-----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, LQJTgqXkradIt3A/jlfsyf/SmwZBUl0J3n179bZaiqaaG4kDBym584vMdTvAN3Qs zQKgUcXYRYXe1DeYmIAyjg== 0000826253-03-000022.txt : 20030821 0000826253-03-000022.hdr.sgml : 20030821 20030821140710 ACCESSION NUMBER: 0000826253-03-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030821 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17249 FILM NUMBER: 03859803 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-Q 1 a10q2003may.txt AURA SYSTEMS, INC. 10-Q MAY 31, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended May 31, 2003 Commission File Number 000-17249 AURA SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Delaware 95-4106894 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2335 Alaska Ave. El Segundo, California 90245 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 643-5300 Former name, former address and former fiscal year, if changed since last report: None 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 NO X --------------- --------------- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at August 20, 2003 Common Stock, par value $0.005 per share 430,923,150 Shares AURA SYSTEMS, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Statement Regarding Financial Information 2 Condensed Consolidated Balance Sheets as of May 31, 2003 (Unaudited)and February 28, 2003 3 Condensed Consolidated Statements of Operations for the Three Months Ended May 31, 2003 (Unaudited) and 2002 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2003 (Unaudited) and 2002 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ITEM 4. Controls and Procedures 15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 16 ITEM 2. Changes in Securities 16 ITEM 6. Exhibits and Reports on Form 8-K 16 SIGNATURES AND CERTIFICATIONS 17 AURA SYSTEMS, INC. AND SUBSIDIARIES QUARTER ENDED MAY 31, 2003 PART I. FINANCIAL INFORMATION The consolidated financial statements included herein have been prepared by Aura Systems, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As contemplated by the SEC under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended February 28, 2003 as filed with the SEC (file number 000-17249). AURA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS May 31. 2003 February 28, Assets (Unaudited) 2003 - ------ --------------- ---------------- Current assets: Cash and cash equivalents $ 125,489 $ 163,693 Receivables, net 175,213 410,717 Inventories, net 1,438,850 1,414,500 Notes receivable 214,505 210,272 Other current assets 595,043 166,589 --------------- ---------------- Total current assets 2,549,100 2,365,771 Property and equipment, at cost 13,839,349 13,839,351 Less accumulated depreciation and amortization ( 6,615,215) (6,495,840) --------------- ---------------- Net property and equipment 7,224,134 7,343,511 Non-current inventories 7,573,225 7,573,225 Long term investments 697,500 1,000,000 Long term receivables 1,950,880 2,006,121 Patents and trademarks, net 2,676,522 2,753,603 Other assets 615,017 725,635 --------------- ---------------- Total assets $ 23,286,378 $23,767,866 =============== ================ Liabilities and Stockholder's Equity Current liabilities: Accounts payable $ 3,085,449 $ 2,753,503 Notes payable 9,610,335 9,542,786 Convertible notes 825,000 3,762,317 Accrued expenses 1,615,035 1,772,936 Deferred income 160,500 160,500 --------------- ---------------- Total current liabilities 15,296,319 17,992,042 Notes payable and other liabilities 38,491 40,275 Minority interest in consolidated subsidiary 1,058,847 1,023,373 COMMITMENTS AND CONTINGENCIES Stockholders' equity - ---------------------------------------------------------------------- Series A Convertible, Redeemable Preferred stock par value $0.005 per share and additional paid in capital. 1,500,000 shares authorized, 558,110 shares issued and outstanding at May 31, 2003; 3,937,176 -- none at February 28, 2003. Common stock par value $0.005 per share and additional paid in capital. 500,000,000 shares authorized, 430,923,150 issued and outstanding at May 31 and February 28, 2003. 305,898,468 305,429,815 Committed common stock 3,102,958 3,102,958 Accumulated deficit (306,045,881) (303,820,597) --------------- ---------------- Total stockholders' equity 6,892,721 4,712,176 --------------- ---------------- Total liabilities and stockholders' equity $ 23,286,378 $23,767,866 =============== ================
See accompanying notes to condensed consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MAY 31, 2003 AND 2002 (Unaudited) Three Months ------------ 2003 2002 ----------- ------------ Net Revenues $ 97,612 $ 183,739 Cost of goods 66,783 80,985 ----------- ------------ Gross Profit 30,829 102,754 Expenses Engineering, research and development expenses 496,072 1,232,818 Selling, general and administrative 1,177,768 2,160,475 ----------- ------------ Total costs and expenses 1,673,840 3,393,293 ----------- ------------ Loss from operations (1,643,011) (3,290,539) Other (income) and expense Interest expense, net 644,088 82,234 Other (income) expense, net (31,695) 585,429 Minority interest in net income of consolidated subsidiary 5,474 -- ----------- ------------ Loss before extraordinary item (2,290,878) (3,958,201) ----------- ------------ Extraordinary item Gain on extinguishment of debt obligations, net of income taxes of $0 65,594 -- ----------- ------------ Net loss $(2,225,284) $(3,958,201) ============ ============ Basic and diluted loss per share Before extraordinary item $ (0.005) $ (0.010) ============ ============ Extraordinary item $ -- -- ============ ============ Total basic and diluted loss per share $ (0.005) $ (0.010) ============ ============ Weighted average shares used to compute basic and diluted loss per share 430,923,150 398,236,320 ============ ============ See accompanying notes to condensed consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MAY 31, 2003 AND 2002 (Unaudited) 2003 2002 ----------- ------------ Net cash used in operations $ (1,301,226) $ (3,969,869) Investing activities: Proceeds from sale of investment 302,500 -- Note receivable 51,008 40,944 ----------- ------------ Net cash provided by investing activities 353,508 40,944 Financing activities: Issuance of debt 644,214 -- Repayment of debt (44,198) (250,000) Issuance of convertible notes 200.000 -- Net proceeds from sale of common stock -- 4,135,000 Net proceeds from sale of Series A preferred stock -- ----------- ------------ 109,500 Net cash provided by financing activities: 909,516 3,885,000 ----------- ------------ Net increase (decrease) in cash (38,202) (43,925) Cash and cash equivalents at beginning of period 163,693 1,143,396 ----------- ------------ Cash and cash equivalents at end of period $ 125,491 $1,099,471 =========== ============ Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 58,587 $ 43,167 Unaudited supplemental disclosure of noncash investing and financing activities: During the three months ended May 31, 2003, the Company: - exchanged $3,605,973 of convertible notes payable, plus accrued interest, for 534,020 shares of Series A Convertible, Redeemable Preferred Stock. During the three months ended May 31, 2002, the Company: - issued 292,508 shares of the Company's common stock in satisfaction of $92,140 in liabilities. See accompanying notes to condensed consolidated financial statements. AURA SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003 (Unaudited) 1) Basis of Presentation The condensed consolidated financial statements include the accounts of Aura Systems, Inc. and subsidiaries ("the Company"). All inter-company balances and inter-company transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications for comparability necessary to present fairly the financial position of Aura Systems, Inc. and subsidiaries at May 31, 2003 and the results of its operations for the three months ended May 31, 2003 and 2002. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. 2) Going Concern In connection with the audit of its consolidated financial statements for the year ended February 28, 2003, the Company received a report from its independent auditors that includes an explanatory paragraph describing uncertainty as to the Company's ability to continue as a going concern. Except as otherwise disclosed, the condensed consolidated financial statements have been prepared on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company continues to experience acute liquidity challenges. The Company had cash of approximately $100,000 and $200,000 at May 31 and February 28, 2003, respectively. For the three months ended May 31, 2003 and the year ended February 28, 2003, the Company incurred a net loss of approximately $2,200,000 and $16,100,000, respectively, on net revenues of approximately $100,000 and $1,100,000, respectively. The Company had working capital deficiencies at May 31 and February 28, 2003 of approximately $12,700,000 and $15,600,000, respectively. These conditions, combined with the Company's historical operating losses, raise substantial doubt as to the Company's ability to continue as a going concern. At July 31, 2003, the Company had less than $100,000 of cash. The Company requires additional debt or equity financing to fund ongoing operations. The Company is seeking to raise additional capital; however, there can be no assurance that the Company will raise sufficient capital to fund ongoing operations. The issuance of additional shares of equity in connection with such financing could dilute the interests of existing stockholders of the Company and such dilution could be substantial. The Company must increase its authorized shares in order to be able to sell common equity and intends to propose to stockholders such action as well as a reverse stock split of its common shares; there can be no assurance that either such action will be approved. The inability to secure additional funding could result in the Company having to cease operations. 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 its fiscal year ending February 28, 2004. 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, sales of non-core assets and external financings. Currently, the Company has no firm commitments from third parties to provide additional financing and there can be no assurance that financing 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 and such dilution may be significant. If financing cannot be arranged in the amounts and at the times required, the Company will cease operations. The Company has no bank line of credit. 3) Capital In March 25, 2003, the Board of Directors of the Company authorized 1,500,000 shares of Series A convertible, redeemable preferred stock (the "Series A Preferred") with a par value of $0.005. Each Series A Preferred share is convertible into common stock at $0.08 per share. The Series A Preferred can be converted at the option of the holder provided that the Company does not exercise the mandatory conversion on any date on or after March 31, 2004. The Company may exercise its right to mandatory conversion provided that the current market value of the Company's common stock equal or exceeds 120% of the then prevailing conversion price. As the redemption of the Series A Preferred is at the option of the company, all preferred outstanding has been classified as equity in the accompanying condensed consolidated financial statements. In the event that circumstances occur which cause the Series A Preferred to be redeemable at the option of the holder or manditorily redeemable on some future event or date, the Series A Preferred would be reclassified out of equity. The Series A Preferred has liquidation preference of $10 per share. In addition, the holders of the Series A Preferred are entitled to receive cumulative dividends at a rate of 5% per annum. Dividends are payable in arrears on the first day of each quarter, commencing on September 1, 2003. The shares can be redeemed on or after March 31, 2004 in whole or in part at a redemption price equal to $10 per share, plus the amount of any accumulated and unpaid dividends. In the three months ended May 31, 2003, Series A Convertible, Redeemable Preferred Stock ("Series A Preferred") outstanding increased by a total of 558,110 shares as follows: 534,020 shares in exchange for convertible notes payable, plus accrued interest, totaling approximately $3,700,000 and 24,090 shares for $109,500 cash proceeds. As of May 31, 2003 the cumulative preferred dividends were not material the Company's financial statements. Additionally, cumulative preferred dividends in future periods will be disclosed as a reduction in the net loss available to common shareholders. The Company did not issue shares of Common Stock during the quarter ended May 31, 2003. 4) Inventories Inventories, stated at the lower of cost (first in, first out) or market, consist of the following: May 31. 2003 February 28, (unaudited) 2003 ---------- ------------ Raw materials $3,886,841 $ 3,846,439 Finished goods 6,803,234 6,819,286 Reserved for potential product obsolescence (1,678,000) (1,678,000) ----------- ------------ 9,012,075 8,987,725 Non-current portion 7,573,225 7,573,225 =========== ------------ $1,438,850 $ 1,414,500 =========== ============
Inventories consist primarily of components and completed units for the Company's AuraGen product. Management has analyzed its inventories based on its current business plan, backlog, and pending proposals with perspective customers and has determined that the Company does not expect to realize all of its inventories within the 12-month period ending May 31, 2004. Because of this, the Company has assessed the net realizability of these assets, the proper classification of the inventory, and the potential obsolescence of inventory for the future if sales do not materialize. In these evaluations, management has recorded a reserve of $1,678,000 at May 31 and February 28, 2003. The net inventories as of May 31 and February 28, 2003 which are not expected to be realized within a 12-month period have been reclassified as long term. 5) Significant Customers In the three months ended May 31, 2003, the Company sold AuraGen related products to three significant customers for a total of approximately $68,000 or 69% of net revenues. None of these customers are related to or affiliated with the Company. At May 31, 2003, the Company held accounts receivable from two of these significant customers for a total of approximately $56,000 or 18% of net receivables. None of these customers are related to or affiliated with the Company. 6) Contingencies The Company is engaged in certain material legal proceedings as described in Item 3 of the Company's Form 10-K for the year ended February 28, 2003 as filed with the SEC. In the case of a judgment or settlement, appropriate provisions have been made in the financial statements. 7) Notes Payable and Other Liabilities Notes payable and other liabilities consist of the following: May 31, 2003 February 28, (unaudited) 2003 --------------- ---------------- Notes payable-buildings (a) $ 5,030,572 $ 5,058,774 Convertible notes payable (b) -- 2,012,320 Convertible notes payable (c) 625,000 1,750,000 Convertible notes payable (d) 200,000 -- Litigation payable (e) 2,201,604 2,201,604 Trade debt (f) 1,204,144 1,308,533 Note payable-related party (g) 1,000,000 1,000,000 Note payable (h) 200,000 -- Notes payable-equipment (i) 12,5077 14,147 --------------- ---------------- 10,473,826 13,345,378 Less: current portion 10,435,335 13,305,103 --------------- ---------------- Long-term portion $ 38,491 $ 40,275 ================== ================
(a) Notes payable-buildings consist 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. In April 2003, the Company defaulted on these notes payable and the notes remain in default at July 31, 2003. As such, these notes payable were classified as current liabilities at May 31 and February 28, 2003. (b) The notes payable bear interest at 5% per annum, mature at various dates, and are convertible into shares of the Company's Series A Preferred at a rate of $1.00 principal amount of notes for each $2.20 of Series A Preferred. During the quarter ended May 31, 2003, the Company issued an additional $466,500 of these notes payable and recorded interest expense of $466,500 related to the conversion feature thereon. On March 31, 2003, the Company completed the conversion of these notes into Series A Preferred (see Note 3). (c) The notes carry an 8% interest rate and are convertible into common stock at various conversion rates. During the quarter ended May 31, 2003, the Company issued an additional $200,000 of these convertible notes payable. In March, 2003, the conversion of $1,125,000 of the notes was completed (see Note 3). The conversion feature on the notes approximated fair value of the underlying shares at the date of issuance. (d) 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. (e) On May 29, 2003, the Company received $200,000 of interim funding and issued term notes bearing interest at 5% per annum, convertible into shares of Series A Preferred. The conversion feature on the notes approximated fair value of the underlying shares at the date of issuance. (f) Trade debt was restructured with payment terms over a three-year period with interest at 8% per annum commencing in January 2000. During the quarter ended May 31, 2003 and the year ended February 28, 2003, the Company settled $59,818 and $1,456,213, respectively, of this trade debt, including accrued interest, for $14,356 and $385,142, respectively. The gains on the extinguishment of debt of $65,594 and $1,050,995, which are reflected as extraordinary items in the quarter ended May 31, 2003 and the year ended February 28, 2003, respectively, resulted in extraordinary income per share of less than $0.01 in each period. To fund these transactions, the Company issued $307,862 of the convertibles notes payable described in (b) above in the year ended February 28, 2003. (g) Note payable - related party consisted of a $1,000,000 note payable, which was entered into in connection with the sale of a minority interest in Aura Realty, as more fully described in the Company's Form 10-K for the year ended February 28, 2003 as filed with the SEC. The note bears interest at 12.3% per annum and is secured by a security interest in a certain note receivable. The Company is required to make interest only payments for the first 17 months of the term, and the $1,000,000 principal is due on May 31, 2004. (h) During the quarter ended May 31, 2003, the Company entered into a note payable agreement for $200,000. The note payable bears interest at a fixed rate of $10,000. The note payable and the $10,000 fixed fee mature on June 7, 2003. On the maturity date of the note payable, the Company will issue warrants to purchase 1,000,000 shares, which was later modified to 3,000,000 shares, of the Company's common stock with an exercise price of $0.05, expiring on June 7, 2006. The warrants are to be included in the next S-1 filing. The note is secured by 177,777 shares of one of the Company's long term investments. As of July 8, 2003, the note was in default. In August 2003, the Company issued warrants to purchase 3,000,000 shares of common stock in relation to this note. The Company is in negotiations to obtain new financing from a different investor to replace this note payable agreement. (i) Notes payable-equipment consists of a note maturing in February 2005 with an interest rate of 8.45%. 8) Subsequent Events Between May 29 and July 11, 2003, the Company received $600,000 of interim funding from Koyah Leverage Partners, LLP to meet its immediate cash needs and issued term notes bearing interest at 5% per annum, convertible into shares of Series A Preferred (the "Term Notes"). From July 24, 2003 through August 20, 2003, the Company has received an additional $646,086 of interim funding. These amounts are evidenced by secured notes payable (the "Secured Notes") on October 24, 2003, which date automatically extends to January 24, 2004 if the Company has not received $2,000,000 of additional funding by October 24, 2003. The Secured Notes bear interest at 10% per annum and are convertible at the option of the holder into new debt or equity securities at of the Company at a 20% discount to the best terms by which such new debt or equity is sold to any new investor. The Secured Notes may be prepaid on notice at a 20% premium. Repayment of the Secured Notes is secured by substantially all the assets of the Company (with limited exceptions). The $600,000 of Term Notes were replaced with Secured Notes as part of this transaction. Although the Company is in discussions with the investor with regard to further financing, there can be no assurance that additional financing will be obtained. On June 11, 2003, the Company sold a portion of one of its long-term investments realizing net proceeds of approximately $112,500. The Company intends to sell the remainder of this investment and is actively seeking buyers but has no commitments from any buyers at this time. In June 2003, the Company received an order for over $1,000,000 of AuraGen(R) units, including mounting brackets and installation, from an existing customer. As of August 20, 2003, approximately $240,000 of this order has been delivered. The remainder of this order will be delivered at the customer's request through June 2006. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview This Form 10-Q report may contain forward-looking statements which involve risks and uncertainties. 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 the Company's Form 10-K for the period ended February 28, 2003 and 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 change in the Company's expectations or any 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. Results of Operations For the three month period ended May 31, 2003 The Company's net loss for the three months ended May 31, 2003 (the "First Quarter FY2004") was $2,225,284 compared to a net loss of $3,958,201 for the three months ended May 31, 2002 (the "First Quarter FY2003"). Net operating revenues and gross profit were $97,612 and $30,829, respectively, in the First Quarter FY2004 and $183,739 and $102,754, respectively, in First Quarter FY2003. Net revenues for the First Quarter FY2004 decreased to $97,612 from $183,739 in the First Quarter FY2003. This represents a decrease of $86,127 (47%) from the First Quarter FY2003. Revenues are lower in Fiscal 2004 due largely to the Company's financial condition adversely impacting sales. Cost of goods decreased to $66,783 in the First Quarter FY2004 from $80,985 in the First Quarter FY2003. This 18% decrease was smaller than the change in net revenues (47%) resulting in a reduction in gross margin to 32% in First Quarter FY2004 from 56% for First Quarter FY2003. This reduction in gross margin results from a normal level of expense associated with warranty and demo units against an unusually low amount of revenue. The Company's cost for the goods included in revenue for the quarter was consistent with the historical gross margins. Cost of goods includes only the direct material and labor costs incurred. Engineering, research and development expenses decreased by $736,746 (60%) to $496,072 in the First Quarter FY2004 from $1,232,818 in the First Quarter FY2003. The decrease was primarily due to the cost control efforts taken throughout fiscal 2003 and into the First Quarter FY2004, most significantly, reductions in headcount. Labor and labor related costs included in engineering expense amounted to approximately $468,000 in the First Quarter FY2004, compared to approximately $774,000 in the First Quarter FY2003. The Company also reduced its research and development activities throughout fiscal 2003 and expects these efforts to continue at or below this reduced level at least through the second quarter of fiscal 2004. Selling, general and administrative ("SG&A") expenses decreased to $1,177,768 in the First Quarter FY2004 from $2,160,475 in the First Quarter FY2003; a reduction of $982,707 (45%). The SG&A expenses were lower due primarily to cost control efforts taken throughout fiscal 2003 and into the First Quarter FY2004, most significantly, reductions in headcount. Labor and labor related costs included in SG&A amounted to approximately $618,000 in the First Quarter FY2004, compared to approximately $1,252,000 in the First Quarter FY2003. Other income was $31,695 in the First Quarter FY2004 compared to other expense of $585,429 in First Quarter FY2003. Net interest expense for the First Quarter FY2004 increased $561,854 to $644,088 from $82,234 in the First Quarter FY2003 due principally to the recording of $466,500 of expense representing the beneficial conversion feature related to the issuance of convertible notes payable. Additional borrowing required in the First Quarter FY2004 caused the remainder of the interest expense increase. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial conditions and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to revenue recognition. The Company uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. The Company believes that the following critical accounting policies affect its more significant judgments and estimates in the preparation of its consolidated financial statements. Revenue recognition The Company is required to make judgments based on historical experience and future expectations, as to the reliability of shipments made to its customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," and related guidance. The Company makes these assessments based on the following factors: i) customer-specific information, ii) return policies, and iii) historical experience for issues not yet identified. Inventory The Company is required to make judgments based on historical experience and future expectations as to the realizability of inventory. The Company makes these assessments based on the following factors: i) existing orders, ii) age of the inventory, and iii) historical experience. Valuation of long-lived assets Long-lived assets, consisting primarily of property and equipment, and patents and trademarks, comprise a significant portion of the Company's total assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Recoverability of assets is measured by a comparison of the carrying value of an asset to the future net cash flows expected to be generated by those assets. The cash flow projections are based on historical experience, management's view of growth rates within the industry, and the anticipated future economic environment. Factors that the Company considers important that could trigger a review for impairment include the following: (a) significant underperformance relative to expected historical or projected future operating results, (b) significant changes in the manner of its use of the acquired assets or the strategy of its overall business, and (c) significant negative industry or economic trends. When the Company determines that the carrying value of patents and trademarks, long-lived assets and related goodwill and enterprise-level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, it measures any impairment based on a projected discounted cash flow method using a discount rate determined by its management to be commensurate with the risk inherent in its current business model. Financial Position, Liquidity and Capital Resources The Company continues to experience acute liquidity challenges. The Company had cash of approximately $100,000 and $200,000 at May 31 and February 28, 2003, respectively. For the three months ended May 31, 2003 and the year ended February 28, 2003, the Company incurred a net loss of approximately $2,200,000 and $16,100,000, respectively, on net revenues of approximately $100,000 and $1,100,000, respectively. The Company had working capital deficiencies at May 31 and February 28, 2003 of approximately $12,300,000 and $15,600,000, respectively. These conditions, combined with the Company's historical operating losses, raise substantial doubt as to the Company's ability to continue as a going concern. At July 31, 2003, the Company had less than $100,000 of cash. The Company requires additional debt or equity financing to fund ongoing operations. The Company is seeking to raise additional capital; however, there can be no assurance that the Company will raise sufficient capital to fund ongoing operations. The issuance of additional shares of equity in connection with such financing could dilute the interests of existing stockholders of the Company and such dilution could be substantial. The Company must increase its authorized shares in order to be able to sell common equity and intends to propose to stockholders such action as well as a reverse stock split of its common shares; there can be no assurance that either such action will be approved. The inability to secure additional funding could result in the Company having to cease operations. 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 its fiscal year ending February 28, 2004. 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, sales of non-core assets and external financings. Currently, the Company has no firm commitments from third parties to provide additional financing and there can be no assurance that financing 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 and such dilution may be significant. If financing cannot be arranged in the amounts and at the times required, the Company will cease operations. The Company has no bank line of credit. Due to the Company's acute liquidity challenges, it has defaulted in payments under many of its financial obligations (see Note 7 in the Condensed Consolidated Financial Statements). These defaults effectively render these obligations payable on demand and the entire principal balance of each obligation has been included in current liabilities in the accompanying Consolidated Financial Statements. Actions by the parties to these obligations to enforce their rights to collect the amounts due could require the Company to cease operations. At May 31, 2003, the Company had accounts receivable, net of allowance for doubtful accounts, of $175,213; $410,717 at February 28, 2003. As of July 31, 2003, the Company had net accounts receivable of approximately $320,000. From April 1 through June 11, 2003, the Company sold a portion of one of its long-term investments realizing net proceeds of approximately $415,000. The Company intends to sell the remainder of this investment and is actively seeking buyers but has no commitments from any buyers at this time. In May 2003, the Company borrowed $200,000, secured by a portion of the remainder of this investment. This borrowing will be required to be repaid from the proceeds of future sales of this investment. There was no spending for property and equipment in the First Quarter FY2004 or the First Quarter FY2003. The Company has no material capital project that would require funding. The Company's current plant and equipment is sufficient to support its current level of sales. Debt repayments of $44,198 were made in First Quarter FY2004 as compared to $250,000 in First Quarter FY2003. The Company leases warehouse space located in Rancho Dominguez, California. Minimum monthly rent under the lease approximates $3,900. The Company is currently in default of this lease and is negotiating a schedule of payments to remedy this default. The status of the Company's lease of its headquarters and manufacturing facility is discussed in the Company's Form 10-K for the period ended February 28, 2003. Capital Transactions In March 2003, the Company issued approximately $400,000 of "5% Discounted Notes". All of these notes (together with other 5% Discounted Notes previously issued) were converted into Series A Preferred on March 31, 2003 as discussed below. On March 25, 2003, the Company designated 1,500,000 shares of its authorized preferred stock as Series A Convertible Redeemable Preferred Stock (the "Series A Preferred"). Each share of Series A Preferred has a par value of $.005, a liquidation preference of $10.00 plus accrued unpaid dividends and is convertible into common stock at $.080 per share, based on the liquidation preference. Dividends accrue on each share at the rate of 5% of the liquidation preference per annum. The Company may call the Series A Preferred for redemption on or after March 31, 2004 subject to certain conditions. As of May 31, 2003, 558,110 shares of Series A Preferred were outstanding, issued as set forth below. On March 31, 2003, the Company exchanged $1,125,000 of 8% Notes and converted $1,101,573 of 5% Notes and $1,342,900 of 5% Discounted Notes, plus accrued interest in all cases, into 534,020 shares of Series A Preferred. The average effective net acquisition price of the shares of Common Stock underlying the conversion feature, based on the mounts paid for the notes, is $0.054 per share. Between May 29 and July 11, 2003, the Company received $600,000 of interim funding from Koyah Leverage Partners, LLP to meet its immediate cash needs and issued term notes bearing interest at 5% per annum, convertible into shares of Series A Preferred (the "Term Notes"). From July 24, 2003 through August 20, 2003, the Company has received an additional $646,086 of interim funding. These amounts are evidenced by secured notes payable (the "Secured Notes") on October 24, 2003, which date automatically extends to January 24, 2004 if the Company has not received $2,000,000 of additional funding by October 24, 2003. The Secured Notes bear interest at 10% per annum and are convertible at the option of the holder into new debt or equity securities at of the Company at a 20% discount to the best terms by which such new debt or equity is sold to any new investor. The Secured Notes may be prepaid on notice at a 20% premium. Repayment of the Secured Notes is secured by substantially all the assets of the Company (with limited exceptions). The $600,000 of Term Notes were replaced with Secured Notes as part of this transaction. Although the Company is in discussions with the investor with regard to further financing, there can be no assurance that additional financing will be obtained. Also during the first quarter of fiscal 2004: - - the Company issued 24,090 shares of Series A Preferred in a private placement for net cash proceeds of $109,500. The effective net acquisition price of the shares of Common Stock underlying the conversion feature, based on the amounts paid for the preferred stock is $0.036 per share. - - the Company issued convertible notes payable to third party investors totaling $200,000. The notes bear interest at 5% per annum and are due on demand no later than August 29, 2003. The notes are convertible into Series A Preferred stock at $10.00 per share. The effective net acquisition price of the shares of Common Stock underlying the conversion feature, based on the amounts paid for the notes, is $0.080 per share. - - the Company issued a $200,000 note in exchange for a loan. The note and $10,000 fixed fee interest became due on June 7, 2003. As part of this borrowing, the Company is obligated to issue warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.050, expiring on June 7, 2006. The note is secured by 177,777 shares of one of the Company's long-term investments. The Company did not pay the note when due and is in default. The Company agreed to increase the warrants to be issued to 3,000,000 to compensate the holder for this default, and in August 2003, the Company issued warrants to purchase 3,000,000 shares of common stock at $0.050 per share. The Company is in negotiations to obtain new financing from a different inventor to replace this note payable agreement but there can be no assurance that such financing will be obtained. ITEM 4 Controls and Procedures (a) The Company's chief executive officer and its chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date within 90 days of the filing date of this quarterly report (the "Evaluation Date") have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them timely by others within those entities. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. PART II - OTHER INFORMATION ITEM 1 Legal Proceedings A group of former officers of the Company, who resigned on February 28, 2002 following the commencement of an SEC investigation into the Company's accounting practices (as described on the company's Annual Report on Form 10-K) filed a lawsuit against the Company, on July 24, 2003, seeking payment of amounts owed under a consulting arrangement. The Company had renegotiated the amounts payable under the consulting arrangement, but defaulted on such amounts. The suit filed by these former officers seeks full payment based on their original employment agreements. The accruals reflected on the Company's financial statements were based on the revised agreements in place at the time of their resignations and, should these former officers be awarded the full amount sought in this suit, the Company would be required to record additional expense of approximately $1,100,000. The Company intends to contest this action vigorously and may bring counterclaims against the individuals. ITEM 2 Changes in Securities For a discussion of recent sales of securities, see Management's Discussion and Analysis. All of the noted sales of unregistered securities were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as these offerings were a private placement to a limited number of accredited investors. ITEM 6 Exhibits and Reports on Form 8-K a) Exhibits: 10.28 - Form of convertible note 10.29 - Koyah Security Agreement 10.30 - Koyah Amendment Waiver 10.31 - Koyah Additional Advance Agreement 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b) Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements 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. ------------------------------------------------ (Registrant) Date: August 20, 2003 By: /s/David A. Rescino --------------- --------------------------- David A. Rescino Interim Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) CERTIFICATION I, Neal F. Meehan, Chairman and Chief Executive Officer of Aura Systems, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Aura Systems, Inc. and, 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Neal F. Meehan ------------------- Neal F. Meehan Chairman & Chief Executive Officer August 20, 2003 CERTIFICATION I, David A. Rescino, Interim Chief Financial Officer of Aura Systems, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Aura Systems, Inc. and, 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ David A. Rescino --------------------- David A. Rescino Interim Chief Financial Officer August 20, 2003 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Aura Systems, Inc. (the "Company") on Form 10-Q for the period ending November 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Neal F. Meehan, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods indicated. /s/ Neal F. Meehan ------------------- Neal F. Meehan Chairman & Chief Executive Officer August 20, 2003 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Aura Systems, Inc. (the "Company") on Form 10-Q for the period ending November 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Rescino, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods indicated. /s/ David A. Rescino --------------------- David A. Rescino Interim Chief Financial Officer August 20, 2003 EX-99 3 koyahcpnote.txt EXHIBIT 10.28 - FORM OF CONVERTIBLE NOTE EXHIBIT 10.28 Form of convertible note THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION, (B) THE TRANSFER IS MADE IN ACCORANCE WITH RULE 144 UNDER SUCH ACT, (C) THE BORROWER RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THE NOTE (CONCURRED IN BY LEGAL COUNSEL FOR THE BORROWER) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (D) THE BORROWER OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. CONVERTIBLE PROMISSORY NOTE Principal Amount: $____________ Spokane, Washington Interest Rate: 10% July 24, 2003 FOR VALUE RECEIVED, the undersigned, AURA SYSTEMS, INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order of _________________, a Delaware limited partnership ("Lender"), at such places and times and under the terms and conditions set forth below, the lesser of (i) the maximum principal amount of this Convertible Promissory Note (this "Note") set forth above and (ii) the aggregate principal amount advanced by Lender from time to time under this Note, together with interest thereon and any other amounts set forth herein. 1. Principal Payments. The entire principal balance of this Note shall be due and payable on October 24, 2003; provided, however, that if Borrower has not received at least Two Million Dollars ($2,000,000) debt or equity financing by such date, then the entire principal balance of this Note instead shall be due and payable on January 24, 2004; provided, further, however, that if Borrower has still not received at least Two Million Dollars ($2,000,000) of debt or equity financing by such date, then the entire principal balance of this Note instead shall be due and payable upon demand (the "Maturity Date"). 2. Interest Rate and Payment. The outstanding principal balance of this Note shall accrue interest at the rate of ten percent (10%) per annum. Accrued interest under this Note shall be due and payable on the Maturity Date. 3. Prepayment. In light of the conversion feature of this Note and to protect Lender's right of conversion hereunder, Borrower shall not have the right to prepay the outstanding principal balance of this Note or accrued interest thereon, in whole or in part, prior to the Maturity Date without the prior written consent of Lender. 4. Collection Costs Borne by Borrower. Borrower agrees to pay all costs and expenses, including without limitation reasonable attorneys' fees, incurred by Lender in enforcing the terms of this Note or in collecting this Note, including without limitation in any out-of-court workout, any court action, any appeal or any bankruptcy proceeding. 5. Late Charge. If any payment of principal or interest under this Note shall not be made within five (5) days after the due date, Borrower agrees to pay interest (after as well as before judgment) at a rate of five percent (5%) per annum above the rate of interest which would otherwise have been payable under this Note or the maximum rate of interest permitted to be charged by applicable law, whichever is less. 6. Governing Law. This Note shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, 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-convenes. 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. 7. Intended Beneficiaries. Nothing in this Note, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Note, except as expressly provided in this Note. 8. Severability. If any part of this Note is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 9. Conversion of Note. In the event Borrower completes any debt or equity financing after the date hereof, then at the option of Lender, the outstanding principal balance of this Note and all accrued interest or other amounts payable under this Note, at any time prior to payment thereof, may be converted, in whole or in part, into the debt or equity securities or instruments issued in any such financing on the best terms offered to any lender or investor in such financing, but with a twenty percent (20%) discount in price from such best terms. In the event Borrower completes more than one debt or equity financing after the date hereof, then such right of conversion shall apply to each such financing. Borrower shall give Lender prompt written advance of each such financing. Lender may exercise such conversion right by providing written notice of exercise to Borrower, together with delivery of this Note to the Company for surrender. In the event of any stock splits, stock dividends, recapitalizations or similar events after the date of such financing but prior to the date of conversion, then the number and kind of debt or equity securities issuable upon conversion shall be appropriately adjusted. Such conversion shall be effective immediately upon giving such notice and as of such date Borrower shall be treated for all purposes as the holder of the shares issuable upon conversion. As soon as practicable after such conversion, Borrower, at its expense, shall cause to be issued in the name of and delivered to Lender the debt or equity securities or instruments to which Lender shall be entitled upon such conversion. Upon a partial conversion of this Note, this Note shall be surrendered by Lender and replaced with a new Note of like tenor for the remaining balance of the Note surrendered. The new Note shall be delivered to Lender as soon as practicable after such partial conversion. No fractional shares of stock shall be issued upon such conversion. If upon such conversion a fractional share results, the number of shares to be issued upon conversion shall be rounded upwards or downwards to the nearest whole number. 10. Representations of Lender. By acceptance of this Note, Lender represents to Borrower that Lender is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and that this Note and any securities issuable upon any conversion thereof are being acquired for Lender's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution of the same, nor with any present intention of distributing or selling the same. 11. No Shareholder Rights. This Note shall not entitle Lender to any voting rights or any other rights as a shareholder of Borrower until any conversion of this Note. 12. Security. This Note, together with other Convertible Promissory Notes executed by Borrower in favor of Lender and __________________________ (collectively, the "Affiliated Lenders"), shall be secured by a first-priority security interest in tangible and intangible personal property of Borrower pursuant to a Security Agreement being executed by Borrower (the "Security Agreement"). 13. Defaults. Each of the following shall constitute a default under this Note (a "Default"): (a) Failure by Borrower to make any payment due under this Note or under any other agreement with the Affiliated Lenders when due; any representation or warranty by Borrower under this Note or any other agreement with the Affiliated Lenders shall be false or inaccurate in any material respect when made; or failure by Borrower to comply with the provisions of any other covenant, obligation or term of this Note or any other agreement with the Affiliated Lenders; (b) Failure by Borrower to pay when due any other indebtedness or obligations in excess of fifty thousand dollars ($50,000) which shall continue after the applicable grace period, if any, specified in the agreement relating to such indebtedness or obligation; failure by Borrower to comply with the provisions of any other covenant, obligation or term of any agreement relating to such indebtedness or obligation which shall continue after the applicable grace period, if any, specified in such agreement if the effect of such failure is to accelerate, or permit the acceleration of, the due date of such indebtedness or obligation; or any such indebtedness or obligation shall be declared to be due and payable, or required to be prepaid, prior to the stated maturity date thereof; (c) Borrower makes a general assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions to any court for a receiver or trustee for Borrower or any substantial part of its property, commences any proceeding relating to the arrangement, readjustment, reorganization or liquidation under any bankruptcy or similar laws; there is commenced against Borrower any such proceedings which remain undismissed for a period of sixty (60) days; or Borrower by any act indicates its consent or acquiescence in any such proceeding or the appointment of any such trustee or receiver; or (d) Lender shall fail to have a valid, perfected and first-priority security interest in any of the collateral covered by the Security Agreement. 14. Acceleration; No Exclusive Remedy. Upon any Default set forth in Section 13(c) above, all principal, interest and other amounts owing hereunder automatically shall become immediately due and payable. Upon any other Default, Lender may declare, by written notice to Borrower, that all principal, accrued interest and other amounts owing hereunder shall be immediately due and payable to Lender. Notwithstanding anything to the contrary herein, Lender shall be entitled to any and all remedies available to it in the event of a Default hereunder and Lender's pursuance of any particular remedy shall not preclude Lender from seeking any other remedies available to it at law or in equity. 15. Notices. Any notice under this Note shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party. Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Attn: Fax: c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane WA, 99201 Attn: Robert Law, Esq. Tel: (509) 455-3588 Fax: (509) 444-4500 16. Miscellaneous. (a) No delay or omission on the part of Lender in exercising any right under this Note shall operate as a waiver of such right or of any other right under this Note. (b) Borrower hereby waives presentation for payment, demand, notice of demand and of dishonor and non-payment of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party. The pleading of any statute of limitations as a defense to any demand against the Borrower, any endorsers, guarantors and sureties of this Note is expressly waived by each and all of such parties to the extent permitted by law. Time is of the essence under this Note. (c) Any payment hereunder shall first be applied to any enforcement or collections costs, then against accrued interest or late charges hereunder and then against the outstanding principal balance hereof. (d) All payments under this Note shall be made without set-off, deduction or counterclaim. (e) Borrower and Lender intend to comply at all times with applicable usury laws. If at any time such laws would render usurious any amounts due under this Note under applicable law, then it is Borrower's and Lender's express intention that Borrower not be required to pay interest on this Note at a rate in excess of the maximum lawful rate, that the provisions of this section shall control over all other provisions of this Note which may be in apparent conflict hereunder, that such excess amount shall be immediately credited to the principal balance of this Note, and the provisions hereof shall immediately be reformed and the amounts thereafter decreased, so as to comply with the then applicable usury law, but so as to permit the recovery of the fullest amount otherwise due under this Note. (f) This Note may be transferred or assigned by Lender in whole or in part if, on Borrower's reasonable request, Lender provides an opinion of counsel reasonably satisfactory to Borrower that such transfer does not require registration under the Securities Act of 1933, as amended, and applicable state securities law, except that this Note may be transferred by a Lender which is a partnership or limited liability company to a partner, former partner, member, former member or other affiliate of such partner or limited liability company, as the case may be, if (i) the transferee agrees in writing to be subject to the terms of this Note and (ii) Lender delivers notice of such transfer to Borrower. Any rights and obligations of Borrower and Lender under this Note shall be binding upon and inure to the benefit of their respective permitted successors, assigns, heirs, administrators and transferees. (g) If at any time the number of authorized unissued shares of Borrower shall not be sufficient to effect the conversion of this Note, Borrower will take all such corporate action as may be necessary to increase its authorized but unissued shares to such number of shares as shall be sufficient for such purpose. (h) Any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Borrower and Lender in the case of an amendment and only with the written consent of the waiving party in the case of a waiver. (i) All shares issued upon conversion of this Note shall be validly issued, fully paid and non-assessable, and Borrower shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. Borrower shall not be required to pay any transfer tax or other similar charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock in any name other than that of Lender. (j) Borrower will not, by amendment of its Certificate of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Lender under this Note against impairment. Without limiting the generality of the foregoing, Borrower (i) will not increase the par value of any shares of Common Stock issuable upon conversion of this Note above the amount payable therefore upon such exercise, and (ii) will take all such action as may be necessary or appropriate in order that Borrower may validly and legally issue fully paid and non-assessable shares upon conversion of this Note. [remainder of page intentionally left blank] ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its corporate name by its duly authorized officer and dated the day and year first above written. AURA SYSTEMS, INC. By: /s/ Neal F. Meehan Name: Neal F. Meehan Title: Chairman & Chief Executive Officer EX-99 4 koyahsecagree.txt EXHIBIT 10.29 - KOYAH SECURITY AGREEMENT EXHIBIT 10.29 SECURITY AGREEMENT This Security Agreement (this "Agreement") is entered into as of July 24, 2003, by AURA SYSTEMS, INC. a Delaware corporation (the "Debtor"), for the benefit of KOYAH LEVERAGE PARTNERS, L.P., a Delaware limited partnership in its capacity as collateral agent for the Lenders referred to below (the "Secured Party"). R E C I T A L S : A. The Debtor has requested that KOYAH LEVERAGE PARTNERS, L.P. and KOYAH PARTNERS, L.P. (collectively, the "Lenders") extend loans to the Debtor. B. Such loans are to be evidenced by Convertible Promissory Notes dated the date hereof made by the Debtor in favor of the Lenders (the "Notes"). C. The Lenders have required, as a condition of making such loans, that the Debtor grant a security interest in all of its personal property to secure such loans and any other present or future obligations of the Debtor to the Lenders. D. In order to induce the Lenders to make such loans, the Debtor is willing to grant such security interest as further provided herein. NOW, THEREFORE, the Debtor hereby agrees with the Secured Party as follows: ARTICLE I. DEFINITIONS Unless otherwise defined herein, any terms used herein (whether or not capitalized, such as "accounts," "inventory" and "equipment") which are defined in the Uniform Commercial Code as enacted in the State of Washington, as amended from time to time, shall have the meaning assigned to such term therein. Unless otherwise defined herein, any capitalized terms used herein which are defined in the Notes shall have the meaning assigned to them therein. In addition, the following terms shall have the meaning set forth below: "Collateral" means all of the Debtor's personal property and fixtures of every nature (except in the case of (ii)(g) below which is limited to the specific property set forth therein), whether tangible or intangible and whether now owned or hereafter acquired, wherever located, including without limitation the following: (i) (a) All goods; (b) all inventory, merchandise, and personal property held for sale or lease or furnished or to be furnished under contracts of service, all raw materials, work in process, or materials used or consumed in Debtor's business, wherever located and whether in the possession of the Debtor, a warehouseman, a bailee, or any other person; (c) all equipment, machinery, tools, office equipment, supplies, furnishings, furniture, or other items used or useful, directly or indirectly, in the Debtor's business, (d) all fixtures; and (e) all substitutes and replacements therefor, all accessions, attachments, and other additions thereto, all tools, parts and supplies used in connection therewith, all packaging, manuals, warranties and instructions related thereto, and all leasehold or equitable interests therein; (ii) (a) All accounts, accounts receivable, contract rights, contracts receivable, purchase orders, notes, drafts, acceptances, and other rights to payment and receivables; (b) all chattel paper (whether tangible or electronic), documents and instruments (including promissory notes); (c) all money and deposit accounts; (d) all letter of credit rights (whether or not the letter of credit is evidenced by a writing), rights under security, guaranties or other supporting obligations, tort claims and proceeds, insurance claims and proceeds, and tax refund claims and proceeds; (e) all securities and other investment property; (f) all general intangibles and payment intangibles, (g) all patents and patent applications and registrations, trademarks and trademark applications and registrations, service marks and service mark applications and registrations, trade names, trade styles, goodwill, inventions, designs, methods, processes, technology, know-how, intellectual property, drawings, specifications, blue prints, confidential information, trade secrets, customer lists, supplier lists, software and computer programs, mask works, and mask work applications and registrations, copyrights and copyright applications and registrations, goodwill, license agreements, franchise agreements and other licenses, permits, franchises, and agreements of every kind and nature pursuant to which the Debtor possesses, uses or has authority to possess or use any property (whether tangible or intangible) of the Debtor or pursuant to which others possess, use or have authority to possess or use any property (whether tangible or intangible) of the Debtor, and infringement and commercial tort claims which are related to the "AuraGen" based technologies or products ("Patents, Trademarks and Copyrights"), including without limitation the patents and patent applications, trademark and trademark applications and copyrights and copyright applications listed on Schedule 1 hereto; and (h) all business records, software, writings, plans, specifications, schematics, and other recorded data in any form; and (iii) All products and proceeds of the foregoing and all other property received or receivable in disposition of or exchange of the foregoing. "Event of Default" means any default in payment or performance of the Obligations. "Obligations" means any and all obligations and liabilities of every nature of the Debtor to the Lenders or the Secured Party, whether now existing or hereafter incurred, including without limitation those arising out of or in connection with the Notes, this Agreement or any other agreements with the Lenders or the Secured Party. The Obligations shall specifically include any and all principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy, would accrue on such obligations), fees, expenses, indemnities or other obligations or liabilities, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created, or incurred, as well as any and all of such obligations or liabilities that are paid, to the extent such payment is avoided or recovered directly or indirectly from the Lenders or the Secured Party as a preference, fraudulent transfer, or otherwise, together with any and all amendments, modifications, extensions or renewals of the foregoing. ARTICLE II. GRANT OF SECURITY INTEREST To secure the payment and performance of the Obligations, the Debtor hereby grants a continuing security interest in the Collateral, and assigns the Collateral to, the Secured Party. ARTICLE III. COVENANTS OF THE DEBTOR The Debtor shall fully perform each of the covenants set forth below. 3.1 Further Documentation Promptly upon request of the Secured Party and at the Debtor's expense, the Debtor (a) shall prepare, execute, deliver and file any financing statement, any filing with the Patent and Trademark Office, Copyright Office or other applicable office, and any renewal, substitution or correction thereof or any other document and shall take any such further action as the Secured Party may require in perfecting or protecting the security interested granted by the Debtor under this Agreement or in otherwise obtaining the full benefits of this Agreement and (b) authorizes the Secured Party to prepare, execute, deliver and file any such documents and to take any such actions on behalf of the Debtor. 3.2 Patents, Trademarks and Copyrights Schedule 1 lists all Patents, Trademarks and Copyrights currently owned by the Debtor. Promptly upon any change in the Patents, Trademarks and Copyrights owned by the Debtor, the Debtor shall provide the Secured Party with an updated Schedule 1 listing all Patents, Trademarks and Copyrights then owned by the Debtor. Schedule 2 lists all Patents, Trademarks and Copyrights currently licensed to the Debtor. Promptly upon any change in the Patents, Trademarks and Copyrights licensed to the Debtor by third parties, the Debtor shall provide the Secured Party with an updated Schedule 2 listing all Patents, Trademarks and Copyrights then licensed to the Debtor. 3.3 Pledges Promptly upon request of the Secured Party and at Debtor's expense, the Debtor shall deliver and pledge to the Secured Party, endorsed or accompanied by instruments of assignment or transfer satisfactory to the Secured Party, any Collateral consisting of instruments, investment property, documents, general intangibles or chattel paper. 3.4 Control Promptly upon request of the Secured Party and at Debtor's expense, the Debtor shall cooperate with the Secured Party in obtaining control with respect to any Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper. 3.5 Maintenance of Records The Debtor shall keep and maintain satisfactory and complete records of the Collateral including but not limited to a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. The Debtor shall mark its books and records pertaining to the Collateral to evidence this Agreement and the security interest granted herein. Promptly upon request of the Secured Party, the Debtor shall deliver and turn over to the Secured Party all books and records pertaining to the Collateral at any time after the occurrence of an Event of Default. 3.6 Liens Except for existing licenses of Patents, Trademarks and Copyrights by the Debtor to third parties set forth on Schedule 3 to this Agreement, the Debtor owns the Collateral free and clear of liens, charges, pledges, security interests, encumbrances or other claims or interests in the Collateral, and the Debtor will neither create nor permit the existence of any of the foregoing without the prior written consent of the Secured Party. 3.7 Disposition of Collateral The Debtor shall not sell, license, lease, transfer or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party, except for sales of inventory, collection of rights to payment, and disposition of equipment or inventory which is obsolete or being replaced, all in the ordinary course of business in accordance with past practices. 3.8 Limitations on Amendments, Modifications, Terminations, Waivers and Extensions of Contracts and Agreements Giving Rise to Accounts Without the prior written consent of Secured Party, the Debtor will not (a) amend, modify, terminate, waive or extend any provision of any agreement giving rise to an account, general intangible, instrument, chattel paper or other right to payment, licensing any Patents, Trademarks or Copyrights to the Debtor or by the Debtor or otherwise relating to the Collateral, in any manner that could reasonably be expected to have a material adverse effect on the value of any Collateral or (b) fail to exercise promptly and diligently every material right that it may have under each such agreement, other than any right of termination (which shall only be exercised with the prior written consent of the Secured Party). 3.9 Indemnification The Debtor agrees to pay, and to indemnify the Secured Party and hold the Secured Party harmless from, all liabilities, costs and expenses (including legal fees and expenses) in connection with protecting or realizing on the Collateral, enforcing any rights or remedies of the Secured Party or otherwise arising out of this Agreement. In any suit, proceeding or action brought by the Secured Party under any account or other right to payment to enforce payment of any sum owing thereunder or to enforce any provisions of any account or other right to payment, the Debtor will indemnify the Secured Party and hold the Secured Party harmless from all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment, reduction or liability whatsoever of any account debtor thereunder arising out of a breach by the Debtor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or its successors from the Debtor. 3.10 Further Identification of Collateral The Debtor will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may request, all in reasonable detail. 3.11 Notices The Debtor will advise the Secured Party promptly in reasonable detail of any lien, charge, pledge, security interest, encumbrance or other claim or interest asserted against any of the Collateral and (b) of the occurrence of any other event that could reasonably be expected to have a material adverse effect on the Collateral. 3.12 Changes in Locations, Name, Etc. The Debtor will not (a) change its state of organization, (b) change the location of its chief executive office/chief place of business or remove its books and records from the locations set forth in Schedule 4 to this Agreement or (c) change its name, identity or structure to such an extent that any financing statement filed by the Secured Party in connection with this Agreement would become ineffective or seriously misleading, unless it shall have given the Secured Party at least 30 days prior written notice thereof. 3.13 Further Assurances The Debtor agrees to take all actions which the Secured Party may request to perfect or maintain the perfection of, or to otherwise protect, the security interest granted herein and the Debtor authorizes the Secured Party to take such actions on behalf of the Debtor, including without limitation (a) filing (including electronic or facsimile filing) financing statements describing the Collateral, which may include descriptions broader than as set forth in this Agreement and (b) filing any documents with the Patent and Trademark Office, Copyright Office or any other applicable office. The Debtor agrees that where allowed by law, a carbon, photographic or other reproduction of a financing statement or this Agreement is sufficient as a financing statement. 3.14 Insurance The Debtor (a) will keep the Collateral continuously insured at its expense against fire, theft, and other hazards in amounts and with insurers as shall be sufficient to fully protect the Collateral, as reasonably approved by the Secured Party, (b) will include in such policies of insurance to the Secured Party clauses making any loss payable to the Secured Party as its interest may appear and agreeing to notify Secured Party of any cancellation or threatened cancellation not less than 30 days prior to the effective date of such cancellation and (c) will deliver copies of such policies of insurance to the Secured Party upon request. ARTICLE IV. REPRESENTATIONS AND WARRANTIES The Debtor hereby makes the following representations and warranties: 4.1 Title to Collateral The Debtor has good and marketable title to all of the Collateral, free and clear of all liens, charges, pledges, security interests, encumbrances or other claims or interests. 4.2 No Impairment of Collateral None of the Collateral shall be impaired or jeopardized because of the security interest granted herein. 4.3 Other Agreements The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof will not result in the breach of any of the terms, conditions, or provisions of, or constitute a default under, or conflict with or cause any acceleration of any obligation under any agreement or other instrument to which the Debtor is a party or by which the Debtor is bound or result in the violation of any applicable law. 4.4 No Approvals No approvals of any governmental entity or third party are required in connection with the security interest herein granted. 4.5 Authority The Debtor has full power and authority to grant to the Secured Party a security interest in the Collateral. 4.6 Location of Records The address(es) of the office where the books and records of the Debtor are kept concerning the Collateral is set forth on Schedule 4 to this Agreement. 4.7 State of Organization The Debtor's state of organization is set forth on Schedule 4 to this Agreement. 4.8 Chief Executive Office The Debtor's chief executive office and chief place of business is located at the address set forth on Schedule 4 to this Agreement. 4.9 Trade Names The Debtor conducts its business only under its legal name except for any additional trade names set forth on Schedule 4 to this Agreement. ARTICLE V. THE SECURED PARTY'S RIGHTS WITH RESPECT TO THE COLLATERAL 5.1 No Duty on the Secured Party's Part The Secured Party and the Lenders shall not be required to realize upon any Collateral, except at their option upon the occurrence of any Event of Default; collect the principal, interest or payment due thereon or exercise any rights or options of the Debtor pertaining thereto; make presentment, demand or protest; give notice of protest, nonacceptance or nonpayment; or do any other thing for the protection, enforcement or collection of any Collateral. The powers conferred on the Secured Party and the Lenders hereunder are solely to protect the Secured Party's and the Lenders' interests in the Collateral and shall not impose any duty upon the Secured Party or the Lenders to exercise any such powers. The Secured Party and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers; and neither the Secured Party nor the Lenders shall be responsible to the Debtor for any act or failure to act hereunder. 5.2 Negotiations with Account Debtors Upon the occurrence of any Event of Default, the Secured Party may, in its sole discretion, extend or consent to the extension of the time of payment or maturity of any instruments, accounts, chattel paper, general intangibles or other rights to payment. 5.3 Right to Assign The Secured Party and the Lenders may assign or transfer the whole or any part of the Obligations and may transfer therewith as collateral security the whole or any part of the Collateral; and all obligations, rights, powers and privileges herein provided shall inure to the benefit of the assignee and shall bind the successors and assigns of the parties. 5.4 Duties Regarding Collateral Beyond the safe custody thereof, the Secured Party shall not have any duty as to any Collateral in its possession or control, or as to any preservation of any rights of or against other parties. 5.5 Collection From Account Debtors Upon the occurrence of any Event of Default, the Debtor shall, upon demand by the Secured Party (and without any grace or cure period), notify all account debtors to make payment to the Secured Party of any amounts due or to become due. The Debtor authorizes the Secured Party to contact the account debtors for the purpose of having all or any of them pay their obligations directly to the Secured Party. Upon demand by the Secured Party, the Debtor shall enforce collection of any indebtedness owed to it by account debtors. 5.6 Inspection The Secured Party and its designees, from time to time at reasonable times, may inspect, audit and make copies of and extracts from all records and all other papers in the possession of the Debtor in connection with the Collateral. ARTICLE VI. THE SECURED PARTY'S RIGHTS AND REMEDIES 6.1 Acceleration; Remedies (a) Upon the occurrence of any Event of Default, the Secured Party and the Lenders shall have all rights and remedies available to it under the Notes, this Agreement, and any other documents or agreements or available at law or in equity, including without limitation the Uniform Commercial Code. The Secured Party and the Lenders may proceed to enforce any or all of such rights and remedies or realize on any or all security or guaranties for the Obligations in any manner or order it deems expedient without regard to any equitable principes of marshaling or otherwise. No failure or delay on the part of the Secured Party or the Lenders in exercising any right, power or privilege hereunder and no course of dealing shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any right, power or privilege. The rights and remedies of the Secured Party and the Lenders are cumulative and not exclusive of any rights or remedies that the Secured Party or the Lenders would otherwise have. No notice to or demand on the Debtor, in any case, shall entitle the Debtor to any other or further notice or demand in similar or other circumstances or shall constitute a waiver of the right of the Secured Party or the Lenders to any other or further action in any circumstances without notice or demand. 6.2 Notice of Sale The Debtor hereby acknowledges and agrees that written notice mailed to the Debtor at the address designated herein ten days prior to the date of public or private sale of any of the Collateral shall constitute commercially reasonable notice. 6.3 Disposition of Collateral In addition to all other rights and remedies available to the Secured Party and the Lenders upon the occurrence of an Event of Default, the Secured Party may dispose of any of the Collateral at public or private sale in its then present condition or following such preparation and processing as the Secured Party deems commercially reasonable. Such sale may include licensing of the Collateral on an exclusive or non-exclusive basis, on a worldwide or geographically limited basis and on an all-uses or limited uses basis. For the purpose of enabling the Secured Party to exercise its rights and remedies hereunder, the Debtor hereby grants to the Secured Party an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Debtor) to use, license or sub-license any of the Collateral, including in such license access to all media in which any of the Collateral may be recorded or stored and to all computer software and programs used for the compilation or printout thereof. The Secured Party has no duty to prepare or process the Collateral prior to sale. The Secured Party may disclaim warranties of title, possession, quiet enjoyment and the like. Such actions by the Secured Party shall not affect the commercial reasonableness of the sale. Further, the Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. ARTICLE VII. APPOINTMENT OF COLLATERAL AGENT The Lenders hereby appoint KOYAH LEVERAGE PARTNERS, L.P. as their collateral agent to act as the Secured Party hereunder for all purposes in obtaining, maintaining, protecting and enforcing the security interest in the Collateral and hereby authorize KOYAH LEVERAGE PARTNERS, L.P., in its sole discretion, to enter into all such agreements and to take all such actions as KOYAH LEVERAGE PARTNERS, L.P. in its sole discretion, deems necessary or advisable in connection therewith. In so acting as collateral agent, KOYAH LEVERAGE PARTNERS, L.P. shall act for the ratable benefit of the Lenders and any amounts realized or costs incurred by the Secured Party in connection with this Agreement shall be ratably allocated between the Lenders. ARTICLE VIII. GENERAL PROVISIONS 8.1 The Secured Party's Appointment as Attorney-in-Fact (a) The Debtor hereby irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Secured Party's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement; and without limiting the generality of the foregoing, the Debtor hereby gives the Secured Party the power and right, on behalf of the Debtor, without consent by or notice to the Debtor, to do the following: (i) upon the occurrence of any Event of Default, to transfer to the Secured Party or to any other person all or any of the Collateral, to endorse any instruments pledged to the Secured Party and to fill in blanks in any transfers of Collateral, powers of attorney or other documents delivered to the Secured Party; (ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral; (iii) upon the occurrence of any Event of Default, (A) to take possession of, endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any account, instrument or general intangible or with respect to any other Collateral and (B) to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Secured Party for the purpose of collecting all such moneys due under any account, financial assets, instrument, investment property, or general intangible or with respect to any other Collateral whenever payable; and (iv) upon the occurrence of any Event of Default, (A) to direct any party liable for any payment under any of the Collateral to make payment of all moneys due or to become due thereunder directly to the Secured Party or as the Secured Party shall direct; (B) to ask for, demand, collect and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharge or releases as the Secured Party may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes; and to do, at the Secured Party's option and the Debtor's expense, at any time or from time to time, all acts and things that the Secured Party deems necessary to protect, preserve or realize upon the Collateral and the Secured Party's security interest therein and to effect the intent of this Agreement, all as fully and effectively as the Debtor might do. (b) The Debtor hereby ratifies all that such attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (c) The Debtor also authorizes the Secured Party, at any time and from time to time, to execute, in connection with the sale provided for in Article VI hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (d) The powers conferred on the Secured Party hereunder are solely to protect the Secured Party's interests in the Collateral and shall not impose any duty upon the Secured Party or the Lenders to exercise any such powers. The Secured Party and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act hereunder. (e) The Debtor shall pay or reimburse the Secured Party for all costs and expenses, including attorneys fees, incurred by the Secured Party while acting as the Debtor's attorney-in-fact hereunder. 8.2 Termination of Agreement This Agreement shall remain in full force and effect until the Obligations have been fully and finally discharged. 8.3 Severability If any provision of this Agreement is for any reason and to any extent determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Agreement will be unaffected and interpreted so as best to reasonably effect the intent of the parties hereto. Such void or unenforceable provision of this Agreement shall be replaced with a valid and enforceable provision so as to achieve, to the greatest extent possible, the economic, business and other purposes of the void or unenforceable provision. 8.4 Waiver No waiver by any party of any breach of any provision hereof shall constitute a waiver of any other breach of that or any other provision hereof. 8.5 Assignment All rights, powers, privileges and immunities herein granted to the Secured Party and the Lenders shall extend to their successors and assigns and any other legal holder of the Obligations or this Agreement, with full right by the Secured Party and the Lenders to assign and/or sell the same. 8.6 Successors The rights and obligations of the parties hereto shall inure to the benefit of, and be binding and enforceable upon, the respective successors and assigns of the parties. 8.7 Entire Agreement This Agreement constitutes the entire agreement of the parties hereto concerning the subject matter hereof, all prior discussions, proposals, negotiations and understandings having been merged herein. This Agreement or any provision hereof may be (i) modified or amended, but only by a writing signed by all parties at such time or (ii) waived (either generally or in a particular instance, either retroactively or prospectively, either for a specified period of time or indefinitely, either with or without consideration), but only by a writing signed by the party granting such waiver. 8.8 Governing Law; Jurisdiction; Venue; Jury Trial This Agreement shall be governed by, and interpreted under, the laws of the State of Washington applicable to contracts made and to be performed therein, without giving effect to the principles of conflicts of law. The parties hereby (i) agree that any legal suit, action or proceeding arising out of or relating to this Agreement must be instituted in a federal or state court located in the County of Spokane, State of Washington, (ii) irrevocably submit to the jurisdiction of any such court and waive any objection to the laying of venue in, or the inconvenience of, such forum and (iii) irrevocably waives all rights to trial by jury in any action, suit or proceeding arising out of or related to this Agreement, the Notes or any other agreement or document between the Debtor and the Secured Party or the Lenders. 8.9 Notices All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial messenger or courier service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to each party at the address (or at such other address for a party as shall be specified by like notice) set forth below; provided, however, that notices sent by mail will not be deemed given until received. Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Attn: Neal Meehan Fax: (310) 643-8719 Koyah Leverage Partners, L.P. 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. c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane WA, 99201 Attn: Robert Law Fax: (509) 444-4500 8.10 Costs and Expenses The Debtor hereby agrees to pay to the Secured Party and the Lenders upon demand all costs and expenses, including attorney's fees, incurred in connection with the administration of this Agreement, including without limitation all filings or other actions required by the Secured Party in connection with perfecting or otherwise protecting the security interest granted hereunder. In addition, the Borrower hereby agrees to pay to the Secured Party upon demand all costs and expenses, including attorney's fees, incurred in connection with the enforcement of this Agreement, collection of the Obligations and the protection, preservation, collection or sale of or other realization upon the Collateral, including without limitation in any out-of-court workout, any court action, any appeal or any bankruptcy proceeding. 8.11 Counterparts This Agreement may be executed in any number of counterparts, each of each of which will be an original, but all of which together will constitute one and the same instrument. 8.12 Title and Subtitles The titles of the sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Debtor, the Secured Party and the Lenders have caused this Agreement to be duly executed as of the day and year first above written. "Debtor" AURA SYSTEMS, INC. By: /s/ Neal F. Meehan ---------------------------------------------------------- Name: Neal F. Meehan ---------------------------------------------------------- Title: Chairman & Chief Executive Officer ---------------------------------------------------------- "Secured Party" and "Lender" KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: /s/ Robert J. Law ------------------------------------------------------ Name: Robert J. Law Title: Vice President "Lender" KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: /s/ Robert J. Law ------------------------------------------------------ Name: Robert J. Law Title: Vice President SCHEDULE 1 Patents and Patent Applications, Trademark and Trademark Applications and Copyrights and Copyright Applications 1. Patents. ------- Any and all domestic and foreign patent registrations, patent applications, patentable invention rights or patent-related rights to current and future interests owned by Debtor or assigned to Debtor, related to the "AuraGen" based technologies, including but not restricted to the following patent registrations and patent applications: 5,734,217 Induction Machine using Ferromagnetic Conducting Material in Rotor 6,157,175 Mobile Power Generation System Pending Mobile Power Generation System Pending Switched Reluctance Motor Delivering Constant Torque From Three Phase Sinusoidal Voltages Pending Bi-Directional Power Supply Circuit 2. Trademarks. ---------- Any and all domestic and foreign trademark registrations, trademark applications, trade and service mark rights, or other trademark-related rights to current and future interests owned by Debtor or assigned to Debtor, relating generally to "AuraGen" based products, including but not restricted to the following trademark registrations and trademark applications: Serial Number Reg. Number Word Mark 75977693 2202313 AURAGEN -------- ------- ------- 75594235 2477031 AURAGEN POWER. ON THE GO. -------- ------- ------------------------- 75559987 2372115 AURA -------- ------- ---- 75237652 AURAGEN OF POWER -------- ---------------- 75141345 AURAGEN -------- ------- 75141344 AURAPOWER -------- --------- 74472095 1991593 AURA -------- ------- ---- 74369064 2196818 AURA -------- ------- ---- 3. Copyrights. ---------- Any and all domestic and foreign copyright registrations, copyright applications or other copyright-related rights to current and future interests owned by Debtor or assigned to Debtor, relating to the "AuraGen" based technologies or "AuraGen" products. [Remainder of page intentionally left blank] SCHEDULE 2 Patents and Patent Applications, Trademarks and Trademark Applications and Copyrights and Copyright Applications Licensed to the Debtor None SCHEDULE 3 Patents and Patent Applications Trademarks and Trademark Applications, And Copyrights and Copyright Applications Licensed By the Debtor None SCHEDULE 4 Debtor Information State of organization: Delaware Address of chief executive office: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Address(es) where books and records are kept: Same Additional trade names: None EX-99 5 koyahamendwaiv.txt EXHIBIT 10.30 - KOYAH AMENDMENT WAIVER EXHIBIT 10.30 AMENDMENT AND WAIVER AGREEMENT THIS AMENDMENT AND WAIVER AGREEMENT (this "Agreement") is entered into as of August 6, 2003 between AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and KOYAH LEVERAGE PARTNERS, L.P. and KOYAH PARTNERS, L.P. each a Delaware limited partnership (collectively the "Lenders"). WHEREAS, in connection with loans to the Company by the Lenders, the Company and the Lenders entered into an Agreement dated as of July 24, 2003 (the "Agreement"), the Company executed in favor of the Lenders four Convertible Promissory Notes (collectively, the "Notes") dated July 24, 2003, the Company executed in favor of Koyah Leverage Partners, L.P. (as collateral agent for the Lenders) a Security Agreement dated as of July 24, 2003 (the "Security Agreement" and together with the Agreement and the Notes, the "Transaction Documents"); WHEREAS, the Company has requested that the Lenders amend or waive certain provisions of the Transaction Documents and the parties wish to correct or clarify certain other provisions of the Transaction Documents; and WHEREAS, the parties are entering into this Agreement to provide for such amendments and waivers, on the terms and conditions set forth herein. NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, the parties do hereby agree as follows: 1. Section 1(g)(ii) of Agreement. The Lenders hereby waive any breach of the Company's representation and warranty contained in Section 1(g)(ii) of the Agreement arising from the existing defaults set forth under the heading "Defaults" in the Schedule of Exceptions attached to this Agreement, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents (as modified by the amendments and waivers set forth in this Agreement) and this Agreement. 2. Section 1(i) of Agreement. The Lenders hereby waive any breach of the Company's representation and warranty contained in Section 1(i) of the Agreement arising from the existing liens set forth under the heading "Liens" in the Schedule of Exceptions attached to this Agreement, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents (as modified by the amendments and waivers set forth in this Agreement) and this Agreement. 3. Section 3(l) of Agreement. The word "rulers" contained in the first sentence of Section 3(l) of the Agreement hereby is amended to read "rules". 4. Section 3 of Notes. Section 3 of each Note hereby is amended in its entirety to read as follows: In light of the conversion feature of this Note and to protect Lender's right of conversion hereunder, Borrower shall not have the right to prepay the outstanding principal balance of this Note or accrued interest thereon, in whole or in part, prior to the Maturity Date without the prior written consent of Lender; provided, however, that Borrower may prepay such principal balance or accrued interest, in whole only, prior to the Maturity Date without such consent if Borrower (i) gives Lender twenty (20) days prior written notice of such prepayment and (ii) together with and at the time of such prepayment, pays Lender a fee equal to twenty percent (20%) of the outstanding principal balance as compensation to Lender for the loss of its continued conversion rights (which fee Lender shall have the right, at its option, to convert pursuant to Section 9 below in lieu of payment thereof in the same manner as principal, interest or other amounts payable under this Note). The parties acknowledge and agree that the damages suffered by Lender in the event of the loss of its continued conversion right is difficult to determine and that the parties have set such fee as liquidated damages in an amount that they believe reasonably estimates such damages. 5. Section 5 of Notes. Section 5 of each Note hereby is amended in its entirety to read as set forth below: If any payment of principal or interest under this Note shall not be made within five (5) days after the due date, this Note shall bear interest (after as well as before judgment) at a rate of five percent (5%) per annum above the rate of interest which would otherwise have been payable under this Note or the maximum rate of interest permitted to be charged by applicable law, whichever is less. 6. Section 9 of Notes. The first sentence of Section 9 of each Note hereby is amended to add ", fees" after the words "accrued interest" contained in such Section. 7. Section 13(b) of Notes. The Lenders hereby waive any breach of the event of default contained in Section 13(b) of each Note arising from the existing defaults set forth under the heading "Defaults" in the Schedule of Exceptions attached to this Agreement, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents (as modified by the amendments and waivers set forth in this Agreement) and this Agreement. 8. Section 13(d) of Notes. The Lenders hereby waive any breach of the event of default contained in Section 13(d) of each Note arising from the existing liens set forth under the heading "Liens" in the Schedule of Exceptions attached to this Agreement, if any, which may cover collateral under the Security Agreement and have priority under applicable law over the security interest of the Security Agreement, so long as the Company otherwise remains in compliance with all of the provisions of the Transaction Documents (as modified by the amendments and waivers set forth in this Agreement) and this Agreement. 9. Section 16(g) of Notes. Section 16(g) of each Note hereby is amended to add at the end of such Section a new sentence which reads as follows: The parties acknowledge that Borrower currently does not have any authorized but unissued shares of its common stock available for issuance and Borrower hereby agrees to use its best efforts to take action to call a shareholder meeting and increase its authorized but unissued common stock as soon as practicable. 10. Section 16(i) of Notes. Section 16(i) of each Note hereby is amended to delete the words "of Common Stock". 11. Section 3.5 of Security Agreement. The third sentence of Section 3.5 of the Security Agreement hereby is amended to read as follows: Promptly upon request of the Secured Party, the Debtor shall deliver and turn over to the Secured Party copies of all books and records pertaining to the Collateral. 12. Section 3.6 of Security Agreement. The Lenders hereby waive any breach of the Company's covenant contained in Section 3.6 of the Security Agreement arising from the existing liens set forth under the heading "Liens" in the Schedule of Exceptions attached to this Agreement, so long as the Company otherwise remains in compliance with all of the provisions of the Transaction Documents (after giving effect to the amendments and waivers set forth in this Agreement) and this Agreement. 13. Section 4.1 of Security Agreement. The Lenders hereby waive any breach of the Company's representation and warranty contained in Section 4.1 of the Security Agreement arising from the existing liens set forth under the heading "Liens" in the Schedule of Exceptions attached to this Agreement, so long as the Company otherwise remains in compliance with all of the provisions of the Transaction Documents (after giving effect to the amendments and waivers set forth in this Agreement) and this Agreement. 14. Reaffirmation and Survival of Representations. The Company hereby re-affirms and re-makes all of the representations and warranties contained in the Transaction Documents as of the date hereof (as modified by the amendments and waivers set forth in this Agreement), and such representations and warranties shall survive the closing of the transactions contemplated by the Transaction Documents and this Agreement. 15. Amendments and Waivers. 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 written consent of the Company and the Lenders in the case of an amendment and only with the written consent of the waiving party in the case of a waiver. 16. Entire Agreement. This Agreement, together with the Transaction Documents, constitute the entire agreement of the parties concerning the subject matter hereof and thereof, all prior discussions, proposals, negotiations and understandings having been merged herein and therein. Except as specifically modified by this Agreement, the Transaction Documents shall remain unchanged and in full force and effect. 17. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company and the Lenders. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as may be expressly provided in this Agreement. 18. Severability. If any part of this Agreement is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 19. Attorneys' Fees. The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Lenders in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought. 20. Governing Law. The Agreement shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, 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. 21. Miscellaneous. Any notice under this Agreement shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party. Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Attn: Neal Meehan Fax: 310-643-8719 Koyah Leverage Partners, L.P. 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. c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane WA 99201 Attn: Robert Law Fax: 509-444-4500 22. The Company shall pay the costs and expenses of legal counsel to the Lenders in connection with the negotiation, execution and delivery of this Agreement, the Transaction Documents, and any other related agreements with the Lenders as well as the consummation of the transactions contemplated by and the administration of such agreements and any amendments or waivers of such agreements. The Company shall pay such costs and expenses immediately upon submittal, and the Lenders may apply any retainer held by them or their legal counsel against such costs and expenses. Alternatively, the Lenders may deduct some or all of such costs and expenses from the proceeds of the loans from the Lenders when disbursing such loans and/or pay such costs and expenses directly and then the amounts so paid shall constitute advances made under the Notes. Notwithstanding that the Company is paying such costs and expenses, the Company acknowledges and agrees that such legal counsel is representing only the Lenders, and not the Company. [Remainder of Page Intentionally Left Blank] [Signature Page to Amendment and Waiver Agreement] ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first set forth above. AURA SYSTEMS, INC. By: /s/ Neal F. Meehan Name: Neal F. Meehan Title: Chairman & Chief Executive Officer KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: /s/ Robert J. Law Name: Robert J. Law Title: Vice President KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: /s/ Robert J. Law Name: Robert J. Law Title: Vice President Schedule of Exceptions Liens 1. El Segundo real property and facilities are subject to a security interest related to mortgage financing and a pending sale/leaseback transaction. 2. Note receivable for approximately $1,000,000 under the Alpha Ceramics purchase agreement has been assigned as collateral to the purchasers in such sale/leaseback transaction. 3. Security interest in 177,000 shares of Telemac Corporate held as a long-term investment has been granted to a lender to secure a $200,000 note issued in May 2003. Defaults 1. Shareholder litigation (Barovich/Chiau et al) judgment settlement for approximately $789,000 is in default. In April 2003, this creditor served Writs of Execution against one of the Company's bank accounts but has taken no further action. 2. Convertible notes issued in August - October 2002 for a total principal amount of $625,000 are or may be in default. EX-99 6 koyahaddadvanceagree.txt EXHIBIT 10.31 - KOYAH ADDITIONAL ADVANCE AGREE. EXHIBIT 10.31 ADDITIONAL ADVANCE AGREEMENT THIS ADDITIONAL ADVANCE AGREEMENT (this "Agreement") is entered into as of August 18, 2003 between AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and KOYAH LEVERAGE PARTNERS, L.P. and KOYAH PARTNERS, L.P., each a Delaware limited partnership (collectively the "Lenders"). WHEREAS, in connection with loans to the Company by the Lenders, the Company and the Lenders entered into an Agreement dated as of July 24, 2003 (the "Agreement"), the Company executed in favor of the Lenders four Convertible Promissory Notes dated July 24, 2003 (collectively, the "Notes"), and the Company executed in favor of Koyah Leverage (as collateral agent for the Lenders) a Security Agreement dated as of July 24, 2003 (the "Security Agreement"); WHEREAS, the Company and the Lenders also entered into an Amendment and Waiver Agreement dated as of August 6, 2003 (the "Amendment"); WHEREAS, the Lenders have made certain additional optional advances to the Company under (i) the Note in the favor of Koyah Leverage in the maximum principal amount of $800,000 and (ii) the Note in favor of Koyah in the maximum principal amount of $200,000 (collectively, the "Optional Advance Notes"); WHEREAS, the Company owns 177,777 shares (the "Telemac Shares") of common stock of Telemac Corporation, a Delaware corporation ("Telemac"), which are currently encumbered by a security interest granted to Judgment Acquisitions, Inc. ("Judgment Acquisitions") to secure a loan made to the Company by Judgment Acquisitions (the "Judgment Acquisitions Loan"); WHEREAS, the Company is in default under the Judgment Acquisitions Loan; WHEREAS, the Company has requested that the Lenders make further additional optional advances under the Optional Advance Notes to pay off the Judgment Acquisitions Loan (the "Further Advances"); WHEREAS, in connection therewith, the Lenders are requiring, as a condition to making the Further Advances, that the Lenders receive a first-priority pledge of and security interest in the Telemac Shares; and WHEREAS, the parties are entering into this Agreement to provide for the Further Advances and related matters, on the terms and conditions set forth herein. NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, the parties do hereby agree as follows: 1. Further Advances. ---------------- The Company hereby requests that the Lenders make advances in an aggregate amount of $_____________ (the "Further Advances") as further additional optional advances under the Optional Advance Notes. The Company hereby directs the Lenders to disburse the Further Advances in the form of direct payment to Judgment Acquisitions in order to pay off the Judgment Acquisitions Loan in full. 2. Escrow Arrangements with Judgment Acquisitions. ---------------------------------------------- Prior to such disbursement of the Further Advances directly to Judgment Acquisitions, Judgment Acquisitions shall enter into escrow arrangements with the Lenders satisfactory to them, with Smith, Gambrell & Russell, LLP in Atlanta, Georgia acting as escrow agent (the "Escrow Agent"). Such escrow arrangements shall provide, among other things, for the Escrow Agent, upon receipt of confirmation of wire transfer(s) of the Further Advances to Judgment Acquisitions, to deliver to the Lenders (or their designee) (i) an acknowledgment from Judgment Acquisitions of satisfaction in full of the Judgment Acquisitions Loan and termination and release of any security interest in favor of Judgment Acquisitions in the Telemac Shares and (ii) stock certificate No. C2233 evidencing the Telemac Shares. 3. Pledge of Telemac Shares. ------------------------ In addition to the security interest in the Telemac Shares already arising under the Security Agreement, the Company shall execute and deliver a Stock Pledge Agreement satisfactory to the Lenders in favor of Koyah Leverage (as collateral agent for the Lenders) to further evidence and effectuate a first-priority pledge of and security interest in the Telemac Shares (the "Stock Pledge Agreement"). 4. Additional Representation and Reaffirmation of Prior Representations; ---------------------------------------------------------------------------- Survival. --------- In addition to making the additional representations and warranties contained in the Stock Pledge Agreement, the Company hereby re-affirms and re-makes all of the representations and warranties contained in the Agreement, the Notes and the Security Agreement as of the date hereof (as modified by the amendments and waivers set forth in the Amendment). For purposes of this Agreement as well as reaffirming the representations and warranties contained in the Agreement, the term "Transaction Documents" as used herein and therein shall mean the Agreement, the Notes, the Security Agreement, the Amendment, the Stock Pledge Agreement and this Agreement. All of such additional and re-affirmed representations and warranties shall survive the closing of the transactions contemplated by this Agreement and the other Transaction Documents. 5. Amendments and Waivers. ------------------------ 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 written consent of the Company and the Lenders in the case of an amendment and only with the written consent of the waiving party in the case of a waiver. 6. Entire Agreement. ------------------ This Agreement, together with the other Transaction Documents, constitute the entire agreement of the parties concerning the subject matter hereof and thereof, all prior discussions, proposals, negotiations and understandings having been merged herein and therein. Except as specifically modified by this Agreement, the other Transaction Documents shall remain unchanged and in full force and effect. 7. Successors. ---------- This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company and the Lenders. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as may be expressly provided in this Agreement. 8. Severability. ------------ If any part of this Agreement is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 9. Attorneys' Fees. --------------- The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Lenders in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought. 10. Governing Law. -------------- The Agreement shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, 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. 11. Miscellaneous. -------------- Any notice under this Agreement shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party. Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Attn: Neal Meehan Fax: 310-643-8719 Koyah Leverage Partners, L.P. 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. c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane WA 99201 Attn: Robert Law Fax: 509-444-4500 12. The Company shall pay the costs and expenses of legal counsel to the Lenders in connection with the negotiation, execution and delivery of this Agreement (including those in connection with prior discussions among the parties of a possible purchase of the Telemac Shares before a change in structure to the Further Advances instead), the other Transaction Documents, and any other related agreements with the Lenders as well as the consummation of the transactions contemplated by and the administration of such agreements and any amendments or waivers of such agreements. The Company shall pay such costs and expenses immediately upon submittal, and the Lenders may apply any retainer held by them or their legal counsel against such costs and expenses. Alternatively, the Lenders may deduct some or all of such costs and expenses from the proceeds of the loans from the Lenders when disbursing such loans and/or pay such costs and expenses directly and then the amounts so paid shall constitute advances made under the Optional Advance Notes. Notwithstanding that the Company is paying such costs and expenses, the Company acknowledges and agrees that such legal counsel is representing only the Lenders, and not the Company. [Remainder of Page Intentionally Left Blank] [SIGNATURE PAGE TO ADDITIONAL ADVANCE AGREEMENT] ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first set forth above. AURA SYSTEMS, INC. By: /s/ Neal F. Meehan Name: Neal F. Meehan Title: Chairman & Chief Executive Officer KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: /s/ Robert J. Law Name: Robert J. Law Title: Vice President KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: /s/ Robert J. Law Name: Robert J. Law Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----