Security Agreement. This Security Agreement may be amended or modified only by the written consent of the parties. (c) Successors and Assigns. This Security Agreement shall inure to the benefit of and shall be binding upon the respective heirs, successors and assigns of the parties hereto. (d) Severability. In case any provision in or obligation under this Security Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. (e) Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Security Agreement for any other purpose or be given any substantive effect. (f) Counterparts. This Security Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. Governing Law. This Security Agreement shall be construed, interpreted and governed by the laws of the State of California, without regard to its conflicts-of-law provisions. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed, as of the day and year first above written. AURA SYSTEMS, INC. By: ____________________________________ Harry Kurtzman Chairman and CEO THE CARL ALBERT TRUST DATED JULY 7, 1991 By: ___________________________________ Carl Albert Trustee Debtor's Address For Notices: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, California 90245 Attn: General Counsel fax: 310-643-8719 EX-99 16 escrow.txt EX. 10.22 EXHIBIT 10.22 ESCROW AGREEMENT This ESCROW AGREEMENT (the "Agreement") is made as of the 27th day of February, 2002, by and among AURA SYSTEMS, INC. ("Aura"), ROBINSON, DIAMANT & WOLKOWITZ, A Professional Corporation, by Lawrence A. Diamant ("Diamant" or the "Escrow Agent") and the purchasers identified on the signature pages attached hereto or on counterparts hereof ("Purchasers") with reference to the following facts: WITNESSETH A. WHEREAS, Purchasers have agreed to acquire the indebtedness owed by Aura to GSS Array Technologies, Inc. ("GSS") and that group of entities formally known as INFINITY INVESTORS LIMITED, a Nevis West Indies corporation ("IIL"), GLACIER CAPITAL LIMITED, a Nevis West Indies corporation ("Glacier"), SUMMIT CAPITAL LIMITED, a Nevis West Indies corporation ("Summit") and GLOBAL GROWTH LIMITED, a Nevis West Indies corporation ("Global") and hereinafter referred to as Hunt or Infinity and for consideration to Aura, forgive a portion of the indebtedness and convert the remaining Hunt indebtedness to free trading, non-legended Aura common stock in the amounts set forth on the signature pages attached hereto (the "Shares"); and B. WHEREAS, the transactions stated above require an escrow account or trust account maintained by Escrow Agent in which Purchasers' funds shall be deposited and from which they shall be paid on the following conditions: 1. That the purchase prices be exchanged for assignments by Hunt and GSS of the respective indebtednesses and related rights to Purchasers or their agent on their behalf along with releases to Aura of possible GSS or Infinity claims other than the indebtednesses (the "Assignments"); and 2. On receipt by Escrow Agent as agent for Purchasers ("Agent") of the Assignments, to deliver the same and other consideration to Aura in exchange for Aura's agreement to allow conversion of the remaining Hunt indebtedness to Shares and the delivery of instructions by Aura to its transfer agent to issue the Shares to Purchasers. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Paragraphs A and B are incorporated herein by reference as though fully set forth. 2. Purchasers and Aura hereby appoint the Escrow Agent as escrow agent and Agent for Purchasers as hereinabove described and the Escrow Agent and Agent hereby accepts such appointment for the purposes and on the terms and conditions set forth in this Escrow Agreement. 3. The Escrow Agent will accept from Purchasers, by wire transfer, the Escrow Funds representing the full amount required to consummate the transactions stated in paragraphs A and B above (the "Purchase Price"), which Purchase Price is the sum total of the amounts designated by each Purchaser's name on the signature pages attached hereto. 4. Purchasers and Aura hereby instruct the Escrow Agent that on the first Closing Date the Escrow Agent shall release payment to GSS ($1,600,000.00) and to Hunt ($5,500,000.00 plus interest) in exchange for the Assignments. 5. The First Closing Date shall be deemed to occur upon satisfaction or waiver of the following conditions: The Escrow Agent shall have received the Assignments or facsimile copies thereof showing the same to have been fully executed along with written representations that originals have been dispatched, at which time Escrow Agent shall have wire transferred payment for the indebtednesses to Hunt and GSS or their agents, respectively. 6. The Second Closing Date shall occur on receipt by Escrow Agent of a communication from general counsel for Aura in writing by facsimile representing to Escrow Agent that Aura has instructed its stock transfer agent to issue free trading Shares free and clear of any restrictive legends, in the names of Purchasers and in the amounts set forth on the signature pages attached hereto, along with a copy of the written instructions so instructing the stock transfer agent. The communication shall represent that the Shares are acquired at thirty cents ($.30) per Share and that they shall be delivered by Aura to the Purchasers immediately upon receipt thereof from the stock transfer agent or delivered directly to the Purchasers by the stock transfer agent (the "Aura Communication"). On receipt by the Escrow Agent of the Aura Communication, the Escrow Agent shall wire transfer the remaining funds held in escrow (the sum of at least $1,280,000.00) to Aura, which wire transfer shall evidence (with no further writing required) the agreement of purchasers as follows: a. That the GSS indebtedness, $3,200,000.00 is forgiven and that the sum of $1,000,000.00 of the Hunt indebtedness is forgiven. b. That the funds wire transferred by Escrow Agent to Aura are consideration to Aura for its agreement to allow the Purchasers to convert the remaining Hunt indebtedness to Aura shares. c. That on receipt by Escrow Agent of the Aura Communication, the remaining Hunt indebtedness shall be fully satisfied with the understanding that if the Shares are not delivered to Purchasers within 14 days of the date of the Aura Communication, then the indebtednesses and each of them shall be reinstated in full. d. That Agent, on behalf of Purchasers, shall be authorized to forthwith execute such documents as may reasonably be required to evidence satisfaction of the indebtednesses and termination of Uniform Commercial Code filings and all other of Purchasers rights. 7. WAIVER OF CONFLICTS OF INTEREST Purchasers and Aura acknowledge that Escrow Agent and Agent has and continues to perform legal services as counsel for Aura. Aura hereby consents to the performance by Escrow Agent and Agent of the services and in the capacities provided for herein and Aura waives any right that it may have to claim that the performance of services by Escrow Agent and Agent herein constitute a conflict of interest for Escrow Agent and Agent. Aura knowingly and willingly agrees to and authorizes the performance by Escrow Agent and Agent of the services and in the capacities provided for herein. With full knowledge of the attorney-client relationship existing between Lawrence A. Diamant and the Law Firm of Robinson, Diamant & Wolkowitz (the "Law Firm"), on the one hand, and Aura, on the other, Purchasers agree to the performance by the Law Firm as Escrow Agent and Agent of the services and in the capacities provided for in this Escrow Agreement. 8. It is understood and agreed by the parties to this Agreement as follows: (a) The Escrow Agent and Agent is not and shall not be deemed to be a trustee for any party for any purpose and is merely acting as a depository and in a ministerial capacity hereunder with the limited duties herein prescribed. (b) The Escrow Agent and Agent does not have and shall not be deemed to have any responsibility in respect of any instruction, certificate or notice delivered to it other than faithfully to carry out the obligations undertaken in this Agreement and to follow the directions in such instruction or notice provided in accordance with the terms hereof. (c) The Escrow Agent and Agent is not and shall not be deemed to be liable for any action taken or omitted by it in good faith and may rely upon, and act in accordance with, the advice of its counsel without liability on its part for any action taken or omitted in accordance with such advice. In any event, its liability hereunder shall be limited to liability for gross negligence, willful misconduct or bad faith on its part. (d) The Escrow Agent and Agent may conclusively rely upon and act in accordance with any certificate, instruction notice, letter, telegram, cablegram, fax transmission or other written instrument believed by it to be genuine and signed by the Purchasers and Aura. (e) Purchasers and Aura agree to save harmless, indemnify and defend the Escrow Agent and Agent for, from and against any loss, damage, liability, judgment, cost and expense whatsoever, including attorney's fees, suffered or incurred by it by reason of, or on account of, any misrepresentation made to it or as to its status for activities as Escrow Agent or Agent under this Agreement except for any loss, damage, liability, judgment, cost or expense resulting from gross negligence, willful misconduct or bad faith on the part of the Escrow Agent or Agent. (f) The Escrow Agent and Agent shall not be required to defend any legal proceeding which may be instituted against it in respect of the subject matter of this Agreement. If any such legal proceeding is instituted against it, the Escrow Agent and Agent agree promptly to give notice of such proceeding to the Purchasers and Aura. The Escrow Agent and Agent shall not be required to institute legal proceedings of any kind. Any legal proceedings arising out of or relating to the subject matter of this Agreement shall be brought in a court of competent jurisdiction in Los Angeles County, California, U.S.A. (g) The Escrow Agent and Agent shall not, by act, delay, omission or otherwise, be deemed to have waived any right or remedy it may have either under this Agreement or generally, unless such waiver be in writing, and no waiver shall be valid unless it is in writing, signed by the Escrow Agent and Agent, and only to the extent expressly therein set forth. A waiver by the Escrow Agent or Agent under the terms of this Agreement shall not be construed as a bar to, or waiver of, the same or any other such right or remedy which it would otherwise have on any other occasion. (h) The Escrow Agent and Agent may refrain from taking any action other than keeping all property held by it in Escrow if it is uncertain concerning its duties or rights under this Escrow Agreement or receives claims or demands from any person or entity or receives a final judgment by a court of competent jurisdiction if it deems that necessary or advisable. 9. Communication to and from the Escrow Agent shall be delivered by messenger or forwarded by facsimile transmission, regular, or certified mail, and shall be effective when received. The addresses for communications shall be those set forth on the signature pages attached hereto. 10. The Escrow Agent's and the Agent's obligations under this Escrow Agreement shall terminate on the date it shall no longer hold any of the funds or instruments delivered in escrow pursuant to the terms of this Agreement. 11. This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of California. 12. This Escrow Agreement may be executed in several counterparts by facsimile signature, each of which shall be original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. THE ORBITER FUND, LTD.*(1,000,000 Shares) By:______________________________________ Capacity:________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. THE VICTOR FUND, LTD. * (1,000,000 Shares) By:______________________________________ Capacity:_________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. MARTIN H. GARVEY* (1,000,000 Shares) By:______________________________________ Capacity:_________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. LANCER PARTNERS, LP* (4,000,000 Shares) By:______________________________________ Capacity:_________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. LANCER OFFSHORE, INC. * (8,000,000 Shares) By:______________________________________ Capacity:_________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. BRUCE D. COWEN* (1,600,000 Shares) By:______________________________________ Capacity:_________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. STERLING TECHNOLOGY PARTNERS* (1,328,000 Shares) By:______________________________________ Capacity:_________________________________ Address:_________________________________ Fax No. _________________________________ IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. TIM YU (833,333 Shares) * By:______________________________________ Capacity:_________________________________ Address: 3115 Gough Street San Francisco, California 94123 Fax No. (520) 752-6930 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. CHANA KURTZMAN (166,667 Shares) * By:______________________________________ Capacity:_________________________________ Address: 338 Westbourne Los Angeles, California 90048 Fax No. (310) 643-7585 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. AURA SYSTEMS, INC. By:______________________________________ Harry Kurtzman, Chief Executive Officer Address: 2335 Alaska Avenue El Segundo, California 90245 Fax No.: (310) 643-7585 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement effective as of the date and year first written above. ROBINSON, DIAMANT & WOLKOWITZ A Professional Corporation By:______________________________________ Lawrence A. Diamant, Secretary Address: 1888 Century Park East, Suite 1500 Los Angeles, California 90067 Fax No.: (310) 277-7584 - -------- * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. * The sum total of $4,980,000.00 is to be paid into escrow on behalf of these parties, who are to receive the shares listed by their names. EX-99 17 assinf.txt EX. 10.23 EXHIBIT 10.23 ASSIGNMENT AND TRANSFER OF NOTES AND SECURITY DOCUMENTS This Assignment and Transfer of Notes and Security Documents ("Assignment") dated February 26, 2002 is executed by AURA SYSTEMS, INC., a Delaware corporation ("Company") and INFINITY INVESTORS LIMITED, a Nevis West Indies corporation ("IIL"), GLACIER CAPITAL LIMITED, a Nevis West Indies corporation ("Glacier"), SUMMIT CAPITAL LIMITED, a Nevis West Indies corporation ("Summit") and GLOBAL GROWTH LIMITED, a Nevis West Indies corporation ("Global") and HW Partners, LP ("HP") (collectively referred to herein as the "Assignors") in favor of LAWRENCE A. DIAMANT as Agent for various investors ("Agent" or "Assignee"). R E C I T A L S: WHEREAS, IIL is the owner and holder of the 8% Secured Note dated February 22, 2000 issued by Company in the principal amount of $10,411,928 (the "IIL Note"). WHEREAS, Glacier is the owner and holder of the 8% Secured Note dated February 22, 2000 issued by Company in the principal amount of $838,680 (the "Glacier Note"). WHEREAS, Summit is the owner and holder of the 8% Secured Note dated February 22, 2000 issued by Company in the principal amount of $410,712 (the "Summit Note"). WHEREAS, Global is the owner and holder of the 8% Secured Note dated February 22, 2000 issued by Company in the principal amount of $838,680 (the "Global Note"). WHEREAS, the Notes are secured by the security agreement and guaranty (collectively, the "Security Documents") described on Schedule A attached hereto. WHEREAS, Assignee desires to receive a transfer and assignment of the Notes and Security Documents from Assignors in exchange for Assignee delivering the Purchase Price (as defined below). A G R E E M E N T S: NOW, THEREFORE, in consideration of the recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed hereby, Assignor agrees in favor of Assignee as follows: 1. Assignment and Purchase Price. a. IIL hereby GRANTS, CONVEYS, TRANSFERS and ASSIGNS to Assignee the IIL Note, the Security Documents, and all of IIL's right, title and interest thereto, together with all other liens, security interests, financing statements, security agreements, guaranties, covenants, agreements, assignments, rights, benefits and privileges in any way belonging or to accrue to the benefit of IIL, in respect of the IIL Note and the Security Documents and any indebtedness now or hereafter evidenced thereby or any security therefor and all of those Company's Variable Interest Rate Convertible Notes due September 30, 1998 and security therefor held by Assignor and exchanged for the IIL Note (together, the "IIL Note, Security Documents and Related Rights") . b. Glacier hereby GRANTS, CONVEYS, TRANSFERS and ASSIGNS to Assignee the Glacier Note, the Security Documents, and all of Glacier's right, title and interest thereto, together with all other liens, security interests, financing statements, security agreements, guaranties, covenants, agreements, assignments, rights, benefits and privileges in any way belonging or to accrue to the benefit of Glacier, in respect of the Glacier Note and the Security Documents and any indebtedness now or hereafter evidenced thereby or any security therefor and all of those Company's Variable Interest Rate Convertible Notes due September 30, 1998 and security therefor held by Assignor and exchanged for the Glacier Note (together, the "Glacier Note, Security Documents and Related Rights"). c. Summit hereby GRANTS, CONVEYS, TRANSFERS and ASSIGNS to Assignee the Summit Note, the Security Documents, and all of Summit's right, title and interest thereto, together with all other liens, security interests, financing statements, security agreements, guaranties, covenants, agreements, assignments, rights, benefits and privileges in any way belonging or to accrue to the benefit of Summit, in respect of the Summit Note and the Security Documents and any indebtedness now or hereafter evidenced thereby or any security therefor and all of those Company's Variable Interest Rate Convertible Notes due September 30, 1998 and security therefor held by Assignor and exchanged for the Summit Note (together, the "Summit Note, Security Documents and Related Rights") d. Global hereby GRANTS, CONVEYS, TRANSFERS and ASSIGNS to Assignee the Global Note, the Security Documents, and all of Global's right, title and interest thereto, together with all other liens, security interests, financing statements, security agreements, guaranties, covenants, agreements, assignments, rights, benefits and privileges in any way belonging or to accrue to the benefit of Global, in respect of the Global Note and the Security Documents and any indebtedness now or hereafter evidenced thereby or any security therefor and all of those Company's Variable Interest Rate Convertible Notes due September 30, 1998 and security therefor held by Assignor and exchanged for the Global Note (together, the "Global Note, Security Documents and Related Rights") e. Assignee shall pay to Assignors as the purchase price for the Notes and Security Documents Five Million Five Hundred Thousand Dollars ($5,500,000) plus all accrued and unpaid interest as set forth in section 3 hereof (the "Purchase Price"). The Purchase Price shall be paid by wire transfer to the account set forth on Exhibit A (the "Escrow Account") attached hereto and shall be dispersed to each Assignor pro rata pursuant to the escrow instructions for the Escrow Account. 2. Representations and Warranties of Assignors. a. IIL. This Assignment is made WITHOUT RECOURSE TO ASSIGNOR AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, any such warranty being expressly disclaimed by IIL and waived by Assignee, except that IIL represents and warrants to Assignee as follows: (i) IIL is the owner and holder of the IIL Note, Security Documents and Related Rights; (ii) IIL has the right and authority to transfer the IIL Note, the Security Documents and Related Rights; and (iii) IIL has not previously sold, transferred, encumbered or assigned any of its right, title or interest in the IIL Note, Security Documents or Related Rights to any other person or entity. b. Glacier. This Assignment is made WITHOUT RECOURSE TO ASSIGNOR AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, any such warranty being expressly disclaimed by Glacier and waived by Assignee, except that Glacier represents and warrants to Assignee as follows: (i) Glacier is the owner and holder of the Glacier Note, Security Documents and Related Rights; (ii) Glacier has the right and corporate authority to transfer the Glacier Note, the Security Documents and Related Rights; and (iii) Glacier has not previously sold, transferred or assigned its right, title or interest in the Glacier Note or Security Documents and Related Rights to any other person or entity. c. Summit. This Assignment is made WITHOUT RECOURSE TO ASSIGNOR AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, any such warranty being expressly disclaimed by Summit and waived by Assignee, except that Summit represents and warrants to Assignee as follows: (i) Summit is the owner and holder of the Summit Note, Security Documents and Related Rights; (ii) Summit has the right and corporate authority to transfer the Summit Note, the Security Documents and Related Rights; and (iii) Summit has not previously sold, transferred or assigned its right, title or interest in the Summit Note or Security Documents and Related Rights to any other person or entity. d. Global. This Assignment is made WITHOUT RECOURSE TO ASSIGNOR AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, any such warranty being expressly disclaimed by Global and waived by Assignee, except that Global represents and warrants to Assignee as follows: (i) Global is the owner and holder of the Global Note, Security Documents and Related Rights; (ii) Global has the right and corporate authority to transfer the Global Note, the Security Documents and Related Rights; and (iii) Global has not previously sold, transferred or assigned its right, title or interest in the Global Note or Security Documents and Related Rights to any other person or entity. e. HP. This Assignment is made WITHOUT RECOURSE TO ASSIGNOR AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, any such warranty being expressly disclaimed by HP and waived by Assignee, except that HP represents and warrants to Assignee as follows: (i) IIL, Glacier, Summit and Global are the owners and holders of the Notes, Security Documents and Related Rights referred to in paragraphs 2(a) through 2(d) above; (ii) IIL, Glacier, Summit and Global have the right and authority to transfer the Notes, the Security Documents and Related Rights mentioned in paragraphs 2(a) through 2(d) above; and (iii) No part nor the whole of the right, title or interest of IIL, Glacier, Summit or Global or anyone in the Notes, Security Documents and Related Rights mentioned in paragraphs 2(a) through 2(d) above has been previously sold, transferred, encumbered or assigned. 3. Representations and Warranties and Agreements of Company. a. Company represents and warrants to Assignee as follows: (i) The unpaid principal balance of each of the Notes and the accrued and unpaid interest thereon as of February 26, 2002 is: $12,069,333.31. Principal Accrued and Unpaid Interest Balance as of February 26, 2002 IIL Note: $9,995,450.88 $ 57,751.49 Glacier Note: $805,132.80 $ 4,651.87 Summit Note: $394,283.52 $ 2,278.08 Global Note: $805,132.80 $ 4,651.87 (ii) None of the Notes, the Security Documents, or any rights, title, liens or interests thereunder, has been amended, released or terminated. b. Company acknowledges and agrees to the assignment of the Notes, the Security Documents and Related Rights from the Assignors to the Assignee in accordance with the terms and conditions of this Assignment. 4. Priority. The priority of the liens and security interests in favor of Assignor by reason of any of the Security Documents shall be deemed preserved and maintained in favor of Assignee. 5. Further Assurances. Assignor hereby agrees to execute and deliver or cause to be executed or delivered hereafter any and all further instruments as Assignee may reasonably require to evidence and vest in Assignee all interests of Assignor in, to and under the Notes, the Security Documents and the Related Rights and all collateral and agreements related thereto. 6. Governing Law. This Agreement shall be governed and construed in accordance with the laws of Delaware. 7. Severability. This Agreement is intended to be severable. If any term, covenant, condition, or provision hereof is illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Agreement. 8. Counterparts. This Agreement may be executed in counterparts or with detachable signature pages and shall constitute one agreement, binding upon all parties hereto as if all parties signed the same document. 9. Headings. The headings used in this Agreement are intended solely for the convenience of reference, and should not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions of this Agreement. 10. Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties and supersedes and replaces all prior oral and written agreements with respect to the subject matter hereof. There are no oral agreements between the parties hereto. EXECUTED the day and year first written above. ASSIGNOR: INFINITY INVESTORS LIMITED, a Nevis West Indies corporation James Loughran, Director GLACIER CAPITAL LIMITED, a Nevis West Indies corporation By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SUMMIT CAPITAL LIMITED, a Nevis West Indies corporation By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- GLOBAL GROWTH LIMITED, a Nevis West Indies corporation By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- HW Partners, LP By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- ASSIGNEE: Lawrence A. Diamant, A Member of Robinson, Diamant & Wolkowitz, A Professional Corporation By --------------------------------------------------- Lawrence A. Diamant As Agent for Various Investors and Assignee Company acknowledges and agrees to this Assignment as of the day and year first written above. COMPANY: AURA SYSTEMS, INC. By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SCHEDULE A SCHEDULE OF SECURITY DOCUMENTS 1. Each Assignor's entire right, title and interest in, to and under that Security Agreement dated February 22, 2000, securing the Assignor's rights and obligations under the Notes. 2. Each Assignor's entire right, title and interest in, to and under that Guaranty Agreement dated February 22, 2000, guaranteeing Company's obligations under the Notes. EX-99 18 assgss.txt EX. 10.24 EXHIBIT 10.24 ASSIGNMENT AND TRANSFER OF NOTES AND SECURITY DOCUMENTS This Assignment and Transfer of Debt ("Assignment") dated February 26, 2002 is executed by AURA SYSTEMS, INC., a Delaware corporation ("Company") and GSS/Array Technology, Inc. and GSS/Array Technology Public Company, Ltd. (collectively referred to herein as the "Assignor") in favor of LAWRENCE A. DIAMANT as Agent for various investors ("Agent" or "Assignee"). R E C I T A L S: WHEREAS, Assignor is the owner and holder of indebtedness owed to Assignor from the Company in the principal amount of $3,267,979.47 (the "Debt"). WHEREAS, Assignee desires to receive a transfer and assignment of the Debt from Assignor in exchange for Assignee delivering the Purchase Price (as defined below). A G R E E M E N T S: NOW, THEREFORE, in consideration of the recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed hereby, Assignor agrees in favor of Assignee as follows: 1. Assignment and Purchase Price. a. Assignor hereby GRANTS, CONVEYS, TRANSFERS and ASSIGNS to Assignee the Assignor's Debt and all of Assignor's right, title and interest thereto, together with all other liens, security interests, financing statements, security agreements, guaranties, covenants, agreements, assignments, rights, benefits and privileges in any way belonging or to accrue to the benefit of Assignor, in respect any indebtedness now or hereafter evidenced thereby or any security therefor. b. Assignee shall pay to Assignor as the purchase price for the Debt ($1,600,000.00 (the "Purchase Price"). The Purchase Price shall be paid by wire transfer to the account set forth on Exhibit A (the "Escrow Account") attached hereto and shall be dispersed to Assignors pursuant to the escrow instructions for the Escrow Account. 2. Representations and Warranties of Assignors. a. Assignor. This Assignment is made WITHOUT RECOURSE TO ASSIGNOR AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, any such warranty being expressly disclaimed by Assignors and waived by Assignee, except that Assignor represents and warrant to Assignee as follows: (i) Assignor is the owner and holder of the Debt; (ii) Assignor has the right and authority to transfer the Assignors Debt; and (iii) Assignor has not previously sold, transferred, encumbered or assigned any of its right, title or interest in the Assignor's Debt to any other person or entity. 3. Representations and Warranties and Agreements of Company. a. Company represents and warrants to Assignee as follows: (i) The unpaid principal balance of the Debt and the accrued and unpaid interest thereon as of February 26, 2002 is: $3,267,979.47 (ii) None of the Debt or any rights, title, liens or interests thereunder, has been amended, released or terminated. b. Company acknowledges and agrees to the assignment of the Debt from the Assignors to the Assignee in accordance with the terms and conditions of this Assignment. 4. Priority. The priority of the liens and security interests in favor of Assignor shall be deemed preserved and maintained in favor of Assignee. 5. Further Assurances. Assignor hereby agrees to execute and deliver or cause to be executed or delivered hereafter any and all further instruments as Assignee may reasonably require to evidence and vest in Assignee all interests of Assignor in, to and under the Debt, the and all collateral and agreements related thereto. 6. Governing Law. This Agreement shall be governed and construed in accordance with the laws of Delaware. 7. Severability. This Agreement is intended to be severable. If any term, covenant, condition, or provision hereof is illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Agreement. 8. Counterparts. This Agreement may be executed in counterparts or with detachable signature pages and shall constitute one agreement, binding upon all parties hereto as if all parties signed the same document. 9. Headings. The headings used in this Agreement are intended solely for the convenience of reference, and should not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions of this Agreement. 10. Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties and supersedes and replaces all prior oral and written agreements with respect to the subject matter hereof. There are no oral agreements between the parties hereto. EXECUTED the day and year first written above. ASSIGNOR: GSS/ARRAY TECHNOLOGY, INC GSS/ARRAY TECHNOLOGY PUBLIC COMPANY, INC Boon Hoe, Chief Financial Officer ASSIGNEE: Lawrence A. Diamant, A Member of Robinson, Diamant & Wolkowitz, A Professional Corporation By Lawrence A. Diamant As Agent for Various Investors and Assignee Company acknowledges and agrees to this Assignment as of the day and year first written above. COMPANY: AURA SYSTEMS, INC. By: Name: Title: EX-99 19 setinf.txt EX. 10.25 EXHIBIT 10.25 SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS This Settlement Agreement and Mutual Release of Claims (the "Agreement") is entered into and effective as of this 26th day of February, 2002, by and between INFINITY INVESTORS LIMITED, a Nevis West Indies corporation ("IIL"), GLACIER CAPITAL LIMITED, a Nevis West Indies corporation ("Glacier"), SUMMIT CAPITAL LIMITED, a Nevis West Indies corporation ("Summit"), GLOBAL GROWTH LIMITED, a Nevis West Indies corporation ("Global") and HW Partners, LP ("HP") (collectively referred to herein as the "Holders") and AURA SYSTEMS, INC., a Delaware corporation ("Aura"). R E C I T A L S WHEREAS, the Holders are holders of certain secured notes dated February 22, 2000 and issued by the Company with an aggregate outstanding principal balance of $12,000,000.00 as of February 26, 2002 (the "Notes"). The Notes are secured by a security agreement and guaranteed by a guaranty agreement each dated as of February 22, 2000 (collectively the Notes). Security Documents and other rights identified in that agreement entitled Assignment and Transfer of Notes and Security Documents and Related Rights. The Notes, Security Documents and Related Rights are heretofore referred to as the "Documents". WHEREAS, the Holders have assigned all of their respective right, title and interest in and to the Documents to Lawrence A. Diamant, as agent for various investors ("Agent") for a cash payment to which Aura has consented. WHEREAS, by entering into this Agreement, the Holders and Aura desire to avoid the risks, uncertainties and costs of litigation and to buy peace, and to fully compromise and settle any and all disputes, known or unknown, between them, which arise from any and all prior dealings and associations with one another, including, but not limited to obligations arising under the Documents or as a result of the termination thereof. NOW, THEREFORE, in consideration of the above stated premises, the mutual promises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Releases. (a) Each Holder hereby releases, acquits and forever discharges Aura and its current and former affiliates, subsidiaries, stockholders, employees, consultants, managers, agents, attorneys, officers and directors (collectively the "Aura Released Parties"), from all claims, counterclaims, demands, causes of action, obligations, express and implied warranties, suits, debts, damages, punitive and exemplary damages, expense reimbursements, common law and statutory penalties, liens, attorneys' fees, judgments, interest and expenses of any type whatsoever, whether known or unknown, in any manner, arising out of, related to, or connected with the prior dealings of Aura and such Holder through the date hereof, including, without limitation, the purchase and sale of the Documents or the assignment thereof occurring prior to and through the date of this Agreement. IIL acknowledges that no Aura Released Party owes any amount to IIL or its affiliates under the Documents as a result of the assignment thereof to Agent. Nothing herein releases Aura's obligation to pay Agent the sums payable under the Notes. (b) Aura hereby releases, acquits and forever discharges each Holder and their respective current and former affiliates, subsidiaries, stockholders, employees, consultants, managers, agents, investment advisors, attorneys, officers and directors from all claims, counterclaims, demands, causes of action, obligations, express and implied warranties, suits, debts, damages, punitive and exemplary damages, common law and statutory penalties, liens, attorneys' fees, judgments, interest and expenses of any type whatsoever, whether known or unknown, in any manner, arising out of, related to, or connected with the prior dealings of Aura and any Holder through the date hereof, including without limitation, the purchase and sale of the Documents or the assignment thereof occurring prior to and through the date of this Agreement. 2. Intention of Parties. It is expressly understood and agreed that the terms hereof are contractual in nature and not merely recitals, and that the agreements and releases contained herein are made and given in order to compromise and settle doubtful and disputed claims, to avoid the cost, risk and uncertainty of litigation and to buy peace. It is further understood and agreed that no term, provision or agreement contained herein shall be construed or interpreted as an admission of liability by or on behalf of any party hereto, all such liability being expressly denied. 3. Confidentiality of Settlement. The parties hereto agree that they and their heirs, assigns, agents, employees and attorneys shall not disparage or make any derogatory remarks whatsoever about any of the other parties thereto or their heirs, assigns, agents, officers, directors, employees and attorneys. 4. Binding Effect. This Agreement and the releases granted herein shall inure to the benefit of and be binding against the parties hereto and their respective heirs, successors and assigns. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Delaware. 6. Voluntary Agreement. Each of the parties hereto acknowledges that this Agreement has been executed freely and voluntarily, without economic compulsion, and with full knowledge of its legal significance and consequences. 7. Ownership of Claims. Each of the parties hereto represents and warrants that it is the sole owner and holder of the various claims and causes of action released herein and that it has not sold, assigned, conveyed or in any way transferred any of its rights in and to any of the claims and causes of action to any third party. 8. Severability. This Agreement is intended to be severable. If any term, covenant, condition, or provision hereof is illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Agreement. 9. Counterparts. This Agreement may be executed in counterparts or with detachable signature pages and shall constitute one agreement, binding upon all parties hereto as if all parties signed the same document. 10. Headings. The headings used in this Agreement are intended solely for the convenience of reference, and should not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions of this Agreement. 11. Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties and supersedes and replaces all prior oral and written agreements with respect to the subject matter hereof. There are no oral agreements between the parties hereto. EXECUTED as of the date first above written. AURA: AURA SYSTEMS, INC., a Delaware corporation By: Name: Title: HOLDERS: INFINITY INVESTORS LIMITED, a Nevis West Indies corporation James Loughran, Director GLACIER CAPITAL LIMITED, a Nevis West Indies corporation By: Name: Title: SUMMIT CAPITAL LIMITED, a Nevis West Indies corporation By: Name: Title: GLOBAL GROWTH LIMITED, a Nevis West Indies corporation By: Name: Title: HW PARTNERS, LP By: Name: Title: EX-99 20 setgss.txt EX. 10.26 EXHIBIT 10.26 SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS This Settlement Agreement and Mutual Release of Claims (the "Agreement") is entered into and effective as of this 26th day of February, 2002, by and between GSS/ARRAY TECNHOLOGY, INC. and GSS/ARRAY TECHNOLOGY PUBLIC COMPANY, LTD. (collectively referred to herein as "GSS") and AURA SYSTEMS, INC., a Delaware corporation ("Aura"). R E C I T A L S WHEREAS, the GSS is the holder of certain indebtedness with an aggregate outstanding principal balance including accrued and unpaid interest of $3,267,979.47 owing from Aura as of February 26, 2002 (the "Debt"). WHEREAS, GSS has assigned all of its respective right, title and interest in and to the Debt to Lawrence A. Diamant, as agent for various investors ("Agent") for a cash payment of $1,600,000 to which Aura has consented. WHEREAS, by entering into this Agreement, GSS and Aura desire to avoid the risks, uncertainties and costs of litigation and to buy peace, and to fully compromise and settle any and all disputes, known or unknown, between them, which arise from any and all prior dealings and associations with one another, including, but not limited to obligations arising under that certain Subcontract Number 15817, Amendment #3 (the "Subcontract"), or as a result of its termination thereof. NOW, THEREFORE, in consideration of the above stated premises, the mutual promises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Releases. (a) GSS hereby releases, acquits and forever discharges Aura and its current and former affiliates, subsidiaries, stockholders, employees, consultants, managers, agents, attorneys, officers and directors (collectively the "Aura Released Parties"), from all claims, counterclaims, demands, causes of action, obligations, express and implied warranties, suits, debts, damages, punitive and exemplary damages, expense reimbursements, common law and statutory penalties, liens, attorneys' fees, judgments, interest and expenses of any type whatsoever, whether known or unknown, in any manner, arising out of, related to, or connected with the prior dealings of Aura and GSS through the date hereof, including, without limitation, the Subcontract, Debt or the assignment thereof occurring prior to and through the date of this Agreement. GSS acknowledges that no Aura Released Party owes any amount to GSS or its affiliates as a result of the assignment thereof to Agent. Nothing herein releases Aura's obligation to pay Agent the sums payable. (b) Aura hereby releases, acquits and forever discharges GSS and their respective current and former affiliates, subsidiaries, stockholders, employees, consultants, managers, agents, investment advisors, attorneys, officers and directors from all claims, counterclaims, demands, causes of action, obligations, express and implied warranties, suits, debts, damages, punitive and exemplary damages, common law and statutory penalties, liens, attorneys' fees, judgments, interest and expenses of any type whatsoever, whether known or unknown, in any manner, arising out of, related to, or connected with the prior dealings of Aura and GSS through the date hereof, including without limitation, the Subcontract, Debt or the assignment thereof occurring prior to and through the date of this Agreement. 2. Continued Protection of Proprietary Information/Technology. Notwithstanding any provision to the contrary set forth in Section 1 above, GSS agrees to continue to protect the confidential and proprietary information related to its manufacture and supply of the AuraGen Electronics Control Unit. GSS acknowledges that all information supplied to it by Aura other than that expressly designated by Aura as non-confidential is confidential and proprietary to Aura (collectively the "Aura Confidential Information") including, without limitation, identification of its customers, the price at which Aura purchases its items, goods and services from GSS, the source and prices of goods and items obtained by Aura, copyrights, trademarks, patents or the technical methods of manufacture of the items, goods, as well as information pertaining to materials, equipment, tools, guages, patterns, designs, drawings and engineering data. GSS shall not disclose or provide any Aura Confidential Information to any third party and shall take all necessary measures to prevent disclosure by its present and future employees, officers, agents, subsidiaries, dealers or consultants. The provisions herein in this Section 2 shall be binding upon GSS, successors in interest of GSS and shall survive for as long a period as is permissible under law. 3. Intention of Parties. It is expressly understood and agreed that the terms hereof are contractual in nature and not merely recitals, and that the agreements and releases contained herein are made and given in order to compromise and settle doubtful and disputed claims, to avoid the cost, risk and uncertainty of litigation and to buy peace. It is further understood and agreed that no term, provision or agreement contained herein shall be construed or interpreted as an admission of liability by or on behalf of any party hereto, all such liability being expressly denied. 4. Confidentiality of Settlement. The parties hereto agree that they and their heirs, assigns, agents, employees and attorneys shall not disparage or make any derogatory remarks whatsoever about any of the other parties thereto or their heirs, assigns, agents, officers, directors, employees and attorneys. 5. Binding Effect. This Agreement and the releases granted herein shall inure to the benefit of and be binding against the parties hereto and their respective heirs, successors and assigns. 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Delaware. 7. Voluntary Agreement. Each of the parties hereto acknowledges that this Agreement has been executed freely and voluntarily, without economic compulsion, and with full knowledge of its legal significance and consequences. 8. Ownership of Claims. Each of the parties hereto represents and warrants that it is the sole owner and holder of the various claims and causes of action released herein and that it has not sold, assigned, conveyed or in any way transferred any of its rights in and to any of the claims and causes of action to any third party. 9. Severability. This Agreement is intended to be severable. If any term, covenant, condition, or provision hereof is illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Agreement. 10. Counterparts. This Agreement may be executed in counterparts or with detachable signature pages and shall constitute one agreement, binding upon all parties hereto as if all parties signed the same document. 11. Headings. The headings used in this Agreement are intended solely for the convenience of reference, and should not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions of this Agreement. 12. Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties and supersedes and replaces all prior oral and written agreements with respect to the subject matter hereof. There are no oral agreements between the parties hereto. EXECUTED as of the date first above written. AURA: AURA SYSTEMS, INC., a Delaware corporation By: Name: Title: GSS: GSS/ARRAY TECHNOLOGY, INC. GSS/ARRAY TECHNOLOGY PUBLIC COMPANY, LTD Boon Hoe, Chief Financial Officer EX-99 21 koyahsub.txt EX. 10.27 EXHIBIT 10.27 SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT (this "Agreement") dated as of May ____, 2002 (the "Closing Date"), is made by and among AURA SYSEMS, INC., a Delaware corporation (the "Company"), and THE PURCHASERS LISTED ON THE SIGNATURE PAGE HEREOF (the "Purchasers"). The Company desires to issue and sell to the Purchasers, and the Purchasers desire to purchase from the Company, a total of _________ shares of the Company's common stock, par value $.005 (the "Common Stock"), with registration rights (collectively, the "Stock"), for an aggregate purchase price of _____________ (the "Purchase Price"), upon and subject to the terms and conditions set forth herein. As used herein, the term "Offering" shall mean the offering of the Stock and the Additional Securities (collectively the "Securities") by the Company to the Purchasers. Certain other capitalized terms used herein are defined in Section 5. Accordingly, in consideration of the premises and the mutual covenants, obligations and agreements contained herein, the Purchasers and the Company hereby agree as follows: 1. Purchase and Sale of the Stock. 1.1. Purchase and Sale. Upon and subject to the terms and conditions set forth herein and in exchange for payment by each Purchaser of its respective portion of the Purchase Price, the Company hereby agrees to issue and sell to such Purchaser, and such Purchaser hereby agrees, severally but not jointly, to purchase from the Company, its respective portion of the Stock, all as specified opposite the name of such Purchaser on the signature page hereof, at a closing ("the Closing") to be held on May ____, 2002 (the "Closing Date"). 1.2. Registration Rights Agreement. As a condition to consummating any such purchase and sale of the Stock hereunder, the Company and the Purchasers shall enter into a Registration Rights Agreement dated concurrently herewith (the "Registration Rights Agreement" and together with this Agreement, collectively the "Agreements") to grant the Purchasers certain registration rights for the Securities. 2. Representation, Warranties and Covenants of the Company. The Company hereby represents, warrants and covenants to each Purchaser as follows, on and as of the date of this Agreement and the Closing Date (if different): 2.1. Accuracy of Reports. All reports required to be filed by the Company since and including the filing of the Company's Form 10-K for the fiscal year ended February 28, 2001 to and including the Closing Date (collectively, the "SEC Reports") have been duly filed with the Securities and Exchange Commission. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act or the Securities Exchange Act, as the case may be, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder applicable to the SEC Reports. None of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports complied as of their respective dates of filing in all material respects with applicable accounting requirements and the published rules and regulations of the Securities and Exchange Commission with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited statements, as permitted by Regulation S-X promulgated by the Securities and Exchange Commission) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), and fairly present the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). The Company has on a timely basis made all filings required to be made by the Company with the Securities and Exchange Commission. Since February 28, 2001, there has been no material adverse change in the condition (financial or otherwise), business, operations, assets, liabilities or prospects of the Company, except as set forth in the SEC Reports. 2.2. Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to conduct its business. 2.3. Valid Issuance and Voting Rights. The Securities have been duly and validly authorized and, when issued and/or paid for pursuant to the Agreements, will be validly issued, fully paid and nonassessable. Except as set forth in the Agreements and as otherwise required by law, there are no restrictions upon the voting or transfer of the Securities pursuant to the Certificate of Incorporation, By-laws or other governing documents of the Company or any agreement or other instruments to which the Company is a party or by which the Company is bound. 2.4. Authorization; Enforceability. The Company has all corporate right, power and authority to enter into the Agreements and to consummate the transactions contemplated by the Agreements. The Agreements have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. The issuance and/or sale of the Securities contemplated by the Agreements will not give rise to any preemptive rights or rights of first refusal on behalf of any Person. 2.5. No Conflict; Governmental Consents. (a) The execution and delivery by the Company of the Agreements and the consummation of the transactions contemplated by the Agreements will not result in the violation by the Company of any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or governmental authority to or by which the Company is bound, or of any provision of the Certificate of Incorporation, By-laws or other governing documents of the Company, and will not conflict with, or result in a breach or violation of, any of the terms or provisions of, or constitute (with due notice or lapse of time or both) a default under, any lease, loan agreement, mortgage, security agreement, trust indenture, securities purchase agreement, registration rights agreement or other agreement or instrument to which the Company is a party or by which it is bound or to which any of its properties or assets is subject, nor result in the creation or imposition of any lien upon any of the properties or assets of the Company. (b) No consent, approval, authorization or other order of any governmental authority or other third party is required to be obtained by the Company in connection with the authorization, execution and delivery of the Agreements or with the authorization, issue and/or sale of the Securities, except such filings as may be required to be made with the Securities and Exchange Commission, or with any state or foreign blue sky or securities regulatory authority. The Company shall make all such filings on a timely basis. The Offering is exempt from the registration requirements of the Securities Act and applicable state or foreign blue sky or securities laws. The Company is eligible to register the resale of the Securities as a secondary offering on a registration statement on Form S-3 under the Securities Act as contemplated by the Registration Rights Agreement. 2.6. Licenses. The Company has all licenses, permits and other governmental authorizations currently required for the conduct of its business or ownership of properties and is in all material respects in compliance therewith. 2.7. Capitalization. The total authorized capital stock of the Company on the Closing Date (after giving effect to the transactions contemplated by the Agreements and any related transactions) consists of (i) 500,000,000 shares of Common Stock and (ii) 10,000,000 shares of preferred stock, par value $.005 (the "Preferred Stock"). Of such authorized Common Stock, ________________shares are issued and outstanding on the Closing Date (after giving effect to the transactions contemplated by the Agreements and any related transactions). Of such authorized Preferred Stock, no shares are issued and outstanding on the Closing Date (after giving effect to the transactions contemplated by the Agreements and any related transactions). Except for (A) __________shares of Common Stock issuable upon exercise of stock options granted, and _______ shares of Common Stock issuable upon exercise of stock options available for grant, under the Company's Stock Option Plans, (B) _______shares of Common Stock issuable upon exercise of outstanding warrants, (C) ________________________________, and (D) the Securities issuable pursuant to the Agreements, there are no outstanding securities convertible into or exchangeable for capital stock of the Company, there are no shares of capital stock of the Company that have been reserved for issuance and there are no outstanding options, warrants or other rights to subscribe for or purchase from the Company any shares of capital stock of the Company or any securities convertible into or exchangeable for capital stock of the Company on the Closing Date (after giving effect to the transactions contemplated by the Agreements and any related transactions). 2.8. Brokers. [[Digital Offering] is acting as placement agent on behalf of the Company for [a portion of] the Offering, and the Company shall be solely responsible for paying all fees, commissions or other payments (whether in the form of cash, stock, warrants or other consideration) owing to [Digital Offering] in connection therewith, as separately agreed between [Digital Offering] and the Company. _________________________.] The Company shall indemnify and hold harmless the Purchasers from and against all fees, commissions or other payments owing to [Digital Offering] or any other Person acting or purporting to act on behalf of the Company, directly or indirectly, as a broker, finder or intermediary. 3. Representations, Warranties and Covenants of Each Purchaser. Each Purchaser, severally but not jointly, hereby represents and warrants to the Company as follows, on and as of the date of this Agreement and the Closing Date (if different): Risk of Investment. Such Purchaser understands that the purchase of the Securities involves a high degree of risk including, but not limited to, the following: (i) only investors who can afford the loss of their entire investment should consider investing in the Company or the Securities, (ii) such Purchaser may not be able to liquidate its investment, (iii) transferability of the Securities is limited under applicable securities laws, and (iv) an investment in the Securities involves risks described in the SEC Reports. 3.2. Lack of Liquidity. Such Purchaser confirms that it is able (i) to bear the economic risk of this investment, (ii) to hold the Securities for an indefinite period of time, and (iii) to afford a complete loss of its investment. 3.3. Purchaser Capacity. Such Purchaser hereby represents that such Purchaser, by reason of such Purchaser's business or financial experience, has the capacity to protect such Purchaser's own interests in connection with the transactions contemplated by the Agreements. 3.4. Receipt of Information. Such Purchaser hereby acknowledges that such Purchaser has reviewed the SEC Reports, and hereby represents that it has been furnished by the Company, during the course of this transaction, with all information regarding the Company which such Purchaser has requested, has been afforded the opportunity to ask questions of, and to receive answers from, duly authorized officers or other representatives of the Company concerning the terms and conditions of the Offering and the affairs of the Company and has received any additional information which such Purchaser has requested, it being understood that neither this nor any other representation or warranty by any such Purchaser is intended to reduce any representation or warranty by the Company. 3.5. Reliance on Information. Such Purchaser has relied upon the information provided by the Company in the SEC Reports and in this Agreement in making the decision to invest in the Securities. To the extent deemed necessary or advisable by it, such Purchaser has retained, at the sole expense of such Purchaser, and relied upon, appropriate professional advice regarding the investment, tax and legal merits and consequences of the Agreements and an investment in the Securities. 3.6. No Solicitation. Such Purchaser represents that no Securities were offered or sold to such Purchaser by means of any form of general solicitation or general advertising, and in connection therewith such Purchaser has not (i) received or reviewed any advertisement, article, notice or other communication published in a newspaper or magazine or similar media or broadcast over television or radio whether closed circuit, or generally available, or (ii) attended any seminar meeting or industry investor conference whose attendees were invited by any general solicitation or general advertising. 3.7. Registration. Such Purchaser hereby acknowledges that the Offering has not been reviewed by the Securities and Exchange Commission or any state regulatory authority, since the Offering is intended to be exempt from the registration requirements of Section 6 of the Securities Act pursuant to Regulation D. Such Purchaser shall not sell or otherwise transfer the Securities unless a subsequent disposition is registered under the Securities Act or is exempt from such registration. 1.1. Purchase for own Account. Such Purchaser understands that the Securities have not been registered under the Securities Act by reason of a claimed exemption under the provisions of the Securities Act which depends, in part, upon such Purchaser's investment intention. In this connection, such Purchaser hereby represents that it is purchasing Securities for its own account for investment and not with a view toward the resale or distribution to others or for resale in connection with any distribution or public offering (within the meaning of the Securities Act), nor with any present intention of distributing or selling the same and such Purchaser has no present or contemplated agreement, undertaking, arrangement, obligation or commitment providing for the disposition thereof. Such Purchaser was not formed for the purpose of purchasing the 3.8. Securities. Notwithstanding the foregoing, the disposition of such Purchaser's property shall be at all times within such Purchaser's own control, and such Purchaser's right to sell or otherwise dispose of all or any part of the Securities, including without limitation pursuant to any registration contemplated by the Registration Rights Agreement, shall not be prejudiced; provided that such Purchaser complies with Section 3.10. Nothing herein shall prevent the distribution of any Securities to any member, partner or stockholder, former member, partner, or stockholder of such Purchaser in compliance with the Securities Act and applicable state securities laws. 3.9. Holding Period. Such Purchaser understands that the Securities are subject to significant limitations on resale under applicable securities laws. Such Purchaser understands that reliance upon Rule 144 under the Securities Act for resales of the Securities requires, among other conditions, a one-year holding period prior to the resale (such resale after such one year holding period being further subject to sales volume limitations). Such Purchaser understands and hereby acknowledges that the Company is under no obligation to register any of the Securities under the Securities Act, any applicable state securities or "blue sky" laws or any applicable foreign securities laws, except as set forth in the Registration Rights Agreement. 3.10. Legends. Each such Purchaser consents to the placement of the legend set forth below, or a substantial equivalent thereof, on any certificate or other document evidencing the Stock: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND THE LAWS OF OTHER APPLICABLE JURISDICTIONS. Such Purchaser further consents to the placement of one or more restrictive legends on any Securities issued in connection with this Offering as may be required by applicable securities laws. Such Purchaser is aware that the Company will make a notation in its appropriate records with respect to the restrictions on the transferability of the Securities. 3.11. Residence of Purchaser. Such Purchaser hereby represents that the address of such Purchaser furnished by such Purchaser on the signature page hereof is such Purchaser's principal business address. 3.12. Authorization; Enforceability. Such Purchaser represents that such Purchaser has full power and authority (corporate, statutory and otherwise) to execute and deliver the Agreements and to purchase the Securities. The Agreements have been duly executed and delivered by such Purchaser and constitute the legal, valid and binding obligations of such Purchaser, enforceable against such Purchaser in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. 3.13. Organization, Good Standing Qualification. If an entity, such Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. 3.14. Brokers. Such Purchaser shall indemnify and hold harmless the Company from and against all fees, commissions or other payments owing to any Person acting or purporting to act on behalf of such Purchaser, directly or indirectly, as a broker, finder or intermediary. 3.15. Accredited Investor. Such Purchaser represents that it is an "accredited investor" as such term is defined in Rule 501 of Regulation D. 3.16. Reliance on Representation and Warranties. Such Purchaser understands that the Securities are being offered and sold to the undersigned in reliance on specific exemptions from the registration requirements of federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of such Purchaser to acquire the Securities. 4. Conditions of Each Purchaser to Closing. Each Purchaser's obligation to purchase its respective portion of the Stock at the Closing is subject to the fulfillment to such Purchaser's satisfaction, prior to or at the Closing, of the following conditions: 4.1. Registration Rights Agreement. The Registration Rights Agreement, in form and substance satisfactory to such Purchaser, shall have been executed and delivered by all parties thereto. 4.2. Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true and correct on and as of each applicable date they are made under Section 2, with the same force and effect as though such representations and warranties had been made on and as of each such applicable date. 4.3. Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing Date. 4.4. Certificate. The Company shall execute and deliver to each Purchaser a certificate of a duly authorized officer of the Company, dated as of the Closing Date, certifying as to the matters set forth in Sections 4.2 and 4.3. 4.5. Opinion of Counsel. The Company shall deliver to each Purchaser an opinion of counsel for the Company, dated as of the Closing Date, in form and substance satisfactory to such Purchaser. 5. Certain Definitions. For the purposes of this Agreement the following terms have the respective meanings set forth below: 5.1. "Additional Securities" means the warrants contemplated by the Registration Rights Agreement and the Common Stock issuable upon exercise of such warrants. 5.2. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. 5.3. "Regulation D" means Regulation D promulgated under the Securities Act. 5.4. "Securities Act" means, as of any given time, the Securities Act of 1933, as amended, or any similar federal law then in force. 5.5. "Securities Exchange Act" means, as of any given time, the Securities Exchange Act of 1934, as amended, or any similar federal law then in force. 5.6. "Securities and Exchange Commission" means the Securities and Exchange Commission or any governmental body or agency succeeding to the functions thereof. 6. Miscellaneous. 6.1. Amendments and Waivers. (a) This Agreement, together with the Registration Rights Agreement, set forth the entire agreement and understanding between the parties as to the subject matter hereof and thereof and supersede all prior discussions, negotiations, agreements and understandings (oral or written) with respect to such subject matter. This Agreement or any provision hereof may be (i) amended only by mutual written agreement of the Company and the Purchasers or (ii) waived only by written agreement of the waiving party. No course of dealing between or among the parties will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any party under or by reason of this Agreement. (b) After an amendment or waiver becomes effective, it shall bind each holder of any Securities, regardless of whether such holder held such Securities at the time such amendment or waiver became effective, or subsequently acquired such Securities. 6.2. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns and each Purchaser and its successors and assigns. The provisions hereof which are for each Purchaser's benefit as purchaser or holder of the Securities are also for the benefit of, and enforceable by, any subsequent holder of such Securities. 6.3. Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to duly given and received when delivered personally or transmitted by facsimile, one business day after being deposited for next-day delivery with a nationally recognized overnight delivery service, or three business days after being deposited as first class mail with the United States Postal Service, all charges or postage prepaid, and properly addressed to the party to receive the same at the address for such party indicated on the signature page hereof or at such other address as such party may have designated by advance written notice to the other parties. 6.4. Governing Law. This Agreement shall be governed by the internal laws of the State of Washington, without giving effect to its conflict of law principles. All disputes between the parties hereto arising out of or in connection with the Agreements or the Securities, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment. 6.5. Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of the Agreements, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.6. Counterparts. This Agreement may be executed in any number of counterparts and, notwithstanding that any of the parties did not execute the same counterpart, each of such counterparts (or facsimile copies thereof) shall, for all purposes, be deemed an original, and all such counterparts shall constitute one and the same instrument binding on all of the parties hereto. Delivery of an executed counterpart of a signature page to this Agreement by facsimile shall be as effective as delivery of a manually executed counterpart of a signature page of this Agreement. 6.7. Headings. The headings of the Sections hereof are inserted as a matter of convenience and for reference only and in no way define, limit or describe the scope of this Agreement or the meaning of any provision hereof. 6.8. Severability. In the event that any provision of this Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless the provision held invalid shall substantially impair the benefit of the remaining portion of this Agreement. 6.9. Survival of Warranties. The representations, warranties and covenants of the Company and the Purchasers made in this Agreement shall survive the execution and delivery of this Agreement and the Closing Date. 6.10. Exculpation Among Purchasers. Each Purchaser acknowledges that such Purchaser is not relying upon any other Purchaser or any other Person, other than the Company and its officers and directors, in connection with any purchase of the Stock hereunder or decision to invest in the Company. Each Purchaser agrees that no other Purchaser or its respective controlling persons, officers, directors, partners, agents or employees shall be liable to such Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with any purchase of the Stock hereunder or decision to invest in the Company or the execution, delivery or performance of any of the Agreements. 6.11. Representation. Each Purchaser acknowledges that (i) ICM Asset Management, Inc. has retained Paine, Hamblen, Coffin, Brooke & Miller LLP to represent only ICM Asset Management, Inc. and its affiliates (collectively "ICM") in connection with the Agreements and the transactions contemplated thereby, (ii) the interests of ICM may not necessarily coincide with the interests of any other Purchaser, (iii) Paine, Hamblen, Coffin, Brooke & Miller LLP does not represent any Purchaser other than ICM, and (iv) each Purchaser other than ICM has consulted with, or has had an opportunity to consult with, its own legal counsel and has not relied on Paine, Hamblen, Coffin, Brooke & Miller LLP for legal representation or advice in connection with the Agreements and the transactions contemplated thereby. 6.12. Expenses. Promptly upon request, the Company shall pay (i) the legal fees and expenses of Paine, Hamblen, Coffin, Brooke & Miller LLP incurred in connection with the Agreements and the closing of the transactions contemplated by the Agreements, in an amount not to exceed $______, and (ii) the legal fees and expenses of Paine, Hamblen, Coffin, Brooke & Miller LLP incurred in connection with the prior Subscription Agreement dated as of March 16, 2001, the prior Registration Rights Agreement dated as of March 16, 2001 and the closing of the transactions and completion of the registration contemplated thereby which have not been previously paid by the Company, in the amount of [$8,602.67]. On the Closing Date, ICM may deduct a total of $_________ from its respective portion of the Purchase Price, to be applied against such legal fees and expenses referred to in (i) and (ii) above. 6.13. Public Disclosure. Promptly after the Closing, the Company shall make appropriate public disclosure of the closing of the purchase of the Stock hereunder. [Remainder of page intentionally left blank.] [Signature page to Subscription Agreement] IN WITNESS WHEREOF, the parties have caused this Subscription Agreement to be duly executed and delivered as of the date first set forth above. "Company" AURA SYSTEMS, INC. By: Name: Title: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Attn: Fax: "Purchasers" KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner Portion of Purchase Price: $_____________ By: Name: Title: No. of Shares of Stock: ____________ c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 [KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner Portion of Purchase Price: $_____________ By: Name: Title: No. of Shares of Stock: ____________ c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 RAVEN PARTNERS, L.P. By: Koyah Ventures LLC, its general partner Portion of Purchase Price: $_____________ By: Name: Title: No. of Shares of Stock: ____________ c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 AURA SYSTEMS, INC. SUBSCRIPTION AGREEMENT Dated as of May ____, 2002 EX-99 22 koyahreg.txt EX. 10.28 EXHIBIT 10.28 AURA SYSTEMS, INC. REGISTRATION RIGHTS AGREEMENT Dated as of May ____, 2002 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT dated as of May ___, 2002, is made by and among AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and THE INVESTORS LISTED ON THE SIGNATURE PAGE HEREOF (each of whom is herein called individually, a "Investor" and all of whom are herein called, collectively, the "Investors"), with reference to the following facts: In connection with the Subscription Agreement dated as of March 22, 2002 (the "Subscription Agreement"), by and among the Company and the Investors, and as a condition to the closing of the transactions contemplated therein, this Agreement is to be executed and delivered by the Investors and the Company. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto further agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) "Form S-3" means such form under the 1933 Act as in effect on the date hereof or any registration form under the 1933 Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (b) "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof. (c) "1933 Act" means the Securities Act of 1933, as amended. (d) "1934 Act" means the Securities Exchange Act of 1934, as amended. (e) "register", "registered", and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement or document. (f) "Registrable Securities" means (i) the shares of the Stock (as defined in the Subscription Agreement), (ii) the shares of the Company's Common Stock (as defined in the Subscription Agreement) issuable on exercise of the Registration Warrants (as defined in Section 1.3(c)), and (iii) any other shares of stock of the Company issued as (or issuable on the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in clauses (i) and (ii) above; provided that there shall be excluded any Registrable Securities sold by a person in a transaction in which that person's rights under this Section 1 are not assigned. (g) The number of shares of "Registrable Securities" outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities. (h) "SEC" means the Securities and Exchange Commission. (i) Other Terms: Any other capitalized term not defined herein shall have the meaning set forth in the Subscription Agreement. 1.2 [Intentionally Omitted]. 1.3 Agreed Registration. (a) Within one hundred twenty (120) days after the Closing Date, the Company shall prepare and file with the SEC a registration statement on Form S-3 (or, if Form S-3 is not then available, on such form of registration statement that is then available to effect a registration of all Registrable Securities, subject to consent of the Investors holding at least a majority of the Registrable Securities) covering the registration of all of the Registrable Securities, other than the shares issuable upon exercise of the Registration Warrants. In the event that any Registration Warrants are issued, the Company shall promptly amend such registration statement to also include the shares issuable upon exercise of such Registration Warrants. The Company shall use best efforts to obtain the effectiveness of such registration statement as soon as possible thereafter. The Company shall keep such registration statement effective at all times until the earlier of the date on which all the Registrable Securities (i) are sold by the Holders in an open market transaction and (ii) can be sold by the Holders (and any affiliate of the Holders with whom the Holders must aggregate their sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act. (b) If the Holders intend to distribute the Registrable Securities by means of an underwriting, they shall so advise the Company. The underwriter will be selected by a majority in interest (as determined by the number of Registrable Securities held) of the Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Holders) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 1.6(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.3, if the underwriter advises the Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Holders shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, provided that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) If on the date one hundred eighty (180) days after the Closing Date either (i) the registration statement described in Section 1.3(a) is not declared effective or (ii) the registration statement described in Section 1.3(a) is no longer deemed to be effective after initial effectiveness (including without limitation any suspension of use under the circumstances described in Section 1.6(f) hereof), the Company, unless waived by the Investors, shall issue to each Investor a warrant in the form attached hereto as Exhibit A (each, a "Registration Warrant" and, collectively, the "Registration Warrants") to acquire the number of shares of Common Stock equal to (i) 5% multiplied by (ii) the aggregate number of shares of Registrable Stock sold to such Investor pursuant to the Subscription Agreement. The exercise price of each such Registration Warrant per share shall be $.20 per share, subject to adjustment as set forth in the Registration Warrant. (d) If at any time during the first thirty (30) day period after the initial one hundred eighty (180) day period referred to in Section 1.3(c) either (i) the registration statement described in Section 1.3(a) is not declared effective or (ii) the registration statement described in Section 1.3(a) is no longer deemed to be effective after initial effectiveness (including without limitation any suspension of use under the circumstances described in Section 1.6(f) hereof), the Company shall, unless waived by the Investors, issue to each Investor an additional Registration Warrant to acquire the number of shares of Common Stock equal to (i) 5% multiplied by (ii) the aggregate number of shares of Registrable Stock sold to such Investor pursuant to the Subscription Agreement. The exercise price of each such Registration Warrant shall be $.20 per share, subject to adjustment as set forth in the Registration Warrant. (e) If at any time during of each subsequent thirty (30) day period after the first thirty (30) day period after the initial one hundred eighty (180) day period referred to in Section 1.3(c) either (i) the registration statement described in Section 1.3(a) is not declared effective or (ii) the registration statement described in Section 1.3(a) is no longer deemed to be effective after initial effectiveness (including without limitation any suspension of use under the circumstances described in Section 1.6(f) hereof), the Company shall, unless waived by the Investors, issue to each Investor an additional Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Stock sold to such Investor pursuant to the Subscription Agreement. The exercise price of each such Registration Warrant will be $.20 per share, subject to adjustment as set forth in the Registration Warrant. (f) The Company shall execute such other and further certificates, instruments and other documents as may be reasonably requested by the Investors or reasonably necessary or proper to implement, complete and perfect the Investors' rights under this Section 1.3 and, upon effectiveness of a registration statement with respect to the Registrable Securities, to freely trade the Registrable Securities without limitation or restriction imposed or created by the Company or securities law. (g) The terms and covenants set forth in this Section 1.3 shall terminate as to each Holder and be of no further force and effect on the earlier of the date on which all the Registrable Securities beneficially owned by that Holder (i) are registered pursuant to this Section 1.3 and sold by that Holder in an open market transaction or (ii) can be sold by that Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act. 1.4 Company Registration. (a) If (but without any obligation to do so) the Company proposes to register any of its stock (including a registration effected by the Company for stockholders other than the Holders) or other securities under the 1933 Act in connection with the public offering of such securities, the Company shall, at such time, promptly give each Holder notice of such registration. On the request of each Holder given within thirty (30) days after such notice by the Company, the Company shall, subject to the provisions of Section 1.4(c), cause to be registered under the 1933 Act all of the Registrable Securities that each such Holder has requested to be registered. (b) The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.4 prior to the effectiveness of such registration, whether or not any Holder shall have elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.8 hereof. (c) In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under this Section 1.4 to include any requesting Holder's securities in such underwriting, unless such Holder accepts the terms of the underwriting as agreed between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enters into an underwriting agreement in customary form with the underwriter or underwriters selected by the Company, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested to be included in such offering by the Company, the Holders and other security holders to whom registration rights have been granted exceeds the amount of securities that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of securities (including Registrable Securities) that the underwriters determine in their sole discretion will not jeopardize the success of the offering (the Registrable Securities so included to be apportioned pro rata among the selling Holders according to the total amount of Registrable Securities requested to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders); provided, that the amount of Registrable Securities requested by the Holders to be included in such offering pursuant to this Section 1.4 and all other securities requested by other holders to be included in such offering pursuant to other "piggyback" registration rights shall be reduced first (the Registrable Securities and other securities so reduced to be apportioned pro rata among the selling Holders and other holders according to the total amount of Registrable Securities and other securities requested to be included therein by each selling Holder and other holder) before any reduction of any (i) securities requested to be included in such offering by any holders exercising "demand" registration rights or (ii) any securities sold by the Company to be included in such offering. For purposes of such apportionment among Holders, for any selling stockholder that is a Holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder", and any pro rata reduction with respect to such "selling Holder" shall be based on the aggregate amount of Registrable Securities requested to be included in such offering by all such related entities and individuals. 1.5 Form S-3 Registration. If the Company shall receive from one or more Holders a request or requests that the Company effect a registration on Form S-3 and any related blue sky or similar qualification or compliance with respect to at least 25% (or a lesser percentage if the requirements of Section 1.5(b)(i) are met) of the Registrable Securities owned by such Holder or Holders, the Company shall: (a) promptly give notice of the proposed registration, and any related blue sky or similar qualification or compliance, to all other Holders; and (b) cause, as soon as practicable, such Registrable Securities to be registered for offering and sale on Form S-3 and cause such Registrable Securities to be qualified in such jurisdictions as such Holders may reasonable request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a request given within fifteen (15) days after receipt of such notice from the Company; provided that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.5: (i) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $500,000; (ii) if the Company has, within the twelve month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.5; (iii) if the Company shall furnish to the Holders a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) days after receipt of the request of the Holder or Holders under this Section 1.5; provided that the Company shall not utilize this right more than once in any twelve (12) month period; provided, further, that the Company shall not register shares for its own account during such sixty (60) day period, but such prohibition shall not apply to the registration of Company shares in connection with (x) a merger or (y) registration of shares relating to a stock option, stock purchase or similar plan; or (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. 1.6 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) except as otherwise provided in Section 1.3, prepare and file with the SEC a registration statement with respect to such Registrable Securities and use best efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to two hundred seventy (270) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided that (i) such two hundred seventy (270) day period shall be extended for a period of time equal to (A) the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company and (B) the period of any suspension of use of such registration statement under the circumstances described in Section 1.6(f); and (ii) in the case of any registration of Registrable Securities on Form S-3 (or any other Form, to the extent permitted by law) that are intended to be offered on a continuous or delayed basis, such two hundred seventy (270) day period shall be extended, if necessary, to keep the Registration Statement effective until all such Registrable Securities are sold, except to the extent that the Holders (and any affiliate of the Holders with whom the Holders must aggregate their sales under Rule 144) of such Registrable Securities may sell those Registrable Securities in any three-month period without regard to the volume limitation and without registration in compliance with Rule 144 under the 1933 Act; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the 1933 Act with respect to the disposition of all securities covered by such registration statement during the period of time such registration statement remains effective; (c) furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request to facilitate the disposition of Registrable Securities owned by them; (d) use best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering; (f) during the period of time such registration statement remains effective, immediately notify each Holder of Registrable Securities covered by such registration statement in writing at any time when (i) a prospectus relating thereto is required to be delivered under the 1933 Act or (ii) the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and in the case of clause (ii) above, the Holder shall suspend the use of the prospectus until its receipt of the written notice referred to in the last sentence of this Section 1.6(f). Notwithstanding the provisions of this Section 1.6, the Company may, during the period a registration statement is required to remain effective hereunder, suspend the use of the prospectus for a period not to exceed sixty (60) days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Holders of Registrable Securities with written notice of such suspension (which notice need not specify the nature of the event giving rise to such suspension), and the Holder shall suspend the use of the prospectus until its receipt of the written notice referred to in the last sentence of this Section 1.6(f). At the end of any suspension period referred to in the first or second sentence of this Section 1.6(f), the Company shall immediately provide the Holders with written notice of the termination of such suspension. (g) cause all such Registrable Securities registered hereunder to be listed on each securities exchange on which securities of the same class issued by the Company are then listed; (h) provide a transfer agent and registrar for all Registrable Securities registered hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and (i) furnish, at the request of any Holder, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and with respect to events subsequent to the date of the financial statements, as are customarily covered in accountants' letters delivered to the underwriters in underwritten public offerings of securities addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.7 Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding such Holder, the Registrable Securities held by such Holder, and the intended method of disposition of such securities as shall be required to effect the registration of such Registrable Securities. 1.8 Expenses of Registration. All expenses incurred in connection with registrations, filings or qualifications pursuant to this Section 1, including without limitation all registration, filing and qualification fees, printing fees and expenses, accounting fees and expenses, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders selected by the Holders, not to exceed $5,000 for each registration statement or each amendment thereto (provided that there are not more than two drafts thereof), shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Sections 1.3 and 1.5 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based on the number of Registrable Securities that were requested to be included in the withdrawn registration); provided that, if at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and shall have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Sections 1.3 and 1.5. Anything herein to the contrary notwithstanding, all underwriting discounts and commissions incurred in connection with a sale of Registrable Securities shall be borne and paid by the Holder thereof, and the Company shall have no responsibility therefor. 1.9 Indemnification. If any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners or officers, directors and stockholders of such Holder, legal counsel and accountants for such Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the 1933 Act, the 1934 Act or any other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law; and the Company will reimburse such Holder, underwriter or controlling person for any legal or other expenses incurred, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity agreement in this Section 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based on a Violation that occurs in reliance on and in conformity with written information furnished expressly for use in connection with such registration by such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities to which any of the foregoing persons may become subject, under the 1933 Act, the 1934 Act or any other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance on and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any person intended to be indemnified pursuant to this Section 1.9(b), for any legal or other expenses reasonably incurred, as incurred, by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity agreement in this Section 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld or delayed); and provided further that in no event shall any indemnity by such Holder under this Section 1.9(b), when aggregated with amounts contributed, if any, pursuant to Section 1.9(d), exceed the net proceeds from the sale of Registrable Securities hereunder received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent that the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9. (d) If the indemnification provided in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that shall have resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided that in no event shall any contribution by a Holder under this Section 1.9(d), when aggregate with amounts paid, if any, pursuant to Section 1.9(b), exceed the net proceeds from the sale of Registrable Securities hereunder received by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.10 Reports under 1934 Act. With a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration statement (including, without limitation, Form S-3), the Company agrees to: (a) make and keep public information available, as those terms are used in SEC Rule 144, at all times; (b) take such action as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith on request, (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the 1933 Act and the 1934 Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form. 1.11 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such Registrable Securities that (i) is a subsidiary, parent, current or former partner, current or former limited partner, current or former member, current or former manager or stockholder of a Holder, (ii) is an entity controlling, controlled by or under common control with a Holder, including without limitation a corporation or limited liability company that is a direct or indirect parent or subsidiary of the Holder, (iii) is a transferee or assignee of a Holder and the number of shares representing or underlying the Registrable Securities (whether in the form of shares, warrants to purchase shares, or a combination of the foregoing) transferred or assigned constitute at least 50,000 shares of Registrable Securities held by such Holder (as adjusted for stock split, combinations, dividends and the like); provided that: (a) the Company is, within a reasonable time after such transfer, notified of the name and address of such transferee or assignee and the Registrable Securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement; (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act; and (d) such assignment is not made pursuant to a registration statement effected pursuant to this Agreement. 1.12 Duplicative Registration Rights. The rights of the Investors under Section 1.4 or Section 1.5 shall not apply to the extent that Registrable Securities then held by the Investors are already covered by an effective registration statement under Section 1.3 or any other Section of this Agreement. 1.13 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided in this Section 1 with respect to a Registrable Security (i) after the date on which that Registrable Security has been sold under a registration statement filed in accordance with this Agreement or (ii) if all Registrable Securities held by such Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act. 2. Covenants. 2.1 Reserve for Exercise Shares. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock such number of shares (the "Exercise Shares") as shall be sufficient to enable it to comply with its exercise obligations under the Registration Warrants. If at any time the number of Exercise Shares shall not be sufficient to effect the exercise of the Registration Warrants, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number as will be sufficient for such purposes. The Company will obtain authorization, consent, approval or other action by, or make any filing with, any administrative body that may be required under applicable state securities laws in connection with the issuance of Exercise Shares. 2.2 Confidential Information. The Company shall provide to each Holder not less than ten days' prior written notice of its intention to deliver to such Holder confidential or non-public information relating to the Company and shall mark such information as "confidential" or "non-public." If a Holder notifies Company that it does not desire to receive such confidential or non-public information, then the Company shall not deliver such information to such Holder. Whether or not a Holder has so notified the Company, such Holder may, in its sole discretion, decline to receive from the Company such confidential or non-public information, and as a result thereof shall not be deemed to have received or have any knowledge of such confidential or non-public information; provided that it has not received the same or promptly returns the same upon receipt by such Holder. 3. Miscellaneous. 3.1 Successors and Assigns. Except as otherwise provided herein, this Agreement shall inure to the benefit of and bind the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer on any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Washington, without giving effect to its conflicts of law principles. All disputes between the parties hereto arising out of or in connection with this Agreement or the Registrable Securities, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above-referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non conveniens. Notwithstanding the foregoing, any party obtaining an order or judgment in any of the above-referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment. 3.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 Headings. The headings of sections and subsections in this Agreement are used for convenience of reference only and are not to be considered in construing or interpreting this Agreement. 3.5 Notices. Any request, consent, notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed duly given and received when delivered personally or transmitted by facsimile, one business day after being deposited for next-day delivery with a nationally recognized overnight delivery service, or three business days after being deposited as first class mail with the United States Postal Service, all charges or postage prepaid, and properly addressed to the party to receive the same at the address for such party indicated on the signature page hereof or at such other address as such party may designate by advance written notice to the other parties. 3.6 Expenses. If any action at law or in equity is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and disbursements in addition to any other relief to which such party may be entitled. In addition, the Company shall pay the reasonable attorneys' fees, costs and disbursements of the Investors in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought. 3.7 Entire Agreement: Amendments and Waivers. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the consent of the Company and the holders of more than 50% of the Registrable Securities; provided that no amendment shall be effective unless approved by the holder or holders of Registrable Securities that shall be affected adversely, or affected differently from the Holders generally, by such amendment. Any amendment or waiver effected in accordance with this Section 3.7 shall be binding on the Company, each holder of any Registrable Securities and each future holder of all such Registrable Securities. 3.8 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by or on behalf of the parties hereto as of the date first above written. "Company" AURA SYSTEMS, INC. By: Name: Title: 2335 Alaska Avenue El Segundo, CA 90245 Attn: ________________ Fax: _________________ "Investors" KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: Name: Title: c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 [Signature page to Registration Rights Agreement] KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: Name: Title: c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 RAVEN PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: Name: Title: c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 [Signature page to Registration Rights Agreement] EXHIBIT A Form of Registration Warrant [Separate document - need to attach] EX-99 23 crs.txt EX. 10.29 EXHIBIT 10.29 SETTLEMENT AGREEMENT AND RELEASE This Settlement Agreement shall be effective as of May 7 ,2002, and is entered into by and between Aura Systems, Inc., a Delaware corporation ("Aura"), and CRS Emergency Vehicles, Co. ("CRS"), an Oklahoma corporation, Custom Coaches International, an Oklahoma corporation ("CCI"), and C. Ray Smith, individually (hereinafter be referred to collectively as the "Defendants"). This Settlement Agreement is entered into with reference to the following facts: RECITALS A. WHEREAS, on or about December 11, 2001, Aura caused a Complaint to be filed against Defendants in the action which is commonly known as Aura v. CRS Emergency Vehicles, Co., et al, United States District Court Case No. 01-10612 DDP (BQRx). Said Complaint shall hereinafter be referred to as the "Action." B. WHEREAS, the Complaint in the Action sought recovery with respect to Defendants' breach of a Distributor Agreement (attached to the Complaint as Exhibit "A") arising from Defendants' failure to pay for 400 units of AuraGen G5000 and G8500 generators. The amount sought by Aura in the Action was: $1,341,472, which includes the following: damages1: $1,234,729; pre-judgment interest2: $78,009; attorneys fees3: $28,294; and costs4: $440. C. WHEREAS, in response to the allegations of Aura in the Action, Defendants' Answer admits to certain allegations plead in Aura's Complaint and denies certain allegations. D. WHEREAS, the Defendants represent that only 399 units were shipped instead of the 400 alleged by Aura (hereafter "Shipped Units") and that four of the Shipped Units were used to replace units previously sold by Aura under warranty. The one missing unit shall hereafter be referred to as the "Missing Unit." The Defendants further represent that they have in their possession the 395 Shipped Units and the four units that were replaced (hereafter "Swapped Units"). They further represent that the remaining Shipped Units are in good order and condition. E. WHEREAS, Aura and the Defendants now wish to resolve all disputes existing between them with respect to any and all matters and claims, both known and unknown, arising from or related to the nonpayment of the Product as asserted in the Complaint and in all discovery and pleadings in the Action, based on the terms and conditions of this Settlement Agreement ("Agreement"). AGREEMENT NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Affirmative Obligations of the Defendants (hereafter "Affirmative Obligations"): i. Upon the signing of this Agreement, Defendants agree to immediately make available the Shipped Units and the Swapped Units to Aura or their designated representative. Aura will pick up and transport the Product at Aura's expense. ii. Defendants shall use their best efforts to conduct a search for and, if found or located, immediately return, at their expense, the Missing Unit. iii. Upon the signing of this Agreement, Defendants shall turn over to Aura all documentation relating, in any way, to the Swapped Units including, but not limited to, work orders, purchase orders, warranty documentation, packaging materials or any similar documentation containing information regarding the Swapped Units. iv. Upon the signing of this Agreement, Defendants shall return to Aura any and all documentation relating to its performance under the Distributor Agreement and/or its status as an AuraGen(TM) distributor, whether or not such documentation was supplied to them by Aura in the first instance, including, but not limited to, all certificates, advertising, sales or marketing materials, manuals or instruction materials, warranty documentation, and the Distributor Agreement. v. The Defendants agree to waive any rights they might otherwise have in connection with the Distributor Agreement and to any warranty or service obligation on the part of Aura as to the Missing Unit or the Shipped Units used to replace the Swapped Units. 2. Dismissal With Prejudice Within ten (10) days of full performance of all of the Affirmative Obligations, Aura shall cause to be filed with the Court a dismissal of the entire Action. 3. Standstill Agreement and Waiver of the Statutes of Limitations The parties hereto agree that the Action is to be stayed in its present state as to all matters pending the full performance of all of the Affirmative Obligations, and that, prior to that time, the Action may be fully reactivated at Aura's election upon the breach of this Agreement by any of the Defendants. The parties further waive the application of all laws, rules or statutes of repose requiring the timely bringing or prosecution of claims (including, but not limited to, the statutes of limitations; the doctrines of waiver, estoppel and latches), as to all claims which are or which might be reasonably assertable in the Action by way of the current Complaint or by way of the filing of an amended complaint against any of the Defendants. 5. Release Except for any remaining rights or obligations as have been created under this Agreement, upon full performance by Defendants of all of the Affirmative Obligations, Aura and Defendants hereby fully, completely, finally and forever release, relinquish and discharge each other and each of their respective parent companies, predecessor companies, subsidiaries, affiliated companies, related entities, agents, present and former employees, attorneys, insurers, successors and assigns (which said aforementioned released parties shall hereinafter be referred to collectively as "Releasees"), of and from any and all claims, actions, causes of action, demands, rights, debts, agreements, promises, liabilities, damages, accountings, costs and expenses, whether known or unknown, suspected or unsuspected, fixed or contingent, of every nature whatsoever, which relate to the claims asserted in the Action. Each party to bear their own attorney's fees and costs. All matters released hereunder, shall sometimes hereinafter be referred to as the "Released Claims." IT IS THE INTENTION OF THE PARTIES HERETO THAT THIS DOCUMENT SHALL BE EFFECTIVE AS A FULL AND FINAL ACCORD AND SATISFACTION AND RELEASE OF EACH AND EVERY RELEASED CLAIM. IN FURTHERANCE OF THIS INTENTION, THE PARTIES HERETO, AND EACH OF THEM, ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY LEGAL COUNSEL AND ARE FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." THE PARTIES HERETO, BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVE ANY RIGHTS THEY MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW DOCTRINES OF SIMILAR EFFECT. The parties hereto, and each of them, acknowledge that they may hereafter discover facts in addition to, or different from, those which they now know or believe to be true with respect to the Released Claims, but that, notwithstanding the foregoing, it is their intention that this release operate to fully, finally, completely and forever settle and release each Releasee from each, every and all of the Released Claims, and that in furtherance of such intention, the releases herein given shall be and remain in effect as full and complete releases, notwithstanding the discovery or existence of any such additional or different facts. The parties hereto warrant and represent to each other that as to any Released Claim, the party releasing same is the sole and absolute owner thereof, free and clear of all other rights and interests therein and has the right, ability and sole power to release such Released Claims, and the releasing party agrees to hold harmless and indemnify the released parties from any liability or claim asserted against a released party which is based on a claim which the releasing party purported to release hereunder. 6. Attorneys Fees In the event there is any dispute concerning the terms of this Agreement or the performance of any party hereto pursuant to the terms of this Agreement, and any party hereto retains counsel for the purpose of enforcing any of the provisions of this Settlement Agreement or asserting the terms of this Agreement in defense of any suit filed against said party, the prevailing party in such a dispute shall be entitled to recover, in addition to any other remedy to which such party may be entitled, all of its costs and attorneys fees in connection with the dispute, including costs and attorneys fee incurred on appeal, irrespective of whether or not a lawsuit is actually commenced or prosecuted to conclusion. 7. No Admission of Liability The existence of this Agreement nor the conduct of any of the parties hereto shall constitute or be construed as an admission of any liability or any wrongdoing whatsoever on the part of any of the parties hereto. 8. Interpretation In the event that any language in this Agreement is held to be uncertain, any such language shall not be interpreted against any party to the Agreement based on who drafted such language. 9. Authority The undersigned further represent and warrant that they have taken all actions and obtained all authorizations, consents and approvals as are conditions precedent to their authority to execute this Agreement. 10. Counterparts This Agreement may be signed in counterparts which will be binding upon the parties hereto as if all of said parties executed the original hereof. 11. Facsimile Signatures This Agreement may be executed by facsimile signatures. A copy of this Agreement bearing a facsimile signature or signatures shall have the same force and effect as an original agreement with inked original signatures. 12. Waiver No waiver by any party hereto of any provision hereof shall be deemed to be a waiver of any other provision hereof or of any subsequent breach of the same or any other provision hereof. 13. Amendment This Agreement cannot be amended or modified except by a writing executed by the parties hereto which expresses, by its terms, an intention to modify this Agreement. 14. Successors This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective administrators, trustees, executors, personal representatives, successors and permitted assigns. 15. Confidentiality Except as is noted below, neither the Parties, nor the respective employees, agents, or attorneys of any of them shall disclose the terms and existence of this Agreement or any documents and/or evidence produced or learned of during discovery, including third party discovery, written discovery, depositions or the facts discovered in this action to any third person without the prior written consent of the other parties to this Agreement. This confidentiality agreement shall never expire. The exceptions are that such information as is necessary may be disclosed: (a) If required by operation of law or court order or by way of subpoena with reasonable notice to the Parties to afford any opposing Party an opportunity to move to quash said subpoena or seek a protective order; (b) To the officers, directors, employees, agents, attorneys, corporate affiliates (including officers, directors, employees, agents and attorneys thereof) of the parties to this Agreement; (c) In an action to enforce the terms of this Agreement; (d) Upon inquiry from third parties as to the results of the litigation, the parties may only disclose that the matter has been resolved. In the event that either party intends disclosure pursuant to subsection (a) of this Section 15, at least ten (10) days written notice will be given to the other parties hereto and their counsel prior to disclosing such information, setting forth all information that is proposed to be disclosed, the identity of each person to whom the information is to be disclosed, the reasons for such disclosure and the circumstances pursuant to which disclosure is proposed to be made. 16. Integration This Agreement constitutes the final and complete agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous negotiations, promises, covenants, agreements or representations concerning any matters directly, indirectly or collaterally related to the subject matter of this Agreement. The parties hereto have expressly and intentionally included in this Agreement all collateral or additional agreements which may, in any manner, touch or relate to any of the subject matter of this Agreement; therefore, all promises, covenants and agreements, collateral or otherwise, are included herein. The parties acknowledge that in entering into this Agreement, neither has relied on any statement, promise, representation or warranty whatsoever, which is not expressly contained herein. It is the intention of the parties to this Agreement that it shall constitute an integration of all their agreements, and each understands that in the event of any subsequent litigation, controversy or dispute concerning any of its terms, conditions or provisions, no party hereto shall be permitted to offer or introduce any oral or extrinsic evidence concerning any other alleged collateral or oral agreement between the parties not included herein. 17. Miscellaneous. 17.1. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 17.2. This Agreement shall be deemed to have been drafted jointly by the parties hereto; accordingly, any rule pertaining to the construction of contracts to the effect that ambiguities are to be resolved against the drafting party shall not apply to the interpretation of this Agreement or of any modifications of or amendments to this Agreement. 17.3. The paragraph headings contained in this Agreement are for convenience of reference only and shall not affect the interpretation or construction of this Agreement. 17.4. No failure or delay in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. SIGNATURES CRS EMERGENCY VEHICLES Date: _____________ By:____________________________ [Signature] ---------------------------- [Print Name and Title] CUSTOM COACH INTERNATIONAL Date: _____________ By:____________________________ [Signature] ---------------------------- [Print Name and Title] Date: _____________ ______________________________ C. RAY SMITH [Signature] AURA SYSTEMS INC. Date: _____________ By:____________________________ [Signature] ---------------------------- [Print Name and Title] APPROVED AS TO FORM AND CONTENT: PRINDLE, DECKER & AMARO LLP By:____________________________ R. JOSEPH DECKER Attorneys for AURA SYSTEMS, INC. THE DRUMMOND FIRM By:______________________________ GENTER F. DRUMMOND WILL K. WRIGHT Attorneys for CRS EMERGENCY VEHICLES, CUSTOM COACH INTERNATIONAL, C. RAY SMITH - ----------------------------------------------------- 1 See, Exhibit "C" attached to plaintiff's Complaint. 2 See, California Civil Code ss. 3289(b); "the obligation shall bear interest at a rate of 10% per annum after a breach." Pre-judgment interest was calculated to May 1, 2002, as follows: (a) $266,000 was due on 07/12/01 (292 days) at 10% = $21,280; (b) $266,000 was due on 08/30/01 (243 days) at 10% = $17,709; (c) $266,000 was due on 09/30/01 (212 days) at 10% = $15,450; (d) $436,729 was due on 10/15/01 (197 days) at 10% = $23,570; Total: $78,009. 3 See, U.S.D.C Central District Local Rule 55-4; "$5,600 plus 2% of the amount over $100,000." 4 Court costs to date: (a) filing fee: $150; (b) service fees: $290 = $440 EX-99 24 ts0212.txt EX. 10.30 EXHIBIT 10.30 Aura Systems, Inc. Term Sheet Instrument Unregistered newly issued common shares Purchase Price $0.26 per share Warrant Coverage One three year warrant for every two shares purchased to be priced at a 10% premium to the closing market price on day of funding. Amount Up to $500,000 Use of Proceeds Working capital Closing By February 12, 2002 Registration Rights To be included in Form S-3 filing awaiting response to SEC comments Documentation Company will provide fully executed common shares and registration rights agreement, if not included in above S-3, by February 28,2002 Other Requirements Visitation rights for Bruce Cowen at all Board of Directors and Committee meetings and he will be provided copies of all materials provided to the Board Anti-dilution protection for one year period related to this and December 2001 financings in that adjustment will be to lowest stock sale price from closing of this transaction Fee To be paid in accordance with December 2001 consulting and success fee agreements On behalf of Aura Systems, Inc. /s/__________________________ on this date_________________ Zvi (Harry) Kurtzman On behalf of Investors: Amount of participation $500,000 /s/__________________________ on this date_________________ Lancer Offshore, Inc. -----END PRIVACY-ENHANCED MESSAGE-----