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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended.............................February 28, 2001
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
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(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 May 18, 2001 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $227,262,739. The aggregate market value
has been computed by reference to the last trading price of the stock on May 17
, 2001. On such date the Registrant had 310,227,313 shares of Common Stock
outstanding.
When used in this report, the word "expects," "anticipates," and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results may differ significantly from the results discussed in forward-looking
statements as a result of certain factors, including those discussed in this
report. The Company expressly disclaims any obligations or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any changes in the Company's expectations with
regard hereto or any change in events, conditions or circumstances on which any
such statement is based. This Report includes product names, trade names and
marks of companies other than the Company. All such company or product names are
trademarks, registered trademarks, trade names or marks of their respective
owners and are not the property of the Company.
PART I
ITEM 1 BUSINESS
A. INTRODUCTION
We develop, design, assemble and sell AuraGen(R) induction power systems
for mobile power applications in the multibillion dollar mobile power generation
markets. An induction power system refers to the basic electromagnetic approach
used in electric motors that do not use brushes and permanent magnets. We
provide a unique and patented energy solution (see "Patents") and are the only
company to provide a proven, commercially available, up to 8,500 watts of pure
sine wave power system, that is fully integrated under the hood of a vehicle.
Our system is capable of generating full power up to 8500 watts at all engine
speeds including enhanced engine idle speed for gasoline based engines and at
idle speed for bigger diesel based engines. The AuraGen combines sophisticated
mechanical and electronics design, advanced engineering and break-through
electromagnetic technology to produce a highly reliable and flexible mobile
power generating system that creates alternating current (AC) and direct current
(DC) electricity, for industrial, commercial and military use. Traditional
mobile power users are found in construction, cable, emergency/rescue, marine,
entertainment, railroad, recreational vehicles, telecommunications, tool sales
trucks, utilities, municipalities, military and personal use. We believe that in
addition to the traditional mobile power market for generators, due to its
compactness and clean power, the AuraGen could allow for energy applications
that were not previously practical, particularly in areas that require clean
power such as computers and other sensitive digital instrumentation.
B. THE AURAGEN(R) PRODUCT
The AuraGen is an induction machine composed of three basic subsystems. The
first subsystem consists of a mechanical device that is bolted to the vehicle
engine. The second subsystem is an electronic control unit ("ECU") that can be
mounted anywhere in the vehicle except under the hood. The third subsystem is
the mounting brackets and supporting components for under-the-hood integration.
The mechanical component generates electricity when the system is rotated
by the vehicle engine in a manner similar to the conventional alternator. Unlike
the alternator, this device generates maximum power at all speeds including
enhanced idle speed for gasoline engines and idle speed for larger diesel
engines. The ECU filters and conditions the electricity to provide clean power
at different steady voltages.
Our AuraGen system is substantially more reliable than existing gensets
(portable generators). The increased reliability is due to our engineering
design (see "Company Strengths") and our approach to use the proven standard
vehicle engines as compared to the small stand-alone engines used by gensets.
The system does not require any maintenance (except normal belt wear and tear)
and does not have any of the starting problems associated with gensets. The
AuraGen uses the standard vehicle exhaust system, which results in a quieter,
cleaner power generating system and also produces substantially less pollutants
compared to conventional gensets.
The AuraGen mobile electric power solution introduces technical, economical
and environmental benefits that are not available through the use of traditional
mobile power solutions using gensets or inverters (inverters are devices that
convert battery DC to AC. Generally in a vehicle application they draw power
from a battery pack, which then relies on the alternator or shore power for
recharge).
We believe that we are uniquely positioned to capture a significant share
of the conventional genset market in the 3.5 to 10 KW range in view of the
following factors:
o The AuraGen' patented breakthrough compact design is more than 50%
smaller and lighter than the traditional solutions, allowing
"under-the-hood" AuraGen installation in commercial vehicles, powered
by the vehicle's existing engine - traditional solutions are too large
and bulky to be integrated into a commercial vehicle and, therefore,
require their own independent power source.
o The AuraGen, unlike traditional gensets, provides "clean" power
required to operate sophisticated electronic equipment, which is a
growing need for mobile power market users who operate computers and
other sophisticated electronic equipment.
o The AuraGen results in reduced operating noise levels, compared to the
traditional genset. The AuraGen's operating noise level is simply the
vehicle engine idle noise when operating in the engine on-mode and
quiet operation in the engine off-mode with the soon available option
(see below).
o The AuraGen is safe and user friendly. The user simply pushes the
start button and then uses the traditional power outlets to plug in
conventional tools or instruments. Unlike traditional gensets, there
are no hot surfaces to touch, no need to add fuel to a hot engine,
nothing to lift or carry, and the AuraGen is not easily stolen.
o Unlike traditional gensets, the AuraGen requires no scheduled service
or maintenance, which translates into substantial life cycle cost
savings and elimination of costly user "down time."
o We expect to introduce in the second quarter an engine off mode as an
available AuraGen option, with the batteries charged directly from the
AuraGen during normal vehicle use. This option will allow continued
quiet operation of the AuraGen when the vehicle engine is turned off,
and will eliminate the need for "shore power" to charge batteries.
The AuraGen environmental benefits are highlighted by a major reduction in
air pollution generated from an existing vehicle engine with all the smog
controls and regulations, when compared to stand alone small genset engines
without all the pollution requirements on vehicle engines. It is estimated that
the air pollution savings using the AuraGen on a standard vehicle engine over a
typical genset could be as much as 95% for CO (Carbon monoxide) and 82% for NOx
(nitrogen oxide compounds).
We sell two basic systems with a number of options. The systems currently
available consist of 5,000 watts continuous with 7,200 watts peak and 8,500
watts continuous with 9,000 watts peak, all at 120/240 volts pure sine wave 60
Hertz. In addition, both of the above systems are available in configurations
that divide the maximum power between AC and DC. The DC available power can be
either 14 Volt or 28 Volt. In the second quarter of Fiscal 2002 we expect to
offer a new model that will be able to generate up to the 5,000 watts of power
with the vehicle engine either turned on or turned off, totally transparent to
the user. This new model will use auxiliary batteries as a power source in
conjunction with the AuraGen to generate pure sine wave AC power while the
engine is turned off. As soon as the engine is turned on, the system switches
automatically, without any dips or spikes, to the standard configuration to
generate power and at the same time the AuraGen charges the batteries at the
maximum safe charging speed of up to 200 amps.
We provide custom engineered brackets for both the 5,000 watts and 8,500
watts systems that cover over 90 different engine models. Our brackets are
designed to fit most General Motors gasoline and diesel engines from 4.8 to 7.4
liters, Ford gasoline and diesel engines from 4.2 to 7.3 liters and Daimler
Chrysler 5.2 to 5.9 liter engines. In addition we have designed custom
engineered brackets for numerous diesel engines provided by American General,
Cummins, Detroit Diesel, Navistar, Caterpillar and Freightliner. We also provide
power-take-off (PTO) as well as hydraulic driven interfaces for the bigger
trucks.
C. TARGETED MARKETS
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.
1. Military and Other Federal Agencies
One targeted market where our AuraGen VIPER (the name given by the US Army)
could be used with great advantage in both cost and logistics is the military.
In military applications, getting quiet, clean power from vehicles at low engine
speed could be critical as the Army changes to digital applications with
numerous sophisticated electronics and sensors. We are currently working with
the US Army in evaluating the use of the AuraGen in multiple army vehicle types
(see "Certain Risk Factors"). We are also pursuing business with other Federal
agencies including the FBI, Border Patrol, Post Office, Department of
Transportation (DOT) and Department of Energy (DOE).
2. Telecommunications
Telecommunications is an important targeted market for our product because
the industry regularly uses mobile power in its daily activities. This industry
needs reliable, clean mobile power that can be used for sensitive instruments
and provide brute power for compressors and tools. In addition the industry
needs a user friendly integrated solution, so that employees can focus on their
jobs. Our product is a perfect fit for the needs of this industry. Currently the
AuraGen is used in limited quantities by a number of broadcasting TV stations in
their mobile news vehicles as well as, a number of cable and telephone companies
for numerous applications.
3. Recreation Vehicle ("RV")
A University of Michigan study states that 8.6 million households currently
own an RV. In 1999, RV manufacturers shipped over 320,000 units. The University
study also projects that RV-owning households will grow to 10.4 million in the
year 2010. Our product offers significant advantages and benefits to RV users
who need electric power. These benefits include fuel savings (using only the RV
engine), reduced maintenance costs (no required scheduled maintenance), no power
derating due to altitude or temperature and the ability to use the system in
camp grounds without noise (using the engine off mode). Our system causes
significant reduction in pollution when compared to the existing gensets. In
addition, since the AuraGen is located under the hood the AuraGen system frees
up additional space that can be used for storage. The AuraGen is also
competitive in price with gensets used in the RV industry.
4. Utilities
Utilities are a major market for the AuraGen because they are heavy users
of mobile power in their maintenance and service activities. In addition,
utilities are generally responsible for traffic lights within their service
areas. The technical advantages of the AuraGen have generated a high level of
interest from utilities across the U.S. In addition, for many existing traffic
light systems, our product appears to be the only mobile power system available
which provides the required clean power at constant 120 volts that is needed to
power the lights when electric power is interrupted. Power interruption can be
caused by many events including, among others, power outages and damage to power
lines caused by accidents or weather. Numerous utilities in the U.S. have
purchased limited numbers of our units and are evaluating the AuraGen for their
applications and requirements.
5. Emergency Rescue
The Emergency and Rescue market consists of fire-trucks, ambulances, police
vehicles and vehicles from other organizations used during emergencies. This
industry is a heavy user of mobile power for lights, communication gear,
instruments, medical equipment and numerous digital equipment and tools. The
industry is undergoing a transition to digital equipment and portable computers
and has experienced constant growth in mobile power needs. Our product provides
an effective solution to the needs of this industry. Many organizations have
already started to use our units.
6. Catering
The mobile food industry, in addition to traditional party and event
catering delivers perishable food to remote locations. Today, some of the
catering trucks still use ice for their refrigeration needs while others use
compressors. New health department regulations in some jurisdictions will
require fans in trucks that are used for cooking. The need for mobile
electricity for refrigeration, microwaves and other appliances is constantly
growing, fueled by regulation and customer need. The AuraGen, with its ability
to produce electric power both while the engine is off and while driving, is an
excellent and cost effective solution to this industry's needs.
7. Public Works/Construction
We have targeted public works and construction as a market because of the
large number of municipalities and construction companies that use portable
power on their projects. Many municipalities are already using our product in
limited quantities in their service and work trucks. We provide significant cost
savings when total life cycle costs are calculated. Our product does not require
scheduled maintenance, which results in more hours on the job. The public works
and construction industry is changing with the introduction of computers and
other sensitive digital equipment in the field. These changes require clean pure
sine wave power in order to function efficiently at the job sites.
D. COMPANY STRENGTHS
Our unique position in under-the-hood mobile power generation stems from
approximately ten years of innovative research and development. This effort has
culminated in our unique, patented, fully integrated products that are totally
transparent to the users and provide clean pure sine wave power to industrial,
commercial and military users through their vehicles.
1. Technology Leadership
We have an engineering department with extensive experience in mechanical,
electrical, software, manufacturing and system engineering. In addition we have
a strong dedicated team that continuously develops engine mount systems for new
applications. All engineering, including specifications, acceptance test
criteria, packaging and documentations, are done in-house.
Our technology allows for the manufacture of induction machines with a
one-half to two-thirds reduction in weight and size for the same output. The
machine itself does not use any exotic materials and the components are
relatively simple to manufacture with conventional tooling. In addition to these
mechanical advantages, the system uses a proprietary control system which
optimizes efficiency as a function of required load. While the technology has
widespread applications over a large range of horsepower, our products are best
utilized for machines in the range of 1.5 to 50 horsepower (1,000 watts is
approximately equal to 1.5 horsepower).
2. Quality, Reliability and Safety
Our Company grew out of the defense and aerospace industry. Thus, quality
and reliability are an integral part of our business culture. The AuraGen is
designed for quality, reliability and safety in heavy industrial, commercial and
military usage.
To ensure quality we use highly qualified suppliers, the majority of which
are ISO 9002 compliant. The Company performs qualification testing on the
AuraGen hardware components, the electronic control unit, all software and on
fully installed in-vehicle systems to ensure reliability in the field. The
qualification testing includes: 1) in-house endurance testing, 2) in-house
parametric thermal testing, 3) in-house power quality testing and 4) laboratory
environmental testing. Also, field failure analysis is performed on any returned
units.
In addition to qualification testing, we have established a Quality
Management system and are independently pursuing both ISO 9001 and QS 9000
registration (see "Certain Risk Factors"). 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. We also use Statistical Process
Control ("SPC"), In-Process Inspection and Functional Test on our AuraGen
assembly line.
We have designed the AuraGen system for durability, with balanced magnetic
fields, oversized bearings for long life, and insulation and varnish well in
excess of operating condition requirements. We have performed laboratory
destructive testing to determine when the system could fail and thus establish
upper performance limits. We have designed the system and set the specifications
to be well below the upper performance limits with significant margins. We have
conducted extensive testing of our AuraGen in both the laboratory and in the
field. We have thousands of units in the field, providing a good sample set for
reliability analysis. The results show very small failure rates, which are
constantly being reduced with better training and some small adjustments. The
U.S. Army has tested and is continuing to test the AuraGen under severe
conditions, including airdrops. The Army has started to use the VIPER (the Army
name for the AuraGen) for special operations. In our laboratory, units under
test are continuously cycled through demanding endurance operating environments.
The AuraGen system was designed for safety by including built-in protection
for the user and the machine. For user protection we have an over-voltage,
over-current shutdown. We use GFI plugs, super fast circuit breakers and
over-RPM shutdown. All the high voltage lines are encased in grounded metal
conduit and any fault causes the throttle control to mechanically disengage. In
order to protect the system we designed automatic shut downs for short-circuits,
overheating, battery voltage line interruption and throttle control failure. The
battery lines are protected with re-settable fuses.
3. Product Support
We are a system house that provides a turn key product and integrated
service to support our customers in every area. We perform all of the
development, from basic physics to detailed engineering. This fundamental
ability provides a solid foundation to resolve technical issues, develop an
ongoing line of new applications and to continually enhance our products. We
have fully developed training materials and provide routine training to
installers nationwide. We provide field support through regional resident field
engineers. We provide technical information, documentation and software through
installation manuals, catalogs and service bulletins. Our installation software
includes a "Call Home" feature and remote diagnostic capability. We track
performance and field failures to enhance product reliability and customer
satisfaction.
Our vehicle integration team develops, engineers and supplies all of the
brackets, pulleys, idlers, belts, tensioners and other components that comprise
a mounting system. The group also specifies all of the requirements of the
AuraGen with other mobile drives, such as hydraulic systems and Power Take Off
("PTO").
We provide a three year standard warranty for our products. The warranty
has no hidden exemptions and can be extended for an additional two years for a
cost of $450.
4. Strong Management Team
We have a strong management team in place with significant experience
covering all principal functional areas. We have extensive experience in the
development of new technology and advanced new products. Our team is
particularly strong in transforming technology into industrial products,
producing high quality and reliable products and establishing sales and
distribution channels.
E. OUR STRATEGY
Our objective is to be a world class leader, developer and supplier of
fully integrated mobile electric power systems. The key elements of our strategy
are:
1. Aggressively Protect Our Intellectual Property
We believe that a policy of actively protecting our patents and know-how is
an important component of our strategy to retain our unique position in
under-the-hood mobile power generation and will provide us with a long term
competitive advantage (see "Patents"). In order to maintain and constantly
increase our know-how we believe that it is critical for our company to stay in
tune with the product, future developments, improvements and enhancements. In
order to address these issues all of our engineering and documentation is
totally under our control and performed by our staff. We have fully implemented
this strategy with our strong engineering and support team.
2. Out Source Manufacturing
We realized that there are many quality manufacturing houses with existing
capacity resources and capability that can economically build parts and
components to our specifications and drawings. Thus we decided to have third
parties custom build the different sub-assemblies for us. We acquire the
sub-assemblies and assemble them into finished goods on our assembly line. We
test every unit under high speed before it is packaged for shipment. This
strategy ensures that we do what we know best without committing large capital
investments for plants and equipment. We also retain full control over the
product and the quality of the finished goods.
3. Market Positioning
We are positioning ourselves in the marketplace as a turn key mobile power
solution that is safer, more reliable, more convenient, with better quality and
at an effective cost. Our safer solution includes the following: 1) no need to
carry fuel in a container, 2) no exposed hot components to touch/start, 3)
nothing heavy to lift, 4) no pull start required, 5) power outlets located away
from hot components, and 6) not easily stolen.
We provide users of mobile power with effective value. When total life
cycle cost is considered, our product saves the user significant cost and
increases productivity. Even more value is added due to the built in safety
features.
4. Near Term Market Opportunity
We have developed an approach that we believe can create within a
reasonable time frame, the awareness and the required infrastructure to attract
users for the AuraGen. The Company's marketing approach consists of three basic
components. The first component is an educational and awareness campaign in
which the AuraGen and its capabilities are presented to industrial and
commercial users. This is achieved through trade shows, publications and private
demonstrations to fleet managers and other opinion setters. The second component
is the establishment of a distribution network for sale, installation and
service. We now have key customers covering 24 states. These customers, in
addition to sales activities, provide us with an infrastructure with 24 hour a
day, seven days a week service. We expect to have distribution established
throughout most of the country by the end of the second quarter of 2001. The
third component consists of establishing strategic relationships with industrial
and commercial OEMs. We have started discussions with a number of such OEMs and
expect to expand such activities throughout the year (see "Certain Risk
Factors"). Before significant OEM agreements can be reached we need to have a
national footprint for service and installation.
5. Develop Long Term Market Opportunity
We expect that business relationships with the major automotive OEMs such
as General Motors, Ford and Daimler Chrysler will develop more slowly than our
near term market opportunities with customers and the industrial OEMs. We are
working with General Motors (see "Certain Risk Factors") and Ford on a number of
activities that may develop into OEM relationships. We have started some
preliminary exploratory discussions with Daimler Chrysler.
We are working closely with numerous U.S. Army organizations to include the
VIPER in their requirements. Early VIPER adopters in the Army such as Special
Forces and the 82nd Airborne are reporting very favorably on the usefulness and
performance of their VIPER units. We expect to continue to penetrate different
Army applications through numerous ongoing and new activities.
6. Broaden and Enhance Our Product Line
We believe that research and development is essential to improve our
product, develop additional options and maintain a leadership position. We have
a strong team dedicated to product improvements and incorporating our magnetic
technology into different power levels and options. Our present strategy is to
develop 12,000 watts and 25,000 watts machines in approximately the same
physical envelope as the current systems. We also plan to develop a 3,500 watts
system in a smaller package. In addition we plan to develop an AuraGen for salt
water and other marine applications. Our development group is constantly
developing new applications for the AuraGen (see "Certain Risk Factors").
F. CERTAIN RISK FACTORS
Our business is focused on the AuraGen family of products. While the
technology for the AuraGen is fully developed and has been extensively tested
and verified, there are significant risks associated with developing a
marketplace for such a new product. The risk factors are discussed below.
1. The AuraGen is a new unique product with limited history in the
marketplace. There can be no assurances that the product will succeed in the
marketplace.
2. Our product is targeted for the mobile power generation market. This
energy generation market is mature, with traditional solutions provided by
mobile generators known as gensets. Gensets are well known and have been in use
for about 50 years, creating an environment of well-entrenched suppliers and
users that are not used to change. This environment may slow down the market
acceptance of our product.
3. Because our product is radically different from the traditional
available mobile power solution, users may require lengthy evaluation periods in
order to gain confidence in the product. After such evaluation we expect initial
incremental increases in adopting the product before major market penetration.
4. Consistent planned monthly sales for our product could possibly be
generated from OEMs and large fleet users with whom we are in discussions. These
organizations require considerable time to make changes to their planning and
production. In addition, delays can be caused by prior commitments and
schedules. No assurances can be given as to the time elements involved before
our product is integrated into some of these potential large fleets and OEM
users or if it will.
5. The Company is currently working with General Motors. At the SEMA show
in November 2000 General Motors exhibited the AuraGen as a potential option in
four selected future concept vehicles. No assurances can be given that the
Company's AuraGen will be offered by General Motors as an OEM option.
6. We intend to expand the product line to include other power levels such
as 12,000 watt and 25,000 watt systems as well as a 3,500 watt system. No
assurances can be given when these additional products will be available for
sale.
7. We started a program in 2000 to be ISO 9001 and QS 9000 certified. The
process normally takes 18 months. No assurances can be given as to if or when we
will be certified.
8. 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 for foreign countries that use 240 Volts. A future
solution will eliminate this additional transformer by changes to the electronic
control unit. While the changes are straightforward, they do require redesign of
some circuit boards. No assurances can be given when the required changes will
be made.
9. Currently, our product is being evaluated by the U.S. Army with a
potential for a number of contracts that could potentially involve thousands of
military vehicles. No assurances can be given when or if such contracts will
materialize and what the ultimate size of the contracts may be.
10. We recently sold to the U.S. Army a number of 10,000 watts VIPERS. No
assurances can be given that the Army will purchase any material quantities of
this product.
G. HISTORICAL SUMMARY
The Company, Aura Systems Inc., a Delaware corporation, was founded in 1987
to engage in the development, commercialization and sales of products, systems
and components using its patented and proprietary electromagnetic and
electrooptical technology. Since 1987 the Company's proprietary and patented
technology has been developed for use in systems and products for commercial,
industrial, consumer, and government use.
Prior to Fiscal 1992, the Company was engaged in various military programs,
which allowed the Company to develop its electromagnetic and electro-optical
technologies and applications. A number of "one-of-a-kind" systems were built
and successfully tested in the field. Subsequently, the Company developed
additional electromagnetic and electro-optical know-how and technology and
transitioned from a supplier of defense technology to a supplier of consumer and
industrial-related products and services.
In 1994, the Company founded NewCom, Inc. ("NewCom"), a Delaware
corporation, which engaged in the manufacture, packaging, selling and
distribution of computer-related communications and sound-related products,
including modems, CD-ROMs, sound cards, speaker systems and multimedia products.
In September 1997, NewCom completed an initial public offering, and over the
next year and a half Aura's ownership decreased to a minority position. During
the second half of Fiscal 1999 NewCom's business suffered from adverse industry
conditions, resulting from increased incorporation of computer peripherals at
the OEM level. These conditions resulted in heavy losses to NewCom and its
competitors. NewCom's business reached a critical juncture in the fourth quarter
of Fiscal 1999 when Deutsche Financial Services, which maintained NewCom's
working capital line, announced that it was unwilling to continue to advance
working capital to NewCom under its credit facility and subsequently seized
NewCom's assets. NewCom ceased operations in early Fiscal 2000.
In 1996, the Company acquired 100% of the outstanding shares of MYS
Corporation of Japan ("MYS") to expand the range of its sound products and
speaker distribution network. MYS engaged in the manufacture and sale of
speakers and speaker systems for home, entertainment and computers. In Fiscal
2000, the Company sold MYS back to the original owners who were part of MYS
management.
Aura anticipated that its working capital needs in Fiscal 1999 would be met
from a number of sources, including the repayment by NewCom of approximately $20
million of indebtedness, which was due in September 1998, and proceeds from
external debt and equity financing. Due to NewCom's financial condition, it was
unable to meet its obligations to Aura in September 1998, ultimately creating a
significant cash shortfall to Aura. This required Aura beginning in January 1999
to refocus its operations by shutting down certain operating divisions, selling
its MYS subsidiary, selling proprietary based AuraSound speaker technology and
assets, and leasing its Electrotec concert touring sound equipment. The Company
sold the assets of its ceramics facility effective March 1, 2000. The Company
also temporarily suspended the further development of certain electro-magnetic
projects, including the electromagnetic valve actuator ("EVA" see "Our Other
Technologies").
In Fiscal 2000 the Company entered into agreements providing for the
restructuring of more than $85 million of debt and contingent liabilities. Of
this amount, over $37 million was either converted into equity or forgiven. The
Company is continuing to focus on debt reduction through payments, settlements
and conversion into equity. By the end of May 2001 the Company's debt has
declined to approximately $31 million of which approximately $5.2 million is the
mortgage on the real estate property.
H. OUR OTHER TECHNOLOGIES
Historically we developed electromagnetic and electrooptical technologies
with broad applications for industrial, commercial and consumer use. These
technologies were transformed into specific applications. During the Company's
refocus and restructure in 1999 and 2000 most of the applications were sold or
discontinued. While our involvement has been temporarily suspended we retain
significant interest in two technology applications, the electromagnetic
actuators and actuated mirror array. At some time in the future we believe we
will revive our activities in these two areas.
1. Electromagnetic Actuator (EMA(TM))
During Fiscal 1995, we developed, built and demonstrated a new type of
actuator, called the Electromagnetic Actuator, or "EMATM." We developed EMATM to
fill the performance gap between linear actuators and solenoids. To date, the
principal application of the EMATM has been in our Electromagnetic Valve
Actuator System ("EVA(TM)"), a patented electro-magnetically powered system
which opens and closes engine valves at any user specified time interval.
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 electro-magnetically: 1) the camshaft and associated mechanical hardware
can be eliminated; and 2) the opening and closing of the intake and exhaust
valves can be commanded by the engine computer. Computer control of the valve
timing has potentially material benefits to engine performance, fuel economy and
emissions.
In recent years, we 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, we
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 our refocus, we temporarily suspended our
activities on further EVA development and commercialization to focus our
resources on the AuraGen. The Company is however, pursuing licensing of this
technology to third parties. We have not entered into any discussions for a
licensing agreements for EVA.
2. Light Efficient Displays - Actuated Mirror Array (AMATM)
We 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. We believe that this device could have a
major impact on applications where light efficiency is paramount, such as in
large screen television, movie and exhibition displays, and the testing of
electro-optical devices for military or civilian use.
Although there can be no assurances, the Company believes that the 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.
We entered into a license and manufacturing agreement with Daewoo
Electronics Co., Ltd. to manufacture televisions and other devices based on
AMATM technology. To date Daewoo invested substantial funds to commercialize the
technology. However, in the last year a number of crises have caused Daewoo to
be taken over by its creditors. Currently we are negotiating with Daewoo about
the future of the AMA technology.
I. COMPETITION
We are applying our AuraGen technology to a variety of mobile power
generating products and services and, as such, we face substantial competition
from companies that have been offering traditional solutions such as gensets
(portable generators) for the last 50 years. In addition we face competition
from companies that offer inverter (a device that inverts battery direct current
electricity to alternating current) solutions for the last 20 years.
We believe that the principal competitive factors in the markets that we
target 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. Our ability to
compete will also depend on our continued ability to attract and retain skilled
and experienced personnel and to exploit commercially our technology prior to
the development of competing products by others.
We compete with many companies that have more experience, name recognition,
financial and other resources and expertise in manufacturing, testing, and
obtaining regulatory approvals, marketing and distribution.
1. Gensets
Gensets meet a large market need for auxiliary power. Millions of units are
sold per year 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.
The market in industrial grade portable power is dominated by such
companies as Onan, Honda and Kohler which are well-established and respected
brand names. The principal advantage of gensets over our product is their stand
alone operational capabilities. Unlike the AuraGen, gensets do not require the
presence of an automobile to operate since they come with their own internal
combustion engine. There are presently 44-registered genset manufacturers.
The following table is a summary of physical parameters comparing the
leading genset products with the 5,000 watts 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 lb. 146 lb. 393 lb. 268 lb. 68 lb.
Derated Power Yes Yes Yes Yes No
Volume 6.72 ft3 5.39 ft3 26.80 ft3 3.71 ft3 0.25 ft3
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 1,800 750 diesel
1,250 gas
Noise (db @10 Ft.)` 73.5 82 65 88.5 64
Load-Follower
Economy No No No No Yes
As can be seen from the table the AuraGen volume and weight are
substantially lower than traditional gensets. Genset power rating is set at sea
level and 60 degrees Fahrenheit with derating due to altitude and outside
temperatures. In addition the AuraGen in use generates less noise than the
competing gensets. Our product unlike the leading gensets, uses a "Load
Following" technique in which the amount of electric power generated at any
given moment is equal to the maximum power possible or the required demand,
whichever one is lower. Traditional gensets always produce their maximum power
at any given time. This Load Following ability provides operational economy
since often the required power at any time could be substantially lower than the
maximum power that can be produced.
2. Inverters
In addition to competition from gensets, there are six major manufacturers
of inverters in the United States including Vanner, Dimension and Heart.
Inverters are generally used in limited and specialized markets where the
power requirements are at the 2,500 watts level. When inverters are used for
higher than 2,500 watts they require a 24 volt system. Furthermore when sine
wave output is required the cost of inverters is significantly increased. Often,
inverters require an upgraded vehicle alternator and battery harness, and for
extended use periods without battery charging they also require an additional
battery pack. Inverters when used, drain the batteries and as such, heavy users
of inverters usually charge up their batteries with shore power during unused
hours.
Traditionally inverters are used in ambulances, fire and rescue vehicles,
small recreational vehicles and telecommunications applications. In the last
several years the power requirements of these traditional users have been
increasing and inverters have not satisfied many users when used in higher power
applications. Inverters when used in high power situations are stressed and may
cause life cycle problems on the alternators and other electrical components.
J. MANUFACTURING
We assemble and test the AuraGen at our 27,690 square foot facility in El
Segundo, California with subassemblies and parts which are produced by various
suppliers. In Fiscal 1998, we set up the above facilities with a maximum
production capacity of 5,000 units per month per 8 hour operating shift. By the
end of May 2001 the assembly line was utilized at approximately 20% of capacity.
We expect that the facility utilization will significantly increase in Fiscal
2002 due to increasing shipments of parts from our suppliers, the establishment
of major customers, and potential OEM agreements.
K. PRODUCT DEVELOPMENT EXPENDITURES
During the fiscal years ended February 28, 2001, February 29, 2000, and
February 28, 1999 the Company spent approximately $ 0.5 million, $ 0.1 million
and $2.0 million, respectively, on Company research and development activities.
The Company plans to continue its research and may incur substantial costs in
doing so. All of the Company's R & D is currently focused on technological
enhancements and product developments for the AuraGen.
L. PATENTS
The Company's Intellectual property portfolio consists of valuable patents,
trademarks, and trade secrets. We believe that the protection of our technology
is an important element of our overall business strategy. We filed and are
continuously filing applications worldwide for patents and trademarks. The U.S.
Patent Trademark Office has to date issued in favor of the Company seventy nine
patents and numerous registered trademarks. In the prior two fiscal years, the
company sold or discontinued certain operations which involved a number of
patents and trademarks.
Our active portfolio presently consists of a total of forty three issued
U.S. patents and six registered trademarks. Twenty five patents relate to
electro magnetic automotive and industrial applications and eighteen patents
relate to electro-optical technology. Two of the electromagnetic patents are
fundamentally and directly related to the AuraGen which utilizes imbedded
electromagnetic technology. Nine additional basic actuation patents cover
designs where rare earth magnets could potentially be used to build both linear
and rotary electromagnetic actuators and similar machines. Two control system
patents provide specific techniques that can be used to control magnetic fields
inside certain mechanical structures. The control patents have wide application
and some components are imbedded in the AuraGen control system. Rounding out the
patent protection in our automotive industrial group are twelve patents devoted
to the Company's EVA technology which cover the implementation of a controlled
magnetic field as applied to linear motors. Many of the techniques used in EVA
applications are applied to our AuraGen system.
The balance of our intellectual property portfolio devote some eighteen
patents to electro-optical technology, ranging in application from optical
switching to the Company's AMA and jointly owned TMA display technology with
Daewoo Electronics Co., Ltd.
The fundamental AuraGen patents expire in 2017 and 2019 while the majority
of the other patents expire between 2008 and 2015. There are additional patent
applications in various stages of preparation for filing and a number of
applications are in the patents pending mode. There are no assurances that any
of the patent applications or any new other patents will be issued in the
future.
M. EMPLOYEES
As of February 28, 2001 the Company employed approximately 95 persons. The
Company believes that its relationship with its employees is good. The Company
is not a party to any collective bargaining agreements.
N. PRINCIPAL SOURCES OF REVENUES
For the year ended February 28, 2001, virtually all of the Company's
revenues were AuraGen related. For year end February 29, 2000, ceramics products
were the largest single source of revenue on a consolidated basis, constituting
approximately $2.9 million or 50% of net revenues. License fees for sound
related patents constituted $1.5 million or 32.8% of revenues. For the year
ended February 28, 1999, multi-media products and modems were approximately
$46.8 million or 87.2% of net revenues.
O. SIGNIFICANT CUSTOMERS
The Company's single significant customer during Fiscal 2001 was Stewart &
Stevenson Services, Inc., accounting for a total of approximately $1.0 million
or 40% of net revenues. Going forward, while we expect Stewart & Stevenson
Services, Inc. to remain a significant customer, we anticipate that its
percentage of overall revenues should substantially decrease. The Company
expects significant increases in revenues for Fiscal 2002 with an expanded
distribution network which will include numerous other well known customers. In
addition the Company expects to have other OEM customers in Fiscal 2002.
ITEM 2. PROPERTIES
The Company owns a 46,000 square foot headquarters facility in El Segundo,
California and a 27,690 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.
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.
NewCom Related Litigation
Deutsche Financial Services v. Aura (Settled March 2001)
--------------------------------------------------------
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 followed
DFS' termination of its credit facility with NewCom of $11,000,000 and seizure
of substantially all of NewCom's collateral in April, 1999. It alleged, among
other things, that Aura was liable to DFS for NewCom's indebtedness under the
secured credit facility purportedly guaranteed by Aura in 1996, well prior to
the NewCom initial public offering of September 1997. Aura responded, denying
DFS' claims and asserted in its defense, among other things, that the guarantee,
if any, was discharged. In addition, Aura through its counsel, asserted
cross-claims for, among other things, tortuous lender liability, alleging that
DFS wrongfully terminated the NewCom credit facility, wrongfully seized the
NewCom collateral and wrongfully foreclosed upon NewCom collateral, acting in a
commercially unreasonably manner. A panel of three arbitrators had been selected
and appointed by the American Arbitration Association, with the Company
expecting a hearing on the matter sometime in the first half of 2001. The
Company believed it had meritorious defenses and cross-claims.
The Company entered into a definitive Settlement and Mutual Release
Agreement effective March 12, 2001 (the "Settlement") providing for the
settlement of litigation. Under the terms of the Settlement DFS will receive
cash payments totaling $350,000 and 10,000,000 shares of Aura's common stock in
exchange for mutual releases. DFS may not sell more than 5,000,000 shares per
year during the first two years following the settlement, may not sell any
shares for the first 120 days following the settlement, and may not sell more
than 50,000 shares in a single day. Aura will retain the right to repurchase
unsold shares under certain conditions for a period of two years. Subject to
certain conditions, DFS will assign to Aura its security interest in assets
pledged by NewCom, Inc. to DFS to secure NewCom's indebtedness.
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. financing consummated in December 1998.
The NewCom financing 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 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. 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. 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.
Aura has alleged certain cross-claims against the Plaintiffs. Aura contends
that Plaintiffs violated their contractual obligations to Aura by engaging in
unlawful "short sales" of NewCom stock, commencing on January 20, 1999, and were
in violation of certain covenants in the subscription agreements. Aura contends
that, as a result of such violations and on the basis of other factors and legal
theories, Aura's obligations to deliver the shares and to make any payments to
Plaintiffs was terminated. Aura further claims that its consent to its
agreements with Plaintiffs was procured as a result of fraudulent
misrepresentations by Plaintiffs. Aura also has asserted claims against
Plaintiffs for damages based on alleged breaches of Plaintiffs' contractual
obligations to Aura and on Plaintiffs' alleged misrepresentations to Aura.
All individually named defendants have been dismissed by agreement of the
parties and the case is scheduled for trial on July 17, 2001. In May 2001 the
Court granted Aura's motion to require Plaintiffs' to post an undertaking in the
amount of $225,000 to secure any cost award that may be entered in Aura's favor
on the basis that it is "reasonably possible" that Aura will prevail in this
matter. Aura and the Plaintiffs have also moved for summary judgment on the
Plaintiffs' action which is scheduled to be heard on June 15, 2001.
The Company believes that it has meritorious defenses and cross-claims to
the Plaintiffs' allegations. However, no assurances can be given as to the
ultimate outcome of this proceeding.
Kerry Morgan, et. al. vs. NewCom, Inc.
In December 1999, a lawsuit was filed against NewCom, Inc. which, as
currently amended also includes Aura Systems, Inc., Steven Veen, Sultan Khan,
Asif Khan and Zvi Kurtzman, Deutsche Financial Services, Inc., Best Buy Co.,
Inc., Circuit City Stores, Inc. a/k/a Compusa, the Computer Super Store, and
Staples, Inc., in the Circuit Court for the County of Wayne Michigan (Case No.
98-838563 CP). The plaintiff's sixth amended complaint purports to be a class
action on behalf of a class alleged to consist of approximately two hundred
thousand persons who purchased a NewCom Inc., a/k/a Atlas Peripherals computer
product from Best Buy Co., Inc., Circuit City Stores, Inc., Computer City,
and/or Staples, Inc. The complaint alleges that plaintiffs did not receive a
rebate of between twenty to fifty dollars on NewCom products, as advertised and
promoted by the above mass retailer. Plaintiffs further allege that the mass
retailers without any justification, failed to pay NewCom for product received
and sold. The lawsuit named Aura primarily on the basis that Aura was the "alter
ego" of NewCom and seeks unspecified damages against Aura as well as the other
defendants. The plaintiffs seek, among other remedies, to recover all or part of
the amount that the retailers failed to pay. Circuit City has filed a
cross-complaint against NewCom, Sultan Khan, Asif Khan, Aura, Deutche Financial
Services, Zvi Kurtzman and Steven Veen. Deutsche Financial Services has filed a
cross-complaint against Staples. No trail date has been set. The named
individuals have tendered coverage of the claims to their respective insurers
and Aura has filed a motion for summary disposition.
The named individuals are vigorously defending the matter and expect to
file notions for summary disposition. Aura believes that ultimately it will have
no liability in this proceeding as NewCom is an independently operated
subsidiary and at no time did Aura assume any of NewCom's obligations regarding
rebates. Aura also believes that in addition to meritorious defenses, it has
cross-claims against Circuit City and other mass retailers, as they did not pay
for the products they purchased from NewCom and then sold to consumers. We
intend to vigorously prove our claims and defenses. 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 on financial conditions, results
of operations or cash flow.
ITEM 4. Submission of Matters to a vote of Security Holders.
The Company's 2000 Annual Meeting of Shareholders was held on January 9,
2001. At the annual meeting each of the Company's nominees were elected to serve
as directors of the Company. The election results are as follows:
Name For Withheld Abstain
---- --- -------- -------
Zvi(Harry) Kurtzman 187,705,178 2,091,943 1,264,362
Stephen A. Talesnick 180,316,671 9,480,450 1,264,362
Harry Haisfield 188,494,140 1,302,981 1,264,362
Harvey Cohen 164,574,056 25,223,065 1,264,362
Norman Reitman 163,947,670 25,849,451 1,264,362
Neal Meehan 183,529,973 6,267,148 1,264,362
Salvador Diaz-Verson, Jr. 189,135,281 661,840 1,264,362
Sanford R. Edlein 183,350,352 6,446,769 1,264,362
William Richbourg 183,311,927 6,485,194 1,264,362
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 other requirements as stated in the Market
Place Rules. On February 1, 2001, the Company's shares were listed on the OTC
Bulletin Board.
Set forth below are high and low sales prices for the Common Stock of Aura
for each quarterly period in each of the two most recent Fiscal years. Such
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions in the Common
Stock. The Company had approximately 9,600 stockholders of record as of April
30, 2001.
Period High Low
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
Fiscal 2001
First Quarter ended May 31, 2000 $0.64 $0.24
Second Quarter ended August 31, 2000 $0.52 $0.20
Third Quarter ended November 30, 2000 $1.19 $0.34
Fourth Quarter ended February 28, 2001 $0.53 $0.29
On May 17, 2001, the average high and low reported sales price for the
Company's Common Stock was $0.75.
Dividend Policy
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. The Company does
not anticipate paying any dividends on its Common Stock in the foreseeable
future but has no restrictions preventing it from paying dividends.
Changes in Securities and Use of Proceeds
In the fourth quarter of Fiscal 2001, the Company completed a private
placement of 7,812,499 shares of its common stock for $2,500,000 and the Company
issued 1,675,272 shares of its common stock for the conversion of $586,346 of
notes payable and accrued interest. These securities were issued to a small
group of accredited investors in private placements in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data has been taken or derived from the
audited consolidated financial statements of the Company and should be read in
conjunction with and is qualified in its entirety by the full consolidated
financial statements, related notes and other information included elsewhere
herein. The data for Fiscal 1999, 1998, and 1997 has been restated to reflect
discontinued operations.
AURA SYSTEMS, INC. AND SUBSIDIARIES
February 28, February 29, February 28, February 28, February 28,
2001 2000 1999 1998 1997
-------------- --------- ------------- ----------- ------------
Net Revenues $ 2,512,508 $ 5,788,221 $53,650,025 $103,939,641 $ 76,424,311
------------ ------------- ---------- ----------- ----------
Cost of goods 1,216,637 1,957,854 83,344,562 58,045,370 48,420,015
Expenses:
Overhead expenses 8,214,981 11,466,449 47,092,632 13,729,152 8,610,224
Research and development 547,812 148,443 1,996,198 475,992 5,674,302
Impairment of long-lived assets 240,000 -- 5,838,466 -- --
Selling, general and administrative 12,695,833 10,725,397 64,131,074 35,266,048 12,742,269
------------- ------------- ---------- ---------- ----------
expenses
Total expenses 22,915,263 24,298,144 202,402,932 107,516,562 75,446,810
------------- ------------- ----------- ----------- -----------
Income (loss) From Operations (20,402,755) (18,509,922) (148,752,907) (3,576,921) 977,501
Other (Income) and Expense
Net interest expense 2,263,916 4,476,690 11,577,990 6,450,741 1,181,910
Termination of license agreements -- -- -- 3,113,030 --
(Gain) loss on disposal of assets and
investments (1,756,746) (259,724) 5,809,811 -- --
Gain on sale & issuance of subsidiary -- -- (811,657) (12,632,265) (250,000)
stock
Class action litigation & other 1,512,769 2,777,762 7,717,518 1,700,000 --
settlements
Equity in losses of unconsolidated joint
ventures -- -- 6,268,384 1,937,747 --
Settlement on accounts payable (1,046,324) -- -- -- --
Other (446,399) (1,101,279) -- (220,291) 40,642
Provision (benefit) for taxes -- -- 566,635 (1,275,555) 13,148
Minority interests -- -- (36,934,376) 946,405 --
Loss in excess of basis of subsidiary -- -- (8,080,695) -- --
-------------- -------------- -------------------------- ---------
Income (loss) from continuing operations (20,929,971) (24,403,371) (134,866,517) (3,597,733) 73,085
Discontinued Operations:
Loss from Discontinued Operations, Net
of -- (4,131,501) (14,875,065) (8,038,807) (2,953,196)
Income taxes
Extraordinary Item
Gain on extinguishment of debt
obligations, net of income taxes -- 19,068,916 -- -- --
-------------- -------------- ----------- ----------- ---------
Net loss $ (20,929,971) $ (9,465,956) $(149,741,582) $(11,636,540) $(2,880,111)
------------- ------------- -------------= ----------- -----------
Other Comprehensive loss, net of taxes -- -- (406,574) -- --
-------------- -------------- ------------ ---------- ----------
Comprehensive Loss $ (20,929,971) $ (9,465,956) $(150,148,156) $(11,636,540) $(2,880,111)
============= ============= ============ ============= ===========
NET (LOSS) PER COMMON SHARE (0.08) $ (0.08) $ (1.74)$ $ (.04)
=============== ============== ============= ============ =========
(.15)
Income (loss) from continuing operations
per common share $ (0.08) $ (0.20) $ (1.57) $ (0.05) $ --
============= ============== ============== =========== ==========
(Loss) from discontinued operations per
common share $ -- $ (0.03) $ (0.17) $ (0.10) $ (0.04)
============= =============== ============= =========== ==========
Extra-ordinary income per common share $ -- $ 0.15 $ -- $ -- $ --
============= ============== =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 261,568,346 124,294,051 85,831,688 79,045,290 68,433,521
============= =========== ============ ========== ==========
Working capital (deficit) (5,105,345) 826,213 (4,869,876) 78,143,895 62,310,715
Total assets 45,278,043 56,122,538 90,143,392 227,302,629 182,528,399
Long-term debt 38,485,108 46,951,716 34,236,944 33,968,393 18,897,631
Net stockholders' equity (deficit) 2,045,035 1,516,008 (13,653,657) 116,901,868 125,477,587
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 along with their potential underutilization, resulting in
production inefficiencies and higher costs and start-up expenses.
Relating to the above are potential difficulties or delays in the
development, production, testing and marketing of products, including, but not
limited to, a failure to ship new products and technologies when anticipated.
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. 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.
Fiscal 2001 as Compared to Fiscal 2000
Revenues
Net revenues in Fiscal 2001 totaled $2.5 million. In Fiscal 2001 virtually
all sales were AuraGen related, up from $0.8 million in AuraGen related sales in
Fiscal 2000. Overall net revenues declined to $2.5 million from $5.8 million in
Fiscal 2000 as approximately $2.9 million, or 50% of Fiscal 2000 revenues were
derived from the ceramics facility, with an additional $1.5 million, or 25.9%
derived from license fees pertaining to sound related patents. The assets of the
ceramics facility were sold effective March 1, 2000.
While the inventory levels at Fiscal 2001 year end are high relative to the
sales level for the year, this was a result of the buildup of inventory prior to
the onset of the Company's financial difficulties. The Company expects that this
inventory will be fully turned over by the end of Fiscal 2002. Although a large
portion of the inventory is over two years old, the inventory related to the
AuraGen remains fully useable and does not require any obsolescence reserve.
Cost of Goods
Cost of goods for the year ended February 28, 2001 was $1.2 million,
applicable almost entirely to the AuraGen product, resulting in a gross margin
of approximately 52%. Cost of goods in the prior year was $2.0 million,
resulting in a gross margin of 54%, after excluding the effects of the $1.5
million license fee noted above. The Company expects the gross margin will
remain at approximately 50% in Fiscal 2002.
Overhead Expense
Overhead expenses for Fiscal 2001 declined to $8.2 million, including $4.8
million of depreciation, from $11.5 million, which included $4.9 million in
depreciation, in the prior Fiscal year. The sale of the assets of the ceramics
facility account for a reduction of approximately $1.6 million, with cost
reduction efforts and facility consolidations accounting for the balance.
Research and development
Research and development expenses increased from approximately $150,000 in
Fiscal 2000 to approximately $550,000 in Fiscal 2001. The Company, in the latter
part of Fiscal 2001, began to once again expand its research and development
activities in order to expand its line of AuraGen products. The Company expects
these expenses to continue to grow as the Company focuses its attention in
developing more variations of the basic 5KW AuraGen, including, but not limited
to, the 6KW, 8.5KW, 10KW, 25KW, AC/DC versions, inverter and battery charger
versions, and marine and other applications.
Selling, General and Administrative
Selling, general and administrative expenses were $12.7 million in Fiscal
2001. The increase in these expenses from $10.7 million in the prior year was
primarily a result of an increase in legal costs of approximately $1.2 million,
and an increase in depreciation and amortization of approximately $1.1 million
partially offset by a decrease of $600,000 as a result of the sale of the assets
of the ceramics facility. Also included in the current year expenses is a bad
debt charge of $1.3 million associated with non-AuraGen related lines of
business we are no longer engaged in. This compares to bad debts of $163,000 in
the prior Fiscal year. Additionally, in the latter part of Fiscal 2001, we began
to increase our sales staff and other sales and marketing expenses. We expect
these expenses to continue to increase in the future, but we expect the rate of
increase in these expenses to be substantially below the rate of increase in
sales.
Other Income and Expense
During Fiscal 2001, the Company recognized a gain on sale of assets of
$1,756,746 related to the sale of assets of the ceramics facility.
Interest Expense
Interest expense for Fiscal 2001 declined to $2.3 million from $4.5 million
in the prior fiscal year. This was a result of the overall decrease in the debt
load associated with the debt foregiveness near the end of Fiscal 2000, and the
conversion of debt into equity.
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 revenues
of $45.2 million or 84.2% of revenues from the NewCom subsidiary in which we
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 Fiscal 2000. Included in Fiscal 2000 revenues are license fees
pertaining to sound related patents of $1.5 million or 25.9% of revenues. There
were no such revenues in the prior year period. License fees have a pronounced
effect on the results of operations since there is little or no cost involved.
Revenue from the ceramics facility totaled approximately $2.9 million or 50% of
the revenues for Fiscal 2000, as compared to approximately $2.7 million or 5% of
revenues in the prior year period. In Fiscal 2000, net revenues from the
Company's AuraGen product totaled approximately $.8 million compared to
approximately $1.2 million in Fiscal 1999. The decline was a result of the
Company's financial difficulties and resultant cut back in sales activities.
Although inventory levels are extremely high in relation to sales volume,
the Company's net inventory is currently comprised solely of AuraGen related
items. While most of the inventory is approximately two years old, there have
been no changes to the product which would render the inventory obsolete. The
Company fully expects that with increasing sales, the inventory levels in
relation to sales will be drastically reduced.
Cost of Goods
Cost of goods decreased to $2.0 million from $83.3 million in the prior
Fiscal year primarily as a result of the shutdown of the Company's subsidiary
previously mentioned. Cost of goods for this subsidiary totaled approximately
$74.5 million in Fiscal 1999. After excluding the effects of the license fee
noted above the gross margin was 54% in Fiscal 2000 compared to a negative 55%
in the prior year.
Overhead Expense
Overhead Expense for Fiscal 2000 declined to $11.5 million from $47.1
million in the prior Fiscal year. The Company's NewCom subsidiary accounted for
$24.3 million of overhead expense in the prior Fiscal year. Included in overhead
expense is $4.9 million in depreciation compared to $7.2 million in the prior
Fiscal year of which $1.3 million pertained to NewCom.
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 shutdown of the Company's subsidiary 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. Additionally, the Company reduced other expenses it was able to
control such as consolidating facilities and reducing travel. 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 debts included in Selling, general and
administrative expenses decreased to approximately $0.5 million in Fiscal 2000
from $13.3 million in the prior Fiscal year.
Interest Expense
Interest expense for Fiscal 2000 declined to approximately $ 4.5 million
from $11.7 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 former owners 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.
Liquidity and Capital Resources
Working capital was a negative $5.1 million compared to approximately
$800,000 at Fiscal 2000 year end, with the current ratio declining to 0.73:1
from 1.05:1. This is primarily a result of the reclassification of the
litigation liability with DFS of $5.5 million to a current liability at February
28, 2001. This litigation has been settled subsequent to year end through the
issuance of common stock and payments to be made totaling $350,000. The
principal differences in our accounts from February 29, 2000 to February 28,
2001 are an increase in cash and equivalents of $1.0 million, a decrease in net
receivables of $1.4 million, a decrease in inventories of $1.4 million and a
decrease in accounts payable and accrued expenses of $1.1 million. These
decreases are primarily a result of the sale of the assets of the ceramics
facility.
The Company's cash and cash equivalents balances were $1,265,912 at
February 28, 2001, $260,437 at February 29, 2000, and $3,822,210 at February 28,
1999.
In Fiscal 2001, we received net proceeds of $12.4 million from private
placements. We also converted $2.9 million of notes payable and $6.1 million of
other liabilities into common stock. 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.
In March 2000, the Company sold the assets of its ceramics facility to the
president of the facility for $3.5 million resulting in a gain recognized of
$1,756,746. The terms of the sale called for a note in the amount of $2.5
million with interest of 8%, a down payment of $100,000 and a payment at closing
of $100,000 plus payments to third parties of $800,000.
The net cash used in operating activities in Fiscal 2001 of $13.3 million
decreased by $2.2 million from the prior year due primarily to the decrease in
the gain on extinguishment of debt, which substantially reduced the net loss in
the prior year, and a lower decrease in accounts payable and accrued expenses,
offset partially by a reduced decrease in inventories and other current assets.
Spending for property and equipment amounted to $38,200 in Fiscal 2001,
$16,103 in Fiscal 2000, and $4,053,848 in Fiscal 1999. Of the Fiscal 1999 amount
$1,910,611 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.
At February, 28,2001, the Company was in violation of its loan covenants on
its line of credit. The Company has received a waiver from the bank for these
violations and fully expects to be able to pay the remaining balance when due in
July 2001.
The Company's cash flow generated from operating activities has to date not
been sufficient to fund its working capital needs. Accordingly, 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 and operations will occur
through a combination of existing working capital, operating profits, equity and
favorable financial terms from vendors. The inability of the Company to obtain
sufficient working capital at the times and in the amounts required would have a
material adverse effect on the Company's business and operations.
Current fixed monthly expenses corporate wide, average approximately
$950,000, principally for labor, overhead, travel and professional fees.
The Company leases warehouse space located in Rancho Dominguez, California.
Minimum monthly rent under the lease approximates $3,900. Rent expense was
approximately $0.1 million for Fiscal 2001, $0.9 million for Fiscal 2000, and
$1.8 million for Fiscal 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 23, 2000 the Company received a notice of resignation from its
independent auditors, Pannell Kerr Forster, Certified Public Accountants, A
Professional Corporation ("PKF"). The Company had been informed by PKF that
their decision was solely due to business reasons. Having served as the
independent auditors of the Company since 1992, PKF never had nor does it
currently have any disagreements with the Company on any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure or any reportable events. The auditors reports on the financial
statements for the past eight years during its entire engagement period have not
contained any adverse opinion or disclaimer of opinion and have not been
qualified or modified as to uncertainty, audit scope or accounting principles
except for fiscal years 1999 and 2000 when the audit reports were modified with
a going concern uncertainty.
PKF fully cooperated with the auditor selection and transition process,
which was completed on January 9, 2001 when the firm Singer Lewak Greenbaum &
Goldstein LLP was engaged by the Company's Board of Directors.
Unrelated to its decision and pursuant to SEC rules, under Item
304(a)(1)(v)(C)(1)(i) of Regulation S-K, PFK also advised that information had
come to its attention which, if further investigated, may materially impact the
fairness or reliability of previously issued audit reports or the underlying
financial statements of Aura Systems Inc. and Subsidiaries. The information
concerning officer loans which took place in Fiscal 1997 was contained in court
filings of the SEC in regards to the Staff's response to an SEC investigation,
reported publicly by the Company in a press release dated January 20, 1999.
The Company does not believe that the matters referred to above will have a
material effect on the Company's future financial condition or results of
operations.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE 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
Harvey Cohen 67 1993 Director, member of Audit Committee
Salvador Diaz-Verson, Jr. 48 1997 Director, member of Compensation Committee
Stephen A. Talesnick 51 1999 Vice-Chairman, Board of Directors, member of Compensation Committee
Norman Reitman 77 2000 Director, member of Audit Committee
Harry Haisfield 59 2000 Director, member of Compensation Committee
Neal Meehan 59 2000 Director, member of Audit Committee
William Richbourg 57 2001 Director
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 with the
Company on various operating and growth strategies since June 1989 and assisted
in the sale of certain of the Company's securities. From December 1979 through
July 1981, he was President and Chief Operating Officer of Silicon Systems,
Inc., a custom integrated circuit manufacturer which made its initial public
offering in February 1981 after having raised $4 million in venture capital in
1980. From 1975 until 1979, Mr. Cohen served as President and Chief Executive
Officer of International Communication Sciences, Inc., a communications computer
manufacturing start-up company for which he raised over $7.5 million in venture
capital. From 1966 through 1975, Mr. Cohen was employed by Scientific Data
Systems, Inc. ("S.D.S."), a computer manufacturing and service company, which
became Xerox Data Systems, Inc. ("X.D.S.") after its acquisition by Xerox in
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.
Hon. Salvador Diaz-Verson, Jr. is a director of the Company and has served
in this capacity since September 1997. Mr. Diaz-Verson is the founder, and since
1991 has been the Chairman and President of Diaz-Verson Capital Investments,
Inc., an Investment Adviser registered with the Securities and Exchange
Commission. Mr. Diaz-Verson served as president and member of the Board of
Directors of American Family Corporation (AFLCAC Inc.) a publicly held insurance
holding company, from 1979 until 1991. Mr. Diaz-Verson also served as Executive
Vice President and Chief Investment Officer of American Family Life Assurance
Company, subsidiary of AFLCAC Inc. from 1976 through 1991. Mr. Diaz-Verson is a
graduate of Florida State University. He is currently a director of the board of
Miramar Securities, Clemente Capital Inc., Regions Bank of Georgia and The
Philippine Strategic Investment Holding Limited. Since 1992, Mr. Diaz-Verson has
also been a member of the Board of Trustees of the Christopher Columbus
Fellowship Foundation, presidentally appointed by President George Bush in 1992,
and re-appointed by President Clinton in early 2000.
Stephen A. Talesnick is Vice Chairman of the Board of Directors and has
served in this capacity since January 2001. He originally joined the board of
directors in September 1999. Mr. Talesnick has owned and maintained a private
law practice since 1977, which is presently located in Beverly Hills. 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.
Harry B. Haisfield is a director of the Company and has served in this
capacity since October 2000 following appointment by resolution of the Board of
Directors, pursuant to the Bylaws of the corporation. Since 1982, Mr. Haisfield,
a private investor, has been involved with start-up companies and has served on
the board of directors of several corporations. He is currently the Chairman and
CEO of Raydak Corporation, which develops non-destructive testing technology. He
has served on the Board of Directors of Achieve.Com, Radiance Communications and
as a director of First Pacific Networks, a publicly-held company. Upon
completing college, Mr. Haisfield entered the U.S. Naval flight training program
in Pensacola, Florida, finishing in the top of his class. He served more than
five years as an officer and pilot in the U.S. Marines until his release in 1966
at the rank of Captain. At that time he left the military to join Pan American
Airlines where he served as an active pilot until 1991.
Neal Meehan is a director of the Company and has served in this capacity
since October 2000 following appointment by resolution of the Board of
Directors, pursuant to the Bylaws of the corporation. Mr. Meehan's business
career spans the transportation and telecommunications sectors, and he is
currently involved in market development and strategic planning for start-up and
mature companies. He has served as president and chief executive officer of a
number of airlines including New York Air, Midway Airlines, Chicago Air and
Continental Express. He has also served in various marketing and operations
capacities for American Airlines and Continental Airlines. In addition, he has
served in various senior capacities for a number of telecommunications firms
including In-Flight Phone Corp., Iridium LLC and Hush Communications USA, Inc.,
a firm specializing in data encryption. After a successful career in the United
States Marine Corps, Mr. Meehan received his MBA from St. Johns University. Mr.
Meehan is also the recipient of an honorary doctorate from St. Johns University
in Commercial Science.
William B. Richbourg is a director of the Company and has served in this
capacity since January 2001. Mr. Richbourg, a trial lawyer, has been engaged in
the private practice of law, since 1968. He has a JD from the University of
Florida Law School. Mr. Richbourg is active in the environmental field where he
has served as President and Director of Environmental Systems, Inc., a
privately-held company involved in the electro-magnetic treatment of water and
as President and Director of ECO-21, a privately-held company specializing in
the marketing and sales of an after-market emissions reducing system for
gasoline and diesel engines. As an outstanding football player at the University
of Florida, he was the recipient of numerous academic and athletic awards.
MANAGEMENT
Listed below are Executive Officers and key employees of the Company who
are not directors or nominees, their ages, titles and background information.
Name Age Title
Gerald S. Papazian 45 President, Chief Operating Officer
Arthur J. Schwartz, Ph.D. 53 Executive Vice President
Cipora Kurtzman-Lavut 44 Senior Vice President, Corporate Communications
Neal B. Kaufman 55 Senior Vice President, Management Information Systems
Steven C. Veen 45 Senior Vice President, Chief Financial Officer
Michael I. Froch 39 Senior Vice President, General Counsel and Secretary
Jacob Mail 50 Senior Vice President, AuraGen Operations
DuWayne Menke 56 Vice President, AuraGen Sales and Marketing
Richard Ulinski 59 Vice President, Engineering
Keith O. Stuart 45 Senior Vice President, Applications Development
Ronald J. Goldstein 59 Senior Vice President, Government/Military Sales
Richard E. Van Allen, Ph.D. 54 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
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.
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.
DuWayne Menke is Vice President of AuraGen Sales and Marketing. Mr. Menke
joined Aura in 2000 to manage sales activities. He is responsible for building
the distributor network and coordinating all commercial and fleet sales
activities of the company. He has 30 years of experience in generator sales. He
has 38 years experience in sales with over 35 years in the sales of electrical
generation equipment. He was previously branch manager for Stewart & Stevenson,
one of the largest distributors of power equipment. He has served on the board
and as CEO of Power Services, Intl., which provided parts and services for
vehicle systems.
Richard Ulinski is Aura's Chief Engineer and Vice President of Engineering.
He has been responsible for all phases of the electronics design for the AuraGen
electronics including module customization, circuit board design,
software-hardware interfaces, test and analysis features both in the company and
for the remote installer and dealer specialty equipment. Previously he ran a
consulting service working on all aspects of digital and analog controls
including 3 years supporting Aura on the AuraGen program. Previously he was VP
of Engineering for RJS Inc. designing bar coders, scanners and verifiers. Mr.
Ulinski holds numerous patents in Electro-optical, Electro-mechanical and bar
code related products. Mr. Ulinski holds an AAS degree in Electronics from
Mohawk Valley Community College.
Keith O. Stuart is Senior Vice President, Applications Development 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, Government/Military Sales,
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.
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 28, 2001, all filing requirements applicable to
its officers, directors, and ten percent beneficial owners were satisfied except
that Messrs. Goldstein, Haisfield, Mail, Meehan, Menke, Reitman, Richbourg,
Stuart, Talesnick, Ulinski, Diaz-Verson, and Van Allen failed to timely file a
single Form 5 with one transaction acquisition reported and Messrs. Cohen,
Froch, Kaufman, Kurtzman, Kurtzman-Lavut, Papazian, Schwartz, and Veen failed to
timely file a single Form 5 with two transaction acquisitions reported. Messrs.
Haisfield, Meehan and Richbourg failed to timely 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 28, 2001.
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) 2001 $385,000 4,500,000 $0
Chief Executive Officer 2000 386,232 0
1999 384,290 1,000,000
Gerald S. Papazian (1) 2001 $210,000 1,000,000 $2,029
President and Chief Operating 2000 217,777 0
Officer 1999 203,025 100,000
Arthur J. Schwartz (1) 2001 $205,000 1,000,000 $0
Executive Vice President 2000 210,192 0
1999 204,895 500,000
Steven C. Veen(1) 2001 $200,000 1,000,000 $2,100
Senior Vice President and 2000 205,469 0
Chief Financial Officer 1999 196,412 100,000
Cipora Kurtzman-Lavut(1) 2001 $195,000 1,000,000 $0
Senior Vice President 2000 203,942 0
1999 199,221 500,000
(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 2001, 2000 and 1999, respectively, were as
follows: Zvi Kurtzman - $385,000, $385,000, $385,000; Gerald S. Papazian -
$210,000, $210,000, $210,000; Arthur J. Schwartz - $205,000, $205,000, $205,000;
Steven C. Veen - $200,000, $200,000, $200,000; Cipora Kurtzman-Lavut - $195,000,
$195,000, $195,000. Of the compensation paid in Fiscal 2001, $100,427, $53,140,
$50,254, $35,301, $38,027 was paid in the form of 315,361, 166,869, 157,807,
110,851, 119,414 shares, respectively, of restricted common stock of the Company
to Mr. Kurtzman, Mr. Papazian, Mr. Schwartz, Mr. Veen and Ms. Kurtzman-Lavut,
respectively. Of the compensation paid in Fiscal 2000, $144,561, $34,781,
$78,201, $44,918 and $58,520 was paid in the form of 535,413, 128,818, 289,632,
166,363, and 216,742 shares, respectively, of restricted common stock of the
Company, valued as of the date of grant, to Mr. Kurtzman, Mr. Papazian, Mr.
Schwartz, Mr. Veen and Ms. Kurtzman-Lavut, respectively. As of February 28, 2001
the restricted shares owned by these persons were valued at $382,848, $133,059,
$201,348, $124,746 and $151,270, respectively, based upon the closing reported
price of the Company's stock on such date.
(2) Such compensation consisted of total Company contributions made to the plan
account of each individual pursuant to the Company's Employee Retirement Savings
Plan during the Fiscal year ended February 28, 2001.
No cash bonuses or restricted stock awards were granted to the above
individuals during the Fiscal years ended February 28, 2001, February 29, 2000,
and February 28, 1999. Effective January 2001, each non-employee director is
entitled to receive $20,000 per year for serving as a director, and an
additional $5,000 per year for each director who serves on the audit committee.
The following table summarizes certain information regarding option grants
to purchase Common Stock of the Company to the Chief Executive Officer and those
other executive officers named in the Summary Compensation Table (the "Named
Executive Officers").
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants For Option Term
- ----------------------------- ------------------------------------------- ------------- --------------------------
Number of % of
Securities Total
Under- Options/
lying SARs
Options/ Granted to Exercise
SARs Employees Or Base
Granted In Fiscal Price Expiration
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
- ----------------------------- --------------- -------------- ------------ ------------- ----------- --------------
Zvi Harry Kurtzman 4,500,000 25% 0.31 6/7/10 855,000 2,205,000
Gerald Papazian 1,000,000 5.7% 0.31 6/7/10 190,000 490,000
Arthur J. Schwartz 1,000,000 5.7% 0.31 6/7/10 190,000 490,000
Steven C. Veen 1,000,000 5.7% 0.31 6/7/10 190,000 490,000
Cipora Kurtzman Lavut 1,000,000 5.7% 0.31 6/7/10 190,000 490,000
The following table summarizes certain information regarding the number and
value of all options to purchase Common Stock of the Company held by the Chief
Executive Officer and those other executive officers named in the Summary
Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/
Name Year End SARs at Fiscal Year End*
- ---- ------------------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
Zvi (Harry) Kurtzman 720,000 5,100,000 $ 0 $ 0
Gerald S. Papazian 166,000 1,060,000 $ 0 $ 0
Arthur J. Schwartz 445,000 1,300,000 $ 0 $ 0
Steven C. Veen 265,000 1,160,000 $ 0 $ 0
Cipora Kurtzman-Lavut 445,000 1,300,000 $ 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 28, 2001.
No options were exercised by the above individuals during the fiscal year ended
February 28, 2001.
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 agreements and
severance agreements with Messrs. Kurtzman, Schwartz, Papazian, Veen, Froch,
Kaufman, and Ms. Kurtzman- and entered into severance agreements with Messrs.
Goldstein, Mail, and Stuart. The Committee reviewed and approved such agreements
unanimously after consulting with a nationally recognized employee benefits firm
and determining that such agreements were necessary in order to retain highly
qualified executives whose abilities are critical to the long-term success and
competitiveness of the Company.
The employment agreements with Mr. Kurtzman and the Named Executive
Officers have an initial term of three years. The term is automatically extended
for one year on each anniversary of the effective date of the employment
agreement unless either party gives prior notice of termination of the
agreement. Upon the death or disability of these executives, their employment
agreements provide for a lump sum payment equal to one year's salary and the
immediate vesting of stock based compensation awards. In the event of the
executive's termination for cause, the terminated executive is entitled only to
compensation accrued through the date of termination. If the executive is
terminated by the Company other than by reason of death, disability or cause,
the terminated executive is entitled to continued payment of the base salary
through the end of the stated term together with an annual bonus for each of the
remaining years under the employment agreement equal to the highest annual bonus
amount received by the terminated executive in the three years preceding
termination and the immediate vesting of stock based compensation awards.
Pursuant to severance agreements entered into effective March 1998 between
the Company and key executives of the Company, including Mr. Kurtzman and the
Named Executive Officers, these individuals are entitled to certain additional
benefits, which become effective at such time as there is a "change in control"
of the Company, as defined in the severance agreements. If such executive's
employment is terminated following a change in control other than by reason of
death, disability or by the executive without "good reason", or if following a
change in control the executive elects to terminate his employment on the one
year anniversary following a change in control, the terminating executive is
entitled to specified severance payments in lieu of salary, bonus and other
compensation which would otherwise accrue to the executive upon termination of
the employment agreement. Specifically, the severance agreements provide that,
for Messrs. Kurtzman and Schwartz and Ms. Kurtzman-Lavut, a lump sum severance
payment is due upon termination in the amount of three times the sum of the
terminated executive's base salary then in effect plus the highest annual bonus
earned in the three years preceding the date of termination; and in the case of
Messrs. Veen and Papazian, 1.5 times such base salary and bonus. The severance
agreements also provide for the accelerated vesting of stock based awards and
the continuation of life and health insurance benefits following the date of
termination (36 months for Messrs. Kurtzman and Schwartz, and Ms.
Kurtzman-Lavut, and 18 months for Messrs. Papazian and Veen).
The Company's senior management believes that at some time in the future,
as market acceptance of the AuraGen accelerates and manufacturing operations
expand, it may be desirable to replace all or part of the senior members of the
management team with individuals having focused experience in large scale
manufacturing and sales operation. Accordingly, in March 2000 Mr. Kurtzman
proposed to the Board of directors that consideration be given to restructuring
employment and severance agreements to allow the Company the flexibility to
implement an orderly management transition, if and when deemed advisable by the
Board.
Subsequently, the Company's Board of directors entered into discussions
with certain members of senior management with a view towards restructuring the
employment and severance agreements. The Board of Directors, through its
Compensation Committee, retained independent outside consultants to formulate a
proposal whereby these agreements with senior management would be modified to
allow for the possibility of an orderly management transition in the future if
and when deemed advisable by the Board.
Following discussions between the Compensation Committee of Board of
Directors and the senior management members, in consultation with independent
consultants, the Compensation Committee proposed that agreements be entered into
whereby the existing employment and severance agreements with Mr. Kurtzman, the
Named Executive Officers and other key executive officers would be restructured.
Under the current proposal, which has been approved unanimously by the
Compensation Committee and by a majority of the Board of Directors, the Company
would have the right to terminate these affected employees at will and such
affected employees would relinquish their rights to further compensation and
severance payments. In exchange for relinquishing their rights, the
participating members would receive a one-time payment in stock options at an
exercise price of $0.55 per share in lieu of receiving cash compensation. The
number of stock options would be determined based upon the underlying total
compensation due to the employee upon termination under the existing agreements,
multiplied by two and divided by $0.32 per share.
If and when any management members subject to the proposal are terminated
in the Board's discretion, such members would thereafter remain as consultants
to the Company for a period of one year at 85% of their then current base
salaries, subject to extension by mutual agreement. The management members
covered by the proposal have agreed to these terms. However, there are material
terms which remain to be considered and agreed to by the Board of Directors and
the affected members of the management team. There are no assurances that final
agreements will be achieved or when such agreements will be implemented.
Compensation of Chief Executive Officer and Other Executives
Pursuant to employment agreements entered into effective as of March 1998
the Compensation Committee increased Mr. Kurtzman's base salary in March 1998 to
$385,000, and increased the base salary of Papazian, Schwartz and Veen and Ms.
Kurtzman-Lavut to $210,000, $205,000, $200,000 $195,000, effective as of
December 1997, after consulting with a nationally recognized employee benefits
firm. The increase for Mr. Kurtzman 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. Under the terms of their
employment agreements the base salary is subject to annual adjustment, based
upon the Company's normal historical business practices and consistent with
salaries paid to executives performing similar functions in the Los Angeles
area.
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.
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 June 2000 the Compensation Committee unanimously approved
additional stock option awards under the Company's stock option plan to Mr.
Kurtzman and the Named Executive Officers, described in the table entitled
"Option/SAR Grants in the Last Fiscal Year' appearing above. 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.
Section 162(m) Policy
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
provides that publicly held companies may not deduct compensation paid to
certain of its top executive officers to the extent such compensation exceeds $1
million per officer in any year. However, pursuant to regulations issued by the
Treasury Department, certain limited exemptions to Section 162(m) apply with
respect to "qualified performance-based compensation" and to compensation paid
in certain circumstances by companies in the first few years following their
initial public offering of stock. The Company has taken steps to provide that
these exemptions will apply to compensation paid to its executive officers, and
the Company will continue to monitor the applicability of Section 162(m) to its
ongoing compensation arrangements. Accordingly, the Company does not expect that
amounts of compensation paid to its executive officers will fail to be
deductible by reason of Section 162(m).
Committee Members
Salvador Diaz-Verson, Jr., Stephen A. Talesnick, Harry Haisfield
Compensation Committee Interlocks and Insider Participation
The Compensation Committee for the Fiscal year ended February 28, 2001
comprised Salvador Diaz-Verson, Jr., Stephen A. Talesnick, and Harry Haisfield.
Decisions regarding compensation of executive officers for the Fiscal year ended
February 28, 2001 were made unanimously by the outside, disinterested, directors
of the Board of Directors, after reviewing recommendations of the Compensation
Committee.
Audit Committee Fraud Detection Program
In August 1998 a lawsuit captioned Collins v. Kurtzman et al. was filed in
U.S. District Court in the Central District of California, which purported to be
a derivative shareholder suit on behalf of Aura against members of the Board of
Directors of the Company. Aura believes that the action was without merit. In
April 1999 a final settlement was entered into by the parties which called for a
dismissal of the action and no payments by any of the defendants. In
consideration of the plaintiff dismissing its lawsuit Aura agreed to adopt and
implement a fraud detection program (the "Program") under the auspices of the
Audit Committee, after consulting with the Company's outside legal counsel and
independent auditors. The purpose of the Program is to detect and prevent fraud,
maintain accurate books and records for financial transactions, establish
procedures to ensure the recording of transactions to be in accordance with
generally accepted accounting principles, and to ensure that the Company's SEC
filings comply with SEC rules and regulations. The Audit Committee is
responsible for monitoring the Program on an ongoing basis, with the assistance
of the Company's outside legal counsel and its independent auditors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock owned as of May 18, 2001 (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 L.P. 21,562,736 (17) 6.6%
ICM Asset Management Inc. 18,897,864 (16) 5.8%
James M. Simmons 18,897,864 (16) 5.8%
Arthur Liu 22,437,274 (15) 6.9%
Zvi (Harry) Kurtzman 5,256,675 (1)(2) 1.6%
Arthur J. Schwartz 3,065,978 (1)(3)(4) 1.0%
Cipora Kurtzman Lavut 2,357,259 (5) *
Harvey Cohen 728,287 (6) *
Salvador Diaz-Verson, Jr. 1,456,037 (7) *
Stephen A. Talesnick 3,087,698 (10) 1.0%
Gerald S. Papazian 964,012 (8) *
Steven C. Veen 1,223,947 (9) *
Norman Reitman 717,142 (14) *
Harry Haisfield 1,556,700 (11) *
William Richbourg 460,000 (12) *
Neal Meehan 440,625 (13) *
All executive officers and directors 25,781,355 8.0%
as a group (20 persons)
- --------------------
* Less than 1% of outstanding shares.
(1) Includes 175,000 shares held of record by Advanced Integrated Systems, Inc.
(2) Includes 2,420,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001.
(3) Includes 878,333 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001.
(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 878,333 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001.
(6) Includes 31,250 shares beneficially owned, and 525,000 shares which may be
purchased pursuant to options within 60 days of May 31, 2001.
(7) Includes 450,000 shares which may be purchased pursuant to options
exercisable withing 60 days of May 31, 2001.
(8) Includes 519,333 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001.
(9) Includes 668,333 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001, and 20,000 shares held by Mr.
Veen as custodian for his children, to which Mr. Veen disclaims any
beneficial ownership.
(10) Includes 300,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001.
(11) Includes 524,000 shares which may be purchased pursuant to options and
warrants exercisable within 60 days of May 31, 2001.
(12) Includes 250,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001.
(13) Includes 296,875 shares which may be purchased pursuant to options and
warrants exercisable within 60 days of May 31, 2001
(14) Includes 475,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 2001 and 12,500 shares owned by Mr.
Reitman's wife, as to which 12,500 shares he disclaims any beneficial
ownership.
(15) Includes 11,833,574 shares held by Alaris, Inc. which may be deemed to be
beneficially owned by Mr. Liu and 4,500,000 shares which may be purchased
pursuant to warrants exercisable within 60 days of May 31, 2001.
(16) Based upon information contained in Schedule 13G/A dated May 16, 2001, as
filed with the SEC by ICM Asset Management, Inc. and James M. Simmons. ICM
Asset Management, Inc. is a registered investment advisor whose clients
have the right to receive or the power to direct the receipt of dividends
from, or the proceeds from the sale of, the stock. James M. Simmons is the
President of ICM Asset Management, Inc, and is the beneficial owner of
these shares in such capacity. Neither of such persons has sole voting or
sole dispositive power with respect to any of the 18,897,864 shares
reported as being beneficially owned. Of the 18,897,864 shares beneficially
owned by these persons, they have shared dispositive power with respect to
all of these shares, and shared voting power with respect to 18,025,524
shares.
(17) Based upon information contained in Schedule 13G/A dated February 13, 2001,
as filed with the SEC by Gardner Lewis Asset Management Inc. Of the
21,562,736 shares beneficially owned by this person, it has sole
dispositive power with respect to all of these shares, sole voting power
with respect to 19,508,336 shares, and shared voting power with respect to
318,100 shares.
The mailing address for Gardner Lewis Asset Management, L.P. is 285
Wilmington - West Chester Pike, Chadds Ford, Pa. 19317.
The mailing address for ICM Asset Management, Inc. is W. 601 Main Avenue,
Suite 600, Spokane Wa. 99201.
The mailing address for the others is c/o Aura Systems, Inc., 2335 Alaska
Avenue, El Segundo, CA 90245.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 $400,000 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
$.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 $.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 28, 2001.
INDEX TO EXHIBITS
Description of Documents
3.1(11) 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(11) Release from Infinity Investors Limited et al. to Aura Systems,
Inc.
10.25(11) Release from Aura Systems, Inc. to Infinity Investors Limited et
al.
10.26(11) Exchange Agreement dated as of February 22, 2000, by and among Aura
Systems, Inc., Infinity Investors Limited et al.
10.27(11) Guaranty dated as of February 22, 2000, by Aura Systems, Inc. and
certain of its subsidiaries.
10.28(11) Stock Pledge Agreement dated as of February 22, 2000, between Aura
Systems, Inc. and HW Partners, L.P. as agent.
10.29(11) 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(11) Secured Note dated February 22, 2000, from Aura Systems, Inc. to
Infinity Investors Limited.
10.31(11) Secured Note dated February 22, 2000, from Aura Systems, Inc. to
Global Growth Limited.
10.32(11) Secured Note dated February 22, 2000, from Aura Systems, Inc. to
Summit Capital Limited.
10.33(11) General Assignment and Bill of Sale dated February 29, 2000,
between Alpha Ceramics, Inc. and Aura Ceramics, Inc.
10.34(11) Assignment and Assumption of Specified Liabilities dated as of May
3, 2000, by and between Alpha Ceramics, Inc. and Aura Ceramics,
Inc.
10.35(11) Assignment and Assumption of Lease dated as of May 3, 2000, by and
between Alpha Ceramics, Inc. and Aura Ceramics, Inc.
10.36(11) Revolving Credit and Term Loan Agreement dated as of May 2000, by
and between Alpha Ceramics, Inc. and Excel Bank.
10.37(11) Asset Purchase Agreement dated February 29, 2000, between Alpha
Ceramics, Inc. and Aura Ceramics, Inc.
10.38(11) Subordination Agreement dated as of May 2000, by Aura Ceramics,
Inc. and Aura Systems, Inc.
10.39(11) Escrow Agreement dated March 6, 2000, by and among Guzik &
Associates, Aura Systems, Inc. and Isosceles Fund Limited.
10.40(11) Subscription Agreement from Isosceles Fund Limited to Aura Systems,
Inc.
10.41(11) Stock Purchase Warrant of Aura Systems, Inc. issued to Isosceles
Fund Limited.
10.42(11) Settlement Agreement and Release of Claims dated as of March 6,
2000, between Aura Systems, Inc. and Isosceles Fund Limited.
10.43 Settlement Agreement and Mutual Release dated as of March 12, 2001,
between Aura Systems, Inc. and Deutche Financial Services
Corporation.
21. Subsidiaries of Aura Systems, Inc.
23.1 Consent of Pannel Kerr Forster
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP
(1) Incorporated by reference to the Exhibits to the Company's Statement on
Form S-1 (File No. 33-19530).
(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)
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the Fiscal year ended February 29, 2000 (File No. 0-17249)
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AURA SYSTEMS, INC.
Dated: May 24, 2001
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 and in the capacities and on the date indicated.
Signatures Title Date
/s/Zvi Kurtzman Chief Executive Officer and Director May 24, 2001
- ---------------------------------
Zvi Kurtzman (Principal Executive Officer)
/s/Steven C. Veen Senior Vice President, May 24, 2001
- ---------------------------------
Steven C. Veen Chief Financial Officer
(Principal Financial and Accounting Officer)
Director May 24, 2001
- ---------------------------------
Harvey Cohen
/s/Salvador Diaz-Verson, Jr. Director May 24, 2001
- ---------------------------------
Salvador Diaz-Verson, Jr.
/s/Harry Haisfield Director May 24, 2001
- ---------------------------------
Harry Haisfield
/s/Neal Meehan Director May 24, 2001
- ---------------------------------
Neal Meehan
/s/Norman Reitman Director May 24, 2001
- ---------------------------------
Norman Reitman
/s/William Richbourg Director May 24, 2001
- ---------------------------------
William Richbourg
/s/ Stephen A. Talesnick Director May 24, 2001
- ---------------------------------
Stephen A. Talesnick
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report on Consolidated Financial Statements and
Financial Statement Schedule F-2 to F-3
Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries:
Consolidated Balance Sheets-February 28, 2001 and February 29, 2000 F-4 to F-5
Consolidated Statements of Operations and Comprehensive Loss-
Years ended February 28, 2001, February 29, 2000 and February 28,
1999 F-6 Consolidated Statements of Stockholders' Equity (Deficit) -Years
ended
February 28, 2001, February 29, 2000 and February 28, 1999 F-7
Consolidated Statements of Cash Flows-Years ended February 28, 2001,
February 29, 2000 and February 28, 1999 F-8 to F-10
Notes to Consolidated Financial Statements F-11 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 accompanying consolidated balance sheet of Aura Systems,
Inc. and subsidiaries as of February 28, 2001, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for the year then ended, 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 based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aura Systems, Inc.
and subsidiaries as of February 28, 2001, and the results of their operations
and their cash flows for the year then ended, and the financial statement
schedule presents fairly, in all material respects, the information set forth
therein, in conformity with generally accepted accounting principles in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has generated significant losses
from operations and is involved with significant litigation. As the Company has
suffered recurring losses from operations, is in violation of its loan
covenants, and is the subject of certain lawsuits, there is substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 12, 2001
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Aura Systems, Inc.
El Segundo, California
We have audited the consolidated balance sheet of Aura Systems, Inc. and
subsidiaries as of February 29, 2000 and the related consolidated statements of
operations and comprehensive loss, stockholders' equity (deficit), and cash
flows for each of the two 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 the results of their operations and
their cash flows for each of the two 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. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California 90017
June 12, 2000
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, February 29,
2001 2000
----- -------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,265,912 $ 260,437
Receivables, net 1,062,041 2,459,200
Inventories, net 9,756,399 11,189,227
Other current assets 452,940 360,117
Note receivable 1,405,857 3,557,067
------------- -------------
Total current assets 13,943,149 17,826,048
------------- -------------
PROPERTY AND EQUIPMENT, AT COST 41,289,011 42,219,417
Less accumulated depreciation and amortization (20,966,852) (15,184,362)
------------ --------------
Net property and equipment 20,322,159 27,035,055
LONG-TERM Investments 1,883,835 2,123,835
long-term receivables 2,516,139 1,250,000
Patents and trademarks-Net 3,370,263 4,615,769
OTHER ASSETS 3,242,498 3,271,831
------------- -------------
Total $ 45,278,043 $ 56,122,538
============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, February 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
-------------- -------
CURRENT LIABILITIES:
Notes payable $ 14,300,594 $ 9,899,531
Convertible note, unsecured -- 1,250,000
Accounts payable 3,463,146 4,216,004
Accrued expenses and other 1,284,754 1,634,300
------------- -------------
Total current liabilities 19,048,494 16,999,835
------------- -------------
24,184,514 37,606,695
------------- -------------
NOTES PAYABLE AND OTHER LIABILITIES
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock par value $.005 per share and additional paid in
capital. Issued and outstanding 291,089,582 and 196,975,392 264,787,864 234,196,092
shares respectively.
Common Stock not issued -- 9,132,774
Cumulative currency translation adjustment (CTA) (365,932) (365,932)
Accumulated deficit (262,376,897) (241,446,926)
----------- --------------
Total stockholders' equity 2,045,035 1,516,008
------------- -------------
Total $ 45,278,043 $ 56,122,538
============= =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and
Comprehensive Loss Years ended February 28, 2001,
February 29, 2000 and February 28, 1999
2001 2000 1999
------------- ------------- -------
Net Revenues $ 2,512,508 $ 5,788,221 $ 53,650,025
Cost of GOODS 1,216,637 1,957,854 83,344,562
------------- ------------- -------------
GROSS PROFIT LOSS 1,295,871 3,830,367 (29,694,537)
------------- ------------- --------------
OPERATING EXPENSES:
Overhead expenses 8,214,981 11,466,449 47,092,632
Research and development 547,812 148,443 1,996,198
Impairment of long-lived assets 240,000 -- 5,838,466
Selling, general and administrative expenses 12,695,833 10,725,397 64,131,074
------------- ------------- -------------
Total operating expenses 21,698,626 22,340,289 119,058,370
------------- ------------- -------------
LOSS FROM OPERATIONS (20,402,755) (18,509,922) (148,752,907)
OTHER INCOME AND (EXPENSE) (527,216) (5,893,449) (30,562,046)
(LOSS) BEFORE INCOME TAXES AND OTHER ITEMS
(20,929,971) (24,403,371) (179,314,953)
Provision for taxes -- -- 566,635
Minority interests in consolidated subsidiary -- -- 10,372,895
Loss in excess of basis of subsidiary:
Aura Systems, Inc. -- -- 8,080,695
Minority interests -- -- 26,561,481
-------------- -------------- --------------
Loss from continuing operations (20,929,971) (24,403,371) (134,866,517)
--------------- --------------- ---------------
Discontinued Operations:
Loss from Discontinued Operations, Net of
taxes of $0 for 2000 and 1999 respectively -- (1,433,859) (14,875,065)
Loss on Disposal, Net of Taxes of $0 for 2000 -- (2,697,642) --
-------------- --------------- --------------
Loss from Discontinued Operations -- (4,131,501) (14,875,065)
-------------- --------------- ---------------
Loss before extraordinary item (20,929,971) (28,534,872) (149,741,582)
Extraordinary Item
Gain on extinguishment of debt obligations, net
of income taxes of $0 -- 19,068,916 --
-------------- -------------- --------------
Net loss (20,929,971) (9,465,956) (149,741,582)
Other comprehensive income (loss), net of taxes: -- -- (406,574)
-------------- -------------- ---------------
Comprehensive loss $ (20,929,971) $ (9,465,956) $ (150,148,156)
-------------- ============== ===============
NET LOSS PER COMMON SHARE $ (0.08) $ (0.08) $ (1.74)
============== ============== ===============
Loss from continuing operations per common share $ (0.08) $ (0.20) $ (1.57)
============= ============== ==============
Loss from discontinued operations per common share
$ -- $ (0.03) $ (0.17)
============== ============= ==============
Extraordinary income per common share $ -- $ 0.15 $ --
============== ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 261,568,346 124,294,051 85,831,688
=========== =========== =============
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended February 28, 2001, February 29, 2000 and February 28, 1999
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, 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
Notes payable converted 7,324,191 36,621 2,912,744 -- -- -- 2,949,365
Stock issued to satisfy 11,642,627 58,160 6,093,135 -- -- -- 6,151,295
liabilities
Private placements 40,721,909 203,610 12,231,830 -- -- -- 12,435,440
Stock issued for prior year 34,425,463 172,128 8,960,646 (9,132,774) -- -- --
Expenses of issuances -- -- (77,102) -- -- -- (77,102)
Net (loss) -- -- -- -- (20,929,971) -- (20,929,971)
----------- -------- ----------- -------- --------------------------- ------------
Balance at February 28, 2001 291,089,582 $1,455,394 $263,332,470 $ -- $(262,376,897) $(365,932) $2,045,035
=========== ========== =========== ========= ============== ========== ==========
See accompanying notes to consolidated financial statements.
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended February 28, 2001, February 29, 2000 and
February 28, 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net loss $(20,929,971) $ (9,465,956) $(149,741,582)
----------- ------------- --------------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 7,619,979 6,853,924 12,985,278
Provision for environmental cleanup -- 48,812 44,516
(Gain) loss on disposition of assets (1,756,746) 93,638 925,525
Equity in losses of unconsolidated joint ventures -- -- 6,268,384
Impairment of long-lived assets 240,000 -- 9,403,687
Gain on extinguishment of debt -- (19,068,916) --
Long term assets charged to operations -- -- 1,425,794
Settlement on accounts payable (1,046,324) -- --
Minority interest in earnings (loss) of subsidiary -- -- (10,372,895)
Non-cash items charged to operations 903,935 -- --
Loss on disposal of investments -- -- 4,877,839
Loss on disposal of discontinued operations -- 2,697,642 --
Assets-(Increase) Decrease:
Receivables 1,397,159 462,541 46,037,727
Inventories 1,432,828 4,019,810 40,236,817
Prepayments -- -- 9,891,144
Other current assets (92,763) 1,515,787 3,801,107
Deferred income taxes -- -- 838,000
Liabilities-Increase (Decrease):
Accounts payable (752,858) (1,371,174) (21,479,522)
Accrued expenses (349,546) (1,577,248) 4,614,005
Litigation and other liabilities -- 222,223 7,389,649
------------ -------------- ------------
Total adjustments 7,355,664 (6,102,961) 116,887,055
--------- --------------- -----------
Net cash used by operating activities (13,334,307) (15,568,917) (32,854,527)
------------- --------------- ------------
Cash flows from investing activities:
Payments from notes receivable 3,784,681 5,674,828 --
Proceeds from sale of assets -- 327,109 2,721,000
Purchase of property and equipment (38,200) (16,103) (2,143,237)
Manufacture of special tools and equipment -- -- (1,910,611)
Investment in joint ventures -- -- (164,466)
Long-term investments -- -- (4,940,000)
Long-term receivables -- -- 3,436,809
Patents and trademarks -- -- (467,167)
Other assets 3,821 -- --
Proceeds from subsidiary stock -- -- 1,611,873
----------- -------------- -----------
Net cash provided (used) by investing activities 3,750,302 5,985,834 (1,855,799)
----------- -------------- ------------
See accompanying notes to consolidated financial statements
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
2001 2000 1999
---- ---- ----
Cash flows from financing activities:
Net proceeds from borrowings $ -- $251,101 $17,922,584
Repayment of notes payable (1,768,859) (1,218,571) (3,396,083)
Proceeds from exercise of options -- -- 103,000
Net proceeds from issuance of common stock 12,358,339 7,393,980 1,675,873
Net proceeds from exercise of warrants -- 24,800 7,884,325
Net proceeds from issuance of convertible notes -- -- 11,720,000
Repayment of convertible notes -- (430,000) (3,050,000)
Foreign currency translation adjustment -- -- (406,574)
------------ ------------ -------------
Net cash provided by financing activities 10,589,480 6,021,310 32,453,125
------------ ------------ ------------
Net increase (decrease) in cash and equivalents 1,005,475 (3,561,773) (2,257,201)
Cash and equivalents at beginning of year 260,437 3,822,210 6,079,411
------------ ------------ ------------
Cash and equivalents at end of year $ 1,265,912 $ 260,437 $ 3,822,210
=========== ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,977,239 $ 922,708 $ 3,374,992
=========== =========== ============
Income Taxes $ -- $ -- $ 2,244,762
=========== =========== ============
Supplemental disclosures of non-cash investing and financing activities:
During the year ended February 28, 2001, $2,912,744 of notes payable and accrued
interest were converted into 7,324,191 shares of common stock. The Company also
issued 11,642,627 shares of common stock in satisfaction of $6,093,135 of
liabilities. During the year ended February 28, 2001, the Company also 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 in Fiscal 2000 due to the limitation on the number of
shares authorized. The Company issued 2,520,000 shares of common stock for the
conversion of notes payable and accrued interest of $686,524; 541,667 shares of
common stock in settlement of accrued and unpaid director's fees of $146,250;
12,500,000 shares of common stock, in the amount of $3,100,000 for the Company's
private placement, and 14,687,972 shares of common stock with a value of
$5,200,000 to satisfy the liability for a class action settlement. In addition,
2,400,000 shares of common stock were issued as a finder's fee for the Company's
private placements and 1,775,824 shares of common stock for repricing a prior
private placement of the Company. The finder's fee and repricing had no effect
on total stockholders' equity. The above items total 34,425,463 shares and
$9,132,774, which is included in the Consolidated Statement of Stockholders'
Equity as Common Stock not issued for Fiscal 2000, and Common Stock in Fiscal
2001.
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.
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. The Company recorded a loss of
$1,820,000 as a result of this transaction in Fiscal 1999.
During the year ended February 28, 2001, the Company sold the assets of the
ceramics facility for $3.5 million in the form of a note receivable of $2.5
million plus $800,000 paid to third parties in satisfaction of liabilities and
payments of $200,000 to Aura. During the year ended February 29, 2000, the
Company sold its MYS subsidiary for a total of $4.2 million consisting of a $1
million down payment and a note receivable of $3.2 million. The Company also
sold the assets of its AuraSound subsidiary for approximately $2.4 million
consisting of a down payment of $100,000 and a note receivable of approximately
$2.3 million.
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 its stock investment in Telemac for $5,499,000, of which
$2,750,000 was recorded as a note receivable and proceeds of $2,699,000 were
received which are reflected above as proceeds from sale of assets. During the
year ended February 28, 1999, the Company assumed explicitly certain obligations
of NewCom, effectively transferring approximately $9,900,000 from current notes
and trade payables to litigation payable. The $9,900,000 represents NewCom
obligations guaranteed by the Company, including a line of credit with a
commercial lending institution and two other trade creditors.
See accompanying notes to consolidated financial statements
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 28, 2001, February 29, 2000 and February 28, 1999
(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 induction machine that can be
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 for
its electro-optics technology ("AMA") licensed to Daewoo Electronics Co.,
Ltd. 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 years ended February 28, 2001 and February 29, 2000, the
consolidated financial statements include accounts of the Company and its
wholly owned subsidiaries Aura Ceramics, Inc. and Electrotec Productions,
Inc. (and its wholly owned subsidiary Electrotec Europe). During the year
ended February 29, 2000, the Company divested its AuraSound segment (see
note 21). 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. In March 2000 the Company sold its interest in Aura
Ceramics, Inc. to 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 has in the past earned a portion of its revenues from license fees,
and generally recorded those fees as income when the Company fulfilled its
obligations under the particular agreement. The Company recognized $1.5
million in revenue from the assignment of patents related to sound products
in Fiscal 2000.
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 and Cash Equivalents
The Company considers all highly liquid assets, having an original maturity
of less than three months when purchased, to be cash equivalents. At
February 28, 2001 and February 29,2000, the Company's uninsured cash
balances total $1,158,980 and $102,098 respectively.
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.
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 64,612,015 common
shares for convertible debt, warrants and options at February 28, 2001,
11,709,000 common shares at February 29, 2000, and 21,312,781 common shares
at February 28, 1999.
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. Of this amount, $3,565,221 is
included in the loss from discontinued operations in the Consolidated
Statement of Operations (see also note 4).
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 2001, 2000 and 1999 approximated nil, nil and $9.4 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 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
$6.3 million, $6.5 million, and $11.9 million for Fiscal 2001, 2000 and
1999, respectively.
(2) Receivables
Receivables consist of the following:
2001 2000
---- ----
Commercial receivables:
Amounts billed $1,228,229 $10,100,962
Advances due (to) from related parties (6,188) 31,455
Less allowance for uncollectible receivables and (160,000) (7,673,217)
--------- -----------
sales returns
$ 1,062,041 $2,459,200
========= ==========
Bad debt expense was approximately $1.3 million, $0.15 million, and $13.3
million in Fiscal 2001, 2000 and 1999 respectively.
(3) Notes Receivable
Notes receivable consist of the following:
2001 2000
---- ----
MYS $ 0 $ 570,092
Algo 0 1,736,975
Telemac 1,250,000 2,500,000
Alpha Ceramics 2,671,996 --
--------- ----------
3,921,996 4,807,067
Less current portion 1,405,857 3,557,067
--------- ---------
$2,516,139 $1,250,000
========= =========
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 final payment of $1,250,000
plus interest accrued at 8% is due in February 2002.
In March 1999, the Company sold MYS Corp. and subsidiaries to the
management of MYS for a sales price of $4.2 million. The terms of the sale
called for a $1 million down payment and twelve monthly payments of
$290,000 including interest at 13.9%. All payments were made timely and the
final payment was received in April 2000. A loss on the sale of MYS in the
amount of $1,696,273 is included in the loss from discontinued operations
in Fiscal 2000. 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. The
terms of the sale called for a down payment of $100,000 and monthly
payments of $100,000 plus interest at a rate of 8%. All payments have been
made timely. A loss on the sale of the AuraSound assets of $1,001,369 is
included in the loss from discontinued operations in Fiscal 2000.
In March 2000, the Company sold the assets of its ceramics facility to the
president of the facility for $3.5 million resulting in a gain recognized
of $1,756,746. The terms of the sale called for a note in the amount of
$2.5 million with interest at 8%, a down payment of $100,000 and a payment
at closing of $100,000 plus payments to third parties of $800,000. This
facility accounted for $2.9 million or 50% of revenues in Fiscal 2000.
(4) Long Term Investments
Long-term investments consist of the following:
2001 2000
---- ----
Aquajet Corporation $ 683,835 $ 923,835
Alaris Industries, Inc. 1,200,000 1,200,000
--------- ---------
$ 1,883,835 $2,123,835
=========== ==========
In the fourth quarter of Fiscal 2001, we examined our investment in Aquajet
and determined to take a reserve of $240,000 to account for the time value
of money at an implicit rate of 10% for a period of three years.
(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-offs 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-offs 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 (to) from related parties, aggregated $(6,188) and
$31,455 at February 28, 2001 and February 29, 2000, respectively, included
in current receivables.
(7) Inventories
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of the following:
2001 2000
---- ----
Raw materials $3,516,826 $4,205,828
Finished goods 6,530,977 7,310,335
Reserve for potential product obsolesence (291,404) (326,936)
--------------- ---------------
$9,756,399 $11,189,227
============== ==============
At February 28, 2001, 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:
2001 2000
---- ----
Land $ 3,187,997 $ 3,187,997
Buildings 8,708,796 8,708,796
Machinery and equipment 26,840,274 27,755,903
Furniture, fixtures and leasehold improvements 2,551,944 2,566,721
------------ ------------
$41,289,011 $42,219,417
========== ===========
(9) Notes Payable and Other Liabilities
Notes Payable and Other Liabilities consist of the following:
2001 2000
---- ----
Litigation payable $2,597,900 $ 5,722,221
Line of credit (a) 1,984,000 2,584,000
Notes payable-equipment (b) 26,093 31,353
Notes payable-buildings (c) 5,248,205 5,535,693
Unsecured notes payable (d) 7,843,321 6,807,676
Trade debt (e) 7,960,027 10,961,151
Secured notes payable (f) 12,825,562 15,309,622
---------- ----------
38,485,108 46,951,716
Less: current portion 14,300,594 9,899,531
-------------- --------------
Long term portion 24,184,514 37,052,185
Reserve for environmental cleanup -- 554,510
----------- -----------
$24,184,514 $ 37,606,695
========== =============
(a) The line of credit consists of a single credit line in the amount of
$3 million, bearing an interest rate of 12% and is secured by a
general security interest in the assets of the Company. The line
currently calls for a monthly principal payment of $100,000 plus
accrued interest, and does not allow for any additional draws. The
Company is in violation of substantially all of the original terms of
this agreement, for which it has received a waiver from the bank
effective through June 30, 2001.
(b) Notes payable-equipment consists of a note maturing in February 2005
with an interest rate of 8.45%.
(c) Notes payable-buildings consists of a 1st Trust Deed on two buildings
in California, due in Fiscal 2009 bearing interest at the rate of
7.625%.
(d) Unsecured notes payable consists of two notes at February 28, 2001 and
four notes at February 29, 2000 all bearing interest at a rate of 8%.
(e) Trade debt was restructured with payment terms over a three year
period with interest at 8% per annum commencing in January 2000.
(f) Secured notes payable consists of three notes bearing interest at a
rate of 8%. On one 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
2002 $ 14,300,594
2003 17,941,630
2004 1,264,240
2005 126,320
2006 129,482
thereafter 4,722,842
---------
$38,485,108
(10) 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 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 with the payment of $430,000 in cash and the issuance of
3,500,000 shares of common stock. 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.
(11) Accrued Expenses
Accrued expenses consist of the following:
2001 2000
---- ----
Accrued payroll and related expenses $ 680,524 $ 582,850
Bond interest payable 280,228 261,330
Deferred income -- 500,000
Other 324,002 290,120
---------- ----------
$ 1,284,754 $ 1,634,300
========== ==========
(12) Income Taxes
At February 28, 2001, the Company had net operating loss carry-forwards for
Federal and state income tax purposes of approximately $262 million and
$129 million respectively, which expire through 2021.
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 $105 million for
Fiscal 2001 and $97 million for Fiscal 2000. 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 deferred tax benefit
consists solely of the benefit of the net operating loss carryforward.
(13) Common Stock, Stock Options and Warrants
At February 28, 2001 and 2000, the Company had 500,000,000 shares of $.005
par value common stock authorized for issuance.
At February 28, 2001 there were warrants outstanding to purchase 21,751,015
shares of the Company's common stock exercisable at an average price of
$0.84 per share.
The Company has granted nonqualified stock options to certain directors.
Options are granted at fair market value at the date of grant, vest
immediately, and are exercisable at any time within a ten-year period from
the date of grant.
A summary of activity in the directors stock option plan follows:
Shares Exercise Price
Options outstanding at February 28, 1998 1,059,578 $ 1.44-5.50
--------- ----------
Expired (499,578) $ 1.44-5.50
-------- -----------
Options outstanding at February 28,1999 560,000 $ 2.06-4.75
Expired (60,000) $ 3.00-4.75
-------- -----------
Options outstanding at February 29, 2000 500,000 $ 2.06-2.30
------- ---------
Options Outstanding at February 28, 2001 500,000 $ 2.06-2.30
======= =========
The following table summarizes information about director stock options
at February 28, 2001:
Number Average Weighted Number
Range of Outstanding at Remaining Life Average Exercise Exercisable As
-
Exercise Price 2/28/01 in Years Price of 2/28/01
-------------- ------- -------- ----- ----------
$2.30 50,000 6.13 $2.30 50,000
$2.06 450,000 6.36 $2.06 400,000
(14) Employee Stock Plans
As of February 28, 2001, 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 2001, 2000 and 1999 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 measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, the standard
permits entities to continue accounting for employee stock option and
similar equity instruments under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has adopted only the disclosure
provisions of SFAS No. 123. It applies Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock issuances to employees and does
not recognize compensation expense for its stock-based compensation other
than for restricted stock and options issued to outside third parties.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for awards under this plan consistent with the
methodology prescribed by SFAS No. 123, the Company's net loss and loss per
share would be reduced to the pro forma amounts indicated below for the
period ended February 28, 2001:
Net loss
As reported $ (20,929,971)
Pro forma $ (22,114,397)
Basic loss per common share
As reported $ (0.08)
Pro forma $ (0.08)
For the years ended February 29, 2000 and February 28, 1999 pro forma
amounts related to option grants were not material.
For the purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and directors
is estimated using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 50%,
risk-free interest rates of 4.9% to 6.0%, and expected life of 1.5 and 2.0
years.
The weighted-average fair value of options granted during the period ended
February 28, 2001 for which the exercise price equals the market price on
the grant date was $0.09, and the weighted-average exercise price was
$0.32. The weighted-average fair value of options granted for which the
exercise price was greater than the market price on the grant date was
$0.07, and the weighted-average exercise price was $0.36. No options were
granted for which the exercise price was less than the market price on the
grant date.
The weighted-average remaining contractual life of the options outstanding
at February 28, 2001 is 8.8 years. The exercise prices of the options
outstanding at February 28, 2001 ranged from $0.31 to $7.31, and
information relating to these options is as follows:
1989 Plan 2000 Plan
--------- ---------
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Options outstanding at February 28, 1998 3,660,000 $1.44-7.31 -- --
----------- --------- ------------- -------------
Grants 2,900,000 3.31 -- --
Cancellations (59,700) 1.44-7.31 -- --
Exercises (50,000) 2.06 -- --
------------ -------------- ------------- -------------
Options outstanding at February 28, 1999 6,450,300 1.44-7.31
Cancellations (454,500) 2.06-7.31 -- --
Expired (131,800) 3.06-4.12 -- --
------------ ----------- ------------- -------------
Options outstanding at February 29, 2000 5,864,000 1.44-7.31
Grants -- -- 17,565,500 $0.31-0.60
Cancellations (5,000) 3.00 (132,500) 0.31
Expired (431,000) 1.44 -- --
------------ ------------- ------------- -------------
Options Outstanding at February 28, 2001 5,428,000 $1.79-7.31 17,433,000 $0.31-0.60
=========== ========== ============= =============
The following table summarizes information about employee stock
options at February 28, 2001:
Number Average Weighted Number
Range of Outstanding at Remaining Life Average Exercise Exercisable As
-
Exercise Price 2/28/01 in Years Price of 2/28/01
-------------- ------- -------- ----- ----------
$7.25 6,000 0.75 $7.25 6,000
$3.00 15,000 1.62 $3.00 215,000
$7.31 6,000 2.60 $7.31 6,000
$3.00 20,000 5.58 $3.00 20,000
$1.79-2.15 2,481,000 6.42 $2.04 2,481,000
$3.13-3.31 2,900,000 7.05 $3.30 1,160,000
$0.31-0.60 17,433,000 9.25 $0.33 0
(15) Leases
At February 28, 2001, the Company has no long term operating leases. Rental
expense charged to operations approximated $.1 million, $.9 million, and
$1.8 million in Fiscal 2001, 2000 and 1999, respectively.
(16) Significant Customers
The Company sold its AuraGen product to six significant customers during
Fiscal 2001 for a total of approximately $1.35 million or 53.8% of net
revenues. Five of these companies are related entities and account for
approximately $1.0 million of net revenues.
The Company sold ceramics related products to a single significant customer
during Fiscal 2000 for a total of approximately $2.1 million or 36.3% of
net revenues.
The Company on a consolidated basis sold computer related products to three
significant customers during Fiscal 1999. Sales of communications and
multimedia products to major mass merchandisers Best Buy, Circuit City, and
Staples accounted for $12.6 million or 23.5% of net revenues. None of these
customers are related to the Company or any other customer of the Company.
(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.
NewCom Related Litigation
Deutsche Financial Services v. Aura (Settled March 2001)
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
followed DFS' termination of its credit facility with NewCom of $11,000,000
and seizure of substantially all of NewCom's collateral in April, 1999. It
alleged, among other things, that Aura was liable to DFS for NewCom's
indebtedness under the secured credit facility purportedly guaranteed by
Aura in 1996, well prior to the NewCom initial public offering of September
1997. Aura responded, denying DFS' claims and asserted in its defense,
among other things, that the guarantee, if any, was discharged. In
addition, Aura through its counsel, asserted cross-claims for, among other
things, tortuous lender liability, alleging that DFS wrongfully terminated
the NewCom credit facility, wrongfully seized the NewCom collateral and
wrongfully foreclosed upon NewCom collateral, acting in a commercially
unreasonably manner. A panel of three arbitrators had been selected and
appointed by the American Arbitration Association, with the Company
expecting a hearing on the matter sometime in the first half of 2001. The
Company believed it had meritorious defenses and cross-claims.
The company entered into a definitive Settlement and Mutual Release
Agreement effective March 12, 2001 (the "Settlement") providing for the
settlement of litigation. Under the terms of the Settlement DFS will
receive cash payments totaling $350,000 and 10,000,000 shares of Aura's
common stock in exchange for mutual releases. DFS may not sell more than
5,000,000 shares per year during the first two years following the
settlement, may not sell any shares for the first 120 days following the
settlement, and may not sell more than 50,000 shares in a single day. Aura
will retain the right to repurchase unsold shares under certain conditions
for a period of two years. Subject to certain conditions, DFS will assign
to Aura its security interest in assets pledged by NewCom, Inc. to DFS to
secure NewCom's indebtedness.
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 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. 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. 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.
Aura has alleged certain cross-claims against the Plaintiffs. Aura contends
that Plaintiffs violated their contractual obligations to Aura by engaging
in unlawful "short sales" of NewCom stock, commencing on January 20, 1999,
and were in violation of certain covenants in the subscription agreements.
Aura contends that, as a result of such violations and on the basis of
other factors and legal theories, Aura's obligations to deliver the shares
and to make any payments to Plaintiffs was terminated. Aura further claims
that its consent to its agreements with Plaintiffs was procured as a result
of fraudulent misrepresentations by Plaintiffs. Aura also has asserted
claims against Plaintiffs for damages based on alleged breaches of
Plaintiffs' contractual obligations to Aura and on Plaintiffs' alleged
misrepresentations to Aura.
All individually named defendants have been dismissed by agreement of the
parties and the case is scheduled for trial on July 17, 2001. The Court has
granted Aura's motion recently to require Plaintiffs' to post an
undertaking in the amount of $225,000 to secure any cost award that may be
entered in Aura's favor on the basis that it is "reasonably possible" that
Aura will prevail in this matter. Aura has also moved for summary judgment
which is scheduled to be heard in June 2001.
The Company believes that it has meritorious defenses and cross-claims 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 on financial
conditions, results of operations or cash flow.
(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 28, 2001. Cash
equivalents consist principally of short-term money market funds, these
instruments are short term in nature and bear minimal risk.
For cash, cash equivalents, trade receivables and trade payables, the
carrying value of these amounts is a reasonable estimate of their fair
value.
The fair value of noncurrent receivables, including notes receivable are
estimated by using the current rates at which similar loans would be made
to such borrowers based on the remaining maturities, consideration of
credit risks, and other business issues pertaining to such receivables.
Long and Short Term Debt: The fair values of debt instruments are estimated
based on quoted market prices or, where quoted prices are not available,
estimated based upon borrowing rates for similar debt instruments or on
estimated prices based on current yields for debt issues of similar quality
and terms.
Considerable judgment is necessarily required in interpreting market data
to develop estimates of fair value. Accordingly, the estimates used by us
are not necessarily indicative of the amounts that the Company would
realize in a current market exchange.
The Company performs credit background checks and evaluates the credit
worthiness of all potential new customers prior to granting credit. UCC
financing statements are filed, when deemed necessary.
(19) Other (Income) and Expenses
Other (income) and expenses consist of:
2001 2000 1999
---- ---- ----
Legal settlements $ 1,512,769 $ 2,777,762 $ 7,717,518
Equity in losses of unconsolidated
joint ventures -- -- 6,268,384
Settlement on accounts payable (1,046,324) -- --
(Gain) loss on disposal of assets (1,756,746) 93,638 925,525
Loss on disposal of investment -- -- 4,877,839
Other income (446,399) (1,454,641) (906,921)
Interest expense 2,263,916 4,476,690 11,679,701
------------- --------- ----------
$ 527,216 $ 5,893,449 $ 30,562,046
============ ========= ============
(20) Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related
Information," as of February 28, 1999. SFAS 131 establishes standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 defined operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision makers in deciding how
to allocate resources and in assessing performance. The Company has
aggregated its business activities into three operating segments:
electromagnetic and electro-optical technology (Aura), computer related
communications (NewCom) and sound 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. This included
the ceramics business which was involved in the manufacture and sale of
piezo electric based electro-magnetic micro actuators. In addition, this
segment also includes our corporate headquarters, revenues generated from
the sale of computer monitors, activity from Electrotec and license fees.
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 consisted of the manufacturing and selling of high performance
computer communication and multimedia products for the personal computer
market. The segment also included 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 consisted of the manufacture and sale of professional and
consumer sound system components and products, including speakers,
amplifiers, and Bass Shakers. AuraSound reflected 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
Net Revenues* (in thousands)
2001 $ 2,513 $ -- $ -- $ 2,513
2000 $ 5,788 $ -- $ -- $ 5,788
1999 $ 6,830 $ 46,820 $ -- $ 53,650
Loss from Operations
2001 $ (20,930) $ -- $ -- $ (20,930)
2000 $ (18,510) $ -- $ -- $ (18,510)
1999 $ (54,396) $ (94,357) $ -- $ (148,753)
Identifiable Assets
2001 $ 45,518 $ -- $ -- $ 45,518
2000 $ 56,122 $ -- $ -- $ 56,122
1999 $ 63,754 $ -- $ 26,389 $ 90,143
Depreciation and Amortization
2001 $ 7,620 $ -- $ -- $ 7,620
2000 $ 6,854 $ -- -- $ 6,854
1999 $ 7,375 $ 1,511 $ 4,099 $ 12,985
Capital Expenditures
2001 $ 244 $ -- $ -- $ 244
2000 $ 16 $ -- $ -- $ 16
1999 $ 2,450 $ 161 $ 1,443 $ 4,054
Number of operating locations at year-end (unaudited)
2001 1 -- -- 1
2000 2 -- -- 2
1999 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):
2001 2000 1999
---- ---- ----
U.S., Canada, Latin America $ 2,495 99.29% $6,845 96.75% $58,871 72.22%
Europe -- -- 63 .89 772 0.95
Asia 18 0.71 168 2.36 21,875 26.83
---- -- ------- ---- --- ------- -- ------ ------
$ 2,513 100.00% $7,076 100.00% $81,518 100.00%
========= ======= ====== ======= ======= ======
All of the Company's operating long-lived assets are located in the United
States
(21) 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 Opinion ("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 2001, 2000 and 1999 were nil and approximately $1,037,000 and
$27,868,000 respectively.
(22) Recently issued accounting pronouncements
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," to provide guidance on the recognition,
presentation, and disclosure of revenue in financial statements. Changes in
accounting to apply the guidance in SAB No. 101 may be accounted for as a
change in accounting principle effective January 1, 2000. Management has
not yet determined the complete impact of SAB No. 101 on the Company;
however, management does not expect that application of SAB No. 101 will
have a material effect on the Company's revenue recognition and results of
operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," (an Interpretation of Accounting Principles Board
Opinion No. 25 ("APB 25")) ("FIN 44"). FIN 44 provides guidance on the
application of APB 25, particularly as it relates to options. The effective
date of FIN 44 is July 1, 2000, and the Company has adopted FIN 44 as of
that date.
(23) Subsequent Events
Effective March 12, 2001, we entered into a definitive Settlement and
Mutual Release Agreement with Deutche Financial Services ("DFS"). Under the
terms of the settlement Aura will pay to DFS $350,000 and 10,000,000 shares
of Aura's common stock in exchange for mutual releases (see also note 17).
SCHEDULE II
AURA SYSTEMS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended February 28, 2001, February 29, 2000 and February 28, 1999
Balance at Charged to Charged to Balance at
beginning of costs and other end
period expenses Accounts1 Deductions of period
-----------------------------------------------------------------------------------
Allowances are deducted from the
assets to which they apply
Year ended February 28, 2001:
Allowance for:
Uncollectible Accounts $7,673,217 $ 1,339,696 $ -- $8,852,913 $ 160,000
Reserve for returns -- -- -- -- --
Reserve for potential product
--------- --------- ---------
obsolescence 326,936 -- -- 35,532 291,404
---------- -- -- ------ -------
$8,000,153 $1,339,696 $ -- $ 8,888,445 $ 451,404
========= ========= =========== =========== ============
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
========== ========== ========== =========== ==========
1 Amounts charged to other accounts include amounts charged to price protection
and rebates in Fiscal 1999.