SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended......................................February 28, 2003
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 (I.R.S. Employer Incorporation
Jurisdiction of Organization) or Identification No.)
2335 Alaska Ave.
El Segundo, California 90245
(Address of principal executive offices)
(310) 643-5300
Registrant's telephone number
Name of each exchange on which registered
None
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [] No [x]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
On July 25, 2003 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $20 million. The aggregate
market value has been computed by reference to the last trading price of the
stock on July 25, 2003. On such date the Registrant had 430,923,150 shares of
common stock outstanding.
When used in this report, the word "expects," "believes," "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 change in the Company's expectations
or any events, conditions or circumstances on which any such statement is based.
This Report includes product names, trade names and marks of companies other
than the Company. All such company or product names are trademarks, registered
trademarks, trade names or marks of their respective owners and are not the
property of the Company.
PART I
ITEM 1. BUSINESS
================================================================================
A. Introduction and History
------------------------
Aura Systems, Inc., a Delaware corporation, ("Aura" or the "Company")
designs, assembles and sells the AuraGen(R), the Company's patented mobile power
generator that uses the engine of a vehicle to generate power. It installs
under-the-hood in many motor vehicles and delivers on-location, plug-in
electricity for any end use including industrial, commercial, recreational and
military applications. Compared to the traditional solutions (i.e., GenSets and
inverters) addressing the multi-billion dollar North American mobile power
market, the Company believes the AuraGen(R) provides cleaner electricity with
greater reliability and flexibility at a lower cost to the end user. The Company
began commercializing the AuraGen(R) in late 1999 as a 5,000 watt 120/240V AC
machine compatible with certain Chevrolet engine models. In mid and late 2001,
the Company added an 8,500 watt configuration and also introduced AC/DC and
Inverter Charger System (ICS) options. The Company now has configurations
available for more than 90 different engine types including a majority of
General Motors and Ford models, many Daimler Chrysler models and numerous others
made by Caterpillar, Detroit Diesel, Cummins, Freightliner and Navistar, among
other chassis and engine manufacturers.
To date, AuraGen(R) units have been sold to more than 500 customers in more
than 10 industries, including recreational, utilities, telecommunications,
emergency/rescue, public works, catering, oil and gas, transportation,
government and the military. The Company's objective is to be the leading
developer and supplier of fully integrated mobile electric power systems.
The Company was founded in 1987 and, until 1992, primarily engaged in
supplying defense technology to classified military programs. In 1992 the
Company transitioned to being primarily a supplier of consumer and industrial
products and services using its developed technology. In 1994, the Company
founded NewCom, Inc., which sold and distributed computer communications and
sound products such as CD-ROMs and sound cards. In 1997, the Company acquired
MYS Corporation of Japan, a manufacturer of speaker systems. New Com ceased
operations in 1999 and the Company experienced severe financial hardship from
this and other causes. In fiscal 2000, the Company sold MYS, the Company's
business divisions providing sound products, and other assets, restructured
substantial indebtedness and concentrated its focus on the AuraGen(R) product.
The Company continues to hold several patents, in addition to those related
to the AurGen(R), which it believes provide the basis for economically viable
products in addition to the AuraGen(R), but sales of the AuraGen(R) currently
provide substantially all the Company's operating revenues.
B. The AuraGen(R)
--------------
The AuraGen(R) is a patented induction power system that uses the engine of
a vehicle to produce electrical energy. The AuraGen(R) can generate maximum
power at engine RPM's from enhanced idle to redline for gasoline engines and
true idle to redline for larger diesel engines. The Company believes the
AuraGen(R) is the only proven, commercialized power system available that can
generate up to 8,500 watts of clean power and is fully integrated under the hood
of a vehicle. While traditional mobile sources of electricity can exhibit
voltage fluctuations, spikes, surges and other inconsistencies, the AuraGen(R)
delivers pure sine wave (or "clean") power. Clean power is generally desired and
often required to safely and reliably operate highly sensitive digital
equipment, such as computers, communication and computer-controlled equipment.
The AuraGen(R) is composed of three basic subsystems. The first subsystem
is the generator that is bolted to, and driven by, the vehicle's engine. The
second subsystem is an electronic control unit, which filters and conditions the
electricity to provide clean, steady voltages for both AC and DC power. The
third subsystem is mounting brackets and supporting components for installation
and integration of the generator with the vehicle engine.
The Company sells two basic models, a 5 Kw and an 8.5 Kw, with a number of
options. The models currently available produce 5,000 watts of continuous power
with 7,200 watts peak and 8,000 watts of continuous power with 9,000 watts peak,
respectively. AC output is in the form of dual 120/240 volts pure sine wave at a
frequency of 60 or 50 Hertz. In addition, both of the above models are available
in configurations that divide the maximum power between AC and DC. The DC
available power can be either 14 volts or 28 volts. In fiscal 2002, the Company
introduced a new model that generates power with the vehicle engine either on or
off, using auxiliary batteries in conjunction with the AuraGen(R). Aura provides
custom engineered brackets for both the 5 Kw and the 8.5 Kw systems that attach
to over 90 different engine and chassis models. The Company also provides
power-take-off (PTO), as well as hydraulic driven interfaces for bigger trucks
that do not involve direct attachment to the vehicle engine.
C. Mobile Power Industry
---------------------
The mobile power generation market is large and growing. Vehicles used in
the telecommunications, utilities, public works, construction, catering, and oil
and gas industries, and emergency/rescue, military and recreational vehicles
rely heavily on mobile power for their internal systems. In addition, mobile
work sites require on-location electricity to power equipment ranging from
computers to power tools.
Based on studies conducted by the U.S. government, Business Communications
Company, Inc. ("BCC") and others, the Company estimates the annual gross North
American mobile power generation market is at least $2.5 billion and growing.
Worldwide growth is expected to be fueled by increases in the development and
construction of industrial infrastructures, significant growth in homeland
security expenditures, and increased use of sophisticated electronic equipment
in underdeveloped areas where grid-based electricity is unavailable or
unreliable. The Company believes that mobile power has become increasingly
important as backup to electric grid power supply.
The two primary options available to users of mobile power today are
GenSets and inverters. GenSets are relatively inefficient power generation units
which are not incorporated into a vehicle and require external fuel, either
gasoline or diesel, in order to generate electricity. GenSets are generally
noisy and cumbersome to transport because of their weight and size. GenSet
technology has been utilized since the 1930s. Inverters convert the DC
electricity stored in automotive or other batteries to AC electricity, which is
required by a wide range of mobile applications. Due to their low power output
capabilities, inverters are typically used for applications that require less
than 2,500 watts of power. Inverters do not generate their own power and so the
user must rely on batteries and recharge them by connecting into a grid power
source, or through GenSets or other means.
The quality of electricity has become more important as computers and other
technologically advanced products have become more widely available and
utilized. Because GenSets usually do not deliver pure sine wave electricity,
they are not well suited for digital instruments and sensors. Inverters that
produce pure sine wave electricity are available but are more expensive than
standard inverters and relatively uncommon. The Company has measured a less than
2.4% THD (total harmonic distortion) for the electrical output from an
AuraGen(R), which compares favorably to the output of that from a typical power
company electric grid.
D. Competitive Advantages of the AuraGen(R)
----------------------------------------
The Company believes the AuraGen(R) is a superior product due to its
convenience, cost efficiency, fuel efficiency, reliability, flexibility in power
output, and the quality of the electricity generated.
The Company believes the cost to operate a typical GenSet is approximately
$0.92 per kW hour and the cost to operate a typical inverter is approximately
$0.70 per kW hour. The cost to operate a comparable AuraGen(R) is approximately
$0.46 per kW hour while a vehicle is stationary. When power is needed while the
vehicle is in motion (e.g., recreational vehicles, ambulances, police vehicles,
military vehicles), the cost to operate the AuraGen(R) drops to approximately
$0.28 per kW hour.
The AuraGen(R) does not require scheduled maintenance and is offered with a
three year warranty compared to the typical one year warranty available for a
comparable GenSet or inverter.
In addition, the AuraGen(R) is significantly cleaner for the environment
than the other generally available mobile power solutions. The AuraGen(R) uses
the automotive engine which is highly regulated for environmental protection.
GenSets use small engines that produce significantly higher levels of emissions
per unit of power output than the automobile engine.
The Company believes that barriers to entry make it less likely that a
product superior to the AuraGen(R) will become available in the foreseeable
future. The inventions upon which the AuraGen(R) is based are protected by
patents issued in the U.S. and key foreign countries. Creating and patenting the
AuraGen(R) required over $150 million and 600 man-years of engineering, research
and development. To Aura's knowledge, there are no other patents to this
technology. Manufacturers and end users of mobile power solutions (including the
military) typically require completion of extensive evaluation and approval
processes before embracing new systems. Many large target customers, including
GM, Ford and Daimler Chrysler, have already invested the time and capital
required to evaluate and test the AuraGen(R). In addition, after extensive
testing, a number of Federal, state and local government departments, utilities
and major industrial companies have approved the AuraGen(R) for purchase.
Thousands of AuraGen(R) units are currently being used for multiple
applications and in all types of operating environments, providing a good sample
set for reliability analysis. The results show very low failure rates, which the
Company is reducing via minor hardware and software modifications, better
assembly procedures and improved installation training. The U.S. Army has
performed its own tests and is continuing to test the AuraGen(R) under severe
conditions. The VIPER (the name for the military version of the AuraGen(R)) now
in use by special operations forces has been air-drop-certified by the Army and
has been successfully deployed in Operation Enduring Freedom and Operation Iraqi
Freedom. In addition to qualification testing, the Company has established a
Quality Management System and has achieved ISO 9001:2000 registration. Elements
of such registration [? - certification?] include manufacturing lot tracking,
documentation and configuration control, as well as acceptance test and
compliance procedures at all manufacturing levels, including suppliers.
The AuraGen(R) generator received UL recognition in July 2002. UL Listing
of the entire AuraGen(R) system is in process. The Company believes that this
process will be completed within several weeks. UL recognition is important - if
not required - in order to be able to sell the AuraGen(R) to the RV and marine
recreational market.
E. Target Markets
--------------
The Company has identified the following target markets:
Military, Homeland Security Administration and Other Federal Agencies
The Company believes the VIPER (the military version of the AuraGen(R)) is
a superior mobile power solution compared with alternatives for numerous
military applications. Producing quiet, clean power from vehicles at low engine
speed is important to the military as the military increases its reliance on
sophisticated electronic systems and strives to enhance its mobility and
transportability by shedding weight and space.
Utilities and Telecommunications
Utilities and the telecommunications industry regularly use mobile power in
their daily activities. Several utilities in the U.S. have purchased the
AuraGen(R) system and continue evaluating the product. The AuraGen(R) is also
used by several television broadcast stations.
Emergency/Rescue
The emergency/rescue market relies heavily upon mobile power for lights,
communications gear, instruments, medical equipment and digital equipment and
tools. As the emergency/rescue market has undergone a transition to digital
equipment and portable computers, it has experienced constant growth in mobile
power needs. Approximately 20 organizations have started to use the AuraGen(R).
Public Works/Construction/Oil and Gas
The public works and construction market comprises a large number of
municipalities and construction companies that use portable power for their
projects. Approximately 35 municipalities are using the AuraGen(R) in limited
quantities in their service and work trucks. The oil and gas industry has a
substantial need for mobile power and has traditionally used GenSets. The
Company believes the AuraGen(R) provides a substantially better product for the
industry's need.
Recreational Vehicles ("RVs")
Electric power is a critical need in RV's. The AuraGen(R) offers
significant benefits to RV users. These benefits include first and foremost the
convenience of residential feel (no need to "shed" loads, no noise, ability to
use standard home appliances), fuel savings (the AuraGen(R) uses only the RV
engine), reduced maintenance costs (no required scheduled maintenance) and no
power derating due to altitude or temperature.
Marine
The company has begun to explore the use of the AuraGen(R) in marine
applications. Initial study and limited field experience indicate that this is a
potentially excellent market for the AuraGen(R).
F. Company Facility, Manufacturing Process and Company Suppliers
-------------------------------------------------------------
Aura assembles and tests the AuraGen(R) at the Company's 68,000 square foot
facility in El Segundo, California with subassemblies and parts which are
produced by various suppliers. The Company established these facilities with a
maximum production capacity of 5,000 units per month per 8 hour operating shift.
The facility is currently substantially under-utilized and the Company is
evaluating the possibility of relocating to a smaller facility.
The Company chose to subcontract part manufacturing. This allows the
Company to control manufacturing costs, maintain competitiveness and contain
production infrastructure cost and expenses.
To ensure quality the Company uses highly qualified suppliers, the majority
of which are ISO 9002 compliant. The Company performs qualification testing on
the AuraGen(R) hardware components, the electronic control unit, all software
and on fully installed in-vehicle systems to ensure reliability in the field.
The Company has partly sold its Aura Realty, Inc. subsidiary, which owns
the El Segundo facility and leases it to the Company. See the discussion under
Item 7. - Liquidity and Capital Resources.
G. Distribution and Product Support
--------------------------------
Aura provides a turnkey product and service to support the Company's
customers in every area. The Company has performed all of the development, from
basic physics to detailed engineering. The Company believes its core
capabilities provide a solid foundation to resolve technical issues, develop an
ongoing line of new products and to continually enhance the Company's products.
The Company's 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(R) to allow its use with other mobile drives, such as hydraulic
systems and Power Take Off ("PTO").
H. Certain Risk Factors
--------------------
Risk Factors Relating to the Company
The Company has a history of losses and the Company may not be profitable
in any future period.
In each fiscal year since organization in 1987, the Company has incurred a
loss. The Company has an accumulated deficit in retained earnings of
approximately $303.8 million from its inception through February 28, 2003. There
can be no assurance that the Company will be able to achieve or maintain
profitability or positive cash flow.
The Company requires additional capital, and there is no assurance that it
will be available.
The cash flow generated from the Company's operations to date has not been
sufficient to fund its working capital needs. Aura has relied upon external
sources of financing, principally equity financing and private and bank
indebtedness. The Company does not expect that operating cash flow will be
sufficient to fund its working capital needs in fiscal 2004, although the
Company has recently instituted significant cost reduction measures intended to
reduce its need for capital. Currently, the Company has no commitments from
third parties to provide additional financing. If future financing involves the
issuance of equity securities, existing stockholders may suffer dilution in net
tangible book value per share and such dilution may be significant. See Item 7.
- - Liquidity and Capital Resources.
The Company is in default of certain of its financial obligations.
Due to the Company's acute liquidity challenges, it has defaulted in
payments under many of its financial obligations (see Item 7. - Liquidity and
Capital Resources and Note 9 in the Consolidated Financial Statements). These
defaults effectively render these obligations payable on demand and the entire
principal balance of each obligation has been included in current liabilities in
the accompanying Consolidated Financial Statements. Actions by the parties to
these obligations to enforce their rights to collect the amounts due could
require the Company to cease operations.
The Company must amend its Articles of Incorporation in order to be able to
issue common stock.
The Company's authorized capital consists of 500,000,000 shares of common
stock and 10,000,000 shares of preferred stock. At July 25, 2003, there were
430,923,150 shares of common stock outstanding and 145,107,441 shares of common
stock reserved or committed for future issuances under outstanding options,
warrants and rights and upon conversion of Preferred Stock. As of July 25, 2003,
591,110 shares of preferred stock were outstanding all of which were Series A
Convertible Redeemable Preferred. The Company intends to seek authorization from
its shareholders to increase its authorized common stock and/or to implement a
reverse stock split; however, there can be no assurance that any such proposal
will be approved by the Company's shareholders and effected. For a further
discussion see Item 7. - Liquidity and Capital Resources.
Any increase in authorized shares or reverse stock split may adversely
affect the market for the common stock.
Aura's revenues have declined significantly in recent years.
The Company has experienced a significant decline in operating revenues
over the past few years. A significant subsidiary (NewCom) ceased operations in
fiscal 1999 and the Company has sold operating divisions and subsidiaries to
raise cash. The Company's net revenues peaked at approximately $104 million in
the fiscal year ended February 28, 1998. Revenues declined to $2.5 million for
the fiscal year ended February 28, 2001; $3.1 million for the fiscal year ended
February 28, 2002, and $1.1 million for the fiscal year ended February 28, 2003.
Revenues related to the Company's current product, the AuraGen(R), have
fluctuated over the last three years. For a further discussion see Item 7. -
Overview.
The Securities and Exchange Commission Brought an Action Against the
Company In June 2002, the Securities and Exchange Commission ("SEC") brought a
civil action against the Company, NewCom (a former subsidiary of Aura), and
certain former members of the Company's management team, including Zvi (Harry)
Kurtzman and Steven Veen for violations of the antifraud and books and records
provisions of the securities laws. The complaint relates to the financial
statements for various transactions during fiscal years 1996 through 1999. A
related action was brought against Gerald Papazanian. Without admitting or
denying the allegations in the complaint, the Company as well as the former
officers filed consents agreeing to settle the case. The Company consented to a
permanent injunction against violations of the securities laws, with no penalty
imposed based on the Company's financial condition. See Item 3. - Securities and
Exchange Commission.
The Company has recently had significant changes in management.
In December 2001, the Company and six former members of the Company's
senior management, including Zvi Kurtzman, the former Chief Executive Officer,
Gerald Papazian, the former President and Steven Veen, the former Chief
Financial Officer, entered into agreements providing for the termination of
their employment with the Company effective February 28, 2002. This followed the
investigation by the SEC described under Item 3. - Securities and Exchange
Commission.
The Company retained Steven Burdick as the Company's Chief Financial
Officer in January 2002. Mr. Burdick resigned in October 2002, for reasons
unrelated to the SEC action.
Effective March 2002 Mr. Carl Albert was appointed Chairman and Mr. Joshua
Hauser was appointed President and Chief Executive Officer. In July 2002, Carl
Albert stepped down as Chairman, remaining on the Board, and Mr. Neal Meehan was
appointed Chairman. Shortly thereafter, Mr. Hauser left the company and Mr.
Meehan was appointed President and Chief Executive Officer. Mr. Meehan continues
to serve as Chairman of the Board, President and Chief Executive Officer. In
November 2002, David Rescino joined the Company as Senior Vice President -
Finance and Chief Financial Officer. Mr. Rescino resigned his full-time position
in April 2003 but continues to serve on a part-time interim basis until a
replacement is named.
Craig Lipus joined the Company in June 2002 as Vice President - Sales and
Marketing. Mr. Lipus resigned in January 2003. Michael Froch, Senior Vice
President, General Counsel and Secretary of the Company since 1997 resigned in
June 2003. Neither of these positions has been replaced at this time.
For a further discussion, see Item 10.
Although the changes in management have been intended to improve the
Company's performance, there can be no assurance that such improvement will be
realized. The changes in management can result in a loss of continuity and
increased inefficiency thereby adversely impacting the Company's sales and
costs.
The success of the Company over the short-term depends on the commercial
success of the AuraGen(R) products, as the Company is not currently engaged in
any other line of business.
Because the Company has focused its business on developing a single product
line, rather than on diversifying into other areas, the Company's success in the
foreseeable future will be dependent upon the commercial success of the
AuraGen(R) product line.
Risk Factors Relating to the AuraGen(R)
The market acceptance of the AuraGen(R) is uncertain.
Aura's business is dependent upon sales generated from the AuraGen(R)
family of products and increasing acceptance of the product. The AuraGen(R) uses
new technology and has only recently been introduced into the marketplace. The
Company's financial condition has limited its ability to promote the AuraGen(R)
and make potential customers aware of its existence. Because the Company's
product is radically different from the traditional available mobile power
solutions, users may require lengthy evaluation periods in order to gain
confidence in the product. Original equipment manufacturers ("OEMs") and large
fleet users also typically require considerable time to make changes to their
planning and production. Distributors used by the Company may not focus adequate
resources on selling the Company's products or may otherwise be unsuccessful.
There can be no assurances that the Company's products will achieve broad
acceptance in the marketplace.
Aura's business may be adversely affected by industry competition.
The industry in which the Company operates is competitive. The primary
competition for the AuraGen(R) is GenSets and there are approximately 44 GenSet
manufacturers in the United States.
Many of the Company's competitors have greater financial resources, have
larger budgets for research, new product development and marketing and have
long-standing customer relationships. The Company must compete with many larger
and more established companies in the hiring and retention of qualified
personnel.
The Company depends on its patented technology.
The Company relies on a number of patents and patent applications to
protect the AuraGen(R) products from competition, which cover the basic
mechanical design of the AuraGen(R) system and some components of the control
system. The Company cannot provide assurance that the patents pending relating
to the AuraGen(R) system or future patent applications will be issued or that
any issued patents will not be invalidated, circumvented or challenged. A
portion of the Company's proprietary technology depends upon unpatented trade
secrets and know-how.
The Company may not be able to effectively manage its turnaround and
growth.
The Company restructured its operation during fiscal 2003 and 2004 in order
to conserve cash. The Company's workforce has declined steadily from 101
employees as of February 28, 2002 to 60 at February 28, 2003 to 39 as of July
25, 2003. The Company will need to rehire employees and rebuild its sales and
production infrastructure in order to service any significant growth in demand
for its products, which growth is critical to the Company's success.
The Company has depended on the expertise of key employees.
Because the Company's product depends on patented and proprietary
technology, and must be periodically modified to adapt the product to changes in
engine design and manufacture, the Company depends on a limited number of key
employees with experience in electromagnetic theory and design. In order to
conserve cash, the Company has recently furloughed or terminated a number of its
employees.
The Company depends on third party manufacturers for certain product
components.
The Company relies extensively on subcontracts with third parties for the
manufacture of most components of the AuraGen(R). The use of third party
manufacturers increases the risk of delay of shipments to the Company's
customers and increases the risk of higher costs if the Company's third party
manufacturers cannot make components available when required.
Some of these components are currently available only from a single source
or from limited sources. The Company may experience delays in production of the
AuraGen(R) if it fails to identify alternate vendors or if any parts supply is
interrupted or reduced, or if there is a significant increase in production
costs or decline in component quality.
I. Aura's Other Technologies
-------------------------
Aura retains significant interest in two other technology applications,
electromagnetic actuators and actuated mirror array. Although the Company has
suspended its prior efforts to develop a commercially viable product using
either of these technologies, the Company intends to revive such efforts in the
future. Significant capital will be required to continue such efforts;
accordingly, the Company cannot predict when its financial condition will allow
such efforts to resume.
Electromagnetic Actuator (EMA(TM))
The Company developed its Electromagnetic Valve Actuator to fill the
performance gap between linear actuators and solenoids. To date, the principal
application of this actuator has been in its Electromagnetic Valve Actuator
System ("EVA(TM)"), a patented electro-magnetically powered system that opens
and closes engine valves at any user specified time interval. The EVA(TM) can
thereby, for instance, replace the mechanical camshaft on an engine. Computer
control of the valve timing has potentially material benefits to engine
performance, fuel economy and emissions.
Light Efficient Displays - Actuated Mirror Array (AMA(TM))
Aura developed and patented a technology (a "light valve") for generation
of images called the Actuated Mirror Array (AMA(TM)). The AMA(TM) utilizes an
array of micro actuators in order to control tiny mirrors whose position change
is used to cause a variation in intensity. The Company believes 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.
The Company entered into a license and manufacturing agreement with Daewoo
Electronics Co., Ltd. ("Daewoo") to manufacture televisions and other devices
based on AMA(TM) technology. Daewoo invested substantial funds to commercialize
the technology. However, Daewoo has since ceased operations due to bankruptcy.
J. Research and Development
------------------------
During the fiscal years ended February 28, 2003, 2002 and 2001, the Company
spent approximately $0.4 million, $0.8 million and $ 0.5 million, respectively,
on Company research and development activities. The Company believes that
ongoing R&D are important to the success of the Company's product in order to
utilize the most recent technology, to develop additional products and
additional uses for existing products, and to stay current with changes in
vehicle manufacture and design and to maintain an ongoing advantage over
potential competition. The Company's financial condition does not currently
allow significant expenditures on R&D as all costs are being minimized while the
Company seeks to maintain solvency and attain profitability.
K. Patents and Intellectual Property
---------------------------------
The U.S. Patent Office has awarded the Company 29 patents applicable to
automotive and industrial applications. Of the above patents, two are focused
directly on the AuraGen(R), nine are for basic magnetic actuation, two are for
control systems associated with controlling the magnetic fields in different
configurations and sixteen are focused on the Electromagnetic Valve Actuator
("EVA(TM)") application. In addition, the Company has two patent applications
pending related to its AuraGen(R) technology. The first of Aura's domestic
patents does not expire until 2015. The Company intends to defend its patents
vigorously.
There are two ways that electromagnetic technology can be used for
generators, motors and actuators. One method uses permanent magnets, while the
other uses electromagnets. The Company is building and selling the AuraGen(R)
product with the imbedded magnetic technology covered in the two AuraGen(R)
patents using electromagnets. The nine additional basic actuation patents cover
designs where rare earth magnets could potentially be used to build similar
machines.
The Company has an additional 18 patents in electro-optical technology and
a number of other patents in other fields.
L. Employees
---------
As of February 28, 2003, the Company employed 60 persons. As of July 8
2003, the Company employed 39 persons. The Company has reduced its workforce
significantly in the past 18 months to conserve cash. The Company is not a party
to any collective bargaining agreements.
M. Significant Customers
---------------------
The Company sold its AuraGen(R) product to one significant customer during
fiscal 2003 for a total of approximately $0.2 million or 22% of net revenues.
ITEM 2. PROPERTIES
================================================================================
The Company's subsidiary, Aura Realty, Inc., owns the 47,000 square foot
headquarters facility and adjacent 27,690 square foot manufacturing facility in
El Segundo, California that the Company uses for its AuraGen(R) product. These
properties are encumbered by a deed of trust securing a note in the original
principal amount of $5.4 million.
The Company has partly sold its interest in Aura Realty, Inc. See the
discussion under Item 7. - Liquidity and Capital Resources.
ITEM 3. LEGAL PROCEEDINGS
================================================================================
Due to the Company's acute liquidity challenges, it has defaulted in
payments under many of its financial obligations (see Item 7. - Liquidity and
Capital Resources and Note 9 in the Consolidated Financial Statements). These
defaults effectively render these obligations payable on demand and the entire
principal balance of each obligation has been included in current liabilities in
the accompanying Consolidated Financial Statements. The Company is engaged in
numerous legal actions by creditors seeking payment of sums owed. Actions by the
parties to these obligations to enforce their rights to collect the amounts due
could require the Company to cease operations.
Securities and Exchange Commission
In June 2002, the Securities and Exchange Commission ("SEC") brought a
civil action against the Company, NewCom (a former subsidiary of Aura), and
certain former members of the Company's management team, including Zvi (Harry)
Kurtzman (the Company's former Chief Executive Officer) and Steven Veen (the
Company's former Chief Financial Officer) for violations of the antifraud and
books and records provisions of the securities laws. The complaint relates to
the financial statements for various transactions during fiscal years 1996
through 1999. The Company originally disclosed the investigation by press
release in January 1999. The SEC brought a related action against Gerald
Papazian (the Company's former President). Without admitting or denying the
allegations in the complaint, the Company as well as the former officers filed
consents agreeing to settle the case. The Company consented to a permanent
injunction against violations of specified sections of the securities laws, with
no penalty imposed based on the Company's financial condition. Mr. Kurtzman
consented to a permanent injunction against violations of specified sections of
the securities laws, a $75,000 civil penalty and a permanent bar from serving as
an officer or director of a publicly-traded company. Mr. Veen consented to a
permanent injunction against violations of specified sections of the securities
laws, a $50,000 civil penalty and a five-year suspension from appearing or
practicing before the SEC. Mr. Papazian consented to a permanent injunction
against violations of specified sections of the securities laws and a $25,000
civil penalty.
In September 2002, a federal grand jury indicted three officers of NewCom,
including Mr. Veen, on various conspiracy and fraud charges related to NewCom's
financial statements.
Barovich/Chiau et. al. v. Aura Systems, Inc. et. al. (Case No. CV -95-3295).
As previously reported in its Fiscal 2000 report on Form 10K, the Company
settled shareholder litigation in the referenced matter in January 1999. On
November 20, 1999, the parties entered into an Amended Stipulation of
Settlement, providing that the Company make payment of $2,260,000 (plus
interest) in thirty-six equal monthly installments of $70,350. On October 22,
2002, after the Company had failed to make certain monthly payments, Plaintiffs
applied for and obtained a judgment against the Company for $935,350,
representing the balance due with respect to the original principal amount of
$2,260,000. The Company has subsequently made only two monthly payments of
$70,350 each, reducing the amount owed to $794,650 (plus interest). Subsequent
to year end, the Plaintiffs took further legal actions to enforce the October
2002 judgment, culminating in a lien on one of the Company's smaller bank
accounts. The Company has made appropriate provisions in its financial
statements to fully reflect this liability.
Frankston v. Aura Systems, Inc., et. al. (CV 91-6232 LGB).
In 1991, Michael Frankston brought the referenced civil action in the
United States District Court for the Central District of California against the
Company, its founding management members who are no longer employees of the
Company, and two of its former subsidiaries. The Company, following an appeal,
paid to Mr. Frankston its portion of the judgment in full. In December 2002, Mr.
Frankston received a court order amending the judgments to make the Company
liable for the damages awarded against the former subsidiaries. In February
2003, the Company paid $212,444 to Mr. Frankston representing the final
settlement in this matter.
Waltco Engineering Co. v. Aura Systems, Inc. et. al. (YC045396).
On December 11, 2002, Plaintiff, Walto Engineering Co. ("Waltco"), filed a
suit in California Superior Court for Breach of Written Agreement against the
Company and related common counts. Waltco asserted that the Company breached the
terms of a payment plan. Waltco claimed damages of $283,296.41. Settlement
discussions between Waltco and the Company have, to date, been largely
unsuccessful. Waltco is advancing this suit in court and a hearing has been
scheduled for August 2003. The Company has made appropriate provisions in its
financial statements to fully reflect its estimated liability in this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
================================================================================
No matters were submitted to a vote of shareholders in the fourth quarter
of fiscal 2003.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
================================================================================
From May 21, 1991, to July 21, 1999, Aura's common stock was listed on the
NASDAQ National Stock Market. The shares were delisted from the NASDAQ National
Market as a result of the Company's failure to meet the minimum $1.00 bid price
and other requirements. On February 1, 2001, the Company's shares were listed on
the OTC Bulletin Board under the symbol "AURA". In June 2003, as a result of its
inability to timely file this Form 10-K, the Company's trading symbol on the OTC
Bulletin Board was changed to "AURAE", and the common stock continued to be
listed. There can be no assurance that the common stock will continue to trade
on the OTC Bulletin Board.
Sets forth below are high and low sales prices for the common stock of Aura
for each quarterly period in 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 9,500 stockholders of record as of July 25, 2003.
Period High Low
- ------ ----- -----
Fiscal 2002
First Quarter ended May 31, 2001 $0.775 $0.370
Second Quarter ended August 31, 2001 $0.763 $0.500
Third Quarter ended November 30, 2001 $0.590 $0.355
Fourth Quarter ended February 28, 2002 $0.450 $0.280
Fiscal 2003
First Quarter ended May 31, 2002 $0.399 $0.195
Second Quarter ended August 31, 2002 $0.180 $0.072
Third Quarter ended November 30, 2002 $0.130 $0.071
Fourth Quarter ended February 28, 2003 $0.135 $0.059
On July 25, 2003, the reported closing sales price for the Company's common
stock was $0.055.
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. Subsequent to February 28, 2003, the Company has issued shares of Series
A Convertible Redeemable Preferred Stock (the "Series A Preferred") (see Item 7
- - Liquidity and Capital Resources). Series A Preferred earns cumulative
dividends at a rate of 5% per annum based on its stated $10.00 per share
liquidation value. Dividends on Series A Preferred would need to be paid before
dividends could be paid on common stock.
Changes in Securities and Use of Proceeds
During the fourth quarter of fiscal 2003, the Company issued an aggregate
of $2.0 million principal amount of notes convertible for 310,417 shares of
Series A Preferred, which are convertible into 38,802,098 shares of common
stock, in each case subject to adjustment. See Item 7. - Liquidity and Capital
Resources. Such issuances were exempt from registration pursuant to section 4(2)
of the Securities Act of 1933 as private placements to a limited number of
accredited investors.
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 has been restated to reflect discontinued
operations.
AURA SYSTEMS, INC. AND SUBSIDIARIES
February 28, February 28, February 28, February 29, February 28,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ -------------
Net revenues $ 1,103,770 $ 3,116,295 $ 2,512,508 $ 5,788,221 $ 53,650,025
Cost of goods sold $ 571,099 $ 1,480,736 $ 1,216,637 $ 1,957,854 $ 83,344,562
Inventory write down - $ 1,510,871 - - -
------------ ------------- ------------ ------------ -------------
Gross profit (loss) $ 532,671 $ 124,688 $ 1,295,871 $ 3,830,367 $ (29,694,537)
Expenses:
Engineering expenses $ 3,514,554 $ 8,413,427 $ 8,214,981 $ 11,466,449 $ 47,092,632
Research and development $ 442,332 $ 810,949 $ 547,812 $ 148,443 $ 1,996,198
Selling, general and administrative expenses $ 7,374,961 $ 10,006,844 $ 12,695,833 $ 10,725,397 $ 64,131,074
Class action litigation & other
legal settlements $ 233,259 $ (2,750,000) $ 1,512,769 $ 427,091 $ 7,717,518
Adjustment to accounts payable - $ (651,685) $ (1,046,324) $ 2,350,671 -
Impairment losses on long-lived assets $ 2,300,000 $ 7,661,559 - - -
Severance expense $ 241,243 $ 1,080,525 - - -
------------ ------------- ------------ ------------ -------------
Total expenses $ 14,106,349 $ 24,571,619 $ 21,925,071 $ 25,118,051 $ 120,937,422
Loss from operations $ (13,573,678) $ (24,446,931) $(20,629,200) $(21,287,684) $(150,631,959)
Other (income) and expense
Impairment of investments $ 818,019 $ 1,433,835 $ 240,000 - $ 5,838,466
Loss on sale of minority interest
in Aura Realty $ 626,676 - - - -
(Gain) loss on disposal of assets $ - - - - -
(gain) Loss on sale & issuance of subsidiary
stock and investments - - - - $ 4,877,839
Equity in losses of unconsolidated
joint ventures - - - - $ 6,268,384
Interest expense $ 2,656,592 $ 2,495,551 $ 2,263,916 $ 4,476,690 $ 11,679,701
Other $ (362,096) $ (535,179) $ (446,399) $ (1,454,641) $ -
Provision (benefit) for taxes - $ (1,549,882) $ (2,203,145) $ (1,361,003) $ 566,635
Minority interest $ 14,018 - - - $ (36,934,376)
Loss in excess of basis of subsidiary - - - - $ (8,080,695)
------------ ------------- ------------ ------------ -------------
Loss from continuing operations $(17,326,687) $ (26,826,435) $(20,929,971) $(24,403,371) $(134,866,517)
Discontinued operations:
Loss from discontinued operations,
net of income taxes - - - $ (4,131,501) $ (14,875,065)
Extraordinary Item
Gain on extinguishment of debt obligations,
net of income taxes $ 1,186,014 $ 1,889,540 - $ 19,068,916 -
------------ ------------ ------------ ------------ -------------
Net loss $ (16,140,873) $ (24,936,895) $(20,929,971) $ (9,465,956) $(149,741,582)
Other comprehensive loss, net of taxes - - - - $ (406,574)
------------ ------------ ------------ ------------ -------------
Comprehensive loss $ (16,140,873) $ (24,936,895) $(20,929,971) $ (9,465,956) $(150,148,156)
============ ============ ============ ============ =============
Net loss per common share $ (0.04) $ (0.08) $ (0.08) $ (0.08) $ (1.74)
============ ============ ============ ============ =============
Loss from continuing operations per common
share $ (0.05) $ (0.08) $ (0.08) $ (0.20) $ (1.57)
============ ============ ============ ============ =============
Loss from discontinued operations per common
share $ - $ - $ - $ (0.03) $ (0.17)
============ ============ ============ ============ =============
Extraordinary income per common share $ 0.01 $ - $ - $ 0.15 $ -
============ ============ ============ ============ =============
Weighted average number of common shares 415,863,637 327,587,590 261,568,346 124,294,051 85,831,688
============ ============ ============ ============ =============
Working capital $ (15,626,271) $ (2,512,553) $ (5,105,345) $ 826,213 $ (4,869,876)
Total assets $ 23,767,866 $ 28,761,990 $ 45,278,043 $56,122,538 $ 90,143,392
Total debt $ 13,345,378 $ 10,895,466 $ 38,485,108 $48,756,226 $ 34,236,944
Net stockholders' equity (deficit) $ 4,712,176 $ 12,652,733 $ 2,045,035 $ 1,516,008 $ (13,653,657)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
Results of Operations
- ---------------------
The Company's fiscal 2003 net loss was $16.1 million, and $5.6 million of
that loss related to non-cash charges for depreciation, amortization, asset
impairments and beneficial conversion of certain debt instruments. In fiscal
2002, the net loss was $24.9 million and the similar non-cash charges were $15.0
million. In fiscal 2001, the net loss was $20.9 million and similar non-cash
charges were $7.9 million. Net operating revenues and gross profit were $1.1
million and $0.5 million, respectively, in fiscal 2003, $3.1 million and $0.1
million, respectively, in fiscal 2002 and $2.5 million and $1.5 million,
respectively, in fiscal 2001.
Revenues
Net revenues in fiscal 2003 declined 65% to $1.1 million due to weakness in
sales, which has continued into the first quarter of 2004. The Company believes
that this weakness reflects a combination of factors. To some extent, sales have
been impacted by a general slowdown of the overall economy and the general
economic effect of the war in Iraq. The Company's weakened financial condition
has also impaired its ability to market effectively and has resulted in deferred
commitments from potential long-term customers. This decrease in net revenues is
substantially volume related. The Company has not engaged in any significant
pricing reductions since it believes that factors other than cost are primarily
responsible for reduced sales volumes.
Net revenues in fiscal 2003 included $0.06 million ($0.05 million in fiscal
2002) of revenues derived from services related to the AuraGen(R) product. These
services were generally training, installation and non-warranty repairs provided
to AuraGen(R) customers. The Company does not consider these services to be a
significant source of revenues.
Net revenues in fiscal 2002 increased to $3.1 million from $2.5 million in
fiscal 2001, an increase of 24%. This increase was due to expansion of the
AuraGen distributor network and increased direct sales to the U.S. Army during
fiscal 2002.
Cost of Goods
Cost of goods decreased to $0.6 million in fiscal 2003 from $1.5 million in
fiscal 2002. This decrease is generally proportional to the decline in net
revenues, although gross margin of 48% in fiscal 2003 was lower than the 52%
gross margin in fiscal 2002, excluding the impact of the $1.5 million inventory
write down recorded in fiscal 2002, largely due to somewhat higher costs
incurred in manufacturing smaller quantities of units.
Cost of goods increased to $1.5 million in fiscal 2002 from $1.2 million in
fiscal 2001 primarily as a result of the increase in sales reflected in the
increase in revenues. Gross margins were consistent at 52% and 52% in fiscal
2002 and fiscal 2001, respectively.
Engineering
Engineering Expense for fiscal 2003 of $3.5 million represents a 58%
decrease from $8.4 million in fiscal 2002. Approximately $4.6 million of this
decrease was due to the elimination of depreciation expense resulting from the
Company's fourth quarter fiscal 2002 write off of tooling fixed assets that were
impaired under SFAS No. 144. Cost control efforts taken during fiscal 2003, most
significantly a reduction in engineering headcount, also contributed to the
expense reductions in fiscal 2003. Labor and labor related costs included in
engineering expense amounted to $2.7 million in fiscal 2003, compared to $4.1
million in fiscal 2002.
Engineering expense for fiscal 2002 increased to $8.4 million from $8.2
million in fiscal 2001 (2%). Included in engineering expense is $4.9 million in
depreciation in fiscal 2002 compared to $4.8 million in fiscal 2001.
Research and Development
Research and development expense declined to $0.4 million in fiscal 2003 as
the Company reduced its research activities. The Company expects research and
development expense to continue at or below this reduced level in the first and
second quarters of fiscal 2004. Research and development expense for fiscal 2002
increased to $0.8 million from $0.5 million in fiscal 2001 as the Company
increased research and development to expand its line of AuraGen(R) products,
which currently include the 6kW, 10kW, 25kW, AC/DC versions, and marine and
other applications.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses declined 26% from
fiscal 2002 to $7.4 million in fiscal 2003, from $10.0 million in fiscal 2002,
as the Company reduced its management headcount and reduced its litigation
expenses. Labor and labor related costs included in SG&A expense amounted to
$4.2 million in fiscal 2003, compared to $5.3 million in fiscal 2002. A
significant portion of this decrease is attributable to the termination of six
senior management persons at February 28, 2002. Several of these positions were
left vacant or eliminated in fiscal 2003, resulting in lower labor costs for the
period.
SG&A expenses were $10.0 million in fiscal 2002, a decrease of $2.7 million
(21%) compared to $12.7 million in fiscal 2001. The decrease from fiscal 2001 to
fiscal 2002 was primarily due to a reduction in legal costs of approximately
$1.2 million and a $1.3 million bad debt expense realized in fiscal 2001 from
discontinued business lines.
Legal Settlements
Legal settlements resulted in expense of $0.2 million in fiscal 2003, a
gain of $2.8 million in fiscal 2002 and expense of $1.5 million in fiscal 2001.
The 2003 expense was related to the final settlement in the Frankston matter.
The 2002 gain resulted from settlements with Excalibur of $2 million and
Deutsche Financial of $1.2 million. These settlement gains were partially offset
by a litigation loss of $400,000 resulting from a NewCom consumer class action
suit. In 2001, the Company recognized losses relative to various lawsuits which
were settled.
Asset Impairment
During fiscal 2003, the Company undertook efforts to sell the Company's
headquarters (discussed below), the Company determined that the value of these
buildings had declined and recorded a $2.3 million asset impairment charge to
reflect a realizable value for assets held for sale less than net book value. In
fiscal 2002, the Company incurred $7.7 million of asset impairment charges
including a charge for obsolescence of engineered tooling amounting to $4.6
million and for unrealizable advertising trade credits of $3.1 million. These
charges were included in loss from operations under FASB 144.
Severance Expense
Severance expense of $0.2 million in fiscal 2003 is principally due to the
termination of the employment of Mr. Joshua Hauser. In fiscal 2002, severance
expense totaled $1.1 million which was attributable to the termination of six
members of the Company's senior management, including Zvi Kurtzman and Steven
Veen. See Item 10 - Changes in Management.
Non-Operating Income and Expenses
The Company incurred $0.8 million and $1.4 million of asset impairment
charges in fiscal 2003 and fiscal 2002, respectively, primarily due to a decline
in the value of non-core long-term investments. In fiscal 2001, impairment
charges of $0.2 million resulted from a reserve against a long-term investment.
During fiscal 2003, the Company completed a sale of a minority interest in
its Aura Realty, Inc. subsidiary (see Note 4 in the Company's Consolidated
Financial Statements). The Company realized a $0.6 million loss on this sale.
Interest expense increased to $2.7 million in fiscal 2003, which included
$1.5 million of non-cash charges attributable to a beneficial conversion feature
of convertible notes issued during fiscal 2003. The decrease in interest
expense, after excluding the non-cash charges, was due to reductions in the
Company's debt levels. Interest expense increased slightly from $2.3 million in
fiscal 2001 to $2.5 million in fiscal 2002.
Other income, net amounted to $0.4 million in fiscal 2003 compared to $1.5
million in fiscal 2002 and $2.2 million in fiscal 2001. In fiscal 2003, this
income was primarily attributable to interest income. In fiscal 2002, the
significant components of this account were a gain of $1.3 million relative to a
transaction fee and expenses of $1.1 million for severance obligations to former
management.
The Company realized an extraordinary gain of approximately $1.2 million in
fiscal 2003 and $1.9 million in fiscal 2002 from the forgiveness of debt by
certain of the Company's creditors.
Critical Accounting Policies and Estimates
- ------------------------------------------
Revenue Recognition
Aura is required to make judgments based on historical experience and
future expectations, as to the reliability of shipments made to its customers.
These judgments are required to assess the propriety of the recognition of
revenue based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," and related guidance. Aura makes these assessments based on the
following factors: i) customer-specific information, ii) return policies, and
iii) historical experience for issues not yet identified. Management believes
its estimates for sales returns and allowances are reasonable; however, should
actual returns exceed the estimates presented in the financial statements, there
could be a material impact on the financial condition of the Company.
Inventory Valuation and Classification
Inventories consist primarily of components and completed units for the
Company's AuraGen(R) product. Inventories are valued at the lower of cost
(first-in, first-out) or market. Provision is made for estimated amounts of
current inventories that will ultimately become obsolete due to changes in the
product itself or vehicle engine types that go out of production. The AuraGen(R)
product being sold currently is not technologically different from those in
inventory. Existing finished goods inventories can be upgraded to the current
model with only a small amount of materials and manpower. Due to continuing
lower than projected sales, the Company is holding inventories in excess of what
it expects to sell in the next fiscal year. The net inventories which are not
expected to be realized within a 12-month period based on current sales
forecasts have been reclassified as long term. Management believes that existing
inventories can, and will, be sold in the future without significant costs to
upgrade it to current models and that the valuation of the inventories,
classified both as current and long-term assets, accurately reflects the
realizable values of these assets. We make these assessments based on the
following factors: i) existing orders, ii) age of the inventory, and iii)
historical experience. If expected sales volumes do not materialize or if
significant discounts from current pricing levels are granted to generate sales,
there would be a material impact on the Company's financial statements.
Estimates of Potential Asset Value Impairment
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that their carrying values may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an
asset to the future net cash flows expected to be generated by those assets. The
cash flow projections are based on historical experience, management's view of
growth rates within the industry, and the anticipated future economic
environment.
Factors Aura considers important that could trigger a review for impairment
include the following:
(a) significant underperformance relative to expected historical or
projected future operating results,
(b) significant changes in the manner of its use of the acquired assets or
the strategy of its overall business, and
(c) significant negative industry or economic trends.
Specific asset categories are treated as follows:
- Accounts Receivable: The Company records an allowance for doubtful
accounts based on management's expectation of collectibility of
current and past due accounts receivable.
- Property, Plant and Equipment: The Company depreciates its property
and equipment over various useful lives ranging from five to ten
years. Similar to inventories, adjustments are made as warranted when
management's review of market conditions and values suggest that the
current value of an asset is less than its net book value.
- Long-Term Investments: As the Company does not hold a sufficient
interest in its investments to exercise significant influence and the
fair market value of the investments are not readily determinable,
long-term investments have been accounted for under the cost method.
Management reviews financial and other available information
pertaining to such investments to determine if and when a decline in
the value of any investment below cost that is other than temporary
has occurred and an adjustment to a lower market value is warranted.
- Patents and trademarks: When the Company determines that the carrying
value of patents and trademarks may not be recoverable based upon the
existence of one or more of the above indicators of impairment, it
measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be
commensurate with the risk inherent in its current business model.
Liquidity and Capital Resources
The Company continues to experience acute liquidity challenges. At February
28, 2003, the Company had cash of $0.2 million as compared to a cash level of
$1.1 million at February 28, 2002, and a working capital deficit of
approximately $11.6 million as compared to a deficit of approximately $2.5
million at the end of the prior fiscal year. These conditions combined with the
Company's historical operating losses raise substantial doubt as to the Company
ability to continue as a going concern. As of May 31, 2003, the Company had cash
of $0.1 million.
The Company requires additional debt or equity financing to fund ongoing
operations. The Company is seeking to raise additional capital; however, there
can be no assurance that the Company will raise sufficient capital to fund
ongoing operations. The issuance of additional shares of equity in connection
with such financing could dilute the interests of existing stockholders of the
Company, and such dilution could be substantial. The Company must increase its
authorized shares in order to be able to sell common equity, and intends to
propose to stockholders such action as well as a reverse stock split of its
common shares; there can be no assurance that either such action will be
approved. The inability to secure additional funding could result in the Company
having to cease operations.
The cash flow generated from the Company's operations to date has not been
sufficient to fund its working capital needs, and the Company does not expect
that operating cash flow will be sufficient to fund its working capital needs in
fiscal 2004. In the past, in order to maintain liquidity the Company has relied
upon external sources of financing, principally equity financing and private and
bank indebtedness. The Company expects to fund any operating shortfall in the
current fiscal year from cash on hand, sales of non-core assets and external
financings. Currently, the Company has no firm commitments from third parties to
provide additional financing and there can be no assurance that financing will
be available at the times or in the amounts required. If future financing
involves the issuance of equity securities, existing stockholders may suffer
dilution in net tangible book value per share and such dilution may be
significant. If financing cannot be arranged in the amounts and at the times
required, the Company will cease operations. The Company has no bank line of
credit.
At February 28, 2003, the Company had accounts receivable, net of allowance
for doubtful accounts, of $0.4 million; $0.1 million at February 28, 2002. These
receivables at February 28, 2003 arose primarily from sales in the fourth
quarter of the fiscal year and the majority of them had been collected as of May
31, 2003. As of May 31, 2003, the Company had net accounts receivable of $0.2
million.
From April 1 through June 15, 2003, the Company has sold a portion of one
of its long-term investments realizing net proceeds of $0.4 million. The Company
intends to sell the remainder of this investment and is actively seeking buyers
but has no commitments from any buyers at this time. In May 2003, the Company
borrowed $0.2 million, secured by a portion of the remainder of this investment.
This borrowing will be required to be repaid from the proceeds of future sales
of this investment.
Spending for property and equipment amounted to less than $0.1 million in
fiscal 2003 and $0.3 million in fiscal 2002. The Company has no material capital
project that would require funding. The Company's current plant and equipment is
sufficient to support its current level of sales.
Debt repayments of $1.0 million were made in fiscal 2003 as compared to
debt repayment of $5.1 million in fiscal 2002, including $2.0 million on the
Company's bank line of credit.
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 2003, $0.1 million for fiscal 2002 and
$0.1 million for fiscal 2001. The Company is currently in default of this lease
and is negotiating a schedule of payments to remedy this default. The status of
the Company's lease of its headquarters and manufacturing facility is discussed
below. Due to the Company's acute liquidity challenges, it has defaulted in
payments under many of its financial obligations (see Note 9 in the Consolidated
Financial Statements). These defaults effectively render these obligations
payable on demand and the entire principal balance of each obligation has been
included in current liabilities in the accompanying Consolidated Financial
Statements. Actions by the parties to these obligations to enforce their rights
to collect the amounts due could require the Company to cease operations.
Capital Transactions
During fiscal 2003, the Company issued 43,360,005 shares of common stock
(the "2003 Subtotal Shares") in private placements and for services in exchange
for consideration valued at approximately $5.9 million, including approximately
$5.7 million of cash funding and approximately $0.2 million in satisfaction of
liabilities. During fiscal 2003, the Company issued $3.75 million of notes as
follows:
--$1.75 million of convertible term notes, bearing annual interest of 8%,
for net cash proceeds of $1.75 million (the "8% Notes"). The 8% Notes are
convertible into common stock at prices ranging from $0.071 to $0.110 per
share. $1.13 million of 8% Notes were exchanged for Series A Preferred as
discussed below. $0.62 million of 8% Notes remain outstanding; however, the
stated terms of these notes expired in January through March 2003 and they
are now payable upon demand.
-- $1.1 million of convertible term notes, bearing interest at 5% per
annum, for net cash proceeds of $1.1 million (the "5% Notes"). The 5% Notes
were convertible into Series A Preferred stock, which is convertible into
125 shares of common stock, at $10.00 per share (effective price per common
share at conversion is $0.080). All of the 5% Notes were converted into
Series A Preferred subsequent to year end as discussed below.
-- $0.9 million of convertible term notes, bearing interest at 5% per
annum, for net cash proceeds of $0.9 million (the "5% Discounted Notes").
The 5% Discounted Notes and were convertible into Series A Preferred stock,
which is convertible into 125 shares of common stock, at an effective
conversion price of $4.55 per share (effective price per common share at
conversion is $0.036). All of these notes were converted into Series A
Preferred subsequent to year-end as discussed below.
During fiscal 2003, the Company agreed to sell its Aura Realty, Inc.
subsidiary ("Aura Realty") to a group of individuals, including five members of
the Company's former management including Zvi Kurtzman and Steve Veen, (the
"Purchasers") and to lease back the Company's headquarters facility, which is
owned by Aura Realty. The purchase price of $7,350,000 was to be paid by
assumption or refinancing of the current mortgage on the property (which had a
principal balance of approximately $5.1 million). Net of this mortgage, $0.6
million of security deposits and prepayments paid to the Purchasers to secure
the Company's performance, $0.1 million of past due amounts owed to certain of
the Purchasers and $0.1 million of fees to Purchasers, the Company received
approximately $1.5 million, of which $0.9 million was advanced to the Company by
the Purchasers prior to closing and $0.6 million was transferred to the Company
at the initial closing on December 1, 2002. Also on December 1, 2002, the
Company transferred 49.9% of the common stock of Aura Realty to the Purchasers,
issued to Purchasers a $1.0 million term note and granted Purchasers a security
interest in a note receivable to secure the Company's performance under the
agreement. The Purchasers also received warrants to purchase 15,000,000 shares
of common stock, exercisable through November 30, 2007, at exercise prices
ranging from $0.15 to $0.25 per share. The value of the warrant was calculated
at $0.7 million using the Black-Scholes method of valuation. The Purchasers also
purchased 21,366,347 shares of the Company's common stock for $1.5 million,
which is included in the 2003 Subtotal Shares. The Company is required to issue
up to 1.3 million additional shares and up to 5.5 million additional warrants to
Purchasers because of its failure to register the shares for resale. Assuming
the full 1.3 million additional shares are required to be issued, the Company
effectively sold Common Stock for $0.070 per share.
The holder of the mortgage did not consent to the transfer of the
Company's remaining 51.1% interest in Aura Realty and the Company failed to
make certain payments to the Purchasers as required under the agreement.
During June 2003, the Company entered into a forbearance agreement with the
Purchasers, whereby the Company agreed to issue the additional warrants
required under the agreements for failure to file a stock registration
shares and warrants and register the previously issued shares and the
shares underlying the warrants for resale to the public, assign the
receivable (a note issued by Alpha Ceramic) to the Purchasers, promptly
engage an exclusive listing agent for the sale of the property and pay
certain amounts in default on the mortgage. The Company is currently in
negotiations with the Purchasers and the holder of the mortgage relative to
these matters. The Company originally recorded and reported the Aura Realty
transaction as a sale of 100% of its Aura Realty subsidiary. The events
subsequent to year end raise significant doubt that the remainder of the
transaction contemplated by the agreement will ever be completed. As a
result, the transaction has been recorded at February 28, 2003 as a sale of
a minority interest in Aura Realty.
Also during fiscal 2003:
-- the Company settled approximately $1.5 million of trade debt
liabilities representing a portion of a long-term restructuring for a total
amount of $0.4 million, resulting in an extraordinary gain on
extinguishments of debt of $1.1 million.
--the Company issued 923,077 shares of common stock that were
committed as of February 28, 2003, which were valued at $207,692, or $0.225
per share.
During fiscal 2002, the Company restructured $16.2 million of debt and
related accrued interest into 46,112,771 shares of common stock valued at $15.2
million, resulting in a pre-tax extraordinary gain for the early extinguishment
of debt of $1.0 million. The Company is obligated to issue an additional
14,714,000 shares of common stock to the debtholders due to repricing
provisions; such shares are included in "committed common stock" on the
Company's balance sheet and results in the Common Stock having been sold at an
effective price of $0.351 per share.
During fiscal 2002, the Company issued 46,151,284 shares of common stock in
private placements and for services in exchange for consideration valued at
approximately $16.3 million, including approximately $13.4 million of cash
funding and approximately $3.0 million of satisfaction of liabilities. Also
during fiscal 2002:
--the Company issued 10,000,000 shares of common stock valued at $4
million ($0.40 per share) as partial settlement of litigation.
--the Company issued 8,947,631 shares of common stock pursuant to the
repricing provisions of a prior year's private placement.
--the Company issued 1,743,801 shares of common stock as finder's fees
for private placements effected during fiscal 2002.
--the Company borrowed $500,000 under two short term loan agreements
entered into with a member of the Board of Directors, one of which was
repaid during the third quarter of fiscal 2002 and the other was
repaid in the first quarter of fiscal 2003
--the Company realized approximately $28,000 from the exercise of
warrants and stock options.
Capital Transactions Subsequent to February 28, 2003
In March 2003, the Company issued $0.4 million of additional "5% Discounted
Notes". All of these notes were converted into Series A Preferred subsequent to
year-end as discussed below.
On March 25, 2003, the Company designated 1,500,000 shares of its
authorized preferred stock as Series A Convertible Redeemable Preferred Stock
(the "Series A Preferred"). Each share of Series A Preferred has a par value of
$.005, a liquidation preference of $10.00 plus accrued unpaid dividends and is
convertible into common stock at $.080 per share, based on the liquidation
preference. Dividends accrue on each share at the rate of 5% of the liquidation
preference per annum. The Company may call the Series A Preferred for redemption
on or after March 31, 2004 subject to certain conditions. As of March 31, 2003,
558,110 shares of Series A Preferred were outstanding, issued as set forth
below.
On March 31, 2003, the Company exchanged the $1.1 million of 8% Notes and
converted the $1.1 million of 5% Notes and the $1.2 million of 5% Discounted
Notes, plus accrued interest in all cases, into 534,020 shares of Series A
Preferred. The average effective net acquisition price of the shares of Common
Stock underlying the conversion feature, based on the amounts paid for the
notes, is $0.054 per share.
On July 24, 2003, the Company received $305,000 of interim funding from
Koyah Leverage Partners, LLP to meet its immediate cash needs. The funding is
intended to be a part of a larger funding secured by substantially all the
assets of the Company (with certain exceptions). There can be no assurance that
additional funding will be obtained.
Also subsequent to February 28, 2003:
--the Company issued 24,090 shares of Series A Preferred in a private
placement for net cash proceeds of $0.1 million. The effective net
acquisition price of the shares of Common Stock underlying the
conversion feature, based on the amounts paid for the preferred stock
is $0.036 per share.
--the Company issued convertible notes payable to third party
investors totaling $200,000. The notes bear interest at 5% per annum
and are due on demand no later than August 29, 2003. The notes are
convertible into Series A Preferred stock at $10.00 per share. The
effective net acquisition price of the shares of Common Stock
underlying the conversion feature, based on the amounts paid for the
notes, is $0.080 per share.
--the Company issued a $200,000 note in exchange for a loan. The note
and $10,000 fixed fee interest became due on June 7, 2003. As part of
this borrowing, the Company is obligated to issue warrants to purchase
1,000,000 shares of the Company's common stock at an exercise price of
$0.050, expiring on June 7, 2006. The note is secured by 177,777
shares of one of the Company's long-term investments. The Company did
not pay the note when due and is in default. The Company agreed to
increase the warrants to be issued to 3,000,000 to compensate the
holder for this default. The Company is in negotiations to obtain new
financing from a different inventor to replace this note payable
agreement but there can be no assurance that such financing will be
obtained.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
At February 28, 2003, the Company did not have any derivative instruments
which created exposure to market risk for interest rates, foreign currency
rates, commodity prices or other market price risks. The Company's long term
notes receivable and long term debt obligations all bear interest at fixed rates
and, therefore, have no exposure to interest rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
================================================================================
See Index to Consolidated Financial Statements at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
================================================================================
None
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
================================================================================
Directors
The following table sets forth of the Company's current Directors, their
age, and the office they hold with the Company.
Name Age Title
Neal Meehan.............. 62 Chairman, Director, Chief Executive Officer
and President
Carl Albert.............. 60 Director
Lawrence Diamant......... 61 Director, Member of Compensation Committee
Salvador Diaz-Verson, Jr. 51 Director, Member of Compensation Committee
John Pincavage........... 58 Director, Member of Audit Committee
NEAL MEEHAN has served as Chairman of the Board of Directors, Chief
Executive Officer and President since July 2002. He has been a Director of the
Company since October 2000. Mr. Meehan's services as Chairman, Chief Executive
Officer and President are provided under the terms of a Consulting Agreement
between the Company and air2ground, LLC. He is currently Managing Partner of
air2ground, LLC and is involved in business development and strategic planning
for start-up and mature companies. Mr. Meehan's business career spans the
transportation and telecommunications sectors. 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
tour as an officer 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 of Commercial Science from St. Johns University.
CARL ALBERT is a Director of Company and has served in this capacity since
July 2001. From March 2002 until July 2002, Mr. Albert served as Chairman of the
Board of Directors. Mr. Albert was, until February 2002, a member of the Board
of Directors of Fairchild Dornier Corporation, a privately held company in the
business of manufacturing aircraft. Mr. Albert held a significant interest in
Fairchild Dornier Corporation from 1990, when he provided the venture capital
necessary for acquiring ownership control of the company's predecessor
corporation, Fairchild Aircraft, until April 2000 when the majority interest in
the company was sold. From 1996 through April 2000, following Fairchild
Aircraft's purchase of Daimler-Benz's 80% interest in Dornier, he was the
Chairman of the Board of Directors of Fairchild Dornier Corporation, its Chief
Executive Officer and the majority stockholder. Mr. Albert was the Chairman of
the Board of Directors of Fairchild Aircraft, its Chief Executive Officer and
the majority stockholder from 1990 through 1996. From 1986 through 1989, he
provided venture capital and served as the CEO or President of a California
based regional airline, West Wings Airlines, which operated as an American Eagle
franchisee until acquired by the parent of American Airlines in 1988. Mr.
Albert's business experience includes 18 years as an attorney, specializing in
business and corporate law in Los Angeles, California. He also serves and has
served as a Member of the Board of Directors of a number of privately and
publicly held corporations, including Dr. Pepper Bottling Company of California,
K & K Properties, Ozark Airlines and Tulip Corporation. Mr. Albert holds a B.A.
from UCLA in political science and an L.L.B. from the UCLA School of Law.
LAWRENCE DIAMANT is a Director of the Company and has served in this
capacity since April 2002. He is a senior partner of the Los Angeles based law
firm Robinson, Diamant & Wolkowitz, a professional corporation. Mr. Diamant is a
member of the State Bar of California and of the American Bar Association
Business Law Section Committees on Banking Law, Commercial Financial Services
and Business Bankruptcy. He has served as a reporter for its Ethics Task Force
sub-section and currently serves as a sub-committee vice chair on Courts,
Jurisdiction, Venue and Administration. Mr. Diamant has also served as Chairman
of the Los Angeles County Bar Association Executive Committee on Commercial Law
and Bankruptcy and is a member of the Financial Lawyers Conference. Mr. Diamant
is a graduate from UCLA School of Law.
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, appointed by President George Bush
in 1992, and re-appointed by President Clinton in early 2000.
JOHN PINCAVAGE is a Director of the Company and has served on the Board of
Directors since March 2002. Mr. Pincavage is a Chartered Financial Analyst with
many years of experience on Wall Street. Since 1999, he has been the President
and founder of Pincavage & Associates, LLC, a consulting and financial advisory
firm for the aviation industry. From 1995 to 1999, he was the executive director
for equity research at Warburg Dillon Read, LLC, a Partner and Director at the
Transportation Group, LLC heading research efforts from 1989 to 1995, Executive
Vice President - Research at Paine Webber Incorporated from 1975 to 1989, and
Vice President - Research at Blyth Eastman Dillon from 1971 to 1975. Mr.
Pincavage is a member of the New York Society of Securities Analysts and has
served on numerous boards including the Board of Directors of the Virginia
Engineering Foundation. He holds a Bachelor degree in Aerospace Engineering and
an MBA, both from University of Virginia.
Officers
Listed below are the current Executive Officers of the Company who are not
Directors or nominees, their ages, titles and background information. Executive
officers serve at the discretion of the Board.
Name Age Position
Jacob Mail..................... 51 Senior Vice President - Operations
and Chief Operating Officer
David Rescino.................. 44 Interim Chief Financial Officer
JACOB MAIL is Senior Vice President - Operations and Chief Operating
Officer. He has served in this capacity since May 2003, prior to which he served
as Senior Vice President - Operations since 1995. Mr. Mail served over 20 years
at Israeli Aircraft Industries. While at Aura, Mr. Mail has identified,
negotiated and contracted all the supply chain arrangements for the AuraGen(R).
In addition, Mr. Mail implemented programs to monitor and project needs for
production schedules and provide full traceability of all components. Mr. Mail
is responsible for the implementation of the "Call Home" programs, which
provides the Company with a user database for every AuraGen(R) installed in a
vehicle. In addition to the manufacturing and infrastructure implementations,
Mr. Mail is also responsible for all engineering and vehicle integration as well
as customer service and training. He holds a B.S. degree in Mechanical
Engineering from the Technion and a Master degree from the University of Tel
Aviv.
DAVID RESCINO is Interim Chief Financial Officer of the Company and has
served in this capacity since April 2003. From November 2002 to April 2003, Mr.
Rescino was Senior Vice President - Finance and Chief Financial Officer of the
Company. He resigned this full time position in April 2003 and agreed to serve
as Interim Chief Financial Officer on a part-time basis until a replacement was
named. Mr. Rescino is also currently providing consulting services to a number
of other companies. From 2001 to 2002, Mr. Rescino was the Vice President -
Finance and Chief Financial Officer of Vanguard Airlines, Inc. ("Vanguard"). He
was serving in this capacity in July 2002 when Vanguard filed for Chapter 11
bankruptcy protection. Mr. Rescino has continuing responsibilities with
Vanguard, including his November 2002 appointment to Vanguard's Board of
Directors. From 1999 to 2001, Mr. Rescino was an aviation consultant in Dallas,
Texas. From 1995 to 1999, Mr. Rescino was Chief Financial Officer of Aspen
Mountain Air/Lone Star Airlines, which filed for Chapter 11 bankruptcy
protection in August 1998. In addition to prior financial management positions
in the transportation sector, Mr. Rescino has several years' experience in
public accounting. He holds a B.S. degree in Accountancy from the University of
Illinois - Urbana.
Change in Management
In December 2001, the Company and six former members of the Company's
senior management, including Zvi Kurtzman, the former Chief Executive Officer,
Gerald Papazian, the former President and Steven Veen, the former Chief
Financial Officer, entered into agreements providing for the termination of
their employment with the Company effective February 28, 2002. This followed the
investigation by the SEC described under Item 3. - Securities and Exchange
Commission.
The Company retained Steven Burdick as the Company's Chief Financial
Officer in January 2002. Mr. Burdick resigned in October 2002, for reasons
unrelated to the SEC action.
Effective March 2002 Mr. Carl Albert was appointed Chairman and Mr. Joshua
Hauser was appointed President and Chief Executive Officer. In July 2002, Carl
Albert stepped down as Chairman, remaining on the Board, and Mr. Neal Meehan was
appointed Chairman. Shortly thereafter, Mr. Hauser left the company and Mr.
Meehan was appointed President and Chief Executive Officer. Mr. Meehan continues
to serve as Chairman of the Board, President and Chief Executive Officer. In
November 2002, David Rescino joined the Company as Senior Vice President -
Finance and Chief Financial Officer. Mr. Rescino resigned his full-time position
in April 2003 but continues to serve on a part-time interim basis until a
replacement is named.
Craig Lipus joined the Company in June 2002 as Vice President - Sales and
Marketing. Mr. Lipus resigned in January 2003. Michael Froch, Senior Vice
President, General Counsel and Secretary of the Company since 1997 resigned in
June 2003. Neither of these positions has been replaced at this time.
Family Relationships
None.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities 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. The Company is
undertaking a review as to whether such reports were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
================================================================================
The Company undertakes to file an amendment to this Annual Report on Form
10-K to include the information required by Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
================================================================================
The Company undertakes to file an amendment to this Annual Report on Form
10-K to include the information required by Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
================================================================================
The Company undertakes to file an amendment to this Annual Report on Form
10-K to include the information required by Item 13.
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
The Company filed Reports on Form 8-K on December 16, 2002 and February 14,
2003, reporting the sale and leaseback transaction involving Aura Realty and
including pro forma financial information (unaudited pro forma consolidated
balance sheet as of November 30, 2002 ; unaudited pro forma condensed
consolidated statements of operations for the nine months ended November 30,
2002 and the year ended February 28, 2002.)
INDEX TO EXHIBITS
Description of Documents
3.1 Certificate of Incorporation of Registrant as amended to date. (1)
3.2 Bylaws of Registrant as amended to date. (1)
3.3 Certificate of Designation of Series A Convertible Redeemable Preferred
Stock.
10.1 Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee Directors. (2)
10.2 Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement. (2)
10.3 Aura Systems, Inc. 1989 Stock Option Plan. (3)
10.4 Aura Systems, Inc. 2000 Stock Option Plan (7)
10.5 Form of Aura Systems, Inc., Director Indemnification Agreement dated as
of July 10, 2001. (1)(10.15)
10.6 Form of Agreement Regarding Termination of Employment dated as of December
21, 2001. (1)(10.16)
10.7 Escrow Agreement dated as of February 27, 2002, by and among Aura Systems,
Inc. and Robinson, Diamant & Wolkowitz, a Professional Corporation, by
Lawrence A. Diamant and Purchasers (1)(10.22)
10.8 Assignment and Transfer of Notes and Security Documents dated as of
February 26, 2002, executed by Aura Systems, Inc. and Infinity Investors
Limited, et al., in favor of Lawrence A. Diamant, as Agent for various
investors. (1)(10.23)
10.9 Assignment and Transfer of Notes and Security Documents dated as of
February 26, 2002, executed by Aura Systems, Inc. and GSS/Array Technology
Public Company, Ltd. in favor of Lawrence A. Diamant, as Agent for various
investors.(1)(10.24)
10.10 Settlement Agreement and Mutual Release of All Claims dated as of
February 26, 2002, by between Aura Systems Inc., and Infinity Investors
Limited, et al.(1)(10.25)
10.11 Settlement Agreement and Mutual Release of All Claims dated as of
February 26, 2002, by between Aura Systems Inc., and GSS/Array Technology,
Inc., et al. (1)(10.26)
10.12 Form of Aura Systems, Inc. Subscription Agreement of May 2002 (1)(10.27)
10.13 Form of Aura Systems, Inc. Registration Rights Agreement of May 2002
(1)(10.28)
10.14 Settlement Agreement and Release dated as of May 7, 2002, by and
between Aura Systems, Inc. and CRS Emergency Vehicles, Co. (1)(10.29)
10.15 Term Sheet dated as of February 12, 2002 (1)(10.30)
10.16 Employment Letter to Joshua Hauser dated February 26, 2002 (1)(10.31)
10.17 Severance agreement with Hauser
10.18 Form of Convertible Note Term Sheets (4)(10.34)
10.19 Agreementfor Sale and Leaseback dated as of December 1, 2002. (Aura
Realty transaction) (5) (10.33.1)
10.20 Lease Agreement dated as of December 1, 2002. (Aura Realty transaction)
(5)(10.33.2)
10.21 Additional Security Agreement dated as of December 1, 2002. (Aura Realty
transaction) (5)(10.33.3)
10.22 Form of Subscription Agreement (10.33.4)
10.23 Pledge Agreement dated as of December 1, 2002 (10.33.4)
10.24 Promissory Note dated as of December 1, 2002.(Aura Realty transaction)
(5)(10.33.5)
10.25 Form of Warrant and appendix 1 (5)(10.33.6)
10.26 Form of Convertible Demand Note (5% Notes)
10.27 Form of Convertible Demand Note (5% Discounted Notes)
21 Subsidiaries of Aura Systems, Inc. (6)
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
99.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the reference exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2002.
(2) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-19531)
(3) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-8 (File No. 33-32993).
(4) Incorporated by reference to the Exhibits to the Company's Quarterly Report
on Form 10-Q for the period ended November 30, 2002.
(5) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K filed December 16, 2002.
(6) Incorporated by reference to the Exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 2001.
(7) Incorporated by reference to the Appendix "A" to the Company's Form 14A
Proxy Statement filed as of February 22, 2000.
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: July __, 2003 By:
Neal F. Meehan
President and 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
President, Chief Executive Officer,
Director and Chairman of the Board
- ------------------------- (Principal Executive Officer) July __, 2003
Neal F. Meehan
Interim Chief Financial Officer
- ------------------------- (PrincipalFinancial and Accounting Officer)
David A Rescino July __, 2003
Director
- -------------------------
Lawrence Diamant July __, 2003
Director
- -------------------------
Salvador Diaz-Verson, Jr. July __, 2003
Director
- -------------------------
Neal F. Meehan July __, 2003
Director
- -------------------------
John Pincavage July __, 2003
CERTIFICATION
I, Neal F. Meehan, Chairman and Chief Executive Officer of Aura Systems, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Aura Systems, Inc. and,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By /s/ Neal F. Meehan
------------------------
Neal F. Meehan
Chairman and Chief Executive Officer
July ___, 2003
CERTIFICATION
I, David A. Rescino, Chief Financial Officer of Aura Systems, Inc., certify
that:
1. I have reviewed this annual report on Form 10-Q of Aura Systems, Inc. and,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ David A. Rescino
--------------------
David A. Rescino
Interim Chief Financial Officer
July ___, 2003
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Aura Systems, Inc. (the "Company")
on Form 10-K/A for the period ended February 28, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Neal F.
Meehan, Chairman and Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
for the periods indicated.
/s/ Neal F. Meehan
------------------
Neal F. Meehan
Chairman & Chief Executive Officer
July___, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Aura Systems, Inc. (the "Company") on
Form 10-K/A for the period ended February 28, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, David A. Rescino,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
for the periods indicated.
/s/ David A. Rescino
------------------
David A. Rescino
Interim Chief Financial Officer
July ___, 2003
AURA SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Reports on Consolidated Financial
Statements and Financial Statement Schedule F-1
Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries:
Consolidated Balance Sheets - February 28, 2003 and 2002 F-3 to F-4
Consolidated Statements of Operations and Comprehensive
Loss - Years ended February 28, 2003, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity -
Years ended February 28, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows - Years ended
February 28, 2003, 2002 and 2001 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-21
Consolidated Financial Statement Schedule II:
Valuation and Qualifying Accounts F-22 to F-23
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.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 2003, 2002, AND 2001
q:\shared\finance\...\Aura Systems Feb03 Aud #0509
n:\ace\0\0509_303\Aura Systems Feb03 Aud Excel
has been transferred to Word
released 7/18/03
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONTENTS
February 28, 2003
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5 - 6
Consolidated Statements of Cash Flows 7 - 9
Notes to Consolidated Financial Statements 10 - 42
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Financial Statement Schedule 43
Valuation and Qualifying Accounts - Schedule II 44
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders Aura Systems, Inc. and
subsidiaries
We have audited the accompanying consolidated balance sheets of Aura
Systems, Inc. (a Delaware corporation) and subsidiaries as of February 28,
2003 and 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended February 28, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aura
Systems, Inc. and subsidiaries as of February 28, 2003 and 2002, and the
results of their operations and their cash flows for each of the three
years in the period ended February 28, 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has generated
significant losses from operations and defaulted on certain debt
obligations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 8, 2003
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
2003 2002
Current assets ---------------- ----------------
Cash and cash equivalents $ 163,693 $ 1,143,396
Accounts receivable, net of allowance for doubtful
accounts of $244,310 and $150,000 410,717 67,491
Current inventories, net of allowance for obsolete
inventories of $1,678,000 and $1,795,411 1,414,500 5,006,424
Current portion of notes receivable 210,272 168,792
Other current assets 166,589 228,758
---------------- ----------------
Total current assets 2,365,771 6,614,861
Property, plant, and equipment, net 7,343,511 10,374,481
Non-current inventories 7,573,225 4,500,000
Long-term investments, net 1,000,000 1,700,000
Notes receivable, net of current portion 2,006,121 2,347,346
Patents and trademarks, net 2,753,603 3,061,932
Other assets 725,635 163,370
---------------- ----------------
Total assets $ 23,767,866 $ 28,761,990
Current assets ================ ================
The accompanying notes are an integral part of these financial statements.
2
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
---------------- ----------------
Current liabilities
Accounts payable $ 2,753,503 $ 3,032,134
Current portion of notes payable (including $1,000,000 and
$250,000 to related parties) 9,542,786 3,913,623
Convertible notes payable 3,762,317 -
Accrued expenses 1,772,936 2,181,657
Deferred income 160,500 -
---------------- ----------------
Total current liabilities 17,992,042 9,127,414
Notes payable, net of current portion 40,275 6,981,843
---------------- ----------------
Total liabilities 18,032,317 16,109,257
Minority interest in consolidated subsidiary 1,023,373 -
---------------- ----------------
Commitments and contingencies
Stockholders' equity
Common stock, $0.005 par value
500,000,000 shares authorized
430,923,150 and 387,690,068 shares issued
and outstanding 2,154,544 1,938,379
Committed common stock 3,102,958 3,310,650
Additional paid-in capital 303,275,271 295,083,428
Accumulated deficit (303,820,597) (287,679,724)
---------------- ----------------
Total stockholders' equity 4,712,176 12,652,733
---------------- ----------------
Total liabilities and stockholders' equity $ 23,767,866 $ 28,761,990
================ ================
The accompanying notes are an integral part of these financial statements.
3
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------- --------------- ----------------
Net revenues $ 1,103,770 $ 3,116,295 $ 2,512,508
Cost of goods sold 571,099 1,480,736 1,216,637
Inventory write down - 1,510,871 -
---------------- --------------- ----------------
Gross profit 532,671 124,688 1,295,871
---------------- --------------- ----------------
Operating expenses
Engineering 3,514,554 8,413,427 8,214,981
Research and development 442,332 810,949 547,812
Selling, general, and administrative 7,374,961 10,006,844 12,695,833
Legal settlements 233,259 (2,750,000) 1,512,769
Adjustment to accounts payable - (651,685) (1,046,324)
Impairment losses on long-lived assets 2,300,000 7,661,559 -
Severance expense 241,243 1,080,525 -
---------------- --------------- ----------------
Total operating expenses 14,106,349 24,571,619 21,925,071
---------------- --------------- ----------------
Loss from operations (13,573,678) (24,446,931) (20,629,200)
---------------- --------------- ----------------
Other income (expense)
Impairment of investments (818,019) (1,433,835) (240,000)
Minority interest in net income of consolidated
subsidiary (14,018) - -
Loss on sale of minority interest in Aura Realty (626,676) - -
Interest expense (2,656,592) (2,495,551) (2,263,916)
Other income, net 362,096 1,549,882 2,203,145
---------------- --------------- ----------------
Total other income (expense) (3,753,209) (2,379,504) (300,771)
---------------- --------------- ----------------
Loss before extraordinary item (17,326,887) (26,826,435) (20,929,971)
Extraordinary item ---------------- --------------- ----------------
Gain on extinguishment of debt, net
of income taxes of $0 1,186,014 1,889,540 -
---------------- --------------- ----------------
Net loss $ (16,140,873) $ (24,936,895) $
(20,929,971)
Basic and diluted loss per share
Before extraordinary item $ (0.05) $ (0.09) $ (0.08)
Extraordinary item 0.01 0.01 -
---------------- --------------- ----------------
Total basic and diluted loss per share $ (0.04) $ (0.08) $ (0.08)
================ =============== ================
Weighted-average shares outstanding 415,863,637 327,587,590 261,568,346
================ =============== ================
The accompanying notes are an integral part of these financial statements.
4
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Committed Additional
Common Stock Common Stock Common Paid-In Accumulated
Shares Amount Stock Capital Deficit Total
------------ ------------ ------------ ------------ ------------- ------------
Balance, February 28, 2000 196,975,392 $ 984,875 $ 9,132,774 $ 233,211,21 $(241,812,858) $ 1,516,008
Issuance of common stock
in private placements 40,721,909 203,610 12,231,830 12,435,440
for conversion of notes payable 7,324,191 36,621 2,912,744 2,949,365
to satisfy liabilities 11,642,627 58,160 6,093,135 6,151,295
Offering costs (77,102) (77,102)
Committed common stock issued 34,425,463 172,128 (9,132,774) 8,960,646 -
Net loss (20,929,971) (20,929,971)
------------ ------------ ------------ ------------ ------------- ------------
Balance, February 28, 2001 291,089,582 1,455,394 - 263,332,470 (262,742,829) 2,045,035
Issuance of common stock
in private placements 37,650,782 188,237 13,215,876 13,404,113
for conversion of notes payable 31,398,771 156,994 11,706,261 11,863,255
to satisfy liabilities 18,500,802 92,504 6,921,208 7,013,712
for exercise of stock options and warrants 102,500 512 27,263 27,775
for re-pricing requirements 8,947,631 44,738 (44,738) -
Offering costs (74,912) (74,912)
Committed common stock recorded under
re-pricing agreements 3,310,650 3,310,650
Net loss (24,936,895) (24,936,895)
------------ ------------ ------------ ------------ ------------- ------------
Balance, February 28, 2002 387,690,068 1,938,379 3,310,650 295,083,428 (287,679,724) 12,652,733
Issuance of common stock
in private placements 41,700,830 208,504 5,485,497 5,694,001
from committed stock 923,077 4,615 (207,692) 203,077 -
to satisfy liabilities 659,175 3,296 166,444 169,740
The accompanying notes are an integral part of these financial statements.
5
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
AURA SYSTEMS, INC. AND SUBSIDIARIES
Committed Additional
Common Stock Common Stock Common Paid-In Accumulated
Shares Amount Stock Capital Deficit Total
------------ ------------ ------------ ------------ ------------- ------------
Common stock returned (50,000) $ (250) $ $ (29,750) $ $ (30,000)
Beneficial conversion feature on
convertible notes payable 1,484,837 1,484,837
Issuance of stock options
as compensation expense 53,076 53,076
as consulting expense 192,404 192,404
Issuance of warrants 659,321 659,321
Offering costs (23,063) (23,063)
Net loss (16,140,873) (16,140,873)
------------ ------------ ------------ ------------ ------------- ------------
Balance, February 28, 2003 430,923,150 $ 2,154,544 $ 3,102,958 $303,275,271 $(303,820,597) $ 4,712,176
============ ============ ============ ============ ============= ============
The accompanying notes are an integral part of these financial statements.
6
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------- --------------- ----------------
Cash flows from operating activities
Net loss $ (16,140,873) $ (24,936,895) $ (20,929,971)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 966,852 5,868,089 7,619,979
(Gain) loss on disposition of assets 21,348 65,823 (1,756,746)
Loss on sale of minority interest Aura Realty 626,676 - -
Change in allowance for doubtful accounts 94,310 - -
Change in reserve for inventory obsolescence (117,411) 1,510,871
- -
Impairment of long-lived assets and investments 3,118,019 9,095,394 240,000
Gain on extinguishment of debt (1,186,014) (1,889,540) -
Minority interest in net income of
consolidated subsidiary 14,018 - -
Stock options issued as compensation
expense 53,075 - -
Stock options issued as consulting expense 192,404 - -
Beneficial conversion feature on convertible
debt 1,484,837 - -
Adjustment to accounts payable - (651,685) (1,046,324)
Adjustments to legal settlements - (750,000) -
Operating expenses satisfied with stock 169,740 278,801 903,935
(Increase) decrease in
Accounts receivable (437,534) 965,700 1,397,159
Inventories 636,110 (1,260,896) 1,432,828
Other current assets 62,169 224,182 (92,763)
Other assets (562,265) (4,300) 3,821
Increase (decrease) in
Accounts payable and accrued expenses,
net of effect of settlements and sale of
Aura Realty 1,063,477 2,744,148 (1,102,404)
Deferred income 160,500 - -
---------------- --------------- ----------------
Net cash used in operating activities (9,780,562) (8,740,308) (13,330,486)
---------------- --------------- ----------------
Cash flows from investing activities
Payments received on notes receivable 181,725 155,857 3,784,681
Purchase of property, plant, and equipment (6,491) (255,733) (38,200)
Proceeds from disposal of property, plant, and
equipment 57,591 - -
Proceeds from sale of minority interest in Aura
Realty 1,463,000 - -
---------------- --------------- ----------------
Net cash provided by (used in) investing activities 1,695,825 (99,876) 3,746,481
---------------- --------------- ----------------
The accompanying notes are an integral part of these financial statements.
7
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended February 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------- --------------- ----------------
Cash flows from financing activities
Proceeds from notes payable and convertible
notes payable $ 2,510,746 $ 500,000 $ -
Payments on notes payable (1,046,650) (5,139,308) (1,768,859)
Net proceeds from issuance of common stock 5,640,938 13,329,201 12,358,339
Proceeds from exercise of stock options - 775 -
Net proceeds from exercise of warrants - 27,000 -
---------------- --------------- ----------------
Net cash provided by financing activities 7,105,034 8,717,668 10,589,480
---------------- --------------- ----------------
Net increase (decrease) in cash and cash
equivalents (979,703) (122,516) 1,005,475
Cash and cash equivalents, beginning of year 1,143,396 1,265,912 260,437
---------------- --------------- ----------------
Cash and cash equivalents, end of year $ 163,693 $ 1,143,396 $ 1,265,912
================ =============== ================
Supplemental disclosures of cash flow
information
Interest paid $ 621,047 $ 1,081,122 $ 1,977,239
================ =============== ================
Income taxes paid $ - $ - $ -
================ =============== ================
Supplemental schedule of non-cash financing and investing activities
During the year ended February 28, 2003, the Company:
- issued 659,175 shares of common stock in satisfaction of $169,740 in
liabilities and contractual obligations.
- issued 923,077 shares of common stock that were committed at February 28,
2002 valued at $207,692.
The accompanying notes are an integral part of these financial statements.
8
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended February 28, 2003
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash financing and investing activities (Continued)
During the year ended February 28, 2002, the Company:
- - restructured $16,179,900 of debt and related accrued interest into
46,112,771 shares of common stock valued at $15,173,905, resulting in a
pre-tax extraordinary gain for the early extinguishment of debt of
$1,005,995. Due to guaranteed share re-pricing agreements, 14,714,000 of
the common shares with a value totaling $3,310,650 were not issued as of
February 28, 2002 and have been reflected on the consolidated Statement of
Stockholders' equity as committed common stock. The gain, in addition to a
$883,846 gain resulting from a creditor's forgiveness of the remaining
balance of an unsecured note payable plus accrued interest, has been
reflected as an extraordinary item in the accompanying consolidated
financial statements.
- - issued 8,500,502 shares of common stock in satisfaction of $278,801 in
operating expenses and $2,734,613 of liabilities, of which $1,416,364 was
long-term trade debt included in notes payable and other liabilities;
10,000,000 shares of common stock valued at $4,000,000 as partial
settlement with Deutsche Financial Services (see Note 10); 8,947,631 shares
of common stock for re-pricing a prior year private placement, and
1,743,801 shares of common stock as a finder's fee for a current year
private placement. The finder's fee and re-pricing did not have any effect
on total stockholders' equity.
During the year ended February 28, 2001, the Company:
- - converted $2,949,365 of notes payable and accrued interest into 7,324,191
shares of common stock.
- - issued 11,642,627 shares of common stock in satisfaction of $6,151,295 of
liabilities, of which $3,748,384 was long term trade debt included in notes
payable and other liabilities.
- - issued shares of common stock which were recorded as a component of
stockholder's equity (committed common stock) at February 29, 2000. The
common stock could not be issued in fiscal 2000 due to the limitation on
the number of shares authorized.
- - 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 valued at $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.
- - issued 2,400,000 shares of common stock as a finder's fee for the Company's
private placements and 1,775,824 shares of common stock for re-pricing a
prior private placement of the Company. The finder's fee and re-pricing had
no effect on total stockholders' equity.
The accompanying notes are an integral part of these financial statements.
9
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND OPERATIONS
General
-------
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. As a technology leader in
mobile power, Aura develops and sells AuraGen(R) mobile induction power
systems to the industrial, commercial, and defense mobile power generation
markets.
The Company (as defined in Note 3) has a unique and patented energy
solution that is the only proven, commercially available pure sine wave
power system that can continuously provide thousands of watts of power at
low engine speed, and is fully integrated under the vehicle hood. The
AuraGen(R) is capable of generating full power up to 8,500 watts at all
engine speeds, including enhanced engine idle speed for gasoline engines
and at idle speed for bigger diesel engines. The AuraGen(R) 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, both with and without the engine
on. Commercial production of the AuraGen(R) commenced in fiscal 1999 and is
being distributed and sold through dealers, distributors, and Original
Equipment Manufacturers ("OEMs").
The Company intends to continue to focus its business on the AuraGen(R)
line of products. In addition, the Company is entitled to receive royalties
for its electro-optics technology ("AMATM") licensed to Daewoo Electronics
Co., Ltd. ("Daewoo") in 1992 (see Note 6).
NOTE 2 - 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 in the normal course
of business. However, as a result of the Company's losses from operations
and its default on certain of its obligations (see Note 9), there is
substantial doubt about its ability to continue as a going concern.
Management is currently seeking or obtaining additional sources of funds,
and the Company has restructured a significant portion of its debt
obligations.
10
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN (Continued)
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 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.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Aura and its
subsidiaries, Aura Realty, Inc. and Electrotec Productions, Inc.(and its
wholly owned subsidiary, Electrotec Europe) (collectively, the "Company").
Investments in affiliated companies are accounted for by the equity or cost
method, as appropriate. Significant inter-company amounts and transactions
have been eliminated in consolidation.
Revenue Recognition
-------------------
The Company recognizes revenue for product sales upon shipment and when
title is transferred to the customer. When Aura performs the installation
of the product, revenue and cost of sales are recognized when the
installation is complete. The Company provides for estimated returns and
allowances based upon experience and the judgment of management. The
Company has in the past earned a portion of its revenues from license fees
and recorded those fees as income when the Company fulfilled its
obligations under the particular agreement.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes
in equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is
not presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period presented.
11
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents ------------------------- Cash and cash
equivalents consist of cash on hand and in banks. The Company maintains its
cash deposits at several banks located throughout the United States.
Deposits at each bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of February 28, 2003 and 2002, uninsured
portions of the balances at those banks aggregated to $28,999 and
$1,091,281, respectively. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risk on
cash and cash equivalents.
Accounts Receivable
-------------------
Accounts receivable consist primarily of amounts due from customers. The
Company has provided for an allowance for doubtful accounts, which
management believes to be sufficient to account for all uncollectible
amounts.
Inventories
-----------
Inventories are valued at the lower of cost (first-in, first-out) or
market. Due to continuing lower than projected sales, the Company is
holding inventories in excess of what it expects to sell in the next fiscal
year. As of February 28, 2003 and 2002, $3,552,000 and $4,500,000,
respectively, of inventories have been classified as long-term assets.
Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, including leasehold improvements, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets as follows:
Buildings 40 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 7 years
Improvements to leased property are amortized over the lesser of the life
of the lease or the life of the improvements. Amortization expense on
assets acquired under capital leases is included with depreciation and
amortization expense on owned assets.
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of operations.
12
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Term Investments
---------------------
The Company accounts for all investments where it holds less than a 20%
voting interest, cannot exercise significant influence, and where the fair
market value of those securities is not readily determinable under the cost
basis. Investments in voting interests between 20% and 50% where the
Company can exercise significant influence are accounted for under the
equity method of accounting, and investments greater than 50% are generally
consolidated for the purposes of financial reporting. As the Company does
not hold a sufficient interest in its investments to exercise significant
influence and the fair market value of the investments are not readily
determinable, long-term investments have been accounted for under the cost
method. A decline in the value of any investment below cost that is deemed
other than temporary is charged to earnings.
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. Amortization expense was $308,329, $308,329, and $308,329
for the years ended February 28, 2003, 2002, and 2001, respectively.
Accumulated amortization was $2,272,787 and $1,964,458 as of February 28,
2003 and 2002, respectively. If a patent or trademark is rejected,
abandoned, or otherwise invalidated, the unamortized cost is expensed in
that period. The Company expects to recognize $308,329 of amortization
expense on these patents for each of the next five years.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews long-lived assets and identifiable intangibles in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," on at least an annual basis or 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. If the
future undiscounted cash flows are not sufficient to recover the carrying
value of the assets, the assets are adjusted to their fair values. During
the years ended February 28, 2003 and 2002, the Company recorded asset
impairment charges on certain of its long-lived assets (see Note 7).
13
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the implicit value based
method and has disclosed the pro forma effect of using the fair value based
method to account for its stock-based compensation.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable, long-term investments, accounts
payable, and accrued expenses. The carrying amounts approximate fair value
due to their short maturities and interest rates that approximate those
current rates offered to the Company.
Minority Interest
-----------------
Minority interest represents the proportionate share of the equity of the
consolidated subsidiary owned by the Company's minority stockholders in
that subsidiary.
Advertising Expense
-------------------
Advertising costs are charged to expense as incurred and were immaterial
for the years ended February 28, 2003, 2002, and 2001.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
14
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
-----------------------
The Company has significant income tax net operating losses; however, due
to the uncertainty of the realizability of the related deferred tax asset,
a reserve equal to the amount of deferred income taxes has been established
at February 28, 2003 and 2002.
Loss per Share
--------------
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.
Reclassifications
-----------------
Certain amounts included in the prior years' financial statements have been
reclassified to conform with the current year presentation. In order to
comply with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company has reclassified non-cash impairments of
its advertising credits and tooling costs, aggregating $7,661,559, to
operating expenses from other income. In order to comply with regulations
promulgated by the Securities and Exchange Commission ("SEC"), the Company
has reclassified severance expense of $1,080,525 from other expense to
operating expenses. In addition, the Company has reclassified inventory
write-down costs, aggregating $1,510,871, from engineering costs to cost of
sales.
A summary of the effect these reclassifications for the year ended February
28, 2002 is as follows:
As Previously Currently
Classified Reclassification Classified
Gross profit $ 1,635,559 $ 1,510,871 $ 124,688
Loss from operations $ (15,704,847) $ 8,742,084 $ (24,446,931)
Other income (expense) $ (11,121,588) $ (8,742,084) $ (2,379,504)
Such reclassifications did not have any effect on reported net loss.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
15
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Major Customers
---------------
During the year ended February 28, 2003, the Company conducted business
with one customer whose sales comprised of 22% of net sales. As of February
28, 2003, three customers accounted for 61% of total accounts receivable.
During the year ended February 28, 2002, the Company conducted business
with four customers whose sales comprised of 77% of net sales. As of
February 28, 2002, one customer which accounted for 86% of total accounts
receivable
Recently Issued Accounting Pronouncements
-----------------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144. This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This statement
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," the accounting and reporting
provisions of 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," for the
disposal of a segment of a business, and amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to
be temporary. Management does not expect adoption of SFAS No. 144 to have a
material impact, if any, on the Company's financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related
income tax effect. As a result, the criteria in Accounting Principles Board
No. 30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary.
SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-lease transactions. This statement
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may
change accounting practice. Management does not expect adoption of SFAS No.
145 to have a material impact, if any, on the Company's financial position
or results of operations. However, as the Company has a history of debt
adjustments and settlements at rates beneficial to the Company, forgiveness
of the Company's debt may not qualify for extraordinary treatment. These
debt forgiveness amounts have previously been classified as extraordinary.
Under SFAS No. 145, future amounts of debt extinguishment gains may not
qualify for treatment as extraordinary gains.
16
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
----------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. Management does not expect adoption of SFAS No. 146
to have a material impact, if any, on the Company's financial position or
results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No.
72 and Interpretation 9 thereto, to recognize and amortize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible
assets. Management does not expect adoption of SFAS No. 147 to have a
material impact, if any, on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. This statement is effective for financial statements for
fiscal years ending after December 15, 2002. SFAS No. 148 will not have any
impact on the Company's financial statements as management does not have
any intention to change to the fair value method.
17
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
----------------------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments
and hedging activities entered into or modified after June 30, 2003, except
for certain forward purchase and sale securities. For these forward
purchase and sale securities, SFAS No. 149 is effective for both new and
existing securities after June 30, 2003. Management does not expect
adoption of SFAS No. 149 to have a material impact on the Company's
statements of earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody obligations
for the issuer are required to be classified as liabilities. SFAS No. 150
will be effective for financial instruments entered into or modified after
May 31, 2003 and otherwise will be effective at the beginning of the first
interim period beginning after June 15, 2003. Upon adoption of SFAS No.
150, the Company will classify any outstanding redeemable preferred stock
to liabilities.
NOTE 4 - SALE OF AURA REALTY
On December 1, 2002, the Company consummated the initial closing under an
Agreement for Sale and Leaseback, (together with the agreements
contemplated thereby, the "Agreement") with a group of individuals (the
"Purchasers") pursuant to which the Company agreed to sell its Aura Realty,
Inc. ("Aura Realty") subsidiary to the Purchasers and enter into a new
10-year lease of the properties owned by Aura Realty (the "Lease").
The Agreement provides for the $7,350,000 purchase price for the Aura
Realty stock, arrived at in arm's length negotiations, to be partially
funded by Purchasers' assumption or refinancing of the current mortgage
note secured by the properties. Net of the principal balance of this
mortgage note of approximately $5,083,000, certain security deposits and
prepayments totaling $564,000, the partial payment of past due amounts owed
to certain of the individual purchasers, as described below, of
approximately $135,000, and Purchasers' fees of $105,000, the Company
received approximately $1,463,000. $878,750 of this amount was advanced to
the Company by the Purchasers prior to the December 1, 2002 closing under
the Agreement.
18
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 4 - SALE OF AURA REALTY (Continued)
At the December 1, 2002 closing under the Agreement, the Company
transferred 49.9% of its stock in Aura Realty to the Purchasers, delivered
a $1,000,000 note payable to the Purchasers, and granted the Purchasers a
security interest in one of the Company's notes receivable to secure
certain aspects of its performance under the Agreement and the Lease A
second closing was to occur after the current mortgage note holder
consented to transfer the stock to the Purchasers and executed the Lease.
At that time, the Company was to deliver its remaining Aura Realty stock to
the Purchasers in exchange for the return and cancellation of the Company's
$1,000,000 note payable. If the current mortgage note holder did not
consent to the transfer of the stock to the Purchasers and execution of the
Lease, The Purchasers were to obtain a substitute mortgage note through a
refinancing. In the event that such a refinancing is required, the Company
would be required to pay certain additional costs.
In connection with the sale, the Purchasers also received warrants to
purchase 15,000,000 shares of common stock of the Company within five years
from December 1, 2002 at exercise prices ranging from $0.15 to $0.25 per
share. The value of the warrants were calculated at $659,321 using the
Black-Scholes method of valuation. In addition, the Purchasers subscribed
to purchase shares of the Company's common stock. The Company is required
to issue up to 1,300,000 additional shares of common stock and warrants to
purchase up to 5,500,000 shares of common stock to the Purchasers because
of its failure to register the shares for resale.
Of the 16 Purchasers, five were members of the Company's former management,
who separated from the Company at the end of February 2002 (the "Former
Management"). The Company paid a fee of $50,000 to the Former Management in
connection with the Agreement. The Company also paid to the Former
Management approximately $135,000 from the funds it received at closing,
representing a portion of unpaid severance contractually due at December 1,
2002 per the Former Management's separation agreements (see Note 15).
Subsequent to February 28, 2003, the Mortgagor had not consented to the
transaction, and Aura failed to make certain payments to the Purchasers as
required under the Agreement. During June 2003, the Company entered into a
forbearance agreement with the Purchasers. The forbearance agreement states
that Aura defaulted on payments to the Purchasers. In order to avoid legal
proceedings by the Purchasers, the Company is required to:
1. Register all previously issued warrants to the Purchasers per the Sale
Leaseback Agreement
2. Execute an assignment of all its proceeds from the Alpha Ceramic note
receivable (see Note 6) to the Purchasers
19
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 4 - SALE OF AURA REALTY (Continued)
3. Enter into an exclusive listing agreement for the sale of it real
estate property
4. Pay all defaulted mortgage payments to the Purchasers and make timely
payments of $46,613 to the Purchasers thereon
The Company is currently in negotiations with the Purchasers and the
Mortgagor related to these matters.
The assets and liabilities of Aura Realty at February 28, 2003 and 2002
consisted of the following:
2003 2002
--------------- -----------------
Current assets $ 26,112 $ 25,177
Property and equipment, net 6,892,692 9,412,356
Other assets 133,617 159,069
--------------- -----------------
Total assets $ 7,052,421 $ 9,596,602
=============== =================
Total liabilities $ 4,952,357 $ 5,058,774
=============== =================
Total equity $ 2,100,064 $ 4,537,828
=============== =================
The Company originally recorded and reported this transaction as a sale of
100% of its Aura Realty subsidiary. The events subsequent to February 28,
2003 raise significant doubt that the remainder of the transaction
contemplated by the Agreement will ever be completed. As a result, the
Company has effectively sold a 49.9% interest in Aura Realty. The
Purchasers' interest in Aura Realty has been recorded as minority interest
in consolidated subsidiary, and the minority interest in net income of
consolidated subsidiary has been classified as such on the accompanying
statement of operations for the period applicable.
The loss on the sale of the subsidiary is calculated as follows:
Net cash received $ 1,463,000
Deposits held back by the Purchasers 564,000
Fees 105,000
Less execution of note payable (1,000,000)
-----------------
Total sale price 1,132,000
Value of warrants issued (659,321)
Net book value of minority interest in Aura Realty at date of sale (1,099,355)
-----------------
Loss on sale of minority interest in Aura Realty $ (626,676)
=================
20
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 5 - INVENTORIES
Inventories at February 28, 2003 and 2002 consisted of the following:
2003 2002
--------------- -----------------
Raw materials $ 3,846,439 $ 4,043,697
Finished goods 6,819,286 7,258,138
--------------- -----------------
10,665,725 11,301,835
Reserve for potential product obsolescence 1,678,000 1,795,411
--------------- -----------------
8,987,725 9,506,424
Non-current portion 7,573,225 4,500,000
--------------- -----------------
Current portion $ 1,414,500 $ 5,006,424
=============== =================
Inventories consist primarily of components and completed units for the
Company's AuraGen(R) product.
Management has analyzed its inventories based on its current business plan,
backlog, and pending proposals with perspective customers and has
determined that the Company does not expect to realize all of its
inventories within the next year. Because of this, the Company has assessed
the net realizability of these assets, the proper classification of the
inventory, and the potential obsolescence of inventory for the future if
sales do not materialize. In these evaluations, management has recorded a
reserve of $1,678,000 and $1,795,411 at February 28, 2003 and 2002,
respectively. The net inventories as of February 28, 2003 and 2002 which
are not expected to be realized within a 12-month period have been
reclassified as long term.
NOTE 6 - NOTES RECEIVABLE
In March 2000, the Company sold its ceramics facility to the former
President of the Alpha Ceramic, Inc. division for cash and a note
receivable in the amount of $2,500,000 (the "Alpha Ceramic Note"). The note
receivable required a $100,000 down payment, bears interest at 8% per
annum, requires a monthly payment of $30,332, and matures on October 1,
2007.
On December 1, 2002, the Company entered into the Agreement (see Note 4)
with a group of individuals. As part of the closing under the agreement,
the Company granted the Purchasers a security interest in the Alpha Ceramic
Note and assigned its monthly payments to the Purchasers in lieu of rent
expense. As of February 28, 2003, $90,996 was paid to the Purchasers and
recorded as rent expense. Subsequent to February 28, 2003, the Company
assigned its interest in the Alpha Ceramic Note to the Purchasers under a
forbearance agreement (see Note 4).
21
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 7 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at February 28, 2003 and 2002 consisted of
the following:
2003 2002
--------------- ----------------
Land $ 3,187,997 $ 3,187,997
Buildings 6,408,796 8,708,796
Machinery and equipment 1,798,600 1,969,206
Furniture and fixtures 2,308,023 2,308,022
Leasehold improvements 135,935 135,935
--------------- ----------------
16,839,351 16,309,956
Less accumulated depreciation
and amortization 6,495,840 5,935,475
--------------- ----------------
Total $ 7,343,511 $ 10,374,481
Depreciation and amortization expense was $658,523, $5,868,089, and
$7,619,979 for the years ended February 28, 2003, 2002, and 2001,
respectively.
In the fourth quarter of fiscal 2002, the Company determined that the
tooling fixed assets were impaired based upon the requirements set forth in
SFAS No. 144. A comparison of the projected future cash flows of the
Company to the carrying value of the assets indicated that the assets were
impaired. The tooling was written down by a total net amount of $4,600,000
to $0, its estimated fair value based upon the discounted estimated cash
flows over the remaining asset lives. This amount is included in impairment
of long-lived assets on the accompanying consolidated statement of
operations.
In the second quarter of Fiscal 2003, the Company's Board of Directors
approved a plan to sell the land and buildings which are currently used as
Aura's headquarters and operating location. The Company had received
bona-fide offers which indicated there was a significant decrease in the
market price of the assets. As a result, the current market value was less
than the recorded net book value. As a result, the Company recorded an
asset impairment charge of $2,300,000. The Company accounted for this
charge in accordance with SFAS No. 144. As such, the expense was recorded
as part of the loss from operations.
22
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM INVESTMENTS
Long-term investments and their related loss reserves at February 28, 2003
and 2002 consisted of the following:
2003
---------------------------------------------
Net
Book Value Reserve Book Value
------------- ------------- -------------
Aquajet Corporation (a) $ - $ (923,835) $ 923,835
Algo Technology, Inc. (b) 500,000 (848,652) 1,348,652
Telemac (c) 500,000 (750,000) 1,250,000
------------- ------------- -------------
Total $ 1,000,000 $(2,522,487) $ 3,522,487
============= ============= =============
2002
---------------------------------------------
Net
Book Value Reserve Book Value
------------- ------------- -------------
Aquajet Corporation (a) $ - $ (923,835) $ 923,835
Algo Technology, Inc. (b) 1,200,000 (148,652) 1,348,652
Telemac (c) 500,000 (750,000) 1,250,000
------------- ------------- -------------
Total $ 1,700,000 $ (1,822,487) $ 3,522,487
============= ============= =============
The above investments consist solely of common stock and constitute
approximately 4.2% of the outstanding shares of Aquajet Corporation, 2.9%
of the outstanding shares of Algo Technology, Inc., and less than 1% of the
outstanding shares of Telemac.
(a) The Company maintains an investment in Aquajet Corporation, a
development stage company that is in the process of developing and
marketing its water recreation vehicle. Aquajet Corporation has been
involved in raising financing for the past several years in order to
exploit its business plan. In relation to this, Aquajet Corporation
has been marginally successful and has developed a strong marketing
and potential customer base, but to date has been unable to generate
sufficient sales to fund its operations. Management expects to realize
its asset through the eventual public offering or acquisition of
Aquajet Corporation by a third party. However, that exit is not
believed to be likely in the near future. The Company recorded a
reserve based on Aura's judgment that Aquajet Corporation will likely
not continue its operations as a going concern.
(b) During the year ended February 28, 2003, Aura became aware of
financial difficulties relative to its investment in Algo
Technologies, Inc. Aura recognized a $700,000 impairment charge as
management concluded there was an other than temporary decline in the
value of the investment. It is now recorded at management's best
estimate of its fair market value of approximately $500,000.
23
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM INVESTMENTS (Continued)
(c) 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 $2,500,000 note
receivable from Telemac. The final payment on the note of $1,250,000,
plus interest accrued at 8% per annum, was due in February 2002. Per
the terms of the agreement, Telemac elected to pay Aura in Telemac
common shares at an exchange price of $5 per share rather than in
cash. Aura received 313,232 common shares in exchange for the final
payment (see Note 8). During the year ended February 28, 2002, the
Company recorded an impairment on this investment of $750,000 as it
expected an other-than-temporary decrease in the value to an estimated
$500,000, or $0.60 per share. Subsequent to February 28, 2003, the
Company sold a portion of its shares of Telemac's common stock for
$2.25 per share (see Note 18).
NOTE 9 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Notes payable and convertible notes payable at February 28, 2003 and 2002
consisted of the following:
2003 2002
--------------- ----------------
Litigation payable (a) $ 2,201,604 $ 2,327,300
Notes payable - equipment (b) 14,147 20,371
Notes payable - buildings (c) 5,058,774 5,157,138
Trade debt (d) 1,308,533 3,140,657
Convertible notes payable (e) 1,750,000 -
Note payable - related party (f) - 250,000
Note payable - related party (g) 1,000,000 -
Convertible notes payable (h) 2,012,320 -
--------------- ----------------
13,345,378 10,895,466
Less current portion 13,305,103 3,913,623
--------------- ----------------
Long-term portion $ 40,275 $ 6,981,843
(a) The litigation payable represents the legal settlements entered into
by Aura with various parties. These settlements call for payment terms
with 8% interest rate to the plaintiffs through fiscal 2004.
(b) Notes payable - equipment consists of a note maturing in February 2005
with an interest rate of 8.45%.
24
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (Continued)
(c) Notes payable - buildings consists of a 1st Trust Deed on two
buildings in California bearing interest at 7.625% per annum. A final
balloon payment is due in fiscal 2009. Subsequent to February 28,
2003, the Company defaulted on these notes payable. As such, as of
February 28, 2003, these notes payable were classified as current
liabilities.
(d) Restructured trade debt with payment terms over a three-year period
with interest at 8% per annum commencing in January 2000.
During the year ended February 28, 2003, the Company settled $1,456,213 of
this trade debt for $385,142, including accrued interest of $198,000.
The total gain on the extinguishment of debt of $1,050,995, which is
reflected as an extraordinary item in the accompanying consolidated
financial statements, resulted in extraordinary income per share of
less than $0.01. In addition, as part of the transaction, the Company
entered into a convertible note payable agreement with a group of
investors for $307,862. This note was converted into Series A
convertible preferred stock subsequent to February 28, 2003 (see
Note 18).
(e) Convertible notes payable carry a 8% interest rate and are convertible
into common stock at various conversion rates. Subsequent to February
28, 2003, the notes were adjusted to be convertible into shares of
convertible, redeemable preferred stock, and such conversion was
completed (see Note 18). The Company recorded interest expense of
$316,619 related to the conversion feature on the debt.
(f) In the fourth quarter of fiscal 2002, the Company entered into a
short-term loan agreement with a member of the Board of Directors for
$250,000. The note accrued interest at 10% per annum and was repaid in
March 2002.
(g) Note payable - related party consisted of a $1,000,000 note payable,
which was entered into in connection with the sale of a minority
interest in Aura Realty (see Note 4). The note payable bears interest
at 12.3% per annum and is secured by a security interest in the Alpha
Ceramic Note (see Note 6). The Company is required to make interest
payments for the first 17 months of the term, and the remaining
$1,000,000 principal is due on May 31, 2004.
25
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (Continued)
(h) The convertible notes payable were entered into with investors. The
notes payable bear interest at 5% per annum, mature at various dates,
and are convertible into shares of the Company's convertible,
redeemable preferred stock at a rate of $1 for each $2.20 of
convertible, redeemable preferred shares. The Company evaluated the
notes for beneficial conversion features below the market price of the
Company's common shares and recorded $1,168,218 of interest expense.
Subsequent to February 28, 2003, the Company completed the conversion
of these notes into preferred stock.
Future maturities of notes payable at February 28, 2003 were as follows:
Year Ending
February,
------------
2004 $ 13,305,103
2005 7,375
2006 -
2007 -
2008 32,900
---------------
Total $ 13,345,378
===============
NOTE 10 - ACCRUED EXPENSES
Accrued expenses at February 28, 2003 and 2002 consisted of the following:
2003 2002
------------- -------------
Accrued payroll and related expenses $ 431,579 $ 794,481
Accrued interest 422,339 76,848
Accrued severance 554,288 1,080,525
Other 364,726 229,803
------------- -------------
Total $ 1,772,932 $ 2,181,657
============= =============
26
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 10 - ACCRUED EXPENSES (Continued)
Separation Agreements
---------------------
In December 2001, the Company and six former members of the Company's
senior management ("former employees'") entered into certain separation
agreements, effective February 28, 2002. The agreements call for a one time
grant of stock options and warrants exercisable at $0.55 per share for an
aggregate of 22,218,750 shares of the Company's common stock. The number of
options granted to each former employee was based on a formula as defined
in the agreement and have been recorded under the provisions of SFAS No.
123, which allows for options issued to employees to be recorded in the
financial statements at their intrinsic value and requires the impact of
the fair value of those employee options on the Company's net loss to be
disclosed on a pro forma basis (see Note 12).
In addition, each of the former employees agreed to be available to the
Company for a period of one year, as required by the Company, in exchange
for payments aggregating 85% of their former salaries. Management has
assessed its anticipated use of the former employees' services in order to
recognize the expenses related to the agreements in relation to the
performance of those services. Accordingly, as of February 28, 2002, the
Company had recognized $1,080,525 of compensation, or approximately 75% of
the value of the contracts, in the financial statements and recognized the
remaining amount in the first quarter of the year ended February 28, 2003.
The Company has not made any significant use of the former employees'
services since the first quarter of 2003.
Adjustment to Accounts Payable
------------------------------
During the years ended February 28, 2003 and 2002, the Company adjusted
certain of its accrual and accounts payable accounts. These adjustments
reflect primarily reductions in amounts previously estimated and limited
contractual adjustments to amounts payable under certain trade payable
agreements. These amounts have been recorded as an adjustment to operating
expenses as they generally represent changes in estimates recorded by the
Company in previous periods
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Leases
------
At February 28, 2003, the Company did not have any significant long-term
operating leases. Rent expense charged to operations amounted to $956,951,
$868,236, and $930,689 for the years ended February 28, 2003, 2002, and
2001, respectively.
27
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
----------
The Company has been informed by the Staff of the SEC that it intends to
recommend that the Commission bring a civil action against Aura, NewCom,
Inc. (a former subsidiary of Aura), Zvi Kurtzman, Steven Veen, and Gerald
Papazian for violations of the antifraud and books and records provisions
of the securities laws. This grew out of an investigation into the
Company's financial statements for various transactions during fiscal years
1996 through 1999. The Company originally disclosed the investigation by
press release in January 1999. The SEC Staff advised the Company that it
would recommend that the SEC seek civil penalties and enjoin the companies
and the individuals from future violations.
In addition, the SEC Staff recommended the SEC impose director and officer
bars against Messrs. Kurtzman and Veen and a bar against Mr. Veen to
prohibit his practicing as an accountant before the SEC. The Company is
informed that in order to avoid potential lengthy and costly litigation,
the individuals have agreed to propose to settle with the SEC without
admitting or denying any of the Staff's allegations. The Company has
engaged in conversations with the Staff of the SEC regarding settlement of
the matter, but the agreements have not yet been reached. Although Aura's
management believes it will reach a settlement in a manner that will not
have a material adverse effect on the Company's business, it cannot predict
with certainty when or if such a settlement will occur or what the actual
effects of such a settlement would be. The Audit Committee will conduct a
full review of the Company's accounting controls and procedures.
On December 11, 2001, the Company filed a complaint in the United States
District Court, Central District of California, against CRS Emergency
Vehicles Co., Custom Coaches International, and C. Ray Smith for Breach of
Contract, Conversion, Bad Faith, Fraud, and Injunctive Relief. The action
arose out of a sale to defendant distributors of approximately $1,200,000
of the Company's AuraGen(R) product. Despite requests for payment, it was
not received. Following service of the complaint and the defendants'
failure to file a responsive pleading in the time required, on January 25,
2002, the Company filed a Request to Enter Default and Application for
Clerk Judgment.
However, on February 7, 2002, the District Court accepted the defendants'
answer denying allegations. On May 7, 2002, following discussions between
the parties, the Company entered into a definitive settlement, whereby the
defendants agreed to release or otherwise account for all of the product
shipped to the Company. The parties also agreed to terminate the
distributorship agreement. The Company has fully accounted for this event
in the fourth quarter and reversed revenue of $1,200,000 due to the return
of the inventory. As a result, revenues in the fourth quarter of fiscal
2002 are a negative $928,000.
28
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
---------------------
As previously reported in its February 29, 2000 report on Form 10-K, the
Company settled shareholder litigation in the Barovich/Chiau matter in
January 1999. On November 20, 1999, the parties entered into an Amended
Stipulation of Settlement, which required the Company to pay $2,260,000,
plus interest, in monthly installments of $70,350. On October 22, 2002,
after the Company had failed to make certain monthly payments, the
plaintiffs applied for and obtained a judgment against the Company for
$935,530, which represents the balance due with respect to the original
principal amount. The Company has subsequently made only two monthly
payments, thereby reducing the amount owed to $794,650, plus interest.
Subsequent to February 28, 2003, the plaintiff took further legal action to
enforce the October 2002 judgment, culminating in a lien on one of the
Company's smaller bank accounts. The Company has recorded this liability in
full in the accompanying financial statements.
In 1991, one of the Company's former shareholders filed a civil action
against the Company, its founding management members, who are no longer
employees of the Company, and two of the Company's former shareholders.
Following an appeal, the Company paid its portion of the judgment in full
to the defendant. In December 2002, the defendant received a court order,
requiring the Company to be liable for the damages awarded against the
former shareholders. In February 2003, the Company paid $212,444 to the
defendant, which represented the final settlement in this matter.
On December 11, 2002, one of the Company's former vendors filed suit
against the Company, alleging the Company breached the terms of a payment
plan for $283,296. The settlement discussions between the two parties have
been large unsuccessful. The plaintiff is advancing this suit through the
court system, and a hearing has been scheduled for August 2003. The Company
has recorded this liability in full in the accompanying financial
statements.
The Company is involved in certain legal proceedings and claims which arise
in the normal course of business. Management does not believe that the
outcome of these matters will have a material effect on the Company's
financial position or results of operations.
29
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
Settlements
-----------
In June 1999, a lawsuit naming Aura was filed by Deutsche Financial
Services ("DFS") regarding the termination of DFS' credit facility. The
Company entered into a definitive Settlement and Mutual Release Agreement
effective March 12, 2001, providing for the settlement of litigation. Under
the terms of the settlement, DFS received cash payments totaling $350,000
and 10,000,000 shares of Aura's common stock in exchange for mutual
releases. The Company had previously recorded an estimated liability of
$5,500,000, which was carried in notes payable on the accompanying
consolidated financial statements. The aggregate value of the settlement
was $4,350,000 based on the Company's common stock price at the settlement
date, resulting in an adjustment to the original accrual of $1,150,000.
Under the agreement, DFS may not sell more than 5,000,000 shares of the
Company's common stock 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. During the first and second years following the
settlement date, Aura may repurchase unsold shares in the possession of DFS
at a price of $0.80 per share in the first year and $1 per share in the
second year.
In addition, as part of the Settlement, DFS will assign to Aura its
security interest in assets pledged by NewCom, Inc. ("NewCom") to DFS to
secure NewCom's indebtedness. Funds received by DFS, if any, with respect
to the assets of NewCom, less costs and expenses incurred, will be held in
trust by DFS for Aura. Aura may also prosecute or pursue a NewCom claim,
asset, or entitlement, which is subject to a DFS' lien.
Aura's receipt of any funds is conditioned upon the bid price of Aura's
common stock reaching $0.80 per share on the 10 business days during the
first year or $1 per share during the second year. To the extent Aura
recovers any funds, it will hold it in trust for DFS until the bid price of
Aura reaches the above levels, or until the 730th day following the
execution date of the settlement agreement when Aura must then pay any
recovered funds to DFS if the minimum bid prices set forth above have not
been met.
On November 12, 1999, a lawsuit was filed by three investors against Aura
and others, arising out of two NewCom. financings consummated in December
1998. As part of the settlement, Aura received $2,000,000. The plaintiffs
received re-pricing shares sought as part of their underlying contract
claims. The re-pricing shares have been recorded as an adjustment to the
original issuances, and the $2,000,000 has been recorded as an adjustment
to legal settlements.
30
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
Settlements (Continued)
----------------------
In December 1999, a lawsuit was filed against NewCom, which, as amended,
also included Aura and others. The plaintiff's sixth amended complaint
purported to be a class action on behalf of a class alleged to consist of
approximately 200,000 people who purchased a NewCom, aka Atlas Peripherals,
computer product from various retail stores. In August 2001, the Company
entered into a settlement Memorandum of Understanding, which limited the
total Aura portion of the litigation to $400,000, payable in monthly
installments of $10,000 to the plaintiffs. The parties have since entered
into a definitive Settlement Agreement incorporating the terms of the
Memorandum, which received final approval of the trial court in December
2001.
NOTE 12 - STOCKHOLDERS' EQUITY
Series A Convertible, Redeemable Preferred Stock
------------------------------------------------
The Board of Directors is authorized to issue from time to time up to
10,000,000 shares of preferred stock, in one or more series, and the Board
of Directors is authorized to fix the dividend rates, any conversion rights
or rights of exchange, any voting right, any rights and terms of redemption
(including sinking fund provisions), the redemption price, liquidation
preferences and any other rights, preferences, privileges and restrictions
of any series of preferred stock. No amounts were outstanding as of
February 28, 2002 and 2001.
On March 25, 2003, the Board of Directors of the Company authorized
1,500,000 shares of Series A convertible, redeemable preferred stock (the
"Series A") with a par value of $0.005. Each Series A share is convertible
into common stock at $0.08 per share. The Series A can be converted at the
option of the holder provided that the Company does not exercise the
mandatory conversion on any date on or after March 31, 2004. The Company
may exercise its right to mandatory conversion provided that the current
market value of the Company's common stock equal or exceeds 120% of the
then prevailing conversion price.
The Series A has liquidation preference of $10 per share. In addition, the
holders of the Series A are entitled to receive cumulative dividends at a
rate of 5% per annum. Dividends are payable in arrears on the first day of
each quarter, commencing on September 1, 2003. The shares can be redeemed
on or after March 31, 2004 in whole or in part at a redemption price equal
to $10 per share, plus the amount of any accumulated and unpaid dividends.
As of March 31, 2003, the Company has 558,110 shares of Series A issued and
outstanding.
Common Stock
------------
At February 28, 2003 and 2002, the Company had 500,000,000 shares of $0.005
par value common stock authorized for issuance.
31
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
-------------
During the year ended February 28, 2003, the Company issued 41,700,830
shares of common stock for cash totaling $5,694,001 in private offerings to
various third party investors.
During the year ended February 28, 2003, the Company issued 923,077 shares
of common stock totaling $207,692 from committed stock.
During the year ended February 28, 2003, the Company cancelled 50,000
shares of common stock that were returned from vendor for a total of
$30,000.
During the third quarter of fiscal 2003, the Purchasers of a minority
interest in Aura Realty (see Note 4) subscribed to purchase and paid for
21,366,347 shares of the Company's common stock for $1,493,000 at an
average price of $0.07 per share under the Agreement. All of these shares
were sold during the third quarter of fiscal 2003. The Company agreed to
file a registration statement with the SEC within 60 days of acceptance of
the subscription agreement and to issue up to 1,300,000 additional shares
to the Purchasers if it failed to do so. The Company has not filed the
required registration statement and will be obligated to issue the
additional shares, but has not yet done so.
During the year ended February 28, 2001, the Company issued shares of
common stock which were recorded as a component of stockholder's equity
(committed common stock) at February 29, 2000. The common stock could not
be issued in fiscal 2000 due to the limitation on the number of shares
authorized.
During the year ended February 28, 2001, the Company issued 2,400,000
shares of common stock as a finder's fee for the Company's private
placements and 1,775,824 shares of common stock for re-pricing a prior
private placement of the Company. The finder's fee and re-pricing did not
have any effect on total stockholders' equity.
Debt Extinguishments and Settlements for Common Stock
-----------------------------------------------------
During the year ended February 28, 2003, the Company issued 659,175 shares
of common stock in satisfaction of $169,740 in liabilities and contractual
obligations.
During the year ended February 28, 2002, the Company restructured
$16,179,900 of debt and related accrued interest into 46,112,771 shares of
common stock valued at $15,173,905, resulting in a pre-tax extraordinary
gain for the early extinguishment of debt of $1,005,995. The original
agreements called for the issuance of 29,428,000 shares of common stock in
exchange for the debt, which would have resulted in a gain on
extinguishment of debt of $4,316,645. However, the former debt holders were
given certain protections if the Company were to sell any of its common
stock subsequent to the settlement at prices less than $0.20 per share.
32
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Debt Extinguishments and Settlements for Common Stock (Continued)
-----------------------------------------------------
Since the Company violated this agreement, the former debt holders were
entitled to receive additional common shares amounting to 14,714,000. The
value of these shares was $3,310,000, which has been recorded as an
adjustment to the gain on extinguishment of debt.
In addition, under the terms of the agreements, the Company was required to
file a registration statement within 120 days of the agreement. If the
Company failed to get a registration statement effective within 180 days of
the closing of the agreement, the Company would be required to issue
warrants for common stock equal to 5% multiplied by the aggregate number of
shares of registrable stock (as defined) received by the former debt
holder. The exercise price of these warrants is to be $0.20 per share,
subject to adjustment. The Company is currently in default of this
requirement. In addition, the Company was required to meet certain other
covenants related to reserved and unissued shares. The Company is currently
in default of these covenants as well.
Due to these guaranteed share re-pricing agreements, which calls for
additional re-pricing shares upon the issuance of shares at a lower price
within a 12-month period, 14,714,000 of the common shares with a value
totaling $3,310,650 were not issued as of February 28, 2002 and have been
reflected on the consolidated statement of stockholders' equity as
committed common stock.
The gain, in addition to a $883,545 gain resulting from a creditor's
forgiveness of the remaining balance of an unsecured note payable plus
accrued interest, has been reflected as an extraordinary item in the
accompanying consolidated financial statements.
During the year ended February 28, 2002, the Company issued 8,500,502
shares of common stock in satisfaction of $278,801 in operating expenses
and $2,734,613 of liabilities, of which $1,416,364 was long-term trade debt
included in notes payable and other liabilities; 10,000,000 shares of
common stock valued at $4,000,000 as partial settlement with Deutsche
Financial Services; 8,947,631 shares of common stock for re-pricing a prior
year private placement, and 1,743,801 shares of common stock as a finder's
fee for a current year private placement. The finder's fee and re-pricing
did not have any effect on total stockholders' equity.
During the year ended February 28, 2001, the Company converted $2,949,365
of notes payable and accrued interest into 7,324,191 shares of common
stock.
During the year ended February 28, 2001, the Company issued 11,642,627
shares of common stock in satisfaction of $6,151,295 of liabilities, of
which $3,748,384 was long-term trade debt included in notes payable and
other liabilities.
33
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Debt Extinguishments and Settlements for Common Stock (Continued)
-----------------------------------------------------
During the year ended February 28, 2001, 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 valued at $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.
Director Stock Options
----------------------
The Company has granted nonqualified stock options to certain directors.
Options were granted at fair market value at the date of grant, vested
immediately, and were exercisable at any time within a 10-year period from
the date of grant.
A summary of the Company's outstanding options and activity under the
director's plan is as follows:
Weighted-
Average
Number Exercise
of Shares Price
--------- -------------
Outstanding, February 28, 2000 and 2001 500,000 $ 2.06 - 2.30
Expired (50,000) $ 2.06 - 2.30
Outstanding, February 28, 2002 and 2003 450,000 $ 2.06 - 2.30
=========
Exercisable, February 28, 2003 450,000 $ 2.06 - 2.30
=========
Employee Stock Options
----------------------
The 1989 Stock Option Plan has granted the maximum allowable number of
options authorized. In March 2000, the Company's Board of Directors adopted
the 2000 Stock Option Plan, a non-qualified plan which was subsequently
approved by the stockholders. The 2000 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 four-
to five-year period.
During the year ended February 28, 2003, the Company issued stock options
to employees to purchase 11,026,000 of the Company's common stock and
recorded $53,075 of compensation expense.
During the year ended February 28, 2003, the Company issued stock options
to various Board members and consultants to purchase 2,575,400 of the
Company's common stock and recorded $192,208 and $196 of compensation and
consulting expense, respectively.
34
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Employee Stock Options (Continued)
----------------------
Activity in the employee stock option plans was as follows:
1989 Plan 2000 Plan
------------------------ ------------------------
Weighted- Weighted-
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- ---------------- ----------- ----------------
Outstanding, February
29, 2000 5,867,000 $ 1.44 - 7.31 - $ -
Granted - $ - 17,565,500 $ 0.31 - 0.60
Canceled (5,000) $ 3.00 (132,500) $ 0.31
Expired (431,000) $ 0.44 - $ -
--------- -----------
Outstanding, February
28, 2001 5,431,000 $ 1.79 - 7.31 17,433,000 $ 0.31 - 0.60
Granted - $ - 18,849,001 $ 0.45 - 0.64
Canceled (20,000) $ 3.00 (428,250) $ 0.31 - 0.45
Expired (6,000) $ 7.25 - $ -
--------- -----------
Outstanding, February
28, 2002 5,405,000 $ 1.79 - 7.31 35,853,751 $ 0.31 - 0.64
Granted - $ - 13,601,400 $ 0.24
Expired - $ - (15,049,750) $ 0.32
--------- -----------
Outstanding, February
28, 2003 5,405,000 $ 1.79 - 7.31 34,405,401 $ 0.31 - 0.64
========= ===========
Exercisable, February
28, 2003 5,405,000 $ 1.79 - 7.31 24,288,272 $ 3.31
========= ===========
35
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Employee Stock Options (Continued)
The weighted-average remaining contractual life of the employee options
outstanding at February 28, 2003 was 8.34 years. The exercise prices for
the options outstanding at February 28, 2003 ranged from $0.07 to $7.31,
and information relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
------------ ----------- ----------- ----------- ----------- -----------
$0.07 - 0.35 13,519,400 8,473,229 8.76 years $0.19 $0.22
$0.36 - 3.00 23,385,001 18,894,043 8.45 years $0.70 $0.74
$3.01 - 7.31 2,906,000 2,326,000 5.39 years $3.31 $3.31
---------- -----------
39,810,401 29,693,272
========== ===========
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for
its plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to
outside third parties. 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 years ended February 28, 2003, 2002, and
2001:
2003 2002 2001
------------- ------------- -------------
Net loss
As reported $(16,140,873) $(24,936,895) $(20,929,971)
Pro forma $(18,311,899) $(26,368,716) $(22,114,397)
Basic loss per common share
As reported $ (0.04) $ (0.08) $ (0.08)
Pro forma $ (0.04) $ (0.08) $ (0.08)
For 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
weighted-average assumptions for the years ended February 28, 2003, 2002,
and 2001: dividend yields of 0%, 0%, and 0%, respectively; expected
volatility of 98%, 70%, and 50%, respectively; risk-free interest rates of
2.3%, 4.9%, and 6%, respectively; and expected lives of two, 2.14, and 1.5
years, respectively.
36
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Employee Stock Options (Continued)
----------------------
The weighted-average fair value of these options was $0.09, and the
weighted-average exercise price was $0.06.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which do not have 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.
Warrants
--------
During the year ended February 28, 2003 and in relation to the Agreement
entered into on December 1, 2002 (see Note 4), the Company issued warrants
to purchase 15,000,000 shares of the Company's common stock as incentive
for the Purchasers to enter into the Agreement.
Per the Agreement, the warrants expire in five years, and the exercise
prices are as follows:
- $0.15 per share during the first 24 months after closing
- $0.20 per share from the 25th month after closing
- $0.25 per share from the 37th month after closing
The Company agreed to file a registration statement with the SEC within 60
days of closing under the Agreement and to issue up to 5,500,000 additional
warrants to the Purchasers if it failed to do so. The Company has not filed
the required registration statement and will be obligated to issue the
additional warrants, but has not yet done so.
At February 28, 2003 and 2002, there were warrants outstanding to purchase
48,956,727 and 33,956,727 shares, respectively, of the Company's common
stock, exercisable at an average price of $0.20 and $0.71, respectively,
per share.
As of February 28, 2003, the aggregate number of outstanding options,
warrants, and common share equivalents was significantly in excess of the
authorized, but unissued number of shares of the Company's common stock.
Management intends to seek shareholder approval of an increase in the
Company's authorized shares sufficient to satisfy all existing commitments
and create available shares for potential future investments. However, such
approval is not guaranteed.
37
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES
The Company has not incurred any income tax expense since inception. The
actual tax benefit differs from the expected tax benefit computed by
applying the United States federal corporate tax rate of 34% to loss before
income taxes as follows for the years ended February 28, 2003, 2002 and
2001:
2003 2002 2001
------------- ------------- -------------
Expected tax benefit 34.0% 34.0% 34.0%
State income taxes, net
of federal benefit 6.0 6.0 6.0
Changes in valuation allowance (40.0) (40.0) (40.0)
------------- ------------- -------------
Total - % - % - %
============= ============= =============
The following table summarizes the significant components of the Company's
deferred tax asset at February 28, 2003 and 2002:
2003 2002
------------- -------------
Deferred tax asset
Property, plant, and equipment and other $ 4,800,000 $ 3,600,000
Net operating loss carryforward 104,800,000 99,000,000
Valuation allowance (109,600,000) (102,600,000)
Net deferred tax asset $ - $ -
The Company recorded an allowance of 100% for its net operating loss
carryforward due to the uncertainty of its realization.
A provision for income taxes has not been provided in these financial
statements due to the net loss. At December 31, 2002, the Company had
operating loss carryforwards of approximately $262,000,000, which expire
through 2023.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company sponsored two employee benefit plans: The Employee Stock
Ownership Plan (the "ESOP") and a 401(k) plan. In addition, the options
granted under the 1989 and 2000 Stock Option Plans are valid and subject to
exercise.
The ESOP is a qualified discretionary employee stock ownership plan that
covers substantially all employees. The Company did not make any
contributions to the ESOP during the years ended February 28, 2003, 2002,
and 2001.
38
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)
The Company sponsors a voluntary, defined, contribution 401(k) plan. The
plan provides for salary reduction contributions by employees and matching
contributions by the Company of the first 7% of the employees' pre-tax
contributions. The matching contributions by the Company included in
selling, general, and administrative expenses were $44,720, $58,025, and
$49,152 for the years ended February 28, 2003, 2002, and 2001,
respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS
During the year ended February 28, 2002, the Company entered into a
short-term loan agreement with a member of the Board of Directors for
$250,000, bearing interest at 10% per annum. The note payable, including
accrued interest of $2,500, was repaid within the third quarter.
In December 2001, following deliberations by the Compensation Committee and
the Board of Directors in consultation with independent consultants and
after concluding discussions with the affected members of the management,
team the Company entered into separation agreements with Messrs. Kurtzman,
Papazian, Schwartz, Kaufman, and Veen and Ms. Kurtzman Lavut, terminating
their existing employment contracts and restructuring their severance
benefits. Pursuant to these separation agreements, these individuals
terminated their employment relationship with the Company effective
February 28, 2002.
Under the terms of the separation agreements, the departing officers
relinquished their rights to any multi-year, cash, severance benefits in
exchange for a one time grant of stock options and warrants, exercisable at
$0.55 per share, which vest over a period of 18 months from the termination
of employment. The aggregate number of shares underlying the options and
warrants issued under these separation agreements is 22,218,750. The number
of stock options for each person was determined based on the underlying
total compensation due to the employee upon termination under each person's
existing employment agreement, multiplied by two and divided by $0.32 per
share.
Each of the officers has agreed to continue as a consultant to the Company
for a period of one year at 85% of his/her former compensation. In
addition, each executive is entitled to receive continued medical benefits
for three years following termination of employment
39
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS (Continued)
On December 1, 2002, the Company entered into a Sale and Leaseback
Agreement with a group of individuals, including five individuals who were
members of the Company's former management, who separated from the Company
at the end of February 2002, pursuant to which the Company agreed to sell
Aura Realty to the Purchasers and enter into a 10-year lease of the
properties owned by Aura Realty (see Note 4).
In February 2003, the Company entered into convertible notes payable
agreements with a group of investors, which included five members of the
Company's former management. The notes payable bear interest at 8% per
annum, mature at various dates, and are convertible into shares of the
Company's convertible, redeemable preferred stock at a rate of $1 for each
$2.20 of convertible, redeemable preferred shares (see Note 9).
NOTE 16 - SEGMENT INFORMATION
The Company is a United States based company providing advanced technology
products to various industries. The principal markets for the Company's
products are North America, Europe, and Asia. All of the Company's
operating long-lived assets are located in the United States. The Company
operates in one segment.
Total net revenues from customer geographical segments are as follows for
the years ended February 28, 2003, 2002, and 2001:
2003 2002 2001
------------- ------------- -------------
United States $ 997,000 $ 2,792,000 $ 2,464,000
Canada 27,000 39,000 31,000
Europe 21,000 218,000 -
Asia 59,000 67,000 18,000
------------- ------------- -------------
Total $ 1,104,000 $ 3,116,000 $ 2,513,000
============= ============= =============
40
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables list the Company's quarterly financial information for
the years ended February 28, 2003, 2002, and 2001:
2003
---------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------------- ---------------- ----------------- --------------- ------------------
Net revenues $ 183,739 $ 272,978 $ 423,066 $ 223,987 $ 1,103,770
Gross profit $ 102,753 $ 127,858 $ 223,912 $ 78,148 $ 532,671
Loss from
operations $ (3,290,539) $ (5,219,668) $ (2,238,263) $ (2,825,208) $ (13,573,678)
Net loss $ (3,958,201) $ (5,694,039) $ (2,334,550) $ (4,154,083) $ (16,140,873)
Basic and diluted
loss per share $ (0.01) $ (0.01) $ - $ (0.01) $ (0.04)
2002
---------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------------- ---------------- ----------------- --------------- ------------------
Net revenues $ 2,874,569 $ 863,773 $ 306,126 $ (928,173) $ 3,116,295
Gross profit (loss) $ 1,433,946 $ 550,099 $ 137,252 $ (1,996,609) $ 124,688
Loss from
operations $ (3,393,606) $ (5,248,819) $ (3,871,227) $ (11,933,279) $ (24,446,931)
Net loss $ (2,105,698) $ (6,034,811) $ (1,094,577) $ (15,701,809) $ (24,936,895)
Basic and diluted
loss per share $ (0.01) $ (0.02) $ - $ (0.05) $ (0.08)
2002
---------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
---------------- ---------------- ----------------- --------------- ------------------
Net revenues $ 381,521 $ 386,885 $ 501,802 $ 1,242,300 $ 2,512,508
Gross profit (loss) $ (2,132,836) $ (2,169,177) $ (1,880,860) $ 7,478,744 $ 1,295,871
Loss from
operations $ (4,368,400) $ (5,865,853) $ (3,755,452) $ (6,639,495) $ (20,629,200)
Net loss $ (2,610,266) $ (6,726,320) $ (4,653,019) $ (6,940,366) $ (20,929,971)
Basic and diluted
loss per share $ (0.01) $ (0.03) $ (0.02) $ (0.02) $ (0.08)
41
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
- --------------------------------------------------------------------------------
NOTE 18 - SUBSEQUENT EVENTS
Subsequent to February 28, 2003, the Company issued convertible notes
payable to a group of investors, which included five members of the
Company's former management, totaling $616,500. The notes bore interest at
5% per annum and were due on demand no later than May 31, 2003. The notes
were convertible into $10 per share face value Series A convertible,
redeemable preferred stock (the "Series A Preferred") at a discount. Each
$1 of convertible notes could be converted into $2.20 of the face value of
the Series A Preferred.
On March 31, 2003, the Company converted $1,192,424 of convertible notes
payable, including the above notes payable and accrued interest of $5,599,
and issued 263,565 shares of the Series A Preferred to the investors
represented by the company whose principals are former management of the
Company. Each share of preferred stock is convertible into 125 shares of
common stock.
On March 31, 2003, the Company converted $2,413,073 of convertible notes
payable, including accrued interest of $66,635, and issued 270,455 shares
of the Series A Preferred to a third party group of investors, which
included five members of the Company's former management. Each share of the
preferred stock is convertible into 125 shares of common stock.
Subsequent to February 28, 2003, the Company issued 24,090 shares of the
Series A Preferred to various investors for cash totaling $109,500 in a
private placement.
Subsequent to February 28, 2003, the Company issued convertible notes
payable to third party investors totaling $200,000. The notes bear interest
at 5% per annum and are due on demand no later than August 29, 2003. The
notes are convertible into the Series A Preferred at $10 per share.
Subsequent to February 28, 2003, the Company entered into a note payable
agreement for $200,000. The note payable bears interest at a fixed rate of
$10,000. The note payable and the $10,000 fixed fee mature on June 7, 2003.
On the maturity date of the note payable, the Company will issue warrants
to purchase 1,000,000 shares, which was later modified to 3,000,000 shares,
of the Company's common stock with an exercise price of $0.05, expiring on
June 7, 2006. The warrants are to be included in the next S-1 filing. The
note is secured by 177,777 shares of Telemac. As of July 8, 2003, the note
was in default. The Company is in negotiations to obtain new financing from
a different investor to replace this note payable agreement.
Subsequent to February 28, 2003, the Company sold 110,000 shares of its
Telemac common stock investment for cash totaling $247,500 (see Note 6).
Subsequent to February 28, 2003, the Company settled $56,000 of various
trade payables for $14,000.
42
SUPPLEMENTAL INFORMATION
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders Aura Systems, Inc. and
subsidiaries
Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The
consolidated supplemental schedule II is presented for purposes
of complying with the Securities and Exchange Commission's rules
and is not a part of the basic consolidated financial statements.
This schedule has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial
statements taken as a whole.
Our report covering the basic financial statements indicates that
there is substantial doubt as to the Company's ability to
continue as a going concern, the outcome of which cannot
presently be determined and that the financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 8, 2003
AURA SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE ii
For the Years Ended February 28, 2003
- --------------------------------------------------------------------------------
Balance, Additions Deductions Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
---------------- ---------------- --------------- ----------------
Reserve for doubtful accounts
February 28, 2003 $ 150,000 $ 94,310 $ - $ 244,310
================ ================ =============== ================
February 28, 2002 $ 160,000 $ - $ (10,000) $ 150,000
================ ================ =============== ================
February 28, 2001 $ 7,673,217 $ 1,339,696 $ (8,852,913) $ 160,000
================ ================ =============== ================
Reserve for obsolete inventories
February 28, 2003 $ 1,795,411 $ - $ (117,411) $ 1,678,000
================ ================ =============== ================
February 28, 2002 $ 291,404 $ 1,510,871 $ (6,864) $ 1,795,411
================ ================ =============== ================
February 28, 2001 $ 326,936 $ - $ (35,532) $ 291,404
================ ================ =============== ================
Reserve for investment
February 28, 2003 $ 1,822,487 $ 700,000 $ - $ 2,522,487
================ ================ =============== ================
February 28, 2002 $ 388,652 $ 1,433,835 $ - $ 1,822,487
================ ================ =============== ================
February 28, 2001 $ 148,652 $ 240,000 $ - $ 388,652
================ ================ =============== ================
The accompanying notes are an integral part of these financial statements.
44