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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended...............................February 28, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from................. to ..................
Commission File Number.......................................0-17249
AURA SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4106894
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2335 Alaska Ave.
El Segundo, California 90245
(Address of principal executive offices)
(310) 643-5300
Registrant's telephone number
Name of each exchange
on which registered
None
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
On February 3, 2000 the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $46,140,620. The aggregate market value
has been computed by reference to the last trading price of the stock on
February 3, 2000. On such date the Registrant had 177,249,203 shares of Common
Stock outstanding.
When used in this report, the word "expects," "anticipates," and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results may differ significantly from the results discussed in forward-looking
statements as a result of certain factors, including those discussed in this
Report. The Company expressly disclaims any obligations or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any changes in the Company's expectations with
regard hereto or any change in events, conditions or circumstances on which any
such statement is based. This Report includes product names, trade names and
marks of companies other than the Company. All such company or product names are
trademarks, registered trademarks, trade names or marks of their respective
owners and are not the property of the Company.
PART I
ITEM 1 BUSINESS
I. INTRODUCTION
Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation,
was founded in 1987 to engage in the development, commercialization and sales of
products, systems and components using its patented and proprietary
electromagnetic and electro-optical technology. Since 1987 the Company's
proprietary and patented technology has been developed for use in systems and
products for commercial, industrial, consumer, and government use.
Prior to Fiscal 1992, the Company was engaged in various classified
military programs, which allowed the Company to develop its electromagnetic and
electro-optical technologies and applications. A number of "one-of-a-kind"
systems were built and successfully tested in these fields. Subsequently, the
Company developed additional electromagnetic and electro-optics know-how and
technology and transitioned from a supplier of defense technology to a supplier
of consumer and industrial related products and services.
In 1994, the Company founded NewCom, Inc. ("NewCom"), a Delaware
corporation, which engaged in the manufacture, packaging, selling and
distribution of computer related communications and sound related products,
including modems, CD-ROMs, sound cards, speaker systems and multimedia products,
thereby expanding presence in the growing multimedia, communication and
sound-related consumer electronics market.
In 1996, the Company acquired 100% of the outstanding shares of MYS
Corporation of Japan ("MYS") to expand the range of its sound products and
speaker distribution network. MYS engaged in the manufacture and sale of
speakers and speaker systems for home, entertainment and computers. Subsequent
to Fiscal 1999, the Company sold MYS to MYS management.
In September 1997, NewCom completed an initial public offering,
resulting in Aura owning a majority interest in NewCom at the conclusion of the
offering. During the second half of Fiscal 1999 NewCom's business suffered from
adverse industry conditions, including increased price reductions and a decline
in demand resulting from increased incorporation of computer peripherals at the
OEM level. These conditions resulted in heavy losses to NewCom and its
competitors, causing a buildup in inventory and difficulty in collecting
receivables from mass merchants. NewCom's business reached a critical juncture
in the fourth quarter of Fiscal 1999 when Deutsche Financial Services, which
maintained NewCom's working capital line, announced that it was unwilling to
continue to advance working capital to NewCom under its credit facility. This,
in conjunction with the actions of the retail mass merchants, resulted in NewCom
ceasing most of its operations by the end of Fiscal 1999 and the ultimate
cessation of its business shortly thereafter.
Aura anticipated that its working capital needs in Fiscal 1999 would be met
from a number of sources, including the repayment by NewCom of
approximately $20 million of indebtedness, which was due in September 1998,
and proceeds from external debt and equity financing. NewCom was ultimately
unable to meet its obligations to Aura in September 1998, ultimately
creating a significant cash shortfall to Aura. This required Aura beginning
in late January 1999 to refocus its operations in shutting down certain
operating divisions, selling its MYS subsidiary, licensing and selling
proprietary based AuraSound speaker technology and assets, and leasing its
Electrotec concert touring sound equipment. The Company also temporarily
suspended the development of certain electro-magnetic projects, including
the electromagnetic valve actuator ("EVA"). Subsequent to Fiscal 1999 the
Company entered into agreements providing for the restructuring of more
than $85 million of debt and contingent liabilities. Of this amount, over
$37 million was either converted into equity or forgiven. See "Item 7.
Management Discussion and Analysis of Financial Condition and Results of
Operations.
Following the end of Fiscal 1999 the Company's operations are now
focused on manufacturing and commercializing the AuraGen(R) ("AuraGen") family
of electromagnetic products, with applications for military, industry and the
consumer. The AuraGen is a unique, patented electromagnetic generator that is
mounted to the automobile engine, which generates both 110 and 220 volt AC power
at all engine speeds including idle. Commercial production of the AuraGen
commenced in Fiscal 1999 and product is being distributed and sold through
dealers, distributors and OEMs.
Aura intends to continue to focus its business on the AuraGen line of
products during the remainder of Fiscal 2000 and beyond. ( See "Description of
Business - Magnetic Technology".) In addition, Aura is entitled to receive
royalties from Daewoo Electronics for its electro-optics technology ("AMA")
licensed to Daewoo in 1992.
(See "Description of business - Electro-Optical Technology.")
II. DESCRIPTION OF BUSINESS
A. Technology
a. Magnetic Technology
The Company has developed and patented highly efficient magnetic
circuits, which the Company believes provides substantial improvements over
devices of similar purpose, available prior to Aura's technology. These designs
include the Ferrodisk Induction Motor applied in the Company's electromagnetic
power generator technology and electromagnetic actuators, such as the HFATM and
the EMATM actuator designs.
Ferrodisk Induction Motor (AuraGen(R))
In Fiscal 1993, the Company's research discovered that certain magnetic
circuit equations could apply, with different parameters, to describe linear
actuators that could provide unusually high force levels in a device of
relatively small volume and weight. As this concept extended from a linear
actuator to a rotary actuator, a motor called the "Ferrodisk Motor" was
developed by the Company.
In the latter half of 1995 and in early 1996, a device named the
Ferrodisk Alternator Starter (FAS(TM)) was designed, built, tested, installed on
a Ford Ranger truck, and displayed publicly at the Society of Automotive
Engineers (SAE) trade show. FAS(TM) used its large torque capacity to start the
engine with direct drive, that is, with no gearing. After starting, its function
converted to that of an alternator, which had a capacity for generating power
several times that of a conventional alternator. The Company called this
electromagnetic power generation feature the AuraGen.
The AuraGen contains aluminum bars and rings embedded in it. AC
voltages, similar to household currents, set up electric currents in the
electromagnets, creating a series of magnetic poles that whirl around the rings.
When the disk of steel is forced to spin faster than the motion of the magnetic
poles, there is an interaction between the magnetism in the disk and the coils
of the electromagnets. The electric currents in the wires are pushed so they
flow backwards against the voltages, and this effect builds up the electrical
energy content in the electronics at the expense of mechanical energy provided
by the rotor. The electronic box of the AuraGen provides the alternating
voltages to make the device work, stores the electrical energy generated, and
prepares the exact type of voltages as in household wiring. The device is
controlled by a computer processor that continuously measures the speed of the
AuraGen rotor and the power drawn by the user, so that alternating voltages of
the best phase and frequency are sent to the electromagnets.
Magnetic High Fidelity Actuators (HFATM)
An actuator is a device that creates a lateral force upon command.
Actuators are used in a wide range of applications, including high speed,
precision applications such as audio speaker drivers, computer-controlled
applications such as the control of aircraft flaps, and heavy-duty applications
such as the lifting of the bed of a dump truck. Actuators are generally
hydraulic, pneumatic, mechanical or voice coil. Hydraulic, pneumatic and
mechanical actuators can produce extremely high forces and long strokes in
relatively small packages. Voice coil actuators provide high precision and
high-speed operation, producing short stroke and very little force. Actuators
are most commonly used to position objects, or to create or cancel vibrations by
producing a force upon command.
The Company believes that its high fidelity electromagnetic actuator
HFATM, is the first "Lorenz's Law" actuator to provide both the high forces and
long strokes produced by hydraulic or pneumatic actuators at the speed and
precision of response produced by voice coil actuators. This ability is
attributable to the patented magnetic design. High-energy permanent magnets are
arranged to focus nearly all of their magnetic energy into useful work. Standard
voice coil actuators typically utilize about 40% of the available magnetic
energy whereas Aura's HFATM uses nearly 90% of that energy. The magnetic
arrangement also allows virtually unlimited stroke potential. Standard voice
coil actuators typically provide less than one inch of stroke whereas the
HFA(TM)'s stroke is virtually unlimited. For example, Aura's HFATM is capable of
producing more than 1,000 pounds of force over a 32 inch stroke. The Company has
commercially used its HFATM technology in applications such as actuated weld
heads and is currently employing HFA(TM) technology in industrial shakers.
Electromagnetic Actuator ("EMA(TM)")
During Fiscal 1995, the Company developed, built and demonstrated a new
type of actuator, called the Electromagnetic Actuator, or EMATM. The Company
developed EMATM to fill the performance gap between linear actuators and
solenoids. To date, the principal application of the EMATM has been in Aura's
Electromagnetic Valve Actuator System ("EVA(TM)"), a patented
electromagnetically powered system which opens and closes engine valves at any
user specified time interval.
Like a solenoid, EMATM operates on purely electromagnetic principles,
and therefore uses no permanent magnets. The Company developed it initially for
the industrial and automotive markets, but believes it may also be incorporated
into the test equipment market as well. An EMA(TM) is physically equivalent in
size to solenoids with comparable force capacities and can be operated at
temperatures exceeding 450 degrees Fahrenheit.
What sets EMATM apart from a standard solenoid is its ability to
custom-tailor the force produced as a function of stroke. For example, an
automotive EGR valve requires peak force at the beginning of the stroke in order
to "crack" the valve open. A standard solenoid, by its very nature, produces
peak force at the end of its stroke, not at the beginning. Therefore, a solenoid
will require a large amount of power to compensate for its inherent limitation.
Conversely, the force profile of an EMATM can be customized to provide high
force at the beginning of the stroke, resulting in a more efficient device that
is much easier to control.
Another advantage of EMATM over a solenoid is its actuator-like
ability, which provides consistent force over much longer lengths. To be used
for an application requiring proportional control, a "proportional" solenoid
requires complex electronics to compensate for this inherent non-linearity. An
EMATM basically "spreads" the solenoid's peak force over the entire stroke,
providing linear force over a greatly extended stroke length without the need
for complex electronics.
b. ELECTRO-OPTICAL Technology
Light Efficient Displays - Actuated Mirror Array ("AMATM")
The Company has developed and patented a technology (a "light valve")
for generation of images called the Actuated Mirror Array ("AMATM") technology.
The AMA(TM) technology utilizes an array of micro actuators in order to control
tiny mirrors whose position change is used to cause a variation in intensity.
The Company expects this device to have a major impact on applications where
light efficiency is paramount, such as in large screen television, movie and
exhibition displays, and the testing of electro-optical devices for military or
civilian use.
Although there can be no assurances, the Company believes that the
AMATM can be manufactured at a competitive cost in large quantities, thus making
it commercially feasible. Thus, AMATM based devices are expected to offer the
combination of increased display intensity at a competitive production cost.
Light displays, such as projectors and large screen televisions, can be
made by a number of techniques, many of which are currently available. These
include liquid crystal displays ("LCD"), cathode ray tubes ("CRT"), deformable
mirror displays ("DMD"), oil film projectors and plasma tubes. For the segment
of the display market addressing large images, the principal requirement is to
get more light out per unit watt of electricity in. However, each of these
technologies requires the utilization of an element, which causes a loss of
light efficiency in order to create the image.
Liquid crystals utilize an electric field to change the light
polarization properties of a surface, which is divided into an array of cells to
paint an image. Cathode ray tubes utilize an electron beam, which is bent by the
video signal to create images by colliding with a phosphor on the front surface
to create light. DMD's utilize an electric field to bend a mirror at a large
angle to switch it to either "on" or "off". Oil film projectors change the
transmissive properties of an oil film allowing an image to be created. Plasma
tubes create an electrical discharge in a tiny tube with gas. The gas glows
allowing an image to be created by an array of such tiny tubes. Each of these
technologies has their own advantages and limitations, thus creating niches
within the display market where competitive advantages can be achieved.
The Company believes that the AMATM technology has a technical
advantage over other technologies in achieving higher contrast, more intensity
and longer lived elements.
The Company has entered into a license and manufacturing agreement
with Daewoo Electronics Co., Ltd. to manufacture televisions and other
devices based on AMATM technology. (See " Description of Business-Certain
Product Risk Factors-AMA."
B. Products
a. AuraGen(R)
The AuraGen is a patented technology (US Patent No. 5,734,217) that
could potentially have substantial benefits in size, weight and cost for
induction type electric motors and generators. The technology allows the
construction of induction machines of somewhere between one-half to two-thirds
reduction in weight and size for the same output. The machine itself does not
use any exotic materials and the components are simple to manufacture with
conventional tooling. In addition to the mechanical advantages the system uses a
proprietary control system which optimizes efficiency as a function of required
load. The AuraGen type machine could potentially offer substantial cost savings
due to reduced material requirements and simpler components. While the
technology has wide applications over a large range of horsepower it is best
utilized for machines in the range of 1.5 to 50 horsepower. The Company has
invested substantial resources to develop the technology into a rugged system
that can be sold commercially.
The first family of products using the AuraGen technology are
generators designed to fit under the hood of a full size pickup truck, SUV or
other large vehicle. In the under the hood application the AuraGen can provide
an effective torque to weight ratio of 0.648 ft-lb/lb with efficiency of 86% as
compared to a typical heavy duty brush-less alternator which has an effective
torque to weight ratio of 0.109 ft-lb/lb and efficiency of 65%. Thus the AuraGen
produces nearly six times more power per pound than typical heavy-duty
alternators.
The Company has gone through extensive testing of its 5KW (5000 watts)
continuous power rated mobile electric generator in both the laboratory and in
the field. Over 1000 units have been in the field for up to two years. The
Company has begun selling the 5KW 120/240V pure sine wave systems with total
harmonic distortion of less than 4%. Aura currently offers full turnkey plug and
play systems that fit in over 70 different engine configurations in popular GM,
Ford and Chrysler vehicles, as well as some models of full size trucks. In
addition the Company is developing other power rated generators between 3.5KW
and 12.5KW, all of which will fit under-the-hood of the types of vehicles
described above.
The North American market for mobile generators is estimated to be in
excess of $4 billion per year and growing at 4% to 5% per year. The worldwide
use is estimated to be over $10 billion per year. Traditional mobile power users
are found in construction, cable, emergency/rescue, marine, railroad,
recreational vehicles, telecommunications, tool sales truck, utilities,
municipalities and personal use. In addition to the traditional mobile power
market for generators, due to its compactness and clean power, the AuraGen could
potentially allow for applications that were not practical until now,
particularly in areas that require computers and other sensitive instruments.
One area where the AuraGen could be used with great advantages in both
cost and logistics is the military. In military applications, getting quiet
clean power from vehicles at low speed could potentially be critical as the Army
changes to digital applications with numerous sophisticated electronics and
sensors. The US Army has been testing the AuraGen product for over one year for
numerous applications and to date the results show a reliable and effective
system that can be used by the military. The Company is currently working with
the US Army for the use of the AuraGen in multiple army vehicle types.
Another area where the AuraGen could potentially offer unique
possibilities is in the telecommunication industry. Currently the AuraGen is
used by a number of broadcasting TV stations in their mobile news vehicles. The
AuraGen is also being used on a limited basis by cable companies for numerous
applications. The technical possibilities of the AuraGen have generated numerous
interests from utilities as well as municipalities across the nation. Currently
over 23 utilities across the nation have bought AuraGens as samples and are
evaluating the product. Similarly over 33 state and city governments have bought
the AuraGen for evaluation and testing.
The Company is positioning itself in the market place as a turn key
mobile power solution that is safer, more reliable, more convenient, with
better quality and at an effective cost. The safer solution is based on the
following: a) no need to carry fuel in a container, b) no exposed hot
components to touch/start, c) nothing heavy to lift, d) no pull start required,
e) power outlets located away from hot components and f) not easily stolen.
The increased reliability is based on using the standard vehicle
engines as compared to small stand-alone engines. The system does not require
any maintenance and does not have any starting problems associated with gensets.
The system uses the standard vehicle exhaust system, which results in a quieter,
cleaner power generating system.
The AuraGen solution provides convenient power by: a) not using
up valuable cargo space, b) not requiring an additional fuel tank, c)
no need to wait for the genset to cool down, d) available power while
driving or parked and e) the power setup and use is totally transparent
to the user. The quality of power delivered by the AuraGen system is pure
60 or 50 Hz sine wave at a constant voltage. As a result one can operate
sensitive equipment such as computers and coarse power such as tools and
compressors at the same time.
b. Electromagnetic Valve Actuator ("EVA(TM)")
EVATM is an electromagnetic actuator capable of opening and closing
internal combustion engine valves, replacing the mechanical camshaft on an
engine
Two major benefits arise from the EVA's ability to open and close the
valve electromagneticaly: 1) the camshaft and associated mechanical hardware can
be eliminated; and 2) the opening and closing of the intake and exhaust valves
can be commanded by the engine computer. Computer control of the valve timing
has potentially material benefits to engine performance, fuel economy and
emissions. With EVATM, the computer can precisely control the amount of air that
is allowed into the engine in the same way that modern fuel injectors control
the amount of fuel. By optimizing this "fuel-air mixture" dynamically as a
function of engine RPM and load, optimum engine performance can be achieved over
the entire operating range of the engine. With a standard camshaft, the engine
can be optimized at only one range of RPM and load conditions. That is why very
high performance engines idle "rough", as they are optimized for high RPM,
thereby sacrificing smoothness at low RPM.
By optimizing the fuel-air mixture dynamically, both performance
(horsepower) and fuel economy will increase, while emissions are expected to
decrease. The entire camshaft assembly, which includes timing chain, camshaft,
rockerarms, etc., is replaced by very simple valve actuators. Other emission
systems currently on the vehicle, such as the EGR (exhaust gas recirculation)
and IMRC (intake manifold runner control) valves can be eliminated. The throttle
assembly can also be eliminated by using EVATM to control the amount of air
going into the engine.
In recent years, the Company has entered into agreements with 15
companies to retrofit EVA's on different types of diesel, automobile and
motorcycle engines for evaluation and testing. During Fiscal 1998 an EVA system
was delivered to a major domestic Original Equipment Manufacturer (OEM) which is
evaluating EVA for possible use in its automobile production. In Fiscal 1998,
the Company developed a new, more reliable servo control system that provides
reduced power usage and reduced noise over the entire RPM range. In addition,
the Company started work on an improved latching mechanism for EVA that will
further reduce noise in the system.
In Fiscal 1999 as part of its refocus, the Company temporarily
suspended its activities on EVA development and commercialization to focus
its resources on the AuraGen. The Company is however, pursuing licensing of
this technology to third parties. The Company has not yet entered into any
licensing agreements for EVA.
C. Certain Product Risk Factors
The Company's business on a going-forward basis is focused on the
AuraGen family of products and on royalties for the AMA technology. While the
technology for the AuraGen has been extensively tested and verified , there are
significant risks associated with developing a market place for such a new
product. Similarly, the Company is totally dependent on Daewoo Electronics for
exploiting the AMA technology.
a. AURAGEN(R)
The AuraGen is a new product with limited history in the market place.
There can be no assurances that the product will succeed in the marketplace.
Currently, the Company's AuraGen is being evaluated by the U.S. Army
with a potential for a contract to install the AuraGen in thousands of military
vehicles. No assurances can be given when or if the contract will materialize
and what the ultimate size of the contract may be.
The U.S. Army has recently completed the field test of 5kW and 10kW
AuraGens. No assurances can be given as to if and when the US Army will conduct
other and future tests.
The Company has a U.S. Army contract for 10kW AuraGens. No
assurances can be given that the Army will purchase any material quantities of
this product.
The U.S. Marine Corp. has recently purchased 5kW AuraGens for
evaluation. No assurances can be given that any sizable contract will develop.
The AuraGen is currently configured for 110 and 240 volts. The 240V
systems that are in use in other countries are different from the U.S. 240-Volt
system. The Company is currently providing a solution that requires an
additional transformer. A future solution will incorporate the required changes
into the Electronic Control Unit ("ECU). While it is straightforward to make the
changes to the international 240 Volt, it has not been done as yet. No
assurances can be given as to when the changes will be made or if they will be
made.
The Company has recently completed the development of a 10kW AuraGen in
the same geometric envelope as the 5kW unit. No assurances can be given that
such a device will succeed in the market place.
The Company is currently cooperating and working closely with General
Motors, a major automotive OEM in regard to the AuraGen. Recently General Motors
has exhibited the AuraGen as a potential option in selected future vehicles. No
assurances can be given that the Company's AuraGen will be offered by General
Motors as an OEM option.
b. AMA(TM)
The Company licensed its AMA technology to Daewoo Electronics Limited
of Korea. Since 1992, Daewoo has been responsible for the commercialization,
production and sale of the AMA products. Daewoo in fiscal 1999 announced the
completion of the commercialization of the AMA. While the Company anticipates
that the AMA will be available in the market place in the near future, no
assurances can be given as to if and when it will be available.
The AMA(TM)/Aurascope(TM) is a new product without a history in the
marketplace. There can be no assurances that the product will succeed in the
marketplace.
The Company's rights under the license agreement provide for a royalty
to be paid on every unit sold by Daewoo and 50% of all sublicensing fees
collected by Daewoo. No assurances can be given as to when and if the royalty
stream will start.
D. Competition
The Company is involved in the application of its technology
to a variety of products and services and, as such, faces substantial
competition from companies offering different and competitive technologies.
The Company believes the principal competitive factors in the
markets for the Company's products include ability to develop and market
technologically advanced products to meet changing market conditions, price,
reliability, product support and the ability to secure sufficient capital
resources for the often substantial periods between technological concept and
commercialization. The Company's ability to compete will also depend on its
continued ability to attract and retain skilled and experienced personnel, to
develop and secure patent and other protection for its technology and to exploit
commercially its technology prior to the development of competing products by
others.
The Company competes with many companies that have more
experience, name recognition, financial and other resources and expertise in
research and development, manufacturing, testing, and obtaining regulatory
approvals, marketing and distribution. Other companies may also prove to be
significant competitors, particularly through their collaborative arrangements
with research and development companies.
Portable generators ("Genset") meet a large market need for
auxiliary power. Millions of units per year are sold in North America alone, and
millions more are sold across the world to meet market demands for 1 to 10
Kilowatts of portable power. The market for these power levels basically
addresses the commercial, leisure and residential markets, and divide
essentially into: a) higher power, higher quality and higher price commercial
level units; and b) lower power, lower quality and lower price level units.
There is significant competition in the auxiliary power market
from portable generator sets with such companies as Onan, Honda and Kohler which
are well-established and respected brand names in the genset market for high
reliability auxiliary power generation. There are presently 44-registered Genset
manufacturers ("Gensets").
The following table is a summary comparing the leading Genset
products with the AuraGen(TM).
TABLE 1: GENERATORS
Onan Honda Honda Kohler AuraGen(TM)
Parameters Marquis EG5000X EX5500 5CKM
Rated Power 5000 5,000 W 4,500 W 5,000 W 5,000 W 5,000
W
Weight 258 146 393 268 68
lbs/117.3 kg lbs/66.4 kg lbs/178.6 kg lbs/122 kg lbs/30.9 kg
Cubic Feet/
Cubic Meters 6.72/.19 5.39/.15 26.80/.76
3.71/0.11 0.25/0.01
Output 120 V 120/240 120/240 V
V 120/240 V 120/240 V
Engine RPM
@ Rated Output 1,800 3,600 3,600 1,800 1,300
Noise (DBA @
10 Ft.)` 73.5 82 65 88.5 64
Load-Follower
Economy No No No No Yes
In addition to competition from Gensets, there are six major
manufacturers of Inverters in the U.S.; representative of the leaders are
Vanner, Dimension and Heart.
Inverters provide strong competition in specific markets of
the overall market place for mobile power: The specific markets where inverters
are strong competitors are Ambulance, Fire and Rescue, Small Recreational
Vehicles and Telecommunications.
Limitations of Inverters:
o Inverters address a much more limited and specialized market than Gensets;
o The most significant portion of inverter sales are in the lower power range:
i.e., 2500 watts or lower.
o True quality Inverter power above 2500 watts requires a 24-volt automotive
electrical system (twice 12 volts);
and the maximum output for quality power in the commercial market is on
the order of 4800 watts. (See Table 2).
o Quality power (pure sine wave and well-regulated 60Hz) is a significant
cost factor in Inverters (Table 2).
o Often, Inverters require upgraded vehicle alternator and battery
harness, and--for extended use period without battery charging--an additional
battery pack.
TABLE 2: INVERTERS
Heart I/F Vanner Vanner Vanner AuraGen(TM)
Parameters
Freedom 25 Bravo 2600 TB30-12 A40-120X G5000
1. Max Rated Power 2500 2600 4800 5000
(Watts) 2800
2. Weight (LBS) 56 70 75 110 68
2A. Weight Battery Pack No No
Add/No Add/No Add/No
3. Overall Cubic In.
1207.5 1866.73 1800 2595.94 432.73
4. 60 Hz Yes Yes Yes Yes Yes
5. Sine Wave @ All RPM Yes Yes
Modified Modified Modified
6. Battery Discharge Yes Yes Yes No No
Operation
7. Vehicle Engine Noise
(DBA @ 10Ft.) 64 64 64 64 64
8. Load Follower-Economy Yes Yes Yes Yes Yes
E. Manufacturing
The AuraGen is assembled at Aura's facility in El Segundo, California
with parts which are produced by various suppliers. In Fiscal 1996 the Company
acquired a 27,692 square foot manufacturing facility in El Segundo for the
AuraGen production line. In Fiscal 1998, the Company set up the production
facilities in the acquired building. This facility is for assembly and testing
and has a production capability of 5000 units per month per operating shift.
The Company's ceramic division manufactures its products at its leased
38,000 square foot ceramic facility in New Hope, Minnesota.
The class 100 clean room fabrication facility for the AMA product in
El Segundo, California was closed in Fiscal 1999 as the Company terminated all
manufacturing activities in the electro-optical area.
Subsequent to the end of Fiscal 1999 the Company either sold, leased
or terminated all of its sound related activities, including all the off-shore
facilities and joint ventures. The Company sold MYS Corporation, AuraSound
assets, leased the assets of Electrotec, and licensed the AuraSound technology.
NewCom ceased most of its operations by the end of Fiscal 1999 after
Deutsche Financial Services seized Newcom's inventory.
F. Quality Assurance and Testing
As the Company focuses its activities on the AuraGen, quality assurance
and testing is a very important component. The Company performs qualification
testing on the AuraGen hardware components, Electronic Control Unit ("ECU"), all
software and on installed in-vehicle systems to ensure reliability in the field.
The qualification testing includes; 1) in-house endurance testing, 2) in-house
parametric thermal testing, 3) in house power quality testing and 4) independent
laboratory environmental testing. In addition, field failure testing is
performed on all returned units.
In addition to the qualification testing, the Company implemented a
fully controlled manufacturing lot traceability system, documentation and
configuration control system, as well as, acceptance test and compliance
procedures at all manufacturing levels, including suppliers. The Company also
uses automated tools for "In Process Inspection" on its AuraGen assembly line.
G. Product Development Expenditures
During the fiscal years ended February 28, 1999, February 28, 1998, and
February 28, 1997 the Company spent approximately $ 2.8 million, $1.4 million
and $6.0 million, respectively, on Company sponsored research and development
activities. The Company plans to continue its research and may incur substantial
costs in doing so. All of the Company's sponsored R & D is focused on
technological enhancements and product developments for the AuraGen.
H. Patents
Since Aura is engaged in the development and commercialization of
proprietary technology, it believes patents and the protection of proprietary
technology are important to its business. The Company's policy is to protect its
technology by, among other ways, filing patent applications for technology which
it considers important to the development of its business. The U.S. Patent
Office has to date issued 78 patents. A majority of these patents expire between
the years 2008 and 2015. The Company's first issued Auragen patent however,
expires in the year 2017. Of the issued patents, 29 pertain to its
automotive/industrial applications, 21 pertain to its electrooptical
applications and 28 pertain to sound applications. There are additional patent
applications in various stages of preparation for filing and numerous patents
are pending. There are no assurances that any of the patent applications or any
new other patents will be issued in the future. The Company believes that its
issued and allowed patents enhance its competitive position.
I. Employees
As of February 28, 1999 the Company employed approximately 500 persons
worldwide. During Fiscal 1999 and continuing into Fiscal 2000 the Company has
gone through a major down-sizing and restructure. As of February 2, 2000, the
Company employed 95 persons. Thirteen people are dedicated to the ceramics
operation and 82 to the AuraGen activities. The Company believes that its
relationship with its employees is good. The Company is not a party to any
collective bargaining agreements.
J. Principal Sources of Revenues
For the year ended February 28, 1999, multimedia products and modems
were the largest single source of revenues on a consolidated basis, constituting
approximately $46.8 million or 57.4% of net revenues. Sound related products
contributed approximately $29 million or 35.6% of net revenues. During Fiscal
1998 multimedia products on a consolidated basis accounted for approximately $52
million, or 32.3% of gross revenues. Sound related products contributed
approximately $31 million or 19.3% of revenues. Modems on a consolidated basis
contributed approximately $38 million or 23.6% of Fiscal 1998 revenues. No other
products accounted for more than 10% of revenues during the foregoing periods.
After the down-sizing, ceasing of NewCom operations and selling the sound
related operations, the principal sources of revenues going forward will be
related to the Company's AuraGen technology. The AuraGen is a new product with
no historical basis for comparison.
K. Significant Customers
The Company sold sound related products and computer related products
on a consolidated basis to four significant customers during Fiscal 1999. Sales
of speakers to a major electronics retailer accounted for approximately $16.3
million or 20.1% of revenues. Sales of communications and multimedia products on
a consolidated basis to major mass merchandisers Best Buy, Circuit City and
Staples accounted for approximately $12.6 million or 15.5% of revenues.
After Fiscal 1999 none of the above will be significant customers since
the Company will no longer be in the consumer electronics business as it has
sold or leased all the sound related operations and NewCom has ceased
operations.
ITEM 2. PROPERTIES
The Company owns a 46,000 square foot headquarters facility in El
Segundo, California and a 27,692 square foot manufacturing facility also in El
Segundo, California for its AuraGen product. These properties are encumbered by
a deed of trust securing a Note in the original principal amount of $5,450,000.
The Company leases an approximate 38,000 square foot ceramic facility in New
Hope, Minnesota. Subsequent toFiscal 1999 the Company as part of its refocus and
downsizing, vacated approximately 135,000 square feet of facilities. In
addition, the Company sold or terminated all of its joint ventures and foreign
activities. The Company retains approximately 115,000 square feet in facilities
and believes that such is adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal actions listed below. In the
case of a judgment or settlement, appropriate provisions have been made in the
financial statements.
Shareholder Litigation
Barovich/Chiau v. Aura
In May, 1995 two lawsuits naming Aura, certain of it directors and executive
officers and a former officer as defendants, were filed in the United States
District Court for the Central District of California, Barovich v. Aura Systems,
Inc. et. al. (Case No. CV 95-3295) and Chiau v. Aura Systems, Inc. et. al. (Case
No. CV 95-3296), before the Honorable Manuel Real. The complaints purported to
be securities class actions on behalf of all persons who purchased common stock
of Aura during the period from May 28, 1993 through January 17, 1995, inclusive.
The complaints alleged that as a result of false and misleading information
disseminated by the defendants, the market price of Aura's common stock was
artificially inflated during the class period. The complaints were consolidated
as Barovich v. Aura Systems, Inc., et. al.
A settlement agreement for this proceeding was submitted to the Court
on July 20, 1998, for preliminary approval, at which time the Court denied the
plaintiffs' motion for approval of the settlement. On September 22, 1998, the
Company and certain of its officers and directors renoticed their motion for
summary judgment. Thereafter, on January 8, 1999, the plaintiffs and the
defendants in the Barovich action executed a Stipulation of Settlement pursuant
to which the Barovich action would be settled in return for payments by Aura and
its insurer to the plaintiff's settlement class and plaintiff's attorneys in the
amount of $2.8 million in cash (with $800,000 to be contributed by Aura and $2
million to be contributed by Aura's insurer, subject to a reservation of rights
by the insurer against the insureds) and $1.2 million in cash or common stock,
at the Company's option, to be paid by Aura. Subsequently the parties and the
insurer entered into an amended settlement agreement. As amended the settlement
calls for the total settlement amount of $4 million to remain the same, with the
insurer contributing $1.8 million, and the remaining $2.2 million to be paid by
Aura in cash over a period of three years, with accrued interest at the rate of
8% per annum. The settlement was preliminarily approved by the Court on December
6, 1999, and is subject to final confirmation by the Court on March 20, 2000.
Morganstein v. Aura.
On April 28, 1997, a lawsuit naming Aura, certain of its directors and
officers, and the Company's independent accounting firm was filed in the United
States District Court for the Central District of California, Morganstein v.
Aura Systems, Inc., et. al. (Case No. CV 97-3103), before the Honorable Steven
Wilson. A follow-on complaint, Ratner v. Aura Systems, Inc., et. al. (Case No.
CV 97-3944), was also filed and later consolidated with the Morganstein
complaint. The consolidated amended complaint purports to be a securities class
action on behalf of all persons who purchased common stock of Aura during the
period from January 18, 1995 to April 25, 1997, inclusive. The complaint alleges
that as a result of false and misleading information disseminated by the
defendants, the market price of Aura's common stock was artificially inflated
during the Class Period. The complaint contains allegations which assert that
the company violated federal securities laws by selling Aura Common stock at
discounts to the prevailing U.S. market price under Regulation S without
informing Aura's shareholders or the public at large.
In June, 1998, the Court entered an order staying further discovery in
order to facilitate completion of settlement discussions between the parties. On
October 12, 1998, the parties entered into a stipulation for settlement of all
claims, subject to approval by the Court. Under the stipulation for settlement
Aura agreed to pay $4.5 million in cash or stock, at Aura's option, plus 3.5
million warrants at an exercise price of $2.25. In addition, Aura's insurance
carrier agreed to pay $10.5 million. The settlement was finally approved by the
Court in October 1999 and was thereafter amended in December 1999 to allow Aura
to defer payment of the settlement amount until April 2000 in exchange for an
additional 2 million shares of Aura Common Stock, subject to certain
adjustments.
NewCom Related Litigation
American Casualty v. Aura
On June 22, 1999, a lawsuit naming Aura was filed in the United States
District Court for the Central District of California, American Casualty Company
of Reading, Pennsylvania ("American Casualty") vs. Aura et. al. (Case No.
CV-99-06343). The complaint alleges that American Casualty, as surety, executed
and delivered a performance bond on behalf of NewCom to Actrade Capital, Inc.
("Actrade") in 1998, which American Casualty became liable to obligee Actrade
when NewCom defaulted on repayment of the penal sum of $4,427, 093.92. In
seeking damages from NewCom, American Casualty further alleged that Aura was
liable because it executed an express general agreement of indemnity,
indemnifying American Casualty on the referenced NewCom bond and a rider which
became the subject of the litigation. Aura answered the complaint and NewCom
defaulted. Subsequently, in December, 1999, the parties reached mutually an
agreement in principal to settle the matter, Aura agreeing to pay American
Casualty: (i) $1,000,000 plus interest at a rate of 8% per annum from December
1, 1999, in thirty-six equal monthly installments commencing March 2000; (ii)
$1,000,000 plus interest at a rate of 8% per annum from December 1, 1999, in
twenty-four equal monthly installments commencing December 1, 2002; and (iii)
warrants to purchase up to 1,000,000 shares of the Company's common stock thirty
three months from November 1, 1999 at a pre-reverse stock split exercise price
of $2.46 per share. The Company expects to enter into the settlement prior to
February 29, 2000, which is in accordance with Aura's restructure.
NEC Technologies v. NewCom
In 1998, a lawsuit naming NewCom, Inc. was filed in the Superior Court
of the State of California, Los Angeles County, NEC Technologies vs. NewCom et.
al (Case No. YC 033592). The complaint alleged that NewCom failed to pay NEC for
products purchased in the sum of approximately $3,000,000. Subsequently, NEC and
NewCom entered into a stipulated settlement where Aura guaranteed expressly
NewCom's performance on the settlement. NewCom thereafter defaulted on the
settlement and the stipulated judgment was filed in April, 1999. Following
negotiation by Aura and NEC, in November, 1999, a settlement was entered into
whereby NEC is to receive $2,479,142 plus interest at eight percent per annum
in thirty-six equal monthly installments, which is in accordance with Aura's
restructure.
Deutsche Financial Services v. Aura
In June, 1999, a lawsuit naming Aura was filed in the United States
District Court for the Central District of California, Deutsche Financial
Services ("DFS") vs. Aura (Case No. 99-03551 GHK (BQRx)). The complaint follows
DFS' termination of its credit facility with NewCom of $11,000,000 and seizure
of substantially all of NewCom's collateral in April, 1999. It alleges, among
other things, that Aura is liable to DFS for NewCom's indebtedness under the
secured credit facility purportedly guaranteed by Aura in 1996, well prior to
the NewCom initial public offering of September 1997. In the proceeding, DFS
sought an order to attach Aura's assets which was denied following an
evidentiary hearing before the Honorable Brian Quinn Robbins, U.S. Magistrate,
and the matter has been ordered by the District Court to binding arbitration.
Aura has now responded in arbitration, denying DFS'claims and has asserted in
its defense, among other things, that the guarantee, if any, is discharged. In
addition, Aura through its counsel, has asserted cross-claims for, among other
things, tortious lender liability, alleging that DFS wrongfully terminated the
NewCom credit facility, wrongfully seized the NewCom collateral and wrongfully
foreclosed upon NewCom collateral, acting in a commercially unreasonably manner.
A panel of three arbitrators has been selected and appointed by the American
Arbitration Association and a hearing in the arbitration has been set for May,
2000. The Company believes it has meritorious defenses and cross-claims.
However, no assurances can be given as to the ultimate outcome of this
proceeding.
Excalibur v. Aura
On November 12, 1999, a lawsuit was filed by three investors against Aura and
Zvi Kurtzman, Aura's Chief Executive Officer, in Los Angeles Superior Court
entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054)
arising out of two NewCom, Inc. financings consummated in December 1998.
The NewCom financings comprised (1) a $3 million investment into NewCom
in exchange for NewCom Common Stock, Warrants for NewCom Common Stock, and
certain "Repricing Rights" which entitled the investors to receive additional
shares of NewCom Common Stock in the event the price of NewCom Common Stock fell
below a specified level, and (2) a loan to NewCom of $1 million in exchange for
a Promissory Note and Warrants to purchase NewCom Common Stock. As part of these
financings Aura agreed with the investors to allow their Repricing Rights with
respect to NewCom Stock to be exercised for Aura Common Stock, at the investors'
option. Aura also agreed to register Aura Common Stock relating to these
Repricing Rights.
The Plaintiffs allege in their complaint that Aura breached its
agreements with the Plaintiffs by, among other things, failing to register the
Aura Common Stock relating to the Repricing Rights. The Plaintiffs further
allege that Aura misrepresented its intention to register the Aura shares in
order to induce the Plaintiffs to loan $1.0 to NewCom. The Complaint seeks
damages of not less than $4.5 million. In January 2000 Aura filed counterclaims
against the Plaintiffs, including claims that the Plaintiffs made false
representations to Aura in order to induce Aura to agree to issue its Common
Stock pursuant to the Repricing Rights. The Company believes that it has
meritorious defenses and counterclaims to the Plaintiffs' allegations. However,
no assurances can be given as to the ultimate outcome of this proceeding.
Securities and Exchange Commission Settlement.
In October, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an administrative
proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The
proceeding was settled on consent of all the parties, without admitting or
denying any of the Commission's findings. In its order, the Commission found
that Aura and the others violated the reporting, recordkeeping and anti-fraud
provisions of the securities laws in 1993 and 1994 in connection with its
reporting on two transactions in reports previously filed with the Commission.
The Commission's order directs that each party cease and desist from committing
or causing any future violation of these provisions.
The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with the
Commission. Neither Mr. Kurtzman nor anyone else personally benefited in any way
from these events. Also, the Commission did not seek any monetary penalties from
Aura, Mr. Kurtzman or anyone else. For a more complete description of the
Commission's Order, see the Commission's release referred to above.
Other Legal Actions
The Company is also engaged in other legal actions. In the opinion of
management, based upon the advice of counsel, the ultimate resolution of these
matters will not have a material adverse effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Since 1988, Aura Common Stock has been quoted on the Nasdaq Stock
Market under the trading symbol "AURA". On May 21, 1991, Aura shares became
listed on the Nasdaq National Stock Market.
On July 21, 1999 the Company's shares were delisted from Nasdaq
National Market. This action was taken as a result of the Company's failure to
meet the filing, minimum $1.00 bid price and listing of additional shares as
stated in the Market Place Rules. Since that date the Company's stock has traded
on the over the counter market.
Set forth below are high and low sales prices for the Common Stock of
Aura for each quarterly period in each of the two most recent fiscal years. Such
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions in the Common
Stock. The Company had approximately 4450 stockholders of record as of February
3, 2000.
Period High Low
Fiscal 1998
First Quarter ended May 31, 1997 $2.78 $1.47
Second Quarter ended August 31, 1997 $2.13 $1.50
Third Quarter ended November 30, 1997 $3.94 $2.00
Fourth Quarter ended February 28, 1998 $3.75 $2.25
Fiscal 1999
First Quarter ended May 31, 1998 $3.69 $2.59
Second Quarter ended August 31, 1998 $1.25 $1.00
Third Quarter ended November 30, 1998 $1.81 $0.91
Fourth Quarter ended February 28, 1999 $1.50 $0.34
On February 3, 2000, the average high and low reported sales price for the
Company's Common Stock was $0.27.
Dividend Policy
The Company has not paid any dividends on its Common Stock and
currently intends to retain any future earnings for use in its business. The
Company does not anticipate paying any dividends on its Common Stock in the
foreseeable future but has no restrictions preventing it from paying dividends.
Changes in securities and Use of Proceeds
In December 1998 the Company completed a private placement of 3,597,300
shares of its common stock and warrants to purchase 1,798,650 shares of common
stock at an exercise price of $1.00 per share to a group of private investors.
On December 1, 1998 (the "Initial Closing Date"), NewCom consummated a
private placement of its Common Stock, warrants and Repricing Rights pursuant to
Regulation D of the Securities Act of 1933 to three private investors. On the
Initial Closing Date the Company received gross proceeds of $3 million in
exchange for the issuance of 871,288 shares of its Common Stock, Warrants
exercisible for five years for up to 166,337 shares of Common Stock at an
exercise price of $4.545, and 792,088 Repricing Rights.
On December 28, 1998, the same investors consummated an additional
financing with NewCom pursuant to certain Notes of NewCom secured by a junior
lien on Newcom's inventory and accounts receivable and issued an aggregate of
75,000 Warrants to purchase NewCom Common Stock. The Repricing Rights entitle
the holder to purchase that number of shares of Common Stock of NewCom
("Repricing Shares") determined by multiplying the number of Repricing Rights by
a fraction, the numerator of which is the Repricing Price minus the Average
Market Price (as defined below), and the denominator of which is the Average
Market Price (defined as the two lowest closing bid prices during the 20 trading
days immediately preceding the exercise date of the Repricing Rights).
The "Repricing Price" for the 792,088 Repricing Rights received on the
Initial Closing Date is $4.32, being 114% of the Initial Closing Date price of
$3.79 (computed based upon the average closing bid prices for the five
consecutive trading days ending on the day immediately preceding the Initial
closing Date) if the Repricing Rights are exercised within 135 days of the
Initial closing Date; $4.40, being 116% of the Initial closing Date Price, if
the Repricing Rights are xercised between the 136th and the 180th day of the
Initial Closing Date; and an additional 2% during each 45 day period following
180 days from the Initial closing Date.
The Repricing Price is increased by 7.5% if the Common Stock is listed for
trading on the Nasdaq SmallCap Market, and 15% if the Common stock is not listed
on a national stock exchange or the Nasdaq Stock Market or upon the occurance of
a "Repurchase Event" as described below.
The investors also have the right to elect to receive shares of Aura Common
Stock upon exercise of the Repricing rights in lieu of NewCom Common Stock,
based upon the Average Market Price of Aura Common stock at the time of exercise
of the Repricing Rights.
In January Aura commenced legal proceedings against these investors
seeking, among other things, the recission of Aura's obligations to honor the
Repricing Rights. See "Item 3, Legal Proceedings" elsewhere herein.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data has been taken or derived from
the audited consolidated financial statements of the Company and should be read
in conjunction with and is qualified in its entirety by the full consolidated
financial statements, related notes and other information included elsewhere
herein.
AURA SYSTEMS, INC. AND SUBSIDIARIES
February 28, February 28, February 28, February 29, February 28,
1999 1998 1997 1996 1995
Net Revenues $ 81,518,162 $136,715,385 $109,950,202 $77,088,850 $42,444,213
------------- ----------- ----------- ---------- ----------
Cost of goods and overhead 158,024,723 101,622,051 86,350,828 71,849,204 30,198,196
Research and development expenses 2,831,847 1,395,160 6,022,586 5,225,735 2,037,464
Impairment of long-lived assets 9,403,687 -- -- -- --
Selling, General and administrative
Expenses 74,419,812 45,018,066 18,542,840 26,399,794 12,771,151
-------------- ---------- ---------- ---------- ----------
Total costs and expenses 244,680,069 148,035,277 110,916,254 103,474,733 45,006,814
(Loss) from operations (163,161,907) (11,319,892) (966,052) (26,385,883) (2,429,340)
Other income and expense
Gain on sale and issuance of
Subsidiary stock and other assets (1,042,665) (12,952,757) (250,000) -- --
Interest expense (income) net 12,014,690 6,827,269 1,415,934 (289,793) 220,539
Class action litigation and
Other settlements 7,717,518 1,700,000 -- -- --
Loss on disposal of assets 1,188,329 -- -- -- --
Termination of license
Arrangements -- 3,114,030 -- -- --
Loss on disposal of investment 4,877,839 -- -- -- --
Equity in losses of unconsolidated
Joint ventures 6,268,384 1,937,747 -- -- --
Minority interests in income
(loss) of Consolidated (10,372,895) 946,405 -- -- --
subsidiaries
Loss in excess of basis of
consolidated subsidiary 8,080,695 -- -- -- --
Excess loss of minority interest 26,561,481 -- -- -- --
Provision (benefit) for income
Taxes 570,641 (1,256,046) 570,484 -- --
Foreign currency translation
adjustment (406,576) -- 40,642 -- --
--------------- ------------ ----------- ------------ -----------
Net (loss) $(150,148,156) $(11,636,540) $(2,880,111) $(26,087,090) $(2,649,879)
============== =========== =========== ============ ===========
Net (loss) per common share $ (1.74) $ (.15) $ (.04) $ (.48) $ (.07)
============== =========== =========== ============= ============
Weighted average number of
Common shares 85,831,688 79,045,290 68,433,521 53,860,527 37,217,673
================ ============ ========== ========== ==========
Working capital (deficit) (4,869,876) 78,143,895 62,310,715 71,362,882 33,796,181
Total assets 90,143,392 227,302,629 182,528,399 134,080,568 73,467,003
Total liabilities and deferrals 103,797,049 110,400,761 57,050,812 34,917,462 19,213,584
Net stockholders' equity (deficit) (13,653,657) 116,901,868 125,477,587 99,163,106 54,253,419
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
During the Fiscal year February 28, 1999 the Company devoted
substantial financial and human resources in furtherance of its plan to
manufacture and sell its patented, proprietary AuraGen product. As is often the
case with the introduction of a capital intensive product launch, Aura
anticipated that in order to implement it's business plan, working capital would
be required in an amount that would exceed cash flow generated from any initial
sales of the AuraGen.
The Company expected that its working capital needs would be met from,
among other things, the repayment by NewCom Inc. ("NewCom") of approximately $20
million of indebtedness which was due in September 1998 and with proceeds from
external debt and equity financing. NewCom was ultimately unable to meet its
obligations to Aura in September 1998, creating a significant cash shortfall to
Aura. NewCom's operations in the third quarter of Fiscal 1999 were severely
impacted by an industry-wide slump in the computer peripherals industry, causing
a buildup in inventory and difficulty in collecting receivables from the mass
merchants. NewCom's business reached a critical juncture in the fourth quarter
of Fiscal 1999 when Deutsche Financial Services ("DFS"), which provided NewCom's
principal working capital line, announced that it was unwilling to continue to
advance working capital to NewCom under its credit facility. This, coupled with
the retail mass merchants failure to pay NewCom for significant receivables past
due and owing, resulted in NewCom ceasing its day-to-day operations, in January
1999. These events substantially impacted Aura's results of operations for
Fiscal 1999.
Commencing January 1999 Aura's management was forced to take steps to
curtail and refocus its plans and implement measures to reduce its overhead
until such time as additional working capital could be obtained. These steps
included employee layoffs, selling the Company's MYS speaker division to its
former owners, eliminating the display division, temporarily suspending
development activities associated with the EVA program, leasing all the assets
of Electrotec, selling the AuraSound subsidiary assets and the licensing of the
proprietary NRT and Line Source speaker technologies. In Fiscal 2000 the Company
reached an agreement in principle to sell the ceramics assets located in New
Hope, Minnesota to the president of the subsidiary.
The Company's ability to maintain its focused AuraGen operations
required an infusion of working capital and the restructure of Aura's principal
indebtedness. The Company believed that the restructure of this indebtedness was
required in order to obtain working capital from other third parties. Management
therefore developed an informal restructure plan under which approximately $35.0
million of indebtedness consisting of convertible debt and other debt
obligations would be eliminated. By the end of the third quarter of Fiscal 2000
the Company had entered into agreements to eliminate approximately $32.2 million
of debt, and providing for the conversion of most of such debt into equity. In
addition, the Company has entered into an agreement to restructure approximately
$17.4 million of additional debt ("Infinity note") into a $12.5 million, 36
month 8 percent note, with interest only payments and a balloon payment at the
end of the 36 months.
The Company is also a party to certain express written corporate
guarantees of NewCom indebtedness, including a guarantee of NewCom's
indebtedness to DFS of approximately $7.2 million and two other creditors with
claims for $2.4 million and $4.4 million respectively. The Company reached a
settlement agreement with American Casualty and NEC Technologies for the above
guarantees (See Legal Item 3, Legal Proceedings, NewCom Related Litigation). In
April 1999 DFS commenced legal proceedings against the Company to obtain an
attachment on Aura's assets to secure Aura's guarantee obligations. The court
denied the DFS motion and the matter has been ordered to binding arbitration.
Aura has responded in arbitration, denying DFS claims and has asserted in its
defense, among other things, that the guarantee, if any, is discharged (See
NewCom Related Litigation).
In the third quarter of Fiscal 2000 the Company completed a private
placement of $6.9 million in the form of common stock and debt that will convert
into common stock upon the execution of the restructured Infinity note.
Since January 1999 the Company's limited resources have been devoted
almost entirely to the AuraGen product, the restructure of debt and the raising
of new working capital. Although the Company has experienced delays in the
shipping of AuraGen products since the beginning of 1999 as a result of
insufficient working capital, necessary parts started to be obtained by late
1999 and limited shipments of AuraGens are now being made. Over 33 state and
city governments across the U.S have purchased evaluation units and some cities
have already specified the AuraGen as a requirement for some of their vehicles.
Over 23 utilities in the U.S have also purchased and are evaluating the AuraGen
for their applications and requirements. The Company has shipped a number of
AuraGen units to two major telecommunication companies and numerous state and
federal agencies are evaluating the AuraGen for their specific applications. The
Company continues to support the U.S Army in its evaluation of the AuraGen
(known to the U.S. Army as VIPER). The Company has continued to develop
different engine mounts for the AuraGen. As of January 2000, the Company has
started production of mounts that will fit most of the trucks, pickups and SUV's
built in North America by the three major OEMs. The Company's 5KW model is now
available for more than 70 different vehicle models and engine configurations.
The Company continues to work closely with General Motors which has displayed
the AuraGen on both the Sierra 2000 professional concept vehicle and the
Terradyne concept vehicle.
Fiscal 1999 as Compared to Fiscal 1998
The Company continued its activity in development of commercial
applications of its proprietary magnetic technologies. The Company has reported
a net loss for each of its five most recent fiscal years. The second half of
Fiscal 1999 had significant negative results from operations which caused
significant cash shortfall problems that affected the entire operation.
Revenues
Net revenues in Fiscal 1999 declined to $81.5 million from $136.7
million, a decrease of 40.4%. The decrease was primarily due to the virtual
shutdown of operations of NewCom in the last quarter of the fiscal year, coupled
with the decline in sales of NewCom in the third quarter of the Fiscal year. The
decline in sales was primarily a result of price pressures in the retail channel
as well as a substantial decline in sales to one of NewCom's major customers. In
the last half of the fiscal year, as NewCom's business began to deteriorate in
conjunction with the overall deterioration of the computer peripherals industry,
the levels of returned goods began to accelerate. In the last quarter of the
fiscal year, when NewCom's operations virtually shutdown, returns increased
dramatically as retailers began to ship back product for fear that NewCom would
go out of business and would not be able to fulfill warranty and other business
obligations. Magnification of this stemmed from its lender "DFS" and a judgement
creditor each sending correspondence to the retail mass merchants asking that
they remit payments to them. A court battle produced an order describing whom to
pay, which was sent to the retail customer. The above actions added to the
uncertainties of NewCom's future and further deteriorated NewCom's relationships
with its customers.
Cost of Goods and Overhead
Cost of goods and overhead increased to $158.0 million in Fiscal 1999
from $101.6 million in Fiscal 1998. This increase both in dollar terms and as a
percentage of revenues is primarily a result of the price pressures from the
retail mass merchants which included the substantial rebates that were required
in order to maintain shelf space, as well as the overall business conditions at
the Company's NewCom subsidiary as described above.
Gross Margin and Net Loss
Gross margins for Fiscal 1999 were a negative 93.9% compared to 25.7%
in Fiscal 1998, primarily due to the substantial drop in gross margin at NewCom
in the third and fourth quarters of the Fiscal year. In the third and fourth
quarters of the Fiscal year, price pressure applied by NewCom's major customers
and inventory write-downs which reflected the change in the computer peripherals
industry resulted in substantially higher costs of product sold as a percentage
of the selling price. Coupled with the substantial rebates NewCom was required
to offer, the resulting gross margins were negative.
During the fourth quarter of Fiscal 1999 the Company experienced severe cash
flow problems that had a major impact on the entire operations of the Company.
The Company began to consolidate its operations around the AuraGen technology
and product. The Company terminated all of its joint ventures due to its
inability to support them. As the Company was cutting down and scaling back its
operations the Company evaluated its asset utilization and concluded that
certain assets values had been impaired. In addition numerous assets such as
machinery and equipment that were no longer needed were sold at a loss. The
Company over the years has made strategic investments in order to improve its
utilization of certain technologies. As the company eliminated operations, these
investments no longer retained their economic value. In addition to the
Company`s heavy losses in its NewCom investment the Company was also a party to
certain explicit written guarantees that were triggered when NewCom's business
deteriorated.
The following table summarizes certain fourth quarter events that contribute to
the loss in Fiscal 1999.
Termination of Joint Ventures $5.6 million
Depreciation Expense $4.6 million
Accounts Receivable reserves and write-off's $13.0 million
Asset Impairment $9.4 million
Interest Expense $3.5 million
Disposed Assets $1.2 million
Investment write-off's and losses $7.0 million
Guarantees for NewCom $9.9 million
NewCom loss (Aura Share) $45.8 million
Total $100.0 million
Research and Development
Research and development expense for Fiscal 1999 increased to $2.8
million from $1.4 million in Fiscal 1998 as the Company focused all its
remaining resources on developing additional engine mounts for the AuraGen, and
researching ways to expand its applications.
Selling, General & Administrative
Selling, general and administrative expenses increased to $74.4 million
in Fiscal 1999 from $45 million in Fiscal 1998. The increase is primarily
attributable to a substantial increase in sales and marketing related expenses
at NewCom as the major retailers required higher levels of sales promotions and
marketing allowances. Further, increased amortization of product design related
costs were necessary to account for impairment of these assets due to shorter
life cycles of products.
Bad Debt Expense
Bad debt expense in Fiscal 1999 increased to $13.3 million from $3.6
million in Fiscal 1998.
Interest Expense
Net interest expense for Fiscal 1999 increased to $12.0 million from
$6.8 million in the prior Fiscal year. The increase is attributable to higher
levels of borrowing and a quarterly fee being charged to interest expense on the
$15 million note that was renegotiated in September of 1997.
Fiscal 1998 as Compared to Fiscal 1997
The Company continued its activity in the development of commercial
applications of its proprietary technologies as well as sales of commercial
products. The Company has reported a net loss for each of its five most recent
fiscal years.
Revenues
Net revenues were $136.7 million as compared to $110.0 million in
Fiscal 1997, or an increase of 24.3%. The increase in revenue was due primarily
to the increase in sales of computer products by the Company's NewCom subsidiary
along with an increase in sales in speakers from the sound group.
Sales of computer monitors to two unrelated parties declined to
approximately $10 million in Fiscal 1998 or 6.2% of revenues, from $16.5 million
or 12.3% of revenues in Fiscal 1997. These sales are expected to continue to
decline both in dollar terms and as a percentage of revenues as the Company
continues to expand its product line and its customer base. Although the Company
does not have any long term agreement with any customers, it has no reason to
believe that sales to customers will be abruptly curtailed.
Cost of Goods and Overhead
Cost of goods and overhead increased to $101.6 million in Fiscal 1998
from $86.4 million in Fiscal 1997. While the dollar value increased as a result
of the increase in sales, as a percentage of net revenues, cost of goods
decreased to 74.3% from 78.5% in the prior fiscal year. As the Company continues
to bring new products to market and introduce new variations of existing
products, this percentage may fluctuate substantially in future periods.
Gross Margin and Net Loss
Gross margins for Fiscal 1998 increased to 25.7% from 21.5% in Fiscal
1997 partially due to the increase in gross margin for the Company's subsidiary
NewCom to 34.8% in Fiscal 1998 from 33.6% in Fiscal 1997.
Due to the increase of the Company's business and in particular as it
relates to consumer electronics, the Company in the fourth quarter increased its
reserve for potential returns of merchandise as well as product obsolescence and
potential bad debts. On a consolidated basis the reserve increased to
approximately $10.5 million or 4.6% of assets as compared to $5.8 million or
3.2% of assets in the prior year.
The following table summarizes the above discussion in the form of
percentages.
FY 98 FY 97
Net Revenues 100.0% 100.0%
Cost of Goods Sold 74.3% 78.5%
Gross Margins 25.7% 21.5%
SG&A and R&D 33.9% 22.6%
Loss from Operations 8.3% 1.1%
Net Loss 8.5% 2.7%
During the fourth quarter the Company attended two major tradeshows.
The CES show in January and the SAE show in February. Both of these had a bias
effect on expenses for the fourth quarter by approximately $0.9 million. During
the fourth quarter the Company experienced an incremental increase in interest
of approximately $1.2 million due to the conversion of a $15 million convertible
note to a straight note in late 3rd quarter and additional interest incurred on
a $10 million financing that also occurred in late 3rd quarter. Legal expenses
increased above other periods in the fourth quarter as legal activities
increased in numerous areas. After a careful analysis and review of expenses the
Company consolidated and relocated its main warehouse facilities from San Diego,
California to Kansas City, Missouri. The cost of approximately $0.8 million
associated with this consolidation will be saved in approximately one year. Due
to uncertainties created by India's detonation of nuclear devices and U.S.
sanctions against India the Company reserved $3.1 million in license fee due
from K&K in India for the AuraGen. The Company also incurred losses from foreign
non-consolidated Joint Ventures of approximately $1.9 million. After year-end
the Company settled one class action suit and other litigation and took a charge
of $1.7 million in Fiscal 1998.
The following table summarizes certain fourth quarter events
contributed to the loss in Fiscal 1998 as described above.
a. Seasonal expenses during the fourth quarter $0.9 million
b. Increment increase in 4th quarter interest expense $1.2 million
c. Increment increase in 4th quarter legal expenses $0.5 million
d. Consolidate and relocate warehouse facilities in Kansas Ci $0.8 million
e. Reserve on AuraGen License in India due to US sanctions $3.1 million
f. Loss on foreign joint ventures $1.9 million
g. Legal settlements $1.7 million
Total $10.1 million
Research & Development
Research and development costs for Fiscal 1998 decreased to $1.4
million from $6.0 million in Fiscal 1997. The Company continues its research and
development in the areas of displays and micromachines, automotive applications
of magnetics and sound systems. As a percentage of net revenues research and
development expenses declined in Fiscal 1998 to 1.0% as compared 5.5% in the
prior year.
Selling, General & Administrative
Selling, general and administrative expenses increased to $45 million
in Fiscal 1998 from $18.8 in Fiscal 1997, for an increase of $26.2 million. The
increase is comprised principally of the following: $8.86 million increase from
the NewCom subsidiary; an increase in bad debts over the prior year due to the
write-off of $4.9 million in license fees; an increase in legal fees over the
prior year of approximately $1.0 million; an increase in sales promotion of
approximately $1.5 million, an increase of payroll and associated benefits of
approximately $2.7 million with the addition of 40 new employees and an increase
in depreciation and amortization of approximately $1.3 million.
Bad Debt Expense
Bad debt expense in Fiscal 1998 increased to $3.6 million from $0.7
million in Fiscal 1997.
Interest Expense
Net interest expense for Fiscal 1998 was $6.8 million as compared to
net interest expense of approximately $1.4 million in the prior fiscal year. The
increase was due to increased lines of credit that were utilized throughout the
year, higher levels of debt issued by the Company, premiums paid on the
repurchase of convertible notes, and a higher interest rate on a $15 million
note.
Liquidity and Capital Resources
As a result of the decline in the Company's ownership percentage in
NewCom to below 50%, the balance sheet, as of February 28, 1999 does not reflect
NewCom on a consolidated basis. This resulted in a significant decrease in
current assets and current liabilities for 1999 in comparison to 1998.
Net working capital decreased by $64.5 million to $(4.8) million at
Fiscal 1999 year end, with the current ratio decreasing to .88:1 from 1.76:1.
The principal differences in the Company's accounts from February 28, 1998 to
February 28, 1999 are a decrease in cash and equivalents of $2.3 million, a
decrease in net receivables of $46 million, a decrease in inventories of $40
million a decrease in notes payable of $20.4 million and a decrease in accounts
payable and accrued expenses of $17.4 million.
The Company's cash balances were $3,822,210 at February 28, 1999, $6,079,411 at
February 28, 1998 and $7,112,354 at February 28, 1997.
The net cash used in operating activities of $24.3 million decreased by
$5.3 million due primarily to the increase in the loss incurred offset by the
decreases in accounts receivable, inventory and accounts payable as a result of
the cessation of NewCom's business.
The level of inventories has decreased primarily due to NewCom.
In Fiscal 1998, the Company raised $584,850 from the exercise of
warrants, $900,000 from the sale of warrants and $51,500 from the exercise of
stock options. The Company also received proceeds of $34,500,000 from the
issuance of convertible notes payable.
In June 1998 the Company completed a refinancing of two properties
owned by Aura in El Segundo, consisting of its headquarters and an adjacent
facility. As part of the financing the Company encumbered these properties with
a first deed of trust securing a Note in the amount of $5,450,000, resulting in
net cash to the Company of approximately $3.0 million.
Spending for property and equipment amounted to $4,053,848 in Fiscal
1999, $18,006,394 in Fiscal 1998 and $22,855,000 in Fiscal 1997. Of the Fiscal
1999, 1998 and 1997 amounts, $1,910,611, $16,096,180 and $16,539,899
respectively was due to the manufacture of tooling and the remainder was due to
the expansion of facilities and purchases of equipment which was necessary in
connection with research and development activities, services performed under
various subcontracts and manufacturing requirements.
The Company's cash flow generated from operating activities has to date
not been sufficient to fund its working capital needs. In the past, the Company
has relied upon external sources of financing to maintain its liquidity,
principally private and bank indebtedness and equity financing. No assurances
can be provided that these funding sources will be available in the future. The
Company currently intends that funding required for future growth, operations or
any joint ventures entered into would occur through a combination of existing
working capital, operating profits, bank credit lines, equity and favorable
financial terms from vendors. The inability of the Company to obtain sufficient
working capital at the times and in the amounts required would have a material
adverse affect on the Company's business and operations.
Current fixed monthly expenses corporate wide, average approximately
$900,000, principally for labor, overhead, travel and professional fees.
The Company and its subsidiaries lease space located in El Segundo, New
Hope, Minnesota, and Kansas City, Missouri. Minimum monthly rents under the
leases approximate $55,000. Rent expense was approximately $1.8 million for
Fiscal 1999, $1.3 million, for Fiscal 1998, and $1.3 million for Fiscal 1997.
Assuming no lease terminations or lease extensions, rent expense is expected to
be approximately $650,000 for Fiscal 2000, $680,000 for Fiscal 2001, and
$570,000 for Fiscal 2002. The Company has no other material long-term capital
commitments.
Debt Restructuring
Following is a description of the principle components of Aura's debt
restructuring:
Restructuring of RGC International Investors, LDC, Debt.
Between October 1997 and March 1998 the Company issued an aggregate of
$21.5 million of its convertible unsecured debentures to RGC International
Investors, LDC ("RGC"). The debentures accrued interest at the rate of 7% per
annum, with the entire principle amount due and payable between 2002 an 2003,
and were convertible into common stock based upon a formula related to the
market price of the Common Stock. In October 1998 the Company issued to RGC a $3
million convertible note which was secured by a lien on certain of the Company's
assets.
In October 1999 the Company entered into an agreement with RGC
International Investors, LDC and a third party investor (AuraSound's assets
purchaser) whereby RGC (i) sold to the third party the Company's three
Convertible Unsecured Debentures (the "RGC Debentures"), in the aggregate
principal amount of $17,365,000, (ii) exchanged with the Company its $3 million
Secured Convertible Note for a new non-convertible Secured Note (the "New RGC
Note") in the principal amount of $3 million, and (iii) cancelled Warrants to
purchase 9,000,770 shares of the Company's Common Stock in exchange for new
Warrants to purchase 1,000,000 shares of common stock exercisable at $0.375 per
share. The New RGC Note bears interest at the rate of 8% per annum, with
principal and interest payable no less frequently than quarterly. The New RGC
Note continues to be secured by a lien on certain assets of the Company,
including inventory and accounts receivable.
Under the agreement with the new holder of the RGC Debentures, the RGC
Debentures are convertible into a maximum of 46,500,000 shares of the Company's
Common Stock unless Aura fails to complete the restructuring with Infinity. The
holder of the RGC Debentures has agreed to cancel the outstanding principal and
interest owed under the RGC Debentures upon consummation of the restructuring of
approximately $17.4 million of outstanding Debentures held Infinity. See
"Restructuring of Infinity Investors debt" below.
Retirement of JNC Debt
In June 1997 the Company issued a $4 million convertible debenture in a
private placement JNC Opportunity Fund, Ltd. ("JNC"). The debenture accrued
interest at the rate of 7% per annum, payable quarterly, and is due and payable
was June 1999. The Debenture was convertible into shares of the Company's Common
Stock at the then current market price at the time of conversion. The investor
also received 318,000 warrants exercisable at ($3.50) per share.
In December 1999, the Company consummated an agreement with JNC
Opportunity Fund, Ltd. resulting in the surrender for cancellation by JNC of the
Company's Convertible Debenture and 318,000 warrants in exchange for a cash
payment of $430,000, 3,500,000 shares of the Company's Common Stock and 113,000
Restructuring of Infinity Investors Debt
In March 1997 the Company issued $15 million of convertible Debentures
to a group of accredited investors in a private placement. The Debentures were
convertible into Common Stock of the Company in accordance with a stated
formula. In October 1997 the Company and the investors entered into an Agreement
modifying the Debentures to eliminate the conversion feature in exchange for
increasing the interest rate on the principal to 18% and the payment of a
quarterly fee of $935,000 for each quarter during which the Debentures remain
outstanding. The stated maturity of the Debentures was shortened from March 2000
to September 1998. The Debentures, as modified, are secured by a Note from
NewCom to Aura in the original principal amount of $17 million and 1,250,000
shares of NewCom stock, subject to adjustment under certain circumstances. As
part of the modification, the Company issued warrants for an aggregate of
2,500,000 shares of Common Stock at an exercise price of $2.50 per share,
subject to adjustment after one year under certain circumstances. The Company
was unable to retire the Debentures upon their maturity in September 1998. As of
February 28, 1999 these debentures had an outstanding balance of approximately
$17.4 million.
Subsequent to September 1998 the Company engaged in extensive
negotiations with the holders of these Debentures. In November 1999 the Company
entered into an agreement with these holders to exchange (the "Exchange") the
Debentures for $3 million in cash, 1,111,111 shares of common stock, 100,000
Warrants exercisable $0.375 per share, and a new Secured Note (the "New Secured
Note") in the principal amount of $12.5 million. The New Secured Note will be
secured by a lien on the Company's assets, will bear interest at the rate of 8%
per annum, interest only payable quarterly, with the principal due three years
from the date of the exchange. In the event of a default under the New Secured
Note, the holder is entitled to convert the unpaid principal and interest into
Common Stock of the Company at $.60 per share. The Company is entitled to a
discount if the New Secured Note is prepaid, which discount is initially 20% of
the amount prepaid, and the discount declines ratably over the three year term
of the New Secured Note. Consummation of the Exchange is subject to completion
of a definitive agreement with the holders of the Debentures, which is expected
to occur in February 2000.
Restructuring of Trade debt
In December 1999, the Company implemented a restructuring of
approximately $10.8 million of trade debt held by certain trade creditors
whereby the holders of a substantial portion of the trade debt have agreed to
the repayment of outstanding trade debt over a period of three years, with
interest at 8% per annum, commencing January 2000. Certain trade payables are
subject to continuing negotiations with the creditors.
Completion of Common Stock Private Placement
In November 1999 the Company completed a private placement of
approximately 27 million shares of its Common Stock at $0.27 per share,
resulting in gross proceeds of approximately $6.9 million.
Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 (SOP No. 98-5), "Reporting on Costs of Start-up
Activities." Adoption of SOP No. 98-5 will have no material impact on the
Company's financial statement.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Identification of Directors
The following table sets forth all of the current directors, executive
officers and key employees of Aura, their age and the office they hold with the
Company. Executive officers and employees serve at the discretion of the Board.
All directors hold office until the next annual meeting of stockholders of the
Company and until their successors have been duly elected and qualified.
NameAge Position with the Company
Directors
Zvi Kurtzman 52 Chief Executive Officer, Chairman, Board of Directors
Gerald S. Papazian 44 President and Chief Operating Officer, Director
Arthur J. Schwartz, Ph.D. 52 Executive Vice President, Director
Cipora Kurtzman Lavut 43 Senior Vice President, Corporate Communications, Director
Neal B. Kaufman 54 Senior Vice President, MIS, Director
Steven C. Veen 44 Senior Vice President and Chief Financial Officer, Director
Harvey Cohen 66 Director, member of Audit Committee
Brigadier Ashok Dewan 60 Director, member of Audit and Compensation Committees
Salvador Diaz-Verson, Jr. 47 Director, member of Audit, and Compensation Committees
Stephen A. Talesnick 50 Director
Other Executive Officers and Key Employees
Michael Froch 38 Senior Vice President, General Counsel and Secretary
Keith O. Stuart 44 Senior Vice President, Sales and Marketing
Ronald J. Goldstein 57 Senior Vice President, Sales and Marketing
Jacob Mail 49 Senior Vice President, Operations
Zvi Kurtzman is the CEO and Chairman of the Board of Directors of the
Company and has served in this capacity since 1987. Mr. Kurtzman also
served as the Company's President from 1987 to 1997. Mr. Kurtzman obtained
his B.S. and M.S. degrees in physics from California State University,
Northridge in 1970 and1971, respectively, and completed all course
requirements for a Ph.D. in theoretical physics at the University of
California, Riverside. He was employed as a senior scientist with the
Science Applications International Corp. a scientific research company in
San Diego, from 1984 to 1985 and with Hughes Aircraft Company, a scientific
and aerospace company, from 1983 to 1984. Prior thereto, Mr. Kurtzman was a
consultant to major defense subcontractors in the areas of computers,
automation and engineering.
Arthur J. Schwartz, Ph.D. is the Executive Vice President
and director of the Company since February 1987. Dr.
Schwartz obtained his M.S. degree in physics from the
University of Chicago in 1971 and a Ph.D. in physics from
the University of Pittsburgh in 1978. Dr. Schwartz was
employed as a Technical Director with Science Applications
International Corp., a scientific research company in San
Diego, California from 1983 to 1984 and was a senior
physicist with Hughes Aircraft Company, a scientific and
aerospace company, from 1980 to 1984. While at Hughes, he
was responsible for advanced studies and development where
he headed a research and development effort for new
technologies to process optical signals detected by space
sensors. While at Aura, he served for 3 years on a Joint Tri
Services Committee reporting to the U.S. Government on
certain technology issues.
Cipora Kurtzman Lavut is Senior Vice President, Corporate Communications, and
has served in this capacity since December 1991. She previously served as Vice
President in charge of Marketing and Contracts for the Company since 1988 and
was appointed director of the Company in 1989. She graduated in 1984 from
California State University at Northridge with a B.S. degree in Business
Administration.
Neal B. Kaufman is Senior Vice President, Management Information Systems, and
has served in this capacity since 1988. Mr. Kaufman is also a director of the
Company and has served in this capacity since 1989. Mr. Kaufman graduated from
the University of California, Los Angeles, in 1967 where he obtained a B.S. in
engineering. He was employed as a software project manager with Abacus
Programming Corp., a software development firm, from 1975 to 1985. He headed a
team of software specialists on the Gas Centrifuge Nuclear Fuel enrichment
program for the United States Department of Energy and developed software
related to the Viking and Mariner projects for the California Institute of
Technology Jet Propulsion Laboratory in Pasadena, California.
Gerald S. Papazian has been the Company's President and Chief Operating Officer
since July 1997. He joined the Company in August 1988 from Bear, Stearns & Co.,
an investment-banking firm, where he served from 1986 as Vice President,
Corporate Finance. His responsibilities there included valuation of companies
for potential financing, merger or acquisition. Prior to joining Bear Stearns,
Mr. Papazian was an Associate in the New York law firm of Stroock & Stroock &
Lavan, where he specialized in general corporate and securities law with the
extensive experience in public offerings. He received a BA, Economics (magna cum
laude) from the University of Southern California in 1977 and a JD and MBA from
the University of California, Los Angeles in 1981. He served as a trustee of the
University of Southern California from 1994 to 1999.
Steven C. Veen, a certified public accountant, is Senior Vice President, Chief
Financial Officer, and has served in this capacity since March 1994. He joined
the Company as its Controller in December 1992. Before that, he had over 12
years experience in varying capacities in the public accounting profession. Mr.
Veen served from 1983 to December 1992 with Muller, King, Black, Mathys & Acker,
Certified Public Accountants. He received a B.A. in accounting from Michigan
State University in1981.
Harvey Cohen is a director of the Company and has served in this capacity since
August 1993. Mr. Cohen is President of Margate Advisory Group, Inc., an
investment advisor registered with the Securities and Exchange Commission, and a
management consultant since August 1981. Mr. Cohen has consulted to the Company
on various operating and growth strategies since June 1989 and assisted in the
sale of certain of the Company's securities. From December 1979 through July
1981, he was President and Chief Operating Officer of Silicon Systems, Inc., a
custom integrated circuit manufacturer which made its initial public offering in
February 1981 after having raised $4 million in venture capital in 1980. From
1975 until 1979, Mr. Cohen served as President and Chief Executive Officer of
International Communication Sciences, Inc., a communications computer
manufacturing start-up company for which he raised over $7.5 million in venture
capital. From 1966 through 1975, Mr. Cohen was employed by Scientific Data
Systems, Inc. ("S.D.S."), a computer manufacturing and service company, which
became Xerox Data Systems, Inc. ("X.D.S.") after its acquisition by Xerox in
1979. During that time, he held several senior management positions, including
Vice President-Systems Division of S.D.S. and Senior Vice President-Advanced
Systems Operating of the Business Planning Group. Mr. Cohen received his B.S.
(Honors) in Electrical Engineering in 1955 and an MBA in 1957 from Harvard
University.
Brigadier Ashok Dewan is a director of the Company and has served in this
capacity since September 1997. Mr. Dewan is the founder and Chairman of K&K
Enterprises of India (K&K), since its formation in 1986. K&K is engaged in the
manufacture, sale and distribution of consumer electronics, and has been on OEM
supplier to companies such as Philips, ASM, JBL and Infinity Systems. In 1995,
Aura and K&K formed a joint venture, Dewan-Aura, which manufactured and sold
Aura's speakers and Bass Shakers in the republic of Taiwan, the Indian
subcontinent, Middle East and Europe. In 1989, Mr. Dewan founded Chand
International, which is engaged in the manufacture and sale of garments, and has
served as its Chairman since its formation.
Salvador Diaz-Verson, Jr. is a director of the Company and has served in
this capacity since September 1997. Mr. Diaz-Verson is the founder, and since
1991 has been the Chairman and President of Diaz-Verson Capital Investments,
Inc., an Investment Adviser registered with the Securities and Exchange
Commission. Mr. Diaz-Verson served as president and member of the Board of
Directors of American Family Corporation (AFLCAC Inc.) a publicly held insurance
holding company, from 1979 until 1991. Mr. Diaz-Verson also served as Executive
Vice President and Chief Investment Officer of American Family Life Assurance
Company, subsidiary of AFLCAC Inc. from 1976 through 1991. Mr. Diaz-Verson is a
graduate of Florida State University. He is currently a director of the board of
Miramar Securities, Clemente Capital Inc., Regions Bank of Georgia and The
Philippine Strategic Investment Holding Limited.
Stephen A. Talesnick is a director of the Company and has served in this
capacity since September 1999, following appointment by resolution of the Board
of Directors to fill a vacancy pursuant to the Bylaws of the corporation. Mr.
Talesnick has owned and maintained a private law practice since 1977, which is
presently located in Beverly Hills. Mr. Talesnick specializes in business and
financial transactions in addition to entertainment industry related matters. He
originally practiced as an associate in the New York law firm of White & Case.
In 1992, Mr. Talesnick became a financial advisor in the financial services
industry and is registered with the Securities and Exchange Commission. Mr.
Talesnick is a graduate of The Wharton School Of Finance And Commerce at The
University Of Pennsylvania and received his Juris Doctor degree from Columbia
University School Of Law.
Michael I. Froch is Senior Vice President, General Counsel and Secretary of the
Company and has served as General Counsel since March 1997 and as Secretary
since July 1997. He joined the Company in 1994 as its corporate counsel. From
1991 through 1994, Mr. Froch was engaged in private law practice in California.
Mr. Froch is admitted to the California and District of Columbia bars. He
received his Juris Doctor degree from Santa Clara University School of Law in
1989, during which time he served as judicial extern to the Honorable Spencer M.
Williams, United States District Judge for the Northern District of California.
He received his A.B. degree from the University of California at Berkeley in
1984, serving from 1982 through 1983 as Staff Assistant to the Honorable Tom
Lantos, Member of Congress.
Jacob Mail is Senior Vice President, Operations, serving in this capacity since
November 1999. Previously he has served as Vice President of Operations from
1995 to 1999. Mr. Mail served over 20 years at Israeli Aircraft Industries,
starting as a Lead Engineer and progressing to Program Manager. He was
responsible for the development and production of hydraulic actuation, steering
control systems, rotor brake systems and other systems and subsystems involved
in both commercial and military aircraft. Systems designed by Mr. Mail are being
used today all over the western world. In addition, Mr. Mail has extensive
experience in the preparation of technical specifications planning and
organizing production in accordance with customer specifications at full quality
assurance.
Ronald J. Goldstein is Senior Vice President, Sales and Marketing and is
responsible for the marketing and sales of AuraGen for worldwide government
agencies, military and OEMs and has served in various capacities at Aura since
1989. He holds two M.S. degrees in Computing Technology and the Management of R
& D from George Washington University and has completed coursework for a Ph.D.
in Nuclear Engineering from North Carolina State University. Mr. Goldstein has
over 25 years of experience in high technology both in government and industry.
Since 1989 Mr. Goldstein has been responsible for all marketing and business
development activities for the Company. Prior to joining Aura, Mr. Goldstein was
Manager of Space Initiatives at Hughes Aircraft Company, a scientific and
research company, where he was responsible for the design, production and
marketing of a wide variety of aerospace systems and hardware. Prior to joining
Hughes in 1982, Mr. Goldstein was the Special Assistant for National Programs in
the Office of the Secretary of Defense, and before that held high level program
management positions with the Defense Department and Central Intelligence
Agency.
Family Relationships
Cipora Kurtzman Lavut, a Senior Vice President and director, is the
sister of Zvi Kurtzman, who is the Chief Executive Officer and a director of the
Company. Jacob Mail, Vice President, Operations is a first cousin of Cipora
Kurtzman Lavut and Zvi Kurtzman.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers and directors, and
beneficial owners of more than ten percent of the Common Stock, to file with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. reports of ownership and changes in ownership of the Common Stock.
Copies of such reports are required to be furnished to the Company. Based solely
on its review of the copies of such reports furnished to the Company, or written
representations that no reports were required, the Company believes that during
its fiscal year ended February 28, 1999, all filing requirements applicable to
its officers, directors, and ten percent beneficial owners were satisfied.
Delinquent SEC Filings
None
ITEM 11. EXECUTIVE COMPENSATION
Cash Compensation For Executives
The following table summarizes all compensation paid to the Company's
Chief Executive Officer, and to the four most highly compensated executive
officers of the Company other than the Chief Executive Officer whose total
compensation exceeded $100,000 during the fiscal year ended February 28, 1999.
SUMMARY COMPENSATION TABLE
Annual Long Term All Other
Compensation(1)Compensation Awards Compensation(2)
Name and
Principal Position Year Salary Options/SARs
Zvi (Harry) Kurtzman (1) 1999 $384,290 1,000,000 $1,966
Chief Executive Officer 1998 245,018 0
1997 212,549 0
Arthur J. Schwartz (1) 1999 $204,895 500,000 $1,872
Executive 1998 172,115 0
Vice President 1997 163,971 0
Gerald Papazian (1) 1999 $203,025 100,000 $1,846
President and Chief Operating 1998 154,737 0
Officer 1997 143,122 0
Steven Veen(1) 1999 $196,412 100,000 $1,811
Senior Vice President and 1998 150,127 0
Chief Financial Officer 1997 151,817 0
Yoshikazu Masayoshi 1999 $290,500 0 $ 0
President, MYS Corporation 1998 273,242 0
1997 270,000 0
(1) The amounts shown are the amounts actually paid to the named officers
during the respective fiscal years. Because of the timing of the payments, these
amounts do not represent the actual salary accrued by each individual during the
period. The actual salary rate for these individuals which was accrued during
the fiscal year ended February 1999, 1998 and 1997, respectively, were as
follows: Zvi Kurtzman - $385,000, $200,000, $200,000; Arthur J. Schwartz,-
$205,000, $160,000, $160,000; Gerald S. Papazian - $210,000, $140,000, $140,000,
Steven C. Veen - $200,000, $150,000, $150,000.
(2) Such compensation consisted of total Company contributions made to the plan
account of each individual pursuant to the Company's Employees Stock Ownership
Plan during the fiscal year ended February 28, 1999.
No cash bonuses or restricted stock awards were granted to the above
individuals during the fiscal years ended February 28, 1999, February 28, 1998
and February 28, 1997. Effective December 1992, the Company elected to begin to
compensate non-officer directors at the rate of $5,000 per year. Effective
September 1997, each non-employee director is entitled to receive $30,000 per
year for serving as a director, and $5,000 per year for each director who serves
on the audit committee.
The following table summarizes certain information regarding the number
and value of all options to purchase Common Stock of the Company held by the
Chief Executive Officer and those other executive officers named in the Summary
Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/
Name Year End SARs at Fiscal Year End*
Exercisable Unexercisable Exercisable Unexercisable
Zvi Kurtzman 870,000 600,000 $ 0 $ 0
Arthur Schwartz 515,000 300,000 $ 0 $ 0
Gerald Papazian 166,000 60,000 $ 0 $ 0
Steven Veen 215,000 210,000 $ 0 $ 0
Yoshikazu Masayoshi 0 0 $ 0 $ 0
*Based on the average high and low reported prices of the Company's Common Stock
on the last day of the fiscal year ended February 28, 1999.
No options were exercised by the above individuals during the fiscal year ended
February 28, 1999.
Compensation Committee Report
The Company maintains a Compensation Committee (the "Committee"),
consisting entirely of outside, disinterested, directors who are not employees
or former employees of the Company. The Committee recommends salary practices
for executive officers of the Company, with all compensation determinations
ultimately made by a majority of the outside, disinterested, directors. Prior to
Fiscal 1998, compensation of executive officers, other than the Chief Executive
Officer, was determined by the Chief Executive Officer after review and
consultation with the Committee.
Compensation Philosophy
The Company's policy in compensating executive officers is to establish
methods and levels of compensation that will provide strong incentives to
promote the profitability and growth of the Company and reward superior
performance. Compensation of executive officers includes salary as well as
stock-based programs. The Board believes that compensation of the Company's key
executives should be sufficient to attract and retain highly qualified personnel
and also provide meaningful incentives for measurably superior performance. The
Company places special emphasis on equity-based compensation, particularly in
the form of options. This approach also serves to match the interests of the
executive officers with the interest of the stockholders. The Company seeks to
reward achievement of long and short-term performance goals which are measured
by a number of factors, including improvements in revenue and achieving
profitability.
Included in the factors considered by the Committee in setting the
compensation of the Company's Chief Executive Officer are the growth in the
Company's commercial sales, the development of commercial applications for the
Company's technology, and the effective allocation of capital resources.
Employment Contracts
The Company offers employment contracts to key executives only when it
is in the best interest of the Company and its stockholders to attract and
retain such key executives and to ensure continuity and stability of management.
Effective as of March 1998, the Company entered into employment and severance
agreements with Mr. Kurtzman, the Company's Chief Executive Officer, and Messrs.
Schwartz and Kaufman and Ms. Kurtzman Lavut (the "Named Executive Officers") and
other key executives of the Company. The Committee reviewed and approved such
agreements unanimously after consulting with a nationally recognized employee
benefits firm and determining that such agreements were necessary in order to
retain highly qualified executives whose abilities are critical to the long-term
success and competitiveness of the Company.
Compensation of Chief Executive Officer and Other Executives
The Compensation Committee increased Mr. Kurtzman's salary in March
1998 to $385,000, effective as of December 1997, after consulting with a
nationally recognized employee benefits firm. The increase reflected the
Compensation Committee's assessment of his performance and Mr. Kurtzman's
service to the Company. Salary increases for other senior executives effected
during 1998 were based on similar considerations including individual
performance, position, tenure, experience and compensation surveys of comparable
companies.
In March 1998, the Committee reviewed and unanimously approved stock
option awards under the Company's stock option plan after consulting with a
nationally recognized employee benefits firm. The Committee granted Mr. Kurtzman
an option to purchase 1,000,000 shares of Common Stock, which vest 20% per year
over five years. The options are exercisable at $3.31 per share which was 105%
of the market price of the Company's Common Stock on the date of grant. Senior
executives in the Company participate in the stock option plan and the
Compensation Committee granted such executives options to purchase Common Stock
during Fiscal 1998. In determining the number of shares to award to Mr. Kurtzman
and other executives, the Compensation Committee considered several factors,
including primarily Mr. Kurtzman's and other executives' actual and potential
contributions to the Company's long term success, and the size of awards
provided to other executives in comparable companies holding similar positions.
In July 1997 the Compensation Committee unanimously
recommended the re-pricing of stock options granted to key
employees, including Mr. Kurtzman and the Named Executive
Officers. The Compensation Committee's re-pricing of options
for key employees was made to those persons who have made
significant contributions to the Company's business, for the
purpose of maintaining corporate morale and creating an
incentive for continued employment. See "Option Re-pricing"
Effective in Fiscal 1999 Mr. Kurtzman and the Named Executive Officers
are, pursuant to their employment agreements with the Company, entitled to a
discretionary annual bonus as determined by the Compensation Committee and a
majority of the outside, disinterested, directors of the Board of Directors. In
determining the amounts of such bonuses, the Compensation Committee considers
the individual performance of each executive and the performance of the Company.
Based upon the Company's financial performance during Fiscal 1999 the
Compensation Committee determined not to award bonuses to Mr. Kurtzman or the
Named Executive Officers.
Section 162(m) Policy
Section 162(m) of the Internal Revenue Code of 1986, as amended,
generally provides that publicly held companies may not deduct compensation paid
to certain of its top executive officers to the extent such compensation exceeds
$1 million per officer in any year. However, pursuant to regulations issued by
the Treasury Department, certain limited exemptions to Section 162(m) apply with
respect to "qualified performance-based compensation" and to compensation paid
in certain circumstances by companies in the first few years following their
initial public offering of stock. The Company has taken steps to provide that
these exemptions will apply to compensation paid to its executive officers, and
the Company will continue to monitor the applicability of Section 162(m) to its
ongoing compensation arrangements. Accordingly, the Company does not expect that
amounts of compensation paid to its executive officers will fail to be
deductible by reason of Section 162(m).
Committee Members
Brigadier Ashok Dewan
Salvator Diaz-Verson, Jr.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Brigadier Ashok Dewan and
Salvador Diaz-Verson, Jr. Decisions regarding compensation of executive officers
for the fiscal year ended February 28, 1999 were made unanimously by the
outside, disinterested, directors of the Board of Directors, after reviewing
recommendations of the Compensation Committee. Decisions regarding option grants
under the 1989 Option Plan for the fiscal year ended February 28, 1999 were made
unanimously by the outside, disinterested, directors of the Board of Directors,
after reviewing recommendations of the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock owned as of January 24, 2000 (i) by each person who is
known by Aura to be the beneficial owner of more than five percent (5%) of its
outstanding Common Stock, (ii) by each of the Company's directors and nominees
and those executive officers named in the Summary Compensation Table, and (iii)
by all directors and executive officers as a group:
Shares of Percent of
Common Stock Common Stock
Name Beneficially Owned Beneficially Owned
Gardner Lewis Asset Management 20,517,936 11.58%
Zvi (Harry) Kurtzman 2,444,468 (1)(2) 1.2%
Arthur J. Schwartz 1,928,487 (1)(3)(4) 1.1%
Cipora Kurtzman Lavut 1,655,468 (5) *
Neal B. Kaufman 1,732,657 (1)(7) *
Harvey Cohen 306,250 (6) *
Yoshikazu Masayoshi 283,455 (8) *
Ashok Dewan 0 *
Salvador Diaz-Verson, Jr. 44,000 *
Stephen A. Talesnick 2,437,596 (9) 1.4%
Gerald S. Papazian 314,992 (10) *
Steven C. Veen 378,585 (11) *
Michael I. Froch 217,997 (12) *
Keith O. Stuart 322,366 (13) *
Ronald Goldstein 180,188 (14) *
Jacob Mail 214,763 (15) *
All executive officers and directors 12,461,272 7.0%
as a group (15 persons)
- --------------------
* Less than 1% of outstanding shares.
(1) Includes 175,000 shares held of record by Advanced Integrated Systems,
Inc.
(2) Includes 870,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of January 24, 2000.
(3) Includes 515,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of January 24, 2000.
(4) Includes 32,000 shares held by Dr. Schwartz as custodian for his children,
to which Dr. Schwartz disclaims any beneficial ownership.
(5) Includes 515,000 shares which may be purchased pursuant to options
exercisable within 60 days of January 24, 2000.
(6) Includes 31,250 shares beneficially owned, and 265,000 shares which may be
purchased pursuant to options within 60 days of January 24, 2000 of which
100,000 are beneficially owned.
(7) Includes 470,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of January 24, 2000.
(8) Includes 283,455 shares which were received as part of the MYS
acquisition purchase consideration.
(9) Includes 196,364 shares which may be purchased pursuant to warrants
exercisable within 60 days of January 24, 2000. Mr. Talesnick joined the Board
of Directors in September 1999.
(10) Includes 166,000 shares which may be purchased pursuant to options
exercisable within 60 days of January 24, 2000.
(11) Includes 215,000 shares which may be purchased pursuant to options and
warrants exercisable within 60 days of January 24, 2000.
(12) Includes 130,000 shares which may be purchased pursuant to options
exercisable within 60 days of January 24, 2000.
(13) Includes 300,000 shares which may be purchased pursuant to options
exercisable within 60 days of January 24, 2000. In Fiscal 2000 these options
were divided equally pursuant to a court order as part of a marital dissolution
proceeding.
(14) Includes 140,000 shares which may be purchased pursuant to options
exercisable within 60 days of January 24, 2000.
(15) Includes 150,000 shares which may be purchased pursuant to options
exercisable within 60 days of January 24, 2000.
The mailing address for each of these individuals is c/o Aura Systems,
Inc., 2335 Alaska Avenue, El Segundo, CA 90245.
a) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS
(a) Documents filed as part of this Form 10-K:
(1) Financial Statements
See Index to Consolidated Financial Statements at page F-1
(2) Financial Statement Schedules
See Index to Consolidated Financial Statements at page F-1
(3) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended February 28, 1999.
INDEX TO EXHIBITS
Description of Documents
3.1(1) Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
10.1(1) Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee
Directors.
10.2(1) Form of Aura Systems, Inc. Non-Statutory Stock Option
Agreement.
10.3(1) Deed of Trust and Assignment of Rents, dated as of February
27, 1989, by the Registrant in favor of Chicago Title
Insurance Company, as Trustee, for the benefit of City
National Bank.
10.4(2) Indenture, dated as of March 1, 1989, between the Registrant
and Interwest Transfer Co., Inc. as Trustee, relating to the
7% Secured Convertible Non-Recourse Notes due 1999.
10.5(2) Form of 7% Secured Convertible Non-Recourse Notes due 1999.
10.6(2) Deed of Trust, Assignment of Leases and Rents and Fixture
Filing, dated as of March 1, 1989, by the Registrant in favor
of Ticor Title Insurance Company, as Trustee, for the benefit
of Interwest Transfer Co., Inc., as trustee under the
Indenture.
10.7(3) Form of 7% Secured Convertible Non-Recourse Note due 2000.
10.8(4) 1989 Stock Option Plan.
10.9(5) Joint Development and License Agreement, dated August 24,
1992, between the Registrant and Daewoo Electronics Co., Ltd.
10.10(6) Agreement, dated September 23, 1993, between the Registrant
and Burlington Technopole SDN. BHD.
10.11(7) Dedicated Supplier Agreement, dated December 2, 1993,
between the Registrant and Daewoo Electronics Co., Ltd.
10.12(8) Form of 7% Secured Convertible Non-Recourse Note due 2002.
10.13(9) Agreement dated July 19, 1995 between the Company and K&K
Enterprises.
10.14(9) Agreement dated July 19, 1995 between the Company and K&K
Enterprises.
10.15(9) Agreement dated July 12, 1995 between the Company and K&K
Enterprises.
10.16(9) Agreement dated July 12, 1995 between the Company and K&K
Enterprises.
10.17(9) Stock Purchase and Sale Agreement dated April 30, 1996 between
the Company and MYS Corporation
10.18(9) Joint Venture Agreement dated July 26, 1995 between the
Company and Microbell
10.19 AuraSound Asset Purchase
10.19.1 Asset Purchase Agreement dated December 1, 1999 among
AuraSound, Inc., Aura Systems, Inc., AlgoSound, Inc., and Algo
Technology, Inc.
10.19.2 Amendment dated December 22, 1999 to Asset Purchase Agreement
dated December 1, 1999.
10.19.3 Assignment and License Agreement as of July 15, 1999
between Speaker Acquisition Sub, Algo Technology, Inc., Aura
Systems, Inc., AuraSound Inc.
10.20 MYS Stock Purchase
10.20.1 Escrow Agreement as of March 26, 1999 among the Company,
Inc.,Yoshikazu Masayoshi, Sadao Masayoshi, Sachie Masayoshi,
Kazuaki Masayoshi, and Wolf Haldenstein Adler Freeman & Herz
LLP.
10.20.2 Promissory Note in the amount of $1,000,000 dated March 26,
1999 payable to the Company by Yoshikazu Masayoshi, Sadao
Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi.
10.20.3 Promissory Note in the amount of $3,200,000 dated March 26,
1999 payable to the Company by Yoshikazu Masayoshi, Sadao
Masayoshi, Sachie Masayoshi and Kazuaki Masayoshi.
10.20.4 Stock Purchase Agreement dated March 26, 1999 between the
Company and Yoshikazu Masayoshi, Sadao Masayoshi, Sachie
Masayoshi and Kazuaki Masayoshi.
10.21 Agreement with RGC International Investors, LDC
10.21.1 First Amendment to Security Agreement dated October 22, 1999
between RGC International Investors, LDC and the Company.
10.21.2 Settlement Agreement and Complete Release of all Claims dated
October 22, 1999 between RGC International Investors, LDC, and
the Company
10.21.3 Stock Purchase Warrant issued to RGC International Investors,
LDC by the Company. 10.21.4 Amended and Restated Convertible
Senior Secured Note dated October 7, 1998 in the amount of
$3,000,000 issued to RGC International Investors, LDC by the
Company.
10.22 Settlement Agreement and Release of Claims dated as of
December 1, 1999 between JNC Opportunity Fund, Ltd., and the
Company.
10.23 Payment Agreement by and between Credit Managers
Association of California and Aura Systems, Inc.
21.1 Aura Systems, Inc. and Subsidiaries
EX-27 Data Schedule
(1) Incorporated by reference to the Exhibits to the Registration Statement
on Form S-1 (File No. 33-19530).
(2) Incorporated by reference to the Exhibits in the Registrant's Current
Report on Form 8-K dated March 24, 1989 (File No. 0-17249).
(3) Incorporated by reference to the Exhibits to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-1 (File No.
33-27164).
(4) Incorporated by reference to the Exhibits to the Registration Statement
on Form S-8 (File No. 33-32993).
(5) Incorporated by Reference to the Exhibit to the Registration Statement
on Form S-1 (File No. 35-57 454).
(6) Incorporated by reference to the Registrants Current Report in Form
10-Q dated November 30, 1993.
(7) Incorporated by reference to the Exhibits to the Registration Statement
on Form S-1 (File No.-33-57454).
(8) Incorporated by reference to the Exhibits to the registrants Annual
Report Form 10-K for the fiscal year
ended February 28, 1994 (File No. 0-17249).
(9) Incorporated by reference to the Registrants Annual Report Form 10-K
for the fiscal year ended February 29, 1996 (File No. 0-17249)
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AURA SYSTEMS, INC.
Dated: February 7, 2000
By: /s/ Zvi Kurtzman
Zvi Kurtzman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Signatures Title Date
/s/Zvi Kurtzman Chief Executive Officer and Director February 7, 2000
- ---------------------------------
Zvi Kurtzman (Principal Executive Officer)
/s/Steven C. Veen Senior Vice President, February 7, 2000
- ---------------------------------
Steven C. Veen Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/Gerald S. Papazian President and Director February 7, 2000
- ---------------------------------
Gerald Papazian
/s/Arthur J. Schwartz Executive Vice President and Director February 7, 2000
- ---------------------------------
Arthur J. Schwartz
/s/Neal Kaufman Senior Vice President and Director February 7, 2000
- ---------------------------------
Neal B. Kaufman
/s/Cipora Kurtzman Lavut Senior Vice President and Director February 7, 2000
- ---------------------------------
Cipora Kurtzman Lavut
Director February 7, 2000
- ---------------------------------
Ashok Dewan
/s/Salvador Diaz-Verson, Jr. Director February 7, 2000
- ---------------------------------
Salvador Diaz-Verson, Jr.
Director February 7, 2000
- ---------------------------------
Stephen A. Talesnick
/s/Harvey Cohen Director February 7, 2000
- ---------------------------------
Harvey Cohen
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report on Consolidated Financial Statements and
Financial Statement Schedule F-2
Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries:
Consolidated Balance Sheets-February 28, 1999 and February 28, 1998 F-3 to F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) -
Years ended February 28, 1999, February 28, 1998 and February 28,
1997 F-5 Consolidated Statements of Stockholders' Equity (Deficit)-Years ended
February 28, 1999, February 28, 1998 and February 28, 1997 F-6
Consolidated Statements of Cash Flows-Years ended February 28, 1999,
February 28, 1998 and February 28, 1997 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-25
Consolidated Financial Statement Schedule:
II Valuation and Qualifying Accounts F-26
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
respective consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Aura Systems, Inc.
El Segundo, California
We have audited the consolidated balance sheets of Aura Systems, Inc. and
subsidiaries as of February 28, 1999, and February 28, 1998 and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
February 28, 1999 and the related financial statement schedule listed in the
accompanying Index at Item 14. These consolidated financial statements, and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aura Systems, Inc.
and subsidiaries as of February 28, 1999, and February 28, 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 1999, and the financial statement schedule presents
fairly, in all material respects, the information set forth therein, all in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming Aura Systems,
Inc. will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has generated significant losses
from operations, all major debt obligations were in default as of year-end and
the Company is currently in the process of restructuring all major debt
obligations. If the Company continues to suffer recurring losses from operations
and continues to have a net capital deficiency, there may be substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 1.
/s/ Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California 90017
February 4, 2000
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, February 28,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,822,210 $ 6,079,411
Receivables, net 8,380,414 54,418,141
Inventories 18,477,058 58,713,875
Prepayments 3,435,645 13,326,789
Other current assets 2,124,535 5,925,642
Deferred income taxes -- 838,000
Note receivable 250,000 --
------------- -------------
Total current assets 36,489,862 139,301,858
------------- -------------
PROPERTY AND EQUIPMENT, AT COST 47,976,699 66,667,671
Less accumulated depreciation and
amortization (10,994,734) (11,888,586)
----------------- --------------
Net property and equipment 36,981,965 54,779,085
JOINT VENTURES -- 6,903,918
LONG-TERM Investments 2,923,835 7,476,299
long-term receivables 2,500,000 3,627,098
Patents and trademarks-Net 5,293,278 6,410,771
GOODWILL-NET 5,383,208 6,146,642
OTHER ASSETS 571,244 2,656,958
------------- -------------
Total $ 90,143,392 $ 227,302,629
============== =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
----------- -------
CURRENT LIABILITIES:
Notes payable $ 8,787,113 $ 31,147,572
Convertible note, unsecured 2,000,000 --
Accounts payable 22,515,842 43,995,364
Accrued expenses 8,056,783 3,990,027
------------- -------------
Total current liabilities 41,359,738 79,132,963
------------- -------------
25,955,529 3,282,003
------------- -------------
NOTES PAYABLE AND OTHER LIABILITIES
convertible Notes-SECURED 4,000,000 2,112,900
------------- -------------
CONVERTIBLE NOTES-UNSECURED 32,481,782 15,500,000
------------- -------------
MINORITY INTERESTS IN SUBSIDIARY -- 10,372,895
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock par value $.005 per share
and additional paid in capital. Issued
and outstanding 107,752,042 and
80,001,244 shares respectively. 218,693,245 199,100,614
Cumulative currency translation
adjustment (CTA) (365,932) 40,642
Accumulated deficit (231,980,970) (82,239,388)
-------------- --------------
Total stockholders' equity (deficit) (13,653,657) 116,901,868
-------------- -----------
Total $ 90,143,392 $227,302,629
============= ===========
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive
Loss Years ended February 28, 1999, February 28,
1998 and February 28, 1997
1999 1998 1997
------------- ------------- -------
Net Revenues $81,518,162 $136,715,385 $109,950,202
Cost of GOODS AND OVERHEAD 158,024,723 101,622,051 86,350,828
------------- ------------- -------------
GROSS PROFIT (LOSS) (76,506,561) 35,093,334 23,599,374
-------------- ------------- -------------
EXPENSES:
Research and development 2,831,847 1,395,160 6,022,586
Impairment of long-lived assets 9,403,687 -- --
Selling, general and administrative expenses 74,419,812 45,018,066 18,761,123
------------- ------------- -------------
Total expenses 86,655,346 46,413,226 24,783,709
------------- ------------- -------------
(LOSS) FROM OPERATIONS (163,161,907) (11,319,892) (1,184,335)
OTHER (INCOME) AND EXPENSE
Gain on sale and issuance of subsidiary stock and
other assets (1,042,665) (12,952,757) (250,000)
Legal settlements 7,717,518 1,700,000 --
Equity in losses of unconsolidated joint ventures 6,268,384 1,937,747 --
Loss on disposal of assets 1,188,329 -- --
Loss on disposal of investment 4,877,839 -- --
Termination of license arrangement -- 3,114,030 --
Interest income (184,168) (224,385) (475,758)
Interest expense 12,198,858 7,051,654 1,891,692
------------- ------------- -------------
(LOSS) BEFORE INCOME TAXES AND OTHER ITEMS
(194,186,002) (11,946,181) (2,350,269)
Provision (benefit) for taxes 570,651 (1,256,046) 570,484
Minority interests in consolidated subsidiary:
Income -- 946,405 --
Loss 10,372,895 -- --
Loss in excess of basis of consolidated subsidiary
Aura 8,080,695 -- --
Minority interests 26,561,481 -- --
-------------- ------------- -------------
NET (LOSS) (149,741,582) (11,636,540) (2,920,753)
--------------= --------------= -------------=
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments (406,574) -- 40,642
--------------- -------------- -------------
Comprehensive loss $ (150,148,156) $ (11,636,540) $ (2,880,111)
=============== ============== =============
NET (LOSS) PER COMMON SHARE $ (1.74) $ (.15) $ (.04)
=============== ============== =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 85,831,688 79,045,290 68,433,521
============= ============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended February 28, 1999, February 28, 1998 and February 28, 1997
Accumulated
Additional other
Common Stock Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit (CTA) Income (Loss) Total
Balances at February 29, 1996 62,222,438 $311,112 $166,534,089 $(67,682,095) $ -- $99,163,106
Private placements, net of
issuance cost 385,000 1,925 1,499,575 -- -- 1,501,500
Notes payable converted 12,815,368 64,077 24,679,389 -- -- 24,743,466
Exercise of warrants 300,000 1,500 598,500 -- -- 600,000
Exercise of stock options 10,000 50 34,950 -- -- 35,000
Stock issued to acquire assets 748,860 3,744 2,310,882 -- -- 2,314,626
Other comprehensive income (CTA) -- -- -- -- 40,642 40,642
Net (loss) -- -- -- (2,920,753) (2,920,753)
----------- ------ ------------- ----------- -------- -----------
Balances at February 28, 1997 76,481,666 382,408 195,657,385 (70,602,848) 40,642 125,477,587
Notes payable converted 3,164,001 15,820 4,528,958 -- -- 4,544,778
Exercise of warrants 241,688 1,208 583,642 -- -- 584,850
Exercise of stock options 25,000 125 51,375 -- -- 51,500
Proceeds from issuance of
warrants -- -- 900,000 -- -- 900,000
Repurchase of warrants -- -- (1,679,956) -- -- (1,679,956)
Stock issued to acquire assets 88,889 445 199,555 -- -- 200,000
Expenses of issuances -- -- (1,540,351) -- -- (1,540,351)
Net (loss) -- -- -- (11,636,540) (11,636,540)
----------- ------ ------------- ------------ -------- ------------
Balances at February 28, 1998 80,001,244 400,006 198,700,608 (82,239,388) 40,642 116,901,868
Notes payable converted 16,513,282 82,566 10,126,867 -- -- 10,209,433
Exercise of warrants 7,475,383 37,377 7,971,198 -- -- 8,008,575
Exercise of stock options 50,000 250 102,750 -- -- 103,000
Stock issued to acquire assets 114,833 574 28,134 -- -- 28,708
Private placements 3,597,300 17,986 1,779,656 -- -- 1,797,642
Expenses of issuances -- -- (554,727) -- -- (554,727)
Other comprehensive income (CTA) -- -- -- -- (406,574) (406,574)
Net (loss) -- -- -- (149,741,582) -- (149,741,582)
Balances at February 28, 1999 107,752,042 $538,759 $218,154,486 $(231,980,970) $(365,932) $(13,653,657)
============== ======== =============== ============== ============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended February 28, 1999, February 28, 1998 and
February 28, 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss $(149,741,582) $(11,636,540) $(2,920,753)
-------------- ---------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 12,985,278 8,362,110 4,797,436
Provision for environmental cleanup 44,516 40,597 37,021
(Gain) Loss on disposition of assets 6,066,168 (555,326) (255,665)
Equity in losses of unconsolidated joint ventures 6,268,384 1,937,747 --
Gain on sale of subsidiary and other stock investments (262,804) (12,144,740) --
Impairment of long-lived assets 9,403,687 -- 2,005,000
Foreign currency translation adjustment (406,574) -- 172,617
Assets-(Increase) Decrease:
Receivables 46,037,727 (674,443) (12,830,713)
Inventories 40,236,817 (24,866,579) (9,410,343)
Prepayments 9,891,144 (5,631,521) --
Other current assets 3,801,107 (5,534,281) 1,245,613
Deferred income taxes 838,000 (940,000) --
Liabilities-Increase (Decrease):
Accounts payable (21,479,522) 20,279,113 3,270,971
Accrued expenses 4,614,005 2,086,583 323,435
Litigation and other liabilities 7,389,649 (345,372) --
------------ ------------ -----------
Total adjustments 125,427,582 (17,986,112) (11,986,546)
----------- ---------- ----------
Net cash used by operating activities (24,314,000) (29,622,652) (13,565,381)
------------ ---------- -------------
Cash flows from investing activities:
Proceeds from sale of assets 2,721,000 920,000 286,217
Purchase of property and equipment (2,143,237) (1,910,214) (8,606,686)
Manufacture of special tools and equipment (1,910,611) (16,096,180) (16,539,899)
Purchase of subsidiary -- -- (1,101,278)
Investment in joint ventures (164,466) 1,202,138 (3,163,475)
Long-term investments (4,940,000) (1,117,465) (2,430,756)
Long-term receivables 3,436,809 3,347,144 (2,450,959)
Patents and trademarks (467,167) (1,903,718) (696,677)
Goodwill and other assets 1,425,794 (2,398,400) (645,241)
Proceeds from subsidiary stock 1,611,873 5,472,656 --
----------- ----------- -----------
Net cash used by investing activities (430,005) (12,484,039) (35,348,754)
------------ ----------= -----------
See accompanying notes to consolidated financial statements
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
Net proceeds from borrowings $17,922,584 $26,287,632 $ 9,772,600
Repayment of notes payable (3,396,083) (10,874,683) (2,624,214)
Proceeds from exercise of options 103,000 -- --
Net proceeds from issuance of common stock 1,675,873 636,350 2,136,500
Net proceeds from exercise of warrants 7,884,325 -- --
Proceeds from issuance of warrants -- 900,000 --
Net proceeds from issuance of convertible notes
11,720,000 13,959,649 24,841,239
Repayment of convertible notes (3,050,000) (5,905,223) --
Minority interest adjustment (10,372,895) 17,749,979 --
Repurchase of warrants -- (1,679,956) --
------------ --------- -----------
Net cash provided by financing activities 22,486,804 41,073,748 34,126,125
------------ ---------- -----------
Net decrease in cash and equivalents (2,257,201) (1,032,943) (14,788,010)
Cash and equivalents at beginning of year 6,079,411 7,112,354 21,900,364
------------ ----------- ----------
Cash and equivalents at end of year $ 3,822,210 $ 6,079,411 $ 7,112,354
============ =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 3,374,992 $ 6,280,859 $1,065,796
============ =========== =========
Income Taxes $ 2,244,762 $ 186,310 $ 8,000
============ =========== ===========
Supplemental disclosures of non-cash investing and financing activities:
During the year ended February 28, 1997, the Company issued 748,860 shares
in connection with the acquisitions of MYS Corporation., Phillips Sound
Labs and Revolver U.K. Limited valued at $2,314,626. During the year ended
February 28, 1997, $25,900,000 of convertible notes and accrued interest
were converted into 12,815,368 shares of common stock.
During the year ended February 28, 1998, $4,544,778 of convertible notes
and accrued interest were converted into 3,164,001 shares of common stock.
Effective January 29, 1998, the Company executed a contract to purchase
title and interest to the "Aura" trademark name in several locations in
Europe, Hong Kong and Taiwan. Partial consideration paid included $200,000
worth of Aura common stock or 88,889 shares, and $1,587,678 of operating
assets transferred to the seller of the trademark name. During the year
ended February 28, 1998 the Company entered into financing arrangements
whereby it acquired assets for notes payable in the amount of $493,781.
During the year ended February 28, 1999, $10,209,433 of convertible notes
and accrued interest were converted into 16,513,282 shares of common stock.
Additionally, 90,510 shares of common stock were issued for services
received totaling $90,510. During the year ended February 28, 1999,
2,000,000 shares of the Company's investment in NewCom Inc., valued at
$2,820,000, were surrendered to a NewCom creditor pursuant to a security
agreement that collateralized a NewCom note in the amount of $1,000,000.
During the year ended February 28, 1999, $800,000 in joint ventures assets
were transferred to long term investments. During the year ended February
28, 1999, the Company sold a stock investment for $5,499,000, of which
$2,750,000 was recorded as a note receivable. During the year ended
February 28, 1999, the Company assumed explicitly certain obligations of
NewCom, effectively transferring approximately $9,900,000 from current
notes and trade payables to litigation payable. The $9,900,000 represents
NewCom obligations guaranteed by the Company, including a line of credit
with a commercial lending institution and two other trade creditors.
See accompanying notes to consolidated financial
statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 28, 1999, February 28, 1998 and February 28, 1997
(1) Business and Summary of Significant Accounting Policies
Business
Aura Systems, Inc. ("Aura" or the "Company"), a Delaware
corporation, is engaged in the development,
commercialization and sales of products, systems and
components using its patented and proprietary
electromagnetic and electro-optical technology.
In 1994, the Company founded its subsidiary NewCom, Inc. ("NewCom"), a
Delaware corporation, which was engaged in the manufacture, packaging,
selling and distribution of computer related communications and sound
related products, including modems, CD-ROMs, sound cards, speaker
systems and multimedia products, thereby expanding its presence in the
growing multimedia, communication and sound-related consumer
electronics market. NewCom ceased operations in 1999.
The Company acquired 100% of the outstanding shares of MYS Corporation
of Japan ("MYS") in 1996 to expand the range of its sound products and
speaker distribution network. Subsequent to Fiscal 1999, the Company
sold MYS to its management.
The Company is involved in the application of its technology to a
variety of products and services and, as such, faces substantial
competition from companies offering different and competitive
technologies.
The Company believes the principal competitive factors in the markets
for the Company's products include the ability to develop and market
technologically advanced products to meet changing market conditions,
price, reliability, product support and the ability to secure
sufficient capital resources for the often substantial periods between
technological concept and commercialization. The Company's ability to
compete will also depend on its continued ability to attract and retain
skilled and experienced personnel, to develop and secure patent and
other protection for its technology and to exploit commercially its
technology prior to the development of competing products by others.
The Company competes with many companies that have more experience,
name recognition, financial and other resources and expertise in
research and development, manufacturing, testing, obtaining regulatory
approvals, marketing and distribution. Other companies may also prove
to be significant competitors, particularly through their collaborative
arrangements with research and development companies.
Basis of Presentation and Going Concern
The accompanying consolidated financial statements of the Company have been
prepared on the basis that it is a going concern, which contemplates the
realization of assets and satisfaction of liabilities, except as otherwise
disclosed, in the normal course of business. However, as a result of the
Company's losses from operations and inability to service its debt
obligations, such realization of assets and liquidation of liabilities is
subject to significant uncertainties. Further, the Company's ability to
continue as a going concern is dependent upon the successful restructuring
of obligations, achievement of profitable operations and the ability to
generate sufficient cash from operations and financing sources to meet the
restructured obligations. Management is currently seeking or obtaining
additional sources of funds and the Company has restructured a significant
portion of its debt obligations. The Company intends to focus its business
on the AuraGen line of products. Except as otherwise disclosed, the
consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that may result from
the possible inability of the Company to continue as a going concern as
otherwise disclosed.
Principles of Consolidation
The consolidated financial statements include accounts of the Company
and its wholly owned subsidiaries, MYS and its subsidiaries Audio-MYS,
MYS America and MYS U.S.A, Aura Ceramics, Inc., Aura Sound Inc. and
Electrotec Productions, Inc. (and its wholly owned subsidiary
Electrotec Europe). For the years ended February 28, 1998 and 1997, the
Company's interest in NewCom, a majority owned subsidiary, is reported
on a consolidated basis, the consolidated financial statements include
100 percent of the assets and liabilities of the subsidiary, and the
ownership percentage of minority interests is recorded as "Minority
Interests in Subsidiary." In February 1999, the Company reduced its
interest in NewCom to approximately 41%. Accordingly, for the year
ended February 28, 1999, the Statement of Operations and Comprehensive
Loss reflects the operating results of NewCom through the period of
majority ownership. The balance sheet as of February 28, 1999 reflects
the Company's investment on an equity basis of accounting. In
consolidation, all significant intercompany balances and transactions
have been eliminated.
For the year ended February 28, 1999, the Company's losses from NewCom,
on a consolidated basis, were in excess of the Company's allocation of
losses as accounted for under the equity method. In accordance with
Accounting Principles Board Opinion No. 18 "The Equity Method of
Accounting for Investments in Common Stock" the Company has recognized
losses up the amount of their investment, advances, and guarantees of
indebtedness. Losses related to the consolidation of NewCom in excess
of losses appropriate under the equity method, in the amount of
$8,080,695, are reflected as an other item in the Statement of
Operations and Comprehensive Loss.
For the year ended February 28, 1999, the minority interest in loss of
subsidiary are in excess of minority interests investments. The
minoritiy interests loss in excess of investment in the amount of
$26,561,481, are reflected as an Other Item in the Statement of
Operations and Comprehensive Loss.
Revenue Recognition
The Company recognizes revenue for product sales upon shipment. The
Company provides for estimated returns and allowances based upon
experience. The Company also earns a portion of its revenues from
license fees, and generally records these fees as income when the
Company has fulfilled its obligations under the particular agreement.
Comprehensive Income
In March 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display
of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. This standard requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement;
display the accumulated balances of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. the Company
adopted SFAS 130 in Fiscal 1999. The adoption of this statement
did not have any impact on the Company's results of operations,
financial position, or cash flows.
Cash Equivalents
maturity of less than three months, to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual future results could
differ from those estimates.
Long-Term Investments
Investments in equity securities with no readily determinable fair
value are stated at cost. Management periodically evaluates these
investments as to whether fair value is less than cost. In the event
fair value is less than cost, and the decline is determined to be other
than temporary, the Company will reduce the carrying value accordingly.
Goodwill
Goodwill represents the excess purchase price over the fair market
value of the assets acquired of certain acquisitions. Goodwill is being
amortized over 40 years on a straight-line basis.
The carrying value of goodwill is based on management's current
assessment of recoverability. Management evaluates recoverability using
both objective and subjective factors. Objective factors include
management's best estimates of projected future earnings and cash flows
and analysis of recent sales and earnings trends. Subjective factors
include competitive analysis and the Company's strategic focus.
Inventories
Inventories are stated at the lower of (first-in,first-out) or market.
Per Share Information
The consolidated net loss per common share is based on the weighted
average number of common shares outstanding during the year. Common
share equivalents have been excluded since inclusion would dilute the
reported loss per share.
Patents and Trademarks
The Company capitalizes the costs of obtaining or acquiring patents and
trademarks. Amortization of patent costs is provided for by the straight
line method over the shorter of the legal or estimated economic life. If a
patent or trademark is rejected, abandoned, or otherwise invalidated the
un-amortized cost is expensed in that period.
Joint Ventures
The Company initially records investments in joint ventures at cost.
These cost amounts are adjusted quarterly to reflect the Company's
share of venture income or losses.
Impairment of long-lived assets
The Company reviews long-lived assets and identifiable intangibles
whenever events or circumstances indicate that the carrying amount of
such assets may not be fully recoverable. The Company evaluates the
recoverability of long-lived assets by measuring the carrying amounts
of the assets against the estimated undiscounted cash flows associated
with these assets. At the time such evaluation indicates that the
future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the assets' carrying value, the assets are
adjusted to their fair values (based upon discounted cash flows).
During 1999, the Company's management redirected its strategy to focus
on the AuraGen production. The Company made the decision to cease
operations in various divisions, reduce overhead and sell or lease
Company assets that were not compatible with the Company's strategy.
Management reviewed the estimated future cash flows related to these
operations and deemed them to be insufficient to fully recover the
carrying value of the assets. Accordingly, the Company has recognized
an $9,403,687 impairment expense to reduce the assets to their
estimated fair value. The impairment includes a write down of
property and equipment and goodwill of $8,893,259 and $510,428,
respectively.
Research and Development
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising charged to
expense in Fiscal 1999, 1998 and 1997 approximated $ 9.4 million, $5.8
million and $4.5 million, respectively, including approximately nil,
$300,000 and $700,000 for the production of the advertising, which is
continuing to be used but has been expensed.
Buildings, Equipment and Leasehold Improvements
Buildings, equipment and leasehold improvements are stated at cost and
are being depreciated using the straight-line method over their
estimated useful lives as follows:
Buildings 40 years
Machinery and equipment 5-10 years
Furniture and fixtures 7 years
Leasehold improvements Life of lease
During 1999 and 1998, the Company capitalized costs of $1,910,611 and
$16,096,180, respectively, on special tools and equipment, which have
been designed for the manufacturing and development of actuators,
speakers and related products, automotive products, actuator mirror
array wafers and internet access and multimedia computer products. The
capitalized amounts, included in machinery and equipment, include
allocated costs of direct labor and overhead. During 1999, management
reduced previously capitalized amounts to their estimated fair value,
due to impairment of assets. See note on Impairment of long-lived
assets.
Depreciation and amortization expense of buildings,
machinery and equipment, furniture and fixtures and leasehold
improvements approximated $11.9 million, $5.4 million and $3.2 million
for Fiscal 1999, 1998 and 1997, respectively.
Product Return Risks
The Company has been exposed to the risk of product returns from its
retailer mass merchant and distributor customers as a result of several
factors, including returns from their customers, contractual stock
rotation privileges, returns of defective products or product
components, primarily through NewCom. In addition, the Company
generally accepts returns of unsold product from customers with whom
the Company has severed its customer relationship. Overstocking by the
Company's customers could lead to higher than normal returns, which
could have a material adverse effect on the Company's results of
operations. The Company also has a policy of offering price protection
to its customers for some or all of their inventory, whereby when the
Company reduces its prices for a product, the customer receives a
credit for the difference between the original purchase price of the
product and the Company's reduced price for the product. As a result of
this policy, significant reductions in price have had, and may in the
future have, a material adverse effect on the Company's results of
operations. In management's opinion, the financial statements include
adequate provisions to reserve for future product returns.
(2) Receivables
Receivables consist of the following:
1999 1998
---- ----
Commercial receivables:
Amounts billed $16,548,666 $59,277,378
Recoverable costs and accrued profits not billed -- 931,056
----------- -----------
Total commercial receivables 16,548,666 60,208,434
Advances due from related parties 102,773 210,837
Less allowance for uncollectible receivables and (8,271,025) (6,001,130)
----------- ----------
sales returns
$8,380,414 $54,418,141
Bad debt expense was approximately $13.3 million, $3.6 million and
$.7 million in Fiscal 1999, 1998 and 1997 respectively.
(3) Long Term Investments
Long-term investments consist of the following:
1999 1998
---- ----
Telemac Cellular C $ -- $4,782,500
Aquajet Corporation 923,835 883,834
Alaris Industries, 1,200,000 1,200,000
Other 800,000 609,965
---------- -----------
$2,923,835 $7,476,299
========== ==========
During Fiscal 1999, the Company sold a portion of its shares in Telemac
Cellular Corp.(Telemac) back to Telemac. The Company then entered into a
cancellation of shares agreement whereby it tendered its shares to Telemac
in exchange for a note receivable from Telemac resulting in a gain
recognized of approximately $850,000.
In February 1998, NewCom, Inc. entered into an Equipment Buy-Sell
Agreement with Fourth Communications Network ("FCN") whereby NewCom
purchased 200,000 shares of FCN Series F Preferred Stock, which is
convertible into Common Stock at a conversion price of $25.00 per
share, and received warrants to purchase 200,000 shares of Common Stock
at $15.00 per share, in consideration of a cash payment of $5,000,000
of which $150,000 was paid in February 1998 with the balance of
$4,850,000 paid in March 1998. In Fiscal 1999, NewCom pledged the
investment as collateral to a secured creditor. The investment has been
foreclosed upon.
(4) Joint Ventures and Other Agreements
(a) Malaysian Joint Venture
In 1993, the Company entered into an agreement with Burlington
Technopole SDN. BHD., a Malaysian corporation (Burlington) for the
formation of a joint venture to manufacture and sell speakers using
Aura's proprietary technology. In Fiscal 1999 the joint venture was
terminated, and a total of $1,064,911 in joint venture losses and
write-off's were recorded during Fiscal 1999.
(b) Aura-Dewan Joint Venture
In 1995, the Company entered into an agreement with K&K Enterprises of
India ("K&K") for the formation of a joint venture to manufacture and
sell speakers using Aura's proprietary technology. In 1995 the Company
also entered into an agreement with K&K for the formation of a joint
venture to manufacture Aura's Bass ShakerTM. In Fiscal 1999 the joint
venture was terminated, and a total of $534,911 in joint venture losses
and write-off's were recorded during Fiscal 1999. The Company's
remaining investment in property of the joint venture, for the amount
of $800,000 has been reclassified to long term investments.
(c) Daewoo Agreement
In 1992, the Company entered into a joint development and licensing
agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and
commercialize televisions using Aura's AMA(TM) display technology. Aura
is to receive a fixed royalty (depending on television size), for each
television set manufactured by Daewoo or licensed by Daewoo to a third
party. Due to Daewoo's existing financial difficulties, it is currently
undeterminable if Daewoo will be able to commercialize a television
using Aura's AMA(TM) display technology.
(d) Eric Joint Venture
In 1997, the Company entered into an agreement with the European Group
to form a joint venture for sales, marketing and further development of
motion base simulators using the Company's proprietary technology. In
Fiscal 1999, as a result of financial crisis the Company ceased on its
commitment to continue to develop improvements to the Company's motion
base simulator technology. The parties agreed to terminate the joint
venture, and $3,856,091 was written-off to loss in joint ventures.
(e) Microbell Joint Venture
In 1995 the Company entered into an agreement with Microbell to form a
joint venture to further develop and commercialize patented and
proprietary technology developed by Microbell.
Aura's inability to continue to fund the joint venture as required, the
joint venture was terminated, and $635,902 was written-off to loss in
joint venture.
(5) Related Party Transactions
Notes and advances due from related parties, aggregated $102,773 and
$210,837 at February 28, 1999 and February 28, 1998, respectively,
included in current receivables, and $0 and $19,000 included in
(6) Inventories
Inventories, stated at the lower of cost (first-in, first-out) or
market, consist of the following:
1999 1998
---- ----
Raw materials $11,318,263 $19,202,024
Finished goods 15,034,795 44,046,851
Reserves for product obsolence (7,876,000) (4,535,000)
--------------- ---------------
$18,477,058 $58,713,875
============== ==============
Inventories at February 28, 1999 and 1998 include approximately $3.5 million and
$5.0 million, respectively, that was received subsequent to year end, but was
shipped F.O.B. shipping point, requiring the Company to include this amount in
its reported inventory and to record the corresponding liability in accounts
payable. At February 28, 1999, inventories consist primarily of components and
completed units for the Company's AuraGen product, along with speaker components
and finished product.
(7) Property and Equipment
Property and Equipment, at cost is comprised as follows:
1999 1998
---- ----
Land $ 3,877,074 $ 3,870,361
Buildings 9,396,392 9,366,512
Machinery and equipment 32,354,243 48,610,238
Furniture, fixtures and
leasehold improvements 2,348,990 4,820,560
------------ -----------
$47,976,699 $66,667,671
=========== ==========
(8) Notes Payable and Other Liabilities
Notes Payable and Other Liabilities consist of the following:
All major debt obligations were in default as of February 28, 1999, see
note 21.
1999 1998
---- --- ----
Litigation payable $17,302,047 $ --
Lines of Credit 3,000,000 9,569,235
Notes payable-equipment (a) 194,296 2,870,971
Notes payable-buildings (b) 8,549,854 3,553,187
Unsecured notes payable (c) 4,907,068 17,975,000
Unsecured bonds payable (d) 283,679 --
-------------- -----------
34,236,944 33,968,393
Less: current portion 8,787,113 31,147,572
-------------- ----------
Long term portion 25,449,831 2,820,821
Reserve for environmental cleanup 505,698 461,182
-------------- -----------
$25,955,529 $ 3,282,003
============== ===========
(a) Notes payable-equipment consists of various notes maturing at various
dates through September 2000 bearing interest at various rates and are
collaterized by equipment.
(b)
Notes payable-buildings consists of a 1st Trust Deed on a building in
California, due in Fiscal 2009, and a note due October 2000
collateralized by a building in Malaysia.
(c) Unsecured notes payable consists of two notes.
(d) There are five unsecured bonds payable.
Annual maturities of long term notes payable and litigation payable for
the next fiscal years are as follows:
Fiscal Year Amount
2000 $8,787,113
2001 7,825,765
2002 2,686,351
2003 2,493,440
2004 925,941
thereafter 11,518,334
----------
$34,236,944
==========
(9) Convertible Notes Payable
In Fiscal 1993, the Company issued its Secured 7% Convertible Notes due 2002 in
the total amount of $5.5 million. In Fiscal 1999, the remaining $2,122,900 of
these notes were redeemed by the Company.
In Fiscal 1997, the Company issued $26,350,000 of unsecured convertible notes
due at various dates, $17.9 million of these notes plus accrued interest of
$228,534 were converted into 10,069,924 shares of common stock in Fiscal 1997.
In Fiscal 1998, the Company issued $34.5 million of unsecured notes payable to
investors. During the fiscal year the Company redeemed $3.8 million of notes
issued in Fiscal 1997 and $2 million of notes issued in Fiscal 1998.
Additionally, $4.5 million of notes issued in Fiscal 1997 were converted into
3,164,001 shares of common stock. In Fiscal 1999, the Company issued $8 million
of unsecured notes payable to investors and $4,662,900 of secured notes payable
to investors. During the Fiscal year the Company redeemed $1.6 million of
convertible notes issued in Fiscal 1998. Additionally $9,662,184 worth of
convertible notes issued in Fiscal 1998 plus interest of $547,249, were
converted into 16,513,282 shares of common stock.
(10) Accrued Expenses
Accrued expenses consist of the following:
1999 1998
---- ----
Accrued payroll and related expenses $1,076,185 $1,092,082
Bond interest payable 4,535,789 880,158
Other 2,444,809 2,017,787
------------- ---------
$8,056,783 $3,990,027
(11) Income Taxes
At February 28, 1999, the Company had net operating loss carry-forwards for
Federal and state income tax purposes of approximately $216 million and $95
million respectively, which expire through 2014.
Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the liability
method of accounting for income taxes. Accordingly, the Company has recorded a
deferred tax benefit of approximately $93 million for Fiscal 1999 and $23
million for Fiscal 1998. The Company has also recorded a valuation account to
fully offset the deferred benefit due to the uncertainty of the realization of
this benefit.
As of September 19, 1997, NewCom, Inc. is no longer included in the
Company's consolidated Federal tax return since the Company's ownership
percentage was reduced below 80% as of that date. In connection with the
deconsolidation of NewCom, Inc. for Federal income tax reporting purposes, the
Company recognized an income tax benefit of approximately $1.3 million for
financial reporting purposes in the accompanying statement of operations for
Fiscal 1998. The Company's Japanese subsidiary, MYS Corporation, pays income
taxes to the Japanese government at an effective rate of approximately fifty
eight percent. At February 28, 1999 and February 28, 1998, MYS Corporation had a
current income tax receivable and liability of approximately $153,000 and
$176,000, respectively.
(12) Common Stock, Stock Options and Warrants
The Company has 200,000,000 shares of $.005 par value common stock
authorized for issuance.
The Company has granted nonqualified stock options to certain directors and
employees. Options are granted at fair market value at the date of grant, vest
immediately, and are exercisable at any time within a five-year period from the
date of grant.
A summary of activity in the directors stock option plan follows:
Shares Exercise Price
Options outstanding at February 29, 1996 1,009,578 $1.44-$5.50
Grants -- --
Cancellations -- --
Exercises -- --
---------- -------------
Options outstanding at February 28, 1997 1,009,578 1.44-5.50
Grants 50,000 2.30
Cancellations -- --
Exercises -- --
Options outstanding at February 28, 1998 1,059,578 1.44-5.50
Grants -- --
Cancellations -- --
Exercises -- --
Expired 499,578 1.44-5.50
-------------- --------------
Options outstanding at February 28,1999 560,000 $2.06-$4.75
============== ==============
The following table summarizes information about director
stock options at February 28, 1999:
Number Weighted Number
Range of Outstanding at Average Average Exercise Exercisable As
Exercise Price 2/28/99 Remaining Life Price of 2/28/99 Exercise Price
$2.30 50,000 8.13 2.30 50,000 $2.30
$2.06 400,000 8.36 2.06 400,000 $2.06
$3.06 70,000 0.33 3.00 70,000 $3.06
$4.75 40,000 0.09 4.75 40,000 $4.75
(13) Employee Stock Plans
The Company has two employee benefit plans: The Employee Stock
Ownership Plan (ESOP) and the 1989 Stock Option Plan (the Stock Option
Plan). A previous plan, the 1989 Employee Stock Ownership Plan, was
terminated in Fiscal 1992 and all plan assets were distributed to
participants.
The ESOP is a qualified discretionary employee stock ownership plan
that covers substantially all employees. This plan was formally
approved by the Board of Directors during Fiscal 1990. The Company made
no contributions to the ESOP in Fiscal 1999, 1998 and 1997
respectively.
During Fiscal 1990, the Company's Board of Directors adopted the Stock
Option Plan, a nonqualified plan which was subsequently approved by the
shareholders. The Stock Option Plan authorizes the grant of options to
purchase the greater of up to 8% of the Company's outstanding common
shares or 4,170,000 common shares. Shares currently under option
generally vest ratably over a five year period.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation," which contains a
fair value-based method for valuing stock-based compensation that
entities may use, which measure compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for
employee stock option and similar equity instruments under APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities that
continue to account for stock options using APB Opinion No. 25 are
required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined is SFAS
No. 123 had been applied. Management accounts for options under APB
Opinion No. 25. If the alternative accounting-related provisions of
SFAS No. 123 had been adopted as of the beginning of 1995, any effect
on 1999, 1998 and 1997 net loss and loss per share would have
been immaterial.
A summary of activity in the employee stock option plan is as follows:
Shares Exercise Price
Options outstanding at February 29, 1996 3,889,800 $1.44-7.31
----------- -------------
Grants -- --
Cancellations -- --
Exercises (10,000) 3.50
Options outstanding at February 28, 1997 3,879,800 1.44-7.31
--------- -------------
Grants 2,983,000 1.79-2.15
Cancellations (3,002,800) 1.44-3.06
Exercises (25,000) 2.06
----------- -------------
Options outstanding at February 28, 1998 3,835,000 1.44-7.31
-------------- -------------
Grants 2,800,000 3.31
Cancellations (59,700) 1.44-7.31
Exercises (50,000) 2.06
--------------- -------------
Options outstanding at February 28, 1999 6,525,300 $1.44-7.31
============== =============
The following table summarizes information about employee stock options at
February 28, 1999:
Number Weighted Number
Range of Outstanding at Average Average Exercise Exercisable As
Exercise Price 2/28/99 Remaining Life Price of 2/28/99 Exercise Price
$3.06-$4.12 131,800 0.44 3.26 131,800 $3.06-$4.12
$1.44 431,000 1.92 1.44 431,000 $1.44
$7.25 7,500 2.75 7.25 7,500 $7.25
$3.00-$4.00 215,000 3.62 3.47 215,000 $3.00-$4.00
$3.50-$7.31 32,000 4.60 5.89 32,000 $3.50-$7.31
$1.79-$2.15 2,908,000 8.42 2.04 2,628,000 $2.06
$3.31 2,800,000 9.05 3.31 -- $3.31
(14) Leases
The Company leases office facilities and equipment under operating leases
that expire through Fiscal 2009. Other costs, such as property taxes, insurance
and maintenance, are also paid by the Company. Rental expense charged to
operations approximated $ 1.8 million, $1.3 million and $1.3 million in Fiscal
1999, 1998 and 1997, respectively.
At February 28, 1999, minimum rentals under non-cancelable operating leases
are as follows: Fiscal year:
Gross Rents Sublease Net Rents
2000 $1,238,623 $77,472 $1,161,151
2001 1,030,348 18,005 1,012,343
2002 995,209 -- 995,209
2003 998,728 -- 998,728
2004 959,456 -- 959,456
2005-2009 3,049,967 -- 3,049,967
-------------- -------------- --------------
$8,272,331 $95,477 $8,176,854
============== ============== ==============
(15) Significant Customers
The Company on a consolidated basis sold sound related products and
computer related products to five significant customers during Fiscal
1999. Sales by MYS Corporation to a major electronics retailer
accounted for approximately $16.3 million or 20.1% of revenues. Sales
of communications and multimedia products to major mass merchandisers
Best Buy, Circuit City, and Staples accounted for $12.6 million or
15.5% of revenues. None of these customers are related to the Company
or any other customer of the Company.
(16) Commitments and Contingencies
The Company is engaged in various legal actions listed below. In the
case of a judgment or settlement, appropriate provisions have been made
in the financial statements.
At February 28, 1999, the Company had approximately $2.8 million in
firm non-cancelable commitments related to tooling costs incurred by
independent contractors and for the purchase of inventory.
Shareholder Litigation
Barovich/Chiau v. Aura
In May, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former officer as defendants, were filed in the
United States District Court for the Central District of California,
Barovich v. Aura Systems, Inc. et. al. (Case No. CV 95-3295) and Chiau v.
Aura Systems, Inc. et. al. (Case No. CV 95-3296), before the Honorable
Manuel Real. The complaints purported to be securities class actions on
behalf of all persons who purchased common stock of Aura during the period
from May 28, 1993 through January 17, 1995, inclusive. The complaints
alleged that as a result of false and misleading information disseminated
by the defendants, the market price of Aura's common stock was artificially
inflated during the class period. The complaints were consolidated as
Barovich v. Aura Systems, Inc., et. al.
A settlement agreement for this proceeding was submitted to the Court
on July 20, 1998, for preliminary approval, at which time the Court
denied the plaintiffs' motion for approval of the settlement. On
September 22, 1998, the Company and certain of its officers and
directors renoticed their motion for summary judgment. Thereafter, on
January 8, 1999, the plaintiffs and the defendants in the Barovich
action executed a Stipulation of Settlement pursuant to which the
Barovich action would be settled in return for payments by Aura and its
insurer to the plaintiff's settlement class and plaintiff's attorneys
in the amount of $2.8 million in cash (with $800,000 to be contributed
by Aura and $2 million to be contributed by Aura's insurer, subject to
a reservation of rights by the insurer against the insureds) and $1.2
million in cash or common stock, at the Company's option, to be paid by
Aura. Subsequently the parties and the insurer entered into an amended
settlement agreement. As amended the settlement calls for the total
settlement amount of $4 million to remain the same, with the insurer
contributing $1.8 million and the remaining $2.2 million to be paid by
Aura in cash over a period of three years, with accrued interest at the
rate of 8% per annum. The settlement was preliminarily approved by the
Court on December 6, 1999, and is subject to final confirmation by the
Court on March 20, 2000.
Morganstein v. Aura.
On April 28, 1997, a lawsuit naming Aura, certain of its directors and
officers, and the Company's independent accounting firm was filed in
the United States District Court for the Central District of
California, Morganstein v. Aura Systems, Inc., et. al. (Case No. CV
97-3103), before the Honorable Steven Wilson. A follow-on complaint,
Ratner v. Aura Systems, Inc., et. al. (Case No. CV 97-3944), was also
filed and later consolidated with the Morganstein complaint. The
consolidated amended complaint purports to be a securities class action
on behalf of all persons who purchased common stock of Aura during the
period from January 18, 1995 to April 25, 1997, inclusive. The
complaint alleges that as a result of false and misleading information
disseminated by the defendants, the market price of Aura's common stock
was artificially inflated during the Class Period. The complaint
contains allegations which assert that the company violated federal
securities laws by selling Aura Common stock at discounts to the
prevailing U.S. market price under Regulation S without informing
Aura's shareholders or the public at large.
In June, 1998, the Court entered an order staying further discovery in
order to facilitate completion of settlement discussions between the
parties. On October 12, 1998, the parties entered into a stipulation
for settlement of all claims, subject to approval by the Court. Under
the stipulation for settlement Aura agreed to pay $4.5 million in cash
or stock, at Aura's option, plus 3.5 million warrants at an exercise
price of $2.25. In addition, Aura's insurance carrier agreed to pay
$10.5 million. The settlement was finally approved by the Court in
October 1999 and was thereafter amended in December 1999 to allow Aura
to defer payment of the settlement amount until April 2000 in exchange
for an additional 2 million shares of Aura Common Stock, subject to
certain adjustments.
NewCom Related Litigation
American Casualty v. Aura
On June 22, 1999, a lawsuit naming Aura was filed in the United States
District Court for the Central District of California, American
Casualty Company of Reading, Pennsylvania ("American Casualty") vs.
Aura et. al. (Case No. CV-99-06343). The complaint alleges that
American Casualty, as surety, executed and delivered a performance bond
on behalf of NewCom to Actrade Capital, Inc. ("Actrade") in 1998, which
American Casualty became liable to obligee Actrade when NewCom
defaulted on repayment of the penal sum of $4,427,093.92. In seeking
damages from NewCom, American Casualty further alleged that Aura was
liable because it executed an express general agreement of indemnity,
indemnifying American Casualty on the referenced NewCom bond and a
rider which became the subject of the litigation. Aura answered the
complaint and NewCom defaulted. Subsequently, in December, 1999, the
parties reached mutually an agreement in principal to settle the
matter, Aura agreeing to pay American Casualty: (i) $1,000,000 plus
interest at a rate of 8% per annum from December 1, 1999, in thirty-six
equal monthly installments commencing March 2000; (ii) $1,000,000 plus
interest at a rate of 8% per annum from December 1, 1999, in
twenty-four equal monthly installments commencing December 1, 2002; and
(iii) warrants to purchase up to 1,000,000 shares of the Company's
common stock thirty three months from November 1, 1999 at a pre-reverse
stock split exercise price of $2.46 per share. The Company expects to
enter into the settlement prior to February 29, 2000, which is in
accordance with the Aura's informal restructure .
NEC Technologies v. NewCom
In 1998, a lawsuit naming NewCom, Inc. was filed in the
Superior Court of the State of California, Los Angeles County, NEC
Technologies vs. NewCom et. al (Case No. YC 033592). The complaint
alleged that NewCom failed to pay NEC for products purchased in the sum
of approximately $3,000,000. Subsequently, NEC and NewCom entered into
a stipulated settlement where Aura guaranteed expressly NewCom's
performance on the settlement. NewCom thereafter defaulted on the
settlement and the stipulated judgment was filed in April, 1999.
Following negotiation by Aura and NEC, in November, 1999, a settlement
was entered into whereby NEC is to receive $2,479,142.50 plus interest
at eight percent per annum in thirty-six equal monthly installments,
which is in accordance with Aura's informal restructure.
Deutsche Financial Services v. Aura
In June, 1999, a lawsuit naming Aura was filed in United States
District Court for the Central District of California, Deutsche
Financial Services ("DFS") vs. Aura (Case No. 99-03551 GHK (BQRx)). The
complaint follows DFS' termination of its credit facility with NewCom
of $11,000,000 and seizure of substantially all of NewCom's collateral
in April, 1999. It alleges, among other things, that Aura is liable to
DFS for NewCom's indebtedness under the secured credit facility
purportedly guaranteed by Aura in 1996, well prior to the NewCom
initial public offering of September 1997. In the proceeding, DFS
sought an order to attach Aura's assets which was denied following an
evidentiary hearing before the Honorable Brian Quinn Robbins, U.S.
Magistrate, and the matter has been ordered by the District Court to
binding arbitration. Aura has now responded in arbitration, denying
DFS' claims and has asserted in its defense, among other things, that
the guarantee, if any, is discharged. In addition, Aura through its
counsel, has asserted cross-claims for, among other things, tortious
lender liability, alleging that DFS wrongfully terminated the NewCom
credit facility, wrongfully seized the NewCom collateral and wrongfully
foreclosed upon NewCom collateral, acting in a commercially
unreasonably manner. A panel of three arbitrators has been selected and
appointed by the American Arbitration Association and a hearing in the
arbitration has been set for May, 2000. The Company believes it has
meritorious defenses and cross claims. However, no assurances can be
given as to the ultimate outcome of this proceeding.
Excalibur v. Aura
On November 12, 1999, a lawsuit was filed by three investors against Aura
and Zvi Kurtzman, Aura's Chief Executive Officer, in Los Angeles Superior
Court entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case
No. BC220054) arising out of two NewCom, Inc. financings consummated in
December 1998.
The NewCom financings comprised (1) a $3 million investment into NewCom
in exchange for NewCom Common Stock, Warrants for NewCom Common Stock,
and certain "Re-pricing Rights" which entitled the investors to receive
additional shares of NewCom Common Stock in the event the price of
NewCom Common Stock fell below a specified level, and (2) a loan to
NewCom of $1 million in exchange for a Promissory Note and Warrants to
purchase NewCom Common Stock. As part of these financings Aura agreed
with the investors to allow their Re-pricing Rights with respect to
NewCom Stock to be exercised for Aura Common Stock, at the investors'
option. Aura also agreed to register Aura Common Stock relating to
these Re-pricing Rights.
The Plaintiffs allege in their complaint that Aura breached its
agreements with the Plaintiffs by, among other things, failing to
register the Aura Common Stock relating to the Re-pricing Rights. The
Plaintiffs further allege that Aura misrepresented its intention to
register the Aura shares in order to induce the Plaintiffs to loan $1.0
million to NewCom. The Complaint seeks damages of not less than $4.5
million. In January 2000 Aura filed counterclaims against the
Plaintiffs, including claims that the Plaintiffs made false
representations to Aura in order to induce Aura to agree to issue its
Common Stock pursuant to the Re-pricing Rights. The Company believes
that it has meritorious defenses and counterclaims to the Plaintiffs'
allegations. However, no assurances can be given as to the ultimate
outcome of this proceeding.
Securities and Exchange Commission Settlement.
In October, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an
administrative proceeding against Aura Systems, Zvi Kurtzman, and an
Aura former officer. The proceeding was settled on consent of all the
parties, without admitting or denying any of the Commission's findings.
In its order, the Commission found that Aura and the others violated
the reporting, record-keeping and anti-fraud provisions of the
securities laws in 1993 and 1994 in connection with its reporting on
two transactions in reports previously filed with the Commission. The
Commission's order directs that each party cease and desist from
committing or causing any future violation of these provisions.
The Commission did not require Aura to restate any of the previously
issued financial statements or otherwise amend any of its prior reports
filed with the Commission. Also, the Commission did not seek any
monetary penalties from Aura, Mr. Kurtzman or anyone else. Neither Mr.
Kurtzman nor anyone else personally benefited in any way from these
events. For a more complete description of the Commission's Order, see
the Commission's release referred to above.
Other Legal Actions
The Company is also engaged in other legal actions. In the opinion of
management, based upon the advice of counsel, the ultimate resolution
of these matters will not have a material adverse effect.
(17) Concentrations of Credit Risk
Financial instruments that subject the Company to concentration of
credit risk are cash equivalents, trade receivables, notes receivable,
trade payables and notes payable. The carrying value of these financial
instruments approximate their fair value at February 28, 1999. Cash
equivalents consist principally of short-term money market funds, these
instruments are short term in nature and bear minimal risk.
The Company performs credit background checks and evaluates the credit
worthiness of all potential new customers prior to granting credit. UCC
financing statements are filed, when deemed necessary.
(18) Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5 (SOP No. 98-5), "Reporting on Costs
of Start-up Activities." Adoption of SOP No. 98-5 will have no material
impact on the Company's financial statements.
(19) Fourth Quarter Adjustments
Certain fourth quarter adjustments were made in Fiscal 1999 that are
significant to the quarter and to comparisons between quarters.
Presented below are the approximate amount of adjustments which are the
result of fourth quarter events and their effects recorded in the
fourth quarter.
During the fourth quarter of Fiscal 1999 the Company experienced severe
cash flow problems that had a major impact on the entire operations of the
Company. The Company began to consolidate its operations around the AuraGen
technology and product. The Company terminated all of its joint ventures
due to its inability to support them. As the Company was cutting down and
scaling back its operations the Company evaluated its asset utilization and
concluded that certain asset values had been impaired. In addition numerous
assets such as machinery and equipment that were no longer needed were sold
at a loss. The Company over the years has made strategic investments in
order to improve its utilization of certain technologies. As the company
eliminated operations, these investments no longer retained their economic
value. In addition to the Company`s heavy losses in its NewCom investment
the Company was also a party to certain explicit written guarantees that
were triggered when NewCom's business deteriorated.
The following table summarizes certain fourth quarter events that
contribute to the loss in Fiscal 1999.
Termination of Joint Ventures $5.6 million
Depreciation Expense $4.6 million
Accounts Receivable reserves and write-off's $13.0 million
Asset Impairment $9.4 million
Interest Expense $3.5 million
Disposed Assets $1.2 million
Investment write-off's and losses $7.0 million
Guarantees for NewCom $9.9 million
NewCom loss (Aura Share) $45.8 million
Total $100.0 million
(20) Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information," as of February 28, 1999. SFAS 131 establishes standards
for the way public business enterprises report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services
geographic areas and major customers. SFAS 131 defined operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in
assessing performance. The Company has aggregated its business
activities into three operating segments: electromagnetic and
electro-optical technology (Aura), computer related communications
(NewCom) and sound and professional and consumer sound system
components (AuraSound).
The electromagnetic and electro-optical technology operating segment
consists of the development, commercialization and sales of products,
systems and components using patented and proprietary electromagnetic
and electro-optical technology. The Company has aggregated all
electromagnetic and electro-optical operating units due to commonality
of economic characteristics, technology employed, and class of
customer. In addition, this segment also includes our corporate
headquarters and revenues generated from the sale of computer monitors.
The overall management and operating results for this segment are based
on the activities and operations as noted.
The computer related communications and sound related products
operating segment consists of the manufacturing and selling of high
performance computer communication and multimedia products for the
personal computer market. The segment also includes internal and
external data fax modems, speaker phones, sound cards, and multimedia
kits. This operating segment suffered significant operating losses
during the year ended February 28, 1999 and ceased operations
subsequent to the year ended February 28, 1999.
The sound segment consists of the manufacture and sale of professional
and consumer sound system components and products, including speakers,
amplifiers, and Bass Shakers. We aggregated the sound segment operating
units due to economic characteristics, products and services, the
production process class of customer and distribution process.
Subsequent to February 28, 1999, the Company elected to discontinue
this segment and the segment was sold in two separate transactions, see
note 21.
Aura NewCom AuraSound Consolidated
Net Revenues* (in thousands)
1999 $ 6,830 $ 46,820 $ 27,868 $ 81,518
1998 $ 10,252 $ 93,687 $ 32,776 $ 136,715
1997 $ 27,547 $ 50,632 $ 31,771 $ 109,950
Income (loss) from Operations
1999 $ (54,396) $ (94,357) $ (14,409) $ (163,162)
1998 $ (19,238) $ 11,872 $ (3,954) $ (11,320)
1997 $ (4,913) $ 5,164 $ (1,435) $ (1,184)
Identifiable Assets
1999 $ 63,754 $ -- $ 26,389 $ 90,143
1998 $ 96,735 $ 96,127 $ 34,441 $ 227,303
1997 $ 86,957 $ 47,435 $ 48,136 $ 182,528
Depreciation and Amortization
1999 $ 7,375 $ 1,511 $ 4,099 $ 12,985
1998 $ 3,621 $ 1,274 $ 3,467 $ 8,362
1997 $ 2,591 $ 348 $ 1,858 $ 4,797
Capital Expenditures
1999 $ 2,450 $ 161 $ 1,443 $ 4,054
1998 $ 15,322 $ 1,455 $ 1,229 $ 18,006
1997 $ 14,008 $ 2,121 $ 9,018 $ 25,147
Number of operating locations at year-end (unaudited)
1999 2 2 5 9
1998 2 2 5 9
1997 4 1 5 10
* Includes revenue from external customers for all groups of products and
services in each segment reported. Products and services sold by each
segment are generally similar in nature; also it is impracticable to
disclose revenues by product.
Segment Reporting
Revenue from customer geographical segments are as follows (in thousands):
1999 1998 1997
---- ---- ----
U.S., Canada, Latin America $58,871 72.22% $120,517 88.15% $84,862 77.18%
Europe $ 772 0.95 451 0.33 1,404 1.28
Pacific Rim 21,875 26.83 15,747 11.52 23,684 21.54
------- ------ -------- ------ -------- ------
$81,518 100.00% $136,715 100.00% $109,950 100.00%
======= ======= ========= ======= ========= =======
The majority of the Company's operating long-lived assets are located
in the United States
(21) Subsequent Events
Sale of MYS Corp.
In March 1999, the Company entered into an agreement for the sale of
MYS Corp. and subsidiaries to the management of MYS. The terms of the
agreement called for a purchase price of $4.2 million with a down
payment of $1.0 million, which was paid on April 15, 1999, and the
balance, including interest at 8% per annum, due in twelve equal
monthly installments.
Sale of Assets of AuraSound
In July 1999, the Company entered into an agreement for the sale of
the assets of the Company's AuraSound speaker division with a supplier
to Sound. The terms of the agreement called for a purchase price of
$2.0 million plus the assumption of up to $1.6 million in debt. The
terms further stated that the liabilities assumed would not exceed the
net realizable value of the accounts receivable by more than $300,000.
In addition to the sale of the assets, the Company entered into a
licensing agreement with the purchaser which calls for a license fee of
$1.5 million payable in monthly installments, with an additional option
to purchase the patents under license. The option may be exercised at
any time prior to the third year anniversary for an additional payments
of $1,500,000.
Restructuring of RGC International Investors, LDC, debt
In October 1999 the Company entered into an agreement with RGC
International Investors, LDC and a third party investor (AuraSound's
assets purchaser) whereby RGC (i) sold to the third party the Company's
Convertible Unsecured Debentures (the "RGC debentures") in the aggregate
principal amount of $17,365,000, (ii) exchanged with the Company its $3
million Secured Convertible Note for a new non-convertible Secured Note
(the "New RGC Note") in the principal amount of $3 million, and (iii)
cancelled Warrants to purchase 9,000,770 shares of the Company's Common
Stock in exchange for new Warrants to purchase 1,000,000 shares of
common stock exercisable at $0.375 per share. The New RGC Note bears
interest at the rate of 8% per annum, with principal and interest
payable no less frequently than quarterly. The New RGC Note continues
to be secured by a lien on certain assets of the Company, including
inventory and accounts receivable.
Under the agreement with the new holder of the RGC Debentures, the RGC
Debentures are convertible into a maximum of 46,500,000 shares of the
Company's Common Stock. The holder of the RGC Debentures has agreed to
cancel the outstanding principal and interest owed under the RGC
Debentures upon consummation of the restructuring of approximately
$14.7 million of outstanding Debentures held by a third party. See
"Restructuring of Infinity Investors debt" below.
Retirement of JNC Debt
In December 1999, the Company consummated an agreement with JNC
Opportunity Fund, Ltd. resulting in the surrender for cancellation by
JNC of the Company's Convertible Debenture and 318,000 warrants in
exchange for a cash payment of $430,000, 3,500,000 shares of the
Company's Common Stock and 113,000 Warrants exercisable at $0.375 per
share expiring December 1, 2002.
Restructuring of Infinity Investors Debt
In November 1999 the Company entered into an agreement with the holders
of approximately $14.7 million of Debentures which were due in
September 1998. Under the terms of the agreement the Investors have
agreed to exchange (the "Exchange") the Debentures and Warrants to
purchase 1,111,111 shares of the Company's Common Stock for $3 million
in cash and a new Secured Note (the "New Secured Note") in the
principal amount of $12.5 million. The New Secured Note will be secured
by a lien on the Company's assets, will bear interest at the rate of 8%
per annum, payable quarterly, with the principal due three years from
the date of the exchange. In the event of a default under the New
Secured Note, the holder is entitled to convert the unpaid principal
and interest into Common Stock of the Company at $.60 per share. The
Company is entitled to a discount if the New Secured Note is prepaid,
which discount is initially 20% of the amount prepaid, and the discount
declines ratably over the three year term of the New Secured Note.
Consummation of the Exchange is subject to completion of a definitive
agreement with the holders of the Debentures.
Restructuring of Trade debt
In December 1999, the Company implemented a restructuring of
approximately $10.8 million of trade debt held by certain trade
creditors whereby the holders of a substantial portion of the trade
debt have agreed to the repayment of outstanding trade debt over a
period of three years, with interest at 8% per annum, commencing
January 2000.
Completion of Common Stock Private Placement
In November 1999 the Company completed a private placement of
approximately 27 million shares of its Common Stock at $0.27 per share,
resulting in gross proceeds of approximately $6.9 million.
SCHEDULE II
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended February 28, 1999, February 28, 1998 and February 28, 1997
Balance at Charged to Charged to Balance at
beginning of costs and other end
period expenses Accounts Deductions of period
-----------------------------------------------------------------------------------
Allowances are deducted from the
assets to which they apply
Year ended February 28, 1999 Allowance for:
Uncollectible Accounts $ 5,431,525 $13,314,320 $10,000,000 $20,596,294 $ 8,149,551
Reserve for returns 569,605 24,741,084 -- 25,189,215 121,474
Reserve for potential product
obsolescence 4,535,000 15,906,337 -- 12,565,337 7,876,000
--------- ---------- ------------ ---------- ---------
$10,536,130 $53,961,741 $10,000,000 $58,350,846 $16,147,025
========== ========== ========== =========== ==========
Year ended February 28, 1998:
Allowance for:
Uncollectible Accounts $2,090,652 $ 3,617,056 $ -- $ 276,183 $5,431,525
Reserve for returns 1,512,679 23,504,148 -- 24,447,222 569,605
Reserve for potential product
obsolescence 2,255,000 4,030,000 -- 1,750,000 4,535,000
--------- ------------ ---------- ----------- ----------
$5,858,331 $31,151,204 $ -- $26,473,405 $10,536,130
========= ========== ========== ========== ==========
Year ended February 28, 1997:
Allowance for:
Uncollectible Accounts $ 1,947,883 $ 737,577 $ -- $ 594,808 $2,090,652
Reserve for returns 535,119 977,560 -- -- 1,512,679
Reserve for potential product
obsolescence -- 2,255,000 -- -- 2,255,000
---------- --------- ----------- ----------- ---------
$2,483,002 $3,970,137 $ -- $ 594,808 $5,858,331
========= ========= ========== ========== =========
Amounts charged to other accounts include amounts charged for price protection
and rebates.