<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 1996 Commission File Number 0-17249
AURA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4106894
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2335 ALASKA AVE.
EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 643-5300
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at October 7, 1996
----- -------------------------------
<S> <C>
Common Stock, par value 67,383,391 Shares
$.005 per share
</TABLE>
================================================================================
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information 2
Condensed Consolidated Balance Sheets
as of August 31, 1996 and February 29, 1996 3
Condensed Consolidated Statement of Operations
for the Three Months and Six Months Ended August 31, 1996
and 1995 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended August 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 4. Submission of Matters to Vote by Security Holders 11
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
QUARTER ENDED AUGUST 31, 1996
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared by Aura Systems,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). As contemplated by the SEC
under Rule 10-01 of Regulation S-X, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended February 29, 1996 as filed with the SEC (file number 0-17249).
2
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29,
1996 1996
---------- ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and equivalents $ 10,159,400 $ 21,900,364
Trade receivables and other 40,125,092 37,512,564
Inventories and Contracts in progress 31,154,337 23,883,964
Other current assets 10,970,394 9,257,060
------------ ------------
TOTAL CURRENT ASSETS 92,409,223 92,553,952
------------ ------------
Property and equipment, at cost 32,624,023 30,012,084
Less accumulated depreciation
and amortization (7,712,293) (6,698,849)
------------ ------------
NET PROPERTY AND EQUIPMENT 24,911,730 23,313,235
Long-term Investments 6,768,387 4,165,000
Long-term Receivables 5,296,344 4,414,344
Patents- net 2,432,697 2,294,059
Investments and Joint Ventures 4,794,528 3,002,225
Deferred charges 1,003,305 1,376,506
Other assets 7,532,124 2,961,247
------------ ------------
$145,148,338 $134,080,568
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current installments of notes payable $ 3,701,454 $ 3,378,758
Accounts payable and accrued expenses 9,167,694 17,812,312
------------ ------------
TOTAL CURRENT LIABILITIES 12,869,148 21,191,070
Convertible Notes 11,512,900 11,662,900
Notes payable and other liabilities 4,945,894 2,063,492
STOCKHOLDERS' EQUITY
Common stock, issued and out-
standing 67,299,391 and 62,222,438
shares respectively 182,371,829 166,845,201
Accumulated deficit (66,551,433) (67,682,095)
------------ ------------
Net stockholders' equity 115,820,396 99,163,106
------------ ------------
$145,148,338 $134,080,568
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $23,855,464 $17,689,005 $45,979,896 $27,214,373
Cost of revenues 17,559,134 14,480,395 33,189,660 21,752,429
----------- ----------- ----------- -----------
GROSS PROFIT 6,296,330 3,208,610 12,790,236 5,461,944
EXPENSES
General and administrative 3,557,884 3,677,333 7,943,211 6,150,896
Research and development 2,001,826 526,741 3,464,114 988,804
----------- ----------- ----------- -----------
Total costs and expenses 5,559,710 4,204,074 11,407,325 7,139,700
----------- ----------- ----------- -----------
INCOME (LOSS ) FROM OPERATIONS 736,620 (995,464) 1,382,911 (1,677,756)
OTHER (INCOME) AND EXPENSE
Interest income (43,105) (162,529) (148,703) (184,341)
Interest expense 254,799 142,472 400,952 241,535
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 524,926 $ (975,407) $ 1,130,662 $(1,734,950)
=========== =========== =========== ===========
NET INCOME (LOSS ) PER SHARE $ .01 $ (.02) $ .02 $ (.04)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES USED
TO COMPUTE NET INCOME (LOSS )
PER SHARE 66,069,088 50,721,313 64,394,950 48,075,734
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET CASH (USED) IN OPERATIONS $(20,310,636) $(20,812,653)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,883,741) (3,516,952)
NET CASH PROVIDED BY (USED) IN INVESTING
ACTIVITIES (1,883,741) (3,516,952)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from short-term borrowing 183,187 254,225
Proceeds from issuance of convertible debt 8,850,000 1,174,830
Repayment of debt (548,274) (460,578)
Proceeds from exercise of stock options 35,000 96,160
Proceeds from exercise of warrants 432,000 -
Proceeds from issuance of common stock 1,501,500 36,894,698
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,453,413 37,959,335
------------ ------------
NET INCREASE (DECREASE) IN CASH (11,740,964) 13,629,730
Cash and cash equivalents at beginning of year 21,900,364 3,827,500
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,159,400 $ 17,457,230
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 396,803 $ 232,207
Income tax 8,400 6,400
============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
In the six months ended August 31, 1996 $9,000,000 of convertible notes payable
were converted into common stock.
In the six months ended August 31, 1996, the Company issued 640,000 shares of
common stock for the acquisition of MYS Corp.
In the six months ended August 31, 1995, the Company entered into financing
arrangements whereby it acquired equipment in exchange for three notes payable
in the amount of $178,343.
In August 1995, 81,950 shares of common stock were issued for the conversion of
$312,500 of convertible debt and the payment of $18,750 in associated interest.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AURA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
1) MANAGEMENT OPINION
The condensed consolidated financial statements include the accounts of
Aura Systems, Inc. ("the Company") and subsidiaries from the effective dates of
acquisition. All material inter-company balances and inter-company transactions
have been eliminated.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) and reclassifications for comparability necessary to
present fairly the financial position and results of operations as of and for
the three and six months ended August 31, 1996.
2) MYS CORPORATION
On February 20, 1996 the Company entered into a Memorandum of Understanding
("MOU") with the principal shareholders of MYS Corporation of Japan setting
forth the Company's intent to purchase and the shareholder's intent to sell 100%
of the outstanding shares of MYS, in exchange for shares of Aura common stock in
an amount and number to be determined. The MOU established a framework in which
the Company could conduct its due diligence and negotiate a definitive sale and
purchase agreement.
In the quarter ended May 31, 1996, the Company concluded its due diligence
and executed a definitive Stock and Investment Purchase Agreement with all the
MYS shareholders. The principal terms of the Stock and Investment Purchase
Agreement required the Company to issue common stock in such number of shares as
would equal Two Million Dollars in exchange for all outstanding shares of MYS
and its subsidiaries. In addition, the Company would assume existing long term
liabilities not to exceed Four Million Dollars and all assets of MYS and its
subsidiaries. MYS Corp. now operates as a wholly owned subsidiary and its
results of operations have been consolidated with the Company effective March 1,
1996.
In addition to its corporate offices in Japan, MYS has manufacturing
operations in Malaysia and the U.S.A. MYS provides speakers to an OEM customer
base which includes Radio Shack as its most significant customer.
3) CAPITAL
In the six months ended August 31, 1996, options to purchase 10,000 shares
of common stock and warrants to purchase 192,200 shares of common stock were
exercised resulting in proceeds of $467,000. Additionally the Company received
proceeds of $1,501,500 from the sale of 385,000 shares common stock which
occurred and was reported in the quarter ended May 31, 1996.
4) SIGNIFICANT CUSTOMERS
Sales of computer monitors to a single unrelated party in the six months
ended August 31, 1996 totalled $9,694,358 or 21% of revenues as compared to
$8,698,149 or 32% of sales to three unrelated parties in the comparable prior
year period. These customers are not related or affiliated with any other
customer of the Company. Although no long term agreement exists with these
customers, the Company does not believe that sales to these customers will be
abruptly curtailed. The Company anticipates that these sales will decrease as a
percentage of sales in the upcoming quarters. There were no sales to Micro
Computer Distributing Company in the current fiscal year compared to $3,783,613
in the prior year period.
6
<PAGE>
Sales of speakers to a single unrelated customer totalled approximately $9
million in the six months ended August 31, 1996. There were no sales to this
customer in the prior year period. This customer is not related to or affiliated
with any other customer of the Company. Based upon existing contracts and
delivery schedules, the Company expects sales to this customer to continue to
increase over the remainder of the current fiscal year.
5) CONTINGENCIES
The Company is engaged in various legal actions listed below. To the extent
that judgment has been rendered, appropriate provision has been made in the
financial statements.
Shareholder Litigation
----------------------
On May 17, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former executive officer as defendants, were filed in
the United States District Court for the Central District of California (Case
Nos. CV-95-3296). Both complaints (the "Complaints") purport to be class actions
on behalf of all persons who purchased common stock of Aura during the period
from May 28, 1993 through January 17, 1995, inclusive (the "Class Period"). The
Complaints allege that as a result of false and misleading information
disseminated by the defendants, the market price of Aura's common stock was
artificially inflated during the Class Period. Specifically, the Complaints
allege that (i) in its periodic reports filed with the SEC during the Class
Period and/or certain public announcements made during that period, the Company
increased its reported revenues by overstating products sales and certain
licensing fees and (ii) the Company misstated the sophistication and quality of,
and commitments for the Company's "Interactor Vest." The Complaints request
damages in an unspecified amount under certain federal securities laws. The
Company believes that this action is frivolous and that it has meritorious
defenses to all these claims. The Company filed motions to dismiss the
complaints on August 4, 1995. The plaintiffs did not oppose the motions to
dismiss but instead filed a consolidated amended complaint on September 1, 1995.
On October 2, 1995, the Company filed its motion to dismiss the consolidated
amended complaint. On November 20, 1995, the court dismissed the consolidated
amended complaint without prejudice and granted plaintiffs 10 days leave to
amend. Plaintiff's filed their second amended complaint on December 5, 1995. The
Company filed motion to dismiss the second amended complaint on December 22,
1995. At a hearing on the defendant's motion on January 16, 1996, the Court
denied the motion.
On February 16, 1996, the Company filed its motion for summary judgment. At
a hearing on the summary judgment motion on April 15, 1996, the court granted
the Company's motion. Judgment dismissing the action was entered on April 16,
1996. Plaintiffs filed a Notice of Appeal to the judgment on May 16, 1996, and
the appeal is now pending before the federal appeals court.
SEC Proceedings
---------------
On October 2, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an administrative
proceeding against Aura Systems, Zvi Kurtzman, Aura's former chief financial
officer, and one other person, which proceeding was settled on consent of all
the parties, without admitting or denying any of the Commission's findings. In
its order, the Commission found that Aura and the others violated the reporting,
recordkeeping and anti-fraud provisions of the securities laws in 1993 and 1994
in connection with its reporting on two transactions in reports previously filed
with the Commission. The Commission's order directs that each party cease and
desist from committing or causing any future violation of these provisions. The
transactions in question involved (1) the purchase and sale of computer monitors
by Aura to a company called Micro Computer Distribution Power ("MCDP") and (2)
Aura's reporting on its agreement with a company called John Jory Corporation
("Jory"). The Commission found that, in addition to disclosing that
7
<PAGE>
MCDP was a significant customer of Aura's, Aura should have disclosed more
details about the nature of the transactions. The Commission found that Aura's
disclosures were misleading in not discussing further the nature of the
transactions and that the revenues did not involve sales of Aura's products or
technologies. The MCDP transactions had no material impact on Aura's reported
losses. As disclosed in later filings, the MCDP transactions, which generated
little or no profit, were part of Aura's long range strategy to develop
relationships with manufacturers, suppliers and distributors for a series of
computer-related applications that Aura has since introduced into the market.
The Jory transaction relates to Aura's original reporting on this
transaction in its Form 10-Q for the nine months ending November 30, 1993. The
Commission found that the Jory transaction as originally reported was used to
improperly recognize $1.1 million in revenue during Aura's third quarter for
fiscal 1994. Most of the revenue and expenses originally reported from the Jory
transaction were excluded from Aura's financial statements for the year ended
February 28, 1994. In 1994, Aura's Form 10-Q for November 30, 1993, was amended
with respect to the Jory transaction. This adjustment had no material impact on
Aura's reported losses.
The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with the
Commission. Also, the Commission did not seek any monetary penalties from Aura,
Mr. Kurtzman or anyone else. Neither Mr. Kurtzman nor anyone else personally
benefited in any way from these events.
Other Litigation
----------------
The Company is also engaged in other legal actions arising in the ordinary
course of business. In the opinion of management based in part upon the advice
of counsel, the ultimate resolution of these matters will not have a material
adverse effect. Therefore, no provision for these matters has been made in the
Company's consolidated financial statements.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended August 31, 1996, the Company earned $524,926 on
revenues of $23,855,464 compared to a loss of $975,407 on revenues of
$17,689,005 for the comparable period of Fiscal 1995. For the six months ended
August 31, 1996, the Company earned $1,130,662 on revenues of $45,979,896,
compared to a loss of $1,734,950 on revenues of $27,214,373 in the prior year
six months.
Revenue for the three and six month periods ended August 31, 1996 increased
by $6,166,459 and $18,765,523 respectively, from the corresponding periods in
the prior year. The increased revenues resulted primarily from sales from the
Company's NewCom subsidiary and sales of speaker products including the
Company's new subsidiary MYS Corporation.
Sales of computer monitors to a single unrelated party in the six months
ended August 31, 1996, totaled $9,694,358 or 21% of revenues compared to
$8,698,149 or 32% of revenues to three unrelated customers in the comparable
prior year period. There were no sales to Micro Computer Distributing Company in
the current year six months as compared to $3,783,613 in the prior year.
Additionally, sales of computer related multimedia products to a single
unrelated party in the prior year six months totalled $5,081,635 or 19% of
sales. There were no sales to this customer in the current year period.
Sales of speakers to a single unrelated customer totalled approximately $9
million in the six months ended August 31, 1996. There were no sales to this
customer in the prior year period. This customer is not related to or affiliated
with any other customer of the Company. Based upon existing contracts and
delivery schedules, the Company expects sales to this customer to continue to
increase over the remainder of the current fiscal year.
Cost of revenues for the three and six months ended August 31, 1996
increased by $3,078,739 and $11,437,231 in comparison with the corresponding
periods in the prior year as a result of the increase in purchased parts
associated with the increase in sales of the variety of products sold by the
Company.
Research and development costs for the three and six months ended August
31, 1996 increased by $1,475,085 and $2,475,310 as the Company continued to
expand its efforts in refining its patented technologies into products it is
preparing to bring to market.
General and administrative costs decreased for the three month and
increased for the six month period by $119,449 and $1,792,315 respectively
primarily due to the Company's continued expansion of its facilities and staff
including the acquisition of MYS Corp. The Company expects that with its
continued expansion, general and administrative expenses will continue to
increase.
Depreciation and amortization for the three and six months ended August 31,
1996 totaled $711,822 and $1,665,760 compared to $1,031,961 and $2,126,819 in
the prior year periods due to the write offs taken in the prior fiscal year.
The Company had net interest expense of $211,694 and $252,249 for the three
and six months ended August 31, 1996, compared with net interest income of
$20,057 and net interest expense of $57,194 for the prior year.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended August 31, 1996, cash decreased by $11,740,964 to
$10,159,400 from $21,900,364, at February 29, 1996. Accounts payable and accrued
expenses decreased by $8,644,618 from February 29, 1996. Inventories increased
by $7,270,373 due partially to the Company's new subsidiary MYS Corp., and
partially due to the need to increase inventories available for the fall selling
season.
The increase in receivables of $2,612,528 is due partially to the
acquisition of MYS Corp. and partially to the increase in sales volume which was
concentrated in the last month of the quarter as sales began to increase for the
fall selling season.
Cash flows used in operations decreased by $502,017 compared to the prior
year six months. Working capital increased to $79,540,075 from $71,362,882 over
the fiscal year end level, with the current ratio improving to 7.2 from 4.4:1.
In the six months ended August 31, 1996, financing activities contributed
$467,000 from the exercise of options to purchase 10,000 shares of common stock
and the exercise of warrants to purchase 192,200 of common stock. Additionally,
the Company received proceeds of $1,501,500 from the sale of 385,000 shares of
common stock which occurred and was reported in the quarter ended May 31, 1996.
In the six months ended August 31, 1995, financing activities contributed
$96,160 from the exercise of options to purchase 33,000 shares of common stock
and $36,894,698 from the sale of 11,236,280 shares of common stock.
In the past, the Company's cash flow generated from operations has not been
sufficient to completely fund its working capital needs. Accordingly, the
Company has also relied upon external sources of financing to maintain its
liquidity, principally private and bank indebtedness and equity financing. No
assurances can be provided that these funding sources will be available in the
future. The Company expects that, with the increasing shipments of the Bass
Shakers, speakers, multimedia kits, modems and sound cards, cash flows and
results of operations should be favorably impacted in the future.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
For information regarding pending legal proceedings, see Note 5 to the
Company's Condensed Consolidated Financial Statements appearing
elsewhere herein.
ITEM 4 Submission of Matters to Vote by Security Holders
The Company held its Annual Meeting of Shareholders on September 5,
1996. At the Annual Meeting all of the Company's eight Directors were
re-elected for a one year term. Zvi Kurtzman, Arthur Schwartz, Anthony
Cascio, Cipora Kurtzman Lavut, Norman Reitman, Neal Kaufman, Harvey
Cohen and Phillip Saffman.
ITEM 6 Exhibits and Reports on Form 8-K
a) Exhibits:
See Exhibit Index
b) Reports On Form 8-K:
The Company filed a report on Form 8-K dated September 29, 1996,
regarding the acquisition of all of the outstanding stock of MYS
Corporation.
11
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
----------------------------------------
(Registrant)
Date: October 10, 1996 By: /s/ Steven C. Veen
----------------------------------------
STEVEN C. VEEN
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Page No.
<S> <C> <C>
EX-27 Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 10,159,400
<SECURITIES> 0
<RECEIVABLES> 40,125,092
<ALLOWANCES> 0
<INVENTORY> 31,154,337
<CURRENT-ASSETS> 0
<PP&E> 32,624,023
<DEPRECIATION> 7,712,293
<TOTAL-ASSETS> 145,148,338
<CURRENT-LIABILITIES> 12,869,148
<BONDS> 0
0
0
<COMMON> 182,371,829
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 145,148,338
<SALES> 45,979,896
<TOTAL-REVENUES> 45,979,896
<CGS> 33,189,660
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,407,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252,249
<INCOME-PRETAX> 1,130,662
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,130,662
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
