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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______COMMISSION FILE NUMBER 0-17249
AURA SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4106894
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2335 ALASKA AVE.
EL SEGUNDO, CALIFORNIA 90245
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310) 643-5300
REGISTRANT'S TELEPHONE NUMBER
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
At June 11, 1997 the aggregate market value of the voting stock held by non-
affiliates of the Registrant was $130,001,799. The aggregate market value has
been computed by reference to the average bid and average asked price of the
stock on June 10, 1997. On such date the Registrant had 78,944,704 shares of
Common Stock outstanding.
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This Report contains forward looking statements that involve risk and
uncertainties. The Company's future results could differ materially from those
anticipated in such forward looking statements as a result of certain factors,
including those set forth under "Business--Forward Looking Statements"
appearing elsewhere in this Report.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, is
engaged in the development, commercialization and sales of products, systems
and components using its patented and proprietary electromagnetic and electro-
optical technology, as well as the sale of other products which do not utilize
this technology, such as CD-ROMs, sound cards, multimedia kits, modems, and
computer monitors. The Company's proprietary and patented technology is being
developed for use and incorporation in systems and products for commercial,
industrial, consumer and government use. To date, a combination of Aura funds
and commercial and governmental development contracts have been utilized in
the process of developing product applications.
Prior to Fiscal 1992, the Company was engaged in work on various classified
military programs which allowed the Company to develop its electromagnetic and
electro-optical technologies and applications. Since such time, the Company
completed the transition from a supplier of defense related technology to a
manufacturer and supplier of consumer and industrial related products and
services to the private sector.
In 1994, the Company founded NewCom, Inc. ("NewCom") as a wholly owned
subsidiary to engage in the manufacture, packaging and distribution of
computer related products, including modems and multimedia products, and
expand its presence in the growing multimedia and consumer electronics market.
In 1996, in order to expand the range of its sound products and speaker
distribution network, the Company acquired 100% of the outstanding shares of
MYS Corporation of Japan ("MYS"), which is engaged in the manufacture and sale
of speakers and speaker systems for home entertainment and computers.
In 1996, the Company combined its operations into four operating divisions:
(1) AuraSound, Inc. ("AuraSound"), which manufactures and sells professional
and consumer sound systems and components and products, including speakers,
amplifiers, and Bass Shakers(TM); (2) NewCom, which manufactures, packages,
sells and distributes computer related communications and sound related
products, including CD-ROM drives, modems, computer speakers, monitors, sound
cards and multimedia kits; (3) Automotive and Industrial, which is
commercializing products with automotive and industrial applications,
including AuraGen(TM) and EVA(TM); and (4) Display Systems, which is
commercializing Aura's actuated mirror array technology ("AMA(TM)") in
consumer and commercial display systems for use in televisions, computer
displays and theaters.
Set forth below is a summary description of the Company's technology and its
applications.
DESCRIPTION OF BUSINESS
PRINCIPAL TECHNOLOGIES
MAGNETICS TECHNOLOGY
The Company has developed and patented highly efficient magnetic circuits,
which provide substantial improvements over devices of similar purpose which
were available prior to Aura's technology. These designs include
electromagnetic actuators, such as the HFA(TM) and the EMA(TM) actuator
designs, and electromagnetic power generation technology incorporated into the
AuraGen(TM) products which are being readied for production.
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. Magnetic High Force Actuators (HFA(TM))
An actuator is a device that creates a lateral force upon command. Actuators
are used in a wide range of applications, including high speed, precision
applications such as audio speaker drivers, computer-controlled applications
such as the control of aircraft flaps, and heavy-duty applications such as the
lifting of the bed of a dump truck. Actuators are generally hydraulic,
pneumatic, mechanical or voice coil. Hydraulic, pneumatic and mechanical
actuators can produce extremely high forces and long strokes in relatively
small packages. Voice coil actuators provide high precision and high speed
operation, producing short stroke and very little force. Actuators are most
commonly used to position objects, or to create or cancel vibrations by
producing a force upon command.
A voice coil actuator uses a law of physics known as Lorentz's Law to
convert electricity directly into force. When electricity goes through a wire,
it creates a magnetic field around that wire. If that wire is exposed to an
external magnetic field, these fields "repel" each other in the same way as
two magnets will repel. If the external magnetic field is held constant, the
repelling force is proportional to the level of electric current in the wire.
This property permits voice coil actuators to be controlled precisely and to
react quickly.
Aura's high force electromagnetic actuator HFA(TM), is the first "Lorentz's
Law" actuator to provide both the high forces and long strokes produced by
hydraulic or pneumatic actuators at the speed and precision of response
produced by voice coil actuators. This ability is attributable to the patented
magnetic design. High energy permanent magnets are arranged to focus nearly
all of their magnetic energy into useful work. Standard voice coil actuators
typically utilize about 40% of the available magnetic energy whereas Aura's
HFA(TM) uses nearly 90% of that energy. The magnetic arrangement also allows
virtually unlimited stroke potential. Standard voice coil actuators typically
provide less than one inch of stroke whereas the HFA(TM)'s stroke is virtually
unlimited. For example, Aura's HFA(TM) is capable of producing more than 1,000
pounds of force over a 32 inch stroke.
A major advantage of Aura's HFA(TM) design is its simplicity. With one
moving part, the Aura HFA(TM) can replace motor-driven actuators with their
associated gearboxes, and hydraulic and pneumatic actuators with their
compressors, fluid valves, seals, etc. Because it is controlled
electronically, an HFA(TM) can be driven directly by computer command. The
Company has commercially employed its HFA(TM) technology in applications such
as audio speakers, motion simulators and actuated weld heads.
The HFA(TM) design has a number of other advantages. As the HFA(TM) is an
all electromagnetic device, it does not require the use of any environmentally
regulated fluid or organic chemical in its use and operation. Because of its
design, this device does not radiate electromagnetic energy, and thus is
automatically shielded. The HFA(TM) can be packaged in a variety of sizes and
shapes and serve as a replacement part without the need for retooling for most
applications. Finally, the efficiency of the HFA(TM) is such that, in many
applications, the system cost using this product is lower going in and
considerably lower in maintenance throughout the life of the machine.
. Electromagnetic Actuator ("EMA(TM)")
During Fiscal 1995, the Company developed, built and demonstrated a new type
of actuator, called the Electromagnetic Actuator, or EMA(TM). EMA(TM) was
developed to fill the performance gap between linear actuators and solenoids.
To date, the principal application of the EMA(TM) has been in Aura's
Electromagnetic Valve Actuator System ("EVA(TM)"), a patented
electromagnetically powered system which opens and closes engine valves at any
user specified time.
Like a solenoid, EMA(TM) operates on purely electromagnetic principles, and
therefore uses no permanent magnets. It is extremely simple in construction (1
moving part, 5 parts total) and is extremely rugged. It was developed
initially for the industrial and automotive markets, but has shown promise in
the test equipment market as well. An EMA(TM) is physically equivalent in size
to solenoids with comparable force capacities, and can be operated at
temperatures exceeding 450 degrees Fahrenheit.
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What sets EMA(TM) apart from a standard solenoid, is its ability to custom-
tailor the force produced as a function of stroke. For example, an automotive
EGR valve requires peak force at the beginning of the stroke in order to
"crack" the valve open. A standard solenoid, by its very nature, produces peak
force at the end of its stroke, not at the beginning. Therefore, a solenoid
will require a large amount of power to compensate for its inherent
limitation. Conversely, the force profile of an EMA(TM) can be customized to
provide high force at the beginning of the stroke, resulting in a more
efficient device that is much easier to control for the EGR application.
Another advantage of EMA(TM) over a solenoid, is its actuator-like ability
to provide consistent force over much longer lengths. As stated above, a
solenoid produces peak force at the end of the stroke. To be used for an
application requiring proportional control, a "proportional" solenoid requires
complex electronics to compensate for this inherent non-linearity. An EMA(TM)
basically "spreads" the solenoid's peak force over the entire stroke,
providing linear force over a greatly extended stroke length without need for
complex electronics.
. Magnetic Materials
The Company is pursuing research into magnetic materials based on the work
of its Russian research located in Moscow. The principal research involves the
development of new materials and improvement in the manufacturing technology
and processes of magnet production used by the Company in its devices.
Significant progress has been reported in three major areas affecting high
energy magnets.
The Company holds proprietary know how and patents from its Russian research
dealing with a new formulation and processing of one of the major high energy
magnet materials. The formulation can be readily manufactured in a number of
shapes, including ring magnets which can greatly simplify the production of
some of the company's magnetic products.
The manufacturing process for the above material appears to offer
considerable potential for cost savings during material production. This
process allows for greater variation in the initial composition of material
thus providing higher yield.
DISPLAY SYSTEM TECHNOLOGY
. Light Efficient Displays--Actuated Mirror Array ("AMA(TM)")
The Company has developed and patented a technology (a "light valve") for
generation of images called the Actuated Mirror Array ("AMA(TM)") technology.
It utilizes an array of micro actuators in order to control tiny mirrors whose
position change is used to cause a variation in intensity. The Company expects
this device to have a major impact on applications where light efficiency is
paramount, such as in large screen television, movie and exhibition displays,
and the testing of electro-optical devices for military or civilian use. The
Company believes that the AMA(TM) can be manufactured at a competitive cost in
large quantities, thus making it commercially feasible. Thus, AMA(TM) based
devices are expected to offer the combination of increased display intensity
at a lower production cost.
Light displays, such as projectors and large screen televisions, can be made
by a number of techniques, many of which are currently available. These
include liquid crystal displays ("LCD"), cathode ray tubes ("CRT"), deformable
mirror displays ("DMD"), oil film projectors and plasma tubes. For the segment
of the display market addressing large images, the principal requirement is to
get more light out per unit watt of electricity in. However, each of these
technologies requires the utilization of an element which causes a loss of
light efficiency in order to create the image.
Liquid crystals utilize an electric field to change the light polarization
properties of a surface which is divided into an array of cells to paint an
image. Cathode ray tubes utilize an electron beam which is bent by the video
signal to create images by colliding with a phosphor on the front surface to
create light. DMD's utilize an electric field to bend a mirror at a large
angle to switch it to either "on" or "off". Oil film projectors change the
transmissive properties of an oil film allowing an image to be created. Plasma
tubes create an electrical
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discharge in a tiny tube with gas. The gas glows allowing an image to be
created by an array of such tiny tubes. Each of these technologies has their
own advantages and limitations, thus creating niches within the display market
where competitive advantages can be achieved.
The AMA(TM) technology is considerably different from the mirror array
technology known as "DMD", which is not covered by Aura's patents. DMD
technology does not utilize an actuator to steer the mirror which, due to lack
of controllability, can only be commanded to either full "on" or "off" in
intensity. DMD images are created by dividing the sampling time available for
a given video frame, thus causing a larger motion of the mirrors at more
stressing rates than Aura's technology requires. The Company believes that the
AMA(TM) technology has a technical advantage over DMD technology in achieving
higher contrast, more intensity and longer lived elements.
The Company has entered into a license and manufacturing agreement with
Daewoo Electronics Co., Ltd. to manufacture televisions and other devices
based on AMA(TM) technology. See "Business--Products--Display Systems."
COMMUNICATIONS TECHNOLOGY
. Signal Processing Patents
The Company acquired the patents and all rights to commercialize a
technology developed by Dr. Daniel Graupe of the University of Illinois, an
internationally recognized scientist. The technology, known as Blind Adaptive
Filtering, is an optimal process of filtering noise from electronic signals.
Such signals include data coming over satellites and/or telephone lines,
signals in the air for television, or even signals in the electronics
associated with hearing aids. The Blind Adaptive Filter gives optimal
performance due to the lack of assumptions required. Such filter requires no
special statistical knowledge of the signal nor noise processes, which is
juxtaposed to existing noise filtering processes.
The Company is developing a version of these noise reduction devices to use
in NewCom fax modems. If successful, devices with these components in them
should be able to operate at significantly higher data rates than conventional
devices. However, no assurances can be given that these noise suppression
filters will be successful for the fax modem application and even if
successful, no assurances can be given to the time needed to bring such
products to market.
PRODUCTS
SOUND RELATED PRODUCTS
. Speakers
Aura has developed audio speakers based upon Aura's patented electromagnetic
actuator and other proprietary magnetic and acoustical techniques. Of the
estimated one-half billion loudspeakers manufactured and sold each year around
the world, approximately 95% use a voice coil motor to produce the movement of
the speaker cone. The basic design of the voice coil motor has not
fundamentally changed since its initial introduction, almost 100 years ago.
Aura has developed a more efficient voice coil motor utilizing a new type of
magnetic structure--based upon Aura's patented line of high force linear
actuators (HFA(TM))--to drive speaker cones. Utilizing the Company's "Neo-
Radial Technology" ("NRT(TM)"), Aura has developed speakers that are more
efficient, which require no magnetic shielding and provide longer stroke for
deeper base as well as lower distortion due to its under-hung magnetic
configuration. Aura's expertise and know-how in magnetic materials, circuits
and actuation has also resulted in other proprietary speaker designs that
provide improved power capabilities as well as lower distortion, using dual
magnetic systems ("DMS(TM)") circuits and magnetic circuits and drivers using
combinations of Neo and ferrite magnets.
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AuraSound NRT(TM) Speakers. AuraSound NRT(TM) audio speakers have been sold
commercially since 1992, and are currently being sold to both end users and
computer and television OEM's as well as the auto aftermarket and the
professional sound market. In Fiscal 1997, the AuraSound division introduced
three new product lines with over 20 products utilizing its proprietary
technology: Aspect(TM) multi-media speakers (NRT(TM)), designed for the
computer multimedia market; the Mobile Reference(TM) Series (NRT(TM)), which
is the top-of-the-line for car sound aftermarket, and the Force(TM) Series
(DMS(TM)), which is a middle-of-the-line car aftermarket sound system.
Aspect(TM) Series speakers are sold through dealers and mass merchandisers
throughout the country, both as stand alone products and packaged in
multimedia kits. The auto aftermarket speakers are sold through dealers and
installers.
MYS Speakers. The AuraSound division expanded its range of sound products
and distribution channels in 1996 with the acquisition of MYS Corporation of
Japan ("MYS"). MYS owns the Linaeum(TM) line of home audio speakers, which
utilize a patented advanced line source driver technology. The driver utilizes
a deformable ribbon which forms a figure eight centered about an integrated
voice coil. The voice coil is driven at right angles to the magnet which
surrounds it. The ribbon becomes the sound generating surface creating an
acoustic dispersion much wider than a cone is able to produce. MYS also
manufactures, markets and sells other moderately priced, conventional
multimedia and bookshelf sound systems through Radio Shack and others.
Revolver(TM) Speakers. The AuraSound division expanded its range of sound
products for home theater in Europe with the acquisition of Revolver U.K.
Limited ("Revolver(TM)") in the latter part of 1996. Revolver(TM) markets and
sells middle range home theater sound systems in the U.K. and many of the
other European countries. Currently, Aura is upgrading the Revolver(TM) line
with its technologies for both NRT(TM) drivers, line source and other
acoustical techniques developed by AuraSound engineering.
Professional Speakers. AuraSound NRT(TM) speakers are showcased by its
wholly owned subsidiary, Electrotec, Inc., which leases high end concert sound
systems to the contemporary touring music industry. In addition, the
AuraSound(TM) professional NRT(TM) speakers are sold to high end manufacturers
and distributors.
. Bass Shakers(TM)
In Fiscal 1995, the Company commenced production of the Bass Shaker(TM), a
patented electromagnetic actuator which generates the bass effect of a large
sub-woofer in both car and home stereo systems without producing the loud
volume which typically accompanies bass range speakers. The Bass Shaker(TM) is
an electromagnetic actuator where the coil is stationary and the magnetic
assembly is moving. The force created by this motion generates a "felt bass"
when responding to low sound vibrations. This makes the Bass Shaker(TM) a very
compact and efficient subwoofer. The Bass Shaker(TM) is bolted to the auto
floor (under the seats or on the sides) and then connected to the existing
stereo system. With the Bass Shaker(TM), the driver and passengers get the
feel and sound of a very large subwoofer without producing sound outside of
the car. In 1996, the Company also introduced the Bass Shaker Plus(TM), a
complete system that includes the Bass Shakers(TM), a fader system, an Aura
digital amplifier and installation accessories. Currently, the Bass Shaker(TM)
and Bass Shaker Plus(TM) are sold through approximately 400 dealers across the
U.S. Alpine Electronics of North America, Inc. is an OEM for the Bass
Shaker(TM) and both systems are sold internationally through distributors.
. Interactors and Theater Seat Transducers
The Company has developed a line of interactive products which utilize
Aura's electromagnetic technology. The first interactive product developed by
Aura, introduced in 1994, was called the Interactor(TM), a vest that
incorporated an electromagnetic actuator and configured to be worn over the
upper torso and plugged into video game systems. After a disappointing 1995
holiday season the Company decided to drastically curtail the Interactor
activities and stopped actively pursuing the business other than sell the
remaining inventory.
Aura also sells a Theater Seat Transducer System ("AVS(TM)"), which creates
an interactive experience in movie theaters with a movie action or sound
track. The AVS(TM) system is a variation of the Bass Shaker(TM)
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products used for cars and homes. Furthermore, the Company manufactures,
markets and sells an interactive cushion based on the same actuation system of
the Interactor(TM), which can be used with sound systems, computers and
televisions to enhance end user experiences. This product is sold through
distributors.
. Amplifiers
In order to fill its product line the Company acquired Phillips Sound Labs
("PSL(TM)") in August 1996, to provide 12 volt power amplifiers to complement
the speaker systems sold by the Company. These current amplifiers are sold
through dealers and distributors under the PSL(TM) and FORCE(TM) Series brand
names.
COMPUTER RELATED PRODUCTS
. Communications and Multimedia Products
Aura, principally through its NewCom subsidiary, is engaged in the
manufacture, packaging and sale of high performance computer related
communications and multimedia products for the personal computer market
through distributors and mass merchandisers. These products include, among
others, computer sound cards, which can be utilized with both AuraSound
NRT(TM) and conventional speakers, data fax modems, including 33.6 Kbps, 56
Kbps and ISDN with 921 Kbps, CD-ROM's, amplifiers and other components. NewCom
also manufactures and sells multimedia kits to end users in order to add or
upgrade multimedia capabilities to their personal computer systems. These
multimedia kits typically include CD-ROM's bundled with sound cards and
conventional 3" desktop speakers as well as numerous CD titles licensed from
unaffiliated third parties. Commencing in the fourth quarter of Fiscal, 1997
the Company has included its AuraSound NRT(TM) desktop speakers in its high
end, audiophile multimedia kits. CD-ROM's distributed by Aura and conventional
speakers contained in the multimedia kits are purchased from unaffiliated
third parties.
. Display Monitors
Since 1993, the Company has been distributing computer monitors manufactured
by unaffiliated third parties in order to develop relationships with potential
OEM customers for its speakers and other computer related products. The
Company has also recently commenced sales of computer monitors, mostly in
India, under both the NewCom and Aura brand names. In addition, in late 1996,
the Company acquired a license for NewCom's internet television solution and
expects to start shipping its unique WebPal(TM) set top box in the Summer of
1997. This WebPal(TM) appliance will allow consumers with standard television
sets to access the Internet. In late 1996, the Company also acquired a
distribution license from Alaris Inc., to market and distribute to dealers a
new product that will allow users to send both video and sound (VideoGram(TM))
through conventional E-mail. This system is composed of both hardware and
software.
AUTOMOTIVE AND INDUSTRIAL PRODUCTS
Aura has developed three novel automotive products, each of which has been
demonstrated through numerous working prototypes in a fully functioning
gasoline powered vehicle, and has spent considerable amount of effort in
Fiscal 1997 preparing for the manufacture of the AuraGen(TM) (See
AuraGen(TM)).
. Electromagnetic Valve Actuators ("EVA(TM)")
Over the past several years, the Company has been applying its patented
electromagnetic technology to a variety of applications. One application
developed is its electromagnetic valve actuator (EVA(TM)), which is an
electromagnetic actuator capable of opening and closing internal combustion
engine valves, replacing the mechanical camshaft on an engine. EVA(TM) uses
the power of electromagnets to open and close engine valves, and is capable of
accomplishing this in less than 3/1000 of a second. The engine computer that
is used on virtually all modern automobile engines will send to the EVA(TM)
electronic module a valve position command in the same way it will send a fuel
injector command. The EVA(TM) electronic module will implement the command and
wait for the next command from the computer.
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Two major benefits arise from the EVA's ability to open and close the valve
electromagnetically: 1) the camshaft and associated mechanical hardware can be
eliminated, 2) the opening and closing of the intake and exhaust valves can be
commanded by the engine computer. As an example, EVA(TM) has been retrofitted
on a 140 HP, 2.3L 4 cylinder Ford engine that is currently running in the
laboratory.
Computer control of the valve timing has potentially material benefits to
engine performance, fuel economy and emissions. With EVA(TM), the computer can
precisely control the amount of air that is allowed into the engine in the
same way that modern fuel injectors control the amount of fuel. By optimizing
this "fuel-air mixture" dynamically as a function of engine RPM and load,
optimum engine performance can be achieved over the entire operating range of
the engine. With a standard camshaft, the engine can be optimized at only one
range of RPM and load conditions. That is why very high performance engines
idle "rough", as they are optimized for high RPM, thereby sacrificing
smoothness at low RPM.
By optimizing the fuel-air mixture dynamically, both performance
(horsepower) and fuel economy will increase, while emissions are expected to
decrease. The implementation of EVA(TM) also greatly simplifies the engine
mechanically. The entire camshaft assembly, which includes timing chain,
camshaft, rockerarms, etc. is replaced by very simple valve actuators. Other
emission systems currently on the vehicle, such as the EGR (exhaust gas
recirculation) and IMRC (intake manifold runner control) valves can be
eliminated. Even the throttle assembly can be eliminated by using EVA(TM) to
control the amount of air going into the engine. Overall engine cost may be
substantially reduced.
Due to the Company's patented design, EVA(TM) requires relatively little
power to operate. Lab measurements have shown that the total power required to
operate EVA(TM) is typically well under 100 watts/valve. Because of friction
and mechanical losses, a typical camshaft requires 3 to 5 horsepower to
operate (1 hp=750 watts).
The Company has entered into contracts with 15 companies to retrofit EVA's
on different types of diesel, automobile and motorcycle engines.
. AuraGen(TM)
AuraGen(TM) is a unique electromagnetic generator that is mounted to the
automobile engine, which generates both 110 volt and 220 volt AC power when
the vehicle is running. AuraGen(TM) is the only load follower AC generator:
the power generated by AuraGen(TM) is directly proportional to the load on the
system. This allows for longer lifetime as well as more economical usage.
AuraGen(TM) turns a vehicle's idling engine into a generator capable of
producing thousands of watts of power. The AuraGen(TM) will be marketed and
sold in the automobile aftermarket through a network of independent
distributors. Potential markets include construction fleets, recreation
vehicles, military vehicles and emergency vehicles. The Company expects to be
in production of AuraGen(TM) in the second half of 1997.
In February 1997, the Company entered into a license agreement with K&K
Enterprises in India to commercialize the AuraGen(TM) in the Indian, Nepal,
Sri Lanka and Bangladesh markets. (The Company has established in the past,
speaker and Bass Shaker(TM) joint ventures with K&K. See discussion of K&K
Enterprises joint venture in the "Manufacturing Section"). The license
agreement calls for a license fee of $3,500,000 to be paid in payments over a
24 month period starting in June 1997 and a fixed per unit royalty for every
unit built and shipped in the licensed territory after December 1998.
Furthermore, all units will be identified on the product by an Aura trademark
("AuraGen"). Royalty payments per unit will be on a scheduled basis every
quarter after December 1, 1998.
. Sparking Gasket System ("SGS(TM)")
The Sparking Gasket System (SGS(TM)) structure is made up of a gasket
material and electric circuit with integrated sparking electrodes. SGS(TM) is
based upon highly unique materials developed exclusively by the Company. The
gasket material utilizes a proprietary polymer formulation with unique
additives. This allows the
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sparking system to perform under the extremes of internal combustion engine
operations. These range from sub-zero to wide open throttle, e.g., 1800F
temperatures and high voltage (40 KV+). Also, the materials are highly
tolerant of hot exhaust gases, engine coolant and oil. Gasket materials are
locally transformed by the engine's exhaust gases from a sealing rubber to a
ceramic heat barrier while the remaining rubber material seals with increasing
effectiveness. During Fiscal 1997, the Company started preparing the SGS(TM)
for production. However, most of the year was focused in getting the
AuraGen(TM) into production and thus the introduction of the SGS(TM) has been
delayed. The Company expects to return to the SGS gasket program as soon as
AuraGen(TM) production is ongoing.
. Industrial Applications
The Company believes that the sphere of industrial applications for
electromagnetic technology is large. In the last few years prototypes using
this technology have been built for evaluation in a variety of industrial
applications. The prototypes and limited production units currently being
tested and evaluated have potential automotive, industrial, petrochemical,
aviation and consumer applications. These applications include fuel flow
control, active welding, fluid power control, shaker control, structure
control, redraw actuation for aluminum can making, flight motion simulation
and amusement rides. The Company has commercially incorporated its technology
in its speaker line, motion simulators, amusement rides, redraw actuators for
aluminum can-making machines, and actuated weld heads.
In 1994, the Company formed Auratech, Inc. as a joint venture to develop,
design, manufacture and market machine tooling robotics and industrial hand
tool applications of the Company's electromagnetics technology. In June, 1995,
Auratech entered into a license agreement with Detroit Center Tool ("DCT").
DCT is engaged in business relating to the design and integration of robotics
in automobile assembly lines. Under the licenses, DCT may manufacture the
Company's patented and proprietary electromagnetic actuator for an actuated
tool used in such assembly lines. Electronic controllers using the Company's
proprietary technology for use with the actuator built under license will be
purchased from the Company. The first application being sought by DCT for use
of the Company's electromagnetic actuator is in the actuation and control of
weld heads for chassis and body fabrication. Under the agreement DCT will pay
an annual license fee of $100,000 in 1997, $250,000 in 1998 and $1 million
every year thereafter for the life of the patents (approximately 16 years) in
order to keep worldwide exclusive applications for us in automotive assembly
lines. In late 1995, the Company purchased 50.1% of Auratech owned by its
joint venture partner. The Company now owns 100% of Auratech and operates it
as a wholly owned subsidiary.
DISPLAY SYSTEMS
In 1992, the Company entered into a joint development and licensing
agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and
commercialize televisions using Aura's AMA(TM) display technology. The
agreement provides for the payment by Daewoo to Aura of a $1,500,000 licensing
fee and the payment of approximately $2,000,000 by Daewoo to Aura for
development costs, all of which have been received by the Company. Aura also
is to receive a fixed royalty (depending on television size), for each
television set manufactured by Daewoo or licensed by Daewoo to a third party.
Under the agreement, Daewoo will be required, in the future, to license the
technology to all interested third parties. Furthermore, all the televisions
using the AMA(TM) will be identified on the product by an Aura trademark
("Aurascope(TM)"). Royalty payments will be on a scheduled basis upon
commencement of commercial production.
Daewoo, who is solely responsible for manufacturing and sales under the
license agreement, has advised the Company that it may be able to begin
commercial production of large screen display televisions under the license
agreement in 1997. There are no assurances as to when or if Daewoo will
commence commercial production of televisions incorporating Aura's AMA(TM)
display technology. The ultimate degree of success, if any, of this venture is
dependent on Daewoo.
8
<PAGE>
PRINCIPAL SOURCES OF REVENUE
For the year ended February 28, 1997, multimedia kits were the largest
single source of revenue, constituting $37.8 million, or 28% of revenues;
sound related products (exclusive of speakers in multimedia kits) contributed
$28.5 million, or 21%, the majority of which (approximately $18 million)
represents speaker sales by MYS Corporation; computer monitors and modems
contributed $17.2 million and $18.7 million of revenue, or 13% and 14%
respectively during Fiscal 1997. In Fiscal 1996 multimedia kits accounted for
$17 million of revenues, or 20%. During Fiscal 1996 modems and speakers
contributed $12 million and $9 million, or 15% and 11% of revenues,
respectively. For the fiscal years ended February 29, 1996 and February 28,
1995, sales of computer monitors accounted for revenues of $24.1 million and
$6.5 million, or 29% and 15%, respectively. During Fiscal 1995, Interactors
accounted for $21 million of revenues, or 48%. No other products accounted for
more than 10% of revenues during the foregoing periods.
SIGNIFICANT CUSTOMERS
The Company sold sound related products and computer related products to
five significant customers during Fiscal 1997. Sales by MYS Corporation to
Radio Shack accounted for approximately $18 million or 13% of revenues. Sales
of communications and multimedia products to major mass merchandisers Best
Buy, Circuit City, and Frys accounted for $20.0 million or 15% of revenues.
Sales of computer monitors to Mag Innovision accounted for $16.5 million or
12% of revenues.
COMPETITION
The Company is involved in the application of its technology to a variety of
products and services and, as such, faces substantial competition from
companies offering different and competitive technologies.
The Company believes the principal competitive factors in the markets for
the Company's products include ability to develop and market technologically
advanced products to meet changing market conditions, price, reliability,
product support and the ability to secure sufficient capital resources for the
often substantial periods between technological concept and commercialization.
The Company's ability to compete will also depend on its continued ability to
attract and retain skilled and experienced personnel, to develop and secure
patent and other protection for its technology and to exploit commercially its
technology prior to the development of competing products by others.
The Company competes with many companies that have more experience, name
recognition, financial and other resources and expertise in research and
development, manufacturing, testing, obtaining regulatory approvals, marketing
and distribution. Other companies may also prove to be significant
competitors, particularly through their collaborative arrangements with
research and development companies.
The Company's products and technologies compete in a variety of markets. The
following is a discussion of certain factors unique to certain of its
products.
. Speakers
The Company believes that the speakers using the AuraSound NRT(TM)
technology's advantages, as compared to conventional design speakers, are as
follows:
. Higher efficiency, lower distortion
. Enhanced bass output--for lower lows
. Longer cone excursion capability--for higher volume sound
. Improved linearity--for more accurate sound reproduction
. No magnetic shielding required--not expected to distort TV or
video/computer monitor displays or corrupt data in computers and disks
9
<PAGE>
. Low weight and small size
. Adaptable design which allows speakers of any size, shape and
performance to be manufactured.
In the speaker applications, the Company's NRT(TM) technology currently
provides products in four basic categories.
In the first category, the professional and high end of the market, the
Company believes its products to be competing for market share with JBL, EV,
Peavey, RCE, TAD and Rainbus-Heinz, among others. All of these competitors
provide a fine system based on traditional and conventional magnetic circuits.
The Company provides a new unconventional magnetic circuit which Aura believes
provides a competitive edge in performance.
In the second category of the market, which is referred to as television and
multimedia, the Company's technology provides superior sounding speaker
systems which do not require any magnetic shielding. While the Company is
experiencing continuous acceptance in the market place based on performance
and the magnetic shielding issues, it faces competition from numerous players
with conventional speaker designs such as Sony, Panasonic, Pioneer, Yamaha,
Altec-Lansing and others.
In the third category, the Company currently provides products that can be
referred to as OEM transducers. In this category, the Company provides speaker
systems without cabinets that can be used by others in their speaker system
products. The system provided by the Company is naturally magnetically
shielded and weighs on the average 33% less than other equivalent systems.
Here, the Company competes with Tenegan Foster, Harmon and Panasonic, among
many other smaller suppliers.
In the fourth category the Company provides its patented and proprietary
Bass Shaker(TM) in competition against large subwoofers that are supplied by
numerous companies such as JBL, Pioneer and Jensen. The Bass Shaker(TM) is
smaller, provides superior bass and does not generate large sounds. It is a
unique product in the market place.
. Computer Related Products
The Company has experienced a great deal of competition in the computer
related communications and multimedia products industry. In the communications
market, the Company's direct U.S. competitors include Zoom Telephonic,
Cardinal Technology, Boca Research, Best Data, Logicode, Hayes Microcomputers,
U.S. Robotics and MicroCom. In the multimedia products market, the Company's
direct competitors include Creative Laboratory Ltd., Aztec Systems Ltd.,
Diamond Technology, Inc., Hi-Val, and Pinnacle Micro.
Many of the Company's current and potential competitors have a significantly
greater market presence, name recognition and financial and technical
resources, and may have long standing market positions and brand name
recognition. Further, semiconductor components are purchased from a number of
vendors to obtain the most advanced components available. However, some of the
Company's competitors have captive semiconductor suppliers, which can give
them greater control over design, availability and cost.
This industry has been marked by consolidations in recent periods as a
result of severe operating losses or discontinuance of business. This
volatility and intense competitive pressure in these markets could adversely
affect this industry.
The market for computer related communications and multimedia products is
characterized by rapidly changing technology, short product life cycles and
evolving industry standards. The Company's success in this industry will
depend upon its ability to continually enhance its existing products and to
introduce new products on a timely basis. Accordingly, the Company intends to
continue to make investments in product and technological development.
10
<PAGE>
. Actuated Mirror Array (AMA(TM))
There are several competing technologies that are currently on the market or
under development to compete for the advanced display market. The Company has
competed with many of these technologies in its military scene projector
programs whereby direct experience of the relative merits of the different
approaches could be gauged. The key parameters which are considered in judging
displays are:
. Efficiency--How bright an image can be produced per watt of electricity
driving it?
. Maximum Brightness--Are there any physical effects that limit the
brightness of images able to be produced?
. Response Time--How quickly does the display respond to image changes?
. Contrast Ratio--How many graduations of intensity can be shown?
. Physical Parameters--Weight and size of displays.
. Lifetime--How long can you expect the device to operate?
. Drive Complexity--How expensive in cost and complexity is it to drive
the display electronically?
Other parameters such as display resolution are not significant
discrepancies, as any of the technologies could be manufactured to any
required resolution.
DMD--Texas Instruments Digital Micro-mirror Device (DMD) is the closest
display concept to the AMA(TM). It consists of arrays of micro-mirrors which
are bent out of the way of a light source to project an on or off image spot.
By controlling the relative on and off time of a spot, the intensity is
increased or decreased to provide an image. This is called Pulse Width
Modulation (PWM).
A significant advantage of this technology is that it is fabricated from
silicon micro machine technology as an integrated structure. This technology
is mature and has had much funding from the U.S. Government.
A significant disadvantage of DMD is lack of position control on the mirrors
causing a need for PWM techniques. The result is a very large complexity in
drive electronics and requirements for high speed electronics and mechanical
structures. The technology also limits the mirror size that can be
manufactured, thus limiting light efficiency. Texas Instrument's mirrors are
16 microns in size as compared to the 100 micron size for an Aura AMA(TM)
mirror. These limitations cause a limit on brightness and dynamic range which
cannot be independently maintained, so that improvements in dynamic range can
be made only by limiting brightness.
The DMD and AMA(TM) can be summarized as follows:
<TABLE>
<CAPTION>
COMPARISON ITEM: TI'S DMD AURA'S AMA(TM)
---------------- -------- --------------
<S> <C> <C>
Image generation technique: Pulse Width Modulation Intensity Modulation
Light efficiency: Low--limited by micro-mirror Very high--due to large mir-
size ror size
Maximum brightness: Large--limited due to heat- Very large--no practical
ing of the electronics limit known
Complexity: High--10 transistors per Low--only 1 transistor per
pixel required pixel
</TABLE>
LCD--Liquid Crystal Display technology has been under development for a
number of years in U.S. military and overseas commercial display markets.
Companies such as Hughes Aircraft, JVC and Sharp are world acknowledged
leaders in these technologies. Limitations of LCDs have caused them to make
their major effect on the computer and small display market, despite enormous
efforts to move into the large screen displays.
11
<PAGE>
Weaknesses of the technology include limited response time. 50 Hz images are
about as fast as LCDs can readily change images. This greatly reduces their
overall utility in television use where 60 Hz and faster are desired image
rates. To obtain fast rates, image quality is sacrificed. LCDs must be viewed
close to straight on causing users to need to sit close to the front of the
set as the intensity falls rapidly as one moves to the side. LCDs have strong
limits on maximum intensity and are moderate to low in light efficiency. If
one tries to increase the power of the projection lamp, once can burn out the
liquid crystal elements.
CRT--Cathode ray tubes are the oldest technology for display production.
Companies such as Sony manufacture both traditional CRTs and a new variety
called projection CRTs. Other producers of CRTs include Mitsubishi and Sharp.
The major disadvantage of CRTs is that they cannot be made very large
without a huge penalty in weight and size. The largest CRT produced provides a
60 inch image and weights approximately 500 pounds. Devices such as this are
not practical in the home. Large images have been produced by making mosaic
arrays of smaller screens. These types of displays have annoying lines through
the image and have limited resolution. Of significant advantage is that the
display cost is lower than any other device currently on the market. As
requirements for large resolution images grow, the CRT reaches limits of light
it can collect into a viewing area and thus starts having intensity
limitations.
. Electromagnetic Valve Actuation (EVA(TM))
For over a decade, automotive engineers have been looking at technology and
techniques to achieve variable valve timing for internal combustion engines.
It is well known that variable valve timing has the potential to achieve
improvements in fuel consumption, reduction in pollution and down sizing of
engines by increasing their efficiency.
Historically, the first technological success has been by using multiple
camshafts, opening different valve trains. This approach provides two or three
different valve opening and closing profiles, by mechanically switching
between different camshafts. However, it has limited benefits, and tends to be
expensive since camshafts require precision grinding. Also, the cost of such
systems doubles the cost of engine valving.
Another historical approach has been hydraulic or pneumatic valve lifters.
While this approach provides more flexibility than multi-cams, it requires
compressors and high pressure lines.
Finally, the Aura EVA(TM) approach uses electromagnetic technology. The
competitor to the Company in this area is FEV in Germany. While both systems
look mechanically similar, they are quite different. The differences are in
the control system and in the magnetics. Aura provides an electronic closed
loop control with soft landing. This allows improved reliability for
operational, lower power consumption by the system as well as noise reduction.
. Competition to AuraGen(TM)
Portable generators meet a large market need for auxiliary power. Millions
of units per year are sold in North America alone, and millions more across
the world to meet market demands for 1 to 10 Kilowatts of portable power. The
market for these power levels basically addresses the Commercial, Leisure and
Residential markets, and divide essentially into: a) higher power, higher
quality and higher price commercial level units; and b) lower power, lower
quality and lower price level units.
There is significant competition in the auxiliary power market from: a)
Portable Generator Sets ("Gensets"); and b) Electrical Inverters
("Inverters").
Gensets provide the strongest competition across the widest marketplace for
auxiliary power: Onan, Honda and Kohler among others are well established and
respected brand names in the Genset market for higher reliability auxiliary
power generation. Gensets are found in most, if not all, fixed position and
mobile (vehicle) power requirement markets. AuraGen(TM) addresses the higher
quality commercial level.
There are 44 registered Genset manufacturing companies in the US, including
major, larger, multi-billion dollar corporations such as Onan, Honda, Kohler
and others.
12
<PAGE>
The following table is a summary comparing the leading Genset products with
the AuraGen(TM).
TABLE 1: GENERATORS
<TABLE>
<CAPTION>
ONAN HONDA HONDA KOHLER AURAGEN(TM)
PARAMETERS MARQUIS 5000 EG5000X EX5500 5CKM G5000
---------- ------------ ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C>
Rated Power 5,000 W 4,500 W 5,000 W 5,000 W 5,000 W
Weight 258 lbs/117.3 kg 146 lbs/66.4 kg 393 lbs/178.6 kg 268 lbs/122 kg 68 lbs/30.9 kg
Cubic Feet/ 6.72/.19 5.39/.15 26.80/.76 3.71/0.11 0.25/0.01
Cubic Meters
Output 120 V 120/240 V 120/240 V 120/240 V 120/240 V
Engine RPM 1,800 3,600 3,600 1,800 1,400
@ Rated Output
Noise (DBA @ 73.5 82 65 88.5 64
10 Ft.)
Load-Follower no no no no yes
Economy
</TABLE>
. Inverters
There are 6 major manufacturers of Inverters in the U.S.; representative of
the leaders are Vanner, Dimension and Hearst.
Inverters provide strong competition in specific markets of the overall
market place for mobile power: The specific markets where inverters are strong
competitors are Ambulance, Fire and Rescue, Small Recreational Vehicles and
Telecommunications.
LIMITATIONS OF INVERTERS:
. Inverters address a much more limited and specialized market than
Gensets;
. The most significant portion of inverter sales are in the lower power
range: i.e., 2500 watts or lower.
. True quality Inverter power above 2500 watts requires a 24 volt
automotive electrical system (twice 12 volts); and the maximum output
for quality power in the commercial market is on the order of
4800 watts. (See Table 2).
. Quality power (pure sine wave and well regulated 60Hz) is a significant
cost factor in Inverters (Table 2).
. Often, or usually, Inverters require upgraded vehicle alternator and
battery harness, and--for extended use period without battery charging--
an additional battery pack.
TABLE 2: INVERTERS
<TABLE>
<CAPTION>
HEART
I/F VANNER VANNER
FREEDOM BRAVO TB30- VANNER AURAGEN(TM) AURAGEN(TM)
PARAMETERS 25 2600 12 A40-120X G2500 G5000
---------- -------- -------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1. Max Rated Power
(Watts)................ 2500 2600 2800 4800 2500 5000
2. Weight (LBS)......... 56 70 75 110 26 68
2A. Weight Battery Pack. Add/No Add/No Add/No No No No
3. Overall Cubic In..... 1207.5 1866.73 1800 2595.94 230.79 432.73
4. 60 Hz................ Yes Yes Yes Yes Yes Yes
5. Sine Wave @ All RPM.. Modified Modified Yes Modified Yes Yes
6. Battery Discharge
Operation.............. Yes Yes Yes No No No
7. Vehicle Engine Noise
(DBA @ 10Ft.).......... 64 64 64 64 64 64
8. Load Follower-
Economy................ Yes Yes Yes Yes Yes Yes
</TABLE>
13
<PAGE>
MANUFACTURING
The Company currently manufactures all of its actuator products, ceramics
and professional speakers at its own facilities. The Company also manufactures
its own consumer and OEM speakers and amplifiers at facilities in the U.S.,
China, Malaysia, Phillipines and India. The Company subcontracts the
manufacture and assembly of other products to several different suppliers on a
purchase order basis.
The facility in China is operated by Guoguang Electric Co. in Guangzhou,
China, a supplier which is unaffiliated with the Company. Speakers are
produced in this facility on a purchase order basis. Speakers are currently
also produced by the joint ventures in Malaysia and India and at a Malaysian
facility operated by MYS, described below, on a purchase order basis. The
production of the Bass Shaker(TM) is done in India and Mexico.
NewCom currently uses four primary contract manufacturers, located in China,
Taiwan, Mexico and the U.S. NewCom performs component integration, testing,
installation of value added software and packaging at its Westlake Village,
California facility.
In Fiscal 1996, the Company acquired a 26,000 square foot manufacturing
facility, in El Segundo, California for the AuraGen(TM) product line. During
Fiscal 1997, the Company set up a fabrication facility for the AMA(TM) product
in El Segundo, California. This facility consists of a class 100 clean room
and fabrication equipment for semi conductor processes.
In addition to the above the Company has entered into a number of joint
ventures to enhance its production on a global basis.
. Malaysian Joint Venture
In 1993, the Company entered into an agreement with Burlington Technopole
SDN. BHD., a Malaysian corporation (Burlington) for the formation of a joint
venture to manufacture and sell speakers using Aura's proprietary technology.
The joint venture, which has been named Audiora Sound(TM) SDN. BHD., was
established under Malaysian law to operate in Malaysia and has the exclusive
right to sell speakers using Aura technology in the ASEAN countries and the
non-exclusive right to sell such speakers in the United States. Under the
terms of the agreement, the Company owns 49% of the joint venture and
Burlington owns 51%. The joint venture began shipping products in 1995.
. Aura-Dewan Joint Venture
In 1995, the Company also entered into an agreement with K&K Enterprises of
India ("K&K") for the formation of a joint venture to manufacture and sell
speakers using Aura's proprietary technology. K&K acquired a license to the
Company's technology and granted an exclusive sub-license to the joint
venture. The joint venture ("Dewan-Aura") has the exclusive right to build and
sell speakers using Aura's technology in the Republic of Taiwan, Indian
Subcontinent, Middle East and the European market. The Company owns 49% of the
joint venture. As consideration for the license, the Company will receive a
$1,000,000 fee, $400,000 of which was received in Fiscal 1996. The joint
venture began shipping product in late, 1995.
In 1995 the Company also entered into an agreement with K&K for the
formation of a joint venture to manufacture Aura's Bass Shaker(TM). The joint
venture, established to operate and manufacture within India, is owned 49% by
the Company. In connection with the agreement, Aura granted K&K an exclusive
license to use Aura's patented and proprietary technology. As consideration
for the license to K&K, the Company is entitled to receive license fee
payments quarterly over the life of the patent. Scheduled payments for the
first five years total approximately $2.9 million, of which $500,000 was
received in Fiscal 1996.
Without any changes to its terms, the two joint ventures were merged in
Fiscal 1996 into one joint venture encompassing both. The new venture was
renamed Dewan Aura.
14
<PAGE>
PRODUCT DEVELOPMENT EXPENDITURES
During the fiscal years ended February 28, 1997, February 29, 1996 and
February 28, 1995, the Company spent approximately $6.0 million, $5.2 million
and $2.0 million, respectively, on Company sponsored research and development
activities. The Company plans to continue its research and development
activities and may incur substantial costs in doing so.
PATENTS
Since Aura is engaged in the development and commercialization of
proprietary technology, it believes patents and the protection of proprietary
technology are important to its business. The Company's policy is to protect
its technology by, among other ways, filing patent applications to protect
technology which it considers important to the development of its business.
The U.S. Patent Office has to date issued 68 patents to Aura and has allowed 3
patent applications which will issue as patents. A majority of these patents
expire between the years 2008 to 2014. Of the issued patents and allowed
applications, 39 pertain to its electromagnetic actuator applications, 21
pertain to its electro-optics applications, 4 pertain to its communication
technology applications and 7 pertain to miscellaneous applications. In
addition, the Company has 29 patent applications pending, 25 of which
originated from its magnetic actuators, 1 from its electro-optics
applications, and 3 from its communication technology. An additional 40 patent
applications are in various stages of preparation for filing. There are no
assurances that any new patents will be issued in the future, or that if
issued, such patents will provide significant proprietary protection, or that
they will not be challenged or replaced by superseding technology. The Company
believes that its issued and allowed patents enhance its competitive position
in electromagnetic actuators and electro-optics applications. The Company
intends to file additional patent applications, when appropriate.
EMPLOYEES
As of May 29, 1997, the Company employed 503 persons on a full time basis
and believes that its relationship with its employees is satisfactory. The
Company is not a party to any collective bargaining agreements. Of the above,
304 persons are located in the U.S. and 199 persons are located outside the
U.S.
FORWARD LOOKING STATEMENTS
This section and report contains forward looking statements. The Company
wishes to caution readers that important factors, in some cases, have
affected, and in the future could affect, the Company's actual results and
could cause the Company's future results of operation, to differ materially
from those expressed in any forward-looking statements made by the Company.
Such factors include, but are not limited to, the following risks and
contingencies: Changed business conditions in the consumer electronic and
automotive industries and the overall economy; increased marketing and
manufacturing competition and accompanying price pressures; contingencies in
initiating production at new factories along with their potential
underutilization, resulting in production inefficiencies and higher costs and
start-up expenses, and inefficiencies, delays and increased depreciation costs
in connection with the start of production in new plants and expansions.
Relating to the above are potential difficulties or delays in the
development, production, testing and marketing of products, including, but not
limited to, a failure to ship new products and technologies when anticipated.
There might exist a difficulty in obtaining raw materials, supplies, power and
natural resources and any other items needed for the production of Company and
other products, creating capacity constraints limiting the amounts of orders
for certain products and thereby causing effects on the Company's ability to
ship its products. Manufacturing economies may fail to develop when planned,
products may be defective and/or customers may fail to accept them in the
consumer marketplace.
15
<PAGE>
Through its subsidiary NewCom, the Company may grant limited rights to
customers such as price protection and the right to return certain unsold
inventories in exchange for new product purchases. Moreover, certain of its
customers readily accept returned product from their own retail consumers, and
these returned products may be returned to the Company for credit .
In addition to the above, risks and contingencies may exist as to the amount
and rate of growth in the Company's selling, general and administrative
expenses, and the impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, asset valuations and organizational
structures. Furthermore, any financing or other financial incentives by the
Company under or related to major infrastructure contracts could result in
other expenses or fluctuation of profit margins from period to period. The
focus by some of the Company's businesses on any large system order could
entail fluctuating results from quarter to quarter.
The effects of, and changes in, trade, monetary and fiscal policies, laws
and regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions
impose yet other constraints on any company statements. The cost and other
effects of legal and administrative cases and proceedings present impose
another factor which may or may not have an impact.
ITEM 2. PROPERTIES
The Company owns a 46,000 square foot headquarters facility in El Segundo,
California, constructed in the late 1980's. The building acquisition and
improvements of $3.1 million were financed principally with the Company's 7%
Secured Convertible Non-Recourse Notes Due in the year 2000, which fully
converted into Aura Common Stock in April, 1991. Thereafter, a similar note
issuance program was completed in Fiscal 1993, raising $5.5 million. The
borrowings are secured by a Deed of Trust on the property. See "MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS." The
Company owns, in addition, a 26,000 square foot manufacturing facility for its
Automotive/Industrial division in El Segundo, California. The building was
acquired from an unrelated party for $2.05 million with a $1.5 million note
secured by a first trust deed carried by the seller. During Fiscal 1996, the
Company acquired from an unrelated party, a 4,000 square foot building for its
Automotive/Industrial division in Artesia, California for $250,000.
The Company leases, for its Display and Automotive/Industrial divisions a
22,000 square foot manufacturing facility situated in El Segundo, California,
and a 5,000 square foot building maintained in Van Nuys, California. It leases
an approximate 38,000 square foot ceramics facility in New Hope Minnesota,
1,500 square foot facility in Kansas City, Missouri and, for its NewCom
operations, leases a 33,000 square foot building in Westlake Village,
California. Also in Westlake, the Company leases a facility of approximately
15,230 square feet for AuraSound, Electrotec. Moreover, Electrotec leases a
5,000 square foot building in Nashville, Tennessee, as well as an
approximately 5,000 square foot building in Cambridge, England, for its
European subsidiary Audiolease Limited. In Otay Mesa, California, the Company
leases a 45,000 square foot warehouse.
The Company maintains numerous properties, worldwide. Through its joint
venture in Malaysia, the Company owns 49% of the factory consisting of
approximately 1.8 acres of land and 18,000 square feet of building, located in
Kangar, Malaysia. With the acquisition of MYS Corporation in Fiscal 1997, the
Company also owns an approximately 25,000 square foot manufacturing facility
in Malaysia.
Through the Company's joint venture in India, it owns 49% of a 32,000 square
foot manufacturing facility and 12,500 square foot warehouse/office in Noida,
India, which is close in proximity to New Delhi. The Company operates offices
in Guangzhou, China; London and Manchester, England; Moscow, Russia; Osaka,
Japan; and has a show room in Brussels, Belgium. In total, the Company has
approximately 335,000 square feet of facilities and believes that they are
adequate for its present needs.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
SHAREHOLDER LITIGATION
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.
Barovich/Chiau v. Aura
In May, 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 purported to be securities class actions on
behalf of all persons who purchased common stock of Aura during the period
from May 28, 1993 through January 17, 1995, inclusive. The Complaints alleged
that as a result of false and misleading information disseminated by the
defendants, the market price of Aura's common stock was artificially inflated
during the Class Period.
On February 16, 1996, the Company filed its motion for summary judgment
which was granted on April 15, 1996. Judgment in favor of the Company and all
defendants was entered on April 16, 1996, thereby dismissing the action.
Plaintiff's thereafter filed a Notice of Appeal to the judgment on May 16,
1996 which is pending before the United States Court of Appeals.
Morganstein v. Aura
On April 28, 1997, a lawsuit naming Aura, certain of its directors and
executive officers, and the Company's independent accounting firm was filed in
the United States District Court for the Central District of California (Case
No. 97-3103). It purports to be a securities class action on behalf of all
persons who purchased common stock of Aura during the period from January 18,
1995 and April 25, 1997, inclusive (the "Class Period"). The complaint alleges
that as a result of false and misleading information disseminated by the
defendants, the market price of Aura's common stock was artificially inflated
during the Class Period. It contains allegations which assert that the Company
violated federal securities laws by selling Aura Common stock at discounts to
the prevailing U.S. market price under Regulation S without informing Aura's
shareholders or the public at large.
Securities and Exchange Commission Settlement
In October, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an
administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura
former officer. The proceeding was settled on consent of all the parties,
without admitting or denying any of the Commission's findings. In its order,
the Commission found that Aura and the others violated the reporting,
recordkeeping and anti-fraud provisions of the securities laws in 1993 and
1994 in connection with its reporting on two transactions in reports
previously filed with the Commission. The Commission's order directs that each
party cease and desist from committing or causing any future violation of
these provisions.
The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with
the Commission. Also, the Commission did not seek any monetary penalties from
Aura, Mr. Kurtzman or anyone else. Neither Mr. Kurtzman nor anyone else
personally benefited in any way from these events. For a more complete
description of the Commission's Order, see the Commission's release referred
to above.
Other Litigation
The Company is also engaged in other legal actions arising in the ordinary
course of business. In the opinion of management based 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.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since 1988, Aura Common Stock has been quoted on the Nasdaq Stock Market
under the trading symbol "AURA". On May 21, 1991, Aura shares became listed on
the Nasdaq National Stock Market.
Set forth below are high and low sales prices for the Common Stock of Aura
for each quarterly period in each of the two most recent fiscal years. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions in the
Common Stock. The Company had approximately 4,500 stockholders of record as of
June 11, 1997.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ----- -----
<S> <C> <C>
Fiscal 1996
First Quarter ended May 31, 1995........................... $5.69 $3.00
Second Quarter ended August 31, 1995....................... 5.56 4.19
Third Quarter ended November 30, 1995...................... 8.25 4.50
Fourth Quarter ended February 29, 1996..................... 6.75 4.06
Fiscal 1997
First Quarter ended May 31, 1996........................... 5.56 4.00
Second Quarter ended August 31, 1996....................... 4.31 2.50
Third Quarter ended November 30, 1996...................... 3.31 1.88
Fourth Quarter ended February 28, 1997..................... 3.06 1.75
</TABLE>
On June 11, 1997, the average high and low reported sales price for the
Company's Common Stock was $1.81.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. The Company
does not anticipate paying any dividends on its Common Stock in the
foreseeable future but has no restrictions preventing it from paying
dividends.
FOURTH QUARTER SALE OF SECURITIES
In December, 1996 the Company completed a private placement under Section
4(2) of the Securities Act of 1933 of $7.5 million of its unsecured
convertible notes (the "Notes") to three institutional investors, of which
$7,275,000 was received by the Company net of placement fees. The Notes bear
interest at the rate of 8% per annum, payable quarterly in arrears, with the
entire principal balance due in 1998. Subject to the Company's right of
redemption, principal may be converted by the holder of the Note at the lesser
of $2.24 or 85% of the five lowest closing bid prices during the 30 days
preceding the conversion date, but in no event less than 65% of the lowest
closing bid price within five trading days of the conversion date. The Notes
provide that the Company has the right to redeem the Notes at any time prior
to maturity upon payment of the applicable redemption premium. In May 1997,
the Company agreed to redeem $4.0 million of the above notes for cash. As of
June 11, 1997, after giving effect to the agreed upon redemption and
conversions approximating $2.8 million, approximately $700,000 of the
principal amount and accrued interest was outstanding.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data has been taken or derived from the
audited consolidated financial statements of the Company and should be read in
conjunction with and is qualified in its entirety by the full consolidated
financial statements, related notes and other information included elsewhere
herein.
AURA SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY FEBRUARY 28, FEBRUARY
1997 1996 28, 1995 1994 28, 1993
------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net Revenues............ $109,950,202 $ 77,088,850 $42,444,213 $ 16,369,825 $11,005,379
------------ ------------- ----------- ------------ -----------
Cost of goods and
overhead............... 86,350,828 71,849,204 30,064,935 13,714,813 10,605,654
Research and development
expenses............... 6,022,586 5,225,735 2,037,467 2,286,051 2,813,018
Selling, General and
administrative
expenses............... 18,542,840 26,399,794 12,771,151 6,259,748 6,402,428
Provision for contract
losses................. -- -- 133,261 17,133 183,597
Equity losses from AMS
investment(1).......... -- -- -- 9,454 511,923
------------ ------------- ----------- ------------ -----------
Total costs and ex-
penses................. 110,916,254 103,474,733 45,006,814 22,287,199 20,516,620
(Loss) from
operations........... (966,052) (26,385,883) (2,429,340) (5,917,374) (9,511,241)
Other income and
expense:
Gain or sale of Delphi
Assets (250,000)
Currency transaction
loss................. 218,283 -- -- -- --
Interest expense
(income) net......... 1,415,934 (298,793) 220,539 301,928 133,876
Class action
litigation and other
settlement........... -- -- -- 4,375,000 --
Provision for taxes... 570,484 -- -- -- --
------------ ------------- ----------- ------------ -----------
Net (loss)............ $ (2,920,753) $ (26,087,090) $(2,649,879) $(10,594,302) $(9,645,117)
============ ============= =========== ============ ===========
Net (loss) per common
share................ $ (.04) $ (.48) $ (.07) $ (.35) $ (.36)
============ ============= =========== ============ ===========
Weighted average
number of common
shares............... 68,433,521 53,860,527 37,217,673 30,117,742 26,881,421
============ ============= =========== ============ ===========
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY FEBRUARY 28, FEBRUARY
1997 1996 28, 1995 1994 29, 1993
------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......... $ 62,310,715 $ 71,362,882 $33,796,181 $ 11,353,783 $ 3,593,473
Total assets............ 182,528,399 134,080,568 73,467,003 37,564,037 22,695,481
Total liabilities and
deferrals.............. 57,050,812 34,917,462 19,213,584 19,488,244 15,439,765
Net stockholders'
equity................. 125,477,587 99,163,106 54,253,419 18,075,793 7,255,716
OTHER OPERATING DATA
EBITDA(2)............... 3,713,785 (22,139,750) 743,070 (4,352,731) (8,395,213)
</TABLE>
- -------
(1) In the fiscal years ended February 28, 1994 and February 28, 1993, the
Company reported the results of Aura Medical Systems, Inc. on the equity
method. In the fiscal years ended February 28, 1997, February 29, 1996 and
February 28, 1995 they were consolidated.
(2) EBITDA represents income before extraordinary items, net interest expense,
financing costs, income taxes, depreciation and amortization and other
expenses and income. The Company has included information concerning
EBITDA in its annual report because it is used by certain investors as a
measure of a company's ability to service its debt obligations. EBITDA
should not be used as an alternative to, or be considered more meaningful
than, operating income, net income or cash flow as an indicator of the
Company's operating performance.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
Fiscal 1997 as Compared to Fiscal 1996
The Company has completed its transition from U.S. government contracting as
its principal business activity to development and commercial application of
proprietary technologies. The Company has reported a net loss for each of its
five most recent fiscal years.
Revenues
Gross revenues in Fiscal 1997 increased to $133.80 million from $82.26
million, primarily as a result of the acquisition of MYS Corporation in March
of 1996, and the increase in sales of computer products by the Company's
NewCom subsidiary. The MYS subsidiary accounted for approximately $20 million
in sales in Fiscal 1997, all in the sound area.
Net revenues were $109.95 million as compared to $77.01 million in Fiscal
1996 an increase of 42.8%. The differences between gross and net revenues are
attributed mostly to returns and allowances experienced at NewCom.
Sales of computer monitors to a single unrelated party declined to
approximately $16.5 million in Fiscal 1997 or 12.3% of revenues in the current
year down from $20.6 million or 25.1% of revenues in Fiscal 1996. These sales
are expected to continue to decline both in dollar terms and as a percentage
of revenues as the Company continues to expand its product line and its
customer base. Although the Company does not have any long term agreement with
this customer, it has no reason to believe that sales to this customer will be
abruptly curtailed.
Returns and allowances increased to $23.85 million or 17.8% of revenues in
Fiscal 1997 as compared to $5.17 million or 6.3% of revenues in the prior
fiscal year. The increase was due largely to a problem in the middle part of
the year with a chip on the DSVD modem that the Company's NewCom subsidiary
sells. The problem necessitated returning the modems to the Company,
reprogramming the chips, and then redistributing the modems to customers.
Gross Margin and Net Loss
Gross margin (gross profit as a percentage of gross revenues) for Fiscal
1997 was 17.6% as compared to 6.4% in Fiscal 1996. As total revenue increased,
the Company experienced a corresponding improvement in EBITDA. The EBITDA for
Fiscal 1997 was $3.7 million.
The Company's net loss for Fiscal 1997 was $2.92 million compared to a net
loss of $26.09 million in the prior fiscal year. This improvement was a result
primarily of the prior year discontinuance of the Interactor and the
improvement in the NewCom subsidiary, along with the improvement in the sound
area. The improvement in the sound area is a result partially of the
transformation of the operations of AuraSound and the introduction of new
products into the marketplace.
20
<PAGE>
Certain fourth quarter events contributed to the loss in Fiscal 1997 as
follows:
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
a) Seasonal expenses during the fourth quarter..................... $1.50
b) Business focus, consolidation and sale of unprofitable
operations........................................................ 1.00
c) Reserves increases for potential product obsolescence........... 2.26
-----
Total............................................................ $4.76
</TABLE>
The Company attends three major tradeshows throughout the year. Comdex in
late November, CES in January and SAE in February. In particular the CES and
SAE tradeshows have a bias effect on expenses by approximately $850,000 in the
fourth quarter. In addition, due to the holiday season, NewCom advertisement
expenses are biased in the fourth quarter by approximately $700,000. Thus, the
Company spends approximately $1.5 million more on tradeshows and advertising
in the fourth quarter than other quarters throughout the year.
During Fiscal 1997, the Company acquired MYS Corporation and its
subsidiaries in both Portland, Oregon and Malaysia. In August the Company
acquired PSL of Kansas City, and in September, Revolver U.K. Ltd. in the
United Kingdom. (See Sound related Products). During the fourth quarter the
Company closed the Portland operation and moved the activities to El Segundo.
Similarly during the fourth quarter the Company consolidated the Kansas City
operation of PSL into the El Segundo operation by transferring personnel and
converting the Kansas City operation into a warehouse for distribution in the
midwest and central part of the country. The relocation of the Portland
operation as well as the Kansas City operation have resulted in extra expenses
and some personnel cuts. The combined operation of Portland and PSL incurred a
loss of approximately $500,000 in the fourth quarter.
Throughout the year the Company has focused its business into its four
operating divisions (See Introduction). Part of this focus has been the
consolidation of operations as described above and also the sale of operations
that no longer fit into the Company's long term business strategy. During the
fourth quarter the Company sold Delphi. The Delphi operation incurred a loss
of approximately $900,000 for the year of which $500,000 was related to the
fourth quarter. Subsequent to year end the Company has sold Aura Precision
which incurred a loss of approximately $700,000 for the year and $250,000 in
the fourth quarter.
Aura Ceramics had experienced technical difficulties on a specific contract.
This problem caused major delays in shipment during the second half of the
year. The Company and the customer ultimately agreed to terminate the
contract. Aura Ceramics incurred a loss of approximately $1.1 million for the
year of which $500,000 was in the fourth quarter. The operation would have
made approximately $300,000 in profit for the year after adjusting for the
problem described.
The Company's operation in Japan (see MYS Corporation) recorded income
before tax for the year of approximately $800,000. The Company recorded
approximately $520,000 provision for income tax in Japan during the fourth
quarter.
Due to the increase of the Company's business and in particular as it
relates to consumer electronics, the Company in the fourth quarter increased
its reserve for product obsolescence as well as a reserve for potential
returns of merchandise.
Cost of Goods and Overhead
Cost of goods and overhead expenses increased from $71.85 million in Fiscal
1996 to $86.35 million in Fiscal 1997 as a result of the acquisition of MYS
Corporation and the increase in the sale of the Company's products. The
increase in sales required a corresponding increase in products and materials
purchased to manufacture the Company's products and an increase in the
overhead costs associated with the expanded operations. As a percentage of net
revenues, cost of goods and overhead, expenses decreased in Fiscal 1997 to
78.5% from, 93.1% in the prior year.
21
<PAGE>
Research & Development
Research and development costs for the Fiscal 1997 increased to $6.0 million
from $5.2 million in Fiscal 1996. The Company continues its research and
development in the areas of displays and micromachines, automotive
applications of magnetics and sound systems. As a percentage of net revenues
research and development expenses declined in Fiscal 1997 to 5.5% as compared
to 6.8% in the prior year. During Fiscal 1997 the Company shifted from the
research and development stage to the pre-production phase on a number of
products.
Selling, General & Administrative
Selling and general and administrative expenses decreased to $18.54 million
from $26.39 million in Fiscal 1996. The decline in Selling, General and
Administrative expenses in Fiscal 1997 from Fiscal 1996 can be mostly
attributed to the reduction in cost in advertisement expenses (approximately
$2.7 million), reduction in bad debt (approximately $2.3 million), a reduction
in the total tradeshows attended and the cost reduction associated with the
major shows particularly the January 1997 CES in Las Vegas (approximately $1.2
million), reduction of consultants and changes in the composition of personnel
(approximately $1.5 million). The total number of employees in Selling,
General and Administrative functions increased during Fiscal 1997 from Fiscal
1996, however the payroll expense decreased due to the reduction of high
salaried individuals. As a percentage of net revenues, SG&A for 1997 decreased
to 16.9 % as compared to 34.2% for the prior year.
Bad Debt Expense
Bad debt expense in Fiscal 1997 decreased to $1.77 million from $4.1 million
in Fiscal 1996. The prior year expense was adversely affected by customers
declaring bankruptcy which resulted in writeoffs in the prior year of
approximately $2.0 million.
Interest Expense
Net interest expense for Fiscal 1997 was $1.42 million as compared to net
interest income of approximately $300,000 in the prior fiscal year. The
decrease was due primarily to increased lines of credit that were utilized
throughout the year.
Fiscal 1996 as Compared to Fiscal 1995
Gross revenues in Fiscal 1996 increased to $82,259,010 from $44,214,242 in
Fiscal 1995. The increase was primarily due to sales of sound related products
as well as computer related products. Sales of computer monitor products to a
single unrelated third party were $20.6 million or 25.1% of revenues occurred
in prior fiscal years. Interactor sales contributed approximately $3.0 million
as compared to approximately $21.0 million in Fiscal 1995. Revenues from U.S.
Government were negligible for both Fiscal 1995 and 1996. Revenues from
development contracts in Fiscal 1996 were under $40,000 compared to $577,000
in Fiscal 1995. License fee revenues in Fiscal 1996 were approximately $2.3
million as compared to $5.8 million in Fiscal 1995. License agreements have a
pronounced effect on operating results as associated direct costs are
insignificant. At the same time, the nature of the transactions underlying
these revenues means that such revenues are likely to be erratic and difficult
to predict. For further information regarding sources of revenue, see
"Business--Principal Sources of Revenue."
22
<PAGE>
The net loss for Fiscal 1996 was $26.09 million as compared to $2.65 million
for Fiscal 1995. Approximately $17.0 million of the loss was due to the
Interactor and $3.5 million of the loss was from the NewCom operation. The
following table summarizes the main cost items of the Interactor.
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
Advertising....................................................... $ 5.5
Trade Shows....................................................... 1.0
Bad Debts......................................................... 2.5
Warehouse and Shipping............................................ 1.0
Personnel......................................................... 4.7
Asset Valuation................................................... 1.5
Misc. Sale Expenses............................................... .6
Severance package................................................. .2
-----
Total........................................................... $17.0
</TABLE>
The loss from NewCom was mostly due to the inventory write-down and
adjustment of approximately $2.0 million. The additional loss in NewCom was
due to the Superbowl advertisement that cost approximately $600,000 to produce
and $900,000 to air across the nation on T.V.
The loss in Fiscal 1996 was mostly due to fourth quarter charges. The
following table summarizes the main fourth quarter charges that contributed to
the loss.
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
Total Advertising................................................. $ 7.0
Trade Shows....................................................... 1.5
Bad Debts......................................................... 4.1
Returns and Allowances............................................ 1.2
Inventory Valuation............................................... 2.1
Asset Valuation................................................... 1.9
Research and Development.......................................... 3.3
-----
Total........................................................... $21.1
</TABLE>
Returns and allowances increased from $1,770,029, or 4% of gross revenues in
Fiscal 1995 to $5,170,160, or 6.3% of gross revenues in Fiscal 1996.
Cost of goods and overhead increased from $30,064,935 in Fiscal 1995 to
$71,849,204 in Fiscal 1996 due principally to the increased amount of goods
purchased to manufacture the Company's products.
Research and development costs for Fiscal 1996 increased to $5,225,735 as
the Company continued to focus its attention on developing new products to
bring to market from $2,037,467 in Fiscal 1995. fourth quarter Research and
Development expense of $3,304,017 primarily focused on automotive applications
related to the FAS and SGS products.
Selling, general and administrative expenses increased from $12,771,151 in
Fiscal 1995 to $26,399,794 in Fiscal 1996 due partially to increased sales
efforts advertising and increased bad debt write-offs.
Bad debt expenses increased to approximately $4.1 million from $1.1 million.
Of the bad debt expense, approximately $2.0 million was primarily a result of
customers who declared bankruptcy during the fourth quarter (Vitel = $1.7
million). The Company also increased its allowance for doubtful accounts to
approximately $2.0 million.
Net interest income was $298,793 in Fiscal 1996 as compared to an expense of
$220,539 in Fiscal 1995 due partially to an increase in available cash for
investments during the year.
23
<PAGE>
GENERAL
During the past three fiscal years inflation and changing prices have not
had a material negative impact on the Company's revenues or income from
continuing operations and management does not anticipate any material negative
impact of inflation and changing prices on the Company's net revenues or on
income from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital decreased by $9,052,167 to $62,310,715 at Fiscal 1997
year end, with the current ratio decreasing to 2.5:1 from 4.4:1. The principal
differences in the Company's accounts from February 29, 1996 to February 28,
1997 are a decrease in cash and equivalents of $14,788,010, an increase in
receivables of $16,231,134, an increase in inventories of $9,963,332 and an
increase in accounts payable and accrued expenses of $7,807,383.
The Company's cash balances were $7,112,354 at February 28, 1997,
$21,900,364 at February 29, 1996 and $3,827,500 at February 28, 1995.
The net cash used in operating activities of $14,907,299 decreased by
$21,496,850 due primarily to the reduction in the loss incurred and the
increase in accounts payable, offset partially by an increase in the level of
accounts receivable and inventories.
The level of inventories has increased due to the expanding product base of
the Company and the need to have parts available to manufacture different
items, such as the Bass Shaker, speakers, multimedia kits, modems and other
computer peripherals as required.
In Fiscal 1997 the Company invested $7.2 million in various joint-ventures,
compared to $2.6 million in the prior year. In Fiscal 1997 the Company formed
a joint venture for simulators with a group in Europe. The Company contributed
approximately $3.8 million of assets, consisting of 6 DOF (6 Degree of
Freedom) and 2 DOF simulators and related hardware for a 40% equity in the
joint venture. The $3.8 million contribution is included in the $7.2 million
above. Through Fiscal 1997 the Company invested $4,655,000 in Telemac Cellular
Corp. The Company has also invested approximately $853,000 in Aquajet Corp.
which it plans to use as a testing ground for the Company's engine component
products. The Company chose this investment in order to provide a harsh engine
environment for the testing of these products.
In Fiscal 1997, the Company raised $1,501,500 through the sale of stock,
$600,000 from the exercise of warrants and $35,000 from the exercise of stock
options. The Company also received net proceeds of $24,841,239 from the
issuance of convertible notes payable. In addition, the Company issued 748,860
shares of stock valued at $2,314,626 in conjunction with the acquisition of
three subsidiaries.
In March 1997 the Company completed a private placement under Section 4(2)
of the Securities Act of 1933 of $15 million of its unsecured notes (the
"Notes"). The Notes bear interest at the rate of 8% per annum and are due in
1999. The Notes are convertible into Common Stock in accordance with a
specified formula, and they are redeemable by the Company upon payment of the
applicable redemption premium.
Spending for property and equipment amounted to $22,855,000 in Fiscal 1997,
$7,301,729 in Fiscal 1996, and $5,577,858 in Fiscal 1995. Of the Fiscal 1997,
1996 and 1995 amounts, $16,539,899, $363,274 and $257,246 respectively was due
to the manufacture of tooling and the remainder was due to the expansion of
facilities and purchases of equipment which was necessary in connection with
research and development activities, services performed under various
subcontracts and manufacturing requirements.
The Company's cash flow generated from operating activities has not always
been sufficient to fund its working capital needs. In the past, the Company
has relied upon external sources of financing to maintain its liquidity,
principally private and bank indebtedness and equity financing. No assurances
can be provided that these funding sources will be available in the future.
The Company currently intends that funding required for future growth,
operations or any joint ventures entered into would occur through a
combination of existing working capital, operating profits, bank credit lines,
equity and favorable financial terms from vendors.
24
<PAGE>
As previously mentioned, the nature of the Company's business has shifted
from predominantly government funded development to design and manufacture of
commercial products. In Fiscal 1998, the Company expects its results to be
favorably impacted by expanded speaker manufacturing activities, the expansion
of selling activities of the Company's Bass Shaker, and the bringing to market
of the Company's automotive products. Additionally, computer related products
sold by the Company's subsidiary, NewCom, Inc., are expected to increase as
vendor relationships and supply lines become more fully developed. The extent
of manufacturing undertaken by the Company versus the use of subcontractors or
joint venture partners will influence the level of capital required for future
expansion. Going forward the Company intends to focus on its four core
businesses: Sound, Automotive, Displays and Computer products.
Current fixed monthly expenses corporate wide, average approximately
$2,300,000, principally for labor, overhead, travel and professional fees.
The Company leases space located in El Segundo, Westlake Village, Van Nuys,
and Otay Mesa, all in California and in New Hope, Minnesota, and Nashville,
Tennessee. Minimum monthly rents under the leases approximate $55,000. Rent
expense was approximately $1,350,000, for Fiscal 1997, $905,000 for Fiscal
1996, and $525,000 for Fiscal 1995. Assuming no lease termination's or lease
extensions, rent expense is expected to be approximately $650,000 for Fiscal
1998, $680,000 for Fiscal 1999, and $570,000 for Fiscal 2000. The Company has
no other material long-term capital commitments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method on which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The following table sets forth all of the current directors, executive
officers and key employees of Aura, their age and the office they hold with
the Company. Executive officers and employees serve at the discretion of the
Board. All directors hold office until the next annual meeting of stockholders
of the Company and until their successors have been duly elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
DIRECTORS
Zvi Kurtzman............ 50 CEO/President
Arthur J. Schwartz,
Ph.D................... 49 Executive Vice President, Technology Committee
Cipora Kurtzman Lavut... 41 Senior Vice President, Corporate Communications
Neal B. Kaufman......... 52 Senior Vice President
Harvey Cohen............ 64 Director, member of Audit and Compensation Committees
Norman Reitman.......... 74 Director, member of Audit and Compensation Committees
Anthony T. Cascio....... 47 Director
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Steven C. Veen.......... 41 Senior Vice President--Chief Financial Officer
Gregory Um, Ph.D........ 49 President Aura Display
Keith O. Stuart......... 41 President Tech Center
Ronald J. Goldstein..... 56 President Aura Automotive
Gerald S. Papazian...... 41 Senior Vice President--Administration
Sultan Khan............. 52 President NewCom
Jacob Mail.............. 47 Vice President Operations Planning
Yoshikazu Masayoshi..... 56 President MYS Corporation
</TABLE>
ZVI KURTZMAN has been the CEO/President and a director of the Company since
February 1987 and devotes his full time to the Company. Mr. Kurtzman has
served as the President of Innovative Information Services, Inc. (IIS), whose
business was primarily computer assisted control systems, since 1982 and
served as Cyphermaster, Inc. (CMI), a computer software company, President
from 1984 to 1988. IIS and CMI are wholly owned subsidiaries of the Company.
Mr. Kurtzman has also served as a director of IIS and CMI since 1982 and 1984,
respectively. Mr. Kurtzman obtained his B.S. and M.S. degrees in physics from
California State University, Northridge in 1970 and 1971, respectively, and
completed all course requirements for a Ph.D. in theoretical physics at the
University of California, Riverside. He was employed as a senior scientist
with the Science Applications International Corp. a scientific research
company in San Diego, from 1984 to 1985 and with Hughes Aircraft Company, a
scientific and aerospace company, from 1983 to 1984. Prior thereto, Mr.
Kurtzman was a consultant to major defense subcontractors in the areas of
computers, automation and engineering. For information regarding certain legal
proceedings to which Mr. Kurtzman was a party, see "Legal Proceedings--
Securities and Exchange Commission Settlement."
ARTHUR J. SCHWARTZ, PH.D. has been the Executive Vice President and director
of the Company since February 1987 and the Executive Vice President and a
director of CMI since 1984. Dr. Schwartz devotes his full time to the Company.
In addition, Dr.ESchwartz was appointed President of IIS in 1988 after having
served as its Executive Vice President since 1984. Dr. Schwartz has also
served as a director of IIS since 1984. Dr. Schwartz obtained his M.S. degree
in physics from the University of Chicago in 1971 and a Ph.D. in physics from
the University of Pittsburgh in 1978. Dr. Schwartz was employed as a Technical
Director with Science Applications International Corp., a scientific research
company in San Diego, California from 1983 to 1984 and was a senior physicist
with Hughes Aircraft Company, a scientific and aerospace company, from 1980 to
1984.
26
<PAGE>
While at Hughes, he was responsible for advanced studies and development where
he headed a research and development effort for new technologies to process
optical signals detected by space sensors.
CIPORA KURTZMAN LAVUT was appointed Senior Vice President Corporate
Communications in December 1991. She previously served as Vice President in
charge of Marketing and Contracts for the Company since 1988 and was appointed
director of the Company in 1989. Ms. Kurtzman was the Director of Contracts
and Marketing for CMI, a computer software company where she served from 1985
to 1988. She graduated in 1984 from California State University at Northridge
with a B.S. degree in Business Administration. Ms. Kurtzman-Lavut is the
sister of Zvi Kurtzman.
NEAL B. KAUFMAN was appointed as a director in 1989, is Senior Vice
President of Aura, where he has served since 1988. Prior thereto, he has
served as President and Vice President of CMI since 1984 and 1988,
respectively. Mr. Kaufman has also been a director of CMI since 1984. Mr.
Kaufman graduated from the University of California, Los Angeles, in 1967
where he obtained a B.S. in engineering. He was employed as a software project
manager with Abacus Programming Corp., a software development firm, from 1975
to 1985 where he headed a team of software specialists on the Gas Centrifuge
Nuclear Fuel enrichment program for the United States Department of Energy and
developed software related to the Viking and Marine projects for the
California Institute of Technology Jet Propulsion Laboratory in Pasadena,
California.
HARVEY COHEN has been a director of the Company since August 1993. Mr. Cohen
is President of Margate Advisory Group, Inc., an investment advisor registered
with the Securities and Exchange Commission, and a management consultant since
August 1981. Mr. Cohen has consulted to the Company on various operating and
growth strategies since June 1989 and assisted in the sale of certain of the
Company's securities. From December 1979 through July 1981, he was President
and Chief Operating Officer of Silicon Systems, Inc., a custom integrated
circuit manufacturer which made its initial public offering in February 1981
after having raised $4 million in venture capital in 1980. From 1975 until
1979, Mr. Cohen served as President and Chief Executive Officer of
International Communication Sciences, Inc., a communications computer
manufacturing start-up company for which he raised over $7.5 million in
venture capital. From 1966 through 1975, Mr. Cohen was employed by Scientific
Data Systems, Inc. ("S.D.S."), a computer manufacturing and service company,
which became Xerox Data Systems, Inc. ("X.D.S.") after its acquisition by
Xerox in 1979. During that time, he held several senior management positions,
including Vice President-Systems Division of S.D.S. and Senior Vice President-
Advanced Systems Operating of the Business Planning Group.
NORMAN REITMAN has been a director of the Company since January 1989. Mr.
Reitman currently serves as an independent consultant to Kroll Associates,
Inc. an international investigative firm. Mr. Reitman obtained his B.B.A.
degree in business administration from St. Johns University in 1946 and became
licensed as a public accountant in New York in 1955. Mr. Reitman is the
retired Chairman of the Board and President of Norman Reitman Co., Inc.,
insurance auditors, where he served from 1979 until June 1990. Mr. Reitman was
a senior partner in Norman Reitman Co., a public accounting firm, where he
served from 1952 through 1979. Mr. Reitman served on the Board of Directors
and was a Vice President of American Family Life Assurance Co., a publicly
held insurance company, from 1966 until April 1991.
ANTHONY T. CASCIO has been a director of the Company since August, 1994. Mr.
Cascio served as Vice President, Intellectual Property from 1991 and as
General Counsel from 1995 until March 1997, at which time Mr. Cascio returned
to the private practice of law. Mr. Cascio currently serves as Aura's outside
patent counsel. Prior to joining the Company, Mr. Cascio was an Associate in
the law firm of Poms, Smith, Lande & Rose, Los Angeles, where he provided
patent services for the Company. Other positions held by Mr. Cascio in the
past were Technology Counsel, Tandem Computers Incorporated, a computer
company in Cupertino and as an attorney with the law firm of Fitch, Even,
Tabin & Flannery (now McCubbery, Bartels, Meyer & Ward) San Francisco. Mr.
Cascio's law degree is from John Marshall School of Law, Chicago, and he is
licensed to practice in both California and Illinois. Mr. Cascio also has a
Masters of Science Degree in Electrical Engineering from the University of
California, Santa Barbara and a Bachelors Degree in Electrical Engineering
from the University of Illinois, Urbana.
27
<PAGE>
STEVEN C. VEEN a certified public accountant, was appointed Chief Financial
Officer in March 1994. He joined the Company as its Controller in December
1992. Prior to that, he had over 12 years experience in varying capacities in
the public accounting profession. Mr. Veen served from 1983 to December 1992
with Muller, King, Black, Mathys & Acker, Certified Public Accountants. He
received a B.A. in accounting from Michigan State University in 1981.
GREGORY UM, PH.D. is President of the Display Division. Dr. Um is in charge
of transforming technological ideas into commercial products. Dr. Um has 15
years of experience in project management and industrial technical experience
in the fields of scene projection systems, sensor systems and analysis signal
processing algorithms, wavefront sensors, high energy laser pointing and
tracking systems, physics of thermodynamics and thermal properties. He is the
principal inventor of the Aura Systems scene projectors and has directed all
of the scene projector development efforts within the company. Prior to
joining Aura. Dr. Um was a Senior Scientist at Hughes Aircraft Co., a
scientific and aerospace company, with major achievements in the areas of
sensors, optics, and algorithms. Dr. Um has over 20 professional publications.
KEITH O. STUART was appointed President of the Research Center in 1995.
Previously he served as Vice President in charge of Hardware Development for
Aura since 1988 and as a Program manager for IIS in 1987. Mr. Stuart obtained
his B.S. and M.S. degrees in electrical engineering from the University of
California Los Angeles in 1978 and 1980, respectively. Mr. Stuart worked for
CMI during 1986 and was employed by Hughes Aircraft Company, a scientific and
aerospace company, prior thereto. Mr. Stuart has designed and fabricated
digitally controlled, magnetically supported gimbals that isolate the seeker
portion of a United States Space Defense Initiative and has also developed a
multi-computer automated test station for the evaluation of sophisticated
electro-optical devices.
RONALD J. GOLDSTEIN was appointed President of Automotive and joined Aura in
1989. He holds two M.S. degrees in Computing Technology and the Management of
R & D from George Washington University and has completed course work for a
Ph.D. in Nuclear Engineering from North Carolina State University. Mr.
Goldstein has over 25 years of experience in high technology both in
government and industry. Since 1989 Mr. Goldstein has been responsible for all
marketing and business development activities for the Company. Prior to
joining Aura Mr. Goldstein was Manager of Space Initiatives at Hughes Aircraft
Company, a scientific and research company, where he was responsible for the
design, production and marketing of a wide variety of aerospace systems and
hardware. Prior to joining Hughes in 1982, Mr. Goldstein was the Special
Assistant for National programs in the Office of the Secretary of Defense, and
before that held high level program management positions with the Defense
Department and Central Intelligence Agency.
GERALD S. PAPAZIAN currently serves as the Company's Senior Vice President
of Administration. He has been with Aura Systems for over eight years and has
been involved in the day-to-day operations of the Company with direct
responsibility for contract administration, purchasing, inventory control,
logistics, warehousing, shipping and receiving and human resources. He joined
the Company in August 1988 from Bear, Stearns & Co., an investment banking
firm, where he served from 1986 as Vice President, Corporate Finance. His
responsibilities there included valuation of companies for potential
financing, merger or acquisition. Prior to joining Bear Stearns, Mr. Papazian
was an Associate in the New York law firm of Stroock & Stroock & Lavan, where
he specialized in general corporate and securities law with the extensive
experience in public offerings. His educational qualifications include a BA,
Economics (magna cum laude) from the University of Southern California in 1977
and a JD and MBA from the University of California, Los Angeles in 1981. He
currently serves as a trustee of the University of Southern California.
SULTAN KHAN has been President of NewCom, Inc. since 1994. He successfully
founded and grew Computer Peripherals, Inc. to a multi-million dollar sales
company before his departure. Under his leadership, the Company was at one
time an industry leader in modem communication products. Prior, at Texas
Instrument he was given the award for the most sales in one year and at Data
Products was responsible for development of a high speed band printer family
of product. Mr. Kahn received his B.S.E.E. at Cal Polytechnic Institute San
Luis Obispo and a M.B.A. at Cal Lutheran College.
28
<PAGE>
JACOB MAIL joined the Company in May 1995 and was appointed Vice President,
Operational Planning. Mr. Mail served over 20 years at Israeli Aircraft
Industries, starting as a Lead Engineer and progressing to Program manager. He
was responsible for the development and production of hydraulic actuation,
steering control systems, rotor brake systems and other systems and subsystems
involved in both commercial and military aircraft. Systems designed by Mr.
Mail are being used today all over the western world. In addition, Mr. Mail
has extensive experience in the preparation of technical specifications
planning and in organizing production in accordance with customer
specifications at full quality assurance.
YOSHIKAZU MASAYOSHI is President of MYS Corporation, joining the Company in
Fiscal 1997 as part of Aura's acquisition of MYS and its subsidiaries. Mr.
Masayoshi has been with MYS since its founding in 1986 and has, during that
time, extended the Japan based R&D center and created the MYS factory in
Malaysia. Prior to joining MYS, he served as the Senior Vice President of
Jyoto Works Co., Ltd., from 1963 to 1986, where he marketed speaker components
to loudspeaker manufacturers worldwide. Mr. Masayoshi holds a B.A. from Kinki
University of Osaka, Japan.
FAMILY RELATIONSHIPS
CIPORA KURTZMAN LAVUT, a Senior Vice President and director, is the sister
of Zvi Kurtzman, who is the CEO/President and a director of the Company. Jacob
Mail, Vice President, Operational Planning is a first cousin of Cipora
Kurtzman Lavut and Zvi Kurtzman. There are no other family relationships
between any director or executive officer.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and beneficial
owners of more than ten percent of the Common Stock, to file with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. reports of ownership and changes in ownership of the Common
Stock. Copies of such reports are required to be furnished to the Company.
Based solely on its review of the copies of such reports furnished to the
Company, or written representations that no reports were required, the Company
believes that during its fiscal year ended February 28, 1997, all filing
requirements applicable to its officers, directors, and ten percent beneficial
owners were satisfied.
DELINQUENT SEC FILINGS
None
29
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION FOR EXECUTIVES
The following table summarizes all compensation paid to the Company's Chief
Executive Officer, and to the four most highly compensated executive officers
of the Company other than the Chief Executive Officer whose total compensation
exceeded $100,000 during the fiscal year ended February 28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION AWARDS
------------- -------------------
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS COMPENSATION*
- ------------------ ---- -------- ------------------- -------------
<S> <C> <C> <C> <C>
Zvi Kurtzman................... 1997 $212,549 0 $1,839
President and CEO 1996 191,791 0
1995 155,673 0
Arthur J. Schwartz, Ph.D. ..... 1997 $163,971 0 $1,965
Executive Vice President 1996 153,216 0
1995 141,220 0
Neal B. Kaufman................ 1997 $151,654 0 $1,921
Senior Vice President 1996 146,350 0
1995 140,342 0
Gregory Um, Ph.D............... 1997 $150,596 0 $1,712
President, Aura Display 1996 123,210 0
1995 119,579 0
Yoshikazu Masayoshi............ 1997 $270,000 0 $ 0
President, MYS Corporation 1996 0 0
1995 0 0
</TABLE>
- --------
* Such compensation consisted of total Company contributions made to the plan
account of each individual pursuant to the Company's Employees Stock
Ownership Plan during the fiscal year ended February 28, 1997. See
"EXECUTIVE COMPENSATION--EMPLOYEES STOCK OWNERSHIP PLAN".
No cash bonuses or restricted stock awards were granted to the above
individuals during the fiscal years ended February 28, 1997, February 29, 1996
and February 28, 1995 Effective December 1992, the Company elected to begin to
compensate non-officer directors at the rate of $5,000 per year.
30
<PAGE>
The following table summarizes certain information regarding the number and
value of all options to purchase Common Stock of the Company held by the Chief
Executive Officer and those other executive officers named in the Summary
Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/
NAME YEAR END SARS AT FISCAL YEAR END*
- ---- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Zvi Kurtzman................ 400,000 70,000 $187,125 $ 0
Arthur Schwartz............. 275,000 40,000 $ 87,325 $ 0
Neal Kaufman................ 248,000 22,000 $ 87,325 $ 0
Cipora Kurtzman Lavut....... 275,000 40,000 $ 87,325 $ 0
Gregory Um.................. 336,000 84,000 $ 0 $ 0
Yoshikazu Masayoshi......... 0 0 $ 0 $ 0
</TABLE>
- --------
* Based on the average high and low reported prices of the Company's Common
Stock on the last day of the fiscal year ended February 28, 1997.
No options were exercised by the above individuals during the fiscal year
ended February 28, 1997.
STOCK OPTIONS
1987 Stock Option Plan. Aura's 1987 Stock Option Plan for Non-Employee
Directors (the "Directors Option Plan") was adopted by the Company in 1987.
The Directors Option Plan is administered by an option committee of the Board
of Directors (the "Committee") and provides that options granted under the
Directors Option Plan will be non-statutory stock options. The maximum number
of shares of Common Stock available for grant under the Directors Option Plan
is 500,000 shares. As of March 1, 1996, no shares remained available for
future grants under the Directors Option Plan.
Options may be granted under the Directors Option Plan to select non-
employee directors, other than members of the Committee. The Committee
determines the non-employee directors who receive options under the Directors
Option Plan, designates the number of shares subject to each option and makes
all other determinations necessary or advisable for the administration of the
Directors Option Plan. Options may have a maximum term of no more than five
years and the Committee has the discretion to make the options exercisable in
cumulative or noncumulative installments.
The exercise price of all stock options granted under the Directors Option
Plan must be at least equal to fifty percent of the fair market value of the
Common Stock on the date the option is granted. The exercise price may be paid
in cash, by cashier's or certified check, or by surrender of shares of Common
Stock. If an option expires, terminates or is canceled, the shares not
purchased thereunder may be optioned again. In Fiscal 1995, no shares of
Common Stock were granted under the Directors Option Plan.
1989 Stock Option Plan. Aura's 1989 Stock Option Plan (the "Option Plan")
was adopted by the Board of Directors effective March 1, 1989 and was approved
by the stockholders on August 16, 1989. The Option Plan is administered by an
option committee of two or more persons selected by the Board of Directors
(the "Option Committee") and provides that options granted under the Option
Plan will be non-statutory stock options. The maximum number of shares of
Common Stock available for grant under the Option Plan is equal to the greater
of 8% of Aura's outstanding Common Stock from time to time or 4,170,000
shares.
31
<PAGE>
Options may be granted under the Option Plan to selected employees and
directors, other than members of the Option Committee. The Option Committee
determines which employees and directors will receive options under the Option
Plan, designates the number of shares subject to each option and makes all
other determinations necessary or advisable for the administration of the
Option Plan. Options may have a maximum term of no more than ten years, and
the Option Committee has the discretion to make the options exercisable in
cumulative or noncumulative installments.
The exercise price of all stock options granted under the Option Plan must
be at least equal to the fair market value of the Common Stock on the date the
option is granted, except with respect to up to 150,000 shares which may be
granted at an exercise price of the lesser of the fair market value or $3.50.
The exercise price must be paid in cash. If an option expires, terminates or
is canceled, the shares not purchased thereunder may be optioned again.
No options were granted under the Option Plan in Fiscal 1997. No options to
purchase shares were exercised under the Option Plan in Fiscal 1997.
EMPLOYEES STOCK OWNERSHIP PLAN
The Company sponsors an Employees Stock Ownership Plan (the "Plan") which
constitutes an individual account plan as defined in Section 3(34) of the
Employee Retirement Income Security Act of 1974, as amended, and is intended
to qualify as a stock bonus plan under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). Part of the Plan also constitutes an
employee stock ownership plan under Section 4975(e)7 of the Code and the other
part of the plan constitutes a cash or deferred arrangement under Section
401(k) of the Code. Each participant in the Plan may elect to defer a
percentage of his compensation and have the Company contribute it to the Plan
for his benefit. If a participant chooses to have the Company make such
"Deferral Contributions" for his benefit, the Company will also make "Matching
Contributions" as described below. The Company may also make "Vested
Discretionary Contributions" and "Employees Stock Ownership Contributions" for
the benefit of participants as described below. An individual account will be
maintained in the Plan for each participant to reflect his interest in the
Plan. Each participant's benefit under the Plan, subject to the vesting rules
described below, is equal to the contributions allocated to the participant's
account, plus earning and forfeitures by other participants; and minus losses
of the Plan which are allocated to the participant's account. Benefits from
the Plan are generally distributable to a participant upon his retirement,
total disability, death or termination of employment with the Company. Any
subsidiary of the Company may adopt the Plan with the consent of the Company.
Employees of the Company who were employed on March 1, 1989 are eligible to
participate in the Plan and new entrants may participate on quarterly entry
dates of March 1, June 1, September 1, and January 1 after 90 days of
continuous service.
Each eligible participant may elect to make Deferral Contributions in an
amount of at least 4% but not more than 12% of his compensation (or, in the
discretion of the Plan's administration committee, 1%, 2% or 3% of his
compensation). Such Deferral Contributions are withheld from the participant's
compensation. A participant's Deferral Contributions for any calendar year,
however, cannot exceed $9,500 currently (adjusted annually for cost of living
increases). Under the Plan, not more than $150,000 of compensation (adjusted
annually for increases in the cost of living) is taken into account for any
participant for any fiscal year.
The Company will make a Matching Contribution of $.20 for each $1.00 of
Deferral Contributions made by a participant which do not exceed 7% of his
compensation. Matching Contributions and earnings thereon are fully vested and
nonforfeitable at all times. For the fiscal year ended February 28, 1997, the
Company made Matching Contributions to the accounts of all participants in the
amount of $42,750.
The Company may make Employees Stock Ownership Contributions to the Plan in
an amount determined in the Company's discretion, which will be allocated to
participants who are employed by the Company on the last day of the fiscal
year. For the fiscal year ended February 28, 1997, the Company made no
Employees Stock Ownership Contributions to the Plan. The Plan provides for
vesting at the rate of 20% for each fiscal year of service completed by
participants.
32
<PAGE>
The Company has not yet made any Vested Discretionary Contributions for the
fiscal year ended February 28, 1997. The Company intends to make such Vested
Discretionary Contributions only if necessary to satisfy certain requirements
of the Code. If the Company makes such Vested Discretionary Contributions,
such contributions will be allocated to participants who complete 1,000 hours
of service with the Company during the fiscal year and who were employed by
the Company on the last day of the fiscal year. Such Vested Discretionary
Contributions are fully vested and at all times.
Contributions to the Plan and earnings thereon will be invested primarily in
Common Stock of the Company. The Plan may acquire such Common Stock from the
Company or any other source, such as purchases on the open market at
prevailing market prices. The Plan will generally be funded by contributions
from the Company and participants as described above. The Plan may also borrow
funds to finance the purchase of Common Stock of the Company. Only Common
Stock of the Company may be used as collateral for such a loan, and a creditor
of such a loan will generally have the right to reach only the Common Stock of
the Company which constitutes the collateral.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of outside directors Messrs. Norman
Reitman and Harvey Cohen. Decisions regarding compensation of executive
officers for the fiscal year ended February 29, 1997 were made by Zvi
Kurtzman, President of the Company, after review and consultation with the
Committee. Decisions regarding option grants under the 1989 Option Plan for
fiscal year ended February 28, 1997 were made by the Option Committee, which
consist of [Thomas Wiley and Dana Bonda;] individuals who are not members of
the Board of Directors or affiliated with the Company, after recommendations
by Mr. Kurtzman.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock owned as of May 24, 1996 (i) by each person who is known by Aura
to be the beneficial owner of more than five percent (5%) of its outstanding
Common Stock, (ii) by each of the Company's directors and those executive
officers named on the Summary Compensation Table, and (iii) by all directors
and executive officers as a group:
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
COMMON STOCK COMMON STOCK
NAME BENEFICIALLY OWNED BENEFICIALLY OWNED
---- ------------------ ------------------
<S> <C> <C>
Zvi (Harry) Kurtzman................. 1,674,896(1)(2) 2.1%
Arthur J. Schwartz................... 1,389,062(1)(3)(4) 1.8%
Cipora Kurtzman Lavut................ 1,306,382(5) 1.7%
Neal B. Kaufman...................... 1,371,434(1)(9) 1.7%
Gregory Um........................... 458,542(7) *
Norman Reitman....................... 607,142(6) *
Harvey Cohen......................... 393,942(8) *
Anthony T. Cascio.................... 278,965(10) *
Yoshikazu Masayoshi.................. 283,455(11) *
All executive officers and directors
as a group (15 persons)............. 8,426,571 10.9%
</TABLE>
- --------
* Less than 1% of outstanding shares.
(1) Includes 175,000 shares held of record by Advanced Integrated Systems,
Inc.
(2) Includes 400,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of May 31, 1997.
33
<PAGE>
(3) Includes 275,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of May 31, 1997.
(4) Includes 32,000 shares held by Dr. Schwartz as custodian for his
children, to which Dr. Schwartz disclaims any beneficial ownership.
(5) Includes 275,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1997.
(6) Includes 365,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1997 and 12,500 shares owned by Mr.
Reitman's wife, as to which 12,500 shares he disclaims any beneficial
ownership.
(7) Includes 336,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1997.
(8) Includes 155,000 shares beneficially owned, of which 145,000 shares may
be purchased pursuant to options and convertible securities within 60
days of May 31, 1997. In connection with his investment advisory
business, this amount also includes 31,250 shares and 207,692 shares
which may be purchased upon conversion of 7% Secured Convertible Notes
over which Mr. Cohen has voting and investment control and as to which
Mr. Cohen disclaims beneficial ownership.
(9) Includes 248,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of May 31, 1997.
(10) Includes 266,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1997.
(11) Includes 283,455 shares which were received as part of the MYS
acquisition purchase consideration.
The mailing address for each of these individuals is c/o Aura Systems, Inc.,
2335 Alaska Avenue, El Segundo, CA 90245.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Business Consulting Agreement
Since 1996 Norman Reitman, a Director of the Company has been retained by
the Company as a part-time business consultant. Mr. Reitman currently receives
a consulting fee of $12,500 per quarter and the engagement is terminable at
any time by the Company.
Legal Consulting Agreement
In April 1997, the Company retained Anthony T. Cascio as its outside patent
counsel, and furnished Mr. Cascio with a $100,000 retainer, which amount is
credited against legal services billed by Mr. Cascio at an agreed hourly rate.
Mr. Cascio is a Director of the Company and was its General Counsel until his
resignation in March, 1997.
Officer Loans
During Fiscal 1997, Zvi (Harry) Kurtzman, Arthur J. Schwartz, Ph.D. and
Cipora Kurtzman Lavut were indebted to the Company for the loans described
below. These were interest bearing at a rate of 9% and were fully
collateralized by a combination of stock and a certificate of deposit. They
were made in the second and third quarters of Fiscal 1997. Repayment started
in the third quarter and by January 8, 1997 the Company was repaid in full for
both principal and interest. The Loans were approved and ratified by all
disinterested board members.
34
<PAGE>
The Company loaned Ms. Lavut $131,000 during the second quarter and an
additional $682,055 during the third quarter. In the fourth quarter the entire
principal amount plus interest was fully paid. Ms. Lavut is a Senior Vice
President of the Company and a member of the Board of Directors.
The Company loaned Dr. Schwartz $180,000 during the second quarter and an
additional $95,000 during the third quarter. In the fourth quarter the entire
principal amount plus interest was fully paid. Dr. Schwartz is the Executive
Vice President of the Company and is a member of the Board of Directors.
The Company loaned Mr. Kurtzman $59,000 during the second quarter and an
additional $425,285 during the third quarter. Also during the third quarter
Mr. Kurtzman paid back $6,000 of the loan. In the fourth quarter the remaining
balance of the principal amount plus interest was fully paid. Mr. Kurtzman is
President and Chief Executive Officer of the Company and Chairman of the
Board.
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
2. Financial Statement Schedules
See Index to Consolidated Financial Statements
3. Exhibits
See Exhibit Index
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant in the last
quarter of Fiscal 1997.
35
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation of Registrant.(1)
3.2 Bylaws of Registrant.(1)
10.1 Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee
Directors.(1)
10.2 Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement.(1)
10.3 Deed of Trust and Assignment of Rents, dated as of February 27, 1989,
by the Registrant in favor of Chicago Title Insurance Company, as
Trustee, for the benefit of City National Bank.(2)
10.4 Indenture, dated as of March 1, 1989, between the Registrant and
Interwest Transfer Co., Inc. as Trustee, relating to the 7% Secured
Convertible Non-Recourse Notes due 1999.(2)
10.5 Form of 7% Secured Convertible Non-Recourse Notes due 1999.(2)
10.6 Deed of Trust, Assignment of Leases and Rents and Fixture Filing,
dated as of March 1, 1989, by the Registrant in favor of Ticor Title
Insurance Company, as Trustee, for the benefit of Interwest Transfer
Co., Inc., as trustee under the Indenture.(2)
10.7 Form of 7% Secured Convertible Non-Recourse Note due 2000.(3)
10.8 1989 Stock Option Plan.(4)
10.9 Joint Development and License Agreement, dated August 24, 1992,
between the Registrant and Daewoo Electronics Co., Ltd.(5)
10.10 Agreement, dated September 23, 1993, between the Registrant and
Burlington Technopole SDN. BHD.(6)
10.11 Dedicated Supplier Agreement, dated December 2, 1993, between the
Registrant and Daewoo Electronics Co., Ltd.(7)
10.12 Form of 7% Secured Convertible Non-Recourse Note due 2002.(8)
10.13 Agreement dated July 19, 1995 between the Company and K&K Enterprises.
10.14 Agreement dated July 19, 1995 between the Company and K&K Enterprises.
10.15 Agreement dated July 12, 1995 between the Company and K&K Enterprises.
10.16 Agreement dated July 12, 1995 between the Company and K&K Enterprises.
10.17 Stock Purchase and Sale Agreement dated April 30, 1996 between the
Company and MYS Corporation(9)
10.18 Joint Venture Agreement dated July 26, 1995 between the Company and
Microbell(9)
21.1 Aura Systems, Inc. and Subsidiaries
23.1 Consent of Parnell Kerr Forster
27 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to the Exhibits to the Registration Statement on
Form S-1 (File No. 33-19530).
(2) Incorporated by reference to the Exhibits in the Registrant's Current
Report on Form 8-K dated March 24, 1989 (File No. 0-17249).
(3) Incorporated by reference to the Exhibits to Post-Effective Amendment No.
2 to the Registration Statement on Form S-1 (File No. 33-27164).
(4) Incorporated by reference to the Exhibits to the Registration Statement on
Form S-8 (File No. 33-32993).
(5) Incorporated by Reference to the Exhibit to the Registration Statement on
Form S-1 (File No. 35-57 454).
(6) Incorporated by reference to the Registrants Current Report in Form 10-Q
dated November 30, 1993.
(7) Incorporated by reference to the Exhibits to the Registration Statement on
Form S-1 (File No. 33-57454).
(8) Incorporated by reference to the Exhibits to the Registrant's Annual
Report Form 10-K for the fiscal year ended February 28, 1994 (File No. 0-
172-49).
(9) Incorporated by reference to the Registrant's Annual Report Form 10-K for
the fiscal year ended February 29, 1996 (File No. 0-172-49)
36
<PAGE>
SIGNATURES
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.
Dated: June 13, 1997 AURA SYSTEMS, INC.
By: /s/ Zvi Kurtzman
----------------------------------
Zvi Kurtzman
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Zvi Kurtzman President and Director June 13, 1997
____________________________________ (Principal Executive
Zvi Kurtzman Officer)
/s/ Steven C. Veen Senior Vice President, June 13, 1997
____________________________________ Chief Financial Officer
Steven C. Veen (Principal Financial and
Accounting Officer)
/s/ Arthur J. Schwartz Executive Vice President June 13, 1997
____________________________________ and Director
Arthur J. Schwartz
/s/ Neal Kaufman Senior Vice President and June 13, 1997
____________________________________ Director
Neal Kaufman
/s/ Cipora Kurtzman Lavut Senior Vice President and June 13, 1997
____________________________________ Director
Cipora Kurtzman Lavut
/s/ Norman Reitman Director June 13, 1997
____________________________________
Norman Reitman
/s/ Harvey Cohen Director June 13, 1997
____________________________________
Harvey Cohen
Director
____________________________________
Anthony Cascio
</TABLE>
37
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report on Consolidated Financial Statements
and
Financial Statement Schedule...................................... F-2
Consolidated Financial Statements of Aura Systems, Inc. and
Subsidiaries:
Consolidated Balance Sheets-February 28, 1997 and February 29,
1996............................................................ F-3
Consolidated Statements of Operations-Years ended February 28,
1997,
February 29, 1996 and February 28, 1995......................... F-4
Consolidated Statements of Stockholders' Equity-Years ended
February 28, 1997,
February 29, 1996 and February 28, 1995......................... F-5
Consolidated Statements of Cash Flows-Years ended February 28,
1997,
February 29, 1996 and February 28, 1995......................... F-6 to F-7
Notes to Consolidated Financial Statements....................... F-8 to F-21
Consolidated Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts................... F-22
</TABLE>
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.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Aura Systems, Inc.
El Segundo, California
We have audited the consolidated balance sheets of Aura Systems, Inc. and
subsidiaries as of February 28, 1997, and February 29, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years ended February 28, 1997 and the related financial
statement schedule listed in the accompanying Index at item 14. These
consolidated financial statements, and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aura
Systems, Inc. and subsidiaries as of February 28, 1997, and February 29, 1996
and the results of their operations and their cash flows for each of the three
years ended February 28, 1997, and the financial statement schedule presents
fairly, in all material respects, the information set forth therein, all in
conformity with generally accepted accounting principles.
/s/ Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California 90017
June 11, 1997
F-2
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and equivalents.............................. $ 7,112,354 $ 21,900,364
Receivables, net.................................. 53,743,698 37,512,564
Inventories and contracts in process.............. 33,847,296 23,883,964
Prepayments to vendors............................ 7,695,268 8,463,236
Other current assets.............................. 391,361 793,824
------------ ------------
Total current assets............................. 102,789,977 92,553,952
------------ ------------
PROPERTY AND EQUIPMENT, AT COST.................... 52,867,243 30,012,084
Less accumulated depreciation and amortization.... (9,676,454) (6,698,849)
------------ ------------
Net property and equipment....................... 43,190,789 23,313,235
JOINT VENTURES..................................... 10,210,872 3,002,225
LONG-TERM INVESTMENTS.............................. 6,534,498 4,165,000
LONG TERM RECEIVABLES.............................. 6,974,242 4,414,344
PATENTS, NET....................................... 2,905,870 2,294,059
DEFERRED CHARGES, NET.............................. 503,545 1,376,506
GOODWILL, NET...................................... 6,540,990 63,125
OTHER ASSETS....................................... 2,877,616 2,898,122
------------ ------------
Total............................................ $182,528,399 $134,080,568
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable..................................... $ 14,859,567 $ 3,378,758
Accounts payable.................................. 23,716,251 16,247,434
Accrued expenses.................................. 1,903,444 1,564,878
------------ ------------
Total current liabilities........................ 40,479,262 21,191,070
------------ ------------
NOTES PAYABLE AND OTHER LIABILITIES ............... 4,458,650 2,063,492
------------ ------------
CONVERTIBLE NOTES-SECURED.......................... 3,662,900 3,662,900
------------ ------------
CONVERTIBLE NOTES-UNSECURED........................ 8,450,000 8,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock par value $.005 per share and
additional paid in capital. Issued and
outstanding 76,481,666 and 62,222,438 shares
respectively..................................... 196,039,793 166,845,201
Accumulated deficit............................... (70,562,206) (67,682,095)
------------ ------------
Total stockholders' equity....................... 125,477,587 99,163,106
------------ ------------
Total............................................ $182,528,399 $134,080,568
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
GROSS REVENUES........................ $133,802,370 $ 82,259,010 $44,214,242
LESS RETURNS AND ALLOWANCES........... (23,852,168) (5,170,160) (1,770,029)
------------ ------------ -----------
NET REVENUES......................... 109,950,202 77,088,850 42,444,213
COST OF GOODS AND OVERHEAD............ 86,350,828 71,849,204 30,064,935
------------ ------------ -----------
GROSS PROFIT.......................... 23,599,374 5,239,646 12,379,278
------------ ------------ -----------
EXPENSES:
Research and development............. 6,022,586 5,225,735 2,037,467
Selling, general and administrative
expenses............................ 18,542,840 26,399,794 12,771,151
------------ ------------ -----------
Total expenses...................... 24,565,426 31,625,529 14,808,618
------------ ------------ -----------
(LOSS) FROM OPERATIONS................ (966,052) (26,385,883) (2,429,340)
OTHER (INCOME) AND EXPENSES
Gain on sale of Delphi assets........ (250,000) -- --
Currency transaction loss............ 218,283 -- --
Interest income...................... (475,758) (647,717) (123,721)
Interest expense..................... 1,891,692 348,924 344,260
------------ ------------ -----------
(LOSS) BEFORE TAXES................... (2,350,269) (26,087,090) (2,649,879)
Provision for taxes................... 570,484 -- --
------------ ------------ -----------
NET (LOSS)............................ $ (2,920,753) $(26,087,090) $(2,649,879)
============ ============ ===========
NET (LOSS) PER COMMON SHARE........... $ (.04) $ (.48) $ (.07)
============ ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES............................... 68,433,521 53,860,527 37,217,673
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at February 28,
1994................... 33,824,000 $169,119 $ 55,580,862 $(37,674,188) $ 18,075,793
Private placements, net
of issuance cost....... 8,416,434 42,083 36,087,123 -- 36,129,206
Issuance to ESOP........ 25,639 128 187,845 -- 187,973
Secured notes payable
converted.............. 292,093 1,460 978,540 -- 980,000
Exercise of warrants.... 45,000 225 224,775 -- 225,000
Exercise of stock
options................ 206,000 1,030 789,422 -- 790,452
Stock issued for non
cash items............. 165,000 825 921,797 -- 922,622
Shares cancelled........ (100,000) (500) (576,250) -- (576,750)
Stock issued to acquire
assets................. 199,468 997 1,417,505 -- 1,418,502
Increase to deficit-AMS
consolidation.......... -- -- -- (1,249,500) (1,249,500)
Net (loss).............. -- -- -- (2,649,879) (2,649,879)
---------- -------- ------------ ------------ ------------
Balances at February 28,
1995................... 43,073,634 215,367 95,611,619 (41,573,567) 54,253,419
Private placements, net
of issuance cost....... 16,749,725 83,749 59,843,541 -- 59,927,290
Issuance to ESOP........ 49,046 245 240,788 -- 241,033
Notes payable converted. 289,106 1,446 1,284,148 -- 1,285,594
Exercise of warrants.... 35,165 176 99,824 -- 100,000
Exercise of stock
options................ 206,000 1,030 655,902 -- 656,932
Stock issued for non
cash items............. 664,380 3,322 3,996,678 -- 4,000,000
Stock issued to acquire
assets................. 1,155,382 5,777 4,801,589 -- 4,807,366
Foreign currency
translation loss....... -- -- -- (21,438) (21,438)
Net (loss).............. -- -- -- (26,087,090) (26,087,090)
---------- -------- ------------ ------------ ------------
Balances at February 29,
1996................... 62,222,438 311,112 166,534,089 (67,682,095) 99,163,106
Private placements, net
of issuance cost....... 385,000 1,925 1,499,575 -- 1,501,500
Notes payable converted. 12,815,368 64,077 24,679,389 -- 24,743,466
Exercise of warrants.... 300,000 1,500 598,500 -- 600,000
Exercise of stock
options................ 10,000 50 34,950 -- 35,000
Stock issued to acquire
assets................. 748,860 3,744 2,310,882 -- 2,314,626
Foreign currency
translation gain....... -- -- -- 40,642 40,642
Net (loss).............. -- -- -- (2,920,753) (2,920,753)
---------- -------- ------------ ------------ ------------
Balances at February 28,
1997................... 76,481,666 $382,408 $195,657,385 $(70,562,206) $125,477,587
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss).......................... $ (2,920,753) $(26,087,090) $ (2,649,879)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 4,797,436 4,246,133 3,172,410
Shares contributed to ESOP.......... -- 241,033 187,973
Reserve for recoverability of
investment in AMS.................. -- -- (203,996)
Provision for environmental cleanup. 37,021 33,765 28,550
Gain on disposition of assets....... (255,665) -- --
Reduction of asset carrying value... 2,005,000 1,203,972 --
Shares issued for payment of
inventory purchases................ -- 3,744,241 3,116,519
Foreign exchange loss............... 172,617
Assets-(Increase) Decrease:
Receivables......................... (12,830,713) (9,178,666) (22,100,384)
Inventories and contracts in
process............................ (9,410,343) (10,844,934) (10,306,911)
Other current assets................ 1,245,613 (7,296,782) (1,130,269)
Patents............................. (696,677) (337,113) (466,415)
Deferred charges.................... (176,921) (679,965) (2,553,726)
Escrow proceeds..................... -- -- 280,000
Other assets........................ (468,320) (441,535) 673,242
Liabilities-Increase (Decrease):
Accounts payable.................... 3,270,971 8,581,670 3,994,228
Accrued expenses.................... 323,435 544,383 (261,401)
Accrued losses on contracts......... -- (133,261) (67,469)
------------ ------------ ------------
Total adjustments................... (11,986,546) (10,317,059) (25,637,649)
------------ ------------ ------------
Net cash (used) by operating
activities........................ (14,907,299) (36,404,149) (28,287,528)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets........ 286,217 -- --
Purchase of property and equipment.. (8,606,686) (6,938,455) (5,320,612)
Manufacture of special tools and
equipment.......................... (16,539,899) (363,274) (257,246)
Purchase of subsidiary.............. (1,101,278) -- (439,000)
Proceeds from sale of stock in AMS.. -- -- 1,000,000
Investment in joint ventures........ (3,163,475) (2,439,106) (22,921)
Long-term investments............... (2,430,756) (4,165,000) --
Long-term receivables............... (2,450,959) (4,414,344) --
------------ ------------ ------------
Net cash (used) by investing
activities........................ (34,006,836) (18,320,179) (5,039,779)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from borrowings........ 9,772,600 3,131,039 74,050
Repayment of notes payable.......... (2,624,214) (193,469) (182,693)
Net proceeds from issuance of common
stock.............................. 2,136,500 60,684,622 27,703,769
Cash released from escrow........... -- -- 5,000,000
Net proceeds from issuance of
convertible notes.................. 24,841,239 9,175,000 --
------------ ------------ ------------
Net cash provided by financing
activities......................... 34,126,125 72,797,192 32,595,126
------------ ------------ ------------
Net Increase (Decrease) in cash and
equivalents....................... (14,788,010) 18,072,864 (732,181)
Cash and equivalents at beginning of
year................................ 21,900,364 3,827,500 4,559,681
------------ ------------ ------------
Cash and equivalents at end of year.. $ 7,112,354 $ 21,900,364 $ 3,827,500
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................ $ 1,065,796 $ 326,088 $ 353,514
============ ============ ============
Income Taxes........................ $ 8,000 $ 6,400 $ 8,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Supplemental disclosures of noncash investing and financing activities:
During the year ended February 28, 1995, the Company issued 165,000 shares of
common stock in connection with a consulting contract and the settlement of a
previously recorded liability. During the year ended February 28, 1995, the
Company also issued 1,497,700 shares of Regulation "S" restricted common stock
in consideration of previously recorded liabilities.
During the year ended February 28, 1995, the Company acquired assets valued
at $1,418,502 for which it issued 199,468 shares of common stock. The assets
acquired were patent rights valued at $418,502 and the NewCom, Inc. acquisition
of assets of $1,000,000. See note 3(c). During the years ended February 29,
1996, and February 28, 1995, the Company entered into financing arrangements
whereby it acquired assets for notes payable in the amount of $1,678,343, and
$88,300 respectively.
During the year ended February 29, 1996, the Company acquired the 51% of
Auratech it did not own in exchange for the issuance of 315,000 shares of
common stock valued at $1,063,125. The Company also issued 637,380 shares of
common stock in settlement of a $4,000,000 previously recorded liability. The
Company issued 840,382 shares of common stock for the acquisition of assets
valued at $3,744,241. The Company also issued 42,105 shares of common stock for
services in connection with a private placement offering. During the year ended
February 28, 1997, the Company issued 748,860 shares in connection with the
acquisitions of MYS Corporation., Phillips Sound Labs and Revolver U.K. Limited
valued at $2,314,626.
During the years ended February 28, 1997, February 29, 1996 and February 28,
1995, nil, nil and $980,000, of 7% convertible secured notes were converted
into nil, nil and 292,093 shares of common stock respectively. During the year
ended February 29, 1996, $1,250,000 of 9% convertible notes plus accrued
interest were converted into 289,106 shares of common stock. During the year
ended February 28, 1997, $25,900,000 of convertible notes plus accrued interest
were converted into 12,815,368 shares of common stock.
F-7
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, is
engaged in the development, commercialization and sales of products, systems
and components using its patented and proprietary electromagnetic and electro-
optical technology, as well as the sale of other products which do not utilize
this technology, such as CD-ROMs, sound cards, multimedia kits, modems, and
computer monitors. The Company's proprietary and patented technology is being
developed for use and incorporation in systems and products for commercial,
industrial, consumer and government use. To date, a combination of Aura funds
and commercial and governmental development contracts have been utilized in
the process of developing product applications.
Prior to Fiscal 1992, the Company was engaged in work on various classified
military programs which allowed the Company to develop its electromagnetic and
electro-optical technologies and applications. Since such time, the Company
completed the transition from a supplier of defense related technology to a
manufacturer and supplier of consumer and industrial related products and
services to the private sector.
In 1994, the Company founded NewCom, Inc. ("NewCom") as a wholly owned
subsidiary to engage in the manufacture, packaging and distribution of
computer related products, including modems and multimedia products, and
expand its presence in the growing multimedia and consumer electronics market.
In 1996, in order to expand the range of its sound products and speaker
distribution network, the Company acquired 100% of the outstanding shares of
MYS Corporation of Japan ("MYS"), which is engaged in the manufacture and sale
of speakers and speaker systems for home entertainment and computers.
In 1996, the Company combined its operations into four operating divisions:
(1) AuraSound, Inc. ("AuraSound"), which manufactures and sells professional
and consumer sound systems and components and products, including speakers,
amplifiers, and Bass ShakersTM; (2) NewCom, which manufactures, packages,
sells and distributes computer related communications and sound related
products, including CD-ROM drives, modems, computer speakers, monitors, sound
cards and multimedia kits; (3) Automotive and Industrial, which is
commercializing products with automotive and industrial applications,
including AuraGenTM and EVATM; and (4) Display Systems, which is
commercializing Aura's actuated mirror array technology ("AMATM") in consumer
and commercial display systems for use in televisions, computer displays and
theaters.
The Company is involved in the application of its technology to a variety of
products and services and, as such, faces substantial competition from
companies offering different and competitive technologies.
The Company believes the principal competitive factors in the markets for
the Company's products include ability to develop and market technologically
advanced products to meet changing market conditions, price, reliability,
product support and the ability to secure sufficient capital resources for the
often substantial periods between technological concept and commercialization.
The Company's ability to compete will also depend on its continued ability to
attract and retain skilled and experienced personnel, to develop and secure
patent and other protection for its technology and to exploit commercially its
technology prior to the development of competing products by others.
The Company competes with many companies that have more experience, name
recognition, financial and other resources and expertise in research and
development, manufacturing, testing, obtaining regulatory approvals, marketing
and distribution. Other companies may also prove to be a significant
competitors, particularly through their collaborative arrangements with
research and development companies.
F-8
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Principles of Consolidation
The consolidated financial statements include accounts of the Company and
its wholly owned subsidiaries, MYS and its subsidiaries Audio-MYS and Mystical
Audio, Revolver U.K. Limited, Delphi Components, Inc., Phillips Sound Labs,
Inc., Aura Ceramics, Inc., Electrotec Productions, Inc. (and its wholly owned
subsidiary Electrotec Europe), NewCom, Inc. and Auratech, Inc. Additionally,
the Company owned 61% of Aura Medical Systems, Inc. ("AMS") at February 28,
1997, which is included in the 1995, 1996, and 1997 consolidated financial
statements. In consolidation, all significant intercompany balances and
transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue for product sales upon shipment. The Company
provides for estimated returns and allowances based upon experience.
The Company also earns a portion of its revenues from license fees, and
generally records these fees as income when the Company has fulfilled its
obligations under the particular agreement.
Cash Equivalents
The Company considers all highly liquid assets, having an original maturity
of less than three months, to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual future results could differ from those estimates.
Long-Term Investments
Investments in equity securities with no readily determinable fair value are
stated at cost. Management periodically evaluates these investments as to
whether fair value is less than cost. In the event fair value is less than
cost, and the decline is determined to be other than temporary, the Company
will reduce the carrying value accordingly.
Deferred Charges
The Company defers certain costs related to the preliminary activities
associated with the manufacture of its products, which the Company has
determined have future economic benefit. These costs are then amortized over
the initial production units, not to exceed 24 months. Management periodically
reviews and revises, when necessary, its estimate of the future benefit of
these costs, and expenses them if it is deemed there no longer is a future
benefit.
Goodwill
Goodwill represents the excess purchase price paid over the fair market
value of the assets acquired of certain acquisitions. Goodwill is being
amortized over 40 years on a straight-line basis.
The carrying value of goodwill is based on management's current assessment
of recoverability. Management evaluates recoverability using both objective
and subjective factors. Objective factors include management's best estimates
of projected future earnings and cash flows and analysis of recent sales and
earnings trends. Subjective factors include competitive analysis and the
Company's strategic focus.
F-9
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Inventories and Contracts in Process
Inventories are stated at the lower of cost (first-in, first-out) or market.
A portion of the Company's inventories are attributable to long-term contracts
on which the related operating cycles are longer than one year. In accordance
with industry practice, these inventories are included in current assets.
Per Share Information
The consolidated net loss per common share is based on the weighted average
number of common shares outstanding during the year. Common share equivalents
have been excluded since inclusion would dilute the reported loss per share.
Patents
The Company capitalizes the costs of obtaining or acquiring patents.
Amortization of patent costs is provided for by the straight line method over
the shorter of the patents' legal or estimated economic life. If a patent is
rejected, abandoned, or otherwise invalidated the unamortized cost associated
with that patent is expensed in that period.
Joint Ventures
The Company initially records investments in joint ventures at cost. These
cost amounts are adjusted quarterly to reflect the Company's share of venture
income or losses. Because the joint ventures formed have not yet had
significant operations, equity is stated at cost.
Research and Development
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising charged to expense
in Fiscal 1997, 1996 and 1995 approximated $4,500,000, $7,000,000 and
$5,000,000, respectively, including approximately $700,000, $900,000 and
$1,000,000 for the production of the advertising, which is continuing to be
used but has been expensed.
Buildings, Equipment and Leasehold Improvements
Buildings, equipment and leasehold improvements are stated at cost and are
being depreciated using the straight-line method over their estimated useful
lives as follows:
<TABLE>
<S> <C>
Buildings................................ 40 years
Machinery and equipment.................. 5-10 years
Furniture and fixtures................... 7 years
Leasehold improvements................... Life of lease
</TABLE>
During 1997 and 1996, the Company capitalized costs of $16,539,899 and
$363,274 respectively, on special tools and equipment, which have been
designed for the manufacturing and development of actuators, speakers and
related products, automotive products, actuator mirror array wafers and
internet access and multimedia computer products. The capitalized amounts,
included in machinery and equipment, include allocated costs of direct labor
and overhead. The Company expects recovery of these costs from orders.
Depreciation and amortization expense of buildings, machinery and equipment,
furniture and fixtures and leasehold improvements approximated $3,231,000;
$1,967,000 and $1,591,000 for Fiscal 1997, 1996 and 1995, respectively.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with 1997 classifications. These reclassifications have
no effect on reported net loss amounts for 1995 and 1996.
F-10
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(2) RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial receivables:
Amounts billed.................................. $51,328,209 $36,313,927
Recoverable costs and accrued profits not
billed......................................... 5,844,610 3,564,984
----------- -----------
Total commercial receivables.................. 57,172,819 39,878,911
Advances due from related parties................. 174,210 116,655
Less allowance for uncollectible receivables and
sales returns.................................... (3,603,331) (2,483,002)
----------- -----------
$53,743,698 $37,512,564
=========== ===========
</TABLE>
Bad debt expense was $737,577, $3,496,381 and $1,091,450, in Fiscal 1997,
1996 and 1995 respectively.
(3) ACQUISITIONS
(a) Electrotec Productions, Inc.
In Fiscal 1995, the Company purchased 100.0% of the stock of Electrotec
Productions, Inc., a California corporation ("Electrotec"). The total purchase
price was $439,000. As part of the purchase, the Company advanced $1.7 million
to Electrotec to pay off a shareholder loan and a bank loan. The assets
acquired consisted of current assets of $351,765, equipment of $2,563,738,
other assets of $129,512, and the assumption of liabilities of $2,606,015.
In December 1995, Electrotec formed a wholly owned subsidiary, Electrotec
Europe, which then purchased the assets of Audio Lease, Ltd., a United Kingdom
based competitor, for approximately $670,000.
(b) NewCom, Inc.
In June 1994, the Company formed NewCom, Inc. to acquire the assets of Nuvo,
Inc. In September 1994, the Company issued 133,333 shares of stock valued at
$1,000,000 in exchange for inventory, fixed assets, trademarks, designs and
tools.
(c) MYS Corporation
Effective the beginning of Fiscal 1997, the Company purchased 100% of the
stock of MYS Corporation and its subsidiaries Audio-MYS and Mystical Audio
(MYS). The purchase price was $2,000,000. The following summary, prepared on a
pro forma basis, presents the consolidated results of operations as if MYS had
been acquired as of the beginning of Fiscal 1996.
<TABLE>
<S> <C>
Net Revenues................................................ $ 97,615,008
Cost of Revenues............................................ 89,057,471
------------
Gross Profit................................................ 8,557,537
Expenses.................................................... 33,720,949
------------
(Loss) from Operations...................................... (25,163,412)
Other (income) & Expenses................................... 241,293
------------
Net (Loss).................................................. $(25,404,705)
============
Net (Loss) Per Share........................................ $ (0.47)
============
Weighted Average Number of Shares........................... 54,500,527
============
</TABLE>
F-11
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(d) Phillips Sound Labs
In Fiscal 1996, the Company purchased 33.3% of Phillips Sound Labs, Inc.
(PSL). During Fiscal 1997 the remaining shares of PSL were acquired. The total
purchase price was $359,626.
(e) Revolver U.K. Limited
In Fiscal 1997, the Company purchased 100.0% of Revolver U.K. Limited for
$1,150,396.
(f) Long Term Investments
Long-term investments consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Telemac Cellular Corp............................... $4,655,000 $3,570,000
Aquajet Corporation................................. 853,834 500,000
Alaris Industries, Inc.............................. 800,000 --
Phillips Sound Labs................................. -- 95,000
Foremost Audio...................................... 198,650 --
Other............................................... 27,014 --
---------- ----------
$6,534,498 $4,165,000
========== ==========
</TABLE>
(4) JOINT VENTURES AND OTHER AGREEMENTS
(a) Malaysian Joint Venture
In 1993, the Company entered into an agreement with Burlington Technopole
SDN. BHD., a Malaysian corporation (Burlington) for the formation of a joint
venture to manufacture and sell speakers using Aura's proprietary technology.
The joint venture, which has been named Audiora Sound(TM) SDN. BHD., was
established under Malaysian law to operate in Malaysia and has the exclusive
right to sell speakers using Aura technology in the ASEAN countries and the
non-exclusive right to sell such speakers in the United States. Under the
terms of the agreement, the Company owns 49% of the joint venture and
Burlington owns 51%. The joint venture began shipping products in 1995.
(b) Aura-Dewan Joint Venture
In 1995, the Company also entered into an agreement with K&K Enterprises of
India ("K&K") for the formation of a joint venture to manufacture and sell
speakers using Aura's proprietary technology. K&K acquired a license to the
Company's technology and granted an exclusive sub-license to the joint
venture. The joint venture ("Dewan-Aura") has the exclusive right to build and
sell speakers using Aura's technology in the Republic of Taiwan, Indian
Subcontinent, Middle East and the European market. The Company owns 49% of the
joint venture. As consideration for the license, the Company will receive a
$1,000,000 fee, $400,000 of which was received in Fiscal 1996. The joint
venture began shipping product in late 1995.
In 1995 the Company also entered into an agreement with K&K for the
formation of a joint venture to manufacture Aura's Bass Shaker(TM) The joint
venture, established to operate and manufacture within India, is owned 49% by
the Company. In connection with the agreement, Aura granted K&K an exclusive
license to use Aura's patented and proprietary technology. As consideration
for the license to K&K, the Company is entitled to receive license fee
payments quarterly over the life of the patent. Scheduled payments for the
first five years total approximately $2.9 million, of which $500,000 was
received in Fiscal 1996.
F-12
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Without any changes to its terms, the two joint ventures were merged in
Fiscal 1996 into one joint venture encompassing both. The new venture was
renamed Dewan Aura.
(c) Auratech, Inc.
In 1994, the Company formed Auratech, Inc. as a joint venture to develop,
design, manufacture and market machine tooling robotics and industrial hand
tool applications of the Company's electromagnetics technology. In June, 1995,
Auratech entered into a license agreement with Detroit Center Tool ("DCT").
DCT is engaged in business relating to the design and integration of robotics
in automobile assembly lines. Under the licenses, DCT may manufacture the
Company's patented and proprietary electromagnetic actuator for an actuated
tool used in such assembly lines. Electronic controllers using the Company's
proprietary technology for use with the actuator built under license will be
purchased from the Company. The first application being sought by DCT for use
of the Company's electromagnetic actuator is in the actuation and control of
weld heads for chassis and body fabrication. Under the agreement DCT will pay
an annual license fee of $100,000 in 1997, $250,000 in 1998 and $1 million
every year thereafter for the life of the patents (approximately 16 years) in
order to keep worldwide exclusive applications for us in automotive assembly
lines. In late 1995, the Company purchased 50.1% of Auratech owned by its
joint venture partner. The Company now owns 100% of Auratech and operates it
as a wholly owned subsidiary.
(d) Daewoo Agreement
In 1992, the Company entered into a joint development and licensing
agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and
commercialize televisions using Aura's AMATM display technology. The agreement
provides for the payment by Daewoo to Aura of a $1,500,000 licensing fee and
the payment of approximately $2,000,000 by Daewoo to Aura for development
costs, all of which have been received by the Company. Aura also is to receive
a fixed royalty (depending on television size), for each television set
manufactured by Daewoo or licensed by Daewoo to a third party. Under the
agreement, Daewoo will be required, in the future, to license the technology
to all interested third parties. Furthermore, all the televisions using the
AMATM will be identified on the product by an Aura trademark
("Aurascope(TM)"). Royalty payments will be on a scheduled basis upon
commencement of commercial production.
Daewoo, who is solely responsible for manufacturing and sales under the
license agreement, has advised the Company that it may be able to begin
commercial production of large screen display televisions under the license
agreement in 1997. There are no assurances as to when or if Daewoo will
commence commercial production of televisions incorporating Aura's AMATM
display technology. The ultimate degree of success, if any, of this venture is
dependent on Daewoo.
(e) K&K Enterprises Auragen(TM) Agreement
In February 1997, the Company entered into a license agreement with K&K
Enterprises (K&K) in India to commercialize the AuraGen(TM) in the Indian,
Nepal, Sri Lanka and Bangladesh markets. (The Company has established in the
past, a speaker and Bass Shaker(TM) joint venture with K&K. The license
agreement calls for a license fee of $3,500,000 to be paid in payments over a
24 month period starting in June 1997 and a fixed per unit royalty for every
unit built and shipped in the licensed territory after December 1998.
Furthermore, all units will be identified on the product by an Aura trademark
("AuraGen"). Royalty payments per unit will be on a scheduled basis every
quarter after December 1, 1998.
F-13
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(5) Related Party Transactions
Notes and advances due from related parties, aggregated $174,210 and
$116,655 at February 28, 1997 and February 29, 1996, respectively, included in
current receivables and $19,000 and $37,000 included in non-current
receivables at February 28, 1997 and February 29, 1996, respectively.
(6) Inventories and Contracts in Process
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials...................................... $15,516,034 $19,898,783
Finished goods..................................... 18,331,262 3,985,181
----------- -----------
$33,847,296 $23,883,964
=========== ===========
</TABLE>
(7) Property and Equipment
Property and Equipment, at cost is comprised as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land............................................... $ 3,952,425 $ 3,280,398
Buildings.......................................... 8,841,082 7,910,946
Machinery and equipment............................ 34,390,262 16,640,339
Furniture, fixtures and leasehold improvements..... 5,683,474 2,180,401
----------- -----------
$52,867,243 $30,012,084
=========== ===========
</TABLE>
(8) DEFERRED CHARGES
Deferred charges at February 28, 1997 consist of expenses incurred by the
Company in the pre-production phase of its products. The charges relate to the
Company's Sparking Gasket, AuraGen(TM), Bass shaker and multi- media speakers.
Amortization of these charges commences upon initial production over a period
of 24 months. Amortization of the charges relating to the 18" speaker, the
Interactor and the Electromagnetic Valve Actuator began in Fiscal 1995, with
amortization of the remaining items beginning in Fiscal 1996. Amortization
expense related to the deferred charges totaled $1,050,158 in Fiscal 1997,
$1,588,316 in Fiscal 1996 and $639,321 in Fiscal 1995.
F-14
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(9) NOTES PAYABLE AND OTHER LIABILITIES
Included in Notes Payable and Other Liabilities are Notes Payable which
consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Lines of Credit.................................... $ 9,470,656 $ --
Notes payable-equipment (a)........................ 7,935,272 1,161,028
Note payable-building (b).......................... 1,491,703 1,500,000
----------- ----------
18,897,631 2,661,028
Less: current portion.............................. 14,859,567 981,101
----------- ----------
Long term portion.................................. 4,038,064 1,679,927
Reserve for environmental cleanup.................. 420,586 383,565
----------- ----------
$ 4,458,650 $2,063,492
=========== ==========
</TABLE>
- --------
(a) Notes payable-equipment consists of various notes maturing at various
dates thru August 1999 bearing interest at various rates and are
collaterized by equipment.
(b) Note payable-building consists of a 1st Trust Deed held by the seller of
the building, due in Fiscal 2007.
Annual maturities of long term notes payable are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -----------
<S> <C>
1998....................................................... $14,859,567
1999....................................................... 1,688,871
2000....................................................... 543,871
2001....................................................... 267,868
2002....................................................... 203,463
2003-2007.................................................. 1,333,991
-----------
$18,897,631
===========
</TABLE>
The Company has entered into a financing arrangement with a lender who is
providing a line of credit collateralized by NewCom's accounts receivable. At
February 28, 1997 the balance was $8,883,657, with a maximum of $9,000,000.
The interest rate is approximately 9%. Subsequent to Fiscal 1997, the
financing agreement was terminated and a new financing arrangement was entered
into with a different lender on comparable terms.
(10) CONVERTIBLE NOTES PAYABLE
In Fiscal 1993, the Company issued its Secured 7% Convertible Notes due 2002
in the total amount of $5,500,000. The notes are secured by a first lien on
the Company's headquarters facility and are convertible at the holder's
option, into Aura's common stock at an average conversion price of $3.38 per
share. The loan agreement also provides for mandatory conversion into common
stock in the event the market price of the common stock exceeds $10.00 per
share for ten consecutive trading days. The notes are redeemable by the
noteholder or the Company commencing in July 1997.
In Fiscal 1996, the Company issued $1,250,000 of unsecured Convertible Notes
due December 31, 1998. The notes plus accrued interest of $35,594 were
converted into 289,106 shares of common stock in Fiscal 1996.
F-15
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
In Fiscal 1996, the Company issued $8,000,000 of unsecured Convertible Notes
due February 2, 1998. The Notes plus accrued interest of $123,693 were
converted into 2,745,444 shares of common stock in Fiscal 1997.
In Fiscal 1997, the Company issued $26,350,000 of unsecured convertible
notes due at various dates, $17,900,000 of these notes plus accrued interest
of $228,534 were converted into 10,069,924 shares of common stock in Fiscal
1997.
(11) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued payroll and related expenses................. $1,053,294 $1,288,792
Other................................................ 850,150 276,086
---------- ----------
$1,903,444 $1,564,878
========== ==========
</TABLE>
(12) INCOME TAXES
At February 28, 1997, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $61 million and $30
million respectively, which expire through 2012.
Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the
liability method of accounting for income taxes. Accordingly, the Company has
recorded a deferred tax benefit of approximately $26,000,000 for Fiscal 1997
and $23,000,000 for Fiscal 1996. The Company has also recorded a valuation
account to fully offset the deferred benefit due to the uncertainty of the
realization of this benefit.
The Company's Japanese subsidiary, MYS Corporation, pays income taxes to the
Japanese government at an effective rate of approximately fifty eight percent.
At February 28, 1997 MYS Corporation had a current income tax liability of
approximately $520,000, and no net operating losses carry overs available at
year end.
(13) COMMON STOCK, STOCK OPTIONS AND WARRANTS
The Company has 100,000,000 shares of $.005 par value common stock
authorized for issuance.
Remaining warrants outstanding to purchase Common Stock are 1,730,000 at an
average price of $5.44.
The Company has granted nonqualified stock options to certain directors and
employees. Options are granted at fair market value at the date of grant, vest
immediately, and are exercisable at any time within a five-year period from
the date of grant.
F-16
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
A summary of activity in the directors stock option plan follows:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
--------- ----------
<S> <C> <C>
Options outstanding at February 28, 1994.............. 1,104,578 $1.44-5.50
Grants.............................................. -- --
Cancellations....................................... -- --
Exercises........................................... (176,000) $ 4.00
--------- ----------
Options outstanding at February 28, 1995.............. 928,578 $1.44-5.50
Grants.............................................. 100,000 4.50
Cancellations....................................... -- --
Exercises........................................... (19,000) 4.00
--------- ----------
Options outstanding at February 29, 1996.............. 1,009,578 $1.44-5.50
Grants.............................................. -- --
Cancellations....................................... -- --
Exercises........................................... -- --
--------- ----------
Options outstanding at February 28, 1997.............. 1,009,578 $1.44-5.50
========= ==========
</TABLE>
(14) EMPLOYEE STOCK PLANS
The Company has two employee benefit plans: The Employee Stock Ownership
Plan (ESOP) and the 1989 Stock Option Plan (the Stock Option Plan). A previous
plan, the 1989 Employee Stock Ownership Plan, was terminated in Fiscal 1992
and all plan assets were distributed to participants.
The ESOP is a qualified discretionary employee stock ownership plan that
covers substantially all employees. This plan was formally approved by the
Board of Directors during fiscal 1990. The Company made no contributions to
the ESOP in Fiscal 1997, 1996 and 1995 respectively.
During Fiscal 1990, the Company's Board of Directors adopted the Stock
Option Plan, a nonqualified plan which was subsequently approved by the
shareholders. The Stock Option Plan authorizes the grant of options to
purchase the greater of up to 8% of the Company's outstanding common shares or
4,170,000 common shares. Shares currently under option generally vest ratably
over a five year period.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation," which contains a fair value-
based method for valuing stock-based compensation that entities may use, which
measure compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock option and similar equity instruments
under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
that continue to account for stock options using APB Opinion No. 25 are
required to make pro forma disclosures of net income and earnings per share,
as if the fair value-based method of accounting defined is SFAS No. 123 had
been applied. Management accounts for options under APB Opinion No. 25. If the
alternative accounting-related provisions of SFAS No. 123 had been adopted as
of the beginning of 1995, any effect on 1997, 1996 and 1995 net income and
earnings per share would have been immaterial.
F-17
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
A summary of activity in the employee stock option plan is as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at February 28, 1994........... 4,045,200 $1.44-7.31
Grants............................................. -- --
Cancellation....................................... (14,000) 1.44-3.06
Exercises.......................................... (30,000) 1.44-7.25
--------- ----------
Options outstanding at February 28, 1995........... 4,001,200 $1.44-7.31
----------
Grants............................................. 475,000 4.88-5.06
Cancellations...................................... (399,400) 3.00-7.31
Exercises.......................................... (187,000) 3.06-7.25
--------- ----------
Options outstanding at February 29, 1996........... 3,889,800 $1.44-7.31
---------
Grants............................................. -- --
Cancellations...................................... -- --
Exercises.......................................... (10,000) $ 3.50
--------- ----------
Options outstanding at February 28, 1997........... 3,879,800 $1.44-7.31
========= ==========
</TABLE>
(15) LEASES
The Company leases office facilities and equipment under operating leases
that expire through Fiscal 2002. Other costs, such as property taxes,
insurances and maintenance, are also paid by the Company. Rental expense
charged to operations approximated $1,350,000, $905,000 and $525,000 in Fiscal
1997, 1996 and 1995, respectively.
At February 28, 1997, minimum rentals under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
GROSS RENTS SUBLEASE NET RENTS
FISCAL YEAR: ----------- -------- ----------
<S> <C> <C> <C>
1998....................................... $ 748,405 $104,728 $ 643,677
1999....................................... 709,389 26,182 683,207
2000....................................... 569,160 -- 569,160
2001....................................... 492,080 -- 492,080
2002....................................... 245,634 -- 245,634
---------- -------- ----------
$2,764,668 $130,910 $2,633,758
========== ======== ==========
</TABLE>
(16) SIGNIFICANT CUSTOMERS
The Company sold sound related products and computer related products to
five significant customers during Fiscal 1997. Sales by MYS Corporation to
Radio Shack accounted for approximately $18.0 million or 13% of revenues.
Sales of communications and multimedia products to major mass merchandisers
Best Buy, Circuit City, and Frys accounted for $20.0 million or 15% of
revenues. Sales of computer monitors to MagInnovision accounted for $16.5
million or 12% of revenues.
(17) COMMITMENTS
The Company has a firm fixed price commitment to purchase a certain number
of units of the "Net pal set-top-box" at a total cost of $8,250,000, the price
is fixed and not subject to change. After reaching a threshold
F-18
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
purchase of a certain number of units, the Company and seller have agreed to
re-evaluate and renegotiate the pricing and scheduling of an additional number
of units specified in the purchase agreement. The stated purchase price for
all units included in the agreement totals $16,500,000.
(18) 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.
Barovich/Chiau v. Aura
In May, 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") purported to be
securities class actions on behalf of all persons who purchased common stock
of Aura during the period from May 28, 1993 through January 17, 1995,
inclusive (the "Class Period"). The Complaints alleged that as a result of
false and misleading information disseminated by the defendants, the market
price of Aura's common stock was artificially inflated during the Class
Period.
On February 16, 1996, the Company filed its motion for summary judgment
which was granted on April 15, 1996. Judgment in favor of the Company and all
defendants was entered on April 16, 1996, thereby dismissing the action.
Plaintiff's thereafter filed a Notice of Appeal to the judgment on May 16,
1996 which is pending before the United States Court of Appeals.
Morganstein v. Aura.
On April 28, 1997, a lawsuit naming Aura, certain of its directors and
executive officers, and the Company's independent accounting firm, was filed
in the United States District Court for the Central District of California
(Case No. 97-3103). It purports to be a securities class action on behalf of
all persons who purchased common stock of Aura during the period from January
18, 1995 and April 25, 1997, inclusive (the "Class Period"). The complaint
alleges that as a result of false and misleading information disseminated by
the defendants, the market price of Aura's common stock was artificially
inflated during the Class Period. It contains allegations which assert that
the Company violated federal securities laws by selling Aura Common stock at
discounts to the prevailing U.S. market price under Regulation S without
informing Aura's shareholders or the public at large.
Securities and Exchange Commission Settlement.
In October, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an
administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura
former officer. The proceeding was settled on consent of all the parties,
without admitting or denying any of the Commission's findings. In its order,
the Commission found that Aura and the others violated the reporting,
recordkeeping and anti-fraud provisions of the securities laws in 1993 and
1994 in connection with its reporting on two transactions in reports
previously filed with the Commission. The Commission's order directs that each
party cease and desist from committing or causing any future violation of
these provisions.
The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with
the Commission. Also, the Commission did not seek any monetary penalties from
Aura, Mr. Kurtzman or anyone else. Neither Mr. Kurtzman nor anyone else
personally benefited in any way from these events. For a more complete
description of the Commission's Order, see the Commission's release referred
to above.
F-19
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Other Litigation.
The Company is also engaged in other legal actions arising in the ordinary
course of business. In the opinion of management based 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.
(19) CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to concentration of credit
risk are cash equivalents, trade receivables, notes receivable, trade payables
and notes payable. The carrying value of these financial instruments
approximate their fair value at February 28, 1997. Cash equivalents consist
principally of short-term money market funds, these instruments are short term
in nature and bear minimal risk.
The Company maintains cash balances at several financial institutions located
in California and Minnesota. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At February 28, 1997, the
Company's uninsured cash balances total $7,425,666.
The Company performs credit background checks and evaluates the credit
worthiness of all potential new customers prior to granting credit. UCC
financing statements are filed, when deemed necessary.
(20) COMPENSATING BALANCES
At February 28, 1997, the Company has a certificate of deposit in the amount
of $1,000,000 included in cash, that is pledged as collateral for outstanding
letters of credit totaling $134,270 which have not yet been drawn upon. The
Company has a line of credit available in the amount of $1,000,000 but not to
exceed the balance in the certificate of deposit. The balance at February 28,
1997 is $547,730.
(21) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.
F-20
<PAGE>
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(22) FOURTH QUARTER ADJUSTMENTS
Certain fourth quarter adjustments were made in Fiscal 1997 that are
significant to the quarter and to comparisons between quarters. Presented
below are the approximate amount of adjustments which are the result of fourth
quarter events and their effects recorded in the fourth quarter.
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
a) Seasonal expenses during the fourth quarter..................... $1.50
b) Business focus, consolidation and sale of unprofitable
operations........................................................ 1.00
c) Reserves increases for potential product obsolescence........... 2.26
-----
$4.76
=====
</TABLE>
(23) SUBSEQUENT EVENT
In March 1997 the Company completed a private placement under Section 4(2)
of the Securities Act of 1933 of $15,000,000 of its unsecured notes (the
"Notes"). The Notes bear interest at the rate of 8% per annum and are due in
1999. The Notes are convertible into Common Stock in accordance with a
specified formula, and they are redeemable by the Company upon payment of the
applicable redemption premium.
F-21
<PAGE>
SCHEDULE II
AURA SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowances are deducted
from the assets to
which they apply
Year ended February 28,
1997:
Allowance for:
Reserve for potential
product obsolescence. $ -- $2,255,000 $-- $ -- $2,255,000
Uncollectible
Accounts............. 1,947,883 737,577 -- 594,808 2,090,652
Reserve for returns... 535,119 977,560 -- -- 1,512,679
---------- ---------- ---- ----------- ----------
$2,483,002 $3,970,137 $-- $ 594,808 $5,858,331
========== ========== ==== =========== ==========
Year ended February 29,
1996:
Allowance for:
Uncollectible
Accounts............. $1,192,500 $3,496,381 $-- $(2,740,998) $1,947,883
Reserve for returns... 387,749 535,119 -- (387,749) 535,119
---------- ---------- ---- ----------- ----------
$1,580,249 $4,031,500 $-- $(3,128,747) $2,483,002
========== ========== ==== =========== ==========
Year ended February 28,
1995:
Allowance for:
Uncollectible
Accounts............. $ 101,650 $1,091,450 $-- $ 600 $1,192,500
Reserve for returns... -- 387,749 -- -- 387,749
Reserve for AMS
investment........... 203,996 -- -- $ 203,996 0
---------- ---------- ---- ----------- ----------
$ 305,646 $1,479,199 $-- $ 204,596 $1,580,249
========== ========== ==== =========== ==========
</TABLE>
F-22
<PAGE>
EXHIBIT 10.13
AGREEMENT
This Agreement is made by and between K & K Enterprises, with principal
offices in Noida, India ("Majority Owner") and Aura Systems, Inc. ("Aura"), a
Delaware corporation, with principal offices in El Segundo, California, USA, for
the formation of a joint venture between them.
WITNESSETH
WHEREAS, Aura has developed, and is the owner of patented and proprietary
technology relating to the development, design and manufacture of speaker
motors, speakers and speaker systems;
WHEREAS, Aura has identified product applications incorporating the Aura
patented and proprietary technology;
WHEREAS, Aura does not possess the resources with which to pursue the
manufacture of such product applications;
WHEREAS, Majority Owner is interested in funding the further manufacture of
products for such applications incorporating the Aura proprietary technology in
exchange for certain rights;
WHEREAS, to accomplish the above, the parties are desirous of entering into
a joint venture to further the development, design, manufacture and marketing of
such product applications.
NOW, THEREFORE, the parties hereby acknowledge this Agreement to be the
understanding reached by and between the parties hereto as of the date set forth
hereinbelow:
1. OBJECT
(a) The object of this Agreement is to form an Indian company to be called
Dewan Aurasound (hereinafter referred to as "NEWCO") with principal
offices in or about Noida, India under the joint ownership of Majority
Owner and Aura for the manufacture of products (within the scope of a
certain license agreement more particularly set forth hereinbelow)
incorporating Aura patented and proprietary technology. NEWCO will
conduct business as an independent entity separate and apart from its
shareholders.
(b) Majority Owner acknowledge that time is of the essence of making and
performance of this Agreement.
<PAGE>
2. STRUCTURE
(a) The ownership of NEWCO will be 49% held by Aura and 51% held by
Majority Owner. Upon incorporation of NEWCO as a privately held
company, NEWCO shall issue shares (in an amount to be determined)
equal to such percentages.
(b) The NEWCO Board of Directors shall be comprised of five board members,
two of which shall be appointed by Aura and three of which shall be
appointed by Majority Owner. Majority Owner shall serve as Chairman
of the Board. Each party shall have the sole power to appoint its
respective board members and each party shall have the sole power to
remove and replace or substitute its respective board members. Except
as expressly set forth in Paragraphs 2(b) and 2(c) hereinbelow, all
resolutions and other matters to be determined by a vote of the NEWCO
Board of Directors shall be decided by a simple majority of the total
Board.
(c) Aura and Majority Owner agree that the Articles of Incorporation of
NEWCO, and/or its By-Laws, shall provide and establish the structure
of the Board of Directors as set forth in Section 2(b), including the
number of its members and the representations on the NEWCO Board of
Directors by the parties hereto, and further agree that such provision
in the Articles of Incorporation and/or the By-Laws of NEWCO shall not
be amended or modified unless such amendments or modifications are
consented to by a three-quarters vote of the NEWCO shareholders.
(d) Aura and Majority Owner agree that the Articles of Incorporation of
NEWCO, and/or its By-Laws, shall provide and establish that NEWCO
shall not be liquidated unless such liquidation is approved by a
three-quarters vote of NEWCO shareholders, and further agree that such
provision in the Articles of Incorporation and/or the By-Laws of NEWCO
shall not be amended or modified unless such amendments or
modifications are consented to by a three-quarters vote of the NEWCO
shareholders.
(e) Majority Owner shall jointly manage the administration of NEWCO. Aura
shall have primary responsibility over development and design of the
products. Majority Owner shall have primary responsibility over
manufacturing of the products and financing of NEWCO.
(f) NEWCO shall be incorporated as soon as practicable after execution of
this Agreement.
(g) NEWCO, upon receiving its initial capitalization, shall establish a
factory in Noida, India.
-2-
<PAGE>
3. CONTRIBUTION AND COMMITMENTS
(a) Aura shall contribute and has contributed to NEWCO a working prototype
of an exemplary product of the type to be manufactured by NEWCO.
(b) Majority owner shall purchase from Aura the license described in
Article 4. Majority Owner shall contribute the rights under the
license to NEWCO but not the obligation to pay the license fee.
(c) The parties shall contribute working capital in the amount of
$500,000.00 to NEWCO in proportion to their ownership interest.
Additional capital shall be contributed as needed in proportion or by
either, as required, in the form of a loan at prevailing commercial
bank loan interest rates. Such loans shall be approved by a three-
quarters majority of the Board. Additional financing by third parties
shall dilute each party in equal shares of their ownership proportion.
(d) Majority Owner shall make arrangements to facilitate and coordinate
all engagements and necessary licenses with local governments and
regulatory authorities.
(e) Each of the parties shall further contribute, without compensation for
consultancy or otherwise, their respective expertise and know how
regarding the Board and management functions assumed under Article 2
of this Agreement. Nothing contained in this paragraph 3(d) shall
limit or restrict Aura's rights to receive payment from NEWCO for
engineering services ordered by NEWCO. Any such order for engineering
services shall, however, be at Aura's standard labor rates burdened
with overhead and G & A, as defined by generally accepted accounting
principals, plus 10%.
(f) Aura shall provide training to NEWCO personnel at Aura's facility to
establish the assembly procedure for manufacturing the Product. Any
additional expenses not related to the technology transfer under the
license, including but not limited to travel, per diem fees and
special materials, which may be required of Aura at NEWCO's facility,
shall be reimbursed by NEWCO to Aura at Aura's regular billing rates,
and shall be initiated at NEWCO's sole discretion.
(g) Aura shall purchase from NEWCO 20,000,000 units of the licensed
product (as such term is defined in Paragraph 4(a)) within the first
seven years of this Agreement at such times and in such quantities,
sizes, and types as Aura shall in its sole discretion determine.
During the first two years under this agreement, the sales price of
licensed product shall be NEWCO's costs + 20% (but in
-3-
<PAGE>
any event competitive with prevailing wholesale prices for similar
products) and thereafter at competitive wholesale prices as shall be
agreed by and between the parties.
Aura's obligations on this Paragraph 3(g) shall be suspended in the
event of Force Majeure. For the purposes of Aura's purchase
obligations, the term "force majeure" shall mean an act of god,
strike, lockout, act of public enemy, war, blockade, public riot,
fire, storm, flood or other act of nature, explosion, governmental
action, governmental delay, restraint or inaction, unavailability of
equipment, and any other cause, whether of the kind specifically
enumerated above or otherwise, which is not reasonably within the
control of the party claiming suspension. Aura shall use all
reasonable diligence to remove the force majeure as quickly as
practicable. In the event Aura claims an event of force majeure, the
payments outlined in Paragraph 4(b) of this Agreement shall be
suspended for a like period or periods of time.
4. LICENSE
(a) AURA will grant, by separate written instrument, to Majority Owner an
exclusive, life of patents, non-transferable, non-assignable and non-
divisible right, license, without further right of sub-license, and
privilege to use only in the context of Paragraph 3(b) above the Aura
patented and proprietary technology, including patents, patent
applications and trade secrets (hereinafter referred to as the
"Licensed Technology") in the field of speaker motors, speakers and
speaker systems (hereinafter referred to as the "License Field") for
the manufacture of products in the License Field incorporating the
Licensed Technology (hereinafter referred to as the "Licensed
Products") and for the sale of Licensed Products in Indian
subcontinent (India, Pakistan, Nepal, Sri Lanka and Bangladesh),
Middle East countries (Saudi Arabia, Kuwait, UAE, Jordan and Israel),
Taiwan, and Western Europe (except Volkswagen, Mercedes and Fiat, for
which territory such license shall be non-exclusive) (the
"Territory"). Nothing contained herein shall prohibit or restrict the
secondary vertical sale of Licensed Products outside the Territory.
(b) In consideration of the license granted by Aura to Majority Owner,
Majority Owner agrees to pay to Aura a one-time, non-creditable, lump
sum, non-refundable license fee of $1,000,000 within twenty four
months of the date of this agreement according to India law and the
schedule as attached hereto as Exhibit "A".
-4-
<PAGE>
Except for such subsequent events as specified in this Paragraph
3(b), no contingency shall exist to Aura's receipt of the License Fee
when due. Majority Owners's obligations to pay the License Fee when
due shall be suspended in the event of Aura's suspension of payments
under Paragraph 3(g) due to Force Majeure. The parties agree to
execute such license, on usual and customary terms not inconsistent
with this Agreement, within 5 calendar days of the signing of this
Agreement.
(c) Majority Owner further agrees not to compete in the License Field with
either Aura or NEWCO, nor invest in or fund others in competition with
Aura or NEWCO in the License Field. The covenant of this paragraph
4(b) shall survive termination of this Agreement for a period of seven
(7) years. Nothing contained herein shall prohibit ownership of
shares in any company in competition with Aura or NEWCO provided that
such ownership does not exceed 4.9% of the outstanding shares of such
company.
(d) In the event an assignment of any or all of the Aura proprietary
technology is made for the benefit of creditors under an India analog
either Chapter 7 or Chapter 11 of the U.S. Bankruptcy Law, then this
license shall not revert and the assignee-creditor takes title to such
transferred technology subject to the terms of this Agreement.
(e) In the event an assignment of any or all of the assets of NEWCO is
made for the benefit of creditors under an Indian analog to Chapter 7
of the U.S. Bankruptcy law, then the license granted to Majority Owner
shall terminate and all rights under the sub-license revert to Aura.
(f) Any and all improvements to the Licensed Technology made by Aura
subsequent to the date of this Agreement shall be licensed to NEWCO
under the same terms and conditions as set forth in Section 4(a)
without further payment of license fee or royalty to Aura.
(g) Any and all improvements to the Licensed Technology made by NEWCO
(without funding or other assistance by Aura) shall belong to NEWCO
subject to a grant of a fully paid, royalty free license to Aura for
such improvements.
-5-
<PAGE>
5. BOOKS AND RECORDS
(a) NEWCO shall establish and maintain at its principal place of business,
or at such other place as the parties may consent to in writing, full,
true and accurate books of account, records and other data, kept in
accordance with generally accepted accounting principles, containing
all particulars necessary for a precise auditing of the complete
financial statements of NEWCO. The parties and its agents, including
their accountants and attorneys, shall, during the term of this
Agreement, have the right, during normal business hours, and upon
reasonable prior notice, to inspect and make extracts from such books
of account, records and other data relating to the financial condition
of NEWCO provided, however, that such examinations shall be conducted
no more often than once for each fiscal year period.
(b) All financial reporting and accounting of NEWCO shall be performed by
a qualified, independent international auditor.
6. REPRESENTATIONS AND WARRANTIES
(a) AURA represents and warrants to Majority Owner that, as of the date of
this Agreement: (i) AURA has the corporate power and authority to
enter into and to carry out the terms and provisions of this
Agreement; (ii) AURA has not entered into any agreement or
understanding regarding the manufacture of the Licensed Products in
the License Field which is in conflict with or inconsistent with any
of the terms or conditions of this Agreement; (iii) AURA has no actual
knowledge after diligent inquiry that its Licensed Technology or
Licensed Products conflict with, violate or infringe any rights of any
third party, and (iv) there are no actions or proceedings pending, or
to Aura's knowledge, threatened, which would prevent or make unlawful
the consummation of the transactions contemplated by this Agreement.
Aura will indemnify NEWCO and Majority Owner from and against any
cost, expense, lawsuit, legal proceeding, judgment or liability
arising out of or associated with any claim brought by any third party
claiming a violation or infringement by the Licensed Technology or
Licensed Products of such third party's patent rights wheresoever
situated.
NEWCO and Majority Owner shall have the right to engage independent
counsel to defend any claims of such third parties for
violations/infringement of any patent or intellectual property rights,
the cost of which shall be
-6-
<PAGE>
borne solely by Aura.
Aura has applied for and received a patent from the United States
Patent Office relating to the License Technology and has not granted
any rights to any third party which are inconsistent with the rights
to be granted NEWCO under the License Agreement.
(b) Majority Owner represents and warrants to AURA that, as of the date of
this Agreement: (i) Majority Owner has the power and authority to
enter into and to carry out the terms and provisions of this
Agreement, (ii) the execution, delivery and performance of this
Agreement by Majority Owner will not conflict with or violate any
agreements or understandings to which Majority Owner is a party or by
which it may be bound, (iii) Majority Owner has the financial
resources, liquidity, equity, credit and net worth to make the
contribution and arrange for the credit to be extended to NEWCO as
required under Section 3(b), and (iv) there are no actions or
proceedings pending, or to either's knowledge, threatened, which would
prevent or make unlawful the consummation of the transactions
contemplated by this Agreement.
(c) The parties represent and warrant to each other that neither of them
shall liquidate its ownership of NEWCO without first offering to the
other of them the right to obtain the liquidating party's ownership
upon the same or better term's to the liquidating party as offered by
a third party.
(d) The parties agree that NEWCO shall warrant the Licensed Products to be
free from defects in material and workmanship upon such terms as shall
be agreed to in writing between NEWCO and its customers. NEWCO shall
indemnify and hold Aura and Majority Owner harmless from all loss
resulting from the manufacture, use or sale of licensed products.
7. INSURANCE
(a) NEWCO shall at all times during the term of this Agreement and
thereafter carry Director and Officer insurance and product, hazard
(including, but not limited to fire, earthquake, flood, theft and
burglary) and general liability insurance, and any other insurance
required under law, covering acts, omissions or occurrences during the
term of this Agreement, in the amount which shall be commercially
reasonable. Such policies shall name AURA and Majority Owner as
additional insureds and beneficiaries in the same percentages of their
respective stock ownership in
-7-
<PAGE>
NEWCO. NEWCO shall use its best efforts to obtain a policy which
provides that it shall not be cancellable except upon thirty (30) days
prior written notice to AURA and Majority Owner NEWCO agrees to
provide Aura and Majority Owner with one or more certificates
evidencing the insurance coverage hereunder and the insurance policies
promptly upon the request of Aura and/or Majority Owner Aura, Majority
Owner and NEWCO acknowledge that insurance markets are rapidly
changing and that insurance in the form and amounts described in this
paragraph may not be available in the future. In such event, NEWCO
shall nevertheless maintain insurance coverage which is customary and
commercially reasonable.
8. DEFAULT
(a) Each of the following shall constitute an event of default hereunder
("Event of Default"): (i) Either Party fails to perform any material
covenant or agreement contained in this Agreement and Either Party
fails to perform such covenant following thirty (30) days' written
notice from the other party and opportunity to cure, provided,
however, if the default is of such a nature that it cannot reasonably
be cured within such thirty (30)-day period, then the defaulting party
shall not be deemed to be in default so long as the defaulting party
promptly commences to cure such default and diligently pursues such
cure to completion; (ii) Any representation or warranty of either
party herein shall prove to be incorrect in any material respect;
(iii) Majority Owner shall at any time challenge or otherwise assert
the invalidity of any of AURA's rights to Licensed Technology licensed
hereunder; or (iv) Majority Owner or AURA makes a general assignment
or general arrangement for the benefit of creditors without the prior
written consent of the other party, a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or
against either party and is not dismissed within thirty (30) days, a
trustee or receiver is appointed to take possession of all or a
substantial portion of either party's properties and possession
thereof is not restored to such party within sixty (60) days, or all
or a substantial portion of either party's assets shall be subjected
to attachment, execution or other judicial seizure which is not
discharged, stayed or bonded within sixty (60) days.
(b) If a Default shall occur hereunder, either party shall have the right,
to be exercised by it in its sole discretion (after reasonable
opportunity to cure the default has been given), to terminate this
Agreement upon written notice to the defaulting party. The right
-8-
<PAGE>
of either party to terminate this Agreement for Default shall be in
addition to any other rights or remedies to which either party shall
be entitled at law. Termination of this Agreement shall be without
prejudice to any rights or remedies which either party may have, under
this Agreement
(c) In the event this Agreement is terminated by Aura by reason of default
of Majority Owner, then the license granted to NEWCO under Section
4(a) shall terminate and revert to Aura.
9. SECRECY
(a) AURA has taken reasonable security measures to protect the secrecy of
its proprietary technology in speakers, speaker manufacturing
processes and tooling for the manufacture of speakers. The parties
agree that this proprietary technology is valuable only so long as it
remains secret. Accordingly, each party agrees to take all steps
reasonably necessary to protect Confidential Information (as
hereinafter defined) from entering the public domain or falling into
the hands of unauthorized third parties. All information which in any
way embodies, evidences or relates to the proprietary technology is
referred to herein as "Confidential Information". Confidential
Information excludes any information which is or becomes in the public
domain by public use, publication, general knowledge or similar means
other than by breach of this Agreement.
(b) Each party agrees to take reasonable steps to maintain the secrecy of
Confidential Information.
10. BUSINESS PLAN
(a) The parties hereto shall, as soon as practicable after execution of
this Agreement, develop a business plan for NEWCO.
11. SUCCESSORS
(a) Except as otherwise provided herein, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
permitted successors and assigns.
-9-
<PAGE>
12. SEVERABILITY
(a) The provisions of this Agreement are severable, and if any one or more
provisions are determined to be judicially unenforceable, in whole or
in part, the remaining provisions, and any partially unenforceable
provisions to the extent enforceable, shall nevertheless be binding
and enforceable. In the event that any act, regulation, directive, or
law of a government having jurisdiction and respect of this Agreement,
including its departments, agencies or courts, should make it
impossible or prohibit, restrain, modify or eliminate any act or
obligation of Majority Owner under this Agreement, Aura shall have the
right, at its option, to suspend this Agreement or to make such
modifications therein as may be necessary.
13. NOTICES
(a) All notices and other communications permitted or required by the
provisions of this Agreement shall be in writing and shall be
personally delivered or deposited in the United States Mail, bearing
adequate first class postage and addressed as hereinafter provided.
Notices delivered in person shall be effective upon the date of
delivery. Notices by mail shall be effective upon the receipt thereof
by the addressee or upon the tenth (10th) calendar day after being
deposited in the U.S. mail, as the case may be, whichever is earlier.
Any party hereto shall have the right from time to time and at any
time while this Agreement is in effect to change the respective
addressees thereof and each shall have the right to specify as the
address thereof any other address. Any notice herein required or
permitted to be given may be given, in addition to the manner set
forth above, by courier, telex, TWX, cable or facsimile transmission,
provided that the party giving such notice obtains acknowledgment by
courier proof of delivery, telex, TWX, cable or facsimile transmission
that such notice has been received by the party to be notified. Notice
given in this manner shall be effective upon transmission of
acknowledgment of receipt of same by the parties to be notified.
14. DISPUTES
(a) All disputes between the parties arising under or out of this
Agreement shall be settled by arbitration conducted in Los Angeles,
California. Either side to the dispute may institute arbitration by
giving written notice to the other party of its intention to
arbitrate.
-10-
<PAGE>
(b) Unless otherwise expressly provided herein or agreed upon by the
parties in writing, the arbitration shall be conducted in accordance
with the commercial rules then obtaining of the American Arbitration
Association.
(c) Any award made pursuant to arbitration may be entered as a judgment by
any court of competent jurisdiction upon the application of any party
to said arbitration. Such award shall include an award of costs and
reasonable attorney's fees incurred by the prevailing party.
(d) Notwithstanding the foregoing provisions of this Paragraph 11, either
party shall have the right to petition a court of appropriate
jurisdiction seeking injunctive or other similar relief pending the
conclusion of any arbitration proceedings.
15. LITIGATION
(a) In the event of any litigation or proceeding in arbitration between
the parties arising in any manner out of this Agreement or the
asserted breach thereof, the prevailing party shall recover court
costs or costs of arbitration, as appropriate, and actual attorneys'
fees.
16. WAIVER
(a) The waiver or excuse by either party hereto as to any breach, default
or deficiency and the performance by the other party of any duty or
obligation by the other party to be performed hereunder shall not
constitute or be deemed a continuing waiver or excuse of the same or
any other duty or obligation owed by the other.
17. REMEDIES NOT EXCLUSIVE
(a) No remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy and each and
every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more
remedies by any of the parties shall not constitute a waiver of the
right to pursue other remedies.
-11-
<PAGE>
18. CAPTIONS
(a) Captions and paragraph headings used herein are for convenience only
and are not a part of this Agreement and shall not be used in
construing it.
19. ENTIRE AGREEMENT
(a) This Agreement contains the entire understanding between the parties
concerning the subject matter of this Agreement and supersedes all
prior understandings and agreements, whether oral or written, between
them respecting the subject matter hereof. There are no
representations, agreements, arrangements or understandings, oral or
written, between the parties hereto relating to the subject matter of
this Agreement which are not fully expressed herein. This Agreement
may be modified only by an agreement in writing signed by all of the
parties hereto.
20. COUNTERPARTS
(a) This Agreement may be executed in any number of counterparts, each of
which shall constitute an original and all of which together shall
constitute one and the same instrument.
21. GENDER; NUMBER
(a) Terms used herein in any number or gender include other numbers or
genders, as the context may require.
22. GOVERNING LAW
This Agreement is made and entered into in the State of California, United
States of America. It is the intention of the parties hereto that this
Agreement shall be subject to and shall be enforced and construed under
tenets of international law.
-12-
<PAGE>
WHEREFORE, the parties agree that this Agreement constitutes and
memorializes the understanding reached by and between the parties on the date
set forth hereinbelow, and intend to be legally bound by the mutual covenants,
terms and conditions herein. The parties shall use their best efforts to enter
into a definitive agreement setting forth the entire relationship between the
parties hereto.
AURA SYSTEMS, INC. K & K ENTERPRISES
By: /s/ Harry Zvi Kurtzman By: /s/ Kenny A. Dewan
---------------------- ------------------
Harry Zvi Kurtzman Kenny A. Dewan
Chief Executive Officer Vice President
Date: July 19, 1995 Date: July 19, 1995
-13-
<PAGE>
EXHIBIT A
---------
. $50,000 no later than August 31, 1995.
. $100,000 no later than November 30, 1995.
. $250,000 no later than February 29, 1996.
. $40,000 per month thereafter until paid in full.
EXHIBIT A
<PAGE>
Exhibit 10.14
LICENSE AGREEMENT
-----------------
This LICENSE AGREEMENT (the "Agreement") is made and entered into as of
July 19, 1995, by and between AURA SYSTEMS, INC., a Delaware corporation
("Licensor"), and K & K Enterprises, with its principal offices in Noida, India,
("Licensee").
Recitals
--------
A. Licensor is the owner of all right, title and interest in and to
certain inventions relating to the Licensed Products as disclosed and/or claimed
in patent applications identified in Schedule "A" hereto, and has developed
Proprietary Rights which may be utilized in the Licensed Products.
B. Licensor has been heretofore disclosed to Licensee in confidence the
Licensed Technology.
C. Licensee is engaged in the business of manufacturing and selling
speakers and speaker systems throughout the world and proposes to commercialize,
manufacture and sell Licensed Products in the License Field utilizing the
Licensed Technology.
D. Licensor is willing to grant to Licensee a license to utilize the
Licensed Technology for Licensed Products in the License Field on the terms and
subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein the parties hereby agree as follows:
1. DEFINITIONS.
------------
"LICENSED TECHNOLOGY" shall mean the Patent Rights and the Proprietary
---------------------
Rights and any modifications, enhancements or improvements to the technology
embodied in the Patent Rights and Proprietary Rights which are necessary, used
or useful to develop, manufacture or sell the Licensed Products or Derived
Products.
"PATENT RIGHTS" shall mean the issued patents in all countries where
---------------
issued, applications for patents together with the right to obtain the issuance
of letters patent in the United States and in foreign countries based upon said
applications and any continuation, continuation in part, division and re-issues
thereof, as presently itemized in the appended Schedule "A" to this Agreement
and as the same shall be supplemented
-1-
<PAGE>
from time to time on the filing of such additional applications based thereon or
based upon improvements added thereto pursuant to Paragraph 7.1 of this
Agreement.
"PROPRIETARY RIGHTS" shall mean data, inventions, information, processes,
--------------------
know-how, trade secrets, sketches, prototypes, notebooks, papers, drawings,
formulae (including copies or extracts thereof) and similar intellectual
property rights which Licensor has or may hereafter develop and which are
necessary or useful for the development, manufacture or sale of the Licensed
Products.
"JOINT VENTURE AGREEMENT" shall mean the Joint Venture Agreement entered
-------------------------
into between Aura Systems, Inc. and K & K Enterprises on July 19, 1992.
"LICENSE FIELD" shall mean speaker motors, speakers and speaker systems.
---------------
"LICENSED PRODUCTS" shall mean products in the License Field that
-------------------
incorporate the Licensed Technology.
"AFFILIATE" shall mean, as to any party, a person or entity controlling,
-----------
controlled by or under common control with such party.
"TERRITORY" shall mean the Exclusive Territory and the Non-Exclusive
-----------
Territory
"EXCLUSIVE TERRITORY" shall mean India, Pakistan, Nepal, Sri Lanka,
---------------------
Bangladesh, Saudi Arabia, Kuwait, UAE, Jordan, Israel, Taiwan, and Western
Europe.
"NON-EXCLUSIVE TERRITORY" shall mean Volkswagen, Mercedes and Fiat in
-------------------------
Western Europe.
2. GRANT OF LICENSE.
----------------
2.1 SCOPE. Licensor hereby grants to Licensee an exclusive field of
-----
use, non-transferable, non-assignable and non-divisible right, license and
privilege to use the Licensed Technology throughout the world for the
manufacture and sale of Licensed Products in the License Field. Licensor hereby
retains the unfettered right to use, and to sub-license to others to use, the
Licensed Technology for any other purpose, including, without limitation, the
use or other exploitation of the Licensed Technology for or in connection with
the development, manufacture or sale of products, processes, designs or
inventions having application, actual or potential, other than for Licensed
Products.
Licensor hereby grants to Licensee an exclusive, life of patents, non-
transferable, non-assignable and non-divisible right license, without further
right of sub-license, and privilege to use the
-2-
<PAGE>
Licensed Technology in the License Field for the manufacture of Licensed
Products and for the sale of Licensed Products in the Exclusive Territory.
Licensor hereby grants to Licensee a non-exclusive life of patents,
non-transferable, non-assignable and non-divisible, right license, without
further right of sub-license, and privilege to use the Licensed Technology in
the License Field for the manufacture of Licensed Products and for the sale of
Licensed Products in the Non-Exclusive Territory.
2.2 TERM. Subject to earlier termination as provided herein, the
----
license granted by Licensor to Licensee pursuant to this Paragraph 2 to
manufacture and sell Licensed Products shall terminate on the later of (i)
seventeen (17) years from the date hereof, or (ii) the first to expire of any
U.S. patent issuing within the Patent Rights.
3. ROYALTIES.
---------
3.1 AMOUNT OF ROYALTIES. As Licensor's sole compensation for the
-------------------
rights and licenses granted by it to Licensee pursuant to Paragraph 2 and
technical assistance to be provided by Licensor hereunder, Licensee shall pay to
Licensor the following fees and royalties:
(a) a one time, non-refundable, non-creditable disclosure fee of One
Million Dollars ($1,000,000.00) (the "Disclosure Fee") payable by Licensee to
Licensor in immediately available funds within twenty-four (24) months of the
date of this Agreement, according to Indian law and the schedule attached hereto
as Exhibit B, in consideration solely for Licensor's disclosure of the Licensed
Technology existing on the date of this Agreement;
3.2 INTEREST ON LATE PAYMENTS. Time shall be of the essence in
-------------------------
respect of the payment of the Royalty Fee under this Agreement. Royalties which
are not paid when due hereunder shall bear interest from and after the due date
at the rate of the lessor of 18% per annum or the maximum lawful rate.
3.3 CURRENCY. Payments shown by each calendar quarter report shall be
--------
paid in United States dollars and shall be paid to Licensor in full, without
set-off or counterclaim, and in such amount as may be necessary in order that
all Royalty Fees (after deduction for withholding for or on account of any
present or future taxes, levies, imposts, duties or other charges imposed by any
political subdivision or taxing authority on such Royalty Fees ("Taxes")) shall
not be less than the amounts otherwise required to be
-3-
<PAGE>
paid under this Agreement. Any and all Taxes required to be so withheld or
deducted shall be paid by Licensee to the proper taxing authorities, and proof
of payment shall be secured and sent to Licensor as evidence of such payment.
The rate of exchange to be used in computing the amount of the United States
dollars due to Licensor in satisfaction of payment obligations with respect to
sales in foreign countries shall be calculated at the exchange rate set by
Citibank, N.A., New York, New York, for the purchase of United States dollars
with the currency of the country of origin of such payment on the last business
day of the calendar quarter for which payment is being made.
3.4 FOREIGN PAYMENTS. If governmental regulations prevent remittance
----------------
from any foreign country of any amounts due under this Paragraph 3 in respect of
sales in that country, Licensee shall so notify Licensor in writing and, subject
to the remainder of this Paragraph 3.7, the obligation under this Agreement to
make payments respect of sales in that country shall be suspended (but the
amounts due but not paid shall continue to accrue) until such remittances are
possible; provided, however, that notwithstanding the foregoing, (i) to the
-------- -------
extent that Licensee invests its own blocked funds in passive investments in
such country or liquidates its own blocked funds, Licensee shall do the same
with Licensor's funds, and (ii) Licensor shall have the right, at any time and
from time to time, upon written notice to Licensee, to direct Licensee either to
pay such funds in any such country in the local currency or to liquidate such
currency at available rates and pay the liquidated amounts to Licensor. Any such
payment by Licensee shall be deemed to be payment in full of the amount so paid
or liquidated, and Licensee shall have no liability to Licensor for any actions
taken in accordance with this Paragraph 3.7.
3.5 BOOKS AND RECORDS. Licensee shall establish and maintain at its
-----------------
principal place of business, or at such other place as Licensor may consent to
in writing, full, true and accurate books of account, records and other data,
kept in accordance with generally accepted accounting principles, containing all
particulars necessary for a precise determination of the royalties payable under
this Agreement. Licensor and its agents, including its accountants and
attorneys, shall, during the term of this Agreement, and for a period of three
years thereafter, have the right, during normal business hours, and upon
reasonable prior notice, to inspect and make extracts from such books of
account, records and other data relating to the Licensed Products and the
Royalty Fees. If any examination by Licensor of Licensee's
-4-
<PAGE>
books and records discloses an underpayment to Licensor which, for the
accounting periods under examination, exceed in the aggregate five percent (5%)
of the royalties reported to Licensor by Licensee with respect to such periods,
Licensee shall pay such excess upon demand together with Licensor's costs and
expenses reasonably incurred in connection with any such examination.
4. COMMERCIALIZATION OF LICENSED PRODUCTS.
--------------------------------------
In consideration of the grant by Licensor under Paragraph 2 of this
Agreement, Licensee agrees to use its best efforts, at Licensee's expense, to
commercialize Licensed Products utilizing the Licensed Technology in the License
Field and to market and sell such Licensed Products. Such activity shall be in a
manner consistent with sound business judgment and in accordance with Licensee's
normal business practices, giving due regard to the state of the development of
the Licensed Technology, the cost effectiveness of the Licensed Technology and
market opportunities for Licensed Products in the License Field, all as the same
shall exist from time to time. Licensee shall be under no obligation to commit
any specific dollars worth of effort. Licensee shall apprise Licensor on a
regular, periodic and timely basis of all activities of Licensee, including its
affiliates, relating to the development, marketing, manufacture or sale of any
of the Licensed Products or in respect of the development of the Licensed
Technology.
5. TECHNICAL ASSISTANCE.
--------------------
5.1 DISCLOSURE OF LICENSED TECHNOLOGY. Licensor has heretofore
---------------------------------
provided to Licensee in confidence, and will continue to provide Licensee in
confidence, all proprietary information relating to the Licensed Technology
being licensed hereunder. All such information has been and will be received and
retained in confidence in accordance with the terms of this Agreement, including
Paragraph 16. Licensor and Licensee shall each select an employee who shall act
as its technical correspondent in transmitting technical information and in
arranging for other assistance necessary to fully exploit the Licensed
Technology for Licensed Products in the License Field. Each party shall indicate
promptly to the other in writing the name of its technical correspondent. The
technical correspondent shall cooperatively work out a practicable plan to keep
each party informed about the other's current and planned activities relating to
the use, practice, development, manufacture, marketing and sale of the Licensed
Products and the Licensed Technology.
-5-
<PAGE>
5.2 EXCHANGE OF INFORMATION. Licensor's technical correspondent shall
-----------------------
be responsible for answering all reasonable technical inquiries received from
Licensee's technical correspondent relating to Licensed Products and the
Licensed Technology and shall provide, to the extent requested, copies of
pertinent technical information of Licensor, including, to the extent
applicable, test reports and other technical reports, operation and maintenance
manuals, assembly and detailed drawings, and other pertinent information in
Licensor's possession. Licensor shall, subject to any restrictions that may be
imposed by the United States Government, on written notice, give to duly
accredited representatives of Licensee access to its facilities, at reasonable
times and under reasonable conditions, for the purpose of acquiring in
confidence technical information about Licensor's methods of practicing the
Licensed Technology in the License Field. Licensee shall use maximum precautions
in instructing representatives who visit facilities of Licensor to assure that
any in confidence technical information received by them shall be kept
confidential.
5.3 CONSULTANTS. At the request of Licensee, Licensor will provide
-----------
the services of up to three technical consultants on a full-time basis, to
assist Licensee in practicing the Licensed Technology for the purpose of
developing and manufacturing Licensed Products. These consultants will be fully
knowledgeable about all technical aspects of the Licensed Technology. Licensee
agrees to reimburse Licensor for the reasonable living and travel expenses of
such consultants. In addition, effective for services provided on or after July
19, 1996 [first anniversary of effective date], Licensee shall pay Licensor for
such consulting services at Licensor's regular hourly or per diem consulting
rate.
6. IMPROVEMENTS.
------------
6.1 IMPROVEMENTS BY LICENSOR. It is contemplated that Licensor may,
------------------------
but (except as expressly provided herein) is not required to, continue from time
to time to engage in research and development in areas relevant to the Licensed
Technology, both within and outside of the License Field. Such research and
development may result in improvements to the Licensed Technology which will
have commercial utilization for Licensed Products in the License Field.
Accordingly, Licensor (including its affiliates) agrees to disclose to Licensee
in confidence such improvements to the Licensed Technology its deems appropriate
for commercial utilization of the Licensed Technology in the License Field at
such times and with such frequency as Licensor deems appropriate, but in no
event later than ninety (90) days after
-6-
<PAGE>
Licensor has concluded that the subject matter of the improvement may be
appropriate for commercial utilization of the Licensed Technology in the License
Field. Any and all patents, know-how, ideas, processes, inventions and
discoveries, whether patentable or not, conceived by Licensor or its employees
and relating to such improvements shall be and remain the sole and exclusive
property of Licensor. Any such improvements to the Licensed Technology shall
become part of the Licensed Technology and the patent applications therefor
shall be added to Schedule "A").
6.2 IMPROVEMENTS BY LICENSEE. Licensee (including its affiliates)
------------------------
shall make timely disclosures to Licensor both in writing and supplemented
orally as required by Licensor of any and all patentable and non-patentable
proprietary information made or conceived by Licensee which is within the scope
of any claim, as written, of any present or future application for or issued
United States patents, owned by Licensor or any affiliate or Licensor, or in the
nature of improvements, modifications or developments of the Licensed
Technology. Such disclosure shall be made as often and at such times as seems
both timely and appropriate to the nature of the improvement/modification/
development, but in all events not later than the first to occur of (i) one
hundred eighty (l80) days after first use of the improvement/modification/
developments; (ii) one year after the development of the improvement/
modification/development; (iii) forty-five (45) days after the submission
to the management or counsel of Licensee, by one or more of its employees,
of an invention disclosure submitted or considered in contemplation of possible
applications for patent thereon; (iv) if the improvement/modification/
development is potentially patentable, not less than one hundred eighty
(180) days prior to the deadline for filing any application for patent
thereon, domestic or foreign, whichever occurs first.
6.3 RIGHTS TO CERTAIN IMPROVEMENTS. All improvements/
-------------------------------
modifications/developments to the Licensed Technology which are (i) conceived by
Licensee during the term of this Agreement or thereafter, (ii) made
independently of Licensor, (iii) paid for solely by Licensee; and (iv) not
derived from know-how, patents or other proprietary information furnished by
Licensor to Licensee, shall be owned by Licensee, subject to a perpetual,
royalty-free worldwide non-exclusive license in favor of Licensor to make, use
and sell, including the right to sub-license, such improvement/
modification/development, which right shall survive the termination of this
Agreement.
-7-
<PAGE>
7. FILING AND PROSECUTION OF PATENTS.
---------------------------------
7.1 PENDING PATENT APPLICATIONS. Licensor has filed the Patent
---------------------------
Applications in the United States and will cause to be prosecuted such Patent
Applications (Licensor having made no representation that any patents will issue
thereon). In addition, Licensor has filed or will use its best efforts to timely
file Patent Applications and to prosecute such filings in France, West Germany,
Italy, Spain, United Kingdom, Sweden, Japan, Korea, Canada and Australia
("Foreign Territories"). The preparation, filing and prosecution of such Patent
Applications shall be controlled by, and the cost and expenses shall be borne
by, Licensor.
7.2 ADDITIONAL PATENTS. From and after the date of this Agreement
------------------
Licensor agrees to utilize its best efforts to timely file and prosecute, at
Licensor's expense and at the request of Licensee, patent applications in
respect of Licensed Technology which has potential application to the Licensed
Products in the License Field. Such patent applications shall be filed and
prosecuted in the United States and in the Foreign Territories. However, if
Licensor shall determine in its reasonable and good faith discretion, after
consultation with Licensee, that the benefits of filing and prosecuting any such
patents, either within the United States or in any of the Foreign Territories,
are outweighed by the costs thereof, after giving due consideration to the
anticipated costs of prosecution, its potential commercial utility, the
likelihood of successful prosecution, the anticipated protection afforded by the
patent issuing thereon, or any other relevant factors, Licensor shall not be
obligated to file or prosecute such patents and shall promptly notify Licensee
of Licensor's intentions. In such event, Licensee shall have the right, at its
expense, to file and/or prosecute patent applications in Licensor's name in such
countries as it deems appropriate. Subject to the other provisions of this
Agreement, each party agrees to cooperate with the other party and to keep such
other party informed in respect of patent applications and patents comprising
the Licensed Technology.
8. INFRINGEMENT.
------------
Licensor and Licensee shall promptly report to the other any information
which comes to its attention concerning any use by a third party of Licensed
Technology which might amount to an infringement thereof. If the infringement
constitutes a substantial and actionable infringement of any of the
-8-
<PAGE>
Licensed Technology, Licensee shall, at its expense, within ninety (90) days
initiate action through competent legal counsel reasonably satisfactory to
Licensor to terminate or abate such activity unless Licensee shall reasonably
determine that the anticipated costs of prosecuting such action outweigh the
anticipated economic benefits to Licensor and Licensee. If Licensee shall for
any reason fail or refuse to prosecute or continue prosecution of such action,
it shall promptly notify Licensor, who may elect to institute or continue such
action at Licensee's expense (unless such refusal or failure was wrongful, in
which case such costs and expenses shall be for the account of Licensor). Each
party shall cooperate with the other and the prosecuting party shall keep the
other party apprised of the status of the proceeding and shall allow such other
party to participate in such proceedings at such person's expense, including, in
the case of Licensor, Licensor's right to participate as a party. In no event
shall the party prosecuting the action settle any such action without the
consent of the other party hereto, which consent will not be unreasonably
withheld or delayed. If such action shall have been both commenced and
prosecuted by Licensee, any judgment, award or settlement obtained as a result
of such proceeding shall be allocated as follows: (i) first, to costs and
-----
attorneys' fees incurred by Licensee in connection with the prosecution of such
limitation; (ii) second, ninety-six percent (96%) of the remainder to Licensee
------
and four percent (4%) of the remainder to Licensor; Provided, however, if a
-------- -------
portion of the judgment, settlement or award is reasonably identifiable or
identified as representing lost revenues of Licensee, the proceeds of such
judgment, settlement or award (after deducting attorneys' fees and costs) shall
be allocated (y) first, ninety-six percent (96%) to Licensee, and four percent
-----
(4%) to Licensor to the extent such proceeds represent lost revenues, and (z)
second, the balance being divided equally between Licensee and Licensor.
- ------
Licensee shall utilize reasonable efforts to obtain an allocation of lost
revenues in any proceeding or settlement thereof. In the event that Licensee
shall fail or refuse for any reason to prosecute any action under this Paragraph
9, in addition to any right or remedy to which Licensor may be entitled, one
hundred percent (100%) of the proceeds of any judgment, settlement or award
shall be retained by Licensor.
9. INDEMNIFICATION.
---------------
9.1 BY LICENSEE. Licensee agrees to indemnify, defend and hold
-----------
Licensor, including its employees, agents, and affiliates, harmless from and
against any and all payments, damages, demands,
-9-
<PAGE>
claims, losses, expenses, costs, obligations and liabilities (including
reasonable attorney's fees and costs), which arise out of, result from or are
related to the breach by Licensee of any representation, warranty or covenant
contained in this Agreement.
9.2 BY LICENSOR. Licensor hereby agrees to indemnify, defend and hold
-----------
Licensee, including its employees, agents and affiliates, harmless from and
against any and all payments, damages, demands, claims, losses, expenses, costs,
obligations and liabilities (including reasonable attorneys' fees and costs)
which arise out of, result from or are related to (i) infringement or alleged
infringement of the Licensed Technology or Licensed Products on a third party's
patent rights, or (ii) any breach by Licensor of any of its representations,
warranties or covenants contained in this Agreement.
9.3 INDEMNIFICATION PROCEDURE. The party indemnified hereunder (the
-------------------------
"Indemnitee") shall promptly notify the indemnifying party (the "Indemnitor") of
the existence of any claim, demand or other matter involving liabilities to
third parties to which the Indemnitor's indemnification obligations would apply
and shall give the Indemnitor a reasonable opportunity to defend the same at its
own expense and with counsel of its own selection (who shall be approved by the
Indemnitee, which approval shall not be unreasonably withheld); provided,
--------
however, that the Indemnitee at all times also shall have the right to fully
- -------
participate in the defense at its own expense. If the Indemnitor shall fail to
defend within a reasonable time after such notice, the Indemnitee shall have the
right, but not the obligation, to undertake the defense of, and to compromise or
settle (exercising reasonable business judgment) the claim or other matter on
behalf, for the account and at the risk and expense of the Indemnitor. Except as
provided in the preceding sentence, no party shall compromise or settle the
claim or matter without the prior written consent of the other party, which
consent shall not be unreasonably withheld or delayed in each instance. If the
claim is one that cannot by its nature be defended solely by the Indemnitor, the
Indemnitee shall make available all information and assistance that the
Indemnitor reasonably may request.
10. INSURANCE.
---------
Licensee shall at all times during the term of this Agreement and
thereafter carry product and general liability insurance, covering acts,
omissions or occurrences during the term of this Agreement, in
-10-
<PAGE>
the amount of at least Ten Million Dollars ($l0,000,000) per occurrence. Such
policy shall name Licensor as an additional insured, and shall be maintained
with companies holding a "General Policy Rating" of A-12 or better, as set forth
in the most current issue of "Best Key Rating Guide". Licensee shall use its
best efforts to obtain a policy which provides that it shall not be cancellable
except upon thirty (30) days prior written notice to Licensor. Licensee agrees
to provide Licensor with one or more certificates evidencing the insurance
coverage hereunder and the insurance policies promptly upon the request of
Licensor. Licensor and Licensee acknowledge that insurance markets are rapidly
changing and that insurance in the form and amounts described in this paragraph
may not be available in the future. In such event, Licensee shall nevertheless
maintain insurance coverage which is customary and commercially reasonable.
11. SUB-LICENSE.
-----------
Licensee shall not have the right to sub-license Licensee's rights to
manufacture and sell Licensed Products except through separate written agreement
to which Licensor has also been made a party.
12. REPRESENTATIONS AND WARRANTIES.
------------------------------
12.1 REPRESENTATIONS AND WARRANTIES OF LICENSOR. Licensor represents
------------------------------------------
and warrants to Licensee that, as of the date of this Agreement:
(a) INCORPORATION. Licensor represents and warrants that Aura
-------------
Systems, Inc. is a corporation in good standing and is incorporated in the State
of Delaware.
(b) POWER AND AUTHORITY. Licensor has the corporate power and
-------------------
authority to enter into and to carry out the terms and provisions of this
Agreement; and this Agreement is the legal, valid and binding obligation of
Licensor and is enforceable against Licensor in accordance with its terms.
(c) NO CONFLICTING AGREEMENTS. Licensor has not granted to any person
-------------------------
other than the Licensee any right, title or interest in or to the Licensed
Technology or entered into any agreement or understanding regarding the Licensed
Technology, in either case which is in conflict with or inconsistent with any of
the terms or conditions of this Agreement.
(d) INFRINGEMENT. Licensor has no actual knowledge, after diligent
------------
inquiry, that the Licensed Technology conflicts with, violates or infringes any
rights of any third party.
-11-
<PAGE>
(e) LITIGATION. There are no actions or proceedings pending, or to
----------
Licensor's knowledge, threatened, which would prevent or make unlawful the
consummation of the transactions contemplated by this Agreement.
(f) THIRD-PARTY CLAIMS. Licensee shall have the right to engage
------------------
independent counsel to defend any claims of third parties for
violation/infringement of any patent or intellectual property rights, the cost
of which shall be borne solely by Licensor.
(g) PATENT. Licensor has applied for and received a patent from the
------
United States Patent Office relating to the Licensed Technology and has not
granted any rights to any third party which are inconsistent with the rights
granted to Licensee under this Agreement.
(h) ACCURACY OF REPRESENTATIONS. Licensor represents and warrants that
---------------------------
the representations and warrants herein are accurate and true to the best of
Licensor's knowledge, after diligent inquiry.
12.2 REPRESENTATIONS AND WARRANTIES OF LICENSEE. Licensee represents
------------------------------------------
and warrants to Licensor that, as of the date of this Agreement:
(a) INCORPORATION. Licensee represents and warrants that K & K
-------------
Enterprises is a corporation in good standing and is incorporated in Noida,
India.
(b) POWER AND AUTHORITY. Licensee has the corporate power and
-------------------
authority to enter into and to carry out the terms and provisions of this
Agreement; and this Agreement is the legal, valid and binding obligation of
Licensee, enforceable against Licensee in accordance with its terms.
(c) NO CONFLICTING AGREEMENTS. The execution, delivery and performance
-------------------------
of this Agreement by Licensee will not conflict with or violate any agreements
or understandings to which Licensee is a party or by which it may be bound.
(d) LITIGATION. There are no actions or proceedings pending, or to
----------
Licensee's knowledge, threatened, which would prevent or make unlawful the
consummation of the transactions contemplated by this Agreement.
-12-
<PAGE>
(e) ACCURACY OF REPRESENTATIONS. Licensee represents and warrants that
---------------------------
the representations and warrants herein are accurate and true to the best of
Licensee's knowledge, after diligent inquiry.
12.3. DISCLAIMER.
----------
EXCEPT AS EXPRESSLY PROVIDED IN PARAGRAPH 12.1, LICENS0R DISCLAIMS ANY EXPRESS
OR IMPLIED WARRANTY (i) THAT THE LICENSED TECHNOLOGY OR THE USE THEREOF, OR ANY
LICENSED PRODUCTS INCORPORATING THE LICENSED TECHNOLOGY OR MANUFACTURED BY THE
USE THEREOF WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE, OR
UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY, OR (ii) OF THE
ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR
MARKETABILITY OF THE LICENSED TECHNOLOGY OR ITS SUITABILITY OR FITNESS FOR ANY
PURPOSE WHATSOEVER, INCLUDING WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT,
MANUFACTURE, USE OR SALE OF LICENSED PRODUCTS. LICENSOR DISCLAIMS ALL OTHER
WARRANTIES OF WHATEVER NATURE, EXPRESS OR IMPLIED.
13. DEFAULT.
-------
13.1 Each of the following shall constitute an event of default
hereunder ("Event of Default"):
(a) Licensee fails to perform any material covenant or agreement
contained in this Agreement or the Joint Venture Agreement, and Licensee fails
to perform such covenant following thirty (30) days' written notice from
Licensor and opportunity to cure, provided, however, if the default is of such a
-------- -------
nature that it cannot reasonably be cured within such thirty (30) day period,
then Licensee shall not be deemed to be in default so long as Licensee promptly
commences to cure such default and diligently pursues such cure to completion;
(b) Any representation or warranty of Licensee herein shall prove to
be incorrect in any material respect;
(c) Licensee shall at any time challenge or otherwise assert the
invalidity of any of Licensor's rights to Licensed Technology licensed
hereunder;
(d) Licensee makes a general assignment or general arrangement for the
benefit of creditors; a petition for adjudication of bankruptcy or for
reorganization or rearrangement is filed by or against Licensee and is not
dismissed within thirty (30) days; a trustee or receiver is appointed to take
possession of all or a substantial portion of Licensee's properties and
possession thereof is not restored to Licensee within sixty (60) days; or all or
a substantial portion of Licensee's assets shall be subjected to
-13-
<PAGE>
attachment, execution or other judicial seizure which is not discharged, stayed
or bonded within sixty (60) days;
(e) Licensor fails to perform any material covenant or agreement in
this Agreement or the Joint Venture Agreement and Licensor fails to perform such
covenant following thirty (30) days written notice from Licensee and opportunity
to cure, provided, however, that if the default is of such a nature that it
-------- -------
cannot reasonably be cured within such thirty (30) day period, then Licensor
shall not be deemed to be in default so long as Licensor promptly commences to
cure such default and diligently pursues such cure to completion;
(f) Any representation or warranty of Licensor herein shall prove to
be incorrect in any material respect;
(g) Any final determination that all the patents and patent
applications relating to the Licensed Products are determined to be invalid or
unenforceable in the jurisdiction or jurisdictions of the Territory; or
(h) Licensor makes a general assignment or general arrangement for the
benefit of creditors; a petition for adjudication of bankruptcy or for
reorganization or rearrangement is filed by or against Licensor and is not
dismissed within thirty (30) days; a trustee or receiver is appointed to take
possession of all or a substantial portion of Licensor's properties and
possession thereof is not restored to Licensor within sixty (60) days; or all or
a substantial portion of Licensor's assets shall be subjected to attachment
execution or other judicial seizure which is not discharged, stayed or bonded
within sixty (60) days.
13.2 If an Event of Default shall occur hereunder, Licensor shall
have the right, to be exercised by it in its sole discretion, to terminate this
Agreement upon written notice to Licensee, and this Agreement and the rights
granted to Licensee shall thereupon terminate. The right of Licensor to
terminate this Agreement shall be in addition to any other rights or remedies to
which Licensor shall be entitled at law.
-14-
<PAGE>
14. EFFECT OF TERMINATION.
---------------------
14.1 On and after termination of this Agreement, whether pursuant to
the provisions of Paragraph 2.2, 3.3(b) or otherwise:
(a) All rights granted to Licensee hereunder, including any interest
in and to the Licensed Technology which Licensee may acquire, shall forthwith
and without further act or instrument, be assigned and revert to Licensor. In
addition, Licensee will execute any instruments requested by Licensor which are
necessary to accomplish or confirm the foregoing. Any such assignment, transfer
or conveyance shall be without consideration other than the mutual agreements
contained herein:
(b) Licensee will refrain from further use of the Licensed Technology;
and
(c) Licensee shall refrain from manufacturing the Licensed Products.
14.2 Termination of this Agreement in any manner shall be without
prejudice to any rights or remedies which either party may have, under this
Agreement or otherwise, and shall not prejudice Licensor's right to recover any
royalty or other sum accrued to Licensor hereunder and unpaid at the time of
termination. Nor shall termination prejudice any cause of action or claim of
Licensor or Licensee then accrued or to accrue on account of any breach or
default of Licensee or Licensor, as the case may be. Without limiting the
foregoing, the provisions of Paragraphs 3.8, 9 and 16 are intended to survive
termination of this Agreement. After the termination in any manner of this
Agreement, Licensee may fill any orders for Licensed Products received before
the date of termination, subject to the provisions of Paragraph 3.
15. PATENT MARKING: TRADEMARK.
-------------------------
15.1 Licensee shall do everything reasonably required of it by
Licensor in connection with patent marking or the giving of such other notices
as provided for under United States or applicable foreign patent laws.
15.2 All Licensed Products shall bear Licensor's trademark "AURA
SOUND" (the "Trademark").
15.3 Licensee acknowledges and agrees that Licensor is the sole and
exclusive owner of the Trademark. As such, Licensee's use of the Trademark shall
at all times be pursuant to this Agreement as
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<PAGE>
a non-exclusive licensee, and Licensee shall not at any time acquire any rights
in the Trademark by virtue of its use thereof.
15.4 Licensee agrees to take such actions as Licensor may reasonably
require for the protection of Licensor's proprietary interest in the Trademark.
Licensee shall cooperate fully and in good faith at Licensee's own expense with
Licensor for the purpose of preserving Licensor's rights in and to the
Trademark. Nothing contained in this Agreement shall be construed as an
assignment or grant to Licensee of any right, title or interest in or to the
Trademark, or any of Licensor's other trademarks, it being understood that all
rights relating thereto are reserved by Licensor, except for the license
hereunder to Licensee of the right to use and utilize the Trademark as expressly
provided herein. Licensee agrees that it will not at any time question the
validity of the Trademark or register or attempt to register the Trademark in
its own name or that of any other firm, person or corporation.
15.5 Licensee, at its own expense, shall assist Licensor to the full
extent requested by Licensor in the protection of or the procurement of any
protection of Licensor's rights to the Trademark. Licensee shall promptly notify
Licensor in writing of any uses which may be infringements of the Trademark
which come to Licensee's attention. Licensor shall have the sole right to
determine whether or not any action shall be taken on account of any such
infringements.
15.6 Licensee agrees that, in order to protect the prestige and
goodwill associated with the Trademark, all Licensed Products shall be of high
quality materials and workmanship and shall be otherwise manufactured in
accordance with the usual standards of Licensee.
16. SECRECY.
-------
16.1 Licensor has taken reasonable security measures to protect the
secrecy of the Licensed Technology. All employees of Licensor and any other
persons who have invented, discovered, designed, or developed the Licensed
Technology or who otherwise have knowledge of or access to the Licensed
Technology have been adequately notified that the Licensed Technology is
proprietary to Licensor, and is not to be divulged. The parties agree that the
Licensed Technology is valuable only so long as it remains secret. Accordingly,
each party agrees to take all steps necessary to protect Confidential
Information (as hereinafter defined) from entering the public domain or falling
into the hands of
-16-
<PAGE>
unauthorized third parties. All information which in any way embodies, evidences
or relates to the Licensed Technology which has been or will be tendered to the
other, including, without limitation, all prototypes, documents, books,
notebooks, papers, drawings, sketches, formulae or copies or extracts thereof,
and other data of any kind and description pertaining to the Licensed
Technology, as well as written instructions or comments given by employees of
either party to the other pertaining to the Licensed Technology is referred to
herein as "Confidential Information".
16.2 Each party agrees to take reasonable steps to maintain the
secrecy of Confidential Information, including but not limited to, the
following:
(a) Segregation by each party of the areas of its factory, laboratory
or other facility where it develops the Licensed Technology or the Licensed
Products to prevent unauthorized personnel from acquiring information about the
Licensed Technology or the Licensed Products;
(b) Restriction of access to these areas to technical personnel
pledged to secrecy, who are required to know the methods for the practice or
manufacture of the Licensed Products or the Licensed Technology in order to
utilize them for the purposes of this Agreement, and to those supervisory,
executive or other personnel pledged to secrecy who are required to have access
to these areas in the performance of their duties; and
(c) Numbering all originals and copies of all photographs and writings
evidencing the Licensed Technology, and maintaining a record of the persons
entrusted with the custody of these originals and copies and, to the extent
practicable, maintaining all copies in safes or other locked containers when not
in actual use.
16.3 All Confidential Information will be received by each party and
maintained in confidence and not be copied or communicated to any third party
except as specifically authorized herein, and all employees of each party will
be made aware of the terms and conditions of this Paragraph. Each party shall
obtain, from its respective employees, agents and other persons who have access
to the Licensed Technology, such non-disclosure agreements satisfactory in form
and content to the other party as are necessary or appropriate to implement the
provisions of this Paragraph.
-17-
<PAGE>
16.4 Subject to the provisions of Paragraph 16.6, the obligations of
each party imposed by this Paragraph 16 shall survive the termination of this
Agreement.
16.5 All Licensed Technology in documentary or other tangible form,
and all copies of it, must be returned promptly to Licensor upon termination of
this Agreement or, as applicable, upon earlier expiration of Licensee's rights
thereto in accordance with Paragraph 3, and Licensee shall thereupon cease the
use thereof.
16.6 No party shall be liable to the other for disclosure of any
Confidential Information if the same: (l) was well known in written form in the
public domain at the time it was disclosed; (2) was known to the party receiving
it at the time of disclosure, as shown by documentation in existence at or prior
to the date such Confidential Information was received by such party sufficient
to clearly establish such knowledge; or (3) is disclosed with the prior written
approval of the other party.
17. ARBITRATION.
-----------
17.1 SELECTION OF ARBITRATORS.
------------------------
All disputes between the parties arising under or out of this Agreement
shall be settled by arbitration conducted in Los Angeles, California. Either
side to the dispute may institute arbitration by giving written notice to the
other party of its intention to arbitrate, which notice shall contain the name
of the arbitrator selected by the party instituting arbitration, the nature of
the controversy, the amount involved, if any, the remedies sought, and any other
pertinent matter. Within fifteen (15) days after the giving of such notice, the
other party may submit to the initiating party the name of an arbitrator whom it
has appointed; thereafter the two arbitrators so appointed shall in good faith
select a neutral third arbitrator; the three arbitrators so selected shall
resolve the controversy. If the two arbitrators are unable to agree upon a
neutral third arbitrator within the fifteen day period, the third arbitrator
shall be appointed by the American Arbitration Association in accordance with
its then existing rules. If the other party shall refuse or neglect to appoint
an arbitrator within the requisite fifteen day period, the arbitrator appointed
by the initiating party shall be empowered to proceed to arbitrate and determine
the fact or matter in controversy as the sole arbitrator, and his award in
writing shall be final, conclusive and binding upon the parties. The
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<PAGE>
arbitrators nominated or appointed hereunder shall not be parties hereto or
associated with or employed by or have the status of a supplier of goods and
services to any party hereto.
17.2 PROCEDURE. The arbitrator or arbitrators, if they desire, shall
---------
have access to all books and records of Licensor and Licensee, as well as any
and all other documents and things of the parties pertinent to the matter in
arbitration which shall enable them to make the required decision. Prior to
rendering their decision, the arbitrators shall afford each of the parties an
opportunity, both orally and in writing, to present any relevant evidence and to
present that party's factual contentions and arguments in connection with the
matter in arbitration; provided, however, that the formal rules of evidence
applicable to judicial proceedings shall not apply; and provided, further, that
any party submitting written materials shall be required to deliver a copy of
the same to the other party concurrently with the delivery thereof to the
arbitrators and such other party shall have the opportunity to submit a written
reply, a copy of which will also be delivered to the other party concurrently
with the delivery thereof to the arbitrators. Oral argument shall take place
only at a hearing before all of the arbitrators at which all parties are
afforded a reasonable opportunity to be present and be heard. The parties may
engage their own experts for purposes of presenting evidence to the arbitrators.
In all other respects and unless otherwise expressly provided herein or agreed
upon by the parties in writing, the arbitration shall be conducted in accordance
with the commercial rules then obtaining of the American Arbitration
Association. In addition, the provisions of California Code of Civil Procedure
Section 1283.05, or any successor section thereto, relating to the taking of
depositions in an arbitration proceeding, shall be applicable to the
arbitration.
17.3 ARBITRATION AWARD. Unless the time is extended by a majority of
-----------------
the arbitrators, they shall submit their determination in writing within sixty
(60) days after the third arbitrator is selected, or if only one arbitrator is
acting, within sixty (60) days after his appointment. If there are three
arbitrators selected, as above provided, an award in writing signed by any two
of them shall be final, conclusive and binding upon the parties hereto. Any
award made pursuant to arbitration Any be entered as a judgment by any court of
competent jurisdiction upon the application of any party to said arbitration.
Such award shall include an award of costs and reasonable attorney's fees
incurred by the prevailing party.
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<PAGE>
17.4 INTERIM INJUNCTIVE RELIEF. Notwithstanding the foregoing
-------------------------
provisions of this Paragraph 17, either party shall have the right to petition a
court of appropriate jurisdiction seeking injunctive or other similar relief
pending the conclusion of any arbitration proceedings.
18. MISCELLANEOUS.
-------------
18.1 NOTICES. All notices and other communications permitted or
-------
required by the provisions of this Agreement shall be in writing and shall be
personally delivered or deposited in the United States Mail, bearing adequate
first class postage and addressed as hereinafter provided. Notices delivered in
person shall be effective upon the date of delivery. Notices by mail shall be
effective upon the receipt thereof by the addressee or upon the fifth (5th)
calendar day after being deposited in the U.S. mail, whichever is earlier. Any
party hereto shall have the right from time to time and at any time while this
Agreement is in effect to change the respective addressees thereof and each
shall have the right to specify as the address thereof any other address. Any
notice herein required or permitted to be given may be given, in addition to the
manner set forth above, by telex, TWX, cable or facsimile transmission, provided
that the party giving such notice obtains acknowledgment by telex, TWX, cable or
facsimile transmission that such notice has been received by the party to be
notified. Notice given in this manner shall be effective upon transmission of
acknowledgment of receipt of same by the parties to be notified. Notices shall
be addressed, until notice of change is aforesaid, as follows:
(a) IF TO LICENSOR:
--------------
Aura Systems, Inc.
2335 Alaska Ave.
El Segundo, California 90245
Attention: Anthony T. Cascio,
VP, General Counsel
(b) IF TO LICENSEE:
--------------
K & K Enterprises
128 Sector 37
Noida 201303, INDIA
Attention: Mr. Kenny A. Dewan,
Managing Director
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<PAGE>
18.2 NO JOINT VENTURE. Nothing contained herein shall be construed to
----------------
deem the parties in the relationship of partners or joint venturers, and no
party hereto shall have any power to obligate any other party hereto in any
manner whatsoever, except as expressly provided for herein.
18.3 WAIVER. The waiver or excuse by either party hereto as to any
------
breach, default or deficiency and the performance by the other party of any duty
or obligation by the other party to be performed hereunder shall not constitute
or be deemed a continuing waiver or excuse of the same or any other duty or
obligation owed by the other.
18.4 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the
----------------------
specific provisions of this Agreement is intended to be exclusive of any other
remedy and each and every remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more remedies by
any of the parties shall not constitute a waiver of the right to pursue other
remedies.
18.5 NO ASSIGNMENT. Subject to the provisions of Paragraph 11,
-------------
Licensee may not assign or encumber, in whole or in part, its rights under this
Agreement or grant any sub-licenses without the prior written consent of
Licensor. Licensor shall have the right to assign its rights and duties
hereunder without the consent of Licensee provided that Licensor gives Licensee
prior written notice of any such assignment. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement.
18.6 SUCCESSORS. Except as otherwise provided herein, this Agreement
----------
shall be binding upon and inure to the benefit of the parties hereto and their
permitted successors and assigns.
18.7 LITIGATION. In the event of any litigation or proceeding in
----------
arbitration between the parties arising in any manner out of this Agreement or
the asserted breach thereof, the prevailing party shall recover court costs or
costs of arbitration, as appropriate, and actual attorneys' fees.
18.8 CAPTIONS. Captions and paragraph headings used herein are for
--------
convenience only and are not a part of this Agreement and shall not be used in
construing it.
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<PAGE>
18.9 ENTIRE AGREEMENT. Except for such Joint Venture Agreement dated
----------------
July 19, 1995 by and between the parties herein, this Agreement contains the
entire understanding between the parties concerning the subject matter of this
Agreement and supersedes all prior understandings and agreements, whether oral
or written, between them respecting the subject matter hereof. There are no
representations, agreements, arrangements or understandings, oral or written,
between the parties hereto relating to the subject matter of this Agreement
which are not fully expressed herein. This Agreement may be modified only by an
agreement in writing signed by all of the parties hereto.
18.10 SEVERABILITY. The provisions of this Agreement are severable,
------------
and if any one or more provisions are determined to be judicially unenforceable,
in whole or in part, the remaining provisions, and any partially unenforceable
provisions to the extent enforceable, shall nevertheless be binding and
enforceable. In the event that any act, regulation, directive, or law of a
government having jurisdiction and respect of this Agreement, including its
departments, agencies or courts, should make it impossible or prohibit,
restrain, modify or eliminate any act or obligation of Licensee under this
Agreement, Licensor shall have the right, at its option, to suspend this
Agreement or to make such modifications therein as may be necessary.
18.11 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
18.12 GENDER; NUMBER. Terms used herein in any number or gender
--------------
include other numbers or genders, as the context may require.
18.13 GOVERNING LAW. This Agreement is made and entered into in the
-------------
State of California. It is the intention of the parties hereto that this
Agreement shall be subject to and shall be enforced and construed pursuant to
the internal laws of the State of California without reference to California's
choice of law rules.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date and year first above written.
LICENSOR: LICENSEE:
AURA SYSTEMS, INC., K & K ENTERPRISES
A DELAWARE CORPORATION A NOIDA, INDIA CORPORATION
By /s/ Anthony T. Cascio By /s/ K.A. Dewan
---------------------------- ------------------------------
Anthony T. Cascio K.A. Dewan
VP Secretary Its Vice President
--------------------------
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<PAGE>
Exhibit 10.15
AGREEMENT
This Agreement is made by and between K & K Enterprises, with principal
offices in Noida, India ("Majority Owner") and Aura Systems, Inc. ("Aura"), a
Delaware corporation, with principal offices in El Segundo, California, USA, for
the formation of a joint venture between them.
WITNESSETH
WHEREAS, Aura has developed, and is the owner of patented and proprietary
technology relating to the development, design and manufacture of
electromagnetic transducers;
WHEREAS, Aura has identified product applications incorporating the Aura
patented and proprietary technology;
WHEREAS, Aura does not possess the resources with which to pursue the
manufacture of such product applications;
WHEREAS, Majority Owner is interested in funding the further manufacture of
products for such applications incorporating the Aura proprietary technology in
exchange for certain rights;
WHEREAS, to accomplish the above, the parties are desirous of entering into
a joint venture to further the development, design, manufacture and marketing of
such industrial applications.
NOW, THEREFORE, the parties hereby acknowledge this Agreement to be the
understanding reached by and between the parties hereto as of the date set forth
hereinbelow:
1. OBJECT
(a) The object of this Agreement is to form an India company to be called
Dewan Aura International (hereinafter referred to as "NEWCO") with
principal offices in or about Noida under the joint ownership of
Majority Owner and Aura for the manufacture of products (within the
scope of a certain license agreement more particularly set forth
hereinbelow) incorporating Aura patented and proprietary technology.
NEWCO will conduct business as an independent entity separate and
apart from its shareholder.
(b) Majority Owner acknowledge that time is of the essence of making and
performance of this Agreement.
<PAGE>
2. STRUCTURE
(a) The ownership of NEWCO will be 40% held by Aura and 51% held by
Majority Owner. Upon incorporation of NEWCO as a privately held
company, NEWCO shall issue shares (in an amount to be determined)
equal to such percentages.
(b) The NEWCO Board of Directors shall be comprised of five board members,
two of which shall be appointed by Aura and three of which shall be
appointed by Majority Owner. Majority Owner shall serve as Chairman
of the Board. Each party shall have the sole power to appoint its
respective board members and each party shall have the sole power to
remove and replace or substitute its respective board members.
(c) Aura and Majority Owner agree that the Articles of Incorporation of
NEWCO, and/or its By-Laws, shall provide and establish the structure
of the Board of Directors as set forth in Section 2(b), including the
number of its members and the representations on the NEWCO Board of
Directors by the parties hereto, and further agree that such provision
in the Articles of Incorporation and/or the By-Laws of NEWCO shall not
be amended or modified unless such amendments or modifications are
consented to by a three-quarters vote of the NEWCO shareholders.
(d) Aura and Majority Owner agree that the Articles of Incorporation of
NEWCO, and/or its By-Laws, shall provide and establish that NEWCO
shall not be liquidated unless such liquidation is approved by a
three-quarters vote of NEWCO shareholders, and further agree that such
provision in the Articles of Incorporation and/or the By-Laws of NEWCO
shall not be amended or modified unless such amendments or
modifications are consented to by a three-quarters vote of the NEWCO
shareholders.
(e) Majority Owner shall manage the administration of NEWCO. Aura shall
have primary responsibility over development and design of the
products. Majority Owner shall have primary responsibility over
manufacturing of the products and financing of NEWCO.
(f) NEWCO shall be incorporated as soon as practicable after execution of
this Agreement.
(g) NEWCO, upon receiving its initial capitalization, shall establish a
factory in Noida, India.
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<PAGE>
3. CONTRIBUTION AND COMMITMENTS
(a) Aura shall contribute and has contributed to NEWCO a working prototype
of an exemplary product of the type to be manufactured by NEWCO.
(b) NEWCO shall purchase from Aura the license described in Article 4.
Majority Owner shall contribute to NEWCO 51% of the license fee to be
paid by NEWCO to Aura. Similarly, Aura shall contribute to NEWCO 30%
of the license fee to be paid by NEWCO to Aura.
(c) The parties shall contribute working capital in the amount of
$240,000.00 to NEWCO in proportion to their ownership interest.
Additional capital shall be contributed as needed in proportion or by
either, as required, in the form of a loan at prevailing commercial
bank loan interest rates. Such loans shall be approved by a three-
quarters majority of the Board. Additional financing by third parties
shall dilute each party in equal shares of their ownership proportion.
(d) Majority Owner shall make arrangements to facilitate and coordinate
all engagements and necessary licenses with local governments and
regulatory authorities.
(e) Each of the parties shall further contribute, without compensation for
consultancy or otherwise, their respective expertise and know how
regarding the Board and management functions assumed under Article 2
of this Agreement. Nothing contained in this paragraph 3(d) shall
limit or restrict Aura's rights to receive payment from NEWCO for
engineering services ordered by NEWCO. Any such order for engineering
services shall, however, be at Aura's standard labor rates burdened
with overhead and G & A, as defined by generally accepted accounting
principals, plus 10%.
(f) Aura shall provide training to NEWCO personnel at Aura's facility to
establish the assembly procedure for manufacturing the Product. Any
additional expenses not related to the technology transfer under the
license, including but not limited to travel, per diem fees and
special materials, which may be required of Aura at NEWCO's facility,
shall be reimbursed by NEWCO to Aura at Aura's regular billing rates,
and shall be initiated at NEWCO's sole discretion..
(g) Aura shall purchase from NEWCO the licensed products (as defined
below) at $30.50 per pair according to the following schedule:
(in thousands of units):
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<PAGE>
Year 1 Units
-------------- -----
1st Quarter 60
2nd Quarter 60
3rd Quarter 80
4th Quarter 80
---
280
Year 2
--------------
1st Quarter 100
2nd Quarter 100
3rd Quarter 120
4th Quarter 120
---
440
Year 3
--------------
1st Quarter 130
2nd Quarter 130
3rd Quarter 150
4th Quarter 150
---
560
Years 4 - 17
------------
150,000 per Quarter
Aura's obligations on this Paragraph 3(g) shall be suspended
in the event of Force Majeure. For the purposes of Aura's
purchase obligations, the term "force majeure" shall mean an
act of god, strike, lockout, act of public enemy, war,
blockade, public riot, fire, storm, flood or other act of
nature, explosion, governmental action, governmental delay,
restraint or inaction, unavailability of equipment, and any
other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the
control of the party claiming suspension. Aura shall use all
reasonable diligence to remove the force majeure as quickly
as practicable. In the event Aura claims an event of force
majeure, the payments outlined in Paragraph 4(b) of this
Agreement shall be suspended for a like period or periods of
time.
4. LICENSE
(a) AURA hereby grants to NEWCO an exclusive, life of patents,
non-transferable, non-assignable and non-divisible right,
license, without further right of sub-license and
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<PAGE>
privilege to use the Aura patented and proprietary
technology, including patents, patent applications and trade
secrets (hereinafter referred to as the "Licensed
Technology") in the field of electromagnetic transducers for
audio sound enhancement (hereinafter referred to as either
the "License Field") for the manufacture of products in the
License Field incorporating the Licensed Technology
(hereinafter referred to as the "Licensed Products").
(b) In consideration of the license granted by Aura to NEWCO,
NEWCO agrees to pay to Aura a one-time, non-creditable, lump
sum, non-refundable license fee according to the following
schedule:
<TABLE>
<CAPTION>
Year 1
- -----------
<S> <C> <C>
1st Quarter $ 178,571
2nd Quarter 178,571
3rd Quarter 357,143
4th Quarter 285,714
-------
$ 999,999 per Year
Years 2 and 3
- -------------
1st Quarter $ 500,000
3rd Quarter 500,000
-------
1,000,000 per Year
Years 4 and 5
- -------------
Per Quarter $ 142,857 571,428 per Year
Years 6 through 17
- ------------------
(for life of license)
- ---------------------
Per Quarter $ 71,428 285,712 per Year
-----------
TOTAL $ 7,285,687
</TABLE> ===========
Except for such subsequent events as specified in this Paragraph 3(b),
no contingency shall exist to Aura's receipt of the License Fee when
due. NEWCO's obligations to pay the License Fee when due shall be
suspended: (i) in the event of a material breach by Aura of its
obligations under Paragraph 3(g); and (ii) in the event of Aura's
suspension of payments under Paragraph 3(g) due to Force Majeure. The
parties agree to execute such license, on usual and customary terms
not inconsistent with this Agreement, within 5 calendar days of the
signing of this Agreement.
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<PAGE>
(c) Majority Owner further agrees not to compete in the License Field with
either Aura or NEWCO, nor invest in or fund others in competition with
Aura or NEWCO in the License Field. The covenant of this paragraph
4(b) shall survive termination of this Agreement for a period of seven
(7) years. Nothing contained herein shall prohibit ownership of shares
in any company in competition with Aura or NEWCO provided that such
ownership does not exceed 4.9% of the outstanding shares of such
company.
(d) In the event an assignment of any or all of the Aura proprietary
technology is made for the benefit of creditors under either Chapter 7
or Chapter 11 of the U.S. Bankruptcy Law, then this license shall not
revert and the assignee-creditor takes title to such transferred
technology subject to the terms of this Agreement.
(e) In the event an assignment of any or all of the assets of NEWCO is
made for the benefit of creditors under an Indian analog to Chapter 7
of the U.S. Bankruptcy law, then the sub-license granted to NEWCO
shall terminate and all rights under the sub-license revert to Aura.
(f) Any and all improvements to the Licensed Technology made by Aura
subsequent to the date of this Agreement shall be licensed to NEWCO
under the same terms and conditions as set forth in Section 4(a)
without further payment of license fee or royalty to Aura.
(g) Any and all improvements to the Licensed Technology made by NEWCO
(without funding or other assistance by Aura) shall belong to NEWCO
subject to a grant of a fully paid, royalty free license to Aura for
such improvements.
5. BOOKS AND RECORDS
(a) NEWCO shall establish and maintain at its principal place of business,
or at such other place as the parties may consent to in writing, full,
true and accurate books of account, records and other data, kept in
accordance with generally accepted accounting principles, containing
all particulars necessary for a precise auditing of the complete
financial statements of NEWCO. The parties and its agents, including
their accountants and attorneys, shall, during the term of this
Agreement, have the right, during normal business hours, and upon
reasonable prior notice, to inspect and make extracts from such books
of account, records and other data relating to the financial condition
of NEWCO provided, however, that such examinations shall be conducted
no more often than once for each fiscal year period.
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<PAGE>
(b) All financial reporting and accounting of NEWCO shall be performed by
a qualified, independent international auditor.
6. REPRESENTATIONS AND WARRANTIES
(a) AURA represents and warrants to Majority Owner that, as of the date of
this Agreement: (i) AURA has the corporate power and authority to
enter into and to carry out the terms and provisions of this
Agreement; (ii) AURA has not entered into any agreement or
understanding regarding the manufacture of the Licensed Products in
the License Field which is in conflict with or inconsistent with any
of the terms or conditions of this Agreement; (iii) AURA has no actual
knowledge after diligent inquiry that its Licensed Technology or
Licensed Products conflict with, violate or infringe any rights of any
third party, and (iv) there are no actions or proceedings pending, or
to Aura's knowledge, threatened, which would prevent or make unlawful
the consummation of the transactions contemplated by this Agreement.
Aura will indemnify NEWCO and Majority Owner from and against any
cost, expense, lawsuit, legal proceeding, judgment or liability
arising out of or associated with any claim brought by any third party
claiming a violation or infringement by the Licensed Technology or
Licensed Products of such third party's patent rights wheresoever
situated.
NEWCO and Majority Owner shall have the right to engage independent
counsel to defend any claims of such third parties for
violations/infringement of any patent or intellectual property rights,
the cost of which shall be borne solely by Aura.
Aura has applied for and received a patent from the United States
Patent Office relating to the License Technology and has not granted
any rights to any third party which are inconsistent with the rights
to be granted NEWCO under the License Agreement.
(b) Majority Owner represents and warrants to AURA that, as of the date of
this Agreement: (i) Majority Owner has the power and authority to
enter into and to carry out the terms and provisions of this
Agreement, (ii) the execution, delivery and performance of this
Agreement by Majority Owner will not conflict with or violate any
agreements or understandings to which Majority Owner is a party or by
which it may be bound, (iii) Majority Owner has the financial
resources, liquidity, equity, credit and net worth to make the
contribution and
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<PAGE>
arrange for the credit to be extended to NEWCO as
required under Section 3(b), and (iv) there are no actions or
proceedings pending, or to either's knowledge, threatened, which would
prevent or make unlawful the consummation of the transactions
contemplated by this Agreement.
(c) The parties represent and warrant to each other that neither of them
shall liquidate its ownership of NEWCO without first offering to the
other of them the right to obtain the liquidating party's ownership
upon the same or better term's to the liquidating party as offered by
a third party.
(d) The parties agree that NEWCO shall warrant the Licensed Products to be
free from defects in material and workmanship upon such terms as shall
be agreed to in writing between NEWCO and its customers. NEWCO shall
indemnify and hold Aura and Majority Owner harmless from all loss
resulting from the manufacture, use or sale of licensed products.
7. INSURANCE
(a) NEWCO shall at all times during the term of this Agreement and
thereafter carry Director and Officer insurance, business interruption
insurance, hazard (including, but not limited to fire, earthquake,
flood, theft and burglary) and general liability insurance, and any
other insurance required under law, covering acts, omissions or
occurrences during the term of this Agreement, in the amount of the
actual replacement value of building, equipment and inventory, per
occurrence (or such other amount as the parties shall determine to be
reasonable). Such policies shall name AURA and Majority Owner as
additional insureds and beneficiaries in the same percentages of their
respective stock ownership in NEWCO. NEWCO shall use its best efforts
to obtain a policy which provides that it shall not be cancellable
except upon thirty (30) days prior written notice to AURA and Majority
Owner. NEWCO agrees to provide Aura and Majority Owner with one or
more certificates evidencing the insurance coverage hereunder and the
insurance policies promptly upon the request of Aura and/or Majority
Owner. Aura, Majority Owner and NEWCO acknowledge that insurance
markets are rapidly changing and that insurance in the form and
amounts described in this paragraph may not be available in the
future. In such event, NEWCO shall nevertheless maintain insurance
coverage which is customary and commercially reasonable.
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<PAGE>
8. DEFAULT
(a) Each of the following shall constitute an event of default hereunder
("Event of Default"): (i) Either Party fails to perform any material
covenant or agreement contained in this Agreement and Either Party
fails to perform such covenant following thirty (30) days' written
notice from the other party and opportunity to cure, provided,
however, if the default is of such a nature that it cannot reasonably
be cured within such thirty (30)-day period, then the defaulting party
shall not be deemed to be in default so long as the defaulting party
promptly commences to cure such default and diligently pursues such
cure to completion; (ii) Any representation or warranty of either
party herein shall prove to be incorrect in any material respect;
(iii) Majority Owner shall at any time challenge or otherwise assert
the invalidity of any of AURA's rights to Licensed Technology licensed
hereunder; or (iv) Majority Owner or AURA makes a general assignment
or general arrangement for the benefit of creditors without the prior
written consent of the other party, a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or
against either party and is not dismissed within thirty (30) days, a
trustee or receiver is appointed to take possession of all or a
substantial portion of either party's properties and possession
thereof is not restored to such party within sixty (60) days, or all
or a substantial portion of either party's assets shall be subjected
to attachment, execution or other judicial seizure which is not
discharged, stayed or bonded within sixty (60) days.
(b) If a Default shall occur hereunder, either party shall have the right,
to be exercised by it in its sole discretion (after reasonable
opportunity to cure the default has been given), to terminate this
Agreement upon written notice to the defaulting party. The right of
either party to terminate this Agreement for Default shall be in
addition to any other rights or remedies to which either party shall
be entitled at law. Termination of this Agreement shall be without
prejudice to any rights or remedies which either party may have, under
this Agreement
(c) In the event this Agreement is terminated by Aura by reason of default
of Majority Owner, then the license granted to NEWCO under Section
4(a) shall terminate and revert to Aura.
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<PAGE>
9. SECRECY
(a) AURA has taken reasonable security measures to protect the secrecy of
its proprietary technology in electromagnetic transducer and
electromagnetic transducer systems. The parties agree that this
proprietary technology is valuable only so long as it remains secret.
Accordingly, each party agrees to take all steps reasonably necessary
to protect Confidential Information (as hereinafter defined) from
entering the public domain or falling into the hands of unauthorized
third parties. All information which in any way embodies, evidences
or relates to the proprietary technology is referred to herein as
"Confidential Information". Confidential Information excludes any
information which is or becomes in the public domain by public use,
publication, general knowledge or similar means other than by breach
of this Agreement.
(b) Each party agrees to take reasonable steps to maintain the secrecy of
Confidential Information.
10. BUSINESS PLAN
(a) The parties hereto shall, as soon as practicable after execution of
this Agreement, develop a business plan for NEWCO.
11. SUCCESSORS
(a) Except as otherwise provided herein, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
permitted successors and assigns.
12. SEVERABILITY
(a) The provisions of this Agreement are severable, and if any one or more
provisions are determined to be judicially unenforceable, in whole or
in part, the remaining provisions, and any partially unenforceable
provisions to the extent enforceable, shall nevertheless be binding
and enforceable. In the event that any act, regulation, directive, or
law of a government having jurisdiction and respect of this Agreement,
including its departments, agencies or courts, should make it
impossible or prohibit, restrain, modify or eliminate any act or
obligation of Majority Owner under this Agreement, Aura shall have the
right, at its option, to suspend this Agreement or to make such
modifications therein as may be necessary.
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<PAGE>
13. NOTICES
(a) All notices and other communications permitted or required by the
provisions of this Agreement shall be in writing and shall be
personally delivered or deposited in the United States Mail, bearing
adequate first class postage and addressed as hereinafter provided.
Notices delivered in person shall be effective upon the date of
delivery. Notices by mail shall be effective upon the receipt thereof
by the addressee or upon the tenth (10th) calendar day after being
deposited in the U.S. mail, as the case may be, whichever is earlier.
Any party hereto shall have the right from time to time and at any
time while this Agreement is in effect to change the respective
addressees thereof and each shall have the right to specify as the
address thereof any other address. Any notice herein required or
permitted to be given may be given, in addition to the manner set
forth above, by courier, telex, TWX, cable or facsimile transmission,
provided that the party giving such notice obtains acknowledgment by
courier proof of delivery, telex, TWX, cable or facsimile transmission
that such notice has been received by the party to be notified. Notice
given in this manner shall be effective upon transmission of
acknowledgment of receipt of same by the parties to be notified.
14. DISPUTES
(a) All disputes between the parties arising under or out of this
Agreement shall be settled by arbitration conducted in Los Angeles,
California. Either side to the dispute may institute arbitration by
giving written notice to the other party of its intention to
arbitrate.
(b) Unless otherwise expressly provided herein or agreed upon by the
parties in writing, the arbitration shall be conducted in accordance
with the commercial rules then obtaining of the American Arbitration
Association.
(c) Any award made pursuant to arbitration may be entered as a judgment by
any court of competent jurisdiction upon the application of any party
to said arbitration. Such award shall include an award of costs and
reasonable attorney's fees incurred by the prevailing party.
(d) Notwithstanding the foregoing provisions of this Paragraph 11, either
party shall have the right to petition a court of appropriate
jurisdiction seeking injunctive or other similar relief pending the
conclusion of any arbitration proceedings.
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<PAGE>
15. LITIGATION
(a) In the event of any litigation or proceeding in arbitration between
the parties arising in any manner out of this Agreement or the
asserted breach thereof, the prevailing party shall recover court
costs or costs of arbitration, as appropriate, and actual attorneys'
fees.
16. WAIVER
(a) The waiver or excuse by either party hereto as to any breach, default
or deficiency and the performance by the other party of any duty or
obligation by the other party to be performed hereunder shall not
constitute or be deemed a continuing waiver or excuse of the same or
any other duty or obligation owed by the other.
17. REMEDIES NOT EXCLUSIVE
(a) No remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy and each and
every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more
remedies by any of the parties shall not constitute a waiver of the
right to pursue other remedies.
18. CAPTIONS
(a) Captions and paragraph headings used herein are for convenience only
and are not a part of this Agreement and shall not be used in
construing it.
19. ENTIRE AGREEMENT
(a) This Agreement contains the entire understanding between the parties
concerning the subject matter of this Agreement and supersedes all
prior understandings and agreements, whether oral or written, between
them respecting the subject matter hereof. There are no
representations, agreements, arrangements or understandings, oral or
written, between the parties hereto relating to the subject matter of
this Agreement which are not fully expressed herein. This Agreement
may be modified only by an agreement in writing signed by all of the
parties hereto.
-12-
<PAGE>
20. COUNTERPARTS
(a) This Agreement may be executed in any number of counterparts, each of
which shall constitute an original and all of which together shall
constitute one and the same instrument.
21. GENDER; NUMBER
(a) Terms used herein in any number or gender include other numbers or
genders, as the context may require.
22. GOVERNING LAW
(a) This Agreement is made and entered into in the State of California,
United States of America. It is the intention of the parties hereto
that this Agreement shall be subject to and shall be enforced and
construed under tenets of international law.
WHEREFORE, the parties agree that this Agreement constitutes and
memorializes the understanding reached by and between the parties on the date
set forth hereinbelow, and intend to be legally bound by the mutual covenants,
terms and conditions herein. The parties shall use their best efforts to enter
into a definitive agreement setting forth the entire relationship between the
parties hereto.
AURA SYSTEMS, INC. K & K ENTERPRISES
By:/s/ Harry Zvi Kurtzman By: /s/Brigadier Ashok Dewan
--------------------- ------------------------
Harry Zvi Kurtzman Brigadier Ashok Dewan
Chief Executive Officer
Date: July 12, 1995 Date: July 12, 1995
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<PAGE>
Exhibit 10.16
AMENDED JOINT VENTURE AGREEMENT
This Agreement is made by and between K & K Enterprises, with principal
offices in Noida, India ("Majority Owner") and Aura Systems, Inc. ("Aura"), a
Delaware corporation, with principal offices in El Segundo, California, USA, for
the formation of a joint venture between them.
WITNESSETH
WHEREAS, Aura has developed, and is the owner of patented and proprietary
technology relating to the development, design and manufacture of
electromagnetic transducers;
WHEREAS, Aura has identified product applications incorporating the Aura
patented and proprietary technology;
WHEREAS, Aura does not possess the resources with which to pursue the
manufacture of such product applications;
WHEREAS, Majority Owner is interested in funding the further manufacture of
products for such applications incorporating the Aura proprietary technology in
exchange for certain rights;
WHEREAS, to accomplish the above, the parties are desirous of entering into
a joint venture to further the development, design, manufacture and marketing of
such industrial applications.
NOW, THEREFORE, the parties hereby acknowledge this Agreement to be the
understanding reached by and between the parties hereto as of the date set forth
hereinbelow:
1. OBJECT
(a) The object of this Agreement is to form an India company to be called
Dewan Aura International (hereinafter referred to as "NEWCO") with
principal offices in or about Noida under the joint ownership of
Majority Owner and Aura for the manufacture of products (within the
scope of a certain license agreement more particularly set forth
hereinbelow) incorporating Aura patented and proprietary technology.
NEWCO will conduct business as an independent entity separate and
apart from its shareholder.
(b) Majority Owner acknowledge that time is of the essence of making and
performance of this Agreement.
<PAGE>
2. STRUCTURE
(a) The ownership of NEWCO will be 49% held by Aura and 51% held by
Majority Owner. Upon incorporation of NEWCO as a privately held
company, NEWCO shall issue shares (in an amount to be determined)
equal to such percentages.
(b) The NEWCO Board of Directors shall be comprised of five board members,
two of which shall be appointed by Aura and three of which shall be
appointed by Majority Owner. Majority Owner shall serve as Chairman
of the Board. Each party shall have the sole power to appoint its
respective board members and each party shall have the sole power to
remove and replace or substitute its respective board members.
(c) Aura and Majority Owner agree that the Articles of Incorporation of
NEWCO, and/or its By-Laws, shall provide and establish the structure
of the Board of Directors as set forth in Section 2(b), including the
number of its members and the representations on the NEWCO Board of
Directors by the parties hereto, and further agree that such provision
in the Articles of Incorporation and/or the By-Laws of NEWCO shall not
be amended or modified unless such amendments or modifications are
consented to by a three-quarters vote of the NEWCO shareholders.
(d) Aura and Majority Owner agree that the Articles of Incorporation of
NEWCO, and/or its By-Laws, shall provide and establish that NEWCO
shall not be liquidated unless such liquidation is approved by a
three-quarters vote of NEWCO shareholders, and further agree that such
provision in the Articles of Incorporation and/or the By-Laws of NEWCO
shall not be amended or modified unless such amendments or
modifications are consented to by a three-quarters vote of the NEWCO
shareholders.
(e) Majority Owner shall manage the administration of NEWCO. Aura shall
have primary responsibility over development and design of the
products. Majority Owner shall have primary responsibility over
manufacturing of the products and financing of NEWCO.
(f) NEWCO shall be incorporated as soon as practicable after execution of
this Agreement.
(g) NEWCO, upon receiving its initial capitalization, shall establish a
factory in Noida, India.
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<PAGE>
3. CONTRIBUTION AND COMMITMENTS
(a) Aura shall contribute and has contributed to NEWCO a working prototype
of an exemplary product of the type to be manufactured by NEWCO.
(b) NEWCO shall purchase from Aura the license described in Article 4.
Majority Owner shall contribute to NEWCO 51% of the license fee to be
paid by NEWCO to Aura. Similarly, Aura shall contribute to NEWCO 49%
of the license fee to be paid by NEWCO to Aura.
(c) The parties shall contribute working capital in the amount of
$400,000.00 to NEWCO in proportion to their ownership interest.
Additional capital shall be contributed as needed in proportion or by
either, as required, in the form of a loan at prevailing commercial
bank loan interest rates. Such loans shall be approved by a three-
quarters majority of the Board. Additional financing by third parties
shall dilute each party in equal shares of their ownership proportion.
(d) Majority Owner shall make arrangements to facilitate and coordinate
all engagements and necessary licenses with local governments and
regulatory authorities.
(e) Each of the parties shall further contribute, without compensation for
consultancy or otherwise, their respective expertise and know how
regarding the Board and management functions assumed under Article 2
of this Agreement. Nothing contained in this paragraph 3(d) shall
limit or restrict Aura's rights to receive payment from NEWCO for
engineering services ordered by NEWCO. Any such order for engineering
services shall, however, be at Aura's standard labor rates burdened
with overhead and G & A, as defined by generally accepted accounting
principals, plus 10%.
(f) Aura shall provide training to NEWCO personnel at Aura's facility to
establish the assembly procedure for manufacturing the Product. Any
additional expenses not related to the technology transfer under the
license, including but not limited to travel, per diem fees and
special materials, which may be required of Aura at NEWCO's facility,
shall be reimbursed by NEWCO to Aura at Aura's regular billing rates,
and shall be initiated at NEWCO's sole discretion..
(g) Aura shall purchase from NEWCO the licensed products (as defined
below) at $30.50 per pair according to the following schedule:
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<PAGE>
Year 1 Pairs
------------ -----
1st Quarter 60,000
2nd Quarter 60,000
3rd Quarter 80,000
4th Quarter 80,000
-------
280,000
Year 2
------------
1st Quarter 100,000
2nd Quarter 100,000
3rd Quarter 120,000
4th Quarter 120,000
-------
440,000
Year 3
------------
1st Quarter 130,000
2nd Quarter 130,000
3rd Quarter 150,000
4th Quarter 150,000
-------
560,000
Years 4 - 17
------------
150,000 per Quarter
Aura's obligations on this Paragraph 3(g) shall be suspended in the
event of Force Majeure. For the purposes of Aura's purchase
obligations, the term "force majeure" shall mean an act of god,
strike, lockout, act of public enemy, war, blockade, public riot,
fire, storm, flood or other act of nature, explosion, governmental
action, governmental delay, restraint or inaction, unavailability of
equipment, and any other cause, whether of the kind specifically
enumerated above or otherwise, which is not reasonably within the
control of the party claiming suspension. Aura shall use all
reasonable diligence to remove the force majeure as quickly as
practicable. In the event Aura claims an event of force majeure, the
payments outlined in Paragraph 4(b) of this Agreement shall be
suspended for a like period or periods of time.
4. LICENSE
(a) AURA hereby grants to NEWCO an exclusive, life of patents, non-
transferable, non-assignable and non-divisible right, license, without
further right of sub-license and privilege to use the Aura patented
and proprietary technology, including patents, patent
-4-
<PAGE>
applications and trade secrets (hereinafter referred to as the
"Licensed Technology") in the field of electromagnetic transducers for
audio sound enhancement (hereinafter referred to as either the
"License Field") for the manufacture of products in the License Field
incorporating the Licensed Technology (hereinafter referred to as the
"Licensed Products").
(b) In consideration of the license granted by Aura to NEWCO, NEWCO agrees
to pay to Aura a one-time, non-creditable, lump sum, non-refundable
license fee according to the following schedule:
<TABLE>
<CAPTION>
Year 1
-------------
<S> <C> <C>
1st Quarter $245,097
2nd Quarter 245,097
3rd Quarter 490,194
4th Quarter 392,162
--------
$ 1,372,550 per Year
Years 2 and 3
-------------
1st Quarter $686,275
3rd Quarter 686,275
-------
1,372,550 per Year
Years 4 and 5
-------------
Per Quarter $196,017 784,068 per Year
Years 6 through 17
------------------
(for life of license)
---------------------
Per Quarter $ 98,038 392,152 per Year
-----------
TOTAL $10,391,610
</TABLE>
Except for such subsequent events as specified in this Paragraph 3(b),
no contingency shall exist to Aura's receipt of the License Fee when
due. NEWCO's obligations to pay the License Fee when due shall be
suspended: (i) in the event of a material breach by Aura of its
obligations under Paragraph 3(g); and (ii) in the event of Aura's
suspension of payments under Paragraph 3(g) due to Force Majeure. The
parties agree to execute such license, on usual and customary terms
not inconsistent with this Agreement, within 5 calendar days of the
signing of this Agreement.
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<PAGE>
(c) Majority Owner further agrees not to compete in the License Field with
either Aura or NEWCO, nor invest in or fund others in competition with
Aura or NEWCO in the License Field. The covenant of this paragraph
4(b) shall survive termination of this Agreement for a period of seven
(7) years. Nothing contained herein shall prohibit ownership of
shares in any company in competition with Aura or NEWCO provided that
such ownership does not exceed 4.9% of the outstanding shares of such
company.
(d) In the event an assignment of any or all of the Aura proprietary
technology is made for the benefit of creditors under either Chapter 7
or Chapter 11 of the U.S. Bankruptcy Law, then this license shall not
revert and the assignee-creditor takes title to such transferred
technology subject to the terms of this Agreement.
(e) In the event an assignment of any or all of the assets of NEWCO is
made for the benefit of creditors under an Indian analog to Chapter 7
of the U.S. Bankruptcy law, then the sub-license granted to NEWCO
shall terminate and all rights under the sub-license revert to Aura.
(f) Any and all improvements to the Licensed Technology made by Aura
subsequent to the date of this Agreement shall be licensed to NEWCO
under the same terms and conditions as set forth in Section 4(a)
without further payment of license fee or royalty to Aura.
(g) Any and all improvements to the Licensed Technology made by NEWCO
(without funding or other assistance by Aura) shall belong to NEWCO
subject to a grant of a fully paid, royalty free license to Aura for
such improvements.
5. BOOKS AND RECORDS
(a) NEWCO shall establish and maintain at its principal place of business,
or at such other place as the parties may consent to in writing, full,
true and accurate books of account, records and other data, kept in
accordance with generally accepted accounting principles, containing
all particulars necessary for a precise auditing of the complete
financial statements of NEWCO. The parties and its agents, including
their accountants and attorneys, shall, during the term of this
Agreement, have the right, during normal business hours, and upon
reasonable prior notice, to inspect and make extracts from such books
of account, records and other data relating to the financial condition
of NEWCO provided, however, that such examinations shall be conducted
no more often than once for each fiscal year period.
-6-
<PAGE>
(b) All financial reporting and accounting of NEWCO shall be performed by
a qualified, independent international auditor.
6. REPRESENTATIONS AND WARRANTIES
(a) AURA represents and warrants to Majority Owner that, as of the date of
this Agreement: (i) AURA has the corporate power and authority to
enter into and to carry out the terms and provisions of this
Agreement; (ii) AURA has not entered into any agreement or
understanding regarding the manufacture of the Licensed Products in
the License Field which is in conflict with or inconsistent with any
of the terms or conditions of this Agreement; (iii) AURA has no actual
knowledge after diligent inquiry that its Licensed Technology or
Licensed Products conflict with, violate or infringe any rights of any
third party, and (iv) there are no actions or proceedings pending, or
to Aura's knowledge, threatened, which would prevent or make unlawful
the consummation of the transactions contemplated by this Agreement.
Aura will indemnify NEWCO and Majority Owner from and against any
cost, expense, lawsuit, legal proceeding, judgment or liability
arising out of or associated with any claim brought by any third party
claiming a violation or infringement by the Licensed Technology or
Licensed Products of such third party's patent rights wheresoever
situated.
NEWCO and Majority Owner shall have the right to engage independent
counsel to defend any claims of such third parties for
violations/infringement of any patent or intellectual property rights,
the cost of which shall be borne solely by Aura.
Aura has applied for and received a patent from the United States
Patent Office relating to the License Technology and has not granted
any rights to any third party which are inconsistent with the rights
to be granted NEWCO under the License Agreement.
(b) Majority Owner represents and warrants to AURA that, as of the date of
this Agreement: (i) Majority Owner has the power and authority to
enter into and to carry out the terms and provisions of this
Agreement, (ii) the execution, delivery and performance of this
Agreement by Majority Owner will not conflict with or violate any
agreements or understandings to which Majority Owner is a party or by
which it may be bound, (iii) Majority Owner has the financial
resources, liquidity, equity, credit and net worth to make the
contribution and
-7-
<PAGE>
arrange for the credit to be extended to NEWCO as required under
Section 3(b), and (iv) there are no actions or proceedings pending, or
to either's knowledge, threatened, which would prevent or make
unlawful the consummation of the transactions contemplated by this
Agreement.
(c) The parties represent and warrant to each other that neither of them
shall liquidate its ownership of NEWCO without first offering to the
other of them the right to obtain the liquidating party's ownership
upon the same or better term's to the liquidating party as offered by
a third party.
(d) The parties agree that NEWCO shall warrant the Licensed Products to be
free from defects in material and workmanship upon such terms as shall
be agreed to in writing between NEWCO and its customers. NEWCO shall
indemnify and hold Aura and Majority Owner harmless from all loss
resulting from the manufacture, use or sale of licensed products.
7. INSURANCE
(a) NEWCO shall at all times during the term of this Agreement and
thereafter carry Director and Officer insurance, business interruption
insurance, hazard (including, but not limited to fire, earthquake,
flood, theft and burglary) and general liability insurance, and any
other insurance required under law, covering acts, omissions or
occurrences during the term of this Agreement, in the amount of the
actual replacement value of building, equipment and inventory, per
occurrence (or such other amount as the parties shall determine to be
reasonable). Such policies shall name AURA and Majority Owner as
additional insureds and beneficiaries in the same percentages of their
respective stock ownership in NEWCO. NEWCO shall use its best efforts
to obtain a policy which provides that it shall not be cancellable
except upon thirty (30) days prior written notice to AURA and Majority
Owner. NEWCO agrees to provide Aura and Majority Owner with one or
more certificates evidencing the insurance coverage hereunder and the
insurance policies promptly upon the request of Aura and/or Majority
Owner. Aura, Majority Owner and NEWCO acknowledge that insurance
markets are rapidly changing and that insurance in the form and
amounts described in this paragraph may not be available in the
future. In such event, NEWCO shall nevertheless maintain insurance
coverage which is customary and commercially reasonable.
-8-
<PAGE>
8. DEFAULT
(a) Each of the following shall constitute an event of default hereunder
("Event of Default"): (i) Either Party fails to perform any material
covenant or agreement contained in this Agreement and Either Party
fails to perform such covenant following thirty (30) days' written
notice from the other party and opportunity to cure, provided,
however, if the default is of such a nature that it cannot reasonably
be cured within such thirty (30)-day period, then the defaulting party
shall not be deemed to be in default so long as the defaulting party
promptly commences to cure such default and diligently pursues such
cure to completion; (ii) Any representation or warranty of either
party herein shall prove to be incorrect in any material respect;
(iii) Majority Owner shall at any time challenge or otherwise assert
the invalidity of any of AURA's rights to Licensed Technology licensed
hereunder; or (iv) Majority Owner or AURA makes a general assignment
or general arrangement for the benefit of creditors without the prior
written consent of the other party, a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or
against either party and is not dismissed within thirty (30) days, a
trustee or receiver is appointed to take possession of all or a
substantial portion of either party's properties and possession
thereof is not restored to such party within sixty (60) days, or all
or a substantial portion of either party's assets shall be subjected
to attachment, execution or other judicial seizure which is not
discharged, stayed or bonded within sixty (60) days.
(b) If a Default shall occur hereunder, either party shall have the right,
to be exercised by it in its sole discretion (after reasonable
opportunity to cure the default has been given), to terminate this
Agreement upon written notice to the defaulting party. The right of
either party to terminate this Agreement for Default shall be in
addition to any other rights or remedies to which either party shall
be entitled at law. Termination of this Agreement shall be without
prejudice to any rights or remedies which either party may have, under
this Agreement
(c) In the event this Agreement is terminated by Aura by reason of default
of Majority Owner, then the license granted to NEWCO under Section
4(a) shall terminate and revert to Aura.
-9-
<PAGE>
9. SECRECY
(a) AURA has taken reasonable security measures to protect the secrecy of
its proprietary technology in electromagnetic transducer and
electromagnetic transducer systems. The parties agree that this
proprietary technology is valuable only so long as it remains secret.
Accordingly, each party agrees to take all steps reasonably necessary
to protect Confidential Information (as hereinafter defined) from
entering the public domain or falling into the hands of unauthorized
third parties. All information which in any way embodies, evidences
or relates to the proprietary technology is referred to herein as
"Confidential Information". Confidential Information excludes any
information which is or becomes in the public domain by public use,
publication, general knowledge or similar means other than by breach
of this Agreement.
(b) Each party agrees to take reasonable steps to maintain the secrecy of
Confidential Information.
10. BUSINESS PLAN
(a) The parties hereto shall, as soon as practicable after execution of
this Agreement, develop a business plan for NEWCO.
11. SUCCESSORS
(a) Except as otherwise provided herein, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
permitted successors and assigns.
12. SEVERABILITY
(a) The provisions of this Agreement are severable, and if any one or more
provisions are determined to be judicially unenforceable, in whole or
in part, the remaining provisions, and any partially unenforceable
provisions to the extent enforceable, shall nevertheless be binding
and enforceable. In the event that any act, regulation, directive, or
law of a government having jurisdiction and respect of this Agreement,
including its departments, agencies or courts, should make it
impossible or prohibit, restrain, modify or eliminate any act or
obligation of Majority Owner under this Agreement, Aura shall have the
right, at its option, to suspend this Agreement or to make such
modifications therein as may be necessary.
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<PAGE>
13. NOTICES
(a) All notices and other communications permitted or required by the
provisions of this Agreement shall be in writing and shall be
personally delivered or deposited in the United States Mail, bearing
adequate first class postage and addressed as hereinafter provided.
Notices delivered in person shall be effective upon the date of
delivery. Notices by mail shall be effective upon the receipt thereof
by the addressee or upon the tenth (10th) calendar day after being
deposited in the U.S. mail, as the case may be, whichever is earlier.
Any party hereto shall have the right from time to time and at any
time while this Agreement is in effect to change the respective
addressees thereof and each shall have the right to specify as the
address thereof any other address. Any notice herein required or
permitted to be given may be given, in addition to the manner set
forth above, by courier, telex, TWX, cable or facsimile transmission,
provided that the party giving such notice obtains acknowledgment by
courier proof of delivery, telex, TWX, cable or facsimile transmission
that such notice has been received by the party to be notified. Notice
given in this manner shall be effective upon transmission of
acknowledgment of receipt of same by the parties to be notified.
14. DISPUTES
(a) All disputes between the parties arising under or out of this
Agreement shall be settled by arbitration conducted in Los Angeles,
California. Either side to the dispute may institute arbitration by
giving written notice to the other party of its intention to
arbitrate.
(b) Unless otherwise expressly provided herein or agreed upon by the
parties in writing, the arbitration shall be conducted in accordance
with the commercial rules then obtaining of the American Arbitration
Association.
(c) Any award made pursuant to arbitration may be entered as a judgment by
any court of competent jurisdiction upon the application of any party
to said arbitration. Such award shall include an award of costs and
reasonable attorney's fees incurred by the prevailing party.
(d) Notwithstanding the foregoing provisions of this Paragraph 11, either
party shall have the right to petition a court of appropriate
jurisdiction seeking injunctive or other similar relief pending the
conclusion of any arbitration proceedings.
-11-
<PAGE>
15. LITIGATION
(a) In the event of any litigation or proceeding in arbitration between
the parties arising in any manner out of this Agreement or the
asserted breach thereof, the prevailing party shall recover court
costs or costs of arbitration, as appropriate, and actual attorneys'
fees.
16. WAIVER
(a) The waiver or excuse by either party hereto as to any breach, default
or deficiency and the performance by the other party of any duty or
obligation by the other party to be performed hereunder shall not
constitute or be deemed a continuing waiver or excuse of the same or
any other duty or obligation owed by the other.
17. REMEDIES NOT EXCLUSIVE
(a) No remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy and each and
every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more
remedies by any of the parties shall not constitute a waiver of the
right to pursue other remedies.
18. CAPTIONS
(a) Captions and paragraph headings used herein are for convenience only
and are not a part of this Agreement and shall not be used in
construing it.
19. ENTIRE AGREEMENT
(a) This Agreement contains the entire understanding between the parties
concerning the subject matter of this Agreement and supersedes all
prior understandings and agreements, whether oral or written, between
them respecting the subject matter hereof. There are no
representations, agreements, arrangements or understandings, oral or
written, between the parties hereto relating to the subject matter of
this Agreement which are not fully expressed herein. This Agreement
may be modified only by an agreement in writing signed by all of the
parties hereto.
-12-
<PAGE>
20. COUNTERPARTS
(a) This Agreement may be executed in any number of counterparts, each of
which shall constitute an original and all of which together shall
constitute one and the same instrument.
21. GENDER; NUMBER
(a) Terms used herein in any number or gender include other numbers or
genders, as the context may require.
22. GOVERNING LAW
(a) This Agreement is made and entered into in the State of California,
United States of America. It is the intention of the parties hereto
that this Agreement shall be subject to and shall be enforced and
construed under tenets of international law.
WHEREFORE, the parties agree that this Agreement constitutes and
memorializes the understanding reached by and between the parties on the date
set forth hereinbelow, and intend to be legally bound by the mutual covenants,
terms and conditions herein. The parties shall use their best efforts to enter
into a definitive agreement setting forth the entire relationship between the
parties hereto.
AURA SYSTEMS, INC. K & K ENTERPRISES
By: /s/ Anthony T. Cascio By: /s/ Kenny A. Dewan
-------------------------- ---------------------------
Anthony T. Cascio Kenny A. Dewan
V.P., Secretary Vice President
Date: July 12, 1995 Date: July 12, 1995
-13-
<PAGE>
Exhibit 21.1
Aura Systems, Inc. and Subsidiaries
-----------------------------------
Aura Systems, Inc
Audio-MYS Corporation
Aura Ceramics, Inc.
Aura Medical Systems, Inc.
AuraSound, Inc.
AuraTech, Inc.
Delphi, Inc.
Electrotec, Inc.
Electrotec-Audio Lease Limited
MYS Corporation
Mystical Audio Ltd., Inc.
NewCom, Inc.
Phillips Sound Labs, Inc.
Revolver UK Limited
<PAGE>
EXHIBIT 23.1
CONSENT OF PANNELL KERR FORSTER
We hereby consent to the incorporation by reference in the Registration
Statements of Aura Systems, Inc. on Form S-3 (File Nos. 333-1315 and 33-75160)
and Form S-8 (File No. 33-66982) of our report dated June 11, 1997, on our
audits of the consolidated financial statements of Aura Systems, Inc. as of
February 28, 1997, February 29, 1996, and February 28, 1995, and for each of
the three years then ended, which report appears in Form 10-K of Aura Systems,
Inc. for the fiscal year ended February 28, 1997.
/s/ Pannell Kerr Forster
Los Angeles, California
June 13, 1997
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<PAGE>
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<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
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<SECURITIES> 0
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<COMMON> 196,039,793
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