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