-----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, QcIxy4lrx/JjN7mXl+kTgZR87y/Q4IPgBOwt27O6+w6EUlwoGmRyIz3Yy5ABh5Ub gmZYXn0fIhcoeFn3v5z6kw== 0001144204-04-015949.txt : 20041008 0001144204-04-015949.hdr.sgml : 20041008 20041008141610 ACCESSION NUMBER: 0001144204-04-015949 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20041008 DATE AS OF CHANGE: 20041008 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Ben Moshe Yair CENTRAL INDEX KEY: 0001304126 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: BUSINESS PHONE: 323 954 8888 MAIL ADDRESS: STREET 1: 7250 BEVERLY BOULEVARD STREET 2: #101 CITY: LOS ANGELES STATE: CA ZIP: 90036 SUBJECT COMPANY: 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: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-39865 FILM NUMBER: 041071935 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 SC 13D 1 v07362_sc13dmoshe.txt ================================================================================ SEC POTENTIAL PERSONS WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION 1746 CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM (11-02) DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER. ================================================================================ ========================== OMB APPROVAL ========================== OMB Number: 3235-0145 ========================== Expires: December 31, 2005 ========================== Estimated average burden hours per response. . .11 ========================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ________)* AURA SYSTEMS, INC. - -------------------------------------------------------------------------------- (Name of Issuer) Common Stock - -------------------------------------------------------------------------------- (Title of Class of Securities) 051526 10 1 - -------------------------------------------------------------------------------- (CUSIP Number) Melinda Mason, Secretary Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 310-643-5300 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) September 14, 2004 - -------------------------------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of ss.ss.240.13d-1(e), 240.13d-1(f) or 240.13d-1(G), check the following box. [_] Page 1 of 6 CUSIP No. 051526101 - -------------------------------------------------------------------------------- 1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only). Ben Moshe, Yair - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (See Instructions) (a) (b) [X] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds (See Instructions) OO, PF - -------------------------------------------------------------------------------- 5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) - -------------------------------------------------------------------------------- 6. Citizenship or Place of Organization United States of America - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power 130,505,311 Shares ------------------------------------------------------------------------- Beneficially 8. Shared Voting Power 0 Owned by ----------------------------------------------------------------------- Each 9. Sole Dispositive Power 130,505,311 Reporting ---------------------------------------------------------------------- Person 10. Shared Dispositive Power 0 With -------------------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 130,505,311 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) - -------------------------------------------------------------------------------- 13. Percent of Class Represented by Amount in Row (11) 22.59 - -------------------------------------------------------------------------------- 14. Type of Reporting Person (See Instructions) IN - -------------------------------------------------------------------------------- Page 2 of 6 ITEM 1. SECURITY AND ISSUER The securities to which this Schedule 13D relates are the common stock (the "Common Stock") of Aura Systems, Inc., a Delaware corporation (the "Company"). The address of the Company's principal executive office is 2335 Alaska Avenue, El Segundo, CA 90245. ITEM 2. IDENTITY AND BACKGROUND This Schedule 13D is being filed by Yair Ben Moshe (the "Reporting Person") whose address is 7250 Beverly Blvd., #101, Los Angeles, CA 90036. The Reporting Person is self employed as a real estate investor. During the past five years, the Reporting Person has (1) not been convicted in any criminal proceeding (excluding traffic violations or similar misdemeanors), or (2) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which he was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, Federal or State securities laws or finding any violation with respect to such laws. The Reporting Person is a citizen of the United States. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION Debt Conversion - The Reporting Person purchased $333,333 of The Company debt from a secured party of the Company in August 2004. All of the $333,333 was borrowed from the selling lender under a secured promissory note. In September, 2004, the Reporting Person converted this debt on the same terms and conditions as private placement investors. The debt converted to 66,831 shares of Series B Preferred and a warrant to purchase 4,176,936 shares of Common Stock. The shares and warrants of The Company secure the debt to the selling lender. The Reporting Person intends to use personal funds to repay the note. Private Placement - The Reporting Person purchased $1,575,000 of securities in a private placement. $115,000 of this investment was previously advanced to the Company and was from Reporting Person's personal funds. The balance of $1,460,000 was paid in a promissory note which is secured by the portion of the securities purchased which remained unpaid. The securities are being held in escrow and will be released proportionately as payments are made under the promissory note. The note bears interest at 8% per annum. The Reporting Person intends to use personal funds to repay the note. ITEM 4. PURPOSE OF TRANSACTION The Reporting Person acquired the Stock for investment purposes. In pursuing such investment purposes, the Reporting Person may further purchase, hold, vote, trade, dispose or otherwise deal in the Stock at times, and in such manner, as they deem advisable to benefit from changes in market price of the Stock, changes in the Company's operations, business strategy or prospects, or from sale or merger of the Company. The Reporting Person reserves the right to formulate other plans and/or make other proposals, and take such actions with respect to his investment in the Company, including any or all of the actions set forth in paragraphs (a) through (j) of Item 4 of Schedule 13D, and to acquire additional Stock or dispose of all the Stock beneficially owned by him, in public market or privately negotiated transactions. The Reporting Person may at any time reconsider and change his plans or proposals relating to the foregoing. The Reporting Person holds, among other securities of the Company, shares of the Company's Series B Preferred Stock (the "Series B Preferred Shares"). The Company's Certificate of Incorporation entitles the holders of the Series B Shares to elect four of the Company's directors for as long as the Series B Shares are outstanding. Under that certain Shareholder Agreement effective as of September 14, 2004, among the holders of the Series B Shares (the "Series B Shareholders"), the Series B Shareholders agreed, among other things, to use their best efforts to cause the size of the Company's board of directors to remain set at seven directors at all times and that each of four named Shareholders has the right to elect one of the four directors that the Series B Shareholders are entitled to elect. Mr. Ben Moshe has the right to designate a director and has designated Izar Fernbach. The Shareholder Agreement is an exhibit to this Schedule 13D. See Item 7. Page 3 of 6 ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) The Company had an aggregate of 452,865,398 shares of Common Stock outstanding as of September 14, 2004. (b) The Reporting Person has sole power to vote securities convertible into 130,503,311common shares. (c) The Reporting Person participated in the following transactions in the Common Stock in the past sixty (60) days (transactions 2 - 3 were contingent upon one another): (1) On August, 2004, the Reporting Person bought a note issued by the Company in the amount of $333,333 from a secured lender. (2) On September 14, 2004, the Reporting Person invested $1,575,000 in the Company's private placement and received 315,000 shares of Series B preferred (which convert to 75,750,000 shares of Common Stock) and 19,687,500 Warrants to purchase Common Stock. The Reporting Person paid $115,000 in cash and issued a promissory note in the amount of $1,460,000. The note is payable over a nine month period. Securities which have not been paid for are being held in escrow and released pro-rata as payment is made. (3) On September 14, 2004, the Reporting Person converted the debt referred to in (1) above on the same terms as the private placement and received 66,831 shares of Series B preferred (which convert to 16,707,750 shares of Common Stock) and warrants to purchase 4,176,936 shares of Common Stock. Page 4 of 6 ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER The Reporting Person has no contract, arrangement, understanding or relationship (whether or not legally enforceable) with any person with respect to any shares or other securities of any class of the Company, except as described in Item 4 herein. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS Exhibit 99.1 Ownership Table Exhibit 99.2 Promissory Notes dated August 2004 totaling $333,333 Exhibit 99.3 Amendment and Conversion Agreement dated 9/14/04 Exhibit 99.4 Shareholders Agreement effective as of 9/14/04 Exhibit 99.5 Promissory Note effective 9/14/04 in the amount of $1,460,000 Page 5 of 6 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Date: October 6, 2004 /s/ Yair Ben Moshe - -------------------------------------------------------------------------------- Signature Yair Ben Moshe - -------------------------------------------------------------------------------- Name/Title - -------------------------------------------------------------------------------- Signature - -------------------------------------------------------------------------------- Name/Title The original statement shall be signed by each person on whose behalf the statement is filed or his authorized representative. If the statement is signed on behalf of a person by his authorized representative (other than an executive officer or general partner of the filing person), evidence of the representative's authority to sign on behalf of such person shall be filed with the statement: provided, however, that a power of attorney for this purpose which is already on file with the Commission may be incorporated by reference. The name and any title of each person who signs the statement shall be typed or printed beneath his signature. ATTENTION: INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACT CONSTITUTE FEDERAL CRIMINAL VIOLATIONS (SEE 18 U.S.C. 1001) Page 6 of 6 EX-99.1 2 v07362_ex99-1.txt Exhibit 99.1 OWNERSHIP TABLE YAIR BEN MOSHE (the "Reporting Person") The Reporting Person has sole voting and dispositive power with respect to the shares described herein unless otherwise indicated. NUMBER OF SHARES BENEFICIALLY OWNED - ------------------------------------------------------------------------------- Aggregate Number of Shares Aggregate Number Beneficially Owned of Shares as Converted to Beneficially Owned Common Stock ---------------------------------------- Series A Convertible Redeemable Preferred Stock 43,425 5,428,125 - ------------------------------------------------------------------------------- Series B Cumulative Convertible Preferred Stock (1) 381,831 95,457,750 - ------------------------------------------------------------------------------- Warrants and Options to Purchase Common Stock (1) 23,864,436 23,864,436 - ------------------------------------------------------------------------------- Common Stock 5,755,000 5,755,000 - ------------------------------------------------------------------------------- TOTAL COMMON STOCK N/A 130,505,311 =============================================================================== Common Stock of Aura Systems, Inc. Outstanding as of September 14, 2004 (2) 452,865,398 - ---------------------------------------------------------- Percentage of Shares of Common Stock Beneficially Owned on a Fully Converted Basis 22.59% - ---------------------------------------------------------- Note 1 - Excludes convertible preferred stock and warrants covering an aggregate of 41,875,000 shares of common. These securities are potentially issuable pursuant to a real estate contract which has been signed but not closed. Note 2 - Includes 21,942,248 shares referenced as "committed" in the latest Aura financial statements which include the following: (i) 1,943,276 penalty shares in connection with the purchase of real estate, (ii) 8,151324 shares penalty shares to Aura Realty minority shareholders for failure to have an effective registration statement (iii) 5,639,600 shares issuable upon Aura's forced conversion of a convertible note and (iv) 6,208,048 shares issued upon settlement of litigation with the Aries Group. EX-99.2 3 v07362_ex99-2.txt PROMISSORY NOTE (BEN MOSHE/KP) Principal Amount: $66,666.66 Spokane, Washington Interest Rate: 8% August 10, 2004 FOR VALUE RECEIVED, the undersigned, Yair Ben Moshe ("Borrower"), hereby promises to pay to the order of KOYAH PARTNERS, L.P. a Delaware limited partnership ("Lender"), the principal sum of Sixty-Six Thousand Six Hundred Sixty-Six and 66/100ths Dollars ($66,666.66) together with interest thereon at the rate of 8% per annum, from the date hereof, payable as follows: (i) Installments of $1,333.33, or more, per month commencing on September 1, 2004, and continuing thereafter on the first day of each month until February 1, 2006; and (ii) installments of $6,666.67, or more, per month commencing on March 1, 2006, and continuing thereafter on the first day of each month until August 1, 2006 at which time the entire unpaid principal balance, together with accrued interest, shall be due and payable in full. 1. Interest Rate and Payment. The outstanding principal balance of this Note shall accrue interest at the rate of eight percent (8%) per annum. All payments shall be made to the address of Lender stated in this Note, or to any other address as Lender may specify. 2. Prepayment. This note may be prepaid, in whole or in part, at any time, without penalty. 3. 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. 4. Late Charge. If any payment of principal or interest under this Note shall not be made within seven (7) business days after the due date, this Note shall bear interest (after as well as before judgment) at a rate of three percent (3%) 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. 5. 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. 6. Severability. If any part of this Note is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 7. Security. This Note shall be secured by a first-priority security interest in tangible and intangible personal property of Borrower pursuant to a Security and Pledge Agreement being concurrently executed by Borrower (the "Security and Pledge Agreement"). 8. Defaults. Each of the following shall constitute a default under this Note (a "Default"): 1 (a) Failure by Borrower to make any payment due under this Note or under any other agreement with the Lender or its affiliates when due; any representation or warranty by Borrower (or any of them) under this Note or any other agreement with the Lender or its affiliates shall be false or inaccurate in any material respect when made; or failure by Borrower (or any of them) to comply with the provisions of any other covenant, obligation or term of this Note or any other agreement with the Lender or its affiliates; (b) Borrower (or any of them) 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 (or any of them) any such proceedings which remain undismissed for a period of sixty (60) days; or Borrower (or any of them) by any act indicates its consent or acquiescence in any such proceeding or the appointment of any such trustee or receiver; or (c) Lender shall fail to have a valid, perfected and first-priority security interest in any of the collateral covered by the Security and Pledge Agreement. (d) Borrower shall default on any if its obligations under a Securities Purchase Agreement hereafter entered into among Aura Systems, Inc. (the "Company"), Borrower and the other investors named therein with respect to issuance and funding of a Series B Cumulative Convertible Preferred Stock financing by the Company, or under any Note issued in connection therewith, or shall default on any of its obligations under any related agreements or documents. 9. Acceleration; No Exclusive Remedy. Upon any Default set forth in Section 8(b) 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. 10. 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. if to Borrower: if to Lender: Yair Ben Moshe Koyah Partners, L.P. 7250 Beverly Blvd., Suite 101 c/o ICM Asset Management, Inc. Los Angeles, CA 90036 601 West Main Avenue, Suite 600 Spokane WA 99201 Attn: Robert Law 11. 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. 2 (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) 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. [remainder of page intentionally left blank] 3 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. -------------------------------------------- Yair Ben Moshe PROMISSORY NOTE (BEN MOSHE/KLP) Principal Amount: $266,666.67 Spokane, Washington Interest Rate: 8% August 10, 2004 FOR VALUE RECEIVED, the undersigned, Yair Ben Moshe ("Borrower"), hereby promises to pay to the order of KOYAH LEVERAGE PARTNERS, L.P. a Delaware limited partnership ("Lender"), the principal sum of Two Hundred Sixty-Six Thousand Six Hundred Sixty-Six and 67/100ths Dollars ($266,666.67) together with interest thereon at the rate of 8% per annum, from the date hereof, payable as follows: (i) Installments of $5,333.34, or more, per month commencing on September 1, 2004, and continuing thereafter on the first day of each month until February 1, 2006; and (ii) installments of $26,666.66, or more, per month commencing on March 1, 2006, and continuing thereafter on the first day of each month until August 1, 2006 at which time the entire unpaid principal balance, together with accrued interest, shall be due and payable in full. 1. Interest Rate and Payment. The outstanding principal balance of this Note shall accrue interest at the rate of eight percent (8%) per annum. All payments shall be made to the address of Lender stated in this Note, or to any other address as Lender may specify. 2. Prepayment. This note may be prepaid, in whole or in part, at any time, without penalty. 3. 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. 4. Late Charge. If any payment of principal or interest under this Note shall not be made within seven (7) business days after the due date, this Note shall bear interest (after as well as before judgment) at a rate of three percent (3%) 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. 5. 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. 6. Severability. If any part of this Note is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 7. Security. This Note shall be secured by a first-priority security interest in tangible and intangible personal property of Borrower pursuant to a Security and Pledge Agreement being concurrently executed by Borrower (the "Security and Pledge Agreement"). 1 8. 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 Lender or its affiliates when due; any representation or warranty by Borrower (or any of them) under this Note or any other agreement with the Lender or its affiliates shall be false or inaccurate in any material respect when made; or failure by Borrower (or any of them) to comply with the provisions of any other covenant, obligation or term of this Note or any other agreement with the Lender or its affiliates; (b) Borrower (or any of them) 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 (or any of them) any such proceedings which remain undismissed for a period of sixty (60) days; or Borrower (or any of them) by any act indicates its consent or acquiescence in any such proceeding or the appointment of any such trustee or receiver; or (c) Lender shall fail to have a valid, perfected and first-priority security interest in any of the collateral covered by the Security and Pledge Agreement. (d) Borrower shall default on any if its obligations under a Securities Purchase Agreement hereafter entered into among Aura Systems, Inc. (the "Company"), Borrower and the other investors named therein with respect to issuance and funding of a Series B Cumulative Convertible Preferred Stock financing by the Company, or under any Note issued in connection therewith, or shall default on any of its obligations under any related agreements or documents. 9. Acceleration; No Exclusive Remedy. Upon any Default set forth in Section 8(b) 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. 10. 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. if to Borrower: if to Lender: Yair Ben Moshe Koyah Leverage Partners, L.P. 7250 Beverly Blvd., Suite 101 c/o ICM Asset Management, Inc. Los Angeles, CA 90036 601 West Main Avenue, Suite 600 Spokane WA 99201 Attn: Robert Law 11. 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. 2 (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) 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. [remainder of page intentionally left blank] 3 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. -------------------------------------------- Yair Ben Moshe EX-99.3 4 v07362_ex99-3.txt AMENDMENT AND CONVERSION AGREEMENT THIS AMENDMENT AND CONVERSION AGREEMENT (this "Agreement") is entered into as of August 19, 2004 between AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and KOYAH LEVERAGE PARTNERS, L.P., a Delaware limited partnership ("Leverage"), KOYAH PARTNERS, L.P., a Delaware limited partnership ("Koyah"), EDGAR APPLEBY, an individual ("Appleby"), PRUDENT BEAR FUND, INC., a Maryland corporation ("Prudent Bear"), KOYAH VENTURES LLC, a Delaware limited liability company ("Ventures"), and RAVEN PARTNERS, L.P., a Delaware limited partnership ("Raven") (collectively, the "Lenders"). WHEREAS, in connection with loans by Leverage to the Company, (i) the Company, Leverage and Koyah entered into an Agreement dated as of July 24, 2003 (the "Leverage Agreement"), (ii) the Company executed in favor of Leverage two Convertible Promissory Notes dated as of July 24, 2003 (collectively, the "Leverage Notes"), (iii) the Company executed in favor of Leverage (as collateral agent for Leverage and Koyah) a Security Agreement dated as of July 24, 2003 (the "Leverage Security Agreement"), and (iv) the Company executed in favor of Leverage (as collateral agent for Leverage and Koyah) a Stock Pledge Agreement dated as of August 18, 2003 (the "Leverage Pledge Agreement") (collectively, the "Leverage Loan Documents"); WHEREAS, in connection with loans by Koyah to the Company, (i) the Company, Leverage and Koyah entered into an Agreement dated as of July 24, 2003 (the "Koyah Agreement"), (ii) the Company executed in favor of Koyah two Convertible Promissory Notes dated as of July 24, 2003 (collectively, the "Koyah Notes"), (iii) the Company executed in favor of Leverage (as collateral agent for Leverage and Koyah) a Security Agreement dated as of July 24, 2003 (the "Koyah Security Agreement"), and (iv) the Company executed in favor of Leverage (as collateral agent for Leverage and Koyah) a Stock Pledge Agreement dated as of August 18, 2003 (the "Koyah Pledge Agreement") (collectively, the "Koyah Loan Documents"); WHEREAS, in connection with loans by Appleby to the Company, (i) the Company and Appleby entered into an Agreement dated as of January 19, 2004 (the "Appleby Agreement"), (ii) the Company executed in favor of Appleby a Convertible Promissory Note dated as of January 19, 2004 (the "Appleby Note"), (iii) the Company executed in favor of Appleby a Security Agreement dated as of January 19, 2004 (the "Appleby Security Agreement"), and (iv) the Company executed in favor of Appleby a Stock Pledge Agreement dated as of January 19, 2004 (the "Appleby Pledge Agreement") (collectively, the "Appleby Loan Documents"); WHEREAS, in connection with loans by Prudent Bear to the Company, (i) the Company and Prudent Bear entered into an Agreement dated as of January 19, 2004 (the "Prudent Bear Agreement"), (ii) the Company executed in favor of Prudent Bear a Convertible Promissory Note dated as of January 19, 2004 (the "Prudent Bear Note"), (iii) the Company executed in favor of Prudent Bear a Security Agreement dated as of January 19, 2004 (the "Prudent Bear Security Agreement"), and (iv) the Company executed in favor of Prudent Bear a Stock Pledge Agreement dated as of January 19, 2004 (the "Prudent Bear Pledge Agreement") (collectively, the "Prudent Bear Loan Documents"); 1 WHEREAS, in connection with loans by Ventures to the Company, (i) the Company and Ventures entered into an Agreement dated as of June 14, 2004 (the "Ventures Agreement"), (ii) the Company executed in favor of Ventures a Convertible Promissory Note dated as of June 14, 2004 (the "Ventures Note"), (iii) the Company executed in favor of Ventures a Security Agreement dated as of June 14, 2004 (the "Ventures Security Agreement"), and (iv) the Company executed in favor of Ventures a Stock Pledge Agreement dated as of June 14, 2004 (the "Ventures Pledge Agreement") (collectively, the "Ventures Loan Documents"); WHEREAS, in connection with loans by Raven to the Company, (i) the Company and Raven entered into an Agreement dated as of June 14, 2004 (the "Raven Agreement"), (ii) the Company executed in favor of Raven a Convertible Promissory Note dated as of June 14, 2004 (collectively the "Raven Note"), (iii) the Company executed in favor of Raven a Security Agreement dated as of June 14, 2004 (the "Raven Security Agreement"), and (iv) the Company executed in favor of Raven a Stock Pledge Agreement dated as of June 14, 2004 (the "Raven Pledge Agreement") (collectively, the "Raven Loan Documents"); WHEREAS, certain of the Notes are for a term loan in a set principal amount (collectively, the "Term Notes") and certain of the Notes are for optional advance loans up to a maximum principal amount (the "Optional Advance Notes"). WHEREAS, certain of the Loan Documents have been further amended or supplemented and all references in this Agreement to the "Agreements", the "Notes", the "Security Agreements", the "Pledge Agreements" or the "Loan Documents" of the various parties shall mean and refer to the Agreements, the Notes, the Security Agreements, the Pledge Agreements and the Loan Documents of such parties as so further amended or supplemented; WHEREAS, Leverage, Koyah, Appleby and Prudent Bear entered into an Intercreditor Agreement dated as of January 19, 2004 (the "Intercreditor Agreement") to which the Company was an additional party for purposes of acknowledging the intercreditor arrangements contained therein and agreeing to the obligations of the Company contained therein; WHEREAS, Leverage and Koyah, as the majority lenders under the Intercreditor Agreement, entered into a Joinder Agreement dated as of June 14, 2004 (the "Joinder Agreement") with Ventures and Raven to add them as additional lenders under the Intercreditor Agreement; WHEREAS, the Company is entering into a Securities Purchase Agreement dated as of the date hereof (the "Securities Purchase Agreement") with certain investors, for the purchase of units (the "Units") consisting of Series B Cumulative Convertible Preferred Stock (the "Series B Stock") and warrants to purchase Common Stock (the "Warrants"), as part of a $5,000,000 minimum/$15,000,000 maximum financing (the "Series B Financing"), and is completing the initial issuance and funding of the Series B Financing on the date hereof; WHEREAS, the aggregate principal amounts outstanding under the Notes (excluding any costs and expenses of the Lenders payable by the Company which have been incurred but not yet been invoiced) and the accrued interest on the Notes as of the date hereof are as set forth in Schedule 1 attached hereto; 2 WHEREAS, in connection with the initial issuance and funding of the Series B Financing, the Company has requested that the Lenders extend the maturity date of the Notes, amend the Notes and convert the Notes over time into Units; and WHEREAS, the parties are entering into this Agreement to extend the maturity date of the Notes, to amend the Notes, to convert the Notes over time into Units and to provide for related matters, all 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. Extension of Maturity Dates. The Maturity Date (as defined in the Notes) set forth in Section 1 of each of the Notes hereby is amended and extended to August 19, 2005, after which date each of the Notes shall be due and payable upon five (5) days demand; provided however, that if all of the conditions set forth in Section 9(b) of this Agreement, other than the condition set forth in clause (iii)(A) thereof have been satisfied as of August 19, 2005, then the Maturity Date (if all other Section 9(b) conditions remain satisfied at the commencement of each extension) shall be further amended and extended for up to four (4) successive three (3) month periods (ending respectively on November 19, 2005, February 19, 2006, May 19, 2006 and August 19, 2006) to allow such condition set forth in Section 9(b)(iii)(A) to be satisfied. If the condition set forth in Section 9(b)(iii)(A) is not satisfied by August 19, 2006, each of the Notes shall be due and payable upon five (5) days demand. 2. Amendment of Prepayment Terms. Section 3 of each Note, entitled "Payment Terms" in the case of the Leverage Note, the Koyah Note, the Ventures Note and the Raven Note and "Prepayment" in the case of the Appleby Note and the Prudent Bear Note, hereby is deleted in its entirety and replaced with the following: 3. Prepayment. This Note may be prepaid in whole but not in part, at any time upon ten (10) business days' prior written notice, without any premium or penalty. In the event of any tender of prepayment of this Note by Borrower, Lender shall have the right to exercise its conversion rights instead of electing acceptance of such prepayment, as provided in Section 9 of this Note. 3. Amendment of Conversion Terms. Section 9 of each Note, entitled "Conversion of Note", hereby is deleted in its entirety and replaced with following: 9. Conversion of Note. At the option of Lender, the outstanding principal balance of this Note and all accrued interest, fees or other amounts payable under this Note, at any time prior to acceptance by Lender of payment thereof instead of conversion as provided below, may be converted, in whole or in part, into units (the "Units") consisting 3 of shares of Series B Cumulative Convertible Preferred Stock (the "Series B Stock") and warrants to purchase Common Stock (the "Warrants") of Borrower, at the same price and on the same other terms and conditions as the $5,000,000 minimum/$15,000,000 maximum Series B Cumulative Convertible Preferred Stock financing (the "Series B Financing"), as set forth in the Securities Purchase Agreement (the "Securities Purchase Agreement") with the initial investors in the Series B Financing which is attached as Exhibit A to the Amendment and Conversion Agreement dated as of August 19, 2004 (the "Amendment and Conversion Agreement") among Borrower and the Lenders named therein (collectively, the "Intercreditor Lenders"), the terms and conditions of which are incorporated herein by reference; provided, however, that the following terms shall be adjusted as applied to the Intercreditor Lenders: (i) the subscription amount shall be the amount being converted by an Intercreditor Lender in the particular conversion involved and the subscription date shall be the date of such conversion; (ii) the option to purchase additional Units contained in Section 1.5 of the Securities Purchase Agreement (A) shall be in an amount up to fifty percent (50%) of the total number of Units issuable to an Intercreditor Lender in the Initial Conversions and Additional Conversions (as defined in the Amendment and Conversion Agreement) and (B) shall be exercisable by an Intercreditor Lender, in whole or in part, at any time on or before May 31, 2005, (1) in increments as set forth in Schedule 3 attached to the Amendment and Conversion Agreement and (2) subject to earlier termination upon notice as set forth in Section 1.5(a)(iii) of the Securities Purchase Agreement, but with the amount of the option exercisable under the circumstances described in Section 1.5(a)(iii) being equal to fifty percent (50%) of the unexercised portion of the original option; (iii) Section 4.5 of the Securities Purchase Agreement shall not apply to an Intercreditor Lender and instead shall be replaced by Section 24 of the Amendment and Conversion Agreement; (iv) Section 8.1 of the Securities Purchase Agreement shall not apply to an Intercreditor Lender and instead shall be replaced by Section 20 of this Agreement; and (v) the Registration Rights Agreement referred to in the Securities Purchase Agreement shall not apply to an Intercreditor Lender and shall be replaced by the Registration Rights Agreement referred to in the Amendment and Conversion Agreement. Upon any conversion, Borrower and Lender shall be deemed to have entered into a Securities Purchase Agreement (with such adjusted terms) for such conversion, as if executed and delivered by them. Upon any tender of payment of this Note by Borrower (whether by prepayment before maturity or payment at or after maturity), Lender shall have ten (10) business days thereafter to elect either acceptance of such payment instead of conversion or exercise of its conversion right, in whole or in part. In the event Lender fails to make such election by such date, Lender shall be deemed to have elected acceptance of payment instead of conversion, provided that 4 the payment tendered is the full amount owing under this Note. Any exercise of such conversion right shall be at the option of Lender, in its sole discretion. Lender may exercise such conversion right by providing to Borrower written notice of exercise in the form attached as Exhibit B to the Amendment and Conversion Agreement or other appropriate form. In the event of any stock splits, stock dividends, recapitalizations or similar events after August 19, 2004 but prior to the date of conversion, then the number and kind of securities issuable upon conversion shall be appropriately adjusted. Such conversion shall be effective immediately upon giving such notice and as of such date Lender shall be treated for all purposes as the holder of the securities 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 securities to which Lender shall be entitled upon such conversion. Upon a partial conversion of this Note, (i) this Note may be surrendered by Lender and replaced with a new Note of like tenor for the remaining balance of the Note surrendered or (ii) Lender may retain this Note and the parties may keep separate records of the outstanding balance of this Note. A new Note shall be delivered to Lender as soon as practicable after any such surrender. No fractional shares 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. 4. Amendment of Defaults. Section 13 of each Note, entitled "Defaults," hereby is amended to add an additional "Default" reading as follows: (e) The investors in the Series B Financing shall fail to fulfill or default on any of their respective obligations under the Securities Purchase Agreement(s) for the Series B Financing or any related promissory notes or other agreements or documents or Borrower shall fail to receive all of the funds as scheduled under such Securities Purchase Agreement(s) or any related promissory notes or other agreements or documents, in each case if (i) the subscription amount(s) of the defaulting or non-paying investor(s) is at least twenty percent (20%) of the total subscription amounts of all investors in the Series B Financing and (ii) the default or failure to receive funds continues for sixty (60) days from the scheduled due date. 5. Amendment of Maximum Principal Amount of Raven Optional Advance Note. The maximum principal amount of the Optional Advance Note in favor of Raven hereby is amended to be One Hundred Twenty-Five Thousand Dollars ($125,000). 5 6. Amendment of Schedule of Exceptions. (a) Agreements. The last sentence of Section 1(k) of the Leverage Agreement, the Koyah Agreement, the Appleby Agreement and the Prudent Bear Agreement hereby is amended to add at the end thereof ", except as listed in the Schedule of Exceptions". In addition, the Schedule of Exception attached to each such Agreement hereby is amended to read as set forth in the Schedule of Exceptions attached hereto as Exhibit C. (b) Notes. The Schedule of Exceptions attached to the Leverage Note, the Koyah Note, the Appleby Note and the Prudent Bear Note hereby is amended to read as set forth in the Schedule of Exceptions attached hereto as Exhibit D. (c) Security Agreements. The Schedule of Exceptions attached to the Leverage Security Agreement, the Koyah Security Agreement, the Appleby Security Agreement and the Prudent Bear Security Agreement hereby is amended to read as set forth in the Schedule of Exceptions attached hereto as Exhibit E. 7. Amendment of Warrants. The last sentence of the first paragraph of the Warrant dated April 5, 2004 issued by the Company to Leverage and the Warrant dated April 5, 2004 issued by the Company to Koyah hereby is amended to read as follows: The Holder may exercise this Warrant at any time after the date of this Warrant and prior to the seventh anniversary of the date hereof (the "Expiration Date"). 8. Confirmations and Releases. (a) Loan Balance Confirmation. The Company hereby confirms, acknowledges and agrees that (i) the respective amounts for the Lenders set forth in Schedule 1 attached hereto are the aggregate amounts of principal outstanding and accrued interest under the Notes as of the date hereof (excluding any costs and expenses of the Lenders payable by the Company which have been incurred but not yet been invoiced) and (ii) such principal amounts and accrued interest, together with any other amounts payable by the Company under the Notes or other Loan Documents, are owing under the Notes and other Loan Documents. (b) Release. (i) The Company, on behalf of itself and its heirs, successors and assigns, and (ii) each Lender, on behalf of its heirs, successors and assigns, hereby fully and irrevocably: (A) releases, acquits, satisfies and forever discharges each of the Lenders, and each of their respective past, present and future affiliates, officers, directors, partners, employees, agents, attorneys, representatives, heirs, successors and assigns, from any and all manner of liabilities, obligations, expenses, damages, judgments, executions, actions, claims, demands and causes of action of any nature whatsoever, whether at law or in equity, known or unknown or now accrued or subsequently maturing, which such releasing party now has or hereafter may have arising under, related to or in connection with the Loan Documents, the Intercreditor Agreement or the Joinder Agreement (the "Claims"); (ii) covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against any released party with respect to the Claims; and (iii) waives any and all rights and benefits which it now has or hereafter may have by virtue of the provisions of Section 1542 of the Civil Code of the State of California which provides as follows: 6 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Each releasing party specifically agrees, represents and warrants that (x) such releasing party realizes and acknowledges that factual matters now unknown to it may have given or hereafter may give rise to Claims which are presently unknown, unanticipated or unsuspected, (y) the release contained herein has been negotiated and agreed upon in light of such realization and (z) such releasing party nevertheless hereby intends the release contained herein to fully and irrevocably release, acquit, satisfy and forever discharge each of the released parties from any such unknown, unanticipated or unsuspected Claims. The foregoing release, however, is not intended to release any Lender from its express, continuing obligations specifically contained in the Loan Documents, the Intercreditor Agreement, the Joinder Agreement, this Agreement, the Securities Purchase Agreement (as deemed executed and delivered upon any conversion (with adjusted terms) pursuant to the amended conversion rights under Section 9 of the Notes), the Registration Rights Agreement (as defined below), the Shareholder Agreement (as defined below), the Certificate of Designations (as defined in the Securities Purchase Agreement) or any related agreements or documents (collectively, the "Transaction Documents"). (c) Additional Confirmation. Without limiting the generality of the foregoing, the Company hereby specifically confirms, acknowledges and agrees that, as of the date hereof and as of the date of any conversion, the Company owes all such principal, interest and other amounts under the Notes and the other Loan Documents and all of its other obligations under the Notes, the other Loan Documents and the other Transaction Documents in full, without any defense, setoff or reduction of any nature whatsoever (including without limitation any claims released under such release). 9. Conversion of Notes. (a) Initial Conversions. Upon the initial closing of the Series B Financing, the Lenders shall exercise their amended conversion rights under Section 9 of the Notes for an aggregate conversion amount of Two Million Five Hundred Thousand Dollars ($2,500,000), allocated among the Lenders and the Notes on a non-pro rata basis in accordance with the initial conversion amounts set forth in Schedule 2 attached hereto for each Lender and Note (the "Initial Conversions"). Each Lender shall exercise such conversion right by giving written notice thereof. 7 (b) Additional Conversions. At the end of each calendar quarter after the Company has received a total of $4,100,000.00 in New Funds, plus an additional amount equal to Costs and Fees (as those terms are defined below), but subject to the conditions set forth below, the Lenders shall exercise their amended conversion rights under Section 9 of the Notes for an aggregate conversion amount equal to the amount of funds actually received by the Company in the Series B Financing during such quarter, allocated among the remaining Lenders and the remaining Notes on a pro rata basis in accordance with the then outstanding total amounts of the remaining Notes (the "Additional Conversions"). Each remaining Lender shall exercise such conversion right by giving written notice thereof. For purposes of this paragraph the term "New Funds" means cash received by the Company after the initial closing of the Series B financing from payments due under notes made by investors under the Securities Purchase Agreement or from cash received from new investors. New Funds shall not include, among other things (1) funds received at or prior to the time of initial closing of the Series B financing, (2) debt converted at the time of initial closing of the Series B financing, (3) conversions of dividend accruals or stock issued in exchange for non-cash consideration (4) funds paid to or on account of the Company in connection with the sale of the real property located at 2335 Alaska Avenue and 2330 Utah Avenue, El Segundo, California (the "Real Estate") For purposes of this paragraph the term "Costs and Fees" means any legal costs and legal fees incurred by others and paid or payable by the Company in connection with the (m) sale of the Real Estate including, without limitation, assumption by the purchasers thereof of the debt on the Real Estate, (n) settlement with the minority Shareholders of Aura Realty, Inc., and (o) settlement of litigation filed by, and other claims of, certain former officers and employees pursuant to a Mutual Settlement Agreement and Release between the Company and Arthur Schwartz, et. al., dated as of August ___, 2004. The obligations of the remaining Lenders to do any Additional Conversion shall be subject to the following conditions: (i) all investors in the Series B Financing have fulfilled all of their respective obligations under the Securities Purchase Agreement(s) for the Series B Financing and any related promissory notes or other agreements or documents and the Company has received all of the funds as scheduled under such Securities Purchase Agreement(s) and any related promissory notes or other agreements or documents; (ii) the authorized number of shares of Common Stock of the Company has been increased sufficiently; (iii) (A) the registration statement described in Section 1.3 of the Registration Rights Agreement is effective or (B) an automatic conversion has occurred under Section 6(a)(ii) of the Certificate of Designations; and (iv) the Company's has resolved matters with its creditors in a manner satisfactory to the Lenders holding a majority of the then outstanding total balance of the Notes. In the event that any remaining Lender has previously exercised its amended conversion right other than as part of the Initial Conversions or the Additional Conversions, the amount of such other conversion shall be credited against such remaining Lender's amount of subsequent Additional Conversions. In the event that (x) additional issuances and fundings of the Series B Financing occur during any calendar quarter but the conditions to the obligations of the remaining Lenders to do any Additional Conversion are not satisfied at the end of such calendar quarter and (y) such conditions are subsequently satisfied, the obligations of the remaining Lenders to do such Additional Conversion shall become effective on the date that such conditions are subsequently satisfied. 8 10. Registration Rights Agreement and Shareholder Agreement. In connection with this Agreement, each Lender is entering into (i) a Registration Rights Agreement with the Company in the form attached hereto as Exhibit F (the "Registration Rights Agreement") and (ii) a Shareholder Agreement with other investors in the Series B Financing in the form attached to the Securities Purchase Agreement (the "Shareholder Agreement"). 11. Company Acknowledgements. The Company confirms, acknowledges and agrees that (i) after giving effect to the Initial Conversions and the Additional Conversions, the Security Agreements and the Stock Pledge Agreements will continue to secure all of the Company's remaining obligations under the Loan Documents and (ii) any future additional advances to the Company by the Lenders under the Optional Advance Notes, or any conversions or other future financing of the Company by the Lenders or their affiliates (other than the Initial Conversion and the Additional Conversions on the terms and conditions hereof), are at the option of the Lenders or their affiliates, in their sole discretion. The Company further confirms, acknowledges and agrees that: (i) as reflected in the Loan Documents, (a) the Lenders have already made substantial additional advances to the Company that were not originally contemplated, (b) the total amount of advances by the Lenders to date are far in excess of the maximum amount of advances originally contemplated, and (c) as a result of several extensions of the maturity date, the advances are for a substantially longer term than originally contemplated, (ii) the Lenders were under no obligation to make such additional advances or grant such extensions and did so to help the Company in a time of need with its tight financial position, (iii) the Lenders have been very accommodating to the Company in this regard, (iv) the Lenders are under no obligation to make any future additional advances, grant any further extensions, or do any conversions or other future financing of the Company (other than the Initial Conversions and the Additional Conversions on the terms and conditions hereof), (v) the Company has been aware for some time of the need for the Company to line up alternative financing sources and put in place alternative financing arrangements, (vi) the Company is and was aware that the Lenders do not intend to make any additional advances or grant any further extensions, (vii) accordingly, the Company is aware that it needs to line up alternative financing sources and put in place alternative financing arrangements, and (viii) it is the Company's sole responsibility to line up alternative financing sources and put in place alternative financing arrangements in amounts, on terms and at times necessary to meet its financing needs. 12. [Intentionally Omitted.]. 13. Further Assurances. If requested by the Lenders, the Company shall promptly execute and deliver amended and restated documents to replace the Notes or any other Transaction Documents and appropriately reflect the amendments of the Notes or any other Transaction Documents which are contained in this Agreement or any other Transaction Documents, as further evidence of the Company's obligations thereunder. 9 14. Representations and Warranties. The Company hereby re-affirms and re-makes, as of the date hereof and as of the date of any conversion, all of its representations and warranties contained in the Loan Documents, as modified by the amendments and waivers set forth in this Agreement and certain of the Loan Documents. For purposes of re-affirming the representations and warranties contained in the Loan Documents, the term "Transaction Documents" as used therein shall mean the Transaction Documents as defined in this Agreement. In addition, the Company hereby affirms and makes, as of the date hereof and as of the date of any conversion, all of its representation and warranties contained in the Securities Purchase Agreement for such conversion, it being understood that pursuant to Section 9 of the Notes, such representations and warranties of the Company like all of the other terms and conditions of the Securities Purchase Agreement (as adjusted pursuant to Section 9 of the Notes) apply to any conversion, including the Initial Conversions and the Additional Conversions. All of such representations and warranties shall survive the closing of the transactions contemplated by this Agreement and the other Transaction Documents. Such representations and warranties by the Company include, among others, a representation and warranty that the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company's Board of Directors. As a further assurance to the Lenders with respect to such representation and warranty, the Company shall deliver to the Lenders, within five (5) business days after request by the Lenders, evidence satisfactory to the Lenders in their sole discretion of the authorization by the Company's Board of Directors of the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby, to the extent such evidence has not been previously delivered to the Lenders. 15. Acknowledgements. The Lenders acknowledge that (i) the Company has agreed to provide continued directors and officers insurance as provided in Section 4.6 of the Securities Purchase Agreement and (ii) the Company has entered into indemnification agreements with its directors and that such agreements shall remain in effect as provided in Section 4.7 of the Securities Purchase Agreement. 16. 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 (i) the written consent of the Company and all affected Lenders in the case of an amendment and (ii) the written consent of the waiving party in the case of a waiver. 17. 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 remainn unchanged and in full force and effect. The Company hereby re-affirms all of its obligations under the Transaction Documents, as amended hereby. 10 18. 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. 19. Severability. If any part of this Agreement is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 20. Attorneys' Fees. The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Lenders in enforcing any terms of this Agreement and the other Transaction Documents, whether or not any action at law or in equity is brought. 21. 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 TO THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, 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. 22. Notice. 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 11 Edgar Appleby Peacock Point Locust Valley, NY 11560 Fax: (516) 674-3748 Prudent Bear Fund, Inc. 8140 Walnut Hill Lane, Suite 300 Dallas, TX 75206 Attn: Greg Jahnke Fax: (214) 696-5556 Koyah Ventures LLC c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 Raven Partners, L.P. c/o ICM Asset Management, Inc. 601 West Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: (509) 444-4500 23. Independent Nature of Lenders' Obligations and Rights. The obligations of a Lender under this Agreement and the other Transaction Documents are several and not joint with the obligations of any other Lenders, and each Lender shall not be responsible in any way for the performance of the obligations of any other Lenders under this Agreement or the other Transaction Documents. The investment and/or credit decision of each Lender to enter into this Agreement and the other Transaction Documents has been made by such Lender independently of any other Lenders and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operation, condition (financial or otherwise) or prospects of the Company or of any subsidiary which have been made or given by any other Lenders or by any agent or employee of any other Lenders, and each Lender and its agents and employees shall have no liability to any other Lenders (or any other person) relating to or arising from any such information, materials, statements or opinions. Each Lender acknowledges that it has the sophistication and ability to look out for its own interest and has independently made its own investment and/or credit decision to enter into this Agreement and the other Transaction Documents based upon such evaluation and information as it has deemed appropriate. 12 Nothing contained in this Agreement or in the other Transaction Documents, and no action taken by any Lender pursuant thereto, shall be deemed to constitute the Lenders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Lenders are in any way acting in concert or as a group with respect to the obligations contained in or the transactions contemplated by this Agreement or the other Transaction Documents. Each Lender acknowledges that no other Lenders have acted as agent for such Lender in connection with entering into this Agreement and the other Transaction Documents and that no other Lenders will be acting as agent of such Lender in connection with monitoring its investment or making any future investment and/or credit decisions. Each Lender shall be entitled to independently protect and enforce its rights, including with limitation, the rights arising out of this Agreement or the other Transaction Documents, and it shall not be necessary for any other Lenders to be joined as an additional party in any proceeding for such purpose, except as otherwise provided in the Intercreditor Agreement or the Joinder Agreement. 24. LEGAL REPRESENTATION. THE COMPANY AND EACH LENDER ACKNOWLEDGE THAT PAINE HAMBLEN COFFIN BROOK & MILLER LLP ("PAINE HAMBLEN") HAS REPRESENTED ONLY LEVERAGE, KOYAH, VENTURES, RAVEN AND THEIR AFFILIATES IN CONNECTION WITH THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, AND THAT PAINE HAMBLEN HAS NOT REPRESENTED THE COMPANY OR ANY OTHER LENDER IN ANY WAY IN CONNECTION THEREWITH. EACH LENDER ALSO ACKNOWLEDGES THAT THE INTERESTS OF LEVERAGE, KOYAH, VENTURES, RAVEN AND THEIR AFFILIATES ARE DIFFERENT THAN THE INTERESTS OF SUCH LENDER AND THAT SUCH LENDER HAS THE SOPHISTICATION AND ABILITY TO LOOK OUT FOR ITS OWN INTEREST. THE COMPANY AND EACH LENDER FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY ITS (OR THE CASE OF APPLEBY, IS AN ATTORNEY ACTING AS HIS) OWN LEGAL COUNSEL IN CONNECTION WITH THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS AND HAS CONSULTED WITH AND RELIED UPON THE LEGAL REPRESENTATION AND ADVICE OF SUCH LEGAL COUNSEL IN CONNECTION THEREWITH. 25. Lenders' Attorney Fees and Expenses. On the terms and conditions set forth below, the Company shall pay the costs and expenses of legal counsel to the Lenders in connection with (i) the negotiation, execution and delivery of this Agreement and the other Transaction Documents as well as the consummation of the transactions contemplated by such agreements, the administration of such agreements and any amendments or waivers of such agreements and (ii) the evaluation, discussion and negotiation by the Lenders, as debt or equity holders of the Company, of any other financing or similar proposals or expressions of interest involving the Company which previously have been, currently are or subsequently may be made or advanced by or any persons or entities (including the Lenders) and the negotiation, execution and delivery of any related agreements or documents as well as the consummation of the transactions contemplated thereby. The Company shall pay such costs and expenses within ten (10) business days of submittal, and the Lenders may apply any retainer held by them or their legal counsel against such costs and expenses. Alternatively, the Lenders may pay such costs and expenses directly and then the amounts so paid shall constitute advances made under the Optional Advance Notes to the extent such advances are within the maximum principal amount of the Optional Advance Notes and otherwise shall constitute additional amounts payable by the Company under this Agreement and bear interest at the rate set forth in the Notes until paid by the Company. All such costs and expenses incurred and invoiced on or before the date of this Agreement are already reflected in the principal amounts set forth in Schedule 1 attached hereto and shall be paid by the Company in full 13 through advances under the Optional Advance Notes. All such costs and expenses incurred but not yet invoiced on or before the closing date of the Initial Conversions are not reflected in Schedule 1 attached hereto and shall be paid by the Company in full through advances under the Optional Advance Notes. All such costs and expenses incurred after the closing date of the Initial Conversions are not reflected in Schedule 1 attached hereto and (x) shall be paid by the Company up to a maximum amount of $25,000 (it being understood that such maximum amount shall only apply to the attorney fee provision set forth in this Section 24, but not any other attorney fee provisions of the Transaction Documents) and (y) shall not be paid by the Company through any additional advances under the Optional Advance Notes, and instead shall only be paid by the Company in cash. 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] 14 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: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- EDGAR APPLEBY ------------------------------------------- PRUDENT BEAR FUND, INC. By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- [Signature Page to Amendment and Conversion Agreement] 15 KOYAH VENTURES LLC By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- RAVEN PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- [Signature Page to Amendment and Conversion Agreement] 16 SCHEDULE 1 NOTE BALANCES (08/19/04) [ATTACH EXCEL SPREADSHEET] 17 SCHEDULE 2 INITIAL CONVERSION AMOUNTS (08/19/04) [ATTACH EXCEL SPREADSHEET] 18 SCHEDULE 3 OPTION EXERCISABILITY 1. Exercisable Increments. The option of each Intercreditor Lender under Section 1.5 of the Securities Purchase Agreement (as adjusted pursuant to Section 9 of the Notes) shall be exercisable at any time in an amount equal to the total amount of the Initial Conversion and the Additional Conversions of such Intercreditor Lender actually done up to that time. 2. Termination. The option of each Intercreditor Lender under such Section (as so adjusted) shall terminate in increments (expressed as a percentage of the original total amount of such option) as follows: Terminated Increment --------- December 31, 2004 50% May 31, 2005 50% -------- TOTAL 100% Notwithstanding the foregoing, if any portion of the option of an Intercreditor Lender is not exercisable on December 31, 2004 because the conditions to the obligation of such Intercreditor Lender to do an Additional Conversion underlying such portion of the option have not been satisfied by such date, then such portion of the Option shall not terminate on December 31, 2004 and shall instead be extended to May 31, 2005. 19 EXHIBIT A SECURITIES PURCHASE AGREEMENT [ATTACH] 20 EXHIBIT B NOTICE OF EXERCISE (TO BE SIGNED ONLY UPON EXERCISE) To: Aura Systems, Inc. The undersigned holder hereby elects to convert $___________ (the "Conversion Amount") of the outstanding total balance of the Convertible Promissory Note dated as of ________________ in the original principal amount of $__________ made by Aura Systems, Inc. (the "Company") in favor of the undersigned holder, as amended (the "Note"), pursuant to Section 9 of the Note and effective as of _______________ . Unless otherwise specified below, the Conversion Amount shall be allocated (i) first to accrued interest on the Note, (ii) second to fees or other amounts payable under the Note and (iii) third to the principal balance of the Note. Other Instructions: ______________________________________________________ _______________________________________________________________________________. Please issue the stock certificates and warrants issuable upon such conversion in the name or names specified below: - ----------------------------------- -------------------------------------- (Name of Holder) (Name of Holder) - ----------------------------------- -------------------------------------- (Name of Signer) (Name of Signer) - ----------------------------------- -------------------------------------- (Signature) (Signature) - ----------------------------------- -------------------------------------- (Title of Signer) (Title of Signer) - ----------------------------------- -------------------------------------- (Address) (Address) - ----------------------------------- -------------------------------------- (City, State, Zip Code) (City, State, Zip Code) - ----------------------------------- -------------------------------------- (Federal Tax Identification Number) (Federal Tax Identification Number) - ----------------------------------- -------------------------------------- (Date) (Date) 21 EXHIBIT C SCHEDULE OF EXCEPTIONS (AGREEMENTS) 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 Alpha Ceramics purchase agreement has been assigned as collateral to the purchasers in such sale/leaseback transaction. 3. The Plaintiffs in Arthur Schwatz v. Aura Systems, Inc. received a Writ of Attachment to collect a portion of their judgment. On May 3, 2004, the Plaintiffs used this Writ to effect a levy against the Company's primary bank account and received approximately $191,689. On May 11, 2004, Plaintiffs returned those funds to the Company without relinquishing their rights under the Writ. On June 7, 2004, the Plaintiff and the Company entered an Agreed Judgment in this case with a 45 day delayed effective date. Defaults 1. Shareholder litigation (Barovich/Chiu et al ) judgment settlement for approximately $789,000 is in default. In April of 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. 3. The $1,000,000 Note Payable to the purchasers in the sale/leaseback transaction, dated December 1, 2002, became due and payable on May 30, 2004. Financial Statements 1. The long-term note receivable from Alpha Ceramics was assigned to the Purchasers in the Sale/Leaseback Agreement, dated December 1, 2002, as disclosed in the footnotes and MD&A of recent public filings (see Liens Note 2 above); however, this receivable was included on the balance sheet in the most recent financial statements. 22 EXHIBIT D SCHEDULE OF EXCEPTIONS (NOTES) 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 the Company's bank accounts but has taken no further action. 2. Convertible notes payable, issued in August - October 2002 for a total principal amount of $625,000 are in default. 3. The $1,000,000 Note Payable to purchasers in a sale/leaseback transaction, dated December 1, 2002, became due and payable on May 30, 2004. 23 EXHIBIT E SCHEDULE OF EXCEPTIONS (SECURITY AGREEMENTS) 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. The Plaintiffs in Arthur Schwatz v. Aura Systems, Inc. received a Writ of Attachment to collect a portion of their judgment. On May 3, 2004, the Plaintiffs used this Writ to effect a levy against the Company's primary bank account and received approximately $191,689. On May 11, 2004, Plaintiffs returned those funds to the Company without relinquishing their rights under the Writ. On June 7, 2004, the Plaintiff and the Company entered an Agreed Judgment in this case with a 45 day delayed effective date. 24 EXHIBIT F REGISTRATION RIGHTS AGREEMENT [ATTACH INTERCREDITOR FORM] 25 EX-99.4 5 v07362_ex99-4.txt SHAREHOLDER AGREEMENT This SHAREHOLDER AGREEMENT (this "Agreement") is made as of August 19, 2004 by and among the parties listed on the signature page hereto (individually, a "Shareholder" and collectively, the "Shareholders"). PREAMBLE A. Certain of the Shareholders are parties to that certain Securities Purchase Agreement of even date herewith (the "Securities Purchase Agreement") for the purchase of Series B Convertible Preferred Stock, par value $.005, (the "Series B Preferred Stock") of Aura Systems, Inc., a Delaware corporation (the "Company"), which is convertible into shares of common stock, par value $.005 (the "Common Stock") of the Company. B. Certain of the Shareholders are parties to that certain Amendment and Conversion Agreement of even date herewith (the "Amendment and Conversion Agreement") for the conversion of indebtedness of the Company into Series B Preferred Stock. C. Certain of the Shareholders are parties to that certain Settlement Agreement dated as of August __, 2004 whereby certain shares of Series B Preferred Stock are being issued in settlement of litigation (the "Settlement"). D.. In connection with the Securities Purchase Agreement, Cipora Lavut, Maimon and Ben Moshe each have executed a Promissory Note dated the date hereof (the "Lavut Note", the "Maimon Note" and the "Ben Moshe Note", respectively) (individually, a "Note" and collectively, the "Notes"). E. To induce each other to enter into the Securities Purchase Agreement, the Amendment and Conversion Agreement and the Settlement the Shareholders have agreed to enter into this Agreement. F. Capitalized terms which are not defined in this Agreement shall have the respective meanings ascribed thereto in the Securities Purchase Agreement or the Amendment and Conversion Agreement and , the Settlement NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, the parties hereto hereby agree as follows: SECTION 1. BOARD OF DIRECTORS; VOTING OF SHARES. 1.1. BOARD SIZE. The Company's Certificate of Incorporation is silent on the size of the Board of Directors. The Company's Bylaws, after giving effect to a recent amendment effective on the Closing Date, provide that the Board of Directors shall be seven in number. The Shareholders shall use their best efforts to take all necessary action to cause the size of the Board of Directors of the Company at all times to remain set at seven directors. 1.2. DIRECTOR DESIGNATION RIGHTS. The Company's Certificate of Incorporation entitles the holders of the Series B Preferred Stock to elect four directors so long as any Series B Preferred Stock is outstanding. Following the Closing Date the Shareholders agree to vote for directors for such four director positions, designated as follows: (i) Leverage shall have the right to designate one director; (ii) Cipora Lavut shall have the right to designate one director; (iii) Maimon shall have the right to designate one director; and (iv) Ben Moshe shall have the right to designate one director. Such designees may be either the persons nominated by the Company's Board of Directors to serve as directors or such other persons as the Shareholder(s) may designate in accordance with the provisions of this Agreement. Upon the occurrence of (x) a Default (as defined in the Lavut Note), the director designation right of Lavut under this Agreement shall terminate, (y) a Default (as defined in the Maimon Note), the director designation right of Maimon under this Agreement shall terminate and (z) a Default (as defined in the Ben Moshe Note), the director designation right of Ben Moshe under this Agreement shall terminate. In addition, if any Shareholder with designation rights under this Agreement ceases to hold any Series B Preferred Stock, the director designation right of such party shall terminate. Any director designated by any Shareholder as an "Initial Director Designee" (as hereinafter defined) pursuant to this Section shall take and hold office only so long as the Shareholder designating such director is not in Default under its respective Note and, upon taking office shall submit a conditional resignation, effective automatically upon termination of such designating Shareholder's director designation rights. If any Shareholder's director designation rights under this Agreement terminate, then any successor director shall be selected by the Board of Directors. As a condition to the Closing under the Securities Purchase Agreement, Carl Albert, James S. Harrington and Lawrence Diamant will submit their resignations as members of the Company's Board of Directors, effective as of the Closing Date. The initial director designees (the "Initial Director Designee") of such Shareholders on the Closing Date are as follows: Leverage: Neal Meehan (Existing director) Lavut: Raymond Yu (New director) Maimon: Dr. Fred Balister (New director) Ben Moshe: Izar Fernbach (New director) Each Shareholder with director designation rights represents and warrants (i) that any director now or hereafter designated by such Shareholder under this Agreement is not (and will not be at the time of designation) a person of the type described in 17 CFR 230.262(b), the text of which is attached hereto as Exhibit A, and (ii) that the director designation rights held by such Shareholder, the exercise thereof, and the voting for the election of such director do not (and will not) violate any applicable law, statute, rule or regulation or any applicable order or decree, including without limitation any federal or state securities law, statute, rule or regulation or any order or decree of the Securities Exchange Commission or state securities agency. -2- For purposes of this Agreement, (i) rights and obligations under this Agreement with respect to voting as shareholders shall also include any shareholder action by written consent pursuant to Delaware law, and (ii) director designation rights under this Agreement shall include the right to designate an initial designee for election as director, as well as the right to change such designation by designating a replacement designee. Each Shareholder further acknowledges that, in the event of any subsequent vacancy on the Board of Directors (whether by resignation, removal or death of any such directors) or upon the expiration of a director's term of office, in addition to the right of the Shareholders to designate amongst themselves a successor director to fill such vacancy in accordance with the terms of this Agreement, the Board of Directors of the Company retains the unfettered discretion and right to appoint a director to fill any vacancy in accordance with the Bylaws and to nominate directors for the stockholders to approve at a stockholder meeting (including any action by written consent of the stockholders). 1.3. BOARD COMPOSITION. Each Shareholder shall use their best efforts to cause the four directors who are elected by the Shareholders to be comprised at all times of the persons designated from time to time in accordance with the director designation rights. 1.4. VOTING AND OTHER ACTIONS TO EFFECTUATE. Without limiting the generality of the foregoing: (i) each Shareholder shall vote all shares of stock of the Company currently owned or hereafter acquired by such Shareholder which are entitled to vote in any election or removal of such directors by the stockholders of the Company (whether at a stockholder meeting or by written consent) in accordance with the exercise of director designation rights; (ii) each Shareholder shall not vote any such stock or take any other action in any manner which is inconsistent with the terms of this Agreement, including without limitation amending or causing the amendment of the Certificate of Incorporation or Bylaws in any manner inconsistent with the terms of this Agreement; (iii) each Shareholder shall take or cause to be taken all other action necessary to effectuate or implement the director designation rights; (iv) each Shareholder shall also cause their affiliates to do the same. SECTION 2. INCREASE IN AUTHORIZED SHARES; VOTING OF SHARES. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock and exercise of all warrants issued in connection therewith, each Shareholder shall vote all shares of stock of the Company currently owned or hereafter acquired by such Shareholder which are entitled to vote on any increase of the authorized shares of Common Stock (whether at a stockholder meeting or by written consent) in favor of an increase to at least such number of shares as shall be sufficient for such purpose, including, but not limited to, voting in favor of any necessary amendment to the Company's Certificate of Incorporation. Each Shareholder shall also cause their affiliates to do the same. SECTION 3. INTENTIONALLY OMITTED -3- SECTION 4. LEGENDS ON STOCK CERTIFICATE. In order to effectuate the terms of this Agreement, each certificate of stock issued to the Shareholders evidencing ownership of shares of Series B Stock of the Company currently owned or hereafter acquired by such Shareholder shall bear the following legend upon its face or legends of similar effect: "THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VOTING AGREEMENTS CONTAINED IN A SHAREHOLDER AGREEMENT DATED AS OF AUGUST 19, 2004, AS IT MAY BE AMENDED FROM TIME TO TIME." SECTION 5. PROTECTIVE PROVISIONS. So long as any shares of Series B Preferred Stock held by the Shareholders shall be outstanding, this Agreement may not be amended or otherwise modified without the written consent of the four Shareholders having director designation rights under this Agreement which have not terminated. Any amendment or modification effected in accordance with this Section shall be binding on all Shareholders. SECTION 6. FURTHER ASSURANCES. Each Shareholder covenants and agrees (i) to vote, and otherwise use its best efforts to cause the Company to provide, the full rights and benefits contemplated by this Agreement and to fully comply with and perform each of its obligations contained in this Agreement and shall take any and all action as a stockholder of the Company as may be necessary to cause the Company to provide such rights and benefits and to comply with such obligations and (ii) to execute such further documents and take such further actions as may be necessary or appropriate to effectuate the purposes of this Agreement, including without limitation the granting of irrevocable proxies. SECTION 7. TERMINATION. This Agreement shall terminate on the occurrence of any of the following events: (a) As to any single Shareholder, when such Shareholder no longer own any shares of Series B Preferred Stock; or (b) As to all Shareholders, upon the execution of a written agreement by the four Shareholders having director designation rights under this Agreement which have not been terminated. -4- SECTION 8. MISCELLANEOUS. 8.1. NOTICE. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered upon transmittal by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. Notice to a Shareholder shall be sent to its facsimile number or at the address set forth below or at such other address as may be furnished in writing to the notifying party: American Friends of Karen Chava Bnai Levi Aries Group attn: Z. Kurtzman 12100 Wilshire Blvd., Suite 705 Los Angeles, CA 90025 Fax: (310) 820-4118 Edgar Appleby Peacock Point Locust Valley, NY 11560 Fax: 516-674-3748 Yair Ben Moshe 7250 Beverly Blvd., Suite 101 Los Angeles, CA 90036 Fax: 323-954-8848 Shmuel Ben Moshe 7250 Beverly Blvd., Suite 101 Los Angeles, CA 90036 Fax: 323-954-8848 Anton d'Espous 22 Rue d'Bearn 9200 St. Cloud, France 92210 Fax: ____________________ Izar Fernbach 7250 Beverly Blvd., Suite 101 Los Angeles, CA 90036 Fax: 323-954-8848 Yaska Ginsberg P.O. Box 1406 Studio City, CA 91614 Fax: 323-330-1390 Patrick Glen 3003 Windmill Rd. Torrance, CA 90505 Fax: ____________________ Neal Kaufman Aries Group 12100 Wilshire Blvd., Suite 705 Los Angeles, CA 90025 -5- 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 Koyah Ventures LLC c/o ICM Asset Management, Inc. 601 W. Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: 509-444-4500 Zvi Kurtzman 109 N. Kilkea Dr. Los Angeles, CA 90048 Fax: 310-820-4118 Cipora Lavut Aries Group attn: Cipora Lavut 12100 Wilshire Blvd., Suite 705 Los Angeles, CA 90025 Fax: (310) 820-4118 David Maimon P.O. Box 1406 Studio City, CA 91614 Fax: 323-330-1390 Prudent Bear Fund, Inc. 8140 Walnut Hill Lane, Suite 300 Dallas, TX 75206 Attn: Gregg Jahnke Fax: 214-696-5556 Raven Partners, L.P. c/o ICM Asset Management, Inc. 601 W. Main Avenue, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: 509-444-4500 -6- Arthur Schwartz Aries Group 12100 Wilshire Blvd., Suite 705 Los Angeles, CA 90025 Fax: (310) 820-4118 James Simmons c/o ICM Asset Management, Inc. 601 W. Main Avenue, Suite 600 Spokane, WA 99201 Fax: 509-444-4500 TripleNet, LLC 80 W. Wieuca Road Suite 150 Atlanta, GA 30342 Fax: (404) 250-1612 Steven Veen 7936 E. 6th Street Downey, CA 90241 Fax: ____________________ 8.2. ADDITIONAL SHAREHOLDERS. Any additional persons or entities acquiring Series B Preferred Stock after the date hereof shall become additional parties to this Agreement with all of the rights and obligations of a Shareholder hereunder by executing and delivering an agreement joining in this Agreement in the form of the Joinder Agreement attached hereto as Exhibit B (a "Joinder Agreement"). In the event of any sale or other transfer of Series B Preferred Stock other than in an open market transaction, the transfer shall be on the condition that the transferee is bound by and subject to the terms of this Agreement, and the transferring Shareholder shall cause the transferee to confirm being bound by and subject to this Agreement by executing and delivering a Joinder Agreement unless such transferee is already a party to this Agreement. 8.3. NO WAIVER. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. 8.4. GOVERNING LAW; JURISDICTION. THE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA, 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 LOS ANGELES, CALIFORNIA, 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. -7- 8.5. SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. 8.6. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 8.7. NO LIABILITY. No Shareholder with director designation, rights makes any representation or warranty as to the fitness or competence of such Shareholders designee or shall incur any liability for the actions of such designee; it being understood, however, that this Section is not intended to reduce the representation and warranty made by each Shareholder with director designation rights contained in Section 1.2. 8.8. SPECIFIC PERFORMANCE. Each Shareholder acknowledges that money damages for breach of this Agreement are impossible to measure and would not adequately compensate the other Shareholders for damages resulting from such breach, and that the other Shareholders would suffer irreparable harm from such breach. Accordingly, each Shareholder agrees that the other Shareholders shall be entitled to specific enforcement of this Agreement (including a temporary injunction or restraining order) and, in any action to specifically enforce this Agreement, waives any claim or defense that an adequate remedy exists at law and any requirement to post a bond. 8.9. ATTORNEYS FEES. In any action to enforce this Agreement, the prevailing party shall be entitled to recover its reasonable costs and expenses, including without limitation attorneys fees. 8.10. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. 8.11. HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 8.12. COUNTERPARTS. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. -8- 8.13. CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. 8.14. NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity. [SIGNATURES ON NEXT PAGE] -9- IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the day and year first above written. SHAREHOLDERS: AMERICAN FRIENDS OF KAREN CHAVA BNAI LEVI By: ------------------------------------------ Name: ------------------------------------------ Title: ------------------------------------------ ------------------------------------------------ EDGAR APPLEBY ------------------------------------------------ YAIR BEN MOSHE ------------------------------------------------ SHMUEL BEN MOSHE ------------------------------------------------ ANTON D'ESPOUS ------------------------------------------------ IZAR FERNBACH ------------------------------------------------ YASKA GINSBERG ------------------------------------------------ PATRICK GLEN ------------------------------------------------ NEAL KAUFMAN -10- KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: --------------------------------------------- Name: Robert J. Law Title: Vice President KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: --------------------------------------------- Name: Robert J. Law Title: Vice President KOYAH VENTURES LLC By: --------------------------------------------- Name: Robert J. Law Title: Vice President ------------------------------------------------ ZVI KURTZMAN ------------------------------------------------ CIPORA LAVUT ------------------------------------------------ DAVID MAIMON PRUDENT BEAR FUND, INC. By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ -11- RAVEN PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: --------------------------------------------- Name: Robert J. Law Title: Vice President ------------------------------------------------ ARTHUR SCHWARTZ ------------------------------------------------ JAMES SIMMONS TRIPLENET, LLC By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ ------------------------------------------------ STEVEN VEEN ACKNOWLEDGMENT AND AGREEMENT The Company hereby acknowledges the existence of the foregoing Agreement, but is not a party to this Agreement and shall not have any obligations under this Agreement except as follows: To effectuate the provisions of Section 8.2 of this Agreement, the Company hereby agrees that: (1) in the event of the issuance of any additional shares of Series B Preferred Stock after the date hereof, the Company shall require, as a condition of the issuance of certificates evidencing such shares, that the person or entity acquiring such shares execute and deliver to each of the other Shareholders a duly executed counterpart of this Joinder Agreement unless such person or entity is already a party to this Agreement, and (2) all such certificates shall be legended as set forth in Section 4 of the foregoing Agreement. AURA SYSTEMS, INC. By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ -12- EXHIBIT A 17 CFR 230.262 SS. 230.262 DISQUALIFICATION PROVISIONS. Unless, upon a showing of good cause and without prejudice to any other action by the Commission, the Commission determines that it is not necessary under the circumstances that the exemption provided by this Regulation A be denied, the exemption shall not be available for the offer or sale of securities, if: (a) The issuer, any of its predecessors or any affiliated issuer: (1) Has filed a registration statement which is the subject of any pending proceeding or examination under section 8 of the Act, or has been the subject of any refusal order or stop order thereunder within 5 years prior to the filing of the offering statement required by ss.230.252; (2) Is subject to any pending proceeding under ss.230.258 or any similar section adopted under section 3(b) of the Securities Act, or to an order entered thereunder within 5 years prior to the filing of such offering statement; (3) Has been convicted within 5 years prior to the filing of such offering statement of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission; (4) Is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily restraining or enjoining, or is subject to any order, judgment or decree of any court of competent jurisdiction, entered within 5 years prior to the filing of such offering statement, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the Commission; or (5) Is subject to a United States Postal Service false representation order entered under 39 U.S.C. ss.3005 within 5 years prior to the filing of the offering statement, or is subject to a temporary restraining order or preliminary injunction entered under 39 U.S.C. ss.3007 with respect to conduct alleged to have violated 39 U.S.C. ss.3005. The entry of an order, judgment or decree against any affiliated entity before the affiliation with the issuer arose, if the affiliated entity is not in control of the issuer and if the affiliated entity and the issuer are not under the common control of a third party who was in control of the affiliated entity at the time of such entry does not come within the purview of this paragraph (a) of this section. (b) Any director, officer or general partner of the issuer, beneficial owner of 10 percent or more of any class of its equity securities, any promoter of the issuer presently connected with it in any capacity, any underwriter of the securities to be offered, or any partner, director or officer of any such underwriter: -13- (1) Has been convicted within 10 years prior to the filing of the offering statement required by ss.230.252 of any felony or misdemeanor in connection with the purchase or sale of any security, involving the making of a false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment adviser; (2) Is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily enjoining or restraining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within 5 years prior to the filing of such offering statement, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security, involving the making of a false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment adviser; (3) Is subject to an order of the Commission entered pursuant to section 15(b), 15B(a), or 15B(c) of the Exchange Act, or section 203(e) or (f) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.); (4) Is suspended or expelled from membership in, or suspended or barred from association with a member of, a national securities exchange registered under section 6 of the Exchange Act or a national securities association registered under section 15A of the Exchange Act for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; or (5) Is subject to a United States Postal Service false representation order entered under 39 U.S.C. ss.3005 within 5 years prior to the filing of the offering statement required by ss.230.252, or is subject to a restraining order or preliminary injunction entered under 39 U.S.C. ss.3007 with respect to conduct alleged to have violated 39 U.S.C. ss.3005. (c) Any underwriter of such securities was an underwriter or was named as an underwriter of any securities: (1) Covered by any registration statement which is the subject of any pending proceeding or examination under section 8 of the Act, or is the subject of any refusal order or stop order entered thereunder within 5 years prior to the filing of the offering statement required by ss.230.252; or (2) Covered by any filing which is subject to any pending proceeding under ss.230.258 or any similar rule adopted under section 3(b) of the Securities Act, or to an order entered thereunder within 5 years prior to the filing of such offering statement. -14- EXHIBIT B JOINDER AGREEMENT The undersigned, hereby agrees to become a party to the Shareholders Agreement dated as of August 19, 2004, relating to Aura Systems, Inc. as it may be amended from time to time, with all of the rights and obligations of a "Shareholder" thereunder, which obligations include without limitation the obligation to vote for directors as designated by certain parties to the Shareholders Agreement. This Joinder Agreement shall take effect and shall become a part of such Shareholders Agreement immediately upon execution. Executed as of the date set forth below. Dated: [Name of Joining Party] -------------------------- By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Address: ------------------------------------ ------------------------------------ -15- EX-99.5 6 v07362_ex99-5.txt PROMISSORY NOTE Principal Amount: $1,460,000 El Segundo, California Interest Rate: 8% August 19, 2004 FOR VALUE RECEIVED, the undersigned, Yair Ben Moshe ("Borrower"), hereby promises to pay to the order of AURA SYSTEMS, INC., a Delaware corporation ("Lender"), the principal sum of One Million Four Hundred and Sixty Thousand Dollars ($1,460,000) together with interest thereon at the rate of 8% per annum, from the date hereof, payable in according with the schedule attached hereto, with the entire remaining unpaid principal balance, together with accrued interest, due and payable in full on May 5, 2005. This Note is being delivered by Borrower to Lender pursuant to a Securities Purchase Agreement ("Purchase Agreement") dated as of August 19, 2004, by and between Lender, Borrower and the other purchasers signatories thereto, and is subject to the terms of an Escrow Agreement ("Escrow Agreement") dated as of August 19, 2004, by and between Lender, Borrower and the other purchasers signatories thereto. All capitalized terms not defined herein shall have the meanings set forth in the Purchase Agreement. 1. Interest Rate and Payment. The outstanding principal balance of this Note shall accrue interest at the rate of eight percent (8%) per annum. All payments shall be made to the address of Lender stated in this Note, or to any other address as Lender may specify. 2. Prepayment. This note may be prepaid, in whole or in part, at any time, without penalty. 3. 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. 4. Late Charge. If any payment of principal or interest under this Note shall not be made within seven (7) business days after the due date, this Note shall bear interest (after as well as before judgment) at a rate of three percent (3%) 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. 5. Default. The following shall constitute a default under this Note (a "Default"): Failure by Borrower to make any payment due under this Note, within seven (7) business days following the due date, or (ii) failure by Borrower to comply with its obligations under Paragraph 7(b) of this Note. 6. Acceleration. If a Default shall continue for more than sixty (60) days after written notice by Lender to Borrower (an "Acceleration 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. 7. Certain Default Consequences. Upon the occurrence of a Default, in addition to any other rights and remedies that may exist as a result of such Default, the following provisions shall apply: (a) Purchase Price Adjustment. In addition to principal, interest or other amounts otherwise due and payable, there shall become due and payable under this Note as additional principal, without notice or demand, a sum equal to Ten Percent (10%) of the amount of the past due payment ("Purchase Price Adjustment"), which amount shall constitute additional consideration for the Units purchased by Borrower under the Purchase Agreement. Upon acceleration of this Note after the occurrence of an Acceleration Default, there shall become due and payable under this Note, as additional principal, without notice or demand, a sum equal to Ten Percent (10%) of the accelerated amount. (b) Reduction of Warrant Shares. 4,562,500 Series B Warrants shall automatically be cancelled and Borrower shall forthwith surrender or cause to be surrendered for cancellation Series B Warrants in such amount. Such cancellation shall only occur one time regardless of whether there are multiple Defaults. The Series B Warrants to be surrendered by Borrower shall be surrendered by Borrower in the following order: First, Series B Warrants which are not on deposit under either (i) the Escrow Agreement or (ii) the Security and Pledge Agreement with Koyah Partners dated as of August 10, 2004 (the "Security Agreement"). Second, to the extent the surrendered Warrants do not equal the number of Series B Warrants required to be cancelled, Series B Warrants on deposit under the Escrow Agreement. The Series B Warrants on deposit under the Security Agreement shall not be cancelled pursuant to this paragraph 7(b). (c) Conversion of Series B Shares Upon Default. At the option of Lender, exercisable at any time, Lender shall have the right, upon notice to Borrower ("Conversion Notice"), to cause the conversion of all Series B Shares acquired by Borrower under the Purchase Agreement into Common Stock ("Conversion Shares") without any action by Borrower, but on the other conversion terms set forth in Section 6(c) through 6(j) of the Certificate of Designations. Notwithstanding the foregoing, Lender cannot cause conversion of any Series B Shares on deposit under the Security Agreement pursuant to this paragraph 7(c).If, at the time of the Conversion Notice, the resale of the Conversion Shares is not covered by an effective registration statement under the Securities Act of 1933, then such Conversion Notice shall not become effective until such time as the resale of the Conversion Shares are either covered by an effective registration or can be sold by Borrower in any three-month period without volume limitation and without registration in compliance with Rule 144 under the Securities Act of 1933. (d) Suspension of Voting Rights During Default. So long as any Default shall be continuing, then without notice or demand, Borrower shall cease to be entitled to vote any Series B Shares, Conversion Shares or Warrant Shares held by the Escrow Agent for the account of Borrower. 2 (e) Termination of Director Nominating Rights. The director nomination rights of Borrower under the Shareholder Agreement shall terminate. (f) Cancellation of Unpaid Securities. Series B Shares and Series B Warrants which have not been paid for shall, at Lender's option, be cancelled. In the event that the Lender elects to cancel any Series B Shares and Warrants under this Paragraph 7(f) as a result of a Default, Borrower's obligation to pay for the cancelled Series B Shares and Warrants shall terminate. 8. No Exclusive Remedy. 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. 9. Governing Law. This Note shall be governed by and construed and interpreted in accordance with the law of the State of California, 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 Los Angeles County, California, 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. 10. Severability. If any part of this Note is determined to be illegal or unenforceable, all other parts shall remain in full force and effect. 11. 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. If to Lender: Aura Systems, Inc. 2335 Alaska Avenue El Segundo, CA 90245 Attention: President Fax: (310)-643-8719 If to Borrower: At the address set forth in the Purchase Agreement. 3 12. 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. Prepayments applied to principal shall be applied in inverse order of maturity. (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) 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. 4 IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its name on and as of the day and year first above written. "Borrower" - ---------------------- Yair Ben Moshe 5 -----END PRIVACY-ENHANCED MESSAGE-----